Schrödinger Q1 2026 Earnings Call - Accelerated Hosted Shift and Bunsen AI Drive Software Momentum

Operator: Thank you for standing by. Welcome to Schrödinger’s conference call to review first quarter 2026 financial results. My name is Rob, and I’ll be your operator for today’s call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. 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, Ms. Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations. Please go ahead.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger: Thank you, good afternoon, everyone. Welcome to today’s call, during which we will provide an update on the company and review our first quarter 2026 financial results. Earlier today, we issued a press release summarizing these results and progress across the company, which is available on our website at schrodinger.com. 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 2026, our plans to accelerate the growth of our software business and advance our therapeutics portfolio, the clinical potential and properties of our and our collaborators’ compounds, the use of our cash resources, as well as 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, 2026. 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. This afternoon, Ramy Farid, our CEO, will review our recent progress. Richie Jain, Chief Financial Officer, will discuss our financial results in 2026 guidance. Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships, will review our therapeutics portfolio. Pat Lorton, our Chief Technology and Chief Operating Officer, will join us for the Q&A. With that, I will turn the call over to Ramy.

Ramy Farid, Chief Executive Officer, Schrödinger: Thanks, Jaren, and thank you everyone for joining us today. We are off to a strong start this year, delivering $28.4 million in ACV, a 12% increase compared to Q1 last year. Our growth was broad-based, reflecting usage scale-ups, new customers, and growth from new products. Drug discovery revenue of $23 million was also a significant contributor in the quarter. Lilly’s announced $2.3 billion acquisition of Ajax Therapeutics, a company we co-founded and in which we have an approximately 6% equity stake, is the latest example of a multi-billion dollar deal for a Schrödinger co-developed molecule and speaks to the power of our platform. We are pleased with our momentum transitioning customers to hosted licensing. We are seeing positive conversion dynamics upon contract renewals and with new products that are hosted.

In limited cases, we are also seeing the early conversion of multi-year on-premise deals to hosted ahead of the scheduled renewal date. We are encouraged by the improving biopharmaceutical funding environment. While macroeconomic uncertainty remains, it is clear to us that there is a growing recognition of the critical importance of our computational platform as R&D organizations embrace the predict first computational paradigm that offers a demonstrated path toward improving probability of success and reducing the time and cost of molecular discovery. We remain poised to benefit from the evolving regulatory environment with our Predictive Toxicology initiative set to address a key element of the FDA’s focus on reducing animal testing and broadening the use of computational methods. Our market-leading position is built on the inherent accuracy and scalability of our physics-based approach and is further reinforced by our unmatched track record.

While standard AI models are limited by the scarcity of training data, our platform generates the ground truth simulations, accuracy, and scale required for AI to precisely navigate the vastness of chemical space. By combining the accuracy of physics with the speed and scalability of AI, we are able to evaluate key properties of billions, even approaching trillions of molecules with a level of accuracy impossible to achieve through models trained solely on experimental data. This capability enables our customers to integrate computation more deeply into their workflows, driving the consistent demand that underpins our long-term growth trajectory. We are committed to technology leadership and evolving our platform to meet customer needs. We are very excited about the upcoming release this summer of an early access version of Bunsen, our new agentic AI co-scientist.

Designed to autonomously execute complex molecular discovery workflows, Bunsen enhances productivity and accelerates the design, predict, make, test, analyze cycle that drives modern molecular discovery. Our material science and therapeutics teams have been successfully using Bunsen internally. We are excited to offer this capability to our customers. Our throughput-based licensing model is well-positioned to capture the value of this expanding utilization. The repeated success of our co-invented molecules and the continued progress of our therapeutics portfolio place us at the forefront of a digital transformation, moving material science and life science industries toward a more efficient, predict first, computationally driven model of discovery. We continue to deliver the technology that transforms the way molecules are discovered. We look forward to updating you on our progress throughout the year. I’ll now turn the call over to Richie.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Thank you, Rami, and good afternoon. ACV in the first quarter was $28.4 million, which represents 12% growth compared to $25.4 million in Q1 2025. On a trailing 4-quarter basis, ACV reached $201 million. As a reminder, we believe ACV provides important visibility into the performance of our business during a period where we expect recognized revenue to be highly variable due to the accelerated transition to hosted. ACV growth was primarily driven by our top 20 pharma customers as these customers broaden their platform access, onboard new products, and integrate our platform more deeply into their R&D organizations. Starting this quarter, we are breaking out contribution revenue as a separate line item to provide better visibility into our software and drug discovery performance.

