Good day and thank you for standing by. Welcome to the Burning Rock's 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

Before we begin, I want to remind you that this conference call 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 Securities Litigation Reform Act of 1995.

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Statements that are not historical facts, including statements about Burning Rock's beliefs and expectations are forward-looking statements.

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Forward-looking statements involve risks, uncertainties and other factors that could cause actual results to differ materially from those contained in any such statements.

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And now, I'd like to hand the conference over to your first speaker today, Mr. Yansheng Han, CEO of Burning Rock. Thank you, sir. Please go ahead..

Thank you. Welcome to Burning Rock Q3 conference call. I'm, Yusheng Han, the CEO and Founder of Burning Rock. So today we have our COO, Shannon; CTO, Joe; and CFO, Leo in the meeting.

So first, I will go through some exciting highlights of our recent progress and then our COO, Shannon, will elaborate on our product line expansion and our CFO Leo will walk you through the financials. So let's turn to Page 4.

So we all know that Burning Rock started the therapy selection business in 2014 and has grown to the market leader in this segment. So the leading position has laid a good foundation and it gave us advantage moving forward to new business, early detection, MRD and pharmaceutical collaborations. And that's what we have described last time.

And we have strong brandings on our technology and product quality which help us attract talents. So the network we have built across thousands of oncologists and hundreds of hospitals enable us rapid innovation and R&D studies on new products, as well as faster distribution when it goes to market.

The existing high testing volume makes it possible for us to continue lowering the cost and that's why we aim to tackle the therapy selection -- MRD and therapy selection -- sorry , the early detection market in parallel in the coming few years. And then, let's turn to Page 4 for some highlights on our recent progress.

So the first one we talk about is the commercialization preparation of the 6-cancer early detection. We discussed that last time and I have to say that it's got -- the preparation is going on well. We have strong confidence to sign six hospitals by the end of this year -- sign contract with six hospitals by the end of this year.

However, since multi-cancer early detection is a new category of product in the market and consumers instead of doctors, the real customer, will plan to run the choose free education campaign together with the hospital and doctors. So we will see how it goes -- how it will be going next year.

In terms of the trials of early detection, we expect the 9-cancer product development to readout in H1 2022, with a potential to demonstrate performance improvement versus the 6-cancer tests. No matter in sensitivity, specificity and also TOO. Last time we talked about our tumor-informed MRD technologies called BR PROPHET.

It has shown very promising performance with sensitivity on par with what has been shown in Natera and Archer's publications. And the lung cancer readout will be in the first half year 2022 and we have already launched trials for colon and esophageal cancers.

For therapy selection, we recorded 37 volume increase in QC for the in-hospital model, despite COVID-19 case in August, proving that the in-hospital model is a much more stable and reliable model. And last time, I also introduced fast growing pharmaceutical collaboration business.

If you remember correctly last time -- by Q2, the contract number was RMB98 million. And by the end of Q3, the number went to RMB144 million and which is a 4.5x of the total year of 2020. So I'll illustrate in detail on next page.

So if we turn to Page 5, to remind that the business we have to -- I think I need to explain why we separate the pharmaceutical collaboration as an independent business unit. So pharmaceutical business, it's not a new business for NGS industry in U.S. but this market hasn't been major in China until about a year and half ago.

So some recent trends and paradigm shift drivers include; first, NMPA is moving toward regulating targeted therapy drug approval in CDx model which means that the targeting drugs needs tests to go to the market together.

The second driver is with the pressure of volume-based government procurement, more domestic innovative pharmaceutical companies seeking for global expansion opportunities.

And for targeted therapy drugs, the need for pharmaceuticals includes high-quality product available on both FFPE and liquid biopsy samples and registration capability in both the U.S. and China and sometimes in the other developed country like Japan and Europe. And the third driver is MNCs that need NGS companies that can do CDx in China.

