Burning Rock Biotech Ltd (BNR) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Burning Rock's 2022 Fourth Quarter Earnings Conference Call. (Operator Instructions) 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, beliefs, 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 contains not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

I would now like to hand the conference over to your speaker today, Mr. Han, the CEO. Please go ahead.

Thank you. And welcome to Burning Rock's 2022 Annual Conference Call. I'm Yusheng Han, CEO and Founder of Burning Rock. Today, we also have our CTO, Joe Zhang; and CFO, Lee Li.

So now let's turn to Page 3. In case there are some investors who are not familiar with Burning Rock. I hereby illustrate what we do. So our business started from tissue-based therapy selection in 2014 and then expand to multi-directions of liquid biopsy, including liquid-based therapy selection, MRD, multi-cancer early detection, and we have 3 business units, providing products and services to doctors, [pharma] and consumers.

Now let's turn to Page 4. So in this page, we will have a review of 2022. For the general view of our company, we completed profitability-driven organization optimization. The overall headcount have been optimized by 25%. And we -- in that case, we still delivered strong growth in non-COVID quarter and achieved 11% year-on-year growth in 2022. And we completed listing on London Stock exchange, offering an alternative listing venue in addition to NASDAQ. We believe that this is a significant corporate development as it provides a fallback solution to facilitate continued trading and listing of our shares in case of a delisting scenario of ADRs on NASDAQ.

We also noted that the latest statement from the SEC in December that, as of now, there is no risk of Chinese issuers getting delisted, which is good for us.

And for Therapy Selection, we achieved 13% volume growth despite COVID challenges, driven by in-hospital channel. And the 9-genes panel was approved by NIMPA, providing a better weapon or in-hospital model. This is our second approved NGS-based test by the NIMPA and demonstrating our capability of working with NIMPA to bring innovative diagnostic products to the market.

For MRD, 2022 was a big year in terms of clinical data publication. We provided initial readout on lung and colon cancer at AACR 2022, followed by additional publications on colon and pancreatic cancer at ASCO 2023. We also expected additional publication on lung this year at AACR and commercially, we launched our BR profit, our personalized MRD product in March and the volume of patients that we're serving keep increasing at a very good speed.

For biopharma, the new contract value increased 43% to RMB 263 million in 2022 and over 200% revenue growth on strong backlog execution.

And for MRD, overseas was granted FDA breakthrough device designation and standard study for 6-cancer test development was published on Annual of Oncology as a journal with an impact factor of 51 and is another strong proof of our technology and products.

The PROMISE study, which is around -- which is exactly 2,035 subjects, 9-cancer test development completed and read-out. PREDICT and PRESCIENT study almost 17,000 subjects, 22-cancer test development is ongoing. And PREVENT study, which is a prospective study of 6-cancer test, was launched last year. And our CEO, Joe Zhang, will illustrate more about our early detection study.

And now let's turn to Page 5. This page shows what Burning Rock aim to achieve in 2023. The #1 goal is profitability. The goal we set is to breakeven, excluding R&D during a quarter in 2023. The main reason is that in 2022 -- 2023 and 2024 is still a big year for MCD R&D development.

The second goal is continued revenue growth, a healthy increase with probability is what we want to achieve. Our initial outlook for 2023 revenue growth rate is at 20%. And the third goal is to further our leading position in MCD as the #1 player in China and a top player globally. The main R&D spend, as I said, will focus on MCD this year.

And let me break down the goals into 4 parts. For Therapy Selection, we'll continue to improve the sales productive activity by strengthening the in-hospital model. And for MRD, launch in top -- personalized MRD in top hospitals. Due to the operational difficulties of personalized MRD, it is very challenging to install this method in hospital. However, since more and more hospitals control the outstanding of tissue samples in MRD baseline needs tissue samples, only an in-hospital model can bring the volume of MRD to the next level. And thanks to the efforts of our R&D and operations team, we will be able to launch the in-hospital model of BR profit in the near future. I believe it will be a strong engine for Burning Rock Onco [BU] and start to impact in Q4 this year.

