Schrodinger, Inc.

Thank you for standing by. Welcome to Schrodinger's conference call to review fourth quarter and full year 2024 financial results. My name is Kelvin 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press pound key or star two. Please be advised that today's call is being recorded at the company's request. Now I would like to introduce your host for today's conference, Ms. Jared Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Thank you and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our fourth quarter and full year 2024 financial results. Earlier today, we issued the press release summarizing our financial results and progress across the company, which is available on our website at Schrodinger.com. Here with me on our call today are Rami Fareed, Chief Executive Officer. Jeff Porges, Chief Financial Officer, and Karen Nakansanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A. During today's call, management will make statements that are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitation, statements related to our outlook for the full year 2025, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of initiation of and readouts from our clinical trials, the clinical potential and properties of our compounds, the use of our cash resources, 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 considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our Form 10-K for the year ended December 31, 2024. These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events, or otherwise. Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures. Please refer to the tables at the end of our press release, which is available on our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. With that, I'd like to turn the call over to Rami.

Thanks, Jaron, and thank you everyone for joining us today. 2024 was an exciting year for Schrodinger. We exceeded our software revenue expectations, established a new drug discovery collaboration and expanded software agreement with Novartis, and we continue to advance our collaborative and proprietary pipeline. We advanced the science underlying our platform, including initiating a project to predict toxicity associated with off-target binding and launching a new enterprise informatics platform for biologics. 2024 was also marked by important milestones at companies we co-founded. Ajax and Structure progressed their clinical programs, and Morphic was acquired by Lilly for $3.2 billion, resulting in approximately $48 million for Schrodinger. As we look to 2025, I'm optimistic this broad momentum will continue. Total revenue for the year was $208 million. Software revenue was $180 million, representing just over 13% growth, and fourth quarter software revenue grew 16% to $80 million. The strength of our business is also reflected in our 2024 KPIs. The number of software customers with an annual contract value of greater than 5 million increased from 4 to 8, and the number of customers with ACV of greater than 1 million increased from 27 to 31. Total ACV increased by 24% to 191 million. our software customer retention was 100% for customers with ACV of at least 500,000. We believe this strong performance of our KPIs is a direct consequence of the impact our technology is having on our customers' programs. Our priority for 2025 is driving continued increases in adoption of our computational technology and enterprise informatics platform. It is clear that the computational landscape in the industry is changing rapidly and that our unique integration of physics and AI ML methods is producing powerful solutions for drug discovery and materials design. This year, we plan to release several new products and solutions that reflect our continued investment in the platform, including our predictive toxicology technology, where we have already enabled more than 50 off-targets. We are also planning to release enhancements to our biologics discovery technologies and additional applications of AI ML methods that are accelerating and broadening the impact of our physics-based methods. Our platform is having a big impact on our ability to rapidly progress a broad pipeline of collaborative and proprietary discovery programs. This year, we look forward to sharing initial phase one clinical data from our three lead programs. Karen will provide a detailed update later in the call. We are well positioned for a transformational 2025, and we look forward to providing updates over the course of the year. I will now turn the call over to Jeff.

