Science 37 Holdings Inc (SNCE) 2022 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Science 37's earnings conference call for the quarter ended March 31, 2022. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Caroline Paul of Investor Relations for a few introductory comments.

Thank you, and thank you all for participating in today's call. Joining me are David Coman, Chief Executive Officer; and Mike Zaranek, Chief Financial Officer. Earlier today, Science 37 released financial results for the quarter ended March 31, 2022. A copy of the press release is available on the company's website.

Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon our current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

We encourage you to review our filings made with the Securities and Exchange Commission for a discussion of these risk factors, including our quarterly report on Form 10-Q for the quarter ended March 31st, 2022, which was filed earlier today. You are cautioned not to place undue reliance on these forward-looking statements, which we speak only as of today, and the company disclaims any obligation to update such statements for new information.

We believe that certain non-GAAP metrics are useful in evaluating our operational performance. We use these non-GAAP measures to evaluate our ongoing operations and for internal planning and forecasting purposes. Information about non-GAAP financial measures referenced, including a reconciliation of those measures to the most comparable GAAP measures, can be found in our SEC filings and the earnings materials available on the Investor Relations portion of our website, at investors.science37.com.

I would now like to turn the call over to David Coman.

Thanks, Caroline. Good morning, everyone, and thank you for joining us. We started the year with strong financial and operational results, which reflect the continuing demand we're seeing for the Science 37 Operating System. We're particularly pleased with our revenue for the first quarter, which reached $18.7 million, a 50% increase year over year, despite having pulled $2.3 million out of the first quarter and into 2021, given our ability to over-deliver operationally, in addition to the impact of the two large COVID cancellations that we discussed in detail last quarter. Mike will drill into the rest of the financial KPIs in more detail.

I'd like to start today by discussing the broader market context which is creating some terrific tailwinds for our business. In the last several months, there have been a number of third-party market research reports that have spoken to the significant increase in demand for decentralizing clinical research. Our own research corroborates these findings. According to more than 125 senior clinical research executives who are assessing their portfolio of new clinical trial starts over the next 12 months, demand for clinical trials that include components of decentralization now outpaces demand for fully traditional clinical trials.

From a regulatory perspective, the FDA released new draft guidance last month requiring race and ethnicity diversity plans to be submitted by sponsors with specific measures to enroll underrepresented racial and ethnic populations. This is a widespread industry problem, given biases derived as a result of a limited number of traditional clinical trial sites that are geographically constrained to recruit from their existing patient populations.

This issue is naturally resolved with the Science 37 Operating System, which enables us to recruit just about any patient anywhere, regardless of location, and has enabled Science 37 to recruit three times the proportion of diverse patient populations across trials we've conducted to date. While the FDA has written more than 70 papers since the beginning of COVID, encouraging the use of decentralization, the NHS in the United Kingdom is taking this one step further with their new advertising campaign that reads, why should I drive miles, pay GBP8 for parking and sit outside a waiting area for hours to be seen for 15 minutes when I could do this in the comfort of my living room?

Not only does the Science 37 model make it significantly more convenient for the patient and attract a more representative patient population, but it's also faster, much faster. According to the Tufts Center for Study of Drug Development, the process of selecting clinical trial sites and launching studies takes more than 30 weeks on average. Our startup time averages less than 12 weeks, taking months out of the process because we're essentially a virtual site with only one contract required.

We've said from the beginning that we also enroll patients up to 15 times faster. In two recently completed studies, we enrolled patients 19 and 21 times faster than the parallel site network. By enrolling faster, we can dramatically save on duration, which enables sponsors to get their drug to market faster, by conservatively shaving three months off the startup process and another three to six months off the enrollment time lines on a Phase 3 trial.

The Science 37 model can dramatically reduce cash burn for sponsors and also give them six to nine months of additional commercialization time for their drug, which represents, for a product at peak revenue of $200 million, about $100 million to $150 million in additional revenue for the sponsor.

Now translating market dynamics into our value proposition into the strategic priorities we outlined during our fourth-quarter earnings call, we continue to make significant strides on enhancing our commercial efforts, extending our leadership position through investments in our operating system, and positioning the company for long-term profitability without the need to raise additional capital.

With respect to our commercial efforts, we're happy to report that as we exited the first quarter, our total pipeline was again at record levels, representing significant year-over-year growth. This is as a result of the investments we've made to expand our commercial presence and leverage our CRO partnerships. We saw an increase in RFP dollar volume across each of our main customer cohorts, including large pharma, midsize pharma and emerging growth companies.