For biopharma, the goal is to continue its profitable growth. With the new platform of MRD and more international orders, we are optimistic to the growth of biopharma business.

Over, MCD PREVENT study, which is a prospective study of over 10,000 subjects, we'll have an interim readout in second half year of 2023. We will continue the development study of 22-cancer test in PREDICT and PRESCIENT. Also, we are building the regulatory pathway with FDA and NIMPA, especially NIMPA. The commercialization will go on as selected top hospitals.

Let's turn to Page 6. I know that investors care about our financial status. Our CFO, Leo, will illustrate more later on. But on this page, I just want to show that we are doing a great effort to reduce the burn rate. If there's no more big scale clinical trials of MCD, the burn rate will significantly decrease in the coming 2 years. And if there is a new trial started, especially under NIMPA registration, I think there will be even better news.

So that's what I want to present today, and I will pass the presentation to Chuai to talk about our technologies and trials of MCD and MRD. Chuai, please?

Thanks, Yusheng. So I'm going to introduce some update regards the MCD and MRD.

Let's turn to Page 8. So this is basically an update in regards to Burning Rock's early detection technology development. So the after publication of the basic technology in proof of concept in nature biomedical engineering in last year, we actually recently made a good publication and oncology regards to the STANDARD study, which is 6-cancer early detection trial we ran in the past several years.

And so the other very highlight part is basically we got a regulatory breakthrough, which is we grant -- FDA granted the breakthrough device designation early this year. And this is actually a very significant achievement for Burning Rock. Currently, we're actually working closely with the FDA for the next step to seeking for regulatory approval in the future.

So let's turn to Page 9. Basically, this is a slide which we presented previously, talking about the Burning Rock's Early Detection program, product development roadmap. As you can see here, for the 6-cancer Early Detection product, which we oversee. And after the THUNDER study being published in an oncology last month. So currently, we are actually running a program called PREVENT study, which is a prospective and interventional intent of use population, and this is ongoing at this moment. The recruitment is a pretty significant number there. And we probably will update the readout later this year for the first phase.

And meanwhile, actually, we are actually developing up to 22-cancer MCD product. There's several trials -- several clinical studies related to it. And we already published in poster format in ESMO last year, we call PROMISE study. And at this moment, we actually in a very intensive preparation regards -- preparation stage in the PREDICT and PRESCIENT study, which cover up to 17,000 individuals for this 22-cancer product in the future.

So like I mentioned, there is Slide 10, just to lay out the 6-cancer and 22-cancer program, what steps it is? And I won't cover too much -- repeat this anymore.

And so let's just talk to -- turn to page 12, I'm going to talk about the Minimal Residual Disease update. So MRD is actually one of the very important business -- new business of Burning Rock in past several years. And Slide 13, talk about the MRD test utility. So there's 2 kind of utilities. One is the prognosis utility, which has already been proven in a lot of clinical study in the trial. Another more important utility will be the actionable diagnosis and try to direct the therapy, you can see (inaudible) in red.

And in the United States, there are already some CMS coverage regards to MRD utility by some other products. So that's why Burning Rock actually seeking for all those kind of utilities utilizing our own technology, we call bringing brPROPHET which is summarized in Slide 14. So brPROPHET is our technology. It's leverage on the Whole Exome Sequencing to get up to 50 tracking sites and we designed the personalized panel tracking the 50 sites for the follow-up, trying to get the prognosis as well as therapy guidance utility in the future. So this product already launched last year. We almost like anniversaried the launching at this moment.

And Slide 15 talks about the (inaudible) from MRD-related publication we achieved. So we are keeping -- keep very -- looking very hard trying to get a lot of cancer covers. This is basically pan-cancer product that we believe. We have already published our non-small cell lung cancer poster in AACR last year. And in AACR happen next month, we will provide update on this non-small cell lung cancer study and the patient number will increase significantly.

