Earnings Call Transcript - BNR Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Burning Rock Biotech 2021 Second Quarter Earnings Conference Call. 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 21E 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 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 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 statement 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 first speaker today, Mr. Yusheng Han, CEO of Burning Rock. Thank you. Please go ahead, sir.

Yusheng Han, CEO

Thank you and welcome to Burning Rock’s Q2 conference call. I am Yusheng Han, the CEO and Founder of Burning Rock. Today, we have our COO, Shannon; CTO, Joe; and CFO, Leo in the meeting. First, I will go through some exciting highlights of our recent progress, then our COO, Shannon, will elaborate on our product line expansion, and then our CFO, Leo, will walk you through the financials. So first, let’s turn to Page 3. Burning Rock started with the therapy selection business in 2014 and has grown to the market leader in this segment. The leading position has laid a good foundation and given us advantages moving toward new businesses – to new business of early detection, MRD and pharmaceutical collaborations. We have strong branding on our technology and product quality, which help us attract talent. And the network we have built across thousands of oncologists and hundreds of hospitals enables us to innovate and conduct R&D studies on new products as well as faster distribution when the products go to market. The existing high testing volumes make it possible for us to continue lowering the cost. And that’s why we aim to tackle the therapy selection, MRD and early detection market in parallel in the coming few years. Let’s turn to Page 4 for some highlights of our recent programs. First of all, we are very proud that the technology of our early detection combining a maturation-based assay and a machine learning-based algorithm has been published in Nature Biomedical Engineering. Even though it doesn’t fully reflect the most recent version of our early detection product, it’s a very nice endorsement of our innovation, which is built on a solid foundation for our product line development. We mentioned the preparation for commercialization of early detection earlier this year. For those of you who are interested in knowing the progress on that, so far, we have tested over 2,000 samples through the early access program, built out an operations team, a call center and a CRM team. Our initial commercialization channel will be with hospital health management departments and innovative insurance companies. We have so far presented at 10 national or regional conferences with hospital health management KOLs. Our validation data on the 6-cancer test attracted great attention from the doctors. So far, we have entered the contracting stage with 6 hospitals and we see the number scoring at a very decent pace. We have also made some exciting progress on MRD. We are developing a tumor-informed MRD testing platform called BR Prophet. It has shown very promising performance with sensitivity on par with what has been shown in Nature and in Archer’s publications. We have started a study on lung cancer and there are several trials for other cancer types under planning. For therapy selection, we recorded a 40% volume increase in this quarter, mainly driven by the in-hospital model. It is the first time that our in-hospital model test volumes exceed 10,000 per quarter. Last but not least, I will spend some time to introduce some exciting outlook of our pharma collaboration business. We started a new business unit last year anticipating a strong opportunity in this segment. The new BU has been growing rapidly, new contract value reached RMB 98 million during the first half of the year 2021, which is 3x versus the full year of 2020. I will illustrate in detail on the next page. So, let’s turn to Page 5. Pharma business is not a new business for the NGS company in the U.S., but this market hasn’t been major in China until about 1.5 years ago. Some recent trends in the paradigm shift drivers include the first NTA moving toward regulating targeted therapy drug approval in the CDx model. Second, with the pressure of volume-based government procurement, some domestic innovation pharma companies are seeking global expansion opportunities. For targeted therapy drugs, the need of former companies for NGS partners includes: first, it must have a high-quality product and be available on both therapy and liquid biopsy samples; second, registration capability in both the U.S. and China and sometimes also in Japan, Europe and other developed countries. The third criterion is that MNCs need NGS companies that can do CDx in China. However, it’s very challenging for foreign NGS companies to operate registration trials in China due to the regulation of human genome resources. So as a Chinese NGS company with global operations, we are the ideal choice. Seeing this chance, we set up our U.S. lab, which is now clear certified and CAP accredited. The SEQC2 results, which we have published in Nature Biotechnology, strongly endorse our technology. We have also invited very key talent to join us. We invited Sharon Liang, who had 9 years of experience in the FDA covering molecular diagnostic device submission and 2 years of experience in GRAIL to join us as the VP of RA and QA. We believe that the trend will continue in the coming years. So, that is our pharma segment, and we are really very excited about that. The expansion of pharma globally is the first step of our global expansion. So, that’s all I am going to discuss today. And next, I will shift to Shannon to discuss the operational part. Thank you.

