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Item 7. Management’s Discussion and Analysis

2025-02-26 compared with 2024-02-28 · 158 added, 133 removed, 467 unchanged (38% of the section changed)

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We have devoted substantially all of our resources to introducing new capabilities and refining our software, conducting research and development activities, recruiting skilled personnel, and providing general and administrative support for these operations.

Over the last decade, we have entered into a number of collaborations with leading biopharmaceutical companies that have provided us with significant income and have the potential to produce additional milestone payments, option fees, and future royalties.

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Over the last decade, we have entered into a number of collaborations with leading biopharmaceutical companies that have provided us with significant revenue and have the potential to produce additional milestone payments, option fees, and future royalties.

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.

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

The trial is designed to evaluate the safety, pharmacokinetics, pharmacodynamics, maximum tolerated dose and/or recommended dose of SGR-1505.

Exploratory cohorts will evaluate additional pharmacokinetics, pharmacodynamics, preliminary anti-tumor activity, and safety to establish the recommended dose.

We anticipate reporting initial data from the trial in the second quarter of 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 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, confirming target engagement and meeting the pharmacodynamic goals for the trial.

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 100mg 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.

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

In addition, in August 2023, the FDA 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.

In July 2024, the FDA granted Fast Track designation to SGR-2921 in patients with relapsed or refractory acute myeloid leukemia, or AML.

In addition, in January 2025, the FDA granted orphan drug designation to SGR-2921 in patients with relapsed or refractory AML.

We have initiated dosing in a 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 AML or high-risk myelodysplastic syndrome.

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 trial in the second half of 2025.

In March 2024, we also submitted an IND to the FDA for our novel Wee1/Myt1 inhibitor, which we refer to as SGR-3515, and the FDA cleared the IND in April 2024.

We recently initiated dosing in a Phase 1 clinical trial of SGR-3515 in patients with advanced solid tumors.

The trial is a dose-escalation trial designed to evaluate the safety, tolerability and recommended Phase 2 dose of SGR-3515.

Secondary and exploratory objectives of the trial include evaluating the pharmacokinetics and preliminary anti-tumor activity of SGR-3515.

We anticipate reporting initial data from the trial in the second half of 2025.

In July 2024, we launched an initiative to expand our computational platform to predict toxicity associated with binding to off-target proteins.

The goal of this initiative is to develop a computational solution to improve the properties of drug development candidates and reduce the risk of development failure.

The project is being funded initially by $19.5 million in grants from the Bill & Melinda Gates Foundation.

We have funded our operations to date principally from the sale of our equity securities, including our initial public offering and our follow-on public offering, and to a lesser extent, from sales of our software solutions and from upfront payments, research funding and milestone payments from our drug discovery collaborations, and from distributions on account of, or proceeds from the sale of, our equity stakes in our collaborators.

On February 13, 2023, April 6, 2023, and November 9, 2023, on account of our equity stake in Nimbus Therapeutics, LLC, or Nimbus, we received cash distributions of $111.3 million, $35.8 million, and $0.1 million, respectively, from Nimbus in connection with Takeda’s acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its TYK2 inhibitor NDI-034858.

In 2023, on account of our equity stake in Nimbus Therapeutics, LLC, or Nimbus, we received an aggregate of $147.2 million in cash distributions from Nimbus in connection with Takeda’s acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its TYK2 inhibitor NDI-034858.

On August 15, 2024, Morphic Holding, Inc., or Morphic, one of our drug discovery collaborators and co-founded companies, was acquired by Eli Lilly and Company, or Lilly, for $57.00 per share, or approximately $3.2 billion.

In connection with the acquisition, we received $47.6 million for the 834,968 shares of Morphic we owned.

We are also entitled to low single-digit royalties on our clinical development programs under our collaboration agreement with Morphic, including MORF-057.

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We currently conduct our operations through two reportable segments:

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Our software segment generates revenue from software product licenses, hosted software subscriptions, software maintenance, professional services, and contributions.

The revenue we generate through our software solutions from each of our customers varies largely depending on the number of software licenses our customers purchase from us.

The revenue we generate through our software solutions from each of our customers varies largely depending on the type and number of software licenses our customers purchase from us.

The licenses that our customers purchase from us provide them the ability to perform a certain number of calculations used in the design of molecules for drug discovery or materials science.

The amount we charge per license depends on the specific software products our customers purchase from us, and the number of licenses needed to perform calculations per software product varies.

With the exception of certain limited products, the number of licenses a customer requires is typically based on the scale at which they are running our software products and is not based on how many users have access to the software.

As customers increase the number of licenses they purchase from us, they will typically be able to run a greater number of simultaneous instances of our products, thereby increasing the number of calculations they will be able to perform in parallel, subject to having enough computational capacity.

We deliver our software through either (i) a product license that permits our customers to install the software solution directly on their own in-house hardware and use it for a specified term, or (ii) a subscription that allows our customers to access our cloud-based software solution on their own hardware without taking control of licenses.

We currently generate drug discovery revenue from our collaborations, including upfront payments, research funding and discovery and development milestones.

Our collaboration agreements typically include upfront consideration, discovery, development, commercial and regulatory milestones, and royalties from future sales of commercialized products.

We generate drug discovery revenue through the performance of specified research and development activities under our collaboration agreements and upon the achievement of discovery and development milestones, and we have the potential to generate drug discovery revenue from commercial and regulatory milestones, option fees, and royalties under our collaboration agreements.

In the future, we may also derive drug discovery revenue from our collaborations from option fees, the achievement of regulatory and commercial milestones, and royalties on commercial drug sales.

