Q1 2024 Schrodinger Inc Earnings Call

Participants

Jaren Madden; Senior Vice President, Investor Relations & Corporate Communications; Schrodinger Inc

Ramy Farid; President, Chief Executive Officer, Director; Schrodinger Inc

Geoffrey Porges; Chief Financial Officer, Executive Vice President; Schrodinger Inc

Karen Akinsanya; President - R&D Therapeutics; Schrodinger Inc

Michael Yee; Analyst; Jefferies

David Lebowitz; Analyst; Citi

Scott Schoenhaus; Analyst; KeyBanc

Vikram Purohit; Analyst; Morgan Stanley

Steven Mah; Analyst; Cowen & Co., LLC.

Michael Ryskin; Analyst; BofA Global Research

Matt Hewitt; Analyst; Craig Hallum

Joe Catanzaro; Analyst; Piper Sandler Companies

Chris Shibutani; Analyst; Goldman Sachs

Presentation

Operator

Thank you for standing by, and welcome to Schrodinger's conference call to review first quarter and 2024 financial results. My name is Chloe, and I'll be your operator for today's call. Please be advised that this call is being recorded at the company's request.
Now, I would like to introduce your host for today's conference, Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Jaren Madden

Thank you, and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our first-quarter 2024 financial results.Earlier today, we issued a press release summarizing our financial results and progress across the company, which is available on our website at schrodinger.com.
Here with me on our call today are Ramy Farid, Chief Executive Officer; Geoff Porges, Chief Financial Officer; and Karen Akinsanya, President of R&D and Therapeutics. Following our prepared remarks, we'll open the call for Q&A.
During today's call, management will make statements that are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including without limitation, statements related to our outlook for the second quarter and full year 2024, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of initiation of and readouts from our clinical trials, the clinical potential and properties of our compounds for use of our cash resources and our future expenses. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially due to a number of important factors, including the considerations described in the Risk Factors section and elsewhere in the filings we make with the SEC, including our Form 10 Q for the quarter ended March 31st, 2024. These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future whether as a result of new information, future events or otherwise. Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to and not a substitute for or superior to GAAP measures, please refer to the tables at the end of our press release, which is available on our website for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures.
And with that, I'd like to turn the call over to Ramy.

Ramy Farid

Thanks, Jaren, and thank you, everyone, for joining us today. We are pleased with the start to the year, delivering revenue growth in line with our expectations and continuing to advance our proprietary pipeline.
As you will hear from Karen, our first two clinical programs are progressing in Phase one clinical studies. And today we announced IND clearance for STR. 35 15 are we one mid one inhibitor?
Total revenue for the first quarter was $36.6 million, with software revenue totaling $33.4 million, and we are reiterating our full year guidance. We are in active discussions with multiple global and emerging biopharma companies about increasing adoption of our platform. While it is too early to predict the magnitude of scale-up from customers with renewals in the remainder of the year, we continue to see high interest in computationally driven drug discovery and believe we are well positioned to capitalize on the growing wave of research teams incorporating computation at scale into molecular discovery programs. Today, we reported that rights to the soft one inhibitor discovered and developed as part of the collaboration with BMS has referred to us based on portfolio prioritization decisions. Collaborations are an important part of our business, and we are routinely assessing opportunities with existing and new collaborators and partners.
Our venture activity has also been a very successful part of our overall strategy, validating our platform and strengthening our balance sheet with both cash distribution and equity from companies we have cofounded. We have been pioneering computational molecular discovery for over 30 years and continue to push new frontiers, integrating physics and machine learning to extend our scientific and commercial leadership position in the industry. We have a bold vision of structurally enabling every protein, the human genome with an initial focus on the most important off targets known to cause serious side effects that derail clinical programs. There is an emerging requirement for such models to predict drug toxicity risks before animal or human studies. We are very actively developing computational solutions to meet these requirements. Our recent advances characterizing the structure of key proteins such as herd and cytochrome P. four, 50 enzymes are examples of these efforts. We have also extended our informatics platform. And in March, we launched a new version of live design that supports biologics. Like design is an enterprise cloud-based solution that allows drug discovery teams to centralize access to computational modeling tools and data in a single interface live design previously only supported small molecules, and we are pleased to expand our informatics capabilities to support biologics. We are well positioned to advance all aspects of our business. This year, we see clear opportunities to drive software adoption to extend our scientific leadership in the industry and to advance our clinical programs towards multiple data readouts.
I will now hand the call over to Geoff.

