View:
December 9, 2019
Tara Harkins
Kevin Kuhar
Jeffrey Gabor
Christine Westbrook
Office of Life Sciences
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-7561
Re: Burning Rock Biotech Limited
Response to the Staff's Comments on the Draft Registration Statement on
Form F-1 Confidentially
Submitted on November 4, 2019 CIK No. 0001792267
Dear Ms. Harkins, Mr. Kuhar, Mr. Gabor and Ms. Westbrook:
On behalf of our client, Burning Rock Biotech Limited, a foreign
private issuer incorporated under the
laws of the Cayman Islands (the "Company"), we submit to the staff (the
"Staff") of the U.S. Securities and
Exchange Commission (the "SEC") this letter setting forth the Company's
responses to the comments contained in
the Staff's letter dated December 4, 2019 regarding the Company's draft
Registration Statement on Form F-1
confidentially submitted to the SEC on November 4, 2019 (the "Draft
Registration Statement"). Concurrently with
the submission of this letter, the Company is submitting a revised draft
registration statement on Form F-1 (the
"Revised Draft Registration Statement") via EDGAR to the Commission for
confidential non-public review
pursuant to the Jumpstart Our Business Startups Act.
To facilitate the Staff's review, we have separately delivered to the
Staff today five courtesy copies of the
Revised Draft Registration Statement, marked to show changes to the Draft
Registration Statement.
Securities and Exchange Commission
December 9, 2019
Page 2 of 11
The Staff's comments are repeated below in bold and are followed by the
Company's responses. We have
included page references in the Revised Draft Registration Statement where the
language addressing a particular
comment appears. Capitalized terms used but not otherwise defined herein have
the meanings set forth in the
Revised Draft Registration Statement.
***Copyrighted Material Omitted.
In addition to revising the disclosure in response to the
Staff's comments, the Company has also
included in the Revised Draft Registration Statement: (i) its audited
consolidated financial statements as of and for
the nine months ended September 30, 2019, and its unaudited consolidated
financial statements as of and for the
nine months ended September 30, 2018, and (ii) other information and data to
reflect recent developments.
* * * *
Securities and Exchange Commission
December 9, 2019
Page 3 of 11
Prospectus Summary
Overview, page 1
1. We note your reference to findings by China Insights Consultancy. Please
provide us with a copy of the
report.
In response to the Staff's comment, the Company encloses, as Annex A
hereto, a copy of the industry report
prepared by China Insights Consultancy.
2. The prospectus summary should include a balanced presentation of your
business, including your
competitive position in the industry. In the presentation of your
business, you present your organization
as a "China's number one cancer diagnostics company" and your platform
technologies as "unrivaled"
and "world-class." Please revise to state the basis for your performance
claims or revise to state such
claims are management's belief. Additionally, please balance your summary
presentation by providing
equally prominent disclosure about the competitive, regulatory and
technical challenges you face.
The Company has revised the disclosure on pages 1, 4, 73, 109, 111 and
132 of the Revised Draft Registration
Statement in response to the Staff's comment.
3. We note your statement that your "products are validated by the medical,
pharmaceutical and scientific
communities..." Please clarify what you mean by "validated" in your
disclosure.
The Company has revised the disclosure on pages 1 and 109 of the Revised
Draft Registration Statement in
response to the Staff's comment.
4. We note that you currently offer 13 NGS-based cancer genotyping tests
applicable to a broad range of
cancer types. Please revise your disclosure to identify in the Summary the
specific cancer types.
The Company has revised the disclosure on pages 1 and 109 of the Revised
Draft Registration Statement in
response to the Staff's comment.
5. Where you reference your collaborations on clinical trials, please revise
your disclosure to indicate you
primarily provide central laboratory services and companion diagnostics
development services, as
discussed on page 119. Please also expand your disclosure in the Business
section to include any
compensation arrangements with oncology key opinion leaders.
The Company respectfully advises the Staff that as disclosed on pages 1,
109, and 123 - 125 of the Revised
Draft Registration Statement, the Company collaborates with oncology key
opinion leaders by providing the
Company's products for use in the clinical trials and research studies
initiated by these oncology key opinion
leaders. The Company does not have any compensation arrangement with
oncology key opinion leaders.
Securities and Exchange Commission
December 9, 2019
Page 4 of 11
The Company has revised the disclosure on pages 1, 109 and 125 of the
Revised Draft Registration Statement
in response to the Staff's comment.
