Thank you for standing by. Welcome to Schrodinger's conference call to review third quarter 2025 financial results. My name is Rob, and I'll be your operator for today's call. [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, Chief Corporate Affairs Officer and Head of Investor Relations. 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 2025 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 schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer; Richie Jain, Chief Financial Officer; and Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships. Following our prepared remarks, we'll open the call for Q&A. During today's call, management will make statements that are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to our financial outlook for the full year 2025, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of and initiation of and readouts from our clinical trials, the clinical potential and properties of our compounds, the use of our cash resources as well as future 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 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 quarter ended September 30, 2025. These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events or otherwise. And with that, I'd like to turn the call over to Ramy.

Thank you, Jaren, and thank you, everyone, for joining us today. We made very solid progress during the third quarter. Total revenue was $54 million, a 54% increase from the third quarter of 2024, reflecting strong execution across our business. Software revenue in the third quarter was $40.9 million, representing 28% year-over-year growth and was just above our expectations. Drug discovery revenue was $13.5 million, highlighting the progress in our collaborative programs. We are seeing continued strong demand for advanced computational solutions across the industry. We are also pleased to see wide recognition that simulated data is required to realize the full potential of AI and drug discovery. To effectively harness AI and machine learning for molecular discovery, vast amounts of high-quality physics-based simulation data are essential for training robust AI models. Experimental data alone is insufficient to generate the required training data. Schrodinger's differentiated and extensively validated platform generates high-quality simulated data at a scale that far exceeds what is possible with experiments alone. With this new computational physics plus AI paradigm becoming the accepted standard, we are very optimistic about the long-term potential and value of our platform. As we execute through the remainder of 2025, we are encouraged by the continued high level of customer engagement as the macroeconomic pressures that have impacted the industry stabilize. While we remain confident about our long-term growth opportunity, we are updating our software revenue growth guidance for 2025 to 8% to 13% from 10% to 15% to reflect our current expectations regarding the timing of certain pharma scale-up opportunities. Turning briefly to our pipeline. We continue to work toward completing the Phase I package for SGR-1505, our MALT1 inhibitor and the Phase I dose escalation study for SGR-3515, our Wee1/Myt1 co-inhibitor. Beyond these planned investments, we do not intend to advance our internal discovery programs into the clinic independently. This decision and the $30 million expense reduction in May improve our operational efficiency and long-term profitability profile. We are continuing to invest in advancing our platform, including making significant improvements to the accuracy and domain of applicability as well as usability, which is driving adoption among scientists throughout the R&D organization, not just dedicated computational chemists. Last week, we released our 2025-4 software update, which includes enhancements for challenging modalities such as bifunctional degraders. Additionally, the beta for our predictive toxicology solution is ongoing. This version encompasses approximately 50 representative kinases in addition to multiple key anti-targets. We are continuing to expand the number of off-targets supported in our platform and are optimistic about the potential long-term contribution of this product. Overall, we have made considerable progress this year and remain focused on executing against our strategic priorities, including increasing customer adoption of our software, delivering major scientific advancements to the platform and advancing our therapeutics portfolio. I will now turn the call over to Richie to discuss the financials in greater detail. Richie?

