Ladies and gentlemen, thank you for standing by and welcome to the Burning Rock's 2020 Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. Before we begin, I would 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 US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, 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 markets and operating conditions and relate to events that involve known and unknown risks 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. With that, I'd like to turn the call over to the company's Founder and CEO, Mr. Yusheng Han. Thank you, please go ahead.

Thank you. This is Yusheng Han, the CEO and Founder of Burning Rock. So good morning and good evening, everyone. Thanks for attending the call. And I'll start with a little bit of introduction of Burning Rock. We are the leader in China's molecular diagnostics for precision medicine, and there are two parts of our business. The first one is therapy selection, which means a $4.5 billion TAM for the China market. And the second one is early detection, which means a $29 billion TAM for the China market only. Our TAM lies in three parts. First, we have world-class technology. Second, we have a deep understanding and good experience of China regulation. And third, we have a very strong network of hospitals and doctors. For therapy selection, our focus nowadays is on expanding leadership in the China market, based on our product performance and quality for both tissue and liquid-based NGS testing. We enable higher NGS penetration through kit-based in-hospital channels, complementing existing central-lab based testing. For early detection, we are at the forefront of global R&D on blood-based pan-cancer early detection through in-house R&D and clinical collaboration with top physicians and hospitals in China. I am very pleased to introduce the speakers today, including me and our COO, Shannon Chuai, our CTO, Joe Zhang, our CFO, Leo Li, and our Chief Medical Officer, Hao Liu who is now online. Our topic today will cover three parts: the first part is our progress for early detection. We will give everyone the product roadmap update, detailing our plans for clinical development for our products, including the 6-cancer test and the 9-cancer test. I am excited to share that we have very good data just released at ESMO Asia Virtual Congress 2020. We released our 6-cancer test validation data, which is very fresh and I encourage everyone to find the poster and read it, our CTO, Joe will explain this in detail later. The second part is about our milestones for therapy selection; we have released our library prep automation system, Magnis BR analytical validation data at the AMP meeting, showing very good data for both tissue-based and liquid-based testing. Additionally, we signed a licensing agreement with Myriad for the myChoice HRD test, which is the gold standard for PARP inhibitors. We are proud to say that this test will provide a meaningful pathway for patients with ovarian cancer and potential applications for prostate cancer. Lastly, our CFO, Leo Li will explain our Q3 operation metrics and financials in detail. Let me now transfer to our CTO, Joe Zhang to talk about exciting early detection progress. Joe?

Thanks, Yusheng. Let's get started on Slide 7, recapping ELSA-Seq, which is the technology behind our early detection program. ELSA-Seq is a targeted deep methylation sequencing assay that utilizes highly efficient library preparation and machine learning classification models for early detection. The assay can inquire methylation status from hundreds or thousands of loci in the genome from as low as 1 nanogram of cell-free DNA to detect whether circulating tumor DNA (ctDNA) exists in the blood and predict tumor origin. Some technology highlights include single-stranded library preparation compatible with various conversions, selection of the most informative regions from the genome for deep sequencing, and multiple noise reduction and signal correction before machine learning model building. The.next slide discusses the early detection product development roadmap. We started this program four years ago in a research development mode. Last year, in 2019, we presented the proof-of-concept for single-cancer type, lung cancer, at the AACR Annual Meeting. Earlier this year, we demonstrated 3-cancer performance at the AACR Advancing Liquid Biopsy Special Meeting, achieving 95.1% specificity and about 81% sensitivity for 3-cancer types. Just a few hours ago at ESMO Asia Virtual Congress, we presented our 6-cancer model, which includes lung cancer, colorectal, liver cancer, ovarian cancer, pancreatic cancer, and esophageal cancer, achieving a specificity of 98.3% and an overall sensitivity of 80.6%. We were able to predict tumor-of-origin in 98.6% of cases with about 81% accuracy. This product development roadmap continues to expand; we aim to add additional cancer types like gastric, cholangio, and head and neck. The next slide focuses on the latest ESMO Asia results, where Dr. Chao Chung from Fudan University Shanghai Liver Institute shared data on a multi-cancer early detection study composed of three stages: marker discovery, panel design, and validation, as well as assay validation. For marker discovery, we profiled cancer and non-cancer tissue samples in-house and surveyed public databases to identify key methylation changes associated with 6 specified cancer types. As a result, we selected approximately 160,000 CpG sites to construct a customized capture-based panel for this cancer early detection. Randomly dividing plasma cfDNA samples from cancer patients and non-cancer controls into training and validation sets allowed us to develop a machine learning classifier to identify cancer derived signals. The overall charts in Slide 9 show the training and validation set overview, detailing how many patients were tested, both cancer patients and controls. Key clinical characteristics of the training cohort are shown at the top and for the validation cohort at the bottom. Both groups are comparable regarding age, gender, and smoking status, with about 80% of patients diagnosed at earlier stages (1, 2, or 3) at study start. Slide 11 is critical, summarizing the detection accuracy across different cancer types and clinical stages with training set in green and validation in red. In general, performance was consistent, with detection rates increasing along with tumor progression from stages 1 to 4. In the training cohort, specificity was controlled at 99.5%, with overall sensitivity at 79.9%. The validation cohort achieved a specificity of 98.3% and a sensitivity of 80.6%. Slide 12 provides further breakdown by cancer type and clinical stage, with sensitivity showing distinctions across stages. The liver cancer exhibited the highest detection sensitivity at approximately 93%, while lung cancer showed the lowest at around 67%. Slide 13 discusses the predicted tumor or tissue of origin accuracy, achieving approximately 82% accuracy in the validation cohort, with better predictions among top organ calls. Moving to therapy selection, I'd like to provide an update on the Magnis BR, the automated library prep solution for hybridization capture in oncology panel testing. The instrument simplifies current library prep methods, enabling a walkaway solution from DNA to enriched library ready for sequencing. This year, we have made Magnis BR compatible with several popular panels, including a 168-gene liquid biopsy test, and a 520-gene tissue-based test, as noted on Slide 15. We presented strong analytical validation results for both assays at the AMP Annual Meeting this week, indicating equivalent or improved performance relative to manual methods. The overall message is that the Magnis BR assay shows better performance, and it achieves high concordance. Notably, it is compatible with multiple biomarkers, including SNVs, indels, fusions, copy number variations, and microsatellite instability status. Now let me ask our Chief Operating Officer, Shannon, to provide updates on the Myriad myChoice product licensing activity.

