Q3 2023 Burning Rock Biotech Ltd Earnings Call

Participants

Yusheng Han; Founder, Chairman of the Board of Directors & CEO; Burning Rock Biotech Limited

Leo Li; Director & CFO; Burning Rock Biotech Limited

Joe Zhang; Director & CTO; Burning Rock Biotech Limited

Presentation

Operator

Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of Securities Exchange Act of 1934 as amended and as defined in the US 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, target, confident 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.

Yusheng Han

Hey, it this my turn? Well, okay. This is Yusheng Han from Burning Rock, I'm the CEO and Founder. And today you also have our CFO, Leo Li, and our CTO, Joe Zhang online. And today we have a brief introduction of [recent progress], and then I'll hand on to Leo, talking about the financials and then Joe talking about our pipeline program.
So let's turn to page 3, which shows that what Burning Rock doing. How we started from therapy selection and expanded to early detection MRD and biopharma business. And so far that's our business, our construction.
Let's turn to page 4, which is the page that I think most of the investors care about most, that's about breakeven. And so we set a goal to breakeven in terms of non-GAAP profit minus SG&A. And we say that in Q2 this year we have -- this is the first time in Burning Rock to reach the goal.
Well in Q3, actually, there is some industry disruption, you know that, even most of the medical conferences or meetings would hold anomaly. So in Q3, it is a little be impacted by this event and the profit dropped to the negative part, which is a negative 9.9 -- sorry, RMB8.9 million. But we are still moving to the breakeven level, especially I think that this kind of volatility will pass by the end of this year.
So let's turn to page 5, that we set a goal to breakeven sometime this year. And we think that we are moving toward that direction very firmly and without the disruption.
And in terms of the therapy selection, despite of the industry disruption, we still continue to grow in the in-hospital model, which means that the in-hospital revenues has 10% year-on-year growth. And the part of it has been impacted with the central-lab model.
In MRD, we have a strong clinical validation publications with the METAL study of lung cancer published in Cancer Cell, which is a big milestone for our MRD study. And we know that the other studies, for example, like colon cancer and esophageal cancer are on way.
For biopharma, despite of the struggling time of capital market for our biopharmars, we still have a strong growth showing our systematic value of Burning Rock was revenue growth of 31% year-on-year. And our backlog too keeps growing. And one thing to mention is that we just signed a CDx contract with BI.
In terms of our early detection there is a big step -- I mean, a big milestone for that. We got a breakthrough device designation granted by China National Medical Product Administration, which is NMPA. And we are the only -- our multi-cancer early detection only test that has received a BDD from both FDA and NMPA.
And let's turn to Page 6 to explain that the how the industry volatility impact our volume. You can see that the central-lab model has been impact a negative 31% while for in-hospital model is still growing in terms of volume.
So we're seeing that -- yeah, and that actually impact our competitors much more than Burning Rock because our Burning Rock is the only company that our in-hospital model represents more than half of our revenues.
And then I'll turn to Leo about our financials.

