Things have been a little slow here as your favorite Gumshoe puts in some sweat equity for our kitchen renovation project this holiday week, so please accept my apologies for not having written for a couple days. But I’m not completely drowning in dust, so I thought I’d take a moment to get a teaser answer out to you today — this one generated a few reader questions thanks to the “IPO” reference and, of course, to the Bill Gates name, which seems to be ever more a lightning rod.
The spiel is from Chris Wood for his Healthy Returns newsletter ($49 year “on sale” at the moment), published by Mauldin Economics. That’s an entry-level “healthy advice plus health investments” letter, something several publishers have tried, and I’ve only covered it once before, when Wood was pitching Esperion as his 10-bagger for 2020... and that one didn’t work out particularly well (yet, at least), so we can let that be our calming influence as we get revved up by the pitch today.
Here’s how he gets us going in the spiel…
“My #1 Top Stock for 2021 sits in the sweet spot right at the intersection of the two most powerful money-making trends on the planet.
“Healthcare and Technology. This little-known software company is disrupting the pharmaceutical industry.
“It has developed a proprietary digital platform that drug companies desperately need. It’s cutting-edge emerging technology that can quickly—and accurately—predict drug discovery testing outcomes.”
And the Mr. Softy connection…
“Bill Gates, the software king, is a HUGE backer of this company. He’s poured in $301 million in venture capital already!”
We also get some other validation, since apparently these guys already have partners and connections…
“… the top 20 Big Pharma companies such as Biogen, Bayer, Johnson & Johnson, and Pfizer are very happy customers of this breakthrough software company. You may recall Pfizer was first to announce an effective COVID vaccine in record time—after only 10 months in development!
“It’s possible this company’s software played a major role in Pfizer’s ability to bring a vaccine to market so quickly….
“In addition to the top 20 pharma companies, 1,250 academic research institutions also license the company’s software. The company has a jaw-dropping 96% customer retention rate.”
And then some metrics we can use to double-check the Thinkolator’s results…
“Revenue growth rates in 2020 for this company have been a staggering 35%. And I believe growth would have been even stronger without the COVID headwinds.
“In 2020, this company made its public debut raising $232 million in its IPO. In less than a year, this company’s price has already rocketed 245%! Market cap is now over $6 billion.
“And Bill Gates is one of their largest shareholders with a 12.5% stake. Gates now owns almost seven million shares of its stock….”
And another celebrity investors is an endorser of this one, too…
“Widely respected Citron Research says this company’s ‘runway for growth is massive.’
“Citron reportedly told its elite clients that investing in this company is like ‘investing in early Tesla, only better!’ And look how well that turned out for early investors….
“Tesla’s IPO was in 2010—also at $17 a share. Tesla ended 2020 over $700! That’s a 4,151% increase in 10 years!”
So… hoodat? Thinkolator sez this is drug discovery/software company Schrödinger (SDGR). Here’s how they describe themselves:
Schrödinger’s industry-leading computational platform facilitates the research efforts of biopharmaceutical and industrial companies, academic institutions, and government laboratories worldwide. Schrödinger also has wholly-owned and collaborative drug discovery programs in a broad range of therapeutic areas.
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just click here...Schrödinger is deeply committed to investing in the science and talent that drive its computational platform. Schrödinger was founded in 1990, has over 400 employees and is engaged with customers and collaborators in more than 70 countries.
The company has been around for 30 years or so, and did indeed get early investments from David E. Shaw about 20 years ago, then from Bill Gates about ten years ago, and they’ve gradually built through collaborations and have sold, spun off or partnered off a number of drug discovery projects. The Bill and Melinda Gates Foundation has sold off a few million shares of SDGR over the past year, but they remain the largest shareholder (I haven’t checked to see what Gates paid over the years, but they currently own ~7 million shares of common stock after their last sale of two million shares in November, plus another ~9 million limited shares that they can convert to common stock as they like).
The reason for possible optimism is probably from Schrödinger’s drug development collaborations, not just from the software sales and licensing — they can do quite well from selling their software and their analytical and materials science prowess, and there is some potential for that to snowball as they get more partners using their technology and then build that into more collaborations, but with revenue growth of 30% and a price/sales ratio of almost 70, investors are clearly expecting more than just a solidly growing software company. The software sales are the foundation, the upside excitement will come either from many years of that software snowballing into a larger part of the market, something every drug developer needs… or, as seems likely to be the focus right now, from commercializing the technology in specific molecules by developing drugs that lead to meaningful royalties.
