Schrödinger, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
Schrödinger operates two segments: software, which licenses its computational platform, and drug discovery, which provides collaboration services and advances partnered and wholly owned programs. It has no drug products approved for commercial sale; its business remains dependent on software sales, collaboration revenue and milestone timing.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Software revenue | $28.9 | $24.7 | $90.5 | $87.8 |
| Drug discovery revenue | $13.7 | $12.3 | $52.1 | $36.4 |
| Total revenue | $42.6 | $37.0 | $142.5 | $124.1 |
| Gross profit | $23.6 | $17.2 | $83.1 | $62.3 |
| Operating loss | $(56.2) | $(46.2) | $(147.8) | $(118.3) |
| Net income (loss) | $(62.0) | $(39.9) | $71.4 | $(122.0) |
| Operating cash flow | Not presented by quarter | $(99.5) | $(94.7) |
Q3 total gross margin was approximately 55.5%, compared with 46.5% a year earlier; nine-month gross margin was approximately 58.3%, compared with 50.2%. Software gross margin was 76% for Q3 and 77% for the nine-month period. R&D expense rose 42% year over year in both periods: to $46.8 million for Q3 and $130.3 million for nine months. Nine-month sales and marketing expense increased 28% to $27.3 million, while G&A increased 9% to $73.4 million.
At September 30, 2023, cash and cash equivalents were $249.4 million, restricted cash $6.2 million and marketable securities $246.9 million, totaling approximately $502.5 million. Total liabilities were $230.6 million, including $129.0 million of operating lease liabilities; the company reported no borrowings in the presented balance sheet. Undiscounted future lease payments were $199.0 million. Stockholders’ equity was $563.6 million and accumulated deficit was $307.7 million.
Material changes and unusual items
- Nine-month revenue rose 15%, led by 43% growth in drug discovery revenue; software revenue increased 3%. Q3 revenue rose 15%, with software up 17% and drug discovery up 11%.
- Nine-month net income was principally driven by a $147.3 million realized gain on the Nimbus investment following Takeda’s acquisition of a Nimbus subsidiary, plus $61.9 million in net fair-value gains. These investment gains are volatile and do not reflect operating profitability. The company recorded a $14.5 million net fair-value loss in Q3, including a $28.7 million Morphic investment loss, partly offset by gains on Structure Therapeutics and Nimbus.
- Q3 drug discovery revenue benefited from accelerated recognition after BMS elected not to continue two related oncology programs; rights reverted to Schrödinger. Nine-month results also included a $25.0 million BMS development milestone. BMS had recognized $25.0 million of total milestone revenue under the agreement as of quarter-end.
- Zai Lab gave notice in July 2023 to terminate its collaboration; rights to the program reverted to Schrödinger.
- Operating cash outflow was $99.5 million for nine months despite reported net income, reflecting primarily noncash investment gains and working-capital movements. Investing activities provided $252.6 million, including $147.1 million of Nimbus distributions and net proceeds from marketable securities maturities.
Outlook, risks and contingencies
- Management said existing cash, cash equivalents and marketable securities should fund operating expenses and capital expenditure requirements for at least 24 months from September 30, 2023. It expects R&D spending to increase as proprietary programs and the platform advance; operating losses are expected over the next several years.
- Clinical milestones: Phase 1 trials of SGR-1505 were underway, with preliminary healthy-volunteer data expected by year-end 2023. SGR-2921’s first patient was dosed in October 2023. The company expected to submit an IND for SGR-3515 in the first half of 2024, subject to favorable enabling-study data, and aimed to start a Phase 1 trial by year-end 2024, subject to regulatory clearance.
- The company had $250 million available under its at-the-market offering at quarter-end and had sold no shares under the program. Additional financing may be needed depending on spending, revenue and collaboration or investment proceeds.
- Deferred revenue was $55.4 million, of which the company expected to recognize approximately 78% within the next 12 months. One customer accounted for 28% of Q3 revenue and 29% of nine-month revenue, creating concentration exposure.
- Disclosure controls were not effective because of an unremediated material weakness in controls over assessing milestone revenue in newly executed drug discovery arrangements. The weakness had caused a $1.7 million revenue and contract-asset understatement in 2022, corrected before issuance. Management expected remediation before year-end 2023, subject to successful testing.
- The company was under audit with a royalty partner and considered a contingency probable but not material. It reported no material legal proceedings.
- Key risks include recurring operating losses and cash burn, uncertain software renewals and collaboration milestones, early-stage clinical and regulatory risks, volatile equity-investment valuations, competition, and the ability to remediate financial-reporting controls.
Important facts for investors to verify
- Whether R&D spending and operating cash burn develop in line with the stated 24-month liquidity outlook.
- How much future earnings depend on investment gains, distributions and milestone-related revenue rather than recurring software operations.
- Software renewal, hosted-subscription growth and customer concentration, including the large customer’s contribution to revenue and receivables.
- Progress and data from SGR-1505 and SGR-2921, and the timing and regulatory status of the SGR-3515 plans.
- Whether the revenue-control material weakness was remediated and controls demonstrated to operate effectively.
- Changes in BMS and other collaboration programs, milestone prospects, and any liabilities or outcomes from the royalty-partner audit.