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Operator: Welcome to Schrödinger’s Conference Call to review First Quarter and 2024 Financial Results. My name is Claudette [ph], and I will be your operator for today’s call. 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, Miss. Jaren Madden, Director of Investor Relations and Corporate Affairs. Please go ahead.

Jaren Madden: Thank you, and good afternoon, everyone. Welcome to today’s call, during which we will provide an update on the company and review our first quarter and 2024 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; 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. 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 second quarter and full year 2024, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of, initiation of, and readouts from our clinical trials, the clinical potential and properties of our compounds.

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 March 31, 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.

Ramy Farid: Thanks, Jaren and thank you everyone for joining us today. We are pleased with the start of the year, delivering revenue growth in line with our expectations, and continuing to advance our proprietary pipeline. As you will hear from Karen, our first two clinical programs are progressing in Phase 1 clinical studies, and today we announced IND clearance for SGR-3515, our Wee1/Myt1 inhibitor. Total revenue for the first quarter was $36.6 million with software revenue totaling $33.4 million, and we are reiterating our full year guidance. We are in active discussions with multiple global and emerging biopharma companies about increasing adoption of our platform. While it is too early to predict the magnitude of scale up from customers with renewals in the remainder of the year, we continue to see high interest in computationally driven drug discovery, and believe we are well positioned to capitalize on the growing wave of research teams incorporating computation at scale into molecular discovery programs.

Today we reported that rights to the SOS1 inhibitor discovered and developed as part of the collaboration with BMS have reverted to us based on portfolio prioritization decisions. Collaborations are an important part of our business, and we are routinely assessing opportunities with existing and new collaborators and partners. Our venture activity has also been a very successful part of our overall strategy, validating our platform and strengthening our balance sheet with both cast distribution and equity from companies we have co-founded. We have been pioneering computational molecular discovery for over 30 years, and continue to push new frontiers integrating physics and machine learning to extend our scientific and commercial leadership position in the industry.

We have a bold vision of structurally enabling every protein in the human genome with an initial focus on the most important off targets known to cause serious side effects that derail clinical programs. There is an emerging requirement for such models to predict drug toxicity risks before animal or human studies. We are very actively developing computational solutions to meet these requirements. Our recent advances characterizing the structure of key proteins such as HERG and cytochrome P450 enzymes are examples of these efforts. We have also expanded our informatics platform, and in March we launched a new version of live design that supports biologics. Live design is an enterprise cloud-based solution that allows drug discovery teams to centralize access to computational modeling tools and data in a single interface.

Live design previously only supported small molecules, and we are pleased to expand our informatics capabilities to support biologics. We are well positioned to advance all aspects of our business this year. We see clear opportunities to drive software adoption, to extend our scientific leadership in the industry, and to advance our clinical programs towards multiple data readouts. I will now hand the call over to Geoff.

Geoff Porges: Thank you, Ramy, and good afternoon, everyone. Schrödinger have a solid Q1 with software revenue meeting our expectations. A handful of software renewals were bumped into Q2 from Q1 and reduced some of the upside opportunities for the quarter. But we should see the benefit of these in Q2 and the balance of the year, underpinning our confidence in our full-year revenue growth guidance. Our business in China has been below our expectations this year, based on the challenging commercial environment there, but we have many opportunities to offset that impact with larger renewals in the U.S. and Europe. We continue to enhance the capabilities of our software and see multiple paths to secure multimillion-dollar increases in contract size, a global and emerging biopharmaceutical companies in 2024 and beyond.

We are also very excited to have advanced our proprietary portfolio to now have a third program entering the clinic. And we are within sight of our first clinical data for our proprietary programs in patients later this year or in 2025. Finally, the return of our SOS1 program from BMS gives us another opportunity to evaluate for our proprietary portfolio and to consider for external partnership and combination development opportunities. In Q1, software revenue was $33.4 million and increased to 4% compared to Q1 last year. Q1 last year benefited from a significant revenue contribution from multi-year renewals that did not recur in Q1 this year. Hosted software revenue was 22% of total revenue and grew more than 60% compared to Q1 2023. The faster growth in hosted software was in line with our expectations and consistent with our prior comments about an anticipated gradual transition to hosted software licenses across our customer base over a number of years.

