AnPac Bio-Medical Science Co., Ltd (ANPC) Q2 2020 Earnings Call Transcript

AnPac Bio-Medical Science Co., Ltd (NASDAQ: ANPC) earnings call dated September 10, 2020

Corporate Participants:

Phil Case — Marketing and Investor Relations

Chris Yu — Co-Founder & Chief Executive Officer

Jinqiu Tang — Chief Financial Officer

Analysts:

Michael Irwin — Universe Securities — Analyst

Unidentified Participant — — Analyst

Theodore O’Neill — Litchfield Hills Research — Analyst

John Vandermosten — Zacks — Analyst

Presentation:

Operator

Good morning, everyone. Thank you for standing by. [Operator Instructions] The call is being recorded.

At this time, I will turn the call over to Phil Case.

Phil Case — Marketing and Investor Relations

Welcome everyone. This is Phile Case, Investor Relations for the Company. This is AnPac Bio’s First Six Months of the Fiscal Year 2020 Financial Results conference call. During today’s presentation, all parties will be on listen-only. Joining us today from AnPac Bio are also the Company’s Chairman and CEO, Dr. Chris Yu and the Company’s Chief Financial Officer, Mr. Edward 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 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 Privacy 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.

At this time, I would like to turn the call over to Dr. Chris Xu, Chairman and CEO of AnPac Bio. Dr. Yu, please go ahead.

Chris Yu — Co-Founder & Chief Executive Officer

Thank you Phil and everyone for joining AnPac Bio’s earnings conference call today. We are pleased to report strong financial results for the first six months of fiscal year 2020 with both revenue, gross margin and average selling price up. Our revenue increased by 3.4% to RMB4.1 million. We have also paid down debt significantly. Net loss was RMB56.1 million, which contained an IPO dominated one-time charge of RMB19.4 million and a stock compensation related cost of RMB17.5 million compared with the same period of last year of RMB34.9 million.

We’re proud of the financial results given the tremendous amount of headwinds during the period. Starting in late January, several of our labs begins shutting down due to the COVID-19. By the end of April with COVID-19 gradually under control and once we had put in plans to safely protect our employees, we began slowly opening up. Towards the second half of the May, we started to see testing volume returning to normal level. We then had an excellent June with 65 [Phonetic] pay tests in a single month alone. During the period, we have also commercialized the two new products to broaden our offerings including our immunology test, which has significant market potential and appeal and also complement to cancer test as well. In addition, our US San Jose lab has been qualifying our novel test via laboratory developed test route as well as qualifying our COVID-19 antibody test on a major supplies equivalent which has already received the EFDA’s — FDA’s Emergency Use approval. And we finally intend to — we fully intend to commercialize it in the second half of the year.

Furthermore, in the United States our new lab in Philadelphia, Pennsylvania is now up and running. It is already clear certified. We hope to start the clinical studies to the site in the near future.

In summary, our Company has made a significant progress in a number of fronts in a challenging time. We’re very proud of our accomplishments.

Thank you all for your attention.

Phil Case — Marketing and Investor Relations

Thank you, Dr. Yu. Next I will turn the time over to Mr. Edward Tang, our CFO, who will summarize our first six months of fiscal year 2020 financial results on behalf of the management team. Mr. Tang, Please go ahead.

Jinqiu Tang — Chief Financial Officer

Thank you Dr. Yu, and good morning, everyone. Next on behalf of the management team, I now would like to summarize some of the key financial results for the first six months of fiscal year 2020.For first six-months of fiscal year 2020, trending, our revenue was RMB4.1 million or $0.6 million, increased by 3.4% from RMB3.9 million. Our gross profit was RMB1.8 million or $0.3 million, an increase of 13.1% from RMB1.6 million. Our net loss was RMB56.1 million or $7.9 million compared with RMB34.9 million for the same period of last year. Our gross profit margin was 45.3%, increased from 41.4% in the same period last year.

Basic and diluted loan per share was RMB5.12 or $0.7 compared with RMB4.03 for the same period last year. Cost of revenues was RMB2.2 million or $0.3 million, a decrease of 3.5% from RMB2.3 million for the same period last year. The decrease was a primarily attributable to streaming of various staffing function and government’s stimulus during the COVID-19.The decrease of cost of revenue was also attributable to decrease in outsource testing expense as we performed more test in our own lab.

