Burning Rock Biotech Ltd Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, thank you for standing by, and welcome to Burning Rock 2022 First Quarter Earnings Conference Call. This presentation contains forward-looking statements. These statements constitute 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 terminologies such as will, expect, anticipate, future, intend, plans, believes, estimates, target, confident and similar statements. Burning Rock may also make written or oral forward-looking statements in its periodic reports to the SEC, in its annual reports to shareholders, in press release and other written materials and in oral statements made by its officers, directors or employees to third-parties. Statements that are 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 relate 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. All information provided in this presentation is as of today and 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. I'd now like to turn the call over to your speaker host and CEO, Mr. Han. Please go ahead.

Thanks. Welcome to Burning Rock’s 2022 Q1 conference call. I'm Yusheng Han, the CEO and Founder of Burning Rock. And today, we have our COO, Shannon; CTO, Joe; and CFO, Leo in the meeting. First, I will recap our business fundamentals and then go through some important recent business programs. I believe that what our investors care about most, especially in the situation of COVID impact in the past five months, is the business. Since most of our product development efforts are moving forward as laid out in previous calls, we will directly go to CFO Leo, who will walk you through the financials and elaborate on our growth trend after my presentation. So let's turn to Page 3. Burning Rock started with therapy selection business in 2014 and has grown to the market leader in this segment. We were the first NGS company to cultivate the in-hospital channel and the first to have an oncology NGS-based kit approved by NMPA in China. Our initial strategy of developing this unique in-hospital channel in China has taken 10 years of our efforts that have really started to realize rapid market growth in the past quarters. This advantage was especially shown during the pandemic situation, and our leading position has laid a good foundation and given us advantage moving forward to new business of early detection, MRD, and pharmaceutical collaboration, and our strong branding in technology and product quality also helps us attract key talent. So that's what we are doing. And let's turn to Page 5 to discuss recent business programs. The first thing I want to talk about is the strong policy push from the government on cancer early detection and NGS, which has occurred regionally. In China's 14th Five-Year Development Plan, which is the most influential roadmap for industry and society announced every five years, NGS and cancer early detection have been explicitly identified as key development areas. We expect local healthcare departments will adopt and act on our roadmap in the coming months, which will create an encouraging environment for industry development. For patient testing business, including therapy selection and MRD, we believe that we are gaining market share via the in-hospital model and new product lines, including MRD, DetermaRx, and myChoice+. We recorded a total volume increase of 42% in Q1 2022, with in-hospital volume growing by 83% year-over-year. As you might know, China has experienced significant COVID impact, and Shanghai has been locked down since the beginning of April. Despite this heavy hit, we still saw a total volume increase of 15%. Looking at in-hospital volume, it increased even more, at 60% in the month of April. It is also worthwhile to note that our new products, including MRD, DetermaRx, and myChoice contributed 7% among our central lab revenue. March was just our first month of MRD product launch, so we found this number quite encouraging. As mentioned in our last quarter's call, the validation data of MRD technology has been released at AACR, showing state-of-the-art sensitivity and specificity performance. Regarding multi-cancer early detection, we have released our analytical validation data at AACR as well, demonstrating a limit of detection of 0.02% to 0.1% across different cancer types. We have completed our PROMISE study for our 9-cancer product, with data readout expected later this year. In the PREDICT trial, which is our case-control validation study for the 9-cancer products, over 10,000 participants have completed more than 50% enrollment. Our commercialization progress for early detection is ongoing, with several hospitals starting to generate revenues. In terms of our pharmaceutical business, the growth trend continued in Q1, with over 300% year-over-year backlog progress and RMB59 million new contract value, representing 125% year-over-year growth. Now, moving to Page 5, I would like to highlight one of the recent events at Burning Rock's Liquid Biopsy Conference. This was the first time we held this conference under our own brand name, which took place in early April. It was a two-day conference chaired by three fellows from the China Academy of Sciences with over 150 medical KOLs participating as speakers or panelists. The total audience for this virtual event exceeded 36,000 people, covering topics from liquid-based companion diagnostic registration pathways to new technologies such as MRD and MCED. Many concepts discussed were relatively new to doctors in China, and market education is crucial. Through this conference, we worked with doctors’ groups to promote awareness and understanding of new technology while hosting serious discussions about how they should apply to Chinese patients. Now let's move to Page 6. This graph illustrates the promising growth trend of our pharma business. As I mentioned, we saw the contract value double year-over-year in the first quarter, continuing from the trend we saw in 2021. Building on our risk portfolio, global registration capability, and excellent BD team are key factors that will drive continuous growth of our pharma business. That's a brief update on our recent progress, and I will pass it to Leo to discuss the financials.

