Welcome to Schrödinger’s conference call to review our third quarter 2024 financial results. My name is Madison and I will be your Operator for today’s call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and two. 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, Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Thank you and good morning everyone. Welcome to today’s call, during which we will provide an update on the company and review our third quarter 2024 financial results. In addition to our press release announcing our third quarter results, we also issued a press release announcing our new research collaboration and expanded software licensing agreement with Novartis. Both press releases are available on our website at schrodinger.com. Here with me on our call today are Ramy Farid, Chief Executive Officer, Karen Akinsanya, President of R&D Therapeutics, and Geoff Porges, Chief Financial Officer. 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 outlook for the full year 2024, our plans to accelerate growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of, initiation of and read-outs from our clinical trials, the clinical potential and properties of our compounds, the anticipated benefits of our collaboration with Novartis, the use of our cash resources, and our 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, 2024. 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. Also included in today’s call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures. Please refer to the tables at the end of our press release, which is available on our website, for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. 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 are transforming the way therapeutics and materials are discovered. Our industry-leading computation platform combines proven physics-based methods with the speed of machine learning to accelerate molecular discovery. Our platform is used by thousands of companies and research institutes worldwide, including every major pharmaceutical company, and the success of collaborators and co-founded companies reflects the power of our approach. Today, we are very pleased to review the progress we have made across the business this quarter, beginning with this morning’s exciting news of our collaboration with Novartis. Under the multi-target collaboration, Schrödinger and Novartis will combine preexisting research efforts to advance therapeutics for a number of undisclosed targets outside of oncology. Schrödinger will receive $150 million upfront and be eligible to receive up to $2.3 billion in milestone payments, as well as mid-single digit to low double-digit royalties on sales. This collaboration is a testament to the track record of our world-class discovery and translational science teams, who are leveraging our leading computational platform at scale. Novartis also signed an expanded multi-year software agreement that substantially increases their access to our computational technology and enterprise informatics platform. The collaboration and software license agreement with Novartis combines further development of programs from our portfolio, commitment to develop candidates against targets of mutual interest, and increase scaled deployment of our software by Novartis. We are seeing increased demand for these combination drug discovery-software arrangements that leverage synergies between different components of our business. Turning to our financial results, total revenue for the third quarter was $35.3 million and software revenue was $31.9 million. While software revenue was slightly below our expectations, we are excited about the opportunities we have to finish the year strongly. Customer engagement is high. We are confident about the expected scale of customer renewals and scale-ups through the end of the year, and we have raised the lower end of our software revenue growth guidance for the year. Geoff will discuss our third quarter financial results and updated guidance in more detail shortly. We continue to see progress and value from companies we have co-founded. Ajax Therapeutics recently dosed the first patient in their first Phase I study, Nimbus announced updated Phase I/II clinical data for their HPK1 inhibitor, and we added $48 million to our cash balance as a result of Lilly’s acquisition of Morphic. Our proprietary pipeline is also advancing and we look forward to reporting initial data from all three of our clinical stage programs next year. Through the remainder of the year, we see clear opportunities to drive software growth, extend our scientific leadership and advance our collaborative and proprietary pipeline. I will now turn the call over to Karen, who will discuss the Novartis collaboration in more detail and provide an update on our proprietary pipeline.

Thank you Ramy, and good morning everyone. The collaboration we announced today with Novartis builds on more than a decade of productive collaborations with pharmaceutical partners and companies we’ve co-founded. This significant new agreement underscores our track record of generating high quality candidates for clinical development and the growing interest across the industry in scaling up the use of our physics-based computational platform to solve drug design challenges. Over the last few years, we have leveraged our expertise in experimental structural biology and protein structure refinement together with our computational platform to pursue novel insights and chemical matter for compelling first-in-class targets outside of oncology. A selection of these undisclosed programs were licensed to Novartis as part of this transaction. Schrödinger and Novartis will now combine our existing research efforts to advance therapeutics for these programs and collaborate on additional targets of mutual interest in Novartis’ core therapeutic areas. The decision to partner these programs with Novartis reflects our view that their deep therapeutic area and clinical expertise will amplify and accelerate the opportunity to move these programs through development after candidate selection and potentially to commercialization. This partnership is emblematic of our business development and translational science strategy to leverage the extensive capabilities and experience of specific partners to advance and maximize the potential of certain proprietary programs. The Novartis collaboration is also an example of an important initiative that we have implemented in recent years, the juxtaposition of a drug discovery collaboration and significantly expanded software access enables peer-to-peer platform learning while pursuing joint therapeutic programs. This enhances knowledge transfer and firsthand understanding of the impact of the platform during the scale-up journey, facilitating wider adoption in the future. Turning briefly to our proprietary pipeline, we are continuing to make progress in our three clinical stage program. SGR-1505,…