Shannon Chuai, COO

Yes. Thank you, Yusheng. So, now let’s move to Page 6. It’s an overview, and we would like to give you some important updates on Burning Rock’s product pipeline. First of all, let’s take a look at the cancer early detection for asymptomatic people. In this sector, we have reported the validation results from the THUNDER study on our 6-cancer product last November. We have accumulated more data on our intend-to-use population through the early access program that Yusheng just mentioned. With that, we plan to start the commercialization of our 6-cancer product in early 2022. In the meanwhile, we are launching a prospective study on the intend-to-use population to provide more data and also validation clarity on clinical utility and also false-negative and false-positive impacts of our early detection tests on people. And then on our 9-cancer and 22-cancer products, we have launched the multi-site prospective case control studies, the PREDICT and PRESCIENT, earlier this year, as you might already know. Each study will recruit more than 10,000 participants and each study is led by a Chinese academy member as the leading PI. PREDICT is expected to have the first readout by the end of 2022, and PRESCIENT will have data readouts about 2024. In terms of early-stage cancer patients, we are quite excited that we will have two products launched in 2022. The first one is a tumor-informed MRD product developed by ourselves in-house, as Yusheng already mentioned. The other one is DetermaRx, which is the prognosis prediction and adjuvant chemotherapy benefit prediction product for lung cancer patients that we licensed in from OncoCyte to enter the Chinese market. For the MRD products, we are now putting together some clinical validation data on lung cancer patients and we are also initiating validation studies on other cancer types such as colon and esophageal cancer. For DetermaRx, we are close to completing the assay transfer and analytical validation studies and we will be able to start offering this product to Chinese patients shortly. We believe the MRD product and DetermaRx will synergize in providing precision medicine solutions to Chinese patients and doctors in lung cancer, and we really look forward to a promising market for early-stage patients, which used to not be the group of patients who benefit most from molecular testing, but it’s about to change. Moving on to our late-stage therapy section product line, the NGS panels in this segment are mostly past the development phase and entering the registration pathway. We will focus more on registration prospects. After our 4-gene panel obtained the first NMPA approval in Japan and China in 2018, we now anticipate another approval on our 13-gene panel in the near future. Importantly, we are now pushing the regulatory timeline on our 520-gene tissue panel and 168-gene liquid panel. For those panels, we are aiming to start the pivotal study in a few months. We think NMPA approvals on these large panels will ultimately create a paradigm shift in the competitive landscape and also foster the adoption of NGS for in-hospital use. So, moving on, I am going to break it down into the three segments one by one. So, let’s move on to Page 9 for early detection with liquid biopsies. As Yusheng has mentioned, we are glad to show that our early detection technology was published by Nature Biomedical Engineering earlier this year. I wanted to reiterate that this is an older version of both the assay and the model as you can imagine since the publication process took nearly 2 years. We have made multiple improvements to our technology ever since. Nonetheless, this endorses the novelty and the utility of our technology. Now, looking at Page 11, on this page, I wanted to revisit our clinical program for the three products, the 6-cancer, 9-cancer, and 22-cancer products. We are happy to report that all programs are progressing nicely and on track. More specifically for our 6-cancer product, we mentioned that we have cumulative testing data on over 2,000 samples in the past few months through our early access program. What we have observed so far from this data gives us a clear estimate on the performance among the intended-to-use population, which helps us with the design of the prospective interventional study down the road, as well as with our ongoing communications with regulatory bodies. One thing that’s quite promising and we can share with you is that the specificity we demonstrated in the case-control seminar study is holding very well in the real world. This gives us a lot of confidence going forward. The 9-cancer and 