Our Addressable Markets, page 3
6. Please revise your references here and throughout your registration
statement to your "addressable"
market to remove any implication you have captured or are likely to
capture the stated market potential.
The Company has revised the disclosure on pages 3, 4, 98, 103, 105 and
106 of the Revised Draft Registration
Statement in response to the Staff's comment.
Implication of Being an Emerging Growth Company, page 5
7. Please supplementally provide us with copies of all written
communications, as defined in Rule 405 under
the Securities Act, that you, or anyone authorized to do so on your
behalf, present to potential investors
in reliance on Section 5(d) of the Securities Act, whether or not they
retain copies of the communications.
In response to the Staff's comment, the Company encloses, as Annex B
hereto, a copy of the presentation slide
deck that has been presented to potential investors in reliance on
Section 5(d) of the Securities Act. To the
extent that the Company, or anyone authorized to do so on the Company's
behalf presents written
communications to potential investors in reliance on Section 5(d) of the
Securities Act in the future, the
Company will provide to the Staff on a supplemental basis copies of all
such written communications. The
Company confirms that potential investors have not obtained, and will not
retain copies of any such
communication.
Risks Related to Our Business and Industry
If we were to be sued for product liability or professional liability.....,
page 16
8. We note your disclosure that similar to other Chinese companies, you do
not carry product liability or
professional liability insurance. Please briefly explain the relevant
features of the China market that
impact this decision.
The Company has revised the disclosure on pages 16 and 17 of the Revised
Draft Registration Statement in
response to the Staff's comment.
Securities and Exchange Commission
December 9, 2019
Page 5 of 11
We rely on a limited number of suppliers, or in some cases, sole suppliers, for
some of our
laboratory equipment and supplies, page 19
9. We note your disclosure that you source sequencers, reagents and certain
other laboratory supplies used
in your laboratory operations from several sole suppliers. Your supply
agreements appear to be material
contracts. Please expand your disclosure in the Business section to
provide the material terms of your
material supply agreements, including each parties' rights and
obligations, financial terms, term and
termination provisions.
Please also file your supply agreements as exhibits to your registration
statement or tell us why you
believe such filing is not required. Refer to Item 601(b)(10) of
Regulation S-K.
In response to the Staff's comment, the Company has revised the
disclosure on pages 19 and 129 to provide
additional clarification. The Company further advises the Staff that:
(i) The Company generally sources laboratory equipment and supplies
from more than one supplier.
These suppliers are typically trading companies which procure
such equipment and supplies from a
variety of manufacturers. There are a large number of
manufacturers that are capable of supplying
such equipment and supplies at similar qualities and prices. As
such, the Company does not believe
that its business is substantially dependent on any particular
supplier.
(ii) The company currently sources certain probes and reagents from a
sole supplier. Purchases from this
supplier accounted for 11.3%, 14.9% and 7.3% of the Company's
total equipment and raw materials
purchases in 2017, 2018 and the nine months ended September 30,
2019, respectively. There are
multiple replacement suppliers that are capable of supplying the
same supplies at similar qualities
and prices. As such, the Company does not believe that this
supplier is material to its business.
(iii) As replacement suppliers are readily available, the Company
does not enter into framework
agreements with its suppliers; instead, it enters into
short-term supply agreements with its suppliers
on an as-needed basis, each specifying the quantity, quality,
delivery and payment terms for the
respective batch of laboratory equipment and supply the Company
purchases. These agreements are
entered into in the ordinary course of the Company's business
and the Company's business is not
substantially dependent on any of these supply agreements.
Based on the foregoing, the Company does not believe that any of
its supply agreements qualifies as a
"material contract" as defined under Item 601(b)(10) of Regulation
S-K which needs to be filed as an
exhibit to the Revised Draft Registration Statement.
Risks Relating to Our ADSs and This Offering
Our dual-class structure with different voting rights will limit your ability
to influence
corporate matters...., page 53
10. We note your disclosure that each Class B ordinary share will be entitled
to six votes. Please expand your
disclosure to discuss the risk that future issuance of Class B shares may
be dilutive to holders of Class A
shares and that your dual-class structure may render your shares ineligible
for inclusion in certain stock
market indices and the potential impact on the market price and liquidity
of your ordinary shares.
The Company has revised the disclosure on page 54 of the Revised Draft
Registration Statement in response
to the Staff's comment.
