Burning Rock Biotech (NASDAQ:BNR) Q3 2021 Earnings Call

0:00 Good day and thank you for standing by. Welcome to the Burning Rocks 2021 Third Quarter Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. Before we begin, I want to remind you that this conference call contains forward-looking statements. These statements constitute 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.

0:50 These forward-looking statements can be identified by the terminology such as will, expects, anticipates future intents, plans, beliefs, estimates, targets, confidence, and similar statements. Bedding Rock may also make written or oral forward-looking statements in its periodic reports to the SEC, in its annual report to shareholders, in press releases and other written materials, and in oral statements made by its officers, directors, or employees to third parties. Statements that are not historical facts, including statements about burning rock's beliefs and expectations, are thought-looking statements.

1:36 Such statements are based upon management's current expectations, current markets 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. while looking statements involve risks and certainties and other factors that could cause actual results to differ materially from those contained in any such statements. All information provided in this conference call is as of the date of this conference call and 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.

2:26 And now I'd like to hand the conference over to your first speaker today, Mr. Yusheng Han, CEO of Burning Rock. Thank you, sir. Please go ahead. Thank you. Welcome to Burning Rock Q3 conference call. I'm Yusheng Han, the CEO and founder of Burning Rock. So today we have our CEO, Shannon, CTO, Joe, and CFO, Leo, in the meeting. So first, I will go through some exciting highlights of our recent progress. and our CEO, Shannon, will elaborate on our product line expansion and our CFO, Leo, will walk you through the financials. So, let's turn to page four. So, we all know that Burning Rock started the therapy selection business in 2014 and has grown to the market leader in this segment.

3:18 So, the leading position has laid a good foundation and it gave us an advantage moving forward to new business of early detection MRD, and pharmaceutical collaborations. And that's what we have described last time. And we have a strong branding from our technology and product quality, which help us attract talents. So the network we have built across thousands of oncologists and hundreds of hospitals enable us rapid initiation of R&D studies on new products, as well as fast distribution when it goes to the market. The existing high testing volume makes it plausible for us to continue lowering the cost. And that's why we aim to tackle the therapy selection, MRD, and therapy selection, sorry, the early detection market in parallel in the coming few years.

4:15 And then let's turn to page four with some highlights on our recent progress. So, The first one, we talk about the commercialization preparation of the six cancer early detection. We discussed that a lot of time, and I have to say that the preparation is going on well. We have strong confidence to sign six hospitals by the end of this year, sign contract with six hospitals by the end of this year. However, since multi-cancer early detection is a new category of product in the market, and consumers instead of doctors are the real customer. We plan to run the 2C education campaign together with the hospital and doctors.

5:05 So we will see how it goes, how you are going next year. And in terms of the trials of early detection, We expect the nine cancer product development to read out in H1 2022 with a potential to demonstrate performance improvement versus the six cancer tests, no matter in sensitivity, specificity, and also POO. In our last time, we talked about our tumor-informed MRD technology called BR-PROFIT. It has shown very promising performance with sensitivity on par with what has been shown in Natara and Archer's publication.

5:55 And the lung cancer readout will be in the first half year to 2022. And we have already launched trials for colon and oesophageal cancers. For therapy selection, we recorded a 37-volume increase in Q3 for the in-hospital model, despite the COVID-19 hit in August, proving that the in-hospital model is a much more stable and reliable model. And last time, I also introduced the fast-growing pharmaceutical collaboration business. if you remember correctly last time by Q2 the contract number was 98 million RMB and by the end of Q3 the number went to 144 million and which is a 4.5 times of the total year of 2020 so yeah are listed in detail on the next page. So if we turn to page five, to remind that the business we have to, I think I need to explain why we separate the pharmaceutical collaboration as an independent business unit. So pharmaceutical business

7:28 is not a new business for unjust industry in US. But this market hasn't been major in China until about a year and a half ago. So some recent trends and paradigm shift drivers include first, AMPA is moving toward regulating targeted therapy drugs approval in CDX model, which means that the targeted drugs needs test to go to the market together. The second driver is with the pressure of volume-based government procurement, more domestic innovative pharmaceutical companies seeking for global expansion opportunities.