22-cancer products, both PREDICT and PRESCIENT studies are progressing as planned in terms of accrual. That’s about what we can share in this call. Again, we anticipate the first readout of PREDICT by the end of 2022. Now, let’s move on to Page 14 to talk a little about MRD. Page 14 shows our development progress on MRD products, which we haven’t talked about in detail previously. One key update we wanted to emphasize here is that we have most recently completed development and analytical validation of a novel personalized assay for tumor-informed MRD testing. We named the technology BR Prophet, which has a target LOD, limit of detection, approaching 4x10^-6, which is 0.004%. We expect to report clinical validation data on BR Prophet for lung cancer in the first half of 2022 and we are also initiating studies on other cancer types, including colon and esophageal cancers. We would also like to share some recent trends in MRD adoption among Chinese oncologists in the past few months. Earlier this year, MRD was recommended in a consensus by Chinese lung cancer clinicians to help predict the risk of relapse for early-stage non-small cell lung cancer patients. In this same consensus, it was made clear that the methods used for MRD testing should be able to reach an LOD as low as 0.02%, which is 5x higher than what we are aiming for. It’s noteworthy that most NGS panel solutions offered for liquid-based therapy selection tests have an LOD only around 0.1% to 0.5%, including ours, which is not enough in MRD detection. So, you can imagine that this will be a new line of work in terms of technology. In terms of the market, we are seeing trends that oncologists and pharma companies are actively exploring MRD applications, embedding it into a lot of research studies recently. We now expect this market to advance greatly in the coming years. Moving to Page 15, let’s briefly recap the SEQC2 study. A lot of you might already be familiar with it. From this study, our OncoCompass liquid test panel showed very strong performance specifications, including sensitivities with reliability and robustness when compared to four other NGS liquid testing kits from the U.S. This is a very nice endorsement of our liquid-based testing technology. And we went through the results from the publication extensively last quarter, so we will keep the details at this time. But we would love to take questions and share reference materials if you are interested in more. Let’s move to Page 17 to cover a bit of the business side. On Page 17, we demonstrate how our business has been transitioning to working directly with the in-hospital model rapidly in the past months. This trend has been predicted from the very beginning, but it’s most recently accelerated, partially driven by the pandemic. The top part here shows a bar graph demonstrating our test volume over the past quarter. The green bar represents the central lab model, while the blue bar represents the in-hospital model. You can see clearly that in the past three quarters, the total test volume growth has mostly been driven by the in-hospital model. So this trend matches our expectations but has been greatly accelerated due to the impact of COVID. During the pandemic, two changes have occurred in the hospitals. First, rigid travel restriction rules have made it much more difficult for patients from small cities to travel to top hospitals in nearby large cities or the provincial capital of their problems. This change impacts both the central lab and in-hospital channels with NGS tests mostly offered among only the top hospitals. Secondly, almost all hospitals have made tighter rules for doctor visits. It has been harder to reach clinicians just about prescribing tests and introducing new products. However, this change unlike the first one negatively affects the central lab model but positively impacts the in-hospital model. Therefore, at the bottom part of this page, we wanted to reiterate why we see the in-hospital channel as our strategic focus because it’s a stickier model and also more product and quality driven in terms of competition. We think the in-hospital model will dominate when large NGS panel liquid-based NGS panels obtain NMPA approval, which will likely happen in about 2 years. We believe Burning Rock is well-positioned for this paradigm shift, although we do recognize that since the in-hospital model has a lower unit price than the central-lab model, we will see lower blended ASP during this transitional process. This concludes my segment on the product and business side. And I will now turn to Leo to walk you through the financial numbers.

