Operator: Good morning, and thank you for standing by. Welcome to the First Quarter 2022 Genetron Health Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Evan Xu, CFO at Genetron Health. Please go ahead. Evan Xu : Hello, everyone, and welcome to Genetron's first quarter 2022 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 provision of the US 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 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. Sizhen Wang, Co-Founder, Chairman and CEO of Genetron Health, will discuss recent business updates and upcoming catalysts. And I will provide financial highlights related to the unaudited first quarter results outlined in today's release, as well as our outlook for 2022.

Following management's prepared remarks, we will 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 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. Sizhen, please go ahead.

Sizhen Wang: Thank you, Evan. Hello everyone.

Thanks for joining our first quarter 2022 earnings conference call. I would like to direct you to the supplemental earnings presentation on our Investor Relations website and begin on slide two. As a leading provider of precision oncology product services in China, our comprehensive portfolio covers the entire spectrum of cancer management from early screening and therapy selection to MRD monitoring and the development of CDx with biopharma companies. In each of the segment, we are increasing adoption and penetration of our products. Turning to slide four, the first quarter was rather productive for Genetron.

We continue to demonstrate the strength and increase awareness for our precision oncology platform. The recent highlights include a new CDx collaboration agreement with HUTCHMED for their ORPATHYS, drug for non-small cell lung cancer using our marketed 8-gene lung cancer assay. Receiving the CE Mark of the Seq-MRD kit for the detection of hematologic cancers as well as FusionScan Plus, which uses integrated DNA and RNA as templates for genetic alteration detection. A peer-reviewed publication of Mutation Capsule’s potential in MRD asset development in Clinical and Translational Medicine, as well as 17 clinical data presentations at the American Association for Cancer Research Annual Meeting. In the first quarter of 2022, we grew diagnostics and monitoring revenue by 14% to RMB99.5 million, of which IVD in hospital sales rose 18%, driven by greater adoption of our sequencing platforms in assays, including the Genetron S5 instrument and 8-gene Lung Cancer Assay.

As we have mentioned, we plan to prioritize and further penetrate this reimbursed in-hospital market with our solutions. We have gained solid traction here and increased the number of contracts of in-hospital pharmacists to 31 at the end of the quarter and are excited to build on this moment. On the LDT side of the business, we grew revenue by 14%, of which diagnostic test volume grew about 9% year-over-year in the first quarter. We continue to operate in a challenging environment, where COVID outbreaks and the zero COVID policies are affecting commercial opportunities across healthcare facilities. Relatively speaking, within our portfolio, the LDT business was more heavily impacted by virus containment policy, which caused declines in patient traffic to many of our LDT customers.

Our development services revenue more than doubled in the quarter. In addition to higher sequencing revenues, the growth was also a result of an increasing biopharma partnerships and the meaningful progress we are making with each. Against the backdrop of a challenging operating environment, we are committed to forging ahead with our major top line assets that we expect will be key drivers for our future growth. So on slide five, let me start off with our early screening segment. In November 2021, we initiated NMPA registration trial for our HCC early detection assay by beginning the enrollment for the trial of our methylation multi-marker PCR based assay, HCCscan.

Recall that this was a 5,000-patient trial in nine clinical sites, and we intend to select a few of these sites for our multi-omics NGS based HCCscreen trial. As a result of COVID disruptions, the HCCscreen trial has been delayed, and we now project to begin rolling subjects in third quarter. We continue to believe that this structure of both PCR and NGS tests is the best strategy to help the most patients and expand the addressable market for the assays. There is a more established PCR infrastructure with rapidly available workflows in many hospitals and clinics in China. Based on the nucleic acid testing needs and associate government-led infrastructure builds since COVID, PCR capabilities continue to increase across healthcare systems in China.

Additionally, a few months ago, a DNA methylation and other genetic testing were added to some Beijing and other provincial insurance programs. This reimbursement published a benchmark price of around RMB800 for methylation-based tests and around RMB1,500 for NIPT NGS-based testing. Based on these dynamics, we believe that adding a high-performing PCR-based assay would be commercially viable, while also providing self-pay patients in lower-tier markets with a cost optimal solution. Overall, we are confident that we can deploy both in-hospital and central lab models to increase accessibility and efficiently penetrate the liver cancer early screening market. As for our HCCscreen plans in the US, we have started a confirmatory study with two medical institutions in the US and may present the data at an upcoming conference.