Thank you, Rami, and good afternoon, everyone. We're very pleased with Schrodinger's financial performance in 2024. Our software growth exceeded our expectations and showed the resilience of our business through changing industry cycles and the headwinds of large contract renewals in prior years. The revenue contribution from hosted contracts continues to increase, and we expect this will gradually reduce the Q4 concentration of our revenue. The strong software result for the year is reflected in the excellent progress we have made in our KPIs and in the financial guidance we are providing for 2025. Our drug discovery collaborations and portfolio are expanding, driven by the landmark new agreement with Novartis and new programs added to the existing Otsuka and Lilly collaborations. Finally, our proprietary clinical programs are reaching key data milestones with significant clinical disclosure from three programs coming this year. I'll now summarize our financial results, beginning with Q4. Total revenue in Q4 was 88.3 million, an increase of 19% compared to Q4 2023. The increase was driven by higher software and drug discovery revenue. Software revenue was 79.7 million, an increase by 16% compared to Q4 2023. The increase was mainly due to higher hosted revenue from large customers who have transitioned from on-prem to hosted licenses over the last two years. On-prem software revenue increased by 3% to $55.4 million as new multi-year deals that closed in Q4 2024, including Novartis, matched the contribution of multi-year deals closed in Q4 2023. Hosted revenue increased by 86% to $11 million. Maintenance revenue was $5.9 million and increased by 3.5%. Maintenance revenue was driven by support for on-prem contracts from prior periods and offset reductions in maintenance from customers switching to hosted licenses. Services declined by 23% as existing services projects were completed or expired. Contribution revenue was $4.9 million, reflecting the new predictive tax project funded by the Bill and Melinda Gates Foundation. Overall, hosted revenue contributed 14% of total software revenue in the quarter, compared to 9% in Q4 2023. We are very encouraged by the software result, with strong growth in the top 30 global pharma accounts, offsetting continued churn in our small and mid-cap customer segments. Small biotech companies continue to embrace our software, but equally each year we are seeing a number of our biotech software customers being acquired. These outcomes are positive for the industry and add to the validation of our platform, but also contribute to the churn in our mid-cap biotech segments. Drug discovery revenue was $8.7 million in Q4 compared to $5.5 million in Q4 2023. The increase was due to milestones received in the quarter and amortization of upfront payments from existing collaborations. Very little revenue was recognized for the New Nevada's collaboration in the quarter. Turning to margins, the software cost of revenue was $13.3 million in the quarter compared to $8.7 million in the same period in 2023. The increase was mainly due to the costs associated with the Predictive Tox project, along with higher royalties. The software gross margin was 83% in Q4 compared to 87.4% in Q4 2023. The decrease in gross margin was due to the lower profitability of the Predictive Tox project. Drug discovery cost of goods was $10.9 million compared to $7.9 million in Q4 2023. The increase was due to higher royalties as well as some increases in FTE and technology expenses. Overall, our cost of revenue increased by 46% compared to Q4 2023 and the overall gross margin declined from 77.6% in Q4 2023 to 72.6% in Q4 2024. The decline was due to higher drug discovery expenses and the higher cost of software. Looking ahead, we expect this trend to continue for the balance of this year as more of our R&D expenses associated with internal projects moves into cost of goods for drug discovery and as the Predictive Tox project continues in 2025. Our largest operating expense remains R&D. R&D declined from 51.5 million in Q4 2023 to $49.4 million in Q4 2024. The decline was due to lower CRO spending and lower FTE allocation for projects that were discontinued during the year. Sales and marketing expenses in Q4 decreased by 2.5% to $9.7 million based on relatively stable headcount and associated expenses, and G&A was essentially flat at $25.8 million, mainly associated with higher professional services being offset by decreases in royalties. Total operating expenses were $84.8 million compared to $87.2 million in Q4 last year. And the loss from operations was $21 million compared to $29.6 million in Q4 last year. The change in fair value was a loss of $22 million based on the mark-to-market of our equity and structured therapeutics and to small changes in private company valuations. This compares to a loss in value of $8 million in Q4 of 2023. Other income was $3.5 million in Q4 compared to $6.6 million in Q4 2023. The lower income was due to a lower cash balance and the unfavourable effect of currency fluctuations and foreign currency balances. Total other expense was a loss of $18.5 million compared to a loss of $1.9 million in Q4 last year, resulting in net loss before taxes for the quarter of $39.3 million and net loss after taxes of $40.2 million or $0.55 per diluted share. This compares to a net loss of $31 million or $0.43 per diluted share in Q4 last year. The fully diluted share count for Q4 was $72.9 million and for the year was $72.7 million. The share count increased by 1% compared to the same periods in the prior year. I'll now summarize the full year 2024 financial results. Full year revenue was 208 million compared to 217 million in 2023. Software revenue grew by 13.3% from 159 to 180 million with two thirds of the growth coming from hosted software and one third from contribution revenue. Hosted revenue grew from 20 million to 35 million due to an increasing number of large accounts transitioning to hosted licenses. Hosted contracts contributed 20% of software revenue for 2024 compared to 13% in 2023. On-prem contract revenue was flat at 104 million. As new large multi-year on-prem contracts signed this year more or less offset those signed last year. Contribution revenue increased due to the impact of the Predictive Talks project funded by the Gates Foundation. Drug discovery revenue was $27 million for the year compared to $58 million in 2023. The reduction was due to the impact of non-recurring milestones received from partners in 2023. Software gross margin for the year was 79.5% compared to 81.5% in 2023. The change in gross margin was due to the higher costs associated with the contribution revenue in 2024 compared to 2023. Overall gross margin was relatively stable at 64% compared to 65% in 2023. Operating expenses increased by 7.3% compared to 2023, with R&D increasing by 11% to $202 million, sales and marketing increasing by 7% to $40 million and G&A increasing by 1% to $100 million. Our operating loss for the year was 209 million, compared to 177 million in 2023. Other income was 23.6 million this year, compared to 220 million in 2023. And our net loss in 2024 was 187 million, or $2.57 per diluted share, compared to net income of 41 million, or 54 cents per diluted share in 2023. The profit in 2023 was driven by the gains associated with the distribution from Nimbus and the gains in the value of our stakes in Morphic and Structure during 2023. Our net cash used in operating activities was 31 million in Q4 compared to 37 million in Q4 2023 and our net cash used in operating activities for the year was 157 million in 2024 compared to 137 million in 2023. Our cash and marketable securities balance was 367 million at the end of Q4 2024, compared to 469 million at the end of Q4 2023. Our cash position at the end of Q4 2024 did not reflect the effect of the receivable from Novartis, which added 150 million to our cash balance in January. I'll now provide our initial financial guidance for 2025. We expect our software revenue growth to be in the range of 10 to 15% and currently expect drug discovery revenue to be in the range of 45 to 50 million. We expect a further increase in the proportion of our revenue from hosted contracts, which should slightly reduce our fourth quarter weighting of software revenue and bolsters our revenue in earlier periods. Our current expectation is that software revenue will be in the range of 44 to 48 million in Q1, and the drug discovery revenue will be weighted towards the later quarters of the year. Our software gross margin is likely to be in the range of 74% to 75% compared to 79.5% in 2024. The reduction is driven by the increase in the contribution revenue from the predictive tax initiative. Our operating expenses are likely to grow by less than 5% in 2024, as certain expenses shift from R&D to cost of goods in associated with the Predictive Talks Initiative and newly announced collaborations. We now expect net cash used in operating activities in 2025 to be lower than 2024. In 2025, we expect the growth of our software business to continue to be driven by increasing adoption of our technology by large customers. Many of these companies have not scaled up their investment in our technology and are increasingly interested in improving the productivity of their drug discovery efforts. We are already having encouraging discussions with many of the companies who have not yet adopted our technology at scale and anticipate that the enhancements to our platform, including capabilities for biologics and expanded integration of AI and machine learning with our physics-based methods, should contribute meaningfully to our growth this year. While we are fielding inquiries from new and emerging biotech companies, we don't expect small companies to contribute meaningfully to our growth this year. Our exposure to China is less than 5% of revenue, and we don't expect significant growth from that market this year either. To conclude, Schrodinger had an excellent year in 2024 with strong results that leave us well positioned operationally, financially, and strategically entering 2025. We have many opportunities to drive continued growth in our software business, and our collaborations are poised to contribute significant value in 2025 and beyond. Our balance sheet is strong and our operating metrics, including KPIs and operating expenses, are trending in the right direction. I'll now turn the call over to Karen to comment on our therapeutics R&D.

