Burning Rock Biotech Ltd Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the Burning Rock's 2020 the Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there we will be a question-and-answer session. 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 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, expect, anticipate, future, intents, plans, believes, estimate, 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 related 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. And now, I'd like to hand the conference over to the management team of Burning Rock. Thank you. Please go ahead.

Good morning, and good evening, everybody. This is Leo, Chief Financial Officer of Burning Rock. I have today with me our Founder and CEO, Yusheng. I have our Chief Operating Officer, Shannon, and myself; the three of us will be presenting and answering your questions today. So, I'd like to pass on to our Founder and CEO, Yusheng, please.

Good evening, ladies and gentlemen. This is Yusheng Han, Founder and CEO of Burning Rock. Welcome to our First Earnings Call today. We are delighted to be listed on NASDAQ in June this year and broaden our shareholder base to include many experts in the industry across both Asia and the US. We actually celebrated our IPO by having an evening of social events, followed by three full days of Management Discussion and Planning sessions. We have much to do in our two business areas, which are therapy selection and early detection. We started therapy selection when we were founded in 2014, and now we have become the market leader in terms of R&D, market share, and registration. We provide high-quality products which I think that Shannon might mention later on for the SEQC2 study, initiated by the US FDA. We have strong registration, and the first NGS kit for oncology was approved in 2018. We know a lot about the situation in China. We also have a strong sales channel covering over 600 hospitals in China. In terms of the business model for therapy selection, there are two models: the first one is Central Lab, similar to what Foundation Medicine and Guardant Health are doing in the U.S.; they collect samples from prescriptions by doctors and do the lab work in our Central Lab. The other model is the in-hospital model where we sell the whole NGS platform into the hospital and continuously sell the reagents and consumables to the hospital, and they do the tests at their own site. This is quite unique if you want to compare it with the US situation because most of the top hospitals in China want to have their own platform. We were quite successful in that model, which grows faster than the Central Lab model and also in the hospital model which takes around 80% market share. Four years ago, we realized that the combination of NGS, machine learning, and Epigenomics might grow beyond therapy selection. We can combine them to lead to early detection for pan-cancer. So we started our R&D efforts on early detection four years ago using these technologies. In the last four years, we have accumulated 8,000 samples in different types of cancers. The promising results gave us strong confidence. In May this year, we started the PREDICT trial, a single trial called PREDICT. This is our pan-cancer prospective trial that will test 14,000 patients in the coming three years. We are looking forward to that. So, this is generally what we are doing. I'm going to pass it to our COO, Shannon Chuai, to talk about more details. Shannon?

