Burning Rock Biotech Limited

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Burning Rock's 2023 Second Quarter Earnings Conference Call. All participants are on a listen-only mode. After this week's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your touch-tone phone. You will then hear an automatic message advising your hand is raised. 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 21 of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Investigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, confident, and similar statements. Statements are non-historical facts, including statements about burning rocks, beliefs, and expectations. Our 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 rocks 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 on applicable law. I will now hand the conference over to the company's CEO, Mr. Yusheng Han, so he may begin.

Thanks. Welcome to the Burning Rocks 2023 Q2 conference call. I'm Yisheng Han, 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 three in case there are some investors who are not familiar with Burning Rock. I here 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 three business units providing products and serving to doctors, farmers, and consumers. And let's turn to page four. 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. So the number one goal is profitability. The goal we set is to break even, excluding R&D during a quarter in 2023. And the second goal is continued revenue growth. A healthy increase with profitability is what we want to achieve. And our initial outlook for 2023 Our revenue is a mild increase over last year. And the third goal is to further our leading position in MCED as number one player in China and a top player globally. The main R&D fan will focus on MCED. And let's break down the goals in four parts. So for therapy selection, will 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 starts from the end of May this year. And usually, it will take like a half year to one year to have one product installed in one 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 biopharma business. And for MCD, we have several big studies, including PREVENT, PREDICT, and PRESENT. So these are very important clinical trials that will set a very solid base for our MCED data. And we are very proud that this data gave us several years ahead of our peers in China. And even globally, we are a leading player. And then let's see what's the result of our effort in Q2 2023 and turn to page five. As we illustrated, the number one goal this year is profit. The main indicator of commercial efficiency is non-GAAP gross profit minus SGMA. So in Q2 2023, we made it. So the number of non-GAAP gross profit minus SGMA was 7.6 million RMB. And this is the first quarter of break-even in our operating history. And we are super proud of it, especially in this difficult economy environment. And the team will continuously work hard to improve this number in the coming time of this year. Let's turn to page six to see other important facts. So for therapy selection, as we said, the in-house video model continued to grow. of 44% year-on-year. And for MRD, there are several important clinical trials going on, and there will be additional data released at AACR. And for BioPharma, the contract value and growing backlog still continues. So the contract value of new projects 43% year-on-year growth in the first half year of 2023. And the revenue of biopharma is 46% increase. And for early detection, all the clinical trials are on track. We are 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 good news to this segment. And from page seven, I will turn to our CFO, Leo, to discuss about the numbers in detail. Leo?

Thank you, Yusheng. I will supplement Yusheng's remarks with our latest numbers and financials. So first on page seven 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. We have achieved very good volume growth in the second half of 2023. 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 the more institutionalized in-hospital model. So we're happy about the result and progress of our transition As you can see in our Q2 numbers, 33% overall growth. I think that's a very strong number, reflecting, I think, two 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. 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 second quarter. 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're 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 positions towards the better in-hospital channel way ahead of time. And we're benefiting from the current industry turbulence. So that's the overall volume trends on page seven. Then going to page eight, our financial numbers. As Yisheng mentioned, the biggest news item out of this quarter is breakeven excluding R&D expenses and on a non-GAAP basis, i.e. excluding share-based compensation and depreciation and amortization. So that is the first quarter we have achieved breakeven of our commercial business. And we're happy and proud of that progress. 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 result of our Salesforce reorganization that we have carried out in the second half of last year. So we're bearing the fruits of that effort. And we'll continue to keep a very tight lid on sales and marketing expenses going forward. In addition to that, you can also see that our G&A expenses have also trended down. So we have been managing our overheads more efficiently. And importantly, we have increased or we have got better results in terms of receivable collections from our hospital customers. So there is a drop in the provision of credit loss, which is carried in the GNA line in the second quarter this year. So that has helped us lower GNA expenses as well. So overall, you can see the operating expenses have continued to trend down and we're still managing our expenses very well. So that's the overall results. One more thing to highlight is our pharma segment. So in this quarter, we have achieved a good growth of that segment. We grew 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. 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. So overall, continued growth and lowered expenses and breakeven for the first time in our operating history. That's the financial numbers on page eight. Now moving on to page nine, 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 Yusheng mentioned, we still have a few large clinical programs on our multi-cancer detection product development, and these are executed well and on time according to schedule. So our cash outflow is, again, according to our plan. So we plan for about 400 million outflow of this year, and we've hit about 199 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 MCED development. So our R&D clinical program expenses will run down naturally as we complete those programs, and we expect lower expense. And this is the same number as we laid out at the start of this year, so 200 million 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 three years in terms of our cash balance. So this concludes our prepared remarks, and we'll see if we have questions.

Thank you. Ladies and gentlemen, to ask a question on the phone line, you will need to press star 1-1 on your touched-on telephone and wait for your name to be announced. One moment, please. Again, to ask a question on the phone line, you may press star 1 1. And I see we have no phone questions at this time. Ladies and gentlemen, Tata Sunkura conference call for today. Thank you for your participation for today. You may now disconnect.