Science 37 Holdings, Inc. (NASDAQ:SNCE) Q3 2023 Earnings Call Transcript

Science 37 Holdings, Inc. (NASDAQ:SNCE) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Greetings and welcome to the Science 37 Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Halper from LifeSci Advisors. Thank you, Steve. You may begin.

Steve Halper: Thank you, operator, 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 September 30, 2023. A copy of the press release is available on the company’s website. 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 of 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.

A scientist in a lab coat discussing clinical trial results in a laboratory.

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 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 in 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?

David Coman: Thank you, Steve, and thank you, everyone, for joining us today for our third quarter 2023 earnings call. I am pleased to report another quarter of solid revenues with significant progress on profitability and cash management on our path to EBITDA positive and cash flow breakeven by the end of 2024. Compared to the second quarter, third quarter revenue remained relatively constant as expected, while we achieved significantly higher adjusted gross margins above 40%, gross profit growth of 10%, and adjusted EBITDA improvement of more than 30%, and at the same time, cut cash burn in half. These improvements are the result of the plans we put in place as we became laser-focused on our Metasite model, including investments in patient recruitment and quality and the implementation of our near and offshore centers of excellence and the elimination of expenses that don’t support our strategy.

Focusing on the investments we’ve made in patient recruitment in particular, we’ve been able to significantly accelerate enrollment rates, which has helped us to drive revenue and customer satisfaction. We’re crushing enrollment on studies right now across several therapeutic areas, including CNS, respiratory, oncology for diagnostic work and cardiovascular. What’s more is that our cost per patient recruited is 75% lower than it was in the first quarter, a big part of the reason for our gross margin improvement, which is at its highest level since going public. We’ve been able to do this by aligning our patient recruitment sources with our customer contracts, gaining more from our existing community of patients and providers, and significantly improving our patient conversion rates through ongoing process improvement.

Gross bookings for the third quarter were $17.9 million, which was up more than 50% versus the prior year, but down more than 50% from the previous quarter, a result of similar seasonality trends we’ve seen in prior years in addition to continued delays in decision-making. Similar to last year, we expect a much stronger fourth quarter as a result. As we close out the year, we expect that our third quarter bookings delays will have a modest impact on our 2023 revenue and we’re now expected to achieve between $58 million and $59 million for the year. We are adjusting our previous 2023 EBITDA guidance from a loss of $35 million to a loss of $32.5 million. We’re also reiterating our guidance for the second half cash burn of less than $15 million and we continue to anticipate exiting the year with more than $50 million of cash on hand.

With continued progress on RFP volume and a growing qualified sales pipeline that was more than 33% higher for the fourth quarter than it was for the third quarter, we expect continued bookings and revenue growth in 2024 with a similar approach to expense and cash management. And we have been consistent in our communication that we expect to exit fourth quarter of 2024, EBITDA positive with ample cash on hand without having to raise additional capital. With that, I’ll turn the call over to Mike Zaranek, our Chief Financial Officer, to provide additional details.

Mike Zaranek: Thank you, David, and good morning, everyone. I’ll discuss the quarter ended September 30, 2023, and then we’ll provide our outlook for the full year 2023. As David mentioned, third quarter gross bookings were $17.9 million, which was $6 million or 51% higher than the same period of the prior year. We ended the third quarter with $163.1 million in our backlog, which compared to $170.4 million for the same period of the prior year. The backlog at the end of September 2023 also reflected $8.7 million in cancellations and realization adjustments, which represented approximately 5.1% of the beginning backlog for the quarter. Third quarter revenues were $14.9 million, which was $1.3 million or 8% lower than the same period of the prior year and $0.3 million or 3% lower than the second quarter.

Adjusted gross profit for the third quarter was $6.1 million, an increase of $1.5 million or 32% compared to the same period of the prior year, and up about $500,000 or 10% sequentially versus the second quarter. We were particularly pleased with our adjusted gross margin for the fourth quarter. This is 40.8%, which was up 12.5 percentage points from the same period last year and up 4.8 percentage points from the second quarter of 2023. Similar to the second quarter, much of this gross margin improvement was the result of our patient recruitment efforts and, to a lesser extent, continued improvements in utilization rates across the organization. Moving over to SG&A. Selling, general and administrative expenses, excluding $3.7 million of stock-based compensation and depreciation were $11.7 million in the third quarter.