To facilitate year-over-year comparisons, we have reclassified our historical results to reflect this change as contribution was previously included in software and drug discovery revenue. Total revenue for the first quarter of 2026 was $58.6 million. Software revenue was $35.6 million, of which hosted revenue contributed $12.1 million, or 34% of the software total, compared to 24% in the first quarter of 2025. On a trailing four-quarter basis, hosted revenue increased to 27% of the software total. As we’ve discussed, the year-over-year software revenue comparison reflects our planned accelerated transition to hosted licenses, for which revenue is recognized ratably over the life of the contract rather than upfront. While this dynamic creates a near-term headwind on recognized revenue, over the long term, it will better align revenue with operational growth, resulting in a more predictable financial profile.

Software gross margin was 69% for the quarter, compared to 80% in Q1 2025, reflecting our planned accelerated transition to hosted software licensing. Contribution revenue was $0.1 million for the period, compared to $4.3 million in Q1 2025. The decline is driven by completion of the initial funding by the Gates Foundation in support of our predictive toxicology initiative. Drug discovery revenue was $22.9 million, compared to $10.2 million in the same period last year. The increase is due to the accelerated recognition of deferred revenue associated with the continued progress of the company’s collaboration portfolio and the discontinuation of one collaboration program. Total operating expenses for Q1 were $78 million, a decrease of 4% compared to $82 million in Q1 2025.

This reflects the impact of our efficiency measures and disciplined expense management across R&D and G&A while we continue to invest in sales and marketing to drive long-term growth. Total other expenses were $11 million, primarily due to changes in fair value of equity investments and interest income expense. Net loss for the quarter and for the first quarter of 2025 was $60 million. We ended the quarter with a strong balance sheet of $406 million in cash and marketable securities. We anticipate receiving our portion of the upfront cash payment from the Ajax Lilly transaction when the deal closes. The fully diluted share count was 74 million. Today, we are maintaining our full year 2026 guidance.

For the full year, we continue to expect ACV to be in the range of $218 million-$228 million, representing 10%-15% growth. We anticipate drug discovery revenue between $55 million and $65 million for the year. As a reminder, drug discovery revenue has quarterly variability due to the collaboration and milestone-driven nature of the business. Our operating expenses are expected to be less than 2025 as we maintain overall expense discipline and make select investments in sales and marketing to support growth and the release of new products. We anticipate our clinical activities will be largely complete by the end of 2026 and to incur approximately $10 million-$15 million of R&D for full year 2026 as we wind down these activities and seek partners for mid- and late-stage clinical development.

Our $19 million-$23 million guidance range for Q2 2026 ACV excludes contribution ACV compared to $23.3 million from Q2 2025 that included $5 million of contribution ACV. I would like to hand the call over to Karen.

Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships, Schrödinger: Thank you, Richie. Our therapeutics business continues to create significant value, most recently highlighted by Lilly’s planned acquisition of Ajax Therapeutics for $2.3 billion. By combining Ajax’s deep expertise in blood cancer and JAK family structural biology with our industry-leading track record in computational drug design, we discovered AJ11095, a first-in-class type 2 JAK inhibitor, which is the primary driver of the announced deal. Over a 10-year span, Schrödinger has co-founded multiple companies, including Ajax. There have been seven major transactions and liquidity events related to molecules we co-discovered across our biotech collaboration portfolio, including Lilly’s acquisitions of Morphic, Petra, and Ajax, the sale of Nimbus’ ACC and TYK2 inhibitors, and the successful IPOs of Relay and Structure. The success of these companies and multi-billion dollar exits establishes unquestionable validation of the impact of computational physics-based design and our biotech and pharma collaboration business model.

