Science 37 Holdings Inc (SNCE) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Science 37 third-quarter 2022 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Steve Halper, Managing Director at LifeSci Advisors. Please go ahead.

Thank you, Katherine, and thank you all for participating in today's call. Joining me are David Coman, Chief Executive Officer; and Mike Zaranek, Chief Financial Officer.

Yesterday, Science 37 released financial results for the quarter ended September 30, 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 that 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 in the Risk Factors section of the company's most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings. 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 obligations 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.sience37.com

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

Thanks, Steve. Good morning, everyone, and thank you for joining us. Our third-quarter top-line results reflected some of the challenges we discussed during our second quarter call.

In the quarter, we continued to experience delays in decision making representing a 40% increase in the sales cycle from this time a year ago. We attribute this to the biopharmaceutical cost pressure in the macroeconomic environment, in addition to the size, strategic value and complexity of the studies we are solutioning.

Seeing these shifts, particularly regarding the need for more in-depth solutioning, we announced a commercial leadership change in September with the appointment of Michael Shipton to the role of Chief Commercial Officer. Michael brings more than 25 years of commercial leadership experience in clinical research and technology, including his most recent role as Senior Vice President of Customer Solutions and Strategy at Syneos Health, which he left at the beginning of this year.

You've surely noted that third-quarter bookings were well below our expectations. Offering an early indicator for fourth quarter, we see some positive momentum with approximately $20 million of gross bookings quarter to date. It's also important to note that nearly all of those bookings come from repeat customers including one program that's greater than $10 million in contract value.

Third-quarter revenues grew 14% year over year to $16.2 million due to our strong backlog entering the quarter. Our revenues were down quarter over quarter and below expectations and as a result of the recent light bookings and timing on two important projects that Mike will address in a moment.

We remain highly confident and focused on our strategic plan that we laid out for our team and our shareholders. And it continues to yield a strong sales pipeline, technology that is powerful and differentiated, and quality that keeps our customers coming back for more.

Our financial goal remains to reach profitability and cash flow breakeven in the fourth quarter of 2024 with cash we have on hand.

Given the headwinds, as disclosed in our 10-Q filing from yesterday, we have implemented a cost reduction program, which we expect will result in about $21 million of gross cash savings on an annual basis. This cost reduction program incorporates the difficult decision to reduce our staff by approximately 16%.

While we eliminate excess capacity and significantly reduce our spend in G&A, we are making additional investments in commercial resourcing and maintaining strong investments in both our technology and operations functions. With these investments, we plan to re-accelerate top-line growth, continue to ensure our market differentiation, and deliver with high quality on behalf of our customers.

With that, I will now turn the call over to Mike Zaranek, our Chief Financial Officer to provide additional detail regarding our financial performance.

Thank you, Dave, and good morning, everyone. I'll discuss the third-quarter results for the period ended September 30, 2022, and then provide our outlook for the full-year 2022.

In the third quarter, we reported revenues of $16.2 million, which represents a 14% increase from the $14.2 million in the same period of the prior year.

As we've discussed previously at our current size and scale, one or two projects can have a material impact on the quarter. For example, in the third quarter, one of our large customers achieved the number of patients they needed to reach their safety and efficacy endpoints and therefore, chose to wrap up enrollment early.

Another large customer offset to slow the pace of initial enrollments to be able to measure early results prior to opening all of our recruitment channels. These two events resulted in more than a $3 million headwind to the third quarter revenue, and they will continue to have an impact on the fourth quarter compared to what we had previously expected.

We continue to have strong relationships with both customers, one of which contracts with us for a new study already in October. We finished the quarter with net bookings of $4.7 million compared to $35.9 million in the third quarter of 2021. As David noted, our third quarter bookings were adversely impacted by delays in expected contract signings given the longer sales cycles we discussed earlier. In the quarter, we also recognized approximately $8 million of scope reductions.

From a fourth quarter to date standpoint, we have signed approximately $20 million in gross bookings, including one contract greater than $10 million. We continue to see some strong trends in our pipeline, including the average selling price, which has increased more than 90% year over year for both repeat as well as new customers.

Our adjusted gross profit for the third quarter was $4.6 million compared to $4 million in the same period of the prior year. Adjusted gross margin was flat year over year at 28.3% compared to 28.4% for the same period last year.

