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Edited Transcript of SDGR.OQ earnings conference call or presentation 10-Aug-20 12:30pm GMT

Q2 2020 Schrodinger Inc Earnings Call

Sep 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Schrodinger Inc earnings conference call or presentation Monday, August 10, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joel Lebowitz

Schrödinger, Inc. - CFO & Executive VP

* Karen Akinsanya

Schrödinger, Inc. - Executive VP, Chief Biomedical Scientist and Head of Discovery R&D

* Ramy Farid

Schrödinger, Inc. - CEO, President & Director

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Conference Call Participants

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* Aryeh Dylan Gold

Jefferies LLC, Research Division - Equity Associate

* David Neil Lebowitz

Morgan Stanley, Research Division - VP

* Guyn Kim

BMO Capital Markets Equity Research - Analyst

* Michael Leonidovich Ryskin

BofA Merrill Lynch, Research Division - Associate

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Presentation

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Operator [1]

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Good morning. And welcome to the Schrödinger Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to the Schrödinger team. Please go ahead.

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Unidentified Company Representative, [2]

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Thank you, operator. And thank you all for listening in on our second quarter financial results call. Today, you will hear from Ramy Farid, President and Chief Executive Officer; Karen Akinsanya, Chief Biomedical Scientist and Head of Discovery R&D; and Joel Lebowitz, our Chief Financial Officer.

Before we begin, I'd like to remind you that management will make statements related to our business that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to the potential advantages of our platform, our strategic plans to accelerate the growth of our software business, and advance our collaborative and internal drug discovery program, risk related to the COVID-19 pandemic, our expectations related to the use of our cash, cash equivalents and marketable securities as well as our future operating 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 from those described in the forward-looking statements and are subject to a variety of assumptions, uncertainties, risks and factors that are beyond our control, including those risks detailed under the caption Risk Factors and elsewhere in our most recent Securities and Exchange Commission filings and reports.

Except as required by law, we undertake no duty or obligation to update any forward-looking statements discussed on this call as a result of new information, future events, changes in expectations or otherwise. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today.

With that, I'd like to turn the call over to Ramy.

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [3]

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Thank you, everyone, for joining the Schrödinger call to review our most recent financial results. We had a very strong second quarter, building on the momentum of our first quarter. As you'll hear from Karen, we are making excellent progress on our 5 internal wholly owned drug discovery programs and have achieved important milestones with several of our biotech and pharma collaborators.

Also, as Joel will describe later on the call, we saw very strong revenue growth in our software business and we continue to make significant progress on the science that underlies our differentiated computational platform. As further validation of our technology and business model, we saw 2 important developments since our last call: Petra Pharma was acquired, a testament to the strength of the assets discovered by leveraging our computational platform; and Relay Therapeutics had a very successful IPO in July. These milestones build on the success we've seen at Nimbus Therapeutics and Morphic Therapeutic and demonstrate our continued ability to derive value from our portfolio of biotech equity stakes.

In a moment, Joel will expand on the financials in greater detail. But top line, we achieved total revenue of $23.1 million in the second quarter, which represents 21% growth over the second quarter of 2019. Underpinning this top line growth was software revenue of $20.9 million, an increase of 44% compared to the second quarter last year. This growth is a clear sign our customers are engaging more deeply with our platform.

Importantly, we're also adding new material science customers, an area we think will become increasingly meaningful in the coming years as the industry continues to recognize the potential of computational methods. As part of our ongoing efforts to deepen our software solutions for material science applications, we entered into a 3-year agreement in June with Gates Ventures to develop and apply novel, accurate atomistic simulation methods to improve battery performance.

We remain strongly committed to advancing the science that underlies our computational platform. To that end, in the second quarter, we published several noteworthy scientific papers describing our work in such areas as integration of molecule-generative machine learning with mixed physics-based and machine learning scoring for ultra-large-scale multiparameter optimization, improved methods for determination of cryo-EM structures of protein-ligand complexes, improvements to the accuracy of binding affinity predictions from FEP+ through enhanced modeling of water molecules and improved methods for calculation of protein thermal stability using FEP+.

