Executive Summary / Key Takeaways

• Schrödinger delivered robust financial performance in Q1 2025, with total revenue increasing 63% year-over-year to $59.6 million, driven by strong software growth (+46%) and a significant surge in drug discovery revenue (+237%).
• The recent landmark collaboration and expanded software agreement with Novartis (NVS), including a $150 million upfront payment received in Q1 2025, validates Schrödinger's platform and is a key driver for the projected increase in 2025 drug discovery revenue ($45-50 million guidance).
• The company's differentiated physics-based computational platform, augmented by AI/ML, provides a competitive edge, enabling faster, more accurate molecular discovery and driving increasing adoption and scale-ups among large pharmaceutical customers.
• Schrödinger's proprietary pipeline is advancing, with three programs (SGR-1505, SGR-2921, SGR-3515) in Phase 1 clinical trials, and initial data readouts expected throughout 2025, representing significant potential value inflection points.
• A strong liquidity position of $512.1 million in cash and marketable securities as of March 31, 2025, bolstered by the Novartis upfront and improved operating cash flow, is expected to fund operations for at least 24 months, supporting continued investment in the platform and pipeline while anticipating lower cash burn in 2025.

The Computational Revolution in Molecular Discovery

Schrödinger, Inc. is positioned at the forefront of a transformative shift in how new medicines and materials are discovered. For nearly 35 years, the company has been pioneering computational molecular discovery, building a differentiated platform designed to accelerate the identification and design of high-quality, novel molecules. At its core, Schrödinger's strategy is dual-pronged: to provide its industry-leading software to researchers globally and to leverage this same powerful technology internally and through collaborations to advance a pipeline of drug discovery programs. This integrated approach aims to reduce the time and cost associated with traditional discovery methods, offering a compelling value proposition in the competitive landscape of life sciences and materials science.

The Engine of Innovation: Schrödinger's Differentiated Platform

Schrödinger's competitive moat is fundamentally built upon its physics-based computational platform, a technology that stands apart from purely data-driven or machine learning-only approaches. This platform leverages a deep understanding of physical principles to accurately predict the properties of molecules and their interactions with biological targets or materials. While competitors like Certara (CERT), Simulations Plus (SLP), and Dassault Systèmes (DASTY) with its BIOVIA division also offer computational tools, Schrödinger emphasizes the accuracy and predictive power derived from its physics engine, which is then amplified by advanced machine learning and AI techniques.

The company highlights specific technological differentiators such as its Free Energy Perturbation (FEP+) method, which it states provides significantly higher accuracy in predicting drug-target binding affinities compared to traditional methods. Tools like Maestro offer enhanced efficiency in molecular simulations. While precise, publicly disclosed comparative performance metrics against all specific competitor tools are challenging to ascertain, Schrödinger's narrative consistently emphasizes that its platform enables researchers to explore vast chemical spaces more effectively, design molecules with desired properties, and reduce the need for costly and time-consuming physical experiments. The company's R&D efforts are focused on continuously enhancing these capabilities and expanding the platform's applicability. Recent initiatives include the development of new crystal structure prediction software for drug formulation, expanded support for protein degrader modeling, and new machine learning-based tools for biologics discovery, such as T cell receptor structure prediction.

A particularly significant strategic initiative is the Predictive Toxicology project, aimed at developing computational solutions to predict toxicity associated with binding to off-target proteins. This project, partially funded by a $19.5 million grant from the Bill & Melinda Gates Foundation, seeks to build predictive models for hundreds of known off-targets. Management anticipates that this capability, expected to see a beta release to select customers in 2025, will contribute meaningfully to long-term software revenue growth by addressing a critical pain point in drug development – reducing the risk of late-stage failure due to toxicity. For investors, this technological differentiation translates into a stronger value proposition for customers, potentially leading to higher adoption rates, increased contract values, and a more defensible market position against competitors who may rely on less predictive or more commoditized approaches.

Building Value Through Partnerships and Proprietary Programs

Leveraging its computational platform, Schrödinger operates a Drug Discovery segment that pursues value creation through both strategic collaborations and the advancement of its own proprietary pipeline. This segment generated $10.7 million in revenue in Q1 2025, a substantial increase from $3.2 million in the prior year period, primarily driven by the ramp-up of activities under the landmark collaboration with Novartis.