The emerging results from our maturing therapeutics portfolio span internal discovery programs licensed to pharma through to co-invented molecules with late-stage clinical readouts like Takeda’s zasocitinib, which completed phase III trials earlier this year. To date, our equity and business development activities have resulted in close to $700 million of cash, as well as potential future preclinical, clinical, and commercial milestones of up to $5 billion and royalties on 15 programs. Our wholly owned programs also represent future value capture opportunities. As Ramy mentioned, the therapeutics team has integrated our new agentic solution, Bunsen, across the combined portfolio. Bunsen’s ability to execute our powerful predictive models and orchestrate multi-step, multi-skill drug discovery workflows enables us to accelerate the design, predict, make, test, analyze cycle.

This is an exciting development that we expect to have a major impact on the productivity of our team and teams across biopharma once they get access. Turning to our wholly owned portfolio, in April, we presented initial clinical data for SGR-3515, our Wee1/Myt1 inhibitor, at the AACR annual meeting. As a reminder, this is an ongoing phase I dose escalation study with primary objectives of safety, tolerability, and pharmacokinetics. The data presented demonstrate that SGR-3515 was generally well-tolerated on an intermittent dosing schedule of 3 days on and 11 days off. Importantly, the initial clinical biomarker data validated our hypothesis that dual inhibition can overcome compensatory resistance mechanisms. We observed encouraging early anti-tumor activity with a 65% disease control rate among evaluable patients treated at doses of 100 milligrams or higher.

We also remain encouraged by the progress of SGR-1505, our MALT1 inhibitor. We continue to see a 100% response rate and durable responses in patients with Waldenström’s macroglobulinemia, where the drug has both FDA Fast Track and Orphan Drug Designations. As we complete these phase I studies, we are actively exploring partnership opportunities to continue the mid and late-stage development of SGR-1505 and SGR-3515. Our track record of generating differentiated discovery stage breakthroughs, clinic-ready molecules, and valuable data packages is well established. We believe our drug discovery expertise, coupled with the use of our computational platform at scale, will enable us to continue unlocking high-potential target product profiles and drive the next wave of successful collaborations and transactions. I’ll now turn the call back to Ramy.

Ramy Farid, Chief Executive Officer, Schrödinger: Thank you, Karen. As you have heard, we are off to a strong start in 2026. I want to thank our employees for their hard work and commitment to our mission. We are pleased with the momentum across the company and look forward to updating you on our progress throughout the year. At this time, we are happy to take your questions.

Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Scott Schoenhaus from KeyBanc Capital Markets. Your line is open.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger2: Hey, guys. This is Steve on for Scott. Can you talk more about how agentic AI is driving our utilization of high compute calculations and how this is impacting your business? What’s the upside potential as adoption of it increases? How would this show up in your customer contracts? Thanks.

Ramy Farid, Chief Executive Officer, Schrödinger: Absolutely. Yeah. I assume you’re referring to the announcement we just made about the release this summer of Bunsen, an agentic AI system for automating complex workflows. We’ve already been using Bunsen internally for a number of months. The impact that it’s had already on productivity of both our expert modelers and computational chemists as well as non-experts has been extraordinary. We’re very excited about it. What it’s doing is eliminating sort of barriers to large scale deployment of the technology, and it’s very much as we describe it, a co-scientist, a companion that improves efficiency and productivity, again, both for experts and non-experts.

Our collaborators who we’re working with are already recognizing the impact, this improved efficiency and our ability to actually use the technology on a larger scale and in a more effective way. Again, as we said, we’ll be releasing it this summer. Already feedback that we’ve been getting as we start to talk about the imminent release of Bunsen has been very positive. I think there’s a lot of excitement about the potential.

The last thing I’ll say is, and we’ve talked about this actually, in the last earnings call and we mentioned it again today, that our throughput-based licensing, that is not seat-based licensing, but throughput-based licensing, of course, benefits from solutions like this where an agentic AI has the potential to increase the demand for the technology and the need for our customers to license that technology on a larger scale. Pat, is there anything you wanted to add? Did I cover it?