Thanks, Joe. On page 17, I'll discuss an exciting advancement for Burning Rock: we finalized an agreement with Myriad to bring the myChoice HRD assay to China. This assay is the first, and arguably a current gold standard for genomic instability assessment, a key biomarker particularly in PARP inhibitor development. The FDA has approved myChoice HRD as a companion diagnostic for two PARP inhibitors, Olaparib and Niraparib, both for ovarian cancer, with approvals in 2019 and 2020. Next, I want to introduce our rationale for this licensing move. Our purpose for bringing this assay to China is chiefly to enhance our capabilities in collaborating with pharmaceutical companies for biomarker, especially CDx biomarker development for PARP inhibitors. We see an increasing interest in this area. Additionally, we aspire to make this assay commercially available to Chinese patients in an LDT format initially, estimating an addressable market of 10,000 to 15,000 patients annually, primarily in first-line advanced ovarian cancer maintenance therapy. However, it's critical to note that we anticipate an initial penetration of around 5% among these patients in the first year, with expected growth over time. The second reason for this agreement is to accommodate the long-term commercial needs for this assay, as we maintain an optimistic outlook for HRD as a biomarker in PARP inhibitor therapies. We also note the list of PARP inhibitors and relevant cancer types where myChoice HRD is utilized in clinical studies. This assay holds great potential for application beyond just ovarian cancer, which drives our optimism and ambition to position ourselves favorably for future collaborations with pharmaceutical companies and hospitals in China. Now, I'll turn it over to Leo, our CFO, for the operating metrics.

Thank you, Shannon. Now turning to our numbers on Page 20. First of all, we had a good quarter in Q3 2020, showing sequential recovery in both the central-lab and in-hospital channels. This is against a backdrop of increasing competition in our industry in China. We achieved a 16% overall revenue growth on our top line on a sequential or quarter-over-quarter basis, outpacing numbers recorded by other public and private companies in the industry. Looking at our operating numbers on Slide 19, we continued sequential recovery in the central-lab channel, achieving a 19% quarter-over-quarter volume growth. Year-over-year, central-lab volume grew 28%; despite lack of published industry-wide data, we believe we are gaining market share. For context, one competitor reported only a 5% year-over-year LBT volume growth in Q3, significantly lower than our 28%. In the in-hospital channel, Q3 presented challenges in contracting new hospitals. However, existing hospitals showed continued recovery with strong double-digit growth. Magnis BR, initially launched at the China Annual Pathology Conference last November, has seen strong demand but faced external supply issues in previous quarters. These issues are gradually being resolved, leading to placement in multiple hospitals while awaiting contract completions to book associated revenues, expected to mainly occur in 2021, with some extending into 2022. The demand for Magnis BR remains strong, and we foresee additional placements in 2021. Overall, our revenue grew 19% year-over-year; the central-lab channel improved significantly with 30% year-over-year growth from the previous 18% growth rate experienced in Q2. In-hospital revenue growth was modest at 3% year-over-year, though this lumps in prior quarters due to substantial hospital contracts and one-off revenues. Comparing the current average with Q3 and Q4 in 2019 indicates a more accurate year-over-year growth of 41.6%. On a sequential basis, we noted a 15% in-hospital revenue increase from Q2 to Q3. However, it's important to highlight that all in-hospital revenues in the last two quarters have come from reagent sales due to previous supply challenges. We intend to convert already placed Magnis BR instruments into revenue streams in 2021, and there's strong demand underlying this need. We noted a decrease in pharma revenues in Q3 due to lowered testing volume in pharmaceutical projects. Looking forward, with COVID still prevalent in China, public health systems remain focused on pandemic control, which complicates precise predictions on the pathway to normalcy. We will continue to monitor the situation, providing updates as needed. Lastly, on OpEx, we expect increasing investments in early detection R&D moving forward as we are enthusiastic about pursuing significant opportunities in this space.