This was down $7.5 million or more than 39% compared to the same period last year and down $1.4 million or approximately 11% sequentially. Most of the decline in the SG&A compared with the second quarter relates to incentive compensation accruals, adjusted for the third quarter actual bookings performance and, to a lesser extent, a full quarter’s worth of cost reduction realization from our April restructuring activities. Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, other income, stock-based compensation and other non-cash charges was a loss of $5.2 million in the third quarter, representing $9.4 million or 64% improvement compared to the same period of the prior year and a $2.3 million or 30.9% sequential improvement compared to the second quarter.

This is our best quarterly adjusted EBITDA performance since becoming a public company 2 years ago. Over this period, we’ve been able to reduce our cost basis which we define as the difference between revenue and adjusted EBITDA by more than 50%. Consistent with the factors we cited on our second quarter earnings call, U.S. GAAP required us to record a non-cash impairment charge of $5.5 million related to our long-lived assets in the third quarter. Among other things, this continues to be a result of our market capitalization, which was less than book and book value and cash for a sustained period of time. On a U.S. GAAP net loss basis, third quarter represented a $13.9 million loss versus a U.S. GAAP net loss of $23.5 million in the third quarter a year ago which represents almost a 29% improvement year-over-year.

The adjusted net loss for the third quarter was $5.4 million, compared to an adjusted net loss of $19.5 million in the same period last year, which represents a 72% improvement over the prior year. Now turning to cash. We ended the quarter with approximately $56 million in cash and cash equivalents. In the third quarter, our cash burn, which is the difference between balance sheet cash and cash equivalents from June 30th to September 30th, was approximately $8.6 million, which represents a sequential improvement of approximately $8.8 million versus the second quarter. In other words, we effectively cut our cash burn in half on a sequential basis. Now, let’s turn to the outlook for 2023. As David noted previously, we are providing updated full year 2023 revenue guidance of $58 million to $59 million.

Our previous commentary around fourth quarter gross margins was in the mid-30% range, we now expect gross margins to come in, in the mid to upper 30% range. This reflects margin expansion relative to historical results and previous expectations. However, we do not expect to repeat our record high third quarter results for adjusted gross margin due in part to higher expected pass-through revenues related to several studies in the fourth quarter. As we have previously stated, at our current size and scale, a single project or two can have a material impact to our results. In addition, we expect an increase in SG&A from the third quarter to the fourth quarter, in part due to expected increases in incentive compensation accruals and to still outperform our previous adjusted EBITDA guidance of negative $35 million.

Instead, we are now forecasting $32.5 million adjusted EBITDA loss, an improvement of approximately $2.5 million versus our previous guidance. Moving over to cash flow, consistent with our guidance on the second quarter earnings call, we remain on track to achieve second half 2023 cash burn of less than $15 million, and we expect to exit the year with more than $50 million of cash on hand. While we will provide initial 2024 guidance, when we report the fourth quarter 2023 earnings, given our backlog visibility, our continued progression on RFP volume, and our growing quarterly qualified phased sales pipeline, which is more than 33% higher for the fourth quarter than it was at the same point in the third quarter, we do expect revenue growth in 2024.

We are targeting full year 2024 adjusted gross margins of 40% or more as we continue to realize efficiencies on the patient recruitment front, the value from our technology investments and increases in utilization rates delivering a higher gross profit with continued leverage on SG&A. In summary, we are encouraged by our third quarter 2023 results and remain optimistic as we continue towards the path to profitability. At this point, I would like to turn the call back over to David for closing comments.

David Coman: Thank you, Mike. We remain focused on our strategy and the actions we are taking to execute our goals. We are pleased with the financial results of the third quarter, and we look forward to a strong end of the year from our commercial team. We are on track to reach our financial goal of adjusted EBITDA and cash flow positive by the fourth quarter of 2024 without having to raise additional capital. And with that, I will open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Charles Rhyee from Cowen and Company. Charles, please proceed.