Maintenance and professional services were relatively constant, as new service and maintenance agreements largely offset the native effects of projects that were completed or transitioned to hosted licenses. Drug discovery revenue was $3.2 million in the quarter compared to $32.6 million in the same quarter last year. The first quarter of 2023 included a large collaboration milestone payment associated with the progression of a collaboration project at BMS. We continue to expect that drug discovery revenue to be variable from quarter-to-quarter due to the timing of milestones and challenging to forecast given uncertainty about partner decisions and about the timing and value of new business development activity. Total revenue was $36.6 million in Q1 compared to $64.8 million in Q1 of 2023.

The difference was due to drug discovery revenue. Our cost of software revenue was $8 million compared to $7.1 million in Q1 2023. The increase was mainly due to high technology costs. Our software gross margin was 76% for the quarter compared to 78% in Q1 2023, also mainly due to high technology expense. Our cost of drug discovery revenue was $9.7 million compared to $12 million in Q1 2023. The decrease in the cost of drug discovery was due to the shift in allocation of staff from collaboration to proprietary programs and also lower CRO expenses for collaboration programs. Our drug discovery margin was negative compared to a profit in Q1 2023 when the quarter benefited from a single relatively large milestone payment from BMS. Overall, our gross margin was 52% compared to 71% in Q1 2023.

The decline was driven by lower drug discovery revenue. Turning to operating expenses, R&D expenses $51 million compared to $41 million in the same period of 2023. Most of the increase was for our therapeutics R&D was partly driven by changing allocation between our collaboration investments and our proprietary programs, as well as by higher headcount and higher CRO expenses. Overall platform of therapeutics R&D continued to be approximately balanced in their contributions to our total R&D. Health and marketing expenses $10.2 million for the quarter and increased by 11% compared to the prior year. The increase was mainly due to high headcount and associated costs. G&A expense was $25.5 million in Q1 2024 and decreased slightly compared to the same period a year ago.

The decrease was due to royalty payments associated with an Nimbus distribution in Q1 2023, which flows through G&A by county convention. None of this effect underlying G&A expenses increased by approximately 5% mainly due to higher FTE expenses. Total operating expenses were $86 million in Q1 2024 compared to $76 million in the same period in 2023. The increase is mainly due to higher R&D. For the quarter our operating loss is $67 million compared to $31 million in the same period a year ago. Changing for value of equity method investments was $8.1 million compared to $35.7 million in Q1 2023. The change in Q1 2024, which is the changes in the value of our equity ownership and structure therapeutics and Morphic during the quarter. In the same period in 2023, the change in fair value was driven by the change evaluation of our ownership position and structure associated with a successful IPO.

Other income consisted of $5 million in Q1 2024, mainly consisting of interest on cash balance. In Q1 23, other income was $2.9 million. Gain on equity method investments was zero in Q1 2024 compared to $147 million reported in Q1 2023 driven by the Nimbus distribution. Total other expense or income was $13.2 million in Q1 2024 compared to $186 million in Q1 2023. Our loss before taxes was $54.3 million compared to a pre-tax profit of $155 million in Q1 2023. Our tax expense in Q1 2024 was $0.5 million compared to $26 million of tax expense in Q1 last year. Our net loss diluted share was $0.76 in Q1 2024 compared to a profit of $170.75 in Q1 2023. On a non-GAAP basis, excluding gains and changes in fair value for equity method investments, our loss per share was $0.86 in Q1 2024 compared to a loss of $0.39 per share in Q1 2023.

Our cash used in operating activities was $39 million in Q1 2024 compared to $31 million in Q1 2023. And our total cash and marketable securities balance declined by $33 million in Q1 as our operating cash was offset by $7.6 million in cash realized from the sale of equity during the quarter from our ATM. At the end of Q1, we had $436 million in cash and marketable securities compared to $469 million at the end of Q4 2023. Our previously provided financial guidance for the year is unchanged. We are confident about the outlook for our software business and see multiple opportunities for significant step ups in contract size at many of our customers. We are encouraged by the interest and opportunities in front of our drug discovery business and by the potential of our proprietary medicines.

And we believe the trajectory of our expenses and cash use this year are consistent with our original expectations. For Q2 2024, we expect our software revenue to be in the range of $31 million to $33 million. I now turn the call over to Karen to comment on a therapeutic R&D.

Karen Akinsanya: Thank you, Geoff, and good afternoon, everyone. Our Therapeutics team continues to advance our pipeline of collaborative and proprietary programs. With the IND clearance of SGR-3515, our Wee1/Myt1 Inhibitor, we now have three clinical stage proprietary programs. In addition to our proprietary pipeline, several collaborative programs are advancing in clinical trials at companies we have co-founded or partnered with, providing continued validation of our platform. As Ramy reported, we have received full rights to the SOS1 development candidate that we discovered as part of our collaboration with BMS. As you know, BMS acquired a clinical stage SOS1 inhibitor when it completed its acquisition of a clinical stage oncology company earlier this year.