In addition to revenue from our collaborations, we may also derive drug discovery revenue from collaborating on or out-licensing our proprietary drug discovery programs when we believe it will help maximize our clinical and commercial opportunities for the program.

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.

In addition to revenue from our collaborations, we may also derive drug discovery revenue from collaborating on or out-licensing our proprietary drug discovery programs when we believe it will help maximize the clinical and commercial opportunities for the program.

We are party to 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, we are 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.

We are eligible to receive up to $482.0 million in total milestone payments for the one remaining neurology target currently subject to the collaboration, of which we have recognized $32.0 million as of December 31, 2024, 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 and License Agreement" in Note 3 to our consolidated financial statements for additional information relating to this agreement.

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

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.

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

Our net income for the year ended December 31, 2023 was $40.7 million and our net loss for the year ended December 31, 2022 was $149.2 million.

In November 2024, we entered into a research collaboration and license agreement with Novartis Pharma AG, or Novartis, pursuant to which we and Novartis agreed to collaborate on the discovery, research and preclinical development of small molecule compounds for targets in certain specified therapeutic areas.

The agreement is intended to advance multiple development candidates for development and commercialization by Novartis.

Under the terms of the research collaboration and license agreement, Novartis paid us an initial upfront fee of $150.0 million in January 2025 and we will be eligible to receive up to $2.272 billion in total milestone payments across the initial programs.

Such milestones consist of up to $892.0 million in discovery and development milestones and up to $1.38 billion in commercial milestones.

We are also entitled to a tiered percentage royalty on net sales of each product commercialized by Novartis ranging from mid

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single-digits to low double-digits, subject to certain specified reductions.

No milestone revenue has been recognized as of December 31, 2024.

In November 2024, we also entered into an expanded three-year software agreement with Novartis that substantially increases Novartis' access to our computational predictive modeling technology and enterprise informatics platform.

See "Collaboration and License Agreement" in Note 3 to our consolidated financial statements for additional information relating to this agreement.

For the year ended December 31, 2024, we generated total revenue of $207.5 million and had a net loss of $187.1 million.

Key Factors Affecting Our Performance

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We define the number of active customers as the number of customers who had an annual contract value, or ACV, of at least $1,000 in the fiscal year.

Included in the number of customers are entities we derive software contribution revenue from, which for the year ended December 31, 2024, consisted of Gates Ventures, LLC and the Bill & Melinda Gates Foundation.

We use $1,000 as a threshold for defining our active customers as this amount will generally exclude customers who only license our PyMOL software, which is our open-source molecular visualization system broadly available at low cost.

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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 at higher thresholds, including customers with an ACV of at least $500,000 or $1.0 million.

Our ability to expand within our customer base is demonstrated by the increasing number of our customers with an ACV at higher thresholds.

For the year ended December 31, 2024, we had 61 customers with an ACV of at least $500,000 compared to 54 for the year ended December 31, 2023.

Furthermore, we had 31, 27, and 18 customers with an ACV of at least $1.0 million for the years ended December 31, 2024, 2023, and 2022, 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.

We also had eight customers with an ACV of at least $5.0 million for the year ended December 31, 2024, compared to four customers for each of the years ended December 31, 2023 and 2022.

With respect to contracts that have a duration of one year or less, or contracts of more than one year in duration that are billed annually, we define ACV as the contract value billed during the applicable period.

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We had 235, 222, and 227 customers with an ACV of at least $100,000 for the years ended December 31, 2024, 2023, and 2022, respectively.

For the year ended December 31, 2023, our year-over-year customer retention rate for such customers was 92% and was 96% or higher for each of the previous nine fiscal years.

For the year ended December 31, 2024, our year-over-year customer retention rate for such customers was 95% and was 92% or higher for each of the previous 10 fiscal years.

Our customer retention rate for our customers with an ACV of at least $500,000 was 100% for the year ended December 31, 2024 and 98% for the year ended December 31, 2023.

We calculate year-over-year customer retention for our customers with an ACV of at least $100,000 or $500,000 by starting with the number of such customers we had in the previous fiscal year.

We then calculate how many of these customers were active

customers in the current fiscal year.

We then calculate how many of these customers were active customers in the current fiscal year.

We then divide this number by the number of customers with an ACV of at least $100,000 or $500,000, as applicable, that, we had in the previous fiscal year to arrive at the year-over-year customer retention rate for such customers.

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This is demonstrated by the length of our key relationships, with the average tenure of our 10 largest software customers in 2024 being nearly 21 years.

Furthermore, we have significantly penetrated the pharmaceutical industry, with all of the top 20 pharmaceutical companies, measured by 2022 revenue, licensing our software in 2023.

Furthermore, we have significantly penetrated the pharmaceutical industry, with 19 of the top 20 pharmaceutical companies, measured by 2023

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revenue, licensing our software in 2024.

Our ability to continue to grow our software revenue is dependent upon our ability to retain customers through the continued support and investment in our sales and marketing efforts and the ongoing enhancement of our software solutions.

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

We have initiated dosing in a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell lymphomas as well as 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 both clinical trials in late 2024 or 2025.

In addition, we expect 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 the receipt of regulatory clearance.

We continue to advance new programs where we can leverage our computational platform to discover novel molecules, and we have recently announced new discovery-stage programs targeting PRMT5-MTA, EGFR C797S , and NLRP3.

We have initiated dosing in a Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell malignancies, a Phase 1 clinical trial of SGR-2921 in patients with relapsed or refractory acute myeloid leukemia or high-risk myelodysplastic syndrome, and a Phase 1 clinical trial for SGR-3515 in patients with advanced solid tumors.

