Everyone, thank you for standing by. Welcome to Schrödinger Conference Call to review Third Quarter 2022 Financial Results. My name is Chris, 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, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to today’s call, during which we will provide an update on the Company and review our third quarter 2022 financial results. Earlier today, 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, Chief Executive Officer; Geoff Porges, Chief Financial Officer; and Karen Akinsanya, President of R&D, Therapeutics. Following our prepared remarks, we’ll open the call for Q&A. I’d 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 outlook for the full year 2022 and for the fourth quarter ending December 31, 2022, our strategic plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of potential IND submissions and the initiation of clinical trials for our proprietary drug discovery programs, the clinical potential and favorable properties of our compounds, our expectations related to the use of our cash resources as well as our 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 what we project today due to a number of important factors, including the considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC including our Form 10-Q for the period ended September 30, 2022. These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events or otherwise. With that, I’d like to turn the call over to Ramy.

Thanks, Jaren, and thank you everyone for joining us today. We have developed a computational platform that is transforming the way therapeutics and materials are discovered. Our platform has enabled us to create a balanced business model with each component of our business providing a distinct risk reward profile. We licensed our software to biopharma and materials companies as well as government and academic institutions around the world. Software licensing is continuing to provide a growing source of revenue that enables continued investment and innovation. Additionally, we work on collaborative projects that are contributing to our inflecting drug discovery revenue. And we have an expanding portfolio of 18 proprietary drug discovery programs with first-in-class or best-in-class potential. Today, we reported total revenue for the third quarter of $37 million, a 24% increase over the prior year. The strong growth was driven primarily by approximately $12 million in drug discovery revenue. Third quarter software revenue was $24.7 million, which was in line with our expectations. As we look out to the remainder of the year, we have tightened our 2022 financial guidance and are pleased to remain within the original total revenue range even in a challenging economic environment. In a moment, Geoff will review our third quarter financial results and provide more detail on our fourth quarter and full year 2022 financial guidance. As you’ll hear shortly from Karen, we are also continuing to make progress across our pipeline of collaborative projects and proprietary programs. Today, we announced that our Phase 1 study of our MALT1 inhibitor, SGR-1505, is open for patient enrollment. We also reported that in December, we will present new preclinical data for our CDC7 inhibitor SGR-2921 at the ASH Annual Meeting. We are also continuing to expand our drug discovery portfolio and recently announced a partnership with Lilly for the discovery of small molecule compounds for an undisclosed target. Under the agreement, we received an upfront payment and are eligible to receive up to $425 million in discovery, development and commercial milestone payments as well as royalties on net sales. We are pleased with the progress we have made so far this year, particularly in a challenging macroeconomic environment. Fundamentals of our business are strong and we have a solid cash position, having ended the third quarter with approximately $479 million. We are continuing to focus on executing across all aspects of our business to generate value as we advance our vision of transforming drug discovery and materials design. I will now turn the call over to Geoff to review our third quarter financial results and financial guidance.

Thank you, Ramy. And hello, everyone. It’s an honor to be here with the team today for my first financial results call as Schrodinger’s CFO. As I hope you heard at Platform Day, we have a deep and broad computational platform that is creating value through technology licensing, collaborations and the development of our proprietary programs. We delivered a strong third quarter, driven by better-than-expected drug discovery revenue. The increasing contribution from drug discovery reflects the positive returns we are seeing from the investments we have made in that business over the last four years. The underlying trends in the software business are strong, and the reported growth reflects the effect of significant multi-year contract revenue recognized in Q3 2021. Adjusting for those large pre-purchases in the prior year, software revenue growth in Q3 would have been consistent with the growth reported in Q1 and Q2 this year. Total revenue was $37 million for the quarter, up 24% compared to the third quarter of 2021. Software revenue was $24.7 million, in line with our expectations and similar to the $24.3 million reported for the third quarter of last year. Drug discovery revenue was $12.3 million for the third quarter of 2022, compared to $5.6 million in the third quarter of 2021. Drug discovery revenue for the quarter included $9.9 million in revenue recognized from our ongoing collaboration with Bristol-Myers Squibb as well as revenue from milestones related to other collaborative and proprietary programs. During the quarter, the rights to one of our collaboration programs reverted to us, after BMS selected not to proceed with further development. And this resulted in increased revenue recognition due to accelerated completion of our obligations related to the program during the period. Gross profit was $17.2 million in the third quarter, compared to $11.1 million…

