Earnings Call Transcript - BNR Q1 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Burning Rock’s 2023 Q1 Earnings Conference 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 these forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. With that, I would now like to turn the call over to your first speaker today, Mr. Han, CEO of the company. Thank you. Please go ahead.

Yusheng Han, CEO

Thank you. Welcome to Burning Rock’s 2023 Q1 conference call. I’m Yusheng Han, the CEO and Founder of Burning Rock. So today, we also have our CTO, Joe Zhang, and CFO, Leo Li online. So before the presentation, I would say that this quarter's data, although not a lot of new information, but very important information and making us excited. So let's turn to Page 3. In case there are some investors who are not very familiar with Burning Rock, I hereby illustrate what we do. Our business started from tissue-based therapy selection and then expanded to multi-directions of a liquid biopsy, including liquid-based therapy selection, minimal residual disease (MRD), and multi-cancer early detection. We have three business units providing products and services to doctors, pharma, and consumers. So let's turn to Page 4. We set up our goals for 2023 and reported to the investors three months ago. The number one goal is profitability; that is, the goal we set is to break even excluding R&D during the quarter in 2023. The second goal is continued revenue growth; a healthy increase with profitability is what we want to achieve, and our initial outlook for 2023 revenue growth rate is at 20%. The third goal is to further our leading position in multi-cancer early detection as the number one player in China and a top player globally, and the main R&D spending will focus on multi-cancer early detection. Let me break down the goals into four parts. For therapy selection, we will continue to improve sales productivity by strengthening the in-hospital model, and for MRD launch installation, personalized MRD in top hospitals. Due to the operational difficulties of personalized MRD, it is very challenging to implement this method in hospitals. However, since more and more top hospitals control outstanding tissue samples, and MRD baseline needs tissue samples, only the in-hospital model can bring the volume of MRD to the next level. We launched the in-hospital MRD product in early May, and I believe that it will be a strong engine for Burning Rock, Onco business unit and start to impact in Q4 this year. Regarding Pharma, this goal is to continue its profitable growth; with a new platform of top MRD and more international orders, we are optimistic about the growth of the biopharma business. For the multi-cancer early detection (MCD) PREVENT study, which is a prospective study of over 10,000 subjects, we will have an interim readout in the second half of the year 2023. We will continue this development study of nine cancers and 22 cancer tests in PREDICT and PRESCIENT. We are also building the regulatory pathways with the FDA and NMPA, especially NMPA. The commercialization will go on at selected top hospitals, that's what we said as the goal of 2023. Let's see what's the result of our effort in Q1 2023 and turn to Page 6. As illustrated, the number one goal this year is profitability, and the main indicator of commercial efficiency is non-GAAP gross profit minus SG&A. The number reached its bottom in Q2 2022, and we can see that it was quite bad at that time. At that time, we initiated the optimized vision plan. We managed to narrow down the loss from minus $84 million per quarter in Q2 2022 to minus $3.8 million in Q1 2023. We are very excited by this achievement, meaning that we are on a good trend towards breakeven. Let's move to Page 7 to see the other achievements. As we know, Q1 is quite challenging for most companies this year, especially January and early February due to the pandemic impact. The reason we were able to narrow this loss is that we experienced a strong rebound of in-hospital services in March and continued to improve our sales efficiency. Regarding the progress of MRD, we launched the in-hospital model of our product in May. Since installation of the platform in hospitals takes time, we expect it to start impacting revenue in Q4 this year. In terms of clinical studies, we released data at AACR and we will have more in the coming ASCO conference. In biopharma, the business continues to grow. Contract value grows 27% year-over-year, while revenues grew triple digits, which are also impressive figures. For early detection, all the clinical trials are on track and dialogues with NMPA and FDA continue. We will inform you of any new breaking news at any moment. Now, I will pass it over to our CFO, Leo, to discuss the numbers in detail. Leo, please.