Securities and Exchange Commission
December 9, 2019
Page 6 of 11
Use of Proceeds, page 58
11. Please revise the discussion to disclose the estimated net amount of the
proceeds broken down into each
principal intended use, (i) research and development of our early cancer
detection technologies,
(ii) obtaining NMPA approvals for additional cancer genotyping products,
including completing related
clinical trials; and (iii) other general and administrative matters. If the
anticipated proceeds will not be
sufficient to fund all the proposed purposes, please disclose the order of
priority of such purposes. To the
extent material amounts of other funds are necessary to accomplish the
specified purposes, state the
amounts and sources of such other funds needed for each specified purpose.
Refer to Item 3.C.1 of Form
20-F.
The Company has revised the disclosure on page 58 of the Revised Draft
Registration Statement in response
to the Staff's comment. The Company respectfully advises the Staff that
while the sufficiency of the net
proceeds of the offering will depend on the size of the offering, the
Company currently anticipates that the net
proceeds will be sufficient for all the proposed purposes.
Capitalization, page 60
12. We note on pages F-24 and F-36 that all of your outstanding preferred
shares will convert automatically
into ordinary shares in the event of a "Qualified IPO". Please revise your
disclosures to clarify all of the
stipulations of a "Qualified IPO" and explain why you believe that it is
factually supportable that the
outstanding preferred shares will automatically convert into ordinary
shares.
The Company respectfully advises the Staff that, pursuant to the Company's
seventh amended and restated
memorandum and articles of association and fourth amended and restated
shareholders' agreement
(collectively, the "Corporate Documents"), which were filed as Exhibit 3.1
and Exhibit 4.4 to the Draft
Registration Statement, all preferred shares shall automatically be
converted into fully-paid and non-
assessable ordinary shares upon the closing of a Qualified IPO. A
"Qualified IPO" refers to the closing of a
firm commitment underwritten initial public offering of the ordinary
shares (or securities representing
ordinary shares) on a recognized exchange which meets the following
requirements: (i) such closing shall take
place on or prior to the third (3rd) anniversary of the original Series C
issue date (i.e. January 31, 2019),
(ii) the pre-offering valuation of the Company shall be at least
US$1,442,496,338; and (iii) the post-offering
public float shall not be less than 10% of the total issued capital of the
Company.
Securities and Exchange Commission
December 9, 2019
Page 7 of 11
The Company further advises the Staff that pursuant to the Corporate
Documents, the requirement of
Qualified IPO can be waived by the Company's shareholders without
triggering any valuation adjustment
mechanism. In the event that this offering does not meet the requirement
of a "Qualified IPO", the Company
expects its shareholders to waive such requirement so that all preferred
shares will nonetheless be
automatically converted into ordinary shares without any adverse impact on
the Company's financials. As
such, the Company does not believe that the stipulations of a "Qualified
IPO" are meaningful disclosures for
investors.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Key Components of Results of Operations
Operating Expenses
Selling and Marketing Expenses , page 76
13. We note your disclosure that selling and marketing expenses primarily
consist of staff costs for personnel
engaged in sales and marketing functions, travel and entertainment expenses
and convention expenses.
We further note your disclosure on page 80 that your selling and marketing
expenses as a percentage of
total revenues decreased in 2018 primarily due to economies of scale.
Please expand your disclosure to
discuss your compensation structure with your sales force. Refer to Item
5.A of Form 20-F. Additionally,
please reconcile the description of selling and marketing expenses with
your statement on page 80 that
your general and administrative expenses increased in 2018 in part due to
an increase in travel and
entertainment expenses.
The Company respectfully advises the Staff that its selling and marketing
expenses primarily consist of staff
costs for its sales and marketing personnel. Such staff costs are
comprised of (i) fixed base salary (which
accounted for 83%, 77% and 76% of total staff costs for sales and
marketing personnel in 2017, 2018 and the
nine months ended September 30, 2019, respectively), and (ii)
performance-based bonuses linked to the
Company's growth, which is determined by certain key-performance
indicators such as annual sales
volume. As the vast majority of such staff costs is fixed, the growth of
the Company's revenues from 2017 to
2018 outpaced the growth of such staff costs (i.e. increased economies of
scale), which resulted in a decrease
of selling and marketing expenses as a percentage of revenues.
The Company has revised the disclosure on pages 77 and 83 of the Revised
Draft Registration Statement in
response to the Staff's comment.