Thank you, Geoff, and good afternoon, everyone. 2024 was a productive year as we advanced our collaborative and proprietary pipeline. In November, we signed a significant new drug discovery agreement with Novartis, and we recently expanded our collaborations with Otsuka and Lilly. Dose escalation studies for SGR 1505 and SGR 2921 progressed, and we initiated our Phase I study for SGR 3515. These achievements laid the groundwork for important milestones this year, with the expected presentation of initial Phase I data from all three clinical stage programs. Beginning with our collaboration portfolio, we are pleased with the addition of another target to our discovery collaboration with Lilly. Today's announcement of an exciting new program in a high-value therapeutic area builds on the agreement initially signed in 2022 and the advances made by the team on a challenging initial target. Last month, we announced the expansion of our collaboration with Otsuka, adding another program to the existing agreement. The expansion of these two partnerships, as well as our collaboration with Novartis, reflect the excellent track record we have established for delivering differentiated molecules and robust preclinical packages for high-value targets. Turning to our clinical programs, our most advanced phase 1 program is our MALT1 inhibitor, SGR1505. MALT1 is a clinically validated target for leukemias and lymphomas. It is downstream of the BTK pathway and regulates NF-kappa-B signaling, which is elevated in B-cell malignancies and in patients with BTK inhibitor resistance. Our ongoing Phase 1 dose escalation study is evaluating SGR1505 in patients with relaxed refractory B-cell malignancies. We expect to report safety, pharmacokinetic and pharmacodynamic data, as well as preliminary pre-K-PD relationships and efficacy data at a medical meeting in the second quarter. Our goal is to provide an initial understanding of the profile of SGR1505 to inform further development. Enrolment is also ongoing in our Phase 1 study of SGR2921, our CDC7 inhibitor, in patients with acute myeloid leukemia or myelodysplastic syndrome. As a reminder, the objectives of this Phase 1 study are to evaluate the safety and tolerability of SGR2921 and to determine the recommended Phase 2 dose and schedule. The study is progressing well, with multiple dose escalations completed, and we continue to anticipate reporting initial clinical data in the second half of this year. Third, our Phase 1 study of SGR3515, our WE1-MIT1 co-inhibitor, is also advancing. Our ongoing dose escalation study will evaluate the safety PKPD, preliminary anti-tumor activity, and dosing schedule in patients with advanced solid tumors predicted to be sensitive to WE1-MIT1 inhibition. ovarian, uterine, and breast cancer, in addition to other solid tumors with elevated replication stress. SGR3515 inhibits both WE1 and MIT1, and concurrent loss of these two proteins confers amplified vulnerability in cancer cells, termed synthetic lethality. our intermittent dosing schedule is intended to maintain efficacy while allowing recovery from any potential mechanism based hematological toxicity we are pleased with our progress in this study and anticipate reporting initial data in the second half of this year Beyond our clinical programs, we are also progressing early discovery programs for targets involved in inflammation and neurodegenerative diseases. Recently, we selected a development candidate for our EGFR-C797S program for osimertinib-resistant non-small-cell lung cancer, including brain metastases. Over the past three years, we have advanced several programs into the clinic and partnered some of our early stage programs. We continue to see additional opportunities for value creation emerging from our portfolio through outlicensing, new ventures or collaborations. We are very much looking forward to sharing clinical results from all three clinical programs throughout the year. I'll now turn the call back to Rami.

