Q3 2022 Burning Rock Biotech Ltd Earnings Call
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Good day, and thank you for standing by welcome to the burning rock 2022 third quarter earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation, there will be the question and answer session.
To ask a question during the session you will need to press star one on your telephone keypad, you will never get an automated message utilizing Johan this waste please.
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Before we begin I would like to remind you that this conference call contains forward looking statements within the meaning of section 21 E.
All of the Securities Exchange Act of 19th at your fault 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 well expects anticipates future intends plans beliefs estimates targets confidence and similar statements.
Statements that are not historical facts, including statements about its been in Bronx beliefs and expectations are forward looking statements.
Such statements are based upon management's current expectations.
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 studying rocks 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.
But no real does not undertake any obligation to update any forward looking statements as a result of new information future events or otherwise expect as required under applicable law.
And now I would like to hand, the conference although two of my Speaker today, you shouldn't see Oh. Please go ahead.
Thank you.
Welcome to burning rock Tenn to tender until Q3 conference call are Michele Honda CEO and founder of burning rock.
And our team today has solid Shannon.
Hi, Leo.
Joe.
So Q3 was a strong rebound from Q2 for burning rock.
Because of the real power of Shanghai, and though we have seen some signals out succor regulation of Covid.
We don't think that the economy can fully recover in Q4 and therefore it the first thing I wanted to see.
I thought where we will adjust their guidelines this year, two 5% growth despite out that Q3 rebound.
And then let's turn to page three our about our highlights.
Highlights of our recent progress.
So we listed in London stock Exchange recently.
Did you have a benefit provision in capital market.
And in terms of our performance.
<unk> recorded a 22% year on year revenue growth in Q3.
And salary bonds.
36% Q O Q.
At this time.
For therapy.
<unk> therapy selection are the in hospital model volume is back to growth in Q3 with 24% year on year growth.
In a situation that so are we.
We successfully lowered our selling expense.
The 15% in Q3 versus Q2.
And there's a good chance to a proper.
Profit profitability of uncle deal, which is a relatively mature business.
Since we launched it in March.
The protocol in March this year, the gross churn it's great volume.
More than doubled in Q in Q3 versus Q2, two seven test so.
So sorry, 277 hundred tests.
The revenue of our Biopharma grew triple digit year on year to RMB 15 million in backlog continues to build with newly contracted project value increase up.
38% year on year to.
To RMB 100.
$98 million during the nine months up 22.
And oversee is the name of our.
Now the cancer early detection product, we lost that.
This year and the volume of our oversea in Q3.
With 264 test.
Though it was not a big a not a big number we're still very exciting because we gradually are finding their way to convince doctors and consumers in class III a hospitals.
Let me illustrate some background information.
Chinese people I used to do have a health checkup annually and 80% of the high end health checkup population.
Concentrating in class III a hospital in China.
And it is challenging and time consuming to sign contracts with those hospitals and after signing the contract. It usually takes three months to advocate of doctors about how the prescribed either attached to the consumers because it's a new type of product does.
Finding a way to to sell oversea, if very meaningful for us.
And I want to emphasize here that our operating efficiency, our will be our number one focus going forward for both commercial and pipeline asset. So we expect the cash outflow to drop significantly next year compared to that you intend to attend to.
Let's turn to page four on this page so what we do and many friends might be very familiar with it.
Or just want to.
Remind our investors that Bernie started therapy selection business in 2014 and has grown to the market leader in its segment and in the past eight years, we have expanded our technology and business too early detection MRV and pharma collaborations.
And let's turn to page five and this page shows the business object.
Burning rock.
And Oh, we are or have been talk about that several times and by comparing it with the with the with the <unk>.
There is some progress I talked to in phase III, we can easily see that we are heading in the right.
Direction in both in order.
Key objectives objectives, such as start of therapy selection cost effective saving at Mardi.
Pipeline, developing and commercialization Biopharma business development and also the the clinical development and commercialization of multi cancer early detection.
And then.
I will I would tend to turn to the pipeline development to Shannon and before I hand over to Shannon I would like to go through a management change.