Thank you, Jeff. And good afternoon, everyone. We are continuing to make important progress across our portfolio. Within our collaborative pipeline, there are 9 programs currently in the clinic, and 12 projects are advancing through the discovery phases. Additionally, over the last five years, we have continued to increase the number of proprietary programs our therapeutics group is working on. Today, our proprietary portfolio includes 18 programs, some of which are partnered and some of which are wholly owned. As we discussed at Platform Day, cumulative technical success rates we and our collaborators are achieving across the growing number of completed and ongoing programs signals meaningful improvements relative to published industry averages. We believe this is a very promising trend that highlights the power of our computational platform. As programs complete discovery and move into the clinic, we are able to initiate new programs. As you heard from Ramy, we recently entered into a new relationship with Lilly to advance the discovery of small molecules for an undisclosed target. Lilly will be responsible for disease model studies, completion of preclinical and clinical development, as well as commercialization of the products. Notably, the program handoff to Lilly occurs earlier than in our collaborations with BMS and Takeda. In addition to an upfront payment, we are eligible to receive up to $425 million in discovery, development and commercial milestone payments, and royalties on future sales in all geographies. This new program is the 15th for which we are eligible to receive royalties on commercial sales. As Geoff mentioned, BMS made a strategic decision to deprioritize one of our partnered programs. Given the progress we have made on this genetically validated target, we have elected to continue to invest in the program internally. We expect to be able to share more information about…

Thanks, Karen. We are really pleased with our third quarter results and the progress we are making this year. We have a strong balanced business model based on a highly validated software platform, and we remain focused on the key objectives that we believe will generate value and position us for continued success. At this time, we’d be happy to take your questions. Operator?

Thank you. [Operator Instructions] Our first question will come from Do Kim of Piper Sandler. Your line is open.

Hi. Thanks for taking my question and congrats on the progress. First on guidance. Geoff, I was wondering if you could quantify the impact to the software guidance from each of those components you talked about, the FX, small biotech customers and the larger customers. Did one of those groups influence more than the other? And you said that the impact from FX was small, how small was it?

Sure. Thanks for the question, Do. So, you are right. Those are the three buckets that I alluded to, but let me give you a little bit more color on each of those. First, on FX, our business is largely conducted in U.S. dollars. Our contracts are priced in U.S. dollars. So, we’re relatively insulated against direct impact of exchange rate fluctuations. Now, there is a modest impact in terms of our receivables and our cash balances that are held in other currencies, but that’s relatively small. However, there is -- and in fact that probably isn’t fully anticipated, which is because our contracts are priced in U.S. dollars for our customers who tend to have relatively fixed budgets in local currencies, they are running up against the top end of their budgets earlier in the year at a point that’s yielding less revenue for us in U.S. dollars than we had in some cases anticipated. Now, we are also finding that because of the higher value of software in their local currencies, there are less opportunities to step up their revenue to a higher level that we anticipated. That’s particularly having an effect on the 40% obviously of our revenue that comes outside the U.S. The second effect is the uncertainty in the biopharma capital markets. We are seeing a handful of customers who are scaling back their software purchases as their small biopharma companies are rather consolidated or to conserve cash, they are focusing on one or two of their priority clinical programs and not investing in further discovery. So, we are seeing a little bit of effect of that. But I think, again, the bigger hidden effect is that we aren’t seeing new companies created by the capital markets that become the growth contributors to our software for this year, in the near-term in the future, because capital markets just haven’t been as hospitable to new and emerging companies. So there’s new companies that showed up in ‘20 and ‘21 haven’t shown up this year in the same numbers. Lastly, I mentioned the large customers. Typically towards the end of the year, we see step-ups in adoption by our largest customers. We still believe there are opportunities for those step-ups towards the end of the year. But there is more uncertainty about when those steps will occur, and also about magnitude of them. And that uncertainty is both, reflected in the range of our guidance but also the change we made to the overall guidance. In terms of the answer to your direct question, three effects, probably roughly equal in terms of the magnitude of the impact and the contribution to the change in the guidance. I hope that answers the question for you, Do.

