Burning Rock Biotech Ltd (BNR) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Burning Rock 2022 Q2 Earnings Conference Call and Webcast. (Operator Instructions)

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 terminology 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 such factors -- in such statements. Burning Rock does not undertake any obligation to update any forward-looking statements as a result of information, future events or otherwise except as required under applicable law. Please note that today's conference call is being recorded.

I would now like to hand over to your first speaker, Mr. Yusheng Han. Please go ahead, sir.

Thank you, and thanks for coming to Burning Rock's 2022 Q2 conference call. I'm Yusheng Han, the CEO and Founder of Burning Rock. So today, we have our COO, CTO and CFO in the meeting.

We know that Q2 was really a hard time for most of the companies in China with completely lockdown of Shanghai in April and May and half lockdown of Beijing in May. Despite these difficulties, we still recorded a year-on-year increase in Q2 in terms of revenue. The growth was contributed by strong in-hospital revenue growth outside of Shanghai and Beijing, new product lines such as MRD products and pharma business.

So let's review our business outline and the progress. And our COO, Shannon, will go through the development of our product line. And after that, our CFO, Leo, will go through the financials.

So let's turn to Page 3. So that's the basic introduction of Burning Rock. We started with therapy selection business in 2014 and has grown to the market leader in this segment. And the leading position has laid a good foundation and given us advantages as moving forward to new business of early detection, MRD and pharma collaborations.

Let's turn to Page 4, and this is for our business objectives in the future. So therapy selection is a segment that we have working for 8 years. In the past years, our main goal for this segment is to expand market share in both in-hospital model and central lab model.

And the in-hospital model now is operating profit positive, while central lab is lossmaking. And we are strongly -- now we are strongly leaning our strategy to in-hospital model. We have set a clear goal of making onco (inaudible) profitable in 2023.

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new clinical utility evidence and the technology development demands mature liquid biopsy technology and personalized panels. Therefore, our -- therefore, we initiate trials in lung, CRC and other cancers. This will be the barrier for our product and not easy to be replicated like service (inaudible).

The pharma business is a trend with strong needs of both therapy selection and MRD. And this (inaudible) highly depends on the institution values such as quality and registration capability. And the business has been profitable, and strong growth continues.

For multi-cancer early detection, we believe that it is the optimal solution for cancer early detection. Powered by multi-dimensional testing, including methylation plus NGS plus machine learning, multi-cancer early detection has better performance versus single cancer early detection. And by the way, in a real scenario, we cannot draw like 20 tubes of blood if you want to detect 20 type of cancers. Thus, we invested a huge resource of technology development and clinical trials.

We believe that it will build strong barriers that can last for many years. And (inaudible) is that the conversation with NMPA of multi-cancer early detection registration got better recently.

So let's turn to Page 5 for our recent progress. The in-hospital model, I mean, revenue keeps a strong increase. Our regions, excluding Beijing and Shanghai, grew over 60% year-on-year in Q2 in terms of volume.

The new product, including MRD, myChoice and DetermaRx, help us gain market share in central lab model. At the end of Q2, we optimized the headcount cost and started to reduce -- at the end of Q2, we started to reduce the commercial investment of oncology business unit as well. And due to the excellent execution, impact to the revenue is very limited. We are -- so we are in a much better position to grow through the winter.

And the commercial ramp of MRD is strong since we launched the product in March especially after data readout on (inaudible) cell lung cancer and CRC at AACR. The revenue of biopharma grew triple digit of year-on-year to RMB 18 million contributed to 14% of overall revenue.

And the backlog continues to build with contracted project value grew 49% year-on-year to RMB 158 million during the 7 months in 2022. For early detection, the data of our PROMISE was released. It's a data of over 2,000 participants for 9 cancer test, reading out at ESMO in September.

And for the clinical programs of early detection, the PREVENT study was launched. And it is a trial composed of 100 -- sorry, 12,500 participants. And it's China's first multi-cancer prospective interventional study.

And let's turn to Page 6. On this page, I just want to utilize the graph to illustrate that the pharma business growing really strongly. The green columns are comparison of contract value of 2021 versus 2020. And the blue columns are comparison of contract value of the first 7 months of 2022 and 2021.