Change that we announced recently.
Shannon, our chief operating officer is going to tick up a new role of Chief Science Officer relinquishing of her C. O overall starting in November .
And China has been with us since 2014 and as a member of our board since 2016.
Jeff played two important role is one is the product side, including managing our therapy selection product.
And Marty and.
Early detection, leading site scientific collaboration with medical care, where else developing communication strategy with our regulatory bodies and driving the expansion of our product pipeline.
And the other road. She has played a S owned operation operation site.
Managing cross department and collaborations and giving the amount of complexity that has taken place in our business scope, especially the expansion on the new product. We believe that time is that a focus on the product development and regulation regulatory side.
And on the operations operating site, we believe that we have a strong team of leaders.
Later are in place.
Leading the risk.
<unk> respective business unit and this unit will report to me directly we believe we believe that the team our union leaders, we have in place if the right one to execute on this objective.
And there's no change at our board and Shannon will continue to serve as a board.
Gotcha.
Yes Shannon.
Okay, I'll say something.
Yes. Thank you so.
So first I'd like to emphasize that I'm proud to see the world of hard talent base and a team of leaders that we have in place already I think that there are more than capable of.
Allow me to free up my time, managing internal processes and to focus more on all items Antefix insights products development.
So next I'd.
I'd like to talk about the promise study for our cancer early detection program, which we have recently completed and presented at the small conference in September . So first let's go directly to page 17 for a recap on what promise study yes.
So promise study is our proof of concept study, which is a crucial step in the Knight cancer Test development, It's a pretty rigorously designed prospective multi center H matched case control study, which included 2035 participants more interestingly we did.
Signed promise as a multi omics study, where she have DNA maturation, Jeff DNA mutation and multiple quotes markers serum.
When tested in parallel and an integrated model was developed to assess whether and how much do these three types of biomarkers complement each other.
Improvement in sensitivity when overall specificity was held at a very high level.
So let's move on to page 18.
For the main findings on promise.
In the validation that we have demonstrated an overall sensitivity of 83, 7% and specificity of 98, 3% the sensitivity and the confidence intervals in each cancer type has shrunk now in the interim.
Block.
So we noted that this not cancer test not only covered three more cancer types, recharged stomach head and neck and biliary tract.
But it also showed improved sensitivity on some previously covered cancer types, such as colorectal cancer, while holding similarly high specificity asked us six cancer test as reported in the study.
So this gives us a lot of confidence moving forward to the much larger scale predict study for.
Our motto locked for at the Knight cancer test.
Furthermore, the Knight cancer test demonstrated a 90% and 99% accuracy for the top two organs for tissue of origin predictions in this promise study.
This is also in par as what was strong for the night offering six cancer testing Thunder, which shows a great promise for extending our algorithm to even more pizza types in the future.
So when comparing the three I'll make stayed at dimensions methylation actually contributed more than 90% of the total sensitivity. This is also in line actually with our hypothesis and expectations. So overall, we think promise study was a very successful proof of concept and more details can be found in our east.
Poster, if you're interested in learning more.
In addition for our six cancer test we are right now actively recruiting for the prevent study which is the prospective intend to youth population studies for clinical utility establishment. So we are expecting interim data readout from prevent study in the second half of 2023.
On the other hand, you Chris.
All off predict prescient and our other MRV studies are all moving along as planned we don't have any particular, new information to release for these studies in this quarter. So I'll stop here and pass on to Leo to walk you through our financials.
Yeah.
Thank you Shannon.
And first let's recap before going to numbers recap just on Covid and the third quarter, given the sensitivity of our business volumes.
On Covid disruptions in China are.
We had a locked down during the third quarter of a major city Chengdu for about two weeks at the end of August somehow.
Some outbreaks in west Northwest China.
Temporary restrictions in a few cities in northern China.
Overall apart from Chengdu other large cities that were important markets for us did not experience prolonged disruptions.
So with that backdrop, we had a good window to execute on our growth during the third quarter and we achieved good results first.
First volumes as shown on page 22 volume growth returned in the third quarter.
