Schrödinger - Q3 2022

Transcript

Operator (participant)

Everyone, thank you for standing by. Welcome to the Schrödinger conference call to review third quarter 2022 financial results. My name is Chris and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question and answer session. To ask a question during that session, you'll need to press star one one on your telephone. Please be advised that this call is being recorded at the company's request. Now I'd like to introduce your host of today's conference, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Jaren Madden (Chief Corporate Affairs Officer and Head of Investor Relations)

Thank you and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our third quarter 2022 financial results. Earlier today, we issued a 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 Ramy Farid, Chief Executive Officer, Geoffrey Porges, Chief Financial Officer, and Karen Akinsanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A. I'd like to remind you that during today's call, 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 our outlook for the full year 2022 and for the fourth quarter ending December 31, 2022.

Our strategic plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs. The timing of potential IND submissions and the initiation of clinical trials for our proprietary drug discovery program. The clinical potential and favorable properties of our compounds, our expectations related to the use of our cash resources 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 what we project today due to a number of important factors, including the considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC, including our Form 10-Q for the period ending September 30, 2022.

These forward-looking statements represent our views only as of today, and we caution you that we may not update them in the future, whether as a result of new information, future events, or otherwise. With that, I'd like to turn the call over to Ramy.

Ramy Farid (CEO)

Thanks, Jaren, thank you everyone for joining us today. We have developed a computational platform that is transforming the way therapeutics and materials are discovered. Our platform has enabled us to create a balanced business model with each component of our business providing a distinct risk-reward profile. We license our software to biopharma and materials companies as well as government and academic institutions around the world. Software licensing is continuing to provide a growing source of revenue that enables continued investment in innovation. Additionally, we work on collaborative projects that are contributing to our inflecting drug discovery revenue, and we have an expanding portfolio of 18 proprietary drug discovery programs with first in class or best in class potential. Today, we reported total revenue for the third quarter of $37 million, a 24% increase over the prior year.

The strong growth was driven primarily by approximately $12 million in drug discovery revenue. Third quarter software revenue was $24.7 million, which was in line with our expectations. As we look out to the remainder of the year, we have tightened our 2022 financial guidance and are pleased to remain within the original total revenue range, even in a challenging economic environment. In a moment, Jeff will review our third quarter financial results and provide more detail on our fourth quarter and full year 2022 financial guidance. As you'll hear shortly from Karen, we are also continuing to make progress across our pipeline of collaborative projects and proprietary programs. Today, we announced that our phase I study of our MALT1 inhibitor, SGR-1505, is open for patient enrollment.

We also reported that in December we will present new preclinical data for our CDC7 inhibitor SGR-2921 at the ASH annual meeting. We are also continuing to expand our drug discovery portfolio and recently announced a partnership with Eli Lilly for the discovery of small molecule compounds for an undisclosed target. Under the agreement, we received an upfront payment and are eligible to receive up to $425 million in discovery, development, and commercial milestone payments as well as royalties on net sales. We are pleased with the progress we have made so far this year, particularly in a challenging macroeconomic environment. The fundamentals of our business are strong and we have a solid cash position, having ended the third quarter with approximately $479 million.

We are continuing to focus on executing across all aspects of our business to generate value as we advance our vision of transforming drug discovery and materials design. I will now turn the call over to Geoffrey Porges to review our third quarter financial results and financial guidance.

Geoffrey Porges (CFO)

Thank you, Ramy, and hello everyone. It's an honor to be here with the team today for my first financial results call as Schrödinger's CFO. As I hope you heard at Platform Day, we have a deep and broad computational platform that is creating value through technology licensing, collaborations, and the development of our proprietary programs. We delivered a strong third quarter driven by better than expected drug discovery revenue. The increasing contribution from drug discovery reflects the positive returns we are seeing from the investments we have made in that business over the last four years. The underlying trends in the software business are strong, and the reported growth reflects the effect of significant multi-year contract revenue recognized in Q3, 2021.

