Burning Rock Biotech Limited

Good day and thank you for standing by. Welcome to Burning Rocks 2023 Q1 Earnings Conference Call. Before I 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 U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intent, plans, beliefs, estimate, target, 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 risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond Burning Rock's control. Forelooking 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 obligations 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 11 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 um welcome to burning rocks 2023 q1 conference call uh i'm yusheng han the ceo and founder of burning rock so today we also have our cto joe zhang and cfo lily online um so before uh before the uh uh the presentation we i would say that uh this uh this quarter's um data, although not a lot of new information, but they are very important information and they can be very exciting. So let's turn to page three. In case there are some investors who are not very familiar with Burning Rock, here is what we do. So our business started from tissue-based therapy selection. and then expand to multi-directions of 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 profitability. That is, 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 proper profitability is what we want to achieve. And our initial outlook for 2023 revenue growth rate is at 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 therapy selection, we will continue to improve the sales productivity by strengthening the in-hospital model. And for MRD, launch and install personalized MRD in top hospitals. And 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 Oncobu and start to impact Q4 this year. And for farmer, this goal is to continue its profitable growth with a new platform of MRD and more international orders. We are optimistic to the growth of our farmer business. For MCED Prevent Study, which is a study of over 10,000 subjects, we'll have an interim readout in the second half. year of 2023, and we will continue the development study of non-cancer and 2022 cancer tests in predict and present. Also, we are building the regulatory pathways with FDA and NIMPA, especially NIMPA, so the commercialization will go on as selected top hospitals. That's where we set the goals of 2023. So let's see what's the result of our effort in Q1, 2023, and turn to page six. 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 this spot in Q2, 2023. 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 point million in Q1 2023. We are very excited by this achievement. So that means that we are in a good trend to break even. So let's turn to page four, sorry, page seven 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 a strong rebound of in-hospital in March and continued improved our sales efficiency. And for the progress of MRD, we launched the in-hospital model of our product in May. And since the installing 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 a coming OSCO conference. So MRD in terms of no matter in commercial or in clinical trials or going on the chat. For BioPharma, the business continues to grow. Contract value grows 27% year-on-year. while revenues grew 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 breaking news at any moment. So next, I will pass to our CFO, Leo, to talk about the numbers in detail. Leo, please.

Thank you, Yusheng. 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 Yusheng walks us over these numbers as demonstrated on page five, so you can see them in 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, two key metrics to track for this year. On growth, let's first visit our volume trend shown on page seven. Our testing volumes achieved strong rebounds in March. Recall that in our previous results that we said January and February combined, the 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. On a sequential basis, our volumes in first quarter was up 3% versus the fourth quarter last year. And the strong rebound in March was led by the in-hospital segment, where we continued our lead in that channel, taking further market share. And then let's move to our P&L, which is shown on page eight. 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 six, our pharma backlog continues to grow with new contracts signed 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 wing major tenders in April, so we are on a strong footing for that segment going forward as well. Then moving down to the gross profit line, gross profit grew 16% year over year with non-GAAP gross profit margin, which excludes depreciation and amortization at 75.7% 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. Now 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 Yusheng 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, resilient top-line growth led by biopharma and in-hospital strengths. 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 nine, 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 the previous results call. The losses from our commercial operations is dropping rapidly and approaching break-even, while the vast majority of our burn is towards investment 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 breakeven 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 our pipeline updates.