Thank you, Ramy, and good afternoon, everyone. Schrodinger had an excellent third quarter with strong growth in both software and drug discovery revenue, coupled with disciplined expense management. Total revenue for the quarter was $54.3 million, an increase of 54% compared to Q3 2024. The increase was driven by both higher software and drug discovery revenue. Software revenue was $40.9 million, an increase of 28% compared to Q3 2024 and just ahead of our expectations for the quarter. The increase was primarily driven by higher revenue from hosted contracts, on-premise renewals and contribution revenue from the grant related to our predictive toxicology initiative. This growth primarily reflects the expansion of existing accounts with limited contribution from new customers. Drug discovery revenue was $13.5 million compared to $3.4 million in Q3 2024. The increase reflects continued successful execution across our expanded portfolio of collaborations. Software gross margin for both Q3 2025 and Q3 2024 was 73%. R&D expenses were $42.8 million in Q3 2025, a 16% decrease from $51 million in Q3 2024. The decrease was primarily due to lower employee-related expenses and the continued shift of the predictive toxicology expenses into software cost of goods sold from internal R&D. Sales and marketing expense was $9.5 million, an 8% decrease compared to Q3 2024. G&A decreased 13% to $21.7 million. The decline in both expenses was primarily due to lower employee-related expenses. Overall, total operating expenses were $74 million in the quarter, a decrease of 14% compared to Q3 2024. Total other income was a gain of $13 million compared to a gain of $30 million in Q3 last year due to mark-to-market changes in our equity investments and currency fluctuations. Net loss was $33 million or $0.45 per diluted share versus a net loss of $38 million or $0.52 per…

Thank you, Richie, and good afternoon, everyone. Our highly experienced drug discovery team are pioneers of the predict first computational approach to drug discovery. We leverage structural biology breakthroughs and physics combined with the power and speed of AI to enable broad exploration of chemical space to identify novel molecules that repeatedly meet a wide range of product profiles. Examples of molecules discovered as part of collaborations include zasocitinib acquired by Takeda from Nimbus MORF-057 now advancing at Lilly following the Morphic acquisition and Structure Therapeutics, GSBR-1290, which all continue to make progress through the clinic. These Phase IIb and III assets represent the most advanced examples of medicines designed by leveraging large-scale use of our physics-based methods, along with AI and machine learning. Turning to updates on our clinical pipeline. Next month, we will present new translational data and a clinical update on SGR-1505, our MALT1 inhibitor during a [ poster ] session at the American Society of Hematology Conference. The abstract published on Monday builds on the encouraging data we presented in June, reinforcing SGR-1505 as a potential best-in-class MALT1 inhibitor for the treatment of relapsed/refractory B-cell malignancies in patients who become resistant to standard of care agents. The abstract includes initial data in patients with aggressive lymphomas such as ABC-DLBCL, where one patient has now achieved a complete response as well as updated safety and efficacy data in patients with Waldenstrom's macroglobulinemia or CLL. The poster will also include translational data on the mutational profiling of BTK and BCL2 inhibitor resistance mutations. These data, combined with the recent orphan drug designation by the FDA in Waldenstrom's, support the therapeutic potential and commercial opportunity for SGR-1505. We are continuing to focus on securing the right strategic partnership to ensure this program receives the dedicated focus and resources required…

Thank you, Karen. We have made significant progress across the business this quarter, and we are optimistic about our outlook through the end of the year. Looking ahead, we are operating at the intersection of 2 powerful currents shaping the future of molecular discovery, the integration of computational drug discovery and the industry's dramatically increased focus on AI. We are at the forefront of this paradigm shift. We believe our technological advantages, combined with the strategic actions we have taken to improve our operational efficiency and long-term profitability profile, will position us to deliver growth in the years to come. At this time, we'd be happy to take your questions.

[Operator Instructions] Your first question today comes from the line of Mani Foroohar from Leerink Partners.

A question about the implications of the guidance regarding the reduced spend year-over-year and trimming of OpEx. How should we think about that in line with your commentary around reduced focus on novel clinical development, et cetera? What does that imply in a longer-term time horizon about how we should think about your OpEx trajectory?

Yes, Mani, thanks for the question. I think we've -- just to summarize the actions we've taken. We announced a $30 million expense reduction in May. We've achieved more than half of that goal. We'll achieve the full amount by next year. The announcements that we've made today regarding our clinical intentions, that has the effect of another roughly $40 million. That is putting us on a track towards improving our profitability profile. We're not guiding to any specifics there, but these are actions that we've taken to improve the overall profitability profile that we're on.

Okay. And as a quick follow-up, [indiscernible] got the one. Do you guys think of formal profitability either in GAAP or cash terms as a meaningful milestone to pursue? Or is that not a metric that you guys think is really meaningful on its own?