Adjusting for those large pre-purchases in the prior year, software revenue growth in Q3 would have been consistent with the growth reported in Q1 and Q2 this year. Total revenue was $37 million for the quarter, up 24% compared to the third quarter of 2021. Software revenue was $24.7 million, in line with our expectations and similar to the $24.3 million reported for the third quarter of last year. Drug discovery revenue was $12.3 million for the third quarter of 2022 compared to $5.6 million in the third quarter of 2021. Drug discovery revenue for the quarter included $9.9 million in revenue recognized from our ongoing collaboration with Bristol Myers Squibb, as well as revenue from milestones related to other collaborative and proprietary programs.

During the quarter, the rights to one of our collaboration programs reverted to us after BMS elected not to proceed with further development. This resulted in increased revenue recognition due to accelerated completion of our obligations related to the program during the period. Gross profit was $17.2 million in the third quarter, compared to $11.1 million for the third quarter of 2021, representing a 55% increase year-over-year. Software gross margin was 72% in the third quarter of 2022, which is similar to the third quarter last year and consistent with our expectations. Operating expenses were $63.4 million, compared to $45.8 million for the same quarter last year. The increased expenses reflect growth in headcount, continued investment in our platform, and the progress of our proprietary and collaborative programs.

We recorded a net loss of $39.9 million for the third quarter of 2022, compared to a net loss of $35 million for the same period in the prior year. We ended the quarter with cash equivalents, marketable securities, and restricted cash balances of approximately $479 million, compared to approximately $513 million on June 30th, 2022. I'll now turn to our financial guidance for 2022. With one quarter remaining in the year, we are updating our full year financial guidance. We have narrowed our range for total revenue guidance for the year. We now expect total revenue for 2022 to be in the range of $167 million-$175 million, compared to our prior range of $161 million-$181 million.

The midpoint of our range is $171 million, which is the same midpoint as our prior guidance. Our new range corresponds to 21%-27% growth over 2021. We now expect software revenue to range from $122 million to $127 million, compared to $126 million-$136 million previously. The reduced range is based on several factors that have emerged in the last three months and are having a continuing effect in Q4. These factors include a modest impact from foreign currency, lower than anticipated adoption and scale up by smaller biotech companies impacted by the capital markets environment, and uncertainty about the timing of increases in adoption of our technology among our largest customers.

Those increases typically occur in Q4, and our new guidance reflects remaining uncertainty about our customers' year-end purchase decisions. The implied Q4 revenue range of $34 million-$39 million reflects the potential for significant contracts to still be completed in Q4, which are excluded from the lower end of the guidance range. We are increasing the range of our expected drug discovery revenue for 2022 to $45 million-$48 million, compared to our prior expectation of $35 million-$45 million. Our greater than anticipated drug discovery revenue for the year is driven by BMS's strategic decision not to advance one collaboration program and by meeting milestones in our other drug discovery collaborations and partnered programs. The remaining uncertainty for the year relates to the timing of completion and revenue recognition for certain other outstanding collaboration projects.

Finally, we now expect that operating expense growth for the year will be approximately 40% compared to our prior expectation of just under 42% growth. The lower growth in expenses reflects our latest expectations for the timing of hiring and other expense drivers. We continue to expect our software gross margins to be in the mid-70s. We are very encouraged that in a challenging macroeconomic environment, our revenue continues to grow strongly. We are committed to delivering continued growth in software licensing revenue and to building increasing value in our collaborations and proprietary programs. Our balance sheet is strong, and our technology platform is becoming more and more validated and differentiated.

With technology licenses in place across the biopharmaceutical industry, partnered programs and collaborations with some of the largest and most innovative companies in the industry, and 18 proprietary programs advancing through development, we are very confident that we will deliver continued growth and increasing value in the coming quarters. I'll now turn the call over to Karen for an update on our drug discovery programs.

Karen Akinsanya (President and Head of Therapeutics R&D and Chief Strategy Officer and Partnerships)

Thank you, Jeff, and good afternoon, everyone. We are continuing to make important progress across our portfolio. Within our collaborative pipeline, there are nine programs currently in the clinic, and 12 projects are advancing through the discovery phases. Additionally, over the last 5 years, we have continued to increase the number of proprietary programs our therapeutics group is working on. Today, our proprietary portfolio includes 18 programs, some of which are partnered and some of which are wholly owned. As we discussed at Platform Day, cumulative technical success rates we and our collaborators are achieving across the growing number of completed and ongoing programs signals meaningful improvements relative to published industry averages. We believe this is a very promising trend that highlights the power of our computational platform. As programs complete discovery and move into the clinic, we are able to initiate new programs.

