Good day, and thank you for standing by. Welcome to the Burning Rock's 2021 third quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Be advised that today's conference is being recorded. Before we begin, I want to remind you that this conference call contains forward-looking statements. These statements constitute 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 the terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, targets, confident, and similar statements.
Burning Rock may also make written or oral forward-looking statements in its periodic reports to the SEC, in its annual report to shareholders, in press releases and other written materials, and in oral statements made by its officers, directors or employees to third parties. 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, current markets, 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.
All information provided in this conference call is as of the date of this conference call, and Burning Rock does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law. Now I'd like to hand the conference over to your first speaker today, Mr. Yusheng Han, CEO of Burning Rock. Thank you, sir. Please go ahead.
Thank you. Welcome to Burning Rock's Q3 conference call. I'm Yusheng Han, the CEO and founder of Burning Rock. Today we have our COO, Shannon, CTO, Joe, and CFO, Leo in the meeting. First I will go through some exciting highlights of our recent progress. Then our COO, Shannon, will elaborate on our product line expansion, and our CFO, Leo, will walk you through the financials. Let's turn to page four. We all know that Burning Rock started this therapy selection business in 2014 and has grown to the market leader in this segment. The leading position has laid a good foundation and give us advantages moving forward to new business of early detection, MRD, and pharmaceutical collaborations. That's what we have described last time.
We have strong brand, branding from our technology and product quality, which help us attract talents. The network we have built across thousands of oncologists and hundreds of hospitals enable us rapid initiation R&D studies on new products as well as fast distribution when it goes to market. The existing high testing volume makes it plausible for us to continue lowering the cost. That's why we aim to tackle the therapy selection, MRD and early detection market in parallel in the coming few years. Let's turn to page four for some highlights on our recent progress. The first one we talk about the commercialization preparation of the six cancer early detection.
We discussed that last time, and I have to say that the preparation is going on well. We have strong confidence to sign six hospitals by the end of this year. Sign contract with six hospitals by the end of this year. However, since multi-cancer early detection is a new category of product in the market and consumers instead of doctors are the real customer, we plan to run the Two C education campaign together with the hospital and doctors. We will see how it goes next year.
In terms of the trials of early detection, we expect the 9-cancer product development to read out in H1 2022, with a potential to demonstrate performance improvement versus the 6-cancer test, no matter in sensitivity, specificity, and also PPV. Last time we talked about our tumor-informed MRD technology called brPROFILE. It has shown very promising performance with sensitivity on par with what has been shown in Natera and ArcherDX's publication.
The lung cancer readout will be in the first half of year 2022, and we have already launched trials for colon and esophageal cancers. For therapy selection, we recorded a 37% volume increase in Q3 for the in-hospital model despite a COVID-19 case in August, proving that the in-hospital model is a much more stable and reliable model. Last time, I also introduced the fast-growing pharmaceutical collaboration business. If you remember correctly, last time, by Q2, the contract number was RMB 98 million. By the end of Q3, the number went to RMB 144 million, which is 4.5 times of the total year of 2020.
Yeah, I'll list this in detail on next page. If we turn to page five to remind that the business we have to, I think I need to explain why we separate the pharmaceutical collaboration as an independent business unit. Pharmaceutical business is not a new business for NGS industry in U.S., but this market hasn't been major in China until about a year and a half ago. Some recent trends and the paradigm shift drivers include, first, NMPA is moving toward regulating targeted therapy drugs approval in CDx model, which means that the targeted drugs needs CAP to be to go to the market together.
The second driver is with the pressure of volume-based government procurement, more domestic innovative pharmaceutical companies seeking for global expansion opportunities. For targeted therapy drugs, the needs for of pharmaceuticals includes high quality products available on both FFPE and liquid biopsy samples, and registration capability in both U.S. and China, and sometimes in the other developed countries like Japan and Europe. The third driver is the MNCs needs NGS company that can do CDx in China. However, it's very challenging for NGS companies to operate registration trial in China due to the regulation of Human Genetic Resources Administration of China. Thus, Chinese NGS company with global operation is their ideal choice.
