Good day and thank you for standing by. Welcome to the Burning Rock 2022 Q2 earnings conference call and webcast. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question and answer session.

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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 such statements.

Burning Rock does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that today’s conference call is being recorded. I would now like to hand over to your first speaker, Mr. Yusheng Han. Please go ahead, sir..

Thank you, and thanks for joining Burning Rock’s Q2 2022 conference call. I’m Yusheng Han, the CEO and Founder of Burning Rock. Today we have our COO, CTO and CFO in the meeting. We know that Q2 was really a hard time for most of the companies in China with completely locked down of Shanghai in April and May and a hard lockdown of Beijing in May.

Despite these difficulties, we still recorded year-on-year increase in Q2 in terms of revenue. The growth was contributed by strong in-hospital revenue growth outside of Shanghai and Beijing, new product lines such as MRD products, and the pharma business.

Let’s review our business outline and the progress, and our COO, Shannon will go through the development of our product lines, and after that our CFO, Leo will go through the financials. Let’s turn to Page 3.

To get a basic introduction of Burning Rock, we started with therapy selection business in 2014 and have grown to be a market leader in this segment. The leading position has laid a good foundation and given us an advantages moving forward to new business of early detection, MRD and pharma collaborations.

Let’s turn to Page 4, and this is for our business objectives in the future. Therapy selection is a segment that we have working for eight years. In the past years, our main goal for this segment is to expand market share in both in-hospital models and central lab models.

The in-hospital model now is operating profit positive while central lab is [indiscernible]. Now we are strongly leaning our strategy to in-hospital model. We have set a clear call of making [indiscernible] profitable in 2023.

[Indiscernible] new clinical utility evidence and the technology development demands mature [indiscernible] and personalized panels, therefore we initiated trials in lung, CRC and other cancers. This will be the variable our product and not easy to be replicated like therapy selection.

The pharma business [indiscernible] with strong needs of both therapy selection and MRD and its strength highly depends on the institution values such as quality and registration capabilities. The business has been profitable and strong growth continues.

For multi-cancer early detection, we believe that it is the ultimate solution for cancer early detection, powered by multi-dimensional testing including [indiscernible] plus NGS plus machine learning.

Multi-cancer early detection has better performance versus single cancer early detection, and by the way in a real world scenario, we cannot draw 20 tubes of blood if we want to detect 20 types of cancers, thus we invested a huge resource of technology development and clinical trials.

We believe that it will build strong barriers that can last for many years. The good news is that the conversation with NMPA of multi-cancer early detection registration gets better recently. Let’s turn to Page 5 for our recent progress. The in-hospital model, the revenue keeps strong increase.

Regions excluding Beijing and Shanghai grew over 60% year-on-year in Q2 in terms of volume. The new products, including MRD, myChoice, and DetermaRx help us gain market share in central lab model.

At the end of Q2, we optimized the [indiscernible] cost and started to reduce--at the end of Q2, we started to reduce the commercial investment of oncology business unit as well, and due to the excellent execution, impact to the revenue is very limited, so we are in a much better position to grow through the winter.

The commercial ramp-up MRD is strong since we launched the product in March, especially after the data readout on non-small cell lung cancer and CRC at AACR. The revenue of biopharma grew triple digits year-on-year to RMB 18 million, contributed to 14% of overall revenue.

The dialog continues to build with contracted project value grew 49% year-on-year to RMB 158 million during the seven months in 2022. For early detection, the data of our PROMISE was released. It’s the data of over 2,000 participants for a nine-cancer test reading out at ESMO in September.

For the clinical programs of early detection, the PREVENT study was launched and it is a trial composed of 12,500 participants and is China’s first multi-cancer prospective interventional study. Let’s turn to Page 6. On this page, I just want you to see the graph to illustrate that the pharma business is growing really strongly.

The green columns are the contribution of contract value of 2021 versus 2020, and the blue columns are contribution of contract value of the first seven months of 2022 and 2021.

This is achieved in a situation that Shanghai was totally locked down in April and May, and as we note that Shanghai is the headquarters of many biopharmas, we would like to think that this achievement is great. That’s basically about the outline for Burning Rock, and I will pass to Shannon to talk about our [indiscernible]..

