Burning Rock Biotech Limited: FY2021 Form 20-F Summary
Business context and reporting period
Burning Rock is a Cayman Islands holding company whose operations are conducted primarily in China through subsidiaries and a variable interest entity (VIE) under contractual arrangements. The company provides next-generation sequencing cancer therapy selection tests through central laboratories and in-hospital laboratories, pharma research and development services, and is developing minimal residual disease and early cancer detection products.
The filing is an annual report for the fiscal year ended December 31, 2021, filed April 29, 2022. The requested period was “2021 Q4”; this filing does not provide a standalone quarterly Form 20-F, but it includes selected fourth-quarter operating data and full-year results. Financial statements are prepared under U.S. GAAP and reported in RMB, with convenience translations at RMB6.3726 per US$1.
Financial and operating metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | RMB507.9 million (US$79.7 million) | RMB429.9 million | +18.1% |
| Gross profit | RMB364.1 million (US$57.1 million) | RMB313.9 million | +16.0% |
| Gross margin | 71.7% | 73.0% | Down 1.3 percentage points |
| Operating loss | RMB797.1 million (US$125.1 million) | RMB412.4 million | Loss increased |
| Net loss | RMB796.7 million (US$125.0 million) | RMB407.2 million | +95.6% |
| Net loss per Class A and Class B share | RMB7.65 (US$1.20) | RMB6.88 | Loss per share increased |
| Research and development expense | RMB367.9 million | RMB263.9 million | +39.4% |
| Selling and marketing expense | RMB303.1 million | RMB168.6 million | +79.8% |
| General and administrative expense | RMB490.3 million | RMB293.8 million | +66.9% |
- Central laboratory revenue was RMB319.4 million, up 7.4%, and represented 62.9% of total revenue. Patients tested increased to 28,199 from 25,262.
- In-hospital revenue was RMB165.1 million, up 40.1%, and represented 32.5% of total revenue. Partner hospitals increased to 64 from 52, including 41 contracted hospitals.
- Pharma research and development services revenue increased 59.3% to RMB23.4 million, or 4.6% of total revenue.
- Share-based compensation expense was RMB282.4 million, compared with RMB173.2 million in 2020, and was a significant contributor to operating expenses.
- Cash and cash equivalents were RMB1.431 billion (US$224.6 million), short-term investments were RMB63.8 million (US$10.0 million), and restricted cash was RMB7.8 million at year-end.
- Net cash used in operating activities was RMB477.9 million (US$75.0 million), compared with RMB73.5 million in 2020. Net cash generated from investing activities was RMB81.7 million, while financing activities used RMB52.9 million.
- Capital expenditures were RMB206.9 million (US$32.5 million), primarily for property, equipment and software. Property and equipment increased to RMB325.4 million from RMB111.5 million.
- Total liabilities were RMB433.3 million (US$68.0 million). Debt was limited relative to cash: short-term borrowings were RMB2.4 million, and long-term borrowings were repaid during 2021. Operating lease liabilities totaled approximately RMB84.3 million at year-end.
Material changes versus the prior comparable period
- Revenue growth accelerated through expansion of the in-hospital model and higher pharma service activity, but central laboratory growth was comparatively slower.
- Operating expenses grew substantially faster than revenue, particularly general and administrative, selling and marketing, and research and development costs. The resulting operating loss nearly doubled.
- Operating cash burn increased materially as the company expanded inventories, contract assets, facilities and personnel. Cash and cash equivalents declined by approximately RMB464.0 million during 2021.
- The gross margin declined modestly because of business mix and increased in-hospital and pharma activity. Pharma research and development gross margin fell to 47.4% from 58.0%.
- The company adopted ASC 842 for leases and ASC 326 for expected credit losses effective January 1, 2021. ASC 326 reduced opening retained earnings by approximately RMB13.9 million.
- Deferred revenue increased to RMB142.9 million from RMB74.4 million, while net contract assets increased to RMB42.4 million from RMB22.5 million. Credit-loss allowances increased for both accounts receivable and contract assets.
- The company launched OncoMaster in December 2021. Subsequent to year-end, it launched the brPROPHET minimal residual disease product and received additional NMPA approval for LungCure CDx in March 2022.
Guidance, outlook, commentary and risks
Management provided no formal revenue, earnings or margin guidance. Management stated that existing cash, financing resources and IPO proceeds were expected to fund current and anticipated general corporate needs for at least the next 12 months, while acknowledging that additional equity or debt financing may be required to support product development and expansion.
- Strategy centers on expanding the in-hospital laboratory network, increasing central laboratory adoption, investing in early cancer detection, developing MRD products, pursuing NMPA approvals and expanding pharma companion-diagnostics partnerships.
- Central laboratory capacity was stated to exceed 100,000 tests annually, with an expected increase to 250,000 tests by the end of 2022 through automation and laboratory expansion.
- COVID-19 continued to create risks of deferred cancer procedures, hospital disruption, supply-chain interruptions and regional lockdowns, although 2021 testing volume and revenue recovered and grew.
- The company uses a VIE structure because foreign ownership is restricted in businesses involving genomic diagnosis and treatment technology. The company does not own equity in the VIE and relies on contractual control, which may be difficult to enforce or could be challenged by PRC authorities.
- New and evolving PRC rules concerning data security, cybersecurity reviews, personal information, human genetic resources, medical devices, foreign investment and overseas listings could increase compliance costs, restrict operations or affect the ADS listing.
- The company’s auditor was included on the PCAOB’s December 2021 list of firms that could not be fully inspected. The filing warns that the ADSs could become subject to HFCA Act trading prohibitions if the required inspection conditions are not resolved.
- Additional risks include persistent losses, substantial cash burn, dependence on cancer therapy selection products, regulatory approval uncertainty, product liability without product or professional liability insurance, supplier concentration, competition, intellectual property protection, foreign-exchange controls and dilution from share-based awards.
- As of the filing date, management reported no material legal or administrative proceedings, no cybersecurity investigation or sanction, and effective disclosure controls and internal control over financial reporting. These statements do not eliminate the underlying regulatory and enforcement risks.
Most important facts for an investor to verify
- Whether revenue growth and hospital expansion can outpace the company’s rapidly increasing operating expenses and cash burn.
- The sustainability of the 71.7% gross margin as the business mix shifts toward in-hospital products and pharma services.
- Actual liquidity runway after planned capital expenditures, operating losses, lease obligations and potential funding needs.
- The enforceability and continued regulatory acceptability of the VIE contractual arrangements under PRC law.
- Current status of PRC approvals for cancer diagnostics, human genetic resources, data security and overseas listings.
- Progress toward PCAOB inspection access and the resulting HFCA Act and Nasdaq trading-risk implications.
- The amount, vesting conditions and future dilution associated with outstanding options, restricted shares and the 2021 incentive plan.
- Collection of accounts receivable and contract assets, including the increase in credit-loss allowances and reliance on hospital customers.
- Commercial validation, regulatory status and revenue contribution of early cancer detection and MRD products, which remained development or early commercialization initiatives at the reporting date.