So, beyond liver cancer, we have planned to develop multi-cancer products in the future. We have already shared some early retrospective CRC data during our last earning calls, showing over 91% of sensitivity and 95% specificity. We continue to expect to have CRC data published sometime in 2020. So turning to Slide 6. On the MRD side, recall that we have announced a exciting multiyear co-development agreement with AstraZeneca R&D China for an NGS-based personalized MRD test for solid tumors in China.

MRD testing has the potential to help in the clinical management for patients well before metastatic lesion grow to the size detectable by conventional methods, such as MRI and CT scan. With this partnership, AZ plans to use this co-development MRD test for China-specific solid tumor clinical trials that are designed to incorporate the use of NGS-based personalized MRD test. The assay optimization is currently ongoing and expect to finish by end -- by year-end. Concurrently, we're also planning a pilot LDT launch in the second quarter and expect to expand the official launch before year-end. So now moving to Slide 8.

The assay would be developed based on Genetron's patent Mutation Capsule platform, a method for detecting mutation methylation of tumor-specific genes in ctDNA. The mutation capsule platform enables multiple test analysis based on a single cfDNA sample, providing head-to-head comparisons between multiple MRD strategies, such as personalized and non-personalized assays as shown in Slide 9 and 10. With some of the early data we generate from gastric rectal and liver cancer patients. The liver data was recently published in clinical and translational medicine, demonstrating the technology's potential in MRD assay development. The Mutation Capsule also allows more sensitive detection in low-yield cfDNA samples with higher conversion efficiency of cfDNA molecules.

Beyond tumor-informed MRD assay, we're also exploring tumor naïve MRD approach based on the same technology platform. We look forward to sharing more updates as these programs proceed. Currently, there are only a handful of companies in China that may have the capability to develop a high perform MRD assay. We continue to be optimistic about the MRD solid tumor market in China and in particular, Genetron's competitive position after the AstraZeneca collaboration. On Slide 11, for seq-MRD in hematological malignancies, our exclusive partnership with Fosun Pharma in China is progressing well.

We have expanded our clinical launch in the second quarter. This assay is also generating many dialogues with biopharma owners and we anticipate a few more partners to sign on in the next few months. Although, we're pleased with continued support by the healthcare authorities of MRD testing in hematological malignancies in China and we believe that our NGS based seq-MRD represents a innovative and differentiated solution. So now turning to slide 12, moving on to discuss our biopharma service business. In the first quarter, we have signed on additional four biopharma partners, increasing the total now to 64 partners.

We continue to maintain a strong pipeline, as we have the opportunity to form partnerships through our key products, including Seq-MRD, Onco PanScan, FusionScan and others. So recently, we have announced our CDx partnership with HUTCHMED for savolitinib in non-small cell lung cancer, using our already marketed 8-gene lung cancer IVD assay. As mentioned, our 8-gene lung cancer assays are already gaining very good traction in the IVD in-hospital use market. We're excited about this partnership as it is our second major CDx after our first one CStone for avapritinib, which has entered the NMPA priority review and approval process. In China, the trend of CDx demand is growing stronger, resulting from NMPA's increasing focus on genomic testing for innovative targeted immunotherapies.

Together with our CLIA lab in Maryland, we have excellent opportunities to work on cross-border trials and CDx developments. We anticipate continued strong growth in this business segment. So now I will turn the call over to our CFO, Mr. Evan Xu, to provide more details on our first quarter financials. Evan?
Evan Xu : Thank you, Sizhen.

So please note that all numbers provided are in RMB terms and that all comparisons are made on a year-over-year basis. Starting on slide 15. In the first quarter, our total revenue increased by 19.8% to RMB110 million, from RMB92 million in a same period of 2021. Diagnosis and monitoring revenue increased by 14% to RMB100 million from RMB87 million in the same period of 2021. LDT revenue increased by 13.5% to RMB22 million during the first quarter.