As you heard from Ramy, we recently entered into a new relationship with Lilly to advance the discovery of small molecules for an undisclosed target. Lilly will be responsible for disease model studies, completion of pre-clinical and clinical development, as well as commercialization of the product. Notably, the program handoff to Lilly occurs earlier than in our collaborations with BMS and Takeda. In addition to an upfront payment, we are eligible to receive up to $425 million in discovery, development, and commercial milestone payments and royalties on future sales in all geographies. This new program is the fifteenth for which we are eligible to receive royalties on commercial sales. As Jeff mentioned, BMS made a strategic decision to deprioritize one of our partners' programs. Given the progress we have made on this genetically validated target, we have elected to continue to invest in the program internally.

We expect to be able to share more information about this and other proprietary programs in 2023. We are also exploring an alternative target of mutual interest with BMS. Turning to our wholly-owned pipeline. Today, I will review our three most advanced programs. MALT1 has emerged as a potential therapeutic target for the treatment of B-cell malignancies, including relapsed or resistant ABC DLBCL and mantle cell lymphoma, with initial clinical signs already described by others in CLL and SLL. While our current focus is on B-cell malignancies, there is emerging literature suggesting that MALT1 inhibition could also have potential in solid tumors and autoimmune disease. Today, we announced that the phase I study of our MALT1 inhibitor, SGR-1505, is open to patient enrollment. This dose escalation trial will evaluate the safety, pharmacokinetics, pharmacodynamics, and early signals of antitumor activity of SGR-1505 as monotherapy.

Once the recommended dose is determined, an expansion cohort is planned to evaluate SGR-1505 in combination with other therapies such as BTK and BCL-2 inhibitors. This is the first clinical study emerging from our proprietary pipeline and marks an important milestone for our company. Moving to our WEE1 program. Clinical data from other companies' WEE1 programs has provided evidence of clinical activity in several forms of cancer with high unmet need, including proof of concept in uterine and ovarian cancers. Data from other WEE1 programs have also underscored the importance of identifying highly selective molecules with optimized properties that can help avoid drug-drug interactions and off-target effects that have been observed with WEE1 inhibitors. We have already identified compounds from multiple lead series that are potent, selective, and demonstrate antitumor activity with desirable ADME, pharmacokinetic, and pharmacodynamic properties.

We are continuing pre-clinical studies and now expect to select a development candidate in the first half of 2023 and submit an IND in the first half of 2024. We believe taking additional time to characterize and benchmark our molecules will afford us the opportunity to advance a potential best-in-class WEE1 inhibitor for use in combinations. Now I will turn to our CDC7 program, a target in the DNA damage repair pathway. Today, we announced that we will present new pre-clinical data for our CDC7 inhibitor, SGR-2921, at the American Society of Hematology, or ASH, annual meeting next month. In the abstract published today, we report that SGR-2921 demonstrated strong antitumor activity in vitro in AML cell models and in vivo in AML xenograft models.

SGR-2921 also shows strong antitumor activity in AML cell lines resistant to FLT3 inhibitors, venetoclax, and other standard of care agents, suggesting that CDC7 inhibition is a potential therapeutic strategy for treating patients with relapsed or refractory AML. We look forward to presenting the full poster on December eleventh. We are also making progress towards our IND submission for this program and continue to expect to submit an IND to the FDA in the first half of 2023. Subject to regulatory clearance, we expect to initiate a phase I study in the second half of 2023. In summary, our diverse portfolio of discovery and development programs is advancing. Activities to expand our wholly-owned programs in oncology and immunology are progressing. We are pleased with the value we have already generated from our portfolio and are excited about the value creation opportunities ahead.

We look forward to updating you on our R&D progress over the coming months. I will now turn it back over to Ramy.