Leo Li, CFO

Thank you, Yusheng Han. Regarding our financials, we have two key metrics to track for 2023. The first one is breakeven profitability defined as non-GAAP gross profit minus SG&A, and Yusheng walked us over these numbers as demonstrated on Page 5, which you can see in our slide pack. We are on track to hit breakeven on this metric at some quarter during 2023. The second metric we track is top-line growth. So profitability and top-line growth are two key metrics for this year. Let’s first review our volume trend shown on Page 7. Our testing volumes achieved strong rebounds in March. Recall that in our previous results, we stated that January and February combined volumes were down 28% year-over-year. We observed strong double-digit growth in March, bringing the whole quarter to just down 5% year-over-year. On a sequential basis, our volumes in the first quarter were up 3% versus the fourth quarter of last year, and the strong rebound in March was led by the in-hospital segment, where we continued our lead in that channel, capturing further market share. Now let's move to our P&L, shown on Page 8. First, regarding revenues, we grew our revenues by 5% year-over-year in the first quarter. Despite a tough start in January and February, we achieved very good results in March. The continued delivery of pharma projects was the biggest contributor, with the pharma segment maintaining its triple-digit revenue growth rate in the first quarter of this year. In addition to the robust growth in the current quarter, we have strong visibility into growth in the pharma segment for the future. Our pharma backlog continues to grow, with new contracts signed during the first quarter of this year up 27% compared to the same period last year. For our patient testing business, in-hospital services showed strong growth in March, resulting in a positive 5% year-over-year growth for the entire quarter, despite the challenging conditions in January and February. We are pleased with our growth resilience in that segment, continuing to win major tenders in April, putting us on solid footing for future growth. Moving down to the gross profit line, gross profit grew 16% year-over-year, with non-GAAP gross profit margin at 75.7% in the first quarter this year. We believe our gross profit growth is strong and industry-leading. We have visibility into additional gross profit margin gains for the medium-term as we execute our cost-saving initiatives. Over the years, our gross profit margin has climbed steadily, and we aim to improve it further down the road. Regarding operating expenses, total operating expenses dropped 10% sequentially, continuing our trend of declining operating expenses and improving efficiency. The largest improvement this quarter came from the sales and marketing line, which is vital as we demonstrate our sales and marketing efficiency. This line has declined since the middle of 2022 as we executed on our efficiency gain programs that Yusheng mentioned earlier. Importantly, sales and marketing expenses as a percentage of revenues were at 42% in the first quarter this year, making us one of the most efficient operators in our industry, while peers' sales and marketing expenses generally exceed 60% based on published data. Our key takeaways from our P&L for this quarter are three points: number one, resilient top-line growth led by biopharma and in-hospital strength; number two, strong gross profit growth of 16% year-over-year in the first quarter this year; and number three, high selling efficiency with sales and marketing at 42% of revenues. We strive to maintain our momentum in these initiatives as we work towards our corporate goals of breakeven and continuous top-line growth. As for guidance, we reiterate our previous guidance of 20% top-line growth for 2023 versus 2022. Moving on to Page 9, our cash balance and cash runway projections remain unchanged from our previous results. Our burn in the first quarter is within the framework set out in the previous results call. The losses from our commercial operations are dropping rapidly and approaching breakeven, while most of our burn is directed towards investments in future product development, our multi-cancer early detection, MRD, and product registration with China's NMPA. Our cash balance is sufficient to fund us for the next three years as we approach breakeven on our commercial operations, and we retain discretion over our investment strategies for product development. We are satisfied with our cash runway and are not in any rush to raise capital at this stage. This concludes the financial section. Now let me pass the call to Joe to discuss our pipeline update.

