Burning Rock Biotech Ltd Q2 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Burning Rock 2022 Q2 earnings conference call and webcast. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to slowly press star, one and then one on your telephone. You will then hear an automated message advising that your hand is raised. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link at any time during the conference. Before we begin, I’d like to remind you that this conference call contains forward-looking statements within the meaning of Section 21(e) 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, 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 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 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. Please note that today’s conference call is being recorded. I would now like to hand over to your first speaker, Mr. Yusheng Han. Please go ahead, sir.

Thank you, and thanks for joining Burning Rock’s Q2 2022 conference call. I’m Yusheng Han, the CEO and Founder of Burning Rock. Today we have our COO, CTO and CFO in the meeting. We know that Q2 was really a hard time for most companies in China due to the complete lockdown of Shanghai in April and May and a hard lockdown of Beijing in May. Despite these difficulties, we still recorded a year-on-year increase in Q2 in terms of revenue. The growth was contributed by strong in-hospital revenue growth outside of Shanghai and Beijing, new product lines such as MRD products, and the pharma business. Let’s review our business outline and the progress. Our COO, Shannon, will go through the development of our product lines, and after that, our CFO, Leo, will go through the financials. Let’s turn to Page 3. To get a basic introduction of Burning Rock, we started with therapy selection business in 2014 and have grown to be a market leader in this segment. The leading position has laid a good foundation and given us advantages moving forward to new businesses of early detection, MRD and pharma collaborations. Let’s turn to Page 4, and this is for our business objectives in the future. Therapy selection is a segment that we have been working on for eight years. In the past years, our main goal for this segment is to expand market share in both in-hospital models and central lab models. The in-hospital model now is operating profit positive while central lab is still developing. Now we are strongly leaning our strategy to the in-hospital model. We have set a clear goal of making central lab profitable in 2023. With new clinical utility evidence and the technology development demands maturing in personalized panels, we initiated trials in lung, CRC and other cancers. This will create substantial differentiation in our product and will not be easy to replicate like therapy selection. The pharma business is growing strongly with significant needs for both therapy selection and MRD, and its strength highly depends on institutional values such as quality and registration capabilities. The business has been profitable and strong growth continues. For multi-cancer early detection, we believe that it is the ultimate solution for cancer early detection, powered by multi-dimensional testing including liquid biopsies plus NGS plus machine learning. Multi-cancer early detection has better performance versus single cancer early detection, and in a real-world scenario, we cannot draw 20 tubes of blood if we want to detect 20 types of cancers. Thus, we invested significant resources into technology development and clinical trials. We believe that it will build strong barriers that can last for many years. The good news is that the conversation with NMPA regarding multi-cancer early detection registration has improved recently. Let’s turn to Page 5 for our recent progress. The in-hospital model saw strong revenue increases. Regions excluding Beijing and Shanghai grew over 60% year-on-year in Q2 in terms of volume. The new products, including MRD, myChoice, and DetermaRx, helped us gain market share in the central lab model. At the end of Q2, we optimized the operational costs and started to reduce the commercial investments in the oncology business unit as well, and due to the excellent execution, the impact on the revenue is very limited, so we are in a much better position to grow through the winter. The commercial ramp-up of MRD is strong since we launched the product in March, especially after the data readout on non-small cell lung cancer and CRC at AACR. The revenue from biopharma grew triple digits year-on-year to RMB 18 million, contributing to 14% of overall revenue. The dialogues continue to build with contracted project value growing 49% year-on-year to RMB 158 million during the seven months in 2022. For early detection, the data of our PROMISE study was released, which involved over 2,000 participants for a nine-cancer test reading at ESMO in September. For the clinical programs of early detection, the PREVENT study was launched, which is China’s first multi-cancer prospective interventional study with 12,500 participants. Let’s turn to Page 6. On this page, I just want you to see the graph to illustrate that the pharma business is growing strongly. The green columns represent the contribution of contract value in 2021 versus 2020, and the blue columns are contribution of contract value for the first seven months of 2022 and 2021. This achievement is notable given that Shanghai was totally locked down in April and May, and as we note that Shanghai is the headquarters for many biopharma companies, we are proud of this performance. That’s basically about the outline for Burning Rock, and I will pass to Shannon to talk about our recent developments.

