Ladies and gentlemen, thank you for standing by and welcome to the Burning Rock's 2020 Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. 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 US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies 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 markets and operating conditions and relate to events that involve known and unknown risks 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. With that, I'd like to turn the call over to the company's Founder and CEO, Mr. Yusheng Han. Thank you, please go ahead.

Thank you. This is Yusheng Han, the CEO and Founder of Burning Rock. So good morning and good evening, everyone. Thanks for attending the call. And I'll start with a little bit of introduction of Burning Rock. We are the - we are China's molecular diagnostics leader for precision medicine, and there are two parts of our business. The first one is therapy selection, which means $4.5 billion TAM for China market. And the second one is early detection, which means $29 billion TAM for China market only. And our [TAM] [ph] lies in three parts. The first one, we have world-class technology. And the second is that we have a deep understanding and good experience about China regulation. And the third one is that we have a very strong network of hospitals and doctors. So for therapy selection, our focus nowadays our expanding leadership in China market, based on our product performance and quality, for both tissue and liquid-based NGS testing. Also, we enable higher NGS penetration through kit-based in-hospital channel, and that is complementing to existing central-lab based testing. And for early detection, we are at the forefront of global R&D on blood-based pan-cancer early detection, through in-house R&D and clinical collaboration with top physicians and top hospitals in China. And today, I'm very pleased to introduce the speakers today, including me and our COO, Shannon Chuai; and our CTO, Joe Zhang; our CFO, Leo Li; and our CMO, Chief Medical Officer, Hao Liu is now online. And our topic today will cover three parts. The first part is for our progress for early detection. We will give everyone the product roadmap update, setting our beliefs that how we plan to do the clinical development for our products, no matter for the 6-cancer test or the 9-cancer test.…

Thanks, Yusheng. So let's just get started on the Slide 7, so as first let's just recap ELSA-Seq, which is the technology behind our early detection program. So the ELSA-Seq is a targeted methylation - deep methylation sequencing assay, utilizing the high efficient library preparation, as well as the machine learning at the classification model to perform the early detection. So the [indiscernible] can inquire methylation status from hundreds or thousands of the low side, from the genome on the methylation status, and from as low as 1 nanogram of cell-free DNA to detect whether the ctDNA we call circulating tumor DNA existing in the blood or not, and also predict tumor of origin. So it has some kind of technology highlights being listed here. So including I just mentioned, there the single-stranded library preparation as well as compatible with different kind of conversion. And also, we select the most informative region from the genome for deep sequencing. Also we apply the multiple noise reduction and signal correction before machine-learning model building. So the next slide talk about the early detection product development roadmap. So this is basically back in 2000 - we started this program actually four years ago, but it's being under the research development mode. And right now, I mean, back to last year, in 2019, we presented the proof-of-concept of single-cancer type, which is lung cancer in AACR Annual Meeting. And it's been listed in the first step. And then - and in early this year, early 2020, we demonstrated 3-cancer performance in AACR Advancing Liquid Biopsy Special Meeting. And then we demonstrated 95.1% specificity. At this specificity we achieved about 81% sensitivity on 3-cancer type. As of like a couple hours ago, we actually just presented our 6-cancer model in ESMO Asia Virtual Congress as…

Yes. Thanks, Joe. On page number 17 another exciting progress by Burning Rock in the last quarter is that, we finally reached an agreement with Myriad to bring in myChoice HRD assay into China. So this essay is actually the first and arguably the current gold standard for genomic instability calculation, which has become a very important and significant biomarker, especially for PARP inhibitor development. So far, the FDA has approved the myChoice HRD as a companion diagnostics for 2 PARP inhibitors, the Olaparib and Niraparib. Both in the ovarian cancer, and we are listing the exact indications here on the table. So they were approved in 2019 and 2020, respectively. And then on the next page, here we want to introduce our thoughts behind the licensing in. So the purpose of bringing in this assay to China was first, to improve our capabilities to collaborate with the pharmaceutical companies for biomarker, especially CDx biomarker development for PARP inhibitors in China, because we see heightened growing interest in that realm. And secondly, we also want to make this assay commercially available to Chinese patients in an LDT format at first. So our estimated immediately addressable market, which would be the first line advanced ovarian cancer patients who will undergo maintenance therapy, it's around 10,000 to 15,000 patients annually. But I want to emphasize here that our estimated penetration initially for these patients for that test would be around 5% in the first year or so. And then we anticipate it to grow of course, in the long run. And the second purpose was, of course, to host the long run development a need for the - and also commercial needs for this assay, because we have a very optimistic view of the HRD as a biomarker for PARP inhibitors. And we are listing, I think that each complete list of the PARP inhibitors and cancer types, which myChoice HRD is currently being used as a companion or exploratory biomarker in the clinical studies. So you can see that it has a great potential to be extended beyond ovarian cancer, and also beyond Olaparib or Niraparib in the future. So we are very optimistic in that and we are also - we want to fit in that good position to host the such services for some companies and also for hospitals in the future in China. So next, I'm going to turn to Leo, our CFO for the operating metrics. Leo?

