AnPac Bio-Medical Science Co., Ltd.
Q4 2020 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Good morning, everyone. Thank you for standing by. The call is being recorded.

[Phil Case:]

This is Phil Case, Investor Relations for the Company. Welcome to AnPac Bio’s Fiscal Year 2020 Financial Results Conference Call. During today’s presentation, all parties will be on listen mode only. This conference is being recorded today, Friday, April 30, 2021. Joining us today from AnPac Bio are the Company’s Chairman and CEO, Dr. Chris Yu; and the Company’s Chief Financial Officer, Mr. Edwards Tang. I’d like to remind our listeners who are on the call, management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements as contained in the Private and Security Litigation Reform Act of 1995. This presentation may include references to non-GAAP financial measures as defined by the SEC’s newly issued Regulation G. AnPac Bio is under no obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

[Dr. Chris Yu:]

Thank you, Phil, and everyone for joining us for AnPac Bio’s fiscal year 2020 earnings conference call today. As you all know, year 2020 was a challenging year due to COVID-19. However, AnPac Bio still managed to achieve significant growth in revenue and improvement in gross margin, but at the same time, the net loss and debt were reduced. During the year, we continued to invest in research and development with more cancer screening, prognosis, and follow-up clinical studies completed or more ongoing clinical study data collected with positive results. We successfully developed two new products, one immunology tests and one cancer combination test involving CDA technologies. Both of them became contributor to our revenue. Our intellectual property and the cancer screening data base continued to grow, reaching 141 issued patents and over 210,000 samples at the end of year 2020. We continued to invest in operational excellence and infrastructures in the U.S. and China. Our second lab in the U.S., Philadelphia lab completed a renovation, became operational and obtained a CLIA certification in August of 2020. Our Company’s technology and products have been increasingly recognized and accepted by the market and customers. As evidenced by our revenue growth, 15 global fortune 500 companies as our customers, awards received by our company and the founder, and renewal of major multiyear cancer test contracts, we are very pleased with our excellent performance in a very challenging year. We will enter year 2021 with a very strong momentum. As we have already pre-announced a few weeks ago, we achieved a record Q1 test volume in 2021. In this year, we will continue to invest in R&D and accelerate the Class III medical device registration in China, and a laboratory developed test approval in the U.S. We will continue to introduce CDA cancer test as well as new products to the market and customers and speed up our revenue growth. We will continue to leverage our strength in innovation and testing technologies, including novel sensors and signal processing technologies to deliver excellent performance. We are confident that we will have another solid year. Thank you again for your attention. Next, I will turn the call over to Mr. Edwards Tang, our CFO, who will summarize our fiscal year 2020 financial results on behalf of the management team. Mr. Tang, please go ahead.

[Edwards Tang:]

Thank you, Dr. Yu. And good morning, everyone. Next, on behalf of the management team, I would like to summarize some of the key financial results for fiscal year 2020. For fiscal year 2020, our revenue was RMB 20.5 million or $3.1 million, increased by 89.1% from RMB 10.8 million in fiscal year 2019. Our gross profit was a RMB 12.9 million or $2.0 million, an increase of 168.8% from RMB 4.8 million in fiscal year 2019. Our net loss was RMB 80.6 million or $12.3 million compared with RMB 101.6 in fiscal year 2019. Our gross profit margin was 62.8%, increased from 44.2% in fiscal year 2019. Cost of revenue was RMB 7.6 million or $1.2 million, an increase of 26.1% from RMB 6 million in fiscal year 2019. The increase was primarily attributable to more comprehensive multi-cancer testing performance, which resulted in increased cost related to testing material, blood sample testing and medical consumables. The increase in our cost of revenue was also attributable to an increase in depreciation expense as well for the more CDA devices used to meet the demand for our CDA-based tests. Let’s move to our balance sheet and cash flow. During fiscal year 2020, we used some of the proceeds from IPO to pay down a significant amount of debt and now have only RMB 8.2 million debt remaining. Net cash used in operating activities was RMB 59.0 million or $9 million, compared to with RMB 48.6 million in fiscal year 2019. Net cash used in investing activities was RMB 2.5 million or $380 million compared with RMB 3.5 million in fiscal year 2019. Net cash provided by financing activity was RMB 60.9 million or $9.3 million, compared with RMB 46.1 million in fiscal year, 2019. Thank you.

[Phil Case:]

Thank you, Mr. Tang for reviewing the financial results. We’d like to turn the time back over to Dr. Yu for some closing remarks.

[Dr. Chris Yu:]

Thank you, Phil. Given the significant cancer screening market size and it is still in early stage, and given our very strong IP and a patent position and wide range in cancer screening data base, our expertise in novel detection technologies, including sensors and signal processing and our cancer detection product advantages in cost, ability to detect early and can perform cancer tests, we believe AnPac Bio is well positioned. With CDA products along with higher margin new products, we expect AnPac Bio’s revenue growth and gross margin expansion to continue. We are optimistic that we can deliver solid financial and operational performance. Thank you again for attending our earnings conference call.

