Pear Therapeutics, Inc.

Everyone, welcome to the Pair Therapeutics third quarter 2022 earnings conference call. My name is Elizabeth and I will be your operator today. All lines have been placed on mute to prevent background noise. This call is being recorded. A replay of the webcast will be available in the investors section of the company's website approximately two hours after the completion of the call and will be archived for 30 days. I will now turn the call over to your host, Mira Murphy, Senior Director of Corporate Communications.

Thank you, Elizabeth. Welcome to our third quarter earnings call, and thank you for joining us today. With me today are Cory McCann, our President and Chief Executive Officer, Chris Guifre, our Chief Financial Officer and Chief Operating Officer, Erin Brenner, our Chief Product Development Officer, Yuri Nerevich, our Chief Medical Officer, Ronan O'Brien, our General Counsel, and Julia Strandberg, our Chief Commercial Officer. I'll turn it over to Ronan for the safe harbor statement.

Good afternoon. Some of the statements we make in today's call may constitute forward-looking statements. This includes statements concerning our future business operating results, management intentions, beliefs, and expectations about future results, events, strategies, operating plans, and performance or financial condition. And statements regarding proposed federal legislation regarding PPPs all of which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Actual results may differ materially from those indicated by these forward-looking statements due to a variety of important factors. Additional information regarding these factors is included in our annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC. except as required by law, PEAR assumes no obligation to update or revise these forward-looking statements, even if actual results or future expectations change materially. With that, I'll hand it off to Corey.

Thank you, Ronan, and thanks, everyone, for joining us today as we discuss PEAR's third quarter 2022 results. In the third quarter, we continued to drive revenue growth, reduce costs, and drive PEAR towards sustainability. We improved on our operating metrics, and we once again grew revenue more than 20% quarter over quarter. We focused our commercial and product development resources on the most mature segment of our business, specifically on the intersection of our addiction products and payment by states. We secured a number of large contracts at this intersection, and the pipeline of commercial opportunities continues to grow. We continue to maintain what I'll call option value in several other areas of our business, commercial payers, federal payers, and our pipeline of product candidates, as well as our dual platforms. We published additional real-world evidence reinforcing our triple threat value proposition of increased patient engagement, improved clinical outcomes, and lower costs. We restructured our cost base, including today's reduction in force, such that we can accomplish all of this at lower cost and less cash burn. In the current environment of scarce and expensive capital, it would be imprudent to try to grow at any cost. So PAIR is demonstrating it can grow at lower cost. With that in mind, first, I'll say a few words about revenue. Then, a few about operating expenses and the reduction in force we announced earlier this afternoon. Finally, I'll spend a few minutes mapping out where we are on our journey to make software a mainstream medicine. First, revenue. We continue to grow revenue each quarter, this quarter posting $4.1 million. Demand from patients and providers is strong, with more than 11,400 prescriptions in the quarter. Turning scripts into revenue requires two things. First, adding payers who provide access, and second, targeting regions with sufficient coverage density. This quarter, we acted on both, as evidenced by our increased payment rate. We believe that our performance is indicative of strong fundamentals, where payers save money by providing coverage, providers have a positive prescribing experience, and patients see real-world clinical benefit. To drive payment rate upward, we temporarily prioritize the most mature payer channel of our business which is selling RESET and RESET-O to states. Most of our patients for RESET and RESET-O are covered by state programs, like Medicaid and state opioid response funding. States are exposed to both the healthcare and societal costs associated with addiction. In response, earmarked funds are being allocated to states to help them tackle the epidemic, with more than $34 billion in federal support and settlement funding awarded in the last two years alone. States are looking to take innovative approaches to treatment, and we believe that our value proposition is particularly compelling. We now have 10 states who have paid for our products. Those include Alabama, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Ohio, Oklahoma, South Carolina, and Wisconsin. Within these 10 states, approximately 4 million people suffer from addiction. With a significant population of addiction patients covered by states and with robust unit economics, we believe PAIR is well positioned to steadily grow near-term revenue by selling our addiction products to states. We've only just begun helping states battle the addiction crisis. As we broaden access within our existing 10 states and expand to the additional 40 states, the opportunity to provide Reset and Reseto to all states could become a very big business. States are just one piece of our 2023 opportunity. We're seeing progress with commercial payers as well. Highmark, a large payer in Pennsylvania, Delaware, West Virginia, and New York, is now providing coverage for all three of our commercial products. Excellus, a Blues plan with membership across upstate New York, is also providing coverage, bringing us to 16 Blues plans that cover PEARS products. Additionally, A top three payer in Massachusetts, Tufts Health Plan in Massachusetts, and Kaiser Plan in Colorado added up to formulary. We have much work to do with commercial payers, but we see signs that momentum is building. Non-covering payers are becoming outliers, standing in opposition to health equity and mental health parity. Finally, our pipeline of product candidates continues to represent significant potential long-term values. Leveraging our dual platforms, PairCreate and PairConnect, we have the opportunity to own the space we created. But we need to balance that opportunity with the current market landscape and with driving our business towards sustainability. Today we announced a reduction in force. I want to take this opportunity to publicly express my gratitude for the countless contributions of our departing pairmates. And I want to wish each and every one of them great success in their future endeavors. These are hardworking, mission-driven, and talented individuals who have been valued members of our team. Our mission remains making software mainstream medicine, and we are steadily making that a reality. No one asks anymore if PDTs will become mainstream medicine. Now they ask when. Our commercial progress in the last 12 months and our continuum of clinical and real-world evidence demonstrate that PDTs are well on their way. Our revenue trajectory illustrates my point. Last year, we delivered $4.2 million in revenue as we saw product revenue for the first time. This year, we expect to triple that. Next year, our revenue guidance is double this year's guidance, and that strong growth is driven predominantly from the sale of Reset and Reseto to states. The upside case could be significant as we continue to remove barriers to patient access, grow prescriber demand, and demonstrate strong patient outcomes. To share more on our commercial progress, I'll turn it over to Julia. Then, Yuri will discuss new real-world data for our products, further demonstrating our value proposition. And finally, Chris will walk through financial and operating metrics, as well as additional steps we've taken to reduce our reliance on fundraising next year.