Geoffrey Porges

Thank you, Ramy, and good afternoon, everyone. Shorting out a solid Q1 with software revenue meeting our expectations. A handful of software renewals were bumped into Q2 from Q1 and reduced some of the upside opportunities for the quarter, but we should see the benefit of these in Q2 and the balance of the year underpinning our confidence in our full year revenue growth guidance, our business in China has been below our expectations this year based on the challenging commercial environment there, but we have many opportunities to offset that impact with larger renewals in the US and Europe. We continue to enhance the capabilities of our software and see multiple paths to secure multimillion dollar increases in contract size, the global and emerging biopharmaceutical companies in 2024 and beyond. We're also very excited to have advanced our proprietary portfolio to now have a third program entering the clinic. And we are within sight of our first clinical data for our proprietary programs in patients later this year or in 2025.
Finally, the return of our first one programs from BMS gives us another opportunity to evaluate for our proprietary portfolio and to consider for external partnership and combination development opportunities.
In Q1, software revenue was $33.4 million, an increase of 4% compared to Q1 last year. Q1 last year benefited from a significant revenue contribution from multiyear renewals that did not recur in Q1 this year. Hosted software revenue was 22% of total revenue and grew more than 60% compared to Q1 2023. The faster growth in hosted software was in line with our expectations and consistent with our prior comments about anticipated a gradual transition to hosted software licenses across our customer base over a number of years. Maintenance and professional services were relatively constant as do service and maintenance agreements largely offset the negative effects of projects that were completed or transition to hosted licenses. Drug discovery revenue was $3.2 million in the quarter compared to $32.6 million in the same quarter last year. The first quarter of 2023 included a large collaboration milestone payment associated with the progression of a collaboration project at BMS. We continue to expect that drug discovery revenue to be variable from quarter to quarter due to the timing of milestones and challenging to forecast, given uncertainty about partner decisions about the timing and value of new business development activity.
Total revenue was $36.6 million in Q1 compared to 40 $64.8 million in Q1 of 2023. The difference was due to drug discovery revenue. Our cost of software revenue was $8 million compared to $7.1 million in Q1 2023. The increase was mainly due to higher technology costs. Our software gross margin was 76% for the quarter compared to 78% in Q1 2020 23, also mainly due to higher technology expense and cost of drug discovery revenue was $9.7 million compared to $12 million in Q1 2023. The decrease in the cost of drug discovery was due to the shift in allocation of staff from collaboration to proprietary programs and also lower CRO expenses to deliberation programs. Our drug discovery margin was negative compared to a profit in Q1 2023 when the quarter benefited from a single relatively large milestone payment from BMS. Overall, our gross margin was 52% compared to 71% in Q1 2023. The decline was driven by lower drug discovery revenue.
Turning to operating expenses. R&d expenses $51 million compared to $41 million in the same period of 2023. Most of the increase was for our therapeutics. R&d was partly driven by changing allocation between our collaboration investments in our proprietary programs as well as by higher headcount and higher CRO expenses. Overall platform and therapeutics R&D continued to be approximately balanced and their contributions to our total R&D.
Sales and marketing expense was $10.2 million for the quarter and increased by 11% compared to the prior year. The increase was mainly due to higher headcount and associated costs.
G&a expense was $25.5 million in Q1 2024 and decreased slightly compared to the same period a year ago. The decrease was due to royalty payments associated with the Nimbus distribution in Q1 2023, which flows through G&A by accounting convention. Net of this effect, underlying G&A expenses increased by approximately 5%, mainly due to higher FT. expenses.
Total operating expenses were $86 million in Q1 2024 compared to $76 million in the same period in 2023. The increase was mainly due to higher R&D for the quarter, our operating loss of $67 million compared to $31 million in the same period a year ago. Change in fair value of equity method investments was $8.1 million compared to $35.7 million in Q1 2023. The change into Q1 2024, which is the changes in the value of our equity ownership and structure therapeutics and Morphic during the quarter in the same period of 2023, the change in fair value was driven by the change in valuation of our ownership position and structure associated with a successful IPO. Other income consisted of $5 million in Q1 2024, mainly consisting of interest. Our cash balance in Q1 23, other income was $2.9 million. Gain on equity method investments was zero in Q1 2024 compared to $147 million reported in Q1 2023, driven by the Nimbus distribution. Total other expense or income was $13.2 million in Q1 2024 compared to $186 million in Q1 2023. Our loss before taxes was $54.3 million compared to a pretax profit of $155 million in Q1 2023. A tax expense in Q1 2024 was $0.5 million compared to $26 million of tax expense in Q1 last year. And net loss per diluted share was $0.76 in Q1 2024 compared to a profit of one 7.75 in Q1 2023 on a non-GAAP basis, excluding gains and changes in fair value for equity method investments, our loss per share was $0.86 in Q1 2024 compared to compared to a loss of $0.39 per share in Q1 2023. Cash used in operating activities was $39 million in Q1 2024 compared to $31 million in Q1 2023. And our total cash and marketable securities balance declined by $33 million in Q1, as our operating cash was offset by $7.6 million in cash realized from the sale of equity during the quarter from our ATM. At the end of Q1, we had $436 million in cash and marketable securities compared to $469 million at the end of Q4 2023. Our previously provided financial guidance for the year is unchanged. We are confident about the outlook for our software business and see multiple opportunities for significant step-ups in contract size at many of our customers. We are encouraged by the interest and opportunities in front of our drug discovery business and by the potential of our proprietary medicines. And we believe the trajectory of our expenses and cash use this year are consistent with our original expectations for Q2 2024, we expect our software revenue to be in the range of $31 milion to $33 million.
I'll now turn the call over to Karen to comment on therapeutics and R&D.

