Burning Rock Biotech Limited

Ladies and gentlemen, please stand by. Your conference call will begin momentarily. Thank you for your patience and please stand by. Good day, ladies and gentlemen. Thank you for standing by, and welcome to Running Broad 2022 First Quarter Earnings Conference Call. This presentation contains forward-looking statements. These statements constitute 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 Security Subrogation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expect, anticipates, future, intent, plans, beliefs, estimates, target, confidence, and similar statements. Burning Rock may also make written or oral forward-looking statements in its periodic reports to the SEC, in its annual report to shareholders, in press release and other written materials, and in oral statements made by officers, directors, or employees to third parties. Statements that are 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 statement involves risks or incidences and other factors that could cause casual results to differ materially from those contained in any such statement. 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 like to turn the call over to your speaker host and CO, Mr. Hunt. Please go ahead.

Thanks. Welcome to Burning Rock 2022 Q1 Conference Call. I'm Yisheng Han, the CEO and founder of Burning Rock. And today we have our CEO, Shannon, CTO, Joe, and CFO, Leo, in a meeting. First, I will recap our business fundamentals and then go through some important recent business programs. And I believe that what our investors care about most, especially in the situation of COVID impact in the past five months is the business. And since most of our product development efforts are moving forward as laid out in our previous call, we will directly go to CFO Leo who will walk you through the financials elaborated on our growth trend after my presentation. So let's turn to page three. The Burning Rock started with therapy selection business in 2014 and has grown to the market leader in this segment. So we were the first NGS company to cultivate the in-house fetal channel and the first to have an oncology NGS-based kit approved by NMPA in China. Our initial strategy of developing this unique in-hospital channel in China has 10 years of our effort that has really started to realize a rapid market growth in the past quarters. This advantage has especially shown during the pandemic situation, and our leading position has laid a good foundation and given advantage moving forward to new business of early detection, MRD, and pharmaceutical collaboration. And our strong branding on technology and product quality also help us attract the main key talent. So that's what we are doing. And let's turn to page five to recent business programs. So the first thing I want to talk about is the strong policy push. from the government on cancer early detection and NGS, which happened most recently. In China's 14th five-year development plan, which is the most influential roadmap for China industry and society, announced every five years, NGS and cancer early detection have both been spelled out as key development areas. We expect local healthcare departments will adopt and act on our roadmap in the coming months, which will give the industry an encouraging environment for development. For patient testing business, including therapy selection and MRD, we believe that we are gaining market share by in-hospital models and new product lines including MRD, DetermineRx, and MyChoice+. We recorded 42 total volume increase in Q1 2022, with in-hospital volume growing 83% year-over-year. As you might know, China experienced a heavy COVID impact, and Shanghai has been locked down since the beginning of April. So despite such a heavy hit, we still see a total volume increase of 15%. And if you look at in-hospital, a volume that increased even more. I mean, 60% in the month of April. And it's also worthwhile to note that our new products, as I said, including MRD, DetermineRx, and MyChoice, contributed 70% among our central lab revenue. So considering March is just our first month of MRD product launch, we found that the number quite encouraging. As mentioned in our last quarter's call, the validation data of MRD technology PR profit for non-small cell lung cancer and CRC have been released at AACR. we saw state-of-the-art sensitivity and specificity performance of our MRD technology. For multi-cancer early detection, we have released our analytical validation data in AACR as well, demonstrating the 0.02 percent to 0.1 percent LOD across different cancer types. We have completed our PROMIS study for our nine cancer products. The data readout is expected later this year. And the PREDICT trial, which is our case control validation study for the nine cancer products, including over 10,000 participants, has completed more than 50% improvement, so it's doing well. And our commercialization progress for early detection is ongoing with several hospitals starting generating revenues. And in terms of pharmaceutical farmer business, the chain of growth continued in Q1 with over 300% year-over-year backlog progress and RMB 59 million new contract value which was 125% year-over-year growth. Let's turn to page five. So on page five, I would like to highlight the recent, one of the recent events, that Burning Rock Liquid Biopsy Conference. It's the first time we hold this conference under Burning Rock's own brand name. which and that conference took place in early April. It was a two-day conference chaired by three fellows from China Academy of Sciences and over 150 medical KOLs participating as speakers or panelists. The total audience for this virtual event was more than 36,000 people, and the topics stand from liquid-based companion diagnostic registration pathway to new technology such as MRD and MCED. A lot of these concepts are relatively new to the doctors in China, and market education is very important. Through this conference, we work with doctors' groups to promote awareness and understanding of new technologies while hosting heated discussions about how should they apply to Chinese patients. Now let's move to page six. So this graph here illustrates the promising growth trend of our pharma business. As mentioned just now, we can't the contract value doubled year after year in the first quarter, and which has been a continuous trend inherited from 2021. So we will build on our rich pipelines, global registration capability, and excellent BD team are the key factors to pursue continuous growth of our pharma business. So that's a brief of our recent progress, and I will pass to Leo about the financials.