And this is achieved in a situation that Shanghai was totally locked down in April and May. And we know -- as we know that Shanghai is the headquarter of many biopharmas. So we would like to think that this achievement is great.

And yes, that's basically the -- about the -- our line of Burning Rock. And then I will pass to Shannon to talk about our top line.

Okay. Thank you, Yusheng. So now I'd like to move on to Page 8. So first, I'd like to take a minute and reillustrate the (inaudible) of MRD test on early stage patients as the establishment of different clinical activities will ultimately drive the market growth.

So on this diagram, we can see that an early-stage patient could go through neo-adjuvant and/or adjuvant therapies before and after surgery. And then hopefully, along (inaudible) period afterwards. As we all know, the most well-established MRD utility is the prognosis prediction.

And multiple studies across different cancer types and different technology platforms have validated the strong and robust association between MRD status and the patient prognosis at both the landmark and longitudinal time points. So such utility is marked as green on this diagram. You can see that happen at different time points along the way.

However, this prognosis utility itself would probably not be strong enough to drive a very high penetration of MRD tests because it would be the kind of nice to have but so what test, which is informative but not exactly actionable for clinicians. But with that said, we are now starting to see more and more truly actionable utilities of MRD tests to solve -- to evolve, which are the one labeled red on this diagram.

So among these utilities, the most important one and also, I think the most immediate one is to differentiate low-risk and high-risk patients based on the landmark MRD right after surgery and to commence escalated or de-escalated adjuvant therapy regimen. So if clinical trials in the coming years can validate such MRD-guided treatment selection strategy, then the penetration of MRD tests among early stage patients would become very, very significant.

So Page 9 and Page 10 actually show 2 such examples in terms of what kind of results from trials which serves the need as validation of the MRD-guided treatment strategy. They are both recent studies.

Page 9 is the IMvigor010 study, which is the Phase III trial of atezolizumab in bladder cancer patients at maintenance treatment. So on the top corner, the top left corner here, it shows that in this trial, the whole ITT population did not show any efficacy from the treatment compared to the control arm.

And then on the right, we can see that if we zoom in, only the 39% MRD (inaudible) patients at landmark benefited from atezo. So this is a very strong evidence. This is a great example to show that the MRD utility is to identify the high-risk group and give them more therapy.

Of course, the MRD analysis in this study was only retrospective. And that's why IMvigor011 has been initiated as a prospective study, and we'll be able to confirm if such utility can be validated in a CDx type of setup.

And then Page 10 is an even more recent example. This is the DYNAMIC study in the colon cancer. Patients were randomized into 2 groups: with standard of care or ctDNA-guided treatment strategy.

So in the past ASCO meeting, which has happened a couple of months ago, it has reported that the MRD-negative patients in this study who underwent far less adjuvant chemotherapy achieved similar or noninferior recurrent free survival compared to the standard of care group. So if this is validated repeatedly in multiple studies in the near future, it would mean that MRD-negative status actually represent group of cured patients after surgery who can be exempt from adjuvant chemotherapy.

So again, studies like these will truly bring MRD into a CDx level biomarker and greatly increase its penetration down the road. Because of this advancement, we are also witnessing more endorsement for MRD in the clinician community, including its mentioning in the MPC and colorectal cancer guidelines in the ESMO recommendations in (inaudible).

As we have shown last time, Page 11 is the consensus among Chinese lung cancer doctors for MRD. And this particular consensus has been widely talked about recently within the China doctor community. And also, as far as we know, a consensus on MRD in colon cancer among Chinese oncologists are also being written and should be expected in the near future.

And with all that, on Page 12, we outlined the development plan for brPROPHET, which is to capture based personalized MRD assay we have developed and launched a few months ago starting from March. The initial market response has been pretty exciting, which our CFO, Leo, will cover in later slides.

And as we have introduced before, brPROPHET is able to reach an LOD of 0.004%. We have released initial clinicalization data on lung cancer and colorectal cancer cohorts in the past AACR. And then on the bottom half of Page 12 here, we lined up our additional clinical programs and expected data readout timeline.

For example, for lung cancer, for the observational studies as the pink bar is showing on the top, we will submit the MEDAL cohort for position in a few months, for which I'll show some key findings on the next page. We also have 2 interventional studies launched or plan to launch later this year. We expect to start having data readouts from these interventional studies to validate the MRD-guided treatment section utility in lung cancer in 2025, which is shown here as the dark red bar.