In addition to these publications, we released to our software customers a method for calculating absolute binding affinities using free energy perturbation. We have shown that this technology can improve hit rates in virtual screening. We look forward to continuing to make important scientific advances in drug discovery and materials design.

We are also excited that we've expanded the reach of our platform by forming partnerships with leading structural biology companies: Viva Biotech, a leader in X-ray crystallography; and Thermo Fisher, the leader in cryogenic electron microscopy, cryo-EM. These joint efforts will allow us to explore targets that were previously not structurally enabled for physics-based methods, thereby broadening the domain of applicability of our platform.

I'd like to give you an update on the progress we are making on our COVID-19 multicompany philanthropic alliance, which was created to discover and develop small molecule antiviral therapeutics to address COVID-19 and possible future SARS-CoV-2 outbreaks. In June, we announced that Google Cloud had joined the alliance with a significant donation of high-powered, parallel computing resources to help accelerate our discovery work.

We are also excited because the alliance is using LiveDesign, our enterprise solution that enables full project management and interactive collaboration among discovery teams at numerous sites and across many traditionally siloed areas of research. If ever there was a more critical time to apply LiveDesign, it is now and the alliance is finding it instrumental for sharing computational and experimental data across all the organizations at multiple sites.

And finally, I'm very happy to report that despite the obvious challenges we're all facing with COVID-19, our teams have been collaborating to successfully engage both existing customers and potential new customers, while advancing our drug discovery programs and those of our collaborators. We're also executing on the hiring plan we established at the beginning of the year, and we're pleased to be adding more talent to our already impressive ranks.

Summing up, we're excited by the many advances we've made as we continue to transform the way therapeutics and materials are discovered. Our leading physics-based computational platform is enabling us, our customers and our collaborators to accelerate the discovery of higher-quality novel molecules compared to traditional methods.

I'll now turn the call over to Karen for an update on our drug discovery programs.

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Karen Akinsanya, Schrödinger, Inc. - Executive VP, Chief Biomedical Scientist and Head of Discovery R&D [4]

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Thank you, Ramy. Good morning, everyone. I'm pleased to share an update on the continued progress across our portfolio of drug discovery collaborations and our pipeline of internal wholly owned programs.

The hard work and dedication of our teams and global partners has enabled us to continue to navigate the challenges of the COVID-19 pandemic with minimal disruption. We continue to see the profound impact of our physics-based methods, including FEP+, deep learning and ultra-large-scale compound enumeration on the efficiency and speed of our programs as well as our ability to address difficult design challenges. We have leveraged these methods extensively in the development of our internal pipeline, which is rapidly advanced since we launched our first program in mid-2018.

In our first quarter call, we reported that our third wholly owned program advanced into late discovery in just under 18 months. Since then, 3 additional programs have moved into lead optimization across our collaborative portfolio. This brings the total number of partnered and internal programs at this later stage of discovery to 12, the largest group we've seen at this stage to date.

We are often asked how large our library of compounds is, and that's an important point. We don't really rely on physical libraries, which are necessarily limited to compounds that have been previously synthesized and so, therefore, much smaller than computationally enumerated virtual libraries. We are able to explore vast amounts of chemical space virtually once we have a validated computational assay.

During the first half of 2020 alone, we have explored 237 billion compounds virtually across our collaborative and internal programs. Furthermore, by combining physics-based methods with deep learning approaches, we've been able to rapidly move several programs into lead optimization in just months instead of potentially years.

It is quite clear that fully exploring chemical space within and between chemical series during all stages of the program allows us to prioritize design and synthesis strategies almost in real-time and achieve multiparameter optimized compounds. Details of this approach were just published in the Journal of Chemical Information and Modeling.

Focusing on our wholly owned pipeline, we have 5 active programs targeting solid tumors and hematological malignancies. Based on the mechanistic validation and characteristics of our molecules, we believe these assets could have monotherapy activity in specific populations as well as utility in combination with other therapies.

