IPO Update: Burning Rock Biotech Bets On U.S. IPO

Summary

• Burning Rock Biotech has filed proposed terms for an IPO in the U.S.
• The firm performs cancer screening and provides therapy selection services in China.
• BNR has been negatively impacted, perhaps temporarily, by the Covid19 pandemic; still, the IPO appears expensive, so I'll be watching from the sidelines.
• Looking for more stock ideas like this one? Get them exclusively at IPO Edge. Get started today »

Quick Take

Burning Rock Biotech (NASDAQ:BNR) has filed to raise $196 million from the sale of American Depositary Shares, according to an amended registration statement.

The company provides a variety of cancer screening and therapy decision support services in China.

BNR’s revenue trajectory has been temporarily attenuated, but even upon resumption I believe the IPO’s price is excessive, so I'll watch the IPO forom the sidelines.

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:

Selling & Marketing	Expenses vs. Revenue
Period	Percentage
Three Mos. Ended March 31, 2020	44.3%
2019	40.2%
2018	49.2%

Click to enlarge

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:

Selling & Marketing	Efficiency Rate
Period	Multiple
Three Mos. Ended March 31, 2020	-1.4
2019	1.1

Click to enlarge

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:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Three Mos. Ended March 31, 2020	$ 9,509,000	-38.1%
2019	$ 53,903,000	75.5%
2018	$ 30,715,735
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Three Mos. Ended March 31, 2020	$ 6,325,000	-91.9%
2019	$ 38,602,000	94.4%
2018	$ 19,861,618
Gross Margin
Period	Gross Margin
Three Mos. Ended March 31, 2020	66.52%
2019	71.61%
2018	64.66%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Three Mos. Ended March 31, 2020	$ (8,380,000)	-88.1%
2019	$ (23,880,000)	-44.3%
2018	$ (23,734,706)	-77.3%
Net Income (Loss)
Period	Net Income (Loss)
Three Mos. Ended March 31, 2020	$ (7,424,000)
2019	$ (23,889,000)
2018	$ (177,497,000)
Cash Flow From Operations
Period	Cash Flow From Operations
Three Mos. Ended March 31, 2020	$ (982,000)
2019	$ (32,207,000)
2018	$ (148,780,000)

Click to enlarge

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

BNR intends to sell 13.5 million ADSs representing underlying Class A shares of stock at a midpoint price of $14.50 per share for gross proceeds of approximately $196.0 million, not including the sale of customary underwriter options.

Several existing shareholders have indicated an interest to purchase shares of up to $104 million at the IPO price either from the offering or in a concurrent private placement. This is a positive signal as to the company’s valuation at IPO.

Class B shareholders will be entitled to six (6) votes per share versus one vote per Class A share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.7 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 13.24%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

[i] approximately US$61.0 million for research and development of our early cancer detection technologies;

[ii] approximately US$40.6 million for obtaining NMPA approvals for additional cancer therapy selection products, including completing related clinical trials; and

[iii] the balance for other general and administrative matters.

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

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

Commentary

BNR is seeking U.S. capital investment to fund further development of additional service offerings and continue to expand its business within China.

The firm’s financials indicate contracting topline revenue and increasing operating losses in the most recent reporting period.

This is likely due to a temporary shift by hospital clients toward Covid19 focus areas resulting in a business drop that in my opinion will reverse in future quarters as hospital ordering activity resumes its normal pace.

Selling and marketing expenses have predictably been uneven and the efficiency ratio has moved into negative territory due to the Covid19 pandemic’s effects on client behavior, again, likely temporary.

The market opportunity for cancer testing and therapy selection decision support services in China is a large and growing market.

China’s population is aging and growing in wealth so is demanding better treatment options for a rising prevalence of all types of cancers.

As a comparable-based valuation, it is difficult to determine a young company’s future growth and earnings prospects with publicly held firms in a fairly wide band included in the NYU Stern School’s valuation dataset for Healthcare Information & Technology companies.

However, management is asking IPO investors to pay an Enterprise Value / Revenue multiple of over 35x, which appears extremely high, especially for a firm with contracting revenue (albeit probably temporary due to the Covid19 pandemic) and continued significant operating losses.

Although I believe BNR’s revenue trajectory will return to positive, I’m leery of paying such a high multiple for the IPO, so I'll pass on it.

Expected IPO Pricing Date: June 11, 2020.

Analyst’s 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.