Burning Rock Biotech Ltd Q3 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Burning Rock 2022 Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there 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 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, targets, confidence, 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 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. And now I would like to hand the conference over to your main speaker today, Yusheng, CEO. Please go ahead.

Thank you. Welcome to Burning Rock’s 2022 Q3 conference call. I'm Yusheng Han, the CEO and Founder of Burning Rock. Our team today also has Shannon Chuai, Leo, and Joe. Q3 was a strong rebound from Q2 for Burning Rock mainly because of the reopening of Shanghai. Though we have seen some signals of softer regulation of COVID, we don't think that the economy can fully recover in Q4. Therefore, the first thing I want to say is that we will adjust the guidance this year to 5% growth despite the Q3 rebound. Then let's turn to Page 3 about the highlight of our recent progress. We listed on the London Stock Exchange recently to better position in the capital market. In terms of our performance, we recorded a 22% year-on-year revenue growth in Q3 and a strong rebound of 36% quarter-on-quarter. Every therapy selection and the in-hospital model volume is back to growth in Q3 with a 24% year-on-year increase, alongside our successful reduction of selling expenses by 15% in Q3 versus Q2. This presents a good chance for profitability with Onco deal, a relatively mature business. Since we launched the MRD product in March this year, its growth trend has been significant, and volumes more than doubled in Q3 compared to Q2, reaching 700 tests. The revenue from our biopharma sector grew triple digits year-on-year to RMB 15 million, with our backlog continuing to build, as newly contracted product value increased by 38% year-on-year to RMB 198 million during the first nine months of 2022. OverC is the name of our multi-cancer early detection product launched this year, and in Q3, we performed 264 tests with OverC. Although this number is not huge, we are excited because we are gradually figuring out how to convince doctors and consumers in Class 3A hospitals. It's challenging and time-consuming to sign contracts with those hospitals; even after signing, it usually takes three months to educate doctors on how to prescribe the test to consumers, as it is a new type of product. Making OverC available for sale is very meaningful for us. I want to emphasize that operating efficiency will be our primary focus going forward, both commercially and for pipeline assets. We expect cash outflows to drop significantly next year compared to 2022. Now let's turn to Page 4. This page shows what we do, and many may be familiar with it. I want to remind our investors that Burning Rock started its therapy selection business in 2014 and has grown to become a market leader in this segment. In the past eight years, we have expanded our technology and business to early detection, MRD, and pharma collaborations. Let’s turn to Page 5 to discuss our business objectives. We have been discussing this several times, and by comparing it with the recent progress I talked about on Page 3, we can easily see that we are heading in the right direction on all key objectives like therapy selection, cost-effective savings, MRD pipeline development and commercialization, biopharma business development, and also the clinical development and commercialization of multi-cancer early detection. I will now turn to pipeline development and hand it over to Shannon. Before I hand over to Shannon, I’d like to go through a management change we announced recently. Shannon, our Chief Operating Officer, is going to take on a new role as Chief Science Officer, relinquishing her COO role starting November. Shannon has been with us since 2014, as a board member since 2016. She has played two important roles: managing our therapy selection product, MRD, and early detection, leading scientific collaboration with medical care, developing communication strategy with regulatory bodies, and driving the expansion of our product pipeline. And the operational side of her role included managing cross-department collaborations. Given the complexity that has taken place in our business scope, especially the expansion of new products, we believe her time is best focused on product development and regulatory matters. We believe the leaders and teams we have in place are well-equipped to execute these objectives. There’s no change on our Board, and Shannon will continue to serve as a Director.

Okay, yes, thank you. First, I’d like to emphasize that I’m proud to see the growth of our talent base and the capable team of leaders we have. This allows me to focus more on providing scientific insights in new product development. Next, I’d like to discuss the PROMISE study for our cancer early detection program, which we recently completed and presented at the ESMO Conference in September. First, let’s go directly to Page 17 for a recap of what the PROMISE study is. The PROMISE study is our proof of concept study, crucial for the development of our 9-cancer test. It is a rigorously designed prospective multicenter age-matched case-control study, which included 2,035 participants. Notably, we designed PROMISE as a multi-omics study where cfDNA isolation, cfDNA mutation, and multiple protein markers in serum were tested in parallel, and an integrated model was developed to assess how these biomarkers complement each other in improving sensitivity while maintaining high specificity. Moving on to Page 18 for the main findings of PROMISE: in the validation set, we demonstrated an overall sensitivity of 83.7% and specificity of 98.3%. The sensitivity and confidence intervals for each cancer type are shown in the plots. This 9-cancer test not only covered three additional cancer types—stomach, head and neck, and biliary tract—but also showed improved sensitivity for some previously covered cancer types, like colorectal cancer, while maintaining similarly high specificity as the 6-cancer test reported in the THUNDER study. This gives us confidence moving forward to the much larger scale, PREDICT study for the 9-cancer test. Furthermore, the 9-cancer test demonstrated a 90.9% accuracy for the top two organs for tissue origin prediction in the PROMISE study, which aligns with what was shown for the 6-cancer test in THUNDER, indicating promise for extending our algorithm to even more cancer types in the future. In comparing the three omics data dimensions, methylation contributed more than 90% of the total sensitivity, consistent with our hypothesis and expectations. Overall, we believe the PROMISE study was a very successful proof of concept, with more details available in our ESMO poster if you're interested in learning more. Additionally, we are actively recruiting for the PREVENT study concerning our 6-cancer test, which is focused on clinical utility establishment. We expect interim data from the PREVENT study in the second half of 2023. On the other hand, the accrual of PREDICT, PRESCIENT, and other MRD studies are progressing as planned, with no particular new information to release for these studies this quarter. I’ll stop here and pass it on to Leo to walk you through our financials.

