Thank you for standing by. Welcome to Schrödinger Conference Call to review the company’s First Quarter Financial Results. My name is Kevin, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this call is being recorded at the company’s request. Now, I would like to introduce your host for today’s conference call, Jaren Madden, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, and hello, everyone. Welcome to today’s call during which we will provide an update on the company and review our financial results for the first quarter of 2021. Earlier this morning, we issued a press release summarizing our financial results and progress across the company, which is available on our website at www.schrodinger.com. Here with me on our call today are Ramy Farid, President and Chief Executive Officer; Karen Akinsanya, Executive Vice President, Chief Biomedical Scientist and Head of Discovery R&D; and Joel Lebowitz, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we’ll open up the call for Q&A. I would like to remind you that during today’s call, management will make statements related to our business that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitation, statements related to our future financial performance, including our outlook for the year 2021, the potential advantages of our platform, our strategic plans to accelerate the growth of our software business, and advance our collaborative and internal drug discovery programs, risks relating to the COVID-19 pandemic, our expectations related to the use of our cash, cash equivalents and marketable securities, as well as our other future operating expenses. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us, and on assumptions we have made. Actual results may differ materially from those described in the forward-looking statements and are subject to a variety of assumptions, uncertainties, risks and factors that are beyond our control, including the demand for our software solutions, our ability to further develop our computational platform, our reliance upon our drug discovery collaborators and other risks detailed under the caption, Risk Factors and Elsewhere in our most recent Securities and Exchange Commission filings and reports. Except as required by law, we undertake no duty or obligation to update any forward-looking statements discussed on this call, as a result of new information, future events, changes in expectations or otherwise. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today. And with that, I’d like to turn the call over to Ramy.

Thanks, Jaren, and thank you everyone for joining us today. At Schrödinger, we have developed a computational platform that is transforming the way therapeutics and materials are discovered. The platform is enabling our customers and our internal drug discovery team to discover high quality molecules for drug development and materials applications faster at lower cost, and with we believe a higher probability of success compared to traditional methods. We license our platform to pharmaceutical, biotech and materials companies, and universities and government labs worldwide. We are also leveraging our platform in a number of drug discovery programs in collaboration with pharmaceutical and biotech companies. And we are advancing an internal drug discovery pipeline, which Karen will review shortly. As we look out at the next decade, we believe the increasing speed of computing, expanding access to high resolution three dimensional protein structures, coupled with our platform’s ability to predict molecular properties with a high degree of accuracy, will allow us to broadly explore even greater chemical space, and ultimately, enable us to identify novel high quality development candidates for a broad range of targets within as little as one year from program launch. Beyond the progress we are making across our internal drug discovery pipeline, we’re continuing to see exciting examples of the power of our platform and the potential for continued scale up by the industry. In March, our collaborator Morphic Therapeutic reported promising clinical results from one of their integrin programs for the treatment of inflammatory bowel disease. We also recently expanded our collaboration with AstraZeneca to fully deploy our platform across all their structurally enabled discovery programs. We are making continued investments in the science underlying our platform to maintain our leadership position in physics-based computation and machine learning, with the focus on increasing accuracy of the predictions and expanding the domain of applicability to wider range of therapeutic targets and industrial applications. We also continue to look for opportunities to make supercomputing even more accessible for our customers. Last month, we establish a strategic collaboration with NVIDIA to further optimize our platform for one of NVIDIA’s key enterprise systems designed to enable companies to reach supercomputing power. As you’ll hear shortly from Joel, we are in a strong financial position, ending the quarter with cash resources of $649 million. This allows us to continue to invest in our science, invest in growing our software business, advance our internal pipeline and add new talent to support our strategic initiatives. We’re excited by the progress we’ve made so far this year across all aspects of our business. We are continuing to navigate the challenges of COVID-19 and are planning for return to several of our offices in the fourth quarter. We appreciate the dedication of all our employees and we are optimistic about the ability to return to working together in person again. I’ll now turn the call over to Karen for an update on our drug discovery programs.

