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Item 1. Business

2024-02-28 compared with 2023-02-28 · 579 added, 356 removed, 893 unchanged (51% of the section changed)

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Our software platform is licensed by biopharmaceutical and industrial companies, academic institutions, and government laboratories around the world.

We are applying our computational platform to discover and advance a broad pipeline of development programs in collaboration with leading biopharmaceutical companies.

In addition, we use our platform to advance a pipeline of partnered and wholly-owned drug discovery programs, which we refer to collectively as our proprietary drug discovery programs.

Traditional drug discovery and development efforts have become increasingly complex, lengthy and capital-intensive, and are prone to high failure rates.

We are applying our computational platform to advance a broad pipeline of drug discovery programs in collaboration with leading biopharmaceutical companies.

In addition, we use our computational platform to discover novel molecules for our pipeline of proprietary drug discovery programs, which we are advancing through preclinical and clinical development.

Traditional drug discovery and development efforts are complex, lengthy and capital-intensive, and are prone to high failure rates.

Traditional drug discovery relies upon many iterations of costly and time-consuming manual molecule design, chemical synthesis, and experimental testing.

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In 2023, all of the top 20 pharmaceutical companies, measured by 2022 revenue, licensed our solutions, accounting for $71.8 million, or 45%, of our software revenue in 2023.

We had 222, 227, and 190 customers with an annual contract value, or ACV, of at least $100,000, which represented 83%, 82%, and 80% of our total ACV, for the years ended December 31, 2023, 2022, and 2021, respectively.

The widespread adoption of our software, supported by our global team of sales, technical, and scientific personnel, has driven steady growth in our software revenue.

Biopharmaceutical companies are increasingly adopting our software at a larger scale, and we anticipate this scaling-up will drive future revenue growth.

Our ability to expand within our customer base is demonstrated by the increasing number of our customers with an annual contract value, or ACV, in excess of $100,000.

We had 227, 190, and 153 such customers, which represented 82%, 80%, and 79% of our total ACV, for the years ended December 31, 2022, 2021, and 2020, respectively.

Furthermore, the number of customers with an ACV in excess of $1.0 million increased to 18 for the year ended December 31, 2022 compared to 15 and 16 for the years ended December 31, 2021 and 2020, respectively.

We also had four customers with an ACV in excess of $5.0 million for the year ended December 31, 2022, compared to two such customers for the year ended December 31, 2021.

In addition, our customer retention rate for our customers with an ACV over $100,000 for the year ended December 31, 2022 was 96% and was 96% or higher for each of the previous nine fiscal years.

We believe the growth in the number of our customers demonstrates that companies are increasingly recognizing the power and appreciating the scientific and financial benefits of using our platform at scale while the retention in this group is indicative of the continued value of our platform.

Our ability to expand within our customer base is demonstrated by the increasing number of our customers with an ACV at higher thresholds, including customers with an ACV of at least $500,000 or $1.0 million.

For the year ended December 31, 2023, we had 54 customers with an ACV of at least $500,000 compared to 52 for the year ended December 31, 2022.

Furthermore, the number of customers with an ACV of at least $1.0 million increased to 27 for the year ended December 31, 2023 compared to 18 and 15 for the years ended December 31, 2022 and 2021, respectively.

We also had four customers with an ACV of at least $5.0 million for the year ended December 31, 2023, compared to four and two such customers for the years ended December 31, 2022 and 2021, respectively.

In addition, our customer retention rate for our customers with an ACV of at least $100,000 for the year ended December 31, 2023 was 92% and was 96% or higher for each of the previous nine fiscal years.

Our customer retention rate for our customers with an ACV of at least $500,000 was 98% for the year ended December 31, 2023 and 100% for the year ended December 31, 2022.

We believe the growth in the number of our larger customers demonstrates that companies are increasingly recognizing the power and appreciating the scientific and financial benefits of using our platform at scale while the retention in our customer base is indicative of the continued value of our platform.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Performance” for additional information regarding ACV and customer retention rate.

We also leverage our platform and capabilities across a portfolio of collaborative and proprietary drug discovery programs spanning a wide range of disease targets and indications.

Our drug discovery group, which we refer to as the Schrödinger Therapeutics Group, is comprised of a multidisciplinary team of approximately 150 experts in protein science, biochemistry, biophysics, medicinal and computational chemistry, and discovery scientists with expertise in preclinical and early clinical development.

Our collaborative and partnered programs generate drug discovery revenue, including upfront payments, research funding payments, and discovery and development milestones, and have the potential to produce additional milestone payments, option fees, and future royalties.

In 2018, we began to develop a pipeline of wholly-owned drug discovery programs with the goal of using our platform to produce a portfolio of novel, high value therapeutics.

Our initial programs were focused on discovering and developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.

Since then, we have expanded into other therapeutic areas, including in the areas of immunology and neurology.

We submitted an investigational new drug application, or IND, for our MALT1 inhibitor, which we refer to as SGR-1505, and the U.S.

Food and Drug Administration, or FDA, cleared the IND in June 2022.

We recently initiated a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell lymphomas and currently have clinical trial sites open for screening and enrollment, but we have not yet dosed any patients with SGR-1505.

In addition, we continue to advance other wholly-owned programs through IND-enabling studies.

We expect to submit an IND application to the FDA for our CDC7 inhibitor, which we refer to as SGR-2921, in the first half of 2023 and for our WEE1 inhibitor, which we refer to as SGR-3515, in 2024, subject to favorable data from IND-enabling studies.

In addition, we plan to initiate a Phase 1 clinical trial of SGR-2921 in the second half of 2023, subject to receipt of regulatory clearance.

In November 2020, we entered into an exclusive, worldwide collaboration and license agreement with Bristol-Myers Squibb Company, or BMS, pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas.

The initial collaboration targets included HIF-2 alpha and SOS1/KRAS, which were two of our wholly-owned pipeline programs.

In November 2021, we and BMS mutually agreed to replace the HIF-2 alpha target with another precision oncology target.

Following the replacement election, all rights to the HIF-2 alpha target program reverted to us.

In September 2022, BMS elected not to proceed with further development of another target and all rights to this program reverted to us.

In December 2022, we and BMS entered into an amendment to our collaboration and license agreement to include an additional target in neurology on terms similar to the original agreement.

Under the terms of the agreement, as amended, we received a $55.0 million upfront payment from BMS in November 2020 and an additional upfront payment in December 2022 related to the additional target, and we are eligible to receive up to $2.7 billion in total milestones from BMS across all potential targets, as well as a tiered percentage royalty on net sales of each product commercialized by BMS ranging from mid-single digits to low-double digits, subject to certain specified reductions.

Our drug discovery group, which we refer to as the Schrödinger therapeutics group, is comprised of a multidisciplinary team of approximately 180 experts in protein science, biochemistry, biophysics, medicinal and computational chemistry, and discovery scientists with expertise in preclinical and

early clinical development.

We have entered into drug discovery collaborations with biopharmaceutical companies under which our collaborators are pursuing research in a number of therapeutic areas, including programs in oncology, antifungal diseases, fibrosis, inflammatory bowel disease, metabolic disease, autoimmune disease, immuno-oncology, cardiopulmonary disease and tuberculosis.

When we engage in drug discovery with these collaborators, we typically provide access to our platform and platform experts who assist the drug discovery collaborator in identifying molecules that have activity against one or more specified protein targets.

Our collaborative programs generate drug discovery revenue, including upfront payments, research funding payments, and discovery and development milestones, and have the potential to produce additional commercial milestone payments, option fees, and royalties.

We also rely on collaborators for the development and potential commercialization of product candidates we discover internally when we believe it will help maximize clinical and commercial opportunities for the product candidate.

For example, in November 2020, we entered into an exclusive, worldwide collaboration and license agreement with Bristol-Myers Squibb Company, or BMS, pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas.

After mutual agreement on the targets(s) of interest, the Schrödinger therapeutics group is responsible for the discovery of development candidates.

Once a development candidate meeting specified criteria for a target has been identified, BMS will be solely responsible for the development, manufacturing and commercialization of such development candidate.

We are eligible to receive up to $1.5 billion in total milestone payments across the potential targets currently subject to the collaboration, of which we have received $25.0 million as of December 31, 2023, as well as a tiered percentage royalty on net sales of each product commercialized by BMS ranging from mid-single digits to low-double digits, subject to certain specified reductions.

See “—Collaboration Agreement with Bristol-Myers Squibb Company” for additional information relating to this agreement.

We generated revenue of $181.0 million, $137.9 million, and $108.1 million in 2022, 2021, and 2020, respectively, representing year-over-year growth of 31% and 28%, respectively.

Our net loss was $149.2 million, $101.2 million, and $26.6 million for the years ended December 31, 2022, 2021, and 2020, respectively.

In 2018, we began to develop a pipeline of proprietary drug discovery programs with the goal of using our platform to produce a portfolio of novel, high value therapeutics.

In June 2022, the U.S.

Food and Drug Administration, or FDA, cleared our first investigational new drug application, or IND, for our MALT1 inhibitor, which we refer to as SGR-1505.

We have initiated dosing in a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell lymphomas and we anticipate reporting initial data from the trial in late 2024 or 2025.

We also completed a Phase 1 clinical trial of SGR-1505 in 73 healthy volunteers to gather additional data, including data relating to the safety, tolerability and pharmacokinetics of SGR-1505, as well as the effect of food and drug-drug interactions.

In the healthy volunteer trial, SGR-1505 was generally well tolerated with no drug-related serious adverse events or dose limiting toxicities observed.

In the trial, we observed that SGR-1505 achieved greater than 90 percent inhibition of IL-2 secretion in an activated T cell whole blood assay at 100 mg twice a day (n=4), confirming target engagement and meeting the pharmacodynamic goals for the trial.

Inhibition of IL-2 secretion is a marker for target engagement and pathway modulation as it is tightly linked to MALT1 and the downstream NF-κB signaling.

The data supported continued evaluation of SGR-1505 in the ongoing Phase 1 clinical trial in patients with relapsed or refractory B-cell lymphomas.

In addition, the FDA recently granted orphan drug designation to SGR-1505 for the potential treatment of mantle cell lymphoma.

In July 2023, the FDA cleared our IND for our CDC7 inhibitor, which we refer to as SGR-2921.

We have initiated dosing in a Phase 1 clinical trial of SGR-2921 in patients with relapsed or refractory acute myeloid leukemia or high-risk myelodysplastic syndrome, and we anticipate reporting initial data from the trial in late 2024 or 2025.

We are also advancing SGR-3515, our novel WEE1/MYT1 inhibitor for the treatment of solid tumors.

We expect to submit an IND to the FDA for SGR-3515 in the first half of 2024, subject to favorable data from ongoing IND-enabling studies, and we plan to initiate a Phase 1 clinical trial of SGR-3515 by the end of 2024, subject to receipt of regulatory clearance.

We generated total revenue of $216.7 million, $181.0 million, and $137.9 million in 2023, 2022, and 2021, respectively, representing year-over-year growth of 20% and 31%, respectively.

Our net income for the year ended December 31, 2023 was $40.7 million and our net losses for the years ended December 31, 2022 and 2021 were $149.2 million and $101.2 million, respectively.

Our mission is to improve human health and quality of life by transforming the way therapeutics and materials are discovered.

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We are the leader in the field of physics-based computational drug discovery, and we believe our computational platform is far ahead of that of our nearest competitors.

We intend to maintain our industry-leading position by introducing new capabilities and refining our software to further strengthen our technology and advance the science underlying our platform.

We intend to maintain our industry-leading position by introducing new

capabilities and refining our software to further strengthen our technology and advance the science underlying our platform.

• Growing and expanding our software business:

We have experienced steady growth in our software revenues, achieving $159.1 million in revenue in 2023, an increase of 17% compared to 2022, primarily driven by broad adoption of our software solutions by the biopharmaceutical industry and the expansion of our materials science business.

We aim to continue to grow our software sales by increasing the adoption of our software by our existing customers and identifying and adding new customers.

Further, we believe there remains a large opportunity for growth as there are thousands of biopharmaceutical companies that could benefit from our software solutions.

▪ Progressing our wholly-owned and partnered drug discovery programs :

We plan to progress our wholly-owned drug discovery programs, including SGR-1505, SGR-2921 and SGR-3515, and continue to add new programs that leverage our computational platform.

As we progress these programs, we will strategically evaluate on a program-by-program basis advancing them into preclinical and clinical development ourselves, entering into collaborations to co-develop them with leading industry partners, or out-licensing them to maximize clinical and commercial opportunity.

As part of this strategy, we entered into an exclusive, worldwide collaboration and license agreement with BMS in November 2020, as well as collaboration agreements with Zai Lab Limited, or Zai Lab, in August 2021, with Eli Lilly and Company, or Lilly, in September 2022, and with Otsuka Pharmaceutical Co.

Ltd., or Otsuka, in December 2022.

Biopharmaceutical companies are increasingly adopting our software at a larger scale, and we anticipate that this scaling-up will drive future revenue growth.

▪ Advancing our collaborative programs:

We intend to continue to work with our collaborators on advancing our collaborative programs, which generate revenues through upfront payments, research funding, preclinical and clinical milestones as well as potentially through option fees, commercial milestones, and future royalties.

We achieved drug discovery revenue of $45.4 million in 2022, an increase of 84% compared to 2021, largely driven by the achievement of milestones from our collaborative and partnered programs.

We also benefit from equity positions in certain of our collaborators.

We intend to continue to work with our collaborators on advancing our collaborative programs through discovery research stages.

Our collaborative programs generate revenues through upfront payments, research funding, preclinical and clinical milestones as well as potentially through option fees, commercial milestones, and future royalties.

We achieved drug discovery revenue of $57.5 million in 2023, an increase of 27% compared to 2022, largely driven by the achievement of milestones from our collaborative programs.

We also benefit from our equity positions in certain of our collaborators.

For example, during the fiscal year ended December 31, 2023, we received a total of $147.2 million in cash distributions on account of our equity stake in Nimbus Therapeutics, LLC, or Nimbus, following the closing of the acquisition by Takeda Pharmaceuticals Company Limited, or Takeda, of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its tyrosine kinase 2, or TYK2, program, which included the TYK2 inhibitor, NDI-034858.

▪ Progressing our proprietary drug discovery programs :

We plan to progress the development of our proprietary drug discovery programs, including SGR-1505, SGR-2921 and SGR-3515, and continue to advance new programs where we can leverage our computational platform to identify novel molecules.

As we progress these programs, we plan to strategically evaluate on a program-by-program basis advancing them into preclinical and clinical development ourselves, entering into collaborations to co-develop them with leading industry partners, or out-licensing them to maximize clinical and commercial opportunity.

• Leveraging the synergies between our businesses:

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Industry Overview

Traditional drug discovery and development efforts have become increasingly complex, lengthy and capital-intensive, and are prone to high failure rates.

Traditional drug discovery involves experimental screening of existing libraries of molecules to find molecules with detectable activity, or “hit molecules,” followed by many iterations of chemical synthesis to attempt to optimize those hit molecules to a development candidate that can be advanced into human clinical trials.

Traditional drug discovery and development efforts are complex, lengthy and capital-intensive, and are prone to high failure rates.

Traditional drug discovery involves experimental screening of existing libraries of molecules to find molecules with detectable activity, or “hit molecules,” followed by many iterations of chemical synthesis to optimize those hit molecules to a development candidate that can be advanced into human clinical trials.

Efforts to optimize initial hit molecules for a drug discovery project involve costly and iterative synthesis and testing of molecules seeking to identify a molecule with the required property profile.

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As a result, larger pools of molecules could be analyzed allowing for more selective synthesis of molecules, leading to higher-quality molecules.

In addition, with predictive computational methods, better selections of molecules would be synthesized through exploration of larger portions of chemical space, leading to higher-quality molecules that would in turn have a higher probability of progressing through clinical development and obtaining regulatory approval for commercial sale.

In addition, with predictive computational methods, better selections of molecules would be synthesized

through exploration of larger portions of chemical space, leading to higher-quality molecules that would in turn have a higher probability of progressing through clinical development and obtaining regulatory approval for commercial sale.

There have been many attempts to improve the efficiency of the drug discovery process by using computational methods to predict properties of molecules.

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Further, to apply such methods to design molecules that will bind with high affinity to a particular protein target, the three-dimensional structure of that protein must be generated with sufficient atomic detail to enable application of these physics-based approaches, which is referred to as being “structurally enabled,” and such structures have been historically difficult to obtain and are only available today for a relatively small subset of the universe of human proteins.

factor preventing computational chemistry from realizing its promise has been limited compute speed.

Another factor preventing computational chemistry from realizing its promise has been limited compute speed.

However, despite all of these challenges, physics-based methods have a significant advantage over machine learning in that they do not require a training set and can, in principle, compute properties of molecules that are well beyond existing industry experience and data.

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We have built our platform on a foundation of rigorous, physics-based methods, combined with the rapid data processing and scaling advantages of machine learning, that together provide a significant advantage over traditional methods.

We believe that physics-based simulation is at an inflection point as a result of the increased availability of massive computing power, combined with a more sophisticated understanding of models and algorithms and the growing availability of high-resolution protein structures.

We believe that physics-based simulation has reached an inflection point as a result of the increased availability of massive computing power, combined with a more sophisticated understanding of models and algorithms and the growing availability of high-resolution protein structures.

We have demonstrated that our software platform can have a transformative impact on the drug discovery process by:

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In addition, our platform enables real-time collaboration on drug discovery projects to inform decision-making and maximize the impact of the predictive capabilities of our computational platform.

Our computational platform provides the following significant technological advantages over traditional approaches to drug discovery, all of which enable shortening timelines, decreasing costs, and increasing the probability of success of drug discovery efforts:

Our platform is able to evaluate molecules in hours rather than the weeks that it typically takes to synthesize and assay molecules in the laboratory.

Our platform can explicitly evaluate billions of molecules per day, whereas traditionally operated discovery projects only synthesize approximately one thousand molecules per year, thereby increasing the probability that we find a novel molecule with the desired property profile.

Our computational platform provides the following significant technological advantages over traditional approaches to drug discovery, which we believe enable shorter timelines, lower costs, and higher probability of success of drug discovery efforts:

Our platform is able to evaluate molecules in hours rather than the weeks it typically takes to screen, synthesize and test molecules in the laboratory.

Our platform can explicitly evaluate billions of molecules per day, whereas traditional drug discovery projects only synthesize and evaluate approximately one thousand molecules per year, thereby increasing the probability that we find a novel molecule with the desired property profile.

In a peer-reviewed study, our platform was tested against traditional methods for selecting tight-binding molecules and resulted in an eight-fold increase in the number of molecules with the desired affinity.