We made considerable progress across our programs during Q2, most notably in our MALT1 program. We are developing novel, allosteric MALT1 inhibitors to treat relapsed or resistant lymphomas, which represent an area of high unmet medical need. Molecules from our first MALT1 chemical series demonstrate similar tumor growth inhibition in vivo when compared to data from activated B-cell diffuse large B-cell lymphomas or ABC DLBCL xenograft model, just reported by Janssen at AACR for their clinical compound.

We have continued to advance our MALT1 program inhibitor optimization, and now our most advanced molecule has been shown to be an order of magnitude more potent than other known competitor molecule. Additionally, published MALT1, 2 molecule data has shown that these inhibitors have activity against both naive and ibrutinib-resistant CLL and mantle cell lymphoma. We are now testing our most potent leads to assess their potential, both as monotherapy and in combination regimens in resistant and relapsed patient samples.

We are delighted with the rapid pace with which our MALT1 molecules are progressing. Just over a year into the program and a quarter ahead of schedule, our leads are on track to begin non-GLP tox in the coming months, followed by GLP tox studies early in 2021.

Our 2 programs focused on DNA damage repair mechanisms, CDC7 and WEE1, are also in the in vivo testing phase. Across both programs, we have achieved differentiated kinase selectivity profile, while maintaining potency and desirable drug-like properties. Our plan for 2021 initiation of GLP tox studies in support of regulatory interactions, including pre-IND meetings with the FDA and IND filings are on track.

Our picomolar CDC7 inhibitors show excellent potency in our biochemical assays and deeper growth inhibition responses in preclinical, acute myeloid leukemia models when compared to other known CDC7 inhibitors. Additionally, our inhibitors show synergistic effect from AML cell death when combined with Venetoclax, which received accelerated approval in 2018 for the treatment of newly diagnosed AML in adults. We have now gone on to show that CDC7 inhibition is effective in AML models with the right range of sensitivity to Venetoclax. To date, CDC7 inhibitors have only been studied clinically in solid tumors, so we believe our data provides compelling rationale to investigate them in hematological malignancies such as AML.

Moving on to our WEE1 program. The potential for this class of drug was confirmed by recently reported deep, prolonged responses to AstraZeneca's AZD1775 in uterine serous carcinoma, especially in the setting of FBXW7 loss. From a precision oncology perspective, identifying the hallmarks of super responders is a key component of our molecular stratification plan to achieve improved therapeutic windows in patients. Our next-generation WEE1 inhibitors are highly selective and, we believe, have the potential to be used in optimized dosing regimens.

I'll round out the discussion of our internal programs with 2 more updates. First, next-generation inhibitors that address resistant patients have seen significant clinical success and approvals over the last few years. We believe that our next-generation HIF-2 alpha program for use in renal cell carcinoma patients who have become resistant to first generation agents is an important opportunity to capture more patients with VHL disease-associated renal cell carcinoma.

Finally, our early-stage SOS1 inhibitor program for use in combination with KRAS inhibitors also continues to advance. Using drug combinations to target proteins that indirectly interact with KRAS is an emerging and promising strategy. We believe that multitargeted approaches will likely be necessary to achieve a durable therapeutic response in most cancers harboring mutant KRAS.

From a capabilities and execution standpoint, we continue to strategically expand our ranks as we prepare to enter the next stages of discovery and development in liquid and solid tumors. We are adding industry veterans with decades of experience in order to expedite the development of potential new therapies for patients in need. We continually evaluate our drug discovery programs in order to focus on those with the best chance for success. We are accelerating promising new targets with validational genetic support in human cohorts and emerging pharmacology data that we believe are valuable candidates for our future development.

Some of these emerging and potentially high-value drug targets do not have protein structures, which limits our ability to apply our physics-based technology. We recently entered into strategic collaboration with Thermo Fisher and Viva Biotech that will provide our teams with greater access to cryo-EM and X-ray structures to broaden the reach of our technology.