Thank you, Shannon and turning to our numbers on Page 20. And, first of all, let me recap that overall, we have had a good quarter during 3Q 2020, continuing our sequential recovery growing in both the central-lab and in-hospital channels on a sequential basis. And this is - unfortunately this is under the context of increasing competition in our industry in China. For example, we achieved 16% overall revenue growth on our top line on a sequential or quarter-over-quarter basis, and this is higher than the numbers we have seen from other public and private companies in our industry in China. Looking specifically at our operating numbers on Slide 19. First, on the central-lab channel, we continued the sequential recovery growing our volume at 19% quarter-over-quarter. On a year-over-year basis, our central-lab volume grew 28%, although there's no published industry-wide data, we believe we are gaining market share based on anecdotal observations. For example, one company in our industry reported a 5% year-over-year LBT volume growth in the third quarter, which is lower than our 28% volume growth rate. Looking at the in-hospital channel, the third quarter has been a slow quarter in terms of new contracted hospitals. But on the other hand, the existing contracted hospitals continued their recovery and grew at good double-digit rate. And let me discuss a little bit on the Magnis BR and the cap that this was launched at the China Annual Pathology Conference back in November last year, the demand for Magnis BR have been strong. However, we encountered some external supply issues in the previous couple of quarters. This has been gradually resolved, but it did mean that we have missed some demands and we were not able to supply customers for a couple of quarters. At the end of the…

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Doug Schenkel of Cowen. Please go ahead.

Hey, good morning and good afternoon, everyone and thank you for taking my questions. Just to start with a few questions on the asymptomatic cancer data presentation that you shared. First, just to start, I'm a little bit surprised that the way you cut this data, it seems like you toggled to higher specificity than what we talked about earlier this year. At that point, you know, at least in our discussions and going back to the AACR Liquid Biopsy Meeting in Miami, you talked about maybe structuring the assay to have higher sensitivity at the expense of specificity, you know, the normal toggle decision that one has to make in designing an assay, you know, and kind of going that way, in a way that was really different than you know, maybe what we see typically from companies focused on developing liquid biopsy assays for asymptomatic cancer screens in Western markets. And I think you said that you were positioning it that way, largely because of the differences in screening test availability in China relative to Western markets. I'm just wondering, why this change in the way it seemed to over the last several months?

Yes. This is Shannon. I can take that question, Joe.

Shannon, maybe go ahead. Yeah.

Yeah. So first off, I wanted to make it clear that we didn't do it on purpose. So our philosophy stayed the same. If we could sacrifice, you know, if we could compromise on specificity to gain largely on sensitivity that would still be a route that we want to take. So moving from the 3-cancer assay to 6-cancer assay, actually we didn't just extend on the cancer types. There was a reshape of the marker selection and also the chemistry and also the algorithm. So this was not - we didn't keep it at the same 95% specificity level on purpose, of course, but this is again, looking at this assay data separately and find the back that kind of [technical difficulty] stay that we think is the good balance between the sensitivity and specificity.