8:14 And for targeted therapy jobs, the needs of pharmaceuticals include high-quality products available on both FIP and liquid biopsy samples, and registration capability in both US and China and sometimes in the other developed countries like Japan and Europe. And the third driver is the MNC needs NGS company that can do CDX in China. However, it's very challenging for foreign NGS companies to operate registration trial in child due to the regulation of human genome regulation committee. and that Chinese unjust company with global operation is their ideal choice.

9:00 So that's seen this trend with our US lab, which now is clear and CAP certificated and a high quality and broad portfolio and the global registration capability and strong registration team and our unique advantages for this business. And let's turn to page six. So this is our product line progress. And we will let our COO, Shannon, to go through that from this page on.

9:46 Shannon? Okay. Okay, sure. Thank you, Yusheng. So let's move to page six. and we have actually shared this overview of our product pipeline last time, so I'll skip most of the content on the page and just focus on some key updates. First, we now have more clarity on the timeline for launching the three very important products in Q1 next year. We actually mentioned about the commercialization of these three products, but now we have a clear timeline of launching them in the first quarter. and we will start the commercialization of DetomaRx, which is for adjuvant chemotherapy benefit prediction for early stage lung cancer patients. And also our MRD product using our BiProfit technology, as Yusheng just mentioned, for early stage solid tumors, which will become available to those clinicians and also our pharmaceutical customers.

10:45 And as well as our six cancer early detection product. So we expect these new products to make significant contribution to our growth in the coming years. And then for our cancer early detection program, for the night cancer product development program, we now have more visibility that we can share. We will most likely see some data readout in the first half of next year. I'll give more details on exactly what that means on page 10. And then for our MRD program, besides the lung cancer study, which is called MED-EL, that we have previously talked about, the MED-EL will have data readout released early next year, as I shared before. And also, in the past few months, we have also expanded validation into other solid tumors, including colon, esophageal, and gastric, et cetera.

11:37 And we expect to have validation data available in 2022 relapse risk prediction on these cancer types from retrospective cohorts. So there are also increasing interest in the China market on MRD-driven adjuvant therapy studies for drug development. and we think Bioprofit will be very well positioned to collaborate with our pharmaceutical partners on that end as well because most of the liquid biopsy products available in the China market are for fixed panels. So Bioprofit will be a very innovative technology in terms of the personalized panel for MRD approach.

12:23 So let's now move directly to page 10 where I'd like to walk you through more details, some updates for our cancer early detection program. For the six cancer early detection product, we expect to launch a prospective slash interventional study on intended use population in the first half of 2022. This study we think will provide us with key inputs for the design of the future pivotal study for the six cancer test registration in China. And then on our nine cancer product, One key update is that we have finished accrual on a pilot case-control validation study, including over 2,000 participants.

13:08 We call this study the PROMIS study, and we expect to release some data readouts for the PROMIS study in the first half of 2022. And in the meanwhile, the PREDICT study, which is the main validation study plan for our nine cancer products, with more than 14,000 participants to be enrolled, if you still remember. It's recruiting at full speed right now with about 30 centers contributing to enrollment. We remain our anticipation of having the first data readout for PREDICT around the end of 2022. We also wanted to emphasize that both PREDICT and PRACENT, which is the case control validation study, for our 22 cancer product development.

