Q3 2023 Akili Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Chilean interactive apps.
Third quarter 2023 earnings call.
At this time all lines are in listen only about.
Following the presentation, we will conduct a question and answer session.
If at any time during this call we required immediate assistance. Please press star zero for operator.
This call is being recorded on Thursday November 19 2023.
Now I'd like to turn the call over to Katie Reed. Please go ahead.
Thank you Andrew Good afternoon, and welcome to Kelly's earnings call for the third quarter of 2023. This is Katie Reed Vice President of marketing and communication for Kelly and I'm joined on today's call by Kelley CEO, Matt frankly, our Chief Medical Officer, Dr. Scott Collins.
Our Chief Financial Officer Santos Schein back.
We issued our earnings release after the market closed today you can access the release on the Investor Relations section of our website.
Along with the earnings slides that we'll reference during today's call.
This call is being recorded and we will make a replay available on our website. Shortly after today's event.
During today's call, we'll make forward looking statements regarding future events expectations plans prospects of our financial performance as a company.
These forward looking statements are based upon estimates and assumptions that while considered reasonable by the Companys management involve certain risks and uncertainties.
The company's actual results may differ materially from those expressed or implied by any such forward looking statements.
As a result of various important factors.
Factors that might cause such differences include but are not limited to those risks and uncertainties set forth in our Q3 2023 Form 10-Q that we're filing today.
Ross.
Other subsequent filings with the SEC.
Information provided on today's call reflect our views only as of today November nine and should not be relied upon as representative of our views as of any subsequent date.
We disclaim any obligation to update or revise any forward looking statements or our outlook.
Also during today's call, we will refer to certain non-GAAP financial measures.
Management does not intend to presentation of these non-GAAP financial measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP.
It is a complement to provide greater transparency.
A reconciliation of the historical non-GAAP financial measures to our GAAP financial measures is included in our earnings slides and in our earnings release.
If youre following along with the slides. Please turn now to slide three as I hand, the call over to Matt for his prepared remarks.
Matt.
Thank you Katie and thanks to those joining us on the call.
Before I highlight some of the key accomplishments from Q3 I wanted to take a moment to step back and touch on the reason why we do what we do.
It is not widely appreciated, but it's estimated that 11 million adults where nearly one in 2000 adults in the U S are affected with ADHD.
For decades, ADHD whats considered a childhood condition, leaving adults with ADHD struggling to understand and find resources for their symptoms or not even realizing that there was a label for their daily challenges.
Thankfully over the past several years theres been growing awareness of the individual and public health burden of adult ADHD.
In addition to being a risk factor for a host of other psychiatric conditions like depression substance abuse and suicide.
ADHD is also associated with a wide range of other vocational and social challenges.
Such as chronic employment issues, lower average salaries high rates of divorce and greater risk for incarceration.
These outcomes are real and devastating to individuals and their families.
ADHD treatment is traditionally involved medication and cognitive behavioral therapy or CVT each.
Each of these treatments has particular strength, whereas medications such as stimulants helped to manage the core symptoms of Distractability impulsivity CVT targets, the habits and skills needed for executive functioning as well as the emotional interpersonal self regulation.
Each of these treatments also has significant limitations such as medication side effects or the variable quality of DVT in routine clinical practice.
Despite the clear need for effective treatment, it's estimated that only 13% 13% of adults with ADHD are receiving any professional treatment <unk>.
These gaps in care stem from a wide range of factors from the ongoing stimulant shortage to many barriers to behavioral treatments such as limited reimbursement in chronic specialty provider shortages.
These barriers to care underscore the critical need for scalable evidenced based mental health solution.
To address this treatment gap in ADHD in June we launched endeavor OTC is a nonprescription subscription base treatment for adults, who have been struggling with ADHD.
What's exciting about endeavor OTC is that we believe it combines the best parts of each of these leading treatments like medication endeavor OTC delivers the same high quality treatment each time.
Behavioral therapy endeavor OTC targets, the core mechanisms of attention dysfunction in the brain in order to drive sustained change.
Now with more than a full quarter on the market. It's clear that the launch of Endeavour OTC has fundamentally changed the trajectory of our business.