Okay, thank you Yusheng. Now I’d like to move onto Page 8. First, I want to take a minute and reiterate the [indiscernible] of MRD tests on early stage patients as the establishment of different clinical utilities will ultimately drive the market growth.

On this diagram, you can see that an early stage patient could go through neo-adjuvant and/or adjuvant therapies before and after surgery, and then hopefully a long [indiscernible] period afterwards.

As we all know, the most well established MRD utility is the prognosis prediction, and multiple studies across different cancer types and different technology platforms have validated the strong and robust association between MRD status and the patient prognosis at both the landmark and the longitudinal time points.

Such utility is marked as green on this diagram - you can see that they have been at different time points along the way.

However, this prognosis utility itself is probably not strong enough to drive a very high penetration of MRD tests because it would be the kind of nice-to-have-but-so-what test, which is informative but not exactly actionable for clinicians.

With that said, we are now starting to see more and more truly actionable utilities of MRD tests to evolve, which are the ones labeled red on this diagram.

Among these utilities, the most important one and also, I think, the most immediate one is to differentiate low risk and high risk patients based on the landmark MRD right after surgery and to commence escalated or deescalated adjuvant therapy regimens.

If clinical trials in the coming years can validate such MRD guided treatment selection strategies, then the penetration of MRD tests among early stage patients would become very, very significant.

On Page 9 and Page 10 actually show two such examples in terms of what kind of results from trials would serve the need as validation of the MRD guided treatment strategy. They are both very recent studies. Page 9 is the IMvigor010 study which is a Phase III trial of atezolizumab in bladder cancer patients at maintenance treatment.

On the top corner, the top left corner here, it shows that in this trial, the whole ITP population did not show any efficacy from the treatment compared to the control arm.

Then on the right, we can see that if we zoom in, only the 39% MRD positive patients at landmark benefited from atezo, so this is a very strong evidence, this is a great example to show that the MRD utility to identify the high risk group and give them more therapy.

Of course, the MRD analysis in this study was only retrospective and that’s why IMvigor011 has been initiated as a prospective study and will be able to confirm is such utility can be validated in a CDX type of set-up. Then Page 10 is an even more recent example - this is the DYNAMIC study in colon cancer.

Patients were randomized into two groups, standard of care or ctDNA guided treatment strategy.

In the past ASCO meeting, which just happened a couple of months ago, it has reported that the MRD negative patients in this study who underwent far less adjuvant chemotherapy achieved similar or non-inferior recurrence-free survival compared to the standard of care group, so if this is validated repeatedly in multiple studies in the near future, it would mean that MRD negative status actually represents [indiscernible] cured patients after a surgery who can be exempt from adjuvant chemotherapy.

Again, studies like these will surely bring MRD into a CDX-level biomarker and gradually increase its penetration down the road. Because of these advancements, we are also witnessing more endorsement for MRD in the clinician community, including its mentioning in the MCC and colorectal cancer guidelines and the ESMO recommendations [indiscernible].

As we have shown last time, Page 11 is the consensus among Chinese lung cancer doctors for MRD, and this particular consensus has been widely talked about recently within the China doctor community. Also as far as we know, a consensus on MRD in colon cancer among Chinese oncologists are also being written and should be expected in the near future.

With all that, on Page 12 we outline the development plans for brPROPHET, which is the capture based, personalized MRD assay we have developed and launched a few months ago, starting from March.

The initial market response has been pretty exciting, which our CFO Leo will cover in later slides, and as we have introduced before, brPROPHET is able to reach an LOD of 0.004%. We have released initial clinical validation data on lung cancer and colorectal cancer cohorts in the past AACR.

Then on the bottom half of Page 12 here, we lined up our additional clinical programs and expected data readout timelines. For example, for lung cancer for the observational studies, as the pink bar is showing on the top, we also used a MEDAL cohort [indiscernible] for which I’ll show some key findings on the next page.

We also have two interventional studies launched or planned to launch later this year. We expect to start having data readouts from these interventional studies to validate the MRD guided treatment [indiscernible] utility in lung cancer in 2025, which is shown here as the dark red bar.

Then the timeline in colorectal cancer is actually similar to lung cancer in our plans. We expect to have large cohort observational study results reported in early 2024, as in the light blue bar, and we’re also initiating interventional studies which expect to have data readout by 2026, as in the dark blue bar.