Yes. Thanks for all the details, Geoff. And a question for Karen. On the MALT1 trial, you’re ready to start enrolling patients. Can you talk about how many clinical sites you plan to activate, and if you have other geographic locations, you said the U.S. that you plan to open up clinical sites for?

Yes, we have been working very hard on initiating this study. As you know, this is an important goal for us this year. And we’re pleased with the progress. We are reaching out broadly to sites in the U.S. As you know, lymphoma is a very active space right now. We have a handful of sites that we’re working with very actively. And we continue to evaluate the opportunity to consider sites, obviously, broadly across the U.S., but also globally. We haven’t taken that off the table at this point. And so, that’s something we continue to discuss and monitor as this trial continues to move forward.

Our next question will come from David Lebowitz of Citi.

I guess moving on to the guidance for the drug discovery business, which got moved slightly above the prior guidance, could you just elaborate more on where that might have come from this year? And how this increase might or might not affect the previously provided number of $100 million for 2023? Thank you.

I’ll just comment really quickly -- this is Ramy, on the comment you made or the question about the $100 million. So, if you remember that was strategic objective that we provided at the beginning of ‘22. We still believe that we can achieve that goal of $100 million in drug discovery revenue. And in February we’ll actually provide formal guidance on that number. But, Karen or Geoff -- Geoff, I think you were going to respond to the first part of the question.

Sure. Hi, David. So, you’re right. We’ve raised the revenue guidance for the year for drug discovery. Part of the raise came from the recognition of the revenue from one of the BMS programs, the program that we alluded to, that was returned to us and that we’re continuing to invest in internally, but it also came from a number of other collaborations where we’ve successfully advanced programs to the point where we think it’s reasonable to recognize some of that revenue that have previously been held in the deferred account. And so, that’s flowed through as recognized revenue or we expect to or in some cases has. Clearly we are above the lower end of that guidance after three quarters of the year. And so, we’re inevitably going to be in the range and we think it’s reasonable to expect that we’ll be above the top end of the range now, given what we see.

Our next question will come from Michael Yee of Jefferies.

Hi. This is Yi Chen [ph] from Mike. Two questions on our end, the first, just digging in a little deeper on drug discovery. So, you’ve raised guidance. Just wondering if there’s any revenue from 2023 drug discovery pulled forward that plays a part into the raised guidance for the remainder of this year. If you could, just some more color on that that would be great. And second in question on the BMS discontinuation, if you could just provide some more color as to why they chose to discontinue that collaboration? Thank you.

And Geoff, do you want to answer the first part, and then we can hand over to Karen?

Sure. So, as I alluded to in the previous answer, the revenue is a composite of revenue that we recognize across multiple programs and collaborations. So, we’ve advanced the revenue recognition on one of the programs, as I alluded to, in the BMS collaboration, but the target for next year includes a host of different programs and opportunities. So, as Ramy alluded to, we still see that as achievable. I wouldn’t say it was revenue that was pulled forward, because we don’t actually count on that revenue until we see it as being highly achievable. So, the fact that has occurred and we recognized it during this period doesn’t necessarily mean that we were assuming that it was going to occur in its entirety next year. Our forecasts are actually probability weighted basket of different slices. So, nothing is assumed at 100% probability until we recognize it.

And then, Karen on BMS’s decision?