The figure below compares the optimization process of drug discovery using traditional methods and our approach.

Our computational platform includes a broad array of proprietary capabilities:

Our computational platform includes a broad array of capabilities:

• Faster Lead Discovery :

the ability to rapidly identify potent molecules suitable to initiate hit-to-lead and lead optimization efforts via solutions for virtual screening of extremely large libraries of molecules, as well as physics-based replacement of the central core of a molecule, known as scaffold hopping, to identify novel, highly potent molecules unavailable in library collections;

the ability to rapidly identify potent molecules suitable for hit-to-lead and lead optimization efforts by virtually screening extremely large libraries of molecules, as well as physics-based replacement of the central core of a molecule, known as scaffold hopping, to identify novel, highly potent molecules unavailable in library collections;

• Accurate Property Prediction :

the ability to assess key properties of drug-like molecules using physics-based calculations with accuracy comparable to that of experimental laboratory assays, to facilitate optimization of drug properties, including drug potency, selectivity, and bioavailability;

• Optimizing Protein Structures :

the ability to refine and optimize protein structure models to increase the number of targets amenable to structure-based drug design;

• Large-Scale Molecule Exploration :

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Our computational platform is also applicable to new problems of interest and new fields of study.

Since the underlying physics that drives a biologic to bind to its target is no different than the physics that drives a small drug molecule to bind to a protein, we have been able to successfully apply these technologies to the discovery of biologics.

Since the underlying physics that drives a biologic to bind to its target is no different than the physics that drives a small drug molecule to bind to a protein, we have been able to apply our technologies to the discovery of biologics and we continually work to increase our platform's capabilities in biologics.

Similarly, the physics underlying the properties of materials is no different than the physics underlying the properties of drug molecules.

Therefore, we have successfully applied our computational platform to materials science applications, including in the fields of aerospace, energy, semiconductors, and electronic displays.

Therefore, we have applied our computational platform to materials science applications, including in the fields of aerospace, energy, semiconductors, and electronic displays.

Software Business

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The widespread adoption of our software is supported by an approximately 240-person global team of sales, technical, and scientific personnel.

Our direct sales operations span across the United States, Europe, Japan, India, and South Korea, and we have sales distributors in other important markets, including China.

Our direct sales operations span across the United States, the European Union, United Kingdom, Japan, India, and South Korea, and we have sales distributors in other important markets, including China.

We have a diverse and large existing customer base, ranging from startup biotechnology companies to the largest global pharmaceutical companies as well as an increasing number of materials science customers.

Our ten largest software customers represented approximately 32% of our software revenue in 2022, including one customer that makes up 16% of total revenue.

Our ten largest software customers represented approximately 42% of our software revenue in 2023, including one customer that makes up 14% of total software revenue.

We continue to expand our customer base as we provide education and information to increase the awareness of the potential of our computational platform across different industries.

As of December 31, 2023, we had 1,785 active customers, which we define as the number of customers who had an ACV of at least $1,000 in a given fiscal year.

We believe there is a significant opportunity to expand the adoption of our platform within our growing customer base.

We had 222, 227, and 190 customers with an ACV of at least $100,000 for the years ended December 31, 2023, 2022, and 2021, respectively.

We believe there is a significant opportunity to expand the adoption of our platform within our customer base.

For example, in November 2023, we entered into an expanded, three-year, software agreement with Eli Lilly and Company, or Lilly.

The three-year agreement builds on the collaboration established in 2022, which is more fully described in "— Collaboration Agreements ." The agreement provides Lilly with large-scale access to our full suite of technologies to enable and accelerate all stages of drug discovery, from target enablement and assessment of target druggability to hit discovery and lead optimization activities through development candidate identification.

We provide advanced support to ensure full integration and optimization of the platform across Lilly’s research sites.

Biopharmaceutical companies are increasingly adopting our software at a larger scale, and we anticipate that this scaling-up will drive future revenue growth.

Our ability to expand within our customer base is demonstrated by the increasing number of our customers with an ACV over $100,000.

We had 227, 190, and 153 such customers for the years ended December 31, 2022, 2021, and 2020, respectively.

In addition, we had 18, 15, and 16 customers for the years ended December 31, 2022, 2021, and 2020, respectively, with an ACV of over $1.0 million.

Furthermore, we also had four customers with an ACV in excess of $5.0 million for the year ended December 31, 2022, compared to two such customers for the year ended December 31, 2021.

For the year ended December 31, 2022, our top 10 customers, measured by ACV, accounted for $46.5 million of our total ACV compared to $34.1 million for the year ended December 31, 2021.

For the year ended December 31, 2023, we had 54 customers with an ACV of at least $500,000 compared to 52 for the year ended December 31, 2022.

In addition, we had 27, 18, and 15 customers for the years ended December 31, 2023, 2022, and 2021, respectively, with an ACV of at least $1.0 million.

Furthermore, we also had four customers with an ACV of at least $5.0 million for the year ended December 31, 2023, compared to four and two such customers for the years ended December 31, 2022 and 2021, respectively.

For the year ended December 31, 2023, our top

10 customers, measured by ACV, accounted for $51.0 million of our total ACV compared to $46.5 million for the year ended December 31, 2022.

We believe biopharmaceutical companies are increasingly recognizing and appreciating the scientific and financial benefits of using our platform at scale.

Furthermore, we believe our sales and marketing approach and the quality of our software solutions help us cultivate long-standing relationships and reoccurring sales.

Furthermore, we believe our sales and marketing approach and the quality of our software solutions result in long-term relationships and high retention with our largest customers.

This is demonstrated by the length of our key relationships, with the average tenure of our 10 largest software customers in 2023 being nearly 19 years.

Furthermore, our ability to

expand our customer relationships over time is exemplified by our ability to retain our customers with an ACV over $100,000.

For the year ended December 31, 2022, our year-over-year customer retention rate for our customers with an ACV over $100,000 was 96% and was 96% or higher for each of the previous nine fiscal years.

We believe the continued expansion of our customer base coupled with our ability to expand our customers’ use of our software will continue to drive revenue growth.

The figure below shows the different ways in which we are accelerating our growth.

Furthermore, our ability to expand our customer relationships over time is exemplified by our ability to retain our customers with an ACV of at least $100,000.

For the year ended December 31, 2023, our year-over-year customer retention rate for our customers with an ACV of at least $100,000 was 92% and was 96% or higher for each of the previous nine fiscal years.

Our customer retention rate for our customers with an ACV of at least $500,000 was 98% for the year ended December 31, 2023 and 100% for the year ended December 31, 2022.

We believe our high retention rate for our customer base coupled with our ability to expand our customers’ use of our software will continue to drive revenue growth.

The figures below show the different ways in which we are accelerating our growth.

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◦ WaterMap characterizes the locations and energetics of water molecules occupying the binding site of, or solvating, a target protein.

From this analysis, one can infer the druggability of a protein, as well as uncover opportunities to significantly increase binding affinity by exploiting the water structure in the binding site.

From this analysis, one can infer the druggability of a protein,

as well as uncover opportunities to significantly increase binding affinity by exploiting the water structure in the binding site.

◦ SiteMap allows binding site identification and evaluation to help locate potential protein binding sites, including allosteric sites, and predict the approximate druggability of those sites.

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◦ Shape uses the three-dimensional structure and shape of earlier known hit molecules to find new hits when screening libraries of molecules.

◦ AutoQSAR/DeepChem uses modern machine-learning methods trained to earlier known hit molecules to find novel hits when screening libraries of molecules.

◦ Induced Fit Docking can computationally predict the binding mode of molecules to a binding site of a protein, including predicting how the conformation of the protein binding site may reorganize upon binding the molecule.

◦ DeepAutoQSAR uses modern machine-learning methods trained to earlier known hit molecules to find novel hits when screening libraries of molecules.

◦ IFD-MD can computationally predict the binding mode of molecules to a binding site of a protein, including predicting how the conformation of the protein binding site may reorganize upon binding the molecule.

• Hit to Lead and Lead Optimization:

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FEP+ can also be used to calculate the binding selectivity, solubility, and mutational resistance profiles of molecules, which are key properties for the optimization of bioavailability, toxicology, and efficacy.

◦ AutoQSAR/DeepChem uses modern machine-learning methods to produce predictive quantitative structure-activity relationship, or QSAR, models.

◦ DeepAutoQSAR uses modern machine-learning methods to produce predictive quantitative structure-activity relationship, or QSAR, models.

This allows more accurate methods, such as FEP+, to be applied at a much greater scale but with less accuracy to much larger sets of molecules than would otherwise be possible and enables predictive QSAR models of other properties to be developed and deployed on drug discovery projects.

◦ PathFinder is an enumeration tool that enables the rapid exploration of synthetically tractable ligands.

When PathFinder is deployed in conjunction with multiparameter optimization, machine learning, and FEP+ simulations, it provides a streamlined approach to create and evaluate large sets of synthetically tractable, lead-like, potent ligands.

◦ AutoDesigner is an enumeration tool that enables the rapid exploration of synthetically tractable ligands.

When AutoDesigner is deployed in conjunction with multiparameter optimization, machine learning, and FEP+ simulations, it provides a streamlined approach to create and evaluate large sets of synthetically tractable, lead-like, potent ligands.

• Software Solutions Used Throughout the Drug Discovery Process:

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We also sell software licenses to customers engaged in molecule design for industrial purposes.

The software solutions for our materials science customers leverage much of the same technology as our software for biopharmaceutical companies.

The software solutions for our materials science customers leverage much of the same technology as our software for biopharmaceutical

In addition, similar to traditional drug discovery efforts, traditional approaches to discovering new molecules in these fields also suffer from long timelines, and it can take as long as 10 to 20 years to bring new materials to the market.

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• consumer packaged goods —soft matter, formulations.

As part of our ongoing efforts to further advance our software solutions for materials science applications, in June 2020, we entered into a three-year agreement with Gates Ventures, LLC to develop and apply atomistic simulations methods to improve battery performance.

As part of our ongoing efforts to further advance our software solutions for materials science applications, in June 2020, we entered into a three-year agreement with Gates Ventures, LLC, or Gates Ventures, to develop and apply atomistic simulations methods to improve battery performance.

In August 2023, we extended the agreement with Gates Ventures for an additional three-year term at an increased scale.

Furthermore, in March 2022, we entered into a three-year collaboration with Eonix LLC, or Eonix, to accelerate the discovery and design of materials for safer, energy dense lithium ion batteries.

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The figure below illustrates the advantages in time, cost, and molecule quality of our computational drug design approach over traditional drug discovery approaches.

The figures below show the number of collaborative and partnered programs we have worked on in each given year, as well as the amount of drug discovery revenue we have generated for the years presented.

Collaborative programs on which our discovery work is completed, but for which we remain eligible for future milestones and royalties are not included in the figures below.

As of December 31, 2022, we also had an aggregate of 15 collaborative and partnered programs for which we are eligible to receive future royalties on sales, if any, compared to 13 programs as of December 31, 2021.

While our revenue-generating collaborations are an important component of our business, our strategy is also to invest in wholly-owned drug discovery programs.

We evaluate these programs individually to determine the advisability of entering into preclinical and clinical development ourselves, entering into collaboration, or out-licensing programs to optimize their development and clinical and commercial potential.

As part of this strategy, we have entered into collaboration agreements with BMS, Zai Lab Limited, and Lilly, which are more fully described in "—Our Proprietary Drug Discovery Programs."

Our drug discovery revenue consists of revenue generated from collaborations through the combination of upfront payments, research funding payments, discovery and development milestones, and other fees, as well as any revenue generated from our pipeline of proprietary drug discovery programs.

Our collaborative programs generate drug discovery revenue, including upfront payments, research funding payments, and discovery and development milestones, and have the potential to produce additional milestone payments, option fees, and future royalties.

As of December 31, 2023, we had 19 active collaborative drug discovery programs.

We define an active collaborative drug discovery program as a program that we are actively progressing for, or together with, a collaborator of ours, or a program that our collaborator is progressing and which we are eligible to receive milestone payments, option fees, and/or future royalties.

Furthermore, as of December 31, 2023, we had an aggregate of 12 collaborative programs for which we were eligible to receive future royalties on commercial sales, if any, of collaborative programs that receive marketing approval compared to 15 programs as of December 31, 2022.

We track the aggregate number of collaborators which we have collaborated with, or partnered with, for drug discovery and development since 2018, and as of December 31, 2023, we have had 17 collaborators.

The number of

collaborators is a cumulative number and we only include those collaborations from which we have derived revenue since the fiscal year ended December 31, 2018.

While our drug discovery revenue-generating collaborations are an important component of our business, our strategy is also to invest in our proprietary drug discovery programs including SGR-1505, SGR-2921 and SGR-3515, which we describe in more detail below under "—Our Proprietary Drug Discovery Business." We evaluate our proprietary drug discovery programs individually to determine the advisability of entering into preclinical and clinical development ourselves to co-develop them with leading industry partners, entering into collaborations, or out-licensing programs to optimize their development and clinical and commercial potential.

We intend to pursue additional proprietary drug discovery programs as existing programs advance through discovery and into development stages, internally or with partners, and we will continue evaluating new collaborative programs that fit our selection criteria and where the collaborator’s particular expertise, resources or intellectual property has the potential to create substantial value.

Our Drug Discovery Collaborations

Over the last decade, leveraging our platform and expertise, we have steadily grown our portfolio of collaborative programs.

These programs have provided us with significant income and have the potential to produce additional milestone payments, option fees, and royalties in the future.

These programs pursue the discovery and development of clinical candidates across a wide range of therapeutic target protein classes and indications.

Over the last decade, leveraging our platform and expertise, we have steadily developed a portfolio of collaborative programs.

We have entered into a number of collaborations with leading biopharmaceutical companies under which our collaborators are pursuing research in a number of therapeutics areas, including without limitation, various programs in oncology, antifungal diseases, fibrosis, inflammatory bowel disease, metabolic disease, autoimmune disease, immuno-oncology, cardiopulmonary disease and tuberculosis.

Many of these programs are pursuing novel molecules for targets where a low-dose small molecule inhibitor or activator with optimal drug-like properties has been difficult to achieve or where selectivity for the target of interest has been difficult to achieve relative to other proteins.

We have steadily grown our pipeline of collaborative programs by selectively entering into drug discovery collaborations with leading drug development and commercialization companies.

We have developed our pipeline of collaborative programs by selectively entering into drug discovery collaborations with leading biopharmaceutical companies.

Among the factors that we use to embark on collaborations are whether the targets are well-validated, have high therapeutic potential, and are amenable to the strengths of our computational platform, and whether or not the collaborator brings complementary capabilities, all of which we believe contribute to an increased probability of success.

Certain of these programs have provided us with significant income and have the potential to produce additional milestone payments, option fees, and royalties in the future.

Through access to the maximum potential scale of our computational platform and our drug discovery and software development teams, our collaborators receive the following key benefits:

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Collaboration Agreements

We have entered into a number of collaborations with biopharmaceutical companies under which our collaborators are pursuing research in a number of therapeutics areas, including without limitation, various programs in oncology, antifungal diseases, fibrosis, inflammatory bowel disease, metabolic disease, autoimmune disease, immuno-oncology, cardiopulmonary disease and tuberculosis.

Our current collaborators include, but are not limited to, Ajax Therapeutics, Inc., Bright Angel Therapeutics Inc., Morphic Holding, Inc., or Morphic, Nimbus Therapeutics, LLC, or Nimbus, Otsuka Pharmaceutical Co., Ltd., or Otsuka, Petra Pharma Corporation, Sanofi S.A., and Structure Therapeutics Inc.

(formerly ShouTi, Inc.).

Our current collaborators include, but are not limited to, Ajax Therapeutics, Inc., BMS, Bright Angel Therapeutics Inc., Eli Lilly and Company, or Lilly, Morphic Holding, Inc., or Morphic, Otsuka Pharmaceutical Co., Ltd., or Otsuka, Sanofi S.A., Structure Therapeutics Inc.

(formerly ShouTi, Inc.), and Takeda.

Our opportunity to receive potential revenues from any of the programs under these collaborations is generally limited to research funding payments, development, regulatory, and commercial milestones, and royalties on commercial sales, if any.

With the exception of our collaboration agreements with Takeda, BMS, Otsuka, and Lilly, which are described below, our collaborative agreements typically have the following characteristics:

Control/Ownership.

All of the programs being pursued under these collaborations are fully owned and controlled by each respective collaborator.

Our opportunity to receive potential revenues from any of these programs is generally limited to research funding payments, development, regulatory, and commercial milestones, and royalties on commercial sales, if any.

We are not responsible for advancing their preclinical or clinical development or their commercialization, if approved.

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We have received equity consideration in certain of our collaborators, and from time to time, we have also made additional equity investments in certain of these collaborators.

As noted above, all of these programs are fully owned and controlled by each respective collaborator, with the exception of Faxian Therapeutics, LLC, which is a

50/50 joint venture.

The following table presents our equity stakes on an issued and outstanding basis (unless otherwise noted) as of December 31, 2022:

Unless otherwise noted, the following table presents our equity stakes on an issued and outstanding basis as of December 31, 2023:

Company Ownership %

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Faxian Therapeutics, LLC (JV) (2)

Lakshmi, LLC (3)

Morphic Holding, Inc.

Nimbus Therapeutics, LLC (5)

Ravenna Pharmaceuticals, Inc.

Structure Therapeutics Inc.

(1) Represents our equity in the entity, which entity holds the rights to any future payments received in connection with Gilead Sciences, Inc.’s acquisition of Nimbus’ ACC inhibitor program.

(2) Based on the number of shares of common stock outstanding as of February 21, 2023, as reported on Morphic’s Annual Report on Form 10-K for the annual period ended December 31, 2022, as filed with the SEC on February 23, 2023.

(1) Represents our equity in the entity, which entity holds the rights to any future payments received in connection with Gilead Sciences, Inc.’s acquisition of Nimbus’ ACC inhibitor program, on a fully diluted basis.

(2) Represents a 50/50 joint venture.

(3) Represents our equity in the entity, which entity holds the rights to any future payments received in connection with Takeda's acquisition of Nimbus' TYK-2 inhibitor program, on a fully diluted basis.

(4) Based on the number of shares of common stock outstanding as of February 20, 2024, as reported on Morphic’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 22, 2024.

(5) On a fully diluted basis

(4) Based on the number of ordinary shares outstanding as of December 31, 2022, as reported on Structure Therapeutics Inc.'s prospectus, as filed with the SEC on February 6, 2023.

(6) Based on the number of ordinary shares outstanding as of October 31, 2023, as reported on Structure Therapeutics Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, as filed with the SEC on November 17, 2023.

From time to time, we may also receive distributions on account of our equity stakes in our collaborators.

