Earnings Call Transcript - BNR Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Burning Rock's 2020 Fourth Quarter and Full Year Earnings Conference Call. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies 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 markets and operating conditions and relate to events that involve known or unknown risks 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. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. Now, I'd like to turn the call over to the management team of Burning Rock. Thank you, please go ahead.

Yusheng Han, CEO

Welcome to Burning Rock's earnings conference call. This is Yusheng Han, the CEO and Founder. Today you have our team consisting of COO, Shannon Chuai; CTO, Joe Zhang; and our CFO, Leo Li. Please turn to Page 3, let's start. The Burning Rock is China's molecular diagnostic leader for precision oncology. There are two main parts of our business. The first one is therapy selection. And the second one is early detection. Let's turn to Page 4. So today we'll go through our 2020 recap. And also, we'll go through other issues such as 2021 priorities and financials. But what is more exciting is about our commercialization plan for our blood-based multi-cancer early detection. Let's turn to Page 5. Let's look at 2020 recap first. In terms of therapy selection, we have accumulated 273k samples in the past seven years, which means that Burning Rock has one of the biggest genomic data for cancer patients in the world. And the second thing I want to illustrate is that 2020 is really a tough year for the whole industry because of COVID-19. The first half year is significantly impacted by COVID-19. But we see that in the second half year, we have a strong turnaround. So we recorded 33% year-over-year growth in the second half of 2020. And in terms of early detection, we all know that we started the early detection R&D efforts from 2016. We have already accumulated around 10,000 samples in the past five years, which is one of the biggest in the world as well and the biggest in China for pan-cancer early detection. Through our strong product development execution, we have completed 6-cancer product development and moved to clinical trials for 9-cancer and other trials as well. Next page, so - yeah, let's turn to Page 7. So this is a highlight of today. As I said that through the five-year R&D efforts, we have finally published our 6-cancer validation data in ESMO Asia last November, with a very high sensitivity and specificity. When we shared this data with our potential partners, they were very excited about the data. And that makes us think that we might start commercialization for the six panel - 6-cancer panel before originally planned for 9-cancer. That means that we need to start an early access program first to find out the feasibility in operation key points and also the feedback from the potential collaborators. And at the same time, we have already designed the prospective validation for the 6-cancer product. We expect the revenue for early detection to start in January 2021, which means that one year before originally planned. Operationally, we have a strong advantage for the pan-cancer early detection in China. We have the biggest data accumulated. And also, we have the strongest clinical execution, and the third thing is that we're the first mover and the fastest mover.

Shannon Chuai, COO

Yes. Thanks Yusheng. So let's go to the next page, Page 9. This lays out our product development roadmap. I believe some of you might have seen this a few times before. We have shared our clinical development plan before. However, as Yusheng has mentioned, with the recent responses we have received after releasing the 6-cancer test results, there have been some additions and also updates on our plan going forward leading to commercialization. So just to recap, we started our clinical - or product development from the year 2016. And then we started with the proof of concept on single-cancer, which was lung cancer as a proof of concept, demonstrating the feasibility for early detection on both the assay and the bioinformatics methodology or algorithm. And then we extended the validation from single-cancer to 3-cancer as an additional proof of concept for methylation, being able to deliver tissue of origin accuracy as well. And most recently, as Yusheng mentioned, last November, we released our results at ESMO Asia on the 6-cancer test. The assay and the algorithm have been significantly improved compared to previous versions, and we delivered a 98.3% specificity and 80.6% sensitivity across different cancer types, mostly early-stage cancer patients. Originally, our plan was to just use the 6-cancer test as a prototype and then to move on to the 9-cancer test, which would ultimately become our commercialization product and also billing for registration. However, as Yusheng mentioned, with the recent responses we have received from potential partners or collaborators, we have decided to speed up the commercialization rollout plan, and because of that, we have added two additional programs on the 6-cancer test. So we wouldn't stop at the validation that we have presented at ESMO Asia. On the 6-cancer test, we will first initiate - we actually have initiated an early access program to gather real-world visibility and feedback. In these early access programs, we will also closely monitor the positive rate which reflects largely on the specificity and make sure that it holds largely compared to the validation or case-control studies that we have established - specificity established in those case-control studies. And also, we will try our best to follow up on the positive participants and assess the downstream sure positive rate, which reflects the sensitivity as well. But in the meanwhile, we will also launch a prospective validation study on the 6-cancer test. We have finalized the design of the protocol for that prospective validation and are in progress of communicating with participating sites and investigators. So hopefully we'll have more details to disclose in the near future. And then on the 9-cancer test, I wanted to emphasize that the studies we planned for the 9-cancer test, there are a few being carried out in parallel as originally planned. They're making good progress. So what we added to this cancer test are moving in parallel with our originally planned studies on the 9-cancer test. So it won't cause any delay or any negative impact on the other planned studies. And then last but not least, we are also launching some development efforts on future products going beyond the 9-cancer test, which involves validating the product in more cancer types, as well as adding more dimensions of biomarkers as also contributing to the assay and the model.

