Good day and thank you for standing by. Welcome to the Burning Rock 2022 Third Quarter Earnings Conference Call. At this time, all participants are in 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’d like to remind you that this conference call contains forward-looking statements within the meaning of Section 21(e) 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 terminology such as will, expects, anticipates, future, intends, plans, believes, 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 risks, 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 statements as a result of new information, future events or otherwise, except as required under applicable law. And now I would like to hand the conference over to your main speaker today, Yusheng, CEO. Please go ahead..

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 Chuai, Leo, and Joe.

So Q3 was a strong rebound from Q2 for Burning Rock mainly because of the reopening of Shanghai and though we have seen some signals of softer 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 3 about the highlight 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 our performance, we recorded 22% year-on-year revenue growth in Q3 and it is a strong rebound of 36% Q-on-Q this side.

Every 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 chance to profitability of onco deal [ph], which is a relatively mature business.

But 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 7 test, sorry, to 700 test.

The revenue of our biopharma grew triple digit year-on-year to RMB 15 million and backlog continues to build with newly contracted product value increase of 38% year-on-year to RMB 198 million during the nine months of 2022. And OverC is the name of our multi cancer early detection product.

We launched that this year and the volume of OverC in Q3 was 264 tests. Though it was not a big number, we are still very exciting because we gradually finding the way to convince doctors and consumers in Class 3A hospitals. So let me illustrate some background information.

And Chinese people are used to do health checkup annually and 80% of the high end health checkup population concentrated in Class 3A hospital 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 is a new type of product. Because finding the way to sell OverC is very meaningful for us.

And I want to emphasize here that the operating efficiency will be our number one focus going on forward for both commercial and pipeline assets. So we expect the cash outflow to drop significantly next year compared to that in 2022. Now let's turn to Page 4 and this page shows what we do, and many friends might be very familiar with it.

Just want to remind our investors that Burning Rock started 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.

Let's turn to Page 5 and this page shows the business object of Burning Rock and we are -- we have been talking about that several times and by comparing with the recent progress I talked in Page 3, we can easily see that we are heading in the right direction in all the key objectives such as by 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 through a 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 care [ph], developing communication strategy with regulatory bodies, and driving the expansion of our product pipeline.

And the other role she has played is on the operation side, managing cross department collaborations and giving the amount of complexity that has taken place in our business scope, especially the expansion on new product, 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 Union 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 both Director. Yeah, Shannon..

Okay, 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 so it allowed me to free up my time on managing internal processes and to focus more on providing scientific insights in new product development.

So next, I'd like to talk about the PROMISE study for our cancer early detection program, which we have recently completed and presented at the ESMO Conference in September. So first let's go directly to Page 17 for a recap on what PROMISE study is.

So PROMISE study is our proof of concept study which is a crucial step in the 9-cancer test development. It's a pretty rigorously designed prospective multicenter age matched case control study which included 2035 participants.

More interestingly, we designed PROMISE as a multi omics study where cfDNA isolation, 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 on 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 PROMISE. 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 plots.

So we noted that this 9-cancer test 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 6-cancer test 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 9-cancer test. Furthermore, the 9-cancer test demonstrated a 90.9% accuracy for the top two organs for tissue origin prediction in this PROMISE study.

This is also in par as what was shown for the 6-cancer test in THUNDER, which shows a great PROMISE for extending our algorithm to even more cancer types in the future. So when comparing the 3-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 PROMISE study was a very successful proof of concept, and more details could be found in our ESMO poster if you're interested in learning more.

In addition, for our 6-cancer test, we are right now actively recruiting for the PREVENT study, which is the prospective intent to use population studies 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, PRESCIENT 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..

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. Our 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 within MPA. 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 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. That's chiefly by 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 dropped by single digit percentage points versus the second quarter as we cut back our noncore R&D projects.

Going forward, we expect continued efficiency gains and therefore improvements on cash flows. Qualitatively, we expect our cash flows to drop significantly, I mean 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 U.S.

$143 million and given up projective 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 -- 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 a case number rise across many cities in China.

We do note China’s adjusted COVID response that was announced on 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 whereas 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 like to open for questions please..

[Operator Instructions]. Now I'm going to take our first question. And the first question comes from the line of Alexis Yan from Morgan Stanley. Your line is open. Please ask your question..

Thank you. Thank you for taking my question. I have two quick questions. Number one is on the revised guidance for 4Q and full year.

