Burning Rock Biotech Ltd Q4 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Burning Rock Fourth Quarter 2023 Earnings Conference Call. Please be advised 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 terminologies such as will, expects, anticipates, future, intends, plans, beliefs, estimates, target, confident and similar statements. Statements that 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 statements as a result of new information, future events or otherwise, except as required under applicable law. I would now like to hand the conference over to your speaker today, Mr. Yusheng Han. Please go ahead.

Thanks, Gena. This is Yusheng Han, the CEO and Founder of Burning Rock. Today, our CFO, Leo Li, and CTO, Joe Zhang, are also with us. I'm pleased to share the annual financial report with our investors. Let's look at Page 3 which outlines our beginnings and evolution. We started with therapy selection in 2014, and with advances in NGS technology, we broadened our focus to early detection, MRD testing, and biopharma services. Moving to Page 4, the macro environment has changed over the last three years, prompting us to develop a strategy focused on efficiency and profitability. Last year, our objectives included improving sales efficiency, enhancing gross margins, cutting G&A expenses, and reducing R&D expenses to prioritize profitability. To boost sales efficiency, we aimed to increase productivity per salesperson. Additionally, the cooler capital market has led to more rational competition in our industry. We also worked on improving gross margins, first by scaling our sales efforts and implementing a margin improvement project by reducing dependence on sales and marketing expenses and lowering the cost of goods through supplier partnerships. For G&A expenses, we cut overhead and reduced fixed costs, and when it comes to R&D expenses, we scaled back due to the slowdown of major clinical programs like multi-cancer early detection, complete, and burning wage. In terms of new investments, we are proceeding cautiously while analyzing NPV, but we are still making conservative investments in MRD, CDx, and MCD. On Page 5, we show how we've improved sales efficiency. In Q2 2022, our sales expense percentage peaked at 77%. Since then, we've gradually decreased it to 38% by Q4 2023. This represents a significant improvement, and we anticipate further reductions in 2024, enhancing our sales expense efficiency. On Page 6, we disclose our non-GAAP gross profit as a percentage of revenue. The cost of goods is a major expense in the NGS sector, especially in oncology. We continuously evaluate suppliers and negotiate costs. Consequently, our gross margin has risen from 72.5% in 2021 to 74.3% in 2023, and we expect further growth in 2024. On Page 3, I also mentioned our G&A expense reductions, which included significant workforce cuts and lower related costs, as well as reduced professional services fees like legal expenses and office costs, particularly in our Shanghai location. We look forward to additional reductions in 2024 through negotiations with our landlord to cut office space. Overall, in 2023, we reduced G&A expenses by over RMB 60 million. On Page 8, I will now turn the call over to our CFO, Leo Li, to go through the charts and figures. Leo, please?

Sure. Thank you, Yusheng, for taking us through the initiatives we've undertaken and what that has translated into the P&L lines. On Page 8, we start with our reported operating profit of a negative RMB 166 million. We first add back our R&D expenses of RMB 73 million to separate what's at the commercial stage and what's in investment. We isolate R&D expenses and then take out non-cash items. The three major items are share-based compensation, depreciation, and amortization of our fixed assets, along with provisions for receivables and contract assets. We expect these three non-cash items to decrease going forward. For illustration, we take out these three non-cash items to get to where we are on the commercial business, excluding R&D expenses and non-cash provisions. Based on that measure, we achieved a positive RMB 4 million for the fourth quarter of 2023. Thus, excluding R&D costs and non-cash expenses, we are at profitability for the fourth quarter and expect further improvement as we head into 2024. Page 9 discusses our cash position, which we've reviewed in each quarterly call. At the end of 2023, we had a cash balance of RMB 615 million, with an outflow of about RMB 265 million, a significant reduction from RMB 532 million in 2022. Much of what Yusheng described delivered results with positive impacts on reducing operating cash outflow for 2023. Going forward, we expect selective investments to continue and anticipate our commercial operation reaching profitability in the first half of 2024, projecting an outflow in the range of RMB 150 million to RMB 200 million for 2024. We foresee this outflow decreasing in the following years. Thus, we have good visibility on our cash runway for at least three years. So, with reduced operating cash outflows, ample cash balance, and continued progress towards profitability, we present these figures clearly on Page 9. Page 10 breaks down our P&L in more detail, with the top line at RMB 121 million in total. By the different segments, first, Central Lab saw a substantial decrease due to our active efforts to move away from that area, alongside industry changes that began in July 2023. The fourth quarter for Central Lab indicates a continuation of trends described in past earnings calls, with In-hospital expected to gain more share going forward. For In-hospital, we faced one-off adjustments in the fourth quarter, detailed in the footnote. Excluding those adjustments, we experienced approximately flat or negative 1% growth in Q4 2023 compared to Q4 2022. Even with adjustments, demand from the two hospitals related remains robust and stable, indicating no deterioration in underlying business demand. Our Pharma segment reported excellent growth in Q4, with double-digit growth both for the quarter and the year, totaling 59% growth across 2023. On the operating expenses side, we have previously reviewed those details, so I will not elaborate further. Finally, regarding operating cash outflows, we have observed improving cash flows quarter-over-quarter due to the initiatives Yusheng outlined, leading to significant improvements throughout 2023. This concludes our prepared remarks. For any questions, please feel free to reach out to us. And that would conclude the call here today. Thank you, everybody, for joining us.

This concludes today's conference call. Thank you for your participation. You may now disconnect.