Yes. It's a meaningful milestone for sure, and we're taking actions towards that goal. I think, again, another way that we're thinking about this is the -- we went public in 2020. We've not raised external capital since then. There was a follow-on in 2020, but nothing since then. We've been incredibly productive in growing the business between software revenue and drug discovery revenue. And we've had an incredibly productive business development effort in our discovery programs, that's generated $600 million of cash over the last 5 years. So we are focused on longer-term profitability and improving the profile. And these are the actions that we're taking towards that goal.

Your next question comes from the line of Scott Schoenhaus from KeyBanc Capital Markets.

Nice quarter. Question on the software guidance here. You've been reporting pretty nice software growth. Third quarter was really strong, 28% growth. And there was comments about sort of seeing a slowdown in the end markets with your discussions with your customers. Maybe talk about what's changed over the last -- or maybe when this started -- the slowdown started to happen? And maybe by cohort where you're starting to see the slowdown happen on the software side?

Yes. Thanks, Scott. So yes, as you mentioned, we're pleased with the quarter, the quarterly results, and the year-to-date results with software growth of roughly 30%. As you know, there's been a multitude of factors impacting the whole pharmaceutical industry this year. Despite that backdrop, we've been encouraged with the continued high level of customer engagement and the initial signals that suggest that the industry is stabilizing and poised for a recovery. But I think we have to be honest that sustained improvement in the sector may take time, and we are cautiously optimistic. With that in mind, we did lower the software guidance by 2% at both ends of the range to reflect the uncertainty regarding the timing of certain pharma scale-up opportunities. It's worth noting that our scheduled renewals continue to be on track. What's changed since our last call in August is the conversations that we've been having with our customers regarding scale-up opportunities have been delayed longer than anticipated. As these conversations matured or have matured, we have greater visibility into the size of the opportunity, but less visibility into the timing of close. We also did not anticipate the continued challenges in the biotech sector. We did not factor that into our revenue guidance growth for the year, but some of the challenges have been greater than we expected and have persisted over the previous few months. The underlying fundamentals with those customers have been weaker. You've probably seen all the news that we have been seeing with layoffs and companies altogether shutting down discovery or not achieving anticipated financing rounds. Even recently, there's been some very high-profile companies that have shut down their operations altogether as an indication of continued challenges. So we are seeing some early signs of recovery with biotech as well, some new customer formation that are creating opportunities for us. But across pharma and biotech, those are the tops of the waves that we're seeing since our last call in August.

That's super helpful. And then I guess a follow-up question would be on the predictive toxicology. I know it's still in beta. How is the customer response to it? When do you think you can start monetizing? And I know, Ramy, you said it's more of a longer term opportunity, but maybe if we could just like provide more color there on the timing of the monetization of this product?

Sure. Yes. So first of all, we and actually the Gates Foundation are who funded the work, are quite pleased with the progress we've made. It's been really going extremely well. There's also really significant interest in the project and the initiative and in the ultimate product, the ability to actually predict toxicity associated with binding to off targets. And we're engaged in quite a number of discussions with customers. And as you noted, we are actually, yes, still in the beta. There are customers using it, but it's a little early to discuss feedback yet. So we're not quite there yet, but we're really, really pleased with the interest and the progress we're making both in the product itself, but also with the beta.

Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital Group.

Maybe just to dig in a little bit about your expectations of no longer advancing discovery into the clinic. Does this mean that you'll still be seeking and finding new molecules, but rather than advancing the clinic and then looking for partnerships, now you'll be looking for those partnerships pre-clinic? And what does that mean from an economic standpoint?