Okay, that's helpful. And maybe building off of that, you know, the performance is impressive, especially when you look at it on a blended basis across all stages of cancers. And that said, you know, when you peg the result at a high specificity, and then look at the sensitivity specifically for stage 1 lung cancer, which was 37.5%, I think it was 33% in stage 1 ovarian, it gets a bit better, you know, in esophageal and ovarian where it gets to 54% and 64%. And then, of course, liver and pancreatic is quite good in the 80s. That said, for the first 4 cancers I mentioned. I'm just wondering if you think that's good enough for your target market? And you know, I guess by extension, I'm wondering if your thinking is that given the absence of standard screening in China, at least in terms of availability relative to Western markets, that performance at that level would be good enough, given the alternative is effectively finding no cancers. I'm just wondering how you're thinking about this, because it does seem like the early stage detection for those cancers could be better, you know, while keeping in mind that typically these metrics actually deteriorate when you move the assays more into real world studies?

Yes, I think you're absolutely right, Doug. This is not awkward. This is not ideal. This is not like the ideal, the final ultimate performance we want to see on early detection products. But we actually think this is already a very good performance product for early detection market, especially given that it's a pan-cancer or a multi-cancer assay. And keep in mind that, when we say multi-cancer, we have to, also, in the algorithm to balance between sensitivities or the algorithms to balance the performance among different assay tests. And also for the specificity, especially, it's a highly correlated between different cancer types. So it's not like you can just adjust it, adjust the cutoff on one piece or type and not, you know, not impacting the other ones. So this is what our research team has so far figured out as the “balance”. But, of course, there are rooms for improvement possible in the future, especially, this is still a relatively small cohort, we're still learning a lot about the stage 1, stage 2, because actually, you know, even within stage 1 and stage 2, there are a lot of different clinical features between you know, even within stage 1, there are different clinical features and that each can have different performance. So in the future, when we have the larger cohort, we might be able to tweak it a little bit more precisely to see where can we gain and without losing too much on the other cancer types. And also, I want to point out that this surprisingly we find out now that we are in the 98 Young's specificity zone, we actually do have a better sensitivity or a similar sensitivity at least on growth it's showing, so we are also very interested to watch how people perceive the product performance on growth products. And we are also, of course, talking closely with the Chinese clinicians and see what their take is on that. And their view also helps us to shape the - to find the best balance probably when we do commercialization. Joe -

Okay, thank you Shannon. -

Maybe just a point -

Go ahead, I'm sorry.

Doug you mentioned -

I was just going to ask -

Just one point.

Yeah, okay. Thank you. Sorry to interrupt.

So you mentioned China and just that one point that, if we look across other Chinese innovators in this space, this data does look very strong. I mean, we've seen more data around liver cancers in China. And this pan-cancer test results look strong, even compared to others through blood-based single-cancer test for liver cancer.

Yeah, absolutely. That data did look good. Yeah that's a good point. Just last on the studies, what comes next in terms of, you know, I guess what should we look for, you know, I guess, could you provide an update on PREDICT study enrollment and timelines or plans for any other large studies?

Well unfortunately we can't provide any further details on PREDICT. We will as long as we have any update that we can release, we will share them with you guys, but not at this point. Sorry.

Okay. No that's okay. Can't blame me for trying. Leo, maybe just a couple for you and then I'll get back in the queue. It was a better than expected revenue quarter. That said, we had expected the number of ordering physicians and number of hospitals ordering in the central-lab to maybe increase a bit more than they did in the quarter, it did seem like you just lost a little momentum there relative to what we saw in Q2? And it also seems like on a net basis, at least, that there were no additions to the in-hospital pipeline. I know you talked about some inherent lumpiness to some of these things in your prepared remarks. But I just want to make sure that these metrics weren't drastically different than what you expected. And if there was a divergence from expectation, I'm just hoping you could provide a little more detail? Leo?

This is the operator. And I afraid Leo has just got disconnected. Allow me to call him back and we will receive the call shortly. Please standby. Thank you. Thank you for your patience. Leo is now back. Maybe I'll invite Doug to ask the questions again, please.

Okay. Hey, Leo, do you want - okay, great.

I got the question on these operating numbers, apologies for the technical issue. So first, on the central-lab operating metrics and I would note that we are still on the COVID in China, so we were not able to get back to the peak breadth of reach or catchments that we achieved back in the fourth quarter '19. So that's - I think that's, you know, still due to COVID being around China, we are, I think doing well in terms of the number of patients tested per physician. So we are making progress there. But in terms of the breadthness of our coverage, you know, that's with the COVID backdrop in mind. And the in-hospitals, I mean, this is one quarter and hospitals they run annual cycle. So I think we should keep observing and rather than drawing too much of a conclusion out of a single quarter.