We are quite pleased with the substantial progress in our diversified portfolio of collaborative and wholly owned programs and with the continued positive impact of existing and new technology. We are genuinely excited by the opportunities for our future preclinical and clinical pipeline.

Now I'll turn it over to Joel.

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Joel Lebowitz, Schrödinger, Inc. - CFO & Executive VP [5]

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Thank you, Karen. Hello, everyone. Thank you for joining us today to review our second quarter results.

As you heard from Ramy and Karen, we are executing on our strategy across our business. In the second quarter, we continued to see strong momentum, recording $23.1 million in total revenue, an increase of 21% compared to the second quarter of 2019. Our software business powered the results, delivering $20.9 million in revenue, which represents 44% growth versus the second quarter of 2019. The underlying trends of new customer additions and increased adoption of our solutions continue to drive the business, and we experienced growth in all regions and in both life sciences and material science. We also continue to see increasing adoption of LiveDesign, our project management enterprise solution for drug discovery. LiveDesign plays an essential role in our integrated platform offerings and this solution can be especially powerful in fully remote work environments that many of our customers are still experiencing.

With regard to the COVID-19 crisis, while we did not experience any material impact to our software business in the first half, certain risks have been identified that if materialized, could affect the growth of our software business in the second half of the year. Customers, particularly those in hard-hit industries, could come under budgetary pressures, which could impact our software sales growth. Software sales could also be affected by the limited ability to engage with customers in person as the crisis continues. That being said, through the first half of 2020, we have been pleased with the execution of our strategy to grow our customer base and increase adoption of our solutions, which resulted in 35% software revenue growth versus the first half of 2019.

On the discovery side of our business, we achieved revenues of $2.2 million in the second quarter compared to $4.5 million in the same quarter last year. As we have discussed previously, these revenues depend upon the timing of program milestones and are expected to vary significantly from period to period. This quarter, we continue to see broad advancement of our collaborative programs, many of which we expect will lead to milestones and associated revenues in future periods. In some cases, we are experiencing variability in certain collaboration program time lines impacted by COVID-19 that could result in delays in reaching certain milestones and impact the timing of revenue in the second half of 2020.

Turning to our internal programs. We are moving rapidly through late-stage discovery, as you heard from Karen, and we are on track to begin our first IND-enabling studies early next year. Accordingly, we are continuing to add to our capabilities as we prepare for the advancement of our programs toward the clinic.

In the quarter, we also saw significant returns from our collaborations that are reflected in other income in the P&L. One of our collaborators, Petra Pharma Corp., was acquired in June, which resulted in a $4.2 million gain in the quarter. As part of the acquisition, we received $4.6 million in cash from our share of an upfront payment related to our equity stake in Petra. We are also eligible to receive potential earnouts tied to the achievement of specified development, regulatory and commercial milestones in addition to being eligible to continue to earn revenue under the terms of our original collaboration agreement. Also, our equity holdings in Morphic Therapeutic resulted in a $10.3 million gain in the quarter, reflecting Morphic's stock price appreciation.

In a subsequent event to the second quarter, Relay Therapeutics successfully completed an IPO in July. We anticipate that we will record a gain in the third quarter commensurate with the approximately 422,000 shares owned by Schrödinger, and these will be marked-to-market each quarter. So we continue to derive value from our biotech equity stakes.

Before shifting to the rest of the P&L, I'd like to point out that our deferred revenue balance at the end of the quarter was $25.1 million, an increase of 12% compared to the end of the second quarter of 2019, reflecting underlying growth in our business.

Moving on, gross profit reached $13.6 million in the quarter, up 38% compared to the second quarter of 2019. The growth was driven by the significant increase in software revenue and slower growth in cost of revenues. Software gross margin was 82% compared to 75% in the second quarter of last year.

Operating expenses were $30.7 million for the quarter, up 29% versus the same period of 2019, primarily reflecting the continued investment in research and development for the advancement of our technology platform and support of our internal drug discovery programs, several of which are now in late-stage discovery. The growth relative to 2019 also reflects the increased costs associated with operating as a public company.