Karen Akinsanya

Thank you, Jonathan, and good afternoon, everyone. Our Therapeutics team continues to advance our pipeline of collaborative and proprietary programs with the IND clearance of SGN-35, 15 LV. one and yet one inhibitor. We now have three clinical stage proprietary programs. In addition to our proprietary pipeline, several collaborative programs are advancing in clinical trials at companies. We have cofounded or partnered with providing continued validation of our platform. As Rami reported, we have received full rights to the south one development candidate that we discovered as part of our collaboration with BMS. As you know, BMS acquired a clinical-stage, thus one inhibitor when it completed its acquisition of a clinical-stage oncology company. Earlier this year, we received a milestone upon completing the first one development candidate package and BMS have been conducting IND-enabling studies. The transfer of information from BMS to Schroders is ongoing. We will determine the next steps and plans for further investment in this program based on our assessment of the updated data package from BMS as well as the opportunity within the context of our overall proprietary portfolio and the evolving therapeutic landscape as we look ahead, we expect collaborations to continue to be an important component of our portfolio, and we continue to evaluate new partnerships where the science project, scope and value are consistent with our strategy.
Turning to SGR. 15.5, our MALT1 inhibitor, our Phase one study in patients with relapsed refractory B-cell lymphomas is progressing well. We've expanded the study to 15 sites globally and dose escalation is ongoing. As a reminder, the primary objectives of the study are to evaluate the safety, tolerability, PKPG. and determine the recommended dose measures of clinical activity as secondary endpoints, we are on track to have clinical data in late 2014 or in 2025. Our CDC7 inhibitor SGL. 29. 21 is also advancing in a Phase one dose escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome. The study is progressing well with multiple dose escalation steps completed, and we also expect to report initial data from this trial in late 24 or 2025.
Today, we announced that we received FDA clearance of our IND for SGN-35 15. However, we won one inhibitor. Our preclinical data package demonstrated the SGR. 35, 15 exhibited sustained tumor growth inhibition while maintaining a favorable safety profile using an intermittent dosing schedule activities are underway to open clinical study sites, and we expect to begin patient enrollment in the third quarter. The Phase one study is designed to evaluate the safety PK/PD and establish a recommended dose for SVR35 15 in patients with solid tumors. The study population will include patients with advanced solid tumors predicted to be sensitive to. We want or we want one inhibition, including breast cancer, ovarian cancer, uterine cancer and solid tumors with elevated replication stress. In addition, we are advancing several discovery programs in areas of high interest including inhibitors of EGFRC. seven nine seven STRMT. five NTA. and NLRP. three. We have identified potent selective inhibitors that may have become product profile design challenges observed across other programs. We are on track to select development candidates to support an additional IND submission in 2025 in our collaborative portfolio. We are excited about the progress we have made in identifying oral small molecule inhibitors for targets previously addressed by antibodies or that required intravenous administration, and we anticipate advancing early-stage proprietary modalities, which programs across multiple disease areas.
In summary, we are pleased with the progress we are making across our collaborative and proprietary pipeline with Phase one studies of SGN 1505 and 29 21 advancing and 35, 15 poised to enter the clinic this year. We are excited to be advancing towards clinical readouts and inflection points from three programs behind our clinical stage programs. We have a next generation of molecules with opportunities to generate value through partnerships, new ventures, all by advancing them independently. We are excited about our first-in-class and best-in-class opportunities within our portfolio and look forward to updating you on our progress in the coming months.
I'll now turn the call back to Ramy.

