Burning Rock Biotech - Q4 2023

Transcript

Speaker 1

Good day, and thank you for standing by. Welcome to the Burning Rock fourth quarter 2023 earnings conference call. At this time, all participants are in listening 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.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, 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 and/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.

Speaker 2

Thanks, Chetan. This is Yusheng Han, the CEO and founder of Burning Rock. Today you also have our CFO, Leo Li, and CTO, Zhihong Zhang, online. Very glad to share the annual financial report with our investors. Let's turn to page 3 that explains how we started and how we evolved. We started from a several-view selection from 2014, and then with the development of NGS technology, we expanded our market to early detection, to MRD, and also to biopharma services. Let's turn to page 4. With the microenvironment changes in the past 3 years, we have a makeup strategy dedicated to the efficiency gains, driving towards profitability. 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&A expenses, and also reducing R&D expenses.

All the target is making the company profitable first. In terms of the driving sales efficiency, we're going to plan to increase the sales productivity, perhaps, and also with the capital market cooling down, we benefit from more rational industry competition. The second is improving gross margin. So the first thing we do is we have a scale of sales, so we leverage on that. 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. The third is reducing G&A expenses. We cut the overhead and lowering fixed cost base. The fourth thing is reducing R&D expenses as our major clinical programs, such as multi-cancer early detection, complete and the burn rate is cooling down.

In terms of new investment, we are very disciplined, counting on the NPV carefully, but we still invested in MRD and also CDx and also MCED in a conservative way. So page five 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%. 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 expected in the coming 2024, the number will go down further. That increased our sales expense efficiency increased a lot. In page six, and that expands our non-GAAP gross profit as percentage of revenue, cost of goods is a significant cost of NGS industry, especially for oncology.

So we continue to replace the two suppliers and also bargain with shipment and other issues in terms of cost of goods. So we can see that the gross margin continues to increase from the 72.5% in 2021 to 74.3% in 2023. And we expect that rate, the gross margin, will continue to grow in 2024. On page 3, I explain how we reduce our G&A expenses. We can see that the major cut is reduction in headcount and related cost, 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. And also in 2024, I think we can see further reduction by bargaining with the owner of the land to see the reduction in office space. And there's another reduction as well.

So overall, in 2023, we can see that the G&A expenses reduced in terms of R&D of around over CNY 60 million. So on page 8, let's see, page 8, and from page 8 to page 10, I will hand to our CFO and to our CFO, Leo Li, to explain the chart and numbers. Leo, please.

Speaker 0

Sure. Thank you, Yusheng, for taking us through the initiatives we've taken through and what has that translated into the P&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 investment in R&D and also what's cash and non-cash. So on page 8, we start with our reported operating profit of a negative CNY 166 million. We first add back our R&D expenses of CNY 73 million. So this is to separate what's already at commercial stage versus what's in the investment. So first, we take out R&D expenses. Then we take out non-cash items. The three major items are share-based compensation, depreciation, and amortization of our fixed assets. And lastly, the provision of receivables and contra assets. So these three, we actually expect to decrease going forward.

But here, just for illustrative purposes, we take out these three non-cash items and get to where we are on the commercial business, excluding R&D expenses and non-cash provisions. And on that measure, we are at a positive CNY 4 million for the fourth quarter of 2023. So on that basis, excluding R&D and excluding non-cash costs, we are at profitability already in the fourth quarter of 2023, and we expect this to further improve as we head into 2024. Page nine talks about our cash position. 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 CNY 615 million. In the year, we had cash outflow of about CNY 265 million.

This is a significant reduction compared to the cash outflow of CNY 532 million in the year of 2022. So a lot of Yusheng has described did deliver to results and positive impact on reducing operating cash outflow for the year 2023. 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 2024. So these two factors combined, we expect an outflow in a range of CNY 150 million-CNY 200 million 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 three years.

So reducing operating cash outflows, ample cash balance, and continued progress towards profitability, that's what we're trying to show by numbers here on page 9. Page 10 breaks into our P&L in more details, first looking at the top line, which is at CNY 121 million in aggregate. By the different segments, first, 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. So fourth quarter for the Central Lab is pretty much a continuation of the trend that we described 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 fourth quarter. That's described in detail in a footnote.

If we take out that one-off adjustment, we are pretty much flat or negative 1% growth in the fourth quarter in 2023 compared to the fourth quarter of 2022. 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 segments grew very well in the fourth quarter. It grew double digits in the fourth quarter, and it grew double digits in the year of 2023. It grew 59% in the year of 2023, and we expect continued growth for that line going forward. Now, on the operating expenses, we have taken time to go through that in the previous slides, so I'm not going to walk through them in detail.

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 the result of what Yusheng has described of a number of projects and initiatives that we have taken through, and our operating cash outflows have improved significantly throughout the year in 2023. That 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 today.

Speaker 1

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