And then the timeline in colorectal cancer is actually similar to lung cancer in our plan. We expect to have a large cohort operational study results reported in early 2024 as in the light blue bar. And we're also initiating interventional studies, which expect to have data readout by 2026 as in the dark blue bar.

So for other cancer types, which are in the last bar, we have initiated multiple operational studies, mostly in esophageal cancer, breast cancer, et cetera. The earliest time for data readout expected is in 2024.

So our expectation for the market growth margin in China is also matched with the clinical program timeline outlined here. So which means that from 2022 to 2024 is what we expect to be the early market adoption period mostly driven by the prognosis part of the MRD utility, which has been well established.

And then between 2025 and 2027 when more and more interventional studies conclude, the actionable part of the MRD utility will be fully established. So we would expect for a second wave of strong growth of MRD penetration around that time.

So now let's turn to Page 13. Here, we want to take a couple of minutes to briefly show some key results from the full MEDAL cohort. In this study, in the MEDAL study, which contained about 200 participants, brPROPHET was compared actually to a fixed panel approach in terms of landmark and longitudinal MRD testing.

What we have observed on the left graph is that brPROPHET identified almost 3x as many true high-risk patients as the fixed panel assay at the landmark time point. This shows the superior sensitivity of brPROPHET. That's the personalized approach.

And then in the middle graph, we can see that the longitudinally MRD-negative patients, which are the blue line here on the top, has near perfect progress in about 3 years of follow-up, indicating that the brPROPHET MRD test when applied repeatedly can pretty accurately identify the patients who are practically cured.

And then on the right graph here, we can see that the prognosis separation between MRD-positive and MRD-negative patients defined by brPROPHET is actually across different stage. So it doesn't matter whether you are in stage 1 or stage 3, the prediction power stays the same. So we think this is a very strong validation for the sensitivity and accuracy of brPROPHET.

Now I'll skip Page 14, which is our MRD data in colorectal cancer because we already talked about it last time. And let's go directly to the early detection part. Since we have gone through our development road map for multiple times for early detection programs, I'll be very brief today on this topic and just bring your attention to Page 17.

On Page 17 -- I'm sorry, on Page 17, there are 2 major updates here. First, as Yusheng already mentioned, the PROMISE study, which is a pilot case control study for our 9 cancer type assay, has been completed. The results will be released at the coming ESMO in a few days. In short, we successfully expanded the model from 6 cancers to 9 cancers. We showed promising improvement on positivity in some of the 9 cancers compared to the previous version while maintaining equally high specificity and geo accuracy.

And also interestingly, we have tried to combine multi-omic data, including DNA isolation, the mutation and protein markers to show the contribution of each omic data on different cancer types. We will be able to share the details of this performance in the PROMISE study in the next call. But of course, you are welcome to read on the details in our ESMO (inaudible).

The other update here is the PREVENT study. So unlike all the other studies we have done before, PREVENT study is a prospective study conducted on symptom 3 population. It's the first study of this kind in China for cancer early detection with sample size greater than 10,000 participants. It's also designed so that our 6 cancer and 9 cancer (inaudible) that can be both tested for the performance later on in this cohort of individuals. We started patient enrollment in Q2 and are seeing pretty good accrual program.

So that's all from me. Now I'll turn to our CFO, Leo, to walk you through our financials. Leo?

Thanks, Shannon. Let's move on to the financials, and we'll start with Page 22. And for the first -- for the second quarter, as Yusheng mentioned earlier, we had 2 going on. We had number one, COVID impact; and number two, our underlying growth momentum.

During the following 2 pages, we try to separate the 2 factors to provide better clarity on our volume trend, underlying trend. In other words, we're trying to address the question that if we assume that COVID impact is eventually going to go away in China and what would our volume trends look like.

So first of all, a brief recap on COVID in China during the second quarter. It wreaked havoc in China. Shanghai was locked down for more than 2 months. There were multiple other large metropolitans that have been shut or have locked down.

Beijing had school closures and partial lockdowns. And so frontline anecdotal peer data indicated that our industry was generally down in the second quarter, and our peers generally down in the second quarter and our peers generally down year-over-year on their volumes.