Announced in November 2024, the research collaboration and expanded software agreement with Novartis is a significant validation of Schrödinger's capabilities. The deal includes a $150 million upfront payment (received in Q1 2025) and potential future milestones totaling up to $2.27 billion across initial programs, along with tiered royalties. This partnership, which combines collaborative drug discovery efforts with substantially increased software access for Novartis, exemplifies Schrödinger's strategy of integrating its business segments to drive deeper customer engagement and technology adoption. Beyond Novartis, Schrödinger maintains collaborations with other leading biopharmaceutical companies like Bristol-Myers Squibb (BMY) and Eli Lilly (LLY), which contribute research funding, milestones, and potential royalties.

Simultaneously, Schrödinger is building a proprietary pipeline of drug candidates, applying its platform to targets where it believes it can make a significant impact. The company currently has three programs in Phase 1 clinical trials: SGR-1505 (MALT1 inhibitor for B-cell malignancies), SGR-2921 (CDC7 inhibitor for AML/MDS), and SGR-3515 (Wee1/Myt1 co-inhibitor for solid tumors). Initial data readouts from all three programs are anticipated throughout 2025, representing key milestones that could significantly impact the perceived value of these assets and the platform's ability to translate computational predictions into clinical success. The company also continues to advance earlier-stage programs, including a recently selected development candidate for an EGFR C797S program and preclinical efforts in inflammation and neurodegenerative diseases, which could generate future value through partnerships or independent development.

Schrödinger's involvement in co-founded companies like Nimbus, Morphic (MORF), Ajax Therapeutics, and Structure Therapeutics (GPCR) further demonstrates the platform's ability to catalyze innovation and provides potential avenues for value realization, as seen with the distributions from Nimbus and proceeds from the Morphic acquisition.

Financial Performance: Growth and Investment

Schrödinger's recent financial results reflect the increasing traction of its software and the impact of strategic collaborations. Total revenue in Q1 2025 reached $59.6 million, a 63% increase from $36.6 million in Q1 2024. Software revenue grew robustly by 46% to $48.8 million, driven by the timing of multi-year contracts with upfront revenue recognition, increased adoption by existing hosted customers, and contributions from new hosted agreements and software grants. Hosted software continues to grow as a proportion of total software revenue, reaching 28% in Q3 2024 compared to 23% in Q3 2023, a trend expected to continue and provide a more stable revenue base. Drug discovery revenue saw a dramatic increase to $10.7 million in Q1 2025, primarily due to the initial recognition of revenue from the Novartis collaboration.

Despite revenue growth, Schrödinger continues to operate at a loss, reporting a net loss of $59.8 million in Q1 2025, compared to a $54.7 million net loss in Q1 2024. The accumulated deficit stood at $585.3 million as of March 31, 2025. Gross margins in Q1 2025 were 72% for software and 52% overall, with the software margin temporarily impacted by lower profitability associated with the Gates-funded Predictive Tox grant. Operating expenses totaled $82.0 million in Q1 2025, a decrease from $86.3 million in Q1 2024, primarily due to a reduction in R&D expenses ($45.8M vs $50.6M) as some early-stage proprietary programs shifted to partnered efforts, partially offset by increased costs for clinical trials and platform development. Sales and marketing ($10.4M) and G&A ($25.8M) expenses saw modest increases.

Financial Strength and Outlook

Schrödinger's financial position was significantly strengthened in Q1 2025. Cash, cash equivalents, restricted cash, and marketable securities totaled $512.1 million as of March 31, 2025, a substantial increase from $367.0 million at the end of 2024. This improvement was largely driven by positive cash flow from operating activities, which provided $144.1 million in Q1 2025, a stark reversal from the $39.3 million used in Q1 2024. This positive operating cash flow was primarily a result of the $150 million upfront payment from Novartis and strong collection of year-end receivables.

Management is confident in its financial outlook for 2025, reiterating guidance for software revenue growth of 10% to 15% and drug discovery revenue between $45 million and $50 million. They anticipate operating expense growth to be less than 5% for the year, with net cash used in operating activities expected to be lower than in 2024. The existing cash and marketable securities are believed to be sufficient to fund operations for at least the next 24 months. The outlook assumes continued scale-up of software adoption by large customers, the recognition of revenue from the Novartis collaboration, and disciplined expense management, although the timing and scale of future collaboration milestones and the pace of proprietary program advancement introduce some variability.