Thank you, Karen. As you heard, we had a very successful 2024, and I would like to take this opportunity to thank our dedicated employees for their hard work and accomplishments. I'm very excited about our outlook for 2025, and we look forward to providing further updates across the business throughout the year. At this time, we'd be happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone to ask a question. Press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key or star two. One moment please for your first question. Your first question comes from the line of Michael Yee of Jefferies. Please go ahead.

Hey guys, this is Kyle Yang for Michael Yee. Thanks for taking our questions. Congrats on the quarter. First question, a few quick ones for us. The first question is, what is your assumption behind your 2025 drug discovery revenue guidance? And could you please share what proportion of the guidance comes from revenue from the Novartis partnership? And second is, could you please tell us a little bit about your updated thoughts on your program We understand that you previously sort of used J&J's first-generation molecule data as a bar. So how should we think about the bar now, knowing that J&J has initiated a second-generation molecule, and also AbbVie has one as well? Thank you so much.

Do you want to cover the first?

Yep. Let me start off with your question about the 2025 revenue guidance for drug discovery. The increase in the drug discovery revenue that we're forecasting is pretty broad-based. It comes from quite a few different collaborations. As you would imagine, part of it is the amortization of the upfront payment from the Novartis collaboration, which we've indicated is going to be over multiple years. I wouldn't want you to think that it's most of that revenue because we're just scaling up all of those activities on those projects. I imagine we're going to be sort of at peak recognition of that upfront payment probably in 18 to 24 months, but it is a significant portion. But there are a number of other programs. As we announced today, we have a new collaboration in the Lilly Agreement. We announced a new collaboration, a new program, sorry, in the Lilly Agreement, a new program in the Yotsuka Agreement at the beginning of the year. Both of those contribute. And the progress that we're making in some of the other collaborations, such as BMS, also contributes. So it's really pretty broad-based. And that's similar for the guidance that we're providing on software, frankly, as well. Karen, can you address the second question?

Yes. So as you point out, there is a lot of excitement, I think, about more one as a mechanism. That's reflected, I think, in the number of companies that are pursuing this target. We are very pleased with the progress we're making in our phase one trial. Just to remind you, This is a dose escalation study where we are studying the PKPD safety, which we think is super important for this mechanism, for combinations, as well as initial signs of clinical activity. Now, in terms of the bar, I would say that we're really focused on understanding the performance of our molecule in this trial. As you point out, there are other companies entering this space, but our focus this year was laser focused on describing the profile of our molecule. And as you heard, we will be sharing some of that data in the second half of the year at a medical conference with an update on the profile so far from this dose escalation study. Second quarter. Second quarter, sorry. Yeah. Okay, thanks.

Your next question comes from the line of Manny Orohar of Learing Partners. Please go ahead.

Hi, this is CJ Arnformani. Congrats on the progress and thanks for taking our question. Our question is, you previously noted that seasonality becomes more orcuated over time. Is this something that's happening at a pace that we would start to show this year or this is something we would see a more longer term over the next half decade?