For example, in February 2023, Nimbus announced the closing of the acquisition by Takeda Pharmaceuticals Company Limited, or Takeda, of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its tyrosine kinase 2, or TYK2, program, which includes the TYK2 inhibitor, NDI-034858, which is being evaluated for the treatment of multiple immune-mediated diseases following positive results from the Phase 2b clinical trial in psoriasis.

Following the closing of the acquisition, in February 2023, we received a cash distribution in the amount of $111.3 million from Nimbus, and we expect to receive a second cash distribution in the amount of $36.0 million from Nimbus in the second quarter of 2023, for a total cash distribution of $147.3 million.

For example, in February 2023, Nimbus announced the closing of the acquisition by Takeda of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its TYK2 program, which includes the TYK2 inhibitor, NDI-034858, which is being evaluated for the treatment of multiple immune-mediated diseases following positive results from the Phase 2b clinical trial in psoriasis.

On February 13, 2023, April 6, 2023, and November 9, 2023, we received cash distributions of $111.3 million, $35.8 million, and $0.1 million, respectively, related to the Takeda acquisition.

Financial Rights.

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Under certain of our collaboration agreements, we are also eligible to receive a percentage of our collaborators’ sublicense revenue.

Many of our collaborative programs are currently still in the discovery stages.

Many of our collaborative programs are currently still in the discovery and preclinical development stages.

Generally, the size of the payments we are eligible to receive from a collaborative program increases as the program advances.

As a result of the broader validation of our platform, we intend to pursue an increasing number of wholly-owned drug discovery programs, and we will continue evaluating new collaborative programs that fit our selection criteria and where the collaborator’s particular expertise, resources or intellectual property has the potential to create substantial value.

Importantly, our current collaboration agreements typically also contemplate additional program targets being added, allowing our collaborators to potentially increase the number of programs under our current collaboration agreements, subject to our pre-existing exclusivity obligations and interests.

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The collaborator retains the intellectual property related to any molecules developed under the collaboration.

Generally, our collaborators are not contractually required to provide us with, nor do we expect generally to receive, access to nonpublic information regarding key developments related to the advancement of these collaboration programs, such as clinical trial results, including safety and efficacy data, regulatory communications, or commercialization plans and

To the extent we do receive such information, our collaboration agreements generally require us to maintain the confidentiality of information we receive under the collaboration.

In December 2022, we entered into a multi-part agreement with Otsuka, together with Otsuka’s subsidiary Astex Pharmaceuticals, which includes a collaboration for the discovery and development of a program focused on an emerging central nervous system, or CNS, disease target.

Under the collaboration, we are responsible for drug design through lead optimization and Otsuka will be responsible for all other drug discovery and clinical development activities.

We received an upfront payment and will be eligible to receive discovery, development and regulatory milestones, as well as tiered royalties on net sales of any products emerging from the drug discovery collaboration in all markets.

Our Proprietary Drug Discovery Programs

In 2018, we began to develop a pipeline of wholly-owned drug discovery programs with the goal of using our platform to produce a portfolio of novel, high value therapeutics.

Our initial programs were focused on discovering and developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.

Since then, we have expanded into other therapeutic areas, including in the areas of immunology and neurology.

The FDA cleared our IND for SGR-1505 in June 2022.

In addition, we continue to advance other wholly-owned programs through IND-enabling studies.

We expect to submit an IND application to the FDA for SGR-2921 in the first half of 2023 and for SGR-3515 in 2024, subject to favorable data from IND-enabling studies.

In addition, we plan to initiate a Phase 1 clinical trial of SGR-2921 in the second half of 2023, subject to receipt of regulatory clearance.

Our strategy is to pursue an increasing number of wholly-owned programs and strategically evaluate on a program-by-program basis advancing them into preclinical and clinical development ourselves, entering into collaborations to co-develop them with leading industry partners, or out-licensing them to maximize their clinical and commercial opportunities.

As part of this strategy, in November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas.

The initial collaboration targets included HIF-2 alpha and SOS1/KRAS, which were two of our wholly-owned programs.

In addition to the collaborations described above, we also have collaboration agreements with Takeda, BMS, Otsuka, and Lilly which are described below:

We are advancing a program in collaboration with Takeda focusing on an oncology target.

Under this collaboration, we conducted certain drug discovery research and pharmacology activities through the lead optimization stage, at which point Takeda exercised its option to obtain exclusive rights to such program, subject to continued collaboration towards a development candidate.

In November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS pursuant to which we and BMS agreed to collaborate in the discovery, research and development of small molecule compounds for biological targets in the oncology, neurology and immunology therapeutic areas.

After mutual agreement on the targets(s) of interest, the Schrödinger therapeutics group is responsible for the discovery of development candidates.

The initial collaboration targets under our agreement with BMS included HIF-2 alpha and SOS1/KRAS, which were two of our proprietary programs.

In November 2021, we and BMS mutually agreed to replace the HIF-2 alpha target with another precision oncology target.

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In December 2022, we and BMS entered into an amendment to the agreement to include an additional target in neurology on terms similar to the original agreement.

Under the terms of the agreement, as amended, we received a $55.0 million upfront payment from BMS in November 2020 and an additional upfront payment in December 2022, and we are eligible to receive up to $2.7 billion in total milestones from BMS across all potential targets, as well as a tiered percentage royalty on net sales of each product commercialized by BMS ranging from mid-single digits to low-double digits, subject to certain specified reductions.

We recently announced we are expecting the first program from this collaboration to advance to development candidate status.

Following finalization of this advancement, we expect to recognize a drug discovery milestone associated with advancement of the program, which is projected in the first quarter of 2023.

In September 2023, BMS elected not to proceed with further development of two related oncology programs and all rights to these programs reverted to us, which increased revenue recognition due to the accelerated completion of our obligations related to those programs.

Under the terms of the agreement, as amended, we received a $55.0 million upfront payment from BMS in November 2020 and an additional upfront payment in December 2022.

We are eligible to receive up to $1.5 billion in total milestones from BMS across the targets currently subject to the collaboration, of which we have received $25.0 million as of December 31, 2023, upon selection of a development candidate for the SOS1 program for the treatment of KRAS mutant tumors.

BMS is now solely responsible for the further preclinical and clinical development, manufacturing and commercialization of such candidate at its own expense.

We are also eligible to receive a tiered royalty on net sales of each product commercialized by BMS under the agreement ranging from mid-single digits to low-double digits, subject to certain specified reductions.

See “—Collaboration Agreement with Bristol-Myers Squibb Company” for additional information relating to this agreement.

In August 2021, we entered into a global discovery, development and commercialization collaboration with Zai Lab Limited focused on a novel program in oncology targeting DNA damage response.

Under the terms of the agreement, we received an upfront payment, and if we elect to co-fund clinical development of a product candidate under the collaboration, we will be entitled to receive 50% of any profits from the commercialization of an approved therapeutic in the United States.

We are also eligible to receive up to approximately $338.0 million in preclinical, clinical, regulatory and sales-based milestone payments from Zai Lab Limited for any product candidate developed under the collaboration, and we are entitled to receive tiered royalties on net sales outside the United States.

In September 2022, we entered into a collaboration with Lilly, under which we are responsible for the discovery and optimization of small molecule compounds addressing a specific target.

Under our collaboration with BMS, BMS is advancing a SOS1 protein-protein interaction inhibitor for the treatment of KRAS-driven cancers that we discovered.

SOS1, or Son of sevenless-1, is involved in the activation and regulation of KRAS.

Oncogenic mutant KRAS stimulates the growth of some of the most intractable tumors, such as lung, pancreatic, and colon cancer.

Inhibition of SOS1 is considered a potential therapeutic strategy for the treatment of KRAS-driven cancers.

In September 2022, we entered into a collaboration with Lilly, under which we are responsible for the discovery and optimization of small molecule compounds addressing an immunology target.

Lilly will be responsible for the completion of preclinical development, clinical development and commercialization.

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We are also eligible to receive low single- to low double-digit royalties on net sales of any products emerging from the collaboration in all markets.

In addition to the above, we are also advancing a program in collaboration with Takeda focusing on an oncology target.

Under this collaboration, we conduct all drug discovery research and pharmacology activities through the development candidate stage, and Takeda has the option to acquire the program at either the lead optimization stage or development candidate stage and to develop and commercialize such product candidate from the program.

We control the drug discovery process and retain all intellectual property rights to any product candidate that is discovered under the program until Takeda exercises its option to acquire the program.

Under the collaboration, we are responsible for drug design through lead optimization and Otsuka will be responsible for all other drug discovery and clinical development activities.

Our Proprietary Drug Discovery Programs

In 2018, we began to develop a pipeline of proprietary drug discovery programs with the goal of using our platform to produce a portfolio of novel, high value therapeutics.

Our initial programs were focused on discovering and developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.

Since then, we have expanded into other therapeutic areas, including immunology and neurology.

Our strategy is to pursue a number of proprietary programs and strategically evaluate on a program-by-program basis advancing them into preclinical and clinical

development ourselves, entering into collaborations to co-develop them with leading industry partners, or out-licensing them to maximize their clinical and commercial opportunities.

The following is a summary of our proprietary drug discovery programs:

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Using this comprehensive analysis, we have identified a large number of protein targets that we believe are amenable to our technology.

We continue to evaluate a number of additional targets using this analysis methodology.

We continue to evaluate a number of additional targets using this analysis.

Our MALT1 Inhibitor

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MALT1 is a key mediator of the NF-κB signaling pathway, the main driver of a subset of B-cell lymphomas, and functions by forming a complex with CARMA1 (Caspase recruitment domain-containing protein 11 also known as CARD-containing MAGUK protein 1) and BCL10 (B-cell lymphoma/leukemia 10) to mediate antigen receptor-induced lymphocyte activation.

MALT1 is considered a potential therapeutic target for several subtypes of non-Hodgkin’s lymphomas.

MALT1 is considered a potential therapeutic target for several subtypes of lymphomas and leukemias.

Activated B-cell, or ABC, a subtype of diffuse large B-cell lymphoma, or ABC-DLBCL, is the most common type of aggressive non-Hodgkin’s B-cell lymphoma.

ABC-DLBCL is associated with a number of mutations that trigger a constitutively active NF-κB signaling pathway, which often is mediated by increased MALT1 protease activity.

Among these mutations is a gain of function mutation or amplification of MALT1, which has also been identified in ABC-DLBCL patients.

Our program utilized our physics-based software platform to enable the identification and advancement of multiple novel series of MALT1 inhibitors from hit finding to lead optimization.

these mutations is a gain of function mutation or amplification of MALT1, which has also been identified in ABC-DLBCL patients.

We utilized our physics-based computational platform to enable the identification and advancement of multiple novel series of MALT1 inhibitors from hit finding to lead optimization.

Combining multi-parameter optimization, FEP+, and machine learning, we were able to prioritize tight-binding compounds with drug-like properties, and identified multiple novel and distinct chemical series which showed strong anti-tumor activity, ultimately enabling us to select SGR-1505 as our development candidate in under two years.

As shown in the figures below, in preclinical studies, SGR-1505 showed anti-tumor activity in a MALT1 enzymatic assay and strong anti-proliferative effect in cell viability in a Bruton's tyrosine kinase, or BTK, inhibitor resistant OCI-LY3 B-cell non-Hodgkin’s lymphoma cell line, when compared to ibrutinib, a covalent BTK inhibitor.

Preclinical Development of SGR-1505

As shown in the figures below, in preclinical studies, SGR-1505 showed anti-tumor activity in a MALT1 enzymatic assay and strong anti-proliferative effect on cell viability in a Bruton's tyrosine kinase, or BTK, inhibitor resistant OCI-LY3 B-cell non-Hodgkin’s lymphoma cell line, when compared to ibrutinib, a covalent BTK inhibitor.

As shown in the figures below, in preclinical studies, SGR-1505 also demonstrated strong anti-tumor activities as a single agent in BTK inhibitor resistant OCI-LY3 cells and in BTK sensitive OCI-LY10 B-cell non-Hodgkin’s lymphoma in vivo cell-line derived xenograft (CDX) models.

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SEM = scanning electron microscopy, a method used to measure cell volume

In addition, as shown in the figures below, SGR-1505 demonstrated strong anti-tumor activities in combination with ibrutinib in the BTK inhibitor sensitive in viv o models, such as the ABC-DLBCL patient-derived xenograft (PDX) model LY2298 and the OCI-LY10 CDX model.

In addition, as shown in the figures below, SGR-1505 demonstrated strong anti-tumor activity in combination with ibrutinib in BTK inhibitor sensitive in viv o models, such as the ABC-DLBCL patient-derived xenograft (PDX) model LY2298 and the OCI-LY10 CDX model.

Beyond ABC-DLBCL disease models, as shown in the figures below, SGR-1505 also demonstrated single agent anti-tumor activity in an in vivo mantle cell lymphoma REC-1 CDX model.

SGR-1505 also showed strong combination effects with venetoclax (an inhibitor of the anti-apoptotic protein B-cell lymphoma 2 (BCL2)) on inhibition of cancer cell viability in the OCI-LY10 CDX model.

SGR-1505 also

showed strong combination effects with venetoclax (an inhibitor of the anti-apoptotic protein B-cell lymphoma 2 (BCL2)) on inhibition of cancer cell viability in the OCI-LY10 CDX model.

QD = once per day dosing;

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These data suggest that targeting MALT1 with SGR-1505 may expand therapeutic options for patients with selected B-cell lymphomas, such as ABC-DLBCL, with the possibility of expanding into other B-cell lymphomas such as mantle cell lymphoma.

Furthermore, SGR-1505 demonstrated potential in combination with BTK inhibitors to overcome drug-induced resistance to BTK inhibitors in patients with relapsed/refractory B-cell lymphomas.

The FDA cleared the IND for SGR-1505 in June 2022.

Our Phase 1 clinical trial of SGR-1505 is designed as an open-label, multi-center dose escalation clinical trial in patients with relapsed or refractory B-cell lymphomas.

We anticipate enrolling up to 52 patients with confirmed mature B-cell malignancies who are 18 years or older and have a life expectancy of equal to or greater than 12 weeks.

In addition, SGR-1505 demonstrated potential in combination with BTK inhibitors to overcome drug-induced resistance to BTK inhibitors in samples derived from patients with relapsed/refractory B-cell lymphomas.

In addition, in a series of biochemical and cell-based assays, we compared the potency of SGR-1505 against JNJ-6633, a MALT1 inhibitor advanced into Phase 1 clinical development by Johnson & Johnson, as measured by IC 50 and IC 90 values, which are measures of the potency of a compound in inhibiting specific biological functions.

As shown in the graphic below, SGR-1505 demonstrated better potency in all assays tested.

All competitor data is internally generated by contract research organizations, using commercially available tools or synthesized by third-party research chemists using publicly available structure information.

Clinical Development of SGR-1505

Phase 1 Clinical Trial of SGR-1505 in Patients with Relapsed or Refractory B-cell Lymphomas

The FDA cleared our IND for SGR-1505 in June 2022.

We have initiated dosing in a Phase 1 clinical trial of SGR-1505, which is designed as an open-label, multi-center dose escalation clinical trial in patients with relapsed or refractory B-cell lymphomas.

We anticipate enrolling up to 52 patients in the United States and Europe with confirmed mature B-cell lymphomas who are 18 years or older and have a life expectancy of equal to or greater than 12 weeks.

SGR-1505 will be administered orally.

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Exploratory cohorts will evaluate additional pharmacokinetics, pharmacodynamics, preliminary anti-tumor activity and safety to establish the recommended dose, and a sub-study will also evaluate the effect of food and drug-drug interactions.

We recently initiated a Phase 1 clinical trial of SGR-1505 and we currently have clinical trial sites open for screening and enrollment, but we have not yet dosed any patients with SGR-1505.

As of February 14, 2024, all patients dosed in our Phase 1 clinical trial of SGR-1505 remained on study drug, and based on the adverse events reported to date, the safety and

tolerability profile of SGR-1505 in patients appears to be consistent with the safety and tolerability profile observed in our Phase 1 clinical trial of SGR-1505 in healthy volunteers.

We anticipate reporting initial data from the trial in late 2024 or 2025.

The FDA recently granted orphan drug designation to SGR-1505 for the potential treatment of mantle cell lymphoma.

Phase 1 Clinical Trial of SGR-1505 in Healthy Volunteers

We also have recently completed a Phase 1 clinical trial of SGR-1505 in 73 healthy volunteers to gather additional data, including data relating to the safety, tolerability, pharmacokinetics of SGR-1505, as well as the effect of food and drug-drug interactions.

SGR-1505 was generally well tolerated with no drug-related serious adverse events or dose limiting toxicities observed.

Adverse events were primarily Grade 1 and not treatment related.

Bilirubin elevations occurred in 27% of healthy volunteers but were not deemed to be clinically relevant.

These elevations were primarily Grade 1 and none were Grade 3 or 4.

All bilirubin elevations reversed upon discontinuation of SGR-1505.

As shown in the figure below, we observed greater than 90 percent inhibition of IL-2 secretion in an activated T cell whole blood assay in the cohort of healthy volunteers who received doses of SGR-1505 at 100 mg twice a day for 10 days (n=4), confirming target engagement and meeting the pharmacodynamic goals for the study.

Inhibition of IL-2 secretion is a marker for target engagement and pathway modulation as it is tightly linked to MALT1 and the downstream NF-κB signaling.

QD = once a day dosing, Q12H = twice a day dosing

The data from the healthy volunteer trial support continued evaluation of SGR-1505 in our ongoing Phase 1 clinical trial in patients with relapsed or refractory B-cell lymphomas.

Our CDC7 Inhibitor

We are advancing SGR-2921, our novel CDC7 inhibitor, for the treatment of advanced solid and liquid tumors.

We are advancing SGR-2921, our novel CDC7 inhibitor, for the treatment of relapsed or refractory acute myeloid leukemia or high risk myelodysplastic syndrome.

CDC7 is a serine/threonine protein kinase that has been shown to play important roles in DNA replication initiation and in response to replication stress and DNA damage.

CDC7 levels are high in certain tumors, and are thought to be linked to these cancer cells’ proliferative capacity and ability to bypass normal DNA damage responses.

CDC7 levels are high in certain tumors, including acute myeloid leukemia, or AML, and are thought to be linked to these cancer cells’ proliferative capacity and ability to bypass normal DNA damage responses.

CDC7 phosphorylates and activates the enzymes responsible for DNA replication initiation and proteins involved in replication stress response.

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The antiproliferative potential of CDC7 inhibition was validated by a third party in Phase 1 clinical trials of a CDC7 inhibitor in which responses were observed in patients, including those with duodenal, esophageal and cervical cancer.