However, it is very challenging for foreign NGS companies to operate registration trial in China due to the regulation of Human Genome Regulation Committee. And our Chinese NGS company with global operation is their ideal choice. So thus seeing this trend, we set up our U.S. lab which is now a CLIA and CAP certificated.

And a high quality and broad portfolio and global registration capability and strong registration team are our unique advantages for this business. And let's turn to Page 6. So this is our product line progress and we will let our COO, Shannon, to go through that from this page on.

Shannon?.

Okay. Thank you, Yusheng. So let's move to Page 6 and we have actually showed this overview of our product pipeline last time, so I'll skip most of the content on the page and just focus on some key updates. First, we now have more clarity on the timeline for launching the three very important products in Q1 next year.

We actually mentioned about the commercialization of these three products but now we have a clear timeline of launching them in the first quarter.

And we will start the commercialization of the DetermaRx which is for adjuvant chemotherapy benefit prediction for early-stage lung cancer patients and also our MRD product using our BR PROPHET technology as Yusheng just mentioned for early-stage solid tumors which will become available to those clinicians and also our pharmaceutical customers and as well as our 6-cancer early detection product.

So we expect these new products to make significant contribution to our growth in the coming years. And then for our cancer early detection program for the 9-cancer product development program, we now have more visibility that we can share. We will most likely see some data readout in the first half of next year.

And I'll give more details on exactly what happens on Page 10 and then for our MRD program besides the lung cancer study which is called MEDAL that we have previously talked about.

The MEDAL has been a readout released early next year as shared before and also in the past few months, we have also extended validation into other solid tumors including colon and esophageal and gastric et cetera. And we expect to have validation data available in 2022 on relapse risk prediction on these cancer types from retrospective cohorts.

And so, there are also quickly increasing interest in the China market on MRD driven as we went therapy studies for drug development and we think BR PROPHET will be very well positioned to collaborate with our pharmaceutical partners on that as well, because most of the liquid biopsy products available in the China market are for six panels.

So BR PROPHET will be a very innovative technology in terms of the personalized panel for MRD approach. So let's now move directly to Page 10, where I'd like to walk you through more details, some updates for our cancer early detection program.

For the 6-cancer early detection product, we expect to launch prospective/interventional study, intending huge population in the first half of 2022. This study we think will provide us with key inputs for the design of the future pivotal study for the 6-cancer test registration in China.

And then on our 9-cancer product, one key update is that we have finished approval on a pilot case control validation study including over 2,000 participants. We call this study the PROMISE study and we expect to release some data readouts for the PROMISE study in the first half of 2022.

And in a meanwhile, the PREDICT study which is the main validation study plan for our 9-cancer product with more than 14,000 participants to be enrolled, if you still remember, it's recruiting at full speed right now with about 30 centers contributing to enrollment.

We remain -- our anticipation of having the first data readout for PREDICT around the end of 2022. We also wanted to emphasize that both PREDICT and PRESCIENT which is the case control validation study for 22-cancer product development.

Both these studies have gained approval from the human genetic resources of nutrition in China, because all studies with more than 500 subjects need to go through their approval process. So from what we can tell, we wanted to show that PREDICT and PRESCIENT are such far the only large-scale multi-cancer early detection trials going on in China.

So, that's about all I wanted to elaborate on. So now I'll turn to our CFO, Leo, to walk you through our financials.

Leo?.

Thank you, Shannon. Let's go to Page 17 please. Before heading into our financials, I'd like to quickly recap on the COVID curve for China.

In China's current defense against COVID, it is primarily through non-therapeutic means [Technical Difficulty] or the off-phase, it's a free movement and business [Technical Difficulty] large scale testing and if there is sign of cases spreading, we would see containment measures by the tightened movements or travel restrictions.

And just to recap what happened for Q3, we saw a significant wave back in August that spread through multiple cities that impacted Beijing which is a key market for us. This impacted our volumes for August.

