Business context and reporting period
Schrödinger, Inc. develops physics-based molecular discovery software and uses its platform in collaborative and internal drug discovery. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $29.9 | $25.8 | $91.8 | $75.1 |
| Software revenue | $24.3 | $22.9 | $74.7 | $67.6 |
| Drug discovery revenue | $5.6 | $2.9 | $17.1 | $7.5 |
| Gross profit | $11.1 | $15.3 | $39.3 | $44.5 |
| Gross margin | 37.2% | 59.2% | 42.8% | 59.3% |
| Operating loss | $(34.7) | $(15.4) | $(88.9) | $(44.3) |
| Net income (loss) attributable to common and limited common stockholders | $(35.0) | $3.9 | $(69.7) | $(13.3) |
| Basic loss per share | $(0.49) | $0.06 income | $(0.99) | $(0.23) |
Software gross margin was 73% in Q3 and 76% for the nine months, versus 81% and 82% in the comparable 2020 periods. Drug discovery generated segment gross losses of $6.6 million in Q3 and $17.3 million year to date.
Cash, cash equivalents, restricted cash and marketable securities totaled $600.2 million at September 30, 2021, including $163.9 million of cash and restricted cash and $436.3 million of marketable securities. Operating cash use was $50.9 million for the nine months, compared with $26.9 million in 2020. No borrowings are reported. Lease liabilities totaled $79.1 million, including $77.1 million long-term; undiscounted operating lease payments were $132.7 million.
Material changes versus the prior comparable periods
- Q3 revenue rose 16% year over year; nine-month revenue rose 22%. Drug discovery revenue increased 90% in Q3 and 128% year to date, primarily reflecting the BMS collaboration, research funding and milestone timing. Software revenue increased 6% in Q3 and 11% year to date.
- Gross profit fell 27% in Q3 and 12% year to date as cost of revenue grew faster than sales. Software costs included higher personnel and royalty expenses; drug discovery costs rose with CRO activity and staffing.
- Operating expenses increased 49% in Q3 and 44% year to date, led by research and development and general and administrative costs. Management cited expanded program investment, higher personnel costs and public-company infrastructure.
- Q3 2020 included an $18.2 million fair-value gain, while Q3 2021 recorded a $0.6 million fair-value loss. The nine-month 2021 results included a $19.3 million fair-value gain, mainly from Morphic shares; these gains are noncash and may fluctuate.
- Two new leases added $71.1 million of right-of-use assets and lease liabilities during Q3. The company also disclosed a five-year cloud-computing agreement with a $60 million minimum payment obligation, not included in the contractual-obligations table because it did not constitute an annual commitment.
Outlook, commentary and risks
Management said existing cash, cash equivalents and marketable securities should fund operations and capital expenditure requirements for at least 12 months. The company expects significant operating losses and rising R&D expense as it advances internal programs and invests in its platform, sales and marketing, and public-company infrastructure. No specific revenue or earnings guidance is provided in the supplied filing text.
Management planned to submit an IND application for its MALT1 program in the first half of 2022; MALT1 and CDC7 were in IND-enabling studies, and the company had not yet advanced its own candidates into human clinical trials. In November 2021, after the quarter-end, BMS and Schrödinger agreed to replace the HIF-2 alpha target with another oncology target, with rights to HIF-2 alpha reverting to Schrödinger.
The BMS agreement included a $55 million upfront payment and potential milestone payments of up to $2.7 billion, plus tiered royalties; these contingent amounts are not assured. A separate Zai Lab collaboration announced in August 2021 provides for an upfront payment, potential milestones of approximately $338 million, and other contingent economics, including possible U.S. profit sharing if Schrödinger elects to co-fund clinical development.
Key risks include continued losses and uncertain path to profitability; reliance on software renewals and life-sciences customers; variable collaboration milestones and partner decisions; early-stage drug development and clinical/regulatory uncertainty; competition, intellectual-property and cybersecurity risks; and potential COVID-19 effects. The company reported no material legal proceedings, no material COVID-19 business impact to date, and effective disclosure controls as of September 30, 2021. Management noted that Schrödinger expected to cease qualifying as an emerging growth company on December 31, 2021, increasing reporting and compliance requirements.
Important facts for investors to verify
- Whether software growth and customer renewals can sustain revenue while software gross margin recovers from the reported decline.
- How operating cash burn develops against the stated 12-month funding outlook, including spending on internal programs and the $60 million cloud commitment.
- Timing and progress of MALT1 IND submission and other internal programs, and the costs and clinical risks of advancing them.
- Actual research progress, target allocation and eventual milestone or royalty receipts under BMS and Zai Lab agreements; headline potential payments are contingent.
- Effects of equity-investment valuation changes, customer concentration, and long-term lease commitments on reported results and liquidity.