Joe Zhang, CTO

Thanks, Leo. Let's move to Page 11. This is a recap of the early detection business and the development milestones we achieved over the past several years, including the paper published in Nature Biomedical Engineering regarding the technology itself as well as major multi-cancer early detection clinical study published in Annals of Oncology this year in Q1. Additionally, we received the FDA breakthrough device designation granted for our multi-cancer early detection product. Page 12 lays out the development roadmap for the multi-cancer detection product. Currently, we are actively developing a 22-cancer, multi-cancer early detection product, which is an upgraded version of the 6-cancer product published previously in Annals of Oncology. There are multiple trials mentioned here, such as PREVENT, which was mentioned by Yusheng Han, as well as PREDICT and PRESCIENT, focusing on 22-cancer early multi-cancer detection. Page 13 covers the differences between the 6-cancer and 22-cancer products. Moving on to MRD business, Page 16 highlights MRD tests and their roles at multiple time points throughout the treatment journey, which is crucial for early-stage cancer patients. MRD can be used for prognosis, which is advantageous. It also has a lot of potential for actionable therapy guidance, including escalation or de-escalation based on MRD status. Page 17 presents our MRD solution, called brPROPHET. This solution is based on whole-exome sequencing tumor profiling and seeks to provide trackable up to 50 mutations for constructing a personalized panel for each individual patient. We utilize this personalized panel to perform the brPROPHET MRD assay ctDNA, employing ultra-deep sequencing at 100,000x raw depth and leveraging UMI error correction to estimate the MRD status and tumor fraction based on these 50 mutations. Currently, on Page 18, we are conducting several trials across different cancers utilizing this technology, brPROPHET. At last month’s AACR meeting in Orlando, we presented updated data from the MEDAL study. We enrolled around 200 non-small cell lung cancer patients and compared the brPROPHET methodology versus standard tumor-agnostic or fixed-panel methodologies. The results indicated that the brPROPHET showed the highest detection sensitivity in pre-operative cancer patients. Furthermore, we assessed the prognostic value post-operatively at three days or four weeks after the operation, confirming a significant difference in disease-free survival between MRD-negative and MRD-positive patients. This study demonstrated a strong hazard ratio of around 16.4, which gives us confidence in the prognostic value of our technology, motivating us to pursue further interventional studies. On Page 20, we showcase another small cohort of gastric cancer patients presented in the AACR meeting last month. In this study, we enrolled 55 patients with gastric cancer at Stages 1, 2, and 3. Out of the 55, we ultimately enrolled 19 for the brPROPHET personalized panel detection. The remaining utilized the fixed panel for genotyping. The results indicated that the brPROPHET methodology had vastly superior detection sensitivity compared to a fixed-panel method. Notably, out of the MRD-negative patients tested by brPROPHET, none experienced recurrence, while a significant proportion of MRD-positive patients relapsed. This repeatedly reinforces our confidence that brPROPHET technology is foundational for our MRD product's value. Many trials are listed on Page 18. I appreciate your attention, and this concludes my update regarding product development.

Yusheng Han, CEO

Operator, let's open up for questions, please.

Operator, Operator

Certainly, we will now begin the question-and-answer session. We have a question from the line of Alexis Yan from Morgan Stanley. Please go ahead.

Alexis Yan, Analyst

Thank you, Yusheng, for taking the question. I just have a question on the commercialization of the MRD products. You mentioned that since early May, the MRD products started commercialization via the in-hospital channel as well. I’m curious if you could share more information on its current hospital coverage. Additionally, if we consider the full-year guidance of 12% revenue growth, how much of that could reasonably come from the MRD portfolio? Lastly, in three to five years, are there any commercialization targets that management could share, such as sales targets, market share, hospital coverage, etc.? For my second question, how has April and May performance been trending so far? Has the recent wave of COVID impacted our business? That’s it for me.

Yusheng Han, CEO

In response to your first question, I’ll ask Leo to provide details. In terms of MRD, the R&D for that is quite challenging, which is why we launched it in May, and I am very proud of that. We may be the only company to provide the in-hospital model of personalized MRD worldwide. The revenue impact, as I mentioned, will likely start in Q4 because, although we have a large in-hospital base, we still need to negotiate and participate in tenders of various hospitals. We are aware that the fastest timeline to secure an opportunity in hospitals is this half-year. I believe we will require at least one to two years to fully implement personalized MRD across our hospital network. Looking ahead three to five years, we expect MRD will be a crucial force, likely as significant as therapy selection since it applies to most cancers and transcends targeted drugs, combining options with chemotherapy and immunotherapy.

Leo Li, CFO

To address that, it is premature to conclude Q2 results, as we haven't even completed May. However, there were no surprises in April. We do benefit from a low base regarding year-over-year comparisons. I would say that indicators in April are on track, and we will continue monitoring for Q2. So far, there are no surprises.

Alexis Yan, Analyst

Okay. That’s clear. Thank you.

Leo Li, CFO

Thank you, Alexis.

Operator, Operator

With that, there are no further questions at this time. I would like to conclude the call. Thank you for participating. This does conclude the call. You may now disconnect your lines. Thank you, management.