Looking at sequential total expense growth in 2020, including both cost of revenues and operating expenses taken together, we experienced a 6% increase versus the first quarter of this year. As I pointed out last quarter, we expect total expenses to continue to rise steadily quarter-to-quarter on a sequential basis as we progress through the rest of this year and continue to invest in key capabilities and our drug discovery programs.

Loss from operations was $17.1 million in the quarter versus $14 million in the second quarter of 2019, driven primarily by the increased investments in research and development. As I mentioned earlier, our results this quarter reflect the positive contributions from our equity stakes in 2 collaborators, Morphic and Petra, resulting in $13.1 million in other income. Net loss in the second quarter after adjusting for noncontrolling interest was $3.4 million versus $0.5 million in the second quarter of 2019. Our total cash and marketable securities balances were $284.5 million at the end of June, a decline of $4.2 million from the end of the first quarter this year, as our increased operating expenses were partially offset by strong software revenue performance and the cash distribution from our equity stake in Petra.

We are excited about the continued execution of our strategy to further develop our platform science, drive growth in our software business and rapidly advance our discovery programs. During the second quarter, we made significant progress in these areas despite an uncertain global environment. We believe that we are well positioned to deliver on our long-term strategy and that the current crisis only underscores the critical need for transforming drug discovery and materials design.

With that, we would like to open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Lebowitz with Morgan Stanley.

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David Neil Lebowitz, Morgan Stanley, Research Division - VP [2]

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When you talk to your customers, do you hear any commentary from them on how they might be evolving their approach to spending on discovery and clinical-stage development these days, given what has happened in the pandemic?

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [3]

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David, this is Ramy. Thanks for the question. Not really, actually. We certainly are hearing on the discovery side that because of reduced chemistry resources, wet chemistry resources, that they are relying more heavily on computation and pleased to see that the platform is resulting in fewer compounds being synthesized. But that's the extent of it on -- we're not hearing anything about changes in plans on the development side.

But maybe, Karen, knows of -- has a different thought.

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Karen Akinsanya, Schrödinger, Inc. - Executive VP, Chief Biomedical Scientist and Head of Discovery R&D [4]

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Nothing direct, but I think everyone is aware that certain trials have been delayed. It's been talked about publicly in the media, but we don't have any specific information about the impact on customers' particular trials now.

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Joel Lebowitz, Schrödinger, Inc. - CFO & Executive VP [5]

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Actually, I might add that the momentum in the quarter really was largely underpinned by continued increasing adoption of our solutions by some of our largest customers. So to the extent that that's an indicator that they're still investing in methods to drive early discovery, that might be the case.

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [6]

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And to make it more efficient.

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Joel Lebowitz, Schrödinger, Inc. - CFO & Executive VP [7]

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Yes, right. Exactly.

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David Neil Lebowitz, Morgan Stanley, Research Division - VP [8]

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And also, given that you said you had 3 compounds entering, I guess, GLP tox in preparation for entering the clinic in 2021, from that point, how long does it actually take do you expect until an IND would be filed and you do enter humans?

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [9]

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Karen?

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Karen Akinsanya, Schrödinger, Inc. - Executive VP, Chief Biomedical Scientist and Head of Discovery R&D [10]

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So yes, the -- one can think about a span of 9 to 12 months. We've been in regular contact with the vendors who will be working with us on those studies. We're not hearing anything about delays or extended time lines for GLP tox studies. So again, you can think about 9 to 12 months between the start of those IND-enabling studies and the opening of our IND studies or dosing.

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Operator [11]

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Our next question comes from the line of Michael Yee with Jefferies.

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Aryeh Dylan Gold, Jefferies LLC, Research Division - Equity Associate [12]

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This is Aryeh Gold on for Michael Yee. So it feels like -- 2 questions, right? It feel like the consensus for Q4 is modeling a potential deal. Would you be able to commentary -- comment on that? It seems like there's a bit of a spike in Q4.