We received a milestone upon completing the SOS1 development candidate package, and BMS had been conducting IND enabling studies. The transfer of information from BMS to Schrödinger is ongoing. We will determine the next steps and plans for further investment in this program based on our assessment of the updated data package from BMS, as well as the opportunity within the context of our overall proprietary portfolio and the evolving therapeutic landscape. As we look ahead, we expect collaborations to continue to be an important component of our portfolio, and we continue to evaluate new partnerships where the science, project scope and value are consistent with our strategy. Turning to SGR-1505, our Malt1 inhibitor, our Phase 1 study in patients with relapsed refractory B-cell lymphomas is progressing well.

We’ve expanded the study to 15 sites globally, and dose escalation is ongoing. As a reminder, the primary objectives of the study are to evaluate the safety tolerability PKPD and determine the recommended dose. Measures of clinical activity are secondary end points. We are on track to have clinical data in late 2024 or in 2025. Our CDC7 inhibitor, SGR-2921 is also advancing in a Phase 1 dose escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome. The study is progressing well with multiple dose escalation steps completed, and we also expect to report initial data from this trial in late 2024 or 2025. Today, we announced that we received FDA clearance of our IND for SGR-3515, our Wee1/Myt1 inhibitor. Our preclinical data package demonstrated that SGR-3515 exhibited sustained tumor growth inhibition while maintaining a favorable safety profile using an intermittent dosing schedule.

Activities are underway to open clinical study sites, and we expect to begin patient enrollment in the third quarter. The Phase 1 study is designed to evaluate the safety PKPD and establish a recommended dose for SGR-3515 in patients with solid tumors. The study population will include patients with advanced solid tumors predicted to be sensitive to Wee1 or Wee1/Myt1 inhibition, including breast cancer, ovarian cancer, uterine cancer, and solid tumors with elevated replication stress. In addition, we are advancing several discovery programs in areas of high interest, including inhibitors of EGFR, C797S, PRMT5-MTA and NLRP3. We have identified potent selective inhibitors that may overcome product profile design challenges observed across other programs.

We are on track to select development candidates to support an additional IND submission in 2025. In our collaborative portfolio, we are excited about the progress we have made in identifying all small molecule inhibitors for targets previously addressed by antibodies or that required intravenous administration, and we anticipate advancing early stage proprietary modality switch programs across multiple disease areas. In summary, we are pleased with the progress we are making across our collaborative and proprietary pipeline. With Phase 1 studies of SDR-1505 and 2921 advancing and 3515 poised to enter the clinic this year, we are excited to be advancing towards clinical readouts and inflection points from three programs. Behind our clinical stage programs, we have a next generation of molecules with opportunities to generate value through partnerships, new ventures, or by advancing them independently.

We are excited about our first-in-class and first-in-class opportunities within our portfolio and look forward to updating you on our progress in the coming months. I’ll now turn the call back to Ramy.

Ramy Farid: Thank you, Karen. As you heard, we are off to an excellent start this year and are continuing to make progress against our goals for the year. We appreciate the hard work and commitment of our employees who are instrumental to our mission. We look forward to providing further updates throughout the year. At this time, we’ll open the lines for questions.

Operator: [Operator Instructions] And we’ll take our first question from Michael Yee with Jefferies. Your line is open.

Michael Yee: Hey, guys. Thank you for the question and thank you for the update. Question on software and question on the pipeline. On the core business, I think Geoff just made a comment about how some business was maybe pushed from Q1 to Q2. Can you talk a little bit about that and how that relates to ongoing trends, appreciating that fourth quarter still is really your biggest quarter? So just comment on some of that dynamic. And then on the pipeline, maybe for Karen, can you talk about the MALT1 study going on and what you would deem to be positive and very promising efficacy for a new small molecule for B cell lymphomas? Thank you.

Geoff Porges: Hi, Mike. Just on the contracts that I mentioned, there were a couple of relatively small contracts, but really the difference between the core meeting our expectations and then being a little bit lighter, I don’t think it reflects any underlying trends in the business. These were contracts that we knew were renewals, and for logistics reasons, they didn’t renew at the very end of Q1 and they tipped into Q2. We don’t think that there’s any – there’s no increase in the number of non-renewals or anything like that. We continue to have very high conviction about the outlook for the full year and just don’t see anything in the external environment that affects that outlook. I did highlight the effects in China. Our business, underlying business in China is relatively small.

