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spk02: The conference will begin shortly. Good day and thank you for standing by.
spk03: Welcome to the Burning Rock 2022 Third Quarter Earning 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 1 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. please be advised that today's conference is being recorded. Before we 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 US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intents, plans, beliefs, estimates, targets, confidence, 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 risk. 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 any forward-looking statement 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 over to our main speaker today, Yusheng, CEO. Please go ahead.
spk07: Thank you. Welcome to Burning Rock's 2022 Q3 conference call. I'm Yusheng Han, the CEO and founder of Burning Rock. And our team today has Shannon Chai, Leo, and Joe. So Q3 was a strong rebound from Q2 for Burning Rock. mainly because of the reopen of Shanghai. And though we have seen some signals of software regulation of COVID, we don't think that the economy can fully recover in Q4. And therefore, the first thing I want to say that we will adjust the guideline this year to 5% growth despite of the Q3 rebound. Then let's turn to page three about the highlights of our recent progress. So we listed in London Stock Exchange recently in order to have a better position in capital market. And in terms of performance, we recorded 22% year-on-year revenue growth in Q3, and it is a strong rebound of 36% Q on Q this time. And for therapy selection, The in-hospital model volume is back to growth in Q3 with 24% year-on-year growth in a situation that we successfully lowered the selling expense of 15% in Q3 versus Q2. And it's a good trend to profitability of OncoBU, which is a relatively mature business. Since we launched the MRD product in March this year, the growth trend is great, and volume more than doubled in Q3 versus Q2 to 700 tests. The revenue of BioPharma grew triple-digit year-on-year to RMB 15 million, and backlog continues to build with newly contracted project value increase of 38% year-on-year to RMB 198 million during the nine months of 2022. And Oversea is the name of our mild cancer early detection product. We launched that this year and the volume of Oversea in Q3 with 264 tests. Though it was not a big number, we are still very excited because we are gradually finding the way to convince doctors and consumers in Class 3A hospitals. Let me elicit some background information. Chinese people are used to do health checkups annually, and 80% of the high-end health checkup population concentrates in Class 3A hospitals 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 educate the doctors about how to prescribe the test to the consumers because it's a new type of product. So finding a way to sell overseas is very meaningful for us. And I want to emphasize here that operating efficiency will be our number one focus going forward for both commercial and pipeline assets. So we expect the cash outflow to drop significantly next year compared to that in 2022. Let's turn to page four and this page shows what we do and many friends might be very familiar with it. We just want to remind our investors that Burning Rock started the therapy selection business in 2014 and has grown to the market leader in this segment. In the past eight years, we have expanded our technology and business to early detection MRD and pharma collaborations. And let's turn to page five. And this page shows the business object of Burning Rock. And we have been talking about that several times. And by comparing with the recent progress, I talked in page three, we can easily see that we are heading in the right direction in all the key objectives, such as the severity selection, cost effective saving, MRD pipeline developing and commercialization, biopharma business development, and also the clinical development and commercialization of multi-cancer early detection. And then I will turn to the pipeline development to Shannon. And before I hand over to Shannon, I would like to go management change that we announced recently. Shannon, our chief operating officer, is going to take up a new role of chief science officer, relinquishing her COO role starting November. And Shannon has been with us since 2014, and as a member of our board since 2016. She has played two important roles. One is the product side, including managing our therapy selection product, MRD, and early detection, leading scientific collaboration with medical KOLs, developing communication strategy with regulatory bodies, and driving the expansion of our product pipeline. And the other role she has played is on the operations side, managing cross-department collaboration And given the amount of complexity that has taken place in our business scope, especially the expansion on new products, we believe that her time is best focused on the product development and regulatory side. And on the operating side, we believe that we have a strong team of leaders in place leading the respective business unit. And this unit will report to me directly. We believe that the team of unit leaders we have in place is the right one to execute on this objective. And there's no change at our board, and Shannon will continue to serve as board director. Yeah, Shannon.