You can see on slide four in Q3 2023 endeavor OTC was downloaded by about 177000 individuals contributing just over 530000 of the more than 700000 in total Q3 revenues of 500% increase in total revenues over Q2 2023.
This gives us confidence that the clinical need is real and that there is strong demand from adults with ADHD.
By removing the prescription requirement and engaging individuals struggling with ADHD directly. We've also been able to transform our business economics Q3 saw a dramatic improvement in our gross margins crossing from negative gross margins in Q2 2023 to positive gross margins in Q3 2023.
Santos will provide additional detail on our expectations for gross margins during his update in a few moments.
These gross margin improvements coupled with operating expense reductions announced with our September restructure have allowed us to extend our cash runway for the first quarter of 2025 into the second half of 2025, while continuing to fund focused regulatory product development and promotional activities.
Going forward onto the confidence that the clinical need is real the demand from consumers is there and that we have the ability to drive revenue with our direct marketing efforts our focus in 2024 will be on accelerating profitability.
First this means continuing to drive down user acquisition costs by optimizing our marketing mix here, we've made solid progress and we will continue to utilize our data science capabilities to optimize our messaging and channel effectiveness in parallel we'll work to systematically improve free trial conversion and monthly retention.
Thanks, and engineering teams have identified a roadmap of enhancements based directly on user feedback and high.
<unk> prioritized, our regular cadence of product updates to tailor endeavor OTC for the adult audience and to improve the overall treatment experience.
Did it even more cleanly and 2024 will be focusing on conserving our cash balance while we optimize our consumer funnel, which will enable us to spend more aggressively unprofitable revenue growth in the future.
Now I'll hand, it over to Scott to provide more detail on our regulatory activities.
Thanks, Matt.
As you can see on slide five we have continued to execute on our regulatory strategy that we've previously reported.
In May we submitted our adolescent age expansion five 10-K application to the FDA for Endeavour Rx, our pediatric prescription product for ADHD and we're continuing to work with the FDA is seeking ultimate clearance for this label expansion.
For Endeavour OTC, we submitted our 500 10-K application to FDA for our adult OTC indication and this submission was received by FDA on October 30th.
The submission is currently undergoing review by FDA.
We were also excited to present, our adult study findings for the first time at the annual meeting of the American Academy of child, and adolescent Psychiatry last month in New York City with summary of this presentation was published in the conference proceedings.
Progress has also continued with our collaboration with shionogi for the development of a pediatric ADHD product in Japan.
The phase III study for pediatric ADHD in Japan, which includes both our randomized phase and a longer term follow up phase is expected to be complete by the end of Q1 2024.
<unk> plans to submit the results of this trial for regulatory approval to Japans Pharmaceuticals, and medical devices agency in 2024.
Finally, a mutual decision was made to terminate our agreement with tally for the development of a pediatric ADHD product for children younger than eight years of age.
I'll now hand, it off to Santos for an update on our financials.
Thank you Scott and Hello, everyone.
I had indicated in our call in September we plan to continue to monitor and share three critical metrics for endeavour OTC active subscribers billings and average revenue per paying user or ERP.
Slide six shows the performance of Endeavour OTC on each of these metrics for the third quarter of 2023, which is the first full quarter of endeavour OTC on the market.
There were 7535 active subscribers in the quarter. These are the total number of endeavour OTC users with a paid subscription in the period.
Additionally, in the third quarter of 2023 endeavor OTC generated about half a million dollars in billings with an average revenue per paying user off $93 now keep in mind that ERP you reflects a blend of what our customers be between monthly and annual subscriptions.
Now, let's take a look at our third quarter financials on slide number seven.
From a revenue perspective, we recognized 700 in $2000 in gold revenues in the third quarter, which was five times more than the total revenues recognized in the second quarter of 'twenty greatly. This growth was driven primarily by revenues associated with endeavour OTC within the adult ADHD market.
Total billings are non-GAAP financial measure that we believe provides helpful information regarding the economic contribution of the subscriptions in the period were $699000 in the third quarter of 2023 compared to $170000 in the second quarter.
Once again the growth was driven primarily by billings associated with Endeavour OTC.
