Burning Rock Biotech Q3 2023 Earnings Call Transcript

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November 30, 2023

There are 4 speakers on the call.

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

Operator

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.

Speaker 1

Hey,

Speaker 2

this

Speaker 1

is Yushiong Han from Burning Rock. I'm the CEO and Founder. And today, you also have our CFO, Leo Li and our CTO, Zhou Zhang, online. And today, we have a brief introduction of recent progress and then I will hand on to Leo talking about the financials and then Joe talking about our pipeline progress. So let's turn to Page 3, which shows that what Burning Rock is doing.

Speaker 1

We started from the therapy selection and expect to expand it to early detection, MRD and biopharma business. And so far that's our business construction. And let's turn to page 4, which the page that I think most of the investors care about most, that's about breakeven. And we set a goal to breakeven in terms of non GAAP profit minus SG and A. And we say that in Q2 this year, we have this is the first time in Burning Rock to reach the goal.

Speaker 1

Well, in Q3, actually there is some industry disruption. You know that even most of the medical conferences or meetings would hold normally. So in Q3, there's a little bit impacted

Speaker 3

by

Speaker 1

this event and the profit dropped to the negative part, which is a negative 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 for the in hospital model, which means that the in hospital revenues has 10% year on year growth.

Speaker 1

And the part that has been impacted was the central lab model. In MRD, we have a strong clinical validation publications, which is with the META study for 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, intrafacial cancer are on weight. For biopharma, despite of the struggling time of capital market for biopharmas, we still have a strong growth, showing our systematic value of Burning Rock with revenue growth of 31 year on year. And our backlog still keeps growing.

Speaker 1

And one thing to mention is that we just signed a CDX contract with BI. And then in terms of early detection, there is a big step, a big milestone for that is that we've got a breakthrough device designation granted by China National Medical Products Administration, which is Nimba. And we are the only our multi cancer early detection product is the only cat that has received a BDD from both FDA and NIMPA. And let's turn to Page 6 to explain that how the industry volatility impact our volume. You can see that the Central Lab model has been impacted negative 31%, while for in hospital model, it's still growing in terms of volume.

Speaker 1

So we think that and that actually impacts our competitors much more than Burning Rob because Burning Rob is the only company that in hospital model represents more than half of our revenues. And then I'll turn to Leo about our financials.

Speaker 2

If you could just move on to Page 7. As Yixin mentioned earlier, the whole China Healthcare Industry had a disruption during the quarter. And what that meant for us was actually 2 divergent 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 3rd quarter. That 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.

Speaker 2

So I think that continues to prove the value of the in hospital segments where the real value or the profit is. And Central Lab, as we mentioned earlier, is being shifted more towards in hospital. So I think the events in the Q3 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 segments. So at some point last year, we were in more in hospital segments by volume. And you can see in the Q3, we are actually in hospital represented the largest segment overtaking central labs.

Speaker 2

So I think with that transition complete at some point down the road, our volume and revenue 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 Q3. Revenues grew 31% on a year over year basis. So we're very pleased with that results. Our backlog continues to grow, particularly from multinational companies.

Speaker 2

And Yixuan 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 a 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 Q3 and that should turn for the better in the quarters down the road.

Speaker 2

So measured on a non GAAP basis by gross profits minus SG and A, I mean, we hit a positive territory in the Q2, but we did in the Q3 and we're looking to turn this to a positive number again at some quarter down the road. So we're working towards that. And we have done some rejigging in the recent time period to make sure that we are on the right track. So our operating loss did widen a little bit in the Q3 compared to the Q2, and we're aware of that. We've made the adjustments towards the end of September.

Speaker 2

We hope to be on a better track going forward. Notably, we are also managing our operating cash flows. We're managing our expenses, our cash expenses very carefully. And you can see the net operating cash outflow this quarter has dropped to RMB47 1,000,000 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 Q2.

Speaker 2

And as we think industry volume normalizes down the road, our operating margins should improve and we hope to get back to the positive non GAAP territory in the quarters down the road. So that's a quick recap of the P and L for the quarter. Then 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 1,000,000 in the year of 2022. That's not our run rate for 2023.

Speaker 2

Our guidance at the start of this year was about RMB400 1,000,000 outflow. And you can see in the 3 quarters so far to this year, we had an outflow of about RMB249 1,000,000, so significantly below the outflow guidance that we set out at the start of this year. And if you look at our 3rd Q3 Q3 of quarterly cash operating cash outflow of RMB47 1,000,000 That's even close to the run rate that we set for the year over 2024. So on that run rate, looking at the cash balance at the end of this period of RMB 637 1,000,000, we're sitting on more than 3 years of cash runway. So we are in a rush to do anything.

Speaker 2

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'll just reiterate those here again. So first, our commercial operations is coming towards profitability.

Speaker 2

We were even slightly positive in the second quarter. Our R and 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, then we'll look to improve our operating cash outflows and we make sure that we're sitting on ample cash balance. Then next I'd like to turn to Joe who has some important pipeline and clinical publication data to share with you all.

Speaker 3

Thanks, Leo. So I'm going to present a little bit of give you guys an introduction about the pipeline update, majorly focused on the MRD, which is minimal residual disease or molecular residual disease. So let's turn to Page 10. So Page 10 basically presenting the BrainRock MRD clinical publication. So basically, MRD has a lot of utilities.

