Start Time: 08:30 January 1, 0000 9:07 AM ET
Science 37 Holdings, Inc. (NASDAQ:SNCE)
Q3 2022 Earnings Conference Call
November 11, 2022, 08:30 AM ET
Company Participants
David Coman – CEO
Mike Zaranek – CFO
Steve Halper – Managing Director, LifeSci Advisors
Conference Call Participants
Steven Braun – Cowen
Max Smock – William Blair
Matthew Hewitt – Craig-Hallum
Frank Takkinen – Lake Street
Eric Coldwell – Baird
David Windley – Jefferies
Operator
Good day and thank you for standing by. Welcome to the Science 37 Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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.
Steve Halper
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 Web site.
Before we begin, I would 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 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 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 Web site at investors.science37.com.
I would now like to turn the call over to David Coman. David?
David Coman
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 continue 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 & 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 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’re making additional investments in commercial resourcing and maintaining strong investments in both our technology and operations functions. With these investments, we plan to reaccelerate 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.
Mike Zaranek
Thank you, David, and good morning, everyone. I’ll discuss 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 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 opted to slow the pace of initial enrollment 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. 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 earn-out 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 [indiscernible] 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, these 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 will 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 taking the appropriate steps to achieve this.
At this point, I’d like to turn the call back over to David for closing comments.
David Coman
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 growing business that scales to long-term profitability and maximizes value for all shareholders.
With that, I will now turn it over to the operator to open it up for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question comes from Lucas Romanski from Cowen. Your line is open.
Steven Braun
Hi. This is Steve Braun on for Charles Rhyee actually. Thanks for taking our questions this morning.
David Coman
Thanks for calling in, Steve.
Steven Braun
Yes, absolutely. So I guess like maybe just on the third quarter bookings, you had mentioned basically falling short on some delays in expected contract signings and longer sales cycles, which was something you had cited last quarter as you’d focus on larger engagements. Do you believe the decision to shift away from smaller engagements is maybe still like 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, while you remain committed to like working on those longer term, larger engagements?
David Coman
Yes, it’s not that we’re abandoning smaller engagements altogether. It is that we are striving to go after larger studies. And we’re being pulled that direction to, which is I think a testament to the case studies that we’ve been able to accumulate to date. And so I continue to think that larger opportunities are continuing 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.
Steven Braun
Okay, great. And then I guess 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?
David Coman
Sure. I’ll start. Maybe you pile on, Mike. So the quarter’s 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 trend for the beginning of the quarter, we expect our — and we expect our results to be stronger in the fourth quarter than even the second quarter, certainly in the third quarter, just want to make sure that we’re cautioning beyond the record — achieving a record number for the quarter. But it is certainly — the trend certainly is changing in the fourth quarter.
Mike Zaranek
Yes. And just to be super clear on that. What David’s referring to is from a bookings perspective, good start to the fourth quarter from a booking standpoint. As I mentioned, one of the opportunities that was in 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.
Operator
Thank you. And just one moment for our next question. We have a question from Max Smock with William Blair. Your line is open.
Max Smock
Hi, David. Hi, 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?
Mike Zaranek
Yes. 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 sort of 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 costs, in terms of how they’re managing costs, and maybe a little bit less focus 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 nimble in terms of being able to address that customer needs in terms of the cost side and so on. David, do you want to add anything to that?
David Coman
That sounds good. Thanks.
Max Smock
Okay. So for my follow up, just following up on your point there about the funding environment, right, and I was hoping we can dig into that point a little bit here. 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 cancelled? And then I think in the past, you’ve talked about how the value proposition for DCT 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?
David Coman
Yes. I think its characterized best in the broader macroeconomic environment in general. A number of our customers are navigating through a challenging cost environment themselves. In some cases, that’s driving risk aversion and less priority on aggressive speed, which is the core to 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 twofold. 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 has nearly doubled since the beginning of the year. That elevates the approval process within big pharma and then also extended timeline.
Mike Zaranek
And Max, I think 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.
Max Smock
Got it, very helpful. Thank you for taking our questions.
David Coman
Thank you.
Operator
Thank you. And we have a question coming from Matthew Hewitt with Craig-Hallum. Your line is open.