Let’s go to our balance sheet and cash flows. During the first half of the year, we paid down a significant amount of the debt and now have only RMB6 million debt. We used the proceeds from the IPO to pay down debt. Net cash used in operating activities was RMB53.9 million or $7.6 million, an increase of 143% from RMB2.2 million for the same period last year. The increase was mainly due to payment for IPO-related costs.Net cash used in investment activity was RMB1.2 million or $0.2 million compared with RMB0.4 million for the same period last year. The increase was mainly due to renovation of US lab and purchase of new equipments.

Net cash provided by financing activities was RMB58.9 million or $8.3 million compared with RMB20.9 million for the same period last year and the increase was mainly due to the proceeds from issuance of ordinary shares.

Thank you.

Phil Case — Marketing and Investor Relations

Thank you, Mr. Tang for reviewing the financial results. We will now turn the time back to Dr. Yu for some concluding remarks.

Chris Yu — Co-Founder & Chief Executive Officer

Thank you Phil. We have accomplished a great deal in the first half of the year in terms of financial aspects, new product launch, strengthening our market positioning, continue the customer acceptance, expanding IP, given COVID-19 occurrence during the period. While solidifying our leadership position in the space, we will continue the build up in our IP [Phonetic] space and a patent portfolio in one of the global top-ranked sample size and data basis by Frost & Sullivan. With COVID-19 controlling in China and moderating in the US, new products contributing to our revenue and cancer tests continue to grow, improve the ASP and gross margin. We are optimistic about our technology and business in the second half of the year, including more validations, more customers increase the revenue and improve the overall financial performance.

Thank you for your attention.

Questions and Answers:

Operator

We will now begin the question-and-answer session.

[Operator Instructions]First question comes from Michael Irwin of Universe Securities [Phonetic], please go ahead.

Michael Irwin — Universe Securities — Analyst

Hi. I have a few questions. First of all with this new data coming out from your five-year study in lung cancer, is this going to be pushing toward CDA testing becoming the new standards for the current lung cancer post-treatment?

Phil Case — Marketing and Investor Relations

Thank you, Michael for that question. That absolutely is the direction we feel like the market will eventually head. The data that we see that’s coming out and the utility of the CDA technology as it relates to reoccurrence monitoring, we feel will be a very cost effective and a very efficient way of monitoring post-treatment for lung cancer. And I think what we’re seeing now for lung cancer and the data that’s supporting that, we continue to anticipate this to be proven true and validated for other cancer types.

Michael Irwin — Universe Securities — Analyst

Okay. And along with that because now we’ve seen more validation for these cancer types, will there be a push towards studying pediatric [Indecipherable] in the future because there is a lack of pediatric cancer screenings except for genetic one.

Phil Case — Marketing and Investor Relations

We have begun to look at pediatric cancer screening as a more holistic part of our testing lineup. It’s something that we haven’t released any information on at this time, but it is one thing that we are looking at and as that information develops, we’ll make that available — to be available.

Michael Irwin — Universe Securities — Analyst

Okay. And with this new, immunology testing lines, other diseases will be looked at half of it versus — half.

Phil Case — Marketing and Investor Relations

Dr. Yu do you want to speak to that?

Chris Yu — Co-Founder & Chief Executive Officer

Yes, two parts to this question and one is about immunology test we have developed. It really– organically approved a set of clinically approved validated tests which are being offered in the hospitals and clinics in both the US and China. Of course we’re studying in China with this test and what we have done is taking the holistic approach basically — typically immunology test involve over 20 or even 50 types of tests including like see, wide [Indecipherable] sales, key sales etc. But the receivers typically the patients or even typical doctors do not fully comprehend the test results and very difficult to combine them and give holistic assessment. So what we have done is combines our technology to develop that with cancer CDA technology, what is a multilevel, multi-parameter approach. So we use that large data set. We synthesize the information from various tests.