spk05: Okay.
spk07: Want to say something?
spk05: Yes, thank you. So first, I'd like to emphasize that I'm proud to see the growth of our talent base and the team of leaders that we have in place already. I think that they are more than capable to allow me to free up my time on managing internal processes and to focus more on providing scientific insights in new products development. So next, I'd like to talk about the PROMIS study. for our cancer early detection program, which we have recently completed and presented at the eSmall conference in September. So first, let's go directly to page 17 for a recap on what PROMIS study is. So PROMIS study is our proof of concept study, which is a crucial step in the NYE cancer test development. It's a pretty rigorously designed prospective, multicenter, age match, case control study, which included 2,035 participants. More interestingly, we designed PROMIS as a multi-omic study, where CFDNA methylation, CFDNA mutation, and multiple protein markers in serum were tested in parallel. And an integrated model was developed to assess whether and how much do these three types of biomarkers complement each other, improving sensitivity. when overall specificity was held at a very high level. So let's move on to page 18 for the main findings of PROMIS. In the validation set, we have demonstrated an overall sensitivity of 83.7% and specificity of 98.3%. The sensitivity and the confidence intervals in each cancer type is shown below in the plot. not only covered three more cancer types, which are 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 as the six cancer tests as reported in the thunder study. So this gives us a lot of confidence moving forward to the much larger scale PREDICT study for a model log for the night cancer test. Furthermore, the nine cancer tests demonstrated a 90.9% accuracy for the top two organs for tissue origin prediction in this PROMIS study. This is also in par as what was shown for the six cancer tests in thunder, which shows a great promise for extending our algorithm to even more cancer tests in the future. So when comparing the three omics data 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 PROMIS study was a very successful proof concept. And more details could be found in our eSMO poster if you are interested in learning more. In addition, for our six cancer tests, we are right now actively recruiting for the PREVENT study, which is the prospective intent-to-use population study for clinical utility establishment. So we are expecting interim data readout from PREVENT study in the second half of 2023. On the other hand, the accrual of PREDICT, PRESSION, and our other MRD 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. Leo.
spk06: Thank you, Shannon. And first, let's recap before going to numbers, recap just on COVID in the third quarter, given the sensitivity of our business volumes on COVID disruptions in China. We had a lockdown during the third quarter of a major city, Chengdu, for about two weeks at the end of August. Some outbreaks in west, northwest China, and 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 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, MRD drove the volume growth in the central lab channel. 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 listed peer in the PCR space showed a drop of 16% year over year in the third quarter. Our anecdotal color in the NGS space also suggested a tough quarter that our peers went through in Q3. Again, we think the in-hospital strategy is our key in delivering above industry growth in the third quarter. And also that's supported by new products, chiefly MRD. 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 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 CDX development with the NMPA. And importantly, the pharma segment is very efficient in terms of sales productivity per head and therefore a positive contributor to our operating margin. Then moving to operating expenses, in addition to strong top line growth, we also demonstrated the improvement in operating efficiency in the third quarter. First on the selling expenses, which dropped 15% quarter over quarter compared to the second quarter, as our sales reorganization showed initial progress. We are going through a disciplined Salesforce productivity optimization effort, and we expect our selling expenses to continue to trend down going forward. Next, looking at our general and admin expenses, and excluding non-cash, share-based compensation, and depreciation and amortization, our G&A expenses also started to drop down 9% quarter over quarter, led chiefly by a drop in staff costs. The drop was also contributed to a lesser extent by tighter cost controls on other spend in G&A. Then R&D expenses was up 14% quarter over quarter as our early 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 R&D projects. Going forward, we expect continued efficiency gains and therefore improvements on cash flows. Qualitatively, we expect our cash outflows to drop significantly in the year 2023 compared to this year. We will come back with more specifics at the time of our 4Q 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 US dollars 143 million. And given our projected burn, we think we have sufficient cash balance to fund ourselves for the next three years. Now turning to our revised guidance for 2022, the revision is mostly driven by the latest COVID wave and the disruptions that we're seeing on the ground since the start of October. And it started with the national holiday periods, but it never went away during the month of October. And numbers were rising and stayed above 10,000 over the past number of days and are still trending upwards. For the large cities that are important to us, Guangzhou is where, you know, that's one of our large markets, and that's where our lab is located. Guangzhou 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 numbers rise across many cities in China. We do note China's adjusted COVID response that was announced on the 11th of November. The adjustment calls for a more targeted, less blanket lockdown 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're at 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 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 courses, the absolute case number will bring less disruptions. But for now, I think we need to observe for at least one more quarter, as China has just started the COVID policy adjustments on the 11th of November. So this concludes our prepared remarks, and we'd like to open for questions, please.