Pat Lorton, Chief Technology Officer and Chief Operating Officer, Schrödinger: I think you pretty much covered it.

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah.

Pat Lorton, Chief Technology Officer and Chief Operating Officer, Schrödinger: I think the one thing I would add is that we are seeing customers using more general generic agentic AI, and they are already having access to higher throughput of our technology using other LLM providers. That said, the reason we’ve built Bunsen is because our tools are such an expert tool that we feel that the LLM has to be trained specifically to how to use our tools to optimize it and to run in the most efficient way, and we think the solution we’re putting together will be best for that.

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger2: Great. Just one follow-up. You mentioned, you were working with Anthropic last quarter. Just any update on that partnership or collaboration, whatever you, however you wanna refer to it?

Ramy Farid, Chief Executive Officer, Schrödinger: Sure. Pat, do you wanna give an update?

Pat Lorton, Chief Technology Officer and Chief Operating Officer, Schrödinger: Sure, yeah. We’re, we regularly work with, and talk with Anthropic as we’re building out Bunsen. It is one of the top LLM providers. We are not tied to a single LLM. We are open to using whatever our customers prefer or whatever we think would be working best. We’re building an agentic layer on top of LLMs. Anthropic is, you know, obviously a fantastic provider in this space and we’ve learned a lot from them. We’re really excited to continue to work with them.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger2: Okay, great. Thank you.

Ramy Farid, Chief Executive Officer, Schrödinger: Thank you.

Operator: Your next question comes from the line of Mani Foroohar from Leerink Partners. Your line is open.

Mani Foroohar, Analyst, Leerink Partners: Hey, guys. A quick question. When you think about the % of customers or % of contract value that are previously on-prem that are renewing, in 1Q, recognizing that we’re often recycled for many, can you give us a sense of what % we’re able to convert over to hosted? Just so you can give us a little bit of real-time quantitative feedback on how that transition is going.

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah. Richie?

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Yep, I’ll cover that. Thanks, Manny, for the question.

Mani Foroohar, Analyst, Leerink Partners: Thanks.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: For the quarter, we were pleased with the progress for the revenue. Hosted revenue was 34% of the software revenue in the quarter and 27% on a trailing 4-quarter basis. That compares to 23% just a quarter ago. We’re pleased with the early progress. Anecdotally, we’re aiming to transition from on-prem to hosted upon the contract date, that’s what we achieved in the quarter as well as all new customers, we’re deploying them hosted in the first instance. Overall, we’re pleased with the first quarter and, you know, still have our same expectations for the year and the 3-year outlook, getting to 75% by the 3-year period.

Ramy Farid, Chief Executive Officer, Schrödinger: I think it’s also worth mentioning that in a few cases, which I think is quite encouraging, is that we were able to transition some customers to hosted before their renewal dates. Richie, is there worth, sorry.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Yeah. While the primary emphasis has been on renewing-

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: sorry, transitioning at renewal, in a few instances for larger multiple year contracts that were on-premise, we were able to work with those customers and transition over to hosted well in advance of the renewal date. That you’ll start there was modest impact of that in Q1, but you’ll start to see more impact in that in Q2 onwards.

Mani Foroohar, Analyst, Leerink Partners: Great. A quick follow-up. We’re seeing substantial pickup in M&A activity in private biotech markets, Ajax being one example. How much velocity would you have to see in that space to start tinkering with how you think about guidance for drug discovery revenue, given the broad portfolio of co-founded, partnered, et cetera, companies and your equity exposure there?

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah. I mean, first of all, we can certainly, and Karen, I’ll hand it over to you to answer. Let me just say, on the software side, we’re also quite encouraged. We definitely, things look a lot better this year or this quarter, I should say, so far this year compared to last year where we saw lots of biotech companies, of course, shutting down or very significantly reducing their discovery budgets. We’re not seeing that. We’re even seeing a pickup in new customers, so that’s very encouraging and that sort of, you know, dynamic is the premise of your question is certainly impacting, we think the software business. As far as the drug discovery business, Karen, I think you have some thoughts about that?

Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships, Schrödinger: Yeah, sure. Happy to share.

So as you know, we have always had a lot of interest in partnerships, both obviously with the companies we’ve co-founded, you mentioned Ajax, and prior companies we’ve co-founded. I will say that your comment about the private market and companies is who are still in stealth even as well as public companies are still reaching out very actively to Schrödinger with respect to collaboration on programs that are in their pipelines, but also on new programs. We remain very enthusiastic about the potential for new collaborations. Obviously, we’re not guiding to any specific BD event, but the momentum and the interactions remain very robust both with biotech and with pharma.

Ramy Farid, Chief Executive Officer, Schrödinger: Thanks. That’s helpful.

Operator: Your next question comes from the line of Brendan Smith from TD Cowen. Your line is open.

Brendan Smith, Analyst, TD Cowen: Great. Thanks for taking the questions, guys. Congrats on all the progress here. Actually wanted to first quickly ask about the Predictive Toxicology launch, if you can maybe just give us a sense of, if not relative revenue breakdown between the legacy business and that, and then Predictive Toxicology, at least maybe how new customer adds there are tracking. Just quickly, I guess on the upcoming Bunsen launch, how should we really think about this go-to-market strategy for the agent? I know you gave us some good color earlier. I guess, is this just something that you expect to kind of roll out as an add-in with existing customers, or is there kind of a whole separate base you could potentially reach with this?

I guess just any kind of go-to-market strategy there, stuff would be super helpful. Thanks.

Ramy Farid, Chief Executive Officer, Schrödinger: Yep, we can cover both those. Thanks for the questions. With regard to Predictive Toxicology, feedback continues to be really very positive for the results of evaluations now that are being kicked off. It’s very clear that there’s significant interest in the technology, but also that prospective testing of it in our customers’ hands is validating the kind of results that we were seeing when we were developing the technology and using it also prospectively internally. That’s really quite gratifying to see. That continues to go well. With regard to Bunsen and the go-to-market strategy and you asked about the base, that’s a really good question because, and I sort of alluded to this in talking about it earlier.

Certainly this in some sense democratizes access to very sophisticated technology, and you can appreciate what kind of impact that can have on the business. When this kind of technology, you know, previous to systems like this may just have been inaccessible and, you know, it would take years of training. You know, you need an advanced degree, you’re not sure, or you’re using the technology and not using it quite right and not getting very good results. That’s not a good thing for anybody, for a customer or for us. This obviously, you know, very directly addresses that. This is very similar to image processing. That used to be a thing that was not available to very many people, only people who were expert users at Photoshop, right?

You know, to remove red eye or remove somebody who is in the background of your vacation photo was really difficult. Now you just circle the area and say, "Remove the background," and it’s done. It’s the same basic idea, now all of a sudden, a very sophisticated image processing or image manipulation is available to the masses. We expect the same sort of thing, well, not masses, but you understand, to non-experts in research. Pat, anything to add to that?

Pat Lorton, Chief Technology Officer and Chief Operating Officer, Schrödinger: No, I think that sums it up great. The other thing I would just highlight on top of adding additional customers is one thing that is really limiting. I think we’ve discussed in the past that the amount of computational chemists we have per project at Schrödinger is a lot higher than the industry average. That’s part of the reason behind our very high success rate. One thing that’s very limiting in our customers is they simply don’t have enough people who can run this to get it done, even if they have experts who are good enough. Simply getting this in the hands of those experts and allowing them to get a multiple of their work done, similar to how the agentic coding tools have allowed developers to work much, much faster.

We think even those experts being able to run much, much faster, they’ll be able to consume a lot more of our throughput-based licensing before we even have it broadened to a broader user base.

Ramy Farid, Chief Executive Officer, Schrödinger: Exactly.

Brendan Smith, Analyst, TD Cowen: Got it. Sounds good. Thank you, guys.

