Burning Rock Biotech Q2 2023 Earnings Call Transcript

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August 31, 2023

There are 3 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Burning Rock's 2023 Second Quarter Earnings Conference Call. All participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

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, targets, confident and similar statements.

Operator

Statements are non 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 by applicable law. I will now hand the conference over to the company's CEO, Mr.

Operator

Yushheng Han. Sir, you may begin.

Speaker 1

Thanks. Welcome to the Burning Rock 2023 Q2 conference call. I'm Yifheng Han, the CEO and Founder of Burning Rock. And today, we also have our CTO, Zhou 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.

Speaker 1

I hear illustrate what we do. Our business started from tissue based therapy selection and then expand to multi directions of liquid biopsy, including liquid biopsy therapy selection, MRD and multi cancer early detection. So we have 3 business units providing products and serving to doctors, farmers and consumers. And let's turn to Page 4. So this is what we set up our goal of 2023 early this year and reported to investors twice in the last two conference calls.

Speaker 1

So the number one goal is profitability. The goal we set is to breakeven excluding R and D during a quarter in 2023. And the second goal is continue the revenue growth. A healthy increase with profitability is what we want to achieve. And our initial outlook for 2023 revenue is a mild increase over last year.

Speaker 1

And the 3rd goal is to further our leading position in MCEB as number 1 player in China and a top player globally. The main R and D spend will focus on MCEB. And let's break down the goals in 4 parts. So for therapy selection, we'll continue to improve the sales and productivity by strengthening the in hospital model. And for MRD, we launched an initial and installed personalized MRD in top hospitals and that start from the end of May this year.

Speaker 1

And usually, it will take like half year to 1 year to have one product installed in 1 hospital. So the earliest time we can see the impact is in Q4 this year. And for BioPharma, the goal is to continue its profitable growth. And with the new platform of MRD and more international orders, we are optimistic to the growth of our partner business. And for MCD, we have several big studies including PREVENT, PREDICT and PREVENT.

Speaker 1

So these are very important clinical trials that will set a very solid base for our MCD data. And we're very proud of this data give us several years ahead of our peers in China. And even globally, we are leading player. And then let's see what's the result of our effort in Q2 2023 and turn to Page 5. As we illustrated, the number one goal this year is profit.

Speaker 1

The main indicator of commercial efficiency is non GAAP gross profit minus SG and A. So in Q2 2023, we made it. So the number of non GAAP gross profit minus SG and A was RMB 7,600,000 and this is a first quarter of breakeven in our operating history and we are super proud of it, especially in this difficult economy environment. The team will continuously work hard to improve this number in the coming year of in the coming time of this year. Let's turn to Page 6 to see other important facts.

Speaker 1

So for therapy selection, as we said, the in hospital model continue to grow of 44% year on year. And for MRD, there are several clinical trials going on and there will be additional data released at AACR. And for biopharma, the contract value and growing biomass still continues. So the contract value of new project is 43% year on year growth in the first half year of 2023. And the revenue of biopharma is 46% increase.

Speaker 1

And for early detection, all the clinical trials are on track. We're still continuously on our dialogue with FDA and also NIMPA. Nothing very important or special to say about the discussion, but we can see that the dialogue is quite smooth and we achieved some consensus with them. That's a good news to this segment. And from Page 7, I will turn to our CFO, Liu, to discuss about the numbers in detail.

Speaker 1

Liu?

Speaker 2

Thank you, Yixuan. I will supplement Yixuan's remarks with our latest numbers and financials. So first on Page 7 is our operating metrics in terms of our test volumes. And you can see over the years, we have migrated from the central lab model to in hospital model. And in hospital model increasingly make a dominant share in our channel composition starting 2023.

Speaker 2

We have achieved very good volume growth in the second half of twenty twenty three. On a year over year basis, our in hospital grew 72% in volume terms year over year. And overall, our volume grew about 33%. As you can see here, we have managed down our volumes in central lab as that is a less profitable channel and more competitively intensive or irregular compared to this more institutionalized in hospital model. So we're happy about the results and progress of our transition.