Selling, general and administrative expenses, excluding $5.2 million of stock-based compensation, were $19.3 million in the third quarter, a decrease of $3.2 million versus second quarter of 2022.

Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, other income and stock-based compensation was a loss of $14.6 million in the quarter, representing a $1.9 million sequential improvement compared to the second quarter of 2022.

GAAP net loss was $23.5 million versus a GAAP net loss of $14.7 million in the third quarter a year ago. Our third-quarter 2022 GAAP net loss included a gain of $1.2 million, related to the change in fair value of the earnout liability, which was part of the original transaction with SPAC.

Now moving on to cash, we ended the quarter with $130.2 million of cash and cash equivalents. This would imply (technical difficulty) in the quarter, an improvement of the $31.2 million of cash burn in the second quarter.

As expected, we saw a reduction in our net DSO in the third quarter, and we finished September with a net DSO of 25 days.

As David noted earlier, we announced the cost reduction program in our SEC Form 10-Q last night. While these actions are never easy, this will result in a reduction of approximately $21 million of gross annualized cash spend. These actions will also enable us to reinvest in our business, particularly around technology and our go-to-market efforts. We expect to realize most of the benefits of these cost reductions beyond 2022.

Now, let's turn to the outlook for 2022.

In light of the recent business conditions, we've outlined previously and earlier today, we now expect revenues for 2022 to be in the range of $68.2 million to $69.2 million, which would represent 14.4% to 16.1% year-over-year growth. Likewise, our revised guidance for adjusted EBITDA for 2022 is negative $65.4 million to negative $66.4 million.

Consistent with past practice, we intend to provide 2023 guidance on our fourth quarter earnings call. As of September 30, 2022, we had approximately 116.6 million shares outstanding. As we currently anticipate having a net loss in the upcoming quarter and year, any converted options would be deemed anti-dilutive. Therefore, on a GAAP basis, we expect basic and diluted share counts to be the same.

In summary, while our third quarter commercial execution was challenging, we are encouraged by the strong start to the fourth quarter. We remain committed to delivering long-term profitability and have taken the appropriate steps to achieve this.

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

Thank you, Mike. We remain focused on executing our strategy of building best-in-class technology and solutions to decentralize the clinical trial industry and create meaningful value for our relevant stakeholders. We're focused on our objective of building a sustainable and growing business that scales to long-term profitability and maximize this value for all shareholders.

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

(Operator Instructions) Lucas Romanski, Cowen.

Yes. This is Steve Braun on for -- it's for Charles Rhyee, actually. Thanks for taking our questions this morning.

Thanks for calling in, Steve.

Yeah, absolutely. So I guess maybe just on the third quarter bookings. You mentioned they basically fallen short on some delays in expected contract signings and longer sales cycles, which is something you had cited last quarter as you focused on larger engagements.

Do you believe the decision to shift away from smaller engagements is maybe still the right decision given the trend in bookings over the last two quarters? And then, I guess, would it possibly make sense to, in the near term, focus on some smaller engagements to drive near-term bookings growth, why you remain committed to like working on those longer-term larger engagements?

Yes, it sounds there were imagining all our engagements altogether. It is that we are striving to go after larger studies. And we're being pulled that direction too, which is, I think, a testament to the case study that we've been able to accumulate to date.

And so, continue to think that larger opportunities are going to continue to come our way, it is true that the sales cycle on these are significantly longer. As I noted, the decision-making process is about 40% longer than it was about a year ago.

Just to give you a little bit of color, we have one oncology study that was targeted to close at the beginning of the second quarter. And by the way, this is not one of the $10 million plus specs but that's targeted to end at the beginning of the second quarter, and we're hearing by the end of the year at this point. So you just get a flavor of what the market dynamic looks like in the context of smaller or larger.

Okay. Great. And then maybe like on the fourth quarter bookings, they seem to be on a better trend. Could you give us more details on customer mix? Is it skewed towards larger or smaller deals? And then maybe what the fourth quarter bookings could imply for 2023 revenue growth?

Sure. I'll start, maybe pile on, Mike. So the quarter has been really strong to date in terms of bookings. The mix of the customers that are coming in are repeat customers, which is terrific. They're larger pharma companies rather than smaller biotechs.

While we're really excited to see the trends for the beginning of the quarter and we expect our results to be stronger in the fourth quarter than even the second quarter, certainly in the third quarter, I just want to make sure that we're cautioning beyond achieving a record number for the quarter. But the trend certainly is changing in the fourth quarter.