Joe Zhang, CTO

Yeah. Thanks, Shannon. So on Page 14, basically, this is copying and pasting the presentation presented by the FDA last month in the meeting of the Fifth Annual Liquid Biopsy for Precision Oncology Summit. So basically - this is a very introductory slide talking about the FDA-led SEQC study, especially on the ctDNA study. So on the top left panel, this slide is talking about the SEQC study overview. So basically, SEQC is one of the consortium efforts participated by a lot of academic and industry members, including Burning Rock. So as SEQC2 actually is the first effort of conclusion trying to understand the best practice of sequencing and whole genome sequencing. So basically, Burning Rock participated in the panel sequencing - oncology panel sequencing workgroup on both tissue-based as well as liquid biopsy-based assays. The FDA issued multiple standard reference materials to different kit makers including Burning Rock and Burning Rock distributed those kinds of reference materials to our collaboration labs as well as our users, and to use our kit to process those samples and get the sequencing data and send it back to the FDA to do thorough side-by-side comparisons against the other players and members who participated. On the bottom left, this is talking about a liquid biopsy core study. The study focused on a set of reference materials with different variant allele frequencies from down to 0.1% up to 2.5%, which is very similar to real situations for the ctDNA concentration in cancer patients, also studying the input effect as well as the extraction effect. So bottom right panel of this slide is talking about that five different companies participated in this study, including Burning Rock. Burning Rock used the non-plasma B4, which is the OncoCompass Target panel, the previous version of OncoCompass Target we talked about next slide. And with other companies including IDT, Illumina, Roche, and Thermo Fisher, we participated in the study and presented our data. In the entire meeting, the author presented the sensitivities, specificity as well as reproducibility study across five different companies. You can see here the four different colors represent the four companies utilizing the capture-based assay and look at the sensitivity as well as the reproducibility. Each color represents one company, and in the presentation, the author didn't identify who, as this is still confidential until the paper gets published. As you can see here, along with different - like variant allele frequency, the lower the sensitivity becomes, but there are two companies actually showing higher relative sensitivity compared to others. Burning Rock is one of them, but I cannot speak too much on this at the moment. They also studied reproducibility which I skip here. Basically, the same conclusion that lower variant allele frequency for the ctDNA led to lower reproducibility. This will just give us a lot of confidence showing that Burning Rock has a very solid kit, and the solution including the biochemistry as well as bioinformatics pipeline. Leverage on this technology. The next slide basically very briefly is talking about the progress of NMPA, which is the Chinese version of FDA approval of our liquid biopsy panel. We call it the OncoCompass Target kit, which actually is based on the LungPlasma panel I just presented early in the SEQC2 study. As you know, in order to get NMPA approved kit in China, usually, there are four stages with suggested timelines including analytical validation, which is usually done by the company, followed by a typing test, a third-party evaluation of analytical validation, and then the clinical validation which includes a lot of PI-led clinical studies aiming to prove the efficacy, the clinical utility and clinical validity of the kit, before it is submitted to the NMPA for final review and approval. The Burning Rock's OncoCompass Target kit in software both passed the typing test back in 2020. This is a milestone we achieved trying to get a leading position of this type of kit's approval in China. So we think we have some advantages as a first mover. The kit itself is going to report a 101 gene mutation status, including the SMD in valve, and gene fusion, and very specifically, we also plan to report the blood-based MSI status in this kit. Multiple companion diagnostic pharmaceutical collaborations are happening, and hopefully, we want to prove it, and we’ll get into some companion diagnostic label later on. We plan to do the concordance study as part of the clinical validation in the second half of this year. This is basically the status of the ctDNA liquid biopsy kit approval progress we can update at this moment. Now, I’ll turn back to our CEO, Yusheng, talking about 2021 priorities.

