Burning Rock Biotech Limited — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; quarterly operating data is disclosed, but quarterly financial statements are not presented in the provided text. Financial statements are prepared under U.S. GAAP and reported in RMB, with convenience translations at RMB6.5250 per US$1.
Business context
Burning Rock is a Cayman Islands holding company operating primarily in China through subsidiaries and a variable interest entity under contractual arrangements. It develops and provides next-generation sequencing cancer therapy selection tests, reagent kits, pharmaceutical research and development services, and early cancer detection technologies. Revenue is generated through central laboratory testing, in-hospital laboratory solutions and pharma research services.
- Central laboratory patients tested increased to 25,262 from 23,075 in 2019.
- Partner hospitals increased to 52 from 40, including 29 contracted hospitals and 23 pipeline hospitals.
- The company had 938 employees at December 31, 2020, compared with 705 at December 31, 2019.
- ADSs began trading on Nasdaq under “BNR” on June 12, 2020.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | RMB429.9 million (US$65.9 million) | RMB381.7 million | +12.6% |
| Gross profit | RMB313.9 million (US$48.1 million) | RMB273.3 million | +14.8% |
| Gross margin | 73.0% | 71.6% | +1.4 percentage points |
| Operating loss | RMB412.4 million (US$63.2 million) | RMB169.1 million | Materially higher loss |
| Net loss | RMB407.2 million (US$62.4 million) | RMB169.2 million | Materially higher loss |
| Operating cash flow | RMB(73.5) million (US$11.3 million) | RMB(228.0) million | Improved cash use |
| Cash and cash equivalents | RMB1.895 billion (US$290.5 million) | RMB94.2 million | Significant increase |
| Short-term investments | RMB362.1 million (US$55.5 million) | RMB314.0 million | +15.3% |
| Total liabilities | RMB242.0 million (US$37.1 million) | RMB212.0 million | +14.2% |
| Shareholders’ equity | RMB2.421 billion (US$371.0 million) | RMB(891.5) million | Improved following IPO and preferred-share conversion |
Revenue mix and profitability
- Central laboratory revenue was RMB297.3 million, or 69.2% of total revenue, up 7.6% year over year. Gross profit was RMB223.4 million and gross margin was 75.1%.
- In-hospital revenue was RMB117.9 million, or 27.4% of total revenue, up 34.4%. Gross profit was RMB82.0 million and gross margin was 69.6%.
- Pharma research and development services revenue declined 17.2% to RMB14.7 million, representing 3.4% of total revenue. Gross margin declined to 58.0% from 71.0%.
- Research and development expense increased 68.2% to RMB263.9 million, selling and marketing expense increased 9.9% to RMB168.6 million, and general and administrative expense increased to RMB293.8 million from RMB132.2 million.
- Share-based compensation increased to RMB173.2 million from RMB22.8 million, including RMB119.2 million in general and administrative expense and RMB49.8 million in research and development expense.
Cash flow, debt and liquidity
- Operating cash use improved to RMB73.5 million, principally because of substantial non-cash share-based compensation and working-capital changes.
- Investing cash use was RMB109.3 million, primarily reflecting RMB348.4 million of short-term investment purchases and RMB60.3 million of property and equipment purchases, partly offset by RMB318.0 million of investment maturities.
- Financing cash flow was RMB2.166 billion, primarily from IPO and concurrent private-placement proceeds of RMB1.852 billion and preferred-share and warrant proceeds of RMB270.0 million. This was partly offset by RMB38.9 million of long-term debt repayments.
- Debt included RMB7.4 million of short-term borrowings and RMB34.7 million of current long-term borrowings at year-end. The filing indicates that the long-term borrowings were generally due in 2021, including China Merchants Bank facilities and equipment-financing arrangements.
- Contractual obligations included RMB56.2 million of operating lease commitments, RMB5.1 million of capital lease obligations, RMB34.7 million of long-term borrowings and RMB1.5 million of capital commitments.