Thank you Karen, and good morning everyone. Q3 was a very productive quarter for Schrödinger. During the quarter, our software revenue grew by 10%, and for the first nine months of the year, our software growth of 11% is in line with our expectations and the usual timing of large renewal opportunities. We initiated the predictive tox project, funded in part by the grant from the Gates Foundation, and today we announced a significant new multi-target drug discovery collaboration with Novartis, diversifying our collaboration into new therapeutic areas. Our clinical programs continue to advance and during Q3, we realized $48 million from the successful sale of Morphic to Lilly. We bolstered our cash reserves as a result of this sale and expect our capital position to increase as a result of the collaboration we announced today. Software revenue in Q3 was just below the lower end of our expectations, driven by a slower than expected ramp in our activities for the predictive tox initiative in August and the associated slower recognition of the revenue from the grant from the Gates Foundation, as well a smaller software opportunities that were deferred or reduced compared to our expectations. We expect the shortfall in the revenue for the Gates-funded grant to be made up over the remaining quarters of the grant. Based on these expectations and our outlook for the quarter, we have narrowed and increased the lower end of the range of our software revenue growth guidance for the year. Drug discovery revenue was significantly lower in Q3 than Q2 and compared to Q3 in the prior year. This reduction was based on revenue recognized from milestones and upfronts in the prior periods that did not recur in Q3. Based on the timing of milestones for the remainder of the year, we…

Thanks Geoff. We are very pleased with the progress we have made this year and the opportunities we have to deliver on our full-year results. I’d like to acknowledge the extraordinary efforts of our employees. Our achievements are a direct result of their dedication, commitment and hard work. At this time, we’d be happy to take your questions.

Thank you. [Operator instructions] We will take our first question from Michael Yee with Jefferies. Please go ahead.

Hey, good morning guys. This is Matt on for Mike. Thanks so much for taking the question. Can you expand just a bit on the key drivers here that give you confidence in the updated software guidance today, and especially can you expand at all on the extent that the deal today helps you meet that guidance, and any other trends that you would maybe highlight or point to that give you confidence this quarter and moving forward as well? Thanks.

Sure Matt. The fourth quarter has always been, or at least in recent years a large proportion of annual revenue. If you look back the last few years, it’s been in the range of 42% to 44% of total revenue for software, and we expect that to be similar this year. We are on track to close the renewals necessary to meet that narrowed guidance range. Clearly Novartis is a significant component of that, but it’s not the only component of it, and we are in discussions with multiple other companies about the nature of their renewals. As I said in my prepared remarks, it’s whether the renewals--the number of years of the renewal, the exact mix between on-prem and hosted revenue all influences where we come in that range, but we’re very confident about the range, we’re very confident about the discussions we’re having. Clearly we’re almost halfway through the quarter now, so that’s the basis for the increased confidence that we’ve conveyed within our range.

Thank you.

Thank you. We will take our next question from Mani Foroohar with Leerink Partners. Please go ahead.

Hey guys, thanks for the questions, and congratulations on the deal. As I’m looking at the updated guidance, Geoff, should we think about the narrowed drug discovery guidance as reflecting a timing event, i.e. should we be looking to perhaps a more fulsome 1Q/2Q next year in drug discovery? Then I have a quick follow-up.

Thanks Mani. Yes, I think in my prepared remarks, I indicated that the basis for the reduction in the range was related to uncertainty about timing of events around the end of the year. I think our confidence about next year is considerable already. We’re not giving formal guidance about next year, but you can see some of the opportunities that we were anticipating towards the end of the year, we’re being cautious about in terms of timing, and clearly the [indiscernible] significant announcement with respect to next year as well, so all of those things give us a pretty high degree of confidence turning into the year.