And a strong bounce back from the second quarter in hospital channel had another good quarter growing 24% year over year.
Or 36% quarter over quarter for Central Lab M Rd drove the volume growth in our Central Lab channel.
And then going into our financials on page 23.
Our revenues grew 19% year over year in the third quarter, which we believe is strong and above average given the challenges on the ground for reference our disappear in the PCR space showed a drop of 16% year over year in the third quarter.
Our anecdotal color in the NGL space also suggested a tough quarter.
Peers went through in Q3 again, we think being hospital strategy is are key in delivering above industry growth in the third quarter.
So that's supported by new products chiefly Mardi.
Pharma revenues showed strong growth year over year, there was some volatility quarter to quarter as these projects can be lumpy and dependent on our pharma clients clinical study progress.
This year, a pharma revenues have been an important contributor to our top line growth having grown our pharma backlog multiple times during the year of 2021.
This is built on the back of our strong product suite.
And our experience in companion diagnostics or C. D X development with the N M. P E and importantly, the pharma segment is very efficient in terms of sales productivity per head and therefore, a positive contributor to our operating margin.
Now moving to operating expenses. In addition to strong top line growth. We also demonstrated an improvement in operating efficiency in the third quarter first on the selling expenses, which dropped 16% quarter over quarter compared to the second quarter as our sales reorganization showed initial progress we are.
We are going through a disciplined sales force productivity optimization efforts and we expect our selling expenses to continue to trend down going forward.
Next looking at our general and admin expenses, and excluding noncash share based compensation and depreciation and amortization. Our G&A expenses also started to drop down 9% quarter over quarter, let's chiefly by a drop in staff cost.
The drop I was also contributed to a lesser extent by tighter cost controls.
Other spend in G&A.
Then R&D expenses was up 14% quarter over quarter as our detection clinical programs progressed on track in the third quarter out of Covid disruptions in the second quarter R&D staff dropped by single digit percentage points versus the second quarter as we cut back on non core.
The projects going forward, we expect continued efficiency gains and therefore improvements on cash flows.
Qualitatively, we expect our cash flows to drop significantly.
I mean, our cash outflows to drop significantly in the year of 2023 compared to this year.
We will come back with more specifics at the time of our full year results as we go through the process of finalizing our budget numbers for next year and we are sitting on a cash balance of RMB 1 billion at the end of September or U S dollars $143 million and given our projected burn we think we have sufficient.
Cash balance to find ourselves for the next three years.
Now turning to our revised guidance for 2022, the revision is mostly driven by the latest COVID-19 wave and the disruptions that we're seeing on the ground since the start of October.
And it started with the with the National holiday periods.
Never went away during the month of October our numbers were rising.
And stayed above 10000 over the past.
Days and are still trending upwards for the large cities that are important to us Guangzhou is where that's one of our large markets and that's where our lab is located.
Joe has seen case numbers persisting at a relatively high level and still rising.
So that's having disruptions for us in addition to Guangzhou Beijing is seeing rapid rise of cases.
Chongqing is seeing a lot of cases.
So we do see.
Case number rise.
Across many cities in China, We do notes China's adjusted Covid response that was announced on the 11th of November the adjustment calls for a more targeted less blankets locked down approach than before which we think is a great start towards an eventual.
Reopening however for the near term, we think the absolute number is likely to persist. The absolute case number is likely to persist at a high level and probably longer than it did back in the second quarter.
And we are as a higher risk.
Of high case counts, bringing disruptions to patient flows and our business volumes, so to be cautious and conservative.
We project a year over year drop in the fourth quarter, which will bring our full year guidance to an increase of about 5%.
That's our revised guidance.
A growth of 5% for the year of 2022 compared to the year of 2021 and that is down from the 17% year over year growth. We have achieved so far in the first nine months of this year, we are hopeful that China will transition carefully towards reopening and in future quarters. The absolute case number will bring.
Less disruptions, but for now I think we need to observe for at least the one more quarter as China has just started the COVID-19 policy adjustments on the 11th of November.
So this concludes our prepared remarks, and we'd like to open for questions. Please.
