Q4 2023 Burning Rock Biotech Ltd Earnings Call

Participants

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

Leo Li; Director & CFO; Burning Rock Biotech Limited

Presentation

Operator

Good day and thank you for standing by. Welcome to the Burning Rock fourth-quarter 2023 earnings conference call. (Operator Instructions) 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 21 E of the Securities Exchange Act of 1934 as amended and as defined in the US 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 relates 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.

Yusheng Han

Thank you, Jannet. This is Yusheng Han, the CEO and founder of Burning Rock. And today you also have our CFO, Leo Li and CTO, Joe Zhang. 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 involve. We started from therapy selection from a 2014 and now with the development of NGS technology, we expanded that our market to early detection to MRD in order to perform our services.
Now let's turn to Page 4. So you know, with the macro environment changes in the past three years, we have makeup strategy dedicated to do efficiency gains driving towards profitability and we want to deliver in the early next and 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 and all of this to target us making the Company profitable first.
And in terms of driving sales efficiency, we're going to -- we plan to increase the sales productivity perhaps and also with the capital market cutting down, we benefit from a more rational industry competition. And the second is the improving gross margin. So the first thing we did as we have a scale of sales to leverage that on that. And also we delivered our margin improvement project, including cutting, revise our sales and marketing expenses and also cutting the cost of goods by partnering with the suppliers.
Third is reducing G&A expenses. We cut the overall overhead and lowering fixed cost base. And the fourth thing is we're using R&D expenses as our major clinical programs such as multi-cancer early detection complete and burning rage is cooling down. And so in terms of new investment, we are very disciplined counting on the NPV carefully by week and we're still invested in MRD and also CDX and also MCD in that our conservative rate.
Page 5 explains how we will achieve about drining sales efficiency. You can see that in the Q2 of 2022, we reached our highest point of sales percentage to a 77% and then from there, we gradually and significantly drove the number down to the Q4 of 2023 to 38%. So there is a significant change in that and we expected in the coming 2024 the number will go down further that increased our expense efficiency increase a lot.
In page, page 6, into our non-GAAP gross profit as percentage of revenue, we -- cost of goods is such a significant cost of Jazz industry, especially for oncology. So we continuously to replace the supplier and also bargaining 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%, a percent of 2023. And we expect that rate that gross margin will continue to grow in 2024.
And in Page 3, I explain how we reduced our G&A expenses. We can see that the major card is reduction in headcount and related costs and then the professional services fees such as legal fees. And the third thing is the reduction of office spaces, we closed part of the Shanghai office. And also in 2024, I think we can see further reduction by targeting with the owner of the land to see that the reduced reduction in office space and as either a reduction as well. So overall, in 2023, we can see that the G&A expenses are reduced in terms of RMB of around over RMB60 million.
So in page 8, let's see Page 8 -- From page 8 to Page 10. I will hand to our CFO, Leo Li. Please explain the chart and numbers for us, please.

Leo Li

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 pharma operating profit and break that down into what is the commercial aspect versus the investment in R&D and also what's cash and noncash.
So on Page 8, we start with our reported operating profit of a negative RMB166 million. We first add back our R&D expenses of RMB73 million. So this is the separate what's already at commercial stage versus what's in the investment. So for us, we take our 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 contract assets.
So these three, we actually expect to decrease going forward by here just for illustrative purposes, we take out these three non-cash items and get to where we are on the commercial business, excluding non expenses and noncash provisions. And on that measure, we are at a positive RMB4 million for the fourth quarter of 2023. And so on that basis, excluding R&D and excluding noncash costs, we are at profitability already in the fourth quarter 2023, and we expect this to further improve as we head into 2024.
Page 9 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 RMB615 million. In the year, we had cash outflow of about RMB265 million. This is a significant reduction compared to the cash outflow of RMB532 million in a year of 2022. So a lot of fusion has described it deliver two 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 ongoing, 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 RMB150 million to RMB200 million in year 2024. We expect this outflow to further decrease in a 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 -- well, we're trying to show by numbers here on page 9.
Then Page 10 breaks into our P&L in more details. First, looking at the top line, which is at RMB121 million in aggregate and 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 that 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. And if we take out that one-off adjustments, we are pretty much flat or negative 1% growth in the fourth quarter in 2023 compared to the fourth quarter 2022. And even for the adjustment, if we look at the two 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 a year of 2023 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 slide. So 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 the result of what you should have 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 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.