Yusheng Han, CEO

So let's turn to Page 18. So 2021 is the year that we're really looking forward to. For therapy selection, we're going to continuously increase our penetration of NGS-based cancer therapy selection with some key drivers. The first one is to extend our product menu. As we all know, we have the product supporting ELSA-Seq and ctDNA for companion diagnostics. Last year, we successfully completed the licensing of myChoice HRD test from Myriad and also DetermaRx from Oncocyte. This year we’ll complete the tech transfer and start commercialization. I want to mention specifically about DetermaRx, which targets early detection of adenoma non-small cell lung cancer. It is a significant population in China, where 20% are lung cancer patients and 85% of lung cancer patients are non-small cell lung cancers, among them around 40% are early stage. This represents a huge market for a unique product with strong clinical validation. The second driver includes other products as well in line and we'll talk about that when it is available in the market. The third driver is further in-hospital penetration. You might have already noticed that we have experienced significant in-hospital model revenue growth in the second half of 2020. We will continuously grow in 2021. As for early detection, we have stated that we will bring the 6-cancer test into the real world from lab to commercialization and we are truly excited about that. At the same time, we have started to build out a multi-channel commercial team. Another positive point for us is that we have initiated conversations with the NMPA. It seems as though the registration for pan-cancer early detection might have a clearer path in the future. Before, there was no clear resolution path, but now, we are very positive about that. Additionally, this year, we have rolled out or will roll out additional large clinical programs for product development and validation while also expanding our dimensions and including more cancer types into the additional R&D for the new version products. We cannot disclose much at this time. So, in 2021, we are really looking forward to no matter your therapy selection and also for early detection. I'll turn to our CFO about the financials.

Leo Li, CFO

Thanks Yusheng. Let's turn to our financials. First, we’d like to recap the recent wave of COVID-19 in China. In October and November 2020, the number of COVID cases in China was relatively low. However, cases started to surge in December, leading to renewed restrictions by hospitals across several cities in China. This had a negative impact on our business volumes in December, hammering down the good double-digit revenue growth trends that we saw in October and November. The COVID resurgence worsened in January 2021. Here are a few examples: Beijing and Shanghai closed schools for a period of time. Shijiazhuang, a city with a population of approximately 11 million, about 200 miles away from Beijing, shut down outbound travel so that no personnel could leave the city. A large oncology hospital in Shanghai had COVID cases and was temporarily closed. So the COVID headwind was significant in January 2021. With that context in mind, we achieved strong growth in the fourth quarter of 2020, growing our revenues by 49% on a year-over-year basis. By channel, the in-hospital channel showed notably strong triple-digit year-over-year growth in the fourth quarter. We know that our hospital revenues historically have been lumpy. If we look at the third and fourth quarters of 2020 combined to smooth out the lumpy base across the third and fourth quarters in 2019, our in-hospital revenue grew 63% year-over-year in the second half of 2020. We had four new hospitals come on board in the fourth quarter of 2020 in terms of having the reagent supply contract completed, bringing the total contracted hospitals to nearly 10 for the full year of 2020. This signifies further progress compared to the seven newly contracted hospitals that we had during 2019. Just a reminder, from an accounting standpoint, we only start booking revenues after completing contracts with the hospitals. Turning to the central-lab channel, year-over-year growth was 23% for the fourth quarter. Sequentially, the fourth quarter was down slightly versus the third quarter, primarily due to the dip we experienced in December. Looking at our gross profit trends, we improved gross profit margins even further in the fourth quarter, with the overall gross profit margin trending into the mid-70s by channel. The central-lab GP margin was 76.8% in the fourth quarter of 2020, a new high driven by our scale and reagent cost reductions. The in-hospital GP margin was in the low 70s range in the fourth quarter. Next, regarding our guidance, let me first recap that the COVID-led deceleration in January and February was also quiet due to the Chinese New Year. The combined January and February period had a significant sequential decline, but it was still up double digits year-over-year. Looking forward to our guidance numbers, there are two factors we are watching closely: the first is the risk of another COVID resurgence and related restrictions at hospitals, which negatively impacts overall testing volume. The second factor is competition, which has been intense and disappointing in some cases. We remain confident that our strategy of delivering the highest quality product to the market is the right path to win in the Chinese NGS diagnostics industry for the long term, though we do encounter intense competition in the near term. We believe competition should normalize after major NGS products, for example, liquid-based ctDNA panels and large tissue panels have gone through the NMPA approval process. With these factors in mind, our initial guidance for the 2021 full year is RMB610 million. This implies a year-over-year growth rate of 42%. With that, we conclude the management remarks and operator we are ready for questions.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Doug Schenkel from Cowen. Please ask your question.