13:54 Both these studies have gained approval from the Human Genetics Resources Administration in China. Because all studies with more than 500 subjects need to go through their approval process, so from what we can tell, we wanted to share that PREDICT and PRESSIONS are thus far the only large-scale multi-cancer early detection trials going on in China. So that's about all I wanted to elaborate on. So now I will turn to our CFO, Leo, to walk you through our financials. Leo? Thank you, Shannon. And let's go to page 17, please. Before heading into our financials, I'd like to quickly recap on the COVID curve for China. China's current defense against COVID is primarily through non-therapeutic means, or the off-phase, it's free movement and business large-scale testing. And if there's sign of cases spreading, we would see containment via tightened movements or travel restrictions.

15:14 And just to recap what happened for Q3, we saw a significant wave back in August. that spread through multiple cities that impacted Beijing, which is a key market for us. This impacted our volumes for August. We'll go into exact numbers a little later, but in terms of trend, we saw significant impact in August. Then we recovered and resumed our volume growth in September and October. But we are right in the middle of another wave now in November. Then turning to page 18, which shows our volume trends. The numbers on page 18 combines both our central lab and our in-hospital segments.

15:59 And in aggregate, you can see that our volumes grew by 38% year-over-year during the first nine months of this year, which we believe is higher than industry average that we're tracking. and also higher than some of the growth numbers that we saw from NGS or even PCR peers in China. And specifically for the third quarter, our volumes grew 14% year over year. Within the quarter, July saw good volume growth of about 35%. Then August was hit by a COVID wave and restrictions. We recovered in September, growing at high single digits year over year. then accelerated to 38% year-over-year growth in October. So we see that we've had good double-digit volume growth during the periods where COVID is quiet in China. Then stepping back from the COVID annoyance, we believe the key of our above industry volume growth this year is the results of our in-hospital strategy.

17:03 This has allowed us to take dominant share at a hospital by being the NGS test supplier to that hospital. In-hospital is already more than half of our testing volumes since the second quarter this year, and also that remains the case for the third quarter. We expect this proportion to grow even further going forward. However, this does mean that our blended ASP across the central lab and in-hospital segments will be dragged down as we supply hospitals at a lower ASP versus the price that we charge directly to patients in the out-of-pocket central lab segment. This draft will proceed for a few quarters as we execute the transition towards more in-hospital testing, but we think this is worthwhile doing for the reasons we laid out on page 18, and fundamentally we think the in-hospital segment is a more sticky process A better quality segment that we should get more volumes going forward.

18:08 Then going to our numbers, which is on page 21, we grew our revenues by 2% year-over-year in the third quarter. Within the quarter, it's similar to the volume trend that we explained previously, that August was a hit and July, September was better. Our overall revenue growth rate is lower than our volume growth rate because of the ASP drag that we just explained. And by segment, Central Lab was impacted more and was down year over year during the third quarter. In hospital, segment maintained good growth, growing 38% year over year. And these are primarily recurring kit revenues, so the vast majority is kit revenues, not instrument revenues.

18:56 We believe our market share gain through the in-hospital strategy is the key for achieving above industry growth for the in-hospital segments during the third quarter. The pharma segment is coming off a small base. Our pharma pipeline has been building rapidly this year, as we showed on page five. And these are typically multi-year projects, so the pipeline will convert to revenues over a multi-year period. Moving on to our guidance, which is at or around 500 million RMB for the full year of 2021. And based on our run rate up to October, we would feel confident of achieving our guidance. But the latest COVID wave, which is hitting us now, is having an impact on our fourth quarter. If the current wave were to die down today, and if we were to go back to normal today, we would feel confident about our guidance.

19:51 However, given what's happening on the ground, we'll have to flag the risk and see how much of an impact and how long of an impact this current wave will drag on. And I guess moving beyond 2021, as we look out qualitatively for 2022, we will see commercial launches of multiple products this year. As Yusheng mentioned at the start of the call, we have been preparing for the launch of R6 cancer and Xiaozhi Hu. In addition, as Shannon walked through on page six, we will see the commercial launch of two new products for early stage cancer patients in 2022. So 2022 is an important year that we'll be looking forward to and we will be providing updates on those commercial initiatives in our future earnings course.

