Genetron Holdings Ltd (GTH) 2021 Q2 法說會逐字稿

Good day. And thank you for standing by. Welcome to the Second Quarter of 2021 Genetron Health Earnings Conference Call. (Operator Instructions) And please be advised that today's conference is being recorded. (Operator Instructions) I'd now like to hand the conference over to your first speaker for today, Ms. Hoki Luk. Thank you. Please go ahead, ma'am.

Thank you. Hello everyone and welcome to Genetron Health Second Quarter 2021 Earnings Conference Call. The company's earnings release was issued earlier today and is available on the Company's IR website.

During this call the Company will be making some forward-looking statements regarding future events and results. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts including statements about Genetron Health's beliefs and expectations are forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties. Further information regarding these and other risks is included in Genetron Health's filings with the SEC. All information provided today is as of the date of this call and Genetron Health does not undertake any obligations to update any forward looking statements except as required under applicable law.

With respect to any non-IFRS measures discussed today -- during today's call the Company's reconciliation information related to those measures can be found in the earnings release issued earlier today.

Allow me to introduce the Management Team on the call today. Sizhen Wang, Co-Founder and CEO of Genetron Health will discuss recent business updates and upcoming catalysts [ph]. Evan Xu, our CFO, will provide financial highlights related to the unaudited second quarter results outlined in today release as well as the outlook for 2021.

Following management's prepared remarks we'll open up the call to questions. During the Q&A session our Co-Founder and Chief Scientific Officer, Dr. Hai Yan, Chief Technology Officer Dr. Yuchen Jiao, and our Chief Medical Officer, Dr. Yun-Fu Hu, will also be available to answer questions.

With that said I would now like to turn the call over to Mr. Sizhen Wang, CEO of Genetron Health. Sizhen, please go ahead.

Thank you, Hoki. Good morning and good evening everyone. Thank you for joining our Second Quarter 2021 Earnings Conference Call.

So I would like to direct you to the Supplemental Earnings Presentation within Investor Relations website and begin on slide 2.

In the first half of this year we continue to solidify our position as the leading precision oncology company in China with a comprehensive portfolio that covers the entire spectrum of cash management. Our products allow our customers to address the patient needs and challenges from early screening, diagnosis, and treatment recommendations as well as disease monitoring.

We'll be [ph] turning to slide 4, in the second quarter we delivered strong results with 38.1% top line year over year gross reaching revenue of RMB 140.5 million.

Our revenue gross was also accompanied by a notable margin improvements with gross margin up 67% compared to 63% in the second quarter of last year, thanks to improvements in both LDT and IVD business lines in. We were pleased with the momentum in the business during the second quarter across all of our business lines.

The beginning of the third quarter continued with strong trends and positive operational momentum. However recent COVID-related restrictions in China have impacted our business activities as more cases in more regions have been announced.

Although the absolute total number of the COVID cases are not notably high compared to other parts of the world, health officials in China have continued to stay on high alert implementing stringent strategies to contain the spread.

For example, in Beijing where Genetron Headquarters is located, as well as being a key market for us, the patient traffic to hospitals has been limited due to stricter testing and other requirements. Travel within areas where cases has -- have been reported it also -- is also discouraged with quarantine rules in place.

As a result of these measures in Beijing and other high-risk areas such as Shanghai, Liaoning, and Jiangsu [ph] Province, our business has been affected over the past few weeks, particularly our LDT segment which relies on patient traffic.

But at this point we believe that the restricted operating environment is temporary and rules could be lifted sometime in the third quarter. So if the situation normalize in 4Q we do expect patient activity to improve from current levels similar to the rebound in the pent-up demand that we have experienced a few times over the last year.

And meanwhile we're closely monitoring the fast-evolving circumstances and continue to execute in key geographical areas that are currently less impacted such as Shandong [ph], Guangdong [ph] and Kenjing [ph].

In addition, our IVD segment has been growing stronger than our internal forecast so if 4Q normalizes IVD sales transaction is expected to -- traction is expected to continue.