Leo Li, CFO

Thank you, Shannon. Moving to financials, first, we’d like to recap our Therapy Selection testing volume growth in the second quarter, which is shown on Page 17. Testing volume is the most important metric, representing progress in China and our share of the NGS market. In the second quarter, overall volume growth was strong at 40% year-over-year. Central-lab and in-hospital volumes combined reached a total of close to 20,000 units during the second quarter. We believe that both the absolute scale and the growth rate of our volumes in the second quarter was industry-leading in China. Now moving to Slide 19 by channel, first, in-hospital, in-hospital volume grew strongly at 70% year-over-year, exceeding 10,000 units in the second quarter while central-lab volume growth was more moderate at a 12% year-over-year growth. As Shannon mentioned, the paradigm shift from central-lab to in-hospital is accelerating in China. This trend aligns with what we anticipated strategically a number of years ago, and we’ve been a clear leader in the in-hospital segment. We are pleased to see the accelerated progress that we’ve achieved in the second quarter. As of the end of June, we are officially contracted with 34 hospitals to supply our NGS testing kits. There is also a backlog of an additional 22 hospitals that we are looking to complete contracting with. In terms of coverage breadth, we are working hard on our hospital contracting efforts with a target list of the nation’s top 100 to 150 oncology centers, which represent the lion’s share of China’s NGS testing market so that our tests can be offered in more in-house hospitals. The historically long contracting lead time has been about 2 years, or in some cases, even longer. We hope to accelerate this as NGS becomes more mainstream in China. We have seen wider acceptance of NGS after the top-tier hospitals in cities such as Beijing and Shanghai have installed NGS tests in-house. Additionally, we have observed increasing interest this year among heads of hospitals, and we are optimistic about these trends helping us accelerate our in-hospital efforts. Then moving on to Slide 20 to discuss our central-lab channel, our growth has moderated in the recent period based on our observations and some publicly available data from listed peers in the industry. We believe this is an industry-wide phenomenon, the central-lab slowdown. We see two factors contributing to this slowdown. First is on COVID, which has been on and off in China. On Page 21, we have outlined the impact of COVID in China. For example, back in January, schools in Beijing and Shanghai were shut down for a period of time. In May, Guangzhou and other parts of Southern China were significantly affected. Starting in July, cases and travel restrictions commenced in Nanjing, Eastern China, and spread nationwide. As Shannon mentioned, because NGS adoption is concentrated in leading hospitals located in major cities in China, any travel restrictions impact patient flow, as patients from other parts of the provinces or outside the province represent a significant portion of the overall patient mix. This is particularly true for Tier 1 cities such as Beijing, Shanghai, and Guangzhou, where we have substantial business volumes. Thus, the COVID impact on NGS differs from transitional testing, which is more commoditized and well-penetrated into community and lower-tier hospitals. Additionally, hospitals may also reduce the number of appointments offered when cases are reported in a city. Out of the two factors impacting central-lab, the second is related to LDT, or laboratory developed test, regulation in China. LDT is the model that our central-lab testing relies on. It differs from the most typical testing format in China, where the test is performed within the hospital. Patients pay the hospital rather than third-party outside companies. Historically, LDT regulations in China have existed in a gray area, with rules and regulations regarding tests administered outside of hospitals not fully spelled out. This resulted in low entry barriers and cutthroat competition in this channel. It is becoming clear this year that LDT will be regulated in China, a development we regard favorably for Burning Rock. The new medical device regulation in China that came into effect in June this year further clarifies the scope for LDT. Specifically, Article 53 of the regulation states that in four areas where there are no approved IVD products, LDTs will be permitted for qualified medical institutions. The NMPA is leading the work on drafting detailed implementation rules related to Article 53 of the medical device regulation. We have participated in discussions related to the rule-making process. We believe that clear regulation in LDT will create higher entry barriers for the central-lab segment and help diminish competitive intensity from low-quality offerings in this channel, which is important for the long term. Under this evolving regulatory backdrop, hospitals are also applying greater scrutiny and control over LDTs conducted outside of the hospital. We observed some hospitals tightening or fully cutting outside LDTs in the second quarter. We are confident the industry is changing for the better amid increasing regulatory focus and scrutiny. We’ve been able to gain market share, leveraging