That’s helpful. From the comments here on the Novartis deal, give us some color on how you guys are thinking about the opportunity set on renewals with large existing partners? If you could help comment a little bit on what you’re seeing in terms of new partners, new clients, new customer adds, and to what extent we should think about opening of the capital markets and exposure to biotech funding cycles in terms of new client formation as being a contributor over the next few months, and what you guys are seeing in that slice of the end market for you guys?

Yes, thanks Mani. We are seeing positive new inquiry with respect to smaller companies interested in using our software. I think it’s premature for us to be saying that they will be a significant contributor to our software growth, and to a certain extent we’re also--you know, the numbers are getting fairly large, and so it would take quite a number of emerging biotech companies initiating use of our software to offset what we’re seeing with large companies. We remain very excited about the many large and, frankly, midsized companies who aren’t using our technology at scale yet, and we’re focusing our efforts on that group of customers; but equally, we’re open for business with emerging companies, and I think much of the inquiry we’re seeing there is actually for private companies, pre-IPO companies. I don’t think we’re seeing a significant tailwind in terms of companies that have accessed the public markets yet. That may be something we see next year, and we’re certainly prepared to respond to that. Our sales organization is in dialog with those sort of companies and, frankly, their investors, but so far it’s not hitting our numbers.

Alright, thanks. That’s really helpful.

Thank you, and we will take our next question from Scott Schoenhaus with Keybanc. Please go ahead.

Hey guys, this is Steve on for Scott. Just wondering, what percent of your software book of business is now cloud versus on-prem?

Steve, was your question what percentage of our book of business is hosted versus on-prem?

Yes, that’s correct.

Okay, so of our total software in Q3, 28% was hosted, up from 23% last year. If you focus on just the contracts with customers, then that percentage is going to be even higher. I don’t have the number in front of me, but it’s going to be probably in the high 30% range. Now, that number does go up and down from quarter to quarter, so as I indicated in my prepared remarks, because a significant part of the software license to Novartis will be on-prem, the on-prem piece will bump up; but I would encourage you to look at some sort of smooth, long term trend to see the trajectory of the transition to hosted, which we think is going to continue over the next few years.

Great, thank you.

Thank you, and we will take our next question from Vikram Purohit with Morgan Stanley. Please go ahead.

Good morning everyone, this is Gaspa [ph] on for Vikram. With initial MALT1 data expected shortly, could you recap for us your expectation of what you expect to report with this data release and how you are internally defining success and establishing the [indiscernible] for this read-out? Thank you.

We’ve spoken about releasing data in the first half of 2025 - this will be the first disclosure about our ongoing Phase I dose escalation study. The focus of that study is safety, PK, PD, and early evidence of efficacy. In the disclosures next year, we expect to share an update on those data. In terms of the type of data we’re looking for, obviously MALT1 is a very new mechanism - there’s only one other set of clinical data out there, but we’ll be looking to see positive data obviously on the performance of our molecule from a drug property point of view, but also of course looking for evidence of activity in relapsed refractory B-cell malignancy patients. Now, again I want to remind you, this is a dose escalation study. It is not powered to do a full efficacy analysis, but of course we’ll be sharing whatever data we can when that release comes out.

Thanks very much.

Thank you. We will take our next question from Evan Seigerman with BMO Capital Markets. Please go ahead.

Hi guys, thank you so much for taking my question. Geoff, could you just talk a little bit more about how you’re thinking about your P&L management going forward, especially with all of these more advanced clinical programs, and maybe just remind us as we get to this readout, what’s the bar for efficacy, or how are you thinking about making these go/no-go decisions to advance your clinical programs beyond kind of phase I? Thank you, guys.

