Solskin
Schrödinger (NASDAQ:SDGR) is a high-growth drug development company. The company’s long-term revenue is expected to grow at a CAGR of 15% driven by its versatile drug development platform. The company has a robust pipeline of innovative drug development programs, which I expect will drive the company’s long-term revenue growth. Long-term investors can buy the company’s shares around the current price to maximize their gain.
Schrödinger develops software for drug discovery. The company’s software platform is used by biopharmaceutical and industrial companies, government laboratories and academic institutions. The software platform is also used by the company’s multidisciplinary drug discovery team to advance collaborative drug discovery. The drug discovery team leverages the company’s own pipeline of novel therapeutics to address unmet medical needs.
Growth Drivers
Software Platform for Drug Discovery
The company’s primary growth driver is its differentiated, physics-based software platform that enables discovery of high-quality, novel molecules for drug development. The platform beats competitor platforms since it provides drug development initiatives at high speed and at lower cost. Traditional drug discovery and development efforts are becoming increasingly complex, lengthy and have high failure rates. Schrödinger provides computational software solutions for drug discovery to the biopharmaceutical industry, which is gradually replacing traditional drug discovery methods. As a result, the company’s long-term revenue is growing at a sustainable rate.
Software Solutions for Materials Science
The company’s another growth driver is its software platform that offers several methods for designing new molecules for industrial purposes. The software solutions for the company’s materials science customers uses more or less same technology as its drug development software. Traditional methods of discovering new molecules for materials science suffer from long timelines, which can take up to 10 to 20 years. Schrödinger’s materials science software platform performs well in competitive environment since it offers cost-effective molecule development initiatives and different methods to approach molecule development so that if one method fails, another can be successful. As a result, the company’s long-term revenue is growing at a satisfactory rate.
Competition
The industry in which Schrödinger operates is highly competitive. Its competitors include BIOVIA, a brand of Dassault Systèmes SE (OTCPK:DASTY), or BIOVIA, Chemical Computing Group (US) Inc., Cresset Biomolecular Discovery Limited, OpenEye Scientific Software, Inc., Optibrium Limited, Cyrus Biotechnology, Inc., Molsoft LLC, Insilico Medicine, Inc., Iktos, XtalPi Inc., and Simulations Plus, Inc (SLP). Schrödinger competes with these companies on the basis of accuracy of computations, level of customer satisfaction and functionality, ease of use, breadth and depth of solution and application functionality.
The company’s primary competitive advantage is that its drug development platform offers molecule development enabling shortening timelines, which is able to evaluate molecules in hours rather than the weeks. Traditional methods take weeks for synthesizing and assaying molecules in the laboratory, which is not needed in Schrödinger’s case. The company’s another competitive advantage is that its technology offers scale for drug development. Its platform can explicitly evaluate billions of molecules per day, whereas traditionally methods can only synthesize approximately one thousand molecules per year. As a result, drug development has become a lot easier compared to yesteryears’ methods. Both the advantages lead to significant long-term revenue growth for the company.
Third Quarter 2022 Results
Schrödinger reported third quarter 2022 revenue of $37 million, up 23.7% year-over-year. The company’s third quarter GAAP EPS came in at -$0.56. Top-line increased driven by strong software business, and drug discovery business. Top-line also increased driven by progress across the company’s portfolio of collaborative and proprietary programs. The company announced that it is focused on continuing to drive software adoption and advancing pipeline.
The company recently announced that its Phase 1 study of our MALT1 inhibitor, SGR-1505, is open for patient enrolment. This would mean the company’s long-term revenue could rise meaningfully. The company announced that it is expanding its drug discovery portfolio with the help of a partnership with Lilly for the discovery of small molecule compounds, which I believe will result in significant revenue expansion in the next three to five years.
Valuation
Schrödinger’s peer group companies include NextGen Healthcare (NXGN), Phreesia (PHR), Definitive Healthcare Corp. (DH), American Well Corporation (AMWL), Allscripts Healthcare Solutions (MDRX).
|
SDGR |
NXGN |
PHR |
DH |
AMWL |
MDRX |
|
|
Price/Sales [TTM] |
7.97 |
2.21 |
5.05 |
5.25 |
3.86 |
1.38 |
|
EV/Sales [TTM] |
6.59 |
2.11 |
4.35 |
7.81 |
1.96 |
1.12 |
|
Price to Book [TTM] |
2.94 |
3.07 |
3.60 |
1.22 |
0.98 |
1.70 |
Data Source: Seeking Alpha
Schrödinger’s valuation is rich compared to its peer group companies. The company’s balance sheet consists of cash and equivalents of $102.8 million, and total debt of $95.8 million. The company is richly valued because the company’s drug discovery program is continuously generating strong revenue growth and the company is investing in new programs for drug development. The company is growing its long-term revenue since its software products are seeing strong adoption and it has a robust pipeline of innovative drug development programs. This is the reason why the company’s share price is expected to rise significantly in the coming years. In the last five years the company’s revenue has grown at a CAGR of 25%, and I expect its revenue will continue to grow at a CAGR of around mid-teens in the long term. This is the reason I expect the company’s long-term share price growth probability is strong. The company is a “buy” in my opinion in the long-term (five year) time horizon.
Now I will find out the company’s long-term expected share price. The company’s trailing 12-month revenue is $170.30 million, and at a CAGR of 15% its end-2027 revenue will be $342.50 million, or $4.81 per share. In light of the company’s future revenue growth, I expect the company’s price to sales multiple will touch a high of around 10x in the next five years. Applying a price to sales multiple of 10x on the company’s end-2027 revenue per share, I get the company’s end-2027 share price as $48.10. I believe in the next five years the macro-outlook of the world will remain strong, which will support Schrödinger’s long-term expected share price.
Risks
The company relies on third parties to synthesize molecules with therapeutic potential. The company’s reliance on third parties may expose it to different risks such as theft of trade secrets and reduced control over drug development activities. If the company cannot reduce its reliance on third parties, its long-term revenue growth potential could be negatively impacted.
If the company fails to establish or maintain collaborations regarding development and commercialization of product candidates that it discovers internally, it has to alter its development and commercialization plans, which may result in lowering of revenue growth.
Conclusion
The company is a potentially strong player in the field of physics-based drug development technology. The company’s technology is used by growing number of biopharmaceutical and industrial companies, which is driving the company’s market share growth. As a result, I expect the company’s long-term share price will rise significantly from the current level. Long-term growth-oriented investors can buy the company’s shares around the current price.
Be the first to comment