Navigating the Competitive Landscape

Schrödinger operates in highly competitive markets for both computational software and drug discovery. In the software space, it competes with established players like Certara, Simulations Plus, and Dassault Systèmes (BIOVIA), as well as numerous smaller companies and internal R&D efforts by biopharmaceutical firms. While precise market share figures for all niche segments are not publicly detailed, Schrödinger holds an estimated 15-20% aggregate share in computational drug discovery software.

Schrödinger's key competitive advantage lies in its differentiated physics-based platform, which management asserts provides superior accuracy and predictive power compared to competitors that may rely more heavily on empirical data or less sophisticated modeling. This technological edge is intended to enable faster, more efficient molecular design, a critical factor for large pharmaceutical companies seeking to improve R&D productivity. While competitors like SLP may exhibit higher profitability margins (SLP TTM Net Margin: 14%) compared to Schrödinger's current negative margins (SDGR TTM Net Margin: -83.39%), Schrödinger's focus on high-value, innovation-driven segments and its ability to secure large-scale software deals and significant drug discovery collaborations (like Novartis) demonstrate its ability to capture value despite higher R&D investment (SDGR TTM R&D/Revenue: 97% vs. CERT TTM R&D/Revenue: ~25%).

The competitive landscape is dynamic, with increasing adoption of AI/ML across the industry. Schrödinger's strategy of integrating these techniques with its physics-based foundation is a direct response, aiming to maintain its technological lead. The company's dual business model, combining software licensing with drug discovery partnerships, also provides a unique competitive positioning, allowing it to demonstrate the platform's capabilities internally and through collaborations, which in turn can drive software adoption. However, the company faces challenges from competitors' scale (DASTY), operational efficiency (SLP), and established market positions (CERT), as well as the inherent risks and costs associated with advancing its proprietary drug discovery pipeline in a crowded therapeutic landscape.

Risks and Challenges

Despite its technological strengths and recent successes, Schrödinger faces significant risks. The company has a history of operating losses and is expected to remain unprofitable for the foreseeable future as it continues to invest heavily in R&D for both its platform and proprietary pipeline. The ability to achieve profitability depends on sustained software revenue growth, successful drug discovery collaborations yielding significant milestones and royalties, and the potential commercialization of proprietary programs, all of which are subject to considerable uncertainty.

The drug discovery process is inherently risky, with high failure rates in preclinical and clinical development. Schrödinger's limited experience in clinical development as a company, reliance on third parties for trials and manufacturing, and the unpredictable nature of regulatory approvals pose significant challenges to advancing its pipeline. Competition in both the software and drug discovery markets is intense, potentially leading to pricing pressure or the development of superior or more cost-effective alternatives by rivals.

Furthermore, the company's financial results can fluctuate significantly due to the timing of large software renewals and unpredictable collaboration milestones. While the Novartis upfront payment has bolstered liquidity, future capital requirements may necessitate additional financing, which could dilute existing shareholders or require unfavorable terms. Macroeconomic factors, geopolitical issues (including trade policies impacting international operations and supply chains), and data security risks also present potential headwinds.

Conclusion

Schrödinger is a company at the intersection of computational science and drug discovery, leveraging a differentiated physics-based platform to drive innovation. The strong financial performance in Q1 2025, highlighted by robust software growth and a significant increase in drug discovery revenue fueled by the Novartis collaboration, underscores the increasing adoption and validation of its technology. With a clear strategy focused on scaling its software business within large enterprises, advancing a promising proprietary pipeline towards clinical data readouts in 2025, and pursuing value-generating collaborations, Schrödinger is positioned for continued growth. While the path to profitability involves navigating intense competition, inherent drug development risks, and the need for disciplined expense management, the company's strong liquidity position and the potential for its computational platform to fundamentally transform molecular discovery provide a compelling narrative for investors focused on the long-term potential of this innovative approach. Key factors to watch include the upcoming clinical data from its Phase 1 programs, the continued pace of large customer software scale-ups, and the successful execution of its growing portfolio of collaborations.