Q1 2023 Burning Rock Biotech Limited Earnings Call

two one.

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 four looking statements within the meaning of Section 21e of the Securities Exchange Act of 1934 as amended and as defined in the US Private Security Certification Reform Act.

1995. These four looking statements can be identified by terminologies such as will, expects, anticipates, future, intent, plans, beliefs, estimates, targets, confidence and similar statements. Statements that are not historical facts.

including statements about burning rocks, 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 rocks' control. Four looking statements involve risks, uncertainties and other factors that could cause actual results to differ materially from those contained in any such statement.

BurningRock does not undertake any application because you are not looking at statements as a result of new information, future events or otherwise except as required under applicable law. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

To ask a question during the session, you need to press star 1 1 on your telephone. Please be advised that today's conference call is being recorded. With that, I would now like to hand the call over to your first speaker today, Mr Han, CEO of the company. Thank you. Please go ahead.

Thank you. Welcome to Burning Rock's 2023 Q1 conference call. I'm Yisheng Han, the CEO founder of Burning Rock. So today we also have our CTO Joe Zhang and CFO Lily online.

So, before before the presentation, we, I would say that this quarters data, although not a lot of new information, but they are very important information and they can ask very.

So before before the presentation, we, I would say that this quarters data, although not a lot of new information, but there are very important information and they can ask very exciting.Cheerful music plays

So, let's turn to page 3. In case there are some investors who are not very familiar with Permian Rock, I hear this is what we do. So, our business started from tissue-based serophia selection and then expanded to multi-direction of a liquid biopsy including liquid-based

therapy selection, MRD, and multi-cancer early detection. We have three business units providing products and services to doctors, farmers, and consumers.

So let's turn to page four. We set up our goals of 2023 and reported to the investors three months ago. The number one goal is probability. That is our probability of the

The goal we set is to break even excluding R&D during a quarter in 2023. And the second goal is continued revenue growth, a 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 number one player in China and a top player globally. And the main R&D span will focus on multi-cancer early detection.

So, let me break down the goals in four parts. So, for service selection, we will continue to improve the sales productivity by strengthen the hospital model and for launch install and install personalized in top hospitals.

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 in 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 early May, and I believe that it will be a strong engine for burning rock uncle view and start to impact the engine.

Q4 this year.

And for farmer, this goal is continue is profitable growth. With a new platform of MRD and more international orders, we are optimistic to the growth of our farmer business.

Before I'm CD prevent study, which is prospective study of over ten thousand subjects. We'll have interim readout in second half year of twenty, twenty three.

And we will continue the development study of nine cancer and 22 cancer tests in predict and present.

Also, we will we are building the regular regulatory pathways with FDA and NIMPA, especially NIMPA. So the commercialization will go all as selected top hospitals. That's where we set the goals of 2010-03.

So, let's see what's the result of our effort in Q1, 2022, and turn to page 6.

As we illustrated, the number one goal this year is profitability.

And the main indicator of commercial efficiency is non-GAAP gross profit minus SG&A.

So the number reaches its bottom in Q2 2022, and we can see that it's quite bad at that time.

And it was at that time we initiated the optimization plan. We can see that we are able to narrow down the loss from minus 84 million per quarter in Q2 2022 to minus 3.1 million.

in Q1 2023.

So we are very excited by this achievement. So that means that we are in a good chance to break even.

So let's turn to page 7 to see the other achievement.

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 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 starting 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 OSCQL conference.

So, MRD in terms of the men are in commercial or in clinical trials or going on the chat.

For Biofarmer, the business continues to grow. Contract value grows 27% year on year, while revenue grows triple digit.

That's also a good number. And for early detection, all the clinical trials are on the track, and the dialogues to NIMPA and FDA continues.

So we will let you know if we have new freaking news any moment.

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

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

Thank you, Yuxin. And for our financials, we have two key metrics to track for 2023. The first one is regarding our breakeven profitability, defined as non-GAAP gross profit minus SG&A. And Yuxin walks us over.

these numbers as demonstrated on page five. So you can see them in our slide track and 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 are two 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. We call that in our previous results that we set 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.

And then let's move to our P&L, which is shown on page 8. First, our revenues. We grew our revenues by 5% year over year in the first quarter, despite a very tough start in January and February . And we had very good results, as we talked about in March.

The continued delivery of pharma projects was the biggest contributor, with pharma segments 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 you should talk about on page 6, our farmer backlog continues to grow with new contract signs during the first quarter 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 .

5.7% 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 margin have climbed.

steadily over the years and we aim to even climb that a bit further down the road as well. Then moving down to the operating expenses lines, 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 Yuqing 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 a range of 60s or even above based on published data.

So our takeaway from our P&L for this quarter are mostly three points. Number one, resilience, 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 continued top-line growth.

Moving on to guidance, we iterate 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 a 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.

on multi-cancer early detection, on MRD, and on product registration with China's NMPA.