Yes, hi. Thank you, Yusheng. This is Shannon, the Chief Operating Officer of Burning Rock. It's my pleasure to walk you through some of the key progresses that we have made during the second quarter. We listed our recent progresses on page five. In terms of the therapy selection business, the first and foremost is that we have continued to publish many of our research collaborations with our key doctor collaborators and pharmaceutical company collaborators in China, and these publications represent strong validation of our products and also the adoption and endorsement from our collaborators. These include a few studies including the BENEFIT study, the Blood-based Microsatellite Instability validation study, and also our liquid-based real-world validation COMPASS study, all of which were published in the second quarter recently and validated our liquid-biopsy product LungPlasma. Additionally, we have also published quite a few clinical validation or massive lung-based studies on our other products including tissue-based testing on multiple cancer types, extending from our key business in lung cancer into other cancer types as well, including breast cancer, lymphoma, and colon cancer, etc. The second thing we wanted to mention is our registration efforts in the second quarter; we formed a formal collaboration deal with Illumina on sequencing. This collaboration aims to develop Burning Rock's IVD kits on the NextSeq 550Dx sequencer. This paves the way for registering more panels for Burning Rock in China for the NMPA. Just to remind you, this is on our former collaboration with Illumina on a much smaller sequencer, the MiSeq Dx, which led to the first NMPA approval of an NGS panel in China, which happened in 2018. We believe this collaboration on this larger sequencer will continue our leadership in registration in China. In terms of our collaboration with pharmaceutical companies, we are happy to announce that we have had a companion diagnostic co-development deal with CStone for their RET inhibitor. This will be one of the first CDx types of collaboration in China, meaning the NGS test goes together for approval with the corresponding drug. Regarding our early detection R&D efforts, we have progressed the training and validation from our three cancer type test into a six-cancer type test. In this progress or expansion, we not only expanded the cancer types that we can cover for early detection accuracy but also embedded the tissue of origin analysis capabilities within this early detection assay. We are currently working on validating the six-cancer type assay. As Yusheng mentioned, we also launched a 14,000 patient study called PREDICT. This will ultimately help us develop and validate our ultimate early detection assay, which will cover at least nine cancer types. On page six, just to refresh your memory, we listed our roadmap for developing the early detection product here again. We have finished the first two assays, which are the proof-of-concept study for both a single cancer type early detection and three cancer type early detection. For the single cancer type, we already have the methodology paper submitted for publication under review, and we expect it to come out in a few months. For the three-cancer type proof-of-concept study, we recently presented that result at the AACR Special Conference in January earlier this year. This study covers lung, colorectal, and liver cancer. As I mentioned, we are now expanding into this six-cancer type test, and we expect the readout of this test, covering both the accuracy and the tissue of origin analysis accuracy, will be released in the fourth quarter next year at some conference. We have also listed the six cancer types being covered in this new assay. Eventually, through PREDICT, we will be able to validate the ultimate early cancer detection product, which will cover at least nine cancer types. On page seven, these are the near-term catalysts that we are expecting. First, as Yusheng mentioned, the SEQC-2 study initiated by the FDA is a study that we think is a rare and precious opportunity for Burning Rock to be compared head-to-head with quite a few US assay developers. This SEQC-2 study has two different parts, including the tissue-based comparison and liquid-based comparison. Those parts have been summarized and submitted for publication through manuscripts, and we expect those publications to come out and further strengthen the endorsement of our technology capability. In terms of the laboratory, we expect two approvals for the kits in 2021, one is on the BRCA kit, and the other one is a three-cancer, multiple gene study. We expect both of them to be approved next year. Regarding MRD product development, we wanted to mention briefly that we launched a study called the MEDO study two years ago, and we expect the readout for the baseline results to be released sometime later this year in the second half. In terms of the early detection, the technology paper or methodology paper has been submitted for some time and is under review and should come out soon. For the six-cancer type test, we expect to release validation results on both accuracy and tissue of origin analysis in the first quarter next year. For PREDICT, we are still on track with the same timeline we originally planned. We expect to lock in the Phase-1 model for nine cancer types by the end of 2021 and start the Phase II enrollment sometime in 2022. These are the near-term catalysts that we are expecting. I will now turn it back to Leo for our operating metrics and key financials. Leo?