Speaker 3

So as shown in the picture showing here, basically, it can be done like before the new year is driven to look at the baseline of CTE and A level. Then also we can do like after new adjustment therapy to look at the treatment exactness or like more commonly going to be used as like a post surgical after resection to look at landmark MRD to get a prognosis or is there some kind of a prediction value on the MRD based on MRD status. There also could be a lot of treatment effectiveness assessment after the treatment therapy and also the longitudinal monitoring for the surveillance. So, Brine Rock has a bunch of different kind of publication related to different kind of cancer type, including the non small cell lung cancer as well as the colorectal colorectal cancer, gastric cancer, pancreatic cancer, and BTC, biliary tract cancer. So all the publication, most of them actually showing in the poster format being presented in different kind of academic meeting or clinical meeting happened like within 2 years.

Speaker 3

So the major one, I just want 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 the technology we've been using actually called BR Prophet, in brief they call it Prophet. So basically, it's based on the whole exon sequencing. We got the tumor whole exon sequencing get up to 50 mutations, which is tumor specific.

Speaker 3

Then we designed the personalized panel, MRD panel and utilize use this personalized panel trying to capture a potential ctDNA fragment from the plasma collected from the same patient. Based on the proprietary ultra deep sequencing and also the proprietary sequencing results as well as the MRD coding algorithm, then we can determine the MRD status of that patient for that kind of that type that time point of blood collection. So on the right page, basically, it's showing the analytical performance of this BR prophylase. So it's including the 2 type of so on the top right panel, basically talking about uncontrived cell line sample diluted down to 8 PPM. As you can see here, we still can see out of 50 low side, there's a quite a bit different significant difference compared to the baseline, which is uncontrived, which is a background cellular.

Speaker 3

So this will give us some kind of confidence showing this assay is sensitive enough to detect a very low allele frequency, very rare tumor fraction based on the 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 detect capability as well as the allele frequency of each load set. We can assess estimate what's the ctDNA fraction from that patient. As you can see here, this is a contract data, but it definitely give us a lot of confidence showing the expectation and estimation showing very good correlation.

Speaker 3

So based on this technology, we move to Page 12. Basically, we work with the top tier hospital in Beijing People Hospital. And with 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's a couple of highlight.

Speaker 3

I don't want to read it 1 by 1, but you can look at it. Mostly, it's just showing the profit outperformed the fixed panel MRD assay in a head to head comparison in non small cell lung cancer. Move to Page 13, basically give you an overview of this study. So the cohort is that we enrolled about 181 patient non small cell lung cancer. But as you can see here, most of them actually 63% are Stage 1 patient, very early stage patient after surgery.

Speaker 3

And also there's a few Stage 2 and Stage 3. And the sampling time is that we basically collect the tumor adjacent paired tissue normal normal tissue collect at surgery and we do the whole exon sequencing on those as well as like we collect a blood sample, collect the preoperative and the 3 days and 30 days after surgery. And also we do follow-up time. So every time when patient go back to see the doctor after like 6 months or a year out, if possible, we collect the follow-up blood sample. And then we use in 3 different kind of approach to look at MRD status.

Speaker 3

The first one is basically showing on the top right. It's a whole exon sequencing based personalized panel design as well as doing this kind of MRD assay, we call BR Prophet assay. As comparison, we're also using also a fixed tandem target sequencing to do the tumor either tumor agnostic or tumor informed calling to determine the MRD assay. But you can think about this way. So basically, oaxon sequencing gave us many more potential mutation low side compared to relatively smaller fixed panel target sequencing.

Speaker 3

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 preoperative plasma sample, since you know, this sample is basically untreated patient coming from the 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 detection sensitivity. As you can see here, the sensitivity definitely grow up from Stage IA to Stage III.

Speaker 3

And at Stage III, you got higher sensitivity, detection sensitivity. But as you can see here, the orange color, which is representing the PROFIT assay. So it outperforms the tumor agnostic panel sequencing as well as tumor informed fixed panel sequencing. So totally basically at the Stage 2b, we already see 40% detectability and also Stage 2, we see 75%, Stage 3 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 3 MRD positive patient sample, the CFD and CT DNA structure is showing the highest one, which is showing in the box plot with the red background.

Speaker 3

But if you look at the orange color, which means on the right, there's a 30 patient, preoperative patient, only showing a positive in BR proppant assay, but as a ctDNA fraction is way lower, it's actually 2 magnitudes lower than the O3 positive patient. This is just to reflect the detection sensitivity importance trying to get those kinds of very low allele frequency, very low tumor fraction patient trying to confirm the MRD status. Of course, this is a preoperative. So let's move to the Page 15. Basically, we use a postoperative 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.

Speaker 3

On the last page, basically, we are using the landmark time point, which is 3 days or 3 which is time point B or 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 usually showing the even form a one, one time point landmark time point to check and follow-up up to like 1200 days, you still show very way higher disease free survival compared to MRD positive patient, which is showing the HR ratio

Operator

reached

Speaker 3

to basically for 10.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's any MRD positive signal showing any time on the blood collection, we deem as MRD positive. But if all the sample collected from our patient is MRD negative, then we deem MRD negative.

Speaker 3

As you can see here, the separation will be even better. That just give us a lot of confidence also reflect a lot of other publications. Continuous surveillance require multiple time point collection usually give us better separation of the disease free survival. So basically, it's also not related to the Stage 1 or Phase 2 and the 3, 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 based MRD assay can give a very good prognosis value on the non small cell lung cancer, even the stage 1 and also 2 and 3.

Speaker 3

And so, of course, we are still keep working on this assay and trying to working on multiple different kind of cancer type and also trying to with other top tier hospital, on the not only prognosis value, we also want to look at the predictive value and to see any kind of clinical utility related to drug selection or any kind of treatment effectiveness assessment. So that concludes my part. Thank you.

Speaker 1

Yes.

Operator

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

Speaker 3

Thank you.

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Earnings Conference Call
Burning Rock Biotech Q3 2023
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