Ramy Farid (CEO)

Thanks, Karen. We are really pleased with our third quarter results and the progress we are making this year. We have a strong, balanced business model based on a highly validated software platform, and we remain focused on the key objectives that we believe will generate value and position us for continued success. At this time, we'd be happy to take your questions. Operator?

Operator (participant)

Thank you. To ask a question, you'll need to press star one one on your phone. Please stand by as we compile the Q&A roster. One moment please for our first question.

Our first question will come from Do Kim of Piper Sandler. Your line is open.

Do Kim (Managing Director and Senior Research Analyst)

Hi. Thanks for taking my question and congrats on the progress. First on guidance. Jeff, I was wondering if you could quantify the impact to the software guidance from each of those components you talked about, the FX, the smaller biotech customers and the larger customers. Did one of those groups influence more than the other? You said that the impact from FX was small. How small was it?

Geoffrey Porges (CFO)

Sure. Thanks for the question, Do. You're right, those are the three buckets that I alluded to, but let me give you a little bit more color on each of those. First, on FX, our business is largely conducted in U.S. dollars. Our contracts are priced in U.S. dollars, so we're relatively insulated against direct impact of exchange rate fluctuations. There is a modest impact in terms of our receivables and our cash balances that are held in other currencies, but that's relatively small.

However, there's an effect that probably isn't fully anticipated, which is that because our contracts are priced in U.S. dollars, for our customers who tend to have relatively fixed budgets in local currencies, they are running up against the top end of their budgets earlier in the year at a point that is yielding less revenue for us in U.S. dollars than we had, in some cases, anticipated. Now, we're also finding that because of the higher value of our software in their local currencies, there are less opportunities to step up their revenue to a higher level than we'd anticipated. That's particularly having an effect on the 40%, obviously, of our revenue that comes outside the U.S.. The second effect is the uncertainty in the biopharma capital markets.

We're seeing a handful of customers who are scaling back their software purchases as their small biopharma companies are either consolidated or, to conserve cash, they're focusing on one or two of their priority clinical programs and not investing in further discovery. We're seeing a little bit of effect of that. I think, again, the bigger hidden effect is that we aren't seeing new companies created by the capital markets that become the growth contributors to our software, for this year and in the near term in the future, because capital markets just haven't been, as hospitable to new and emerging companies. Those new companies that showed up in 2020 and 2021 haven't shown up this year in the same numbers. Lastly, I mentioned the large customers.

Typically towards the end of the year, we see step-ups in adoption by our largest customers. We still believe there are opportunities for those step-ups towards the end of the year, but there is more uncertainty about when those step-ups will occur and also about the magnitude of them. That uncertainty is both reflected in the range of our guidance, but also the change we made to the overall guidance. In terms of the answer to your direct question, three effects, probably roughly equal in terms of the magnitude of the impact, and the contribution to the change in the guidance. I hope that answers the question for you, Do.

Do Kim (Managing Director and Senior Research Analyst)

Yes. Thanks for all the details, Jeff. A question for Karen. On the MALT1 trial, you're ready to start enrolling patients. Can you talk about how many clinical sites you plan to activate, and if you have other geographic locations besides the U.S. that you plan to open up the clinical sites for?

Karen Akinsanya (President and Head of Therapeutics R&D and Chief Strategy Officer and Partnerships)

Hi, Do Kim. Yes, we have been working very hard on initiating this study. As you know, this was an important goal for us this year. We're pleased with the progress. We are reaching out broadly to sites in the U.S. As you know, lymphoma is a very active space right now. We have a handful of sites that we're working with very actively, and we continue to evaluate the opportunity to consider sites, obviously broadly across the U.S., but also globally. We haven't taken that off the table at this point. That's something we continue to discuss and monitor as this trial continues to move forward.

Do Kim (Managing Director and Senior Research Analyst)

Great. Thanks for taking my questions.

Operator (participant)

Thank you. One moment please for our next question. Our next question will come from David Lebowitz of Citi. Your line is open.

David Lebowitz (Senior Research Analyst)

Thank you very much for taking my question. I guess moving on to the guidance for the drug discovery business, which got moved slightly above the prior guidance. Could you just elaborate more on where that might have come from this year and how this increase might or might not affect the previously provided number of $100 million for 2023? Thank you.