spk03: Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone and wait for a name to be announced.
spk02: This will take a few moments. Now I'm going to take our first question. And the first question comes to the line of Alexis Young from Morgan Stanley.
spk03: Your line is open. Please ask your question.
spk04: Thank you. Thank you for taking my question. I have two quick questions. Number one is on the revised guidance for 4Q and 4-year. I understood that the Guangzhou pandemic mainly probably impacts the central lab segment by more because where it is located. Just wondering how the other segments have been trending in fourth quarter, for example, in-hospital and the pharma R&D segments. And also, my second question is, after the PROMIS study readouts are released, can you remind us of some of the key readouts or other catalysts ahead.
spk07: So, I'm Yisheng Han. I can answer your first question. So, our lab now is still working, lucky for us. But the impact is that Guangzhou is a big city for burning rock total volume, including hospital and central lab model. what Leo said is that Guangzhou business has been impacted. And for farmer, that's less impacted. That is a main basis. And for multi-cancer early detection, so we have been impacted in Chongqing, which we have two hospitals open there. So yeah, that's a recent impact for the business part. And the second question I turn to Shannon.
spk05: Sure. So PROMIS is a proof-of-concept study for night cancer tests. And if you remember, originally in our plan we had three tiers of products for the multi-cancer early detection product line. the six cancer test, and then the nine cancer test, and then the 22 cancer test. So with the PROMIS data, actually for future, the next line of product development, we are having intensive internal discussions in terms of the adjusted strategy. Because of that, we couldn't give more specific readout time for predict and prescient, which we actually had planned. But one thing I could say is that the accrual process for both predict and prescient studies are as planned. They actually have been moving forward really well in the past couple of quarters. So that's for the new product line development. And then for the sixth cancer test, actually, the PREVENT study, we started the Acruro about a couple of quarters ago. And so far, the Acruro has been entering a strong wave. So we have pretty strong confidence that by before, at the end of next year, we will have at least half of the data completed in PREVENT. So we will have a very informative interim analysis to show whether the six cancer tests with the performance of sensitivity and specificity, whether they hold in the intended use population and whether such performance can actually establish the kind of clinical utility that we were hoping for. and prevent is sort of, by design, sort of like the Pathfinder. So we will have our first sense of the real clinical activity in an intent to use population. So that's something that we are very excited about, if that answers your question.
spk04: Yeah, that's very clear. Thanks a lot.
spk02: That's all of my questions. Thank you. Now we're going to take our next question.
spk03: And the next question comes from the line of Max Masucci from Cohen. Your line is open. Please ask your question.
spk01: Hi. Thanks for taking my questions. So last week, from one of the US-based MRD providers, they gave a quarterly breakout of their MRD test, which has been in the market for some time. So it's great to see Burning Rock's strong growth and the doubling of MRD volumes quarter over quarter. My question is, should we expect a strong sequential growth in MRD monitoring volumes throughout fiscal 23? And then what percentage of the MRD volumes today are for lung cancer patients versus colorectal, esophageal, or other cancer types?
