2023-07-26 18:00:35 ET
Summary
- Schrödinger excels in drug and materials discovery through its computational platform, with consistent revenue growth and collaborations.
- Several promising drug discovery programs are underway, bolstered by Schrödinger's computational platform and strategic partnerships.
- Despite high valuation and potential market dominance, risks in drug discovery and competition necessitate caution for investors.
Company Overview
Schrödinger ( SDGR ) is a global leader in physics-based computational platforms for drug and materials discovery, with a robust customer base including top pharmaceutical companies and academic institutions. Their platform accelerates the traditionally time-consuming and costly process of drug discovery by accurately predicting molecule properties, thus streamlining molecule design and synthesis, reducing costs, and increasing the likelihood of successful clinical development. Schrödinger's revenue has seen consistent growth, underpinned by customer retention and increasing adoption. Their drug discovery group also maintains collaborative and proprietary drug discovery programs, which include promising wholly-owned drug discovery programs and a notable collaboration with Bristol-Myers Squibb.
This article provides a detailed analysis of Schrödinger's financial performance, growth prospects, and risks, recommending a 'Hold' position due to high valuation and inherent risks in drug discovery, despite promising growth and a robust pipeline.
Financial & Stock Performance
In Q1 2023, Schrödinger reported a total revenue increase of 33% to $64.8 million, up from $48.7 million the previous year. Software revenue slightly decreased to $32.2 million, while drug discovery revenue, boosted by a $25 million milestone from BMS, doubled to $32.6 million. Software gross margin improved by 1%, while operating expenses rose due to increased staffing, CRO expenses, and royalties. The company gained $186 million from equity investments and the sale of Nimbus’s TYK2 inhibitor, contributing to a net income of $129.1 million. Cash reserves stood at $532 million. The 2023 outlook anticipates continued software revenue growth and similar software gross margin to 2022, while operating expenses and cash used for activities will reduce. Q2 2023 software revenue is expected to be $27-31 million.
Per Seeking Alpha data, Schrödinger's stock shows impressive momentum, outperforming the S&P 500 considerably over the past year.
The company's revenue growth is robust with YoY growth of 27.58% and 3-year CAGR of 29.39%. Profitability is mixed with a high gross profit margin of 60.25% but negative return on assets and a modest return on equity. Schrödinger's valuation seems high, reflected in the P/E ratio and high EV/Sales ratio. Earnings revisions are positive with more upward than downward adjustments, though future earnings estimates show fluctuation. The capital structure shows manageable debt and a healthy cash position. However, with mixed valuation metrics, investors should tread carefully.
Growth Prospects
Schrödinger's management expressed optimism about the firm's growth prospects during the most recent earnings call. Success has been noted in the firm's collaborative drug discovery programs, with nine such programs currently in the clinic. This includes the advancement of the SOS1 KRAS Precision Oncology program, licensed to BMS, which has reached development candidate status, promising potential for future milestone payments and royalties.
In terms of wholly-owned programs, dosing is ongoing for the MALT1 inhibitor, SGR-1505, in patients with advanced B-cell malignancies and healthy subjects, to inform future trials and potential applications. SGR2921, a CDC7 inhibitor, is nearing the end of IND-enabling studies, with an IND submission expected in the first half of the year. The compound exhibits significant antitumor activity in preclinical patient-derived AML models, indicating a promising future. The WEE1 development candidate, SGR3515, has also shown durable antitumor activity in preclinical models, with encouraging evidence of clinical activity in several forms of cancer.
With the recent integration of structural biology capabilities, Schrödinger is also making strides in obtaining novel protein structures to support first-in-class product opportunities. Several undisclosed programs are currently in various discovery stages across oncology and immunology. These developments highlight Schrödinger's proactive approach in leveraging their computational platform and strategic collaborations to advance a broad pipeline of drug discovery programs.
Market Risks & Opportunities
Schrödinger actively operates within the biotechnology and pharmaceutical industries, specifically targeting the drug discovery and material sciences markets. The company exploits its proprietary computational platform to accelerate and simplify the traditionally lengthy and expensive processes involved in drug development.
In terms of growth prospects , the global market for drug discovery shows promising potential for expansion. This is primarily due to the rising prevalence of chronic diseases and increased investments in pharmaceutical research. Schrödinger's novel computational platform is well-positioned to tap into this growth, presenting extensive opportunities for its widespread adoption in the market. Furthermore, the scope of their technology isn't confined to the drug discovery realm; it also applies to material science fields. This opens up additional revenue streams in sectors like aerospace, semiconductors, energy, and electronic displays.
Moreover, the ongoing digital transformation wave coupled with the adoption of artificial intelligence in healthcare paves the way for Schrödinger to form strategic alliances with top biopharmaceutical companies. The company's prowess in identifying unique molecules for proprietary and partnered drug discovery projects may lead to the development of profitable therapeutics. These have the potential to generate significant revenue through milestone payments, possible commercialization, and royalties.
However, it's important to acknowledge certain risks associated with Schrödinger's operations. The drug discovery domain is inherently associated with high rates of failure, and despite the advantages offered by Schrödinger's platform, there is no guarantee that the identified drugs will succeed in clinical trials or obtain regulatory approval.
The company finds itself in a highly competitive landscape, with many well-established and emerging players offering similar services. Rapid technological innovations in this field could potentially cause their platform to become obsolete. Additionally, the company must grapple with intellectual property risks. The threat of patent infringement allegations could result in costly legal battles and potential compensation payouts.
Finally, Schrödinger's growth is partly dependent on fruitful collaborations with biopharmaceutical firms. Any complications within these partnerships or hurdles in forming new alliances could impede the company's upward momentum. The company is also susceptible to fluctuations in healthcare regulations, funding, or economic stability, which can directly affect its financial well-being.
My Analysis & Recommendation
In reviewing Schrödinger's performance and prospects, there's an interesting dichotomy at play. The firm demonstrates impressive revenue growth and has a robust and diverse customer base that includes top pharmaceutical companies and academic institutions. The successful integration of their computational platform in drug and materials discovery, combined with their strong collaborative and proprietary drug discovery programs, positions them well in a rapidly evolving market.
However, Schrödinger operates in a high-risk, high-reward sector. Drug discovery is fraught with uncertainties and potential setbacks. The future of the firm's current drug candidates is not guaranteed, with clinical trials and regulatory approval processes being significant hurdles.
Despite these risks, Schrödinger's robust revenue growth, promising pipeline, and potential market dominance indicate that the firm has a compelling business model and potential for further expansion. The company's high valuation may be justified given its disruptive platform, strong pipeline, and the considerable market opportunity it's addressing.
Investors should pay close attention to Schrödinger's Q2 earnings on August 2. Key factors to watch include the progress of their drug candidates, particularly SGR-1505, SGR2921, and SGR3515, software revenue, and operating expenses. Any significant changes in these areas could impact the company's valuation.
Given the current information, I would recommend a 'Hold' position for Schrödinger. While the company has shown substantial promise and growth, the inherent risks and high valuation necessitate caution. The upcoming earnings report could provide further clarity on Schrödinger's trajectory and help determine if the firm's high valuation will translate into significant future returns.
For further details see:
Cracking The Code: Schrödinger's AI Dance In Drug Discovery