Fair Value of Share Options, page 88
14. We note that the estimated fair market value per ordinary share is a
significant assumption in your share
option grant valuation. Accordingly, please bridge for us the fair value
per share determinations used for
each option grant subsequent to December 31, 2018 to the current estimated
IPO price per share. We will
delay our assessment of your response pending inclusion of the estimated
IPO price in the filing.
In response to the Staff's comment, the Company has revised the disclosure
on page 92 of the Revised Draft
Registration Statement to include the assumptions used to estimate the
fair value of the share options granted
in the nine months ended September 30, 2019. The Company acknowledges the
Staff's request to bridge the
fair value per share determination used for each option grant subsequent
to December 31, 2018 to the
estimated IPO price per share, and will supplementally provide the
requested information to the Staff when the
estimated IPO price range becomes available.
Securities and Exchange Commission
December 9, 2019
Page 8 of 11
Business
Overview, page 106
15. With respect to your early detection technologies, please briefly explain
what you mean by "specificities
of 96%." Similarly, please revise the graphics and expand your disclosure
as appropriate on page 112 to
provide appropriate context for an investor to evaluate the graphics.
Please also briefly explain what you
mean by a "capture-based" fully automated NGS library preparation system on
page 106. Additionally,
please revise your statement on page 123 that the testing success rate of
your LungPlasma is 99.5%, on
par with worldclass genomic testing companies to indicate how testing
success rate is measured and the
basis for your competitive claim.
The Company has revised the disclosure on pages 110, 118, 119 and 129 of
the Revised Draft Registration
Statement in response to the Staff's comment. The Company respectfully
advises the Staff that:
(i) As disclosed on page 6 of the Revised Draft Registration Statement
under "Conventions that apply to
this prospectus", "specificity" refers to the percentage of people
who test negative for a specific
disease or condition among people who do not have the disease or
condition.
(ii) "Capture-based" enrichment method is one of the two major
enrichment methods widely used for
targeted DNA sequencing, where probe is used to "capture"
specific genomic regions of interest for
downstream sequencing. The other widely used method for targeted
DNA sequencing is "amplicon-
based" method where specific genomic regions are enriched by
being amplified using primers around
both ends of such regions.
(iii) LungPlasmaTM' s testing success rate of 99.5% is calculated by
dividing (x) number of clinical
samples tested by LungPlasma that passed the Company's QC
standards, including cfDNA extraction
amount, pre-library quality, library quality and sequencing data
quality (7,443 samples), by (y) total
number of clinical samples tested by LungPlasmaTM (7,403
samples) in 2019. The Company believes
that such testing success rate is on par with world-class
genomic testing companies, such as Guardant
Health (Nasdaq:GH), who reported a "test success rate of 99.6%"
for Guardant360, the marketing
leading comprehensive liquid biopsy test, in its annual report
on Form 10-K filed on March 19, 2019.
Intellectual Property, page 124
16. We note your disclosure regarding your patent rights. For each of your
material patents, please clearly
disclose:
applicable jurisdictions where patents are issued or where patent
applications are pending;
type of patent protection (e.g. composition of matter, use, or
process); and
Securities and Exchange Commission
December 9, 2019
Page 9 of 11
the specific NGS-based cancer genotyping test or technology to which
the patent relates and the
patent expiration date or expected expiration date for patent
application.
The Company has revised the disclosure on pages 130 and 131 of the Revised
Draft Registration Statement in
response to the Staff's comment.
Note 1. Organization and Basis of Presentation , page F-10
17. We note here and throughout the filing that you consolidate Burning Rock
(Beijing) Biotechnology Co.,
Ltd. ("VIE") and the VIE's subsidiaries within your financial statements as
of each balance sheet date
and that those VIE agreements were amended on October 21, 2019. Please
revise the filing to disclose the
process by which you formed the VIE structure, including relevant
chronological dates. Also, revise the
filing to explain why you are consolidating this VIE and the VIE's
subsidiaries as of each balance sheet
date and how the amended agreements signed on October 21, 2019 impacted
your consolidation
conclusions.
In response to the Staff's comment, the Company has revised the disclosure
on pages F-10 to F-13 of the
Revised Draft Registration Statement to explain why the Company is
consolidating the VIE and its
subsidiaries as of each balance sheet date and the impact of the amended
agreements signed on October 21,
2019 on its consolidation conclusions.