Yes and just to be super clear on that, what David is referring to is from a booking's perspective. Good start to the fourth quarter from a booking standpoints. As we mentioned, one of the opportunities that was in that approximately $20 million was large pharma, greater than $10 million. And so we are seeing and continuing to win those types of opportunities, as well as smaller ones.

Max Smock, William Blair.

Hey David, hey Mike, thanks for taking our questions. Just wanted to start off here asking one about what you're seeing in terms of cancellations. So in the third quarter here, how much of the lower net bookings number was driven by cancellations? And when you do see some cancellations, what are some of the explanations that your customers have given you recently around why they've decided to cancel?

I know you mentioned funding, but any incremental detail you can provide there would be helpful. And then in terms of the $20 million in gross bookings here in the fourth quarter, do you have any sense, or can you provide any detail around what that looks like on a net basis?

Yeah. Let me start and David can provide some additional context as he sees fit.

As I mentioned in my prepared remarks, in terms of the net bookings that we reported in the third quarter of $4.7 million, we had approximately $8 million of primarily scope reductions, a couple of small cancellations in there. That was higher, if you recall, compared to the second quarter where we had a gross in the upper 20s and about $25 million in net. So a little bit higher there. But again, I think it comes back to that point that I made earlier, one or two projects that our current scale can impact the quarter just given where we are.

In terms of cancellations or scope reductions, they can occur for many different reasons. We did see, as I mentioned in the earlier remarks, one customer ended up wrapping up enrollment earlier than was expected, which is great from a customer perspective, it means we're doing what we're supposed to. But yes, that does have an impact on revenue.

Additionally, I think it's fair to say that the macroeconomic environment has impacted some of our customers. We're seeing a greater emphasis on the customer standpoint in terms of their cost, in terms of how they're managing costs, and maybe a little bit less focused in some regards around aggressive moves to speed. But part of why we're doing this cost reduction that we announced is to enable us to be more aggressive and nimbler in terms of being able to address that customer need in terms of the cost side and so on.

David, do you want to add anything to that?

No. That sounds good. Thanks.

And then -- okay, so for my follow-up, just following up on your point there about the funding environment, right? And something we can dig into that point a little bit here. Is that -- it sounds like that is customers dragging their feet more than anything around whether or not they want to move forward with trials or are you seeing some actual programs getting canceled?

And then, I think in the past, you've talked about how the value proposition for DCTs is actually even greater in this kind of funding environment. So can you help us reconcile that comment with your point about funding slowing down your bookings here?

Yes. I mean, I think it characterized best in the broader macroeconomic environment in general. A number of our customers are navigating through a challenging cost environment themselves, in some case, that's driving risk aversion and less priority on aggressive speed, which is the core of our value proposition. And some of the cost actions that we announced, and as Mike just pointed out, that does allow us to become more aggressive on how we price and ultimately how we deliver.

So I think it's kind of the core macro, I think, view of the world. And then underneath that, the decision-making timeline is dragging out. And I think it's two-fold. One of it is the challenging cost environment for our customers. And the other one is the average deal size that we still continue to see, which is nearly doubled since the beginning of the year and that elevates the approval process within big pharma and also extend the timeline.

And Max, I think what -- if you tried to characterize on a relative basis, your follow-up question, in terms of how much is just delayed decision-making versus actual cancellations, it seems to us from our perspective, to be more of the former.

Got it. Very Helpful. Thank you for taking our questions.

Thank you for calling in.

Matthew Hewitt, Craig-Hallum.

Good morning. Thanks for taking the questions. Maybe first up, as you look at some of the lengthening of the sales cycle, is there any way to differentiate between what is based on cost and managing their balance sheets versus how much of it is kind of managing their pipelines and portfolio? Are there shifting focus points for some of your customers and that's kind of what's creating the delay? Or is it entirely based upon their balance sheets?

Yes, it's hard to tell. I think that it's certainly true across the board. So if it was isolated then I'd be able to pinpoint it for you. But it feels like it's more of a broad cost consciousness. We do see longer delays in some of the larger studies. But as I pointed out a moment ago on the one oncology study that's kicked back more than two quarters, it isn't necessarily size alone. And it isn't necessarily at the biopharma, large pharma or even biotech, although I think that we see a little bit faster decision making in the biotech space.