Doug Schenkel, Analyst

Good afternoon, and good morning, everybody. Thank you for taking my questions. I want to start on guidance. How should we model quarterly revenue? Essentially, I just want to get your thoughts on pacing. And then how much do you plan on investing in R&D this year? It would seem like that should increase pretty notably, given all the exciting efforts pursuant to new product development and additional study initiation. So just from a modeling standpoint how should we think about that?

Leo Li, CFO

Thanks, Doug, for the questions. Let me speak qualitatively on these points. In terms of quantitative guidance, what we have is for the full year top line. We don't have quarterly revenue guidance. First on the quarterly trends, Q1 is going to be soft because of the January hit, which worsened compared to December and a quiet February because of the Chinese New Year. It’s still relatively early in March. Year-over-year, it will likely still be up double digits. If we watch the first three weeks of January, and compare that to the first three weeks of 2020, which we didn't have COVID restrictions back in China, we grew about teens. So that's one data point. Then February, March was quite low last year because of Chinese New Year and COVID restrictions. That is the first quarter. Beyond Q1, I would still watch for the two factors that we mentioned. Overall, we are working hard on the in-hospital channel with the Magnus BR making further progress having placed high teens number of Magnus BR platforms into our hospital partners. We would like to execute our strategy of further in-hospital penetration throughout the year although we don't have any quantitative guidance for each quarter. So that's for the top line. Then for R&D, looking at 2020, we have seen notable personnel-based increases in terms of headcount, salary, and share-based compensation as we expanded our team, which we benefit from in terms of expanding the R&D and clinical capabilities. In addition, there is a commercial organization for early detection, which would lead to increased sales and marketing expenses. As you mentioned, for additional clinical programs which we have a few under the plans, we will announce specifics throughout this year. As we roll out those programs, we will expect additional spending on additional R&D programs. These will be large programs, over 10,000 subjects, although we do know that for China, the overall program expense is still likely to be lower than US programs. We will roll these out and announce those as we go throughout the year. We don't have any quantitative guidance on the R&D line, but qualitatively it is going to increase as you mentioned versus the same period last year.

Doug Schenkel, Analyst

And Leo, thank you for all that one. One very quick follow up, as I'm sure you appreciate. You had a very strong - I mean, the fourth quarter was strong in general. But what really jumped out to me was the in-hospital revenue, that's where most of the upside was relative to our forecast. I'm guessing some of that is seasonality, but I guess, as we think about momentum heading into 2021. Should we be thinking that Q4 is emblematic of continued progress in the in-hospital channel and then by extension contemplate a continued change in revenue mix that essentially shifts a little more revenue toward in-hospital versus the central-lab?

