In June 2020, Burning Stone Medicine (BNR.US) was officially listed on NASDAQ at an issue price of $16.5 per share. On the first day of listing, the company's stock price surged by nearly 50%, reflecting that investors are quite optimistic about the cancer circuit. However, since May 2021, the company's stock price has been falling like a cliff, and the slow progress of the company's R&D and commercialization in recent years may be an important reason for investors to lose confidence.

In January of this year, Burnstone Medicine also received a stock price warning notice and slipped to the brink of delisting. Although it has been re-compliant by changing the ADR ratio, it is still unknown how long the unattractive business and business model can help Burning Stone Medicine to support NASDAQ.

Regaining compliance through “joint stock”

On the evening of January 4 this year, Burnstone Medical announced that it had received a notice from NASDAQ that because the closing price of depository shares fell below $1.00 per share for 30 consecutive trading days, it did not comply with the listing rules. According to the rules, Burning Stone Pharmaceuticals must re-comply with the minimum share price requirement by June 26.

In fact, Burning Stone Medicine's performance in the secondary market last year was unsatisfactory. Although it achieved an adjusted gross profit correction in the Q2 quarter of last year, and then achieved that the core in-hospital business accounted for more than 50% of the testing business revenue in the Q3 quarter, Wall Street did not seem to buy it.

The Zhitong Finance App observed that in the secondary market, the stock price of Burnstone Medicine fell from the highest price of 3.80 US dollars at the beginning of last year to 0.96 US dollars on January 4 this year, a drop of 74.74%. Since then, Burning Stone Medicine's stock price has not looked promising; it even fell to its lowest intraday low of $0.57 on March 14 this year, setting a new low since its listing. Since then, the company's stock price hovered between 0.6-0.9 US dollars until May 14.

In other words, within 4 months from January 4 to May 14, Burning Stone Medicine still did not meet the minimum bid price requirement to “maintain at least 10 consecutive business days at least $1.00”. Seeing that it is about to enter the second 180-day compliance period, the risk of delisting is getting higher and higher.

However, in response to Nasdaq's delisting warning, Burnstone said “the notice did not affect its business operations. The company plans to monitor its ADS bid price and “take all reasonable steps” to restore compliance.” And this measure is a “joint stock exchange.”

On May 15 this year, Burnstone Medical issued an announcement stating that it will change the ratio of its American Depositary Shares (“ADS”) representing its common shares, from 1 ADS representing 1 common share to 1 ADS representing 10 common shares.

Judging from the motives behind this burning stone operation, the purpose of changing the ADS ratio was to raise the company's ADS price to meet NASDAQ transaction price requirements. Burnstone's ADS price is expected to increase proportionately due to changes in ADS ratios. On May 16, the stock price of Burnstone Medicine “rose” sharply to $8.99. Although its stock price continued to slowly fall since then, until May 29, its stock price was as low as $7.5, and compliance with the NASDAQ listing has been restored.

However, for Burning Stone Medicine, relying on a joint stock “reliance” on NASDAQ is clearly not a long-term solution. The Zhitong Finance App learned that from 2021 to 2023, the trading volume of Burnstone Pharmaceuticals on the NASDAQ has dropped sharply from 303.01 million shares to 19.687 million shares, and since the beginning of this year, its trading volume is only 5.541 million shares. According to this trend, its trading volume in 2024 may once again fall short compared to the same period last year, and it has completely fallen into a liquidity dilemma and has been forgotten by the market. Now it seems that only a bright financial report can save the company.

Will the Q1 earnings report be a lifesaver?

On May 29, Burnstone Medical announced its 2024 Q1 quarter results. Financial reports show that Burnstone achieved current revenue of 126 million yuan and gross profit of 85.7 million yuan. It is worth mentioning that in the current Q1 quarter, after deducting non-GAAP sales and general and administrative expenses from non-GAAP gross profit, Burnstone turned a loss into a profit for the second time in business history.

Judging from the company's business structure, in order to meet the different needs of different hospitals, in terms of business model, Burnstone Medicine adopted a “central laboratory+hospital” model. Among them, the central laboratory model became an outpatient market, and an in-hospital laboratory is called an in-hospital market. The difference between the two is that samples and fees for the in-hospital market flow from patients to hospitals, while samples and fees for the out-of-hospital market are not directly handed over to third party laboratories through the hospital. As a leading domestic NGS company, the business structure of Burning Stone Medicine includes the above two businesses at the same time.

In fact, at the beginning of its launch, Burning Stone Medicine mainly promoted the “in-hospital+out-of-hospital” two-wheel drive growth model it developed. However, with the gradual deepening of the business, Burning Stone Medicine's business focus has begun to fully shift to the in-hospital model in recent years. In its view, the in-hospital model is unmatched in competitiveness. In a previous financial report, Burning Stone Medicine mentioned, “Once in-hospital laboratories, equipment, and systems are in place, we will regularly sell them our kits, thereby creating high barriers to entry and high customer loyalty.” In other words, Burnstone Medical believes that the in-hospital model business is more stable, and profit margins may also be higher.

However, there appears to be a gap between the short-term earnings report and the company's expectations. Take this Q1 earnings report as an example. Judging from the segment performance, the laboratory business revenue of Burnstone Medical Center was 47.6 million yuan, down 23.0% from the same period in 2023; in contrast, the in-hospital business revenue was 57.4 million yuan, which surpassed the central laboratory's revenue, and increased 11.3% over the same period in 2023. However, the growth in the number of the company's partner hospitals came to a standstill in the Q1 quarter.

With the out-of-hospital business being forced to shrink, the in-hospital business is clearly unable to take the lead in the short term. As a result, Burnstone Medical's total Q1 revenue fell 11.85% year over year.

On the other hand, since the company's previous gross margin of the central laboratory business was higher than that of the hospital business. The former has a gross margin of over 80%, while the latter is 65%-70%. Therefore, the adjustment of the business structure in favor of the latter also means that the company's overall gross margin level will be lowered. During the reporting period, the company's gross margin was 68.22%, a year-on-year decrease of 1.09 percentage points.

On the cost side, Burnstone continued its previous “fee control” strategy in the Q1 quarter of this year. According to the data, current sales and marketing expenses are 46.9 million yuan, down 27.7% from 64.8 million yuan in the same period in 2023, accounting for about 37% of revenue; in addition, Burning Stone Medicine has also increased its R&D control efforts. The current R&D expenses are 66 million yuan, down 30.1% from the same period in 2023

It is worth mentioning that the company's fee control efforts in Q1 increased compared to the same period last year. The company's total sales and administrative expenses fell 16.51% year-on-year in the Q1 quarter of last year, and reached 24.52% this year; the year-on-year decline in R&D expenses increased from 20.99% in 2023Q1 to 30.11% this year. From an operational perspective, the core of Burning Stone Medicine's cost control strategy is clearly to “survive.”

However, from a cash flow perspective, since cash flow from operating activities is still in a net outflow state, the company's current cash reserves still declined sharply year over year. As of March 31 this year, the company's cash, cash equivalents, restricted cash and short-term investments were 573 million yuan, a decrease of 28.69% over the previous year.

Although in financial reports, Burnstone Medicine stated that the contract amount for its pharmaceutical companies' cooperative business increased by more than 100% compared to the same period in 2023, and that many of its early cancer detection products were also recommended by consensus in clinical guidelines, but it seems difficult for these “small achievements” in the business to be taken into Wall Street law. On May 29, the trading volume of Burning Stone Medicine was only 2,347 shares on the financial reporting day, with a turnover of only 17,800 US dollars. This company seems to have been forgotten by market investors.