For other cancer types, which are in the last bar, we have initiated multiple observational studies mostly in esophageal cancer, breast cancer, etc.

The earliest time for data readout expected is in 2024, so our expectation for the market growth for MRD in China is also matched with the clinical program timeline outlined here, which means that from 2022 to 2024 is what we expect to be the early market adoption period, mostly driven by the prognosis part of the MRD utility, which has been well established.

Then between 2025 and 2027, when more and more interventional studies conclude, the actionable part of the MRD [indiscernible] will be fully established, so we would expect for a second wave of strong growth of MRD penetration around that time. Now let’s turn to Page 13.

Here I want to take a couple of minutes to briefly show some key results from the MEDAL cohort. In this study, in the MEDAL study which contained about 200 participants, brPROPHET was compared actually to a fixed panel approach in terms of landmark and longitudinal MR detecting.

What we have observed on the left graph is that brPROPHET identified almost three times as many true high-risk patients as the fixed panel assay at the landmark time point. This shows the period sensitivity of brPROPHET as the personalized approach.

Then in the middle graph, you can see that the longitudinally MRD negative patients, which are the blue line here on the top, have near perfect prognosis in about three years of follow-up, indicating that the brPROPHET MRD tests, when applied repeatedly, can pretty accurately identify the patients who are practically cured, and then on the right graph here, we can see that the prognosis separation between MRD positive and MRD negative patients defined by brPROPHET is actually across different stage, so it doesn’t matter whether you’re at Stage 1 or Stage 3, the prediction power stays the same.

We think this is a very strong validation for the sensitivity and accuracy of brPROPHET. Now I’ll skip Page 14, which is our MRD data on colorectal cancer, because we already talked about it last time, and let’s go directly to the early detection part.

Since we have gone through our development road map multiple times for the early detection program, I’ll be very brief today on this topic and just bring your attention to Page 17. On Page 17, there are two major updates here.

First, as Yusheng already mentioned, the PROMISE study, which is the pilot case control study for our nine-cancer type assay, has been completed. Results will be released at the coming ESMO [indiscernible].

In short, we successfully expanded the model from six cancers to nine cancers, we showed promising improvement on sensitivity in some of the nine cancers compared to the previous version while maintaining equally high specificity and geo-accuracy.

Also interestingly, we have tried to combine [indiscernible] data, including DNA methylation, [indiscernible] and protein markers to show the contribution of [indiscernible] data on different cancer types.

We will be able to share the details of this performance in the PROMISE study in the next call, but of course you are welcome to read on the details in our ESMO [indiscernible]. The other update here is the PREVENT study. Unlike all the other studies we have done before, PREVENT study is a prospective study conducted on a symptom-free population.

It’s the first study of this kind in China for cancer early detection which synthesized greater than 10,000 participants. It’s also designed so that our six-cancer and nine-cancer assays can be both tested for their performance later on in this cohort of individuals. We started patient enrollment in Q2 and are seeing pretty good accrual progress.

That’s all from me. Now I’ll turn to our CFO, Leo to walk you through our financials.

Leo?.

Great, thanks Shannon. Let’s move onto the financials, and we’ll start with Page 22. For the second quarter, as Yusheng mentioned earlier, we had two things going on.

We had, number one, COVID impacts, and number two, our underlying growth momentum, so in the following two pages, we tried to separate the two factors to provide better clarity on our volume trends, underlying trends.

In other words, we are trying to address the question that if we assume that COVID impact is eventually going to go away in China, what would our volume trends look like. First of all, a brief recap of COVID in China during the second quarter.

It wreaked havoc in China - Shanghai was locked down for more than two months, there were multiple other large metropolitans that had been shut or had lockdowns.

Beijing had school closures and partial lockdowns, and so frontline anecdotal peer data indicated that our industry was generally down in the second quarter and our peers generally down year-over-year on their volumes.

If we look at our volume data, the in-hospital channel was heavily impacted as Shanghai was a large [indiscernible] for the in-hospital channel. Central lab held up okay, and this is supported by new products, particularly MRD.

Then on Page 23, we provide further granularity on the trends over time and across different regions with varying COVID impacts.