Leo Li, CFO

Yes, overall, we would expect in-hospital to grow stronger and faster compared to central-lab as that is a more - that is a channel that we believe competes better in terms of our product performance, and the Magnus BR differentiated product solution. If you look at the fourth quarter 2020, there are two things that drove the in-hospital revenue growth. First is a sort of same store sales growth like metric. That metric is tracking similarly, compared to the central-lab channel, and is not a surprise. So that was a much smaller factor in terms of contributing to growth versus the second factor, which is newly contracted hospitals. We made good progress, adding four hospitals in the fourth quarter. It’s difficult to pin down for each exact quarter how many hospitals we're going to contract because it is more driven by hospitals’ own process and contracting and internal approval processes. So it's hard to speak to each quarter going forward. It’s more reasonable to look at rolling two or rolling four quarters. If you look at rolling four quarters, we added 10 for 2020, and we certainly would like to keep that up for 2021.

Doug Schenkel, Analyst

Okay, and I know I'm probably overstaying my welcome. But I want to just make sure I get a couple of questions on the multi-cancer test program. It's really encouraging to hear that you are launching the 6-cancer product in the near term. On the other hand, it may be a bit surprising that this is being launched so quickly with - in the grand scheme of things relatively small data set and no prospective data. So I just want to ensure that I'm understanding how you think we should think about this. My first question related to that is, if you didn't need prospective data to launch the 6-cancers, why was that not the case with the 9-cancers? Is it simply because the data was stronger on the first six and you were asked to do more work to support with confidence the other three cancers? So that's the first question. The second is again, it's great that you can launch, but given you are going to be generating more data and there is a lack of prospective data of substance at this point, how are you thinking that's going to impact adoption over the first few quarters post-launch? And then my third question on this is if you are now essentially establishing that companies can launch multi-cancer screening tests with this type of data, which is good but again, it's a relatively small data set and it's not prospective. Is a possible conclusion that the barriers to entry associated with data generation for assays like this are actually lower than previously thought? On one hand, that would be good because you can get to market quicker, but on the other hand, this structure doesn’t just apply to Burning Rock. So I guess my concern would be in this new world in this new paradigm, that your ability to differentiate from a regulatory standpoint on your established scientific rigor might actually be a bit diminished. It would be great to get your thoughts on those three topics. Thank you.

Shannon Chuai, COO

Yes, Doug, this is Shannon. I try to tap on your questions. Those are really excellent questions. I mean, exactly. Those are what we debated over and over within the team over these past few weeks about our commercialization decision or strategy. So first of all, we don't believe that the multi-cancer detection product barriers to entry will be any lower than previously expected. We do believe that a prospective validation study is still a must-have along with registration, of course, with needed prospective validation data. That is exactly why when we started thinking about this rollout plan, we also added a prospective validation study for the 6-cancer test to run in parallel. However, we have received very encouraging responses from potential channel collaborators for the 6-cancer test product. This encouraged us to think that while we generate more prospective validation data, having some real-world experience will also help us assess whether the prospective validation population really matches our future customers, because this - when starting commercialization, this actually gets very tricky. Whether your targeted population are those that go on annual checkups regularly or not, will greatly influence your expected sensitivity and other operational metrics when we start to think about these commercialization efforts. These are questions that probably won't be answered in the post-facto validation clinical trial because they're in a trial setup. We want to accumulate knowledge and data as well during our early access program to discover things we didn't know. Additionally, in the early access program, we've done some of this already. We are closely monitoring the positive rates, which reflect the specificity. So when you think about a prospective validation cohort, the specificity part is easier to assess because those - the top of your false-positive rates, it is your positive percentage. It’s easy to assess immediately whether your specificity holds out in this real-world population. We are making sure that it doesn't drop significantly compared to what we expect from the center studies. The sensitivity part, however, will take follow-up time to have an accurate estimate from the post-facto validation cohort, which may be very different from what you observed from the case-control studies because those involved symptomatic patients. So for that part, we are also putting great effort into following up these real-world positive findings to assess one, potential estimates on the sensitivity and two, the path to diagnosis for these positive participants. I'm not sure whether I answered your questions, but those are the thoughts that we went through when we discussed this commercialization plan.

