Q2 2023 Burning Rock Biotech Ltd Earnings Call

Participants

Jinxiang Li; CFO, Compliance Officer & Director; Burning Rock Biotech Limited

Yusheng Han; Founder, Chairman & CEO; Burning Rock Biotech Limited

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Burning Rock's 2023 Second Quarter Earnings Conference Call. (Operator Instructions) 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, target, confident and similar statements.
Statements 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. 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 under applicable law.
I will now hand the conference over to the company's CEO, Mr. Yusheng Han. Sir, you may begin.

Yusheng Han

Thanks. Welcome to the Burning Rock's 2023 Q2 conference call. I'm Yusheng Han, CEO and Founder of Burning Rock. And today, we also have our CTO, Joe 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, I here illustrate what we do. So our business started from tissue-based therapy selection and then expanded 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, pharmas 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 2 conference call. So the #1 goal is profitability. The goal we set is to breakeven, 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 mild increase over last year. And the third goal is to further our leading position in MCED as #1 player in China and a top player globally. The main R&D spend will focus on MCED.
And let's break down the growth 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 installed personalized MRD in top hospitals, and that start from the end of May this year. And usually, it will take like half year to 1 year to have 1 product installed in 1 hospital. So the earliest time we can see the impact is in Q4 this year.
For biopharma, the goal is continuous profitable growth. And with the new platform of MRD and more international orders, we are optimistic to the growth of biopharma business. And for MCED, we have several big studies, including PREVENT, PREDICT and PRESCIENT. So these are very important clinical trials that will set a very solid base for our MCED data. And we are 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 #1 goal this year is profit. The main indicator of commercial efficiency is non-GAAP gross profit minus SG&A. So in Q2 2023, we made it. So the number of non-GAAP gross profit minus SG&A was RMB 7.6 million, and this is the first quarter of breakeven in our operating history, and we are super proud of it, especially in this difficult economic environment. And the team will continuously work hard to improve this number in the coming year -- in the coming time of this year.
Let's turn to Page 6 to see other important fact. So for therapy selection, as we said, the in-hospital model continue to growth 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 is 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're still continuously on our dialogue with FDA and also NMPA. Nothing very important or special to say about the discussion, but we can see that the backlog is quite smooth, and we achieved some consensus with them. That's good news to this segment.
And from Page 7, I will turn to our CFO, Leo, to discuss about the numbers in detail. Leo?

Jinxiang Li

Thank you, Yusheng. I will supplement Yusheng'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; an 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 results 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, 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. 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 health care industry since the end of July. Then 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 shift 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. So that's the overall volume trend on Page 7.
Then going to Page 8, our financial numbers. As Yusheng 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 sales force reorganization that we have carried out in the second half of last year. So we're bearing the fruits of that effort.
Then 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 overhead 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 G&A line in the second quarter this year. So that has helped us lower G&A 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 result.
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. So that has contributed 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 lower expenses and breakeven for the first time in our operating history. That's the financial numbers on Page 8.
Now 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 Yusheng mentioned, we still have a few large clinical programs on our multi-cancer early detection product development, and these are executed well and on time according to schedule. So we -- our cash outflow is, again, according to our plan. So we plan for about RMB 400 million outflow of this year, and we've had about RMB 199 million 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. Then we expect lower expense. And this is the same number as we laid out at the start of this year. So RMB 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 3 years in terms of our cash balance.
So this concludes our prepared remarks, and we'll see if we have questions.

Operator

(Operator Instructions) And I see we have no phone questions at this time. Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation for today. You may now disconnect.