Okay, thank you Yusheng. Now I’d like to move onto Page 8. First, I want to take a minute to reiterate the importance of MRD tests on early-stage patients, as the establishment of different clinical utilities will ultimately drive market growth. On this diagram, you can see that an early-stage patient could go through neo-adjuvant and/or adjuvant therapies before and after surgery, and then hopefully a long remission period afterward. As we all know, the most well-established MRD utility is prognosis prediction, and multiple studies across different cancer types and technology platforms have validated the strong and robust association between MRD status and patient prognosis at both landmark and longitudinal time points. Such utility is marked as green on this diagram. However, this prognosis utility itself is probably not strong enough to drive a very high penetration of MRD tests because it may be seen as informative but not exactly actionable for clinicians. That said, we are now starting to see truly actionable utilities of MRD tests to evolve, which are the ones labeled red on this diagram. Among these utilities, the most important and immediate one is to differentiate low-risk and high-risk patients based on the landmark MRD right after surgery and to commence escalated or de-escalated adjuvant therapy regimens. If clinical trials in the coming years can validate such MRD-guided treatment selection strategies, then the penetration of MRD tests among early-stage patients would become very significant. On Page 9 and Page 10, we show two examples of results from trials that would serve as validation of the MRD-guided treatment strategy. The first study, Page 9, is the IMvigor010 study, a Phase III trial of atezolizumab in bladder cancer patients undergoing maintenance treatment. The entire ITP population in this trial did not show any efficacy from the treatment compared to the control arm. However, if we zoom in, we can see that only the 39% MRD-positive patients at the landmark benefited from the treatment, which is strong evidence demonstrating the MRD utility to identify high-risk groups for intensified therapy. Of course, this MRD analysis in this study was retrospective, prompting the initiation of IMvigor011 as a prospective study that will confirm this utility in a CDX type of setup. Page 10 illustrates a more recent example — the DYNAMIC study in colon cancer where patients were randomized into a standard of care or ctDNA-guided treatment strategy. Recently, at the ASCO meeting, it was reported that the MRD-negative patients in this study who underwent less adjuvant chemotherapy achieved similar or non-inferior recurrence-free survival compared to the standard care group. If this is validated repeatedly across multiple studies, it would indicate that MRD-negative status indicates cured patients post-surgery who can be exempt from further chemotherapy. Studies like these will undoubtedly push MRD into a CDX-level biomarker, increasing its penetration over time. Because of these advancements, we are witnessing increased endorsement of MRD in the clinical community, including mentions in the MCC and colorectal cancer guidelines, as well as ESMO recommendations. We previously displayed the consensus among Chinese lung cancer doctors for MRD, and this particular consensus has been widely discussed within the Chinese medical community. As far as we know, a consensus on MRD in colorectal cancer among Chinese oncologists is also being written and should be expected in the near future. On Page 12, we outline the development plans for brPROPHET, a personalized MRD assay launched a few months ago. The initial market response has been promising, which our CFO, Leo, will cover in later slides. We developed brPROPHET to achieve an LOD of 0.004%. We released initial clinical validation data on lung cancer and colorectal cancer cohorts at AACR. The bottom half of Page 12 lists our additional clinical programs and expected data readout timelines. For instance, the observational studies for lung cancer are outlined at the top, where I will present key findings on the next page. Two interventional studies are planned for launch later this year, and we expect data readouts from these studies regarding MRD-guided treatment utility in lung cancer by 2025. The timeline for colorectal cancer is similar; we expect to report results from a large observational study in early 2024, and we are also initiating interventional studies that should yield data readouts by 2026. In other cancer types, multiple observational studies have begun, mainly in esophageal and breast cancer, with the earliest anticipated data readout expected in 2024. Our expectations for MRD market growth in China align with these clinical program timelines, indicating that from 2022 to 2024, we foresee early market adoption primarily driven by the prognosis aspect of MRD utility. Between 2025 and 2027, as more interventional studies conclude, we anticipate a second wave of strong MRD penetration growth during that period. Now let’s turn to Page 13. Here, I want to briefly share key results from the MEDAL cohort. In the MEDAL study, which included about 200 participants, brPROPHET was compared to a fixed panel approach in terms of landmark and longitudinal MR detection. We observed that brPROPHET identified nearly three times as many true high-risk patients as the fixed panel assay at the landmark time point. This demonstrates the sensitivity of brPROPHET as a personalized approach. Moreover, longitudinal data revealed near-perfect prognosis for MRD-negative patients over three years of follow-up, indicating that repeated application of brPROPHET can accurately identify patients likely cured. The differentiation in prognosis between MRD positive and MRD negative patients identified by brPROPHET remained consistent across all stages. This validates the sensitivity and accuracy of brPROPHET. I’ll skip Page 14, which discusses our colorectal cancer MRD data since we talked about it last time, and let’s proceed to early detection. We have covered our early detection development roadmap multiple times, so I’ll be brief today. Referencing Page 17, there are two major updates here. First, as Yusheng mentioned, the PROMISE study for our nine-cancer type assay has been completed, with results to be released at the upcoming ESMO conference. In short, we successfully expanded the cancer model from six to nine types and showed promising improvements in sensitivity while maintaining high specificity. Additionally, we attempted to incorporate other data types, including DNA methylation and protein markers, to assess their impact on different cancer types. We will share detailed performance results from the PROMISE study in our next call, but you are welcome to read the specifics at ESMO. The other update is the PREVENT study, which is a prospective study targeting a symptom-free population. It’s China’s first of its kind in cancer early detection with over 10,000 participants. This study is designed to test the performance of both our six-cancer and nine-cancer assays. We began patient enrollment in Q2 and are seeing positive accrual progress. That’s all from me. Now I’ll turn it over to our CFO, Leo, to walk you through our financials.