So despite COVID-related disruptions we continue to grow and expand our business lines with significant market-size potential and are anticipating some key catalysts for the rest of this year.

Turning to page 5 and 6, for our early screening business we have begun the prep work for our NMPA registration trial during the second quarter. The head-to-head trial which compares HCCscreen versus Ultrasound+AFP remains on track with our plans to proceed with the enrollment this year. And we continue to project, potential NMPA approval of HCCscreen in 2023.

We look forward to updating the market with more information on the trial over the next few months. We also plan to expand the Multi Cancer Early Screening [ph] and project -- and project to release case control CRC data for early screening later this year.

Recently in our second effort to partner with local governments as we have done with the Wuxi Initiative we announced that we would work with Guizhou Province, Dafang County authorities by utilizing [ph] our HCCscreen Assay.

Together with our partners we intend to carry out early screening, diagnosis, treatment, follow-up screenings, and patient management for high-risk liver cancer groups in Dafang County. The project seeks to bring leading cancer early-screening products and services into China's rural markets enabling better technology and a more equitable healthcare options for more people in the country.

These types of initiatives are consistent with other supportive measures laid out and being implemented by the Chinese central and other local governments. Under China's State Councils, Healthy China 2030 Plan, the goal is to increase five-year cancer survival rate from the current roughly 40% to over 46% or a 15% growth rate.

As a leading NGS player in China, the rapid emergence of targeted immunotherapies will increase demand for our diagnostics and monitoring business as well as our Pharma services whereas early detection particularly liver cancer also remains a focus for the government and companies with differentiated technologies like us are highly encouraged to introduce innovative solutions to address unmet medical needs.

So overall we remain confident about the growth prospects of the precision oncology sector in China and we anticipate Genetron to be a continued -- beneficiaries from policy talents [ph].

So now turning to page 7. On the MRD side, our efforts are progressing well for Seq-MRD and blood cancer. This panel continues to be well received by our biopharma partners so recently Seq-MRD has announced a partnership with a leading MNC pharma company representing the first domestic blood cancer MRD -- product that the partner has chosen to use in their clinical trials.

Our broader LDT launch to the clinical setting including hematology centers and hospitals is expected to take place in the next couple of months. Other studies in solid tumors including liver and lung cancer is ongoing and we look forward to sharing some initial data later this year or next year.

Turning to slide 8. So overall we are very excited about our BioPharma service business as we continue to form partnership through our MRD products, OncoPan Scan, Fusion Scan [ph], et cetera.

We're also collaborating with BioPharma companies to co-develop CDx kits for their innovative drug candidates. For example, our collaboration with CStone for the CDx tests for avapritinib has entered the priority review and approval process in China. And in the U.S., our CLIA Lab in Maryland is up and running, providing us with a solid platform to offer services for cross-border trials in CDx developments.

With a booming Chinese Biotech sector we are optimistic about our growth in this business segment. And then in the second quarter we have sign on additional three biopharma partners now totaling 40 partners and we continue to see a strong topline.

And for our diagnostics business we expect to initiate the registration trial for our tissue-based Large Panel OncoPan Scan in the next month or two. This month using OncoPan Scan our Beijing lab achieved full marks and it was ranked first in NCCL's External Quality Assessment of Comprehensive Genomic Profiling Panels. We continue to be a leading LDT player in China and we're planning to providing other types of LDT assays to enrich this part of the business.

And for the IVD segment, we just announced a new partnership with Shanghai Yikon Genomics, recall that Genetron [ph] owns the CDx version of the S5 instrument in China. And with this partnership we will work with Yikon and apply S5 in reproductive health field in the China market and Yikon currently offers pre-pregnancy, prenatal, and inheritance disorder testing solutions for a network of over 400 hospital partners in China.

Genetron will also support the commercialization efforts. Overall we're pleased to expand application potential of S5.

So turning to slide 9. Recently we also received CE Mark for our 8-gene Lung Cancer Assay. The CE Mark represents the second regulatory milestone for these assays and a new commercialization opportunity.

