SchröDinger Stock: Holding the Keys to Discovery (NASDAQ: SDGR)

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Recently, I scoured countless daily healthcare ticker charts looking for candidates to add to one of my healthcare portfolios for my Market Seeking Alpha service, Compounding Healthcare. Schrödinger (NASDAQ:SDGR) was one of the tickers I encountered and remembered how big a fan I was of Schrödinger’s life science and drug discovery software after using it a lot in school doctoral. Admittedly, I had very little interest in the company as an investment because I thought the company was simply a life science software company. I decided to dig a little deeper into Schrödinger’s business and fundamentals before making any decisions. Well, it didn’t take me long to find out that Schrödinger is much more than a software company and they have a legit clinical pipeline and an impressive list of partnerships. At first, I was incredibly surprised to see such a massive pipeline, but that makes perfect sense given that the company’s software is used to discover new drugs and therapeutics. Thus, Schrödinger applies its expertise to both wholly owned assets and partner programs. As a result, the title is not pure-play and could have multiple revenue streams in the coming years that could fuel growth as well as diversify investment.

Following my initial research efforts, I am incredibly intrigued by SDGR and will be adding the ticker as a prospect for my Bio Boom speculative portfolio. Now I need to figure out what the fair value for SDGR is and where I should look for an entry.

I intend to provide a brief history of the company and its growth potential. Additionally, I discuss why I’m so bullish on SDGR. Finally, I try to determine my entry point and my initial strategy for 2022.

Schrödinger’s background

Schrödinger’s software platform changed the way the world can discover drugs and materials. The Company’s computing platform is licensed to materials companies, pharmaceutical companies, biotechnology companies, universities and government agencies around the world to support research and discovery of materials and therapies. The company has developed a computing platform that facilitates the discovery of first-class molecules for materials application and drug development at an accelerated pace. The company believes that this computational approach allows researchers to discover new candidates at a reduced cost with a better probability of success compared to traditional methods.

Schrödinger refined his computational algorithms to accurately map important properties of molecules. This expertise has been enriched by a Partnership with NVIDIA (NVDA) that will scale the Schrödinger platform to “dozens drug programs and screening and evaluating billions of molecules per week.

Schrödinger, many of whom standardized his platform as a key component of preclinical research.

Presentation of Schrödinger's activities

Presentation of Schrödinger’s activities (Schrodinger)

The company’s software sales were $38.6 million for the fourth quarter, an increase of 55% over the fourth quarter of 2020. For the full year 2021, the company made $113.2 million dollars, which represents a growth of 22% compared to the year 2020. The 113.2 million dollars exceeded the company’s forecast. from $102 million to $110 million. This reveals that there has been increased adoption of the company’s platform, both by current customers and new customers.

For the drug discovery business, the company has more than 25 partnerships, which can provide significant milestone payments. The drug discovery business saw a 59% increase in revenue in 2021, which was largely driven by the Bristol Myers Squibb (BMY) Partnership. The Bristol Myers Squibb partnership has the potential to provide Schrödinger with a total of $2.7 billion in milestone payments. In addition, the company has another big Partnership with Zai Lab (ZLAB) for DNA research worth up to $338 million.

Schrödinger partner pipeline

Schrödinger partner pipeline (Schrodinger)

Moreover, the company has its own internal programs that could deliver top-notch products. The company has three main assets, including MALT1 for anti-tumor activity, CDC7 for initiation of DNA replication, and WEE1 programs for tumor cell regression, respectively.

Schrödinger internal programs

Schrödinger internal programs (Schrodinger)

the MALT1 inhibitor program targets relapsed or resistant B-cell lymphomas and chronic lymphocytic leukemia. The CDC7 and WEE1 programs pursue cancer by operator replication stress and DNA repair mechanisms. CDC7 attempts to address cancer’s ability to circumvent ordinary responses to DNA damage. WEE1 is a tyrosine kinase regulator of the G2/M cell cycle checkpoint, which may help trigger the process of apoptosis in cancer cells.

Note that all of these programs are still in the preclinical stage and are far from being adopted by the FDA and brought to market.

Schrödinger's Internal Discovery Pipeline

Schrödinger’s Internal Discovery Pipeline (Schrodinger)

Looking at the company’s internal discovery pipeline, we can see that they have several other oncology programs, as well as immunology and neurology programs. Admittedly, these are still in the discovery phase, but it illustrates how the company can amass and replenish its pipeline.

Why am I so bullish?

The reason I’m so optimistic about SDGR is that they are the industry leader in computer research and development, but at the same time they are able to use their own platform. form to discover and develop their own strengths. As a result, Schrödinger is a healthcare technology and biotechnology game, which will allow Schrödinger to enjoy the immense advantage of the drug discovery business while collecting a reliable revenue stream from his software business. Additionally, Schrödinger could have gigantic growth potential as they have their own platform at their disposal which will allow them to uncover a plethora of candidates that they can fire, find a partner or decide to own 100% for. future programs. . Schrödinger could see exponential growth as they continue to pump out more and more drug prospects…and they may have their pick of the litter.

In addition, growing software sales are expected to increase in the coming years, thereby improving the intrinsic value of the business and will help stabilize the investment in the event that one of the candidates in the pipeline fails.

Perhaps one of the most overlooked scenarios is Schrödinger’s potential to become a major disruptor. Schrödinger basically holds the keys to their software and can develop the best version of their software non-stop, creating heaps of drug prospects. As the company’s platform improves and the power of computers multiplies, we could turn these piles into mountains of drug prospects. At some point, someone will want to have those perspectives and want Schrödinger’s power. Therefore, I think Schrödinger is a prime acquisition target.

Downside risks

Despite Schrödinger’s upside potential, the company still has some downside risks that investors should be aware of. First, the company is not reporting positive earnings and has reported a net loss of $100 million for 2021. Clearly, the company is going to spend money moving its lead drug candidates into the clinic. Another concern is the high likelihood that the stock will experience periods of volatility around the data reading and pipeline updates. It is possible that the company reports disappointing results from one of its pipeline programs and the stock price crashes for an extended period. This volatility will most likely increase as the company moves its programs to later stages of development. Obviously, a regulatory failure will most likely prolong the cash burn, which will negatively impact the stock price.

find a price

Now that I have decided to open a position at SDGR, I need to find an entry point. Using Street’s revenue estimates for 2024, discount for time, company cash position and average industry sales price of 5x, which gives me an entry target of $30 per share.

SDGR Revenue Estimates

SDGR Revenue Estimates (Looking for Alpha)

I will use the same data points and multiples with an error discount to get a discount target of $22 per share.

My plan

In most market environments, I would set buy orders at my target entry price and let the market drive the stock price down to meet those targets, regardless of technical setups or the trend. For now, the market has punished stickers that were trading at high multiples but burning money. SDGR is one such ticker and has been punished further for being a “Cathie Wood Stock” in her ETF ARK Genomic Revolution (ARKG). In this case, I will set a price alert for SDGR and look for a reversal setup below my entry price of $30 per share and make a discretionary buy. Once I establish a starting position, I will look for the discount target of $22 per share as my next buy threshold. In terms of profit taking, I will keep an eye on the “leading stocks” and look to unload some of the position to get a “house money position”. I will continue this strategy until the fundamentals of the company justify a higher valuation and we are in sight of equilibrium. At this point, I will be looking to move SDGR into the “Bioreactor” growth portfolio.

SDGR Daily Chart

SDGR daily chart (trend spider)

Long-term, I’m looking to hold SDGR for at least five years in anticipation of the company getting one of its pipeline programs across the finish line and into the market or the company being acquired for premium valuation.

About Catherine Wilson

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