Sure. Thanks, Yusheng. And just a quick highlight before we go into financials. On our page nine, we did lay out our clinical program progress recently. And for the nine cancers, which is on the development, we have the PROMIS study, as Yusheng mentioned, that has completed enrollment and analysis We are submitting that to a conference this year, so we're looking to a readout of the PROMIS study this year. In addition, the PREDICT study, which is the largest study to follow, we do have over 50% enrollment despite the COVID challenges, so I want to quickly highlight the clinical progress. Then going on to our financials, we'd like to cover three topics today. First is a review of our first quarter. The second topic on our latest trends and operating numbers as COVID has been a concern and focus for everybody. And number three, our progress regarding operating expenses optimization. Now let's go to page 22, which shows our quarterly volumes. We continued to deliver strong growth despite COVID challenges. In the first quarter, we saw very strong volume growth at 42% year-over-year, And for the in-hospital segment, 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 of 2021. At that quarter, we saw overall volume growth at 33% 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 of 2021. We are very pleased to see continued strength in the in-hospital segment despite COVID challenges. And as we mentioned earlier, we are happy to see new products contributing to our growth as well. Then moving on to page 23, we'd like to provide greater granularity on our recent trend. given that COVID has had a very large impact in China in the recent months. Shanghai was affected starting the month of March, and the city came pretty much to a standstill 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 shown on the table, We had a very strong start of the year. In January, overall volume grew over 74% year over year. In-hospital was up double digit. And we started to see COVID impact in March. Overall volume growth was up 17% this month. And this trended lower to a positive growth of 15% in April. And May was a horrific month with larger COVID impact compared to April. and with grim sentiment. And for us, for the month of May, we haven't closed the month yet, but our estimate is that we're likely to be down only single digits in May, so not a lot worse compared to April, despite the severe COVID 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 month of April, If we exclude Shanghai, overall volume growth was up 33%. And in-hospital was up 37%, overall, excluding Shanghai. And in-hospital was up triple-digit again, excluding Shanghai for the month of April. So strong growth outside of Shanghai, even for the month of April. And given how bad COVID impact has been in China in the recent months, I think our numbers speak to the resilience of our growth. Then moving on to financials on page 24. In the first quarter of 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 reported back in the fourth quarter of 2021, which was 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 segments revenue growth was led by in-hospital, which grew 69% year-over-year, which again accelerated growth rates from the fourth quarter last year, which saw a year-over-year growth rate of 25%. Farmer revenue continued to ramp, growing that triple digits, and a larger revenue compared to the fourth quarter last year, given by a strong farmer backlog that Yusheng just walked through on page six. And going to margins, first looking at gross margin this quarter was at 64.6%, excluding depreciation and amortization. So that gives us the non-GAAP gross profit margin. That was at 68.4%. 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 GP 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 build-out was largely complete at the end of 2021, and we would expect greater operating efficiencies going forward. So looking at our OPEX lines, the OPEX expense dropped on a sequential basis. And looking at these line by line, R&D expenses excluding share-based compensation decreased 8%, quarter over quarter, driven by decrease of expenses related to our clinical research project. I think Chinese New Year during February was the reason behind this sequential trend, and also there was COVID impact in March. But as we mentioned on page 9, despite the challenges that COVID brings on enrollment, we do have large data sets already enrolled that will keep us busy on our early detection R&D work. And our sales and marketing expenses, again, excluding share-based compensation, that line dropped 14% Q&Q on a sequential basis due to sequential staff expense decrease. and also because of a drop in conference and meeting expenses. As COVID spread throughout China, oncologists are getting quite used to the virtual format, and we were able to continue good engagement with oncologists in this format. Our liquid biopsy conference Yisheng mentioned was a flagship event that attracted a large number of oncologists to attend, and we are happy that we can keep strong engagement, but in a lower cost format. Then general and admin expenses excluding share-based compensation dropped slightly on a sequential basis as we reduced spend where we believe the efficiency delivered was not high enough. Then 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 compensation was mostly determined at the time of grant and amortized over a period of time going forward. So most of the share-based compensation was predetermined, so to speak, while the market cap was higher back in time. And the number for this non-cash line will be relatively sticky. And in terms of direction of travel for our OPEX lines, as we mentioned on our last call, we are putting greater focus on efficiency starting 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, we are expecting a drop of OPEX over time in terms of trend. Then going to our guidance, and given three factors, number one, our first quarter outperformed. Second, we did leave some buffer room for COVID's impact in setting our guidance. And number three, COVID impact appears to be reducing, or at least Shanghai is looking to reopen on the 1st of June. We believe that there is no need to change our full-year guidance, assuming that COVID impact generally does turn down as we go forward. So we're happy about the first quarter performance, and we hope to catch up some of the pent-up 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. Then lastly, on our cash position, we have a cash balance of RMB 1.34 billion. or U.S. dollars $211 million, including short-term investment at the end of first quarter 2022. Our net operating cash flow in the first quarter was RMB $144 million, so I would say a reasonable burn rate given where we are on our balance. So that concludes our prepared remarks, and operator, please open up for questions.