Thanks, Yusheng. Just a quick highlight before we go into financials. On Page 9, we laid out our clinical program progress. For the 9-cancer study, the PROMISE study mentioned has completed enrollment and analysis, and we are submitting that to a conference this year, expecting to have a readout later this year. Additionally, the PREDICT study, which is larger, has over 50% enrollment despite COVID challenges. I wanted to quickly highlight these clinical advancements before going into our financials, which we'll cover three topics today: a review of our first quarter, the latest trends and operating numbers in light of COVID concerns, and our progress regarding optimizations in operating expenses. Moving to Page 22, we continue to demonstrate strong growth even with COVID challenges. In Q1, we observed volume growth at 42% year-over-year, with in-hospital segment volume growing over 83% year-over-year. Our growth rate accelerated in the first quarter compared to the prior fourth quarter, where we had 33% overall growth and 62% growth in the in-hospital segment. We are pleased to see continued strength in the in-hospital segment despite the current COVID challenges, and we echo Yusheng's earlier points about new products contributing to this growth. Now, on Page 23, we want to provide greater granularity on our recent trends influenced by the recent COVID impact in China, particularly with the lockdown in Shanghai and school closures in Beijing. In January, our overall volume grew over 74% year-over-year, while in March, we started to feel the COVID impact, showing a growth of 17%. That continued to trend lower, with a 15% positive growth in April and an expected modest decrease in May, roughly in the single-digit range. Excluding Shanghai, overall volume growth was up 33% and in-hospital growth was triple digits for April. This demonstrates our strong performance outside of Shanghai even as the COVID impact remains significant. Moving to Page 24, I am pleased to report that our quarterly revenue growth in Q1 2022 reached 27% year-over-year, which is higher than the 12% growth from the fourth quarter of 2021. This accelerated growth was driven primarily by volume increases. By segments, revenue growth was spearheaded by the in-hospital segment, which soared by 69% year-over-year, outpacing the previous year's growth rate of 25%. Our pharma revenue also saw remarkable growth, continuing to ramp up due to a strong backlog. Regarding margins, our gross margin this quarter hit 64.6%, which, excluding depreciation and amortization, gives a non-GAAP gross profit margin of about 68.4%. This marginal decrease was primarily due to inventory write-offs; however, if we exclude that, the gross profit margin would have been around 72%, consistent with our typical levels. As mentioned in our last earnings call, our operational expenses were optimized as of the end of 2021, and we expect greater operational efficiencies moving forward. Sequentially, our OpEx dropped, with R&D expenses down 8% quarter-over-quarter and sales and marketing expenses decreasing by 14% due to reduced staff and conference expenses given the shift to virtual engagements amid COVID. Our Liquid Biopsy Conference was an effective engagement tool that still attracted a large number of physicians, although in a lower-cost format. General and administration expenses slightly decreased as we optimized our spending. In terms of share-based compensation expenses, most of these have a predictable nature without market fluctuations complicating timing. Looking at our cash position, we ended the first quarter with a healthy cash balance of RMB 1.34 billion or about $211 million, with a reasonable burn rate reflected in an operating cash flow of RMB 144 million for the quarter. This places us in a strong position moving forward. Overall, we are optimistic about our full-year guidance considering strong first-quarter performance and the anticipated reduction in COVID impact, especially as Shanghai looks to reopen. We remain committed to achieving robust growth for the remainder of the year. That concludes the prepared remarks, and now I will pass the line back to the operator.

Hi. Thanks for taking the questions. First one on biopharma, how much of the accelerating pharma growth is being driven by your MRD monitoring solutions versus therapy selection? And if you look at the mix of your prospective versus retrospective biopharma projects, how should we think about the pace that you can convert the biopharma contract backlog to revenue here in 2022 compared to 2021?

So far, if you look at our pharma business, it is mainly contributed by therapy selection. As I mentioned, we just launched the MRD in March. We think that MRD will positively impact our pharma business, but that will likely take several months or even up to a year to be fully realized, as the Chinese pharmaceutical and biotech companies can often be slower to adapt compared to their U.S. peers. However, we are very positive about the potential of MRD to enhance the pharmaceutical contracts and revenues. Leo can provide further details.