Prior to this positive result, existing CDC7 inhibitors were not sufficiently tight-binding, lacked selectivity, and demonstrated poor pharmacokinetic properties.

Prior to this positive result, existing CDC7 inhibitors were not sufficiently tight-binding (as measured by their affinity for the target), lacked selectivity, and demonstrated poor pharmacokinetic properties.

In order to maximize the anti-cancer activities of CDC7 inhibitors, very tight-binding inhibitors are required to achieve durable clinical impact as monotherapy or in the context of clinical combinations.

Using our computational platform, we identified multiple tight-binding, selective, and novel CDC7 inhibitor series, and selected SGR-2921 as our development candidate.

As shown in Tables 1 and 2 below, SGR-2921 demonstrated inhibition of recombinant human CDC7 in a biochemical kinase assay and in a biophysical assay, as measured by the average IC 50 value, which is a measure of the

potency of a compound in inhibiting specific biological functions.

Preclinical Development of SGR-2921

Table 1 also shows that SGR-2921 demonstrated strong binding affinity to CDC7 with an average equilibrium dissociation constant, or KD, which is a measure of binding affinity between a protein and a binding partner, in the picomolar range.

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Cell viability

Furthermore, as shown in the figures below, SGR-2921 showed tumor growth inhibition resulting in tumor regression in the COLO205 colorectal cancer CDX model, which is a colorectal cancer cell line derived xenograft model, at doses that did not result in significant body weight loss.

As shown in the figures below, SGR-2921 showed tumor growth inhibition resulting in tumor regression in the COLO205 colorectal cancer CDX model, which is a colorectal cancer cell line derived xenograft model, at doses that did not result in significant body weight loss.

SGR-2921 also showed a dose-dependent increase in plasma drug concentration and a dose-dependent decrease in intratumoral pMCM2 in the COLO205 CDX model.

In mouse models of acute myeloid leukemia, SGR-2921 also showed strong anti-tumor activity at doses that were tolerated.

We expect to submit an IND application to the FDA for SGR-2921 in the first half of 2023 and plan to initiate a Phase 1 clinical trial of SGR-2921 in the second half of 2023, subject to receipt of regulatory clearance.

Our WEE1 Inhibitor

We are advancing SGR-3515, our novel WEE1 inhibitor for the treatment of gynecological cancers and other solid tumors.

In mouse models of AML, SGR-2921 also showed strong anti-tumor activity at doses that were tolerated.

SGR-2921 also showed strong anti-proliferative activity in leukemia cell samples derived from AML patients that varied with respect to mutational status of driver mutations in key genes that are hallmarks of clinical AML, including TP53, FLT3, IDH, or NPM, as well as whether the patient samples were derived from a patient naive to treatment or were relapsed or refractory following previous AML treatments.

We observed that the cell samples were generally sensitive to SGR-2921, as measured by their IC 50 values, and we observed that patient samples which contained TP53, or p53, mutations demonstrated particular sensitivity to SGR-2921.

SGR-2921 showed potent anti-proliferative activity in AML patient-derived samples ex vivo independently of driver mutations, including in p53 mutated AML

Furthermore, as shown in the figures below, in preclinical models SGR-2921 showed single-agent activity and activity in combination with decitabine, which is a type of chemotherapy medication used for the treatment of myelodysplastic syndromes, in standard-of-care resistant models representing difficult-to-treat disease.

SGR-2921 combination treatment with decitabine in patient derived AML samples resulted in synergistic activity ex vivo, particularly in p53 mutant models

ZIP, or zero interaction potency, synergy score is a model used to capture the drug interaction relationships by comparing the change in the potency of the dose-response curves between individual drugs and their combinations

Clinical Development of SGR-2921

The FDA cleared our IND for SGR-2921 in July 2023.

We have initiated dosing in our Phase 1 clinical trial of SGR-2921, which is designed as an open-label, multi-center dose escalation clinical trial in patients with relapsed or refractory acute myeloid leukemia or high-risk myelodysplastic syndrome.

We anticipate enrolling up to 144 patients in the United States and Europe with a confirmed diagnosis of refractory acute myeloid leukemia or high-risk myelodysplastic syndrome who are 18 years or older and have a life expectancy equal to or greater than 8 weeks.

SGR-2921 will be administered orally.

To evaluate the effect of CYP3A4 inhibition on SGR-2921 exposure, patients will be enrolled into one of two staggered, parallel study treatment arms.

Treatment Arm A will evaluate increasing dose levels of SGR-2921.

Treatment Arm B will evaluate increasing dose levels of SGR-2921 with the concomitant administration of azole antifungals that are strong CYP3A4 inhibitors.

Safety and tolerability must be demonstrated in treatment Arm A, at the first two dose levels before initiating treatment Arm B.

Patients will be treated at increasing doses of SGR-2921 until all dose levels have been investigated or any dose level is found to exceed the maximum tolerated dose.

A recommended phase 2 dose will be selected from one of the tolerable dose levels which will not exceed the maximum tolerated dose.

The trial is designed to evaluate the safety and tolerability of SGR-2921 as a monotherapy and to identify the recommended phase 2 dose, including the maximum

tolerated dose.

Secondary and exploratory objectives of the trial include evaluating the pharmacokinetics and pharmacodynamics of SGR-2921 and investigating preliminary anti-tumor activity.

We anticipate reporting initial data from the Phase 1 clinical trial of SGR-2921 in late 2024 or 2025.

Our WEE1/MYT1 Inhibitor

We are advancing SGR-3515, our novel WEE1/MYT1 inhibitor for the treatment of solid tumors.

WEE1 is a gatekeeper checkpoint kinase that prevents cellular progression through the cell cycle allowing time for DNA repair before cell division takes place.

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A third party WEE1 inhibitor is currently being studied in combinations with chemotherapy, PARP inhibitors, and immunotherapy.

We identified a number of tight-binding, selective WEE1 inhibitor series using our computational platform and we have recently selected SGR-3515 as our development candidate.

MYT1 inhibition is a potential cancer therapy as inhibition of MYT1 forces cells into premature unchecked mitosis resulting in cell death.

The biological functions of WEE1 and MYT1 are independent, yet partially overlapping.

Emerging data suggests that MYT1 has a synthetic lethal relationship with WEE1 and high MYT1 protein levels are associated with resistance to WEE1 inhibitors.

Concurrent loss of function of WEE1 and MYT1 confers selective vulnerability in cancer cells and could offer increased anti-tumor activity.

We identified a number of tight-binding, selective WEE1/MYT1 inhibitor series using our computational platform and ultimately selected SGR-3515 as our development candidate.

We believe SGR-3515's physicochemical properties make it well suited for combinations with DNA damage response inhibitors such as PARP and ATR inhibitors and other targeted therapies for the treatment of ovarian, colorectal, breast, and other solid tumors.

Prior third party WEE1 inhibitors may have off-target effects resulting from inhibition of other kinases and proteins, some of which are liver enzymes responsible for elimination of drug and drug metabolites from the body,

potentially making dosing and combinations more challenging.

As shown in the figure below, we have benchmarked SGR-3515 against AZD1775, a WEE1 inhibitor from AstraZeneca, and Zn-C3, a WEE1 inhibitor being advanced by Zentalis Pharmaceuticals, and SGR-3515 demonstrated an improved kinase selectivity profile and we believe has lower potential for drug-drug interaction, or DDI, liabilities associated with liver enzyme inactivation.

As shown in the figure below, SGR-3515 also showed better potency against WEE1 in cells measured by target engagement marker pCDC2 Y15.

The selectivity of SGR-3515 was evaluated by profiling it at 1 uM across a panel of over 400 kinases.

SGR-3515 demonstrated a more desirable selectivity profile compared to Zn-C3 and AZD1775.

SGR-3515 has also shown comparable or better effects on the viability of various tumor cells including the A427 non-small cell lung cancer cell line and the OVCAR3 high grade serous ovarian cancer cell line compared to Zn-C3 and ADZ1775.

SGR-3515 demonstrated robust and sustainable anti-tumor activity in vivo in A427 and OVCAR3 tumor models.

These effects and anti-tumor activity are shown in the figure below with SGR-3515 demonstrating lower IC 50 values in these models as compared to Zn-C3 and AZD1775.

Existing third party WEE1 inhibitors may have off-target effects resulting from inhibition of other kinases and proteins, some of which are liver enzymes responsible for elimination of drug and drug metabolites from the body, potentially making dosing and combinations more challenging.

As shown in the table below, we have benchmarked SGR-3515 against AZD1775, a WEE1 inhibitor from AstraZeneca, and ZN-c3, a WEE1 inhibitor being advanced by Zentalis Pharmaceuticals, Inc., or Zentalis, and SGR-3515 demonstrated an improved selectivity profile.

We believe SGR-3515 has lower potential for drug-drug interaction, or DDI, liabilities associated with liver enzyme inactivation.

SGR-3515 has also shown comparable or better effects on the viability of tumor cells in the A427 non-small cell lung cancer cell line compared to AZD1775 and ZN-c3 in our preclinical studies.

SGR-3515 also demonstrated robust and sustainable anti-tumor activity in vivo in A427 and OVCAR3 tumor models.

As shown in the table below, SGR-3515 also showed better potency against WEE1 and MYT1 in cells measured by binding affinity and SGR-3515 demonstrated lower IC 50 values in the A427 non-small cell lung cancer model as compared to AZD1775 and ZN-c3.

We plan to submit an IND application to the FDA for SGR-3515 in 2024, subject to favorable data from IND-enabling studies.

SOS1/KRAS Inhibitor Program

In collaboration with BMS, we are developing a SOS1/KRAS protein-protein interaction inhibitor for the treatment of KRAS-driven cancers.

SOS1, or Son of sevenless-1, is involved in the activation and regulation of KRAS.

Oncogenic mutant KRAS stimulates the growth of some of the most intractable tumors, such as lung, pancreatic, and colon cancer.

Strategies to disrupt the persistently active Ras pathway have focused on targeting Cys12 of the oncogenic mutant KRAS G12C with covalent inhibitors.

Disruption of the SOS1/KRAS interaction has emerged as an alternative approach based on third party preclinical data.

Pursuant to our collaboration and license agreement with BMS, once we have discovered or identified a SOS1/KRAS protein-protein interaction inhibitor that meets specified, mutually agreed criteria (or upon BMS's selection), BMS will be solely responsible for the further preclinical and clinical development, manufacturing and commercialization of such candidate at its own expense.

See “—Collaboration Agreement with Bristol-Myers Squibb Company” for additional information relating to this agreement.

LRRK2 Inhibitor Program

We are developing a LRRK2 inhibitor for the treatment of Parkinson’s disease.

As shown in the figure below, in the A427 non-small cell lung cancer model, SGR-3515 maintained anti-tumor activity in an intermittent 3 days of dosing in a 2-week cycle (3 days on/11 days off) as compared to the anti-tumor activity observed with continuous daily dosing.

Furthermore, when SGR-3515 was dosed intermittently, we observed recovery of red blood cell counts.

n=6 per group

We plan to submit an IND application to the FDA for SGR-3515 in the first half of 2024, subject to favorable data from IND-enabling studies, and we plan to initiate a Phase 1 clinical trial of SGR-3515 by the end of 2024, subject to receipt of regulatory clearance.

Discovery Programs

We are also progressing a number of other programs in the areas of oncology, immunology, and neurology and a number of undisclosed programs in multiple therapeutic areas.

All of these programs are currently in the discovery stage, and we have not yet identified a development candidate for any of these programs.

Our goal is to continue to advance these discovery-stage programs to enable at least one IND submission to the FDA in 2025.

Our most advanced discovery-stage programs are identified below.

PRMT5-MTA inhibition has demonstrated clinical responses in both hematologic and solid tumors with improved safety versus PRMT5 inhibitors due to a synthetic lethal targeting of cancer cells with MTAP-deletions.

We have identified selective, potent PRMT5-MTA inhibitors with potential applications in solid tumors, brain metastases and primary CNS tumors.

EGFR inhibitors are first-line standard of care agents for advanced non-small cell lung cancer patients with activating EGFR mutations.

We have identified multiple EGFR C797S inhibitors with potential to treat patients whose disease progressed following first-line treatment, potentially achieving deeper, more durable responses through new combination regimens.

NLRP3 is a validated target, and mutations in the NLRP3 gene are associated with a broad spectrum of inflammatory and auto-immune diseases.

We have identified structurally distinct, selective, NLRP3 inhibitors with anti-inflammatory activity in preclinical models, and we are continuing to optimize peripheral and brain-penetrant lead molecules.

LRRK2, a genetically validated target, is a large multifunctional kinase enzyme and mutations in the LRRK2 gene have been shown to be associated with the development of Parkinson’s disease.

In 2022, we generated cryo-electron microscopy structures of LRRK2, which have helped us to accelerate the identification of novel LRRK2 inhibitors.

We expect to select a development candidate for this program in 2024.

Other and Future Programs

We have identified a large number of protein targets that we believe are amenable to our computational platform, and now have a significant inventory of targets that we can potentially advance into discovery programs.

The Schrödinger therapeutics group also intends to pursue targets with strong biological validation and therapeutic potential that currently lack protein structures of sufficient quality to permit the use of our computational platform for drug discovery.

We are actively pursuing strategic alliances with collaborators, as well as progressing internal initiatives, that enable us to generate high-quality protein structures for these targets, which will enable us to initiate discovery efforts.

For example, as part of these efforts, in 2020 we entered into strategic partnerships with Viva Biotech to access new x-ray crystal structures as well as with Thermo Fisher Scientific to obtain structures of protein complexes leveraging cryo-EM technology.

Furthermore, in January 2022, we acquired XTAL BioStructures, Inc., a company that provides structural biology services, including biophysical methods, protein production and purification, and X-ray crystallography, which we believe will augment our ability to produce high quality target structures for our drug discovery programs.

Our initial programs are focused on discovering and developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.

For example, as part of these efforts, in January 2022, we acquired XTAL BioStructures, Inc., a company that provides structural biology services, including biophysical methods, protein production and purification, and X-ray crystallography, which have augmented our ability to produce high quality target structures for our proprietary drug discovery programs.

Our initial programs were focused on discovering and developing inhibitors for targets in DNA damage response pathways and genetically defined cancers.

Genomic instability of malignant cells leads to genetic mutations that can drive resistance to kinase inhibitors, creating the need for second and third generation drugs targeting the same disease.

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We believe that deploying our platform at scale with access to genomic profiling data for patients puts us in a strong position to predict the impact of active-site resistance mutations with clinically relevant accuracy to optimize the design of molecules that are robust against common resistant mutations.

In addition to our programs highlighted above, we are also progressing a number of undisclosed programs in the areas of oncology, immunology, and neurology.

We are pursuing certain of these programs on our own and certain of these programs are partnered with others pursuant to our collaboration agreements described above.

All of these programs are currently in the discovery stage, and we have not yet identified a development candidate for any of these programs.

Technical Details of Our Key Technologies

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Enumeration of extremely large libraries of molecules

We have developed methods to enumerate extremely large libraries of molecules with our PathFinder software solution, thereby allowing our software customers, our drug discovery collaborators, and the Schrödinger Therapeutics Group to explore a much larger portion of chemical space than is possible through manual design.

The chemical enumeration technology we have developed incorporates the most commonly used chemical reactions and can, in a fully automated fashion, computationally explore billions of alterations of a molecule of interest.

We have developed methods to enumerate extremely large libraries of molecules of interest with our AutoDesigner software solution, thereby allowing our software customers, our drug discovery collaborators, and the Schrödinger therapeutics group to explore a much larger portion of project-relevant chemical space than is possible through manual design.

Scaling accurate physics-based calculations to extremely large libraries of molecules

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Advances in deep learning, a type of machine learning, in the past several years have required very large data sets as input to train the model.

In a drug discovery program, the experimental data is typically sparse and expensive to procure, which is particularly problematic given that relevant drug-like chemical space is effectively infinitely large, estimated to be 10^60 molecules.

For this reason, we believe that it would be extremely difficult to realize competitive advantage in a drug discovery program by using a platform exclusively based on machine learning or deep learning.

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FEP+ calculations are much more accurate than either conventional machine learning or modern machine learning when scoring molecules structurally distinct from the training set data.

In addition, by integrating FEP+ with our machine learning implementation, which we refer to as AutoQSAR/DeepChem, we developed a solution that we refer to as Active Learning FEP+.

In addition, by integrating FEP+ with our machine learning implementation, which we refer to as DeepAutoQSAR, we developed a solution that we refer to as Active Learning FEP+.

Active Learning FEP+ combines the accuracy of free energy calculations with the speed of machine learning calculations and can be used to explore up to billions of molecules within a day.

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In our hit-finding campaigns, we and our software customers typically utilize:

• modern machine learning models trained to the two-dimensional structures of known active molecules using our software solution, AutoQSAR/DeepChem;

• modern machine learning models trained to the two-dimensional structures of known active molecules using our software solution, DeepAutoQSAR;

• shape-based methods trained to the known or computationally deduced three-dimensional bioactive conformations of known active molecules using our software solution, Shape;

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• free energy calculations using our software solution FEP+, which provides a fully dynamic atomistic representation of the target protein receptor.

These four approaches are complementary to each other, and their integrated use has led to successful hit-finding campaigns for dozens of protein targets in our collaborative and proprietary drug discovery programs.

There are also numerous reports in the literature and in patents of our software customers utilizing some combination of these approaches to identify hit molecules.

AutoQSAR/DeepChem is trained to find known active molecules in a search through a molecule library and operates solely on the two-dimensional structure of the molecule.

From this training process, AutoQSAR/DeepChem learns to identify substructures in the molecules that may lead to activity.

Then when applied to large libraries of molecules, these methods can identify molecules with measurable activity against the target protein.

These methods are highly efficient and can be used to screen billions of molecules in less than one day.

However, one significant limitation is that machine learning methods cannot extrapolate into chemical space that differs from the training set and therefore, this method tends to identify molecules similar to already known molecules.

Shape is used to identify molecules with a similar shape to known active molecules.

It has been shown that molecules with similar three-dimensional shapes can have similar activities.

While the hit rates and computational efficiencies of Shape and AutoQSAR/DeepChem are generally comparable, the hit molecules returned by these techniques tend to be distinct and complementary rather than redundant.

This allows results from Shape to augment the AutoQSAR/DeepChem results while still being efficient for screening a large library.

Glide and WScore use knowledge of three-dimensional structure of the binding site of the protein of interest, rather than the structure of active molecules, to evaluate the likelihood that a small molecule will bind to a protein target.

Glide and WScore evaluate molecules based on the number and kind of contacts made between the molecule and protein.

These methods are much more computationally expensive than AutoQSAR/DeepChem or Shape.