Ramy Farid, Chief Executive Officer, Schrödinger: Thank you.

Operator: Your next question comes from a line of Michael Riskin from Bank of America. Your line is open.

Michael Riskin, Analyst, Bank of America: Hey. Hey, thanks for taking the question, guys. First I wanna dig into sort of the new way you’re guiding ACV. I wanna talk about the contribution ACV. You called out, you know, for the second quarter, your guide is $19-$23, and that’s excluding any contributions. Is that your way of saying we, you know, we don’t know what the contribution ACV will be, or are you actually expecting it to be, you know, zero because it was, you know, relatively modest in the first quarter? Sort of the same question for the full year. Anything you could tell us in terms of how much of the full year ACV is made up of that or how much there was in all of 2025?

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah. Richie?

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Yep. The guidance for the Q2 is $19 million-$23 million, as you noted. The reason we explicitly called out the comparison to last year, Q2 of 2025 was $23.3 million, of which $5 million was contribution ACV related to our grant with the Gates Foundation. We just wanted to call out when you’re looking quarter to quarter that on a commercial business or excluding contribution, we’re still projecting growth for this quarter. For the full year range, $218 million-$228 million of ACV, we do expect potentially some contribution ACV in there. That’s a component of it, in the full year number.

Michael Riskin, Analyst, Bank of America: You don’t want to break that out or quantify that?

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Correct.

Michael Riskin, Analyst, Bank of America: Okay. Okay. All right. Fair enough. In terms of Ajax, just how should we think about that flowing through the P&L, and in terms of, you know, use of proceeds, anything like that? Is that in your guide for the year? I don’t believe it is. Just timing and pacing of that.

Ramy Farid, Chief Executive Officer, Schrödinger: Richie, you should answer that, but let me just say, just to remind, that our equity stake is around 6%. Just wanted to throw that in there. Richie, please go ahead and answer.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: The Ajax sale was not contemplated in our guidance framework. Obviously it’s a private company sale that we couldn’t have included, but its impact to our financials will mostly be to cash. Our cash position at the end of the quarter was $406 million. As Ramy just noted, we own about a 6% equity stake in Ajax, when the upfront portion is received by Ajax, we will receive our 6% of that approximately. The impact to us will be cash. The upfront amount was not disclosed in the Ajax Lilly announcement, as we receive the cash, we’ll be able to reflect it in the balance sheet.

Michael Riskin, Analyst, Bank of America: But, but the-

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Beyond the upfront

Michael Riskin, Analyst, Bank of America: Yeah, just in terms of how you think about.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: There’s also, you know.

Michael Riskin, Analyst, Bank of America: Yeah

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: There’s also milestones, you know, kinda near term and downstream milestone opportunities, in which we would continue to have that 6% participation.

Michael Riskin, Analyst, Bank of America: Okay. I guess my question is, does that change in terms of how you think about investment priorities in the second half or just, you know, the fact the balance sheet’s gonna be a little bit stronger? Any early thoughts on that or just gonna wait and see for now?

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: I would say more the latter. I think our path to profitability between growth in software and drug discovery as well as expense management, over the three-year window, that was all based on our cash position at the time. This is just upside to that. We will, once we receive the cash, kind of revisit if anything changes, but I would expect our three-year outlook at the time to be unchanged.

Michael Riskin, Analyst, Bank of America: Okay. All right. Thank you.

Ramy Farid, Chief Executive Officer, Schrödinger: Thanks.

Operator: Your next question comes from the line of Michael Yee from UBS Securities. Your line is open.

Michael Yee, Analyst, UBS Securities: Great. Thanks. We had 2 questions. First, maybe for Ramy. Just thinking about your overall P&L, you’ve got some very attractive 70% gross margins. Overall as an entity, you’re EBITDA negative and running operating losses. Given the general shift to reduce focus on moving things to later preclinical or in clinical and looking to partner things, how would we expect the overall operating expense structure to potentially change? In other words, what % of your R&D do you estimate is going towards those types of programs? If I back that out, could think about a more appropriate run rate of where you think your R&D could. That’s question number 1. Appreciate, I think you have guided to sort of be EBITDA profitable in 2028, that’s helpful.