We'll go into exact numbers a little later but in terms of the trend, we saw significant impact in August, then we recovered and resumed our volume growth in September and October but we are right in the middle of another wave now in November. Now turning to Page 18 which shows our volume trends.

Please come back -- the page on -- the numbers on Page 18 combines both our central lab and our in-hospital segments.

And in aggregate, you can see that our volumes grew by 38% year-over-year during the first nine months of this year which believe is -- we believe is higher than industry average that we're tracking and also higher than some of the growth numbers that we saw from NGS or even PCR players in China.

And specifically for the third quarter, our volumes grew 14% year-over-year. Within the quarter, July saw good volume growth of about 35%, then August was hit by COVID wave and restrictions. We recovered in September growing at high single-digits year-over-year, then accelerated to 38% year-over-year growth in October.

So we see that we've had good double digits volume growth during the period where COVID is quiet in China. Now stepping back from the COVID's annoyance, we believe the key of our above industry volume growth this year is the results of our in-hospital strategy.

It has allowed us to take dominant share at a hospital by being the NGS test supplier to the hospital. In-hospital is already half -- more than half of our testing volumes since the second quarter this year and also that remains the case for the third quarter. We expect this proportion to grow even further going forward.

However, this does mean that our blended ASP across the central lab and in-hospital segments will be dragged down as we supply hospitals at a lower ASP versus the price that we charge directly to patients in the out-of-pocket central lab segment.

This drag will repeat for a few quarters as we execute the transition towards more in-hospital testing which we think this is worthwhile doing because we even -- we laid out on Page 18 and fundamentally we think in-hospital segment is more sticky, a better quality segment that we should get more volumes going forward.

And then go into our numbers which is on Page 21. We grew our revenues by 2% year-over-year in the third quarter. Within the quarter, it's similar to the volume trends that we explained previously that August was a hit and July and September was better.

Our overall revenue growth rate is lower than our volume growth rates, because of the ASP drag that we just explained. And by segments, central lab was impacted more and was down year-over-year during the third quarter.

In-hospital segments maintained good growth, growing 38% year-over-year and these are primarily recurring kit revenues and the vast majority is kit revenues, not instrumental revenues.

We believe our market share gains through the in-hospital strategy is the key for achieving above industry growth for the in-hospital segments during the third quarter. The pharma segment is coming off a small base. Our pharma pipeline has been building rapidly this year as we showed on Page 5. And these are typically multiyear projects.

So the pipeline will convert to revenues over a multi-year period. Then moving onto our guidance which is at or around RMB500 million for the full year of 2021. And based on our run rate up to October, we would feel confident of achieving our guidance. But the latest COVID wave which is hitting us now is having an impact on our fourth quarter.

If the current wave were to die down today and if we were to go back to normal today, we would feel confident about our guidance. However, given what's happening on the ground, we'll have to flag the risk and see how much of an impact and how long of an impact this current wave will drag on.

And I guess moving beyond 2021 as we look out qualitatively for 2022, we will see commercial launches of multiple products this year. As Yusheng mentioned at the start of the call, we have been preparing for the launch of our 6-cancer early detection test which will go live next year.

In addition and as Shannon walked through on Page 6, we will see the commercial launch of new, two new products for early-stage cancer patients in 2022. So 2022 is an important year that we'll be looking forward to and we will be providing updates on those commercial initiatives in our future earnings calls.

And lastly we announced today, the dates and agenda of our annual shareholders meeting. At the meeting our Board is pushing forward a long-term share incentive plan for a shareholder's votes.

The share incentive is long-term in nature it's award our senior managements and keep talent and incentive to achieve not linear growth but nonlinear breakthroughs on our company's vision on a collective basis.

Specifically, half of the share incentive amounting to 5% of our total shares outstanding will invest if our market cap reaches US$10 billion, another 5% of total shares outstanding we'll invest -- if our market cap reaches US$15 billion.

The timeframe for reaching the US$10 billion market cap is within five years and after which the options will lapse. The timeframe for reaching the US$15 billion market cap target is within seven years.

