Good day, and thank you, for standing by. Welcome to the Burning Rock’s 2023 Q1 Earnings Conference Call. 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 [Technical Difficulty] forward-looking statements 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 speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference call is being recorded. With that, I would now like to turn the call over to your first speaker today, Mr. Han, CEO of the company. Thank you. Please go ahead..

Thank you. Welcome to Burning Rock’s 2023 Q1 conference call. I’m Yusheng Han, the CEO and Founder of Burning Rock. So today, we also have our CTO, Joe Zhang; and CFO, Leo Li online. So before the presentation, I would say that, this quarter's data, although not a lot of new information, but very important information and making us exciting.

So let's turn to Page 3. In case, there are some investors who are not very familiar with Burning Rock, I hereby illustrates, what we do. So our business started from tissue based therapy selection and then expanded to multi-directions of a liquid biopsy, including liquid-based therapy selection, MRD, and multi-cancer early detection.

We have three business units providing products, and services to doctors, pharmas and consumers. So let's turn to Page 4. 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 breakeven excluding R&D during the quarter in 2023.

And the second goal is continued revenue growth, a healthy increase with profitability is what we want to achieve and our initial outlook for 2023 revenue growth rate is at 20%.

And the third goal of -- 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 spend 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 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 controlled outstanding of tissue samples and MRD baseline needs 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, Onco BU (ph) and start to impact in Q4 this year. And for Pharma, this goal is continued its profitable growth, with a new platform of top MRD and more international orders, we are optimistic to the growth of biopharma business.

For MCD PREVENT study, which is prospective study of over 10,000 subjects, we will have an interim readout in second half year of 2023. We will continue this development study of nine cancer and 22 cancer tests in PREDICT and PRESCIENT. Also, we are building the regulatory pathways with FDA and NMPA, especially NMPA.

The commercialization will go on at selected top hospitals, that's what we said the goal of 2023. So let's see, what's the result of our effort in Q1 2023 and turn to Page 6. 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 its bottom in Q2 2022 and we can see that it's quite bad at that time. And it was at that time, we initiated the optimized vision plan (ph). We can see that we are able to narrow down the loss from minus $84 million per quarter in Q2 2022 to minus $3.8 (ph) million this -- in Q1 2023. So we are very excited by this achievement.

So that means that we are in a good trend to breakeven. So let's turn to Page 4 -- sorry, Page 7 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 our strong rebound of in-hospital in March and continued to improve our sales efficiency. 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 a data AACR and we will have more in the coming ASCO conference. So MRD in terms of no matter in commercial or in clinical trials or going on the chat (ph).

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 NMPA 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 Han. 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 walked us over these numbers as demonstrated on Page 5. So you can see them in our slide track and 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 7. Our testing volumes achieved strong rebounds in March.

Recall that in our previous results that we said January and February combined 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 8.

First, on revenues, we grew our revenues by 5% year-over-year in the first quarter. Despite a very tough start in February -- in January and February, and we had very good results as Yusheng talked about in March.

The continued delivery of pharma projects was the biggest contributor with Pharma segment 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 Yusheng talked about on Page 6, our pharma backlog continues to grow with new contracts signed during the first quarter of 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 win major tenders in April.

So we're on a strong footing for that segment going forward as well. And 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 continues 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 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 revenues stood at 42% in the first quarter this year, making us one of the most efficient operator in our industry.

While peers, our 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, resilience top line growth, led by BioPharma and in-hospital strength; 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 continuous top line growth. Moving on to guidance. We reiterate our previous guidance of 20% top line growth in 2023 versus 2022.

Then moving on to Page 9, 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 breakeven, while the vast majority of our burn is towards investments on future product development, our multi-cancer early detection, MRD, and 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 update..

Thanks, Leo. So let's move to Page 11.

So basically, this is a recap of the early detection business and the development milestone we achieved in past several years, including the paper published in Nature Biomedical Engineering in regards to the technology itself as well as major 6-cancer early -- multi-cancer early detection clinical study published in Annals (ph) Oncology this year in Q1.

So basically, we also got the FDA breakthrough Device Designation granted as for the product multi-cancer early detection product. So the Page 12 basically lay out the road map of MCD product development so far.

And right now, we actually actively develop in 22-cancer, multi-cancer early detection product, which is the upgraded version of the 6-cancer we already published in Annals Oncology (ph) earlier.

There's a multiple different kind of trials named there, like PREVENT, just mentioned by Yusheng Han as well as a PREDICT and PRESCIENT, which is 22-cancer, early multi-cancer detection. On the Page 13, I'm going to skip this one basically just talk about the difference between the 6-cancer and 22-cancer. Page -- let's move to MRD business.

So for MRD as a recap here, basically, MRD has -- on Page 16 basically talking about MRD test play a role for the multiple time points throughout the treatment journey, which is very important for early cancer of curable cancer patient. As you can see here, MRD can be used as a prognosis which is nice to have.

Also, it has a lot of potential for actionable therapies guidance, including deescalate or escalate utilizing based on MRD status. And also, it has a lot of other utility has been listed here at different stages of treatment. So for Burning Rock, on Page 17, we basically -- we launched this product called brPROPHET as our MRD solution.

So this MRD solution is based on whole exome sequencing tumor profiling and trying to getting the trackable up to 50 tracked mutation as trying to construct a personalized panel for each individual patient.