Matthew Hewitt
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 kind of 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?
David Coman
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 one oncology study that’s been kicked back more than two quarters, it isn’t necessarily on size alone. And it isn’t necessarily the biopharma, large pharma or even biotech, although I think that we see a little bit faster decision making in the biotech space.
Mike Zaranek
Yes. And just a context, I think we’ve provided this previously. If you look at our backlog, just to give you some context around how much could funding 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.
Matthew Hewitt
Got it.
Mike Zaranek
I think it [indiscernible] more of delays in decision making is what we’re seeing more of.
Matthew Hewitt
Okay, understood. And then maybe separately, 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.
David Coman
Yes. I think that the broad macroeconomic issues from a biopharma perspective in terms of costs certainly is — applies to our business and how we think about structuring our business. 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 sponsors, even in a world where they’re asking for more. So I think it’s appropriate.
Mike Zaranek
And to add to that, you’re absolutely right. 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 that the fact that we’re seeing that, particularly on the repeat customer side, is 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. And I think you saw some of that there in the third quarter.
Matthew Hewitt
That makes sense. Thank you.
David Coman
Thank you. Appreciate the call.
Mike Zaranek
Thanks, Matt.
Operator
We have a question from Frank Takkinen with Lake Street. Your line is open.
Frank Takkinen
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?
Mike Zaranek
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 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.
Frank Takkinen
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 the net bookings, any expectation around cancellations or scope reduction that you’ve spoken to about this quarter?
Mike Zaranek
Sure. Thanks, Frank. 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 point, 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 month and a half will be important as we look to close out the year strong.
Frank Takkinen
Okay, that’s helpful color. I’ll stop there. Thanks for taking the questions.
David Coman
Thanks, Frank.
Mike Zaranek
Thanks, Frank.
Operator
We have a question from Eric Coldwell with Baird. Your line is open.
Eric Coldwell
Thanks. Good morning. So I just — sorry for the technical clarification. On the prepared remarks, I heard about a scope 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 were 8 [ph] or maybe there was an 8 million scope reduction plus cancels on top. Just hoping you could be very specific –?
Mike Zaranek
Sure. Good morning. The total reduction between gross and net, inclusive of scope reductions and cancellations, was about $8 million. A vast majority of that was scope reductions.
Eric Coldwell
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 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 it meant 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 hurt your revenue. It would seem maybe it would accelerate your revenue, but I’m not sure why it would hurt your revenue?
Mike Zaranek
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 the 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 had already given us new work here at the beginning of October. Anything else to add to that?
David Coman
Sounds good.
Eric Coldwell
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 on 3Q was related to work performance at your channel partners, or are there any relationship changes among the five that you’ve publicly named in the past?
David Coman
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.
Eric Coldwell
Got it. Thanks, guys. Appreciate it.
David Coman
Thanks, Eric.
Operator
And our next question comes from David Windley with Jefferies. Your line is open.
David Windley
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 kind of pure DCT trials as a first question?
Mike Zaranek
Hi. Good morning, Dave. Thanks for the question. This is Mike. I think what we talked about historically is that we have seen stronger demand in terms of some of those large opportunities. That’s 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 sort of if we’re one multiple or one of solely, majority right now is we’re multiple.
David Windley
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 your successful execution that helps the client to achieve the success that you’re describing actually rewards you rather than penalizes you?
Mike Zaranek
Yes, definitely. And that’s something that we’ve — 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.
David Windley
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. DCT is new. It’s more innovative and less well traveled. And so I presume when you talk about kind of stepping away from risk that that’s what you mean that clients are — see DCT as a somewhat riskier strategy to execute. It should save money. And I guess I’m — I know that in the early days that it 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?
David Coman
Yes. So one of the things that we’ve pulled together in the third quarter, which we’re 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 sort of 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 as — first recruiting patients in earlier, so we save them time in the upfront. And we also save time in the backend 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. 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 a 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 oversight that’s required — manual oversight that’s required in the process.
David Windley
Super. Thanks for taking my questions.
David Coman
Thanks, David. I appreciate you calling in.
Operator
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.
David Coman
I appreciate everybody joining today. We have no further comments to add, and we can close the call. Thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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