So you suggested that seasonality becomes more weighted, but perhaps you mean that it becomes less weighted over time. We actually do think that it will gradually become less. Our revenue distribution will become less Q4 weighted. It's hard because we keep coming up with great opportunities. Opportunities in the fourth quarter, as we've seen the last couple of years. But we think that this year we will see more distribution. And that's why we emphasize the hosted revenue, because, of course, the hosted revenue is a foundation that continues through all four quarters of the year. So I do think that the Q4 weighting will come down. But similarly, I do want to point out that Q2 and Q3 are still going to be sort of cyclically lower quarters than the other quarters of the year this year. I'll add to that. The Q1 guidance that we provided also reflects the impact of some deals that we signed in Q4 and revenue being recognized for quite a number of things that we closed in Q4, particularly, as you would imagine, hosted deals. So some of that is a tale coming out of Q4 into Q1.

Great. Thank you.

Your next question comes from the line of Scott Shonas of KeyBank Capital Markets. Please go ahead.

Hey, guys. This is Steve on for Scott. Thanks for taking our questions. What do customers take into consideration when potentially moving from on-prem to hosted? And how do you see the percentage of your book transitioning to hosted progressing over the next couple of years? And then as a follow-up, what has the level of demand been like for combination drug discovery and software arrangements? from existing and new customers?

Thanks. So maybe I'll give you a sense of the cadence of the transition from on-prem to hosted. And then, Brian, maybe you can talk a little bit about the basis for making that decision. And then, Karen, you talk about the discovery question. So in terms of the cadence, I pointed out in my prepared remarks, I think that there was about a five to seven percentage point difference in the amount of our software revenue that came from hosted compared to 2023, and also about the same in Q4 compared to Q4, I think that that's a reasonable goal in terms of a continuation of the trend. We previously indicated that we don't envisage a kind of sudden or even rapidly accelerated switch, but that sort of cadence of transition we think is reasonable as a kind of base assumption going forward.

Yeah, and let me just remind you what we mean by hosted. In the large majority of cases, what this means is that we're hosting the license server, not the underlying software. When we do host the license server, it does allow us to deliver the licenses a little bit more seamlessly for the customer. But as far as the customer is concerned, and actually as far as we're concerned, as far as of burden on us or the impact it has on us, it's extremely small. Remember, it's just hosting the license server, not the software itself.

Why do they transition?

I mean, I just, you know, I think that's what I was just saying. It's just, it is a little bit more seamless to deliver the software, deliver the licenses, right? Yeah. Yeah.

And I think the last question was about combination deals.

Yeah, the demand for what do we see as a dominant demand for the combination?

I see, yeah. No, I mean, I think as you're well aware, both the drug discovery team and the software team spend a lot of time with potential partners and software customers really showcasing programs and how we execute drug discovery. And I think as you're aware, that's led to a number of these combined deals over the last few years. We expect that to continue. I think it's hard to give you a sense of the extent to which that will be true, but I think we're excited about these opportunities. It gives us a chance, as we talked about with the Novartis deal, not just to see them scale up the platform, but actually to have this front row seat and watch us use the platform so that they get the most out of it. Exactly.

Your next question comes from the line of Brendan Smith of TD Callen. Please go ahead.

Great. Thanks for taking the question. Excuse me. I wanted to actually maybe just piggyback off of that prior question just a little bit and ask a bit more about kind of customer retention feedback and how you're thinking about new product offerings. Can you maybe just give us a sense of what are some of the stickiest aspects that your software users are responding to that they're kind of telling you about that's really driving some of this retention and driving up ACV over time. And then really just curious how some of that feedback is impacting your capital allocation strategy on where to focus new product offerings and R&D investment moving forward.

Thanks. Yeah, the customer retention is coming from something that we said in our remarks, and it's pretty exciting, which is the technology is having an impact on projects. We're getting constant reports from our customers that They're making fewer molecules to get to a development candidate. Quality molecules are improving. Probability of success is improving. They're getting to development candidates more rapidly. It's very simple. It's impact. And what that means is they become very, very dependent on it. And the option to not continue to use it, of course, isn't there when you have that kind of impact. The other aspect of it is, of course, whether there are alternatives. And obviously this kind of retention rate certainly suggests that there are not viable alternatives to the technology that we're developing. We are, as we indicated in our remarks and you're asking your question, continue to advance the platform in a number of very important areas. And then of course, also helps with retention when customers see that we continue to improve the platform And they continue, you know, then it becomes a more of a partnership, right? They're investing. And also, they know that by continuing to work with us, giving us feedback, they're going to see continued improvements to the software and new technologies. And we talked about, for example, enhancements to our biologics offering in particular in the enterprise informatics. space. That's been really well received. The predictive toxicology, this off-target panel that we're developing, there's a lot of excitement around that. There's a real need to improve that aspect of drug discovery. And that taps into new budgets, which is also part of stickiness as the technology starts to have a broader impact across the whole enterprise, not just in one specific area. The other area that's in that category is formulations, in particular crystal structure prediction. That's an exciting new technology that we released last year, receiving a lot of great feedback from customers. They're seeing that we're advancing the science, we're doing good science, and it's having an impact on their projects.