Just seeing this trend with our U.S. lab, which now is CLIA- and CAP-certified, and high quality and the broad portfolio and the global registration capability and strong regulatory team are our unique advantages for this business. Let's turn to page six. This is our product line progress. We will let our CEO, Shannon, go through that from this page on. Shannon?
Okay, sure. Thank you, Yusheng . Let's move to page six, and we have actually shared this overview of our product pipeline last time, so I'll skip most of the content on the page and just focus on some key updates. First, we now have more clarity on the timeline for launching the three very important products in Q1 next year. We actually mentioned about the commercialization of these three products, but now we have a clear timeline of launching them in the first quarter. We will start the commercialization of DetermaRx, which is for adjuvant chemotherapy benefit prediction for early-stage lung cancer patients.
Also our MRD product using our brPROFILE technology, as Yusheng just mentioned, for early-stage solid tumors, which will become available to both clinicians and also our pharmaceutical customers, as well as our six-cancer early detection product. We expect these new products to make significant contribution to our growth in the coming years. For our cancer early detection program, for the nine-cancer product development program, we now have more visibility that we can share. We will most likely see some data readout in the first half of next year. I'll give more details on exactly what that means on page 10. For our MRD program, besides the lung cancer study, which is called MEDAL, that we have previously talked about, the MEDAL will have data readout released early next year, as shared before.
In the past few months, we have expanded validation into other solid tumors, including colon, esophageal, and gastric, et cetera. We expect to have validation data available in 2022 on relapse risk prediction on these cancer types from retrospective cohorts. There are also greatly increasing interest in the China market on MRD-driven adjuvant therapy studies for drug development. We think brPROFILE will be very well positioned to collaborate with our pharmaceutical partners on that end as well, because most of the liquid biopsy products available in the China market are for fixed panels. brPROFILE will be a very innovative technology in terms of the personalized panel for MRD approach.
Let's now move directly to page 10, where I'd like to walk you through more details on some updates for our cancer early detection program. For the six cancer early detection product, we expect to launch a prospective/interventional study on intended use population in the first half of 2022. This study, we think, will provide us with key inputs for the design of the future pivotal study for the six cancer test registration in China. On our nine cancer products, one key update is that we have finished accrual on a pilot case control validation study, including over 2,000 participants. We call this study the PROMISE study, and we expect to release some data readouts for the PROMISE study in the first half of 2022.
In the meanwhile, the PREDICT study, which is the main validation study planned for our 9-cancer product, with more than 14,000 participants to be enrolled, if you still remember, it's recruiting at full speed right now with about 30 centers contributing to enrollment. We remain our anticipation of having the first data readout for PREDICT around the end of 2022. We also wanted to emphasize that both PREDICT and PRESCIENT, which is the case control validation study for our 22-cancer product development, both these studies have gained approval from the Human Genetic Resources Administration of China. Because all studies with more than 500 subjects need to go through their approval process.
From what we can tell, we wanted to share that PREDICT and PRESCIENT are so far the only large scale multi-cancer early detection trials going on in China. That's about all I wanted to elaborate on. Now I will turn to our CFO, Leo, to walk you through our financials. Leo?
Thank you, Shannon. Let's go to page 17, please. Before heading into our financials, I'd like to quickly recap on the COVID curve for China. China's current defense against COVID is primarily through non-therapeutic means. At the border, we have seen this on and off phenomenon, where during periods of no cases or the off phase, it's free movement and business as usual. Whereas if cases are reported, they are followed by contact tracing, large-scale testing, and if there's sign of cases spreading, we would see containment measures via tightened movements or travel restrictions. Just to recap what happened for Q3, we saw a significant wave back in August that spread through multiple cities that impacted Beijing, which is a key market for us. This impacted our volumes for August.