Thank you, Ramy, and good morning, everyone. We are continuing to make important advances on many fronts across our internal pipeline and portfolio of collaborative programs. We have collaborations with both small biotech and large pharmaceutical companies spanning a broad range of target classes and in these collaborations, we are leveraging our platform at the same scale we do internally. We believe this level of large scale deployment enabled us to more rapidly identify high quality development candidates. We expect several collaborative programs to continue to advance in the clinic and new programs to enter the clinic this year. We have also made significant progress in our own internal oncology programs targeting solid tumors and hematological malignancies. Today, I will highlight three of our most advanced programs, MALT1, CDC7 and Wee1. Based on the strong data we have generated to-date, we plan to move forward with IND enabling studies for these programs. Subject to completion of the preclinical data packages, we expect to submit up to three IND applications in 2022, with our first submission expected in the first half of next year. Starting with our MALT1 inhibitor program, today we announced we have selected a development candidate. To give you a sense of how we explored chemical space to identify a novel potent selected MALT1 inhibitor with favorable drug like properties, our team triage to over 8 billion compounds scored approximately 12,000 compounds using our most advanced multi-parameter optimization methods and synthesized just 78 molecules to identify those suitable for development candidate nomination within 10 months of program initiation. MALT1 has emerged as an interesting target because it is downstream of BTK in the NF KappaB signaling pathway. Constant activation of NF KappaB is a hallmark of several subtypes of lymphoma. We believe that inhibiting MALT1 could be an…

Thank you, Karen, and hello, everyone. This morning I’m pleased to discuss our financial results for the first quarter of 2021 and I’ll also review our outlook for the year. We reported total revenue of $32.1 million for the first quarter, up 23% compared to the first quarter of 2020. Software revenue was $26.3 million, representing 11% growth compared to the first quarter of 2020. The growth in software revenue was driven by increased deployment of our solutions, including FEP+ and live design, as well as growth in new customers. Drug discovery revenue was $5.8 million for the first quarter, compared to $2.4 million in the first quarter of 2020. Of note, drug discovery revenue this quarter included recognition of $2.2 million from a collaboration milestone related to the advancement of a preclinical program. We recognize this revenue one quarter earlier than anticipated. First quarter drug discovery revenue also included $2.4 million recognized from our collaboration with Bristol Myers Squibb. As a reminder, the BMS agreement, which we signed in November 2020, included a $55 million upfront cash payment, which we expect to recognize over a four-year period as we progress the BMS programs to development candidates. Gross profit was $16.2 million in the first quarter of 2021, up 3% over the first quarter of 2020. Software gross margin was 78% in the first quarter of 2021, compared to 83% for the same period in the prior year, reflecting our investment to support the rollout of large scale deployments of our platform. Operating expense was $40.1 million, compared to $27.4 million in the first quarter of 2020, reflecting our investment in R&D to advance our technology and our pipeline. The addition of staff to drive long-term software sales growth and expenses required to support a public company infrastructure. Other income…

Thanks, Joel. We’re excited about the significant impact our technology is having on our internal and collaborative drug discovery programs. It is exciting to see the power our platform has to advance the discovery of new therapeutics with the potential to improve treatment paradigms across a broad range of disease areas. We are also excited about the potential of our platform to impact sustainability initiatives across multiple industries. We have an exceptional team committed to advancing our vision and we look forward to providing updates on our progress throughout the year. At this time, we’d be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from Michael Yee with Jefferies.

Hey, guys. Good morning and thanks for the update. Maybe two questions for us. First, I guess, on software, I noticed that you maintain the guidance. We’re sort of into May now, you gave an updated think March 23rd and also in January. Do you get the sense that things are picking up? You feel more confident about the range of the guidance or the higher end, as it relates to either people getting back to work, COVID, the adoption, just all of those things, do you have any sense of how things are going, whether better or not here we are at the midpoint of the year. That’s question one on software as it is relates the guidance? And then question two, maybe for Karen or the team. You have a candidate now from MALT1, that’s fantastic. Do you feel you’d like to get these things in IND before you consider partnering? Is that kind of, okay, a line in the sand but kind of a good place to think about where is most optimal IND and greater, maybe just talked to that for MALT1 or something else? Thank you.