Further details about this plan and our Annual Shareholders meeting is available on our IR website under the shareholder meeting section under the News and Events tab. And with that, we conclude the opening remarks of the call and we are opening to questions..

[Operator Instructions] Yes, first question comes from the line of Max Masucci from Cowen & Company. Please ask your question..

Hi, thanks for taking the questions.

So, if you look at your key geographic regions and cities and where the COVID impact was the strongest during Q3 can you just help us understand that the central lab volumes were impacted more by the COVID resurgence or if there is any impact from customers shifting to in-hospital testing and with all of these factors in mind along with new product launches.

would be great to hear how we should be thinking about return to growth or the patient growth in central lab volumes in 2022?.

So on the COVID impacts, the key markets for us the major Tier 1 cities in China and Beijing and Shanghai represents a large share of that market. So and these are the cities that typically get impacted when COVID goes on and the movements were impacted for patients cannot visit hospitals in those locations.

So I would say COVID has had an impact on our industry for this year. And what's different for us is the ability to gain share through the in-hospital channel which we believe allowed us to outgrow the markets, beside the COVID impacts, so I think that's what we're seeing primarily this year.

And looking out for next year, we think we will be and China's current strategy is still COVID zero case and -- that either strategy for a period of time and we will be having this impacts while that is the key defense mechanism against the COVID for China.

So that will go on but I think that will at some points we can't predict these accurate but at some point we would expect that China will go back to normal. So that will help alleviate some of the impacts that we're seeing that we have been affected.

And in addition, adding the new product launches which we will launch via the central lab channel initially that will add on to the in-house the central lab revenue growth going forward.

We are launching the in-licensed products for early-stage lung cancer a risk stratification products that had Chinese cohorts validation data that we launched in at Q1 next year as Shannon mentioned. So that will help providing us incremental revenue for the central lab revenue going forward as well.

So that's a qualitative thoughts for next year and as we come back for our fourth quarter results, next year we will be providing our guidance for 2022..

And I have some one additional comment -- this is Yusheng I have additional comments for your question. So just laying out the impact of COVID-19 is bigger in winter. So I think after the spring, the situation will be significantly better according to the situation this year.

And the second thing is that although central-lab model the new product that rely on the central lab model but we can see that central lab model is not -- stop growing, it's growing slowly but with the new product with the hospital down our sales team can really go in, they can really add more revenue because just more indications suitable for the new products..

Great, that makes sense. And then just as it relates to the implied Q4 guidance just curious if there's been any changes to in your access to customers your halfway through November or if it remains largely the same.

Looks like the full year guidance implies about 10% sequential growth in revenues in Q4 compared to Q3? So it would just be great to hear about the factors related to volume growth and ASPs will determine your ability to grow revenues quarter-over-quarter in Q4 and any other embedded assumptions in the implied guidance that we should be keeping an eye on?.

Yes, as we are in the middle of November we closed a strong month for October, we saw good volume growth that month that followed the spread the recovery after the COVID hits back in August.

So that was all going well but as we sit in the middle of another wave there is uncertainty on how long and how large of an impact Beijing tightened a bit further within this week. So it's hard to predict how much and how much further impact the current wave will drag on.

So we're just going to have to bear that risk in mind but we were happy about what we did back in October, it's unknown regarding the current wave for November and December. So we believe the guidance will be around RMB500 million for the full year with the uncertainty around the COVID impact..

And one final question if I could sneak one in. We've seen some recent reimbursement updates for MRD monitoring tests in the U.S. I mean oncologists seem to be very excited about the launch of this test application.

Would be curious to hear whether you feel that oncologists in China are equally receptive and ready to adopt MRD monitoring tests when they're broadly commercially launched.

And whether or not you feel that oncologists in China are more comfortable with a tumor informed MRD approach versus using a blood only fixed panel approach?.

Well, I think Shannon maybe I'll take the question after that..