So in the end through our algorithm, we come up with a single score ranging from a zero to 75 with from a zero to 30 being weak, below normal immunology resistance from 30 to 60 day being a normal and above 60 being overly strong, which may cause diseases such as — allergy — allergic reactions. So this is a, typically it’s for a range of diseases, including some allergic reactions and with children or even with people who are developing later in their adult life. And it’s not so much as specific as for a given disease rather than for ranges of diseases. For example, cancer and now we know with the immunology resistance going lower, well gradually losing resisting — gradually losing the strength in immunology and a cancer may start seeing — may settle in. So what we are looking at is overall holistic approach and overall valuation of a given individuals immune system, which may cause the ranges of diseases, including cancer, including overly allergical reactions.

Michael Irwin — Universe Securities — Analyst

Okay. Last question is how much [Indecipherable] will be needed for the new COVID tests development?

Phil Case — Marketing and Investor Relations

Yeah. So it’s typically one CC and potentially up to two CC. So just a standard blood draw sample that you would expect.

Michael Irwin — Universe Securities — Analyst

Okay, [Indecipherable] more questions. Thank you.

Operator

Next question comes from Emma [Indecipherable], Private Investor. Please go ahead.

Unidentified Participant — — Analyst

Hello. Hi, thanks for taking the question and I have two questions today. So the first one is what are the advantages AnPac Bio has over crowded market of next-generation cancer screening. And the second question is where do you foresee revenue growth to be during the second half of the year? Thank you.

Phil Case — Marketing and Investor Relations

So I’ll take the first question. You had asked what are the advantages that AnPac Bio has over a very crowded market in cancer screening. It’s interesting you have some larger and perhaps more higher profile players right now. And in this next generation cancer screening, not many of which have been able to fully come to market. A few of the advantages that we see AnPac Bio having is the fact that we do have a little bit of a head start this for the fact that we’ve been commercialized now for over five years in China. Our commercialization in the US has begun this year more fully and the ability that we’ve had to have our test in the market available and to be generating such a high volume of paid tests that are both reimbursed by insurance paid for by large employers, self paid by individuals themselves has given us not only a broader distribution understanding of how we will go to market in the US, but it has really established AnPac Bio as a pivotal player in China having immense volume there.

We according to Frost & Sullivan have, we’re in the Top 3 of global sample size in the world. I think the latest count that we had was over 180,000 samples that have been processed both clinical as well as paid samples. And so the advantage with the immense amount of data would be another. And then I would say, lastly is the ability to penetrate a market at a much lower cost. We have the ability now here in the United States for instance to offer a pan-cancer screening test. So the five most common forms of cancer for male or female in the United States for $275, whereas our competitors are often 10 times that or more.

And so our ability to even with insurance or outside of insurance come to market at a much lower costs allows AnPac’s tests to have utility throughout multiple to kind of testing periods and cycles for cancer. And allow the technology to be used in a more ubiquitous fashion. So those are some of the advantages I had mentioned.

I think Chris, if you want to answer the question of what do you foresee revenue growth to be during the second half of the year.

Chris Yu — Co-Founder & Chief Executive Officer

Okay, thank you for the question. We are confident about strong growth in revenue in the second half during the following reasons. One is COVID-19 is very much under control in China and the business has returned to normal for few months now and we basically see increased annual physical test and a check up volume in the last few months that will continue through the remaining of the year.

The second reason is we have added a new products to our portfolio, especially immunology test which we already getting a lot of good traction. Because of COVID-19 people become more aware of the importance of immune resistance. So therefore this product launched at a very good time, and getting a good traction from the marketplace and the customers. So new products begin to contribute to our revenue.

And thirdly and we are seeing increased number of tests and in CDA technology and especially in August. And also, lastly, but not least, is we are seeing increased pricing power. So as you can see from our first half-year results, ASP has increased significantly, which means our market positioning is increasing and therefore we are in a more stronger pricing, buy our products. So couple that with the last a few factors, we are very confident about a strong growth in revenue for the remaining year. Thank you.

Unidentified Participant — — Analyst

Thank you.

Operator

The next question comes from Theodore O’Neill of Litchfield Hills Research. Please go ahead.

Theodore O’Neill — Litchfield Hills Research — Analyst

Thank you. In your prepared remarks you talked about G&A expense being up primarily due to higher professional service fees related to the IPO. Can you give us an idea about approximately how much of that was non-recurring expense?

Phil Case — Marketing and Investor Relations

Is that something Edwards that you’d be able to address?

