Q1 2022 Burning Rock Biotech Ltd Earnings Call

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Unknown Speaker: Good day, Ladies and gentlemen. Thank you for standing by and welcome to Burning Rock's 2022 first quarter earnings conference call. This presentation contains forward-looking statements. These statements constitute forward-looking statements within the meaning of section 21 E of the Securities Exchange Act of 1934, as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipate, future, intense, when, believe, estimates, target, confident, and similar statements.

Speaker 2: This presentation contains forward-looking statements. These statementsment constitute forward-looking statements within the meaning of section 21 E of the Securities Exchange Act of 1900 and thirety-four, as amended and as ified in the? U's Private Securities Litigation from Act of 1900 and ninety-five. These forward-looking statements can be identified by terminology such as will expects anticipates future, intense when Please estimates target, confidant and similar statements.

Unknown Speaker: Burning Rock may also make forward-looking statements in his periodic reports to the SEC, in its annual report to shareholders, in press releases, and other written materials, and in oral statements made by officers, directors, or employees to third parties.

Unknown Speaker: Statements that are historical facts, including statements about Burning Rock's beliefs and expectations of 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.

Speaker 2: 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.

Speaker 2: Forward-looking statements involve risks, uncertainties, and other factors that could cause actual results to differ materially from those contained in any such statements. All information provided in this presentation is as of today, 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. I would now extend the call over to your speaker, host, and CEO, Mr. Han, please go ahead.

Speaker 2: All information provided in this presentation is us of today, 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 a appicable law. I would now ex call over to your speaker hose and see o, misterr Han, Please go ahead.

Yusheng Han: Thanks. Welcome to Burning Rock's 2022 Q1 conference call. I'm Yusheng Han, the CEO and founder of Burning Rock, and today we have our COO, Shannon, CTO, Joe, and CFO, Leo in the meeting.

Speaker 4: Welcome to bernera 20, 22 Q1 conference call shunhat, the CEO and founder of bernerack, and today we have our COO Shannon ceojoe and CFO Leo in a meeting.

Yusheng Han: So first I will recap our business fundamentals and then go through some important recent business progress. And I believe this is what our investors care about most, especially in the situation of COVID-19 impact in the past five months as a business.

Yusheng Han: And since most of our product development efforts are moving forward, as laid out in the previous call, we will directly go to CFO Leo, who will walk you through the financials and elaborate on our growth trend after my presentation. So let's turn to page three. So Burning Rock started with 30 selection business in 2014 and has grown to the market later in this segment. So we were the first [inaudible] company to cultivate the in-hospital channel and the first to have an oncology NGI-based kit approved by the NPA in China.

Speaker 4: So we were the first [inaudible] company to cultivate the in-hospital channel and the first to have an oncology NGI-based kit approved by the NPA in China.

Yusheng Han: Our initial strategy of developing this unique in-hospital in China has 10 years of our effort that have really started to realize a rapid market growth in the past quarters.

Yusheng Han: This advantage has especially shown during the pandemic situation, and our leading position has laid a good foundation and has given an advantage moving forward to new business of early detection and [inaudible] and pharmaceutical collaboration. And our strong branding on technology and product quality also helps us to remain a key talent, so that's what we are doing.

Speaker 4: So that's a local where we are doing.

Yusheng Han: And let's turn to Page 5 to recent business progress. So the first thing I want to talk about is the strong policy push from the government on cancer early to detection and NGIs which happened most recently. In China's 14 years development plan which is the most influential road map for China industry and society announced every five years, NGIs and cancer early detection have both been thought of as key development areas.

Speaker 4: So the first thing I want to talk about is the strong policy push from the government on cancer early to D detection and ungaz, which happened most reittcently in China's 14- five years, the development plant which is the most.

Speaker 5: Influential road map for China industry and society announced every five years. And gaz and cancer early detection has been have.

Speaker 5: Both these startre out as key development areas.

Yusheng Han: We expect the local health care department will adopt and act on our road map in the coming months, which will give the industry an encouraging environment for development.

Speaker 5: Which will go give the industry encouraging an environment for development.

Speaker 5: For patient testing business, including therapy selection and MRD. We believe we are gaining M ket share by e-hospital model and new product lines, including MRD. De toer, IX and my choice plus.