Thanks very much.

Your next question comes from the line of Michael Rice in the Bank of America. Please go ahead.

Great. Thanks. Thanks for taking the question, guys. I want to ask about some of the KPIs you released in terms of 2024 performance. Just taking a look at number of customers with ACV over 5 million, ACV of top 10 customers. Seems like really jumped in those top five, top 10 accounts from the software perspective. Maybe this is a follow-on to the prior question, but just sort of what are you seeing there? Why does that feel like a little bit of a step function? Just sort of how sustainable is that? And is this a little bit of a one-time jump or are you seeing something that's making you reassess that?

Yeah, I know we can address that. It's a great question. We've talked a lot about this, that to see impact from this technology has to be used at scale. You have to explore huge numbers of molecules to solve this incredibly complicated drug discovery and materials design problem that we all face, this multi-parameter optimization problem. It requires exploring huge amounts of chemical space. And that can only be done by using the technology at scale. And it's become very clear that in some sense, there's an inflection in the value that gets created when you reach that 5 million plus spend. That gives you access to enough technology to support enough programs to really see an impact. But as we said over and over again, that's not, we don't think that's the TAM. We don't think that's the limit. We know internally in our 25 to 30 programs or so that we're working on internally, we're using the technology at a much larger scale even then. So yes, these companies can see impact at the 5 to 10 million range or so, but it turns out there's still room to experience significantly more impact by actually spending quite a bit more than that. And again, we have evidence of that through our own partnerships, and our partners experience that. They get access to that level of technology, companies like Lilly and now Novartis and so on. And I think they're going to start to see what's required to achieve the kind of outcomes that we've achieved and that Karen mentioned that's reflected in our track record.

Got it. Thanks so much. Appreciate it.

Your next question comes from the line of Vikram Parohit of Morgan Stanley. Please go ahead.

Hi, good afternoon. Thanks for taking our questions. So we had two. First, on the revenue guidance, was wondering if you could just talk us through what drives the bookends there. Just wanted to understand some of the sensitivities that flow into each end of the range. And then secondly, on MALT 1, so you mentioned that the data update here is going to be a medical meeting in 2Q. I was just wondering, Do you think you'll be in a position to evaluate partnerships for that program post that data cut, or do you think you'd want to see more follow-up or more data points before evaluating potential PD for Malt 1? Thanks.

Jeff will cover the first, yeah.

So on the revenue guidance, we provide revenue guidance to Q1 and then for the full year. And as you can imagine, Vikram, the confidence or certainty that we have about the outlook for Q1 is much higher than for the full year because we're two-thirds of the way through the first quarter as well. And as I mentioned on the earlier question, We have some deals that closed in late in Q4 that are delivering revenue in Q1. So there's a pretty broad foundation behind that Q1 number. For the full year, we're still going to have a pretty big chunk of revenue that we'll have to deliver in the fourth quarter. And the confidence we have in that is based on several things. First, you heard Rami talk about the underpenetration in much of the industry. Yes, we have eight customers over $5 million, but that still leaves an awful lot of the industry that is well below that. In fact, it's substantially below that, where we think we have an opportunity to advance discussions. The second is that, of course, we are deploying all the new capabilities into the technology, results in both new customers coming in and saying, hey, that would be really useful. We'll step up. And then existing customers that have already stepped up taking their utilization to a higher level. The third thing I'll say is that we, because of the hosted contracts that we've put in place, A hosted contract in a strange way puts future revenue in the bank rather than an on-prem contract where you take all the revenue up front. So compared to prior years, the situation we're in, in terms of the base of revenue that we have a high degree of certainty about for 2025 is actually higher. than it's been in prior years because of that hosted revenue contract. So all of those elements give us a very high degree of confidence about the revenue guide for the year. Now, top and bottom end, it just depends on what the magnitude of the step up in those large customers is, particularly towards the end of the year. And as those discussions mature, we'll think about where we actually think the year's going to end up. But we've got a very high degree of confidence at this stage.