It’s the smallest of our geographies, and given what’s going on there, perhaps not a surprise that the renewals there have dropped off somewhat, but it’s not going to have a big impact. The big driver for us, as I highlighted, those large renewals, they will tend to be concentrated in the fourth quarter.

Karen Akinsanya: And, Mike, on the MORT1 mechanism, as you’re aware, we’re obviously in our Phase I dose escalation trial. I think your question was broader than that with respect to the mechanism. We see this as a clinically validated mechanism, given data that’s been published over the last few years, showing monotherapy responses in the range of 28% LRR and combination activity in combination with BTK, giving you around 70% LRR. We also know that there were complete responses in prior trials. So, in terms of what we think would be exciting, obviously, monotherapy activity, but also combination activity, either with BTK inhibitors or with BCR2 inhibitors, and we showed a lot of that preclinically, but preclinically you can get to regression. And so we hope to see similar data emerging from the MORT1 mechanism over the coming years.

Michael Yee: Very good. Thank you.

Operator: And we’ll take our next question from David Leibowitz with Citi. Your line is open.

David Lebowitz: Thank you very much for taking my question. Could you comment on, I mean, Michael, to some extent, got on this, but on the trends that we should expect. I know there was an effort to try to shift the nature of contracts to move revenues, I guess, to be a little bit more smoothed out, or would result in them smoothing out somewhat more. How are those efforts progressing, and how should we see that take hold?

Ramy Farid: Yes, thanks very much for the question, David. Indeed, we are seeing some transition over to hosted for on-prem. You can see it in the breakout in the queue. The hosted in this most recent quarter grew by 60% year-over-year, and was now 21% of total software revenue, whereas in the first quarter of last year, it was only 14% of software revenue. It was much more percentage in the fourth quarter. So when we do have these large quarters with multi-year contract renewals, then the hosted proportion is going to go down. However, the long-term trend is that we think that the proportion of business that’s hosted will gradually increase. We did have a number of significant customers switch over from on-prem to hosted last year.

Now as we’ve said, our business has been around selling software for nearly 30 years. That’s longer than that way before my history with the company. But we have complex contracts and every contract is different. They have to be honest like snowflakes. And so we can’t go in and sort of immediately change all of those contracts over. But we do think that over a number of years that proportion from hosted will continue to increase. It won’t be rapid, sudden, or single-year transition. But we do think that it will increase over time.

David Lebowitz: Thank you for taking my question.

Operator: And we’ll move next to Scott Schoenhaus with KeyBanc. Your line is open.

Scott Schoenhaus: Hi, team. Could you give us an update on what you’re seeing on the biotech end markets? We’ve had some peers in the space that have noted potentially some recovery or it’s mixed commentary. So we wanted to hear from what you guys are seeing and then remind us what’s baked into your guidance in terms of the biotech end markets. Thanks.

Ramy Farid: Sure. Scott, last year we did highlight that there was an increase in the number of small companies that were non-renewing. You could see that in the KPI data that we provided in the companies in the tier between 100,000 and 500,000 of ACV, there was an increase in the non-renewals in that tier. We don’t provide quarterly ACV numbers or quarterly booking numbers, but we’ve seen a stabilization of that trend. We’re not seeing any sort of continued increase in the number of non-renewals. That being said, we aren’t seeing an offsetting increase in the new inquiries, but I will say we’re seeing companies coming forward that are venture backed who are asking are there any creative ways they can get access to our software.

And when engaging in those discussions, we do think over time they will result in software contracts. It may take longer than we normally would have expected, perhaps back in 2020 or 2021 to see that realized into our results, but we’re hearing about those opportunities coming forward. So I would still characterize it as green shoots rather than anything that we can harvest, but we’re definitely seeing some of those opportunities.

Scott Schoenhaus: Thank you.

Operator: And we’ll move next to Vikram Purohit with Morgan Stanley. Your line is open.

Vikram Purohit: Hi, good afternoon. Thanks for taking our questions. So we had two, one on the pipeline and then one on the full-year software guidance. So on the pipeline, at what point do you think there might be some more visibility available on specifically when the late-24 or 25 data could come through from MALTl and CDC7? And how are you currently thinking about what the initial size and scope of that data set could be? And then on the software guidance for the year, with 1Q behind us now, how are you now thinking about which scenarios define the bookends of your guidance of 6% to 13% year-over-year growth? Thanks.