I understood that like the Guangzhou mainly probably impacts the Central lab segment by more because where it's located, just wondering how the other segments have been trending in fourth quarter as in hospital and the pharma, R&D segments? And also, my second question is, after the PROMISE study readout are released, can you remind us of some of the key readouts or other catalysts ahead?.

So, I am Yusheng, I can answer your first question. So our -- is still working. Lucky for us. And, but the impact is that Guangzhou is a big city for Burning Rock’s total volume, including in hospital and such a live model. So that what Leo said is that Guangzhou business has been intact. And for pharma, 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. And the second question, I turn to Shannon..

Sure. So, PROMISE is a proof of concept study for a 9-cancer test. And if you remember, originally, in our plan we had three tiers of products for the multi cancer early detection product line, the 6-cancer test, and then the 9-cancer test, and then the 22-cancer test.

So with the PROMISE data, actually for future, the next line of product development we are having intensive internal discussions in terms of the adjusted strategy. So because of that we couldn't give more specific readouts for Predict and PRESCIENT which we actually had planned.

But one thing I could say is that the accrued note 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 where the new product line development.

And then for the 6-cancer test, actually, the PREVENT study, we started the approval [ph] about a couple of quarters ago, and so far the approval [ph] has been entering a strong wave. So we have pretty strong confidence that before 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 6-cancer test was 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. .

Yeah, that's very clear. Thanks a lot. That's all of my questions..

Thank you. Now we're going to take our next question. And the next question comes from the line of Max Masucci from Cowen. Your line is open. Please ask your question. .

Hi, thanks for taking my questions. So last week, from one of the U.S. 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.

So my question is, should we expect a strong sequential growth in MRD monitoring volumes throughout fiscal 2023? And then what percentage of the MRD volumes today are for lung cancer patients versus colorectal, esophageal, or other cancer types?.

I will say that we think that MRD will continue to grow. But I think that -- 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 put in hospital model, because MRD test it needs to have a tissue first.

And hospitals now are getting more and more stringent about sending samples out of the hospital. So I've seen that by so 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 will ask Shannon to say something about that..

Sure, first of all, on the cancer type on distribution about 60% of our current tests come from lung cancer, and about 30% from colon cancer and the other scattered among the other cancer types. And then, for the first question, I'd also like to add something that actually in the -- I think in previous calls we were asked similar questions.

And I think we still held very similar views as before. Now that we have entered the business for a while 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 step wise, because for the first wave of growth is when the MRD markets first enter -- the MRD products first entered 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 we believe will be the main channel.

And the trend of compliance and regulation have been very, very clear and even more so during the COVID years. So once we have the MRD platform running in the hospital, we will be more ready to embrace the next wave of growth with MRD market..

That's fantastic. And then a second question related to the BeiGene collaboration.

I would just be curious to hear how your MRD test is being used in the clinical trial, wondering if it's being used to guide or accelerate clinical trial enrollment, or if it's being used to identify patients likely to benefit from more aggressive treatment after surgery.

So, that would be the therapy escalation type application or is cfDNA status in the test being used as a surrogate endpoint for disease free survival?.

Okay, I can try to answer that question. So first of all, due to the characteristic of the collaboration, we probably cannot review too many exact details of the trials. But what we can -- I can say is that the BeiGene collaboration actually is sort of a strategic collaboration. So it's not a one or two specific trials.

It's actually -- BeiGene 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 brPROPHET as the strategic sort of partner moving into the -- guided or MRD as biomarker for their clinical trials.

And so far, the trials or the existing trials are mostly observational, meaning that the MRD is only an observational biomarker embedded in the clinical studies, and both BeiGene and the doctors are very interested in seeing MRD data to be embedded in there already going on, already running trials.

But of course, in the future, I think, very likely MRD could be used as the patient's action 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 of a jump for the trial design. But that would be also very interesting to watch out in the future..

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 -- 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, 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 wins?.

So again, I can answer that question. So mainly, now the revenue is still driven mainly by Companion Diagnostics. And -- but a good trend is that we can see that multinational companies -- more and more focused on MRD. So if you look at it, local pharma or local biotech, they are still working on the Companion Diagnostics.

But big global pharmas are doing more and more MRD investigation and a collaboration with Burning Rock [ph]. And so I think that the trend in the near term would not change. But there's still more some challenging that in Q2 and Q3, the capital market is not good.

And there will be some impact to the biopharma especially the small biotech and that is 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..

Okay, great. Thanks for taking my questions. .

Thank you. There are no further questions. That does conclude the conference for today. Thank you for participating. You may now all disconnect. Have a nice day..