Burning Rock Biotech Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 29, 2024

There are 3 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Burning Rock 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. 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.

Operator

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, believes, estimates, targets, 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.

Operator

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. Yushan Han. Please go ahead.

Speaker 1

Thanks, Jonas. This is Yushan Han, the CEO and Founder of Burning Rock. And today, you also have our CFO, Liu Li and CTO, Zhou Zhang online. So very glad to share the annual financial report with our investors. So let's turn to Page 3 that explains that how we started and how we evolved.

Speaker 1

We started from several of these actions from 2014 and then with the development of NGS technology, we expanded our market to early detection to MRD and auto to biopharma services. And let's turn to Page 4. So with the microenvironment changes in the past 3 years, we have a makeup strategy dedicated to the efficiency gains, driving towards profitability. And our we want to deliver in the early next last year. We want to deliver the result on driving sales efficiencies, improving gross margin, reducing G and A expenses and also reducing R and D expenses.

Speaker 1

And all the target is making the company profitable first. And in terms of the driving sales efficiency, we're going to we plan to increase the sales productivity perhaps And also with the capital market cooling down, we benefit from more rational industry competition. And the second is improving gross margin. So the first thing we do is we have a scale of sales. So we'll leverage on that.

Speaker 1

And also we delivered our margin improvement project, including cutting various sales and marketing expenses and also cutting the cost of goods by bargaining with the suppliers. And third is reducing G and A expenses. We cut the overhead, lowering fixed cost base. And the 4th thing is reducing R and D expenses as our major clinical programs such as multi cancer early detection complete and the burning rate is cooling down. And so in terms of new investment, we are very disciplined counting on the NPV carefully, but we're still invested in MRD and also CDX and also MCD in a conservative way.

Speaker 1

So Page 5 explains how we achieved about driving sales efficiency. You can see that in the Q2 of 2022, we reached the highest point of sales expense percentage to a 77 percentage. And then from there, we gradually and significantly drove the number down to the Q4 of 2023 to 38%. So that is a significant change and we expect it in the coming 2024, the number will go down further. That increased our sales expense efficiency increase a lot.

Speaker 1

In Page 6, and that expanded our non GAAP gross profit as percentage of revenue. We cost of good is significant in the cost of NGS industry, especially for Hong Kong College. So we continuously to replace the true suppliers and also bargain with a shipment and other issues in terms of cost of goods. So we can see that the gross margin continues to increase from 70 2.5 percentage in 2021 to 74.3 percent of 2023. And we expect that rate the gross margin will continue to grow in 2024.

Speaker 1

In Page 3, I explained how we reduced our G and A expenses. We can see that the major cut is reduction in headcount and related costs. And then the professional services fees such as legal fees. And the third thing is a reduction in office spaces. We closed part of the Shanghai office.

Speaker 1

And also in 2024, I think we can see further reduction by bargaining with the owner of the land to see the reduction of this space. And there's other reduction as well. So overall in 2023, we can see that the G and A expenses reduced in terms of RMB of around over RMB60 1,000,000.

Operator

So

Speaker 1

in Page 8, let's see Page 8, and from Page 8 to Page 10, I will hand to our CFO and to our CFO, Liu Li. Please explain the chart and numbers. Liu, please?

Speaker 2

Sure. Thank you, Yixuan, for taking us through the initiatives we've taken through and what has that translated into the P and L lines. On Page 8, we're trying to supplement that by starting from our operating profit and break that down into what is the commercial aspect versus the investments in R and D and also what's cash and non cash. So on Page 8, we start with our reported operating profit of a negative RMB166 1,000,000. We first add back our R and D expenses of RMB73 1,000,000.

Speaker 2

So this is to separate what's already at commercial stage versus what's in the investment. So first, we take out R and D expenses. Then we take out non cash items. The 3 major items are share based compensation, depreciation and amortization of our fixed assets. And lastly, the provision of receivables and contra assets.

Speaker 2

So these 3, we actually expect to decrease going forward. But here, just for illustrative purposes, we take out these 3 non cash items and get to where we are on the commercial business, excluding our expenses and non cash provisions. And on that measure, we are at a positive RMB4 1,000,000 for the Q4 of 2023. So on that basis, excluding R and D and excluding non cash costs, we are at profitability already in the Q4 2023, and we expect this to further improve as we head into 2024. Page 9 talks about our cash position.

Speaker 2

So this is a slide that we have been going through on each of our quarterly calls. At the end of the year 2023, we ended with a cash balance of RMB615 1,000,000. In the year, we had cash outflow of about RMB265 1,000,000. This is a significant reduction compared to the cash outflow of RMB532 1,000,000 in the year of 2022. So a lot of Yuxheng has described did deliver to results and positive impact on reducing operating cash outflow for the year 2023.

Speaker 2

Going forward, there are still a few very selective investment areas that we want to keep on going, and we expect the commercial operation to reach profitability in the first half of twenty twenty four. So these two factors combined, we expect an outflow in a range of RMB150 1,000,000 to RMB200 1,000,000 in the year 2024. We expect this outflow to further decrease in the year after 2024. So on that basis, we have very good visibility on our cash runway for at least 3 years. So reducing operating cash outflows, ample cash balance and continued progress towards profitability.

Speaker 2

That's what we're trying to show by numbers here on Page 9. Then Page 10 breaks into our P and L in more details. First, looking at the top line, which is at 121,000,000 in aggregate. And by the different segments, 1st, Central Lab had a substantial decrease. This is our active efforts going away from Central Lab, but also industry change that we saw starting July in 2023.

Speaker 2

So Q4 for the central lab is pretty much a continuation of the trends that we described in on our previous earnings call. So we expect in hospital to take greater and greater share going forward. For the in hospital line, we did have one off adjustments in the Q4. That's described in detail in a footnote. And if we take out that one off adjustments, we are pretty much flat or negative 1% growth in the Q4 in 2023 compared to the Q4 2022.

Speaker 2

And even for the adjustment, if we look at the 2 hospitals related to that adjustment, their underlying demand remains robust and roughly stable. So we're not seeing deterioration on the underlying business demand, but it's mostly to do with one off adjustments. Our Pharma segment grew very well in the Q4. It grew double digits in the Q4, and it grew double digits in the year of 2023, grew 59% in the year of 2023. Now we expect continued growth for that line going forward.

Speaker 2

Now on the operating expenses, we have taken time to go through that in the previous slides. I'm not going to walk through them in detail. And finally, to note here, I think on the operating cash outflow side, we have seen improving operating cash flows quarter over quarter and that is a result of what Yuxiang has described of a number of projects initiatives that we have taken through and our operating cash outflows have improved significantly throughout the year in 2023. So that concludes our prepared remarks. For any questions, please feel free to reach out to us.

Speaker 2

And that will conclude the call here today. Thank you everybody for joining us today.

Operator

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

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Earnings Conference Call
Burning Rock Biotech Q4 2023
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