[Operator:]

We will now begin the question-and-session. Our first question today will come from Jessica He who’s a private investor. Please go ahead.

[Unidentified Analyst:]

All right. My first question is how significant is growing for the full year of the Company’s screening and health products outside of the CDA test?

[Dr. Chris Yu:]

I apologize. Could you speak again?

[Unidentified Analyst:]

My first question is how significant is the growing portfolio of the Company’s screening and health products outside of CDA tests?

[Dr. Chris Yu:]

Okay. So, in addition to CDA technology, we have also developed a number of new products last year and one is related to immunology test, the other one was a combination test using CDA with ct-DNA. And so, in relation to CDA for cancer screening, we are also in the process of clinical validations for assisting diagnosis, prognosis and for follow-up. And those clinical data have been collected before IPO, and we continue to collect more data post IPO. And in 2020, we had some of those clinical study data become available. And in short, those performance data appear to validate the effectiveness of CDA technology for prognosis and follow-up study.

[Unidentified Analyst:]

All right. My second question is, in 2020 revenue significantly increased from 2019. So, what is the major contributor of the growth and increase?

[Dr. Chris Yu:]

Yes. So, your question was -- let me rephrase your question. So, we had a significant growth in 2020 in revenue over 2019, what were the contributing factors, right?

[Unidentified Analyst:]

Yes.

[Dr. Chris Yu:]

So, there are couple of factors in there. And one is, with our CDA technology, we had a range of packages, including 3 types of cancer, 6 types of cancers, 10 types of cancer, up to 25 types of cancer for men, and 27 types of cancer for women. So, what’s happening is our product is being more and more recognized by markets and customers, getting more acceptance, and we find more people select our higher end test packages. So, that’s one. The other one is, before IPO -- a few years before the IPO, the Company made a decision to populate the CDA test. So, we were actually -- our price was set relatively attractive in order to gain market attraction. And now, having demonstrated in the marketplace viability of CDA test technologies, now, we are looking to improve our average selling price. And therefore, that’s why we are seeing our gross margin, due to a number of reasons, one is ASP is improving for a given test package. The second thing is, more people selecting higher testing package, which has higher price point. And thirdly, our new products started contribute, even though in 2020, we are just ahead of those two new products commercialized and especially one of them has a higher average selling price. And they already began to contribute. And we expect that they will contribute even more in the coming years. Thank you.

[Unidentified Analyst:]

All right. My final question is 2020 had a dramatic increase of the testing and revenue. So, with AnPac’s pre-announcement for the Q1 of 2021, so do you anticipate that the increase will be significant from 2020 to 2021, similar to the previous year?

[Dr. Chris Yu:]

Yes. That’s a very good question. So, we do believe, as I mentioned earlier, it’s a long-term trend. The reason for that is population’s aging and cancer screening is at a very early stage. If you look at the available market size -- potentially available market size, and also how many people are doing cancer screening, today in China, we are at a very early stage. So, what we are seeing is more and more people beginning to realize the importance of doing annual physical as well as annual cancer screening. So, we do believe that our revenue increased and also our test volume increase in Q1 is not a blink, is not a short-term event, I should say. It’s a long-term trend. It’s a long-term effect. So, we fully anticipate this trend will continue in 2021 and even beyond. And so, AnPac, we believe, is well positioned to catch this wave. Almost like -- if I think about us, like, in the 1980s, right, or even 1990s, how many households had a computer, right? But, 1980s or even beginning of 1920s, not every hospital that had computer, but now when you look at every single house in the U.S., and in China, every house has a computer and maybe even more. But it’s similar kind of situation today for cancer screening. We are truly at a very early stage of cancer screening. And because, when you look at China, maybe, I would say, few years in, let’s pick number, certainly very small number of people doing annual routine cancer screening. But, I believe with each year passing by, we will have more and more people accept the concept of cancer prevention by doing cancer screening. So, this trend will continue for many years to come in the next 5 and maybe even 10 years.

[Operator:]

Next question will come from Emma Wang who’s private investor. Please go ahead.

[Unidentified Analyst:]

I have just a one question today. So, my question is, the Company has one-time very high churn. With the sales volumes going up, are you expecting for the expenses to go up, or are they mainly in control as sales growth in here?

[Edwards Tang:]

I would think that for our Company, in the past, our volume is also considered very big as the population in China is big. So, for us, we will continue to expand our market. So, we’ll promote our more products for more people to know that. As I mentioned by Chris, like what happened in last year, most of the Chinese people, they realized how important the test is. So, they were willing to do the product. And also, we would like to promote our sales staff to have more business for the Company in the future. So, I would say, we will try to control -- we will control the expense in the future. But at this moment compared with the other companies, it’s okay for us.