Yes. And just a context, I think we provided this previously. If you look at our backlog, just to give you some context around how much could lending environment impact backlog consistent with where we've been the last couple of quarters from what we deem to be emerging pharma and biotech, was less than 25% of the total. I think it [lends] itself to more of the delays in decision making, is what we're seeing more of.

Okay. Understood. And then maybe a separate question here. I think you mentioned in your prepared remarks that ASPs are up significantly year on year, yet you're seeing a more heightened focus on the costs from your customers. Does that put some pressure on your ability to increase price or on those ASPs? Or are they not really tied together? Thank you.

Yes. I think that the broad macroeconomic issues from a biopharma perspective, in terms of cost certainly is -- it applies to our business and how we think about structuring our business. And one of the reasons why we took a look at our costs and did our cost reduction program was specifically for that, so that we could take a closer look at the way we price and become more cost favorable for our sponsors even in a world where they're asking for more. So I think it's appropriate.

And to add to that, you're absolutely right. I mean, we're seeing significant increases year over year, in terms of the average selling price in the pipe. We think that's a great thing. We think this is a fact that we're seeing that, particularly on the repeat customer side within an indicator of the value prop we're able to bring to the customer set.

That being said, given our current size and scale with the increased level of project size in the pipe, that can create more volatility in terms of our bookings in a particular quarter. I think you saw some of that there in the third quarter.

That makes sense. Thank you. Appreciate the call.

Thanks, Matt.

Frank Takkinen, Lake Street.

Okay, great. Thanks for taking my questions.

Maybe to start on a little bigger picture question. Are you seeing any of your RFPs that you're going head to head with brick-and-mortar, more of those wins being towards the brick-and-mortar space? Or are you seeing the DCT environment continue to be something that your customers that have used it previously intend to continue to use it? Just trying to get a feel for if any of the headwinds are because of business shifting back to brick-and-mortar?

Well, I think in this environment, you are seeing a little bit more risk aversion and you're seeing less prioritization on speed and more on cost. And so, I think it's fair to say that there is a little bit of that going on. As we ultimately get into the competitive pitch, the value proposition that we're bringing in at speed, and if our sponsors are focused more on cost, that changes the dynamic a little bit.

Okay. That's helpful. And then maybe a follow-up on the $20 million gross bookings figure you've been speaking to. Can you talk to the other elements in that equation to get to net bookings, any expectation around cancellations or scope production that you've spoken to about this quarter?

Sure. Thanks, Frank. Yeah, I don't think we're providing guidance as it relates to the bookings for the fourth quarter but we did want to give some context that from the starting points, we're coming out of the gate with pretty good momentum.

As David mentioned, we continue to be able to talk to customers about these larger opportunities. We have a good pipeline in front of us. And the next couple of months or next 1.5 months will be important as we look to close out the year strong.

Okay, that's all for color. I'll stop there. Thanks for taking the questions.

Thanks, Frank.

Thanks, Frank.

Eric Coldwell, Baird.

Thank. Good morning. So I just -- sorry for the technical clarification. On the prepared remarks, I heard about a scope, a reduction of $8 million. In the Q&A, I heard about cancellations of $8 million. I'm just wanting to confirm that the scope reduction was a piece of the $8 million, so total cancels rate or maybe there was an $8 million scope production plus cancels on top? Just hoping you can be very specific on that.

Hey Eric and good morning. Yeah, the total reduction between gross and net, so inclusive of scope reductions and cancellations, was about $8 million. Vast majority of that was scope reductions.

Got it. Thanks, Mike. And then, you've also made a comment about the program that wrapped up early. And if I understood the gist of it, the client got to in the enrollment needs faster than they expected. So they wound down. You made some comments about that being good for the customer and you also made a comment that you were doing your job well. But then you also said it hurt your revenue.

So I'm a bit confused about how beating timelines and doing your job well, actually hurts your revenue. It would seem maybe it would accelerate your revenue, but I'm not sure why it would hurt your revenue.

Sure. Let me start on that. And David, you can add to that.

I think in that particular instance, that customer was utilizing both ourselves, as well as the traditional site model. And they made a determination after some interim readouts that they were able to effectively wrap the study early. We, I think, did a good job on that, and that particular customer was the one that I referenced that has already given us new work here at the beginning of October. Anything else to add to that Dave?

No. Sounds good.