Our cash balance is sufficient to fund us for the next three years as we approach break-even 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 the financial situation.

including the paper published in Nature about medical engineering in regards to the technology itself, as well as the major six cancer early, multi-cancer early detection clinical study published in NL Moncology this year in Q1. So basically, we also got the FDA books through derived sedination.

we actually actively developed a 22 cancer, a multi-coded cancer early detection product, which is the upgraded version of the 6Cancer we already published in end-of-oncology earlier.

There's multiple different kind of trial name there, like Prevent, just mentioned by the correlation, as well as predicting the patient, which is 22 cancer, a multi-cancer

The page 13, I'm going to skip this one, basically just talk about the difference between the six cancers, 22 cancer. Let's move to MRD business.

So for MRD as a recap here, basically MRD has a 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 or 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 service guidance, including the de-escalate or escalate utilizing based on the MRD status. And also, it has a lot of utility that's being listed here at different stage of a treatment.

So for Burning Rock, page 17, we basically, we launched this product called Be Our Profit as our MRD solution. So this MRD solution is based on whole exon sequencing tumor profiling and trying to getting the...

the trackable up to 50 tracked mutation as trying to construct a personalized panel for each individual patient. And then we utilizing this personalized panel to perform the DR profit MRD assay CT DNA. And we do our deep sequencing, which is 100,000 X of raw deaths and utilizing leverage on the UMI error correction and to estimate-

The MRD status also estimates the tumor fraction based on the observation of this 50 loci status.

So right now in page 18 we basically have multiple different kinds of trials on different kinds of cancers utilizing this technology.

We call it BROFIT. As you can see here, there's multiple different cancer data. Either being published as a poster in different meetings from last year ACR to this year's ACR. Also, it will be, has more data, we will have more data in this year's, such as ASMO and ASCO later.

So basically, there are several updates here. I just listed in the page 19, which is we just presented in a CR meeting last month in Orlando. And this is basically the update of the metal study. We enrolled about 200.

Nansmoseo lung cancer patient, and we compare the BR profit 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 BR profit has highest sensitivity.

value on the landmark time point, which is a three day or four weeks after the operation and then we look at MRD status. If it's MRD negative, which is showing as a blue line, as you can see here, the DF ratio, the FS ratio is significant different from which is MRD positive, which is showing as a red line.

As you can see here, the harder ratio can reach as high as 16.4. This is a give us a lot of confidence showing on this data that our technology has its pronounced value, which give us more confidence trying to pursue further interventional study.

So, page 20, basically that's another small cohort that we performed on the gastric cancer. We also presented this data in the 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 VR profit personalized panel detection. But for the remaining, we just use the fixed panel to genotyping the 55 patients.

utilizing fixed panel tumor informed the way to to call the to call the MRT status. As you can see here in the middle table, you're showing the preoperative cancer sample, the CKBN detection, the BR profit methodology utilizing whole exome sequencing based.

50 individualized low side, you can see it's reach much higher detection sensitivity compared to a fixed panel with a team of informed calling with limited amount of mutation detected.

And on the RFS measurements in the capillary curve on the right, as you can see here, for the lead mark, which is two to four weeks after operation, there's a 13 patient we got this sample tested by BR Profit. As you can see here, for the negative, MRD negative patient.

none of them actually did these recurred and they relapsed. And for the positive, there are basically, there's about like three out of four already relapsed. Basically, this is to give us a lot of confidence showing the VR profit technology.

which is our MRD foundation of our MRD product. It's a value. So there's a multiple different kind of trial being listed in page 18, prior to mention there. So I think that's concluded by introduction regarding the proxy moments related update.

foundation of our MRD product as its value. So there's a multiple different kind of trial being listed in page 18, I already mentioned there. So I think that's concluded my introduction regarding the product development related update. Thanks.

And all friends, let's open up for questions please. Certainly. We will now begin the question and answer session to ask questions on the phone. Please press star 11 and wait for the MTP announced.

If you'd like to cancel requests, you can press star 11. Once again to ask question, please press star 11. One moment for the first question.

We have questions from the line of Alexis Yen from Morgan Stanley . Please go ahead. Thank you, management, for taking my question. 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.

And also in probably in three to five 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 mini waves of COVID impacted our business?

That's it for me.

So the first question, I can answer your first question, and I'm told Leo. So in terms of, you'll have to be the model of MRD. You know, 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 probably we are the only one provide the hospital model of personalized MRD unit world.

And the impact of that, the revenue, as I said, probably will start in Q4 because although we have a large base of in-hospital model hospitals, we still need to negotiate and attending tenders.

of different hospitals. So we know that the fastest period that you can win a chance to go into the hospital is probably at least half year.

So that's why I say that probably the impact will start in Q4 this year. If you wanted to see the main wave of MRD in-hospital model, I think that we at least need from now on at least one to two years to...

to make the MRD fully available in hospitals. So, to look at it in three to five years, we believe that MRD will be available in the next few years.

a very important force, probably not less important than therapy selection, because it covers most of the cancers and not limited to targeting drugs. You can combine it with chemotherapy, targeting drugs, and also immunotherapy.

So, with that second question. Yeah, let me 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. So far, no surprises.

Okay, that's clear. Thank you.

Okay, that's clear. Thank you. Thank you.

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