Ramy Farid

Thank you, Karen, as you heard, we are off to an excellent start this year and are continuing to make progress against our goals for the year. We appreciate the hard work and commitment of our employees are instrumental to our mission, and we look forward to providing further updates throughout the year.
At this time, we'll open the lines for questions at this time.

Question and Answer Session

Operator

(Operator Instructions) Michael Yee, Jefferies.

Michael Yee

Guys.
Thank you for the question, and thank you for the update on question on software and question on the pipeline on on that on the core business, I think Geoff Porges made a comment about how some business which may be pushed from Q1 to Q2. Can you talk a little bit about that and how that relates to ongoing trends appreciating that Q4 still is really your biggest quarter. So just comment on some of that dynamic. And then on the pipeline maybe And Kimberly, for Karen, can you talk about the mall one study going on and what you would deem to be positive and very promising efficacy for a new small molecule for B-cell lymphomas.

Geoffrey Porges

Thank you and Graham. Hi, Mike. Just on on the contracts that I mentioned, there were a couple of relatively small contracts that were really the difference between, of course, meeting our expectations and then being a little bit lighter, I don't think it reflects any underlying trends in the business. These were contracts that we knew were renewals and for logistics reasons, they didn't renew at the end of Q1 and they've tipped into Q2. We don't think that there's any there's no increase in the number of non-renewals or anything like that. And we continue to have very high conviction about the outlook for the full year and just don't see anything in the external environment that affected our book. I did highlight the effects in China. Our business online business in China is relatively small on the smallest of our geographies. And given what's going on that is perhaps not a surprise that the renewals, they have dropped off somewhat, but it's not going to have a big impact. And the big driver for us is, as I highlighted, those those large renewals that we'll tend to be concentrated in the fourth quarter.

Karen Akinsanya

And Mike, on on the one mechanism, as you're aware, we're obviously in a Phase one dose escalation trial. I think your question was broader than that with respect to the mechanism. And this is a clinically validated mechanism given data that's been published over the last few years, showing monotherapy responses in the range of 20 x and LRR. and combination activity in combination with BTK. giving you around 50% off. We also know that there were complete responses in prior trials in terms of what we think would be exciting. Obviously, a solid therapy activity, but also combination activity, either with BTK inhibitors or with BCL2 inhibitors. And we showed a lot of that preclinically. But in preclinically, you could get to regression and so on. We hope to see similar things are emerging from about one mechanism over the coming years.

Michael Yee

Very good thank you.

Operator

David Lebowitz, Citi.

David Lebowitz

Thank you very much for taking my question. Could you comment on I mean And Michael, to some extent guide on this, but on the trends that we should expect, I know there was an effort to shift the nature of contracts to to move revenues. I guess to be a little bit more smoothed out? Will it result in even excluding up somewhat more? And how are those efforts progressing? How should we see that take hold?
Yes, thanks.

Geoffrey Porges

Thanks very much for the questions. That are the intake. We are seeing some transition over to hosted for on-prem. You can see it in the breakout in the Q, the coaster in this most recent quarter grew by 20 by 16% year over year and was now 21% of total software revenue, whereas in the first quarter of last year was only 14% of software revenue. It was much smaller percentage in the fourth quarter. So when we do have these large quarters with a multiyear contract renewals, then the hosted proportion is going to go down. However, the long-term trend is that we think that the proportion of business that's hosted will gradually increase. And we did have a number of significant customers switch over from on-prem to hosted last year.
Now, as we've said, so our business has been around selling software for nearly 30 years, perhaps longer than that way before my history of the company, but we have complex contracts and every contract is different there, to be honest, like snowflakes. And so we can go in and sort of immediately change all of those contracts over. But we do think that over a number of years, that proportion from hosted will continue to increase in IB or a single year transition. But we do think that it will increase over time.

David Lebowitz

Thank you for taking my questions.

Operator

Scott Schoenhaus, KeyBanc.

Scott Schoenhaus

Tom. Could you give us an update on what you're seeing on the biotech end markets? We've had some peers in the space that have noted potentially some recovery on or it's mixed commentary so wanted to hear from what you guys are seeing and then remind us what's baked into your guidance and in terms of the five biotech end markets?

