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Schrodinger Starts U.S. IPO Effort With $100 Million Filing

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About: Schrödinger (SDGR), Includes: CGEN, DASTY
by: Donovan Jones
Donovan Jones
IPOs, tech, alternative investments, CEO VentureDeal.com
Summary

Schrodinger has filed to raise $100 million (placeholder figure) in an IPO.

The firm sells drug discovery software and uses its platform for internal discovery programs as well.

SDGR is growing well but producing ever-increasing operating losses.

Quick Take

Schrödinger (SDGR) has filed to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm sells drug and compound discovery software to biopharmaceutical firms and other research organizations worldwide.

SDGR is growing revenue but also producing increasing operating losses.

Company And Technology

New York, NY-based Schrödinger was founded to assist drug development companies and researchers in discovering novel molecules more quickly and at lower cost through all phases of the research process.

Management is headed by Chief Executive Officer Ramy Farid, Ph.D., who has been with the firm since 2002 when he joined as a product manager and was previously an assistant professor in the Chemistry Department at Rutgers University.

Below is a brief overview video of the firm's approach:

Source: SchrodingerTV

The firm says it is currently working on over 25 drug discovery programs with more than ten biopharmaceutical companies, some of which the firm co-founded. Additionally, the company has begun five wholly-owned programs since mid-2018, with a focus on 'developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.'

Schrödinger has received at least $162 million from investors including The Bill & Melinda Gates Foundation Trust and David E. Shaw and related entities.

Customer Acquisition

The company obtains customers through a direct sales force that markets to all types of medical research organizations. The customer base growth has been as follows:

The firm provides customers with a variety of software modules within the drug discovery and materials design verticals, as shown here:

Sales and marketing expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

Nine Mos. Ended Sept. 30, 2019

26.2%

2018

26.8%

2017

30.0%

Source: Company registration statement

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, rose to 0.7x in the most recent reporting period, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

Nine Mos. Ended Sept. 30, 2019

0.7

2018

0.6

Source: Company registration statement

Average Revenue per Customer grew by 8.4% in 2018 to reach $57,947, per the table below:

Average Revenue Per

Customer

Period

ARPC

Variance

2018

$57,946.96

8.4%

2017

$53,448.18

Source: Company registration statement

Market And Competition

According to a 2019 report by IndustryARC, the North and South American market for computational medicine and drug discovery software reached $2.9 billion 2018.

The market is expected to reach nearly $7.9 billion by 2023, representing a CAGR of 5.1% from 2018 to 2023.

The main drivers for this expected growth are a continuous desire by researchers to reduce the cost and time to discover new drugs and materials along with the advent of cloud computing which increases collaboration opportunities.

Major competitive vendors include:

  • Entelos

  • Genedata AG

  • Crown Bioscience

  • Biognos AB

  • Chemical Computing Group

  • Leadscope

  • Nimbus Therapeutics

  • Rhenovia Pharma

  • Compugen (CGEN)

  • Dassault Systemes/BIOVIA (OTCPK:DASTY)

Management says its future success will be based on its ability to continue to improve its platform and demonstrate success in its drug discovery efforts.

Financial Performance

Schrödinger’s recent financial results can be summarized as follows:

  • Increasing top line revenue

  • Growing gross profit but reduced gross margin

  • Increasing operating losses and negative margin

  • Decreased use of cash in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2019

$ 59,711,000

21.5%

2018

$ 66,639,000

19.7%

2017

$ 55,693,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2019

$ 33,566,000

2.9%

2018

$ 42,937,000

7.9%

2017

$ 39,800,000

Gross Margin

Period

Gross Margin

Nine Mos. Ended Sept. 30, 2019

56.21%

2018

64.43%

2017

71.46%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Nine Mos. Ended Sept. 30, 2019

$ (30,868,000)

-51.7%

2018

$ (27,969,000)

-42.0%

2017

$ (19,021,000)

-34.2%

Net Income (Loss)

Period

Net Income (Loss)

Nine Mos. Ended Sept. 30, 2019

$ (17,802,000)

2018

$ (28,425,000)

2017

$ (17,392,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Nine Mos. Ended Sept. 30, 2019

$ (14,794,000)

2018

$ (23,711,000)

2017

$ (15,307,000)

Source: Company registration statement

As of September 30, 2019, Schrödinger had $98.3 million in cash and $51.0 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2019, was a negative ($26.2 million).

IPO Details

Schrödinger intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

... we currently intend to use the net proceeds from this offering to continue to advance our physics-based computational platform and our internal drug discovery programs, as well as for general corporate purposes, including working capital, operating expenses, and capital expenditures.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Morgan Stanley, BofA Securities, Jefferies, and BMO Capital Markets.

Commentary

Schrödinger is seeking to raise capital from public investors to continue developing its drug discovery platform.

The firm’s financials show slightly accelerating top line revenue growth and gross profit growth, however, the company steadily increasing operating losses

Sales and marketing expenses as a percentage of total revenue are decreasing; its sales & marketing efficiency rate improved slightly in the most recent reporting period.

The market opportunity for drug discovery software is significant and expected to grow moderately in the years ahead.

SDGR has an interesting hybrid approach. It sells software to other firms yet also uses its system to generate drug compound candidates in-house.

Management says it keeps a strict wall between its in-house efforts and customer data.

In addition, the firm has in-licensed platform technology from Columbia University for a variety of aspects of its system. These licenses will require SDGR to pay royalties based on their respective terms.

SDGR has a significant patent portfolio of approximately 60 patents and patent applications.

I look forward to learning more details about management’s pricing and valuation expectations for the IPO.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.