Karen Akinsanya: So I can start. So I think it’s too early to commit to specific data that we’re going to be sharing. As you know, this is a dose escalation trial with respect to safety, PK, and PD. Our goal is to determine the recommended Phase 2 dose, and clinical activity is a secondary endpoint. However, we are gathering more PK safety and the PD data in the trials that we’re running. And so, that’s ongoing. It’s going well. And so over the course of the period that we’ve shared, 24 through 25, we will be in a position to share an update. But it’s too early to give you any color on what that might look like at this time.

Ramy Farid: Vikram, let me jump in and give you an answer on the second question about the full year guide and the circumstances that would lead us to either of the bookends. First of all, to just remind you, the guidance philosophy is to guide to the range of most likely outcomes. We don’t try and guide to either extremes, the very low probability outcome either on the high side or the low side, but we do want to share with you what we think is most likely. And the range we provide it is that range right now. We do think we’ll get more information as we progress through the year and, of course, ultimately we’d hope to narrow that range, but we don’t know once we get that information we’ll have to incorporate it. In terms of the circumstances that would drive us to either of those extremes, it does depend to a substantial degree on the nature of the renewals.

For example, if we have customers who are on-prem customers who come to us and ask to renew on a multi-year basis, that would drive revenue towards the high end of the guidance range. If they come forward and say we want to renew as we already have on an annual contract basis, then it would be more to the low end of the range. The other factor that we’re considering in the guidance that we provide is some of the conditions that we discuss in terms of the biotech financing environment. If we see some of those conversations about providing our software to relatively early-stage companies, come to fruition and if those companies successfully finance and that might trigger a revenue purchase that would also contribute to driving us towards the upper end of the range.

So those are the two variables that we’re mainly contemplating. I hope that’s helpful.

Vikram Purohit: Great. Thank you.

Operator: And we’ll take our next question from Evan Seigerman with BMO. Your line is open.

Conor McKay: Hi there, this is Conor McKay on for Evan. Thanks for taking our question and congrats on the IND approval for a 3515. With a number of assets either in clinic or soon to be in clinic, can you just talk a bit about how you’re thinking about PNL management as it relates to your broader business and then also how are you thinking about the potential for collaborations and partnerships with your internal assets? Of course, balancing data maturity and preserving economics. Thank you.

Ramy Farid: Maybe collaborations for — yes. That’s probably a good way to…

Karen Akinsanya: Yes, so I can just start by saying each of the mechanisms that we have disclosed, we believe either serve a population that has existing jobs where additive mechanisms is going to lead to deeper responses. As you’re well aware, we don’t have those mechanisms. For example, BCL2, BTK, inhibitors. And we view collaborations as an important way to basically combine our assets with other companies’ products or development assets to recognize the opportunity for these programs in various different indications. So we’re very open to collaboration. We continue to be in those discussions. But obviously, we’re gathering importance data on all of these programs at the moment.

Ramy Farid: I think, hey Conor, let me just dive to that on collaborations. It is a very dynamic deal environment for companies in the computational drug discovery space generally. And that dynamic environment, I think, is to our advantage. And we do see a lot of opportunities for a wide variety of different types of deals as we contemplate the business partner environment. Now, as I said previously, we aren’t guiding to that. We can’t just really forecast the timing value, probability of those discussions. That dynamic environment is to our benefit. In terms of your first question about P&L management, assuming that you’re asking us about the trajectory of expenses, and while we haven’t guided to expenses for next year, I hope that we’ve been communicating consistently that we are seeing a slowing in growth rate of a number of our different expense drivers.

We think that we have opportunities to see slight improvements in our growth markets. And, for example, that you’re seeing some operating leverage now on our G&A line. You’re seeing some operating leverage on sales and marketing as well. And we think that our R&D, while it’s been increasing, and it’s likely to continue to increase, is going to increase significantly more slowly than it has in the past, because there will be additional capital required for the advancing clinical programs. But relative to the totality of our R&D, which is still substantial for the platform, it’s a relatively small contribution. So we don’t think it’s going to drive a large increase in our R&D requirements going forward. I hope that’s clear.

Conor McKay: Great. Thank you.

Operator: We’ll move next to Steven Mah with TD Cowen. Your line is open.