Leo Li, CFO

There’s some comment on that. I think that for early detection, it’s not only about sensitivity and specificity. We think that in the operational part and also in consumer education, as well as how to even have a perfect report to make it easy for the consumers to accept the result and also how to explain that from a service perspective. I think that all these issues are new topics we need to face. That’s why we started the early access program. I think this product is not just a scientific product; it’s a product that we need to consider the psychology of each consumer as well.

Doug Schenkel, Analyst

Super helpful team, really appreciate all the additional color, very helpful as always. Thank you for all the time.

Leo Li, CFO

Thank you.

Shannon Chuai, COO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of David Lee from Bank of America Merrill Lynch. Please ask your question.

David Lee, Analyst

Great. Thank you, management team, for the chance to ask questions. I would like to ask you about your in-licensed products. Previously, you mentioned that this year your top line is going to be RMB610 million. Does it include the potential revenue contribution from the in-licensed products? This is number one. And number two, we know that you are now maybe dealing with tech transfer. So besides tech transfer, is there any barrier on regulation for these two products launch and their commercialization plan in China? I mean, these are also forms of early detection products. Is there any regulation typically on this? And finally, regarding your fourth quarter results, your administrative expenses are over RMB100 million. Can you give us more color on these administrative expenses? That's my question. Thank you.

Leo Li, CFO

Thanks, David, for the questions. First on the two licensed-in products - the Myriad HRD and Shannon talked about this during our third quarter results. Their initial approved indication is not a big market and this is to serve pharmaceutical partners as well. So this is a smaller element compared to the second licensed-in product, which targets early-stage adenocarcinomas and has had Chinese cohorts over 1000 subjects that have gone through and published validation data in The Lancet. This is known by some Chinese physicians as well. So these are two different products. We will complete the tech transfer at least in the first half of the year, followed by validations to make sure that the products perform as they have in the original and the transferred labs. So, these will take a period of time. Any revenue contributions from these will likely be late this year. In terms of guidance, we don’t break out old versus new products, but the guidance has a small element from the new products, although we'll have more visibility after we complete the tech transfer and validations. Additionally, there will be more products we’re going to rollout that are in the process, so these are not the only two new products. Regarding the second question, we will offer these two products in the LDT formats, similar to many other NGS-based products we currently offer, including the Myriad HRD school products, myChoice that has been approved by the FDA for a couple of indications. This has its own backend in terms of marketing, acceptance, and awareness among physicians. We spoke earlier about the DetermaRx validation data. These will be offered as LDT, and there will be driven by our existing sales teams, particularly for lung cancer, which is our largest indication. As for G&A, the main two elements driving that line are one, increased personnel and staff. Our overall headcount has surpassed 1000 personnel, which is significant as we build out across several functions from both our front end to mid and back office. Secondly, we increased physical space. We recently had a new building next to our current lab, which will house early detection labs. We have been building capacity for large clinical studies and at the same time offering early access programs. We were in capacity restraints for a period of time and are glad we have solved that issue. These are the main drivers for the overall G&A line.

David Lee, Analyst

Great, thank you. That's helpful. I have no more questions.

Operator, Operator

Thank you. Our next question comes from Tian Chen from HSBC. Please go ahead.

Tian Chen, Analyst

Hello, good evening. Thank you very much for taking my questions. I think in your opening remarks you mentioned discussions with Chinese regulators or FDA regarding the approval process, and that you made some progress in alternative routes for getting liquid biopsy approval. Can you spend some time to give us a bit more detail?