our strength in the in-hospital business. Now moving to our financials, which are on Page 22. As we shift from testing volume to revenue metrics, the evolving mix from central-lab to in-hospital is impacting ASP, or average sales price, in the short term. We charge lower prices for IVD testing kits supplied to hospitals in the in-house segment compared to the LDT testing service prices charged to patients in the central-lab channel. Our goal is for NGS testing to become a meaningful business for our partner hospitals. We aim to generate more revenue by capturing a larger volume share from the hospital. However, the ASP difference across the two channels means that during this transitional period, which we expect to be a number of quarters, our blended ASP will be lower. In other words, our revenue growth rate will numerically lag behind our volume growth rate during this transitional phase. For the second quarter, our overall revenue growth was 19% year-over-year, which is lower than the 40% volume growth rates due to the ASP reason just explained. By channel, central-lab growth was in single digits at 7% year-over-year. The in-hospital revenue growth was strong at 40% year-over-year. We also recognize a difference between our in-hospital revenue growth and volume growth numbers. The volume growth was at 70% in the second quarter. This discrepancy arises primarily from our billing and revenue recognition for this channel, not from any price changes in the second quarter. Regarding billing and revenue recognition, there are two components. The first, which is the majority, is booked upon the shipment and receipt of the testing kits by the customer. This component correlates with volumes in that quarter. The second component, the minority, is booked when payment occurs. Payment terms typically follow each hospital’s own supplier terms and differ among hospitals, generally spanning a few quarters. Thus, we believe volume growth in in-hospital should lead to revenue growth over time. Now, regarding our pharma revenue segment, which is coming off a small base and growing rapidly. We are witnessing a rapid buildup of backlog as previously discussed in Page 5. These are typically multiyear projects and also subject to our partners’ clinical progress, and we expect greater contributions from this segment to our overall revenue over time. Before we move to our guidance for the year, let’s recap the delta variant’s impacts on China, which we outlined on Page 21. As previously mentioned, NGS adoption is concentrated in leading hospitals located in major cities within China. During COVID flare-ups, non-pharmaceutical interventions—primarily travel restrictions—are the main containment tool in China. As the delta variant spreads more easily than earlier variants, we see a stronger reaction function and wider travel restrictions in August compared to earlier flare-ups this year, significantly impacting our third-quarter volumes. We observed that July was worse than June, and August was significantly worse than July. Therefore, for the third quarter, we expect central-lab volumes to actually decrease on a year-over-year basis. However, we anticipate in-hospital to continue growing due to the structural industry shift toward in-hospital and our strengths in that channel. For the rest of the year, we expect our business to continue to grow chiefly through in-hospital. We expect volume growth to remain strong, but the ASP drag from the channel mix shift will result in a lower revenue growth rate. In summary, accounting for the COVID impact and the accelerated channel shift effect, we are reducing our full-year 2021 revenue guidance to RMB 500 million. After discussing our quantitative guidance for 2021, we also want to discuss qualitatively how we perceive our growth drivers moving forward, as shown on Page 23. For our Therapy Selection business, the industry is shifting toward in-hospital as NGS increasingly becomes mainstream and more hospitals take greater control of NGS testing. In the near term, this allows us to gain additional market share through our strength in that segment. In the long term, more in-hospital testing allows our product and regulatory advantages to play a greater role, distinguishing us from lower-quality competition. We believe we stand to benefit significantly from this industry trend. Additionally, as mentioned at the start of the call, Burning Rock encompasses more than just Therapy Selection. Over the years, we have developed a pipeline of products across Early Detection and MRD. We have expanded our presence beyond China with our lab in California operational and starting to serve pharma CDx projects that commenced in Q2 of this year. 2022 will be the first year we begin commercializing our 6-cancer detection test. We have been preparing for that since we completed product development for this test back in November last year, and the operational readiness and commercial traction thus far are strong, as recently discussed at the start of this call. In addition to early detection, we also have our MRD product data release and commercialization in 2022. Therefore, we believe that 2022 is well-positioned to kick off multiple additional revenue growth drivers going forward. With that, we’d like to conclude the prepared remarks and open it up for questions, please.