Jinqiu Tang — Chief Financial Officer

[Indecipherable] has taken. Our overall expense related to the IPO is around RMB19.4 million and stock compensation related cost is RMB17.5 million compared with the same period of last year is — it was RMB34.9 million.Thank you.

Theodore O’Neill — Litchfield Hills Research — Analyst

Thank you.

Phil Case — Marketing and Investor Relations

And was there a follow up, sir.

Operator

Not at this time, Thank you.

Phil Case — Marketing and Investor Relations

Thank you. The next question comes from John Vandermosten of Zacks. Please go ahead.

John Vandermosten — Zacks — Analyst

Good day everyone and congratulations on the new immunology test. First question is on the expected next milestones for the San Jose and Philadelphia labs. What should be looking out for in the next months or year in the United States for those?

Phil Case — Marketing and Investor Relations

Yeah, thank you for the question. There is kind of two major milestones that we’re looking at. One is going to happen in the more immediate future that we are actively marketing our COVID testing that we can fulfill as a clear and cap approved lab in both facilities. And that marketing is beginning immediately, and that is, — I think we’re expecting and anticipate revenues generated from those laboratories here in the next 60 to 90 days.

In addition to that, the next step is is being able to kind of move forward with our laboratory developed test status. That’s one that we’ve actively been working on, having our LDT approval for both laboratories will allow us to begin full commercialization more or less as it relates to the United States for our CDA product.And so once we receive the LDT approval, that will allow us to begin generating revenue from kind of the main staple of AnPac, which is the CDA cancer screening test. We will be able to do that with both individual self-pay. We’ll be able to do that with private insurance groups, we’ll be able to do that with large employers that the companies has begun approaching with contracts in place and so there is a larger milestones in regards to FY 10-K in completing that process, but in the immediate future we anticipate in early 2021, the ability to begin generating revenue directly from CDA testing in both laboratories with LDT approval.

John Vandermosten — Zacks — Analyst

Okay, great. Great. And second question is, moving to China on the the CFDA Class III approval process and how is that coming along. I know it’s a very lengthy process, but I just wanted to hear if there was any update on that>

Chris Yu — Co-Founder & Chief Executive Officer

John, this is the important question, so we actually have a team working on this product. Obviously, that’s a major milestone for us. And we submitted application about a year and a half ago, little bit over a year and a half ago. So we have gotten a classification. So the process forthis kind of approval in China is, CFDA they have, — we have a new name now but — can skew quite the [Indecipherable]. Basically the first part is review the submitted material and decide whether it will be a Class I or II or III and they apparently — our technology is relatively novel. The experts have met multiple times. And finally, they said, let’s go with the Class III because Class III is the level, is the highest level and most complex level and they just wanted to make sure that whatever the classification they had given to us is a sufficient one. So from that point on, we have been working on the testing the equivalent of performance, mechanical performance, electrical performance and our repeatability etc. So the next major milestone is for us to submit our machine to designated testing centers where they will be running a — of tests in order to, for us to get to the clinical trial stage.

So we have send a machine to a private testing center who for example, like for directly charge for mechanical tests. And so we have since passed a a battery of tests. Now we are finalizing the like because the calibration fluid, a number of things are still remaining with the calibration fluid and the other one is with the accuracy and the repeatability test. And once we have passed that internally, we will submit the machine to designated testing center. And after that we will be permitted to work with up to three hospitals in China and for clinical data collection. So I think we have two more major steps to go before we can obtain the CFDA approval for Class III medical device and we expect we have another year and a half to go.

So it is a long process. But we’ve been working very hard on it.

John Vandermosten — Zacks — Analyst

Great. Well, thank you Dr. Yu for the very detailed response. I appreciate it. That’s all from me.

Phil Case — Marketing and Investor Relations

Thank you. Thank you, everyone. Yeah, thank you for your questions and your participation.And on behalf of the entire Company, we thank you for joining us for the conference earnings call today. If you have additional questions, please contact us by reaching our IR Counsel, Ascent Investor Relations at tina.xiao@ascent-ir.com.And management will respond to your question as soon as possible. We appreciate your interest and support in AnPac Bio. We look forward to speaking with you again next time.

Operator, please go ahead.

Operator

[Operator Closing Remarks]