Yes, certainly. Well, first of all, let’s just say that the BMS collaboration is going really well. And as you know, we added the degrader effort in ‘21. The joint steering committee jointly looked at the progress on the discovery phase of this program. We also work looking forward at the clinical phase. And while we both agree that we’ve made exceptional progress on advancing compounds during discovery, BMS made the strategic decision that they no longer expect to invest in development in this neuroscience program. I want to emphasize though that we remain really excited about this program and the molecule we’ve identified for this target is genetically validated, and those initial signs of translation in the clinic by others. And so, we plan to continue investing in the target and the program. And as we mentioned earlier, we look forward to sharing more about it in 2023, along with the update on the rest of our portfolio. I want to also say, of course, that [indiscernible] continues to look for opportunities on the horizon. We jointly do that. And so, we are continuing to discuss the potential for a new program with BMS.

Our next question will come from Gary Nachman of BMO Capital Markets. Your line is open.

Hi. Good afternoon. Geoff, just following up on the three effects to the software revenue. So, how much of that is a near-term issue versus something that could be more protracted well into next year? And I don’t understand exactly how you are thinking about the low end of the guidance at this point. So, how much conservatism is in there for the larger customers? And Ramy, just maybe your broader comments on economic challenges or the academic environment. How that’s impacting the software business? Just talk more about those dynamics, and how that’s being weaved into the situation that you are seeing?

Ramy, do you want me to jump in? And I’ll address the first part of Gary’s question.

Yes. Please, Geoff. Thank you.

Okay. So I certainly think a lot about this -- your question, Gary. What’s likely to persist versus what is transient? I don’t think that the currency effect that I alluded to is going to pose the same headwind for us next year that it’s been the second half of this year, particularly we all know what exchange rates have done and how that sort of caused disruptions. So, I think that we will re-base those contracts. I think those international customers will be much better positioned with -- to be on a solid foundation to deliver growth next year. In terms of the large customers, the sense I get from talking to our account managers is that, it’s a question of timing, not -- it’s when, not if, and then what’s the magnitude of those opportunities is. But we just do have to recognize that we are getting close to the end of the year. I don’t want to have -- committed to finalize those transactions. So, that’s what’s encompassed in the range of the remaining guidance there. And then, the third factor that I alluded to, which is the capital markets environment in biotech. Gary, if either of us can predict what’s going to happen in biotech capital markets, then we probably are in the wrong situations. I think that most people think that the problem -- the current difficulties in raising money in biotech will persist well into next year. So, I don’t expect there to be a host of new biotech customers -- small biotech customers that are formed with ambitious drug discovery goals and lots of capital, at least for the next few months. So that’s something that we anticipate there will be some sort of parallel well into next year. I hope that gives you some color.

And then, with regard to the academic environment, I’m sorry, can you just clarify what you were referring to? Is that what you said, you said academic?

Yes. I thought you had like comments in the prepared remarks just about the economic challenges, and I thought I heard you say in the academic environment in general. Maybe I misheard that. But just in terms of how that’s impacting the overall software business, like in terms of your academic customer. I mean, everything that Geoff is describing feels like it’s more in just a corporate level, but you do have customers in the academic environment. So, I’m assuming they have budgets as well and that’s leading...

Yes. That’s right. Well, we happen not to mention anything about academic environment, but it’s fine. It’s still a good question. So, happy to address it. As you know and it’s right. We really value the academic part of our business, not only for the revenue generation, obviously, it’s a smaller fraction relative to the commercial component, but of course, this is, in a sense, feeding the market, right, it’s training the future scientists, and it’s very important. And as far as all of our analysis, to date, looking at it, we’re not seeing significant impact there from funding. It continues to grow at very similar rates that we’ve seen over the years. And we continue to see more and more of these -- more and more universities are actually focusing on computation and training. And we play a role in that, by the way. We have now provided courses, online courses, and curriculum to provide to professors who are increasingly interested in teaching computation. Our platform has really increased -- and the success of the platform has increased the demand for free for people to learn computation. And then those students are then going off and becoming customers at company. So, that’s all going really well.

Okay. That’s helpful. And then…

That was good.

Yes, I don’t know. I heard it. It’s been a long day. But anyway, thank you for that. And then one other question, which I know you did not address, but I do think is important. So, how do you think the Inflation Reduction Act will impact your business over time? How will biopharma companies reevaluate their drug discovery strategies, especially with small molecule development, we know some of the potential challenges there. So, do you think this will help you or hurt you? How are you guys thinking about it?