Note 2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue from central laboratory business, page F-20
18. We note that when you are expected to be entitled to a breakage amount, it
is recognized as revenue in
proportion to the pattern of rights exercised by the patient. Please revise
the filing to explain how you
estimate breakage in these situations and the significant judgments
underlying those estimates. Refer to
ASC 606-10-50-17.
In response to the Staff's comment, the Company has revised the disclosure
on pages 90, 91, F-20 and F-21 of
the Revised Draft Registration Statement to explain how the Company
estimates breakage in these situations
and the significant judgments underlying those estimates.
Securities and Exchange Commission
December 9, 2019
Page 10 of 11
Revenue from in-hospital business, page F-21
19. We note that you recognize revenue on a net basis related to the provision
of the facilitation services for
the laboratory equipment sales to hospitals since you have determined that
you are an agent. We also
note that you purchase this laboratory equipment from third-party suppliers
when the hospital makes a
purchase request and resell the laboratory equipment to the hospital.
Please explain in more detail how
you have considered all of the requirements in ASC 606-10-55-36 through
55-40 to conclude that you are
the agent in these transactions.
The Company respectfully advises the Staff that the Company's performance
obligation is to facilitate the
hospitals and third-party suppliers to complete the purchase of laboratory
equipment, which is not controlled
by the Company prior to being transferred to the hospitals. The
third-party suppliers are responsible for the
installation of the laboratory equipment at the hospitals prior to
acceptance. The third-party suppliers are also
responsible for the maintenance of the laboratory equipment at their cost
during the warranty period.
Therefore, the Company concluded that it was not the principal based on
the criteria in ASC 606-10-55-37A
as it does not control the laboratory equipment before it is transferred
to the hospital nor have the rights to
direct the installation or maintenance services provided to the hospitals.
Further, the Company did not meet
the principal indicators in ASC 606-10-55-39 (a) and subparagraph 55-39
(b) as it was not primarily
responsible for fulfilling the promise to provide the specified
laboratory equipment to the hospitals, nor did it
bear inventory risk before the specified laboratory equipment is
transferred to the hospitals. While the
Company has some discretion in establishing the price the customer pays
for the specified goods or services,
this indicator alone does not provide persuasive evidence that the Company
controls the goods or services
prior to transfer to the customer.
20. Please revise the filing to disclose if you have any warranty obligations
or customer rights of return from
the sales of reagent kits to hospitals. Refer to ASC 606-10-55-22 thru
55-35.
In response to the Staff's comment, the Company has revised the disclosure
on page F-21 of the Revised Draft
Registration Statement to disclose that it has no customer rights of
return from the sales of reagent kits to
hospitals other than for defective products.
General
21. Please provide us proofs of all graphics, visual, or photographic
information you will provide in the
printed prospectus prior to its use, for example in a preliminary
prospectus. Please note that we may
have comments regarding this material.
The Staff's comment is duly noted. The Company will provide the Staff with
proofs of all graphics, visual, or
photographic information the Company intends to include in the printed
prospectus as soon as it becomes
available and prior to its use.
Securities and Exchange Commission
December 9, 2019
Page 11 of 11
If you have any questions regarding the Draft Registration
Statement, please contact the undersigned
by phone at +852-2532-3783 or via e-mail at szhao@cgsh.com, or Leo Li, the
chief financial officer of Burning
Rock Biotech Limited, by telephone at +86-185-0164-1666 or via e-mail at
leo.li@brbiotech.com, or William
Huang, the partner at Ernst & Young Hua Ming LLP, by telephone at
+86-20-2881-2888 or via email at
William.Huang@cn.ey.com. Ernst & Young Hua Ming LLP is the independent
registered public accounting firm of
the Company.
Very
truly yours,
CLEARY
GOTTLIEB STEEN &
HAMILTON
LLP
By: /s/
Shuang ZHAO
Shuang ZHAO, a Partner
cc: Leo Li, Chief Financial Officer, Burning Rock Biotech Limited
Sebastian R. Sperber, Esq., Partner, Cleary, Gottlieb, Steen & Hamilton
LLP
Chris K.H. Lin, Esq., Partner, Simpson Thacher & Bartlett LLP
Daniel Fertig, Esq., Partner, Simpson Thacher & Bartlett LLP
William Huang, Partner, Ernst & Young Hua Ming LLP
***