Okay. Karen, I’ll jump in and talk about the P&L, and maybe you can talk a little bit about the efficacy bar. We are pretty focused on bringing our expense growth rate down and seeing some operating leverage emerging from the top line. I would say we’ve guided that our expense, opex growth this year is going to be at the lower end of the prior range, so back into the single digits, and we are optimistic that we can continue to bring that down. Now conversely, we are committed to continuing to invest in our platform and to invest in our proprietary molecules. The collaborations go through the income statement, as you know, in a different place, so what you’re seeing in our R&D expense, which is the largest driver of expenses, is platform and proprietary molecules. As we look ahead for the immediate future, there isn’t a large--there isn’t a lot of pressure to drive those expense plans up, so on the therapeutic R&D, you correctly point out that we’re facing questions about further clinical development, but I think we’ve been pretty clear that it would be very unlikely that we would advance on our own account all of the molecules in our portfolio. That’s not our intention or our expectation, and it’s not what we’re planning for financially. We’re optimistic that there are some opportunities to take them forward, that they will emerge from the data next year, but now that we will be committed to all of that. I think that we’re on a pretty good path to managing the opex growth next year consistently with the trend that we’ve seen this year and start to really see that operating leverage kick in. I apologize for the vague answer as we’re in process of finalizing our outlook, and we’ll give more detailed guidance for next year, but that hopefully gives you a sense of the color.

That’s very helpful, because it’s just--yes?

Sorry.

Yes, sorry Karen - on the go/no-go, I know I ask you this a lot, but now we’re getting close, I’m curious if your views have changed, or just how they’ve evolved. Thank you.

The bar for efficacy for MALT1.

Okay, so first of all, this is a mechanism where we believe that there has to be evidence of monotherapy activity. This mechanism is sort of designed to really work in combination with standard of care, and I mean ECR2 or BTK inhibitors where you’re seeing the opportunity to expand the activity of those molecules on those mechanisms as people become relapsed or refractory. But we think it’s really important that MALT1, also CDC7 and Wee1 offer monotherapy activity, and so that’s the bar - it’s looking for clear evidence that these mechanisms are having activity alone in terms of patient response and are contributing essentially to duration of response, once we get to combination studies.

Thank you. We will take our next question from Joe Catanzaro with Piper Sandler. Please go ahead.

Great, thanks for taking my questions. I actually had a quick one on the PRMT5 space, given your recent poster. There’s been a couple of recent clinical updates for competitive PRMT5 programs, so just wondering if you believe those data provide real clinical validation for that target, and when you look at those data, where do you see opportunities for your program to differentiate? Appreciate you’re still early in development there. Thanks.

Yes, I think you’re pointing to the fact that PRMT5 is an exciting mechanism that sort of burst onto the scene a couple of years ago, benefiting obviously from the synthetic lethal relationship between PRMT5 and MTA, very interesting clinical data released last year at the triple meeting showing monotherapy activity in a very broad number of tumor types, actually, and that includes really tough tumors like glioblastoma. The update this year, I think has demonstrated that there is evidence of activity again across a number of tumors, but the question, I think, that we’re all wondering about is whether the molecules that are out there today in the clinic are best-in-class, and we have pursued molecules that we believe offer the greatest opportunity to go after the broadest set of tumors, and that includes brain-penetrants - we think that’s really important, given the strength of the signals that have been seen previously in glioblastoma, but also other activity around DDI, where we think that PRMT5 and MTA is going to be combined with other drugs, actually, to maximize the potential of the mechanism and the efficacy that’s seen in combinations. These are some of the factors that we’ve been really focused on in our drug discovery efforts, and we also, I think in this abstract, reported we think we have an angle on maximizing that synergy between PRMT5 and MTA, which we think could lead to deeper responses. As you said, it’s early days for this program. We still are enthusiastic about PRMT5 MTA, and I think again early days for our program but excited to participate in what we think is going to remain an important mechanism for cancer patients.

Great, very helpful. Thanks for taking my question.

Thank you, and we will take our next question from Matthew Hewitt with Craig Hallum. Please go ahead.

Hello, this is Toff [ph] on for Matt. I was wondering if you’d give us an update on the predictive toxicity platform and if that is available to customers yet. Thank you.

Sure, yes. I can comment on that. It is not yet available widely to our software customers. We’re making now very good progress on expanding the number of targets that are part of the virtual panel. We’re using that technology very extensively in our collaborations, and we expect to engage with customers in a sort of select way, as we always do with technology like this, where partners get early access to it but it’s not widely available yet.

Thank you.

Thank you. We will take our next question from Brendan Smith with TD Cowen. Please go ahead.

Hi, thanks very much for taking the questions. Just a quick one, kind of expanding on an earlier question. I guess looking earlier in the pipeline, you have a few non-oncology programs listed there. Just really wondering, as you kind of continue to expand some of your collaborations, how should we think about the prioritization of programs in different spaces as they near the clinic? Is it fair to assume the non-oncology assets are still the prime targets for collaborations and your focus remains in oncology, or do you have plans today to eventually invest internally in actual clinical infrastructure, even for phase one for some of those other areas yourselves? Thanks very much.