So together with S5 and our fully automated inaudible [ph] solutions we offer end-to-end fast turnaround and the seamless workflow [ph] for hospitals and the clinical laboratories that prefer to run NGS testing on their own.

We believe that this offers a significant operational advantage for our potential customers outside of China. So I will now turn the call over to our CFO, Mr. Evan Xu, to provide more details on our second quarter financials. Evan?

Thank you, Sizhen. I will provide an update on the financial performance during this reporting quarter. Please note that all numbers provided are in RMB terms and additional comparisons made on a year-over-year basis.

Starting on slide 11. In the second quarter total revenue increased by 38% to RMB 141 million from RMB 102 million in the same period of 2020. Diagnosis and the [ph] monetary revenue increased by 39.4% to RMB 131 million in the second quarter of this year from RMB 94 million in the same period of 2020.

LDT revenue increased by 15% to RMB 87 million during the second quarter of 2021 from RMB 76 million in 2020. LDT diagnostic test sold [ph] in the second quarter of 2021 totaled approximately 6,830 units compared to about 6,700 tests in the same period of 2020. Note that it was a tougher a year-over-year comparison due to some pent-up demand in the second quarter of last year.

In this quarter sales of LDT services included sales of early screening test, HCCscreen. We continue to be pleased with HCCscreen sales uptick and a growing adoption in the market with continued support from our collaborations. These include the work we are doing with JD Health, Chia Tai Tianqing [ph], Yikon, and the Wuxi government.

Moving to slide 12. IVD revenue increased by 142% to RMB 44 million in the second quarter of 2021 from RMB 18 million in the second quarter of 2020. The increase was mainly driven by sales of Genetron S5 instruments as well as the 8-gene Lung Cancer Assay.

This quarter we have added five new IVD hospital contracts compared to one last quarter. As of the end of second quarter, we now have a total of 50 hospital contracts including 28 IVD ones.

We're pleased with the trend of hospital adds in this quarter and anticipate this to continue. An expanding installation base would drive our reagent and [ph] our overall sales in the coming quarters.

Revenue generated from development services increased by 22% to RMB 9.5 million in the second quarter of 2021 from RMB 7.8 million in the same period of 2020.

Biopharmaceutical revenue grow -- gross increased substantially in the second quarter of 2021 compared to last year. We continue to focus on increasing our higher margin biopharma services efforts.

Cost of revenue increased by 23 per cent to RMB 46 million. For second -- for second quarter 2021 compared to RMB 38 million in the same period of last year.

Moving to slide 13. Gross profits increased by 47 per cent to RMB 95 million in the second quarter of 2021 from RMB 64 million in a period of 2020. Gross margin improved to 67.2% for the second quarter 2021 compared to 63.1% in the same period of 2020, thanks to improvements in both LDT and IVD business wise.

In particular gross margin for our LDT segment was 71% compared to 70.1% a year ago. For IVD gross margin was 71.4% versus 55.3% in the second quarter last year, due to higher margins in both instruments and assay -- assays.

Thanks to our One-Step Seq technology and our capability to manufacture the 8-gene Lung Cancer Assay with our -- our with our own raw material resources, our assay gross margin continues to improve.

Operating expenses increased by 66% to RMB 195 million for the -- for second quarter 2021 from RMB 170 million in the same period of 2020. Operating expenses are broken out on slide 14 and are as follows.

Selling expenses increased by 46% to RMB 89 million in the second quarter of 2021 from RMB 61 million in the -- in the same period of 2020. Selling expenses as a percentage of revenue increased to 63%, slightly, in this quarter compared to approximately 60% in the same period of 2020. The increase was primarily due to higher marketing expenses as well as employee compensation expenses.

Administrative expenses increased by 96% to RMB 55 million in the second quarter of 2021 from RMB 28 million in the same period of 2020. Administrative expenses as a percentage of revenue increased to 38.8% in this quarter from 27.4% in the same quarter last year. The increase was mainly driven by higher headcount, higher professional fees, as well as infrastructure costs such as IT expenses.