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from the line of Doug Schenkel of Cowen. Please go ahead.

Hey, good morning and good afternoon, everyone and thank you for taking my questions. Just to start with a few questions on the asymptomatic cancer data presentation that you shared. I was surprised that the way you presented this data shows an apparent toggle to higher specificity than previously discussed. Earlier this year, you suggested structuring the assay for higher sensitivity at the expense of specificity, a decision typical in designing assays. I'm curious why this change happened over the past months?

Yes, this is Shannon. I can take that question, Doug. I want to clarify that this was not a deliberate change in focus. Our philosophy remains: if we can sacrifice specificity to gain significant sensitivity, that remains a path we want to pursue. Transitioning from 3-cancer to 6-cancer assays involved reshaping of marker selection, chemistry, and algorithms—not simply maintaining a specific threshold. The 95% specificity level was not maintained by intent. We are still refining our data separately to find the best balance between sensitivity and specificity.

That's helpful. Moreover, the overall performance looks impressive, even across blended stages. Nonetheless, focusing on stage 1 lung cancer sensitivity, which was reported at 37.5%, alongside an approximate 33% for stage 1 ovarian, I am left wondering if those figures are adequate for your targeted demographic, given the absence of standard screening alternatives. Does this performance meet your expectations?

Absolutely right, Doug. While this is not ideal and certainly not optimal, we believe it represents a considerable performance for the early detection market, especially given its pan-cancer or multi-cancer nature. Striking a balance in algorithm performance across multiple cancers while maintaining high specificity is a significant endeavor. As we move forward, expanded data sets will allow for enhancements, especially regarding early-stage cancer sensitivity.

Thank you, Shannon. Can you provide an update on the enrollment or plans for large studies in the future?

Unfortunately, at this time we cannot disclose further details regarding PREDICT. We will share any updates as they arise, but not presently.

Understood, Leo, a couple of questions for you as well if I may. The revenue for this quarter exceeded expectations, but I anticipated some uptick in the ordering metrics for the central-lab. There was little momentum compared to Q2? Were there factors that diverged from your expectations?

Apologies for the disconnect, Doug. Regarding central-lab metrics, while we are experiencing recovery, maintaining full coverage has been challenging with lingering COVID effects in China, affecting some breadth of reach. Nonetheless, we continue to see increasing test volumes per physician, so we are making progress.

Leo, can you elucidate any implications from recent pricing changes by Illumina in China? Have they benefitted your positioning within the in-hospital market?

Most competitors utilize Illumina's platform. Their price cuts are beneficial for us in that we have not reduced our prices, which supports superior margins in the long-term. However, there won't be significant price shifts since sequencing costs don’t dramatically affect overall costs.

Congratulations on a strong Q3 result. I have two inquiries; first, how will the central-lab for humans policy potentially affect your business long-term given the evolving landscape with PCR testing?

It is still early to comment on pricing for IVD, particularly around companion diagnostics. Hospitals retain significant margins on IVD products, complicating pricing discussions. In summary, I do not foresee any significant shifts for our segment within the next three years.

For early detection sensitivity and specificity, we are cautiously optimistic. In terms of peer comparisons, our current specificity matches closely, with higher sensitivity in ours for stages 1 to 3 overall compared to competitor publications. We are refining methods to enhance early-stage sensitivity. However, obtaining precise enhancement measures at this phase is complex.

Can you shed light on your anticipated revenue and profit impact from your agreement with Myriad?

Thank you for the question. We are eager to commence this partnership, leveraging our commercial infrastructure. However, we cannot currently comment on specific revenue expectations until after the necessary technology transfers occur, which will take time. We anticipate launching this product in 2021 and will provide commercial details at that time.

Congratulations on a strong quarter. I'd like to follow up on another query related to David's concerns regarding early-stage sensitivity and its sustainability within non-cancer models. What is your perspective?

We remain optimistic about maintaining and improving performance when extending into 9-cancer or more cancer types. With additional data and modeling refinements, we anticipate enhanced tissue-of-origin accuracy. We expect a better performance trajectory as we aggregate further data.

We acknowledge the trend towards volume-based procurements for therapeutics could augment accessibility and affordability for targeted treatments, beneficial for patients, notwithstanding the impact on our primary focus on leading hospitals where affordability isn't the main barrier. Increased affordability may increase NGS adoption.

The incorporation of NGS into reimbursement in top-tier hospitals is not a significant issue. In fact, we note significant uptake among cancer patients at these facilities. Moving forward, we foresee higher penetration in testing services across hospitals, signaling a good progression for comprehensive cancer care.

Thank you for your questions. Are there any further inquiries?

No, that would be all.

Thank you, ladies and gentlemen, that concludes today's conference. You may now disconnect your lines.