Burning Rock Biotech Ltd Q4 FY2022 Earnings Call

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. I would now like to hand the conference over to your speaker today, Mr. Han, the CEO. Please go ahead.

Thank you, and welcome to Burning Rock's 2022 Annual Conference Call. I'm Yusheng Han, CEO and Founder of Burning Rock. Today, we also have our CTO, Joe Zhang; and CFO, Leo Li. Now let's turn to Page 3. In case there are some investors who are not familiar with Burning Rock, I would like to illustrate what we do. Our business started from tissue-based therapy selection in 2014 and then expanded to multiple directions of liquid biopsy, including liquid-based therapy selection, MRD, and multi-cancer early detection. We have three business units that provide products and services to doctors, pharmaceutical companies, and consumers. Now let's turn to Page 4. On this page, we will review 2022. Generally, we completed a profitability-driven organization optimization. The overall headcount has been optimized by 25%. Despite this, we still delivered strong growth in non-COVID quarters and achieved 11% year-on-year growth in 2022. We completed our listing on the London Stock Exchange, offering an alternative listing venue in addition to NASDAQ, which we believe is a significant corporate development providing a fallback solution for continued trading and listing of our shares in case of any delisting scenario from NASDAQ. We also noted the latest statement from the SEC in December that there is currently no risk of Chinese issuers being delisted, which is good for us. In therapy selection, we achieved 13% volume growth despite COVID challenges, driven by the in-hospital channel. The 9 genes panel was approved by NMPA providing a better tool for in-hospital models. This is our second approved NGS-based test by the NMPA, demonstrating our capability to work with them to bring innovative diagnostic products to market. In terms of MRD, 2022 was significant for clinical data publication. We provided initial readouts on lung and colon cancer at AACR 2022, followed by additional publications on colon and pancreatic cancer at ASCO 2023. We also expect additional publications on lung cancer this year at AACR. Commercially, we launched our brPROPHET, our personalized MRD product in March, and the volume of patients we are serving continues to increase rapidly. In the biopharma sector, the new contract value increased by 43% to RMB 263 million in 2022, with over 200% revenue growth attributed to strong backlog execution. For MRD, we were granted FDA breakthrough device designation, and the standard study for 6 cancer test developments was published in Annals of Oncology, a journal with an impact factor of 51. This represents another strong proof of our technology and product capability. The PROMISE study, which consists of 2,035 subjects, achieved completion and readout for 9 cancer test developments. The PREDICT and PRESCIENT studies, involving almost 17,000 subjects, are ongoing with 22 cancer test developments. Additionally, the PREVENT study, which is a prospective study of 6 cancer tests, was launched last year. Our CTO, Joe Zhang, will provide more details about our early detection study. Now, turning to Page 5, I would like to outline what Burning Rock aims to achieve in 2023. Our primary goal is profitability, with the aim to break even, excluding R&D expenses, during a quarter in 2023. This is critical as 2023 and 2024 are significant years for MCD R&D development. Secondly, we aim for continued revenue growth, targeting a 20% increase in our revenue for 2023. Our third goal is to maintain and extend our leading position in MCD as the number one player in China and a top player globally. The main focus of our R&D spending will be on MCD this year. Furthermore, I will break down our goals into four parts. For therapy selection, we will continue to improve our sales productivity by strengthening the in-hospital model. In terms of MRD, we will launch and install personalized MRD in top hospitals. However, operational difficulties make it challenging to implement this method in hospitals. The ongoing data model is essential for elevating MRD volumes. Thanks to our R&D and operations teams' efforts, we expect to launch the in-hospital model of brPROPHET soon. I believe it will serve as a strong growth driver for Burning Rock in the upcoming quarters. For Biopharma, the goal is to continue its profitable growth. With the new MRD platform and increasing international orders, we are optimistic about the growth of the biopharma business. Regarding the MCD PREVENT study, which entails a prospective study of over 10,000 subjects, we anticipate an interim readout in the second half of 2023. We will continue with the development studies of 22 cancer tests in PREDICT and PRESCIENT, while building regulatory pathways with FDA and NMPA, especially NMPA. Commercialization will proceed at selected top hospitals. Finally, on Page 6, I understand investors are concerned about our financial status. Our CFO, Leo, will elaborate more later. However, I would like to note that we are making significant efforts to reduce the cash burn rate. If there are no substantial new clinical trials for MCD, the burn rate should significantly decrease in the coming 2 years. If new trials commence, particularly under NMPA registration, this news will be even better. That concludes my presentation, and I will now pass it to Joe for an overview of our technologies and trials of MCD and MRD. Joe, please?