Speaker 5: We recorded 42 total volume volume increase in Q1, 20.022 thousand, with inhospital volume grow growing eight-three percent year of year.

Speaker 4: As you might know, China experience a heavy coobe impact and Sha has been lockeddown since the beginning of April . So despite such a heavy hit, we still see total volume increase of 15% And if you look at a? U hospital of volume, that increased even more- I mean 60% - in a month of apriland it also worth well to know that our new product, as I said, including M? Rd, the to X and my choice, contributed 70% 7, 7% amount our such ial lab revenue. So, considering March is just our first months of M? Rd product launch, we found that the number quite encouragingas mentioned in our last quarter's call.

Speaker 4: The validation data of MRD technoledlogy via profit for nocell lung cancer and CRC have been released at, as we saw, state of the R sensitivity in speatistity performance of our MRD technoledlogy.

Speaker 4: promoic cancer early deteuction. We have released our analytical benaddition data in AC as well, demonstrating thezero point zero, 2% to zero, 0% OD across different caser types.

Speaker 4: We have completed our promis study of our nine cancer product. The data readidout is expected later this yearand the predict trial, which is our case contro validation study for the nine cancer product, including over one thousand participant, has completed more than 50% imcrvement, So it is going well.

Speaker 5: In our commercialization. Progress for early deduction is ongoing, with several hospitals starting generating revenuesin terms of our pharmaceutical pharma business, the trend of growth continued in Q1 with.

Speaker 5: Over 300% year-over year backlog, progress in RB 59 million new contract value, which was one year, and 25% year-over-year growth.

Speaker 5: lecttern to please five.

Speaker 4: So on Page fiveile, I would like to highlight the recent one of the recent event that bning roap liquid bioy conference.

Speaker 5: So it's the first time we we hold this conference under protograph's own frurn name, which and the conference took place in early April . It was a two day conference chaired by three fellowls from China Academy sciences and over 10.15 thousand medical Qs participating as speakers were: or panalyst.

Speaker 5: The total audience for this virtual event was more than 30 30, six soulln people in a topics spent from liquid about the liquid base companion technoic registration pathway to new technology such as MRD and mcd.

Speaker 4: So a lot of this concept are relatively new to the doctors in China and a market education is very important. So through this conference we work with doctors group to promote awareness and understandending of new technoledlogy, while hosted heated discussion about how should they apply to China station.

Speaker 5: And let' move to Page page six So this graph here illustrate the promising growth tren of our uppma business.

Speaker 5: As mentioned just now, we call the contr value double year-after-year in the fourth quarter now, which has been a continuous trend inherited from toning anywhere.

Speaker 5: So we will build, build our buildue. Our rich toplines global, our registration capability and excellent ability team are the key factors to pursue continuous growth of our pharma business.

Speaker 4: That's a brief of our recent program and at I passth to Le about the financials.

Speaker 6: Thanks you an and just a quick highlight before we're going to financials. On our Page nine we did layou outour clinical program progress recently and for the nine cancer, which is on the development, we have the promise study, as you an mentioned, that has completed enrollment and analysiswe are submitting that to a conference this year. So we're looking to a read out of the promis study this year. In addition, the PREDICT study, which is a larger study to follow. We do have over 50% enrollment despite the covidate challenges. So want I quickly highlight the clinical progressthen going on to our financials, we like to cover a three topics today. First is a review of our first quarter. The second topic on our latest trends and operating numbers, as clovid has been a concern focus for everybody. And number 3, our progress regarding operating expenses optimization.

Speaker 6: Now let's go to our Page 22, which shows our quarterly volumes. We continued to deliver strong growth despite covervid challenges. In the first quarter we saw very strong volume growth at 42% year-over-year and for the in-hospital segment, in the volume grew over 83% year-over-year. Our growth rate has accelerated in the first quarter compared to the growth rate we saw in the fourth quarter 2021. at that quarter we saw overall volume growth at 43% year-over-year and in-hospital volume growth at 62% year-over-year. So the first quarter 22 accelerated further compared to a good quarter that we delivered in the fourth quarter 2021. We are very pleased to see continued strength in the in-hospital segment despite covervid challenges and, as we should mentioned earlier, we are happy to see new product contributing to our growth as wellthe. Moving on to Page 23, we like to provide greater granularity on our recent trend.