Julia?

Thanks, Corey. We are laser focused on meeting patients and providers where they are while prioritizing areas of coverage density. We help more and more patients by welcoming new customers like Sparrow Health and expanding the use of our products in existing satisfied customers like Brightview and Crossroads. All these customers are large multi-state addiction health systems with dozens of clinics. Our product, are delivering results for both providers and patients, as evidenced by our real-world data, which Yuri will share in a few minutes, and by the growing refill rate, which now exceeds 25%. I'd like to highlight some of our progress across our three payer channels, state, commercial, and federal. First, the first payer channel is state payers. The unmet need in addiction is enormous. with more than 40 million people suffering from addiction in the US. Corey mentioned the 10 states that have paid for our products, and I can report that we are engaging more than 15 more. In Q3, we welcome new states like Alabama and South Carolina, and welcome back repeat customers like Ohio. Our first of its kind work in the South Carolina Department of Corrections is particularly noteworthy. According to the National Institute on Drug Abuse, 85% of the U.S. prison population has an active substance use disorder or were incarcerated for a crime involving illicit drugs. Therefore, departments of corrections are a significant expansion opportunity. To accelerate our progress with states, PAIR has finalized an agreement with Coeus Healthcare. Coeus and Magellan have a partnership to create a turnkey value-based agreement solution for 26 state Medicaid programs. We believe this agreement could streamline state coverage and accelerate our business with states even further. In addition, just this month, PARA was awarded the opportunity to implement California's groundbreaking program for the treatment of stimulant use disorder. California's Department of Healthcare Services, in collaboration with the Centers for Medicare and Medicaid Services, will work with PAIR to serve up to 10,000 Californians who struggle with stimulant use disorder. Finally, there are a growing number of states with proposed or passed legislation supporting access to PDTs. We believe many states are moving towards access because of the importance to their residents and to their state budgets, both of which have been ravaged by the addiction crisis. The second payer channel is commercial payers. In Q3, we expanded coverage with commercial payers like Highmark and Excellus, as well as individual plans run by a top three commercial payer and Kaiser. A Fortune 500 construction equipment manufacturer also added coverage. Highmark, among the largest blue plans in the country, is an example of the momentum we're seeing with commercial payers. And we are just starting to see an interplay between our state and commercial businesses. In Massachusetts, Oklahoma, and North Carolina, where states are providing access, we have seen commercial payers follow suit. These states are illustrative of what it means to create coverage density in a state. And we believe we'll see similar commercial payer activity in other states next year. The third payer channel is the federal payer. Medicare has more than 63 Americans enrolled. This is where the Access to Prescription Digital Therapeutics Act of 2022 comes into play. If it becomes law, it would establish a new benefit category at CMS for an innovative class of medicine. and it would require both coverage and payment for PDTs. We also believe that it would accelerate the pace of commercial adoption because commercial payers tend to follow Medicare. Now, I'll turn the call over to Yuri, who will talk about new real-world data that further supports the value of PDTs bring to payers, providers, and patients.