Yes, okay. I can take that question I'll try. Well first of all, we have seen a very -- rather dramatic change in the clinicians concept according to their acceptance or interest in MRD product in the past few months. Last year around this time, we didn't feel like the MRD market was ready in any way.

But most recently especially in among the long clinicians and also some of the core actual doctors, clinicians, oncologists start to show very strong interest in MRD related products in their day-to-day applications.

However, most of the interest, so far of course still remain in more a research related or drug development biomarker study related on application realm. But we are going to see whether some of the really -- will be looking in the utility, the clinical utility that's already shown which we think is very, very strong and of course interest.

So we do have pretty high hope on the MRD market but frankly speaking, we are not 100% sure how fast the adoption rate will be among the Chinese clinicians.

But all that I can say right now is that from what we have observed over the past few months, it's becoming more and more promising and because the utility in these early stage cancer patients also significant, we -- I think scientifically we also have very solid reason to believe that eventually as well this will play out.

And in terms of the tumor-informed was at the six panel actually they each have their pros and cons but we are seeing clearly that the -- in terms of this, the most important utility which is yes launched using monitoring for surveillance or relapse risk monitoring for early-stage patients most clinicians in China they think that the NPV or negative predictive value for the MRD applications.

It's the most important thing for the product which means that sensitivity is very it's "more important" than specificity because they want to make sure that all the MRD negative patients really are fine. So, in that situation the tumor-informed methodology clearly have an advantage right now, compared to six panel approaches.

But with that said, it does have some cons compared to the six panel approaches, including about 10% to 15% of patients who have secondary primary second primary tumor [indiscernible] and also the turnaround time for the tumor-informed approach is very concerning for the commercial.

So again we will see their response when they will start to experience beyond the product. I hope that -- does that answer....

Great, thank you. That's great, thank you..

Okay..

Thank you. Next question comes from the line of Sean Wu from Morgan Stanley. Please ask your question..

Thank you very much for taking my questions and also congratulations on your progress towards early screening MRD. So I have a couple of quick question on the, one question from the client.

So looking back over the last few quarters, you would see a pretty kind of picking up of selling expense ratio of the revenue I know the revenue growth mix slowing down for ASPs type situation but maybe can you give us a bit of color about the break time between the in-hospital business and the central lab business? How like a -- and that ratios of selling expenses differ from those two types of our businesses and that's the first question.

This is I think would be for Leo. Another question for Shannon, it's for the early of screening part your 9-cancer readout has been moved up from the end of next year to the first half of 2020 of course that's great.

But what are the reasons behind that? And do we have any kind of early color for that and also for the 2022 cancer type screening, you would have the first readout in 2024. Before that do we have any comparable important critical milestone to pay attention to that's my two questions then a follow-up with the question from the client..

So let me come back on the selling expense question first, then Shannon will talk about the question on the readouts and future milestones. So our selling expenses I think the first factor to bear in mind is, that we have started building the commercial organization for early detection this year.

So that has gone into the sales and marketing expenses line already that includes a few functions. A sales team for getting the products into the hospitals health checkup department, so there is a team in double-digits personnel on that and they've had some breakthroughs as Yusheng explained at the side of this call.

In addition, all other sales related functions are also booked under this line, for example, a customer service team that has been built over time this year as these products would require customer services at pre-sales and after the tests in some cases. So, I think the first build up is related to the early detection and commercial organization.

And that at the moment has not had meaningful revenues so that would, that would have a matching impact on the selling expenses ratio so that's, I think the first factor. Within the patients testing business that is already revenue generating.

We have also been expanding our team this year as we have explained previously that we are building out sales coverage for more in-hospital penetration. And also as we look at our product launches for next year, we will have products going after early stage patients. So, we have been ramping up sales coverage across a few regions in China as well.

So that added towards the overall head counts. Then related to the selling efficiency across central lab versus in-hospital channels. We don't provide the breakdown quantitatively but qualitatively in-hospital is a more productive channel.