Ramy Farid (CEO)

I'll just comment really quickly, this is Ramy, on the comment you made or the question about the $100 million. If you remember, that was a strategic objective that we provided at the beginning of 2022. We still believe that we can achieve that goal of $100 million in drug discovery revenue. In February, we'll actually provide formal guidance on that number. Karen or Jeff. Jeff, I think you were gonna respond to the first part of the question.

Geoffrey Porges (CFO)

Sure. Hi, David. So you're right. We've raised the revenue guidance for the year for drug discovery.

Part of the raise came from the recognition of the revenue from one of the BMS programs, the program that we alluded to that was returned to us and that we're continuing to invest in internally. It also came from a number of other collaborations where we've successfully advanced programs to the point where we think it's reasonable to recognize some of that revenue that had previously been held in the deferred account. That's flowed through as recognized revenue, or we expect it to, in some cases has. Clearly we were above the lower end of our guidance.

Operator (participant)

Thank you. One moment please for our next question. Our next question will come from Michael Yee of Jefferies. Your line is open.

Andrew Tsai (Managing Director)

Hi, this is Yee-Chien for Mike. Two questions on our end. The first, just digging in a little deeper on drug discovery. So you've raised the bar on the raised guidance for the remainder of this year. Second question, on the BMS discontinuation, if you could just provide some more color as to why they chose to discontinue that collaboration. Thank you.

Ramy Farid (CEO)

Jeff, you wanna answer the first part, and then we can hand over to Karen?

Geoffrey Porges (CFO)

Sure.

Do Kim (Managing Director and Senior Research Analyst)

Yeah.

Geoffrey Porges (CFO)

Sure. For you, that we recognize across multiple programs and collaborations. We've advanced the revenue recognition on one of the programs, as I alluded to in the BMS collaboration, but the target for next year includes a host of different programs and opportunities.

Andrew Tsai (Managing Director)

Mm.

Geoffrey Porges (CFO)

As Ramy alluded to, we still see that as achievable. We still see it as being highly achievable. You know, the fact that it occurred and we recognized it during this period doesn't necessarily mean that we were assuming that it was going to occur in its entirety next year. Our forecasts are actually a probability-weighted basket of different slices, so nothing is assumed at 100% probability until we recognize it.

Karen Akinsanya (President and Head of Therapeutics R&D and Chief Strategy Officer and Partnerships)

The Joint Steering Committee jointly looked at the progress on the discovery phase of this program. We also worked looking forward at the clinical phase, and while we both agree that we've made exceptional progress on advancing compounds during discovery, BMS made the strategic decision that they no longer expect to invest in development. As we mentioned earlier, we look forward to sharing more about it in 2023, along with the update on the rest of our portfolio. I want to also say, of course, that the JSC continues to look for opportunities on the horizon. We jointly do that, and so we are continuing to discuss the potential for a new program with BMS.

Operator (participant)

Thank you. One moment please for our next question. Our next question will come from Gary Nachman of BMO Capital Markets. Your line is open.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Hi, good afternoon. Jeff, just following up on the three effects to the software revenue. How much of that is a near-term issue versus here? I don't understand exactly how you're thinking about the low end of the guidance at this point. How much conservatism is in there for the larger customers? Ramy, just, you know, maybe your broader comments on economic challenges and the academic environment, how that's impacting the software business. Just talk more about those dynamics, and how that's being weaved into the situation that you're seeing.

Geoffrey Porges (CFO)

Ramy, do you want me to jump in and I'll address the first part of Gary's question?

Do Kim (Managing Director and Senior Research Analyst)

Yeah, please, Jeff. Thank you.

Geoffrey Porges (CFO)

I certainly think a lot about this, your question, Gary, what's likely to persist versus what is transient. I don't think that the currency effect that I alluded to is going to pose the same headwind for us next year that it's been the second half of this year particularly. We all know what exchange rates have done and how that sort of caused disruptions. I think we'll rebase those contracts, and I think those international customers will be much better positioned to be our solid foundation toward level growth next year.

