Burning Rock Biotech Ltd (BNR) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to Burning Rock's 2023 Q1 Earnings Conference Call. Before I begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the 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, beliefs, estimates, targets, 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 forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

(Operator Instructions) Please be advised that today's conference call is being recorded. With that, I would now like to turn the call over to your first speaker today, Mr. Han, CEO of the company. Thank you. Please go ahead. Thank you.

Thank you. Welcome to Burning Rock's 2023 Q1 Conference Call. I'm Yusheng Han, the CEO and Founder of Burning Rock. So today, we also have our CTO, Joe Zhang; and CFO, Leo Li. So before the presentation, I would say that this quarter's data, although not a lot of new information, but very important information and making us very exciting.

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

So let's turn to Page 4. We set up our goals of 2023 and reported to the investors 3 months ago. The #1 goal is profitability. That is the goal we set to breakeven excluding R&D during a quarter in 2023. And the second goal is continued revenue growth, healthy increase with profitability is what we want to achieve. And our initial outlook for 2023 revenue growth rate is 20%. And the third goal is to further our leading position in multi-cancer early detection as the #1 player in China and a top player globally.

And the main R&D spend will focus on multi-cancer early detection. So let me break down the goals in 4 parts. So for therapy selection, we will continue to improve the sales productivity by strengthening the in-hospital model. And for MRD launch and install personalized MRD in top hospitals. And due to the operation difficulties of personalized MRD, it is very challenging to install this method in hospitals. However, since more and more top hospitals control the outstanding of tissue samples and MRD baseline of these tissue samples, only in-hospital model can bring the volume of MRD to the next level.

So we have launched the in-hospital MRD product in early May. And I believe that it will be a strong engine for Burning Rock Onco BU and start to impact in Q4 this year. And for pharma, this goal is continued its profitable growth with the new platform of MRD and more international orders. We are optimistic to the growth of our pharma business.

For MCD PREVENT study, which is 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 9-cancer and 22 cancer test in PREDICT and PRESCIENT. Also, we will -- we are building the regulatory pathways with FDA and NMPA, especially NMPA. So the commercialization will go on at selected top hospitals. That's what we set the goal of 2023.

So let's see what's the result of our effort in Q1 2023 and turn to Page 6. As we illustrated, the #1 goal this year is profitability. And the main indicator of commercial efficiency is non-GAAP gross profit minus SG&A. So the number reached its bottom in Q2 2022, and we can see that it's quite bad at that time. And at that time, we initiated the optimization plan. We can see that we are able to narrow down the loss from minus RMB 84 million per quarter in Q2 2022 to minus [RMB 3.8 million] in Q1 2023. So we are very excited by this achievement. So that means that we are in a good trend to break even.

So let's turn to Page 4 -- sorry, Page 7 to see the other achievements. As we know, Q1 is quite challenging for most of the companies this year, especially January and early February due to the pandemic impact. The reason that we were able to narrow this loss is because of our strong rebound of in-hospital in March and continued to improve our sales efficiency. For the progress of MRD, we launched the in-hospital model of our product in May.

And since the installing of the platform to hospital really take time, we expect it to start the impact to revenue in Q4 this year. And in terms of clinical study, we released data in AACR and we will have more in the coming ASCO conference. So MRD in terms of no matter in commercial or in clinical trials, all going on the track.

For biopharma, the business continues to grow. Contract value grew 27% year-on-year, while revenues grew triple digit. That's also a good number. And for early detection, all the clinical trials are on the track and dialogues to NMPA and FDA continues. So we will, as you know, if we have new breaking news at any moment.

So next, I will pass to our CFO, Leo, to talk about the numbers in detail. Leo, please.

Thank you, Yusheng. And for our financials, we have 2 key metrics to track for 2023. The first one is regarding our breakeven profitability, defined as non-GAAP gross profit minus SG&A, and Yusheng walked us over these numbers as demonstrated on Page 5, so you can see them in our slide track -- in our slide pack. And we are on track to hit breakeven on this metric at some quarter during 2023. The second metric we track is top line growth, so profitability and top line growth, 2 key metrics to track for this year.

On growth, let's first visit our volume trend shown on Page 7. Our testing volumes achieved strong rebounds in March. Recall that in our previous results that we said, January and February combined, volumes were down 28% year-over-year, and we had a strong double-digit growth in March, taking the whole quarter to down just 5% year-over-year. On a sequential basis, our volumes in first quarter was up 3% versus the fourth quarter last year and the strong rebound in March was led by the in-hospital segment where we continued our lead in that channel, taking further market share.

