Burning Rock Biotech Ltd Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Burning Rock's 2023 Second Quarter Earnings Conference Call. Please note that today's conference is being recorded. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, confident, and similar statements. Statements are not historical facts, including statements about Burning Rock's beliefs and expectations are forward-looking statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond Burning Rock's control. Forward-looking statements involve risks, uncertainties, and other factors that could cause actual results to differ materially from those contained in any such statements. Burning Rock does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. I will now hand the conference over to the company's CEO, Mr. Yusheng Han. Sir, you may begin.

Thanks. Welcome to Burning Rock's 2023 Q2 conference call. I'm Yusheng Han, CEO and Founder of Burning Rock. And today, we also have our CTO, Joe Zhang; and CFO, Leo Li online. So let's turn to Page 3. In case there are some investors who are not familiar with Burning Rock, I will illustrate what we do. Our business started from tissue-based therapy selection and then expanded to multiple directions of liquid biopsy, including liquid biopsy therapy selection, minimal residual disease (MRD), and multi-cancer early detection (MCED). We have three business units, providing products and serving doctors, pharmaceutical companies, and consumers. Now turning to Page 4, this is what we set as our goal for 2023 earlier this year and reported to investors twice in the last two conference calls. Our number one goal is profitability. The target we set is to breakeven, excluding R&D, during a quarter in 2023. The second goal is continued revenue growth; a healthy increase with profitability is what we want to achieve. Our initial outlook for 2023 indicates a mild increase in revenue compared to last year. The third goal is to further our leading position in MCED as the number one player in China and a top player globally. The main R&D spend will focus on MCED. Let's break down the growth into four parts. For therapy selection, we'll continue to improve sales and productivity by strengthening the in-hospital model. For MRD, we launched an installed personalized MRD in top hospitals starting from the end of May this year. Typically, it takes about six months to a year to have one product installed in one hospital. Hence, the earliest time we can see the impact is Q4 this year. For biopharma, our goal is continuous profitable growth. With the new platform of MRD and more international orders, we are optimistic about the growth of our biopharma business. For MCED, we have several large studies underway, including PREVENT, PREDICT, and PRESCIENT. These are important clinical trials that will lay a strong foundation for our MCED data. We are extremely proud of this data as it positions us several years ahead of our peers in China and even globally, where we are a leading player. So, let's examine the results of our efforts in Q2 2023. Turning to Page 5, as we illustrated, profit is our number one goal this year. The main indicator of commercial efficiency is non-GAAP gross profit minus SG&A. In Q2 2023, we achieved that. The non-GAAP gross profit minus SG&A was RMB 7.6 million, marking the first quarter of breakeven in our operating history, and we are incredibly proud of it, especially given the challenging economic environment. The team will continuously work hard to improve this number for the remainder of this year. Let's turn to Page 6 to examine other important facts. For therapy selection, we reported a year-on-year growth of 44% in the in-hospital model. Regarding MRD, there are several critical clinical trials underway, with additional data expected to be released at AACR. For biopharma, the contract value and growing backlog continue to thrive. The contract value for new projects reflected a 43% year-on-year growth in the first half of 2023, and biopharma revenue increased by 46%. For early detection, all clinical trials are progressing on schedule. We are still engaged in dialogue with the FDA and NMPA. While nothing particularly remarkable was concluded during the discussions, we can observe that the backlog remains smooth, and we have reached some consensus with them, which is good news for this segment. From Page 7, I will turn the floor over to our CFO, Leo, to discuss the numbers in detail. Leo?

Thank you, Yusheng. I will supplement Yusheng's remarks with our latest numbers and financials. First, on Page 7, we have our operating metrics concerning test volumes. Over the years, we've migrated from the central lab model to an in-hospital model, which is increasingly becoming the dominant share in our channel composition starting in 2023. We achieved very good volume growth in the second half of 2023, with our in-hospital volumes increasing by 72% year-over-year. Overall, our volume grew about 33%. We've managed to reduce volumes in the central lab as that is a less profitable channel and faces more competitive pressures compared to the more institutionalized in-hospital model. We are pleased with the results and progress of this transition. As shown in our Q2 numbers, overall growth was 33%. I believe this reflects not only a successful transition towards in-hospital testing but also our gaining market share from other established competitors. You might argue that Q2 last year presented a low base due to the COVID lockdown in Shanghai. Looking at the graph for sequential performance, we've also recorded strong growth. In-hospital testing volumes increased by 24% sequentially, while overall volumes rose by 19% sequentially. We're delighted with our progress and results during the second quarter. Despite reports of industry-wide disturbances in China's healthcare sector since the end of July, based on our latest data, the in-hospital testing volumes have remained stable heading into Q3. This resilience in our channel gives us confidence. The central lab channel appears to be more vulnerable, experiencing an ongoing shift toward in-hospital testing in Q3. We're pleased that we positioned ourselves favorably in the in-hospital channel ahead of time, benefiting from the current industry turbulence. Now moving on to Page 8 for our financial numbers: As Yusheng mentioned, the highlight of this quarter is our achievement of breakeven, excluding R&D expenses, on a non-GAAP basis (i.e., excluding share-based compensation, depreciation, and amortization). This marks the first quarter we have reached breakeven in our commercial business, and we take great pride in this progress. If we examine the breakdown, our sales and marketing expenses continue to be efficient, comprising about 44% of revenue in Q2, which has decreased to the low 40s range since the beginning of 2023. This result stems from our reorganization of the sales force, which we executed in the second half of last year. We are now reaping the benefits of that effort. We will continue to closely monitor sales and marketing expenses going forward. Additionally, our general and administrative (G&A) expenses have also declined, reflecting our effective management of overhead costs. Importantly, we've achieved better results in receivable collections from our hospital clients, leading to a reduction in the provision for credit losses carried within G&A during the second quarter of this year. This has helped us lower our G&A expenses as well. Overall, our operating expenses have continued to trend down, and we are managing our costs effectively. To highlight one more key aspect, our pharma segment has achieved significant growth this quarter, with revenue increasing by 46%. Looking at leading indicators, the contract value signed during the first half of this year has also grown by approximately 46%. We continue to secure more contracts and build our backlog, which will convert into revenue as we execute these pharma projects. This has positively contributed to our overall revenue growth in recent months. In terms of gross margin, we achieved around 75% on a non-GAAP basis, which excludes depreciation, and our gross profit has increased by about 20% year-over-year. Overall, we are seeing ongoing growth, reduced expenses, and have reached breakeven for the first time in our operational history. That concludes the financial overview on Page 8. Now moving on to Page 9, where we discuss our cash balance. We laid out these details at the beginning of the year, and we are on track. As Yusheng mentioned, we have several large clinical programs underway for our multi-cancer early detection product development, and these are progressing well according to schedule. Our cash outflow aligns with our plan. We anticipated an outflow of approximately RMB 400 million this year, and we've recorded about RMB 199 million for the first half of this year. This is progressing as anticipated, and we expect to complete most of our clinical programs by the year's end regarding MCED development. As a result, our R&D expenses will naturally decline as we finish those programs, leading to lower overall expenses. The projection remains the same as we outlined at the start of this year, with RMB 200 million expected in operating outflow next year, excluding any upside from our commercial business. We anticipate a reduction in share burn and remain well-capitalized for the next three years in terms of our cash balance. This concludes our prepared remarks, and we are now open for questions.

And I see we have no phone questions at this time. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.