Thanks, Yusheng. I'm going to introduce some updates regarding the MCD and MRD. Let's turn to Page 8, which provides an update on Burning Rock's early detection technology development. Following the publication of our basic technology proof of concept in Nature Biomedical Engineering last year, we have recently made a significant publication concerning the THUNDER study, a trial involving six cancer early detection which we have been conducting over the past few years. Another key highlight is that we received regulatory breakthrough status, with the FDA granting us the breakthrough device designation earlier this year. This is a significant achievement for Burning Rock, and we are currently working closely with the FDA on the next steps toward seeking regulatory approval in the future. Turning to Page 9, this slide presents our early detection program and product development roadmap. For the six cancer early detection product that we oversee, we are actively conducting the PREVENT study, a prospective and interventional trial aimed at identifying its effectiveness with substantial participant recruitment ongoing. We hope to provide updates on the first phase readout later this year. Simultaneously, we are developing up to 22 cancer MCD products, which are linked to several clinical studies. We previously presented the PROMISE study in poster format at ESMO last year. Presently, we are in an intensive preparation stage for the PREDICT and PRESCIENT studies, which involve up to 17,000 individuals for these 22 cancer products. Let’s proceed to Page 12, where I’ll provide updates on Minimal Residual Disease (MRD). MRD is a crucial new business segment for Burning Rock over the past few years. Slide 13 discusses the utility of MRD testing. There are two types of utility: one is prognosis utility, which has already been well established in many clinical studies, and the other is actionable diagnosis, directing therapy. As seen in the U.S., some MRD products have received CMS coverage for their utility. Therefore, Burning Rock is pursuing various forms of utility for our MRD technology, brPROPHET, which utilizes whole exome sequencing to track up to 50 sites, creating a personalized panel for monitoring prognosis and therapeutic guidance. We launched this product last year and are nearing the one-year anniversary of its launch. Slide 15 outlines some MRG-related publications we have obtained. We are diligently working to secure more cancer coverage with our product. Last year, we presented a poster on non-small cell lung cancer at AACR, and we intend to deliver an updated study next month that will significantly increase the patient numbers involved. Regarding colorectal cancer, we have published two studies, one from last year and another ongoing. In ASCO-GI earlier this year in San Francisco, we presented initial data regarding this study. We are still actively collecting longitudinal monitoring data points to produce further insights in the future. We also conducted a pancreatic cancer small cohort study at ASCO-GI this year to showcase our capabilities beyond non-small cell lung cancer and colorectal cancer, demonstrating our potential in identifying MRD in varied cancer types. Slide 16 discusses our pancreatic cancer cohort, which is observational. We collected data from pre-surgery patients and followed up seven days and thirty days post-surgery. Notably, for pre-surgery pancreatic cancer, we achieved a 100% detection rate of ctDNA, highlighting the impressive sensitivity of our assay. Slide 17 provides further updates about colorectal cancer, mirroring the initiatives outlined previously. At ASCO-GI 2023, we already showcased data from 127 patients in the initial cohort. Currently, we have around 220 patient data accumulate from baseline assessments and ongoing follow-up. This technology has exhibited considerable sensitivity and specificity, potentially generating more utility beyond prognosis. I will conclude my part here and turn it over to our CFO, Leo, for the financial update. Thank you.