And second question is, is there any progress or any development on a potential partnership for any of the 2 to 3 key assets that are wholly owned?

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [13]

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Sure. Karen, do you want to...

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Karen Akinsanya, Schrödinger, Inc. - Executive VP, Chief Biomedical Scientist and Head of Discovery R&D [14]

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Yes. So as we've discussed in the past, we are pursuing discussions, both around our internal programs but also just in terms of how one can apply the platform to early-stage drug discovery. So we continue to have actually very good conversations with potential partners. It's a very active space for us. So I think one is looking forward to the opportunity to partner these. I think we remain optimistic that in some cases, it may make actually sense for us to pursue some of these assets ourselves into the clinic. As the landscape for these programs and these mechanisms continues to evolve, we think it might make sense actually for us to pursue some of these further into development before partnering them.

And on the other side, I would say that we're seeing a lot of excitement around particular target or disease areas where partnering around discovery and development of assets is actually a key theme of our conversation. So I think there's a lot of optionality there in terms of deal-making for us.

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Operator [15]

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Our next question comes from the line of Do Kim with BMO Capital Markets.

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Guyn Kim, BMO Capital Markets Equity Research - Analyst [16]

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Congrats on a great quarter. Just a follow-up question for Karen on that prior question. When you're thinking about how the lead internal program, those 3 drug fit into the cancer treatment landscape, are they more valuable as a combination therapy? So a pharma partner that would have a synergistic program already in place or a partner just looking to get competitive in cancer.

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Karen Akinsanya, Schrödinger, Inc. - Executive VP, Chief Biomedical Scientist and Head of Discovery R&D [17]

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So if I understood your question correctly, there are a couple of different opportunities. One is to partner these with companies that already have existing assets in the pathway. The other is potentially to take these forward ourselves. I think that's what you're asking.

So on the partnering these assets with folks who already have these mechanisms in place, I would say that if one takes, for example, the SOS1 program, obviously, the SOS1, MAP, SHP2 pathway is generating quite a lot of excitement out there these days. And there are many players in this space. Some of them are big pharmas, some of them are biotechs. And as such, I think what we're seeing is excitement about the opportunity to combine say SOS1 with KRAS, SOS1 with MAP, SOS1 with SHP2 and other mechanisms in that space with each other. So yes, I would say there is the opportunity to partner these assets with companies that already have existing mechanisms.

I'd also point to MALT1 similarly. As you probably are aware in the relapsed and resistant setting, combination therapies are expected to be -- become more and more important in terms of managing these late-stage patients, these patients who are not responding to existing therapy. So I think for many of our assets, there is going to be the opportunity to partner either early or later on with companies who have existing assets.

In terms of monotherapy for each of these mechanisms, the plan would be to study these as monotherapy. And I think that opens up opportunities for either initial work in the clinic for us or partners who take this on internally after partnering.

So I hope I'm answering your question, if not, please feel free to follow up.

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Guyn Kim, BMO Capital Markets Equity Research - Analyst [18]

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No, that was very helpful. And a question on the software business. When you look at the proportion of on-premise versus hosted software, where do you see that distribution going? And is that a potential driver of revenues?

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [19]

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All right. Joel, did you want to take that?

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Joel Lebowitz, Schrödinger, Inc. - CFO & Executive VP [20]

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Sure. I can take that. Thanks, Do. So actually, in the quarter, we saw healthy growth from both on-premise and hosted software, 29% and 21%, respectively. And on-premise still represents a majority of our revenue base, so 53% this quarter. Hosted was 11%.

And I'd just remind everybody that we, under our hosted solutions, really provide -- we host only access to our license. We don't actually host the computational, the heavy computational work that is done actually by our customers' own computers or their own instances on the cloud. And so economically, over the life of the contracts, we're fairly indifferent between whether our customers choose to enter into contracts through an on-premise arrangement or a hosted arrangement. And I think we're really just focused on the fact that, although there are some differences in revenue recognition timing between the 2, we're really just focused on the fact of -- on the strategy to drive increased uptake, which we saw strong evidence of in the second quarter.