And for the colorectal cancer, we provide 2 different studies. One study already been published last year in AACR 2022. And there's another one actually is ongoing. It's a very brief update, I'm going to talk about it later, basically, it's ASCO GI. This year -- early this year in San Francisco, we presented the initial data. But this study is still ongoing, and we are currently actively collecting the longitudinal monitoring data point. And hopefully, we'll get a more readout in the future.

And in ASCO GI this year, we also have a pancreatic cancer small cohort to demonstrate not only non-small cell lung cancer as well as the colorectal cancer. We can do a lot of other cancer types, including the pancreatic cancer, which is most lethal cancer and also being proved hard-to-find MRD in some other studies.

Slide -- so next slide, the Slide 16, basically talking about the pancreatic cancer cohort. So we recruit -- actually, we -- this is observational study and we collect -- and also we collect 20 patient baseline, which is a presurgery and as well as some follow like 7 days after surgery and the 30 days after surgery. And you can see here for presurgery pancreatic cancer, we got 100% positive regards of the ctDNA existence, which is showing this very impressive sensitivity of this assay. And we -- as you can see here, since some of the survival curve showing that very good [hazard] ratio at 23.45% and showing the prognosis utility of this MRD assay.

And -- so the Slide 17 is another update regarding the colorectal cancer like I mentioned earlier. So we are actually still working on this. In ASCO GI 2023, we already demonstrated 127 patients in the initial cohort. Right now, we almost collect like 220 patient data from the baseline to the continued follow-up and we'll see the -- there's a lot of data showing here, if you have interest, you can read that in the detail later. And basically, the technology demonstrated very high sensitivity along with very high specificity which we believe it will potentially generate a lot more utility other than prognosis.

So I'm going to conclude my part here. Let me turn to our CFO, Leo, to talk about financial. Thank you.

Thanks, Chuai. I'd like to cover 3 topics. First, when we talk about the fourth quarter 2022 recap. Then I'll talk about the latest trend in the first quarter 2023, and I'll talk about 2023 initial outlook.

So first, let's go to the fourth quarter recap, and looking to go to Page 20. Then we can see that we finished the fourth quarter stronger than we previously anticipated. Recall that back in November, we guided for 2022 full year revenue growth to be about 5%, which implies a 20-something year-over-year drop for the first quarter. We ended the quarter in a stronger performance, down only 3% year-over-year.

Now I'm breaking this down a little bit further. Clinical testing revenues dropped in the teens range year-over-year in the fourth quarter, slightly better than we anticipated back in November. And testing for pharma customers held up very well, maintaining the triple-digit growth rates that we achieved throughout 2022. And we'd like to take this opportunity to commend all our staff who worked tirelessly during the difficult COVID lockdown period. Our testing carried out pretty much unaffected despite the lockdown suffered by many areas in China and in particular, the city of Guangzhou where our lab is located. We believe the resilience demonstrated by our business, the strong mentality of our staff to overcome challenges, will help us in our future growth years.

We also like to recap our 2022 full year performance. Our 2022 full year revenues grew 11% year-over-year. We think this is likely on the high end of growth rates achieved in the precision oncology testing industry by our own estimate. There were 3 pillars that drove that strength. Number one, our dominant market position in the in-hospital segment which we have built over the years into China's #1 position. And the second driver is MRD, which is a new product that we launched in March. We believe this is a multiyear growth runway and Joe talked about some of the initial readouts and the future investments we're going to make in the MRD area.

And the third is the pharma service segments, which benefited from our top-performing product portfolio and our leading position in the companion diagnostics regulatory approval capabilities in China. We think these 3 pillars will continue to drive our growth in the future years.

Then moving down on our P&L. We grew our adjusted gross profit, which excludes noncash depreciation and amortization by 12% in the 2022 full year which again is likely towards the high end of the industry performance by our own estimate.

Now moving down to the OpEx lines. As mentioned in our previous earnings calls, we continue to deliver OpEx reductions as we deliver on efficiency improvement initiatives. All 3 OpEx lines dropped in the fourth quarter as we focused on improved sales productivity -- sales productivity, reduction in corporate overhead and better focus on our R&D projects.