20:45 And lastly, we announced today the dates and agenda of our annual shareholders' meeting. At the meeting, our board is putting forward a long-term share incentive plan for a shareholders' vote. The share incentive is long-term in nature. It awards our senior management and key talents an incentive to achieve not linear growth but nonlinear breakthroughs on our company's vision on a collective basis. Specifically, half of the share incentive amounting to 5% of our total shares outstanding will vest if our market cap reaches $10 billion. Another 5% of total shares outstanding will vest if our market cap reaches $15 billion. The timeframe for reaching the $10 billion market cap is within five years, and after which the options will lapse. The timeframe for reaching the $15 billion market cap target is within seven years. Further details about this plan and our annual shareholders meeting is available on our website under the shareholder meeting section under the news and events tab. And with that, we conclude the opening remarks of the call and we're opening to questions.

22:06 Thank you. Ladies and gentlemen, we'll begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and light for your name to be announced. If you wish to withdraw your request, please press the pound or hash key. Please stand by while we compile the question and answer roster. So once again, ladies and gentlemen, it's star 1 for questions. Our first question comes from the line of Max Mussochi from Cohen and Company. Please ask your question. Hi, thanks for taking the questions. So if you look at your key geographic regions and cities and where the COVID impact was the strongest during Q3, can you just help us understand if the central lab volumes were impacted more by the COVID resurgence or if there was any impact from customers shifting to in-hospital testing?

23:03 And with all of these factors in mind, along with new product launches, It would be great to hear how we should be thinking about return to growth or the pace of growth in central lab volumes in 2022. Max, thanks for that question. So on the COVID impacts, the key markets for us are the major tier one cities in China. And Beijing and Shanghai represents a large share of that market. And these are the cities Xiaozhi Hu, Hao Liu Thank you very much.

24:29 Thank you very much. That will add on to the central lab revenue growth going forward. We are launching the in-licensed product for early stage lung cancer, a risk stratification product that had Chinese cohort validation data. We're launching that Q1 next year, as Shannon mentioned.

25:17 So that will help providing us incremental revenue for the central lab revenue going forward as well. So that's a a qualitative thoughts for next year. And as we come back for our fourth quarter results next year, we will be providing our guidance for 2022. And Max, I have some additional comments. Hello. Max, this is Yusheng. I have additional comments for your question. So just so you know, the impact of COVID-19 is bigger in winter. So I think after the spring, the situation will be significantly better according to the situation this year. And the second thing is that although Central Lab model, the new product rely on the Central Lab model, but we can see that Central Lab model is not stop growing slowly, but with the new product, with the hospital, then our sales team can really go in.

26:31 They can really add more revenue because there's more indication suitable for the new product. Great. That makes sense. And then just as it relates to the implied Q4 guidance, Just curious if there's been any changes to your access to customers here halfway through November or if it remains largely the same. Looks like the full year guidance implies about 10% sequential growth in revenues in Q4 compared to Q3. So it would just be great to hear about the factors related to volume growth and ASPs that will determine Your ability to grow revenues quarter over quarter, if you find any other embedded assumptions in the implied guidance that we should be keeping an eye on.

27:33 As we are in the middle of November, we closed a strong month for October. We saw good volume growth that month. That follows the September recovery. After the COVID hit back in August So that was all going well But as we sit in the middle of another wave There is uncertainty on how long and how large of an impact Beijing tightened a bit further within this week So it's hard to predict how much further an impact the current wave will drag on So we're just going to have to bear that risk in mind But we were happy about what we did back in October There is an unknown regarding the current wave for November and December. So we believe the guidance will be around 500 million for the full year with the uncertainty around the COVID impact.

28:30 Okay, and one final question if I could sneak one in. We've seen some recent reimbursement updates for MRD monitoring tests in the U.S., Oncologists seem to be very excited about the launch of this test application. I'd be curious to hear whether you feel that oncologists in China are equally receptive and ready to adopt MRD monitoring tests when they're broadly commercially launched, and whether or not you feel that oncologists in China are more comfortable with a tumor-informed MRD approach versus using a blood-only fixed panel approach. Well, I can take that question. I'll try.

