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spk01: Good day and thank you for standing by. Welcome to the second quarter of 2021 Genetron Health Earnings Conference Call. At this time, all participants are in listen-only mode. Now for the speaker's presentation, there will be a question and answer session. And to ask a question during the session, you need to press star 1 on your telephone. And please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Now I'd like to hand the conference over to your first speaker for today, Ms. Hoki Lok. Thank you. Please go ahead, ma'am.
spk02: Thank you. Hello, everyone, and welcome to Genetron Health's 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 Gentron 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 Gentron Health's filing to the SEC. All information provided today is as of the date of this call, and Genetron Health does not undertake any obligation to update any forward-looking statements, except as required under applicable law. With respect to any non-IFRS measures discussed 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. Susan Wang, co-founder and CEO of Gintron Health, will discuss recent business updates and upcoming catalysts. Evan Xu, our CFO, will provide financial highlights related to the unaudited second quarter results outlined in today's release, as well as our 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. Haiyan, Chief Technology Officer, Dr. Yuzheng Zhang, and our Chief Medical Officer, Dr. Yunfu Hu, will also be available to answer questions. With that said, I would now like to turn the call over to Mr. Shizhen Wang, CEO of Jinchuan Health. Shizhen, please go ahead.
spk05: 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 with investor relations website and begin on slide two. In the first half of this year, we continue to solidify our position as the leading position oncology company in China with a comprehensive portfolio that covers the entire spectrum of cancer management. Our products allow our customers to address patient needs and challenges from early screening, diagnosis, and treatment recommendations, as well as disease monitoring. If you turn into slide four, in the second quarter, we delivered strong results, with 38.1% top-line year-over-year growths reaching revenue of remaining $140.5 million. Our revenue growth was also accompanied by notable margin improvements, with gross margin at 67% compared to 63% in the second quarter of last year, thanks to improvements in both LDT and IVD business lines. We were pleased with the momentum in the business during the second quarter across all of our business lines. The beginning of the sub-quarter continued with strong trends and positive 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 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 Jingcheng headquarters is located, as well as being a key market for us, the patient traffic to hospitals has been limited by strict testing and other requirements. Travel within areas where cases have been reported 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 provinces, Our business has been affected over the past few weeks, particularly our LDT segment, which relies on patient traffic. At this point, we believe that restricted operating environment is temporary, and rules could be lifted sometime in the third quarter. So if the situation normalizes in full queue, we do expect patient activity to improve from current levels. similar to the rebound and 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, Zhejiang, and Tianjin. In addition, our IVD segment has been growing stronger than our internal forecast. So if 4Q normalizes, IVD sales transaction expected to, traction expected to continue. 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 five and six, for our early screening business, we have began the prep work for our NAMPA registrational trial during the second quarter, the head-to-head trial which compares HCC screen versus ultrasound plus AFP remains on track with our plans to proceed with enrollment this year. And we continue to project potential NAMPA approval of HCC screen 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 to multi-cancer early screening 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 our HCC screen 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 more equitable health care 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 State Council's 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 targeting the immunotherapies will increase demand for our diagnosis and monitoring business, as well as our biopharma services. Whereas early detection, particularly liver cancer, also remains a focus for the government. And companies with differentiated technologies like us, I highly encourage to introduce innovative solutions to address unmet medical needs. So overall, we remain confident about the gross prospects of the precision oncology sector in China, and we anticipate Jingcheng to be a continued beneficiary from policy tolerance. So now turning to page seven, on the MRD side, our efforts are progressing well. For second MRD in blood cancer, this panel continues to be well received by our biopharma partners. So recently, SecMRD has inked 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 eight. So overall, we're very excited about our biopharma service business as we continue to form partnership through our MRD products, OncopanScan, FusionScan, et cetera. We're also collaborating with biopharma companies to co-develop CDX kits. for their innovative drug candidates. For example, our collaboration with system for the CDX test for Avapretinib has entered the priority review and approval process in China. And in the U.S., our ClearLab in Maryland is up and running, providing us with a solid platform to offer services for cross-border trials and CDX developments. With a booming Chinese biotech sector, We are optimistic about our growth in this business segment. And in the second quarter, we have signed on additional three biopharma partners, now totaling 40 partners, and we continue to see a strong pipeline. And for our diagnosis business, we expect to initiate the recreational trial for our tissue-based large panel oncopan scan in the next month or two. Using OncoPenscan, our Beijing lab achieved full marks and 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 assets to enrich this part of business. And for the IVD segment, we just announced a new partnership with Shanghai Econ Genomics. Recall that Jingquan owns a CDX version of the S5 instrument in China. And with this partnership, we will work with Econ to apply S5 in reproductive health field in the China market. And Econ 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 nine, recently we also received CE mark for our aging lung cancer assay. The CE mark represents the second regulatory milestone for this assay and a new commercialization opportunity. So together with S5, In our fully automated bioinformatics solutions, we offer end-to-end fast turnaround and a seamless workflow for hospitals and 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.