We anticipate reporting initial data from the Phase 1 clinical trial of SGR-1505 in patients with relapsed or refractory B-cell malignancies in the second quarter of 2025, and from each of the Phase 1 clinical trial of SGR-2921 in patients with relapsed or refractory acute myeloid leukemia or high-risk myelodysplastic syndrome and the Phase 1 clinical trial for SGR-3515 in patients with advanced solid tumors in the second half of 2025.

We continue to advance new programs where we can leverage our computational platform to discover novel molecules, including our programs targeting PRMT5-MTA, EGFR C797S , NLRP3, and LRRK2.

As we progress and expand our pipeline of proprietary programs, we will strategically evaluate on a program-by-program basis advancing them ourselves, entering into collaborations to co-develop them with leading industry partners, or out-licensing them to maximize their probability of clinical and commercial success.

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When a customer enters into a hosted arrangement for which revenue is recognized over time, the amount paid upfront that is not recognized in the current period is included in deferred revenue in our statement of financial position until the period in which it is recognized.

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Software maintenance.

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Software contribution revenue .

Software contribution revenue consists of funds received under a non-reciprocal agreement with Gates Ventures, LLC originally entered into in June 2020 and further extended through August 2026.

Software contribution revenue consists of funds received under non-reciprocal agreements with Gates Ventures, LLC and the Bill & Melinda Gates Foundation.

The agreement with Gates Ventures, LLC was originally entered into in June 2020 and further extended through August 2026.

The agreement is an unconditional non-exchange contribution without restrictions.

Revenue was recognized annually from June 2020 through June 2022 and upon extension of the agreement in August 2023, when invoiced, in accordance with Accounting Standard Codification, or ASC, Topic 958 , Not-for-Profit Entities as the agreement is not an exchange transaction.

Revenue is recognized annually, when invoiced, in accordance with Accounting Standard Codification, or ASC, Topic 958 , Not-for-Profit Entities, or Topic 958, as the agreement is not an exchange transaction.

In July 2024, we entered into a one-year agreement with the Bill & Melinda Gates Foundation to initially fund our initiative to accelerate the expansion of our computational platform to predict toxicity associated with binding to off-target proteins.

In November 2024, we entered into an expansion of the agreement which extends the funding and effort for this initiative through April 2026.

Revenue is recognized as conditions are met and on a cost reimbursement basis in accordance with Topic 958.

Drug Discovery Revenue

Drug discovery services.

We currently generate drug discovery revenue from discovery collaboration arrangements, including upfront payments, research and development payments, and discovery and development milestones.

The majority of our current collaborations are in the discovery and preclinical development stages.

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In addition to revenue from our collaborations, we may also derive drug discovery revenue from out-licensing our proprietary drug discovery programs when we believe it will help maximize the probability of clinical and commercial success of the program.

Overall, we expect that our drug discovery revenue will fluctuate from period to period due to the inherently uncertain nature of the timing of milestone achievement and our dependence on the program decisions of our collaborators.

Overall, we expect that our drug discovery revenue will fluctuate from period to period due to the inherently uncertain nature of the timing of milestone achievements and our dependence on the program decisions of our collaborators.

Drug discovery contribution revenue.

Contribution revenue consists of funds received under agreements with the Bill and Melinda Gates Foundation on a cost reimbursement basis, to perform services aimed at accelerating drug discovery in women’s health.

Revenue is recognized as conditions are met in accordance with ASC Topic 958, Not-for-Profit Entities .

Contribution revenue consists of funds received under agreements with the Bill & Melinda Gates Foundation on a cost reimbursement basis, to perform services aimed at accelerating drug discovery in women’s health.

Revenue is recognized as conditions are met in accordance with Topic 958.

Cost of Revenues

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While we have incurred costs associated with discovery efforts since late 2017, we have recognized and expect to continue to recognize

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revenues in the future if and when milestones are deemed probable or achieved.

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We expect our drug discovery costs of revenue to trend lower over time as we shift our focus to proprietary drug discovery programs.

However, these trends will be impacted by the number and stage of our collaborative programs, especially in the case of new collaborative programs.

Gross Profit and Gross Margin

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For example, the cost of royalties due for sales of our hosted software arrangements are recognized upfront, whereas the associated hosted software revenue for these arrangements is recognized over the term of the underlying agreement.

While the gross margin of our drug discovery business will fluctuate significantly from period to period depending on factors such as the timing of recognition of milestones, we expect the gross margins to generally trend higher over time as more programs advance to later stages of development, the milestones increase in size and our ongoing research and development obligations to such programs decline in cost.

While the gross margin of our drug discovery business will fluctuate significantly from period to period depending on factors such as the timing of recognition of milestones, the number and mix of collaborative programs, and their respective stages of development, we expect the gross margins to generally trend higher over time as more programs advance to later stages of development, the milestones increase in size and our ongoing research and development obligations to such programs decline in cost.

Research and Development Expense

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We expect our research and development expense to increase in absolute dollars as we continue to invest in activities related to discovery and development of our proprietary drug discovery programs, in advancing our computational platform, and as we incur expenses associated with hiring additional personnel directly involved in such efforts.

The amount to which our research and development expense may increase in the future will also be dependent on our development plans for our proprietary drug discovery programs, including the timing of any partnering or out-licensing decisions.

At this time, we do not know, nor can we reasonably estimate, the nature, timing, or costs of the efforts that will be necessary to complete the development of any of our proprietary drug discovery programs.

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We plan to make focused investments in sales and marketing over the foreseeable future to foster the growth of our business as we aim to expand software sales to existing customers and increase our customer base.

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General and Administrative Expense

General and administrative expense consists of personnel-related expenses associated with our executive, legal, finance, human resources, information technology, and other administrative functions, including salaries, benefits, bonuses,

and stock-based compensation.