If we look at the metric of gross profit minus SG&A, so take the adjusted gross profit line and subtract the sales and marketing and the G&A line, where you can see that we're showing on the slide here, we're getting closer and closer towards breakeven. And we anticipate to hit breakeven at some quarter by this metric during 2023. The drivers behind this was laid out in our CEO's remarks. We are driving our commercial business units towards profitability, while our R&D is going to be mostly on multi-cancer early detection protection, which will be more focused than the previous years.

So in summary, operating efficiency and breakeven, excluding R&D expenses, it's going to be our #1 priority for 2023.

Next, I'd like to talk about our latest trend, and we present our latest volumes on Page 19 of the slide deck. We can see that the fourth quarter dropped double digits compared to the third quarter where the central lab segment dropped a bit further. And breaking out into the latest month, we can see that we hit [bad trough] in December and January as COVID ramped through China, but we have returned to positive year-over-year growth in February.

Regarding the first quarter, given the sharp drop volumes in January, which brought the December effect -- sorry, which brought the January, February, 2 months combined volumes to a decline of 28% year-over-year. So we think it's prudent to keep expectations for the first quarter moderate.

And next, I'd like to talk about our 2023 outlook. For 2023, we have 2 financial metrics to track. Number one, what we talked about is the adjusted gross profit minus SG&A. We like to hit breakeven on the metric, some quarters during 2023. And second, we like to continue to deliver top line growth. And out of the 2 objectives, #1 is of higher priority for us. And within that context, we are guiding initially for a 20% increase in revenues in 2023. We'll keep track of our latest progress and update you on our guidance in our next quarterly results.

And lastly, to recap our cash position and future burn rate estimates, which we showed on Page 6 during our CEO's opening remarks, we are sitting close to RMB 1 billion of cash balance. We are sitting on 3 years of cash runway, assuming no capital raise and our cash balance covers all the clinical programs that we have in place. So we would not be in a rush to do any capital raise.

And that concludes our prepared remarks, and we'd like to open for questions, please.

(Operator Instructions) We will take our first question, and the question comes from the line of Alexis Yan from Morgan Stanley.

I have 2 questions. Number one is that regarding the 2023 revenue growth target of 20%. Can you help us maybe better understand like how much of that would be from the existing Therapy Selection portfolio? And how much would be from the MRD as well as the Early Detection product portfolio? It may also be helpful to get a sense of MRD contribution in 2022 as context.

And second question is that -- so for the new businesses like MRD and Early Detection, what are some of the key commercial milestones? For example, hospital contracting that we could be -- we can track for the next few years. And also in terms of sales and marketing, or market education investment, how do we assess the ROI in terms of the commercial investment?

Thanks for your question, Alexis, I'm Yusheng. So for your first question, we don't like have a very clear cut of which part will contribute how much to the percentage of growth. But I can give you a general view that since -- let's take the 3 parts, Onco [BU], Pharma and also Early Detection.

So Onco BU , I think that will be -- still be the main driver. As you know that we have a big baseline of, Onco BU including Therapy Selection and MRD. And for -- within Onco BU, as I said that the in-hospital model of MRD will impact on Q4 as we completed some in-hospital installment of personalized MRD technology into that.

So before that, I think the Therapy Selection will be the main driver, including tissue-based and also liquid-based. And for pharma, I think that they will continue the growth, especially with the revenue -- and I think that trend is good. But compared to the big baseline for, [Onco BU], I think that Onco BU will be the main driver. And for multi-cancer early detection and commercialization, I think that it's still -- the number is still -- cannot be compared with the rest of to be used.

But that can also answer your second question is that multi-cancer early detection, we have installed probably around 50 -- sorry, 40 hospitals, half of them are big hospitals. But as you expected, we need to do more marketing activities to educate the doctors in Class IIIA hospital for them to understand the product and know how to prescribe to the consumers.

So yes, I think that the growth rate of multi-cancer early detection this year will be good. But I cannot give you the exact number of how much we can achieve. But one thing is sure that since we are controlling the burn rate, we are focusing our energies and headcount cost and marketing activities on Class III hospitals. Does that answer your question?

There are no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.