Sure. For this year, we expect high-double-digit growth in the pharma segment. Much of that growth is driven by the backlog projects we have signed already, giving us some visibility. We aim to convert more of these projects into revenue this year.

Great. Second one, just to be curious, did the Chinese lung cancer clinician consensus highlight a specific data set or clinical evidence that spurred the guideline update for MRD monitoring in non-small cell lung cancer patients? And do the updated guidelines recommend MRD testing only for relapse risk prediction in patients that have completed any adjuvant therapy regimen and are in remission, or does it also include the use of MRD tests to guide decisions about adjuvant therapy?

Sure. Yes. Thanks for the question. It's indeed a very interesting consensus. We were pleasantly surprised that the Chinese lung cancer physicians are adopting the MRD concept so quickly. The consensus calls primarily for relapse or prognosis prediction, rather than for guiding adjuvant therapy as there hasn’t been enough interventional evidence deemed sufficient by clinicians for the lung cancer realm yet. Still, the consensus is encouraging, as it calls for more clinical trials or studies to begin embedding MRD measures in as many interventional clinical trials as possible, especially when collaborating with drug companies. Ultimately, once they have more interventional evidence, the consensus or guidelines may be updated to include recommendations for adjuvant therapy.

That's very helpful. Thank you. One final question: in April, central lab revenues saw a dip, understandably so, but in-hospital growth doubled to over 100% growth year-over-year compared to the prior month. Can you elaborate on how the central lab and the in-hospital businesses interact? Is any of that growth in-hospital coming at the expense of the central lab business? Is there any cannibalization?

Yes, I can address that question. Initially, in our business, there was no in-hospital model. For any new technology or product introduced to the market, we began with the central lab model, speaking directly to physicians. As technology and products matured, it became more feasible to transition to an in-hospital model. From our long-term observations, there is significant synergy between these two models. Clinicians sometimes feel hesitant to send samples outside the hospital, so the in-hospital model makes it easier for them to prescribe directly from their systems. When we implement our platforms in hospitals, we generally see growth in both the central lab and in-hospital models. While there may be a slight drop in the central lab model due to COVID-19 challenges, our long-term outlook suggests that new and mature products will increasingly favor the in-hospital model.

Great. Thanks for taking my questions and nice update.

Thanks, Max.

Thanks for taking my questions, and congrats on good growth in the first quarter. I have a few quick questions. First, regarding the in-hospital segment, could you explain the drivers behind the robust growth? Specifically, how much comes from flagship partner hospitals versus mid-sized hospitals, and how much did the big panel NGS and other new products contribute?

The drivers for in-hospital growth are primarily convenience. It's more convenient for doctors to prescribe. Furthermore, hospitals are encouraging doctors to utilize in-hospital labs, and some hospitals are less inclined to send samples outside the hospital. We also see that more high-priced and comprehensive panels, including some liquid biopsy panels, are being integrated into these hospital labs, which significantly contributes to the revenue growth. Does that answer your question?

Yes. That’s helpful. My next question is about the pipeline. Are there any COVID-related delays in terms of patient recruitment or increased recruitment costs that we should anticipate? Also, could you remind us of key upcoming milestones?

Yes. The recruitment for both our early detection PREDICT trial and the PREVENT trial has been affected by COVID-19 to some degree. We anticipate a few months of delay for PREDICT's recruitments, which may delay our expected data readout from the end of this year or early next year. The initiation of the PREVENT trial was also delayed for a couple of months due to COVID, primarily administrative delays, but we plan to resume that study soon.

Thank you. Just one last question from me. Can you provide some insights on projected losses or cash burn for the next few years?

Looking at our cash balance and burn rate, we have a solid two-year cash runway ahead. We have some flexibility to adjust as circumstances require. We are content with our current cash position and focused on improving operational efficiencies, aiming for better visibility regarding our EBITDA progress. While we don't have formal guidance yet, we expect overhead to trend down gradually over time, though not necessarily in a straight line.

Understood. That's all from me. Thanks a lot.

Thank you.

I'm showing no further questions at this time, I would now like to turn the call back over to our speakers for any closing remarks.

Thank you, operator, and thanks everybody for attending today. Any questions please do come back to us and thanks again for your time.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.