Burning Rock Biotech Limited (NASDAQ:BNR) Q3 2023 Earnings Call Transcript

Burning Rock Biotech Limited (NASDAQ:BNR) Q3 2023 Earnings Call Transcript November 30, 2023

Operator: Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the 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, expect, anticipate, future, intends, plans, believes, 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.

Yusheng Han: Yes. Is it my turn? Well, this is Yusheng Han from Burning Rock, I’m the CEO and Founder. And today, we also have our CFO, Leo Li, and our CTO, Joe Zhang online. And today, we have a brief introduction of recent progress, and then I will hand over to Leo talking about the financials. And then Joe talking about our pipeline programs. So let’s turn to Page 3, which shows what Burning Rock doing and we started from therapy selection and expect to expand it to early detection, MRD and biopharma business. And so far, that’s our business construction. And let’s turn to Page 4, which is the page that I think most of the investors care about most, that’s about breakeven. And we set a goal to breakeven in terms of non-GAAP profit minus SG&A.

And we say that in Q2 this year, we have — this is the first time in Burning Rock to reach the goal. Well, in Q3, actually, there is some industry disruption. You know that even most of the medical conferences or meetings would hold anomaly. So in Q3, it’s a little bit our — impacted by this event and the profit dropped to the negative part, which is a negative RMB8.9 million. But we are still moving to the breakeven level. Especially, I think that this kind of volatility will pass by the end of this year. So let’s turn to Page 5, that we set a goal to break even sometime this year. And we think that we are moving towards that direction very firmly and without the disruption. And in terms of the therapy selection, despite of the industry disruption, we still continue to growth in the – for the in-hospital model, which means that in-hospital revenues has a 10% year-on-year growth.

And part that has been impacted was the central lab model. In MRD, we have a strong clinical validation publications, with the MEDAL study for lung cancer published in cancer cell, which is a big milestone for our MRD study. And we know that the other studies, for example, like colon cancer, [indiscernible] cancer are underway. For biopharma, despite of the struggling time of capital market for biopharmas, we still have a strong growth, showing our systematic value of Burning Rock with revenue growth up 31% year-on-year. And our backlog still keeps growing. And one thing to mention is that, we just signed a CDx contract with BI. And then in terms of early detection, there is a big step, I mean, a big milestone for that is, we’ve got a Breakthrough Device Designation granted by China National Medical Products Administration, which NMPA.

And we are the only — our multi-cancer early detection product is the only test that has received BDD from both FDA and NMPA. And let’s turn to Page 6 to explain how the industry volatility impact our volume. You can see that the central lab model has been impacted negative 31%, while for in-hospital model is still growing in terms of volume. So we think that — and that actually impacts our competitors much more than Burning Rock because Burning Rock is the only company that the in-hospital model represents more than half of our revenues. And then I’ll turn to Leo about our financials.

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Q&A Session

Leo Li: If we move on to Page 7. As Yusheng mentioned earlier, the whole China health care industry had a disruption during the quarter. And what that meant for us was actually two divergent trends, which actually accelerated the path that we were already on. So if you look at central lab, that was down — heavily down 41% on a year-over-year basis in the third quarter. [Technical Difficulty] continued to grow, and it grew 10% year-over-year, which is rare in the diagnostics industry or at least in our specialty industry in China. So I think that continues to prove the value of the in-hospital segment where the real value or the profit is. At Central Lab, as we mentioned earlier, is being shifted more towards in-hospitals. So I think the events in the third quarter only accelerated that and that moved us even more on the right track in terms of moving the mainstream of our businesses towards the in-hospital segment.

So at some point last year, we were in more in-hospital segments by volume. And you can see in the third quarter, where actually in-hospital represented the largest segment, overtaking central labs. So I think with that transition complete at some point down the road, our volume and revenue trends will match again as we complete this transition. Then moving on, we can see that pharma services still had a strong growth quarter in the third quarter. Revenues grew 31% on a year-over-year basis. So we’re very pleased with that result. Our backlog continues to grow, particularly from multinational companies, and Yusheng gave an example of a recent win in his remarks. So we’re very pleased with the progress and the outlook that we have in the sector.

Overall, because of the industry impact and the drop in central lab, our revenue was down 17% on a year-over-year basis. And we’re very cautious of this trend and we are managing our expense or our cost base appropriately according to the new industry setup. So I think we had a temporary dip in our operating margins for the third quarter and that should turn for the better in the quarters down the road. So measured on a non-GAAP basis, gross profits minus SG&A, I mean, we hit a positive territory in the second quarter, but we did [Technical Difficulty] third quarter. And we’re looking to turn this to a positive number again at some quarter down the road. So we are working towards that. And we have done some [indiscernible] in the recent time period to make sure that we are on the right track.

So our operating loss did widened a little bit in the third quarter compared to the second quarter and we are aware of that. We’ve made the adjustments at towards the end of September. Then we hope to be on a better track going forward. Notably, we are also managing our operating cash flows. We’re managing our expenses, our cash expenses very carefully. And you can see the net operating cash outflow this quarter has dropped to 70 — RMB47 million per quarter. And if you look at our operating margins, if you look at our sales and marketing expenses as a percent of revenue, despite the drop in revenues, I mean, our sales and marketing expenses were 45% of our revenue, similar to 44% that we achieved in the second quarter. And as we think industry volume normalizes down the road, our operating margin should improve, and we hope to get back to the positive non-GAAP territory in the quarters down the road.

So that’s a quick recap of the P&L for the quarter. Then I think we should also mention our cash position as that’s been a focus, if we go to Page 8. So we had cash outflow of about RMB532 million in the year of 2022. That’s not our run rate for 2023. Our guidance at the start of this year was about RMB400 million outflow. And you can see in the three quarters so far to this year, we had an outflow of about RMB249 million, so significantly below the outflow guidance that we set out at the start of this year. And if you look at our third quarter quarterly cash — operating cash outflow of RMB47 million, that’s even close to the run rate that we set for the year over 2024. So on that run rate, looking at the cash balance at the end of this period of RMB637 million, we’re sitting on more than three years of cash runway.

So we aren’t in a rush to do anything. We’re sitting on ample cash balance. And I just want to reiterate our strong cash position relative to our cash outflow on this page. And the reasons for the reduced cash outflow, I think we have mentioned that before and I’ll just reiterate those here again. So first, our commercial operations is coming towards profitability. We were even slightly positive in the second quarter. Our R&D spend, particularly our early cancer detection programs are maturing. And as these programs complete, the expenses associated with those programs will run off and that will help reduce cash spend naturally. So as we look to complete our spend on early cancer detection and as we move towards better profitability, then we’ll look to improve our operating cash outflows, and we make sure that we’re sitting on ample cash balance.

Then next, I’d like to turn to Joe, who has some important pipeline and clinical publication data to share with you.