Leo Li

Let's move on to Page 7. As Yusheng mentioned earlier, the whole China healthcare industry had a disruption during the quarter. And what I meant for us was actually two diverging trends, which actually accelerated the path that we were already on.
So if you look at central-lab, that was down, heavily down 41% on a year-over-year basis in the third quarter. [In-hospital] channel continued to grow and it grew 10% year-over-year, which is rare in the diagnostics industry or at least in our specialty industry in China.
So I think that continues to improve the value of the in-hospital segments, where the real value or the profits is at central-lab, as we mentioned earlier is being shifted more towards in-hospital. I think the events in the third quarter only accelerated that and that moved us even more on the right track in terms of moving the mainstream of our businesses towards the in-hospital segment.
So at some point last year, we were seeing more in-hospital segments by volume. And you can see in the third quarter, we're actually in-hospital, represented the largest segment overtaking central-lab. So I think with that transition completes some point down the road, our volume and revenue math trends will match again as we complete this transition.
Then moving on, we can see that pharma services still had a strong growth quarter in the third quarter. Revenues grew 31% on a year-over-year basis. So we are very pleased with that result. Our backlog continued to grow, particularly from multinational companies. And Yusheng gave an example of a recent win in his remarks. So we're very pleased with the progress and the outlook that we have in the sector.
Overall, because of the industry impacts and the drop in central-lab, our revenue was down 17% on a year-over-year basis. And we're very conscious of this trend and we are managing our expense or our cost base appropriately in according to the new industry setup.
So I think we had a temporary dip in our operating margins for the third quarter, and that should turn for the better in the quarters down the road. So measured on a non-GAAP basis by gross profits minus SG&A and we hit a positive territory in the second quarter of (technical difficulty) in the third quarter. And we were looking to turn this to a positive number again at some quarter down the road. So we are working towards that.
And we have done some [rejigging] in the recent time periods to make sure that we're on the right track. So our [operating hit] or our operating loss did widen little bit in the third quarter compared to the second quarter. And we're aware of that. We've made the adjustments at towards the end of September, and we hope to be on a better track going forward.
Notably, we are also managing our operating cash flows with managing our expenses, our cash expenses very carefully. And you can see the net operating cash outflow this quarter has dropped to 70 -- up to RMB47 million per quarter.
And if you look at our operating margins, if you look at our sales and marketing expenses as a percent of revenue despite the drop in revenues, I mean our sales and marketing expenses were 45% of our revenues, similar to 44% that we achieved in the second quarter.
And as we think industry volume normalizes down the roads, our operating margins should improve that will help to get back to the positive non-GAAP territory in the quarters down the road. So that's a quick recap of the P&L for the quarter.
And I think we should also mention our cash position as that's been a focus if we go to Page 8. So we had cash outflow of about RMB532 million in the year of 2022. That's not our run rates for 2023. Our guidance at the start of this year was about RMB400 million outflow.
And you can see in three quarters so far this year, we had an outflow of about RMB249 million, so significantly below the outflow guidance that we set out at the start of this year. And then if you look at our third quarter quarterly cash -- operating cash outflow RMB47 million. That's even close to the run rates that we set for the year over 2024.
So on that run rate, I'm looking at the cash balance at the end of this period of RMB637 million, and we're sitting on more than three years of cash runway. So we are in no rush to do anything. We're sitting on ample cash balance. And I just want to reiterate our strong cash position relative to our cash outflow on this page.
And the reasons for the reduced cash outflow, I think we have mentioned that before. And I will just reiterate those here again. So first, our commercial operations is coming towards profitability. We were even slightly positive in the second quarter.
Our R&D spend, particularly our early cancer detection programs are maturing. And as these programs complete, the expenses associated with those programs will run off and that will help reduce cash spend naturally.
So as we look to complete our spend on early cancer detection and as we move towards better profitability, and then we'll look to improve our operating cash outflow that will make sure that we're sitting on ample cash balance.
Next, I'd like to turn to Joe, who has some importance pipeline and clinical publication data to share with you all.