Great, thanks Shannon. Let’s move onto the financials, starting with Page 22. For the second quarter, as Yusheng mentioned earlier, we had two primary factors at play: COVID impacts and our underlying growth momentum. In the next two pages, we’ll separate these factors to provide clarity on our volume trends. First, let me recap COVID’s impact in China during Q2. It has wreaked havoc; Shanghai was locked down for over two months, with other major cities also facing shut-downs or partial lockdowns. Anecdotal peer data indicates that our industry was generally down year-over-year on volumes. Our volume data reveals that the in-hospital channel was heavily impacted since Shanghai served as a significant market. The central lab held up reasonably well, particularly supported by new products, notably MRD. Now on Page 23, we provide further granularity on trends over time and across different regions with varying COVID impacts. On the left, we see that as MRD began generating volumes and post-launch in March, it supported a better industry uptrend in our central lab channel through Q2. We saw robust momentum for MRD adoption among the physician market in China. On the right-hand side, the in-hospital segment, heavily impacted by Shanghai and Beijing, shows a gradual recovery in July; however, we are not back to normal. We maintained strong performance in regions with smaller COVID impacts, and we highlight such growth here by breaking out our performance outside Shanghai and Beijing, where we experienced solid double-digit growth throughout Q2. Now turning to our financials on Page 24, we note that in revenues, we were up 3% year-over-year but down slightly on a sequential basis. COVID impacts have significantly depressed in-hospital revenues, weighing on our overall revenue growth. Outside of in-hospital, our central lab was down 2% year-over-year but up 6% sequentially compared to Q1. The MRD product, launched in March, drove sequential growth despite COVID's challenges. Additionally, pharma revenues continued to rise as we saw the benefits from the backlog we established previously, contributing 14% to our total second quarter revenues. Pharma revenues will generally be recognized as we execute studies for our pharma clients over time, and there can be lumpiness due to variances in their clinical study progress, something we've identified in others in the U.S. industry. Importantly, we see 100% of our revenue comes from precision oncology testing; there are no COVID-related revenues in our top line to concern ourselves with moving forward. Regarding our margins, our non-GAAP gross profit margin remains stable at 70% for Q2. Now for operating expenses, particularly our R&D line, we are increasingly focused on operating efficiency, reducing spending on maintenance or non-core projects while prioritizing key R&D on early detection. Prevailing enrollment slowdowns due to COVID in Q2 brought down clinical study-related expenses. For sales and marketing, the biggest component is our headcount. As Yusheng mentioned, we aimed to achieve higher sales efficiency and undertook an organization optimization program in Q2. Consequently, headcount in our oncology sales organization was reduced both sequentially and year-over-year. There were one-off restructuring costs influencing these numbers; however, we expect a downward trend in operating expenses as we work towards efficiencies. We also incurred one-off items in our general and administrative line, predominantly from headcount, which has also begun to trend down sequentially. We remain committed to improving our operating efficiency over time. In terms of guidance, the COVID situation in China remains fluid with recent lockdowns surfacing in several cities. Should COVID worsen or significant lockdowns occur, we expect negative impacts on our revenue. However, we see strong underlying momentum coming from several areas: market share gains through the in-hospital strategy, the ramp-up in MRD volumes, and a considerable backlog of pharma projects that are converting into revenues. As such, we retain our current guidance for the full year, calling attention to the lingering risks presented by COVID. Lastly, regarding our cash position, we report our operating cash outflow on this page as well. As of the end of Q2, we maintained a robust cash and investments balance of RMB 1.15 billion or roughly USD 172 million, supporting us beyond the next two years. This is the largest cash balance in our industry, which will significantly bolster our long-term product development efforts towards early detection, giving us the longest cash runway in the sector. That concludes our prepared remarks, and we are happy to open the floor for questions.