Joel, do you want to take Mike’s first question or…

Sure. Thanks, Ramy. Thanks, Mike. Good morning. So, yeah, you’re -- we -- of course, we did maintain our guidance for the full year. If you look at the quarter, we came in slightly above what we had guided to back in March at 11% versus high single-digit. And as we look out over the rest of the year, we also reaffirmed the color around the pacing and it’s important to keep in mind. So we believe that the second half, well, we see the second half unfolding to be higher growth than the first half and most of that growth in the fourth quarter. And as we -- the way we look at the year is, we look at the customers that we are interacting with their renewal timing, whether those renewals are on-premise or hosted, so that determines whether revenue is recognized in a particular quarter or over time, whether there are upsizing opportunities within those renewals and also the prospect for new customers. And at this time, we feel comfortable with the guidance that we provided for the full year. So we’re maintaining it.

Karen?

Yes. Good morning, Mike. So, on our MALT1 program and others, as we’ve discussed in the past, we do plan to move these programs forward ourselves. And at this moment, we are looking towards IND opening studies next year, as we discussed in the in the call. However, we do stay very cognizant of the landscape. Each of these mechanisms, as you’re aware, for AACR and ACS, a lot of information coming out and we stayed in contact with potential partners. As you know, each of these mechanisms has the potential to combine with existing marketed agents and so we expect to see combination trials be a part of the clinical development program. And so we remain interested in the potential to benefit from those combination compounds. There’s a number of ways to accomplish that, and so at this point, we are planning to open those IND studies ourselves and stay in touch with potential partners.

Great. Thank you guys. Appreciate that.

Thanks, Michael.

Our next question comes from Michael Ryskin with Bank of America.

Hey, guys. Thanks for taking my question. I want to follow-up on the last one on just real quick on the software pasting through the year. I want to make sure I think about this correctly, because I know this was a big point of debate last quarter and that was sort of as we started the year. Typically there is a little bit of seasonality or 1Q tends to be a little bit stronger than 2Q as far as software revenues goes. Is that a fair way to think about that, just because I know that some of the comps last year with COVID could have been or would have been messed up? So I sort of confirm that a mild step down 1Q to 2Q software is appropriate and I’ve got a follow-up for Karen.

Sure, Mike. Good morning. So you’re right, we have seen that kind of seasonality in the past. And I think the thing is that we have guided to back half being higher growth during the first half and fourth quarter being the majority of that growth. So I think as you think about the pacing of the year, I think, it’s important to keep that in mind. Also, if you look at the performance in the first quarter, as I mentioned, it’s just slightly above what we had guided to in the first quarter in terms of high single-digit. So I think that, hopefully, that’s helpful in thinking about the pacing throughout the year.

Okay. Thanks. And Karen this is for you. Sounds like you’re -- you can seem to emphasize that beyond the three-week compounds in the internal pipeline, you’ve got more and more potential candidates ramping up that you sort of finding some early hits for. I’m just wondering, how should we think about the breath of that early pipeline? How many assets can you -- do you currently have the headcount and the ability to run at the same time, sort of how should we think about that going forward?

Yeah. Thanks, Mike. So as we’ve described in the past, our capacity to run discovery program, we can run around 20, 25 of these programs. Those are both in collaborative -- collaboration and a holding in pipeline. This year we’ve been really ramping up the team that’s looking at the early earlier stage program, where we’re able to initiate a hit ID and hit to lead. And I would say that, right now, we have the capacity for around five steady state programs that are wholly owned and we intend to maintain that steady state over the next couple of years. And as the team grows, that gives us the ability to further expand our internal pipeline. Obviously, as these candidates move forward and into development, clinical development, our plan is to replace them. So, the team is very busy right now working on additional programs that you’ll be hearing more about in the future.