General and administrative expense also includes professional fees for external legal, accounting and other consulting services, allocated overhead costs, and other general operating expenses.

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Change in Fair Value

Fair value gains and losses consist of adjustments to the fair value of our equity investments, which may include Nimbus, Structure Therapeutics Inc., or Structure Therapeutics, and Morphic Holding, Inc., or Morphic.

Fair value gains and losses consist of adjustments to the fair value of our equity investments, which may include Nimbus, Structure Therapeutics Inc., or Structure Therapeutics, and Morphic.

We remeasure our investments at each period end.

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We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.

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Results of Operations

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Loss from operations (209,296) (177,448) (31,848) 18%

Other income (expense):

Gain on equity investments 147,213 11,825 135,388

Change in fair value 53,461 (18,084) 71,545

Other income:

Total other income (expense) 220,367 (2,309) 222,676

Income (loss) before income taxes 42,919 (149,126) 192,045

Income tax expense 2,199 63 2,136

Net income (loss) 40,720 (149,189) 189,909

Net income (loss) attributable to noncontrolling interest — (3) 3

Net income (loss) attributable to Schrödinger stockholders $ 40,720 $ (149,186) $ 189,906

Gain on equity investments — 147,213 (147,213) N/M

Change in fair value 5,683 53,461 (47,778) N/M

Other income 17,902 19,693 (1,791) N/M

Total other income 23,585 220,367 (196,782) N/M

(Loss) income before income taxes (185,711) 42,919 (228,630) N/M

Income tax expense 1,412 2,199 (787) N/M

Net (loss) income $ (187,123) $ 40,720 $ (227,843) N/M

N/M – not meaningful

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Year Ended December 31, Change

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On-premise software.

The increase in revenues for on-premise software during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in multi-year arrangements for which revenue was recognized ahead of annual billings, as well as growth from existing and new customers during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The decrease in revenues for on-premise software during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to a decrease in multi-year customer contracts with upfront revenue recognition in the current period versus the comparable period.

Hosted software.

The increase in revenues for hosted software during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to increased spend from existing hosted customers, as well as growth in new customers purchasing hosted software subscriptions, for which revenue is recognized ratably over the period of the contract.

The increase in revenues for hosted software during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to customers switching from on premise to hosted software purchases, as well as increased spend from existing hosted customers and growth in new customers purchasing hosted software subscriptions, for which revenue is recognized ratably over the period of the contract.

Software maintenance.

The increase in revenues for software maintenance during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to the increase in on-premise software sales in current and previous years.

Software maintenance revenues remained consistent during the year ended December 31, 2024 as compared to the year ended December 31, 2023 primarily due to the fluctuation of on-premise software renewal periods, including multi-year customer arrangements, in the current period versus the comparable period, as well as increased spend from existing customers.

Software maintenance revenue is recognized ratably over the period of the contract.

Professional services.

The decrease in revenues from professional services during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to decreases of approximately $3.1 million in structural biology services and approximately $2.7 million related to progress and completion of technology and modeling service projects.

Professional services revenues remained consistent during the year ended December 31, 2024 as compared to the year ended December 31, 2023 primarily due to the progress and completion of technology and modeling service projects.

Software contribution revenue .

Contribution revenue during the year ended December 31, 2023 and the year ended December 31, 2022 was due to funds received under an agreement with Gates Ventures, LLC, which began in June 2020 and was extended in August 2023.

The increase in software contribution revenues during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was due to the agreements with the Bill & Melinda Gates Foundation entered into during the year ended December 31, 2024, aimed to accelerate the expansion of our computational software platform, and the extension of the agreement with Gates Ventures, LLC.

Drug Discovery Revenue

Drug discovery services.

The increase in revenues for drug discovery services during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to the timing and amount of collaboration milestones achieved, including $25.0 million received from BMS, and the progress of existing and new collaborations accomplished during 2023 as compared to 2022.

The decrease in revenues for drug discovery services during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to the timing and amount of collaboration milestones achieved, including $25.0 million received from BMS during the year ended December 31, 2023, as well as BMS electing not to proceed with further development for two programs during 2023, which resulted in increased revenue recognition due to the accelerated completion of our obligations related to such programs during the year ended December 31, 2023.

This decrease was partially offset by collaboration milestones achieved in 2024, as well as the progress of

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existing and new collaborations.

We expect that our revenue will fluctuate from period to period due to the inherently uncertain nature of the timing of milestone achievement and our dependence on the program decisions of our collaborators.

Drug discovery contribution revenue.

Contribution revenue during the year ended December 31, 2023 was due to services performed under an agreement with the Bill and Melinda Gates Foundation aimed at accelerating drug discovery in women’s health, which began in November 2021.

The decrease in drug discovery contribution revenue during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was due to fluctuation in allotted funds spent under an agreement with the Bill & Melinda Gates Foundation, aimed at accelerating drug discovery in women’s health, which began in November 2021.

Cost of Revenues

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Software products and services.

The decrease in cost of revenues for software products and services during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to decreases of approximately $0.9 million in personnel-related expense and approximately $0.1 million in other expenses, offset by an increase of approximately $0.9 million in cloud computing expense.

The increase in cost of revenues for software products and services during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was attributable to increases of approximately $4.3 million in cloud computing expense and approximately $3.3 million in personnel-related expense, partially offset by a decrease of approximately $0.2 million in royalty expense.

Software products and services gross margin.

The increase in software gross margin during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to an increase in software revenue and relatively flat fixed costs, which was due to the re-allocation of resources from cost of revenue to research and development activities.