Charles Rhyee: Yes. Thanks for taking the question. Wanted to ask quickly on the bookings for the quarter. On the cancellations, I know last quarter, a good chunk of it was COVID related. I think we are expecting about $8 million in backlog from COVID still that could be canceled. In the current quarter, on the $8.7 million, how much of that was COVID related?

David Coman: About $1 million, so if you take a look at what we presented last quarter, our watch list shrank in proportion to the adjustments that we had in the quarter and now comprises about $7 million in COVID risk mitigation work and about $17 million for studies that may reach your endpoint earlier be reprioritized. So, as we have done in the past, we have anticipated this already and adjusted our backlog and guidance accordingly.

Charles Rhyee: Okay. That’s helpful. And then secondly, David, you talked about seasonality, and I understand that, but the drop in the sequential looks a little bit bigger than I would have expected. Anything else you kind of mentioned delays in decision-making. If you could kind of go into sort of what the conversations you are having are like, what you are hearing from sponsors that might be causing some of these delays? And sort of what – how are you thinking about the fourth quarter? You expect a strong fourth quarter, but maybe you can give us some signs of what you are seeing that gives you confidence that we will see this. Thanks.

David Coman: Well, our deal sizes do continue to be very large. And as such, the decision-making is at a higher level within the new organizations and the time to make those decisions continue to increase. And so we had some bookings we expected in the third quarter that ended up getting pushed off into the fourth quarter. And we will continue to push hard from a commercial standpoint to try to close things within the quarter. But when you are starting to talk about larger deals like we are participating in today, it does have that net effect of some times delays in the decision making.

Mike Zaranek: And one thing to add to that, as we mentioned in the prepared remarks, to sort of amplify sort of where we sit right now, one, if you look at the quarterly phased qualified sales pipe, at this point in Q4, it’s about 33% higher than it was at the same point in time in Q3. So, that gives us some increased level of visibility as we look to close out Q4 strong and up from a bookings perspective.

Charles Rhyee: Yes. That’s helpful. Thanks. I appreciate it. Thanks guys.

David Coman: Thanks Charles.

Mike Zaranek: Thanks Charles.

Operator: Our next question comes from Matt Hewitt from Craig-Hallum. Matt, please proceed.

Matt Hewitt: Good morning. Thank you for taking the questions. Maybe first up on the gross margins, obviously, congratulations, very strong improvement there, both year-on-year and sequentially. And it sounds like that’s sustainable, maybe a little bit of a step back here in Q4, but as we start to look at fiscal ‘24 and even further out, are these changes that you have made from a recruitment standpoint, not only sustainable, but are they repeatable into other segments of the market?

David Coman: Not sure I understand the – are they repeatable in other segments of the market, part of that? Can you clarify?

Matt Hewitt: Well, so you mentioned you called out CNS, respiratory, cardiac, I mean are there some other areas that you could roll those recruitment efforts out and expand, obviously the market opportunity there?

David Coman: Yes. I don’t think there is therapeutic specific in terms of the performance and our ability to gain the margins that we have. We do expect some higher than higher pass-through expenses in the fourth quarter, which is going to have a little bit of a dip from the 40.8% that we were able to recognize in the third quarter. But we do expect as we go into 2024 to be at or above that 40% range throughout the year. And that’s driven by our ability to execute the patient recruitment as we have been. It’s driven by our additional technology improvements that we have been able to make, and it’s driven by our increased utilization rates that we have been able to achieve as well. So, yes, I do expect that to improve as we move forward into the future. And frankly, as a tech-enabled site, we expect long-term for that to be in the mid-40s.

Matt Hewitt: That’s great. And then maybe one separate question. So, we are now a couple of quarters removed from when the FDA draft guidance came out, encouraging decentralized trials. Obviously, pharma, the industry doesn’t move on a dime, but now we are a couple of quarters removed. What has changed or what do you see changing as a result of that draft guidance? Is that something that we should be excited about as we look to fiscal ‘24? Thank you.