Joe Zhang

Thanks, Leo. So I'm going to present a little bit and give you guys an introduction about the pipeline update, majorly focused on the MRD, which is minimal residual disease.
So let's turn to Page 10. So Page 10, basically representing -- presenting the Burning Rock MRD clinical publication. So basically MRD has a lot of utilities as shown in the picture shown here.
Basically, it can be done before the neo-adjuvant to look at the baseline of ctDNA level, that also we can do like after adjuvant therapy to look at treatment effectiveness or like more commonly going to be used at like a post-surgical after resection to look at landmark MRD to get a prognosis either some kind of a prediction value on the MRD status. And there also could be a lot of treatment effectiveness assessment after the adjuvant therapy and also the longitudinal monitoring for the surveillance.
So Burning Rock has a bunch of different kind of publication related to different cancer types, including non-small cell lung cancer as well as colorectal cancer, gastric cancer, pancreatic cancer, BTC, biliary tract cancer.
So all the publication -- most of them actually showing in the poster format presented in different academic meeting or clinical meeting happened like within two years. So the major one, I just wanted to give you guys a little bit more introduction about the Cancer Cell publication, which related to the non-small cell lung cancer.
Let's turn to Page 11. So we as a technology, we've been using actually called brPROPHET, in brief it called PROPHET. So basically, it's based on a whole exome sequencing. We got a tumor whole exome sequencing data of up to 50 mutation, which is a tumor specific, then we designed a personalized panel, MRD panel and used this personalized penal trying to capture a potential ctDNA fragment from the plasm collected from the same patient.
And based on the proprietary ultra-deep sequencing and also (coughing) the proprietary sequencing result as well as MRD coding algorithm, then we can determine the MRD status of that patient for that kind of a -- that time point of blood collection.
So on the right page basically showing the analytical performance of this brPROPHET assay. So it's the including the two type of -- so on the top right panel basically I'm talking about a [contracted cell] samples diluted down to [8 PPM].
As you can see here -- you can see out of 50 low side, there's a quite a bit different -- significant difference compared to baseline, which is uncontracted, which is a background [cell]. So this give us some confidence showing this assay is sensitive enough to detect very low [allele] frequency -- very rare tumor fractions based on ctDNA from the patient.
On the top right -- bottom right panel that's showing the quantitative property of this assay. Based on the algorithm we used, we can estimate based on the detection sensitivity -- detection capability as well as the allele frequency of each loci. We can assess, estimate, what's the ctDNA fraction from that patient.
As you can see here, this is a contract data, but it doesn't give us a lot of confidence showing the expectation and estimation showing very good correlation.
So based on this technology, we move to Page 12. Basically, we work with top-tier hospital in Beijing people, hospital and we published this technology utilization on the non-small cell lung cancer in Cancer Cell, which is a top journal -- top-tier journal for translational medicine.
As you can see here -- so this is being published in October 9. And there are a couple of a highlight. I don't want to read it one by one, but you can look at it. Mostly it's just showing the PROPHET outperformed the fixed panel MRD assay in a head-to-head comparison in non-small cell lung cancer.
Move to page 13. Basically, it give you a overview of this study. So the cohort is we enrolled about 181 patient, non-small cell lung cancer. But as you can see here, most of them are actually 63% of Stage I patients, very early-stage patients after surgery. And also there's a few of Stage II and Stage III.
And the sampling time is that we basically collect the tumor that adjacent paired tissue normal, normal tissue collect at surgery and then we do the whole exome sequencing on those as well as like we collect a blood sample, collect the preoperative on the three days and 30 days after surgery.
And also we do a follow-up time. So every time one patient go back to see the doctor, after like six months or a year after, if possible, we collect the follow-up a blood sample. And then we use three different approach to look at MRD status.
The first one is basically showing on the top right. It's a whole exome sequencing based personalized panel design as well as doing this MRD assay, we call brPROPHET assay. And comparison, we also using a fixed panel target sequencing to do the tumor -- either tumor agnostic or tumor informed (inaudible) to determine the MRD assays, but you can think about it this way. So basically whole exome sequencing gave us that many more potential mutation [result] compared to a relatively smaller fixed panel targeted sequencing.
So by using this data, let's move to Page 14. Basically, there are several major conclusion, observation, we have seen. So the page 14 showing actually -- if you look at a pre-operative plasma sample, as you know, this sample is basically untreated patients coming from -- blood coming from untreated patient.
And that's why ideally if your assay is perfect, you should be able to see every patient blood will get like close to very high percentage of our detection sensitivity. As you can see here the sensitivity definitely grow up from Stage IA to Stage III. And at Stage III, you got higher sensitivity -- detection sensitivity, but as you can see here, the orange in color, which is representing the PROPHET assay.
So it outperformed the tumor-agnostic panel sequencing as well as tumor informed fixed panel sequencing. So totally basically at the Stage IIB, we already see 40% detectability and also Stage II, we see 75 patients with 83% positivity.
And as you can see here, in the panel B showing on the right page. As you can see here, for all three MRD-positive patients sample, the ctDNA infraction showing the highest one, which is shown in the box plot with the red background. But if only the -- if you look at the orange color, which means on the right, there's a 30 patient -- pre-operative patient only showing a positive in brPROPHET assay.
But the ctDNA fractions is way lower, it's actually two magnitude lower than the all three positive patients. This is just a reflects the detection sensitivity in patients trying to get those very low allele frequency, very low tumor fraction patient trying to confirm the MRD status. Of course, this is a pre-operative.
So let's move to the Page 15. Basically, we use a post-operative blood sample to determine the real MRD status and also come associated with this kind of a status with the relapse potential to look at the disease-free survival.
On the left page, basically, as we are using the landmark time point, which is three days or -- which is time point B of 30 days after surgery, which is time point C to look at the survival curve. As you can see the DFS survival percentage, if you are MRD-negative, the patient, it will be showing that even for one-time point -- landmark time point to check and follow-up up to like 1,200 days.
This show very way higher disease-free survival compared to MRD-positive patient, which is showing the HR ratio reached to basically for time points C, the HR other ratio reached to 16.4, which is a pretty significant difference.
And on the right page -- right side of the panel, we're basically utilizing longitudinal MRD analysis. This is basically for multiple point time point assessment on the post-surgery patient plasma sample. And if there are any MRD-positive signal showing any time of the blood collection, we deem as MRD-positive.
But if all the sample collected from patient is MRD-negative, then we deem it, MRD negative. As you can see here, the separation will be even better. That just give us a lot of a confidence also reflect a lot of other publications, continuous surveillance require multiple time point collection, usually gave us better separation of the disease-free survival. So basically, it's also non related to the Stage I or Stage II and III, basically showing very similar trend.
So in summary, basically, this paper published in Cancer Cell gave us very good example showing how the personalized west bases MRD assay can give a very good prognosis value on the non-small cell lung cancer, even the stage I and also II and III.
And so of course, we are still keep working on this assay and trying to working on multiple different kind of a cancer type and also trying to with other top-tier hospital, not only prognostic value. We also want to look at the predictive value and to see any kind of a clinical utility related to drug selection or any treatment effectiveness assessment.
So that's concludes my part. Thank you. Back to the moderator.

Operator

Yes, thank you for participating in today's call. You may now disconnect. Everyone, have a great day.

Yusheng Han

Thank you.

Leo Li

Thank you.

Operator

You are welcome.