Steven Mah: Great. Thanks for the questions. I’ve got one on live design for Biologics. Could you give us some color on the adoption and any traction with customers you’ve gotten since the launch in March, and then specifically, what types of companies are making inquiries? Are they big pharma or emerging biotechs?

Ramy Farid: Yes, so we just launched it, but as with many of our launches, including live design itself, we worked very closely with a number of companies to understand the requirements and what they would want in the product. So the feedback so far in all of the presentations that we’ve given before the launch, actually, and since the launch, has been incredibly positive. There is clearly pent-up demand for something like this. There is not a good solution right now. So significant interest. But this is a very new release, so we can’t comment on anything about the number of customers or the revenue from it. But we’re really excited about the launch, and it’s going well so far.

Steven Mah: Okay, great. That’s fair enough. And then I’ve got one last question on the SOS1 inhibitor that reverted back to you guys from BMS. I appreciate the color and why they didn’t take the option that they acquired a company with a similar asset, but do you know how similar that asset that BMS acquired is to the inhibitor that you guys developed? How similar is it? Is it the same mechanism? Thank you.

Karen Akinsanya: Yes. I mean, I think from a mechanism point of view, this is a PPI inhibitor. I think that mechanistically, they’re both very similar. I will say that obviously, we were in a position to benchmark our compound during the discovery phase of the program that we ran with BMS, and we’re very happy, I would say, with the profile of the compound. And BMS brought that program in on the basis of the work that we had done. So we remain excited about the molecule. I think obviously that molecule that they acquired through their acquisition is more advanced than ours. And so we have obviously work ahead of us as an industry actually to see how all these SOS1 compounds compare. So, yes, I think it’s too early obviously to say how they stack up against each other in the clinic.

Steven Mah: Okay. Got it. And how long do you think the evaluation will take, the internal evaluation, and what they proceed with it? Thank you.

Karen Akinsanya: It’s a little hard to determine. We obviously are very early in the process of getting data back from BMS, from the IMD-enabling studies they have been conducting. So I can’t say exactly, but I think obviously we’re in a hurry to understand the opportunity here. And again, we’re excited about the profile and what we’ve seen so far. So hopefully it won’t take too long.

Steven Mah: Okay. Great. Thanks for the questions.

Operator: We’ll move next to Michael Ryskin with Bank of America. Your line is open.

Michael Ryskin: Great. Thanks for the questions, guys. First, I want to just follow up on exactly that last point, the BMS discontinuation. In the past, I think when you’ve had some programs sent back, there might be a milestone fee or some sort of financials associated with it. I’m just curious, was anything like that recognized in the first quarter, or do you expect it in the second quarter? Just any other details around the process of reverting those rights?

Ramy Farid: Okay. Hi, Mike. I’m sure the answer is no. So because this program had transitioned to their portfolio, and we had a milestone from it previously associated with that transition, there isn’t any additional milestone or fee payable being returned to us, nor do we have any prior revenue that we accelerate. So it wasn’t a contributing factor in Q1.

Michael Ryskin: Okay. Easy answer. Thanks. And then for my follow-up, it’s been, I think, a couple quarters since you guys really talked about the material science part of the portfolio, so I thought I’d ask on that. Just any updates there, anything interesting to keep us to a priceless of? I know it’s always sort of in the background and doesn’t get a ton of light, but I just figured we’d see if there’s anything new going on there. Thanks.

Ramy Farid: Sure. Yes. So the thing that we’re most excited about on the material science side, as we talked about before, is we have this collaboration with Gates. The initial project was a three-year project. It went so well that it was actually renewed. And that was on the basis of really progress on the science. This is a really, really hard problem. And as with all really hard problems, we think success in the problem will have significant rewards. So we’re really pleased with the progress on the basic science. But that’s really the stage that we’re at. And that’s what we’re really excited about. We think if we’re successful in the project, as I said, it has the potential to have a really big impact. As far as the core business and the revenue for the business, as we said before, we don’t really break that down.

We’re pleased with the progress. We continue to add new customers. There continues to be scale-up of other customers. But we’re not really disclosing, we’re not breaking down the revenue into the different components. I hope that answers the question.

Michael Ryskin: Yes. Thank you.

Operator: We’ll take our next question from Matt Hewitt with Craig-Hallam Capital. Your line is open.