On the left, we see that for our central lab as MRD started to generate volumes [indiscernible] launch in March, it supported a better industry up-trend for our central lab channel through the second quarter, and we continued to see very good momentum on this MRD pick-up by the physician market in China.

For in-hospital, as shown on the right-hand side, Shanghai and Beijing represent large markets for us, and these were heavily impacted. Our latest month we print for July shows that there was partial recovery, but we are not back to normal.

We did manage to grow very strong in regions where the COVID impact was small, and we try to show that here by breaking out other regions apart from Shanghai and Beijing for the in-hospital channel, and those regions grew very good double digits throughout the second quarter.

Now moving onto our financials on Page 24, first on revenues, we were up 3% year-over-year or down slightly on a sequential basis. Because of COVID impacts and the disproportionately large impact in Shanghai, the in-hospital revenues were heavily depressed in the second quarter, which weighed on our overall revenue growth.

Other than in-hospital, central lab was down 2% year-over-year, but it was actually up 6% on a sequential basis compared to the first quarter. MRD launched since March drove the sequential top line growth despite COVID impacts across various cities in China.

The pharma revenues continued to go up in the second quarter as we bear fruit from the strong backlog that we have been able to build, as previously shown on Page 6, and pharma revenues represented 14% of our total revenues in the second quarter, so that is starting to make meaningful contributions to our overall top line.

The pharma project backlog continues to build nicely, and our pharma revenues are generally recognized as those studies or studies of our pharma customers are executed over time, so there could be some lumpiness and it is dependent on the clinical progress of our pharma client studies, so there could be lumpiness quarter over quarter, as we have seen from other peers, for example in the U.S.

An aside, we don’t have any COVID related revenues in our top line, so it’s 100% precision oncology testing revenues, so we don’t have to worry about a cliff or a decline of COVID testing revenues at all going forward.

Looking at our margins, first on our gross profit margin, on a non-GAAP basis which excludes depreciation and amortization, our non-GAAP GP margin is generally stable. We did 70% GP margin in the second quarter.

Now moving to our operating expenses, first on our R&D line, we are becoming more focused as we put higher focus on operating efficiency, i.e. we have reduced our spend on maintenance or non-core projects and are continuing our core R&D on early detection.

Separately, enrolment slowdowns due to COVID in the second quarter also brought down clinical study-related expenses. Now moving onto the sales and marketing line, the biggest component is our headcount here.

As Yusheng mentioned in his remarks, we have strived to achieve higher sales efficiency starting this year for the patient testing business, and we carried out an organization optimization program in the second quarter.

The result of that was our headcount for the oncology sales organization was down as of June on both a sequential and year-over-year basis, and during the second quarter, however, there were one-off or restructuring costs involved so the numbers appeared lumpy, but as we called out in the previous quarters, the direction of travel should be trending down and efficiency should improve as we move forward.

Now moving onto the G&A line, we also incurred one-off items in the second quarter.

The biggest component of our G&A is our headcount, which that’s the biggest component, and that has started to trend down on a sequential basis as well, so as we mentioned before, we are putting higher focus on our operating efficiency and we generally expect operating efficiencies--or operating expenses to trend down over time.

Then talking about our guidance, the COVID situation remains very fluid in China as the COVID Zero policy is still in place, and there were a couple cities that recently announced lockdowns over the past few days.

If COVID does worsen or if we have large-scale lockdowns, this will have a significantly negative impact on our revenues; however, we believe that the point is not for us to make a forecast on COVID, so we will not try to do that.

We do see strong momentum on our underlying business coming from, number one, the market share gains through the in-hospital strategy; number two, MRD volume ramp; and number three, strong backlog of our pharma projects converting to revenue, so we therefore retain our current guidance for the full year and we just call out the lingering COVID risk.

Lastly, I want to mention our cash balance. We show our operating cash outflow on the page here as well, so as of the end of second quarter, we have a healthy cash and investments balance of RMB 1.15 billion or US $172 million.

We believe this supports us beyond the next two years, so we’re happy with the cash balance and we believe this is also the largest cash balance in our industry, which will provide strength into our long term product development efforts into early detection, making us the longest cash runway in the industry.

That concludes our prepared remarks, and we are happy to open for questions..

[Operator instructions] We have a question from the phone line. Please stand by. The question is coming from the line of Max Masucci from Cowen. Please ask your question, your line is open..