So on MORT1, I think it's important to just restate that this is an ongoing dose escalation trial. As you know, we spend a lot of time with potential partners aligning on what kind of profile people are looking for, what would be impactful in the human space for MORT1. But I will emphasize again that What we will be sharing in 2Q is the data per the cutoff when we submit the abstract. So it will be ongoing. And I think as we approach a more complete study, we'll have second rounds, obviously, of discussions, further rounds of discussions with companies as the year progresses. So, yeah, really an interim update, I think, at the medical meetings.

Got it. Thank you.

Your next question comes from the line of Evan Siegerman of BMO Capital Markets. Please go ahead.

Hi, this is Malcolm Hoffman on for Evan. Thank you for taking our question. I wanted to ask if you guys could think of any impacts that you could foresee from recent proposed U.S. tariffs. You note exposure to China is, you know, only roughly 5% of revenue. Did any of this be meaningfully impacted by those ongoing disputes? Just trying to get your context there. Appreciate it. Thanks.

Yeah, I appreciate the question. I think it's a sensible one, given the context. I think a total revenue for China is actually substantially less than 5%. It's in the low single digits. We aren't expecting that to sort of recover in the immediate future. But equally, we don't see ourselves as having a lot of risk associated with that. I will sort of dovetail your question with another answer, which is our exposure to NIH is less than 1%. Our total exposure to U.S. academic institutions across all different parts of our business is about 10%. High single digits, really mid-single digits, and total U.S. government exposure, including NIH, is still considerably less than 1%. So there's a lot of turmoil out there, and it looks like being a tough environment for academic medical research, but we don't expect that to have a lot of impact on our business.

Appreciate it. Thanks, guys.

Your next question comes from the line of Matt Hewitt of Craig Hallam Capital Group. Please go ahead.

Good afternoon, and thanks for the update. I actually have three different lines of questions, so I'm going to ask them, and then I'll let you answer, and then I'll come back with the follow-ups. But first, as far as the drug discovery revenues are concerned, how should we be thinking about the cadence for those? Obviously, you don't know when milestones are necessarily going to hit, but With the Lilly contract signing in January, is there anything attached to that? I'm just trying to think how we should be dispersing those revenues over the course of the year.

I indicated in my prepared remarks that they're likely to, again, be somewhat back-end weighted. As you can imagine, I mentioned that the Nevada's contract is going to contribute, and that will, of course, scale up during the year as we spin up all of those project teams. And similarly, frankly, with even, for example, the new program, the Lilly and Natsuka collaborations, While we're ready to go, it takes a period of time to scale up those project teams as well, and then you recognize that revenue as those teams scale up. So I don't think it's going to make sense. Very heavily back-end weighted, but it will gradually increase throughout the year.

Got it. And then secondly, the predictive toxicology, can you provide any feedback that you're getting from some of the initial beta customers, and when do you think that could be ready for prime time?

Yeah, as I indicated, the feedback has been really excellent. It's clear there's a wide recognition that this solves a real challenge that essentially every single project faces at some point. As far as the quality of the science and the accuracy of the methods, It's impressive. And that's also being recognized widely as far as when it will be released. We're not in the habit of announcing ahead of time, you know, dates for actual releases, but we are committed to releasing it this year and look forward to sharing with you, you know, announcements around that release and more information as we have more and more customers using it. I will say this is kind of important. Maybe you can hand over to Karen, we are using it already. And so our collaborators have access to it and it's had a big impact on a number of our projects.

Yeah, that's correct. As you know, the internal drug discovery team gets early access to the technology. And it is actually something we've been using in ongoing programs, both our own and with collaborators, as Rami said. And being able to dial in and dial out the profiles we want and those we don't want is really a very powerful tool.

That's great. And maybe the last one, and maybe this is a little bit bigger picture here, but you noted that small pharma is still lagging from an adoption standpoint. It didn't sound like you were expecting much change this year. What do you think is going to be the trigger to get small pharma, small biotech to really get on board with using software in the drug discovery standpoint? Is it simply a money thing? Is it that they need to feel more comfortable with their balance sheets? Is there some other hurdle that you think that needs to be kind of overcome? Or what's it going to take there? Thank you.

I'll hand it over to Jeff to give some thoughts. But let me just first make clear, and this is something we've talked about before, that we have a number of small companies that are using the software, potentially, if you think about the number of programs they have at a higher scale than the large majority of our pharma customers. So the good news there is that there are plenty of relatively small companies that are recognizing the value and using it. That's a good sign. But the broader question, maybe, Jeff, you can. Yeah.