Research and development expenses increased by 88% to RMB 56 million in this quarter from RMB 30 million last year. R&D expenses as a percentage of revenue increased to 40% in the second quarter this year from 29.3% in the same period of last year.

The increase was driven by higher R&D headcount and the related expenses as well as continued innovation efforts such as product development and clinical trial activities.

As a result operating loss was RMB 100 million for this quarter compared to RMB 53 million last year, on slide 15. Net loss for the period was RMB 92 million for this quarter compared to RMB 2.8 billion in 2020.

This was primarily because last year the company had a -- close to RMB 2.8 billion in fair value loss of financial instruments with preferred rights before the IPO. There was none in the second quarter this year.

We are also providing non-IFRS net loss -- net loss figures as management believes these numbers would be helpful to show the trends of the underlying business. Non-IFRS loss includes share-based compensation expenses, fair value change, and other loss of financial instruments with preferred rights. So non-IFRS net loss was RMB 80 million for the second quarter of 2021 compared to RMB 44 million for the prior year.

Basic loss per ordinary share was RMB 20 cents for the second quarter this year compared to RMB 17.04 cents for the same period of 2020. Non-IFRS basic loss per ordinary share was RMB 17 cents for the second quarter this year compared with RMB 26 cents for the same period of 2020. Diluted loss per ordinary share is equivalent to basic loss per ordinary share.

We have a strong -- we have a strong cash position. Cash and cash equivalent, restricted cash, and current financial assets at a fair value through profit and loss were close to RMB 1.2 billion or $188 million as of June 30, 2021.

Now moving to discuss our outlook for 2021. On slide 16, as Sizhen mentioned at the -- at the beginning of the call, over the last several weeks COVID-related restrictions have impacted many areas in China. At this point we believe the heightened situation [ph] is transitory and thus we are maintaining our expected revenue guidance range of RMB 615 million to RMB 625 million for the whole year.

Having said that, if the current environment persists or worsens further beyond the third quarter we would expect to reassess the financial projections and provide appropriate updates to the market at that time.

This concludes the discussion of our Second Quarter Financial Results. I will now turn the call back to Sizhen.

Hey, thank you, Evan. In closing, we've had a successful first half of 2021 financially and operationally.

So shown on slides 18 and 19, our strategic focus going forward will be to accelerate the development of a liquid biopsy-based solutions across the full-cycle cancer management particularly in early screening and MRD while continuing to ramp up our commercialization efforts and grow our base business.

So overall notwithstanding the short-term disruptions we remain confident that we are very well positioned in the fast-growing precision oncology sector and the macro environment in China also remains favorable for us.

And last but not least we remain highly committed to focusing on innovation, to develop high-quality products that would benefit more cancer patients. So this concludes our prepared remarks portion of today's call. So Operator, we're now ready for questions.

Thank you. (Operator Instructions) Our first question is from the line of Sung Ji Nam of BTIG. Your line is open. Please go ahead.

Hi. Thanks for taking the questions. So with HCCscreen, great to see that the registration trials are on track but if the restrictions, the COVID restrictions get worse are there risks to that timeline being delayed a little bit into next year, could you maybe talk about that how you might be risking your plans for the rest of the year there?

Hi, Sung Ji. Thanks for asking the question about HCC System -- screen trial. So as you know, this is one of the most important [ph] trial that that we're planning and you know, up and running right now.

We have done a lot of preparation work so far this year. And apparently the past interruption or the resurgence of COVID-19 slow down our pace a little bit. So however with everything already in place pretty much we do still have a fair high level of confidence that we can start the enrollment you know, within this year.

But with that said if you know, COVID-19 situation gets much worse than we are now so we may expect a further delay of this trial. But again as I said we have done I think that as much as preparation as we can and you know, we -- we're -- we're not ready today to share all the details.

But like we said in the conference call, the earnings call that we will share more details about the design as well as the details of the sites, you know, for -- you know, as we unfold the clinical trials plans for the rest of this year.

But what I can say here is that you know, we have a planned you know, registrational trial sites across the nation. So I would say any regional COVID-19 outbreaks probably would not severely delay our steps on this important trial.