Thanks, Joe. I'd like to cover three topics. First, let me recap the fourth quarter 2022 results. Then, I will provide the latest trends in the first quarter of 2023, and finally, discuss our initial outlook for 2023. Starting with the fourth quarter recap on Page 20, we finished the fourth quarter stronger than we had previously anticipated. In November, we had guided for a full-year revenue growth of about 5% for 2022, which implied a 20% year-over-year drop for the first quarter. However, we ended the quarter with a more robust performance, down only 3% year-over-year. Breaking this down further, clinical testing revenues dropped in the teens range year-over-year in the fourth quarter, slightly better than our previous expectations. Meanwhile, testing for pharma customers performed exceptionally well, maintaining the triple-digit growth rates we had throughout 2022. I would like to commend all our staff who worked tirelessly during the challenging COVID lockdown period. Our testing services operated fairly unaffected by the lockdowns affecting many areas in China, particularly in Guangzhou, where our lab is situated. The resilience exhibited by our business and the strong mentality of our staff to overcome challenges will greatly aid our growth in the coming years. I would also like to recap our full-year performance for 2022, where our overall revenues grew by 11% year-over-year. This growth is arguably on the high end of the precision oncology testing industry's growth rates, as estimated. Three main pillars fueled this growth: first, our dominant market position in the in-hospital segment, which we have developed over the years into China’s leading position; second, the MRD sector, which began serving customers in the March quarterly; and third, our Pharma Service segment, which has benefitted from our top-performing product portfolio and leading companion diagnostics regulatory approval capabilities in China. We believe these three pillars will continue to drive growth in years ahead. Now, looking at our P&L statement, we grew our adjusted gross profit, which excludes noncash depreciation and amortization, by 12% in the full year of 2022. Clinical testing revenues have dropped in the teens range year-over-year, likely toward the higher end of the industry performance estimates. In terms of our operating expenses, as mentioned in previous earnings calls, we have consistently delivered reductions while implementing efficiency improvement initiatives. All three operating expense lines dropped in the fourth quarter due to our focus on enhancing sales productivity, cutting corporate overhead, and concentrating our R&D initiatives. Analyzing adjusted gross profit minus SG&A reveals that we are approaching breakeven; we anticipate achieving this metric during one of the quarters in 2023. The rationale behind this is reflected in Yusheng’s remarks. We are focused on driving profitability in our commercial business units, while our R&D will primarily concentrate on multi-cancer detection, thus appearing more focused than in previous years. In summary, optimizing operating efficiency and achieving breakeven, excluding R&D expenses, remains our top priority for 2023. Now, let's discuss the latest trends. In our slide deck, we observed a decline in volumes in the fourth quarter compared to the third quarter, with the central lab segment dropping further. Also, regarding the latest month trends, we experienced a substantial decline in December and January as COVID surged throughout China. However, we reported a return to positive year-over-year growth in February. Assessing the first quarter, given the significant decline in January, which affected volumes cumulatively, we believe that 2023 will commence with modest performance. In summary, our 2022 full-year revenues grew by 11%, which is likely among the precision oncology testing industry’s better growth rates. Moving to the 2023 outlook, we are tracking two key financial metrics: first, as we mentioned, achieving breakeven on adjusted gross profit minus SG&A sometime during 2023; and second, continuing top-line growth. Among these, reaching breakeven is our top priority. Accordingly, we are guiding an initial revenue growth increase of 20% for 2023. We will closely monitor our latest progress and update our guidance in future quarterly results. There are three key pillars fueling this growth: our dominant position in the in-hospital segment, the emerging MRD sector, and the Pharma Service segment, which has been aided by our strong performance and cash position, as well as estimated future burn rates. On Page 6, we showcased our cash balance, which stands close to RMB 1 billion, giving us roughly three years of cash runway, even without a capital raise. Our current cash reserves sufficiently cover all clinical programs, so we are not rushing any capital raising efforts at this time. That concludes our prepared remarks, and we would like to open the floor for questions, please.

Thank you. We will take our first question from Alexis Yan of Morgan Stanley. Please go ahead; your line is open.

Hi. Thank you for taking my questions. I have two questions. First, regarding the 2023 revenue growth target of 20%, can you help us understand better how much of that would be from the existing therapy selection portfolio, and how much would be from the MRD as well as the early detection product portfolio? It may also be helpful to get a sense of MRD contribution in 2022 as context. My second question regarding new businesses like MRD and early detection: What are some key commercial milestones, for example, hospital contracting, that we should track over the next few years? Additionally, in terms of sales, marketing, or market education investment, how do we assess the ROI on these commercial investments?

Thanks for your question, Alexis. I am Yusheng. For your first question, we don't have a very clear cut of which components will contribute how much to our growth percentage. However, I can provide a general overview: taking into account three segments, OncoVue pharma and early detection. OncoVue will still be the main driver, as we have a substantial baseline involving therapy selection and MRD. In OncoVue, I believe that the in-hospital model of MRD should have an impact on Q4, as we completed the in-hospital installations of personalized MRD technology. Prior to that, therapy selection will remain the main driver, comprising both tissue-based and liquid-based models. As for pharma, they should see continued growth, especially in revenue, but that growth will be smaller compared to OncoVue. Regarding multi-cancer early detection and commercialization, while growth rates should be promising, the numbers are still significantly lower than other segments. To answer your second question on multi-cancer early detection, we have likely installed MRD technology in around 40 hospitals, half of which are major institutions. However, as expected, we still require extensive marketing to educate doctors in Class IIIA hospitals about this product and how to prescribe it to consumers. Therefore, while I anticipate growth in multi-cancer early detection this year, I cannot provide an exact number for expected achievement. One certainty is that we are managing our burn rate and directing our efforts and resources toward Class III hospitals. Does that answer your question?

Yes. That's all my questions. Thank you.

Thank you.

Thank you. There are no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.