The decrease in software gross margin during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to an increase in expenses related to our agreement with the Bill & Melinda Gates Foundation to accelerate the expansion of our computational software platform, partially offset by an increase in revenue.

Drug discovery.

The decrease in cost of revenues for drug discovery during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to decreases of approximately $4.6 million in personnel-related expense reflecting the redeployment of our discovery organization towards proprietary drug discovery programs, approximately $0.5 million in cloud computing expense, and approximately $0.1 million in royalty expense, offset by increases of approximately $1.1 million in third-party CRO costs associated with the expansion and progression of collaborative programs, and approximately $0.2 million in other expenses.

The decrease in cost of revenues for drug discovery during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was attributable to decreases of approximately $7.9 million in third-party CRO costs due to the discontinuation of certain collaboration projects and approximately $0.9 million in personnel-related expense reflecting the redeployment of our discovery organization towards proprietary drug discovery programs, partially offset by approximately $0.6 million in royalty expense and approximately $0.3 million in cloud computing expense.

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Research and Development Expense

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Total research and development expense $201,785 $181,766 $20,019 11%

The increase in external costs of $23.5 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in costs associated with the ongoing Phase 1 clinical trials and other development activities for SGR-1505, as well as other external research costs to support our early-stage product candidates, including SGR-2921 and SGR-3515.

The increase in internal costs for programs in clinical and preclinical development of $15.0 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in personnel-related expense and rent expense.

The increase in all other research and development expense during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to increases of approximately $8.4 million in personnel-related expense, approximately $4.1 million in cloud computing expense, approximately $3.4 million related to office rent, approximately $0.6 million in travel and entertainment expenses, approximately $0.3 million related to professional services, and approximately $0.1 million in other expenses.

The increase in external costs of $0.6 million during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to an increase in costs associated with the ongoing Phase 1 clinical trial and other development activities for SGR-2921, as well as other external research costs to support our early-stage product candidates, partially offset by a decrease in costs for SGR-1505 and SGR-3515 due to timing of work performed.

The increase in internal costs for programs in discovery, preclinical and clinical development of $8.5 million during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to an increase in personnel-related expense and rent expense.

The increase in all other research and development expense during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was attributable to increases of approximately $4.8 million in personnel-related expense, approximately $3.5 million in cloud computing expense, approximately $1.4 million related to office rent, approximately $0.7 million related to professional services, and approximately $0.5 million in other expenses.

Sales and Marketing Expense

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Sales and marketing $ 39,917 $ 37,226 $ 2,691 7%

The increase in sales and marketing expense during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to increases of approximately $4.6 million in personnel-related expense, approximately $0.9 million related to office rent, approximately $0.7 million in travel and entertainment expenses, and approximately $0.4 million in cloud computing expense.

The increase in sales and marketing expense during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was attributable to increases of approximately $2.1 million in personnel-related expense, approximately $0.6 million in travel and entertainment expense, and approximately $0.3 million in cloud computing expense, partially offset by decreases of approximately $0.1 million related to office facilities and approximately $0.2 million in other expenses.

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General and Administrative Expense

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General and administrative $ 99,677 $ 99,148 $ 529 1%

The increase in general and administrative expense during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was attributable to increases of approximately $8.5 million of personnel-related expense, approximately $2.2 million in royalties related to cash distributions we received from Nimbus, approximately $0.8 million in cloud computing expense, approximately $0.8 million related to office rent, approximately $0.5 million in travel and entertainment expense, and approximately $0.5 million in amortization related to the acceleration of customer relationship intangible assets, offset by decreases of approximately $2.4 million related to professional services, approximately $1.1 million related to a one-time non-recurring state and local tax item, and approximately $1.5 million in other expenses.

The increase in general and administrative expense during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was attributable to increases of approximately $5.0 million of personnel-related expense, approximately $2.2 million related to professional services, and approximately $0.4 million in cloud computing expense, partially offset by decreases of approximately $4.3 million in royalties related to cash distributions we received from Nimbus, approximately $0.5 million in amortization related to the acceleration of customer relationship intangible assets, approximately $0.4 million in travel and entertainment expense, approximately $0.1 million related to office facilities, and approximately $1.8 million in other expenses.

Gain on Equity Investments

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Gain on equity investments $ — $ 147,213 $ (147,213)

There was no gain on equity investments during the year ended December 31, 2024.

The gain on equity investments during the year ended December 31, 2023 was due to the realized gain on our equity investment in Nimbus following the closing of Takeda's acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its tyrosine kinase 2 inhibitor, NDI-034858.

The gain on equity investments during the year ended December 31, 2022 was due to cash received from a third party, who previously acquired a collaborator in which we held an equity stake, in exchange for the termination of our rights to receive potential earnouts under the acquisition agreement.

Change in Fair Value

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Change in fair value $ 5,683 $ 53,461 $ (47,778)

The change in fair value during the year ended December 31, 2023 was due to an unrealized gain on our investment in Structure of $49.8 million, an unrealized gain on our investment in Nimbus of $1.9 million, and an unrealized gain on our investment in Morphic of $1.8 million.

The change in fair value during the year ended December 31, 2022 was primarily due to an unrealized loss on our investment in Morphic.

The change in fair value during the year ended December 31, 2024 was primarily due to an unrealized gain on our investment in Morphic of $23.5 million, partially offset by an unrealized loss on our investment in Structure Therapeutics of $18.1 million.

The change in fair value during the year ended December 31, 2023 was due to an unrealized gain on our investment in Structure Therapeutics of $49.8 million, an unrealized gain on our investment in Nimbus of $1.9 million, and an unrealized gain on our investment in Morphic of $1.8 million.