Matthew Hewitt: Good afternoon. Thank you for taking the questions. Maybe first up, and this kind of goes back to Geoffrey, some of your comments about the R&D expense kind of leveling off a little bit. As we look out over this year and maybe into next year, you’ve got a couple of Phase 1 trials that’ll be wrapping up, and then you’ve got Wee1, obviously, kind of kicking off. Is that part of the flattening of the R&D expense over the next, call it year, year and a half? Or is it more a function of kind of looking at those programs and trying to figure out where do we go next and which one do you want to kind of move on to Phase 2? Just help us out there.

Geoff Porges: Okay. Yes, I understand the question about the R&D trajectory. And in fact, the flattening is due to a different phenomenon, which is that we think that we are at scale with respect to our R&D investment in our platform. As I previously indicated, it’s a substantial portion of our R&D investment and where we think that this is such an exciting space and a dynamic industry environment, with still a lot of opportunity in terms of new discoveries, new research that we can then translate into capabilities in the platform. So we’re not dialing that back, but we don’t think that needs to get a lot larger. The second component of our R&D is our drug discovery organization. Not so much the development portion, but the investment that we’re making to come up with the next wave of molecules and the next wave after that.

Same general comment there. We can’t sort of manage 10 new programs a year or 15 new programs a year. And if we keep scaling up, that’s where we would head. So again, we think that we’re at scale in terms of the ability to discover the next wave of programs and the wave after that. So both of those pieces, we don’t see a lot of need to increase. Now, you correctly identified that there has been an increase in the investment on the clinical programs, but that total clinical spend is a relatively small portion of that overall R&D. We do expect that piece to go up, but the rest of the R&D space is likely to be pretty stable from here. And so that’s where you get that, we just don’t see a large other leg up from here. Is that clear?

Matthew Hewitt: Yes, no, that’s super helpful. Thank you. And then I guess separately on the software side. So last fall, obviously, and in particular, very challenging from a funding perspective. You’ve commented on how that likely weighed on some of your smaller customers kind of paring back or not renewing. As that funding environment is improving, and as more recently as China has announced new stimulus package there, are you starting, like how quickly will that turn around where you start to get those customers that maybe didn’t renew previously, they start coming back saying, okay, now we’re ready to re-engage. Is it pretty quickly or does it take quarters or how should we be thinking about the timing on as the environment improves, you’ll start to see that as well.

Ramy Farid: Yes, so to be clear, I think what we expect to happen is new companies will come to us asking to use our technology as a foundation for their drug discovery efforts. And we are seeing those inquiries. Now, those companies are asking, okay, we’re going after this particular target or this drug class. And we’d like to build our company based on your technology, there’s all sorts of availability of funding in those companies. Some of them are well capitalized, some of them hope to be capitalized, some of them may be capitalized in the future. And we’re working with all of them, and we are seeing an uptick of interest there, but it’s too early to bake that into our revenue outlook. Now, the companies that previously discontinued, my expectation is that they will not come back, whether they are based in China or based in the U.S. Those companies have shifted their strategies, in some cases they’ve merged with other companies, in other cases they’ve been acquired themselves, or in other cases they’ve shut down drug discovery altogether and they’re just focusing on the prosecution of their clinical programs.

So we’re not assuming that they come back and become drug discovery software customers again.

Matthew Hewitt: Understood. Thank you.

Operator: We’ll move next to Joe Catanzaro with Piper Sandler. Your line is open.

Joseph Catanzaro: Hey, everybody. Thanks for taking my question. I had maybe a quick one on 3515. I think we’ve seen in this space that patient selection strategy could be really important, and Karen, I think you mentioned selecting patients with elevated replication stress. So I would be curious to hear your thoughts and if you could elaborate a bit on how are you thinking about going about detecting and defining elevated replication stress? Thanks.

Karen Akinsanya: Yes, great question. I mean, first of all, let’s just say that we know that Wee1 inhibitors have been shown to have great efficacy in particular tumor types already, so uterine serous carcinoma, ovarian cancer, really strong responses there. We do, though, believe that there are opportunities in solid tumors beyond those gynecological tumors. We mentioned breast cancer and other solid tumor types. As you know, we had a collaboration with MD Anderson for several years that sought to really help us understand sensitive tumor types, and we’re going to be leveraging that information as we go forward with our clinical trials. As you know, we’re in a dose escalation setup this year, but as we go to look for efficacy signals, we have the opportunity to leverage that information from the collaboration as well as to think about how to select patients that we think are going to be the most sensitive. So we’ll be providing updates on that in the future.

Joseph Catanzaro: Okay, thanks. That’s helpful. Thanks for taking my question.