Geoffrey Porges

Sure, Scott. Last year we did highlight that there was an increase in the number of small companies that were non-renewed. You could say that in the KPI. data that we provided in the company's in the tier between 100,500 thousand of ACV of bill is an increase in our renewals in that tier. We don't provide quarterly ACV numbers or quarterly bookings numbers, but we've seen a stabilization of that trend. We're not seeing any sort of continued increase in the number of nonrenewals. That being said, we aren't seeing an offsetting increase in the new inquiries?
Well, I will say we've seen companies coming forward that are venture-backed. You are asking are there any creative ways they can get access to our software and want to engage in those discussions. We do think over time they will result in software contracts. It may take longer than we normally would have expected perhaps back in 2020 or 2021 to see that realized into our results. But we're hearing about those opportunities coming forward. So I would still characterize it as green shoots rather than anything that we can harvest, but we're definitely seeing some of those opportunities.

Scott Schoenhaus

Thank you.

Operator

Vikram Purohit, Morgan Stanley.

Vikram Purohit

Hi, good afternoon. Thanks for taking our questions. So we had two, one on the pipeline and then one on the full year software guidance on the pipeline. At what point do you think there might be some more visibility available on them specifically when the May 24 25 data could come through from oh one and CDC. seven? And how are you currently thinking about what the initial size and scope of that dataset could be?
And then on the software guidance for the year with 1Q behind us now, how are you now thinking about which scenarios define the bookends of your guidance of one fixed at 13% year over year growth?

Karen Akinsanya

Thanks. So I can start and I think it's too early to commit to specific data that we're going to be sharing. As you know, this is a dose escalation trial with respect to safety, PK and PD. Our goal is to determine the recommended Phase two dose and clinical activity as a secondary endpoint whenever we are gathering more PK, safety and EV data in the trials that we're running. And so that that's all going it's going well. And so over the course of the period that we've shared 24 through 25, we will be in a position to share an update, but it's too early to give you any color on what that might look like at this time?

Geoffrey Porges

Victor, let me jump in and give you an answer on your second question about the full year guidance and the circumstances that related to either of the bookends of first of all. So just remind you, the guidance does philosophy is to guide to the range of most likely outcomes. We are trying to guide to either extremely or very low probability outcome either on the high side or the low side. But we do want to share with you what we think is most likely and the range we've provided is that range right now. We do think we'll get more information as we progress through the year. And of course, ultimately, we hope to narrow that range. But we don't know what do we have that information we'll have to incorporate in terms of the circumstances that would drive us to either of those extremes. It does depend to a substantial degree on the nature of the renewals. For example, if we have customers who are on-prem customers who come to us and asked to renew on a multiyear basis that would drive revenue towards the high end of the guidance range. And if they come forward and say we want to renew as we already have on annual contract basis that it would be more to load in.
The other factor that we're considering in the guidance that we provide is some of the conditions that we discussed in terms of the biotech financing environment, if we see some of those conversations about providing our software to relatively early stage companies come to fruition. And if those companies successfully finance and that might trigger a revenue purchase that would also contribute to driving us towards the upper end of the range. So those are the two variables that we're mainly contemplating hope.

Vikram Purohit

That's helpful. Thank you.

Jaren Madden

Evan Seigerman, BMO.

Either This is Carmen on for Evan. Thanks for taking our question. And congrats on the IND approval for 35 15 out with a number of assets either in clinic or soon to be in clinic. Can you just talk a bit about how you're thinking about PL P&L management as it relates to your broader business? And then also, how are you thinking about the potential for collaborations and partnerships with your internal assets of course, balancing data maturity and preserving economics. Thank you.

Ramy Farid

And the collaborations for Chubb? Yes, that's probably a good way to.

Karen Akinsanya

Yes, I can just start by saying each of the mechanisms that we disclose. We believe this as a population that has existing drugs were additive to the mechanism is going to lead to deeper responses. As you're well aware, we don't have those mechanisms, for example, Bcl two BTK inhibitors. And we view collaborations as an important way to basically combine our assets with other companies' products, all development assets to recognize the opportunities for these programs in various different indications. So we're very open to collaborations and continue to be in those discussions. And that obviously was gathering important data on all of these programs at the moment.