Speaker 6: Given that covert has had a very large impact in China in the recent month. Shanghai was affected starting the month of March and the City came pretty much to a standance still during the month of April and may. In addition, Beijing saw school closures at the end of April and partial lockdowns during may. So looking at our monthly volumes here table, we had a very strong start of the year in January . Over a volume grew over 74% over year in hospital was up double digit and we started to see covert impact in March. Over all volume growth was up 17% this month and this trended lower to a positive growth of 15% in April . And may was horrific month with larger covert impact compared to April and with grim sentiment and for us we haven't.

Speaker 6: For the ammonth of May. We haven't closed the month yet but our estimate is that we are likely to be down only single digit in May, So not a lot worse compared to April . These pitees the severe COVID-19 impact in the recent month. We can see in the bottom half of the table here that, excluding Shanghai, other regions kept up strong growth for the amounth of April . If we exclude Shanghai, overall volume growth was up up 33%. Ending hospital was sorry- up 37% overall, excluding Shanghai. Ending hospital was up triple digit, again excluding Shanghai, for the amth of April . So strong growth outside of Shanghai, even for the ammonth of April . And given how bad provided impact has been in China in the recent month, I think our numbers speak to the resilience of our growththen. Moving on to financials, on Page twenty four.

Speaker 6: In the first quarter 2022. We closed the quarter in a strong position. I believe revenue grew 27% year over year in the quarter, which is a higher growth rate than we recorded back in the fourth quarter 21, which was at up 12% year over year. The accelerated growth rate in the first quarter this year was driven by volume growth. As we walked through just on Page 22, five segment revenue growth was led by in hospital, which grew 69% year over year, which again accelerated growth rate from the fourth quarter last year which saw a year over year growth rate of twenty 5%. Farmer revenue continued to ramp growing that triple digits and and a larger revenue compared to the fourth quarter last year, driven by a strong pharma backlog that you should just walked through on Page six and going to margins first, look in our growross margin this quarter was at sixty four point 6%, excluding depreciation norintization. So that gives us the non-GAAP growth prof margin that was at sixty eight.

Speaker 6: 0% the drop was primarily due to inventory write offs and, excluding the impact of inventory write offs, our gross profit margin in the first quarter and excluding depreciation and amortization, our G P margin for this quarter will be about 72%, which is on par with our typical gross margin level and as we mentioned on our last earnings call. Moving on to OpEx lines, as we mentioned before, our organizational and lab space filled out was largely complete at the end of twotwentthousand and 21 and we would expect greater operating efficiencies. On going forward to looking at our OpEx lines, the OpEx expense are dropped on a sequential basis and looking at these line by line, R expenses, excluding share based compensation, decreased 8% quarter over quarter, driven by decrease of expenses related to our clinical research projects. I think Chinese new year during February was a reason behind the sequential trend.

Speaker 6: And also there was covert impact in March. But, as we mentioned on Page 9, despite the challenges that covert brings on enrollment, we do have large datasets already in ROTH that will keep us busy on our early detection R do work.

Speaker 6: And oursales and marketing expenses, again excluding sales or a share-based compensation. That line dropped 14% Q on Q on a sequential basis due to sequential staff expense decreased and also because of a drop in conference and meeting expenses as cogrt, where throughout China oncologist are getting quite used to the virtual format and we were able to continue good engagement with oncologist in this format. Our liquid boiopsy conference you shall mentioned, was a flagship events that attracted a large number of oncologist to attend and we are happy that we can keep strong engagement But in a lower cost format.

Speaker 6: Then general and addoming expenses, excluding share based compversation, dropped slightly on a sequential basis as we reduced spend where we believe the efficiency delivered was not high enoughthen lastly, on share based compensation, the expense booking of most of our stock awards does not have a Mark to market component. The value of the share based compversation was mostly determined at the time of grounds and ammattiz over a period of time going forward, So most of the share based compversation was predetermined, So to speak, while the market cap was higher back in time and the number for this noncash line will be relatively spey. And in terms of direction of travel for our OpEx lines, as we mentioned on the last call, we are putting greater focus on efficiencicy, startking this year, and we would generally expect OpEx to gradually trend down going forward, not necessarily a straight line, But as we put more focus on efficiency.