Yes, I actually really like that question. It’s something we’ve been thinking about a lot. Obviously there’s still significant unmet need in oncology. We think that our platform allows us to design really great molecules with great properties for that particular set of targets in that therapeutic area, and so we remain committed to highly validated targets in that space. However, we also think that some of our work to come up with molecules for first-in-class targets in other large disease areas, that include immunology, neuroscience, other huge disease areas that have very limited small molecule options, this is very important to us and I think that we’ve been able to make significant progress on some of those undisclosed programs. In terms of how we think about development of those, we believe that we are very well equipped not just to develop compounds in oncology, we’ve got a really great team executing on our current cohort of programs, but we also believe that there is very strong opportunity for us to take a subset of programs in areas outside of oncology into phase one studies and potentially beyond. We think that some of the targets we’re focusing on have very clear value inflection points that will be apparent in phase one very early on, and this comes from, I think, the validation of the pathways that they’re in, where we know what the biomarkers and the end points are that we can study in those phase one studies, so it is not the case that we are restricting our clinical development to just oncology. We intend to pursue a select number of our non-oncology assets into phase one as well.

That’s very helpful, thank you.

Thank you. We will take our next question from Michael Riskin with Bank of America. Please go ahead.

Hi, this is Sean Kim on for Michael. Good morning. You guys talked about the reduced probability of hitting the milestones in 2024, but outside of the Novartis collaboration in the first half of ’25, or even 2025 altogether, does that reduced probability mean that you’re unsure those milestones would be hit in general or can we think of them as just pushed back?

Yes, I don’t want to say that any milestone that’s in the future is 100% certain, but I think we’re trying to convey that our expectation is that those milestones will still be recognized next year rather than this year. Until we get to the point, we’re doing experiments, so we have to wait until the data comes through and then we have the discussions with partners, but that’s our expectation. The other factor, of course, is also when there is elements of the Novartis collaboration, we start to get revenue recognized as well. I indicated in my prepared remarks that our expectation right now is that the drug discovery revenue contribution will be very small from that collaboration, and that’s simply because of the timing of when we start doing work on the project and then can recognize the revenue. But equally, I hopefully conveyed that we think that that will be a significant contributor to our revenue next year because by then, we’ll have the project teams up and running and we’ll be executing the work on a number of programs in that collaboration.

Got you, noted. All right, I’ll just keep it to one. Thank you.

Thank you, and once again if you would like to ask a question, please press the star and one on your telephone keypad now. We will take our next question from David Lebowitz with Citi. Please go ahead.

Good morning, John on for David. Thanks for taking our question. Can you talk about the revenue recognition and pricing dynamics of a hosted contract versus a non-hosted contract, post-execution? How do these revenue recognition dynamics differ for a standard one-year contract versus a longer term agreement? Thanks.

Great question. The hosted contracts are recognized ratably over the period of the contract, so if it is a one-year contract and let’s just say the ACB is $1 million, then roughly $250,000 per quarter over that year. If it’s a three-year contract of $1 million a year, roughly $250,000 per quarter for the three years. An on-prem contract with a licensed server is on the premises of the customer. The revenue shifts to being substantially recognized in the period in which the contract is initiated, so ballpark would be if it’s a one-year contract that is an on-prem license, you could see as much as 80% of the revenue recognized in the period in which the license is signed, so that would be, using my million-dollar contract, $800 in the quarter. Now, these numbers are gross generalizations. All our contracts have maintenance components, so we’re providing services, we’re providing updates, we’re making sure that the technology is running for the customer, and so maintenance is recognized ratably as well. It depends on how many--how much services component there is. That can shift things over to ratable as well. Then lastly, on let’s just say a three-year contract, as much as two-thirds of the revenue could be recognized in the period in which the contract is signed, but again that depends on the balance between maintenance, services, and the actual software in the contract. All of these contracts are different, but those are some broad principles that you could use after thinking about [indiscernible] the value.

Very helpful, thank you very much.

Thank you, and I am showing no further questions at this time. That concludes today’s call. You may now disconnect.