Operator: [Operator Instructions] We’ll move next to Chris Shibutani with Goldman Sachs. Your line is open.

Chris Shibutani: Great. Thank you very much. A question about the business as well as a question about the pipeline. On the business, on an annual basis, you’ve tended to provide some insight into the annual contract value and the number of customers that you’re having there. Can you talk about how the year is progressing and your confidence in terms of that ACV trend moving one direction or another, presumably favorably given the 6% to 13% range that you’ve provided? And then within that, what tends to influence whether the gross margins are closer to sort of the mid-70s versus the 80% level? So if I had to explain to someone the mix of the customers and the gross margin impact and what you’re seeing, how could you help me there?

And then secondly, at the R&D day, Karen, at the end of last year, I think there was a little bit of buzz that emerged when you guys identified a couple of potential targets that the street tends to perk up about. In particular, I’ll mention NLRP3 this year has become somewhat trendy. PRMT5 also has a presence. So with those, you talk about advancing one into an IND in 2025. What’s the horse race like? And is that purely on the domain of something that you guys would plan to take forward? Or is that something you would contemplate possibly shifting over towards a partnership there as a way to perhaps leverage costs but still be able to get some of the carry, so to speak? Thank you.

Ramy Farid: Thanks, Chris. I’ll answer the last couple of questions. I’ll let Karen answer the other five or six. So beginning with the ACV, we highlighted that last year revenue growth exceeded ACV growth by a significant margin, and we disclosed ACV growth. And we don’t break out ACV trends quarterly, but we’ve definitely communicated that ACV growth will be significantly higher than revenue growth this year. And that was driven by the large contribution from the multi-year deals in the fourth quarter of last year, which effectively are recognizing revenue from future years, in that case, 24, 25, and 26 for a three-year deal. So ACV growth this year is likely to be significantly higher than revenue growth. And that was true in the first quarter.

We don’t sort of have an audited ACV growth number, but qualitatively it was significantly above the revenue growth. And it is consistent with what we’re expecting for the full year. Now in terms of the number of customer trends, we do use present that in our KPIs. I think we have confidence that the KPIs are going to trend positively this year. We don’t guide to that. I don’t have specific numbers to share, but you could look at the numbers that we highlighted last year and we remain pretty positive about the trajectory of those numbers this year and about their ability to contribute to us achieving the revenue guidance and by implication the ACV growth outlook that we’re expecting. And then, sorry, I met the other question. I knew it would take me a while to get there, gross margin.

So gross margin is somewhat influenced by the contribution of multi-year deals. If we have a large software renewal that includes revenue that we’re providing the actual access to software two or three years out, then that revenue being recognized as a very high gross margin. And that tends to lift the gross margin overall. Whereas a quarter, for example, like the one we most recently have, where we didn’t have a lot of multi-year deals and we had a significant step up in hosted revenue, that tends to bring the gross margin down. Now we are very confident that the gross margin is going to trend positively over time. There was a little bit of an increase in technology spend that I flagged up in the first quarter. But I think that overall, we’re very convinced that gross margin trend, the guidance will be similar to last year.

And we think that it will trend positively over time. I wouldn’t be dialing in substantial increase in gross margin, but we do think there’s reason to think that it will continue to gradually take up by small amounts each year. Sorry, Karen.

Karen Akinsanya: Sure. Yes, so you’re right. The NLRP3 and PRMT5-MTA have been pretty interesting over the last year with a lot of disclosures from other companies. We are excited about both programs. I think what they both have in common is that there are a number of potential indications. So NLRP3 potential, obviously, in Parkinson’s disease, as well as a number of peripheral inflammatory diseases. For PRMT5, there’s opportunity in the brain, in brain tumors, but also a number of solid tumors. So we are excited to have both of these programs in our portfolio. They’re both in the optimization stage. We’re working hard on the optimization of multiple theories. I think we described that at Pipeline Day. And one of the important features is the opportunity to leverage our platform to optimize brain penetration, which is clearly a key feature for both of these programs.

And that work is underway. I think it’s too early to talk about the sort of picking a horse in the race. I think we’re pleased with the progress that we’re seeing. And then your other question, I think, was whether we would develop these alone or in collaboration with others. I think both opportunities are open to us and we remain sort of open to collaboration discussions. But we also are working right now to think about indications in which we would conduct early clinical trials. So, again, we’ll keep you posted as we make progress with that.

Chris Shibutani: Thank you for all the answers to all my questions. Appreciate it.

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