Yeah. So I may have conveyed the wrong impression. It's not that small pharma or biotech companies are reluctant to use the software or actually even lagging. It's that segment as a whole has churn in it, frankly, because some of them are so successful, they just keep being acquired. And, you know, that is a lot of validation for a platform. And then the acquirer finds out how they discover their molecules. So that's causing some churn. But the other thing is, you know, we're all seeing the headlines about companies that are restructuring and focusing on advancing just a clinical program or concentrating down just to one core therapeutic area or something. And naturally, that has an effect on their appetite for investing in discovery. So my direct answer to your question would be, for that segment to, again, be a growth driver for us, what we want to see is kind of a renewed commitment to providing capital for drug discovery in emerging biotech companies, which is sort of, I would say, still pretty tepid, the environment for that.

That's super helpful. Thank you.

Your next question comes from the line of Chris Shibutani of Goldman Sachs. Please go ahead.

Great. Thank you very much. Two questions, if I may. With the predictive toxicology business, you made several announcements in 2024 about the partnership and the revenue, the contribution that's being made by the Gates Foundation. With that, you mentioned that the majority of quote revenues will be recognized in 2025. Jeff, can you just clarify for us from a modeling perspective how we should think about that revenue recognition, where it appears in the model, and anything to do with sequencing? And then a second question for Karen, perhaps, but still tied to Jeff as well. You have three clinical assets. You've talked about a little over a year ago at your R&D day about having multiple potential candidates that you could advance into the clinics. What is currently the gating factor for you to decide to choose another one to enter into the clinic? And currently, is there a favorite child? Thank you.

Great. Thanks, Chris. In terms of the predictive tax revenue, you are 100% correct. We indicated that most of the revenue would be recognized in 2025. We recognize $6 million in revenue for that initiative in 2025. between Q3 and Q4. And then the total grant, I believe we've disclosed is around 19 and a half million. So most of the balance of that will be recognized in 2025. There is a bit of a tail that will continue into 2026, but that's kind of the cadence of that recognition.

Yeah, I'd say on the programs, I think the focus in 2025 is really on the three programs that we have in the clinic. As we've said, we're excited about progress and we intend to share data on those programs this year. with respect to the pipeline behind those programs we have as you know last year partnered some of our early programs with Novartis and we want to stay flexible in terms of the decision when to partner when to advance programs to the clinic we've got our hands pretty full right now in the clinical space with our three advanced assets but we do have other opportunities that will emerge from the pipeline over the coming years and I think the merits of of each of those assets, not just within the sort of target product profiles that we've been focused on, but also within the landscape. There are a lot of companies pursuing similar exciting targets, and we'll have to decide when the time's right, whether that's one that we will take into the clinic ourselves or whether we will partner.

Thank you.

Your next question comes from the line of David Lebowitz of Citi. Please go ahead.

Hi, this is Ike Lee on for David Lebowitz. Thanks for taking our question. We have one on the WE1-MIT1 inhibitor, the 3515. For the phase one study results coming out later this year, are there any safety signals that you are going to be very focused on, particularly given past discontinuations in this class? And to what degree do you think you have an advantage there based on the work that you've done with the dual mechanism approach? And then two, I guess on a related note as well, when you say you're canvassing different solid tumors, is there one particular interest that stands out to you before we see the data? Thanks.

Yeah, so I mean, I think first of all, with respect to safety, what we have shared with you in the past is what we observed preclinically, that the ability to dose intermittently with a dual inhibitor that essentially allows you to take the break off week one, that's the MIT-1 contribution. that in our preclinical studies, we observed that this allowed for more efficacy while you were in a dosing holiday. As you know, we're currently exploring that in our phase one trial, we're not going to be providing an update, necessarily on this call about the profile, that's something that we're reserving for later on this year. But you're right to say that it's very clear we one has efficacy. The focus is on how do we maintain efficacy? while ensuring that people can tolerate the drug. And so that's going to be a focus during the course of this trial, is to fully understand the safety profile, as well as the efficacy profile, or at least initial clinical activity coming out of a dose escalation trial. I also want to just answer this question on tumours, tumour types. I think what we've seen time and time again with V1 is that there's activity there in some pretty important tumour types, platinum resistant ovarian cancer, uterine serous carcinoma. We're seeing repeatedly with different molecules that there's activity there and that's something that we will be looking to replicate with our proof of mechanism aspect of our trial. But as you know from previous comments, we're also excited about other tumor types that have the potential to respond to WE1. I think we also know CCNE infers some additional sensitivity. We are interested, of course, in exploring that in other tumor types, but we haven't been sharing a lot about beyond ovarian and uterine strategy at this time. That will emerge later on.

Once again, ladies and gentlemen, if you have a question, please press star 1 on your telephone keypad. We will pause just for a moment. There are no further questions at this time. With that, ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.