Speaker 2

As you can see in our Q2 numbers, 33% overall growth, I think that's a very strong number, reflecting I think 2 things, not only a good transition towards in hospital, but also share gain from other incumbents in the market. You might say that Q2 last year was a low base because of the COVID lockdown in Shanghai. When you look at the graph here, on a sequential basis, we have also grown very strong. In hospital grew 24% on a sequential basis and overall volumes grew 19% on a sequential basis. So we are very happy about our progress and results during the Q2.

Speaker 2

There is news reports of industry wide disturbance in China's healthcare industries since the end of July, and we can see that based on our latest numbers, the in hospital testing volumes are still stable heading into Q3. So we are very happy about the resilience of that channel. Central lab channel is more vulnerable. So that channel has seen increased shifts towards in hospital in the Q3. So we're happy that we have positioned towards the better in hospital channel way ahead of time, and we're benefiting from the current industry turbulence.

Speaker 2

So that's the overall volume trends on Page 7. Then going to Page 8, our financial numbers. As Yixin mentioned, the biggest news item out of this quarter is breakeven excluding R and D expenses and on a non GAAP basis, I. E, excluding share based compensation and depreciation and amortization. So that is the Q1 we have achieved breakeven of our commercial business and we are happy and proud of that progress.

Speaker 2

And if you look at the breakdown here, our sales and marketing expenses continue to be very efficient. We were at about 44% as a percent of revenue in Q2. And we've gone into the low 40s range at the start of 2023 and that is the results of our sales force reorganization that we have carried out in the second half of last year. So we're bearing the fruits of that effort. Now we'll continue to keep a very tight list of sales and marketing expenses going forward.

Speaker 2

In addition to that, you can also see that our G and A expenses have also trended down. So we have been managing our overhead more efficiently. And importantly, we have increased or we have got better results in terms of receivable collections from our hospital customers.

Speaker 1

So there is a

Speaker 2

drop in the provision of credit loss, which is carried in the G and A line in the second quarter this year. So that has helped us lower G and A expenses as well. So overall, you can see the operating expenses have continued to trend out and we're still managing our expenses very well. So that's the overall results. One more thing to highlight is our pharma segment.

Speaker 2

So in this quarter, we have achieved a good growth of that segment. We've brewed our revenue by 46%. And if you look at the leading indicator, if you look at the contract value signed during the first half of this year, we've grown that metric by about 46%. So we continue to sign more contracts, build our backlog. And as we execute on these pharma projects, they get converted into revenue.

Speaker 2

So that has contributed to our overall revenue growth very well over the past. Then gross margin, we've also achieved good results around 75% on a non GAAP basis, I. E. Excluding depreciation. And we have grown our gross profit by about 20% in this year on a year over year basis.

Speaker 2

So overall, continued growth and lowered expenses and breakeven for the first time in our operating history. That's the financial numbers on Page 8. Then moving on to Page 9, which is our cash balance. We've laid this out at the start of this year and we've been executing on track. So we still as Yixuan mentioned, we still have a few large clinical programs on our Autocaster detection product development And these are executed well and on time according to schedule.

Speaker 2

So we our cash outflow is again according to our plan. So we plan for about RMB400 1,000,000 outflow of this year and we've hit about RMB199 1,000,000 in the first half of this year. So that's progressing on track. We will finish most of our clinical programs by the end of this year on MCAD development. So our R and D clinical program expenses will run down naturally as we complete those programs.

Speaker 2

And we expect lower expense and this is the same number as we laid out at the start of this year. So RMB200 1,000,000 operating outflow next year and that excludes any upside that we may achieve from the commercial business. So reduced share burn and well capitalized for the next 3 years in terms of our cash balance. So this concludes our prepared remarks and we'll see if we have questions.

Operator

Thank you. And I see we have no phone questions at this time. Ladies and gentlemen, that concludes our conference call for today.

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