Wanted to know what % of R&D is related to drugs. The second question relates as a follow-up. I estimate, given I cover Lilly, that Ajax could be like a billion dollar upfront. Is the 6%, I think you said is not in your current cash guidance, so we should take 6% of whatever our estimate is and apply that upside to the cash. Does that also, is that booked in the income statement and flows through the income statement? Thank you.

Ramy Farid, Chief Executive Officer, Schrödinger: Absolutely. Richie, do you wanna cover the second? Yeah. I’ll.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Sure. Exactly. We can’t comment on the size of the upfront, but the 6% equity stake we have is not in our cash guidance. I would expect it to run through our P&L as a non-operating gain.

Ramy Farid, Chief Executive Officer, Schrödinger: Okay. With regard to the question about R&D and drug discovery. I think we’ve been very clear about this, that the drug discovery part of our business, which has been in existence for a long time, since the, even a little bit before, but around the founding of Nimbus over 15 years ago, has been an incredibly important part of our business and is highly synergistic with our software business.

We’ve shown, I think, very clearly that the success, the extraordinary success of these drug discovery partnerships, Nimbus, Morphic, Relay, Structure, Ajax, have had such a huge impact on validating our platform, and they’ve also had a huge impact on helping us understand what it is that we should be working on, how we should be advancing the platform to have sort of the maximum impact on projects. That will continue to the extent that there is still a huge amount of work to be done in advancing the field. We’re obviously incredibly excited about the accomplishments that we’ve made, and it’s really been transformative. We’ve transformed the way molecules are discovered. That was our mission. I think we’ve been accomplishing that.

You can see through this initiative, like the Predictive Toxicology initiative and many other initiatives like that, there’s more work to be done, and we can continue to improve the way molecules are discovered, both in material science and life science. Again, that’s a long way of saying that these businesses are highly synergistic, and it will continue to be an incredibly important part of our overall business model. Karen, I don’t know if you wanna add anything to that.

Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships, Schrödinger: As we’ve shared in the past, the vast majority of our portfolio, the combined portfolio of collaborations with our co-founded companies, with biotechs and with large pharma, are an important part of the business, as Ramy just described, both from a scientific point of view, but also, as you saw this quarter, generating revenue. I would say that the vast majority of our activities actually in the R&D space are actually those collaborations. It’s a small portion of the overall effort that is allocated to wholly owned research. As you heard previously on prior calls, we will not be taking programs into the clinic.

We are also obviously partnering programs early, as you saw with the Novartis deal, partnering a program that hadn’t even reached lead optimization yet. You know, our investment in R&D is partly obviously on the science side, as I’ll say again, it’s also to create value. As you heard, we have 15 programs now with royalties on sales and revenue coming from these programs. As you heard across the whole portfolio, close to $700 million generated from collaborative activities in the R&D drug discovery efforts.

Ramy Farid, Chief Executive Officer, Schrödinger: Thanks, Karen.

Michael Yee, Analyst, UBS Securities: Got it. We have guidance for 2028. That’s helpful and positive. Thank you.

Ramy Farid, Chief Executive Officer, Schrödinger: Yep. Thanks.

Operator: Again, if you’d like to ask a question, press star, then 1 on your telephone keypad. Your next question comes from a line of Evan Seigerman from BMO Capital Markets. Your line is open.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger1: Hi there. This is Connor on for Evan. Thanks for taking our question. We just have a follow-up on how we should think about the rollout of Bunsen and maybe kind of the phasing over the next couple of years. Of course, you have the upcoming early access launch this summer. We’re just, you know, trying to think about maybe which types of accounts you’ll be sharing access with in kind of the early summer launch. Maybe as we think longer term, thinking about kind of, you know, understanding the throughput-based licensing, we’re wondering kind of the functional rollout of Bunsen. Will this be kind of a premium add-on or come included as a part of your standard software offering? Thank you.