And then let's move to our P&L, which is shown on Page 8. First, on revenues. We grew our revenues by 5% year-over-year in the first quarter despite a very tough start in February -- in January and February, and we had very good results as Yusheng talked about in March. The continued delivery of pharma projects was the biggest contributor with Pharma segment maintaining its triple-digit revenue growth rate in the first quarter this year. In addition to strong growth rate in the current quarter, we have maintained good visibility into growth of the pharma segment for the future.

As we mentioned and Yusheng talked about on Page 6, our pharma backlog continues to grow, with new contracts signed during the first quarter of this year up 27% compared to the same period last year. For our patient testing business, in-hospital showed strong growth in March, taking the whole quarter to a positive 5% year-over-year growth despite a very challenging start for the January and February period, and we are pleased with our growth resilience in that segment.

We continue to win major tenders in April. So we are on a strong footing for that segment going forward as well. Now moving down to the gross profit line. Gross profit grew 16% year-over-year with non-GAAP gross profit margin, which excludes depreciation and amortization at 75.7% in the first quarter this year. We believe our gross profit growth is strong and industry-leading. We have visibility into additional gross profit margin gains for the medium term as we execute on our cost-saving initiatives. So you have seen in the past that our gross profit margins have climbed steadily over the years, and we aim to even climb that a bit further down the road as well.

Now moving down to the operating expenses line. Total operating expenses dropped 10% sequentially, and that continued our previous trend of declining operating expenses and improving efficiency. The largest improvement this quarter came from the sales and marketing line, which is very important as we demonstrate the sales and marketing efficiency. This line trended down since the middle of 2022 as we executed on our efficiency gain programs that Yusheng alluded to earlier.

Importantly, sales and marketing expenses as a percentage of revenue stood at 42% in the first quarter this year, making us one of the most efficient operators in our industry, while peers sales and marketing expenses were probably higher in the range of 60% or even above based on published data. So our takeaway from our P&L for this quarter are mostly 3 points: Number one, resilient top line growth led by biopharma and in-hospital strength. Number two, strong gross profit growth, up 16% year-over-year in the first quarter this year; and number three, high selling efficiency with sales and marketing at 42% of revenues.

We strive to maintain our momentum in the above initiatives as we execute towards our corporate goals of breakeven and continuous top line growth. Moving on to guidance. We reiterate our previous guidance of 20% top line growth in 2023 versus 2022.

Then moving on to Page 9, which talks about our cash balance and our cash runway projection remains unchanged from our previous results. Our burn in the first quarter is within the framework that we set out in the previous results call. The losses from our commercial operations is dropping rapidly and approaching breakeven, while the vast majority of our burn is towards investments on future product development, our multi-cancer early detection, MRD, and product registration with China's NMPA.

Our cash balance is sufficient to fund us for the next 3 years as we approach breakeven on our commercial operations and given that we retain discretion on how we want to invest towards product development, we are happy with our cash runway, and we are not in any rush to raise capital at this stage. So this concludes the financial section. Then let me pass the call to Joe to talk about our pipeline update.

Thanks, Leo. So let's move to Page 11. So basically, this is a recap of the early detection business and the development milestones we achieved in the past several years, including the paper published in Nature Biomedical Engineering in regard to the technology itself as well as major 6-cancer early -- multi-cancer early detection clinical study published in Annals of Oncology this year in Q1. So basically, we also got the FDA breakthrough designation granted as for the multi-cancer early detection product.

So the Page 12 basically lays out the road map of MCD product development so far. And right now, we actually and actively developing 22 cancer, multi-cancer early detection product, which is the upgraded version of the 6-cancer, we already published in Annals of Oncology earlier.

There's multiple different kind of trials named there, like PREVENT, just mentioned by Yusheng as well as PREDICATE and PRESCIENT, which is 22-cancer, early multi-cancer detection.

On the Page 13, I'm going to skip this one basically just talk about the difference between the 6-cancer and 22-cancer.

Page -- let's move to MRD business. So for MRD as a recap here, basically, MRD has on Page 16 basically talking about MRD test play a role for the multiple time points throughout the treatment journey, which is very important for early cancer of curable cancer patient. As you can see here, MRD can be used as a prognosis which is nice to have. Also, it has a lot of potential for actionable therapies guidance, including deescalate or escalate utilizing based on MRD status. And also, it has a lot of other utility that has been listed here at different stages of treatment.

So for Burning Rock, on Page 17, we basically -- we launched this product called brPROPHET as our MRD solution. So this MRD solution is based on whole exome sequencing, tumor profiling and trying to getting the trackable up to 50 tracked mutation as trying to construct a personalized panel for each individual patient. And then we're utilizing this personalized panel to perform the brPROPHET MRD assay ctDNA, and we do ultra-deep sequencing, which is 100,000x Raw Depth and utilizing -- leveraging on the UMI error correction and to estimate the MRD status, also estimate the tumor fraction based on the observation of this 50 [low] status.