In terms of the large customers, the sense I get from talking to our account managers is that it's a question of timing, not if, it's when, not if, and then what the magnitude of those opportunities is. We just do have to, you know, recognize that we're getting close to the end of the year, and I don't wanna have firmly committed to finalize those transactions. That's what's encompassed in the range of the remaining guidance for you. Then the third factor that I alluded to, which is the capital markets environment in biotech. Gary, if either of us can predict what's going to happen in biotech capital markets, then, you know, we probably are in the wrong situations.

I think that most people think that the problem, the current difficulties in raising money in biotech will persist well into next year. I don't expect there to be a host of new biotech customers, small biotech customers that are formed with ambitious drug discovery goals and lots of capital, at least for the next few months. That's something that we anticipate, there'll be some sort of tail off well into next year. I hope that gives you some color.

Ramy Farid (CEO)

With regard to the academic environment, I'm sorry, can you just clarify what you were referring to? Is that what you said? You said academic.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Yeah. I thought you had like comments in the prepared remarks just about the economic challenges and I thought I heard you say the academic environment in general. Maybe I misheard that. Just, you know, in terms of how that's impacting the overall.

Ramy Farid (CEO)

Yeah.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

software business.

Ramy Farid (CEO)

Yeah.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Like, in terms of your academic customer. I mean, everything that Jeff is describing feels like.

Ramy Farid (CEO)

Mm-hmm.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

It's more in just the corporate level, but you do have customers in the academic environment, so I'm assuming they have budgets as well.

Ramy Farid (CEO)

Yeah. That's right. Well, we happened not to mention anything about academic environment, but it's fine. It's still a good question. We, you know, happy.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Okay.

Ramy Farid (CEO)

To address it. Yeah. Yeah. As you know, and it's right, and we really value the academic part of our business, not only for the revenue generation. Obviously it's a smaller fraction relative to the commercial component. Of course this is, you know, in a sense, feeding the market, right? It's training the future scientists and it's very important. As far as all of our analysis to date, looking at it, we're not seeing a significant impact there from funding. It continues to grow at very similar rates that we've seen over the years. And we continue to see more and more universities actually focusing on computation and training and we play a role in that, by the way.

We have now provided courses, online courses and curricula to provide to professors who are increasingly interested in teaching computation. Our platform has really increased, and the success of the platform has increased the demand for people to learn computation. Those students are going off and becoming customers at companies. That's all going really well.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Okay. No, that's helpful. Thank you.

Ramy Farid (CEO)

Thanks for the hearing. Yeah, that was good.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Yeah. No, I don't know why I heard it.

Ramy Farid (CEO)

Yeah.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

It's been a long day.

Ramy Farid (CEO)

Okay.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Anyway, thank you for that. Then one other question which I know you did not address, but I do think is important. How do you think the Inflation Reduction Act-

Ramy Farid (CEO)

Mm-hmm.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

will impact your business over time? You know

Ramy Farid (CEO)

Yeah.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

How will biopharma companies reevaluate their drug discovery strategies, especially with small molecule development? You know, we know some of the potential challenges there. Do you think this will help you or hurt you, and how are you guys thinking about it?

Ramy Farid (CEO)

Yeah. Here's how we're thinking about it. It's an important question and, of course it's on a lot of people's minds. The trend that we've really been seeing for a while of a shift from small molecule to biologics in pharma that started a number of years ago is certainly continuing. It's likely that the Inflation Reduction Act is contributing to that. Now, the exciting thing is that we have been, again, like I said, this is a trend that started before this act, and we've actually been focused on advancing our physics-based platform to address biologics and protein therapeutics. Remember, the platform is completely agnostic to modality.

Physics is physics and, predicting the potency of a small molecule to a protein actually is the exact same physics as predicting the potency of a large molecule to a protein. This is an area we've been working on, and we've actually already demonstrated in a number of important projects, including our collaboration with AstraZeneca, that our platform can actually be used very efficaciously in the design of biologics. We're continuing. If the answer to your question is yeah, we're engaging more and more in conversations around either our customers using our platform to advance their own programs or even potential partnerships, obviously building on what we started a number of years ago. Remember it was two and a half years ago, the AstraZeneca collaboration.

We're continuing to invest in advancing the computational platform to address a broader range of challenges in the design of biologics.