However, they can be more readily applied to targets for which there is little or no earlier reported active molecules.

The fourth computational method we routinely use to identify hit molecules to initiate drug discovery programs is the FEP+ solution described above.

When used in this context, FEP+ can be used to completely replace the core moiety of an earlier known molecule to yield a novel molecule with similar binding potency.

This approach is much more computationally intensive than previous methods, but is also much more accurate.

Utilizing this approach on multiple programs, we have been able to identify novel nanomolar or picomolar inhibitors in the first few months of project chemistry that have property profiles typical of molecules only observed in the later hit-to-lead phases of drug discovery.

Our FEP+ solution also supports the calculation of absolute binding affinities, which enables the software to evaluate and triage diverse molecules sharing no common peripheral features in a hit discovery context.

Computational analysis of the energetic properties of water molecules occupying molecule binding sites in proteins

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Our software solutions face competition from competitors in the business of selling or providing simulation and modeling software to biopharmaceutical companies.

These competitors include BIOVIA, a brand of Dassault Systèmes SE, or BIOVIA, Chemical Computing Group (US) Inc., Cresset Biomolecular Discovery Limited, Cadence Design Systems, Inc., Optibrium Limited, Cyrus Biotechnology, Inc., Molsoft LLC, Insilico Medicine, Inc., Iktos, XtalPi Inc., and Simulations Plus, Inc.

We also have competitors in materials science, such as BIOVIA and Materials Design, Inc., and in enterprise software for the life sciences, such as BIOVIA, Certara USA, Inc., ChemAxon, PerkinElmer, Inc., and Dotmatics, Inc.

We also have competitors in materials science, such as BIOVIA and Materials Design, Inc., and in enterprise software for the life sciences, such as BIOVIA, Certara USA, Inc., Chemaxon, Revvity, Inc.

and Dotmatics, Inc.

In some cases, these competitors are well-established providers of these solutions and have long-standing relationships with many of our current and potential customers, including large biopharmaceutical companies.

In addition, there are academic consortia that develop physics-based simulation programs for life sciences and materials applications.

In life sciences, the most prominent academic simulation packages include AMBER, CHARMm, GROMACS, GROMOS, OpenMM, and OpenFF.

In the life sciences industry, the most prominent academic simulation packages include AMBER, CHARMm, GROMACS, GROMOS, OpenMM, and OpenFF.

These packages are primarily maintained and developed by graduate students and post-doctoral researchers, often without the intent of commercialization.

We also face competition from solutions that biopharmaceutical companies develop internally, smaller companies that offer products and services directed at more specific markets than we target, enabling these competitors to focus a greater proportion of their efforts and resources on these markets, as well as a large number of companies that have been founded with the goal of applying machine learning technologies to drug discovery.

In addition, we are facing increasing competition from companies utilizing AI and other computational approaches for drug discovery.

Some of these competitors are involved in drug discovery themselves and/or with partners, and others develop software or other tools utilizing AI which can be used, directly or indirectly, in drug discovery.

Drug Discovery Business

The biopharmaceutical industry is characterized by rapidly advancing technologies, intense competition, and strong emphasis on proprietary and novel products and product candidates.

While we believe that our computational platform, technology, knowledge, experience, and scientific resources provide us with competitive advantages, our drug discovery business faces potential competition from many sources, including major pharmaceutical, specialty biopharmaceutical companies, technology companies, academic institutions and government agencies, and public and

private research institutions.

While we believe that our computational platform, technology, knowledge, experience, and scientific resources provide us with competitive advantages, our drug discovery business faces potential competition from many sources, including major pharmaceutical companies, specialty biopharmaceutical companies, technology companies, academic institutions and government agencies, and public and private research institutions.

Any product candidates that we or one of our collaborators successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

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We also face competition in finding and establishing clinical trial sites, enrolling subjects for clinical trials, accessing combination studies and recruiting credible principal investigators and advisors from key clinical disciplines and academic centers.

For example, with respect to our MALT1 inhibitor, SGR-1505, which we are advancing for the treatment of patients with relapsed or refractory B-cell lymphomas, we are aware of several MALT1 inhibitors in clinical development, including by Janssen Research and Development, LLC, a Johnson & Johnson company, AbbVie Inc., Ono Pharmaceutical Co., Ltd.

and Zentalis Pharmaceuticals.

In addition, we are also aware of other therapeutics, both approved and in clinical development, for the treatment of B-cell lymphomas.

For example, with respect to our MALT1 inhibitor, SGR-1505, which we are advancing for the treatment of patients with relapsed or refractory B-cell lymphomas, we are aware of several MALT1 inhibitors in clinical development, including by AbbVie Inc., Ono Pharmaceutical Co., Ltd., HotSpot Therapeutics, and Exelixis, Inc.

In addition, we are also aware of other therapeutics, such as bi-specifics and CAR-Ts, both approved and in clinical development, for the treatment of B-cell lymphomas.

With respect to our CDC7 inhibitor, SGR-2921, which we are advancing for the treatment of relapsed or refractory acute myeloid leukemia or high-risk myelodysplastic syndrome, we are aware of several CDC7 inhibitors in Phase 1 clinical development, including by Chia Tai Tianqing Pharmaceutical Group Co., Ltd., Lin BioScience, Inc., and Cancer Research UK.

With respect to our WEE1/MYT1 inhibitor, SGR-3515, which we are advancing for the treatment of solid tumors, we are aware of several WEE1 inhibitors in clinical development, including by Zentalis, Debiopharm International SA, IMPACT Therapeutics, Inc., Shouyao Holdings Co.

Ltd., BioCity Biopharma, and Aprea Therapeutics, Inc., as well as a MYT1 inhibitor in clinical development being advanced by Repare Therapeutics Inc..

Furthermore, we are also aware of a WEE1/MYT1 inhibitor in preclinical development being advanced by Acrivon Therapeutics, Inc.

Large pharmaceutical and biotechnology companies, in particular, have extensive experience in building and accessing networks of expert investigators, designing and conducting clinical trials, obtaining regulatory approvals, and manufacturing and commercializing biotechnology products.

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In November 2020, we entered into an exclusive, worldwide collaboration and license agreement with BMS, pursuant to which we and BMS agreed to collaborate in the discovery, research and preclinical development of small molecule compounds (other than protein-degrader compounds) for biological targets in the oncology, neurology and immunology therapeutic areas.

Under the agreement, during a limited research term, we will be responsible, at our own cost and expense, for the discovery of small molecule compounds (other than protein-degrader compounds) directed to five specified biological targets pursuant to a mutually agreed research plan for each such target.

Under the agreement, during a limited research term, we were initially responsible, at our own cost and expense, for the discovery of small molecule compounds (other than protein-degrader compounds) directed to five specified biological targets pursuant to a mutually agreed research plan for each such target.

The initial collaboration targets included HIF-2 alpha and SOS1/KRAS, which were two of our early-stage programs.

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In December 2022, we and BMS entered into an amendment to the agreement to include an additional target in neurology on terms similar to the original agreement.

Once we have discovered or identified a compound for a target that meets specified, mutually-agreed criteria or upon BMS selection of a compound as a development candidate, BMS will be solely responsible for the further preclinical and clinical development, manufacturing and commercialization of such candidate at its own cost and expense.

research term will end on the earlier of four years or until we have delivered a candidate for each specified target.

The research term will end on the earlier of four years or until we have delivered a candidate for each specified target.

We may elect to extend the research term for a limited period of time to deliver a candidate for a given target.

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Under the terms of the agreement, BMS paid us an initial upfront fee payment of $55.0 million, and we received an additional upfront fee payment in connection with the amendment in December 2022.

We are also entitled to receive up to $2.7 billion in total milestones across all potential targets.

Such milestones consist of up to $585.0 million in total milestones per oncology target, including $360.0 million in the aggregate for certain specified research, development and regulatory milestones and $225.0 million in the aggregate for certain specified commercial milestones, as well as up to $489.0 million in total milestones per neurology and immunology target, including $264.0 million in the aggregate for certain specified research, development and regulatory milestones and $225.0 million in the aggregate for certain specified commercial milestones.

With respect to the additional neurology target we and BMS added pursuant to the December 2022 amendment, we are entitled to similar research, development, and regulatory milestones and commercial milestones for such target as under the original agreement.

We are also entitled to receive up to $1.5 billion in total milestone payments across the potential targets currently subject to the collaboration.

including $264.0 million in the aggregate for certain specified research, development and regulatory milestones and $225.0 million in the aggregate for certain specified commercial milestones.

As of December 31, 2023, we received a milestone payment of $25.0 million from BMS upon selection of a development candidate for the SOS1 program for the treatment of KRAS mutant tumors.

BMS is now solely responsible for the further preclinical and clinical development, manufacturing and commercialization of such candidate at its own expense.

We are also entitled to a tiered percentage royalty on annual global net sales of licensed products ranging from mid-single digits to low-double digits, subject to certain specified reductions.

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The Columbia License Agreements establish our rights and obligations with respect to certain patents, software code, technology, and improvements thereto that we license from Columbia University and that are used in, and integrated into, our software solutions, and our physics-based computational platform.

Our rights and obligations under, and the terms and conditions of, the Columbia License Agreements that we consider material to the operation of our business are described more fully below.

Our rights and obligations under, and the terms and

conditions of, the Columbia License Agreements that we consider material to the operation of our business are described more fully below.

On November 1, 2008, we entered into an amendment, or the Royalty Amendment, to certain Columbia License Agreements, including each of the agreements described below.

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The 1994 Columbia Agreement and the licenses granted thereunder may be terminated by us or Columbia University only upon the other party’s material breach of the agreement and such party’s failure to cure such breach.

termination, any third party that has licensed the Licensed PS-GVB Software from us will retain the right to use such software, and we will have the perpetual right to continue to provide support to any such third parties in connection with their use of such software.

Upon termination, any third party that has licensed the Licensed PS-GVB Software from us will retain the right to use such software, and we will have the perpetual right to continue to provide support to any such third parties in connection with their use of such software.

Fast Multipole RESPA License Agreement

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The 1998 Columbia Agreement grants us a worldwide, non-exclusive, license to the Fast Multipole RESPA code developed at Columbia University, or the RESPA Code, which was incorporated into the IMPACT software program used in our Glide ligand-protein docking program, PrimeX protein modelling program, QSite QM/MM program, and Combglide automated library generation program, and all improvements to the IMPACT software program, including any new versions and new releases thereof, that are developed by Columbia University, or the IMPACT Improvements, in each case, to reproduce, use, execute, copy, compile, operate, sublicense, and distribute in connection with the marketing and sale of our products and services, to develop improvements thereto, and to conduct research and backup disaster recovery.

We may sublicense the RESPA Code and the IMPACT Improvements, or the Licensed IMPACT Software, to the extent it is incorporated into a product that is sold directly by us or that is distributed on our behalf.

We may sublicense the RESPA Code

and the IMPACT Improvements, or the Licensed IMPACT Software, to the extent it is incorporated into a product that is sold directly by us or that is distributed on our behalf.

Under the 1998 Columbia Agreement, Columbia University retains the right to conduct, and to permit other academic and non-profit research institutions to conduct, research using the Licensed IMPACT Software.

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The technology licensed under the 2003 Columbia Agreement is incorporated into our Prime and PrimeX protein modelling programs and our Membrane Permeability model, which we market and distribute as part of our physics-based computational platform.

The 2003 Columbia Agreement grants us a worldwide, exclusive license to the protein local optimization program software code, or the PLOP Code, developed at Columbia University and the University of California and all software code comprising improvements to the PLOP Code that are developed by Columbia University or the University of California, or the PLOP Improvements, in each case, to reproduce, use, execute, copy, compile, operate, sublicense, and distribute in connection with the marketing and sale of our products and services, to develop improvements thereto, and to conduct research and backup disaster recovery.

that are developed by Columbia University or the University of California, or the PLOP Improvements, in each case, to reproduce, use, execute, copy, compile, operate, sublicense, and distribute in connection with the marketing and sale of our products and services, to develop improvements thereto, and to conduct research and backup disaster recovery.

Pursuant to an interinstitutional agreement between Columbia University and the University of California, the University of California granted Columbia University the sole right to license the PLOP Code and PLOP Improvements and has agreed not to license the PLOP Code or PLOP Improvements to any third party for as long as the interinstitutional agreement remains in effect.

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In addition, we have agreed to pay royalties to Columbia University in low-single digit to low-double digit percentages based upon the contribution of Columbia University generated code to the applicable product, software program, or code on our, and our affiliates’, gross revenues from the sale, licensing, leasing, or renting any commercial product, software program, or code incorporating the PLOP Code or any PLOP Improvements, excluding any sales to Columbia University or the University of California and revenues generated under services agreements.

Our obligation to pay any royalty under the 2003 Columbia Agreement, including any royalty paid pursuant to the Royalty Amendment, will terminate on June 19, 2023.

Our obligation to pay any royalty under the 2003 Columbia Agreement, including any royalty paid pursuant to the Royalty Amendment, expired pursuant to its terms on June 19, 2023.

Columbia University is responsible for the copyright registration of the PLOP Code and PLOP Improvements.

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Our Water Site Products include our WaterMap Core program, which we market and distribute as part of our physics-based computational platform.

We are restricted from

distributing the Water Site Software source code without the prior written consent of Columbia University.

We are restricted from distributing the Water Site Software source code without the prior written consent of Columbia University.

Under the 2008 Columbia Agreement, Columbia University retains the right to use, and to permit other entities and individuals to use, the Water Site Software and Water Site Patents for academic and non-commercial educational purposes in the field of computational chemistry software and related services.

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We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient proprietary protection from competitors.

We also cannot ensure that patents will issue with respect to any patent applications that we or our licensors may file in the future, nor can we ensure that any of our owned or licensed patents or future patents will be commercially useful in protecting our software, technology, computational platform, and any product candidates we develop.

useful in protecting our software, technology, computational platform, and any product candidates we develop.

In addition, the coverage claimed in a patent application may be significantly reduced before a patent is issued, and its scope can be reinterpreted and even challenged after issuance.

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The patent portfolio for our software business includes at least 12 published patent families.

As of February 6, 2023, we owned or held exclusive license rights to approximately 37 patents and patent applications, including at least 12 issued or allowed U.S.

As of January 31, 2024, we owned or held exclusive license rights to approximately 40 patents and patent applications, including at least 14 issued or allowed U.S.

cases, five pending U.S.

non-provisional patent applications, 15 issued or allowed non-U.S.

cases, including six granted European patents which have been validated among multiple individual European Patent Convention nations and five non-European patents, and nine pending foreign patent applications relating to our computational platform.

cases, including seven granted European patents which have been validated among multiple individual European Patent Convention nations and eight non-European patents, and six pending foreign patent applications relating to our computational platform.

While we believe that the specific and generic claims contained in our wholly-owned and licensed pending U.S.

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Any patents that are issued or that may issue from these families are expected to expire between 2026 and 2038, absent any adjustments or extensions.

As of February 6, 2023, there were seven published patent families related to our proprietary drug discovery business, and several of our drug discovery collaborators have filed patent applications related to our collaborations that include employees of ours as inventors, including over 100 compound patents and patent applications since 2010.

As of January 31, 2024, there were approximately 10 published patent families related to our proprietary drug discovery business, and several of our drug discovery collaborators have filed patent applications related to our collaborations that include employees of ours as inventors, including over 100 compound patents and patent applications since 2010.

We do not own any intellectual property rights related to these inventions.

As of February 6, 2023, there are seven pending wholly-owned provisional applications, six pending international patent applications, three pending U.S.

non-provisional patent applications, and 27 pending non-U.S.

patent applications related to our proprietary drug discovery business.

Prosecution is a lengthy process, during which the scope of the claims initially submitted for examination by the U.S.

As of January 31, 2024, we wholly-owned approximately 12 pending U.S.

patent applications, including U.S.

provisional and U.S.

non-provisional patent applications, and approximately 75 pending non-U.S.

patent applications, including international patent applications filed under the Patent Cooperation Treaty, related to our proprietary drug discovery business.

Patent prosecution is a lengthy process, during which the scope of the claims initially submitted for examination by the U.S.

Patent and Trademark Office may be significantly narrowed before issuance, if issued at all.

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We also intend to seek patent term extensions in any jurisdictions where available, however, there is no guarantee that the applicable authorities, including the FDA, will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such extensions.

In addition to patent protection, as of February 6, 2023, we had approximately 53 copyright registrations covering our proprietary software code, and we rely upon unpatented trade secrets and confidential know-how and continuing technological innovation to develop and maintain our competitive position.

In addition to patent protection, as of January 31, 2024, we had approximately 64 copyright registrations covering our proprietary software code, and we rely upon unpatented trade secrets and confidential know-how and continuing technological innovation to develop and maintain our competitive position.

However, trade secrets and confidential know-how are difficult to protect.

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Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain or use information that we regard as proprietary.

Although we take steps to protect our proprietary information, third parties may independently develop the same or similar proprietary information or may otherwise gain access to our proprietary information.

Although we take

steps to protect our proprietary information, third parties may independently develop the same or similar proprietary information or may otherwise gain access to our proprietary information.

As a result, we may be unable to meaningfully protect our trade secrets and proprietary information.

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Drug Discovery Business

We have not established a commercial organization or developed distribution capabilities given the current stage of development of our wholly-owned drug discovery programs.

We have not established a commercial organization or developed distribution capabilities given the current stage of development of our proprietary drug discovery programs.

We plan to enter into agreements with biopharmaceutical companies that contribute to our ability to efficiently advance development candidates that we discover internally using our computational platform through to commercialization.

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A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND.

An IND is an exemption from the FDCA that allows an unapproved product candidate to be shipped in interstate commerce for use in an investigational clinical trial and a request for FDA authorization to administer such investigational product to humans.

product to humans.

Such authorization must be secured prior to interstate shipment and administration of any product candidate that is not the subject of an approved NDA.

In addition to reviewing an IND to assure the safety and rights of patients, the FDA also focuses on the quality of the investigation and whether it will be adequate to permit an evaluation of the drug’s safety and efficacy.

In support of a request for an IND, sponsors must submit a protocol for each clinical trial, and any subsequent protocol amendments must be submitted to the FDA as part of the IND.

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Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical hold on that trial.

Clinical holds are imposed by the FDA whenever there is concern for patient safety and may be a result of new data, findings, or developments in clinical, nonclinical, and/or chemistry, manufacturing, and controls, or CMC.

A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation.

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No more than 30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of the basis for the hold.

Following issuance of a clinical hold or partial clinical hold, a clinical trial may only resume after the FDA has so notified the sponsor.

Following issuance of a clinical hold or partial clinical hold, a clinical trial may only resume after the FDA has so notified the sponsor of its decision to lift the hold.