So overall I would say we're on track. So again you know, that we have exercised quite a few times already in the past is that we feel that we can you know, get the trial done within next year and we expect the approval sometime in 2023.

Gotcha. Great. That's very helpful. And then just in terms of HCCscreen adoption, it seems like through you're leveraging your partnership. That's also going well.

Just kind of curious if you might be able to you know, elaborate further on the different partnerships, whether any you know, one of them standing out or if you know, if they're all tracking kind of according to how you anticipated the different partnerships to really roll out like Yikon, CTTQ, and the local -- the municipal government partnership?

Right. So as you could see that we're setting up all these partnerships for you know, different purposes but we in general focus on building the market awareness and we're focused on you know, testing a model that can be duplicated, right.

I would say here is that you know, that that the Wuxi -- the project in Wuxi, the collaboration with Wuxi government is going very smoothly. We do have a plan to duplicate the same model elsewhere in China.

And we believe this is the fundamental work we need to do, not only to you know, to generate revenues through this type of government collaboration but also to create the data and to generate the -- again that helps create economics -- model that we can leverage. And we still in -- you know, plan to you know, to apply for you know, reimbursement coverage provincial level or nation -- national level you know, shortly after you know, our kit, or our assay, HCC -- HCCscreen assay is approved in 2023.

So all the -- all these works are really laying down the foundation for that. And we believe that with this -- after being approved by NMPA with -- that the likelihood of gaining you know, the reimbursement coverage shortly after that, this could represent a major revenue ramping up opportunity ahead of us.

Great. And then lastly from me, congratulations on the Yikon Genomic partnership. I believe this is going to be some revenue contribution there. Would you be able to break that out for this year? If not could you talk about how we should think about you know, the partnership, the revenue contribution side you know, in 2023 -- 2022, I'm sorry, and beyond?

Sure.

Evan, you want to comment on that? Yes.

Sure, Sung Ji. So obviously this is a new partnership. However it's -- we view this as quite a -- you know, groundbreaking because this is -- this is the first step that we -- like expanding beyond the oncologic -- oncology field, right, our S5.

We'll work with Yikon to apply our S5 instrument to the reproductive health market which is --with a lot of potential in China as well you know, given the current government policy to promote newborn babies' -- birth rates.

So we -- as we push forward in partnership with Yikon, we do think that this represents a significant opportunity down the road. This year -- in this quarter obviously this a new partnership. But in the year 2022, 2023 going forward we do expect this will be a significant -- a meaningful revenue driver for us as well as, as far as the instruments.

Yes. inaudible [ph]...

Great.

... you know, this partnership -- yes, so Sung Ji, I -- you know, something -- the one thing I'd add here is, you see that this is the partnership that opens the S5 application field beyond oncology, right.

It's just like Evan was saying, that reproductive health is a sector which -- is a sector actually having a lot of potential right now in China. So we believe that this partnership or future similar partnerships could you know, you know, can generate additional revenue contribution from the S5 platform.

Great. Thank you so much.

Thanks.

Thank you. Thank you. Our next question is from the line of Yang Huang of Credit Suisse. Your line is open. Please go ahead.

Thanks. Yes. I have two questions. First of all your IVD segment, that we saw quite impressive growth year over year. So can you give us a breakdown in some of IVD, I mean the equipment and the test kit numbers. I will begin with this one. [ph]

Yes. Hi. Hi, Yang. So for this quarter we had a relatively balanced splits between IVD platform instruments versus that is [ph]. The instrument has slightly little more compare -- versus that is roughly 60-40 percentage split.

As -- and you know, as I mentioned just now during the -- during the call we are very happy with the uptick of our IVD solutions in this quarter. We actually added five more new hospital contracts during the quarter versus one in Q1.

So as we continue to increase the installation base, right now we have 28 hospital IVD partners already. And we expect -- we expect this trend which we observe in Q2 is likely to continue in the next few quarters.

As you know, we're very happy to continue to drive the IVD revenue and also more importantly to drive up the contribution from the IVD assets in particular the 8-gene Lung Cancer Assay.