Thank you, Shannon. First, let’s recap the COVID impact in the third quarter, considering the sensitivity of our business volumes on COVID disruptions in China. We experienced a lockdown in Chengdu for about two weeks at the end of August, along with some outbreaks in Northwest China and temporary restrictions in a few Northern cities. Overall, apart from Chengdu, other large cities important to us did not experience prolonged disruptions. With that backdrop, we had a good opportunity to achieve growth in Q3, achieving solid results. Volume growth returned to normal, as shown on Page 22, reflecting strong growth from the second quarter. The in-hospital channel had another good quarter, growing 24% year-over-year and 36% quarter-over-quarter. The Central lab MRD volume growth drove the overall volume increase in this channel. Now, turning to our financials on Page 23: our revenues grew 19% year-over-year in the third quarter, which is strong and above average considering the challenges on the ground. For reference, our listed peers in the PCR space showed a drop of 16% year-over-year in Q3. Anecdotal evidence in the NGS space also suggested a tough quarter for our peers in Q3. We believe our in-hospital strategy is key to our above-industry growth in Q3, supported by new products, chief among them MRD. Our pharma revenues exhibited strong year-on-year growth, although there was some volatility quarter-to-quarter due to the lumpiness of projects and their dependencies on pharma clients’ clinical study progress. This year, pharma revenues have significantly contributed to our top line growth, having increased our backlog multiple times in 2021 due to our solid product suite and our experience in companion diagnostics development. Notably, the pharma segment operates efficiently in terms of sales productivity per head and is therefore a positive contributor to our operating margin. Looking at our operating expenses, in addition to strong top line growth, we demonstrated improvement in operating efficiency in Q3. First, selling expenses dropped 15% compared to Q2, reflecting initial progress from our sales reorganization. We are optimizing our salesforce productivity, and we expect selling expenses to continue trending down. Next, our general and administrative expenses also began to decrease by 9% quarter-over-quarter, primarily due to a decrease in staff costs, aided by tighter cost controls. Meanwhile, R&D expenses rose 14% quarter-over-quarter, as our early detection clinical programs advanced as planned in Q3, recovering from COVID disruptions in Q2. In comparison to Q2, R&D expenses dropped slightly due to reduced non-core projects. Looking forward, we expect continued efficiency gains, which will enhance our cash flows. We predict significant reductions in our cash outflows for 2023 compared to 2022, with more specifics to be provided at our 4Q results as we finalize our budget for next year. As of the end of September, we have a cash balance of RMB 1 billion, or approximately USD 143 million. Given our projected burn, we believe this cash position will sustain us for the next three years. Regarding our revised guidance for 2022, this change is primarily driven by the recent COVID wave and the disruptions we are currently seeing, which started with the national holiday period in October. Case numbers have persisted above 10,000 in many key cities, adversely affecting our business, particularly in Guangzhou, where our lab is located. Notably, Beijing and Chongqing are also experiencing rising case numbers. While we recognize the adjusted COVID response announced on November 11, which advocates for a more targeted lockdown strategy, we anticipate the high number of cases will persist for an extended period, impacting patient flows and our business volumes. To be cautious, we project a year-over-year decline in Q4, bringing our full-year guidance to a 5% increase. This marks a decrease from the 17% year-over-year growth we achieved in the first nine months of 2022. We remain hopeful about China's careful transition towards reopening, but we must observe the situation for at least one more quarter, given the recent policy adjustments. This concludes our prepared remarks, and we would like to open the floor for questions, please.

Now I'm going to take our first question. And the first question comes from the line of Alexis Yan from Morgan Stanley. Your line is open. Please ask your question.