Yes. Here’s how we’re thinking about it. It’s an important question, and of course, it’s on a lot of people’s minds. So, the trend that we’ve really been seeing for a while, a shift from small molecule to biologics in pharma that started a number of years ago, is certainly continuing. And there -- it’s likely that the Inflation Reduction Act is contributing to that. Now, the exciting thing is that we have been -- again, like I said, this is a trend that started before this act. And we’ve actually been focused on advancing our physics-based platform to address biologics and protein therapeutics. And remember, the platform is completely agnostic to modality, physics is physics. And predicting the potency of a small molecule to a protein actually has the exact same physics as predicting the potency of a large molecule to a protein. So, this is an area we’ve been working on. And we’ve actually already demonstrated in a number of important projects, including our collaboration with AstraZeneca that our platform can actually be used very efficaciously in the design of biologics. So, we’re continuing -- so, the answer to your question is, yes, we’re engaging more and more in conversations around either our customers using our platform to advance their own programs, or even potential partnerships, obviously, building on what we started a number of years ago. Remember it was two and a half years ago, the AstraZeneca collaboration, so. And we’re continuing to invest in advancing the computational platform to address a broader range of challenges in the design of biologics.

Yes. And maybe we can just add that, obviously, with a greater emphasis on speed to get to a development candidate and to develop molecules, obviously a small molecule platform has an important impact in the speed of programs. And we think that will be important for companies as they approach targets that can’t be addressed biologic. So, we hope to help in some way.

Thanks, Karen. That’s a really important point. Yes.

Our next question will come from Vikram Purohit of Morgan Stanley.

So just one quick one from our side. On the MALT1 program, now that you have sites open for enrollment, I just wanted to see if you could share some color about what you expect the initial pace of enrollment to be here. And what types of patient profiles and tumor types you’re looking to enroll initially and you think will be quick to enroll? And then looking forward to at what point do you think it’s reasonable to expect some time line the data to be possible to communicate?

Yes. So, in terms of the design and the patients that we’re enrolling in this trial, this is a relapsed resistant lymphoma trial, it does enroll all comers with that profile. The focus of this trial is really a dose escalation to determine safety, tolerability, to gather data on pharmacokinetics and pharmacodynamics. We will though be collecting scan information from patients which will allow us to determine if there are any initial signs of activity. And so, while our focus is obviously on the safety, tolerability, we remain open to assessing any signs of activity as the trial proceeds. In terms of timing, we obviously have just begun our enrollment here. And we’re obviously moving as quickly as we can. We don’t necessarily, at this point, have specific timelines, we can share with you when we’ll be able to disclose data. Obviously, as we make progress, we’ll be updating you on that and sharing information as and when we are in a good position to do so. As the dose escalation trial proceeds, obviously, that can take some months while you’re studying patient populations, as opposed to healthy volunteers, as you might know.

Understood. And then a quick follow-up then, maybe a catch all question on business development then. Looking to 2023, what’s your appetite for partnerships? And if there is appetite, what forms of partnerships could be interesting to you?

Well, I can start. As you know, we’ve been really focused on improving the opportunities we have in the business development space over the last 5 to 10 years. That essentially has taken two sort of different forms. The first is the de novo collaborations. As you know, we have a lot of equity relationships that were established around a decade ago. We’ve moved forward now into these de novo collaborations where we are collaborating with companies, like Lilly and BMS to discover molecules that they will then develop. Last year you saw us do the Zai Lab deal where we have co-development, co-commercialization opt in right. And so, all of those types of conversations continue. We, though, will also be focusing obviously a lot more as time moves on, on the partnering and collaborations around our wholly-owned assets. And that will obviously be a new set of business development relationships for us, where again, we will be looking to, in some cases, retain rights to programs. But in other cases, as we’ve said before, where it makes sense for a partner to accelerate the access to patients, the access to combination agents, we may well be like out licensing those products over time. But no line of sight to that right now. We are really excited about the move into the clinic for our assets and gathering data but we’ll be obviously sharing more as there is more to share over the next years or so.

