Business Overview
Schrodinger, Inc. (SDGR) is a leading provider of computational platforms that are transforming the way drug discovery and materials design are conducted. With over 30 years of research and development investment, the company's physics-based computational methods and cutting-edge machine learning techniques have positioned it as a pioneer in the biopharma and materials science industries.
Schrodinger was founded in 1990 by Dr. Richard Friesner, a professor of chemistry at Columbia University. The company's origins lie in Dr. Friesner's research in computational chemistry and the application of physics-based simulations to model molecular behavior. Over the following decades, Schrodinger developed a differentiated, physics-based computational platform that enabled the discovery of high-quality, novel molecules for drug development and materials applications.
In its early years, Schrodinger focused on licensing its software solutions to biotechnology and pharmaceutical companies, academic institutions, and government laboratories worldwide. The company gradually built a loyal customer base by demonstrating the ability of its computational platform to accelerate and lower the costs of molecular discovery compared to traditional experimental methods. However, Schrodinger faced challenges in the 2000s, including the need to continuously invest in research and development to keep pace with evolving customer demands and growing competition.
To diversify its revenue streams, Schrodinger began collaborating with biopharmaceutical companies on drug discovery projects in the late 2000s. These collaborations provided upfront payments, research funding, and potential milestone payments and royalties, but also required the company to share intellectual property rights. Navigating these collaborative relationships proved challenging at times, as Schrodinger sought to balance the interests of its partners with its own proprietary drug discovery efforts.
In 2018, Schrodinger took a bold step by beginning to develop its own pipeline of proprietary drug discovery programs, leveraging its computational platform to identify and advance novel therapeutic candidates. This move into drug development added operational complexity and risk, but also presented the opportunity for the company to capture a greater share of the value created by successful programs. Early successes, such as the identification of a unique series of acetyl-CoA carboxylase (ACC) inhibitors through a collaboration with Nimbus Therapeutics, bolstered Schrodinger's confidence in its computational approach to drug discovery.
The company operates through two main business segments: Software and Drug Discovery. The Software segment focuses on licensing Schrodinger's computational platform to biopharmaceutical, industrial, and academic customers, enabling them to accelerate their own drug discovery and materials design processes. The Drug Discovery segment leverages Schrodinger's proprietary platform to advance its own pipeline of novel therapeutic candidates, while also collaborating with leading pharmaceutical companies to discover and develop new drug candidates.
Schrodinger's software platform is licensed by biopharmaceutical and industrial companies, academic institutions, and government laboratories around the world. The company is also applying its computational platform to advance a broad pipeline of drug discovery programs in collaboration with leading biopharmaceutical companies. In addition, Schrodinger uses its computational platform to discover novel molecules for its pipeline of proprietary drug discovery programs, which the company is advancing through preclinical and clinical development.
In 2024, Schrodinger exceeded its software revenue expectations, established a new drug discovery collaboration and expanded software agreement with Novartis, and continued to advance its collaborative and proprietary pipeline. The company also achieved important milestones at companies it co-founded, such as the acquisition of Morphic Holding, Inc. by Eli Lilly and Company for $3.2 billion.
The company's priorities for 2025 include driving continued increases in adoption of its computational technology and enterprise informatics platform, as well as advancing its proprietary drug discovery programs, with plans to report initial Phase 1 data from three programs in 2025.
Financial Performance and Metrics
Schrodinger has demonstrated impressive financial performance in recent years, with its software business leading the way. In 2024, the company reported total revenue of $208 million, with software revenue accounting for $180.4 million, a 13.3% increase over 2023. The company's software gross margin remained strong at 79.5% in 2024, although it declined slightly from 81.5% in the previous year due to increased costs associated with new software initiatives.
The company's drug discovery segment generated $27 million in revenue in 2024, down from $58 million in 2023, primarily due to the timing and recognition of milestone payments from collaborations. Schrodinger continues to make significant investments in its proprietary drug discovery pipeline, which is expected to drive future growth and value creation.
Key performance indicators (KPIs) for Schrodinger's software business remain strong, with the number of customers with an annual contract value (ACV) exceeding $5 million increasing from 4 to 8 in 2024. The number of customers with an ACV greater than $1 million also grew from 27% to 31% during the same period, and total ACV increased by 24% to $191 million.