Speaker 6: We are expecting a drop of OpEx over time in terms of trend. Then, going to our guidance and given three factors: number oneour first quarter outperformedsecondwe did leave some buffer room for covert impacting, setting our guidance. And number 3: covidting impact appears to be reducing where at least Shanghai is looking to reopen on the first of June , we believe that there is no need to change our full year guidance, assuming that coviding impact generally does trend down as we go forward to. We're happy about the first quarter performance and we hope to catch up some of the pent toup demand as regions reopen, particularly Shanghai, which is an important market for us, and we remain committed to our strong growth for the rest of the year.

Speaker 6: Then lastly, on our cash position, we have a cash balance of R and B one point three four billion, or U's dollars 220 sorry, $211 million, including short term investment. At the end of first quarter 2022. our net openating cash flow in the first quarter was R and B 144 million, So I would say a reasonable burn rates, given where we are on our balance. So that concludes our prepared remarks, and operator, please open up for questions. Please and gentlemenman, if you like to ask a question at this time, Please stress to start, then the one key on your touch down jlle phone. Please stand by. Want to be compiled? jy lastter.

Speaker 2: And our first question coming from the line up, Max massacht colonyia line helphithanks for taking the questions first. 1, on biopharma, how much of the accelerating pharma growth is being driven by your MRT monitoring solutions versus therapy selection? And if you look at the mix of perspective versus retrospective biopharma projects, how should we think about the pace that you can convert the biopharma contract backlog to revenue here in 2022 compared to 2021?

Speaker 4: Well so far. If you lookcated phar MA business is, you know, mainly contributed by surface election as, as I said, that we just launched the M? Rd marched So that we can withthink that MR D a positive impact for for the pharma business probably will be like several months later or one year later. You know, sometimes the China phmer pharmaceical about C companies the really relatively slower than U's peers. So within that we very positive, very positive about the potential MR impact to the pharmaceutical contract and revenues and in terms of numbers we can erate moreso this year I think we are expecting high bubble visigit grow out of the phar that land.

Speaker 6: A lot of that is on the backaflog, backlog projects that we have signed already. So some visibility into with and we are building the backlog as well. So we look to convert more in terms of pacing- I think high double digit for this year that we have shown through grou quarter, fourth quarter last year and first quarter this year as well.

Speaker 7: Okay great, second 1, just beak curious. Did the Chinese lung cancer clinician consent us highlight a specific data set clinical evidence that spurred the guideline update for for MRD monering in in nonsmall CE lung cancer patients, and did the update guidelines recommend MRD testing only for relapse risk prediction in patients that have completed any adjuent therapy regimen and are remission, or does it also include the use of MRD tests that are used to guide to sit develo adjuent therapy?

Speaker 1: Ok and fsure. Yes, think for think for the question. it'.s- it's yes' indeed a very interesting consensus, actually from almost two years ago, and we were there is also very pleasantly surprised that the Chinese lung cancer patients are adopting the MRD concept So quickly. For the consensus itself, it's mostly for for 1, for relapse or prognotice prediction. It's not for aduent therapy, guiding to differential aduual therapy paradigm yet because there hasn't been enough interventional evidence that coinions F deficicient or the lung cancer in the lung ions around yet. And then for two I think the consensus it's also were COUR encouraging in the area that it calls for.

Speaker 8: More clinical trials or clical studies or vestcator, initsue the studies in China to start in bad the MRD dimension into as many as possible interventional ical trials when collaborating with the drug companies. So that, given that calling down the road, I think that's where the clinicans really hope to start seeing clear path how to in bad MRD into Interventional trials and then generate evidence on that. And then I think it's only after they see the interventional type of evidence that's when they will update consensus or guideline to upgrade for adulent therapy action as well.

Speaker 9: That's very helpful. Thank you. one final question. So in April central lab revenues they took a, took a Deb. Understandably So. But in hospital growth doubled to over one hundred percent growth year over year compared to the prior month. So I would just it would be great to hear sort of how the central lab business in the in the in hospital business are interacting. Is any of that growth in hospital coming the expenive of the central lab business? Is there any cannibalization in? That would be greatso can. I could deal with that hson. So know the very beginning of whole business to ward no, the hospital model.