Year Ended December 31,

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Other income $ 17,902 $ 19,693 $ (1,791)

The increase in other income during the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily attributable to an increase in interest rates on our investment portfolio.

The decrease in other income during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to a decrease of approximately $1.2 million in interest income on our investment portfolio and a decrease of approximately $0.6 million primarily related to unfavorable foreign currency fluctuations.

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Income Tax Expense

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Income tax expense $ 1,412 $ 2,199 $ (787)

Income tax expense for the year ended December 31, 2024 represents state income tax obligations and taxes in foreign jurisdictions for which we conduct business.

Income tax expense for the year ended December 31, 2023 represents our federal and certain state income tax obligations and taxes in foreign jurisdictions for which we conduct business.

Income tax expense for the year ended December 31, 2022 represents our income tax obligations in certain states and taxes in foreign jurisdictions in which we conduct business.

As of December 31, 2024, we have a full valuation allowance on our U.S.

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The federal net operating loss carryforwards are limited to 80% of taxable income generated in a given year and carry forward indefinitely.

At December 31, 2023, we had federal and state research and development tax credit carryforwards of approximately $23.3 million and $1.6 million, respectively.

At December 31, 2024, we had federal orphan drug credits and federal research and development tax credit carryforwards of approximately $31.3 million and state research and development tax credit carryforwards of approximately $2.7 million.

These carryforwards will expire between 2025 and 2044, if not utilized.

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We recorded income tax expense of $1.4 million and $2.2 million for the years ended December 31, 2024 and 2023, respectively.

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Quarterly Results of Operations

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Change in fair value (22,080) 25,459 (5,833) 8,137 (8,408) (14,522) 40,654 35,737

Other income (expense) 6,626 5,804 4,326 2,937 2,687 1,231 (296) 328

Other income 3,539 4,737 4,598 5,028 6,626 5,804 4,326 2,937

Total other (expense) income (18,541) 30,196 (1,235) 13,165 (1,891) (8,718) 44,980 185,996

(Loss) income before income taxes (39,253) (38,226) (53,964) (54,268) (31,512) (64,911) (16,153) 155,495

Income tax (benefit) expense (842) (2,887) (20,431) 26,359 (136) 194 33 (28)

Income tax expense (benefit) 963 (90) 83 456 (842) (2,887) (20,431) 26,359

Net (loss) income $ (40,216) $ (38,136) $ (54,047) $ (54,724) $ (30,670) $ (62,024) $ 4,278 $ 129,136

Net (loss) income attributable to noncontrolling interest — — — — (1) (3) 12 (11)

Net (loss) income attributable to Schrödinger stockholders $ (30,670) $ (62,024) $ 4,278 $ 129,136 $ (27,207) $ (39,853) $ (47,686) $ (34,440)

(1) Includes stock-based compensation as indicated in the table located further below.

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Three Months Ended

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$ 12,479 $ 12,398 $ 12,808 $ 12,218 $ 12,533 $ 12,654 $ 11,773 $ 10,881

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Depreciation and Amortization:

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CRO cost increases were driven by the expansion and progression of our proprietary drug discovery programs.

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Quarterly Other (Expense) Income Trends

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Segment Information

The following tables summarize segment information for the years ended December 31, 2023 and 2022.

See Note 14 – Segment Reporting in our audited consolidated financial statements for additional information regarding our segments.

Segment gross profit is derived by deducting operational expenditures, with the exception of research and development, sales and marketing, and general and administrative activities, from U.S.

GAAP revenue.

Operational expenditures are expenditures made that are directly attributable to the reportable segment.

In many cases, these expenditures are allocated to the segments based on headcount.

The reportable segment expenditures include compensation, supplies, and services from contract research organizations.

Certain cost items are not allocated to our reportable segments.

These cost items primarily consist of non-drug discovery program related compensation and general operational expenses associated with our research and development, sales and marketing, and general and administrative activities.

These costs are incurred by both segments and, due to the integrated nature of our software and drug discovery segments, any allocation methodology would be arbitrary and provide no meaningful analysis.

Additionally, we report assets on a consolidated basis and do not allocate assets to our reportable segments for purposes of assessing segment performance or allocating resources.

Year Ended December 31,

(in thousands)

Segment revenues:

Software $ 159,124 $ 135,578

Drug discovery 57,542 45,377

Total segment revenues $ 216,666 $ 180,955

Segment gross profit:

Software $ 129,610 $ 106,002

Drug discovery 11,082 (4,980)

Total segment gross profit $ 140,692 $ 101,022

Unallocated (expense) income:

Research and development (181,766) (126,372)

Sales and marketing (37,226) (30,642)

General and administrative (99,148) (90,825)

Gain on equity investment

147,213 11,825

Change in fair value 53,461 (18,084)

Income taxes (2,199) (63)

Consolidated net income (loss)

$ 40,720 $ (149,189)

Liquidity, Capital Resources and Funding Requirements

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As of December 31, 2024, we had an accumulated deficit of $525.5 million.

on account of, or proceeds from the sale of, our equity stakes in our collaborators.

Our operating cash flows are impacted by the magnitude and timing of our software sales and by the magnitude and timing of our drug discovery milestone achievements and research funding fees.

On March 4, 2021, we filed a universal shelf registration statement on Form S-3 which allows us to offer and sell an indeterminate number of shares of common stock, preferred stock, depositary shares or warrants, or an indeterminate principal amount of debt securities, from time to time pursuant to one or more offerings at prices and terms to be determined at the time of the sale.

As of December 31, 2023, no securities had been sold under the Form S-3.