Thank you, Julia. To illustrate Julia's comment about our products delivering results for patients, let's review some recent data. First, new RESET data. Here, we published a real-world observational analysis evaluating treatment of substance use disorder with RESET in over 600 patients. These real-world effectiveness data for RESET in substance use disorder complement our previously published data for RESET-O in opioid use disorder. The high rates of engagement and clinical outcomes demonstrate the potential benefit of RESET to more than 40 million Americans living with substance use disorder. There is no other FDA-approved treatment for addiction to cocaine, cannabis, or stimulants available. Second, two new analyses for RESET-O. The American Managed Care Pharmacy, known as AMCP, held its conference in October. and PAIR presented data on rates of inpatient hospitalizations between Reset O and control patients across a two-year time horizon. This analysis observed a 48% decreased incidence of inpatient hospitalizations in patients treated with Reset O compared to 4% in controls. Also, at a conference held by the American Society of Addiction Medicine, known as ASAM, and the National Committee on Quality Assurance, known as NCQA, one of our provider partners, Brightview, presented data on their use of PDTs. The data from this specific case study with Brightview demonstrated robust engagement. The data also showed how PDTs help providers meet and measure NCQA's quality measures. Notably, Brightview's analysis showed a greater than 50% improvement in attendance and engagement with their follow-up clinical appointments and a greater than 90% increase in case management. Third, Somerist. At AMCP, we also presented a new real-world health economic data that compared outcomes for patients treated with Somerist versus pharmaceutical treatments for chronic insomnia. Here, we found that patients treated with Somerist had an $8,202 reduction in per patient costs compared to controls in the 24 months after treatment. The continuum of evidence for our product grows and grows, further demonstrating that our products work for patients, providers, and payers. Now, I would like to turn it over to Chris to discuss our financial results and performance metrics.