If we look at our volume data, the in-hospital channel was heavily impacted as Shanghai was a large market for the in-hospital channel. Central lab held up okay, and this is supported by new products, particularly MRD.

Then on Page 23, we provide further granularity on the trend over time and across different regions with varying COVID impact. On the left, we see that for our central lab, as MRD started to generate volumes since its launch in March, it supported a better industry uptrend for our central lab channel through the second quarter. And we continue to see very good momentum on this MRD take-up by the physician market in China.

For in-hospitals, as shown on the right-hand side, Shanghai and Beijing represent a large market for us. And these were heavily impacted. And our latest monthly print for July shows that there was partial recovery, but we're not back to normal.

We did manage to grow very strong in regions where COVID impact was small. And we try to show that here by breaking out other regions apart from Shanghai and Beijing in-hospital channel. And those regions grew very good double digits throughout the second quarter.

Now moving on to our financials on Page 24. First on revenues. We were up 3% year-over-year or down slightly on a sequential basis. Because of the COVID impact and the disproportionately large impact in Shanghai, the in-hospital revenues were heavily depressed in the second quarter, which weighed on our overall revenue growth.

Other than in-hospital, central lab was down 2% year-over-year or it was actually up 6% on a sequential basis compared to the first quarter. MRD launched since March drove the sequential top line growth despite COVID impact across various cities in China.

The pharma revenues continue to scale up in the second quarter as we bear fruits from the strong backlog that we have been able to build as previously shown on Page 6. And pharma revenues represented 14% of our total revenues in the second quarter. So that is starting to make meaningful contributions to our overall top line.

And our pharma project backlog continues to build nicely. And our pharma revenues are generally recognized as those studies or studies of our pharma customers are executed over time. So there could be some lumpiness and is dependent. It still depend on the clinical progress of our pharma client study. So there could be lumpiness quarter-over-quarter as we have seen from other peers, for example, in the U.S.

As a side, we don't have any COVID-related revenues in our top line, so it's 100% precision oncology testing revenue. So we don't have to worry about a cliff or a decline of COVID testing revenues at all going forward.

Looking at our margins, first on our gross profit margin. On a non-GAAP basis, which excludes depreciation and amortization, our non-GAAP GP margin is generally stable. We did 70% GP margin in the second quarter.

Now moving to our operating expenses. First, on our R&D line, we are becoming more focused as we put higher focus on operating efficiency i.e., we have reduced our spend on maintenance or noncore projects while continuing our core R&D on early detection. And separately, enrollment slowed down due to COVID in the second quarter, also brought down clinical study-related expenses.

Now moving on to the sales and marketing line. The biggest component is our headcount here. And as Yusheng mentioned in his remarks, we have strived to achieve higher sales efficiencies starting this year for the patient testing business. And we carried out an organization optimization program in the second quarter.

The result of that was our headcount for the oncology sales organization down as of June on both sequential and year-over-year basis. And during the second quarter, however, there were one-off or restructuring costs involved. The numbers appeared lumpy. But as we called out in the previous quarters, the direction of travel should be trending down, and efficiency would improve as we move forward.

Now moving on to the G&A line. We also incurred one-off items in the second quarter. The biggest components of our G&A is our headcount, which -- that's the biggest component. And that has started to trend down on a sequential basis as well.

So as we mentioned before, we are putting higher focus on our operating efficiency. And we generally expect operating efficiencies or operating expenses to trend down over time.

Then on talking about our guidance, COVID situation remains very fluid in China as the COVID zero policy is still in place. And there were a couple of cities that recently announced lockdowns over the past few days. If COVID does worsen or if we have large-scale lockdowns, this will have a significantly negative impact on our revenues.

However, we believe that the point is not for us to make a forecast on COVID. So we will not try to do that. And we do see strong momentum on our underlying business coming from, number one, the market share gain through the in-hospital strategy; number two, MRD volume ramp; and number three, strong backlog of our pharma projects converting to revenue. So we, therefore, retain our current guidance for the full year. And we just call out the lingering COVID risk.

And lastly, I want to mention our cash balance. We show our operating cash outflow on the page here as well. So as of the end of second quarter, we have a healthy cash and investments balance of RMB 1.15 billion or USD 172 million. We believe this supports us beyond the next 2 years. So we're happy with the cash balance.

