SCHRODINGER

Richard Friesner was a computational chemistry professor at Columbia University who had built simulation methods for predicting how molecules behave. He co-founded Schrodinger in 1990 to commercialise this work.

The name comes from Erwin Schrodinger, the quantum physicist — appropriate for a company whose core product is physics-based molecular simulation. For most of the 1990s and 2000s, the company sold software licenses to pharma R&D departments.

Ramy Farid, who had a PhD in biophysics, became CEO around 2004. He shifted the company toward a dual business model: software licenses plus active participation in drug discovery programs where Schrodinger would co-own promising candidates.

That second piece — the drug pipeline — is what made investors go very excited in 2020 and very nervous by 2022.

Two revenue streams. The first is straightforward: Schrodinger sells software licenses to pharmaceutical companies, biotech firms, and academic labs.

Their products — Glide for docking simulations, FEP+ for free energy perturbation calculations, Maestro as the interface — are industry-standard tools used in drug design programs globally. License revenue is recurring and predictable.

The second stream is more interesting and more risky: Schrodinger runs its own drug discovery programs, using its own platform to build internal drug pipelines. They co-own these candidates with collaboration partners.

When a drug advances, milestones and royalties flow back. When it fails — as most drugs do — nothing flows back.

This is the part that makes the stock volatile.

Maestro — the integrated drug discovery interface used by researchers globally to visualise and analyse molecular systems. Glide — the high-throughput virtual screening tool that tests millions of compounds against protein targets.

FEP+ (Free Energy Perturbation Plus) — their flagship product, which uses molecular dynamics simulation to predict binding affinities with pharmaceutical-grade accuracy. LiveDesign — a collaborative platform for medicinal chemists to run and share simulation results in real time.

Their internal drug pipeline includes clinical-stage programs in oncology and immunology.

The key insight was that the best demonstration of their software was using it themselves to discover drugs. By running their own drug programs, Schrodinger could point to real clinical candidates discovered by their platform as evidence of its power.

This attracted larger pharma partnerships — Bristol-Myers Squibb, Takeda, and others — who wanted to co-fund programs and share the upside. The NASDAQ listing in February 2020 raised $232 million that went into expanding both the software business and the internal pipeline.

Bill Gates was a pre-IPO investor, which generated enormous profile. The stock surge in 2020 came from the COVID-era love affair with anything that looked like it could accelerate healthcare.

The valuation problem. The software business is real, profitable, and growing.

The drug pipeline is also real, but it is worth an enormous range of values depending on clinical outcomes that will not be known for years. In 2020 and 2021, investors extrapolated extraordinary success from both.

By 2022 and 2023, they panicked in the other direction. The company has had clinical program setbacks that reminded investors how hard drug development is.

The honest challenge is that physics-based drug design dramatically improves the odds of finding a drug candidate — but it does not eliminate the fundamental biology problem, which is that most drugs fail in clinical trials for reasons that the best simulation software in the world cannot predict from a crystal structure.

Bill Gates invested personally in Schrodinger before the IPO and has been a notable backer since. Pre-IPO institutional investors included various venture and growth equity funds.

After the IPO in February 2020 — which raised $232 million at $17 per share — public market investors including major asset managers hold the stock. The company has done follow-on equity offerings to fund its drug pipeline.

At peak in early 2021, the market cap exceeded $8 billion. As of late 2024 it had fallen to around $1.5-2 billion, reflecting the difficult period for unprofitable biotech.