We recently strengthened our commitment to our most prevalent therapeutic area, oncology, with the addition of Dr. Shaalan Beg, a renowned investigator and former Medical Director of the Clinical Research Office at UT Southwestern Medical Center. With his wealth of clinical trial expertise, it will help us to identify, design, and close more oncology clinical trial opportunities while helping to accelerate our active oncology trials as a primary investigator.

Regarding investments in our operating system, tomorrow we will be formally launching our next-generation technology platform. Unlike many of the point solutions being introduced to enable components of decentralization, we believe our unified end-to-end technology solution is the most comprehensive platform available to fully orchestrate study conduct across all stakeholders, unifying the stakeholder journey, increasing compliance and generating high-quality data for decentralized clinical trials and agile trial designs that require both remote and on-premise management.

Commercially, we have had two beta enterprise customers already who have been intimately involved in the product design to ensure its success and traction in the market. It's also important to note that the new platform is built on a new infrastructure to facilitate speed, flexibility and scale. Operating this new product will require fewer resources to enable us to initiate and manage clinical trials going forward, which will have a positive impact on our future cost of revenue and margins.

In addition to this exciting technology release, we will also be announcing rapid deployment solutions for lightweight virtual site designs that will enable the Science 37 meta site to be deployed in less than a month as a rescue option for poorly performing studies, or a risk mitigation option for new studies where Science 37 will benefit from an in-study land-and-expand approach.

Finally, in regard to positioning Science 37 for long-term profitability, we've been aggressively taking expenses out of the business, which will be reflected modestly in our first quarter results and more significantly in our full year guidance as we strive to become EBITDA positive and cash flow neutral by the end of 2024 without the need to raise additional capital.

With that, I will turn the call over to Mike Zaranek, our Chief Financial Officer.

Thank you, David, and hello, everyone. I plan to take us through the first quarter results and then our outlook for the full year 2022. We are pleased to report revenues for the three months ended March 31, 2022, were $18.7 million, which represents a 50% increase from the $12.4 million in the same period of the prior year.

This exceeds our preliminary expectations for the quarter, given the two large COVID cancellations we experienced in the quarter and our ability to accelerate approximately $2.3 million of revenue into the fourth quarter of 2021 from the first quarter of 2022, both of which we shared during the fourth quarter earnings call. As we noted before, we expect to continue to see quarterly variability in bookings, revenues and profitability as a result of our current scale and timing around a limited number of contracts.

As David noted, we finished the quarter with our highest total pipeline in the company's history. And consistent with our remarks from the Q4 2021 earnings call, we continue to see a record number of larger, $10-million-plus opportunities in our pipeline, which reflects growing confidence in both Science 37 and the decentralized clinical trial model. These larger opportunities, when won, tend to be longer in duration and thus give us more visibility for revenue in 2023 and beyond.

The gross bookings in Q1 2022 represented our second highest level ever. Our net bookings for the three months ended March 31, 2022, were a healthy $30.6 million despite having to absorb the two large COVID study cancellations we mentioned previously. As you will recall from our fourth quarter earnings call, the larger of the two COVID studies was from a non-pharma company, which we do not traditionally target. And the smaller of the two was as a result of drug efficacy, which will happen from time to time across the clinical trial industry, particularly on Phase 3 trials.

I would like to reiterate that our cancellation rates were less than 10% for full year 2021. And our 15-month cancellation rate through the end of the first quarter of 2022, including these two first-quarter COVID cancellations, was 17%. Excluding the impact of two large COVID cancellations, our Q1 2022 cancellation rate was in the low double-digit range, close to our full year 2021 level.

For comparison, we view the industry average as between 15% and 20%. As we stand today, we have very little backlog from COVID and non-pharma sponsors. Based on our current backlog, we are currently not seeing any indications that future cancellation rates would be elevated beyond the industry norms.

Now turning to gross profit. As indicated last quarter, we expected a decline in the first quarter, given the excess resources on hand to deliver the two aforementioned COVID studies, along with the drag of profitability from two larger legacy studies that have been priced prior to us revising our pricing strategy in Q4 2020.

As a result, adjusted gross profit was $3.2 million compared to $3.9 million in the same period for the prior year. In addition, adjusted gross profit margin, excluding stock-based compensation, was 17.2% compared to 31% in same period of the prior year. We continue to focus our investments on commercialization, technology delivery and our underlying infrastructure with an eye towards long-term profitability and continued growth.

