Schrodinger: A Long-Term Hold For Biotech Investors With Upside Potential Too

Schrodinger: A Long-Term Hold For Biotech Investors With Upside Potential Too

gorodenkoff/iStock via Getty Images Since the last time I covered Schrodinger ( SDGR ) in September 2021, the stock has suffered from a 55% downside, and this is in sharp contrast with my bullish stance. With this thesis, my objective is to understand what went wrong, and for this purpose, I go through the financial results. Data by YCharts I also analyze the competitive position by comparing it with emerging plays that are using computers to transform the drug discovery process. First, I provide insights as to the business which primarily consists of software sales, but also remains geared at discovering drugs. Software-aided tools for drug discovery

Computer tools to help solve complex chemical problems encountered during the drug discovery process are transforming the way medicines are now being developed. There are several ways in which the use of AI (artificial intelligence) can help overcome some of the barriers to developing drugs like when there is no preliminary information available about a potential protein target, or when there is only partial data.

For this purpose, a strategy making use of analytics and machine learning can compensate for the absence of data by using similar patterns made of closely-related proteins from other organisms. In this way, a model can be built to identify the best candidates to advance for lab testing.

In this respect, Schrodinger’s computational platform , utilizing principles in physics and chemistry together with researchers’ built-in knowledge, enables collaborating companies to discover novel molecules more rapidly. There is also the cost factor that comes into play here given that pharmaceutical or biotechnology companies often have to endure years of research implying large amounts of funds just to identify the right therapeutic molecule.

Interestingly, to benefit from the power of informatics, research organizations do not even need to implement expensive IT infrastructures, as they simply have to subscribe to Schrodinger’s platform. This is as easy as signing up through the company’s website and downloading the software. Thus, a basic level subscription costs $550/year on a per-user basis, which is much cheaper than acquiring a $500K container of server equipment together with the specialist IT skills which go with it.

Also, by incorporating predictive modeling scenarios developed by its own internal therapeutic molecule discovery teams into the platform, customers can benefit from an extended knowledge base and achieve a higher probability of success compared to other methods. company presentation (seekingalpha.com/article/4491109-schrodinger-inc-2021-q4-results-earnings-call-presentation) Now, just like software companies that have been successful with shareware or giving users the possibility of using something before actually paying for it, Schrodinger’s has seen tremendous growth in sales. As a matter of fact, software sales were $38.6 million in the fourth quarter of 2021, or a 55% increase from the $25 million obtained in Q4-2020 as shown in the table below. Revenues and profitability

Overall software revenues for 2021 have amounted to $113.2 million, exceeding the guidance of $102-110 million . Additionally, the 22% sales growth enjoyed over 2020 has turned out to be higher than the estimates of 10-18%. Now, these lower estimates already had a devastating consequence on Schrodinger’s stock back in November last year and were one of the reasons it suffered from a 40% drop over four months.

Another reason for the downside was that Schrodinger, despite its double-digit growth remains a loss-making company. For this matter, it made an operating loss of $114.4 million in 2021 or $53.5 million more than in 2020. This is not well viewed in the current macro-economic environment characterized by high inflation and where a rise in Fed interest rates is viewed as favorable for value stocks, or those which are profitable.

Still, one of the reasons I like the stock is its high software gross margins which were at an astounding 78% in Q4. This is a level normally achieved by highly efficient software plays and signifies that the company has optimized its platform to such an extent that it necessitates relatively few man-hours of configuration to support new customers. company presentations (seekingalpha.com/article/4491109-schrodinger-inc-2021-q4-results-earnings-call-presentation) Furthermore, the operating expense of $48.9 million, or $13.3 million more than the $35.6 million incurred in Q4-2020, partly reflects the company’s investment in R&D, again pertaining to the platform. The other part was used in the internal drug discovery programs, and the remaining to support Schrodinger’s existence as public company infrastructure following its IPO in February 2020.

Coming to drug discovery, the performance has been more muted in the fourth quarter with revenues regressing compared to the same period in 2020, but, nonetheless, there was a 59% rise on […]

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