Schrödinger, Inc. (Nasdaq: SDGR) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report; fourth-quarter figures are included where noted. Schrödinger sells computational software for drug discovery and materials science and develops drug candidates through collaborations and its proprietary pipeline.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $216.7 million | $181.0 million |
| Software revenue | $159.1 million | $135.6 million |
| Drug discovery revenue | $57.5 million | $45.4 million |
| Gross profit / gross margin | $140.7 million / 65% | $101.0 million / 56% |
| Operating loss | $(177.4) million | $(146.8) million |
| Net income (loss) | $40.7 million | $(149.2) million |
| Cash used in operating activities | $(136.7) million | $(119.7) million |
- Software gross margin was 81%, up from 78%. Drug discovery segment gross profit was $11.1 million, versus a $5.0 million loss in 2022.
- At year-end, cash and cash equivalents were $155.3 million, restricted cash $5.8 million, and marketable securities $307.7 million, totaling $468.8 million. Management said this should fund operating and capital requirements for at least 24 months, subject to assumptions and changing plans.
- The filing reports no material borrowings. Operating lease liabilities totaled approximately $128.2 million; undiscounted future lease payments were $195.5 million.
- Fourth-quarter revenue was $74.1 million and net loss was $30.7 million. On-premise software revenue is seasonal and is typically strongest in the first and fourth quarters.
Material changes versus 2022
- Revenue grew 20%: software increased 17% and drug discovery increased 27%. Growth in software reflected on-premise and hosted licenses; professional services revenue declined 38% to $9.4 million.
- Research and development expense rose 44% to $181.8 million, sales and marketing rose 21% to $37.2 million, and general and administrative expense rose 9% to $99.1 million. Total operating expenses increased 28%.
- 2023 net income was driven by $147.2 million of realized gains/cash distributions tied to Takeda’s acquisition of Nimbus’s TYK2 program and $53.5 million of net fair-value gains, primarily an unrealized gain on Structure Therapeutics. The company still recorded a $177.4 million operating loss; the investment-related gains are variable and not recurring operating performance.
- Software ACV was $154.2 million, up from $140.6 million. Customers with ACV of at least $1 million increased to 27 from 18, while retention among customers with ACV of at least $100,000 was 92%, below the 96%-or-higher rate reported in each of the prior nine years.
Outlook, risks, and unusual items
- No clear numeric revenue, earnings, or cash-flow guidance for 2024 is provided in the filing. Management expects operating expenses to rise as it invests in software, its platform, and proprietary drug development; it expects losses over the next several years.
- Management anticipated initial Phase 1 data for SGR-1505 and SGR-2921 in late 2024 or 2025. It planned to submit an IND for SGR-3515 in the first half of 2024, subject to favorable enabling-study results, and aimed to begin a Phase 1 trial by year-end 2024, subject to regulatory clearance.
- Key risks include sustained operating losses and future capital needs; dependence on software renewals and milestone timing; collaborator control over drug development; clinical, regulatory, manufacturing, and patient-enrollment uncertainty; competition in software and therapeutics; intellectual-property and data-security risks; and volatility in equity-investment values.
- The company accrued $2.5 million for a contingency it considered probable in connection with an audit by a royalty partner. It reported no material legal proceedings.
- A material weakness identified in 2022 related to controls over drug-discovery milestone revenue was reported as remediated by December 31, 2023. Management and KPMG concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- How much of future reported earnings and cash generation depends on investment distributions and fair-value changes, rather than recurring software and collaboration operations.
- Whether software growth and customer retention can be sustained, including customer concentration: the top 10 software customers generated about 42% of software revenue, and one customer represented 14% of total software revenue.
- Actual clinical progress, safety, enrollment, and data timing for SGR-1505 and SGR-2921, and whether SGR-3515 meets its stated IND and trial milestones.
- Cash burn, R&D spending, and the assumptions supporting management’s estimate of at least 24 months of funding; also monitor the $250 million ATM capacity, which had not been used by year-end.
- Potential variability in collaboration milestones and equity investments, the $2.5 million royalty-audit accrual, and significant lease and cloud-computing commitments.