Selling, general and administrative expenses, inclusive of $7.6 million of stock-based compensation, $0.1 million transaction-related expenses, and excluding depreciation and amortization for the quarter were $30.2 million, an increase from $9.2 million in the same period of the prior year. Adjusted EBITDA -- which we calculate by adding back depreciation, amortization, taxes, interest, transaction expenses, stock-based compensation, and adjusting for the impact of the change in fair value of the earn-out liability -- was a loss of $19.8 million in the quarter compared to a loss of $5.1 million in the same period of 2021.

On our path to profitability, we were pleased to be able to reduce total non-GAAP operating costs -- as defined by revenue, less adjusted EBITDA -- by more than $3 million sequentially in the first quarter from the fourth quarter of 2021. You will note our GAAP net income of $44.9 million reflects $75.5 million related to the change in fair value of the earn-out liability, which was part of the original transaction with the SPAC.

As a reminder, upon the stock price meeting certain thresholds within the 36-month period of the transaction closing, the equity holders of the former Science 37 entity would receive additional shares; and under US GAAP, we are required to re-evaluate the potential value of that arrangement on a quarterly basis.

Now on to cash, we ended the quarter with approximately $179.6 million of cash, cash equivalents and short-term investments. This was in line with our expectation and reflects, amongst other things, the cash bonuses which were paid out in Q1 2022. Additionally, we were pleased to report that our DSOs -- as defined by accounts receivable, less current deferred revenue, divided by the average daily revenue in the quarter -- were 23 days at 3/31/2022 versus 27 days in the same period a year ago.

Now let's turn to the outlook for 2022, where we will share our updated guidance. We continue to project revenues for the full year 2022 to be in the range of $86 million to $96 million, representing a 44% to 61% year-over-year growth. At the end of the first quarter of 2022, we had approximately $74.1 million of the full year 2022 revenues in our [phased] backlog and year-to-date revenue recognized. This compares to approximately $42.4 million at the same time last year.

The second quarter will mark an end to two of our largest studies that were priced prior to our current model which was established at the end of 2020. This will have an immediate positive impact on our gross margin during the second half of the year. Between additional efficiencies from our new technology platform and vigilant management of resourcing, we expect to achieve gross margins in the low 40% range as we exit the year. We expect adjusted EBITDA for the full year 2022 to be between negative $69 million and negative $75 million.

Looking beyond 2022, as David noted, we expect to be both quarterly EBITDA breakeven and cash neutral by the end of 2024. And based on our current operating plan, we expect to be able to reach cash flow positivity with our existing cash on hand. As of March 31, 2022, we had about 115.7 million shares outstanding. Since we currently anticipate having an adjusted net loss in the upcoming quarter and year, any converted options would be deemed anti-dilutive; and therefore, on a GAAP basis, we expect the basic and diluted share counts to be the same.

In summary, we remain very optimistic about our growth trajectory in 2022 and our path to long-term profitability.

At this point, I would like to turn the call back over to David for closing comments.

Thank you, Mike. Overall, we are pleased with our meaningful progress on the adoption of our platform, new product introductions, and cost management during the first quarter. We are excited about the continued shift of the clinical trial industry toward more decentralization which should continue to provide a strong tailwind to our business.

We also continue to see ample opportunities across large pharmaceutical, midsized and emerging growth companies, given the large whitespace in our market to the tune of $220 billion in R&D spending annually. Our differentiated operating system is able to solve multiple macro trends for trial sponsors. We are seeing increased demand among biotech customers who are eager to reduce cash burn with Science 37, given our ability to save months in start-up time and enroll patients significantly faster. Our platform is also being deployed in Ukraine as a way for providers and patients to stay engaged as people are displaced in great numbers.

And finally, the FDA is demanding increased diversity in clinical research, and the Science 37 Operating System is proven to enroll three times more diverse patient population compared to a traditional clinical trial. We are excited about the launch of our new technology platform, which will create significant differentiation as the industry's most comprehensive end-to-end platform available to fully orchestrate study conduct across all stakeholders, unifying the stakeholder journey, increasing compliance and generating high-quality data for decentralized clinical trials and agile trial designs that require both remote and on-premise management.

Our product development efforts are enabling us to benefit from fewer resources to initiate and manage clinical trials going forward, which augurs well in the current labor market and our path to profitability. Our operating system benefits patients, providers, sponsors and CROs alike. And we believe we are the only company of scale with both the workflow technology and our unique combination of specialized networks to enable both sponsor and CRO to fully orchestrate the conduct of decentralized or agile trials.