Okay. And one the last quick one for Joel, if I can squeeze it in, you had some comments in the prepared remarks on sort of going back to the office post-COVID, returning to normal operations. Should we be assuming any significant impact to the operating expense line, as we go into for cue from those activities or is it going to be a more gradual transition?

Thanks, Mike. Sure. So we are planning to be back in the office in the fourth quarter. And we, of course, had these plans in place, not knowing the exact timing at the beginning of the year, but as we planned out the whole year expenditures. So I think it is more of a gradual thing as we get back to the office. I mean, obviously, other than being in the office we’re operating at full strength. So there really shouldn’t be much change in kind of the way we are supporting our operations, just the fact that we’re able to collaborate together will be kind of a welcome change. The other thing is, more -- the thing that will drive variability and expense to a greater degree is really our R&D side and timing of your pacing and timing of our programs as they move towards the clinic, pursue hiring throughout the year as we build up our capabilities for our early clinic -- clinical operations and also the timing of our CRO expenses as we advance our internal programs in that regard. So I think those operate -- those core operating metrics have more of an impact then, perhaps, return to the office at the end of year.

Great. Thank you.

[Operator Instructions] Our next question comes from Do Kim with BMO Capital Markets.

Hi. Good morning, everyone. I just wanted to ask about the expanded AstraZeneca collaboration. Could you provide a little more detail on that? How much of a step up in usage would AstraZeneca be involved in the platform? And what does the extension mean in terms of economics for Schrödinger?

Yeah. So, first of all, what it means -- thanks, Do, for the question. This was a really highly successful pilot program, if you will. And it was really great to see how successful it was and the rollout to the entire company. We’re, of course, not revealing the details of the agreement. But I think it speaks very well to the, not just the short-term impact of the expansion, but really the long-term expansion. As you know, we’ve talked a lot about the relative usage of our software as pharma companies relative to what we’re using, as Karen said, in our collaboration to the internal program and seeing this kind of transition to a much larger scale deployment is a very good indicator of us achieving that, as we’ve talked about, sort of, in some sense TAM of the software. So we’re really very excited about that transition from a sort of pilot program to a real broad deployment across the whole their whole set of programs.

Great. And you’ve talked previously about how Schrödinger has the ability to use their own software platform in an unlimited fashion. Could you quantify for us, how much it would cost an external company to construct the internal program that you have currently, just like terms of dollar figures, number of licenses that Schrödinger theoretically used?

Absolutely. That’s a good question. So what we -- as Karen said, we’re running around 20, 25 programs. And at the moment, and this is going to increase by the way with timeouts playing out in a second. But at the moment, that turns out the usage of the software to support that number of programs is around $30 million to $40 million of software. That doesn’t include the compute costs, just the software licenses. Now a couple of things that’s important to keep in mind, one is, that’s just 20 to 25 structurally the programs, of course, pharma companies typically have more than that number of programs, certainly the bigger companies. But the incredible thing is that this keeps increasing at a pretty rapid pace. As we discussed before the performance of computers, the availability of computers, availability of structures of proteins, which is a key input to these methods are increasing exponentially and continue to and have been for a long time and still continue today to increase exponentially. So that’s what it is right now. But as we see, we’ve talked about this before, a year ago or so we were exploring around single-digit billion number of molecules. Now we’re exploring hundreds of billions of molecules. And of course, as the -- as computer performance goes up, as the number of structurally the programs goes up, that $30 million to 40 million will continue to increase. So that’s what the value is right now.

Great. That’s very helpful. And for, Karen, you previously said that you expect some -- number of your collaboration that are in lead optimization to move into GLP-tox studies? Is that still your expectation over the next few quarters and the milestones that you expect to achieve, will they be cash payments or just recognition of prior payment?