Yes. Thanks for the question. I think that we can just affirm that we are indeed continuing to work on discovery stage programs, new ideas, new programs as we have been doing actually since the inception of the therapeutics team here at Schrodinger. In terms of our expectations about when one would start to consider partnership, I want to reference the work that we've been doing over the last 5 years to essentially socialize programs from their very inception. Last year, you will recall that we partnered a program that was at the very early stages of drug discovery with Novartis for very significant economics. That was a $150 million upfront deal. It obviously allowed us to partner with a company that ultimately will take those programs into the clinic, but to do the discovery and sync with them so that not only are we very aligned on the target product profile and the features of the molecule, but they're at the same time learning about our platform as they go to adopt that system-wide. So this has worked very well. You heard Richie say that we generated $600 million over the last 5 years from this model. And so we're very confident that we can continue to generate value while working on a very diverse and broad range of targets in the discovery space.

Very helpful. And maybe my follow-up. It sounds like the renewals are on track, you're having success there, but you did note that you're still -- that you're struggling a little bit on the new logo or the new customer front. What do you think -- you also mentioned that you're seeing some improvement in the macro. What do you think it's going to take to kind of flip over where you are starting to sign new contracts with new customers to drive some incremental growth?

You want to take that?

Yes. Thanks for the second question, Matt. Yes, we -- I think the growth that we've delivered this quarter and mostly year-to-date has been growing within our existing customers and closing adoption gaps and scaling up relationships. As we think about new customers, new logos, the biotech market we're seeing, I'd say, are encouraging early signs. Every biotech has its own features. I think we're still trying to figure out how this one is going to come together and what opportunities that will open for us. There -- While there's encouraging signs, there's also discouraging signs with customers going out of business. So, there are some new capital formation opportunities that we think are exciting, that we are having nice conversations around. We are -- we need to advance those to close, and that can give us some greater visibility into those opportunities.

Your next question comes from the line of Evan Seigerman from BMO Capital Markets.

This is Conor on for Evan. I just maybe had a follow-up to the delay that was announced for 3515 today. I was just wondering if maybe you could expand a little bit on what occurred there and kind of maybe when we should be expecting to see data in the first half of '26?

Yes. So, similar to what we did when we were preparing to share data on our first program, SGL-1505, our MALT1 inhibitor, we've elected to complete the collection and analysis of data related to PK safety, PD and preliminary activity before providing an update on the ongoing trial. And just because of where we are in that cycle of data collection and analysis, we decided to move that over into the first half of 2026. We have not yet confirmed the venue or the exact timing of that, but we do expect that to be in the first half, potentially at a medical meeting.

Your next question comes from the line of Sean Laaman from Morgan Stanley.

This is Morgan on for Sean. Wondering if you could share any more details about the SGR-6016 NLRP3 inhibitor and any plans there in terms of what you're doing to progress that?

Yes. We're very excited about this compound. We haven't talked a lot about NLRP3 program. I think we covered it [ at ] Pipeline Day 1 year or so ago. We have selected a development candidate that has really impressive properties. We predict this to be a very low-dose drug, which we think set it out to be an excellent candidate for combinations. And it is a brain-penetrant NLRP3 molecule with pretty impressive properties there. We used our Esol capability to really optimize that brain penetration. So, a really nice looking molecule, preliminary talks are underway. And in terms of the plans for this molecule, it's kind of interesting and timely given the recent updates in the NLRP3 space. We have been socializing this program with potential partners, and we'll update you as those discussions progress. As you heard Ramy point out on his -- in his remarks, we won't be taking this forward alone or ourselves. We'll be doing that in the context of a partnership. And so again, we'll update you once we have more information about that.

Your next question comes from the line of Dennis Ding from Jefferies.

The decision to not do more clinical work on your own, I guess, why now? And is there any read-through to the Wee1 data you guys are seeing so far?

I'm sorry...

Can you repeat the second part of the question? Was it about Wee1 or -- what was the second part?

Yes. I mean, given the Wee1 and Phase I dose escalation, I'm just curious, this decision to not move things further into the clinic on your own, just the timing and just why now and why not wait a little bit more before making that decision seeing the full set of that data?