Karen Akinsanya (President and Head of Therapeutics R&D and Chief Strategy Officer and Partnerships)

Yeah. Maybe we can just add that obviously with a greater emphasis on speed to get to a development candidate and to develop molecules. Obviously our small molecule platform has an important impact in the speed of programs, and we think that will be important for companies as they approach targets that can't be addressed by biologics. We hope to help in some way.

Ramy Farid (CEO)

Thanks, Karen. That's a really important point. Yep.

Gary Nachman (Managing Director and Biopharma and Specialty Pharma Analyst)

Okay, great. Thanks, guys.

Ramy Farid (CEO)

Thanks.

Operator (participant)

Thank you. One moment please for our next question. Our next question will come from Vikram Purohit of Morgan Stanley. Your line is open.

Vikram Purohit (Equity Analyst)

Great. Good afternoon. Thanks for taking my question. Just one quick one from our side. On the MALT-One program, now that you have sites open for enrollment, I just wanted to see if you could share some color about what you expect the initial pace of enrollment to be here and what types of patient profiles and tumor types you're looking to enroll initially and you think will be quick to enroll. Looking forward, at what point do you think it's reasonable to expect some timeline to data to be possible to communicate?

Karen Akinsanya (President and Head of Therapeutics R&D and Chief Strategy Officer and Partnerships)

Yes. In terms of the design and the patients that we're enrolling in this trial, this is a relapsed resistant lymphoma trial. It does enroll all comers with that profile. The focus of this trial is really a dose escalation to determine safety tolerability to gather data on pharmacokinetics and pharmacodynamics. We will, though, be collecting scan information from patients which will allow us to determine if there are any initial signs of activity. While our focus is obviously on the safety tolerability, we remain open to assessing any signs of activity as the trial proceeds. In terms of timing, we obviously have just begun our enrollment here, and we're obviously moving as quickly as we can.

We don't necessarily at this point have specific timelines we can share with you when we'll be able to disclose data. Obviously, as we make progress, we'll be updating our view on that and sharing information as and when we are in a good position to do so. As the dose escalation trial proceeds, obviously that can take some months while you're studying patient populations as opposed to healthy volunteers, as you might know.

Ramy Farid (CEO)

Understood. A quick follow-up. Maybe a catch-all question on business development. Looking to 2023, what's your appetite for partnerships? If there is appetite, what forms of partnerships could be interesting to you?

Karen Akinsanya (President and Head of Therapeutics R&D and Chief Strategy Officer and Partnerships)

Well, I can start. As you know, we've been really focused on improving the opportunities we have in the business development space over the last five to 10 years. That essentially has taken two sort of different forms. The first is the de novo collaborations. As you know, we have a lot of equity relationships that were established around a decade ago. We've moved forward now into these de novo collaborations, where we are collaborating with companies like Lilly and BMS to discover molecules that they will then develop. Last year, you saw us do the Zai Lab deal, where we have co-development co-commercialization opt-in rights. All of those types of conversations continue. We though will also be focusing obviously a lot more as time moves on the partnering and collaborations around our wholly owned assets.

That will obviously be a new set of business development relationships for us, where again, we will be looking to, in some cases, retain rights to programs. But in other cases, as we've said before, where it makes sense for a partner to accelerate the access to patients, the access to combination agents, we may well be like, out-licensing those products over time. But, no line of sight to that right now. We're really excited about the move into the clinic for our assets and gathering data, but we'll be obviously, sharing more as there's more to share, over the next years of those.

Ramy Farid (CEO)

Okay. Understood. Thank you.

Operator (participant)

Thank you. Again, to ask a question, you will need to press star one one on your phone. Stand by as we compile the Q&A roster. Again, one moment for our next question. Our next question will come from Gaurav Goparaju of Berenberg Capital Markets. Your line is open.

Gaurav Goparaju (Equity Research Analyst)

Hey, good afternoon, everyone. Just two quick ones from me. On the first side, more on the software business

Ramy Farid (CEO)

Forward.