Next gross margins gross margins were 60% in the third quarter of 2023 compared to negative 32% in the prior quarter. The launches endeavour OTC that inherently has a lower cost of distribution as enabled us to change the gross margin profile for the company.
We expect gross margins to fluctuate over the upcoming quarters. For example, we may see a benefit to gross margins with the implementation of our in house prescription dispensing as well as transitioning from a prescription to a nonprescription model for the pediatric population.
The other hand, we will likely see an impact to gross margins when we transitioned from being 15% app store fees to paying 30% absolute fees on endeavour OTC sales when we meet certain revenue thresholds.
However, we expect to be between 60, and 70% gross margins by the end of 2025 move.
Moving onto expenses, we incurred approximately $19 million of GAAP total operating expenses and about $15 million of non-GAAP total operating expenses in the third quarter. The increase in expenses you see on this slide compared to the prior quarter was primarily driven by an increase in marketing spend supporting customer acquisition of endeavor.
OTC and was partially offset by the savings associated with the headcount reduction we announced in September.
Note that severance costs related to the restructuring are excluded from the non-GAAP total operating expenses.
GAAP to non-GAAP reconciliation is available in the appendix of our slide presentation.
GAAP net loss was about $16 million in the third quarter compared to GAAP net loss of approximately $12 million in the second quarter of this year.
non-GAAP net loss was approximately $14 million in the third quarter compared to a non-GAAP net loss of about $13 million for the second quarter of this year and last but not least from a capital standpoint, we ended the quarter with approximately $86 million of cash cash equivalents and short term investments.
In summary, we believe the third quarter financials shows us that endeavor OTC has changed the trajectory for the business from a total revenue perspective total billings as well as from a gross margins perspective now.
Now please turn your attention to slide eight on financial guidance.
We are reaffirming guidance, we had previously provided around the projected 2023 and 'twenty 'twenty four non-GAAP total operating expenses as well as our gross margins and cash runway into the second half of 2025.
Moving forward as Matt mentioned earlier in 2024, our focus will be on lowering customer acquisition costs or CAC and improving unit economics before we invest in revenue growth. This will mean, improving CAC and retention before we increased investments in marketing to drive revenues.
With that I'll hand, it back to Matt to wrap up our prepared remarks, and then open it up to questions Matt.
Thank you Santa to sum it up we've made great progress as evidenced by the strong consumer demand and accelerated revenue trajectory that we reported in Q3.
Again, it's clear that the strategic shift to a nonprescription model has been a game changer for Kelly.
And while we're pleased with the progress we're not satisfied we will continue to work to optimize how we drive awareness and adoption with adults and systematically improve the treatment experience for our users to directly benefit from our products.
With that I'll hand, it back to the operator to help us take questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Do you have a question. Please press the star can you followed by the number one on your touch telephone.
You'll hear three Tom prompt acknowledging your request and your question will report in the order that they were received.
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One moment please before your first question.
Okay.
Our first question comes from Vikram <unk>.
From Morgan Stanley.
Please go ahead Sir.
Got it thanks for taking our question. So the question we have is in order to confirm the endeavor.
Pediatric Q OTC use what kind of data set do you need to prepare to provide to the FDA. Thank you.
Yes. Thanks. Thank you for the question so that process.
We are in the midst of working collaboratively with the FDA to define the what what data requirements might exist.
And we'll know more about that as the process unfolds in 2024.
I see thank you.
Your next question comes from Charles <unk> from.
From TD Cowen. Please go ahead Sir.
Next question comes from Charles <unk> from TD Cowen.
Please go ahead Hello.
Can you hear me.
Yes.
Yes, we can okay great. Thanks.
Thanks, Thanks for taking the question Hey.
Just wanted to ask a little bit about.
How youre pursuing acquiring customers wondering what is the main channels that you're using right now and what are you finding most.
Is it simple through like what is assumed certain types of.
Patient forums.
Or is it just through social media, maybe give a little sense on.
The main channels that youre pursuing at the moment and what are you finding most effective so far.
Yeah, Hey, Charles it's Matt. Thanks for the question appreciate it not surprisingly similar to other companies with a consumer health focus our primary.