Thanks, Yuri. Today, we reported third quarter revenue of $4.1 million, up 24% over the prior quarter and up 211% over the same quarter last year. That's in line with our expectations. Before I move from revenue to operating metrics, I'll remind you that at this stage of our growth, revenue can be lumpy. so we caution against overreacting to positive or negative quarterly revenue results, and we suggest that annual revenue results are a better way to measure our growth. Turning to operating metrics, we'll start with total prescriptions. We had more than 11,400 total prescriptions in Q3 in line with our expectations. We believe this is reflective of strong clinician and patient demand for our products. Second, fulfillment rate. In Q3, we had a 60% fulfillment rate, also in line with our expectations. Our progress here is noteworthy, given that patients living with addiction can be a difficult-to-treat population. Third, payment rate. We received payment for 49% of fulfilled prescriptions in Q3, slightly lower than expectations, but an improvement over last quarter. We are targeting areas of coverage density and adding new payers to help us continue to improve this very important operating metric. Finally, ASP. Our ASP in Q3 was $1,345 per script, Once again, in line with our expectations, we believe our strong unit economics are reflective of the significant medical value provided by PDTs. Now, two further financial results to note. First, on September 30th, we had $83.6 million of cash, cash equivalents, and short-term investments on the balance sheet. Also in line with our expectations, Second, our operating expenses in the third quarter were $30.7 million, down $5.4 million from Q2, and again, also in line with our expectations. Now I'll say a few words about the reduction in force we announced today. These difficult cuts are intended to reduce our operating expenses in 2023. First, approximately 59 employees are impacted. Second, we expect to further reduce our operating expenses by approximately $10.7 million in 2023. Third, we expect our non-GAAP operating expenses for 2023 to be less than $100 million. Specifically, we are talking about total gap expenses minus interest, taxes, depreciation, amortization, stock-based compensation, the change in the estimated fair value of the earn-out liability, and the change in the estimated fair value of the warrants. Fourth, we expect to incur approximately $2.6 million in cash expenses related to employee severance, benefits, and related costs, and a stock-based compensation charge of between $300,000 and $900,000 related to employees impacted by the reduction in force. And finally, we expect to extend runway into 2024 with a $40 million financing assumption and a revenue assumption in line with our 2023 guidance which I'll discuss next. Today, we are confirming 2022 revenue guidance of $14 million to $16 million. This guidance assumes roughly 20% quarter-over-quarter growth and is expected to come primarily from the sale of RESET and RESET-O to states. Our 2022 revenue guidance is more than three times our revenue guidance in 2021. Today, we're also announcing 2023 revenue guidance, which is $27 million to $37 million. That's approximately double our 2022 revenue guidance. Our 2023 revenue guidance assumes a roughly 20% quarter over quarter growth rate with a focus on selling RESET and RESET-O to states. major catalysts like state state medicaid coverage decisions and large commercial payer coverage decisions could provide additional upside we intend to provide 2023 guidance for our four operational metrics at our earnings call in march i'll conclude my remarks by underscoring a key theme in this call we are growing revenue while reducing costs. Put another way, we are focused on growth while remaining sustainable in a challenging capital markets environment. We expect to raise capital next year, but we have taken significant steps to minimize the amount we would need to raise. With that, Elizabeth, let's open the call for questions.

If you'd like to ask a question at this time, please press star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Judah Frommer with Credit Suisse. Your line is now open.

Hey, good afternoon, guys. This is Jarway on for Judah. Can you guys comment on which part of the business the bulk of today's workforce reduction is focused in and how might that affect the reorganization affecting sales in the coming quarters? Thanks.

Jarway, thanks for the question. I'd like to hand it off to Chris.

Sure. The impact of the reduction in force is felt across the entire business. Almost all departments of the company were impacted. And while we restructured our business in July to focus more on near-term commercial opportunities and temporarily pause our pipeline and platform efforts, this reduction in force does not change that in any way. It allows us to try to focus on those short-term commercial opportunities, which we talked about in the call, primarily selling RESET and RESET-O to states, and try to do that with a lower cost base.

Got it. Thanks, guys. And just one more, if I can. Going forward, is there any chance you guys might try to target commercial payers in states that are more amenable to providing access?

It's a great question, and I'm happy to speak to that one. In brief, the answer is yes, absolutely. We provided a couple of examples where we're starting to see positive read-through from states to commercial payers. We are already seeing that sort of thing happen in Massachusetts, in Oklahoma, and in North Carolina, and this strategy is really key to establishing large areas of coverage density and propelling the business forward. Got it.

Thanks, guys. Thank you.

Our next question comes from the line of Eric Percher with Nefron Research. Your line is now open.

Thank you. Maybe I'll start with a clarification on the runway. So cash and short-term investments of $84 million, op expense next year of less than $100 million. And Chris, your comment relative to 24, or runway into 24, was with the $40 million financing?