And in terms of selling expenses and that's despite having lower ASP it's margin profile at the operating margin level, we believe is actually better than central lab and importantly, this is an institutionalized channel that allow us to differentiate. So, we think that is important channel going forward.

And looking forward, I think the oncology commercial organization build-out is largely complete, meaning the sales headcount at for the patient testing business. That's primarily done within this year. So next year, we should see -- we shouldn't see huge changes compared to this year.

But early detection I think that's more dependent on our commercial progress if we're making good progress we will be adding more headcounts. So that's the qualitative outlook for next year..

So in terms of the readout time, thanks for the question. The difference here is that, originally when we talked about the readout for our 9-cancer early detection product we were referring to PREDICT -- the first phase of PREDICT.

However, we have added an additional sort of the proof-of-concept cohort on top of PREDICT because PROMISE which has about 2000 -- actually little a bit more than 2000 participants.

And if you remember PREDICT actually has more than 14,000 participants and it's a trial that's designed to have enough statistical power for all 9-cancer types and to be able to give a precise enough estimate for since the PRESCIENT specificity for each cancer type and ideally for each stage.

However, before the readout for PREDICT we now have the additional pilot cohorts comments to give us a little bit clarity on the potential -- specificity, specificity performance, as well as the RTOO performance that we could achieve with the 9-cancer early detection product.

And from what we have seen, we feel like it's how and it's worthwhile to be shared the data looks actually very interesting. So that's why we have moved a little bit ahead on the readout plan. So that's to close on the - readout timelines and actually for PREDICT our readout timeline has remained the same which is that Phase I for Predict.

We will release the data as early as the end of 2022. And then, for the second question in terms of additional milestone and as laid out on Page 10, we will actually have three different product lines or product development programs in terms of early detection the 6-cancer, 9-cancer and 22-cancer products.

So in terms of the 6-cancer on the next milestone will be the visibility on the interventional/prospective cohort that we just mentioned which we expect to kick off on early next year in the first half of next year to be more precise.

And then with the results from that trial, we are really anticipating that we will be able to enter the pivotal registrational study design with what we have by then.

And also the 9-cancer, I think the next important milestone will be the second phase of PREDICT which will be a single blinded study which means that we will have this blinded and multicenter case control study prospectively to have quite robust estimate on our 9-cancer product performance.

And then for the 22-cancer the milestone will be the PRESCIENT study which also has close to 12,000 participants but it will cover 22 major cancer tags which collectively will cover about 90% of the cancer patients in China. And that study will have the readout by 2024 but it's again a case control study.

So in terms of the registrational path, moving forward for the 9-cancer and 22-cancer we don't feel like we have enough visibility at this point to share more accurate timeline.

So we will see what we'll get from the PREDICT and PRESCIENT and then from -- there we will be able to pen out a more accurate path to registration probably not just in China but also in other countries.

Okay, does that answer your question?.

Okay. I have the final question from my client, he is saying he is wondering if you can grow your central lab testing volume in 2022, given that you have not grown volume for four quarters now.

So I suppose the COVID-19 situation has something to do with that but of course also some quarters last year, maybe also coming down can just give this kind of person some guidance as to the volume growth of lab testing next year?.

So I think on the trends that we saw at the end of October, I think that's something we would look forward to for next year. But bear in mind we talked with COVID out of vacuum in China. So that's always going to be a lingering factor I think for some part of next year.

And beyond COVID, I do believe there is potential for us to cover additional oncologists and additional centers in the central lab channel in addition to the new products that will be launching. So, I think that channel should come back to growth in a normal period of time, although it's hard to predict exactly when it so.

So, we can't give a precise estimate at this point but something qualitative that we can look out for..

Great. Thank you very much. That's all -- those are all my questions..

Thank you, Sean..

Great, thank you. There are no further question at this time. With that, we conclude our conference for today. Thank you for participating. You may all disconnect..