The latest bullish surge in sentiment came after they made a big deal with Bristol Myers (BMY) in November, and some of their collaborations have led to approved drugs in the past.
The technology sounds pretty cool, frankly, with the focus on physics and the ability rapidly screen protein structures and molecules and let the software help to identify targets, though I can’t claim to understand it very well. They do have an investor presentation here that tries to walk you through how it works, and how their software and their and drug discovery systems play off of each other. The basic premise is that their drug discovery platform, fueled by their software and machine learning, enables them to design a new drug better and faster — a molecule that is both more optimal for the various needs, since it was screened for that from the beginning, and that also is ready for development in half the time (2-3 years instead of 4-6 years).
I’m not sure how the software deals work, but they already have the top 20 drug companies on board as long-term customers (as teased), and they say they have a 96% retention rate for large customers (those who spend more than $100,000 a year), so that sounds good — but whether those big customers will spend more and more each year, I don’t know… they have slowly ramped up the number of customers who spend more than a million dollars a year, but I don’t know whether there’s potential for that business to accelerate or not.
On the drug discovery side, they do have two approved drugs (from Agios), plus a few in Phase 1 or 2 or likely to file a IND with the FDA to start clinical trials soon, but almost all of their collaborations are still firmly in the “discovery” phase where they’re trying to identify new drug candidates… so stuff like milestone payments and royalties will probably trickle in very slowly in the coming years. They do also own some stakes in their collaborators, particularly the smaller ones or the ones that they spun off in the past — and a couple of those have themselves gone public, so they own about $20 million worth of both Relay Therapeutics (RLAY) and Morphic Holding (MORF), for example, so perhaps those have future potential, but neither of those assets really makes an impact on a $7 billion company like Schrödinger in the near future.
It has certainly been a hot year for these kinds of “picks and shovels” plays in biotech — the companies who provide materials, software and support to biotech companies. That’s partly because the biotech sector is both running all-out in some areas, particularly anything related to vaccines or pandemic response, but also partly because there is so much capital surging into the biotech space, and all those new startup biotech companies have venture capital $$ burning a hole in their pocket as they lease space, buy equipment and order software and services. And all of them want to work faster and better than their forebears, so computer-aided drug discovery and analysis, whether from Schrödinger or from simulation/modeling companies like Simulations Plus (SLP) or Ansys (ANSS), seems to be ever more important.
And if it’s just that Tesla name-drop that excites you, we should note that this company has already been up more than 500% in a year, from its $17 IPO in February of 2020 to today’s $105 or so. Tesla did indeed do that, too, but it took then about eight years. Maybe it will scale dramatically higher at some point, but I don’t see any specific reason why it should.
If I were to buy SDGR (I’m not planning to at the moment), it would not be on a near-term bet that something big will happen, it would be on a bet that they might have a dozen good things happen over the next five years, with the growing software sales helping them to avoid burning too much cash while they wait for drug development deals to become commercially meaningful, and I’d try to mostly ignore the share price in the interim — it will probably be a long time before the business catches up with the market valuation, but you can see that it’s clearly possible if the trajectory of their software sales continues and their collaborations yield some fruit and begin to generate meaningful revenue at some point. The main risk today is that, as with so many popular growth stocks, current valuations mean you’re prepaying for quite a bit of success that might or might not happen in the future. Bill Gates waited 10 years before he started selling shares, you might have to wait a bit as well.
There are only a couple analysts making guesses on SDGR’s future, but right now they expect the company to become profitable next year and for revenues to double between 2020 and 2022. They have continued to raise their price targets over the past few months, but they can’t keep up with the investor enthusiasm for the shares.
I’ll leave it there, because I do not have a finger on the pulse of the biotech business or have any great convictions in this area — the one thing I know for sure in biotech, as I’ve told our readers before, is that the person I’m buying shares from probably knows a lot more about the science than I do. And that’s not a comfortable situation for a long-term investor to be in… doesn’t mean it can’t work out, either for a nimble trader or for a more patient person who has great conviction on the scientific merit of a company’s programs, but I certainly don’t have any “edge.”
