It's often said that investing in biotech stocks is binary. A clinical trial either succeeds or it doesn’t, and shares of a drug developer either rise or fall – often quite dramatically. At a high level that's true, but this is a significant oversimplification.
Drug developers must navigate risks across development, regulatory, commercial, and financial landscapes. Real-world actions and events determine the likelihood of success, which determines a company's valuation.
One often-overlooked development risk is clinical trial enrollment. It seems so simple. Can a drug developer identify patients, enroll them in the study, retain them for the required duration, and coordinate multiple study sites on the expected timeline and budget? Missing deadlines or incurring cost overruns can delay regulatory timelines and worsen competitive positioning in the market. Both can take a significant toll on a company's share price.
Science 37 (SNCE) is focused on de-risking clinical trial enrollment. The small-cap growth stock is mostly flying under the radar, and it needs to achieve significant scale to become a sustainable business, but it's worth a closer look.
Why Faster Enrollment Makes a Difference
A survey conducted by the company found that 80% of all clinical trials encounter delays, and that the primary cause was challenges in enrolling patients. Clinical trials are typically conducted at major medical centers, which creates geographic limitations to enrolling patients. Individuals who don't live near Boston, Pittsburgh, Houston, or another medical hub simply don't have equal opportunities to participate in studies.
Science 37 is building a platform to enable distributed clinical trials by creating virtual sites. It allows more individuals to participate in studies regardless of their location by providing a digital telehealth interface, standardizing data collection, and helping physicians participate in studies. Sometimes virtual sites means facilitating at-home visits by qualified health care professionals.
The company claims its model is 21 times faster than traditional clinical trial enrollment, while delivering 28% higher retention and attracting a more diverse patient population. It estimates faster startup and enrollment could shave six to 10 months off a phase 3 clinical trial. That could save drug developers tens of millions of dollars in cash burn. If a drug candidate earns approval and launches sooner, then it could generate tens of millions of dollars in additional revenue, too.
Can Science 37 Succeed in This Niche?
There are early signs the company's digital and decentralized approach is gaining traction. The business reported 52% revenue growth in the first half of 2022 compared to the year-ago period. However, the competitive landscape in clinical trial management is packed with more established peers. Science 37 has been forced to spend heavily as a result, which has weighed on margins and operating efficiency.
The company reported an 87% increase in the cost of revenue during the first half of this year. Operating losses swelled from $14.8 million in the year-ago period to $57.9 million in the first six months of 2022. Considering the balance sheet held just $148 million in cash at the end of June, there's no doubt the business will need to find additional funding soon.
It certainly didn't help that Science 37 reduced full-year 2022 revenue guidance when those sobering results were announced. The tech platform now expects sales of $81 million at the midpoint, down 11% from the previous midpoint of $91 million.
Management has acknowledged that operating efficiency is a must and recently prioritized profitability above revenue growth. Of course, delivering on those goals will require significantly more scale, which will be expensive to build. It's a bit of a catch 22.
Nonetheless, Science 37 appears to be in the right place at the right time, especially considering the number of drug developers who are seeking ways to expedite clinical trial enrollment. Whether or not it can deliver for investors in the long run will be decided by how the company navigates the next 24 months. Can it tighten the belt and claw its way closer to profitable operations? Can it make itself attractive for a potential acquisition by a larger peer such as Veeva Systems (VEEV)?
This stock may not belong in your portfolio just yet, but it's one to keep an eye on for signs of steady progress.