We'll go into exact numbers a little later, but in terms of trend, we saw significant impact in August. We recovered and resumed our volume growth in September and October. But we're right in the middle of another wave now in November. Turning to page 18, which shows our volume trends. The page, the numbers on page 18 combines both our central lab and our in-hospital segments. In aggregate, you can see that our volumes grew by 38% year-over-year during the first nine months of this year, which we believe is higher than industry average that we're tracking, and also higher than some of the growth numbers that we saw from NGS or even PCR peers in China. Specifically for the third quarter, our volumes grew 14% year-over-year.
Within the quarter, July saw good volume growth of about 35%. August was hit by a COVID wave and restrictions. We recovered in September, growing at high single digits year-over-year, then accelerated to 38% year-over-year growth in October. We see that we've had good double digits volume growth during the periods where COVID is quiet in China. Stepping back from the COVID's annoyance, we believe the key to our above industry volume growth this year is the results of our in-hospital strategy. This has allowed us to take dominant share at a hospital by being the NGS test supplier to that hospital. In-hospital is already half, more than half of our testing volumes since the second quarter this year. That remains the case for the third quarter.
We expect this proportion to grow even further going forward. However, this does mean that our blended ASP across the central lab and in hospital segments will be dragged down as we supply hospitals at a lower ASP versus the price that we charge directly to patients in the out-of-pocket central lab segment. This drag will persist for a few quarters as we execute the transition towards more in-hospital testing. We think this is worthwhile doing for the reasons we laid out on page 18. Fundamentally, we think the in-hospital segment is a more sticky, a better quality segment that we should get more volumes going forward. Going to our numbers, which is on page 21. We grew our revenues by 2% year-over-year in the third quarter.
Within the quarter, it's similar to the volume trends that we explained previously. That August was a hit, and July, September was better. Our overall revenue growth rate is lower than our volume growth rate because of the ASP drag that we just explained. By segment, our central lab was impacted more and was down year-over-year during the third quarter. In-hospital segments maintains good growth, growing 38% year-over-year. These are primarily returning kits revenues. The vast majority is kit revenues, not instrument revenues. We believe our market share gain through the in-hospital strategy is the key for achieving above industry growth for the in-hospital segments during the third quarter. The pharma segment is coming off a small base.
Our pharma pipeline has been building rapidly this year, as we showed on page five, and these are typically multi-year projects, so the pipeline will convert to revenues over a multi-year period. Moving on to our guidance, which is at or around RMB 500 million for the full year of 2021. Based on our run rate up to October, we would feel confident of achieving our guidance. The latest COVID wave, which is hitting us now, is having an impact on our fourth quarter. If the current wave were to die down today, and if we were to go back to normal today, we would feel confident about our guidance. However, given what's happening on the ground, we'll have to flag the risk and see how much of an impact and how long of an impact this current wave will drag on.
I guess moving beyond 2021, as we look out, qualitatively for 2022, we will see commercial launches of multiple products this year. As Yusheng mentioned at the start of the call, we have been preparing for the launch of our 6- cancer early detection tests, which will go live, next year. In addition, as Shannon walked through on page six, we will see the commercial launch of two new products, for early stage cancer patients in 2022. 2022 is an important year, that we'll be looking forward to, and we will be providing updates on those commercial initiatives in our future earnings calls. Lastly, we announced today the dates and agenda of our annual shareholders meeting. At the meeting, our board is putting forward a long-term share incentive plan for a shareholder's vote.
The share incentive is long-term in nature. It awards our senior management and key talent an incentive to achieve not linear growth, but non-linear breakthroughs on our company's vision on a collective basis. Specifically, half of the share incentive amounting to 5% of our total shares outstanding will vest if our market cap reaches $10 billion. Another 5% of total shares outstanding will vest if our market cap reaches $15 billion. The time frame for reaching the 10 billion market cap is within five years, and after which the options will lapse. The time frame for reaching the 15 billion market cap target is within seven years. Further details about this plan and our annual shareholders meeting is available on our website under the shareholder meeting section under the News and Events tab.
With that, we conclude the opening remarks of the call, and we're opening to questions.