Okay, that's great, Leo. And very last one and thank you for giving me this much airtime. Just in terms of competitive dynamics and pricing, I'm just wondering how impactful pricing changes from Illumina and China have been in terms of your positioning relative to others in the in-hospital market? We've heard from Illumina's public remarks and just other checks that there were some notable price cuts made in the Chinese market, as well as in some other geographies with certain products, but specific to China, have those helped you at all as you look ahead and think about your positioning in the in-hospital channel?

This is Yusheng. I'll add things - go ahead Leo.

Go ahead Yusheng.

I'm checking the questions about the impact of the in-hospital models.

Yeah, really just you know, Illumina reducing the cost as your partner on the sequencing side in the in-hospital market. I'm wondering if their price cuts have led to any improvement in your competitive positioning in China?

Well, you know that this most of the competitors are using Illumina's platform, they did cut the price and it's a good thing for us that we don't cut our price. So I think that in the long run, which means that we have - we'll have a better margin. And since you know that for most of the in-hospital model sequencing cost is not a significant part of for the overall cost. So we don't expect significantly a lower I mean significantly higher margins. But will be a little at the improvement.

Okay, thank you again.

Thank you for the questions. Next question comes from the line of David Lee of Bank of America. Please go ahead.

Right. Thanks management, thanks for taking my question. So basically congratulations for your good third quarter result especially during the pandemic period. You just do register a very strong growth. Basically I have two questions. Number one, that recently we observed the press card the central-lab for humans policy are spreading not only other medical - not only on the drugs, but also on the medical devices. And it seems like there is a trend and here the challenge that the PCR testing is also going to have the potential to being enlisted into the centralized procurement. Do you think that is something going to happen in near future? And if that is going to happen, how does this impact our business in the long run? So this is my first question. My - I've got another question is that can you share with us your understanding or the better understanding to the company or to your 6-cancer sensitivity and specificity data. Because the sensitivity and specificity is very strong, is very high for the cancer, that is a Phase 3 and Phase 4 stage. But when it comes to Phase 1 and phase 2, it seems like somewhat the number is not that high. The previous analyst asked about just your views on it. So this time, I want to ask in another way that how does this data, especially the early stage cancer data compared with your peers? And how does - how to consolidated just look at the thing? Is that very strong? Is that a very high quality, something specific for the cancers that in the early stage? Are we expecting these numbers to improve sometimes later? So this is my second question. Thank you.

Okay, so for the first question, I would like to answer that. We think that it will be quite too early to talk about the price. Here the price from the government for IVD, especially for cancer companion diagnostic products. The first reason is that, you know, for IVD product, usually the hospital takes the significant margin, because they have a complicated operation in the hospital. So it's quite hard to explain the desired the reason to relatively I mean for the price. And the second thing is that, the testing costs for the overall treatment for cancer obviously is not a major part. And the third one it's a very important one is that usually if there something happened, similar things will happen for the IVD, it means that after we get the pricing, three years after pricing, we will see the potential price cut or procurement from the government. So, I will say that so for our segment, it will be a long way and we do not expect any change in the coming three years. And in terms of the sensitivity and specificity of early detection, I will turn to our CTO, Joe to explain about the data. Joe?

Yeah, just to try to comment in terms of a different stage and different cancer type and different sensitivity, as you can see here as just mentioned there on Stage 3 and 4 will be showing higher in general sensitivity. Just try to be aware. It's, if you compare it to our peer data, for example [indiscernible], and we currently have a very similar specificity and we'd be able to achieve in terms of overall 75% - over 75% sensitivity for stage 1, 2, 3, which is receptacle of all we call removable of cancer. And compared to their publication, I think we are still showing a little bit of higher sensitivity. And then, but of course, this is still within the, you know, ever range. We still - we are currently a very, you know, we are optimistic, but we've been very, you know, conservatively optimistic on that. And we currently, from R&D program perspective, we are currently further refined our pipeline and the methodology and hopefully by applying additional data filtering as well as the model building and trying to further improve the sensitivity, especially for the earlier stage for certain cancer type, for example, lung cancer and ovarian cancer. And right now, it's still under developments moment, I would just say, we hope we will improve this, you know, the early stage sensitivity. But I cannot tell that actual you know how much we can improve at this moment. Yeah.

