Burning Rock Biotech Starts U.S. IPO Effort

Summary

• Burning Rock Biotech has filed to raise $100 million in a U.S. IPO, although the final figure may differ.
• The firm provides oncology testing and related therapy selection decision support services.
• BNR has shown enviable growth, though recently and temporarily negatively affected by the Covid19 pandemic.

Quick Take

Burning Rock Biotech (BNR) has filed to raise $100 million in an IPO of its ADSs representing Class A shares, according to an F-1 registration statement.

The firm operates as a cancer diagnostics and therapy decision support company in China.

While BNR has produced contracting revenue due to temporary Covid19 pandemic effects on delaying customer orders, the firm appears well positioned within a sector with long-term growth dynamics.

I’ll provide a final opinion when we learn more about the IPO from management.

Company & Technology

Guangzhou, China-based Burning Rock was founded to develop a proprietary cancer screening and therapy selection system utilizing tissue and liquid biopsies, assay biochemistry, genetic databases and bioinformatics to provide decision support services to oncologists in China.

Management is headed by founder, Chairman and CEO Mr. Yusheng Han, who has been with the firm since and was previously general manager at BioTek Instruments and product specialist at Gene Company Limited.

The firm says that it is 'China's largest provider of NGS-based cancer therapy selection tests while building relationships with 4,162 physicians from 602 hospitals across China.'Management claims that it has a 17.5% market share in terms of the number of patients tested in 2019 through its central lab which has accounted for a majority of its revenue to-date.The company also offers hospitals a turn-key, in-hospital model for those hospitals that prefer to perform testing 'on their own in a standardized manner.'

Investors in the firm have invested at least $260.3 million and include Quantum Boundary Holdings, Northern Light Venture Capital, Sequoia Capital China, CMB International, LYFE Capital Stone, Crest Top Developments and 'an entity affiliated with GIC.'

Customer Acquisition

The firm markets its services to hospitals and biopharmaceutical research firms via in-house direct sales and marketing teams.

Selling & Marketing expenses as a percentage of total revenue have fluctuated as revenues have increased, as the figures below indicate:

Source: Company registration statement

The Selling & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, was negative (1.4x) in the most recent reporting period, as shown in the table below:

Source: Company registration statement

Market & Competition

According to a 2019 market research report by Allied Market Research, the market for oncology drugs in China was approximately $6.5 billion in 2018 and is expected to reach $12.7 billion by 2026.

This represents a forecast CAGR (Compound Annual Growth Rate) of 8.7% from 2019 to 2026.

Key elements driving this expected growth are a sharply increasing demand for more modern drug treatment options, growing government initiatives to bolster the nation's healthcare system and an increased number of healthcare facilities to serve the country's aging population.

Major competitive vendors that provide similar or overlapping services include:

• AmoyDx
• BGI
• Geneseeq

Financial Status

Burning Rock’s recent financial results can be summarized as follows:

• Contracting topline revenue
• Reduced gross profit and fluctuating gross margin
• Increasing operating losses
• Growing net losses
• Reduced cash used in operations

Below are the company’s financial results for the past two and ¼ years:

Source: Company registration statement

As of March 31, 2020, the company had $51.3 million in cash and $25.5 million in total liabilities. (Unaudited, interim)

IPO Details

Burning Rock intends to raise $100 million in gross proceeds from an IPO of its ADSs representing Class A shares, although the final amount may be different.

Management says it will use the net proceeds from the IPO as follows:

for research and development of our early cancer detection technologies;for obtaining NMPA approvals for additional cancer therapy selection products, including completing related clinical trials; andthe balance for other general and administrative matters.

Management’s presentation of the company roadshow is not yet available.

Listed bookrunners of the IPO are Morgan Stanley, BofA Securities, Cowen, CMBI, and Tiger Brokers.

Commentary

Burning Rock is seeking U.S capital for its expansion plans within China.

The firm offers a wide and increasing variety of testing and research capabilities.

The market opportunity for cancer testing and related decision support services is a function of the larger oncology market, which is growing markedly within China.

Patients in China are demanding better cancer treatment options and there has been a concerted effort by life science firms to bring suitable pre-approved western drugs into China to meet this growing demand.

However, the onset of Covid19 has significantly affected BNR’s operations as many of its customers have changed their priority to dealing with Covid19 patients, so have reduced their business, at least in Q1 2020 and likely in Q2 2020 as well.

As China makes progress with reducing Covid19 infections and the firm’s clients can no longer put off purchasing testing and related services, I expect the firm’s revenue and related metrics to bounce back.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity.U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

BNR is a promising firm positioned well within a growing market in China seeking better oncology testing and decision support services.

When we learn more details about the IPO’s pricing and valuation assumptions, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.