The FDA will base that determination on information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the clinical trial can proceed.

A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND.

When a foreign clinical study is conducted under an IND, all FDA IND requirements must be met unless waived.

When a foreign clinical study is not conducted under an IND, the sponsor must ensure that such studies are conducted in accordance with GCP, including review and approval by an independent ethics committee, or IEC, and informed consent from subjects, if the data from such a foreign study is to be used in support of a marketing application.

In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually.

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Expanded access, sometimes called “compassionate use,” is the use of investigational new products outside of clinical trials to treat patients with serious or immediately life-threatening diseases or conditions when there are no comparable or satisfactory alternative treatment options.

The rules and regulations related to expanded access are intended

to improve access to investigational products for patients who may benefit from investigational therapies.

The rules and regulations related to expanded access are intended to improve access to investigational products for patients who may benefit from investigational therapies.

FDA regulations allow access to investigational products under an IND by the company or the treating physician for treatment purposes on a case-by-case basis for:

individual patients (single-patient IND applications for treatment in emergency settings and non-emergency settings);

individual patients (single-patient INDs for treatment in emergency settings and non-emergency settings);

intermediate-size patient populations;

and larger populations for use of the investigational product under a treatment protocol or Treatment IND Application.

When considering an IND application for expanded access to an investigational product with the purpose of treating a patient or a group of patients, the sponsor and treating physicians or investigators will determine suitability when all of the following criteria apply:

When considering an IND for expanded access to an investigational product with the purpose of treating a patient or a group of patients, the sponsor and treating physicians or investigators will determine suitability when all of the following criteria apply:

patient(s) have a serious or immediately life-threatening disease or condition, and there is no comparable or satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition;

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or 15 days after the investigational product receives designation from the FDA as a breakthrough therapy, fast track product, or regenerative medicine advanced therapy.

In addition, on May 30, 2018, the Right to Try Act was signed into law.

The law, among other things, provides a federal framework for certain patients to access certain investigational products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval.

Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program.

There is no obligation for a manufacturer to make its investigational products available to eligible patients as a result of the Right to Try Act.

Human Clinical Trials in Support of an NDA

Clinical trials involve the administration of the investigational product candidate to human subjects under the supervision of a qualified investigator in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial.

Clinical trials are conducted under written clinical trial protocols detailing, among other things, the objectives of the study, inclusion and exclusion criteria, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated.

Clinical trials are conducted under written clinical trial protocols detailing, among other things, the objectives of the trial, inclusion and exclusion criteria, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated.

A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND.

Human clinical trials are typically conducted in three sequential phases, but the phases may overlap or be combined.

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In addition to these requirements, the legislation directs the FDA to issue new guidance on diversity action plans.

In January 2024, the FDA issued draft guidance setting out its policies for the collection of race and ethnicity data in clinical trials.

In June 2023, the FDA issued draft guidance with updated recommendations for GCPs aimed at modernizing the design and conduct of clinical trials.

The updates are intended to help pave the way for more efficient clinical trials to facilitate the development of medical products.

The draft guidance is adopted from the International Council for Harmonisation’s recently updated E6(R3) draft guideline that was developed to enable the incorporation of rapidly developing technological and methodological innovations into the clinical trial enterprise.

In addition, the FDA issued draft guidance outlining recommendations for the implementation of decentralized clinical trials.

In some cases, the FDA may approve an NDA for a product candidate but require the sponsor to conduct additional clinical trials to further assess the product candidate’s safety and effectiveness after approval.

Such post-approval trials are typically referred to as Phase 4 clinical trials.

Such post-approval trials are typically referred to as post-marketing clinical trials.

These studies are used to gain additional experience from the treatment of a larger number of patients in the intended treatment group and to further document a clinical benefit in the case of drugs approved under accelerated approval regulations.

Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials could result in withdrawal of approval for products.

If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any post-marketing clinical trial requirement or to request a change in the product labeling.

Failure to exhibit due diligence with regard to conducting post-marketing clinical trials could result in withdrawal of approval for products.

In March 2022, the FDA released a final guidance entitled “Expansion Cohorts:

, the first-in-human clinical trial) to compress the traditional three phases of trials into one continuous trial called an expansion cohort trial.

Information to support the design of individual expansion cohorts are included in INDs and assessed by FDA.

Expansion cohort trials can potentially bring efficiency to product development and reduce developmental costs and time.

Clinical Studies Outside the United States in Support of FDA Approval

In connection with our clinical development program, we are and may in the future conduct trials at sites outside the United States.

When a foreign clinical study is conducted under an IND, all IND requirements must be met unless waived.

When a foreign clinical study is not conducted under an IND, the sponsor must ensure that the study complies with certain regulatory requirements of the FDA in order to use the study as support for an IND or application for marketing approval.

Specifically, the studies must be conducted in accordance with GCP, including undergoing review and receiving approval by an independent ethics committee, and seeking and receiving informed consent from subjects.

GCP requirements encompass both ethical and data integrity standards for clinical studies.

The FDA’s regulations are intended to help ensure the protection of human subjects enrolled in non-IND foreign clinical studies, as well as the quality and integrity of the resulting data.

They further help ensure that non-IND foreign studies are conducted in a manner comparable to that required for IND studies.

The acceptance by the FDA of study data from clinical trials conducted outside the United States in support of US approval may be subject to certain conditions or may not be accepted at all.

In cases where data from foreign clinical trials are intended to serve as the sole basis for marketing approval in the U.S., the FDA will generally not approve the application on the basis of foreign data alone unless (i) the data are applicable to the U.S.

population and U.S.

medical practice;

(ii) the trials were performed by clinical investigators of recognized competence and pursuant to cGCP regulations;

and (iii) the data may be considered valid without the need for an on-site inspection by the FDA, or if the FDA considers such inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means.

In addition, even where the foreign study data are not intended to serve as the sole basis for approval, the FDA will not accept the data as support for an application for marketing approval unless the study is well-designed and well-conducted in accordance with GCP requirements and the FDA is able to validate the data from the study through an onsite

inspection if deemed necessary.

Many foreign regulatory authorities have similar approval requirements.

In addition, such foreign trials are subject to the applicable local laws of the foreign jurisdictions where the trials are conducted.

Interactions with FDA during the Clinical Development Program

Following the clearance of an IND and the commencement of clinical trials, the sponsor will continue to have interactions with the FDA.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur.

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The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical data submitted.

In March 2022, the FDA released a final guidance entitled “Expansion Cohorts:

Use in First-In-Human Clinical Trials to Expedite Development of Oncology Drugs and Biologics,” which outlines how sponsors can utilize an adaptive trial design in the early stages of oncology product development (i.e., the first-in-human clinical trial) to compress the traditional three phases of trials into one continuous trial called an expansion cohort trial.

Information to support the design of individual expansion cohorts are included in IND applications and assessed by FDA.

Expansion cohort trials can potentially bring efficiency to product development and reduce developmental costs and time.

In addition, sponsors are given opportunities to meet with the FDA at certain points in the clinical development program.

Specifically, sponsors may meet with the FDA prior to the submission of an IND, or pre-IND application meeting, at the end of a Phase 2 clinical trial, or EOP2 meeting, and before an NDA is submitted, or pre-NDA meeting.

Meetings at other times may also be requested.

There are five types of meetings that occur between sponsors and the FDA.

Type A meetings are those that are necessary for an otherwise stalled product development program to proceed or to address an important safety issue.

Type B meetings include pre-IND application and pre-NDA meetings, as well as Type B end of phase meetings, such as EOP2 meetings.

A Type C meeting is any meeting other than a Type A or Type B meeting regarding the development and review of a product.

Finally, a type D meeting is focused on a narrow set of issues (should be limited to no more than two focused topics) and should not require input from more than three disciplines or divisions.

Finally, INTERACT meetings are intended for novel products and development programs that present unique challenges in the early development of an investigational product.

These meetings provide an opportunity for the sponsor to share information about the data gathered to date with the FDA and for the FDA to provide advice on the next phase of development.

For example, at an EOP2 meeting, a sponsor may discuss its Phase 2 clinical results and present its plans for the pivotal Phase 3 clinical trial(s) that it believes will support the approval of the new product.

Such meetings may be conducted in person, via teleconference/videoconference or written response only with minutes reflecting the questions that the sponsor posed to the FDA and the FDA’s responses.

The FDA has indicated that its responses, as conveyed in meeting minutes and advice letters, only constitute mere recommendations and/or advice made to a sponsor and, as such, sponsors are not bound by such recommendations and/or advice.

Nonetheless, from a practical perspective, a sponsor’s failure to follow the FDA’s recommendations for design of a clinical program may put the program at significant risk of failure.In September 2023, the FDA issued draft guidance outlining the terms of such meetings in more detail.

Reporting Clinical Trial Results

Sponsors of clinical trials are required to register and disclose certain clinical trial information on a public registry (clinicaltrials.gov) maintained by the U.S.

National Institutes of Health.

National Institutes of Health, or NIH.

In particular, information related to the product, patient population, phase of investigation, study sites and investigators and other aspects of the clinical trial is made public as part of the registration of the clinical trial.

The failure to submit clinical trial information to clinicaltrials.gov, as required, is a prohibited act under the FDCA with violations subject to potential civil monetary penalties of up to $10,000 for each day the violation continues.

Although the FDA has historically not enforced these reporting requirements due to HHS’s long delay in issuing final implementing regulations, those regulations have now been issued and the FDA has issued several Notices of Noncompliance to manufacturers since April 2021.

Concurrent with clinical trials, companies often complete additional animal studies.

Although the FDA has historically not enforced these reporting requirements due to HHS’s long delay in issuing final implementing regulations, the FDA has issued several pre-notices for voluntary corrective action and several notices of noncompliance to manufacturers during the past two years.

While these notices of non-compliance did not result in civil monetary penalties, the failure to submit clinical trial information to clinicaltrials.gov, as required, is a prohibited act under the FDCA with violations subject to potential civil monetary penalties of up to $10,000 for each day the violation continues.

In addition to civil monetary penalties, violations may also result in other regulatory action, such as injunction and/or criminal prosecution or disqualification from federal grants.

Manufacturing and Compliance with cGMP Requirements

Concurrent with clinical trials, companies often complete additional preclinical studies.

They must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements.

The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, must develop methods for testing the identity, strength, quality, purity, and potency of the final drug.

Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

Additionally, appropriate packaging

must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

The FDA’s regulations require that pharmaceutical products be manufactured in approved facilities and in accordance with cGMPs.

The cGMP regulations include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports and returned or salvaged products.

Manufacturers and other entities involved in the manufacture and distribution of approved pharmaceuticals are subject to periodic unannounced inspections by the FDA for compliance with cGMPs and other requirements.

The PREVENT Pandemics Act, which was enacted in December 2022, clarifies that foreign drug manufacturing establishments are subject to registration and listing requirements even if a drug or biologic undergoes further manufacture, preparation, propagation, compounding, or processing at a separate establishment outside the United States prior to being imported or offered for import into the United States.

Manufacturers and others involved in the manufacture and distribution of products must also register their establishments with the FDA and certain state agencies.

Both domestic and foreign manufacturing establishments must register and provide additional information to the FDA upon their initial participation in the manufacturing process.

Any product manufactured by or imported from a facility that has not registered, whether foreign or domestic, is deemed misbranded under the FDCA.

Changes to the manufacturing process, specifications or container closure system for an approved product are strictly regulated and often require prior FDA approval before being implemented.

The FDA’s regulations also require, among other things, the investigation and correction of any deviations from cGMP and the imposition of reporting and documentation requirements upon the sponsor and any third-party manufacturers involved in producing the approved product.

Pediatric Studies

Under the Pediatric Research Equity Act, or PREA, applications and certain types of supplements to applications must contain data that are adequate to assess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the

product is safe and effective.

The sponsor must submit an initial Pediatric Study Plan within 60 days of an end-of-phase 2 meeting or as may be agreed between the sponsor and the FDA.

The sponsor must submit an initial pediatric study plan within 60 days of an EOP2 meeting or as may be agreed between the sponsor and the FDA.

Sponsors must also submit pediatric study plans prior to the assessment data.

Those plans must contain an outline of the proposed pediatric study or studies the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information.

The sponsor, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan.

The FDA or the sponsor may request an amendment to the plan at any time.

For investigational products intended to treat a serious or life-threatening disease or condition, the FDA must, upon the request of a sponsor, meet to discuss preparation of the initial pediatric study plan or to discuss deferral or waiver of pediatric assessments.

In addition, the FDA will meet early in the development process to discuss pediatric study plans with sponsors and the FDA must meet with sponsors by no later than the end-of-phase 1 meeting for serious or life-threatening diseases and by no later than 90 days after the FDA’s receipt of the study plan.

The FDA may, on its own initiative or at the request of the sponsor, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.

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FDASIA further requires the FDA to publicly post the PREA Non-Compliance letter and sponsor’s response.

Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation, although the FDA has recently taken steps to limit what it considers abuse of this statutory exemption in the PREA by announcing that it does not intend to grant any additional orphan drug designations for rare pediatric subpopulations of what is otherwise a common disease.

The FDA also maintains a list of diseases that are exempt from

PREA requirements due to low prevalence of disease in the pediatric population.

In May 2023, the FDA issued new draft guidance that further describes the pediatric study requirements under the PREA.

Expedited Review Programs

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Candidate products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition.

Fast Track designation applies to the combination of the product candidate and the specific indication for which it is being studied.

In addition to other benefits, such as the ability to have greater interactions with the FDA, the FDA may initiate review of sections of a Fast Track application before the application is complete, a process known as rolling review.

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and use expedited procedures to withdraw accelerated approval of an NDA or BLA after the confirmatory trial fails to verify the product’s clinical benefit.

Further, FDORA requires the agency to publish on its website “the rationale for why a post-approval study is not appropriate or necessary” whenever it decides not to require such a study upon granting accelerated approval.

Further, FDORA requires the FDA to publish on its website “the rationale for why a post-approval study is not appropriate or necessary” whenever it decides not to require such a study upon granting accelerated approval.

In March 2023, the FDA issued draft guidance that outlines its current thinking and approach to accelerated approval.

The FDA indicated that the accelerated approval pathway is commonly used for approval of oncology drugs due to the serious and life-threatening nature of cancer.

Although single-arm trials have been commonly used to support accelerated approval, a randomized controlled trial is the preferred approach as it provides a more robust efficacy and safety assessment and allows for direct comparisons to an available therapy.

To that end, the FDA outlined considerations for designing, conducting, and analyzing data for trials intended to support accelerated approvals of oncology therapeutics.

While this guidance is currently only in draft form and will ultimately not be legally binding even when finalized, sponsors typically observe the FDA’s guidance closely to ensure that their investigational products qualify for accelerated approval.

• Regenerative advanced therapy.

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The review process and the Prescription Drug User Fee Act, or PDUFA, goal date may be extended by the FDA for three additional months to consider new information or clarification provided by the sponsor to address an outstanding deficiency identified by the FDA following the original submission.

Despite these review goals, it is not uncommon for FDA review of an application to extend beyond the PDUFA goal date.

In connection with its review of an application, the FDA typically will inspect the facility or facilities where the product is being or will be manufactured.

These pre-approval inspections may cover all facilities associated with an NDA submission, including component manufacturing, finished product manufacturing, and control testing laboratories.

The FDA will not approve an application unless it determines that the

manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications.

The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications.

Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the data in the application.

With passage of FDORA, Congress clarified FDA’s authority to conduct inspections by expressly permitting inspection of facilities involved in the preparation, conduct, or analysis of clinical and non-clinical studies submitted to FDA as well as other persons holding study records or involved in the study process.

the study process.

To ensure cGMP and GCP compliance by its employees and third-party contractors, a sponsor may incur significant expenditure of time, money and effort in the areas of training, record keeping, production and quality control.

In addition, as a condition of approval, the FDA may require a sponsor to develop a REMS.

A REMS uses risk-minimization strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks.

To determine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, the seriousness of the disease, the expected benefit of the product, the expected duration of treatment, the seriousness of known or potential adverse events, and whether the product is a new molecular entity.

The FDA determines the requirement for a REMS, as well as the specific REMS provisions, on a case-by-case basis.

If the FDA concludes a REMS is needed, the sponsor of the application must submit a proposed REMS and the FDA will not approve the application without a REMS.

The FDA may also refer an application for a novel product to an advisory committee or explain why such referral was not made.

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For those seeking to challenge FDA’s CRL decision, the FDA has indicated that sponsors may request a formal hearing on the CRL or they may file a request for reconsideration or a request for a formal dispute resolution.

If the FDA approves a new product, it may limit the approved indications for use of the product, require that contraindications, warnings, or precautions be included in the product labeling, or require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval.

If the FDA approves a new product, it may limit the approved indications for use of the product, require that contraindications, warnings, or precautions be included in the product labeling, or require that post-approval studies, including post-marketing clinical trials, be conducted to further assess the drug’s safety after approval.

The agency may also require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including a REMS, to help ensure that the benefits of the product outweigh the potential risks.

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Following approval of a new prescription product, the manufacturer, the approved product and the product’s manufacturing locations are subject to pervasive and continuing regulation by the FDA, governing, among other things, monitoring and record-keeping activities, reporting of adverse experiences with the product and product problems to the FDA, product sampling and distribution, manufacturing and promotion and advertising.

Although physicians may prescribe legally available products for unapproved uses or patient populations (i.e., “off-label uses”), manufacturers may not market or promote such uses.

Although physicians may prescribe

legally available products for unapproved uses or patient populations (i.e., “off-label uses”), manufacturers may not market or promote such uses.

The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.

In September 2021, the FDA published final regulations which describe the types of evidence that the agency will consider in determining the intended use of a drug product.

In September 2021, the FDA published final regulations which describe the types of evidence that the FDA will consider in determining the intended use of a drug product.

In the United States, health care professionals are generally permitted to prescribe products for such uses not described in the labeling, known as off-label uses, because the FDA does not regulate the practice of medicine.

However, in October 2023, the FDA published draft guidance outlining the FDA’s non-binding policies governing the distribution of scientific information on unapproved uses to healthcare providers.

This draft guidance calls for such communications to be truthful, non-misleading, factual and unbiased and include all information necessary for healthcare providers to interpret the strengths and weaknesses and validity and utility of the information about the unapproved use.

It may be permissible, under very specific, narrow conditions, for a manufacturer to engage in nonpromotional, non-misleading communication regarding off-label information, such as distributing scientific or medical journal information.

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The federal government has levied large civil and criminal fines against companies for alleged improper promotion, and has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

Orphan Drug Designation and Exclusivity

Orphan drug designation in the United States is designed to encourage sponsors to develop products intended for treatment of rare diseases or conditions.