Yes. So, Eric, what I wanted to make sure we tried to provide clarity on is what we expected to be the neighborhood of the financing that would be necessary to get us to 2024. That's the $40 million I mentioned in my prepared comments.

Gotcha. And the reduction in force today, $10.7 million, how does that layer in alongside the 25 employees in July and I had 28 million impact, I think over 18 months when you announced that.

Correct. We did announce the sort of estimated impact over 18 months because we were doing it relatively close to the middle of the year. As we get close to the end of the year, we focused exclusively on providing guidance for how it would impact 2023. You're right, it's $10.7 million for 2023. And in terms of how the two come together, I believe the overall impact for 2023 from the two different cost-cutting measures is in the neighborhood of $14 to $15 million.

Thank you.

Thank you.

Our next question comes from the line of Marie Tibble with BTIG. Your line is now open.

Hi. Thanks so much for taking the questions. I wanted to ask just a quick follow-up here on the reduction in force. I understand the need for that, but just wanted to kind of get a check on how your team is doing, what the mood is, what you're doing to retain talent at this point.

Marie, thanks for the question.

Chris? Sure. Marie, I need to be honest with you. The mood around here today is not great. People here are excited about this mission. They are very passionate about what they do. And one of the things I love about this place is that our employees care about each other very much. So for people to learn that some of their teammates will be leaving the company was hard for everyone today. And it is especially hard for the people who are leaving. That said, this company is singularly focused on bringing a new class of medicine to the world. And most of us, if not all of us, are extremely proud of the historic accomplishments we've already made to do that and are very excited about the progress that lies ahead of us. With that in mind, I believe that most people understand that it would have been irresponsible to this business and to our mission not to take decisive steps to react to the current environment. I believe that our team will rally together as they always do every time they face obstacles, and we will continue to bring our products to more and more patients, grow our revenue more and more quickly, and we'll do it with a lower cost base. I can't promise you that. We'll have to see how the next few months shape up, but that's what I expect from this team based on the way that they've faced every challenge that they've seen in the five years that I've been a part of this company.

Okay, that's very helpful. Well understood, Chris. Thank you. A question here then on the state access agreements. Congrats on those recent wins. Alabama, South Carolina, I know Wisconsin's in there as well. How quickly do some of these agreements kick in? As in, are those wins that we could see impact of in Q4 and early next year as soon as that? Thanks for taking the questions.

Marie, thanks for your question. Many of these access agreements kick in quite quickly. I think as we stated before, our goal is really to make sure that patients have access to our therapeutics. We want to meet payers where they are, and in many states, addiction care is paid for by programs outside of Medicaid, like SOR grants, and we're really working to create broad-based access that meets patients and payers where they are, and to do it as quickly as we possibly can.

Thank you.

Thanks, Marie.

Our next question comes from the line of Nina Vitrido-Garg with Citi. Your line is now open.

Hey, guys. Thanks for taking the question. So I was just curious if you could talk a little bit about, you know, with the efforts that you undertook to increase the payment rate in the third quarter and what you think you can kind of do from here realistically in 4Q.

Thanks.

Nina, thank you for the question.

I think as we have laid out, increasing payment rate requires two things. Number one, adding additional payers who provide access. And number two, targeting regions where that access exists. I think you've seen significant progress on the state front. You've also seen significant progress on the commercial front with large payers like Highmark. And I get the sense that there's some real momentum there. As I mentioned previously, bringing this all together into geographies that we can target, like the work we're doing in Massachusetts, North Carolina, and Oklahoma, stands to benefit our payment rate.

Got it. Thank you. Thanks, Nina.

Our next question comes from the line of Charles Reeve with Cowan. Your line is now open.

Hi, this is Steve Braun on for Charles Rhee. Thanks for taking our questions. Just wanted to touch on the comments around payer coverage and formulary placement. Do payer clients need to opt in so RESET and RESET-O are on formulary? Thanks.