Thank you for taking my question. I have two quick questions. Number one is on the revised guidance for Q4 and the full year. I understand that Guangzhou mainly impacts the Central lab segment, wondering how the other segments, including in-hospital and the pharma, R&D segments, have been trending in Q4. My second question is about the PROMISE study readout release; can you remind us of some of the key readouts or other catalysts ahead?

I can answer your first question. Our business is still operating, which is fortunate for us. However, the impact is significant, as Guangzhou is important for Burning Rock’s overall volume, including both the in-hospital and Central lab models. As Leo mentioned, the business in Guangzhou remains intact, and the pharma side is less affected. For the multi-cancer early detection segment, we have seen impacts in Chongqing, where we operate two hospitals. Now I’ll turn to Shannon for your second question.

Sure. The PROMISE study is a proof of concept study for a 9-cancer test. Originally, we planned three tiers of products for our multi-cancer early detection product line: the 6-cancer test, 9-cancer test, and 22-cancer test. With the PROMISE data, we are having intensive internal discussions regarding our adjusted strategy for future product development, so I can’t provide more specific readouts for PREDICT and PRESCIENT at this time. However, I can assure you that the accrual process for both PREDICT and PRESCIENT studies is progressing well. As for the 6-cancer test, the PREVENT study started approval a couple of quarters ago and remains on track, with strong confidence that we will complete at least half of the data by the end of next year. We’re optimistic about the interim analysis to show whether the 6-cancer test's performance holds in the intended use population and its clinical utility.

That's very clear. Thanks a lot. That's all my questions.

Thank you. Now we're going to take our next question. And the next question comes from the line of Max Masucci from Cowen. Your line is open. Please ask your question.

Hi, thanks for taking my questions. Last week, one of the U.S.-based MRD providers gave a quarterly breakout of their MRD test, which has been in the market for some time. It’s great to see Burning Rock’s strong growth and the doubling of MRD volumes quarter-over-quarter. My question is, should we expect strong sequential growth in MRD monitoring volumes throughout fiscal 2023? Additionally, what percentage of the MRD volumes today are for lung cancer patients versus colorectal, esophageal, or other cancer types?

We believe that MRD will continue to grow, but I cannot specify the exact growth percentage. We think the main business will primarily be focused on the in-hospital model in the future. We're striving to make the MRD test available in this model, as the MRD test requires a tissue sample first. Hospitals are becoming increasingly stringent about sending samples out. So if we successfully establish the test in hospitals next year, we anticipate significant growth. Regarding cancer types, I’ll ask Shannon to provide more detail.

Currently, about 60% of our tests are from lung cancer, 30% from colon cancer, and the remainder from other cancer types. Regarding the growth trajectory for MRD, we continue to hold strong confidence in its potential. The market is still in its early phases in China, and while growth may not be constant, we see it occurring in phases. We expect another significant wave of growth as the clinical trials for utility establish evidence in lung and colorectal cancer, which is already starting in China. We believe that as our MRD platform runs in hospitals, we will be well-positioned for the next wave of growth.

That's fantastic. Regarding the BeiGene collaboration, I’d like to understand how our MRD test is utilized in the clinical trial. Is it used to guide clinical trial enrollment or to identify patients likely to benefit from more aggressive treatment after surgery? Is cfDNA status in the test being utilized as a surrogate endpoint for disease-free survival?

Due to the characteristics of the collaboration, we're limited in sharing specific trial details. However, I can say that the BeiGene collaboration is strategic and not restricted to one or two specific trials. BeiGene has invested considerable time researching and testing MRD products across numerous companies, including us. Our brPROPHET has been selected for collaborative efforts to assess MRD in their clinical trials. Currently, the trials primarily utilize MRD as an observational biomarker, embedded in ongoing studies, as both BeiGene and the doctors are interested in incorporating MRD data. We foresee that in the future, MRD could be utilized as a strategy to enrich trials for patients who would benefit from adjuvant therapy, but its use as a surrogate endpoint may not be applicable in the near future.

I agree we need more data before such a purpose can be incorporated. My last question is about the biopharma contracts; they have been growing at a rapid pace. What are the underlying drivers for the acceleration in biopharma contract wins? What percentage is MRD versus therapy selection, and are there trends driving this strength in biopharma contracts?

Currently, revenue is primarily driven by Companion Diagnostics. However, we observe that multinational companies are increasingly focused on MRD. While local pharma and biotech are still concentrating on Companion Diagnostics, large global pharmaceutical companies are increasingly collaborating with Burning Rock on MRD investigations. Although we do not foresee a change in trends in the near term, challenges remain as capital market conditions have not been favorable, which may impact small biotech, a crucial revenue resource for Burning Rock.

Thanks for taking my questions.

Thank you. There are no further questions. This concludes the conference for today. Thank you for participating. You may all disconnect. Have a nice day.