David Coman: Yes. Thanks Matt. We expect that to continue to have momentum for us. As I have said on previous earnings calls, if you look at the draft guidance, the way that it has been written, it validates the model in terms of what we are trying to do. And it validates the data that’s being provided, which is super important in the past, that’s been a question, I think from an economic buyer perspective. If you look at the SOPs that it requires in order to be able to execute, it reads like a Science 37 operations manual. So, we are super pleased about it. In regards to the sentiment behind it, we have definitely had sponsor/customer conversations that have circled back to that guidance and reference the fact that it’s there, which gives them confidence to be able to execute a Metasite with them with confidence. And so we just believe that’s going to continue to increase as we go forward into 2024 and beyond.

Matt Hewitt: That’s great. Thank you.

David Coman: Thanks a lot Matt.

Mike Zaranek: Thanks Matt.

Operator: Our next question comes from Max Smock with William Blair. Max, please proceed.

Christine Rains: Hi. Good morning. It’s Christine Rains on for Max Smock. Thanks for taking our questions. I was curious, while I appreciate you are not prepared to give full year 2024 guidance, and we are definitely happy to hear you say top line growth is expected for next year, but hoping you can give more color on a broad range for top line expectations for next year.

David Coman: Well, we will provide more detailed guidance when we come to the next quarter’s earnings call, what we can tell you as we throughout the year, the RFP volume increased for us. We can tell you that between the third quarter and fourth quarter qualified pipeline increased for us over 33%. And so that foreshadow is a good future for us in terms of bookings growth, which ultimately will have an improvement in revenue as we increase throughout 2024. I don’t know if you have any more color to add on to that, Mike.

Mike Zaranek: No, I think that you said it well.

David Coman: Okay.

Christine Rains: Great. Thanks. And then I was hoping you can talk about relative bookings and cancellations by customer size and development phase in the quarter.

David Coman: I don’t know if we have any specifics that we can share on that. I do think that what we have shared is some of the COVID risk mitigation work that we had pointed out as an area of risk. As we said earlier, that was – it’s about $7 million of our studies at risk. Most of those are within large pharma. The remainder that we discussed is a cross section, I think across most – all different customer types in therapeutic areas.

Mike Zaranek: And as David said earlier in the prepared remarks, the level of projects on the watch list has decreased. He talked about going from $8 million on the COVID mitigation down to $7 million, and then the $25 million going down to about $17 million on the other stuff. So, we are continuing to monitor that. And as we discussed previously, a single study or two can have a material impact on the results.

David Coman: Yes, but it’s going in the right direction.

Mike Zaranek: Going in the right direction, for sure.

Christine Rains: Great. Thanks for taking our questions.

David Coman: Thank you.

Operator: Our next question comes from Frank Takkinen from Lake Street. Frank, please proceed.

Nelson Cox: Hey. Good morning. This is Nelson Cox on for Frank. Just quickly, a lot of my questions have been answered here. So, thank you, but I want to just ask broadly speaking, any pockets of particular strength or weakness that points out in relation to your customers as we move into 2024, anything that you can just point to and just that would be helpful.

David Coman: I would say I would take it back to our value proposition. We made a strategic shift about this time last year to focus on the Metasite. It’s a tech-enabled clinical trial site in order to be able to take advantage of a larger market, be super focused in terms of our ability to deliver. I think we are starting to see some traction on that. And frankly, it’s a bigger market. If you look at what’s being spent, U.S. sites alone, it’s about $9 billion versus DCT alone, which is about $3 billion. If you take into account Europe, that’s another – that’s $17 billion. So, I think we have left to a much larger market opportunity. And I think we are being recognized now as a site, which is ultimately the value proposition that we have put in place and is resonating with our sponsors.

We just became members of the Society for Clinical Research Sites, I think which is a testament to the direction that we have gone and the acceptance of this model as being something a bit different from a traditional clinical trial site, but can offer speed and access to patients that no other site can actually provide, which makes us a great complement to a traditional site network.

Nelson Cox: Got it. Thank you.

David Coman: Thanks a lot for the question, Nelson. Operator? I am going to assume that there is no further questions. And thank you everybody for your time.

Operator: This concludes our question-and-answer session. I would like to turn the floor back over to David for closing comments.

David Coman: Okay. I would just like to thank everybody for joining us today. Thanks for the questions today and appreciate another good quarter.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.