Geoffrey Porges

And Karl, let me just add to that on collaborations. It is a very dynamic deal environment for companies in the computational drug discovery space generally And hello, but dynamic environment, I think is to our advantage. And we just see a lot of opportunities for a wide variety of different types of deals as we contemplate the business probably about Now I've said previously, we aren't guiding to that. We count this on really a forecast timing, value probability of those discussions and that dynamic environment is throughout benefit in terms of your first question about P&L management. You're assuming that you're asking us about the trajectory of expenses. And while we haven't guided to expenses for next year, I hope that we've been communicating consistently that we are seeing a slowing in growth rate of a number of different expense drivers. And we think that we have opportunities to see slight improvements in our gross margin, for example, that you're seeing some operating leverage now on our G&A line, you're seeing some operating leverage on sales and marketing as well. And we think that R&D, while it has been increasing and is likely to continue to increase. It is going is going to increase significantly more slowly than it has in the past because the so there will be additional capital required for the advancing clinical programs. But relative to the totality of our R&D, which is still substantially for the platform, it's a relatively small contribution. So we don't think it's going to drive a large increase in our R&D requirements going forward. But that's correct.

Great. Thank you.

Operator

Steven Mah, TD Cowen.

Steven Mah

Great. Thanks for the questions. Star one on live design for biologics. Could you give us some color on the income, the adoption and any traction with customers you you've gotten since our launch in March? And then specifically what types of companies are making inquiries or because they're big pharma or emerging biotechs?

Ramy Farid

Yes. So we just launched, but as with many of our launches, including live design itself. We worked very closely with a number of companies to understand the requirements and and what what they would want in the product. So the feedback so far in all of the presentations that we've given before the launch actually. And since the launch has been incredibly positive, there is clearly sort of pent-up demand for something like this. There is not a good solution right now, so significant interest, but this is a very new release. So we can't comment on what is on anything about the number of customers that have revenue from it, but we're really excited about that. It is going well.

Steven Mah

Okay, great. That's fair enough. And then I got one last question on the source one inhibitor that reverted back to you guys from MS. I appreciate the color on why they didn't take the option that they acquired a company with a similar asset, but you know, how similar that asset being acquired? Is two of the inhibitor that you guys on developed and how similar is it the same mechanism?

Karen Akinsanya

Yes. I mean, I think from a mechanism point of view. This is a PPI. inhibitor. I think that mechanistically they're both very similar. I will say that obviously we were in a position to benchmark our compound during the discovery phase of the program that we ran with BMS. And we're very happy to say with the profile of the compound and BMS, I brought that program in on the basis of the work that we have done. So we remain excited about the molecule. And I think obviously that molecule that they acquired through their acquisition is more advanced than ours. And so we have obviously work ahead of us, too. And as an industry actually to see how all the cellphone can compound compare. And so and yes, I think it's too early of integration play how they stack up against each other in the clinic.

Steven Mah

Okay. Got it. And how long do you think the evaluation will take the internal evaluation and what the proceed with it.

Karen Akinsanya

So no longer determined. We obviously are very early in the process of getting data back from BMS from the IND-enabling studies. They have been conducting. And so I can't say exactly, but I think obviously, we are in a hurry to understand the opportunity here. And again, we're excited about the profile and what we've seen so far says it will take too long.

Steven Mah

Okay, great. Thanks for the question.

Jaren Madden

Michael Ryskin, Bank of America.

Michael Ryskin

Great. Thanks for the questions, guys. First, I want to just follow up on on exactly that last point. The BMS's discontinuation in the past, I think when you had some programs sent back, there might be a milestone fee or some sort of financials associated with it. I'm just curious, was there anything like that recognized in the first quarter or do you expect it in the second quarter. Just any other details around the process of regarding those rights programs.

Geoffrey Porges

And like I should add short answer is no because this program has transitioned their portfolio and we had that had a milestone from a previously with associated with that transition. And there isn't any additional milestone or fee payable on a tripping return to us, nor do we have any prior revenue that we accelerate. So it wasn't a contributing factor in Q1.

Michael Ryskin

Okay. You answered. Thanks. And then from a follow-up, you know, it's been, I think a couple of quarters since you guys really talked about the material science part of the portfolio. So I thought I'd ask on that. Any updates there anything interesting to keep us through a process of I know it's always sort of in the background and doesn't get a ton of light, but I just figure if there's any.

Ramy Farid

Sure. Yes. So the thing that we're most excited about. And Mitch, on the material science side, as we've talked about before, is we have this collaboration with <unk> with Gates that was the initial project with a three year project went so well that it was actually renewed, and that was on the basis of really our progress on the science is a really, really hard problem. And as with all really hard problems. We think success in the problem will have significant rewards. So we're really pleased with the progress on the basic science, but that's really the stage that we're at the finish line, and that's what we're really excited about. We think if we're successful in the project, as I said, it didn't have the potential to have a really big impact as far as asset of the core business and the revenue for the business. As we said before, we don't really break that down. We're pleased with the progress that continues to we continue to add new customers. There continues to be scale-up of other customers, but we're not really disclosing. You know, we're not breaking down the revenue into the different components. I hope I hope that answers the question for us, which is good.