Our focus today is on direct digital marketing, so emphasizing search marketing.
And then through many of the common platforms that we use today Instagram and other similar platforms.
In addition to that we have started to build our own organic content sell through blog posts contributing to the dialogue around adult ADHD treatments and helping.
Those who are impacted live more successfully.
The goal there is to drive more traffic to our.
Internally controlled website, so I think youll see us continue to add additional channels over time, but as we indicated our focus is really on a methodical improvement utilizing our data science background and capabilities to truly analyze the effectiveness of each of these channels of each of these campaigns.
And to optimize as we go so it's test and learn and optimize is really the key focus for us today.
That's great.
When you're bringing on these patients' onboarding new patient new subscribers I guess in this case a couple of questions are you capturing information regarding what kind of treatments. If any that are currently on and curious to see if.
<unk>.
A lot of these.
A lot of these new patients are.
We're already on some type of treatment, whether it's a stimulant.
Adderall or.
They're kind of.
They are not taking any treatment currently.
Yeah. Good question, so from an initial onboarding.
Experience, we do not capture detailed clinical information or treatment history, we do capture demographics theres. Some qualifying questions that we do as to ensure that they are appropriate for this treatment but.
But we do offer an adult registry Scott do you want to give a little bit of detail about what we.
Yeah, So as Matt said in the product itself, we don't gather that information, but we actually just in the last couple of weeks have gotten approval.
Approval and we've launched a product registry for the adult OTC product just like we have with our pediatric registry, which has now enrolled.
More than 100 participants and so the plan there for users that are interested they can sign up for that provide additional information and then we can gather outcomes all of them over time.
Okay.
And then just two more quick questions.
First I think you said you have a little over 7500 active subs.
I think sort of first time downloads was more like a 177000.
What is the difference in conversion.
From the previous quarter or.
Just kind of wanted to clarify that.
Yes, I'm just curious it seems like you have a lot more first time downloads just trying to see are there any hurdles in getting somewhat to fully to subscribe to the product.
Okay.
What are you seeing a funnel, where where do you see people drop off and not follow through.
Yes, I understand we haven't provided detailed breakdown of sort of the top of the funnel all the stages in the process overall conversion as you mentioned from sort of initial download to paid subscription is healthy it's actually quite good.
Compared to the benchmarks and the health and fitness space. So again, we're very pleased.
Given the early stages.
For us the key steps to key moments that we focus on.
As we downloads, we do offer a seven day free trial period, so optimizing that first download to free trial experience and then making sure that that trial experience results.
Is that paid subscription.
So those are the kind of the key moments that we're focused on improving that overall conversion.
Okay, and then maybe one last for Santos with if we think about sort of the opex reduction expected.
Next year versus this year.
How should we think about that mix between R&D and SG&A and gross margin.
Yes, that's a great question, Joe So remember in 2023, a large part of our operating expenses included the cost incurred with the sales force as well as market access so.
The reduction.
That we announced earlier this quarter those costs will not continue to exist in next year's operating expenses.
But we do expect our marketing expenses to go up compared to where we were earlier. This year. So you should you should anticipate that.
On the R&D side as you can imagine.
Clinical trials.
We will not we will not have any more clinical trials per se.
Next year other than the registry that Scott talked about.
We will invest in product and product development that will be a key part of our investments next year at a higher level I would say the operating expenses really are to help us get a much better understanding and make the customer acquisition cost a lot more efficient. So our focus next year will be on the unit economics, and Thats, where our investments will be.
Great. Thanks, I appreciate it.
Thank you.
Okay.
Your next question comes from.
Rahul rocket from lifestyle capital please.
Please go ahead Sir.
Hey, guys. Thanks for taking the questions.
Yes, I know I asked this before but I was just wondering if since I last asked if you had any additional learnings kind of around the pricing strategy.
And if theres been any kind of early trends on users opting for one month versus two months versus full year subscription.
Yes.
Thanks, Earl as Matt So from that perspective, we continue along the lines of Optum rising we continue to experiment.
There haven't been significant shifts from previous quarter and.