Gaurav Goparaju (Equity Research Analyst)

Are you working on introducing any new software products to maybe expand the scope of your portfolio for customers? Or are you just more so committed to, you know, reinvesting the development of your existing solutions? Just thinking about different ways to, you know, bolster growth in this segment. Then secondly, just, you know, what should we expect on, you know, annual cash burn over the near term as internal clinical development costs scale? Thanks.

Ramy Farid (CEO)

On the first question, did you say energy or did you just say in general, just the whole platform? I wasn't sure if I missed one of the words you said.

Gaurav Goparaju (Equity Research Analyst)

I said in general, you know, just working on.

Ramy Farid (CEO)

In general. Got it.

Gaurav Goparaju (Equity Research Analyst)

Yeah, new software solutions. It could be, you know.

Ramy Farid (CEO)

Yeah.

Gaurav Goparaju (Equity Research Analyst)

Elsewhere in the discovery development cycle, just one.

Ramy Farid (CEO)

Oh, yeah. Perfect. Yeah. Thanks. That's a really important question. As you know, we really see ourselves as a science innovation company. That's been a long history of ours, and it continues. We're really committed to continuing to make breakthroughs in the science. They fall into a number of categories. Obviously, I won't spend, you know, a huge amount of time, but let me give you the high points. One of the areas that we're really excited about that we think will have a big impact on growth in the future is in target enablement. The number of targets for which we have structures and are therefore amenable to these physics-based methods is very small fraction of the human genome.

There are now experimental and computational methods that are promising have the promise to be really transformational. We think in the future, in the foreseeable future, we can enable nearly all targets. That's obviously incredibly exciting. The other area that we're focused on is, of course, advancing those programs. As we've said many times, a number of the properties that we can compute with essentially experimental accuracy is sufficient to have a profound impact on projects, but there's a lot more to be done. There are a number of properties that we can't yet calculate with experimental level of accuracy, and we're putting a lot of effort into that. With every property we add, it has that much more of an impact on projects.

Now, on the materials science side, this is an area we're very, very excited about. One of the areas that we've talked a lot about is in battery research. At the moment, batteries are essentially designed by trial and error, and we see the impact of that. We have batteries that are frustratingly long, take long to charge. They get passivated. Some of them are flammable, as we all know. We believe that at the core of all of those challenges is molecular design and physics-based methods. We're putting a pretty significant effort into advancing the science that sort of underlies the complex chemistry that's occurring inside batteries at the electrode electrolyte interface.

We think with progress in this area, that can have a really profound impact on the demand for the technology and the impact that it can have. Those are just a few examples.

Geoffrey Porges (CFO)

Ramy, should I jump in on cash burn?

Ramy Farid (CEO)

Oh, please. Yes.

Geoffrey Porges (CFO)

Yeah. Sorry, Gaurav. Your second question.

Ramy Farid (CEO)

Yeah, thanks.

Geoffrey Porges (CFO)

You saw that we reported cash burn approximately $34 million this quarter, compared to $16 million last quarter. If you look over the year, I think that it's roughly been in the range of about $30 million per quarter. At the end of Q3, we had $479.9 million on the balance sheet. Approximately we have four years of cash. I think that what we expect is that our software business will continue to grow, but we're at this point now where we can start to see some operating leverage. We've invested pretty heavily over the last few years, and we should see the revenue continue to grow, but the expenses plateau.

We think that the overall cash burn should moderate, and we still have a lot of opportunities from things like equity investments in some of the programs in that Karen alluded to, but aren't really even included in that balance sheet right now. I see a lot of opportunities for additional cash to come in and also a moderation of our cash burn. As you know, Greg, we haven't committed to profitability. We haven't set a timeline for that. I think you can see we're starting to see a really nice return from the investments we have been making in our discovery portfolio. As Ramy described, we just see lots and lots of runway to create tremendous value from continuing to invest in our core platform.

It's a sort of long answer to the question. We have a great balance sheet. I think you'll see operating leverage on both sides of the business going forward, but equally terrific opportunities to continue to invest, and we plan to prosecute those opportunities to their fullest.

Ramy Farid (CEO)

Awesome. Makes sense. Thanks, guys.

Geoffrey Porges (CFO)

Thanks.

Operator (participant)

One moment. I am showing no further questions at this time. This will conclude today's call. You may all now disconnect and have a pleasant day.