spk07: I would say that we think that MRD will continue to grow. But I think the biggest, I cannot tell the exact forecast growth percentage, but I will say that in China, the main business in the future will be the in-hospital model. And we are trying our best to make the MRD test available for the in-hospital model. Because MRD test, it needs to test the tissue first. And hospitals now are getting more and more stringent about sending samples out of the hospital. So I think that by next year, if we successfully make the test available in the hospital, we're going to see much bigger growth. In terms of the cancer type, I would like Shannon to say something about that.
spk05: Sure. First of all, on the cancer type distribution, about 60% of our current tests come from lung cancer and about 30% from colon cancer and the others scattered 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 in previous costs 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 we have even stronger confidence that for one MRD market is still in its very very early baby stage in China the future is actually very promising. And the second, more importantly, the growth curve for MRD is probably not like constantly exponential or something. It's actually stepwise because for the first wave of growth is when the MRD markets first enter, the MRD products first enter the market, which has been the past year or so. And then The second big wave would come when the utility, actually, the evidence for utility grows 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 type of utility coming out from those trials. And once those are established, we firmly believe that the market will have its next even bigger wave of growth. And the other dimension is, as Yusheng just mentioned, the in-hospital model, which we believe will be the main channel. And the trend of compliance and regulation has been very clear, even more so during the COVID years. So once we have the MRD platform running in the hospitals, we will be more ready to embrace the next waves of growth for the MRD market.
spk01: That's fantastic. And then a second question related to the Beijing collaboration. just be curious to hear you know how the how your mrd test is being used in the clinical trial um you know wondering if it's being used you know to to guide or accelerate clinical trial enrollment you know or if it's being used to identify patients likely to benefit from more aggressive treatment after surgery so that would be the you know therapy escalation type application or Is ctDNA status in the test being used as a surrogate endpoint for disease-free survival?
spk05: Okay, I can try to answer that question. So, first of all, due to the characteristics of the collaboration, Probably cannot review too many exact details of the trials. But what I can say is that the Beijing collaboration actually is sort of a strategic collaboration. So it's not one or two specific trials. It's actually, Beijing actually spent a lot of time doing research and also testing MRD products across many different testing companies like us. And then they selected our BR profit as the strategic sort of partner moving into the guided or MRD as biomarker for their clinical trials. And so far, all the trials, all the existing trials are mostly observational, meaning that the MRD is only an observational biomarker embedded in the clinical studies. And both Beijing and the doctors are very interested in seeing MRD data to be embedded in their already going on, already running trials. But of course, in the future, I think very likely MRD could be used as the the patient selection strategy for some of their trials to enrich the patients who can benefit more from adjuvant therapy. But I honestly don't think it's going to be any near future where it can be used as a surrogate endpoint. I think that's probably too much a jump for the trial design, but that would be also very interesting to watch out in the future.
spk01: Yeah, I agree. We need a bit more data before we incorporate it for that purpose. And then final question for me, the biopharma contract wins have 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. you know, what percentage are coming from MRD versus therapy selection, any sort of trends you're seeing that are driving that continued strength in the biopharma contract lens?
spk07: So again, I can answer that question. So mainly now the revenue is still driven mainly by companion diagnostic. But a good trend is that we can see that multinational companies are transferring more and more focus on MRD. So if you look at a local farmer or local biotech, they are still working on the companion diagnosis. But big global farmers are doing more and more MRD investigation and collaboration with Brennan Rock. And yeah, so I think that the trend in the, in the near term would not change, but there's still more, some challenging, you know, that in Q2 and Q3, the capital market is not good, and that will be some impact to the biofarmers, especially the small biotechs. And there's important, there's also an important resource, I mean, revenue resource for burning rock, and I think that will be a little bit impact to the revenue or backlog in the future.
spk01: Okay, great. Thanks for taking my questions.
spk03: Thank you. Darano, for the questions, that does conclude the conference for today. Thank you for participating. You may now all disconnect. Have a nice day.
spk00: Thank you. Bye.
spk02: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
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