And we believe this is also the largest cash balance in our industry, which will provide strength into our long-term product development efforts into early detection, making us the longest cash runway in the industry.

So that concludes our prepared remarks, and we are happy to open for questions.

(Operator Instructions) The questions come from the line of Max Masucci from Cowen.

This is Stephanie on for Max. To start off, Leo, could you speak to some of the key revenue drivers and any assumptions baked in for the second half of this year? What gives you confidence in maintaining the full year 2022 guidance, and are there any potential sources of upside to keep in mind?

Yes. So when we made our guidance towards the start of this year, we did leave some buffer for COVID. And I would say those buffer were pretty much used up in the second quarter. So we were conservative to start with.

And if we don't have any other COVID outbreaks going forward and based on the underlying trends, we are happy -- we are confident to -- of our guidance. We saw a large drop in Shanghai. And if those come back, we will get pent-up demand there.

Apart from just getting back to normal from COVID, the underlying growth from pharma and from MRD from additional gains in the hospital are strong when there's no COVID impact. So I think COVID remains the #1 factor. But if we take that aside, we are still confident about the guidance that we have for the full year.

Got it. Understood. That's helpful. And then following the lockdowns, could you give us some more color on what Shanghai and Beijing currently look like? You mentioned some pent-up demand there. Any more color you can give on that as patients return to get tested? And then if you can share -- do you mind sharing how much Shanghai and Beijing make up of your total revenue?

Yes. They make up -- I mean, for the in-hospital, they make up the lion's share, more than half of our in-hospital volumes. For the overall volume, they represent a significant portion, about 1/4 roughly speaking. And we have seen improving trend over time, but they're not back to full normal yet.

But if there is no further impact, we do expect patients to return. And a lot of patients go to Shanghai and Beijing from regions outside of Shanghai and Beijing. So if that travel can come back, there is a volume that we have yet been able to catch up with. So that's something to keep and watch. We provided in the presentation the latest reads into July, and we will continue to try to provide as much clarity as possible going forward.

Got it. And squeezing one more, it's great to hear the uptake of your MRD test following its launch in March as well as the consensus view of MRD for lung cancer among Chinese physicians. When should we expect a similar consensus for colorectal cancer? And are there any catalysts to keep in mind in the near to midterm that could further drive MRD adoption?

Yes. In terms of the consensus among the colorectal cancer, all that we can comment right now is that it's been very actively discussed. And there have been multiple conferences focused on MRD and how should the consensus be reached. But I can't predict precisely when the exact consensus is going to happen.

But I can say that just the discussion itself has got a lot of attention among the community. So we are pretty optimistic that the colorectal cancer community for the clinicians are going to have -- going to catch up with the lung clinicians community in terms of their awareness of the MRD usage.

And then in the near future, I think the upcoming studies, for example, like the DYNAMIC, the (inaudible) so I think people are anticipating the results from these interventional studies because people have been fully convinced about the prognosis prediction part of MRD. But now they are waiting to see whether the MRD can resolve the ultimate so what question.

So I think the (inaudible) and DYNAMIC are very well-designed studies to answer those questions. And so far, the DYNAMIC results showing the MRD negative half from the study has been viewed as very promising and pretty exciting.

So I think in the next couple of years, these studies will have their readouts. And if they continue to show positive results, it would be a very, very strong push for the community.

And also another potential factor is the pharmaceutical company's adoption on MRD to embed MRD into their drug development on studies, for example, the (inaudible) study from AstraZeneca. I think those were -- had MRD embedded in their design, and also the results from those trials would be very critical in terms of people's view on the MRD utility ultimately.

Got it. And just one quick one on the guide. Does your guidance contemplate the uptick in pharma revenues in the first half of this year when you set that guidance range?

Yes. Pharma has been on track or slightly beating our internal forecast so far this year. So we're happy about the progress there. And it has been a strong factor in our outperformance across peers in the industry.

But I would say that the -- I think the visibility of that has been built already previously on the backlog, and that continues to build. So that should provide us with further runway going forward as well.

We have no further questions at this time. I hand back the conference to you. Thank you. Please go ahead.

So thanks, everybody, for attending our earnings call today. And if you have any questions, please do come back to us. Thanks very much for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.