In May 2023, we entered into a sales agreement with Leerink Partners LLC (formerly SVB Securities LLC), or Leerink Partners, as sales agent, with respect to an at-the-market offering program, or the ATM, under which we could offer and sell, from time to time pursuant to our Form S-3, shares of common stock, having an aggregate offering price of up to $250.0 million, through Leerink Partners.

During the three months ended December 31, 2023, no shares of common stock were sold under the ATM and as of December 31, 2023, we had $250.0 million of common stock remaining available for sale under the ATM.

On February 28, 2024, we filed a universal shelf registration statement on Form S-3 which allows us to offer and sell an indeterminate number of shares of common stock, preferred stock, depositary shares or warrants, or an indeterminate principal amount of debt securities, from time to time pursuant to one or more offerings at prices and terms to be determined at the time of the sale.

In February 2024, we entered into an amended and restated sales agreement with Leerink Partners LLC (formerly SVB Securities LLC), or Leerink Partners, as sales agent, with respect to an at-the-market offering program, or the ATM, under which we could offer and sell, from time to time pursuant to our Registration Statement on Form S-3, shares of common stock, having an aggregate offering price of up to $250.0 million through Leerink Partners.

The amended and restated sales agreement amends and restates the original sales agreement that we entered into with Leerink Partners with respect to the ATM in May 2023, which is no longer in effect.

As of December 31, 2024, 323,085 shares of common stock, were sold under the ATM for total net proceeds of $8.7 million and gross proceeds of $8.9 million, before deducting sales agent commissions.

As of December 31, 2024, we had $241.1 million of common stock remaining available for sale under the ATM.

As of December 31, 2024, we had cash, cash equivalents, restricted cash, and marketable securities of $367.5 million.

We believe our existing cash, cash equivalents, and marketable securities as of December 31, 2023 will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 24 months.

In January 2025, we received the upfront payment of $150.0 million from Novartis in connection with entering into our research collaboration and license agreement with Novartis.

We believe our existing cash, cash equivalents, and marketable securities as of December 31, 2024, together with the upfront payment we received from Novartis, will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 24 months.

Our future capital requirements will depend on many factors, including the growth of our software revenue, the timing and extent of spending to support research and development efforts, the continued expansion of software sales and marketing activities, the timing and receipt of milestone payments from our collaborations, as well as spending to support, advance, and broaden our proprietary drug discovery programs.

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With respect to our proprietary drug discovery programs, as part of our strategy we may choose to advance them into preclinical and clinical development ourselves, enter into collaborations to co-develop them with leading industry partners, or out-license them to maximize their clinical and commercial opportunities.

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We may be required to seek additional equity or debt financing.

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In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.

Our contractual obligations as of December 31, 2023 include lease obligations of $195.5 million, consisting of our continuing rent obligations through December 2037, primarily for our offices located in New York, New York for $145.4 million, Cambridge, Massachusetts for $16.4 million and Framingham, Massachusetts for $11.3 million, which expire in December 2037, June 2032 and March 2033, respectively.

Our contractual obligations as of December 31, 2024 include lease obligations of $177.5 million, consisting of our continuing rent obligations through December 2037, primarily for our office located in New York, New York for $136.0 million, which expires in December 2037.

In addition, see Note 6 – Commitments and Contingencies to our consolidated financial statements appearing in Item 8 of this Annual Report for more information relating to our operating lease obligations.

In December 2022, we entered into an agreement with a third-party to establish an exclusive integrated drug discovery dedicated facility in Hyderabad, India.

The agreement contains a minimum payment obligation, which totals $21.8 million over five years after the date of first occupancy.

In addition, see Note 7 – Commitments and Contingencies to our consolidated financial statements appearing in Item 8 of this Annual Report for more information relating to our operating lease obligations.

In December 2020, we entered into a five-year agreement with a third-party cloud provider for compute power.

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Net cash provided by financing activities 10,123 9,048

Net increase (decrease) in cash and cash equivalents and restricted cash $ 65,349 $ (27,550)

Net increase in cash and cash equivalents and restricted cash $ 1,591 $ 65,349

Operating activities

During the year ended December 31, 2023, operating activities used approximately $136.7 million in cash, due to a $147.2 million gain from equity investments, of which the cash received is included in investing activities , $53.5 million of non-cash gain on changes in fair value, $22.4 million in changes in our operating assets and liabilities, and $2.1 million of non-cash operating expenses.

These items are offset by a net income of $40.7 million, including depreciation and investment accretion costs and $47.8 million in stock-based compensation.

During the year ended December 31, 2022, operating activities used approximately $119.7 million in cash primarily resulting from net loss of $149.2 million, which included an $11.8 million gain from equity investments, partially offset by $5.0 million of non-cash operating expenses included in net loss, including depreciation and investment accretion costs, $39.6 million in stock-based compensation, and $18.1 million of non-cash loss on changes in fair value.

Changes in our operating assets and liabilities used cash of approximately $21.4 million.

During the year ended December 31, 2024, operating activities used approximately $157.4 million of cash, primarily due to a net loss of $187.1 million, which included changes to our operating assets and liabilities of $13.1 million, a $5.7 million non-cash gain on changes in fair value, and $1.4 million of non-cash operating expenses, depreciation and investment accretion costs.

These items were partially offset by $49.9 million of stock-based compensation.

During the year ended December 31, 2023, operating activities used approximately $136.7 million of cash, due to a $147.2 million gain from equity investments, of which the cash received is included in investing activities, $53.5 million of non-cash gain on changes in fair value, $22.4 million in changes in our operating assets and liabilities, and $2.1 million of non-cash operating expenses.

These items were offset by a net income of $40.7 million, including depreciation and investment accretion costs and $47.8 million in stock-based compensation.