Sure. Thanks, Shannon. First of all, I'd like to cover our top line and given the unprecedented COVID environment, would like to be more granular than what we would typically be. I'll first go through our trends in more detail on a monthly basis and recap China's COVID outbreak, which started toward the end of January and led to a nationwide lockdown during Chinese New Year, extending into February. So the month of February was our low point. We were down 50% on a year-over-year basis. Going into March, we started to see sequential improvement on a week-over-week basis. For the month of April, we closed that month at around RMB35 million in revenue, up 30% on a year-over-year basis. May, we had an unexpected dip, which we disclosed in the IPO perspective. We did RMB30 million, which was flat on a year-over-year basis. In June, we resumed year-over-year growth, doing RMB40 million in revenue, with a growth rate higher than that of April. For the month of July, we had a similar run rate in terms of dollar value compared to June. That is what we're seeing at the moment, and the run rate for July was not back to the full run rate that we achieved or saw in the first three weeks of January prior to COVID. By region-wise, Eastern China has been strong, while Northern China has been weak due to a few top centers in Northern China, particularly in the hospital channel compared to the central lab channel. So, Northern China has had a significant impact for us. First, in terms of channels, I'd like to talk about the in-hospital channel. We grew this quarter by 69% year-over-year. We continue to make new progress in converting hospitals into contracted hospitals. It is only with the contracted hospitals that we book revenues. We were able to add three more contracted hospitals during the second quarter, extending the progress we made back in January when we added two. For the first half of the year, we've been able to add five more hospitals into the contracted status. These contributions led to our high double-digit revenue growth for the in-hospital channel because, in the base last year, we did not have those hospitals. For hospitals we contracted before 2019, they showed divergent trends: Eastern China grew strong in the second quarter, but Northern China has been weak. Regarding the central lab channel, we have had stable ASP (Average Selling Price) for the second quarter. The first quarter of this year was an outlier in terms of revenue and cost base, but we did not see those trends in any major way for the second quarter; the second quarter was normalized, with a 20% volume growth for the central lab channel and a top line growth rate at 18%, very similar to the volume growth. Next, talking about our GP margins, the margins have been largely stable and the details are in the earnings announcement in terms of breakdown by channel and also the qualitative description of trends. Then moving onto OpEx, we actually were largely stable in terms of our OpEx base compared to the first quarter. The only difference is that we had additional share-based compensation related to our R&D team in the second quarter, which posed the biggest challenge in terms of OpEx expenses compared to the first quarter, with details of our OpEx trends available in our earnings announcements. Now, I'd like to move on to our guidance and to recap again the trends we disclosed in our IPO prospectus quantitatively for April and qualitatively for May, which did dip. We actually made two observations: one is that we are able to see share gain by Burning Rock growing slightly stronger compared to the broader market according to our market survey data; the second is that the rebound or recovery out of COVID is not linear. We saw that in May, so we like to call that out. I think both points are still valid in the current environment as we head into August. Given where China is on the COVID trajectory—China had a very tight lockdown during outbreak periods with relatively small case numbers before reopening and quarantine requirements for cross-border traffic movement—our base case is that China will come out of COVID over time. In that context, we are providing our guidance. We should point out that there are risks of a return of COVID in China; we are not factoring those probabilities into our guidance numbers, and the guidance does not factor in a return of COVID in China. With all this context in mind, our full-year top line revenue guidance is RMB420 million, implying RMB246 million for the second half of the year, which translates to a 28% year-over-year growth rate compared to the second half of last year. Looking at this in terms of the monthly run rate, this would imply RMB41 million in revenue monthly for the second half of the year, which is higher than the second-quarter monthly average run rate but similar to the run rate we are doing in July. That's the context of our guidance. Lastly, I would like to call out the lumpiness of our in-hospital channel revenues when we think about our second half-year guidance, particularly around the third-quarter backing to 2019. In-hospital channel revenues are more concentrated in terms of the number of customers; it’s lumpier in this channel in terms of revenue spread across hospitals. We do have an impact from very large centers that are signed on, which happened for the third quarter last year. We had lumpy revenues in the third quarter last year and relatively light revenue for the fourth quarter due to timing differences on revenue and COGS bookings. We do not expect any lumpiness on that scale for the second half of this year. The trend should be smoother and easier to digest for the remainder of this year, but when we make third-quarter year-over-year comparisons, we'd like to call this out, and it’s more representative to consider our year-over-year growth trends comparing to the second half average of last year. This concludes our prepared remarks, and we are open for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from the line of Doug Schenkel from Cowen. Please ask your question.

Hey, good evening and good morning to everyone on the line, and congrats to the team on your first earnings call. I want to talk about three things. One is the PREDICT study, just a couple of follow-ups there. Two is just on commercial trends in the central lab, and then just a clarification on guidance. So first on PREDICT, I'll start there. It's good to hear a bit more about the 14,000 patient, 9-cancer test prediction, I'm sorry, PREDICT study. You positioned this as a training validation study in your deck. I'm just wondering, does this mean there would be another follow-up study planned? I ask because I'm wondering if you envision having to do something that resembles what Grail is doing in terms of scope and size for their asymptomatic multi-cancer test. So that's the first part. I'm just wondering if there's anything about the study design specifically that you believe would limit the utility of this test to China versus other global geographies.

Yes, this is Shannon, I can take that question. So first of all, there is a follow-up factor in the PREDICT design. We actually mentioned that there are two phases for PREDICT. In Phase 1, it focuses on training and validations. By the end of Phase 1, the model, exit, and cut-off will all be locked. Phase 2 will be a blinded study, meaning that all the teams within Burning Rock, the SA team and the analysis team will be blinded to the identity of the samples. Validation will be a blinded and independent process. Within Phase 2, we do have a follow-up module, which means that for those who turn out to be healthy controls but tested positive, we will conduct up to a 12-month follow-up on them to give them a second test and see if specificity improves by a second test. This follow-up will also allow us to assess the utility of the test, which indicates how much effort a healthy control who tested positive would need to exclude the cancer probability or to undergo the full diagnosis process. This somewhat mimics the DETECT-A study in some design aspects. So, the short answer is yes, there will be some follow-up module embedded in PREDICT. In terms of the applicability of PREDICT results to other geographical regions, we don't believe that early detection trial results would be very applicable to different ethnicities or races per se. Early detection is expected to be very population-specific because it links back to people's genetic or epigenetic basis and their particular local living habits and check routines, etc. Therefore, we don't expect that to be applicable elsewhere anyway. If we plan to expand to other places or countries, we will have to do a separate trial there.