Hi, this is Stephanie on for Max. Thanks for taking my questions.

To start off, Leo, can you speak to some of the key revenue drivers and any assumptions baked in for the second half this year? What gives you confidence in maintaining the full year 2022 guidance, and are there any potential sources of upside to keep in mind?.

Yes, so when we made our guidance towards the start of this year, we did leave some buffer for COVID, and I would say that buffer was pretty much used up in the second quarter, so we were conservative to start with.

If we don’t have any other COVID outbreaks going forward, and based on the underlying trends we are confident of our guidance, we saw a large drop in Shanghai and if those come back, we will get pent-up demand there.

Apart from just getting back to normal from COVID, the underlying growth from pharma and from MRD from additional gains in the hospital are strong when there is no COVID impact, so I think COVID remains the number one factor but if we take that aside, we are still confident about the guidance that we have for the full year..

Got it, understood. That’s helpful. Then following the lockdowns, could you give us some more color on what Shanghai and Beijing currently look like? You mentioned some pent-up demand there.

Any more color you can give on that as patients return to get tested, and then if you can share--do you mind sharing how much Shanghai and Beijing make up of your total revenue?.

Yes, they make up--I mean, for the in-hospital, they make up the lion’s share, more than half of our in-hospital volumes. For the overall volume, they represent a significant portion, about a quarter roughly speaking, and we have seen improving trends over time but they’re not back to full normal yet.

But if there is no further impact, we do expect patients to return, and a lot of patients go to Shanghai and Beijing from regions outside of Shanghai and Beijing, so if that travel can come back, there is volume that we have yet been able to catch up with, so that’s something to keep in watch.

We provide in the presentation the latest reads into July and we will continue to try to provide as much clarity as possible going forward..

Got it, thanks for that color. If I could squeeze in one more, it’s great to hear the uptick of your MRD test following its launch in March, as well as the consensus view of MRD for lung cancer among Chinese physicians.

When should we expect a similar consensus view for colorectal cancer, and are there any catalysts to keep in mind in the near to midterm that could further drive MRD adoption?.

Yes, in terms of the consensus among the colorectal cancer, all that we can comment right now is that it’s being very actively discussed and there have been multiple conferences focused on MRD and how should the consensus be reached.

I can’t predict precisely when the exact consensus is going to happen, but I can say that just the discussion itself has brought a lot of attention among the community, so we are pretty optimistic that the colorectal cancer community for the clinicians are going to have--going to catch up with the lung clinician community in terms of their awareness of the MRD usage.

Then in the near future, I think the upcoming studies, for example the DYNAMIC, the CIRCULATE-Japan, so I think people aren’t anticipating the results from these interventional studies because people have been fully convinced about the prognosis prediction part of MRD, but now they are waiting to--they are waiting to see whether the MRD can resolve the ultimate so-what question.

I think the CIRCULATE-Japan and DYNAMIC are very well designed studies to answer those questions, and so far the DYNAMIC results showing the MRD [indiscernible] from the study has been viewed as very promising and pretty exciting.

I think in the next couple of years, these studies will have their readouts and if they continue to show positive results, it would be a very strong push for the community.

Also, another potential factor is the pharmaceutical companies’ adoption of MRD to embed MRD into their drug investment studies, for example the MERMAID-1, MERMAID-2 study from AstraZeneca.

I think those had MRD embedded in their design, and so the results from those trials would be very critical in terms of people’s view on the MRD utility [indiscernible]..

Got it. Thanks so much, Shannon, for that color.

Just one quick one on the guide, does your guidance contemplate the uptick in pharma revenues in the first half of this year, when you set that guidance range?.

Yes, pharma has been on track or slightly beating our internal forecasts so far this year, so we’re happy about the progress there.

It has been a strong factor in our outperformance across peers and the industry, but I would say that I think the visibility of that has been built already previously on the backlog, and that continues to build, so that should provide us with further runway going forward as well. .

Got it, understood. Thanks so much for taking all my questions..

Thank you Stephanie..

We have no further questions at this time. I hand back to the conference to Leo. Thank you, please go ahead..

End of Q&A:.

Thanks everybody for attending our earnings call today, and if you have any questions, please do come back to us. Thanks very much for your time..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect your lines. Thank you..