29:18 Well, first of all, we have seen a very rather dramatic change in the clinicians' concept according to their acceptance or interest in MRD products in the past few months. Last year, around this time, We didn't feel like the MRD market was ready in any way. But most recently, especially among the lung clinicians and also some of the colorectal doctors, clinicians, oncologists, start to show very strong interest in MRD-related products in their day-to-day applications.

30:05 However, most of the interest so far of course still remain in more research-related or drug development biomarker study-related application realm. But we are going to see whether some of them really believe in the utility, the clinical utility that's already shown, which we think is very, very strong and are persuasive. So we do have pretty high hope on the MRD market, but frankly speaking, we are not 100% sure how fast the adoption rate will be among the Chinese clinicians.

30:52 But all I can say right now is that from what we have observed over the past few months, it's becoming more and more promising. And because the utility in these early stage cancer patients are so significant, I think scientifically, we also have very solid reasons to believe that eventually this will play out. And in terms of the tumor-informed versus the fixed panel, actually they each have their pros and cons, but we are seeing clearly that in terms of the most important utility, which is the longitudinal monitoring for surveillance, are relapse risk monitoring for early-stage patients. Most clinicians in China, they think that the NPV, or negative predictive value, for the MRD applications is the most important thing for the product, which means that sensitivity is, quote-unquote, more important than specificity because they want to make sure that all the MRD-negative patients really are fine.

32:08 So in that situation, then tumor-informed methodology clearly has an advantage right now compared to fixed panel approaches. But with that said, it does have some cons compared to the fixed panel approaches, including about 10% to 15% of patients who have secondary primary cancer The second primary tumor, you will miss them. And also the turnaround time for the tumor-informed approach is very concerning for the clinicians. So again, we will see their response when they really start to experience the product. I hope that does that answer your question.

32:55 Great. Thank you. That's great. Thank you. Okay. Thank you. Our next question comes from the line of Sean Wu from Morgan Stanley. Please answer the question. Thank you very much for taking my questions and also consideration of your progress with the early screening MRD. So I have a couple of quick questions. One question from the client. So looking back over the last few quarters, you would see a pretty kind of Picking up of selling expense ratio of the revenue. I know the revenue growth may be a bit slowing down for ASB type of situation. But maybe can you give us a bit of color about the breakdown between the in-hospital business and central lab business.

33:49 How the ratios of selling expenses differ from those in Two types of business. That's the first question. This, I think, would be for Leo. Another question for Sherman. For the early screening part, your nine cancer readouts have been moved up from the end of next year to the first half of 2020. Of course, that's great, but what are the reasons behind that? And Do we have any kind of early color for that? And also for the 22 cancer type screening, you would have the first readout in 2024.

34:38 Before that, do we have any kind of important critical milestone to pay attention to? That's my two questions. Then I'll follow up with a question from the clients. Sure. Let me come back on the selling expense question first. Then Shannon will talk about the question on the readouts and future milestones. So on selling expenses, I think the first factor to bear in mind is that we have started building the commercial organization for early detection this year. So that has gone into the sales and marketing expenses line already. That includes a few functions. a sales team for getting the products into the hospital's health check-up department.

35:24 So there is a team in double-digit personnel on that, and they've had some breakthroughs, as Yusheng explained at the start of this call. In addition, all other sales-related functions are also booked under this line. For example, a customer service team that has been built over time this year as this product would require customer services at pre-sales and after the tests in some cases. So I think the first build-up is related to the early detection commercial organization, and that at the moment has not had meaningful revenue, so that would have a matching impact on the selling expenses ratio.