And we do offer that annual subscription of around $130 monthly subscription at $25 per month. That's remained stable the mix between annual and monthly has also remained fairly consistent in the last several months, so that settling into sort of a steady state there as well.
We will continue to experiment and offer.
Different value propositions to different user segments overtime.
And it's just kind of a core part of our.
Focus in the unit economics for next year.
Got it okay.
I was just wondering I know you mentioned that shionogi is going to be.
Looking to submit a PMA.
Later.
Does that going to trigger a milestone payment as well or even just broadly if you could just help us understand.
Potential for milestone payments through the shionogi partnership that'd be helpful.
Yeah. The shionogi milestone is not triggered by the submission, but more by the outcome of the <unk>. After review by P. M. D. So that's where the milestones get strict good Yahoo.
Got it and do you have added typically how long that P. MBA.
Submission and review process.
It would be a wild guess I mean, it's a regulatory body they do have a reasonable process.
I think it's I would say, it's similar to what you would see in the U S. But there are no specific date or or milestones that the march towards unfortunately.
Understood I appreciate that.
Why don't you want from me.
I know, which our brands performed well with the COVID-19 emergency mandate ending I think in the next week or more I just wanted to clarify that with the.
The five five and you guys submitted youre still able to continue providing.
Endeavour OTC to adult patients.
How does that work.
Yeah, so per the per the per the guidance that the FDA issued around the transition out of that enforcement discretion, we have.
We have sort of met the requirement. So we submitted our 500 10-K before the deadline, which was November 7th.
And wallet is under review, we were able to continue to market until we until we hear something back from them.
Got it.
Really appreciate it and then the last one from me.
I know on the last call you kind of mentioned the percentage of subscribers that played the full.
25 minutes as well as those.
The monthly retention.
Was wondering if you just kind of comment on those metrics for this quarter as well.
Yeah, those continue to remain strong and healthy in line with those that we presented last time and again.
In line with comparable benchmarks clearly that will also be an opportunity for improvement over time.
But yeah remain healthy.
Okay.
Got it thanks, so much guys I appreciate it.
Yes. Thank you.
Yes.
Ladies and gentlemen, as a reminder, should you have any questions. Please press the star key followed by the number one.
We will pause a moment for any further questions.
Okay.
Your next question is from Charles <unk> from TD Cowen. Please go ahead Sir.
Yes. Thanks, I just had one more follow up question.
Obviously, we are seeing good traction.
In terms of subscribers I guess two questions.
Still short.
Not a long time to have a good sense, but in.
In terms of sort of the average length of subscription how would you how should we think about that in terms of people coming on board and then secondly.
Is sort of the direct the directional.
The increase of new subscribers.
Should we think of as sort of linearly growing or or or given sort of your expectations on an outreach.
Would you expect that to maybe accelerate at a faster pace. Thanks.
In other words, how should we think about I guess revenue growth.
Rapid growth over the next.
Coming periods.
Yeah, Yeah. So we have not provided guidance on revenue for 2024, nor have we provided forecast for demand.
Going forwards.
From a characteristic perspective as Santos mentioned as I've mentioned, our focus is going to be deemphasizing growth for the sake of growth and focusing more on optimizing profitability.
Profitability right on that user economic basis. So.
I'll again point towards those comments as far as setting.
Setting expectations for how rapid growth will be central has also provided guidance on our operating expense expectations for next year, so that could potentially help you there.
From the retention and renewal perspective, really honestly too early we have just a few months.
Every single month, more and more users come up for renewal. So we're really still learning and gathering data.
Clearly that could be helpful. In the future and that is something we would hopefully be able to provide going forward, but bear with us here, let us get a couple more quarters under our belt before we <unk>.
Sure any kind of expectations are detailed metrics around that.
Okay, Great I appreciate it thanks.
Yes. Thank you.
Once again as a reminder, should you have any questions. Please press the starkey followed by the number one.
No pause just a moment for any more questions.
There are no further questions at this time. Please proceed with any closing remarks.
Okay.
I think that's great. Thank you very much for your time on the call and the purchasing next quarter.
Ladies and gentlemen, this concludes your conference call for today.
Thank you for participating and ask that you. Please disconnect your lines.
Yes.