Thank you.
As a reminder, if you wish to ask a question. Please press star one on your telephone microphone name to be announced Mr. Barber will compile the Q&A roster. How these will take a few moments.
Now I'm going to take the first question.
And the first question comes from the line of Alex <unk> from Morgan Stanley . Your line is open. Please ask your question.
Thank you. Thank you for taking my question I have two quick questions number one is on the revised guidance for <unk> and four year understood that like the Guangzhou economic mainly probably impacts the central App Guzman by more because where its located just wondering like how the other.
That must have been trending in one quarter.
Or something in hospital, and the pharma R&D segments.
And also my second question is accurately.
Study I read out are released.
Your line is open.
Some of the key readouts or other catalysts ahead.
So.
And I can answer your first question.
So our lab.
As to our working Lucky for us.
And but the impact is that Guangzhou.
It's a big city for burning routes total volume, including hospital and.
Such a late model so that.
Leo sat as a console business.
Is there an impact.
And for a farmer that's less impacted.
That.
In basis and four for multi cancer early detection. So we have been impacted in Chongqing, which we have two hospitals opened there.
So yeah, that's a recent impactful for the business.
This part and the second question I turned to Shannon.
I'm sure so promise is.
Proof of concept study floor.
Oh for Knight cancer test and if you.
Remember, we originally our ground rent.
And then we had three tiers of products for the multi cancer detection product line. The six cancer test and then the non cancer test and then.
22 cancer test.
So with the promise data actually is the future.
The next line of product development, we are.
Having intensive internal discussion.
<unk> adjusted our strategy so because.
Because of that we couldn't give more specific read out and predict and questions, which we actually had planned.
But one thing I am I right.
It says that the accrued now.
Process for both predict impressions.
Studies are.
Our ASP blend there actually.
Had been Maureen for work really well in the past couple of quarters.
So that's for the new product line development, and then 46 cancer test actually the prevent study we started the accrued all about.
About a couple of quarters ago, and so far the accrual has been.
Entering a strong nave so we have.
Pretty strong confidence that right before the end of next year, we will have at.
At least half after data.
Completed and prevent so we will have a very.
Informative interim analysis to show, whether they're six cancer test with the performance.
Sensitivity and specificity, whether they hold in the intended use population and whether such performance can actually establish the kind of clinically with surety that we were hoping for.
And prevent and sure enough you know by design sort of like the Pathfinder. So we will have our first.
Sense after young real clinical utility and intend to use population. So that's something that we are very excited about is that answer to your question.
Yeah, that's very clear thanks, a lot.
All my questions.
Thank you.
Now I will go and take our next question.
Okay.
And the next question comes from the line of Max Masucci from Cowen. Your line is open piece ask your question.
Hi, Thanks for taking my questions.
So last week from one of the U S based <unk> providers. They gave a quarterly breakout of their AR <unk> test, which has been in the market for some time. So it's great to see burning rock strong growth in the doubling of our marquee volumes quarter over quarter.
Sure So Mike.
The question is should.
Should we expect strong sequential growth in MRV monitoring volumes throughout.
Fiscal 'twenty three and then.
What percentage of the MRV volumes today or for lung cancer patients versus colorectal esophageal or other cancer types.
I will say that.
It would seem that MRV will continue to grow.
I think that big it I cannot tell what the exact forecast.
Gross percentage.
I will say that in China.
The main business in the future will be that you know hospital model and we are tightening our past.
Two to make a M R D tests available.
Put it in a hospital model.
Because NRT test.
It needs to attach a tissue first and hospitals now.
Getting more and more.
Stringent about sending samples.
Samples.
Hospital, so I've seen that by so.
Next here fully successful successfully make the.
The test available.
In the hospital.
A much bigger outgrows in terms of the cancer type I will lessen into let's say something about that.
Sure first of all on the cancer type on distribution about 60% of her current tests come from lung cancer and about 30% from colon cancer and the other.
Scattered among.
Among the other cancer types and then for the first question I would also like to add something.