In the United States, a rare disease or condition is statutorily defined as a condition that affects fewer than 200,000 individuals in the United States or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available the biologic for the disease or condition will be recovered from sales of the product in the United States.

Orphan drug designation qualifies a company for tax credits and market exclusivity for seven years following the date of the product’s marketing approval if granted by the FDA.

An application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product.

A product becomes an orphan when it receives orphan drug designation from the Office of Orphan Products Development at the FDA based on acceptable confidential requests made under the regulatory provisions.

The product must then go through the review and approval process like any other product.

A sponsor may request orphan drug designation of a previously unapproved product or new orphan indication for an already marketed product.

In addition, a sponsor of a product that is otherwise the same product as an already approved orphan drug may seek and obtain orphan drug designation for the subsequent product for the same rare disease or condition if it can present a plausible hypothesis that its product may be clinically superior to the first drug.

More than one sponsor may receive orphan drug designation for the same product for the same rare disease or condition, but each sponsor seeking orphan drug designation must file a complete request for designation.

If a product with orphan designation receives the first FDA approval for the disease or condition for which it has such designation or for a select indication or use within the rare disease or condition for which it was designated, the product generally will receive orphan drug exclusivity.

Orphan drug exclusivity means that the FDA may not approve another sponsor’s marketing application for the same product for the same indication for seven years, except in certain limited circumstances.

If a product designated as an orphan drug ultimately receives marketing approval for an indication broader than what was designated in its orphan drug application, it may not be entitled to exclusivity.

The period of exclusivity begins on the date that the marketing application is approved by the FDA and applies only to the indication for which the product has been designated.

The FDA may approve a second application for the same product for a different use or a second application for a clinically superior version of the product for the same use.

Orphan drug exclusivity will not bar approval of another product under certain circumstances, including if the company with orphan drug exclusivity is not able to meet market demand or the subsequent product with the same drug for the same condition is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care.

This is the case despite an earlier court opinion holding that the Orphan Drug Act unambiguously required the FDA to recognize orphan drug exclusivity regardless of a showing of clinical superiority.

Under Omnibus legislation signed by President Trump on December 27, 2020, the requirement for a product to show clinical superiority applies to drugs and biologics that received orphan drug designation before enactment of the FDA Reauthorization Act of 2017, but have not yet been approved or licensed by the FDA.

In September 2021, the Court of Appeals for the 11th Circuit held that, for the purpose of determining the scope of exclusivity, the term “same disease or condition” in the statute means the designated “rare disease or condition” and could not be interpreted by the FDA to mean the “indication or use.” Thus, the court concluded, orphan drug exclusivity applies to the entire designated disease or condition rather than the “indication or use.” Although there have been legislative proposals to overrule this decision, they have not been enacted into law.

In January 2023, the FDA announced that, in matters beyond the scope of that court order, the FDA will continue to apply its existing regulations tying orphan-drug exclusivity to the uses or indications for which the orphan drug was approved.

Patent Term Restoration and Extension

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and state laws governing privacy, security and breaches of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts;

• laws and regulations prohibiting bribery and corruption such as the FCPA, which, among other things, prohibits U.S.

• laws and regulations prohibiting bribery and corruption such as the U.S.

Foreign Corrupt Practices Act, which, among other things, prohibits U.S.

companies and their employees and agents from authorizing, promising, offering, or providing, directly or indirectly, corrupt or improper payments or anything else of value to foreign government officials, employees of public international organizations or foreign government-owned or affiliated entities, candidates for foreign public office, and foreign political parties or officials thereof.

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For example, the California Consumer Privacy Act of 2018, or the CCPA, which became effective on January 1, 2020, requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, allow consumers to opt out of certain data sharing with third parties and provide a new cause of action for data breaches.

Many other states are considering similar legislation, and a broad range of legislative measures also have been introduced at the federal level.

Additionally, effective as of January 1, 2023, the California Privacy Rights Act, or CPRA, will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information.

The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA.

The CCPA and CPRA could impact our business activities depending on how it is interpreted and exemplifies the vulnerability of our business to not only cyber threats but also the evolving regulatory environment related to personal data and individually identifiable health information.

These provisions may apply to some of our business activities.

In addition to California, a number of other states have passed comprehensive privacy laws similar to the CCPA and CPRA.

These laws are either in effect or will go into effect sometime before the end of 2026.

Like the CCPA and CPRA, these laws create obligations related to the processing of personal information, as well as special obligations for the processing of “sensitive” data (which includes health data in some cases).

Some of the provisions of these laws may apply to our business activities.

There are also states that are strongly considering privacy laws that will go into effect in 2025 and beyond.

Other states will be considering these laws in the future, and Congress has also been

debating passing a federal privacy law.

There are also states that are specifically regulating health information that may affect our business.

These laws may impact our business activities, including our identification of research subjects, relationships with business partners and ultimately the marketing and distribution of our product candidates, if approved.

Pharmaceutical Insurance Coverage and Health Care Reform

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Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on coverage, reimbursement and requirements for substitution of generic products.

Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit a company’s revenue generated from the sale of any approved products including those that we are our collaborators may develop.

Coverage policies and third-party reimbursement rates may change at any time.

Even if favorable coverage and reimbursement status is attained for one or more products for which a company or its collaborators receive marketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

If we obtain approval in the future to market in the United States any product candidates we may develop, we may be required to provide discounts or rebates under government healthcare programs or to certain government and private purchasers in order to obtain coverage under federal healthcare programs such as Medicaid.

Participation in such programs may require us to track and report certain drug prices.

We may be subject to fines and other penalties if we fail to report such prices accurately.

Outside the United States, ensuring adequate coverage and payment for any product candidates we may develop will face challenges.

Pricing of prescription pharmaceuticals is subject to governmental control in many countries.

Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of any product candidates we

may develop to other available therapies.

The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts.

Healthcare Reform

In March 2010, Congress enacted the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or the PPACA, which, among other things, includes changes to the coverage and payment for drug products under government health care programs.

Other legislative changes have been proposed and adopted since the PPACA was enacted.

In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress.

A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs.

These changes included aggregate reductions to Medicare payments to providers of up to two percent per fiscal year, which went into effect in April 2013.

Under current legislation, the actual reductions in Medicare payments may vary up to four percent.

The Consolidated Appropriations Act, which was signed into law by President Biden in December 2022, made several changes to sequestration of the Medicare program.

Section 1001 of the Consolidated Appropriations Act delays the four percent Statutory Pay-As-You-Go Act of 2010, or PAYGO, sequester for two years, through the end of 2024.

Triggered by enactment of the American Rescue Plan Act of 2021, the four percent cut to the Medicare program would have taken effect in January 2023.

The Consolidated Appropriations Act’s health care offset title includes Section 4163, which extends the two percent Budget Control Act of 2011 Medicare sequester for six months into 2032 and lowers the payment reduction percentages in years 2030 and 2031.

The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

These laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.

Since enactment of the PPACA, there have been, and continue to be, numerous legal challenges and Congressional actions to repeal and replace provisions of the law.

For example, the Tax Act repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, became effective in 2019.

Further, on December 14, 2018, a U.S.

District Court judge in the Northern District of Texas ruled that the individual mandate portion of the PPACA is an essential and inseverable feature of the PPACA, and therefore because the mandate was repealed as part of the Tax Act, the remaining provisions of the PPACA are invalid as well.

Supreme Court heard this case on November 10, 2020 and, on June 17, 2021, dismissed this action after finding that the plaintiffs do not have standing to challenge the constitutionality of the PPACA.

Litigation and legislation over the PPACA are likely to continue, with unpredictable and uncertain results.

The Trump administration also took executive actions to undermine or delay implementation of the PPACA, including directing federal agencies with authorities and responsibilities under the PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices.

On January 28, 2021, however, President Biden revoked those orders and issued a new Executive Order which directs federal agencies to reconsider rules and other policies that limit Americans’ access to health care, and consider actions that will protect and strengthen that access.

Under this Order, federal agencies are directed to re-examine:

policies that undermine protections for people with pre-existing conditions, including complications related to COVID-19;

demonstrations and waivers under Medicaid and the PPACA that may reduce coverage or undermine the programs, including work requirements;

policies that undermine the Health Insurance Marketplace or other markets for health insurance;

policies that make it more difficult to enroll in Medicaid and the PPACA;

and policies that reduce affordability of coverage or financial assistance, including for dependents.

Pharmaceutical Prices

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congressional inquiries, as well as proposed and enacted state and federal legislation designed to, among other things, bring more transparency to pharmaceutical pricing, review the relationship between pricing and manufacturer patient programs, and reduce the costs of pharmaceuticals under Medicare and Medicaid.

In 2020, the prior administration issued several executive orders intended to lower the costs of prescription products and certain provisions in these orders have been incorporated into regulations.

In 2020, the Trump administration issued several executive orders intended to lower the costs of prescription

products and certain provisions in these orders have been incorporated into regulations.

These regulations include an interim final rule implementing a most favored nation model for prices that would tie Medicare Part B payments for certain physician-administered pharmaceuticals to the lowest price paid in other economically advanced countries, effective January 1, 2021.

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With issuance of this rule, CMS stated that it will explore all options to incorporate value into payments for Medicare Part B pharmaceuticals and improve beneficiaries' access to evidence-based care.

In addition, in October 2020, HHS and the FDA published a final rule allowing states and other entities to develop a Section 804 Importation Program, or SIP, to import certain prescription drugs from Canada into the United States.

The final rule is currently the subject of ongoing litigation, but at least six states (Vermont, Colorado, Florida, Maine, New Mexico, and New Hampshire) have passed laws allowing for the importation of drugs from Canada with the intent of developing SIPs for review and approval by the FDA.

In addition, in October 2020, HHS and the FDA published a final rule allowing states and other entities to develop a Section 804 Importation Program to import certain prescription drugs from Canada into the United States.

That regulation was challenged in a lawsuit by the Pharmaceutical Research and Manufacturers of America, or PhRMA, but the case was dismissed by a federal district court in February 2023 after the court found that PhRMA did not have standing to sue HHS.

A number of states have passed laws allowing for the importation of drugs from Canada.

Certain of these states have submitted Section 804 Importation Program proposals and are awaiting FDA approval.

In January 2024, the FDA approved Florida’s plan for Canadian drug importation.

Further, on November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law.

The final rule would eliminate the current safe harbor for Medicare drug rebates and create new safe harbors for beneficiary point-of-sale discounts and pharmacy benefit manager, or PBM, service fees.

It originally was set to go into effect on January 1, 2022, but with passage of the Inflation Reduction Act has been delayed by Congress to January 1, 2032.

On July 9, 2021, President Biden signed Executive Order 14063, which focuses on, among other things, the price of pharmaceuticals.

The Order directs HHS to create a plan within 45 days to combat “excessive pricing of prescription pharmaceuticals and enhance domestic pharmaceutical supply chains, to reduce the prices paid by the federal government for such pharmaceuticals, and to address the recurrent problem of price gouging.” On September 9, 2021, HHS released its plan to reduce pharmaceutical prices.

The key features of that plan are to:

(a) make pharmaceutical prices more affordable and equitable for all consumers and throughout the health care system by supporting pharmaceutical price negotiations with manufacturers;

(b) improve and promote competition throughout the prescription pharmaceutical industry by supporting market changes that strengthen supply chains, promote biosimilars and generic drugs, and increase transparency;

and (c) foster scientific innovation to promote better healthcare and improve health by supporting public and private research and making sure that market incentives promote discovery of valuable and accessible new treatments.

More recently, on August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was signed into law by President Biden.

The final rule would eliminate the current safe harbor for Medicare drug rebates and create new safe harbors for beneficiary point-of-sale discounts and pharmacy benefit manager service fees.

It originally was set to go into effect on January 1, 2022, but with passage of the Inflation Reduction Act of 2022, or IRA, has been delayed by Congress to January 1, 2032.

More recently, on August 16, 2022, the IRA was signed into law by President Biden.

The new legislation has implications for Medicare Part D, which is a program available to individuals who are entitled to Medicare Part A or enrolled in Medicare Part B to give them the option of paying a monthly premium for outpatient prescription drug coverage.

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The new law also caps Medicare out-of-pocket drug costs at an estimated $4,000 a year in 2024 and, thereafter beginning in 2025, at $2,000 a year.

The IRA includes a provision exempting orphan drugs from Medicare price negotiation but this exclusion has been interpreted by CMS in final guidance issued in July 2023 to apply only to those orphan drugs with an approved indication (or indications) for a single rare disease or condition.

The final guidance clarifies that CMS will consider only active designations/approvals when evaluating a drug for the exclusion, such that designations/indications withdrawn before the selected drug publication date will not be considered.

CMS also clarified that, if a drug loses its orphan drug exclusion status, the agency will use the earliest date of approval/licensure to determine whether the product is a qualifying single source drug subject to price negotiations.

In June 2023, Merck filed a lawsuit against HHS and CMS asserting that, among other things, the IRA’s Drug Price Negotiation Program for Medicare constitutes an uncompensated taking in violation of the Fifth Amendment of the Constitution.

Subsequently, a number of other parties, including the U.S.

Chamber of Commerce and pharmaceutical companies, also filed lawsuits in various courts with similar constitutional claims against HHS and CMS.

Litigation involving these and other provisions of the IRA will continue with unpredictable and uncertain results.

At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

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In addition, regional healthcare organizations and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription pharmaceutical and other healthcare programs.

These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.

Review and Approval of Medicinal Products in the European Union

In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety, and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales, and distribution of products.

In order to market any product outside of the United States, a sponsor must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety, and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales, and distribution of products.

Whether or not it obtains FDA approval for a product, a sponsor will need to obtain the necessary approvals by the comparable non-U.S.

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Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.

Specifically, however, the process governing approval of medicinal products in the European Union generally follows the same lines as in the United States.

The process governing approval of medicinal products in the European Union generally follows the same lines as in the United States.

It entails satisfactory completion of preclinical studies and adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed indication.

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Clinical Trial Approval

On January 31, 2022, the new Clinical Trials Regulation (EU) No 536/2014 became effective in the European Union and replaced the prior Clinical Trials Directive 2001/20/EC.

The new regulation aims at simplifying and streamlining the authorization, conduct and transparency of clinical trials in the European Union.

On January 31, 2022, the new Clinical Trials Regulation (EU) No 536/2014, or the Clinical Trials Regulation, became effective in the European Union and replaced the prior Clinical Trials Directive 2001/20/EC, or the Clinical Trials Directive.

The Clinical Trials Regulation aims at simplifying and streamlining the authorization, conduct and transparency of clinical trials in the European Union.

Under the new coordinated procedure for the approval of clinical trials, the sponsor of a clinical trial to be conducted in more than one member state of the European Union, or EU Member State, will only be required to submit a single application for approval.

The submission will be made through the Clinical Trials Information System, a new clinical trials portal overseen by the EMA and available to clinical trial sponsors, competent authorities of the EU Member States and the public.

Beyond streamlining the process, the new Regulation includes a single set of documents to be prepared and submitted for the application as well as simplified reporting procedures for clinical trial sponsors, and a harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts.

Part I is assessed by the competent authorities of all EU Member States in which an application for authorization of a clinical trial has been submitted (Member States concerned).

Part II is assessed separately by each Member State concerned.

The submission will be made through the Clinical Trials Information System, a new clinical trials portal overseen by the European Medicines Agency, or the EMA, and available to clinical trial sponsors, competent authorities of the EU Member States and the public.

All ongoing clinical trials in the European Union approved under the prior Clinical Trials Directive, or CTD, must be transitioned to the Clinical Trials Information System by January 31, 2025.

This date marks the end of a three-year transition period that began when the Clinical Trials Regulation became applicable in the European Union on January 31, 2022.

Clinical trials that were started under the Clinical Trials Directive and subject to transition to the Clinical Trials Regulation will, by January 31, 2025, have to comply with the obligations of the Clinical Trials Regulation even if these are not included in the previous study protocol, such as (i) obligations of notification via Clinical Trials Information System;

(ii) safety reporting rules;

(iii) archiving requirement;

and (iv) transparency requirements.

The failure to transition ongoing clinical trials to the Clinical Trials Regulation by January 31, 2025 can result in corrective measures under Article 77 Clinical Trials Regulation, including revocation of the authorization of the clinical trial or suspension of the clinical trial as well as criminal sanctions and fines under national law of EU Member States.

Beyond streamlining the process, the Clinical Trials Regulation includes a single set of documents to be prepared and submitted for the application as well as simplified reporting procedures for clinical trial sponsors, and a harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts.

Part I is assessed by the competent authorities of all EU Member States in which an application for authorization of a clinical trial has been submitted (EU Member States concerned).

Part II is assessed separately by each EU Member State concerned.

Strict deadlines have been established for the assessment of clinical trial applications.

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However, overall related timelines will be defined by the Clinical Trials Regulation.

The new regulation did not change the preexisting requirement that a sponsor must obtain prior approval from the competent national authority of the EU Member State in which the clinical trial is to be conducted.

The Clinical Trials Regulation did not change the preexisting requirement that a sponsor must obtain prior approval from the competent national authority of the EU Member State in which the clinical trial is to be conducted.

If the clinical trial is conducted in different EU Member States, the competent authorities in each of these EU Member States must provide their approval for the conduct of the clinical trial.

Furthermore, the sponsor may only start a clinical trial at a specific study site after the applicable ethics committee has issued a favorable opinion.

Parties conducting certain clinical trials must, as in the United States, post clinical trial information in the EU at the EudraCT website:

https://eudract.ema.europa.eu.

Parties conducting certain clinical trials must, as in the United States, post clinical trial information in the EU at the EU Clinical Trials Register.

PRIME Designation in the European Union

In March 2016, the European Medicines Agency, or EMA, launched an initiative to facilitate development of product candidates in indications, often rare, for which few or no therapies currently exist.

In March 2016, the EMA launched an initiative to facilitate development of product candidates in indications, often rare, for which few or no therapies currently exist.

The PRIority MEdicines, or PRIME, scheme is intended to encourage drug development in areas of unmet medical need and provides accelerated assessment of products representing substantial innovation reviewed under the centralized procedure.

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Many benefits accrue to sponsors of product candidates with PRIME designation, including but not limited to, early and proactive regulatory dialogue with the EMA, frequent discussions on clinical trial designs and other development program elements, and accelerated marketing authorization application assessment once a dossier has been submitted.

Importantly, a dedicated agency contact and rapporteur from the Committee for Human Medicinal Products, or CHMP, or Committee for Advanced Therapies are appointed early in PRIME scheme facilitating increased understanding of the product at EMA’s Committee

A kick-off meeting initiates these relationships and includes a team of multidisciplinary experts at the EMA to provide guidance on the overall development and regulatory strategies.