I think there are multiple answers to this question. So I'll invite Ramy and Richie to comment as well. I think you heard us explain on the call here to others that we have been extremely productive and successful at partnering programs that are still in discovery and generating -- are still in discovery or completed discovery where we're collaborating already with others. And so we think that is a very high potential model for us to continue without exposing ourselves to having to generate clinical data ourselves. So this is really not related, let me be clear, to our assessment of SGR-1505, our MALT1 inhibitor, which we're very excited about. And we've already announced that we plan to progress that in partnership with others, or with respect to 3515, as I just explained to you the prior -- on the prior question, we're still gathering that data. We expect to have a more complete analysis in the coming months. And you heard, we also talked about NLRP3. We're excited about all of these programs. We just think that Schrodinger's profile right now, It's much better to advance those molecules in the clinic with others and expand on what we've done in discovery to create value.

And I'll just add, as we've been saying since the IPO that we're very excited about the synergies between drug discovery business and the software business. And we see the height of those synergies in the discovery efforts. And that's why we're really focused on the discovery efforts. You heard earlier in -- both in our remarks how successful that is. I think Karen has said this, it's very obvious that this is something that we should be investing more in.

Perfect. And then as a follow-up, can you just please give an update on the Novartis partnership and the progress that has been made there since I mean, we've almost anniversaried the announcement of that partnership?

Yes, you're right. It's about 1 year since we announced. Excellent progress across the efforts there. Teams are working extremely well together, both on the advancement of the programs, but also on the incorporation of the [indiscernible] Schrodinger's platform into the work that Novartis are doing. You can tell from the revenue update that a portion of that is related to the Novartis progress. And so, happy to report all is going well, and we're looking forward to another productive year with Novartis.

[Operator Instructions] Your next question comes from the line of Andrea Newkirk from Goldman Sachs.

This is [ Twana ] on for Andrea. Just a quick one from us. Would you mind elaborating some more on the nature of the ASH disclosures for SGR-1505? Will those new data feature the same patients mostly from the prior analysis with some additional follow-up time? And what will be the most key takeaways from those data in your view?

Yes, absolutely. So if I could just take you back a moment to ASH -- sorry, to EHA. So at EHA, we provided our first update on SGR-1505. At that time, we had really only focused on a lot of the analysis around the indolent patients with CLL, WM. That was based on the FDA recommendation to delay dosing aggressive patients. So there's a couple of key updates, I would say, from the abstract that came out yesterday, that we'll be presenting at ASH. The first is an update on the aggressive patients. If I can remind you, our patients with DLBCL are in that category. If you have had a chance to look at the abstract, you will see there, and I can update you now, but we now have patients with a complete response in the aggressive space. This is -- let me remind you, monotherapy MALT1 inhibition producing a complete response in an aggressive lymphoma patient. We think that's an exciting update, and so we'll be providing a fresh cut of the data across both indolent and aggressive patients at the ASH meeting. The other focus of that abstract which we think is very important is the concept that patients who are double exposed, who've seen a BCL-2 inhibitor or a BTK inhibitor or both. The question was what is happening with respect to the resistance profile. So we've now done genomic profiling of several of the patients that have that particular profile. And what we're seeing there is that they do indeed have the sentinel mutations in both BTK. I'm going to pause there because I think I was about to [ say ] something that's in the actual [indiscernible] and I won't do that yet. But they do have the sentinel mutations that you expect to see in patients who have more aggressive disease and more difficult to treat disease. We think that is a endorsement of our idea that MALT1 is going to be an important medicine for patients with unmet need in lymphoma. And so that's the update that we'll be providing at ASH.

Your next question comes from the line of Brendan Smith from TD Cowen.

I wanted to ask maybe just another one on the predictive [ talk ] about Flare, and really how we should be thinking about the broader commercial rollout for this kind of relative to your existing customer base? Fully appreciate it's early, but I guess, are you expecting this to be maybe by and large, additive to people already using your other software? Or maybe just given where some of those users sit on different development teams, would you expect kind of separate customer population, even maybe within the same company is ultimately the prime target? And do you think that would maybe require a separate sales strategy or push? Just kind of trying to understand assumptions about who's likely to use this really out of the gate?