So I’ll turn it over to you, dear readers — see great potential from Schrodinger as they build on their software and drug discovery platforms? Sad that they were unable to get the CAT ticker symbol? Looking for a quick surge, or hoping for a pullback? Let us know what you think with a comment below… thanks for reading!
Recommended in one of MF’s portfolios.
Recently?
Recommended in Ownership Portfolio last October 2020 price then was $54
So good company with big upside but overvalued. Add it to the “buy at the dip if it ever happens” list.
Coo’ Fo’ Sho’!
I have owned this since the first day they started trading post IPO. I review every IPO name and this one was one of the most interesting I had seen in some time. It’s expensive but they have a unique model where they have both a software business and a royalty interest in drugs that end up being commercialized using the platform. I think the post should work without having to pay anything: https://ipocandy.com/2020/02/schrodinger-sdgr-ipo/
I to throughly research IPO’s. the problem I have as a retail investor is getting into the stock.
I usually miss the initial pop and then try to buy it mid morning after much of the run up has occurred.
How doe you manage to get in early? Or do you get offers through your broker or brokerage.
The same ol after a stock is up 100%
Think you’re right to be cautious on this one. Very high valuation this early. I’m still hoping you’ll do an eval of THBR.
Thanks for the article. What do you think of selling put option at the price level you are comfortable owning the stock?
I think that’s a very reasonable strategy. But it has to be at the value you are comfortable owning the company, even if a piece of bad news hits or the market crashes and it falls twice that far — which means it’s probably best to actually have a number and valuation argument in mind.
For example, you might think to yourself, “I see this as very likely to grow revenues to $500 million by 2024, and I’m willing to buy at 10X that sales number and hold on — that would be $75-80 per share, so I’ll sell a put at that level”. That can help you make rational decisions.
If you use put buying as a timing mechanism to buy at 10% dip or something like that, without a specific reason why that price makes sense to you, it could be stressful, because at valuations like this it would not be shocking to se a 50%
“dip” over a few months if the market moves on to the next shiny object… or 75% if the market really crashes. Stocks that are going up because they’re going up don’t necessarily stop going down just because they hit milestones like 50X sales or 30X sales on the way down. If Apple falls 30% there will probably be some bottom fishing because of the earnings and the dividend and the brand power… if a real momentum stock that isn’t profitable falls 30% there might just be a lot of people trying to come up with some reason to buy other than “it’s going up,” and they might not find that reason.
If the market turns against these stories that trade on momentum and are valued at 30X sales or 50X sales or whatever, it becomes hard to find that foundation level of “this is clearly a reasonable value” — that’s the challenge I find with selling puts on growth stocks here, really, that we’re dealing with so many stocks that trade at valuations we’ve only really ever seen once, during the 1999-2000 peak, and a lot of growth stocks fell 90% from those levels. The companies are better now, but still, 70X sales is a lot to pay for anything.
So yes, short answer, I like selling puts as a concept for those who want to buy a little lower… but make sure you really want to buy.
Good day a lil a
Off topic but Back 2 Bill Gates
I have been hearing of a ” Holy Grail” investment from Bill Gates regarding robotics any clue????….Thanks for holding down a good chat
Been trying this investment stock market thing so far so good just lookin for the one homerun for my family
I did some research on that and I think the company is Heliogen.
Well SDGR is probably overpriced but it does have good income growth while losing the usual boatloads of cash but the idea of specializing in software that aids in drug development is a classic disruptive idea. I’ll very slowly buy in going forward while hoping for a pullback.
Dear Travis,
By reading the headline, I was thinking it must be talking about the SPAC, LGVW (
started as BFLY as of yesterday). Either way, it is looking very pretty.
Long LGVWW (BFLY-WT).
Hi there… I would like to get some advice from you on spac warrants if you can provide me some means of contacting you, i ll really appreciate.
Travis wrote a lot of SPACs and WARRANTS in his past articles, and I did a lot of search of this subject since March of 2020 after stock market turned south because of the CCP ( Chinese Communist Party) virus and in between I asked a lot of questions of SPACs Warrants that I could not learn from the “book”. Travis did help me a lot, the rest I learned it from Seeking Alpha, the author, Chris DeMuth JR, is very good about this subject matter. Sometimes he answered my questions but I did not subscribe his SPACS letter. There are a lot of good websites about this
subject also.