Okay, understood. Thank you.

Thank you. [Operator Instructions] And our next question will come from Gaurav Goparaju of Berenberg Capital Markets. Your line is open.

Hey. Good afternoon, everyone. Just two quick ones for me. On the first side, one of the software business [Technical difficulty] working on introducing any new software products to maybe expand the scope of your portfolio for customers or are you just more so committed to reinvesting in the development of your existing solutions? Just thinking about different ways to bolster growth in this segment. And then, secondly, just what should we expect on annual cash burn over the near-term as internal clinical development costs scale? Thanks.

So on the first question, did you say energy or did you say in general, just the whole platform? I wasn’t sure. I missed one of the words you said.

I said in general, just working on…

In general.

Yes, new software solutions, it could be elsewhere in the discovery development cycle, just more on that.

Yes, yes, perfect. Yes, thanks. That’s a really important question. So, as you know, we really see ourselves as a science and innovation company. That’s been a long history of ours and it continues. We are really committed to continuing to make breakthroughs in the science. And they fall into a number of categories. Obviously, I won’t spend a huge amount of time, but let me give you the high points. One of the areas that we’re really excited about that we think will have a big impact on growth in the future is in target enablement. The number of targets for which we have structures and are therefore amenable to these physics-based methods is very small fraction of the human genome. But there are now experimental and computational methods that are promising to be really -- have the promise to be really transformational. And we think in the future, in the foreseeable future, we can enable nearly all targets. That’s obviously incredibly exciting. The other area that we are focused on is, of course, advancing those programs. So, as we said many times, a number of the properties that we can compute with essentially experimental accuracy is sufficient to have a profound impact on projects, but there is a lot more to be done. There are a number of properties that we can’t yet calculate with at experimental level of accuracy. And we’re putting a lot of effort into that. And with every property we add, it has that much more of an impact on projects. And the material science side, this is an area we’re very, very excited about. One of the areas that we’ve talked a lot about is in battery research. So, at the moment, batteries are essentially designed by trial and error. And we see the impact of that. We have batteries that are frustratingly long -- take long to charge, they get passivated. Some of them are flammable, as we all know. And we believe that at the core of all of those challenges is molecular design and physics based methods. So, we’re putting a pretty significant effort into advancing the science that sort of underlies the complex chemistry that’s occurring inside batteries at the electrode-electrolyte interface. And we think with progress in this area that can have a really profound impact on the demand for the technology and the impact that it can have. Those are just a few examples.

Ramy should I touch something on cash burn?

Oh, please. Yes.

Yes. Sorry. Gaurav, your second question and you saw that we reported cash burn of approximately $34 million this quarter, compared to $16 million last quarter. If you look over the year, I think that it’s roughly been in the range of about $30 million per quarter. At the end of the end of Q3, we had $479 million on the balance sheet. So approximately, we have four years of cash. I think that what we expect is that our software business will continue to grow. But we’re at the point now where we can start to see some operating leverage. And we’ve invested pretty heavily over the last few years, and we should see the revenue continue to grow, but the expenses -- so we think that the overall cash burn should moderate. And we still have a lot of opportunities from it seems like equity investments in some of the programs that Karen alluded to, but aren’t really even included in that balance sheet right now. So, I see a lot of opportunities for additional cash to come in, and also a moderation of our cash burn. As you know, Gaurav, we haven’t committed to profitability. We haven’t set a timeline for that. And I think you can see, we’re starting to see a really nice return from the investments we have been making in our discovery portfolio. And as Ramy described, we just see lots and lots of runway to create tremendous value from continuing to invest in our core platform. So, it’s -- so long answer to the question. We have a great balance sheet. I think you’ll see operating leverage on both sides of the business going forward, but equally terrific opportunities to continue to invest. And we plan to prosecute those opportunities to the fullest.

One moment. I am showing no further questions at this time. This will conclude today’s call. You may all now disconnect and have a pleasant day.