That actually in the I think in previous calls we were asked similar questions and I think we still hold very similar views as before now that we have entered the business for a while we have even stronger confidence that for one MRV market is still in its very very early stage.
In China.
The future.
<unk> is actually very promising and the second.
Importantly, the growth curve for MRV is probably not like.
Like constantly exponential or something it's actually step wise because for us for the first wave of where else is when the MRV markets first enter.
MRV products worth entered a market, which has been the paas.
Yeah, So and then the SEC.
Big wave would come when the utility actually the evidence for utility.
Gross Inc.
In both the lung cancer and colorectal cancer, and we can see that there have been trials clinical trials.
Interventional clinical trials in China, just starting so in the next couple of years, we would expect interventional taphouse on utility.
Out from those trials and once notes are established we firmly believe that the market will have its next even bigger wave off road and the other dimension is as <unk> just mentioned the in hospital module with stupid and it will be the main channel and.
The trend of compliance and regulation has been very.
Where a career in even more so during the Covid era. So once we have the <unk> platform.
<unk> running in the hospital.
We will be more ready to embrace the next moves off on growth with an emerging market.
Okay.
Fantastic and then a second question related.
Related to the Beijing collaboration.
Be curious to hear how the how your M. R&D test is being used in the clinical trial.
Wondering if it's being used to guide or accelerate clinical trial enrollment.
Or if it's being used.
To identify patients likely to benefit from more aggressive treatment. After surgery. So that would be the therapy escalation type application or is it as CTO DNA status in the test being used as a surrogate endpoint for.
For disease free survival.
Okay I can.
I can try to answer that question, so first off though due to the all of them.
Sure.
The characteristic of the collaboration we probably cannot reviewed to too many exact details of the of the trials, but what do we can I can say is that the Beijing and collaboration actually and so it's sort of a strategic collaboration so it's not on one or two specific.
Trials, it's actually Beijing actually spent lots of time.
Doing research and testing.
MRV products across many different testing company Oh, My Gosh, and then they selected our beyond profit at the strategic.
So we're not sort of a partner and moving into the army.
Guy did RMR D S biomarker for their clinical trials and so far.
Trials.
Existing trials are mostly observation now meaning that the Mardi is only an observational biomarker in bad debt in the <unk>.
In the clinical studies and.
Both Beijing and.
The doctors are very interested in seeing them already data.
To be embedded in there already.
Going on already running trials.
Of course in the future.
Thanks.
Very likely.
<unk> could be used as the the patient selection strategy for some of their their trials to to enrich the the.
Patients, who can benefit more from adjuvant therapy, but I honestly don't think it's.
It's going to be any near future, where it can be used as a surrogate endpoint and I think that's probably too too much.
Jump for the for the trial design, but that would be interesting to watch out in the future.
Yeah, I agree we need a bit more data before we can.
For reincorporate it for that purpose and then final question for me.
The biopharma contract wins.
Been growing at a really rapid pace pretty consistently and so it would be great to hear some of the underlying drivers of the acceleration biopharma contract wins.
What percentage are coming from M D versus therapy selection.
Any sort of trends you're seeing that are driving that continued strength in the biopharma contract wins.
So again I can't answer that question so mainly.
Now the revenue is still driven mainly by.
The companion diagnostic.
But it's a good trend is that we can see that our multinational companies.
Chest, starting more and more focus at Marty.
So if you look at it local.
Fatima local biotech.
We're still working on the companion diagnostic.
But.
Big Globe Global Global farmers.
Are doing more and more Marty investigation, and the collaboration with Western Iraq.
And so.
So I think that the trend in the.
The.
Near term.
Would not change, but there's still more some challenging.
In.
Q2, and Q3, the capital market is not good and there'll be some impact to the.
Biopharma, especially the small biotechs.
And those are important to us.
Also.
<unk> results.
<unk> results were putting rock and I think that will be a little bit of impact.
Our revenue or backlog in our future.
Okay, great. Thanks for taking number thanks for taking my questions.
Thank you.
There are no further questions that does conclude our conference for today. Thank you for participating you may now all disconnect have a nice day.
Okay.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Yes.
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Okay.
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