So I’ll say that, first of all, we don’t have full visibility into everything going on in all of our collaboration. However, we have seen and I think you’ve also seen the progress that’s being made in the programs that are described publicly, you’ve seen progress, for example, with Morphic, and we know that these programs that we’re working on with a variety of different partners are meeting their scientific milestones moving forward with regard to the data packages. So we continue to be very confident that these programs are going to move forward through the various stages of GLP-tox and including a number that are in IND enabling studies actually moving into the clinic with the data packages supporting that. So I would say that we remain confident about a number of these programs not just moving into the lead time [ph], but to further milestones and dates. I would though turn over the question on the financial to Joel, if that’s okay.

Sure. And Do, if I misinterpreted your question, please just clarify. But I think with regard to our discovery revenue, what we have signaled this year is growth in our -- in our full year guidance is growth in our discovery revenue versus prior year. And what we’ve also said is that, as we continue to advance collaboration programs, generally speaking, milestones get larger, that’s certainly the case on the BMS side, as we’ve talked about the potential to earn up to well over $2 billion in milestones with two-thirds of it being -- roughly being pre-commercial. And so we’re really excited about investing and advancing those programs towards this very significant step up -- step ups and milestones in the future. And I think, we continue to see, as Karen mentioned, advancement in the pipeline in that regard. So we’re confident really across that pipeline that over time, we’re going to continue to see opportunities for significant growth on the discovery side coming out of the collaboration. So we did see a signal in the first quarter where we were able to recognize $2.2 million related to a single milestone early preclinical stage milestone one quarter earlier than anticipated, which I think is a nice signal in that particular case of the continued advancement of a specific program. But we’re seeing broad advancement, as we’ve talked about and so we’re excited to continue to grow that side of the business.

Great. Thanks for taking my question.

Thanks, Do.

Our next question comes from David Lebowitz with Morgan Stanley.

Thank you very much for taking my question. Could you run us through the purchasing dynamics for a pharmaceutical company? How do they -- what’s the typical cycle for making decisions, obviously, they tend to make decisions on an annualized basis. But do they ever make incremental decisions throughout the year or is it really on a one-time basis on an annual each year and then they tend to make the decision to upgrade at the end of a cycle?

Yeah. It’s typically the most of our contracts are one year contracts. So the decisions are made on an annual basis. There’s certainly examples of cases where companies have essentially recognized in the middle of the year that they’re running out of licenses and have -- we’ve done contracts and they’ll be your -- that does sometimes happen, but typically it’s every year. Now the interesting thing about that is that in 2020, as you know, there was quite a large increase. I think this was at a time where the validation of the technology was coming from sort of external sources. It was coming from the success of Nimbus and Morphic and our internal programs and that was catalyzing a broad adoption of the whole platform by quite a number of -- a very large number of companies. Now, even though the decisions then are made on an annual basis of the renewals, the decision to scale up in a very significant way can actually take longer than a year, because they’re -- now the validation switches over to sort of internal validation. So what does that mean? Now you have to, first of all, you have to deploy the technology at a much larger scale than there used to, this involves, obviously, running the calculations on the cloud. And then you have to go through these design tests make cycles, where you’re determining whether the technology is really having any kind of impact that we’re seeing and if they seen from other collaborations and that can sometimes take a little bit longer than a year and that’s what we have taught -- how we’ve talked about sort of the growth in the business. It’s not necessarily completely linear. We know where it’s headed, right, as we talked about before in response to other questions. But it can take a sort of lumpy course to get there. That makes sense.

Yes. It does.

Yeah. Great.

On the occasion, when a customer does add on incrementally during the year, with that add on be a yearlong contract or would it be to, I guess, to fit into the current contract and then conclude that that in the fourth quarter? So if that’s when the contracts currently in and…

Yeah.

…so that they basically incorporated into the current cycle?

It really varies. It’s a really good question. It varies. We -- sometimes the contract is started and so that it’s coincident with the earlier contract. But actually, just as often, it’s a contract now where there are two duals in the year and then later on they are merged. They are -- it is really all -- every different possible way of doing it as it occurs. Sometimes it’s six months, sometimes three months, nine months, sometimes a little bit over a year. I mean, is -- there’s quite a bit of variability.

Thank you very much for taking my questions.

Sure.

Thank you. There are no further questions. Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.