Thanks for all that. Yes, that's great, Shannon. The only thing I don't think you touched on was just the size of the follow-up studies; is it too early to comment on that?

Right, great. Currently, our expected 6-cancer tests are aiming for 90%-98% specificity, so you can estimate the size of the cohort from that. However, we don't know for sure yet, so you will see more results when we release the 6-cancer type assay result.

Okay, super helpful. Just pivoting to a commercial question, specific to the central lab. If we look at Q1 and then the number of ordering physicians and hospitals that were active, you had a notable drop in Q1 relative to previous quarters, which was largely a function of the pandemic. If we then look at what happened in Q2, mathematically, you recovered about 90% of the ordering physicians lost in Q1 and over 70% of the ordering physicians. I'm guessing that's an oversimplification, but really what I’m getting at is how much of the Q2 central lab recovery was due to actually getting those doctors and those hospitals back versus moving beyond kind of same-store sales and adding first-time hospitals and first-time ordering physicians.

Yes. On the last point, it is more related to same-store, or existing physicians that we work with. You can actually look at our number of ordering physicians, which was 1,175 for the second quarter. We are not back to the number we had, which was 1,222. There are still some restrictions or limits that our sales team face to reach the physicians or interact with them as they would under normal circumstances prior to COVID; that’s one factor. Also, looking at the physicians or hospitals they work with, there are capacity caps, so hospitals are not back to 100% capacity in terms of biopsies or even in the number of visits or appointments they can handle, and this varies by region. Generally, Eastern China has recovered better compared to Northern China, and since we have a nationwide business, these pockets of weakness affect us. So, if you look at the numbers here, the number of patients tested compared to the ordering physicians—those that our sales team can reach and interact with and have resumed contact—have shown recovery, but there are physicians who we just cannot reach yet.

Okay, understood. Last one, a quick one, I'll direct this at you, Leo. Guidance seems to imply that you're basically assuming not much improvement relative to the June and July revenue run rate. Specifically, if you take first-half revenue and add RMB40 million per month for the second half, you end up within RMB5 million to RMB6 million of your full-year revenue guidance. Assuming I'm just doing that basic math right, is this just an acknowledgment that you don’t want to assume the environment improves or deteriorate relative to trend, given the inherent uncertainty associated with the pandemic?

I don't think we are holding back our numbers per se. I do believe there are uncertainties and volatilities of COVID. If we look at the news on a more linear level, particularly for Northern China, there are outbreaks we see in a few cities—not just one. When those occur, the hospitals are typically more impacted compared to other service industries. We are more sensitive to that compared with other industries in China, which have resumed quite well. It is with this background that we think about our guidance for the second half of the year. We must base that on what we've seen, and this is what we are seeing.

Okay, all right. Thank you for all the detail, really appreciate it.

Thanks, Doug.

Thank you. Our next question comes from the line of Sean Wu from Morgan Stanley. Please go ahead.

Hello. Thank you very much for answering my question, and congratulations on the deal. Yusheng and Shaokun Chuai, great results despite the challenges posed by COVID-19. I have a few questions that I hope you can help clarify. Your core offering is distinctive; you provide both tissue samples and liquid biopsies, unlike Cardington in the US, which focuses solely on liquid biopsies. This raises the question of whether there are advantages or disadvantages when using both methods. Genetron has reported solid results for the first half and operates under a different business model involving NGS and long-adjusted mouse testing. What similarities do you see between your business model and theirs? You also mentioned that your market share is growing. Can you provide details on the overall market share for both the central lab and in-hospital segments for the first half or second quarter, if that data is available for investors? Thank you very much.

I think that in terms of the different technology platforms, Burning Rock now focuses more on the NGS platform because we think that it is the future. We didn't pursue the COVID testing opportunity because we think there were very low entry barriers regarding the technology. We have witnessed that any technology without entry barriers in the long run will face adjusted competition. So, we didn’t pursue that opportunity. I don’t think we should comment on our peers’ financial reports, but I can say that our position remains strong in the oncology market for solid tumors, assessing that I can address. Any additional comments, Shannon or Leo?

