Burning Rock Biotech Faces New COVID Wave (NASDAQ:BNR)

A Quick Take On Burning Rock Biotech

Burning Rock Biotech (NASDAQ:BNR) went public in June 2020, raising $248 million in gross proceeds from the IPO and concurrent private placement.

The firm provides a range of cancer screening and decision support services in China.

Given the initial reports of extremely high COVID case growth as China’s Zero-COVID policy is quickly reduced, it’s my judgment that the firm will be hard hit by a drop in demand in excess of its projections.

So, I’m on Hold for BNR in the near term.

Burning Rock Biotech Overview

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 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.”

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:

BNR’s Recent Financial Performance

• Total revenue by quarter has risen according to the following chart:

• Gross profit margin by quarter has trended lower in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have grown markedly in recent reporting periods:

• Operating losses by quarter have worsened significantly recently:

• Earnings per share (Diluted) have also worsened further into negative territory, as the chart shows here:

(All data in the above charts is GAAP)

In the past 12 months, BNR’s stock price has fallen 80.5% vs. the U.S. S&P 500 Index’s drop of around 18.8%, as the chart below indicates:

Valuation And Other Metrics For Burning Rock Biotech

Below is a table of relevant capitalization and valuation figures for the company:

Measure (TTM)	Amount
Enterprise Value/Sales	-1.3
Enterprise Value/EBITDA	0.7
Revenue Growth Rate	15.5%
Net Income Margin	-177.0%
GAAP EBITDA %	-176.5%
Market Capitalization	$234,709,500
Enterprise Value	-$717,612,423
Operating Cash Flow	-$501,451,000
Earnings Per Share (Fully Diluted)	-$9.63

Click to enlarge

(Source – Financial Modeling Prep)

Commentary On Burning Rock Biotech

In its last earnings call (Source – Seeking Alpha), covering Q3 2022’s results, management highlighted the positive effect on revenue due to the reopening of Shanghai from its previous COVID-19 lockdown status.

Despite this, management was downbeat on the greater economy’s chances of recovery in Q4 2022.

For its PROMISE cancer tests (6 and 9 versions) study, management reported results that indicate a successful proof of concept study of 2,035 participants.

As to its financial results, total revenue rose 22% year-over-year, while gross profit margin dropped 2 percentage points.

SG&A as a percentage of total revenue has also been rising, with the combined activity resulting in generally worsening operating losses and negative EPS.

For the balance sheet, the firm finished the quarter with $141.9 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash used was ($100.1 million), of which capital expenditures accounted for $29.6 million in cash use.

Looking ahead, management expects its cash outflow to drop significantly in 2023, resulting in a cash runway of 3 years if management is correct in its estimates.

Management reduced forward guidance for full-year 2022 to revenue growth of only 5% over 2021.

The primary risk to the company’s outlook is a rapid rise in COVID cases, which may serve to reduce demand for its screening tests while healthcare systems deal with the COVID case crisis in the wake of relaxing the Zero-COVID policy by Chinese authorities.

Given the initial reports of extremely high COVID case growth, it is my judgment that the firm will be hard hit by a drop in demand in excess of its projections.

So, I’m on Hold for BNR in the near term.