Shannon Chuai, COO

Hi Tian, thank you for the question. I'll take this one. I think there might be a misunderstanding. What Yusheng meant in the opening remark is that for the early detection products, which used to be a completely new class product with no previous dialogue with the NMPA, but most recently we started the dialogue and are receiving very positive feedback. We are very hopeful that in the near or midterm future, the early detection liquid-based multi-cancer early detection products will have clearer regulatory pathways than the current situation. For the liquid-based product, the structure for registration has always been there, similar to other NGS tissue-based products, except for the concordance study regarding the tissue versus liquid, which is different than the tissue-based panel. The overall structure is generally similar. However, the liquid-based products, of course, are also first in class. There will be some unpredictable activity down the road. As Joe mentioned earlier, on Page 16, with the typing test passed, we are now entering the clinical validation, starting the concordance study, and establishing companion diagnostics collaborations. We are making very positive progress there as well. Hopefully, we will see the first liquid biopsy based NGS panel being approved in China in the next couple of years.

Tian Chen, Analyst

Hi, yeah. Okay, that's clear now. So I guess your discussions are mainly focused on the multi-cancer early detection approval process.

Shannon Chuai, COO

Correct.

Tian Chen, Analyst

Okay. So my understanding was why there's no clear approval path is because the regulator has been insisting on looking at each individual indicator, right? That becomes a problem in terms of design, and also, of how the population recruitments will be the main barrier, given you're targeting multiple cancer types. So, have there been any progress made in how to test out the individual indicators? Will they go for the multi-indicator level or do they still insist on each individual indicator's efficacy? That's the first question. Secondly, for populations, given the multiple types, will the regulator still insist the population be sufficiently large enough to control for each type of cancers?

Shannon Chuai, COO

Well, regarding the first question, yes, one major progress we've observed is that now the regulators at least embrace the idea of having a multi-cancer early detection product being applied on multiple cancers simultaneously, instead of testing it on intended populations for each single cancer type, and targeting high-risk populations individually. So it will be on a general population application. That’s significant progress. However, it’s about far more than that. For early detection products, how do you justify your benefit? How do you control your measure your harm? How do you justify that the benefit is greater than the harm? That’s the key to the regulatory path. I think with the most recent progress from our data and from our global peers, like those from GRAIL and Thrive, such justification rules or philosophies are becoming clearer over time. That’s one of the reasons why we could start the dialogue with the NMPA.

Tian Chen, Analyst

Sounds good. So you think the cost-benefit for the multi-cancer early screenings can be conducted on the pool level rather than on the individual cancer type levels?

Shannon Chuai, COO

Of course, because your intended population is the general population, you wouldn't be able to differentiate based on just one cancer type. That would be a huge waste of resources in study design. So you would measure the performance on multi-cancer simultaneously.

Tian Chen, Analyst

So NMPA now recognizes and agrees to go in this direction.

Shannon Chuai, COO

No, we're not saying that an agreement has been reached. We just started the conversation and see positive trends towards having active dialogues.

Tian Chen, Analyst

Can I just ask one last question on your early access program? You answered the earlier questions, and I can see why you would go for that. But just from the P&L point of view, can I say this kind of early access program will be loss-making, or can you do it at cash breakeven levels? The main point is for you to get validated in the real world and collect more data points.

Leo Li, CFO

I don't think about the cash. If you look at the financial report, we still have a lot of cash on account. So the main purpose of the early access program is to find out any potential issues in the real world and gather feedback. For example, how regimen will be for a certain cohort like the annual checkup population doing annual checkups without annual checkups, the sensitivity and the specificity might differ. Also, there will be operational issues, for example, how to educate the customer about NPV, and MBV, etc. These terms are quite familiar with professionals, but to common consumers, they're totally new. We know that a PBV above 40% for a pan-cancer test can be an excellent product regarding PBV. But a consumer might think that giving a positive result gives me only half the odds of being a true positive; that could be a problem. Hence, we need the early access program to discover all these issues and address topics such as pricing and perceptions about negative or positive results. I think the challenges we face in this operational context are no less significant than those in a clinical trial.

Tian Chen, Analyst

Got you, so I guess in your P&L structure, if you do any early access program, this will be through your central-lab secondary expenses.

Leo Li, CFO

Exactly, this will be expenses. As this is not - we're not charging for the early access program, so it's going to hit our expenses line.

Tian Chen, Analyst

Got you, okay, that's all for me. Thank you very much.

Operator, Operator

Thank you for your participation today. There are no further questions, so we will conclude our conference. You may now disconnect.