Schrödinger, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Schrödinger sells computational software and services and conducts collaborative and internal drug discovery. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $38.5 | $29.8 | $87.1 | $61.9 |
| Software revenue | $30.0 | $24.1 | $63.1 | $50.4 |
| Drug discovery revenue | $8.5 | $5.7 | $24.0 | $11.5 |
| Gross profit / margin | $17.1 / 44.5% | $12.0 / 40.2% | $45.1 / 51.8% | $28.1 / 45.5% |
| Operating loss | $(43.5) | $(30.3) | $(72.1) | $(54.3) |
| Net loss attributable to common and limited common stockholders | $(47.7) | $(34.6) | $(82.1) | $(34.7) |
| Loss per share, basic and diluted | $(0.67) | $(0.49) | $(1.15) | $(0.49) |
| Cash used in operating activities | Not presented by quarter | $(64.4) | $(40.3) |
- Q2 revenue grew 29% year over year; first-half revenue grew 41%. Software revenue rose 25% in both comparisons. Drug discovery revenue rose 48% in Q2 and 109% for the first half.
- First-half operating expenses increased 42% to $117.2 million, including R&D expense up 39% to $58.9 million and G&A up 51% to $44.2 million. Management attributed much of the increase to personnel, internal-program and collaboration research, computing, and public-company costs. G&A also included a one-time state and local tax item.
- Software gross margin was 76% in Q2 versus 77% a year earlier, and 77% for both six-month periods. Drug discovery segment gross profit remained negative: $(5.8) million in Q2 and $(3.4) million for the first half.
Financial position, liquidity and obligations
- At June 30, cash and cash equivalents were $127.3 million, restricted cash $3.5 million, and marketable securities $382.2 million: $513.1 million combined, compared with $579.5 million at December 31, 2021.
- Current assets were $556.9 million versus current liabilities of $85.6 million. Total liabilities were $194.8 million; the filing reports no borrowings or funded debt. Lease liabilities totaled $95.3 million, including $7.2 million current.
- Management said available cash, cash equivalents and marketable securities should fund operating expenses and capital expenditures for at least 24 months. Operating cash use increased to $64.4 million in the first half from $40.3 million.
- Contractual and other commitments include $150.1 million of future minimum operating lease payments, a $60 million minimum cloud-computing agreement over five years, a $10.5 million CRO services agreement, and a $4.2 million non-cancelable laboratory-equipment purchase contract. The lease total includes long-term commitments; some new leases had not yet commenced.
Material changes and unusual items
- Q2 included an $11.8 million gain related to cash received in exchange for terminating rights to potential earnout payments. This was an investing cash inflow and a nonrecurring item.
- Fair-value changes were a loss of $15.7 million in Q2 and $21.9 million for the first half, primarily reflecting the Morphic investment. The first-half 2021 comparison included a $19.9 million fair-value gain, making period-to-period net-loss comparisons particularly sensitive to investment valuations.
- Schrödinger acquired structural-biology services company XTAL BioStructures in January for approximately $7.4 million, including $6.4 million net of acquired cash. The acquisition added $4.8 million of goodwill and $1.1 million of identifiable intangible assets.
- The company’s Cambridge lease commenced during Q2, adding $13.6 million to right-of-use assets and lease liabilities. It also amended its New York office lease for additional space.
Outlook, commentary and principal risks
- The FDA cleared the IND for the internal MALT1 inhibitor SGR-1505 in June 2022; management expected to begin a Phase 1 trial in relapsed or refractory B-cell lymphomas in Q4 2022.
- Management expected to submit an IND for the CDC7 inhibitor SGR-2921 in the first half of 2023 and, subject to regulatory clearance, begin a Phase 1 trial in the second half of 2023. It expected a WEE1 IND submission by year-end 2023, subject to favorable enabling-study data. CRO and manufacturing capacity constraints, including COVID-related disruption, had delayed CDC7 work.
- The filing does not provide clear numerical financial guidance for revenue, earnings or cash burn. Management expects R&D and other operating expenses to increase as it advances internal programs, expands the software business and builds development capabilities. Revenue from collaborations may fluctuate with research progress, collaborator decisions and milestone timing.
- Key risks include sustained operating losses and uncertain path to profitability; software renewals, competition and customer concentration; dependence on collaborators for drug development and milestone or royalty payments; clinical, regulatory and trial-enrollment uncertainty; reliance on CROs and cloud providers; and volatility in equity-investment values. Two customers each represented 19% of accounts receivable at quarter-end.
- Management reported no material COVID-19 impact on business in the quarter or first half, but noted that pandemic-related CRO capacity constraints had affected preclinical work. It also cautioned that future impacts remain uncertain.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level. The company reported no material legal proceedings and no material change in internal control over financial reporting during the period.
Most important facts for investors to verify
- Whether software revenue growth and customer renewals persist, and how much growth reflects on-premise license timing versus hosted subscriptions and services.
- Whether operating cash use and expense growth remain consistent with management’s stated minimum 24-month liquidity runway.
- Progress against the SGR-1505, SGR-2921 and WEE1 development timelines, including the impact of CRO capacity and regulatory requirements.
- The timing and probability of collaboration milestones, including the BMS program, and the degree to which reported drug discovery revenue is recurring research funding versus milestone-driven.
- Changes in Morphic and other investment valuations, and the impact of nonrecurring gains or losses on reported results and cash flows.
- The full cost and timing of lease and other contractual commitments, including leases not yet commenced.