Right, got you. Well planned, that's helpful. Can I ask a follow-on question? So days ago, you announced the cooperation with Myriad. Can you share with us from the P&L perspective? How does this cooperation impact your potential revenue and potential profit? And what's your pricing strategy? Can you give us some color on this? Thank you so much.

David, this is Leo and I appreciate the question. And we are excited about commencing the partnership. And hopefully, this will not be the only licensing partnership that we're going to have. So we are excited about leveraging our commercial infrastructure and bringing more tests to China for the benefit of Chinese patients. At this moment, we cannot comment specifically on pricing or revenues. We will need to go do a technology transfer initially, before we can commence the test in China. So that will take a period of time and we expect to launch this product at some point in 2021. And it will be at that time that we will be talking about the commercial aspects of this test. So appreciate the patience there.

I got you, very clear. Thank you. Thank you so much. Have no more questions.

Thank you for the question -

Thank you, David.

Our next question comes from the line of Ethan Ding of Morgan Stanley. Please go ahead.

Thank you for taking my question and congratulations on the strong quarter. I want to ask two questions on the behalf, Shannon. So the first one is on the data. I kind of want to follow-up on the on David's questions earlier. So I've seen that compared with your previous 3-cancer model, your 6-model data seen, you know, some are higher, some are lower, maybe basically in line with a 3-cancer model. So how should we interpret this trend? And do you think this trend could be sustained for non-cancer model? That's my first question. And my second question is that, so in this year's - sorry, so in this year's negotiation for the national reimbursement list, more, you know, targeted cancer therapies may be included. Maybe in the next couple of years, more will be included as well. So how do you think that could drive the overall cancer genotyping market, especially NGS, given that NGS is not reimbursable at this point? That's my two questions. Thank you.

Shannon, maybe you can go ahead.

Yes. So for the 6-cancer type improvement over 3-cancer type improvement, I think we are optimistic about the trends that we will be maintain - we will be able to maintain that performance when we extend into 9-cancer type or even more cancer type, because we do have further ideas or activities to further improve our chemistry and algorithms once we move into the 9-cancer type assays. So, there will be another technical improvement which theoretically will bring a better performance, especially on the tissue-of-origin accuracy. I think there you will definitely see some groups for improvement in the future. For the early stage cancer sensitivity, we are not sure what have to say - see once we have more data come in, more data to train our model. As you know this is a highly data-driven self-learning algorithm. So I think with more data coming in, we will for sure have a more robust performance. So, the short answer is, yes, we are confident that we will be able to at least maintain and significantly improve in some dimension, maybe not all. Leo, do you want to do the second question about -

Yeah, on the second question, we do notice increasing progress of volume-based procurements in therapeutics. And we believe - we agree that it is helpful in terms of driving demands and increasing availability or affordability of targeted treatments for the benefit of Chinese patients which will lead to increasing demands for patients with affordability issues. So it is a positive for the market overall. For us, it's less of an impact as we focus primarily on the top hospitals and centers, which have less of an issue on affordability. But overall, we think this is a good trend, and we look to complement the increasing affordability with increasing accessibility through our in-hospital model by placing more tests into the pathology labs of hospitals, which is a typical way that patients are used to getting tested in China. So I think with the combination of increasing affordability and accessibility, these are helpful for increasing NGS penetration.

And this is Yusheng. I have some additional comments for that. So I think for the top 200 hospitals the NGS goes into reimbursement it's not a key issue. If you have an investigation with top hospitals with and just have installed in the hospital, you can see that yes, and now it's taking a majority for the test for cancer patients. And we can see that PCR test is still increasing. The thing is that the penetration lowered to more hospitals, and that's a good thing. So first for NGS testing is the penetration is just a starting and we can see that PCR are exploring the boundary of gene testing, and we can see the overall gene testing for cancer patient is increasing. So we don't see any increased situation for the whole market in the coming several years. Thank you.

Excuse me, Mr. Ding, any further questions?

No. That'd be all.

Thank you. [Operator Instructions] There are no more question at this time. With that, ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.