Operator, Operator

Thank you. Your first question comes from the line of Doug Schenkel from Cowen. Please go ahead.

Doug Schenkel, Analyst

Hi. Good morning and good afternoon. Just maybe a couple of follow-ups quickly on those final comments on guidance, in terms of pacing, meaning Q3 versus Q4, if I’m listening correctly, it sounds like the trends direction in the central lab are continuing to improve in the field, and you would expect those to somewhat offset over the next two quarters? Would you expect both Q3 and Q4 revenue to be about the same, or is that the wrong interpretation of pacing?

Leo Li, CFO

Yes. Doug, thanks for the question. On pacing, I guess, it’s helpful to go back to Page 21 and we can see that the COVID impact in August was quite significant. So, that made Q3 very challenging and out of our expectation. So, Q3 is going bad because of COVID for the central lab. For Q4, we don’t rule out another COVID flare-up. We are not certain whether it’s going to be as bad as August. We hope it won’t be, but we do want to leave some buffer room there. So, in the absence of any significant COVID flare-ups again, we think of Q4 should proceed a bit better. And this is the typical seasonality that we do see. But with COVID, it’s becoming more difficult to predict.

Doug Schenkel, Analyst

Understood. Okay. And then one more on guidance for the year, in the second quarter operating spend came in a little higher than we expected. How should we think about operating spend over the balance of the year?

Leo Li, CFO

Yes. It’s helpful to go back to the business for a little bit regarding OpEx. There are a few areas where we are adding our spend. First is on early detection. As Yusheng mentioned, we are looking to partner with hospitals and insurance companies. So, we have an increasing funnel for the hospital segment, adding sales personnel for the insurance segment, marketing teams, and on the back end, we have call centers and other operational support elements. We have started adding organizational headcount and infrastructure for early detection since starting this year, and these will remain in place. If the business traction is good, then we will look to add more to these elements. In addition, on these early detection clinical programs, we are adding to the prior programs in execution. So over time, this will hit our R&D line. Early detection clinical expenses will increase as we have quite a few large studies ongoing already, and we are looking to launch additional studies down the road. So, early detection will be an incremental driver. Additionally, as we think about MRD and additional product launches offered for oncology patients, we are also building up our sales and marketing team over time for the oncology patient business, which also increases spending. On the overall footprint, we have a new building rented that is about double the size of our current place in Guangzhou. This will house our early detection operation, including the lab function, which will support large clinical studies and commercialization efforts. The overall footprint, which will increase G&A, is also expanding. Thus, I would expect OpEx levels to remain at this level and trend upward over time, more dependent on commercial and clinical progress.

Doug Schenkel, Analyst

Great. And one last question for me. A clear bright spot in the quarter was the performance in the biopharma, the pharma services line. Recognizing that can be lumpy, the value of contracts entered into in the first half of the year was pretty impressive. Can you share anything in terms of the mix of projects or applications that you are working on with your biopharmaceutical partners, how you expect this to trend over time? And how we should view this as a future indicator for NGS test adoption in China? I am wondering how much weight you put on these trends as you think about the outlook for adoption of NGS-based tools in your key markets?

Shannon Chuai, COO

Okay. Doug, I can try to answer that question. In the context of product mix for our pharmaceutical collaboration business, it’s a blend between biomarker service studies and companion diagnostics collaboration. We have most recently made mention in our announcement of a collaboration with IMPACT Therapeutics for a CDx collaboration in both the U.S. and China. We are seeing more and more domestic, as well as U.S. innovative drug development companies showing interest in our pipeline and in our registration capability to serve CDx projects in both the U.S. and China. We are noticing a trend towards larger CDx collaboration projects in that area. However, we still have numerous biomarker service exploratory studies and collaborations with domestic companies as well. Thus, the short answer is it’s a mix. Regarding NGS adoption, we see a clearer trend toward pharmaceutical companies in China increasingly adopting the CDx concept. The transition from traditional methods, such as IHC or PCR, to NGS is still gradual and occurs on a case-by-case basis, since certain biomarkers like PD-L1 don’t necessarily require NGS, while others could be performed either using IHC or NGS. Consequently, we observe a case-by-case transition. However, we are seeing a sharp shift towards the CDx concept, which means that many drug companies working on targeted therapy or immunotherapy drugs in China, now view establishing a biomarker strategy strategically as part of the requirement for regulatory considerations from almost the very beginning, particularly as they enter the approval phase. We are excited to see this development in China, which has been true in the U.S. market for quite some time.