The future for Science 37 is very bright as we continue to pioneer in the clinical trial industry, [growing] while tightly managing expenses to ensure our current cash position is sufficient to support our plans to achieve long-term profitability.

With that, I will now turn it over to the operator to open it up for questions.

(Operator Instructions) Eric Coldwell, Baird.

Thanks. Thanks very much. Good morning, and congrats on a relatively strong quarter here. David, we've all spoken a lot about these macro headwinds in the R&D ecosystem, things the Street's been worrying about for the last, call it, six to nine months: various items like Russia, Ukraine, China; biotech funding; labor; interest rates; foreign currency, and the list just goes on and on.

You brought up a number of those topics on the call today, but I'm curious, are there any of the macro situational items that the Street's worried about for more traditional R&D participants? Are there any of those items that are actually having a negative influence or creating a headwind for your model? I mean, it sounds like everything has actually been sort of -- you're almost countercyclical to that, but I'm curious what your thoughts are on the bigger picture.

Yes, Eric, thanks for the question. I'm glad you asked. And that's why I wanted to address it in some of the prepared remarks because the reality is -- or the things we continue to get asked about, the macro trends -- we do run counter to many of them. You think about biotech funding is a big question that's hitting many of the CROs. But the reality for us is that's an area where we're accelerating.

If you think about the Science 37 solution where we're able to recruit patients faster, and frankly, we're able to start up in almost [four] more in half the time. So when you are cash constrained, coming to Science 37 gives you the ability to reduce your cash burn and to accelerate in recruitment.

Areas like Ukraine, where the patient and provider are being displaced, is the perfect opportunity for the Science 37 platform to be able to connect people together in a remote environment. In terms of the labor shortage issues and inflation we are -- our retention rates are extraordinarily high relative to the rest of the industry.

And frankly, we're just not seeing it. So we feel really good about the Science 37 solution, which is really the antithesis, I think, to a lot of the macro trends that are headwinds to the rest of the industry.

Thanks for that. I wanted to hit on this topic of rescue work and your conversation about maybe getting into trials in a bit of a land-and-expand, come in small, grow fast, impress the client, maybe take over more of those patients or more of the activity as compared to the original contract that you might sign.

Could you give us some anecdotes of either rescue work or these land-and-expand deals that have played out well, and maybe give us a sense on how much of your pipeline or backlog that those two categories might comprise today?

Yes. And I'll tell you about one that we shared briefly, I think, in an Analyst Day quite some time ago, but it's a perfect example of what we're talking about. We were hired to do about 40 patients originally for a trial that ended up enrolling 490. We ended up enrolling 427 of those 490 patients because we were just simply able to go find them, enroll them faster than what was able to be done otherwise.

So there's plenty of examples within the pipeline that we have today, even when we come in at a higher number, in terms of the percentage that were supposed to get. We continue to over-deliver in terms of our ability to go recruit patients. What I think is exciting about this solution is that we are able to deliver from initiation to execution within four weeks, four weeks, which will enable us to really affect the rescue side of the equation.

So that if you think about it, 80% of our trials are delayed, most of which are from the patient recruitment issues. So that enables us to get a really nice additional market that we haven't really been addressing today and will be a new area of expansion for Science 37.

I have just one last follow-up and I'll jump back into queue. The larger contracts referenced that were awarded in the past under the prior pricing model that you mentioned will wear off in Q2 -- is it the beginning of Q2, the end of Q2? Just getting a sense on how much the gross margin ramp might -- how much of that might be realized in 2Q versus your comments that you'll exit the year in the low 40s? I'm just not sure exactly how much influence those two trials have on the current quarter.

Hi Eric, this is Mike. Thanks for the question. I think what you're going to see in terms of Q2, our expectation is that they will continue for a good part of the Q2 in terms of the impact. And as David said in his prepared remarks, our expectation would be that we would see a pretty significant ramping the gross profit margin in the second half of the year as those two roll off.

Thanks very much.

Thanks, Eric.

Justin Lin, William Blair.

Hi, good morning. Congrats on the quarter. Are you able to provide the new versus existing client mix in your bookings this quarter? Are you seeing a trend of new customers increasingly taking share or vice versa?

