Schrödinger, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Schrödinger sells computational software and conducts drug discovery programs independently and with collaborators.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $64.8 million | $48.7 million | +33% |
| Software revenue | $32.2 million | $33.1 million | -3% |
| Drug discovery revenue | $32.6 million | $15.6 million | +109% |
| Gross profit / gross margin | $45.7 million / 70.5% | $28.0 million / 57.5% | Margin +13.0 percentage points |
| Operating loss | $(30.5) million | $(28.6) million | Loss widened $1.9 million |
| Net income (loss) | $129.1 million | $(34.4) million | Improved $163.6 million |
| Diluted EPS | $1.75 | $(0.48) | — |
| Cash used in operations | $(31.1) million | $(39.7) million | Use reduced $8.6 million |
Revenue and margins: Drug discovery growth chiefly reflected a $25.0 million development milestone for the BMS SOS1/KRAS program and progress on collaborations. Software revenue was mixed: hosted software and maintenance grew, while on-premise licenses and professional services declined. Software gross margin was 78%, compared with 77% a year earlier. Consolidated gross margin benefited from the mix and timing of drug discovery revenue and costs.
Unusual earnings items: Q1 net income was primarily driven by a $147.3 million gain on equity investments, including gains related to Nimbus following Takeda’s acquisition of Nimbus Lakshmi, and a $35.7 million increase in fair value of equity investments, chiefly Structure Therapeutics and Morphic. These gains are not equivalent to recurring operating earnings. The company reported an operating loss of $30.5 million. Income tax expense was $26.4 million.
Liquidity and obligations: At March 31, cash, cash equivalents, restricted cash and marketable securities totaled $532.2 million. The company reported no borrowing debt; recognized lease liabilities totaled $115.9 million, with $184.5 million in future minimum lease payments. Stockholders’ equity was $590.3 million and accumulated deficit was $250.0 million.
Material changes and management outlook
- Operating expenses rose 35% to $76.2 million. Research and development increased 46% to $40.7 million, reflecting investment in wholly owned programs, CRO work and computing; sales and marketing rose 37% to $9.1 million, and general and administrative expense rose 19% to $26.3 million.
- Management expects operating expenses to increase as it invests in its computational platform, software sales and marketing, and drug discovery programs. It expects drug discovery revenue to fluctuate with milestone timing and collaborator decisions. The filing provides no specific quarterly or annual revenue or earnings guidance.
- Management said existing cash, cash equivalents and marketable securities, together with the $35.8 million Nimbus distribution received on April 6, 2023, should fund operating and capital needs for at least 24 months. This estimate depends on assumptions and could change with operating plans and spending.
- Development plans include ongoing Phase 1 testing of SGR-1505 in patients with relapsed or refractory B-cell lymphomas; dosing in healthy volunteers began in April 2023. The company expected to submit an IND for SGR-2921 in the first half of 2023 and, subject to favorable studies, for SGR-3515 in 2024.
- Revenue concentration is notable: one customer accounted for 44% of Q1 2023 revenue, versus 15% in Q1 2022. At March 31, two customers represented 53% and 10% of accounts receivable.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in controls over evaluating milestone probability and variable consideration in drug discovery revenue. A prior-period review identified a $1.7 million revenue and contract-asset understatement, corrected before issuance of the 2022 financial statements. Management was implementing remediation and expected completion before year-end 2023, subject to testing.
Risks, contingencies and other notable items
- The company has a history of operating losses and expects losses over the next several years, notwithstanding Q1’s investment-driven net income. It has not generated revenue from commercial drug sales, and its proprietary programs remain early stage.
- Key risks include software renewals and competition, uncertain collaboration milestones and drug development outcomes, clinical and regulatory delays, dependence on CROs and collaborators, intellectual-property and cybersecurity risks, and the possibility of needing additional capital.
- Future results may be volatile because of milestone timing and changes in the fair value or distributions of equity investments. Equity investment gains are especially sensitive to market prices and transaction events.
- Contractual and operating commitments include $21.8 million over five years for a dedicated Hyderabad drug discovery facility, a $60 million minimum cloud-computing commitment over five years, and other CRO and laboratory-equipment commitments described in the filing.
- The company reported no material legal proceedings and stated that routine litigation was not expected to materially affect its financial position or results.
Most important facts for investors to verify
- How much of future revenue and earnings comes from recurring software activity versus collaboration milestones and investment gains.
- Whether software renewals, hosted subscriptions and customer diversification improve after the Q1 software revenue decline and high customer concentration.
- Progress and timing of SGR-1505 clinical work and the planned SGR-2921 and SGR-3515 IND submissions.
- Cash burn and operating-expense growth relative to management’s stated 24-month funding runway, including the effect of the April Nimbus receipt.
- Whether management remediates the revenue-control material weakness and demonstrates that the new controls operate effectively.
- Future fair-value changes, liquidity and concentration risks in equity investments, and the company’s lease and other contractual commitments.