Yes, that's a great question. We see sources of growth in both those areas. Certainly, our existing customer base are interested in this, and it would be an add-on. This would require them actually spending more money. This is not something that would just get thrown in the package. But you bring up a really good point that we also believe this will allow us to tap into new budgets to the extent that this is obviously a technology that's of interest to toxicology groups, and that's not who we're traditionally selling our software to. We're traditionally selling our software to earlier discovery teams, computational chemistry teams. So we think we'll see growth in both those areas.

Your next question comes from the line of Michael Ryskin from Bank of America.

Apologies if I missed this, I've kind of been bounced around a couple of calls. But I want to go back to the sort of the phasing out of the independent clinical development activities. I got some of the notes from your earlier answers on that topic, but I just want to dig into it a little bit deeper. One question is I'm curious of, is this something that you came to, based on your experience with either MALT1 or Wee1, where you're trying to monetize those assets and you just kind of didn't have the interactions with potential sponsors and partners that you thought you would and you decided it's not worth the risk? Is this something based on sort of how much leverage you can have, how many individual programs you could push forward if you are just doing partnering out at discovery? Maybe talk about the bandwidth and the opportunity to sort of just think about number of programs you can bring forward using this new strategy shift. And I've got a follow-up.

So, I can start and just reiterate that the decision we've made today or that we've announced today is really nothing to do with the experience that we had developing our first 3 programs. The development went well, actually moved very quickly. So from idea to end of Phase I was a 5-year window for discovering the molecule and also doing the development for 1505. So, I will say the environment for development, particularly of oncology programs, has become quite challenging. And I think some of Richie's remarks about the biotech space and the risk profile of taking programs into the clinic, this is not unique to us. And so, I think the team has been very productive. You just heard we've got to EGFR and also our NLRP3. It's really a sustainability question, right? How many things can we put in the clinic one after the other and also reach the goals that you heard Richie talking about with respect to operational efficiency and our profitability. So the other piece that you asked about is we have been very productive at partnering programs during the discovery phase. And in fact, if we can partner programs during early discovery, the bandwidth question you asked is we can work on a lot of programs, obviously, in the early phases of discovery. That funnel narrows a little bit as you go a little later. But there's only so many things we can put in the clinic. And so when we looked at the overall mix of value creation in the last 5 years, we convinced ourselves that actually discovery partnerships has been very value creating, and we can continue to do that and scale that up.

Yes. So this is more about the success of the discovery program. To the extent that we can't do everything, we have to prioritize. It's very clear what we should be prioritizing. So I hope that's clear.

Okay. Okay. Yes. That's helpful. And if I can -- maybe if I can --

Maybe just one other remark.

Yes, go ahead.

The value we're generating in these programs, ultimately, we have milestones in the clinic when our discovery work is done. We have royalties on sales for those drugs that actually make it, and there's 15 of those right now. So the value creation continues even if we're not the ones doing the clinical development. There's the opportunity at least [indiscernible].

Yes. Yes, of course, that was -- Karen, that was actually going to be my follow-up question, was exactly on that. When we think about these programs now -- okay, so shift to exclusively discovery stage partnerships, things like that. When I think about these programs going forward, realizing that each one is going to be custom, it's going to be very unique. In terms of the royalties, the milestones, the economics, are they going to be similar to the ones you're doing already with Novartis and Bristol? Or are they -- is there any change to the economic structure there? Or is that pretty consistent?

Yes. What I'd say about that is -- we talked about this before. We -- as you know, we've done quite a number of these collaborations. And I think we've said this a number of times before that the economics that we've been able to demand as our track record continues to improve and the efficacy of the platform improves and the expertise of the team, the economics continue to get better. That's been the case with every program. Now are we saying for sure guarantee the next collaboration will have better economics? Of course, we're not saying that. But I think it's noteworthy that the terms continue to improve. And that certainly would be an expectation.

I am showing no further questions at this time. That concludes today's call. You may now disconnect.