Operator

Matt Hewitt, Craig-Hallum Capital.

Matt Hewitt

Good afternoon, and thank you for taking the questions. And maybe first up and this kind of goes back to Jeffrey, some of your comments about the R & D expense kind of leveling off a little bit as we look out over this year and maybe into next year, you've got a couple of Phase one trials that will be ramping up. And then you've got we want obviously kind of kicking off, is that part of the the flattening of the R & D expense over the next, call it year, year and a half? Or is it more a function of kind of looking at those programs and trying to figure out where do we go next and which one do you want to kind of move on to Phase two just help us out there.

Geoffrey Porges

Okay. Yes, I understand the question about the R&D trajectory. And in fact, the flattening is due to a different phenomenon and images. But we we think that we are at scale with respect to our R&D investment in our platform. As I previously indicated, it's a substantial portion of our R&D investment and where we think that this is such an exciting space and a dynamic in this industry environment and with so a lot of opportunity in terms of new discoveries, new research that we can then translate into capabilities in the platform. So we're not dialing that back. So we don't think that needs to get a lot larger.
The second component of our R&D is our drug discovery organization, not so much the development portion, but and the investment that we're making to come up with the next wave of molecules and the next wave after that. But that same general comment there, we can sort of manage 10 new programs a year or 15 new programs a year. I think we keep scaling out that where we would have. So again, we think that we're at scale in terms of the ability to discover the next wave of programs in a way and after that. So both of those pieces, we don't see a lot of need to increase. Now you correctly identified that there has been an increase in the investment on the clinical programs, but that total clinical spend is a relatively small portion of that overall R&D. We do expect that piece to go up, but the rest of the R&D phase is likely to be pretty stable from here. And so that's where you get that we just don't see a large other leg up from here?
It's unclear.

Matt Hewitt

Yes, no, that's super helpful. Thank you. And then I guess separately on the software side, so last fall, obviously, and in particular, very challenging from a funding perspective. You've commented on how that likely weighed on some of your smaller customers kind of paring back or not renewing as that funding environment is improving. And as more recently, as China has announced new stimulus package there, are you starting like how quickly will that turnaround restart to get those customers that maybe didn't renew previously, they start coming back saying, okay, now we're ready to reengage as it is pretty quickly or does it take QUARTERS or how should we be thinking about the timing on as the environment improves, you'll start to see that as well.

Geoffrey Porges

Yes. So kind of to be clear, I think what we expect to happen is new companies will come to us asking to use our technology as a foundation for their drug discovery efforts, and we are seeing those inquiries now those companies are asking the K with we are going after this particular target of this drug class, and we like to build a company based on your technology. There's all sorts of availability of funding in those companies some of them are well capitalized on them, hope to be capitalized. Some of that may be capitalized in the future, and we're working with all of them, but we are seeing uptick of interest there, but it's too early to bake that into our revenue outlook.
Now the companies that previously discontinued and my expectation is that they will not come back whether they are based in China or based in the US, both companies have shifted their strategy. In some cases, they've merged with other companies. In other cases, they can acquire themselves or in other cases, they've shut down drug discovery altogether, and they just focusing on the prosecution of their clinical programs. So we're not assuming that they come back and become drug discovery software customers again.

Matt Hewitt

Understood. Thank you.

Jaren Madden

Joe Catanzaro, Piper Sandler. Your line is open.

Joe Catanzaro

Ready.Thanks for taking my question. And maybe a quick one on 35 15. I think we've seen in this space that patient selection strategy could be really important.
And can I think you mentioned selecting patients with elevated replication stress. So would be curious to hear your thoughts and if you could elaborate a bit on sort of how are you thinking about going about detecting and defining elevated replication stress? Thanks.

Karen Akinsanya

Yes, it's a great question. I mean, first of all, let's just say that we know that we one inhibitors have been shown to have great efficacy in particular tumor types already. So uterine serous have now a very intense, really strong responses that we do, though, believe that there are opportunities in solid tumors beyond those gynecological tumors. We mentioned breast cancer and other solid tumor types. As you know, we have a collaboration with MD Anderson for several years that thought to really help us understand a sensitive tumor type, and we're going to be leveraging that information as we go forward with our clinical trials. As you know, we're in a dose escalation setup this year. But as we go to look for efficacy signals, we have the opportunity to leverage that information from the collaboration as well as to think about how to and select patients that we think are going to be the most sensitive. And we'll be providing updates on that in the future.