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Investing activities

During the year ended December 31, 2023, investing activities provided approximately $193.0 million of cash, consisting of $147.2 million cash distributions received, on account of our equity investment in Nimbus, from Nimbus in connection with Takeda’s acquisition of Nimbus Lakshmi, Inc., a wholly-owned subsidiary of Nimbus, and its TYK2 inhibitor NDI-034858 and $63.3 million provided by marketable securities, net of purchases.

These items are partially offset by $13.4 million in cash used for purchases of property and equipment, $4.1 million used for purchases of equity investments in Structure Therapeutics.

During the year ended December 31, 2022, investing activities provided approximately $90.0 million of cash, consisting of $93.2 million provided by marketable securities, net of purchases and $11.8 million in cash from a third party, who previously acquired a collaborator in which we held an equity stake, in exchange for the termination of our rights to receive potential earnouts under the acquisition agreement.

These items are partially offset by $8.0 million in cash used for purchases of property and equipment, $0.6 million used to make equity investments in Structure Therapeutics, and $6.4 million used to acquire XTAL, net of cash acquired.

During the year ended December 31, 2024, investing activities provided approximately $148.8 million of cash, consisting of $110.4 million provided by marketable securities maturities, net of purchases, and $48.8 million primarily provided by the disposition of equity investments.

These items were partially offset by $7.3 million in cash used for purchases of property and equipment and $3.1 million primarily used for purchases of our equity investment in Ajax Therapeutics, Inc.

These items were partially offset by $13.4 million in cash used for purchases of property and equipment, and $4.1 million used for purchases of our equity investment in Structure Therapeutics.

Financing activities

During the year ended December 31, 2023, financing activities provided approximately $9.0 million of cash, primarily attributable to proceeds from stock option exercises.

During the year ended December 31, 2024, financing activities provided approximately $10.1 million of cash, consisting of $8.7 million attributable to net proceeds received from the ATM and $1.4 million attributable to proceeds received from stock option exercises.

During the year ended December 31, 2023, financing activities provided approximately $9.0 million of cash, primarily attributable to proceeds from stock option exercises.

Generally, the first and fourth quarter of each year have typically been our largest quarters for software products and services revenue, primarily due to the timing of customer renewals of on-premise software arrangements, for which revenue is recognized at a single point in time.

Generally, the first and fourth quarter of each year have been our largest quarters for software products and services revenue, primarily due to the timing of customer renewals of on-premise software arrangements, for which revenue is recognized at a single point in time.

Seasonality has been a less significant factor for our hosted software arrangements, for which revenue is recognized ratably over time.

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In accordance with Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

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To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps:

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and (v) recognize revenue when or as we satisfy a performance obligation.

Significant management judgment is applied to determine the allocation of the transaction price and measurement of progress, including (1) the constraint on variable consideration, (2) the allocation of the transaction price to the performance obligations using their standalone selling price, or SSP, and (3) the appropriate input or output based method to recognize collaboration revenue and the extent of progress to date.

Significant management judgment is applied to determine the allocation of the transaction price and measurement of progress, including (1) the constraint on variable consideration, (2) the identification of performance obligations and allocation of the transaction price to the performance obligations using their standalone selling price, or SSP, and (3) the appropriate input or output based method to recognize collaboration revenue and the extent of progress to date.

Variable consideration:

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If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.

Milestone payments that are not within our control or that of the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

The transaction price is then allocated to each performance obligation on an SSP basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

Milestone payments that are not within our control or that of the licensee, such as certain regulatory approvals, are not considered probable of being achieved until those approvals are received.

The transaction price is then allocated to each performance obligation on an SSP basis consistent with the allocation objectives of Topic 606, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price.

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Software performance obligations and transaction price allocation :

At contract inception, we assess the goods or services promised within each contract that falls under the scope of Topic 606 to identify distinct performance obligations, which requires significant judgment based on the nature of each transaction.

At contract inception, we assess the goods or services promised within each contract that falls under the scope of Topic 606 to identify distinct performance obligations, which requires the most difficult, subjective, and complex judgments based on the nature of each transaction.

We allocate the transaction price to each distinct performance obligation on an SSP basis.

We determine the SSP using information that includes historical discounting practices, market conditions, cost-plus analysis, and other observable inputs.

We typically have more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances.

We typically have more than one SSP for individual software license performance obligations due to the stratification of those items by classes of customers and circumstances.

In these instances, we may use information such as the size and geographic region of the customer in determining the SSP.

We may also estimate SSP based on management judgment by considering available data such as internal cost and margin objectives, pricing strategies, market/competitive conditions, historical profitability data, as well as other observable inputs.

We establish SSP ranges for our products and services and reassesses them periodically.

We establish SSP ranges for our products and services and reassess them periodically.

The determination of SSP required significant management judgment.

Collaboration agreement transaction price allocation and measurement of progress:

At the inception of each arrangement, we utilize judgment to assess the nature of the performance obligations to determine whether they are distinct or a single combined performance obligation.

We allocate the transaction price to each performance obligation based on the relative SSP of each performance obligation at inception, which will be determined based on each performance obligation’s estimated SSP.

Collaboration agreement performance obligations, transaction price allocation, and measurement of progress:

At the inception of each arrangement, we utilize judgment to assess the nature of the performance obligations to determine

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whether they are distinct or a single combined performance obligation.

We allocate the transaction price to each performance obligation based on the relative SSP of each performance obligation at inception.

We determine the SSP at contract inception of the research activities based on internal estimates of the costs to perform the services, inclusive of a reasonable profit margin.

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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 7. Management’s Discussion and Analysis