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Guyn Kim, BMO Capital Markets Equity Research - Analyst [21]

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Great. And last question on the Relay equity. Is there an ongoing relationship with that company? Are you involved in their platform or drug discovery? And are there any economics in that pipeline?

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [22]

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There are economics, Do. This is Ramy. And -- but with regard to the ongoing relationship, that's actually not something that we can comment on, given confidentiality between the companies.

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Operator [23]

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Our next question comes from the line of Mike Ryskin with Bank of America.

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Michael Leonidovich Ryskin, BofA Merrill Lynch, Research Division - Associate [24]

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Congrats on the quarter. I want to ask sort of a bigger-picture question first on the software utilization and some of your conversations with customers. You flagged potentially some budgetary constraints for a couple of quarters now as a result of COVID. But I'm wondering, longer term, do you think you've seen any indication of a longer-term change in how your customers think about software versus how they think about wet chemistry and internal design? And I mean beyond the next couple of quarters, once it sort of shakes out and people come back to the lab, are there conversations indicating that you could -- this entire outbreak could lead to potentially wider adoption or just sort of different workflows in terms of people how go around the early- or late-stage drug discovery?

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [25]

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Yes. So I think the trends that we're seeing now of broader and broader adoption and this idea that you really can, by deploying the technology on a large scale, really reduce the number of compounds that are made, which significantly of course reduces the costs associated with getting to a development candidate, of course reduces the time and really does result in higher-quality compounds, we see that trend continuing. And I seriously doubt that when this current crisis is over that somehow, there'll be a shift in that. It doesn't make any sense, right? This is -- what I think happened is the COVID-19 crisis sort of catalyzed the faster adoption, right, because of necessity. And then, of course, once you recognize the positive impact it has, it's hard to imagine it going back.

So hopefully I'm answering your question.

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Michael Leonidovich Ryskin, BofA Merrill Lynch, Research Division - Associate [26]

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Yes. Yes. And then I want to -- have a follow-up on the material science side of the business. Nice update there with the agreement with Gates Ventures. I'm just wondering was there any upfront revenue or milestone with that? And also, on the back end, do you have sort of flexibility to monetize whatever comes out of that? Do you have potential collaboration partners lined up? And just in general, if you could add some comments on material science, sort of how that's progressed over the last couple of months, that'd be great.

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Ramy Farid, Schrödinger, Inc. - CEO, President & Director [27]

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Sure. Yes. So that collaboration that we announced, the 3-year collaboration with Gates Ventures to improve battery -- to develop software to improve battery performance is really meant to fund basic research effort. As probably most people know, batteries are incredibly complex. The interface between the electrolyte and the cathode and anodes are very complex. The cathode and anodes themselves, are highly complex, and there is a real need to develop software to more accurately simulate these complex interfaces. So that's what the collaboration is about, is to fund basic research. And I think we have a pretty good track record of working on really hard problems and solving them.

And so -- and then to answer your other question, yes, we -- the agreement allows for us to take that technology that we hopefully develop -- again, it's basic research. So there is uncertainty in it, but that's how we solve hard problems, right, working on basic research problems and take that technology then and productize it and put it into software and actually sell it.

With regard to (inaudible) work on with this, there are -- no, we haven't announced anything along those lines. But that's certainly something we'll be looking at.

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Joel Lebowitz, Schrödinger, Inc. - CFO & Executive VP [28]

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Sorry. And just one -- just to add, I think, Mike, you asked if there was an upfront. So we did received $1 million from Gates Ventures in the second quarter. And it's part of a 3-year deal, $3 million deal. So we expect to receive that annually, and -- the $1 million, and it's under contribution revenue in our software business segment.

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Operator [29]

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Ladies and gentlemen, this concludes today's question-and-answer session and earnings call. Thank you for your participation. You may now disconnect. Everyone, have a great day.