So right now, in Page 18, we basically have multiple different kind of trials on different kind of cancer, utilizing this technology, we call brPROPHET. As you can see here, there's multiple different cancer data either being published at a poster in different meetings from last year AACR to this year's AACR. Also, it will be -- has more data -- we will have more data in this year such as ESMO and ASCO later. So basically, there's several updates here. I just listed in the Page 19, which is we just presented in AACR meeting last month in Orlando. And this is basically the update of the MEDAL study. We enrolled about 200 non-small cell lung cancer patients, and we compare the brPROPHET methodology versus standard tumor agnostic or fixed panel tumor informed methodology utilizing look at the positive rate.

On the left panel, basically, the orange bar showing the brPROPHET has highest detection sensitivity on pre-operated cancer patient, which showing the best performance regards to the sensitivity. And then we look at the -- in the middle panel, we basically look at the post-operative prognostic value on the landmark timepoint, which is 3 days or 4 weeks after the operation, and we look at MRD status. So if it's MRD-negative, which is shown as the blue line, as you can see here, the DFS ratio is significantly different from which is MRD positive, which is shown as a red line.

As you can see here, the hazard ratio can reach as high as about 16.4. This give us a lot of confidence showing on this data. Our technology has its prognostic value, which gives us more confidence trying to pursue further interventional study.

So Page 20 basically is another small cohort that we perform under gastric cancer. We also presented this data in AACR meeting last month. So in this study, we actually enrolled about 55 patients with gastric cancer with Stage 1, 2, 3. But out of this 55, we finally enrolled 19 for brPROPHET personalized panel detection. For the remaining, we just using the fixed panel to genotyping all 55 patients utilizing fixed panel tumor informed way to call the MRD status.

As you can see here in the middle table, they're showing the preoperative cancer, the sample ctDNA detection the brPROPHET methodology utilizing whole exome sequencing-based 50 individualized (inaudible), you can see it's reached much higher detection sensitivity compared to a fixed panel with tumor informed calling with a limited amount of mutation detected.

And on the RFS measurement in the Kaplan-Meier curve on the right, as you can see here, for the landmark, which is 2 to 4 weeks after operation, there are 13 patients we got this sample tested by brPROPHET. As you can see here, for the negative MRD-negative patient, none of them actually disease recurred and relapsed. And for the positive, they're basically -- there's about like 3 out of 4 early relapse. So basically, this has given us a lot of confidence showing the brPROPHET technology, which is our MRD -- foundation of our MRD product, it's a value. So there's a multiple different kind of trials being listed in Page 18, I already mentioned there. So I think that's concluded my introduction in regard to the product development-related update. Thank you.

And operator, let's open up for questions, please.

We have a question from the line of Alexis Yan from Morgan Stanley.

I just have a question on the commercialization of the MRD products. You mentioned that since early May, the MRD products started commercialization via the in-hospital channel as well. So I'm just wondering could you share more color on its current of, for example, hospital coverage so far? And also, if we look at the full year guidance of 20% revenue growth, how much of that roughly could come from the MRD portfolio? And also in -- probably in 3 to 5 years, any commercialization target that management could share at this stage in terms of either like sales target, market share, hospital coverage, et cetera? And second, just a housekeeping question. How has April and May performance been trending so far? And has the recent many waves of COVID impacted our business? That's it for me.

The first question, I can answer and the second one to Leo. So in terms of in-hospital model of MRD, the R&D for that is not easy. So that's why we launched that in May, I'm very proud of that. I think that we are the only one to provide the in-hospital model of personalized MRD in the world. And the impact of that, the revenue, as I said, probably we will start in Q4 because although we have a large base of in-hospital model, hospitals, we still need to negotiate in attending tenders of different hospitals.

So we know that the fastest period that you can win a chance to go into the hospital is at least half year. So that's why I say that probably the impact will start in Q4 of this year. But if you wanted to see the main wave of MRD of in-hospital model, I think that we at least need -- from now on at least 1 to 2 years to make the MRD fully available in our hospitals.

So -- but if you look at it in 3 to 5 years, we believe that MRD will be a very important force, probably not less important than therapy selection because it covers most of the cancers and not limited to targeting drugs. We can combine with chemotherapy targeting drugs and also immunotherapy. So with that second question, Leo?

Yes, let me address that. So our recent trends, I think it's premature to conclude about Q2 as we haven't even closed out for May. For April, there was no surprise. And we do benefit from a low base on year-over-year comparisons compared to last year. So I would say April is on track, then we'll keep monitoring for Q2. But so far, no surprises.

With that, there are no further questions at this time. I would like to conclude the call. Thank you for participating. That does conclude the call. You may now disconnect your lines. Thank you, management.