Yes. Got it. And then last one for me. You do work with CRO channel partners where, by and large, seen most companies put up solid book-to-bills above 1.2 but one of your named partners did not do so this last quarter, obviously, not even close.

I'm curious if some of the impact you saw in 3Q was related to poor performance at your channel partners? Or are there any relationship changes among the five that you've publicly named in the past?

No relationship changes between them. I don't think it's fair to say that impacts within those individual CROs impact us significantly. I would say that as we continue to forge ahead as an organization, the CRO partnership channel is very important to us. Michael Shipton comes from that environment and is a very strong area of focus for him. So we expect to accelerate in that channel, in particular.

Got it. Thanks, guys. Appreciate it. Sure.

Thanks, Eric.

David Windley, Jefferies.

Hi, good morning. Thanks for taking my question. Kind of a related question to what Eric was just touching on, or your answer to his, you mentioned the trial that you were working on through another CRO. I'm wondering if you could give just rough breakdowns on how much of your business is on trials where you're one of multiple CRO-type vendors versus trials that you're running exclusively yourself, pure DCT trials as a first question?

Hey good morning, Dave, thanks for the question. This is Mike.

I think what we've talked about, historically, is that we have seen stronger demand in terms of some of those large opportunities has trended around more skewed towards Metasite.

In the instance of Metasite, we would typically be one of multiple partners with the pharma. So I think from that standpoint, and as I mentioned on that particular study, there was a Metasite. And so as you think about if we're one multiple or one of solely, majority right now is we are multiple.

Yes. Okay. And then also related, I guess, maybe trying to reinforce Eric's question, get out in a slightly different way. In instances where -- or I guess I'll start by saying, I'm getting that contract structure.

And so to the extent that remote capabilities and decentralized capabilities are aimed at speeding patient recruitment and driving faster time to last patient in, can you build into your contracts incentives such that more successful execution that helps the client to achieve the success that you're describing actually rewards you rather than penalizes you?

Yes. Yes, definitely. And that's something that as we've gotten more mature as an organization and more confident in our ability to over-deliver, we've been more bullish on ourselves. And so, that's definitely something that we're encouraging on contracts this year and going forward.

And you may recall in the second quarter, we outlined a couple of new sub offerings around Metasite rescue and so on, where the thought process is that we make it easy for a customer to say, yes. They start off small in terms of a certain percentage of the trial that they're contracting with us, and what we found in many cases is they upsize that over time, given some of the advantages that we can bring to bear from a speed perspective.

Okay. Great. And then, if I can sneak one more in. David, your earlier answer around, I think to Frank's question, risk versus cost, I totally understand your point on DCT is new. It's more innovative and less well traveled. And so I presume when you talk about stepping away from risk that that's what you mean. That clients see DCT as a somewhat riskier strategy to execute.

It should save money. And I guess I know that in the early days, it maybe hasn't proven that completely yet. But there's also this issue that some of the CROs have raised about site level staffing and limitations around throughput at the site. And I'm wondering how kind of all of those things factor in to increase the incentive, increase the motivation, to try to use more remote capabilities?

Yes. So one of the things that we pulled together in the third quarter, which were effectively rolling out as we speak is our new ROI tool. And so, if you actually take a look at the data that we've been able to pull from the trials that we've worked on and the broader landscape, there may be cases where we might be more expensive upfront.

But the speed that we're able to achieve in terms of bringing patients in early -- first recruiting patients in earlier so we save them time in the upfront. And we also save time in the back end, in terms of getting to LPI, last patient in, has a real cost and an opportunity cost savings associated with it.

In addition, there are costs that we're able to get out of the traditional model, in terms of the need for as many study visits that need to take place in order to provide oversight because of the massive number of patients that we're able to bring in as one single site, [115-72].

Now, from a quality standpoint, one of the strong things about the value proposition is that through the entire Science 37 network, we're operationalizing everything through one unified platform with one set of procedure SOPs and standardized set of people that are delivering across the whole thing, which really mitigates the risk of a disparate network of individual sites that have their own people, processes and technology in order to be able to deliver and you're trying to tie all those together through monitoring.

So we effectively create a more consistent product in that case and mitigate the amount of a manual oversight that's required in the process.

Sure do. Thanks for taking my questions.

Thanks, David.

Thank you. And I'm showing no other questions at this time. I'd like to turn the call back to Mr. David Coman for closing remarks.

I appreciate everybody joining us today. We have no further comments to add, and we can close the call. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.