Accordingly, regarding the tissue vs. liquid platforms, we do think being able to do both tissue and liquid gives us quite a bit of advantage, both in terms of technology development and commercialization channel. Being able to collect both tissue and prepare samples allows us to test on the two positive and epigenetics on liquid-based technologies. It provides more data to refine our algorithms for liquid testing. Additionally, in China, the consensus among doctors is that tissue is still the main central source and the gold standard for testing during first-line treatment. More doctors are adopting the view that liquid biopsies have advantages later in treatment. So, being able to conduct both gives doctors the choice to select the most comfortable sample for them, helping us cover all their needs regardless of location.

Okay, great. Thank you very much.

Thank you. Our next question comes from Jayaraj from Bank of America. Please ask your question.

Yes, hi. Sorry, guys, I joined the call a bit late, but just on the magnus BR, have we commented on when the approval is expected from the NMPA?

Shannon?

I'm sorry, I didn't catch the question. I know it's about magnus BR, but what exactly are you asking if you don’t mind?

Yes. Just asking when is the approval expected from the China regulator?

Thank you. We already had Type 1 approval from the NMPA; we got that in July for our magnus BR. We didn't mention that in particular in the slide deck because we are now focusing on the Type 2 registration, which we think is key and will help us differentiate ourselves. We expect to get that sometime next year, but we don’t have a specific quarter or more specific date for the prediction of registrations yet.

That's helpful. On the PREDICT study, just remind us what the endpoints of the PREDICT phase 1 are?

The endpoints would be sensitivity and specificity, as well as tissue of origin accuracy. These three statistics would be our endpoints.

The endpoints of the PREDICT phase 1 study will focus on sensitivity, specificity, and tissue of origin accuracy. These three statistics will be our endpoints.

When you look, please proceed.

Yes, I just wanted to mention—remind Shannon that you are asking about the phase 1 endpoint.

Great. Yes, that is for phase 1.

So, when you actually validate the technology using these two criteria, you are looking at certain benchmark endpoints that it should cross this level of specificity and sensitivity to take it as a positive trial, is that correct?

Right. From the classical trial design perspective, you should be able to do that. However, for early detection trials, because there isn't anything to compare to, what some studies are doing is that they design trials large enough to have precise enough estimates on sensitivity and specificity, but they do not have a particular threshold to cross, which would allow them to claim a positive or negative result. That is what we are doing with PREDICT. Eventually, once the first product is brought to market, the next generation of products can compare with it, and trials will follow more classical designs.

Right. Lastly, on contracted hospitals and the pipeline, if your guidance indicates that you have not factored in a return of COVID, would hospitals pick up regarding pipeline and contracted hospitals? Since your previous growth rate was higher, that addition to new hospitals has been impacted; where do you see this number going by the end of the year?

Yes, so in terms of guidance, we provide guidance for our overall top line and do not have specific guidance or breakdown by channel. However, qualitatively speaking, when we look at the in-hospital channel, it's driven by both new hospitals getting signed on and existing hospitals ramping up their volume. We added five new contracted hospitals in the first half of the year compared to seven for the full year of 2019. So, that’s what we've been able to achieve for the first half of the year. For existing hospital ramp-ups, we have seen better ramp-up for Eastern China but weak numbers for Northern China, which contributes to the qualitative trend.

Thank you so much.

Thanks.

Thank you. Our next question comes from the line of Derek Woo from Nomura. Please ask your question.

Thanks for the presentation and congratulations on the good result. So on behalf of Astra Wang from Nomura, I have a question about our prospective study, which was launched in May this year. Could you please provide the average R&D expense for each enrolled patient in this study? We would appreciate a breakdown of patient recruitment, expenditure, testing fees, and payments to doctors. So could you please tell us some details about this expense? Thanks.

Sure. I'd like to take a step back and provide the overall expense for the PREDICT program that we expect will be around USD30 million. However, we do not provide specific breakdowns by component for that number. Given our current burn rate at the beginning of the PREDICT study, we are able to fund ourselves for the next three years with our current cash balance after the IPO.

Okay, thanks for the answer.

Thank you, Derek.

Thank you. As there are no further questions, that does conclude our conference for today. Thank you for participating. You may all disconnect.