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The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid across the European Economic Area (i.e.

the European Union as well as Iceland, Liechtenstein and Norway).

the European Union as well as Iceland, Liechtenstein and Norway), or the EEA.

Pursuant to Regulation (EC) No 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, advanced therapy medicinal products, and products with a new active substance indicated for the treatment of certain diseases.

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This draft decision must take the opinion and any relevant provisions of European Union law into account.

Before arriving at a final decision on an application for centralized authorization of a medicinal product the European Commission must consult the Standing Committee on Medicinal Products for Human Use, or the Standing Committee.

Before arriving at a final decision on an application for centralized authorization of a medicinal product the European Commission must consult the Standing Committee on

Medicinal Products for Human Use, or the Standing Committee.

The Standing Committee is composed of representatives of the EU Member States and chaired by a non-voting European Commission representative.

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The reference EU Member State prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application.

The resulting assessment report is submitted to the concerned EU Member States who, within 90 days of receipt, must decide whether to approve the assessment report and related materials.

The resulting assessment report is submitted to the concerned EU Member States who, within 90 days of receipt, must decide whether to approve the assessment report and

related materials.

If a concerned EU Member State cannot approve the assessment report and related materials due to concerns relating to a potential serious risk to public health, disputed elements may be referred to the European Commission, whose decision is binding on all EU Member States.

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Data exclusivity prevents sponsors for authorization of generics of these innovative products from referencing the innovator’s data to assess a generic (abridged) application for a period of eight years.

During an additional two-year period of market exclusivity, a generic marketing

authorization application can be submitted and authorized, and the innovator’s data may be referenced, but no generic medicinal product can be placed on the European Union market until the expiration of the market exclusivity.

During an additional two-year period of market exclusivity, a generic marketing authorization application can be submitted and authorized, and the innovator’s data may be referenced, but no generic medicinal product can be placed on the European Union market until the expiration of the market exclusivity.

The overall ten-year period will be extended to a maximum of 11 years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies.

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Once subsequently definitively renewed, the marketing authorization shall be valid for an unlimited period.

Any authorization which is not followed by the actual placing of the medicinal product on the European Union market (in case of centralized procedure) or on the market of the authorizing EU Member State within three years after authorization ceases to be valid (the so-called sunset clause).

Brexit and the Regulatory Framework in the United Kingdom

The United Kingdom’s withdrawal from the European Union took place on January 31, 2020.

The European Union and the United Kingdom reached an agreement on their new partnership in the Trade and Cooperation Agreement, or the Agreement, which was applied provisionally beginning on January 1, 2021 and which entered into force on May 1, 2021.

The Agreement focuses primarily on free trade by ensuring no tariffs or quotas on trade in goods, including healthcare products such as medicinal products.

Thereafter, the European Union and the United Kingdom will form two separate markets governed by two distinct regulatory and legal regimes.

As such, the Agreement seeks to minimize barriers to trade in goods while accepting that border checks will become inevitable as a consequence that the United Kingdom is no longer part of the single market.

As of January 1, 2021, the Medicines and Healthcare products Regulatory Agency, or the MHRA, became responsible for supervising medicines and medical devices in Great Britain, comprising England, Scotland and Wales under domestic law whereas Northern Ireland continues to be subject to EU rules under the Northern Ireland Protocol.

The MHRA will rely on the Human Medicines Regulations 2012 (SI 2012/1916) (as amended), or the HMR, as the basis for regulating medicines.

The HMR has incorporated into the domestic law the body of EU law instruments governing medicinal products that pre-existed prior to the United Kingdom’s withdrawal from the European Union.

The MHRA may rely on a decision taken by the European Commission on the approval of a new marketing authorization via the centralized procedure until December 31, 2023.

Furthermore, while the Data Protection Act of 2018 in the United Kingdom that “implements” and complements the European Union’s GDPR is now effective in the United Kingdom, it is still unclear whether transfer of data from the EEA to the United Kingdom will remain lawful under GDPR.

The Trade and Cooperation Agreement provides for a transitional period during which the United Kingdom will be treated like an European Union member state in relation to processing and transfers of personal data for four months from January 1, 2021.

This may be extended by two further months.

After such period, the United Kingdom will be a “third country” under the GDPR unless the European Commission adopts an adequacy decision in respect of transfers of personal data to the United Kingdom.

The United Kingdom has already determined that it considers all of the European Union and EEA member states to be adequate for the purposes of data protection, ensuring that data flows from the United Kingdom to the European and EEA remain unaffected.

Regulatory Requirements after Marketing Authorization

Following approval, the holder of the marketing authorization is required to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of the medicinal product.

These include compliance with the European Union’s stringent pharmacovigilance or safety reporting rules, pursuant to which post-authorization studies and additional monitoring obligations can be imposed.

In addition, the manufacturing of authorized products, for which a separate manufacturer’s license is mandatory, must also be conducted in strict compliance with the EMA’s GMP requirements and comparable requirements of other regulatory bodies in the European Union, which mandate the methods, facilities and controls used in manufacturing, processing and packing of drugs to assure their safety and identity.

Finally, the marketing and promotion of authorized products, including industry-sponsored continuing medical education and advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the European Union under Directive 2001/83EC, as amended.

Pricing Decisions for Approved Products

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Some countries provide that products may be marketed only after a reimbursement price has been agreed.

Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available

therapies or so-called health technology assessments, in order to obtain reimbursement or pricing approval.

Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies or so-called health technology assessments, in order to obtain reimbursement or pricing approval.

For example, EU Member States have the option to restrict the range of products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.

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Many countries outside of the United States maintain rigorous laws governing the privacy and security of personal information.

The collection, use, disclosure, transfer, or other processing of personal data, including personal health data, regarding individuals who are located in the EEA, and the processing of personal data that takes place in the EEA, is subject to the GDPR, which became effective on May 25, 2018.

The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, and it imposes heightened requirements on companies that process health and other sensitive data, such as requiring in many situations that a company obtain the consent of the individuals to whom the sensitive personal data relate before processing such data.

The General Data Protection Regulation, or GDPR, is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including heightened requirements on companies that process health and other sensitive data, such as requiring in many situations that a company obtain the consent of the individuals to whom the sensitive personal data relate before processing such data.

Examples of obligations imposed by the GDPR on companies processing personal data that fall within the scope of the GDPR include providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, appointing a data protection officer, providing notification of data breaches and taking certain measures when engaging third-party processors.

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The CJEU decision also drew into question the long-term viability of an alternative means of data transfer, the standard contractual clauses, for transfers of personal data from the EEA to the United States.

Following the withdrawal of the U.K.

from the EU, the U.K.

Data Protection Act 2018 applies to the processing of personal data that takes place in the U.K.

and includes parallel obligations to those set forth by GDPR.

Additionally, in October 2022, President Biden signed an executive order to implement the EU-U.S.

Data Privacy Framework, which would serve as a replacement to the EU-US Privacy Shield.

The EC initiated the process to adopt an adequacy decision for the EU-US Data Privacy Framework in December 2022.

It is unclear if and when the framework will be finalized and whether it will be challenged in court.

The uncertainty around this issue may further impact our business operations in the EU.

The European Commission adopted the adequacy decision in July 2023.

The adequacy decision permits U.S.

companies who self-certify to the EU-U.S.

Data Privacy Framework to rely on it as a valid data transfer mechanism for data transfers from the European Union to the United States.

However, some privacy advocacy groups have already suggested that they will be challenging the EU-U.S.

Data Privacy Framework.

If these challenges are successful, they may not only impact the EU-U.S.

Data Privacy Framework, but also further limit the viability of the standard contractual clauses and other data transfer mechanisms.

Brexit and the Regulatory Framework in the United Kingdom

The United Kingdom’s withdrawal from the European Union took place on January 31, 2020.

The Agreement focuses primarily on free trade by ensuring no tariffs or quotas on trade in goods, including healthcare products such as medicinal products.

Thereafter, the European Union and the United Kingdom will form two

separate markets governed by two distinct regulatory and legal regimes.

On February 27, 2023, the UK government and the European Commission announced a political agreement in principle to replace the Northern Ireland Protocol with a new set of arrangements, known as the “Windsor Framework”.

This new framework fundamentally changes the existing system under the Northern Ireland Protocol, including with respect to the regulation of medicinal products in the United Kingdom In particular, the MHRA will be responsible for approving all medicinal products destined for the United Kingdom market (i.e., Great Britain and Northern Ireland), and the EMA will no longer have any role in approving medicinal products destined for Northern Ireland.

A single UK-wide marketing authorization will be granted by the MHRA for all medicinal products to be sold in the United Kingdom, enabling products to be sold in a single pack and under a single authorization throughout the United Kingdom.The Windsor Framework was approved by the EU-UK Joint Committee on March 24, 2023, so the United Kingdom government and the European Union will enact legislative measures to bring it into law.

On June 9, 2023, the MHRA announced that the medicines aspects of the Windsor Framework will apply from January 1, 2025.

The Human Medicines Regulations 2012 (SI 2012/1916) (as amended), or HMR, is the primary legal instrument for the regulation of medicines in the United Kingdom.

The HMR has incorporated into the domestic law the body of EU law instruments governing medicinal products that pre-existed prior to the United Kingdom’s withdrawal from the European Union.

European Union laws which have been transposed into United Kingdom law through secondary legislation continue to be applicable as “retained EU law”.

However, new legislation, such as the Clinical Trials Regulation, will not be applicable in Great Britain.

Since a significant proportion of the regulatory framework for pharmaceutical products in the United Kingdom covering the quality, safety, and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales, and distribution of pharmaceutical products is derived from EU directives and regulations, Brexit may have a material impact upon the regulatory regime with respect to the development, manufacture, importation, approval and commercialization of our product candidates in the United Kingdom.

For example, the United Kingdom is no longer covered by the centralized procedures for obtaining EU-wide marketing authorization from the EMA, and a separate marketing authorization will be required to market our product candidates in the United Kingdom.A new international recognition framework has been in place since January 1, 2024, whereby the MHRA will have regard to decisions on the approval of marketing authorizations made by the EMA and certain other regulators when determining an application for a new marketing authorization in Great Britain.

As with other issues related to withdrawal of the United Kingdom from the European Union, there are open questions about how personal data will be protected in the United Kingdom and whether personal information can transfer from the European Union to the United Kingdom.

Following the withdrawal of the United Kingdom from the European Union, the UK Data Protection Act 2018 applies to the processing of personal data that takes place in the United Kingdom and includes parallel obligations to those set forth by the GDPR.

While the Data Protection Act 2018 in the United Kingdom that “implements” and complements the GDPR has achieved Royal Assent on May 23, 2018 and is now effective in the United Kingdom, it is still unclear whether transfer of data from the EEA to the United Kingdom will remain lawful under the GDPR.

The UK government has already determined that it considers all European Union and EEA member states to be adequate for the purposes of data protection, ensuring that data flows from the United Kingdom to the European Union/EEA remain unaffected.

In addition, a recent decision from the European Commission appears to deem the United Kingdom as being “essentially adequate” for purposes of data transfer from the European Union to the United Kingdom, although this decision may be re-evaluated in the future.

Human Capital

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Further, 37.3% of our new hires since January 1, 2023 self-identify as female, 0% self-identify as non-binary, and 1.9% have chosen not to disclose their gender.

As of February 6, 2023, 59% of our full-time employees in the United States self-identified as White, 24% self-identified as Asian, 4% self-identified as having two or

more races, 3% self-identified as Black or African American, 2% self-identified as Hispanic or Latino, and 8% chose not to disclose their race or ethnicity.

As of February 5, 2024, 60.3% of our full-time employees in the United States self-identified as White, 26.1% self-identified as Asian, 4.4% self-identified as having two or more races, 3.3% self-identified as Black or African American, 2.6% self-identified as Hispanic or Latino, 0.2%

self-identified as American Indian or Alaskan Native, 0.2% self-identified as Native Hawaiian or Other Pacific Islander, and 2.9% chose not to disclose their race or ethnicity.

Our employees are our greatest asset and we strive to create a work environment that is inclusive, challenging and rewarding.

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The assessment was informed by both internal and external stakeholders and by key ESG standards and frameworks such as the Global Reporting Initiative, Sustainability Accounting Standards Board and United Nations Sustainable Development Goals.

This assessment will serve as the foundation for our comprehensive, data-driven, Corporate Sustainability strategy.

This assessment served as the foundation for our inaugural Corporate Sustainability Report, which we published in April 2023, and continues to serve as the foundation for our comprehensive, data-driven, Corporate Sustainability strategy.

Among the ESG-related topics identified as most important to our company and stakeholders was Diversity, Equity and Inclusion, or DEI, an area we have been dedicated to addressing for many years.

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Further, we utilize a standardized interviewing model to reduce unconscious bias and to create a consistent hiring process across our open positions.

Our DEI Council was founded in 2021 and is comprised of a select group of senior leaders, Employee Resource Group, or ERG, representatives and passionate employees who meet on a monthly basis to advise on our DEI strategy, priorities, and goals.

Our DEI Council also provides a permanent forum for voices to be heard across all levels of the organization.

We currently have six ERGs that provide support and sharing of resources while representing and communicating the interest of that group to the company.

While our ERG membership directly engages approximately one third of our employees, these forums also provide an environment for community support, professional development, and educational opportunities for our entire employee population.

Through our ERG leadership program, ERG leaders are provided with the opportunity to hone leadership skills such as negotiation and public speaking.

Additionally, in an effort to advance our DEI aspirations, we have partnered with the Neuroleadership Institute on a learning program to better equip our employees with critical tools and language to talk about inclusion, bias, and leveraging a growth mindset in the workplace.

Our DEI Council is comprised of a select group of senior leaders, Employee Resource Group, or ERG, representatives and passionate employees who meet monthly to advise on our DEI strategy, priorities, and goals.

The DEI Council also regularly seeks feedback from employees to improve DEI programming and provides a permanent forum for voices to be heard across all levels of the organization.

We currently have six ERGs that provide safe and equitable spaces for employees to advance inclusivity, create opportunities for education and awareness, and contribute to ongoing business objectives.

Our ERGs, which include Caregivers and Parents of Schrödinger, Schrödinger Allied Sexualities Society, Schrödinger People of Color, Schrödinger Gender Equity, International Community of Schrödinger, and Healthy Minds Alliance, support the sharing of resources while representing and communicating the interests of a particular ERG and its allies to the company.

While membership in our six ERGs directly comprises approximately one-third of our employees, these forums provide an environment for community support, professional development, and educational opportunities for our entire employee population.

Our ERGs are also involved in recruiting diverse candidates and participating in industry conferences, extending their reach well beyond our company.

In an industry known for its fierce competition for talent, we have been able to maintain high retention and low turnover rates.

For the year ended December 31, 2023, our employee retention rate was 93.1%.

Given our financial resources, our industry-leading position in the field of physics-based computational drug discovery and materials science research and our developing proprietary drug discovery programs, we believe that we will continue to be able to fill positions and grow our headcount in support of our software, drug discovery and materials science businesses.

Given our financial resources, our industry-leading position in the field of physics-based computational drug discovery and materials science research and our developing proprietary drug discovery programs, we believe that we will continue to be able to fill open positions in support of our software, drug discovery and materials science businesses.

We are committed to providing our employees with compensation that meets the expectations of the market and industry norms.

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We routinely review our compensation practices and analyze the equity of our compensation decisions for all employees.

None of our employees is subject to a collective bargaining agreement or represented by a trade or labor union.

A small number of our employees who are located in Europe and Japan are covered by some type of collective bargaining agreement.

We consider our relations with our employees to be good.

We recognize the value of in-person collaboration and relationship building while also being mindful of the needs and priorities our employees have outside of the workplace.

Our flexible hybrid work schedule currently gives employees the option of coming into the office two days per week and working remotely the other three.

Prior to the COVID-19 pandemic, employees had the option of coming into the office three days a week and working remotely the other two.

We believe that our flexible hybrid schedule allows us to engage with each other and our customers effectively and to continue to advance our business.

We have long supported a hybrid work schedule, and our employees have the option of working remotely three days per week.

This allows our employees to develop a work schedule that best suits their individual needs.

Our company culture encourages engagement, both among our employees and within the communities we live and work.

In the advancement of these efforts, internally, we have a well-regarded mentor program, we have expanded our

resonance program to match colleagues to connect over virtual coffee chats globally, updated our management training programs to include mental health and wellness resources, and refreshed our annual review process to encourage more real-time feedback between employees and managers to set and achieve personal performance goals.

Some examples of external engagement in our local communities include hosting a student internship program in partnership with a non-profit educational group that supports underserved local high school students who have demonstrated the knowledge, character, and skills to achieve their aspirations.

To further our community engagement efforts, each of our employees is provided with a paid full day each year to volunteer in their local community, in addition to our matching gifts program.

Internally, we have a well-regarded mentorship program and learning opportunities for hard and soft skills.

We also have a variety of communications channels that allow employees to stay informed and connected, and an annual performance review process that emphasizes regular connections and real-time feedback between employees and managers.

In our local communities, we are focused on giving back through educational outreach to students and educators to increase awareness, interest and literacy for students in STEM.

To further our community engagement efforts, we provide an annual paid volunteer day benefit and matching gift program, and in 2023 we launched a new social impact platform to provide employees access to local volunteer opportunities in various local currencies and languages.

Our Corporate Information

Our principal executive offices are located at 1540 Broadway, 24th Floor, New York, New York 10036, and our telephone number is (212) 295-5800.

Our website address is http://www.schrodinger.com.

The information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC, and any reference to our website address is intended to be an inactive textual reference only.

Our website address is www.schrodinger.com.

The information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report or in any other report or document we file with the Securities and Exchange Commission, or SEC, and any reference to our website address is intended to be an inactive textual reference only.

We own or have rights to trademarks, service marks, and trade names that we use in connection with the operation of our business, including our corporate name, logos and website names.

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Available Information

We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

We make these reports available through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC.

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• For information concerning our software, drug discovery programs, computational platform, please visit:

https://www.schrodinger.com.

• For information provided to the investment community, including news releases, events and presentations, and filings with the SEC, please visit https://ir.schrodinger.com.

www.schrodinger.com.

• For information provided to the investment community, including news releases, events and presentations, and filings with the SEC, please visit ir.schrodinger.com.

• For additional information, please follow us on LinkedIn and Instagram, or visit our blog, Extrapolations.com.

These websites and social media channels, and the contents thereof, are not incorporated by reference into this Annual Report on Form 10-K nor deemed filed with the SEC.

These websites and social media channels, and the contents thereof, are not incorporated by reference into this Annual Report nor deemed filed with the SEC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business