- Management stated that cash and cash equivalents, together with expected financing resources, should be sufficient for current and anticipated general corporate needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue continued to grow, but growth slowed substantially from 82.7% in 2019 to 12.6% in 2020.
- COVID-19 disrupted hospital activity and testing demand in the first quarter. Central laboratory and in-hospital businesses resumed growth from the second quarter.
- In-hospital revenue and hospital coverage expanded faster than central laboratory revenue, increasing the in-hospital model’s share of revenue from 23.0% to 27.4%.
- Gross margin improved because of business growth and economies of scale, but operating and net losses widened sharply due primarily to increased research and development, general and administrative and share-based compensation expenses.
- The IPO, concurrent private placement and conversion of all outstanding preferred shares materially increased cash and shareholders’ equity. Convertible preferred shares of RMB1.527 billion at December 31, 2019 were converted into ordinary shares in 2020.
- The Series C warrant was exercised in January 2020; no warrants remained outstanding at year-end. The company recognized a RMB3.5 million gain from the change in warrant fair value.
- The company entered into licensing arrangements for Myriad’s myChoice tumor testing in China and Oncocyte’s DetermaRx test, and continued investment in early cancer detection and minimal residual disease products.
Guidance, outlook, commentary and risks
The filing does not provide formal numerical revenue, earnings or margin guidance. Management expects continued investment in early cancer detection, cancer therapy selection products, automation, regulatory approvals, sales and marketing and expansion of the in-hospital model. Central laboratory capacity was stated to exceed 100,000 tests annually, with a target of 250,000 tests by the end of 2021.
- COVID-19 resurgences, hospital resource prioritization and disruptions to suppliers or logistics could reduce testing volumes.
- The company remains loss-making and expects substantial ongoing research, development, sales and marketing and public-company costs. Profitability may not be achieved or maintained.
- Regulatory risks include renewal delays for the clinical PCR laboratory certificate and CAP accreditation, as well as evolving NMPA, NCCL, human genetic resources, data privacy and medical-device requirements.
- The PRC government could challenge the VIE structure or restrict foreign investment in genomic diagnosis and treatment businesses. Loss of contractual control could impair consolidation of the VIE and access to its economic benefits.
- The company relies substantially on China operations, RMB revenue, a limited supplier base and third-party sample-delivery providers. Foreign-exchange controls and U.S.-China tensions could affect funding, equipment sourcing and cash transfers.
- The company disclosed that its auditor is not currently subject to PCAOB inspection because of restrictions in China. The HFCA Act and related listing requirements could create delisting or trading risks if inspection restrictions persist.
- Testing errors, product liability, intellectual-property disputes, cybersecurity incidents, patient-data breaches and loss of laboratory certifications could materially harm operations and reputation.
- Management stated that two previously identified internal-control material weaknesses were remediated in 2020, but the company remains exempt from auditor attestation as an emerging growth company and provides no independent attestation of internal-control effectiveness.
Investor verification points
- Verify the sustainability of revenue growth and the effect of COVID-19 on quarterly testing volumes, hospital activity and pharma research demand.
- Reconcile the sharp increase in general and administrative expense, research and development expense and share-based compensation with the path toward profitability.
- Review cash deployment, short-term investments, 2021 debt maturities, lease obligations and expected operating cash burn.
- Confirm renewal status of the expired or delayed NCCL clinical PCR certification and CAP accreditation, and monitor all NMPA and other regulatory approvals.
- Assess the economics and ramp-up period of the 52-hospital in-hospital network, including the distinction between pipeline and contracted hospitals.
- Evaluate VIE contractual enforceability, PRC foreign-investment restrictions, fund-transfer limitations and the extent of assets and liabilities held within the VIE.
- Monitor PCAOB inspection access, HFCA Act developments and Nasdaq listing compliance.
- Assess dilution from 7.8 million outstanding options, the 2020 incentive plan, restricted shares and unrecognized share-based compensation of approximately RMB972.7 million at year-end.
- Confirm that no material litigation or contingencies have arisen after the filing date; the filing states that none were then expected to have a material adverse effect.