We have a question from the phone line. Please stand by. The question is from Max Masucci from Cowen. Please go ahead with your question; you are now live.

Hi, this is Stephanie on behalf of Max. Thanks for taking my questions. To start off, Leo, can you speak to some of the key revenue drivers and any assumptions baked in for the second half of this year? What gives you confidence in maintaining the full year 2022 guidance, and are there any potential sources of upside to keep in mind?

Yes, when we set our guidance at the beginning of the year, we included a buffer for COVID, which has been used up in Q2 due to the conservative estimate we made. If COVID outbreaks do not recur and considering the underlying trends, we are confident in our guidance. There was a significant drop in Shanghai's performance, and should conditions normalize, we will likely see pent-up demand return. Besides that, the underlying growth from pharma and MRD, along with additional gains in the in-hospital segment, seems strong, so while COVID remains our biggest variable, we maintain confidence in our guidance.

Got it, understood. That’s helpful. Following the lockdowns, could you provide more insight into the current conditions in Shanghai and Beijing? You mentioned pent-up demand. Can you elaborate on that and share how much these cities contribute to your total revenue?

Yes, they represent a significant share, more than half of our in-hospital volumes. For overall volume, they account for roughly a quarter. We've observed improving trends; however, we aren't back to full normal yet. If there are no further setbacks, we do expect patients to return, and many patients travel to Shanghai and Beijing from outside regions, which will also recover volumes we haven’t been able to capture fully.

Got it, thank you for that information. If I could squeeze in one more question: it's encouraging to see the uptick of your MRD test since its launch in March, as well as the consensus view on MRD for lung cancer among Chinese physicians. When might we expect a similar consensus for colorectal cancer, and are there near- to mid-term catalysts that could further drive MRD adoption?

Yes, the consensus for colorectal cancer is currently being actively discussed, with multiple conferences focused on MRD and the consensus formation. While I can't predict the exact timing of the final consensus, the ongoing discussions are significantly raising awareness in the community, making us optimistic that the colorectal cancer clinical community is rapidly catching up to the lung cancer community. In the near future, the results of studies like DYNAMIC and CIRCULATE-Japan will be critical. The DYNAMIC results have been received positively and are deemed promising. These studies will provide essential answers to prevailing questions, pushing MRD adoption further. Additionally, pharmaceutical companies embedding MRD in their drug investment studies, such as the MERMAID-1 and MERMAID-2 studies from AstraZeneca, will also be pivotal; their results will have a significant impact on the perception of MRD's value.

Got it. Thank you so much for that insight, Shannon. Just one quick follow-up regarding the guidance — does it factor in the increase in pharma revenues observed in the first half of this year when you set the guidance range?

Yes, pharma revenues have been on track or even slightly beating our internal forecasts so far this year, which is encouraging. This has been a contributing factor to our outperformance within the industry. However, I want to clarify that the visibility we have was built upon the existing backlog, which continues to grow, providing us substantial runway moving forward.

Got it, understood. Thank you again for answering all my questions.

Thank you, Stephanie.

We have no further questions at this time. I hand back to the conference to Leo. Thank you, please go ahead.

Thanks everybody for attending our earnings call today, and if you have any questions, please do come back to us. Thanks very much for your time.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect your lines. Thank you.