For the most recent fiscal year, Schrodinger reported a net loss of $187 million. The company's operating cash flow (OCF) was negative $157 million, and free cash flow (FCF) was negative $166 million.
In the most recent quarter, Schrodinger reported revenue of $88.32 million, representing a 19% increase compared to Q4 2023. The net loss for the quarter was $40.2 million, with operating cash flow of negative $31 million and free cash flow of negative $32 million.
While the company does not disclose detailed performance by geographic markets, it is noted that revenue from China accounts for less than 5% of total revenue.
Liquidity
As of the end of Q4 2024, Schrodinger had a strong liquidity position with $367 million in cash and marketable securities. The company's debt-to-equity ratio stands at 0.28, indicating a relatively low level of leverage. Schrodinger's current ratio and quick ratio are both 3.31, suggesting a robust ability to meet short-term obligations.
To further enhance its financial flexibility, Schrodinger has a $250 million at-the-market (ATM) equity offering program in place, of which $241.1 million was available for sale as of September 30, 2024. This provides the company with additional access to capital if needed for future growth initiatives or to support ongoing operations.
Computational Platform and Competitive Advantages
Schrodinger's computational platform is built on a foundation of physics-based simulations and machine learning techniques, which enable the company to rapidly identify and optimize novel drug candidates and materials with superior properties. The platform's ability to accurately predict molecular properties and behaviors, combined with its AI-powered optimization capabilities, has made it a valuable tool for both the software and drug discovery segments.
In the software business, Schrodinger's platform is licensed by a diverse customer base, including leading biopharmaceutical companies, academic institutions, and industrial organizations. The platform's ability to accelerate the drug discovery process and improve the probability of success has made it an essential tool for many customers, as evidenced by the company's strong customer retention rates and growing ACV metrics.
In the drug discovery segment, Schrodinger is leveraging its computational platform to advance its own pipeline of proprietary drug candidates, as well as collaborate with pharmaceutical partners to jointly discover and develop new therapeutics. The company's focus on high-value therapeutic areas, such as oncology, neurology, and immunology, has yielded promising results, with several of its proprietary programs advancing into clinical trials.
Risks and Challenges
While Schrodinger has demonstrated impressive growth and technological leadership, the company faces several risks and challenges common to the biopharma and software industries. These include intense competition from both traditional drug discovery methods and emerging AI-driven approaches, the inherent risks and uncertainties associated with drug development, and the potential for disruptions in the software business, such as customer churn or delays in new product adoption.
Furthermore, Schrodinger's reliance on collaborations and partnerships with pharmaceutical companies introduces additional risks, as the success of its drug discovery programs is partly dependent on the priorities and decision-making of its collaborators. The company also faces the challenge of continuously innovating and enhancing its computational platform to maintain its competitive edge in a rapidly evolving technological landscape.
Outlook and Conclusion
Schrodinger's outlook for 2025 and beyond remains positive, with the company poised to capitalize on the growing demand for computational solutions in drug discovery and materials design. The company expects its software revenue to grow by 10-15% in 2025, driven by increased adoption among its existing customer base and the introduction of new platform enhancements, such as its predictive toxicology capabilities.
In the drug discovery segment, Schrodinger expects revenue to be in the range of $45-$50 million in 2025, reflecting growth from the $27 million reported in 2024. The company is focused on advancing its proprietary pipeline, with plans to report initial Phase 1 data from three of its clinical-stage programs in 2025. The company's collaboration with Novartis and the expansion of its partnerships with Otsuka and Eli Lilly also demonstrate the continued demand for Schrodinger's computational expertise in the biopharma industry.
Schrodinger anticipates its software gross margin to be in the range of 74-75% in 2025, down from 79.5% in 2024, due to increased contribution revenue from the predictive toxicology initiative. Operating expenses are expected to grow by less than 5% in 2025, with some expenses shifting from R&D to cost of goods associated with the predictive toxicology initiative and new collaborations. The company also expects net cash used in operating activities in 2025 to be lower than in 2024, indicating improved operational efficiency.
Overall, Schrodinger's unique combination of physics-based computational methods and AI-powered optimization techniques has positioned the company as a leader in the rapidly evolving world of molecular discovery and design. As the company continues to execute on its strategic priorities and expand its collaborations, it remains well-positioned to drive long-term value for its shareholders and transform the way drugs and materials are developed.