[Unidentified Analyst:]

Thank you.

[Operator:]

Next question will come from John Vandermosten with Zacks SCR. Please go ahead.

[John Vandermosten:]

Good evening, Dr. Yu and Edward, and good morning, Phil. I had a question on the new sensor that was developed. It seems to be an improvement on many fronts. And I was wondering how that would be implemented or put into new CDA machines. Is that something that will be used when you’ve launched in the United States? Can you give us some detail on how that will be used?

[Dr. Chris Yu:]

Yes. Thank you, John. That’s a very good question. So, a few months ago, I think roughly two months ago, we did announce, we have developed a second generation sensor for cancer detection, which has improved the performance in terms of signal as well as its yield. And so, basically, we are in the process of transitioning from the new sensor to replace the older sensor. So, that starts with China. But we are also -- we already started doing some tests in the U.S. laboratory as well. As you know, we have two labs in the U.S., one is San Jose, one is Philadelphia. So, we started testing this new sensor in Philadelphia lab, started like almost two months ago, and having rigorously tested in China. And so, our plan is to implement it in our machine, in a future generation machine, as well as possibly replacing the existing machine. So, we will have a higher, better performance in terms of cancer detection. As I alluded to -- as our press release mentioned, has a three to four improved performance metrics with new sensor. So, obviously, we want to maximize this positive effect for our operations as well. So, in short, it’s an ongoing process right now.

[John Vandermosten:]

Okay. And as you mentioned earlier and as you released in the press release, you’re currently in the process of pursuing the Class III medical device. And I think you’ve started the studies related to that. What should we expect in terms of the timeline there? And, when do we think that might be approved, based on what we know now?

[Dr. Chris Yu:]

Okay. That’s a good question. So, we announced a few months ago, where we are is we have received approval from the related agency for us to submit the medical device to their designated testing lab for tests. So, we are expecting we will submit the medical device sometime in May for testing there. So, that’s the next major step. Now, after passing the test in the designated testing lab, then we will go into a clinical trial stage. And so, we will have our machines placed in three hospitals for testing. And so, that likely will be immediately following approval by the testing of the machine.

[John Vandermosten:]

Great. Yes. That’s really great detail. I appreciate that. And that new sensor, will that be used in this process that you just laid out for us, or it will be the old technology?

[Dr. Chris Yu:]

Yes. We will be implementing it and -- in the medical device. Yes.

[John Vandermosten:]

And then, one more question on the Class III process. I noticed that it was for lung cancer, how hard is that to expand out to the 26 cancers that you -- that you’re able to test for?

[Dr. Chris Yu:]

Right. So,, that’s a fair question. So, we had planned to do Pan cancer, but after we have got the information on how long it will take, how many data points we have to -- how many samples we will need, so we changed our strategy, just go with lung cancer -- assist lung cancer -- testing lung cancer diagnosis, right? So, it’ll be faster. So, we actually have two options at this point, one is get go head, obtain approval for this Class III medical device, which is like utility is for assessing diagnosis for lung cancer, which is great, because lung cancer is a major type of cancer and maybe number one or number two in terms of incident rate. And on the other hand -- so we -- one strategy is we wait until we get this, then we keep adding on to it. The second strategy is, we will not wait. We will file another application with Pan cancer, which can be anywhere from say, 3 to 10 types of cancers. We will not wait. So, we are in the process of debating pros and cons of each approach. Each approach has its advantages and disadvantages. And so, if we wait, we will wait some time until the first one gets the approval, then we will keep adding on to it, and just based upon the material and design from the first one adding different cancer types to it. So, that’s one strategy. The other one strategy is we go ahead and apply another new registration, Class III registration, start with multiple cancer types. But that one, we would have to be kind of -- be prepared for much longer time. So, if you go adding by one by one, it may be easier and -- but on the other hand, if you go with multiple ones, it may take a long time, because it also depends on we still claim for prognosis or we just go and for claim for screening. To our knowledge, there has been no FDA approval for Pan cancer in both U.S. and in China. So, this will be the very first event globally. In U.S. and China, it will be the advantage and that has not happened before. So, now, we have to make a decision in the next few months.

[John Vandermosten:]

Okay, great. Thank you, Dr. Yu.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. I’d like to turn the conference back over to Phil Case for any closing remarks.

[Phil Case:]

Thank you for your participation today. And thank you on behalf of our entire management team for joining the call today. If you have any additional questions, please contact us through our IR council Ascent Investor Relations at [e-mail]. Her information can also be found on every press release. Management will respond to your question as soon as possible. We appreciate your interest and your continued support in AnPac Bio. We look forward to speaking with you again next time. Operator, please go ahead.

[Operator:]

Thank you again for attending AnPac Bio’s fiscal year 2020 earnings conference call. This concludes our call today and we thank you for listening in. Good bye.