Joe Catanzaro

Okay. Thanks. That's helpful. Thanks for taking my question.

Operator

(Operator Instructions) Chris Shibutani, Goldman Sachs.

Chris Shibutani

Great. Thank you very much. A question about the business as well as a question about the pipeline on the business on an annual basis, you've tended to provide some insight into the annual contract value and the number of customers that you're having there. Can you talk about how the year is progressing and your confidence in terms of that ACV trend moving one direction or another, presumably favorably given the 6% to 13% range that you've provided? And then within that, what tends to influence whether the gross margins are closer to sort of the mid 70s versus the 80% level. So if I had to explain to someone the mix of the customers and the gross margin impact and what you're seeing? How could you help me there?
And then secondly, at the R&D Day, Kevin, at the end of last year, I think there was a little bit of buzz that emerged when you guys identified a couple of potential targets that The Street tends to perk up about in particular, I'll mention NLRP3 this year has become somewhat trendy. Prmt5 also has a presence. So with those you talk about advancing one into an IND in 2025, what's the horse race like? And is that purely on the domain of something that you guys would plan to take forward? Or is that something you would contemplate possibly shifting over towards a partnership there as a way to perhaps leverage costs, but still be able to get some of the carrier services? Thank you.

Geoffrey Porges

Thanks, Chris. I'll answer the first couple of questions. I'll let John answer the other five or six. They So beginning with the ACV up, we highlighted that that last year revenue growth exceeded ACV growth by a significant margin. And we disclosed ACV growth and we don't break out ACV trends quarterly, but we've definitely communicated that ACV growth will be significantly higher than revenue growth this year. And that was driven by the large contribution from the multi-year deals in the fourth quarter of last year, which effectively are of recognizing revenue from future years. That case 24, 25 and 26 and for three deal. So ACV growth this year is likely to be significantly higher than revenue growth. And that was true in the first quarter.
Bob, we don't so I don't have an audited ACV growth number but qualitatively, it was significantly above the revenue growth. It is consistent with what we're expecting for the full year.
I'll now turn to the number of customer trends. We do you prevent that present that in our KPI.s, I think we have confidence that the KPI.s are going to trend positively this year. We don't guide to that and I don't have specific numbers to share, but you could look at the numbers that we highlighted last year and we remain pretty positive about the trajectory of those numbers this year. And about their ability to contribute to us achieving the revenue guidance and by implication the ACV growth outlook that we're expecting.
And then sorry, I missed the other question. You would take a while to get the gross margin. So the gross margin is somewhat influenced by the contribution of multiyear deals. If we have a large software deal that includes revenue that we're providing the actual access the software two or three years out. And that revenue being recognized has a very high gross margin and that tends to lift the gross margin overall whereas for a quarter, for example, like the one we most recently had where we didn't have a lot of those multi-year deals and we had a significant step-up in hosted revenue and that tends to bring the gross margin down. Now we are very confident that the gross margin is going to trend positively over time up. There was a little bit of an increase in technology spend that I flagged up in the first quarter. But I think that overall, we're very convinced that that gross margin trend, the guidance will be similar for is similar to last year, and we think that it will trend positively over time. I wouldn't be dialing in so substantial increase in our gross margin, but we do think there's reason to think that it will continue to gradually tick up by small amounts each year.

Karen Akinsanya

So as Geoff showed, yes, so you're right, the analog in 3M, PRMT5 and TA has been pretty interesting over the last year with a lot of disclosures from other companies, and we are excited about both programs. I think what they have in common is that there are a number of potential indications, NLRP3 potential, obviously in Parkinson's disease as well as a number of peripheral inflammatory diseases for PRMT5. There's opportunity in brain in brain tumors, but also a number of solid tumor cells. We are excited to have both these programs in that portfolio that both in the optimization stage, we're working hard on the optimization of multiples there is I think we described the pipeline today. And one of the important features is the opportunity to leverage our platform to optimize brain penetration, which is clearly a key feature and processing programs and that work is underway. I think it's too early to talk about the sort of picking involved in the race, and I think we're pleased with the progress that we're seeing.
And then your other question, I think was whether we will develop these alone or income collaboration with others. I think both opportunities are open to us and we remain it sort of opened into collaboration discussion, but we also are working right now to think about indications in which we would conduct early clinical trials. So again, we'll keep you posted as we make progress.

Chris Shibutani

Thank you for all the answers to my questions. Appreciate it.

Operator

I am showing no further questions at this time. That concludes today's call. You may now disconnect.