Okay. Great. My second question is about HCCscreen commercialization. So I mean we understand this is temporary [ph] but if management can give us any color on the inaudible [ph] any color on the commercial programs of HCCscreen during the first half? That will be great [ph].

The question is about -- Huang, the question is about the commercialization or the trial?

Yes. Commercialization of HCCscreen of actual -- you know, any volume color, or volume, promotional flows [ph] or you know, or channel, which channel is the most significant inaudible [ph] for us, right now? Anything that kind of help out you know, inaudible [ph] in terms of pro commercialization progress or to what extent [ph]?

Right. So right now we -- we're probably not in the position to give a detailed breakdown of the numbers. But I can give you some color on the models we have been setting up and then we'll try to -- we have been trying.

And you know, what I can say is that you know, that the partnership that was set up last year for you know, the iKang [ph] channel, the house health-check chain [ph] channel as well as the -- the collaboration with the Wuxi government you know, we -- that we launched towards the end of last year, in Q4 last year.

We have seen significant progress that we were able to make this year which means that you know, that these partnerships are generating a meaningful number of tests according to our plan.

And I want to emphasize here that remember we emphasized the benefits of the Wuxi collaboration governments. Not only are we going to generate the testing revenue but also we're going to you know, partner with the local government to create a cohort. And the closely managed cohort is of a meaningful size. Or remember the cohort is intended to be eventually about a 150K people, right.

And that all the efforts are progressing well. And just like I said in addressing Sung Ji's question earlier, you know, that we believe that with the experience with the -- with the data we will be able to accumulate from the -- this very first collaborate -- you know, meaningful scales of government collaboration project on HCCscreen.

We -- not only will position us for a potential you know, the National Provincial Reimbursement Coverage Application but also in you know, in the due course we'll actually prepare us -- give us more experience and data to show to other potential government -- the regional government partners and that we are actually working diligently on that.

And the partnerships that we have been launching this year you know, the -- with the partnership with the CTTQ and the partnership with inaudible [ph] online. And, we're working you know, hard with our partners to get through the initial phase.

So like we discussed the -- in last earnings call, we feel that the more partner we work at this point, the faster or quicker that we can educate the market and we can generate a good enough level of public awareness which you know, again eventually will help us to ramp up the revenue as fast as we can after the assay is formally approved sometimes in two -- 2023.

So all in all I would say you know, we have two workstreams, the HCCscreen, right, the one important workstream that is the trial. I think we're quite well on track to get the trial fully launched. And we're on track to get the trial completed by the end of next year, with anticipated approval sometimes in 2023.

And in parallel, the other very important workstream is (AUDIO GAP) just to get through all these different commercialization platform , to accumulate data, and also accumulate enough experience for us to ramp up the revenue when everything is ready.

So that's what we're working on now. I think you know, general -- generally speaking we're -- we're very excited about the progress we have made and excited about the prospect of HCCscreen as you know, potentially the very first liquid biopsy early-screening assay to be approved in China. It's huge you know, the commercial potential here.

Okay. Great. Thanks a lot.

And actually, one thing I -- I'd probably probably want to add here Huang, is that you know, towards your first question, if you could see that the number of you know, hospital partnerships especially the IVD, the new hospital partnerships you know, are I think at the highest in the past quarter, in Q2 among the last quarters -- the last few quarters.

So this is actually a good evidence that that our focus on commercializing our you know, medical diagnosis solutions, S5 plus Lung 8-gene Cancer Panel [ph] is working well. And we do expect that the -- this trend will continue, if not accelerating.

Got it. Got it. Thanks for the call.

Thank you. (Operator Instructions) No question as of the moment. Please continue.

Well, thank you again for joining us for the Second Quarter Earnings And Business Update Call. We appreciate your ongoing support. If you have any questions please do not hesitate to reach out to the IR Team. Have a good morning and evening.

Thank you. Ladies and gentlemen, that concludes the conference for today. And thank you for participating. You may now all disconnect.

Thank you.

Thanks.