Yusheng Han, CEO

I would like to add one more point about the pharma business. The total contract value is not about one or two projects being dominant; it consists of numerous projects with varying values and different partners. So, I would say it’s truly a trend and very healthy from my observation.

Operator, Operator

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

David Lee, Analyst

Great. Thank you, management for giving me the chance to ask questions. So, my question is regarding the stricter regulation of the overall China healthcare policy. It seems like a trend that the government is going to implement stricter regulations regarding data, especially genetic data. Do you perceive any risks for our business—particularly because we are collecting and have collected a substantial amount of genetic data from patients? Do you think we might face some risks in the future?

Yusheng Han, CEO

Thanks for asking, that’s a very important question. As you mentioned, the government is indeed becoming stricter about data security. We’ve actually been focusing on data security for quite some time. We report to the government and maintain communication with them regularly to prove how we regulate data usage and ensure that the data generated in China stays in China. Importantly, we have established a good communication channel with the relevant government department, HGR. I believe that so far, we have built a solid rapport, and we do not foresee this being a high risk for Burning Rock. As we always align our operations with the government’s expectations.

Leo Li, CFO

To add to what Yusheng mentioned, regarding human genetic resources (HGR), that’s a crucial aspect for the life sciences or biotech industry. There have already been negative impacts on a few companies violating the HGR regulations in the past. Therefore, we have paid meticulous attention to HGR regulations and are committed to ensuring full compliance with HGR regulations, biosecurity, and other relevant laws and regulations in China. We would also like to highlight that we are listed among the approved projects in the HGR framework, where we have maintained a strong record.

David Lee, Analyst

Thanks, Li. That’s helpful.

Operator, Operator

Thank you. Our next question comes from Sean Wu from Morgan Stanley. Please ask your question.

Sean Wu, Analyst

Thank you very much. I have one follow-up question regarding the pharma businesses. While it is clear that there is optimism, I would like to understand better the competitive dynamics. Can you discuss the competition in the pharma business? Also, could you elaborate on other companies in the biopharma space and whether you expect competition to impact your performance?

Yusheng Han, CEO

Thank you for your question, Sean. Regarding the pharma business, you are correct that the total market is expanding rapidly, and that’s why not only Burning Rock is emphasizing our pharma business. Our competitive advantage is that we are among very few globally who can register the CDx in both the U.S. and China with our NGS platform. Additionally, we have hired Dr. Sharon Liang, whose background in regulatory processes in both the U.S. and China is outstanding, having worked over 9 years in the FDA for IVD approval. Quality is another critical factor; we have the FDA endorsement which confirms that our quality ranks among the best—an aspect highly regarded by pharma companies, who prioritize whether their drug can receive regulatory approval and the quality of the tests they depend on. Hence, while we do foresee some competition, in terms of registration in both the U.S. and China, we believe we stand as the first choice among MNCs looking to establish operations in China with high-quality partners. On early detection, we have observed single cancer testing becoming increasingly effective for specific cancers like colon cancer. However, our philosophy prioritizes multi-cancer early detection from the beginning, as we believe that offers a stronger future. The rationale is that a comprehensive health check-up should assess potential issues in several organs rather than focusing on a single organ, which aligns with our strategy. We believe multi-cancer early detection will capture a larger market share in the future. Importantly, data indicates that Burning Rock possesses the best data for multi-cancer early detection in China, with only our trials passing the HGR approval necessary for clinical studies.

Operator, Operator

Thank you. We have reached the end of the question-and-answer session. So with that, we conclude our conference for today. Thank you for participating. You may all disconnect.