Speaker 10: So for any new technology or new product introduced to the market we had to start from the centrer lab model talk to physicians one by one and then when the technology and product getting more and more matture there will be more possibility for the product to a transport in hospital model. So.

Speaker 10: From our observvisation you know you know relatively long time there will be a great signnerage. For for these two model. It means that for the central model some posysinesses you know they just feel not that now that you know encouraging to send a sples outside hospital. So you know quite pretty hospital model make them relatively easy to prescribe on their computers. So in most of the hospital when we put the platform into the hospital we have seen that both are such a lab and hospital model grew. So there's a quite interesting thing and if you look at some little bit job of the send. A L model I think that that is because you know the COVID-19 impact. Actually the imfluence that the.

Speaker 11: The the, the tential model. But if in the long run, in the long run when more and more technology getting mature, I think that for the mature product pipeline there will be some So called connivalbalization. But if you look at the volume of increase of the, the hospital model, actually that is not ival conization, a kind of a huge increase from the hospital model. So I will say that in different stages of different product, it depends you so to I understanding, for any mature product, hospital model will take mainstream in the futuregreat thanks should take my question a N update.

Speaker 1: Thanks that nextour next question coming from the line of how extook with Morgan Stanley on a openthanks for taking my question and can wr on a good growth in the first quarter. So I just have a a few quick questions. First is the in the hospital segment. Could it help us just better understand the drivers behind the good growth in this segment, as in example, how much ofit comes from the more revenue from our like fraguship partner hospitals and how much comes from this will call like long, long town, like midsize hospitals, and also how much did the, the big panel N, GS and also other new products contribute to the close to this segmentso I think that the drivers hospital the first thing is the convenience, if like more convenience for those do to this CL.

Speaker 10: So and also you look at the, the big environment, hospals are encouraging doctors to's, those to to the, the hospital lab and also some hospital with which the hospital lab are Forbidden, forbiddening samples sending out the hospitals. So that is one of the drivers. And the other thing that even is that just more and more high pride panelals coming into the, into the hospital and including mido size panel, big panel and even in some liquid officice kind coming into the hospital lab So that there are also the drivers were for the new runy and as a passthen.

Speaker 12: Yes yes, they're helpful. My next question is on the the pipeline, just wondering if there are any a potential like delayed due to cot impact in terms of patients recruitment or higher like recruitment cost should we be expecting? Just maybe remind us of the milestones we should be looking at the or sent that CL. Yes right, thanks for the question. Yes, apuponarently the recruitment. For both our early question, we predict trial and also for the six tem early detection product prevent trial. They have both being influenced by the impacted by the covert, some in some degree.

Speaker 8: And we are in a few months of thedelay or the predict recruitment. That's why we were initially expecting a dayata readout later by the end of this year or ear last year. Now which probab a few months later. And for the prevent trial, which was the first factor study for the fifth cancer type study the initiation of the trial was delayed for for a couple of months is to the proress but it's mainly, if not related to the pation accrural exthat, just mainly the other ministrator process being delayed and we excusing to itsay that study through maybe within look. So so far that the visiility state after of the time line way yes, but is manageable so far, Thank you, Thank you, just well. Last question from the. We have some color on, like our bottom line.

Speaker 12: Pl or our cusashperurn over next few years. Yes also, looking at our cash balance and our burn rates, I think weare we are doing okay in terms of having a good around two years cash- long way ahead of our- and there is flexibility to make adjustment.

Speaker 13: Is circumstances to require a to adjust. So I think we are happy with the cash balance and we are kind of putting higher focus on our efficiency through higher focus towards EBITDA progress of the patient testing business. But we don't have formal guidance yet. So I think for this year we will see opening expenses as a trend to go down over time, not necessar a straight line, but that's the direction of travel that we should see and that will provide us with set visibility that we to talk about this as we, as we move along, understand that our meet. Thank you.

Speaker 14: I'm sureing now further questions at this time. I would now like to turn the call back over to our speakers for equals and remarks.

Speaker 1: Thank you o per ANDA. Thanks everybody for attending today. Any questions, please do come back to us, and thanks again for your time.

Speaker 1: Ladies and gentlemen, that doesn't call conference for today. Thank you for your participation. You may not disconnect.

Speaker 14: The.

Speaker 14: I.