You are telling a lie about ccp and covid. Can you provide ANY CREDIABLE evidence to support your statement?
Stick to investing here and go somewhere else with your lie.
Thanks Eleanor, these lives need to be called out.
My dog is the best dog in the world..!! . . . Hopefully you do not call out this little white lie..!!
Not to worry …there will be many scholarly papers and books written about this virus that *seems* to have first erupted in communist China. (I think this statement is sufficiently neutral.)
…tom…
Is this Butterfly?
Thanks ytse for recommending BFLY, their portable ultrasound seems like it can really disrupt the industry!! I wouldn’t be surprised if it got acquired by Teladoc or a major healthcare company in order to enable home health. Also read a Motley Fool article on how it could extend to pet care, but this is also a great way to get medical imaging to 2/3 of the world who can’t access ultra-sound labs. Going to buy some shares on Monday.
Bought them on recommendation at 87.00
Not disappointing
Alpha investor pick
Just loved the concept and product This one will fly lots of head room to go
The stock price has gone up steadily since Pfizer announced it’s COVID vaccine success in November last year. It makes me think that investors are really counting on huge earnings this quarter and might be disappointed when earnings do come out, which I think will be soon. Investors may be expecting earnings to be higher than what they end up being, and there might be a price dip at that point.
Bought SDGR last summer. Been a nice ride. Will continue to hold but not add to my purchase
I have owned the stock for a while and have been covering it too. Two other potential reasons for the recent rise are plans to reveal a detailed monetization of the molecule discovery business for drug development, as well as an update on their work for the Gates Foundation on battery performance improvement during the next earnings report conference.
SDGR is part of Mc Calls Early Stage Investor. He recommended the stock at 36 USD, its still a buy up to 90 USD.
SDGR is still small at 7 bn in value, with an annual total addressable market TAM of 250 bn in the next years and the first mover advantage the company could eventually value at 25 – 50 bn according to McCall.
It is over 100 now so what until it comes back closer to 90 then I’m guessing would be best?
So is this the dip we were all hoping for?
Schrödinger faces intense competition from other molecular simulation companies, drug discovery companies, pharmaceutical and biotech companies, and open-source software (OSS). A few competitors in molecular simulation include:
BIOVIA (Dassault Systèmes)
CambridgeSoft (PerkinElmer)
Chemical Computing Group
Inte:Ligand GmbH
QuantumWise (Synopsys)
For a longer (though not necessarily complete) list, see Category: Molecular modelling software (https://en.wikipedia.org/wiki/Category:Molecular_modelling_software).
Note that some of these companies are subsidiaries of much larger companies with much greater technical and financial resources than Schrödinger. Atomistix A/S, the predecessor of QuantumWise, went bankrupt in September 2008. So success in this business is not guaranteed.
Companies such as Insilico Medicine (Hong Kong, https://insilico.com/) use artificial intelligence (AI) for drug discovery and development. AI may be more powerful and ultimately more successful than traditional molecular modeling in this application.
Pharmaceutical and biotech companies have their own internal drug discovery programs with large budgets. Some of this work is outsourced to companies that specialize in drug discovery.
Open-source software (OSS) is free or much less costly than commercial software. For more information, see: Open-source molecular modeling software in chemical engineering focusing on the Molecular Simulation Design Framework, by Peter T. Cummings et al., AIChE J., 23 January 2021, https://doi.org/10.1002/aic.17206.
Beware! This cat may not have nine lives!
Quite true, I suspect competition is one reason they’re working on turning their discovery tools into their own drug development targets… but there’s also a real business, with most of big pharma on board and increasing their usage. That’s not guaranteed to continue, but I judged it to be worth the risk given their established businesses, current growth and healthy cash balance to fund development. We’ll see how it works (or doesn’t) over the next few years.
Chris Wood is now promoting his top stock of 2021 as a “diabetes cure” that can reverse diabetes in just 14 days. Here’s a link to the promo: https://www.mauldineconomics.com/order/plan/21105301,21105302?itm_campaign=JM-431&itm_content=rvq6vmqz&itm_medium=ES&itm_source=mec
Any clues on the name of this company or the validity of their claims?