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spk02: Greetings and welcome to the Science 37 third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
spk04: Thank you, Operator, and thank you all for participating in today's call. Joining me are David Coleman, Chief Executive Officer, and Mike Zernick, 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. We encourage you to review our filings made with the Securities and Exchange Commission for 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.science37.com. I would now like to turn the call over to David Coleman. David.
spk08: Thank you, Steve, and thank you, everyone, for joining us today for our third quarter 2023 earnings call. I'm 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 to break even 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 Medi-Site 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 even to 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.
spk05: Thank you, David, and good morning, everyone. I'll discuss the quarter ended September 30th, 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 percent lower than the same period of the prior year, and 0.3 million, or 3 percent lower than the second quarter. Adjusted gross profit for the third quarter was 6.1 million, an increase of 1.5 million, or 32 percent compared to the same period of the prior year, and up about $500,000, or 10 percent sequentially, versus the second quarter. We were particularly pleased with our adjusted gross margin for the fourth quarter. This was 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 two 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 value in 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've 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 a 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 a path to profitability. At this point, I'd like to turn the call back over to David for closing comments. Thank you, Mike.
spk08: We remain focused on our strategy and the actions we are taking to execute our goals. We're 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're 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'll now open it up for questions.
spk02: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Charles Reeve from Cowan and Company. Charles, please proceed.
spk00: Yeah, thanks for taking the questions. I 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're expecting about 8 million backlog from COVID still that could be canceled. In the current quarter on the 8.7, how much of that was COVID related?
spk08: About a 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. It now comprises about $7 million in COVID risk mitigation work and about $17 million for studies that may reach your endpoint early or be reprioritized. So as we've done in the past, we've anticipated this already and adjusted our backlog and guidance accordingly.
spk00: Okay, that's helpful. And then secondly, you know, 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're having are like, what you're 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're seeing that gives you confidence that we'll see this. Thanks.
spk08: Well, our deal sizes do continue to be very large, and as such, the decision-making is at a higher level within the 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're starting to talk about larger deals like we're participating in today, it does have that net effect of sometimes delays in the decision making.
spk05: 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, you know, that gives us some increased level of visibility as we look to close out Q4 strong and up from a bookings perspective.
spk00: Yeah, that's helpful. Thanks. I appreciate it. Thanks, guys.
spk06: Thanks, Charles. Thanks, Charles.
spk02: Our next question comes from Matt Hewitt from Craig Hallam. Matt, please proceed.
spk03: 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've made from a recruitment standpoint not only sustainable, but are they repeatable into other segments of the market?
spk08: I'm not sure I understand the are they repeatable in other segments of the market part of that. Can you clarify?
spk03: Well, so you mentioned you called out CNS, respiratory, cardiac. I mean, are there some other areas that you could roll out those recruitment efforts out and expand, obviously, the market opportunity there.
spk08: Yeah, I don't think they're therapeutic specific in terms of the performance and our ability to gain the margins that we have. We do expect some 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've been able to make, and it's driven by our increased utilization rates that we've been able to achieve as well. So, yes, we 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.
spk03: That's great. And then maybe one separate question. So we're now a couple 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're a couple 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.
spk08: Yeah, thanks, Matt. We expect that to continue to have momentum for us. As I've 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're 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're super pleased about it. In regards to the sentiment behind it, we have definitely had sponsor slash customer conversations that have circled back to that guidance and referenced 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.
spk03: That's great. Thank you.
spk08: Thanks a lot, Matt. Thanks, Matt.
spk02: Our next question comes from Max Smock with William Blair. Max, please proceed.
spk01: Hi, good morning. It's Christine Raines on for Max Smock. Thanks for taking our questions. I was Curious, while I appreciate you're not prepared to give full year 2024 guidance, and we're 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.
spk08: Well, we'll 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 foreshadows 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 onto that, Mike.
spk05: No, I think that you said it well. Okay.
spk01: Great, thanks. And then I'm also hoping you can talk about relative bookings and cancellations by customer size and development phase in the quarter.
spk08: I don't know if we have any specifics that we can share on that. I do think that what we've shared is some of the COVID risk mitigation work that we had pointed out as an area of risk. As we said earlier, that's about $7 million of our studies at risk. Most of those are within large pharma. The remainder that we've discussed is a cross-section, I think, across most all different customer types and therapeutic areas.
spk05: 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're continuing to monitor that, and as we discussed previously, a single study or two can have a material impact on the results. Yeah, but it's going in the right direction. It's going in the right direction, for sure.
spk01: Great. Thanks for taking our questions.
spk08: Thank you.
spk02: Our next question comes from Frank from Lake Street. Frank, please proceed.
spk07: 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 to point out in relation to your customers as we move into 2024, anything that you can just point to and just that'd be helpful.
spk08: I would say, I 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're starting to see some traction on that. And frankly, it's a bigger market. If you look at What's being spent, you know, U.S. sites alone is about $9 billion versus DCT alone, which is about $3 billion. If you take into account Europe, that's $17 billion. So I think we've leapt to a much larger market opportunity. And I think we're being recognized now as a site, which is ultimately the value proposition that we've 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've 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.
spk06: Got it. Thank you. Thanks a lot for the question, Nelson. Operator?
spk08: I'm going to assume that there's no further questions, and thank everybody for your time.
spk02: This concludes our question and answer session. I would like to turn the floor back over to David for closing comments.
spk08: Okay. I'd just like to thank everybody for joining us today. Thanks for the questions today, and appreciate another good quarter.
spk02: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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