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah. We’re still working out all of the details of that, as we typically do with our early access versions of our technology. We work with our close partners, and we will do that the same thing here, where we can work together to work out the sort of mechanics of integrating it into their workflows, but also checking on the science. Everybody listening to this call and all of us have had experiences that are mixed with LLMs. Sometimes they’re extraordinary, sometimes they do some pretty crazy things. There’s a lot of work that has to be done to make sure that we optimize and maximize the former and minimize the latter. That requires working with close partners, of which, again, we have a large number.

As far as the future, our expectation, of course, is that this will be ubiquitous and, you know, this technology will be available to all of our customers. Exactly how we price it is still to be worked out. That has a lot to do with this feedback that we get as we roll out this early access version. Yep. I think that’s as much as we can say unless Pat Lorton has anything more to add.

Pat Lorton, Chief Technology Officer and Chief Operating Officer, Schrödinger: Nope, that covered it perfectly.

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah. Yep. Great.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger1: Thanks.

Ramy Farid, Chief Executive Officer, Schrödinger: Thank you.

Operator: Your next question comes from a line of Matthew Hewitt from Craig-Hallum. Your line is open.

Matthew Hewitt, Analyst, Craig-Hallum: Good afternoon. Thanks for taking the questions. Maybe first up, given that Q4 is such a big renewal period for you, and you spoke to it earlier that you’re starting to see some of those earlier conversions, is it your hope and intention that you can get through some of that or maybe half of that before you get to Q4 just to kinda ease the burden or the rush that you would see at year-end? How should we be thinking about maybe the conversion over the course of the next couple of quarters before you get to Q4?

Ramy Farid, Chief Executive Officer, Schrödinger: Richie, do you wanna try.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Yes.

Ramy Farid, Chief Executive Officer, Schrödinger: Yep.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Let me start. Hey, Matt.

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah.

Jaren Madden, Chief Corporate Affairs Officer and Head of Investor Relations, Schrödinger0: Thanks for the question. I think the examples that we gave were more anecdotal and not the base case, but they were large contracts, and they, we had a dedicated effort, I think, to try to convert those in advance. More broadly, though, the natural time for us to address a transition is on the contract renewal date. I still would expect Q4 to be our largest quarter of the year for ACV. Having said that, I think you’ll see, you know, where there’s opportunities, we will pull them forward ahead of the renewal date. Sometimes that relates to a new product, sometimes that relates to a new offering.

I think here, on the margin, you may see we’ll do what we can to kind of pull forward, and drive ahead of, Q4, but I’d still expect Q4 to be our largest quarter of the year. Yeah.

Matthew Hewitt, Analyst, Craig-Hallum: Got it. Maybe separately, with the strategic shift where you’re not going to be taking internally discovered molecules into the clinic, besides the ones that you’ve already got there, will you provide an update on how that is progressing? I mean, will you give us a, "Hey, we’ve discovered," or, "We’ve got 17 molecules that are, that we’re working on right now," and maybe three quarters later, "Now we’re up to 20"? Like, how will we monitor, how will we know the progress that you’re having on that internal molecule discovery side? Thanks.

Ramy Farid, Chief Executive Officer, Schrödinger: Yep. Karen?

Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships, Schrödinger: I mean, I think we have in the past kept our pre-LO pipeline relatively quiet for a number of reasons. Obviously, you want to be progressing the program before you start announcing the identity of the program or the progress. What we have been announcing, obviously, is the deals that we’ve been doing. I will say we don’t plan to kind of expand and expand and expand the size of this portfolio without actually transacting some of these programs as they move through the discovery space. Again, as you saw us do with Novartis, we felt that those programs were well-positioned to partner with that particular company because of their expertise and the synergy with those programs. You’ll see us do more of that.

I don’t think you should be expecting an ever-growing, early stage portfolio, but updates as we identify partners for them.

Ramy Farid, Chief Executive Officer, Schrödinger: Yeah.

Matthew Hewitt, Analyst, Craig-Hallum: Understood. Thank you.

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