spk04: Evan. Thank you, Sujin. I will provide an update on the financial performance during this reporting quarter. Please note that all numbers provided are in RMB terms, and that's all 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 102 million in the same period of 2020. Diagnostics and monetary revenue increased by 39.4% to $131 million in the second quarter this year from $94 million in the same period of 2020. LDT revenue increased by 15% to $87 million during the second quarter of 2021 from $76 million in 2020. LDT diagnostic tests sold in the second quarter of 2021 totaled approximately 6,840 units, compared to about 6,700 tests in the same period of 2020. Note that it was a tougher 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 tests, HPCC screen. We continue to be pleased with HTC screen sales uptake and the growing adoption in the market with continued support from our collaborations. These include work we are doing with JD Health, Zhengda Tianqing, iConn, and the Wuxi government. Moving to slide 12, IVD revenue increased by 142% to RMB 44 million in the second quarter of 2021 from 18 million in the second quarter 2020. The increase was mainly driven by cells of GeneTron S5 instruments as well as the HG in 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 IBD ones. We're pleased with the trend of hospital ads in this quarter and anticipate this to continue. An expanding installation base would drive our reagent and 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 7.8 million in the same period of 2020 Biopharmaceutical revenue growth 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% to RMB 46 million for second quarter 2021 compared to RMB 38 million in the same period of last year. Moving to slide 13, gross profit increased by 47% to RMB 95 million in the second quarter of 2021, from 64 million in the same 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 IBD business lines. In particular, gross margin for our LDT segments 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 assays. Thanks to our one-step SIEC technology and our capability to manufacture the HG in lung cancer assay with our own raw material sources. Our assay gross margin continues to improve. Operating expenses increased by 66% to RMB 195 million for second quarter 2021, from RMB 117 million in the same period of 2020. Operating expenses are broken out on slide 14. and are as follows. Selling expenses increased by 46 percent to RMB 89 million in the second quarter of 2021 from 61 million in the same period of 2020. Selling expenses as a percentage of revenue increased to 63 percent slightly in this quarter compared to approximately 60 percent 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 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 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 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 figures as management believes these numbers would be helpful to show the trends of the underlying business. Non-IFRS net 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 for the same period of 2020. Now 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 cash position. Cash and cash equivalents, restricted cash, and current financial assets at fair value through profit and loss were close to RMB 1.2 billion. or US $188 million as of June 30, 2021. Now moving to discuss our outlook for 2021. On slide 16, as Sujai mentioned 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 is transitory. And thus, we are maintaining our expected revenue guidance range of RMB 615 to 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 Sujin. Thank you, Evan.
spk05: 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 liquid biopsy-based solutions across the food 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 market 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 the prepared remarks portion of today's call. So, operator, we are now ready for questions.
spk01: Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. And please stand by while we compile the Q&A roster. Once again, for your questions, Please press star and the number one and wait for your name to be announced. Our first question is from the line of Sungji Nam of BTIG. Your line is open. Please go ahead.
spk00: Hi. Thanks for taking the questions. So with HCC screen, 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 de-risking your plans for the rest of the year there?
spk05: Hi, Sanjeev. Thanks for asking the question about HGCC screen trial. So, as you know, this is one of the most trial 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 slowed 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 within this year. With that said, if the 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, as much as preparation as we can, and we're not ready today to share all the details, but like we said in the conference call, the learning 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 plan in the registrational trial sites across the nation. So I would say any regional COVID-19 outbreaks probably would not severely delay steps on this important trial. So overall, I would say we're on track. So again, we have exercised quite a few times already in the past is that we feel that we can get the trial done within next year, and we expect the approval sometime in 2023.
spk00: Gotcha. Great. That's very helpful. And then just in terms of HCC screen adoption, it seems like through your leveraging your partnerships, 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 rollout like ICOM, CPPQ, and the local, the municipal government partnership.
spk05: 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 With the project in Wuxi, the collaboration with the 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 generate revenues through this type of government collaboration, but also to create the data and to generate the, again, the healthcare economics model that we can leverage. And we still plan to, you know, to apply for, you know, reimbursement coverage provincial level or national level, you know, shortly after. you know, our kit, our assay, the HCC screen assay is approved in 2023. So, all these work are really laying down the foundation for that. And we believe that with this assay being approved by NAMPA with the likelihood of gaining, you know, the reimbursement coverage shortly after that, this could represent a major revenue ramping up opportunity ahead of us.
spk00: Great. And then lastly from me, congratulations on the econ-genomics partnership. I believe there's 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, this partnership, the revenue contribution side, you know, in 2023 and 2022, I'm sorry, and beyond?