Thanks for the question, and I'm happy to speak to that. It really depends upon the particular payer and the particular formulary. In some cases, we have the equivalent of opt-in formulary access. And in other cases, we have the equivalent of standard formulary access. I think one great example of standard formulary access is in the case of the state of Massachusetts. Whereas we previously disclosed MassHealth, the Medicaid organization in the state has put our Reset and Reseto products on standard formulary as a pharmacy benefit for every Medicaid patient in the state.

Okay. Thank you.

As a reminder, if you'd like to ask a question at this time, that's star 1 1. Our next question comes from the line of Keenakai with Chardon. Your line is now open.

Yes, thank you. I wonder if you can give us a little more detail about the current key program that COES has and how that maybe streamlines turning on those types of targeted programs.

Okay, thanks for the question. I'd love to tag in Julia, our Chief Commercial Officer, to provide remarks.

Great. Thanks, Corey. So to enhance our progress, we have entered into an agreement with Coeus Healthcare. Coeus and Magellan have a partnership to create a turnkey value-based solution for 26 state Medicaid programs contracted with Magellan. So we believe this agreement will really enable our expansion of our business within the state as we continue to make progress across state by state.

Right, but how does it help? How does it make things happen quicker, faster, you know, those types of metrics?

Julie, I'm happy to speak to that briefly. I think it's early days, and while we aren't prepared to speak specifically to metrics, you can imagine ways in which standard contracting would speed the process. So right now, as a for instance, when we go to new states, we are drafting coverage contracting from whole cloth. That takes time. You can think about this as increasing the acceptability of contracting terms, as well as streamlining the negotiations around the contracting process. All that said, we'll look forward to reporting progress here to come.

Okay, thank you.

Thank you, Kay.

Our next question comes from the line of Rahul Rakit with LifeSci Capital. Your line is now open.

Rahul, you may have us on mute.

We're not able to hear you. There you go. Sorry about that. No, I appreciate you guys taking the questions. I was just wondering if you'd give us an update on the progress with the pilot program with South Carolina's Department of Corrections. Based on the progress you guys are making there, should we expect additional programs moving forward?

Rahul, thank you for the question, and I'd love to tag in Julia to speak to it.

Yeah, thanks, Corey. So, let's just give you a fact base. of more than 2 million U.S. prison populations are affected by substance use disorder. So the South Carolina pilot represents an opportunity for which our organization can expand into the correctional setting and a significant area within a state as well as many states that we are engaging today. So our program with South Carolina to date is really allowing us to demonstrate with evidence to others on how it can be done and communicating post-implementation, post-value with the outcomes that we've received with South Carolina.

Got it. That's really helpful. And then I guess switching gears, you know, I know the primary focus is on RESET and RESET-O, but given the compelling HEOR data that you guys recently published with Somerist, you know, how are you leveraging that data to make inroads with payers or thinking about how that kind of shifts your commercialization strategy down the road. Thanks, guys.

So, Rahul, thank you for your question, and I think you rightly point out the promise that's associated with SOMREST. You also rightly point out that we are deeply prioritizing RESET and RESET-O at the moment. We're really focused on two things with SOMREST. Number one is expanding commercial coverage. I think, again, Highmark is a good example there where they added all three of our products to standard formulary. Second thing we're focused on with SomRisk is continued generation of real-world and health economic data. And the numbers that Yuri mentioned in excess of $8,000 per treated patient when compared to pharmaceutical treatment, I believe are highly compelling and give us belief in the asset moving forward. So with all that said, we are allocating our resources toward RESET and RESET-O deeply, as we've mentioned several times, but the opportunity with some risk remains.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Corey McCann for closing remarks.

Thanks, Elizabeth. We are meeting what the moment demands.

We drew revenue by more than 20% each quarter this year. At the same time, we continue to reduce operating expenses. In the current environment of scarce and expensive capital, Growing at any cost would be imprudent, so PEAR is demonstrating it can grow at a lower cost instead. With more modest fundraising needs next year, we march toward our bright future, and we look forward to reporting on our fourth quarter and full year progress. Thanks for your time today. As always, please reach out to Mira Murphy, our Head of Corporate Communications, if you have any questions.

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