Thank you. Ladies and gentlemen, we'll begin the question and answer section. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to withdraw your request, please press pound or hash key. Please stand by while we compile the question and answer roster. Once again, ladies and gentlemen, it's star one for questions. Our first question comes from the line of Max Masucci from Cowen and Company. Please ask your question.
Hi. Thanks for taking the questions. So if you look at your key geographic regions and cities and where the COVID impact was the strongest during Q3, can you just help us understand if the central lab volumes were impacted more by the COVID resurgence or if there is any impact from customers shifting to in-hospital testing? With all of these factors in mind, along with new product launches, you know, it would be great to hear how we should be thinking about, or you know, return to growth or the pace of growth in central lab volumes in 2022.
Yes. Hi, Max. Thanks for that question. On the COVID impacts, the key markets for us are the major Tier 1 cities in China, and Beijing and Shanghai represents a large share of that market. These are the cities that typically get impacted when COVID goes on and movements were impacted, so patients cannot visit hospitals in those locations. I would say COVID has had an impact on the industry for this year. What's different for us is the ability to gain share through the in-hospital channel, which we believe allowed us to outgrow the markets despite the COVID impact. I think that's what we're seeing primarily this year.
Looking out for next year, we think China's current strategy is still zero-COVID, and that'll be the strategy for a period of time, and we will be having this impact, you know, while that is the key.
defense mechanism against COVID for China. That will go on. I think, you know, that will at some point, we can't predict exactly when, but at some point, we would expect that China will go back to normal. That will help alleviate some of the impacts that we're seeing that would have been effective. In addition, adding in the new product launches, which we will launch via the central lab channel initially, that'll add on to the central lab revenue growth going forward. We are launching the in-licensed product for early-stage lung cancer, a risk stratification product that had Chinese cohort validation data. We're launching that Q1 next year, as Shannon mentioned.
That will help providing us incremental revenue for the central lab revenue going forward as well. That's a qualitative thoughts for next year. As we come back for our fourth quarter results next year, we will be providing our guidance for 2022.
Max, I have some additional comments.
Hello.
Yes, hello. Max, this is Yusheng Han. I have additional comments for your question. Usually, you know, the impact of COVID-19 is bigger in winter. I think after the spring the situation will be significantly better according to the situation this year. The second thing is that although our central lab model, you know, the new product rely on the central lab model, but we can see that central lab model is not stop growing. It's growing slowly. With the new product, when the hospital down, our sales team can really go in.
They can really add more revenue because there's more indication suitable for the new product.
Great. That makes sense. And then just as it relates to the implied Q4 guidance, just curious if, you know, there's been any changes to, you know, your access to customers, you know, here halfway through November or if it remains largely the same. Looks like the full year guidance implies, you know, about 10% sequential growth in revenues in Q4 compared to Q3. It would just be great to hear about the factors, you know, related to volume growth and ASPs that, you know, will determine your ability to grow, you know, revenues quarter over quarter in Q4 and any other embedded assumptions in the implied guidance that we should be keeping an eye on.
Yeah. As we are in the middle of November, we closed a strong month for October. We saw good volume growth that month. You know, that followed the September recovery after the COVID hit back in August. That was all going well. As we sit in the middle of another wave, there is uncertainty about how long and how much of an impact Beijing tightens a bit further within this week. It's hard to predict how much and how much further an impact the current wave will drag on. We're just gonna have to bear that risk in mind. You know, we were happy about what we did back in October. There's an unknown regarding the current wave for November and December.
We believe the guidance will be around CNY 500 million for the full year with the uncertainty around the COVID impact.
Okay. One final question, if I could sneak one in. We've seen some recent reimbursement updates for MRD monitoring tests in the U.S. I mean, oncologists, you know, seem to be very excited about the launch of this test application. I'd be curious to hear, you know, whether you feel that oncologists in China are equally receptive and ready to adopt MRD monitoring tests, you know, when they're broadly commercially launched. Whether or not you feel that oncologists in China are more comfortable with a tumor-informed MRD approach versus using a blood-only fixed panel approach.
