A software company backed by Bill Gates and hedge fund legend David Shaw is about to disrupt the pharmaceutical industry. But many investors seem to be missing the opportunity.
Schrodinger, Inc. (Nasdaq: SDGR) uses breakthrough artificial intelligence to help companies discover new drugs faster and cheaper. Shares debuted Feb. 5 and promptly soared. Then the coronavirus hit.
Since 1990, the New York software company has been tackling the most difficult and costly part of drug discovery using artificial intelligence, machine learning and physics-based predictive analytics. In the process, the firm’s platform became the industry standard for molecular simulation.
The business takes its name from Erwin Schrodinger, a Nobel Prize-winner born in 1887. The Austrian physicist is best known for Schrodinger’s Cat, a thought experiment based on quantum psychics and superposition.
It argues that a cat placed in a closed box with radioactive material could be both alive and dead simultaneously. It’s only the act of opening the box that determines the state.
Talk about curiosity killing the cat.
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Ironically, Schrodinger the software business is specifically about not killing the cat. The premise of the platform is to use software to predict status.
The platform is in use at 1,250 academic institutions worldwide and the top 20 pharmaceutical companies, as measured by sales. The customer retention rate across its 1,150 subscribers is 96%.
The pharmaceutical industry spent $179 billion on research and development during 2018, according to Statista. The market is expected to swell to $202 billion by 2022.
So far, Schrodinger has a tiny sliver of that business. The company generated sales of only $85.5 million in 2019, an 28% increase year-over-year. And due to extensive spending in R&D and new hiring, the company had losses of $24.5 million during that time frame.
Despite this, the outlook is beyond bright. The company is at the epicenter of a larger digital transformation. Its core biotech and pharma clients are only beginning to embrace AI and predictive analytics models to accelerate drug discovery and reduce costs. Schrodinger is the logical partner.
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Together, Gates and Shaw own 50% of the voting stock of the company. What they saw in Schrodinger parallels the life of the company namesake.
Gates and Shaw got rich by investing in really big ideas from tiny companies. Their vision allowed them to see that both states simultaneously were rare but entirely possible.
Schrodinger shares trade at 43.7 times sales and the market capitalization is $4.4 billion.
Savvy investors would be wise to buy shares into weakness.
Best wishes,
Jon D. Markman