spk04: Do you want to comment on that? Sure. Sanjeev, so obviously this is a new partnership. However, we view this as quite groundbreaking because this is the first step that we're expanding beyond the oncology field. Our S5, we'll work with EECOM to apply our S5 instruments to the reproductive health market which is with a lot of potential in China as well, given the current government policy to promote newborn babies' birth rates. As we push forward in partnership with ECOM, we do think that this represents a significant opportunity down the road. In this quarter, obviously, this is a new partnership, but in year 2022 or 2023, going forward, we do expect this will be a meaningful revenue driver for us as well for S5 Instruments.
spk05: Yeah, I still want to emphasize that this partnership Yeah, so, Sanjeev, you know, one thing to add here is you see that this is the partnership that opens the S5 application field beyond oncology, right? Just like Evan was saying, that reproductive health 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 can generate additional revenue contribution from the SPI platform.
spk00: Great. Thank you so much.
spk05: Thanks.
spk01: Thank you. Thank you. Our next question is from the line of Yang Wang of Credit Suisse. Line is open. Please go ahead.
spk03: Thanks. Yes, I have two questions. First of all, our IVD segment, we saw quite an impressive growth year over year. So can you give us a breakdown in terms of IVD, I mean, the equipment and the test kit numbers for IVD revenue breakdown?
spk04: Yeah. Hi, Yan. So for this quarter we had a relatively balanced split between IVD platform instruments versus the assets. The instruments has slightly, a little more versus the assets, roughly 60, 40% of split. As I mentioned just now during the call, We are very happy with the uptake 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 this trend, which we observed in Q2, is likely to continue in the next few quarters. As you know, we're very happy to continue to drive the IBD revenue, and also, more importantly, to drive up the contribution from the IBD assays, in particular, the aging lung cancer assay.
spk03: Okay, great. My second question is about HCC screen commercialization. So, I mean, we understand it's still early, but if management can give us any color, quantitatively any color on the commercial progress of HCC screen in the first half, that would be great.
spk05: The question is about the commercialization or the trial?
spk03: Yeah, commercialization of the screen. The actual, you know, any volume, color, or volume, or promotional force, or, you know, channel, which channel is the most significant for us right now. So that can help us, you know, continue to monitor the commercialization progress of the early screen.
spk05: Right, so right now we're probably not in a position to give a detailed breakdown of the numbers, but I can give you some color on the models that we have been setting up and we are trying to, we have been trying. And, you know, what I can say is that, you know, the partnership that was set up last year, for the ICOM channel, the health check chain channel, as well as the collaboration with the Wuxi government that we launched towards the end of last year, in Q4 last year. We have seen significant progress that we were able to achieve. to make this year, which means that these partnerships are generating a meaningful number of tests according to our plan. And I want to emphasize here that remember we emphasize the benefits of the Wuxi Collaboration Government. Not only are we going to generate the testing revenue, but also we're going to partner with the local government to create a cohort and the closely managed cohort with a meaningful size, or remember that the cohort is intended to be eventually about 150K people, right? And all the efforts are progressing well, and just like I said, addressing Sanjeev's question earlier, that we believe that with the experience and with the data, we will be able to accumulate from this very first, you know, the meaningful skills of government collaboration project on HHCC screen. We not only will position us for a potential, you know, the national provincial reimbursement coverage application, but also, you know, in the due course, we'll actually prepare us, give us more experience and data to show the other potential government, the regional government partners, and then we are actually working diligently on that. And the partnerships we have been launching this year, the partnership with the CTTQ and the partnership with Jingdong Online, and we're working hard with our partners to get through the initial phase. So like we discussed the NAS earning call, we feel that the more partners we work at this point, the faster or quicker we can educate the market and we can generate a good enough level of public awareness, which, again, eventually will help us to ramp up the revenue as fast as we can after the assay is formally approved, sometimes in 2023. So, all in all, I would say, you know, we have two work streams in HCCC screen, right? So one important work stream 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 sometime in 2023. And in parallel, the other very important work stream is just to get through all these different commercialization. platform to accumulate data and also accumulate enough experience for us to ramp up the remedy when everything's ready. So that's what we're working on now. I think, you know, generally speaking, we're very excited about the progress we have made and excited about the prospect of HCCC screening as, you know, potentially the very first liquid biopsy early screening assay to be approved in China, and it's huge. you know, the commercial potential here.
spk03: Okay, great. Thanks a lot.
spk05: And actually, one thing I probably want to add here, Yang, is that, you know, towards your first question, right, so you could see that the number of, you know, hospital partnerships, especially the IVD, the new hospital partnerships, you know, are, I think, the highest in the past quarter in Q2 among the last quarters. last few quarters. So this is apparently a good evidence that our focus on commercializing our, you know, molecular diagnostic solutions S5 plus lung aging cancer panel is working well. And we do expect that this trend will continue, if not accelerating.
spk03: Got it, got it. Thanks for the comment.
spk01: Thank you. Once again, for those who wish to ask a question, please press star and the number 1 and wait for your name to be announced. For your questions, please press star 1 on your telephones. It is star 1 for your questions. No question as of the moment. Please continue.
spk02: Well, thank you again for joining us for 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.
spk01: Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.
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