Well, I can see that maybe the right person to answer that.
Yeah. Okay. I can take that question. I'll try. Well, first of all, we have seen a very rather dramatic change in the clinicians' concept according to their acceptance or interest in MRD products in the past few months. Last year around this time, we didn't feel like the MRD market was ready in any way. Most recently, especially among the lung clinicians and also some of the colorectal doctors, clinicians, oncologists start to show very strong interest in MRD related products in their day-to-day applications. However, most of the interest so far, of course, still remain in more a research related or drug development biomarker study related application realm.
We are going to see whether some of them really believe in the utility, the clinical utility that's already shown, which we think is very, very strong. We do have pretty high hope on the MRD market. Frankly speaking, we are not 100% sure how fast the adoption rates will be among the Chinese clinicians. All that I can say right now is that from what we have observed over the past few months, it's becoming more and more promising. Because the utility in these early-stage cancer patients are so significant, I think scientifically, we also have very solid reasons to believe that eventually this will play out.
In terms of the tumor-informed versus the fixed panel, actually they each have their pros and cons, but we are seeing clearly that in terms of the most important utility, which is the longitudinal monitoring for surveillance or relapse risk monitoring for early-stage patients, most of the clinicians in China, they think that the NPV or negative predictive value for the MRD applications is the most important thing for the product. Which means that sensitivity is, it's quote-unquote, "more important than specificity" because they want to make sure that all the MRD inactive patients really are fine. In that situation, tumor-informed methodology clearly has an advantage right now, compared to fixed panel approaches.
With that said, it does have some cons compared to the fixed panel approaches, including, you know, about 10%-15% of patients who have second primary tumor, you will miss them. Also the turnaround time for the tumor-informed approach is very concerning for the clinicians. Again, we will see their response when they really start to experience the product. Does that answer-
Great. Thank you. Questions.
Mm-hmm.
That's great. Thank you.
Okay.
Thank you. Our next question comes from the line of Sean Wu from Morgan Stanley. Please state your question.
Thank you very much for taking my questions and also commentary on your progress towards the early screening MRD. I have a couple quick questions and then one question from a client. Looking back over the last few quarters, you would see a pretty kind of picking up of selling expense ratio of the revenue. I know the revenue growth may be a bit slowing down for ASP type of situation. But maybe can you give us a bit of color about the breakdown between the in-hospital business and then central lab business? How, like, the ratios of selling expenses differ from those two type of business? That's the first question. This, I think would be for Leo. Another question for Shannon.
Sure.
It is for the early kind of screening part. Your 9-cancer readout has been moved up from kind of the end of next year to the first half of 2020. Of course, that's great. What are the reasons behind that? Do we have any kind of early color for that? Also for the 22-cancer type screening, you would have the first readout in 2024. Before that, do we have any kind of important critical milestone to pay attention to? Yeah, that's my two questions. Then I'll follow up with a question from the client.
Sure. Let me come back on the selling expense question first, then Shannon will talk about the question on the readouts and future milestones. On selling expenses, I think the first factor to bear in mind is that we have started building the commercial organization for early detection this year. That has gone into the sales and marketing expenses line already. That includes a few functions. A sales team for getting the products into the hospital's health checkup department. There's a team in double-digit personnel on that, and they've had some breakthroughs, as Yusheng explained at the start of this call. In addition, all other sales related functions are also booked under this line.
For example, a customer service team that has been built over time this year, as this product would require customer services at pre-sales and after the tests in some cases. I think the first build-up is related to the early detection commercial organization. That at the moment has not had meaningful revenue. That would have a matching impact on the selling expenses ratio. That's, I think, the first factor. Within the patient testing business that is already revenue generating, we have also been expanding our team this year, as we have explained previously, that we're building out sales coverage for more in-hospital penetration.