Yes. Hi, Justin. Thanks for the question. This is Mike. Yes, I think what we're seeing in terms of the mix is similar. You heard where we were for the end of last year with roughly two-thirds from existing customers, one-third from new customers. We continue to try to go after that through our BD strategy in terms of a nice mix between the two. What I would say is that on a quarterly basis, we could see fluctuations, depending on what comes in in the quarter. But directionally, the two-thirds, one-third split is what we're generally targeting.

Got it. And I guess as a follow-up question to Eric's question earlier, are you able to provide sort of the biotech -- or, more specifically, pre-revenue biotech as a percentage of your total revenue right now?

Yes, sure, sure. So yes, I think the one thing that we have seen that maybe isn't totally apparent to everyone is that while the public markets have been a little bit more challenging for that cohort, the VC markets were -- continued to be pretty strong in Q1.

As it relates to our specific level of exposure, that's something we monitor closely. And just for context, at the end of the first quarter, less than 25% of our backlog came from private emerging biopharma accounts. And as David mentioned in his prepared remarks, we're actually seeing an uptick in the increase in pipe from that cohort along with our other cohorts.

Got it. Okay. And just last one from me. Are R&D as a percentage of your operating expenses or revenue?

Sure. We continue to make significant investments in the tech platform, which I think is what you're referring to in terms of the R&D spend. That is the lifeblood of this organization. It underpins all three offerings we go to market with. I don't think we're going to give you an exact precise figure on that. What I would say, though, is that it is our largest area of spend. And for context, we're running that on a cash basis. It's approximately 2.5 -- in excess of 2.5 times what we're spending on sales and marketing. It's a pretty significant, constant area of focus for us.

Got it. Thank you very much.

(Operator Instructions) Frank Takkinen, Lake Street Capital.

Hey, David. Hey, Mike. Congrats on results. Thanks for taking my questions. I wanted to start with the new product. [Talk heard] the comment about the next-gen system launching tomorrow. Maybe just take us a little bit deeper into some of the key features of that next-generation system. And then how we should be thinking about new product rollout cadence over the next, call it, two, four, six quarters forward?

Yes. Thanks for the question, Frank. We're really excited about it. We've been working on this new product release for quite some time. A lot of the investment spend that we've internalized has really been in order to fund this, which is to enable us to have a fast-paced platform from which we can operationalize a fully decentralized clinical trial or an agile trial that includes both premise and off-premise capability. It takes all the workflow.

So you just think about a nurse in the patient's home with a telemedicine investigator teleported into that living room to sit side-by-side with the patient. So they can all triangulate care together, all entering data into their system simultaneously to be able to manage the clinical conduct of the trial and then having consistency across the entire continuum of the clinical trial -- doesn't matter if you're a telemedicine investigator or if you're an on-premise investigator -- to be able to have that level of consistency to sync all of the stakeholders across the clinical trial, to be able to capture the data that's required and to do it in a more compliant manner.

It all sits on a platform that is interoperable [module] and flexible. So we can deliver speed, flexibility and scale across this platform, and it is an entire end-to-end platform. So it's not like we're taking component parts and trying to paste it together, like a lot of the other players in the market are talking about. It is literally the entire workflow combined into one platform to deliver all of it on a modern infrastructure. We are super excited about it.

Great. That's helpful. And then maybe for the second part, just one for Mike. How should we be thinking about the cadence of revenues throughout the remainder of the year? Obviously a solid outperformance in the first quarter. How should we be thinking about that sequential revenue growth through year end?

Sure. Thanks, Frank, and good morning. I think what we're effectively saying is that our expectation is that we would have sequential growth throughout the quarters through the end of this year. And just some additional context: as we exited Q1, we had about just over $74 million of phased visible revenue via the year-to-date revenue recognized through the end of March, plus our phased backlog for the remainder of the year against our guidance of $86 million to $96 million in revenue.

If you recall, if you look at longer term, our reported backlog of approximately $176 million at the end of Q1. We've talked about some of the larger opportunities that we've been able to bring in. And a number of those actually have a longer duration. And so, as such, whenever you start to deconstruct that 176, you can see that we're getting a higher level of visibility into '23 and beyond.

Great. Okay. I'll stop there. Thanks for taking my questions, and congrats again on the results.

Thanks, Frank.

Thanks. Good to hear from you.

I am showing no further questions at this time. I would now like to turn the call back over to Mr. Coman for any closing remarks.

Thank you for joining us today. Appreciate it. Looking forward to the follow-up questions, and have a great day, everybody.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.