36:12 So that's, I think, the first factor. Within the patient testing business that is already revenue generating, we have also been expanding our team this year, as we have explained previously, that we are building out sales coverage for more in-hospital penetration. And also, as we look at our product launches for next year, we will have products going off to early-stage patients. So we have been ramping up sales coverage potentially across a few regions in China as well. So that added towards the overall headcount. Then related to the selling efficiency across central lab versus in-hospital channels, we don't provide the breakdown quantitatively, but qualitatively, in-hospital is a more productive channel in terms of selling expenses.

37:09 And that's despite having lower ASP, it's margin profile at the operating margin level we believe is actually better than central lab and importantly this is a institutionalized channel that allow us to differentiate so we think that that's that is important channel going forward and looking forward I think the oncology commercial organization build-out is largely complete meaning the cells Thank you. And to Shannon. Oh, yes. So in terms of the readout time, thanks for the question.

38:19 The difference here is that originally when we talked about the readout for our non-cancer early detection product, we were referring to Predict, the first stage, the first phase of Predict. However, we have added and additional sort of a proof of concept cohort on top of Predict called Promise, which has about 2,000, actually a little bit more than 2,000 participants. And if you remember, Predict actually has more than 14,000 participants, and it's a that's designed to have enough statistical power for all nine cancer types to be able to give a precise enough estimate for sensitivity and specificity for each cancer type and ideally for each stage. However, before the readouts were predicted, we now have this additional pilot cohort promise to give us A little bit of clarity on the potential sensitivity specificity performance as well as the TLL performance that we could achieve with the Nye Cancer

39:50 early detection product. And from what we have seen, we feel like it's itself It's worthwhile to be shared. The data looks actually pretty interesting. So that's why we have moved a little bit ahead on the readout plan. So that's to clarify on the V4 readout timeline. And actually for PREDICT, our readout timeline has remained the same, which is that phase one for PREDICT, we will release the data as early as the end of 2022. And then for the second question, in terms of additional milestones, as laid out on page 10, we will actually have three different product lines or product development programs in terms of early detection. There's six cancer, my cancer, and 22 cancer products. So in terms of the six cancers, the next milestone will be the feasibility, the interventional slash prospective cohort that we just mentioned, which we expect to kick off early next year, in the first half of next year, to be more precise. And then with the results from that trial, we are really

41:21 anticipating that we will be able to enter the pivotal registrational study design with what we have by then. And then for the night cancer, I think the next important milestone will be the second phase of PREDICT, which will be a single-blinded study, which means that we will have this blinded and multicenter study case control study collected prospectively to have a quite robust estimate on our night cancer product performance. And then for the 22 cancer, the milestone will be depression study, which also has close to 12,000 participants, but it will cover 22 major cancer types, which collectively will cover about 90% of the cancer patients in China. And that study will have the readout by 2024. But it's, again, a case control study.

42:34 So in terms of the registrational pathway moving forward for the non-cancer and 22 cancers, we don't feel like we have enough visibility at this point to share more Thank you very much. I have a final question from my client. He's wondering if you can grow your central lab testing volume in 2022, given that you have not grown volume for four quarters now. So I suppose the COVID-19 situation has something to do with that, but of course also some quarters last year, maybe also can you just give this kind of person some guidance as to the volume growth of lab testing next year.

43:50 I think on the trends that we saw at the end of October, I think that's something we would look forward to for next year. But bear in mind, we can't separate COVID out of vacuum in China, so that's always going to be a lingering factor, I think, for some part of next year. And beyond COVID, I do believe there is potential for us to cover additional oncologists and additional centers in the central lab channel in addition to the new products that we will be launching. So I think that channel should come back to growth in a normal period of time, although it's hard to predict exactly when. So we can't give a precise estimate at this point, but something qualitative that we can look out for.

44:41 Great, thank you very much. Those are all my questions. Thank you, Xiao. Great, thank you. There are no further questions at this time. With that, we conclude our conference for today. Thank you for participating in All This Connects.