As we look at our product launches for next year, we will have products going after early-stage patients. We have been ramping up sales coverage
Across a few regions in China as well. That added towards the overall headcount. Related to the selling efficiency across central lab versus in-hospital channels, we don't provide the breakdown quantitatively, but qualitatively, in-hospital is a more productive channel in terms of selling expenses. That's despite having lower ASP, its margin profile at the operating margin level, we believe is actually better than central lab. Importantly, this is a institutionalized channel that allow us to differentiate. We think that is important channel going forward. Looking forward, I think the oncology commercial organization build-out is largely complete, meaning the sales headcount add for the patient testing business, that's primarily done within this year.
Next year, we shouldn't see huge changes compared to this year. Early detection, I think that's more dependent on our commercial progress. If we're making good progress, we will be adding more headcounts. That's the qualitative outlook for next year.
Thank you.
To Shannon.
Oh, yes. In terms of the readout time, thanks for the question. The difference here is that originally, when we talked about the readout for our pan-cancer early detection product, we were referring to PREDICT, the first stage, the first phase of PREDICT. However, we have added an additional sort of a proof of concept cohort on top of PREDICT called PROMISE, which has about 2,000, actually a little bit more than 2,000 participants.
If you remember, PREDICT actually has more than 14,000 participants, and it's a trial that's designed to have enough statistical power for all 9 cancer types to be able to give a precise enough estimate for sensitivity and specificity for each cancer type and, ideally, for each stage. However, before the readout for PREDICT, we now have this additional pilot cohort, PROMISE, to give us a little bit clarity on the potential sensitivity, specificity performance, as well as the TOL performance that we could achieve with the 9-cancer early detection product. From what we have seen, we feel like it's itself is worthwhile to be shared. The data looks actually pretty interesting.
That's why we have moved a little bit ahead on the readout plan. That's just to clarify on the forward readout timeline. Actually, for PREDICT, our readout timeline has remained the same, which is that the phase I for PREDICT, we will release the data as early as the end of 2022. For the second question, in terms of additional milestones, as laid out on page 10, we will actually have three different product lines or product development programs in terms of early detection, the 6-cancer, 9-cancer, and 22-cancer product.
In terms of the six cancer, the next milestone will be the feasibility, the interventional slash prospective cohort that we just mentioned, which we expect to kick off early next year, in the first half of next year to be more precise. With the results from that trial, we are really anticipating that we will be able to enter the pivotal registrational study design with what we have by then. For the nine cancer, I think the next important milestone will be the second phase of PREDICT, which will be a single-blinded study, which means that we will have this blinded and multicenter case control study collected prospectively to have a quite robust estimate on our nine cancer product performance.
Then for the 22-cancer, the milestone will be the PRESCIENT study, which also has close to 12,000 participants, but it will cover 22 major cancer types, which collectively will cover about 90% of the cancer patients in China. That study will have the readout by 2024, but it's again a case-control study. In terms of the registrational pathway moving forward for the 9-cancer and 22-cancer, we don't feel like we have enough visibility at this point to share more accurate timeline. We will see what we get from the PREDICT impressions. From there, we will be able to pan out a more accurate path to registration, probably not just in China but also in other countries.
Okay.
Does that answer your question?
Okay. Thank you very much. I have a final question from my client. He's wondering if you can grow your central lab testing volume in 2022, given that you have not grown volume for four quarters now. I suppose the COVID-19 situation has something to do with that, but of course, also some quarters last year, maybe also cannot. Can you just give this kind of person some guidance as to the volume growth of lab testing next year?
Sure. I think, on the trends that we saw, at the end of October, I think that's something we would look forward to for next year. You know, bear in mind, we can't separate COVID out of vacuum in China, so that's always gonna be a lingering factor, I think, for some part of next year. Beyond COVID, I do believe, there is potential for us to cover additional oncologists, and additional centers, in the central lab channel, in addition to the new products that we'll be launching. I think that channel should, come back to growth, in a normal period of time, although it's hard to predict exactly when.
We can't give a precise estimate at this point, but you know, something qualitative that we can now look out for.
Great. Thank you very much. That's all. Those are all my questions.
Thank you, Sean.
Great. Thank you. There are no further questions at this time. With that, we conclude our conference for today.