And then we're utilizing this personalized panel to perform the brPROPHET MRD assay ctDNA, and we do ultra-deep sequencing, which is 100,000x Raw Depth and utilizing leveraging the UMI error correction and to estimate the MRD status also estimate the tumor fraction based on the observation of this 50 [indiscernible] status.

So right now, in Page 18, we basically have multiple different kind of trial on different kind of cancer, utilizing this technology, we call brPROPHET. As you can see here, there's multiple different cancer data either being published as a poster in different meetings from last year AACR till this year's AACR.

Also, it will be -- has more data -- we will have more data in this year, such as ESMO and ASCO later. So basically, there's several updates here. I just listed in the Page 19, which is we just presented in AACR meeting last month in Orlando. And this is basically the updated -- update of the MEDAL study.

We enrolled about 200 non-small cell lung cancer patients, and we compare the brPROPHET methodology versus standard tumor agnostic or fixed panel tumor [indiscernible] methodology utilizing look at the positive rate.

On the left panel, basically, the orange bar showing the brPROPHET has highest detection sensitivity on pre-operated cancer patient, which showing the best performance regards to the sensitivity.

And then we look at the -- in the middle panel, we basically look at the post-operative prognostic value on the landmark timepoint, which is three days or four weeks after the operation, and we look at MRD status.

So if it's MRD-negative, which is shown as the blue line, as you can see here, the DFS ratio is significantly different from which is MRD positive, which is shown as a red line. As you can see here, the hazard ratio can reach as high as about 16.4. This give us a lot of confidence showing on this data.

Our technology has its prognostic value, which gives us more confidence trying to pursue further interventional study. So Page 20 basically is another small cohort that we perform under gastric cancer. We also presented this data in AACR meeting last month. So in this study, we actually enrolled about 55 patients with gastric cancer with Stage 1, 2, 3.

But out of this 55, we finally enrolled 19 for brPROPHET personalized panel detection. For the remaining, we just using the fixed panel to genotyping the all 55 patients utilizing fixed panel tumor-informed [indiscernible] to call the MRD status.

As you can see here in the middle table, they're showing the preoperative cancer as a sample of ctDNA detection the brPROPHET methodology utilizing whole exon sequencing-based 50 individualized [indiscernible], you can see, it is reached much higher detection sensitivity compared to a fixed panel tumor-inform call-in (ph) with a limited amount of mutation detected.

And on the RFS measurement in the Kaplan-Meier curve on the right, as you can see here, for the landmark, which is 2 to 4 weeks after operation, there is a 13 patients, we got this sample tested by brPROPHET. As you can see here, for the negative MRD-negative patient none of them actually recurred and relapsed.

And for the positive, they're basically -- there's about like three out of four early relapse. So basically, this has given us a lot of confidence showing the brPROPHET technology, which is our MRD foundation of our MRD product as a value. So there's a multiple different kind of trials being listed in Page 18, I already mentioned there.

So I think that's concluded my introduction in regards to the product development-related update. Thank you.

And operator, let's open up for questions, please..

Certainly, we will now begin question-and-answer session. [Operator Instructions] We have a question from the line of Alexis Yan from Morgan Stanley. Please go ahead..

Thank you, Yusheng for taking the question. I just have a question on the commercialization of the MRD products. You mentioned that since early May, the MRD products started commercialization via the in-hospital channel as well.

So I'm just wondering that could you share more color on its current, for example, hospital coverage so far? And also, if we look at the full year guidance of 12% revenue growth, how much of that roughly could come from the MRD portfolio? And also in -- probably in three to five years, any commercialization target that management could share at this stage in terms of either like sales target, market share, hospital coverage, et cetera? And second, just a housekeeping question.

How has April and May performance been trending so far and has the recent many waves of COVID impacted our business? That's it for me..

The first question, I can ask Leo to take the line -- to Leo. So in terms of [indiscernible] MRD, the R&D for that is not easy. So that's why we launched that in May, I'm very proud of that. I think that we are the only one to provide in-hospital model of personalized MRD in the world.

And the impact of that, the revenue, as I said, probably will start in Q4 because although, we have a large base of in-hospital model, hospitals. We still need to negotiate in attending tenders of different hospitals. So we know that the fastest period that you can win a chance to go into the hospital at this half year.

So that's why I say that probably the impact will start in Q4 this year. If you wanted to see the main wave of MRD in-hospital model, I think that we at least need from now on at least one to two years to make [indiscernible] fully available in our hospitals.

So -- but if you look at it in three to five years, we believe that MRD will be very important force, probably not less important than therapy selection because it covers most of the cancers and not limited to targeting drugs it can combine with chemotherapy targeting drugs and also immunotherapy.

So what’s that second question?.

Yeah. Let me address that. So our recent trends, I think it's premature to conclude about Q2 as we haven't even closed out for May. For April, there was no surprise. And we do benefit from a low base on year-over-year comparisons compared to last year. So I would say, April is on track, then we'll keep monitoring for Q2. But so far, no surprises..

Okay. That’s clear. Thank you..

Thank you, Alexis..

With that, there are no further questions at this time. I would like to conclude the call. Thank you for participating. That does conclude the call. You may now disconnect your lines. Thank you, management..