LDT diagnostic tests sold in the first quarter increased by 9% to approximately 5,560 units. We are pleased with our early screening sales uptake as well, with continued support from all of our key collaborators. Moving to slide 16. IVD revenue increased by 18% to RMB18 million in the first quarter 2022 from RMB15 million in the last year -- in the first quarter last year. The increase was mainly driven by sales of both Genetron S5 instrument as well as the 8-gene lung cancer assay.

Revenue generated from development services increased by 117% to RMB10.8 million in the first quarter this year from RMB5 million in the same period of 2021. This was primarily driven by both the increase of sequencing and biopharma services revenues. Moving to slide 17. Cost of revenue increased by 30% to RMB49 million for the three months ended March 31, 2022, compared to RMB38 million in same period of last year. As a result, gross profit increased to RMB62 million in the first quarter this year from RMB55 million in the same period of last year.

Gross profit margin was 56% for the first quarter this year, compared to 59% in the same period of last year. Specifically, gross margin for our LDT segment was 64% compared to 68% a year ago, primarily due to promotional activities related to HCCscan. We expect this impact to be temporary and these promotional activities will end in near term. For our IVD segment, gross margin was around 50% versus 34% in the prior year, thanks to higher consumable sales. Operating expenses increased by 48% to RMB241 million for this quarter from RMB164 million in the prior year.

Operating expenses are broken out on slide 18 and are as follows; selling expenses increased by 52% to RMB91 million in this quarter from RMB60 million in the same period of 2021. Selling expenses as a percentage of revenue increased to 82% in this year -- in the first quarter this year from around 65% in 2021. The increase was primarily driven by increased headcount in the sales and marketing team to expand Genetron's core business, including our early screening efforts. And because of the -- partially because of the COVID impact, the revenue growth for this quarter has been affected. We expect the sales headcount to remain stable and the sales efficiency to improve in the quarters to come.

Administrative expenses increased by 13% to RMB50 million in this quarter from around RMB45 million in 2021. Admin expenses as a percentage of revenue decreased to 46% in the first quarter from 48% in the prior year. R&D expenses increased by 59% to around $80 million in the first quarter of 2022 from around $50 million in the same period of last year. R&D expenses as a percentage of revenue also increased to 72% in this quarter compared to 54% last year. The increase was driven by both higher R&D headcount, as well as continued investments in core product development and clinical trial activities such as HCCscan.

As a result, operating loss was $180 million for this first quarter compared to RMB109 million last year. On slide 19, net loss for the period was RMB175 million compared to RMB115 million for the first quarter of 2021. For non-IFRS net loss, this excludes share-based compensation expenses, fair value change, and other losses of financial instruments with preferred rights. Non-IFRS net loss was RMB164 million for this quarter compared to RMB106 million in the prior year. Basic loss per ordinary share was RMB0.38 for this first quarter compared to $0.25 for the same period of 2021.

For non-IFRS net loss, per ordinary share this quarter is $0.35 and for the prior year was $0.23. Diluted loss per ordinary share is equivalent to basic loss per ordinary share. We have cash and cash equivalents in the current financial assets at fair value through profit and loss at RMB559 million as of March 31st, 2022. Now moving to discuss our outlook for 2022. Let's go to Slide 20.

In January, our LDT revenue actually grew rather strongly with a year-over-year growth of nearly 30%. However, the trend took a turn in the following months. In March, LDT revenue experienced a single-digit year-over-year decline, as COVID cases were rising in Shanghai, Shenzhen and several parts of the country. In April, we saw even more -- even deeper negative double-digit year-over-year decrease for our LDT revenue. Many of you may have heard about the severe COVID-related measures in Shanghai, in particular, that began at the end of March until actually very recently, only until June 1, basically one day ago, Shanghai starts to gradually open up.

As a result, it has been extremely difficult for us to conduct any activities in this particular city, which has had a negative impact on our businesses, in particular, LDT revenues. Ongoing spread has been happening in Beijing and other cities and the mass testing continues. In fact, our lab in Beijing where our headquarter is based is also participating in government-led COVID testing programs. While the situation is challenging for our operations, it has negatively impacted our business – our core business volumes, we are very glad that Genetron could step up and take action against fighting COVID together with relevant government authorities. In addition to Shanghai and Beijing, fresh outbreaks in some of our key markets may continue to emerge.

These flareups are addressed through the rigorous zero COVID precautions, which weigh on our ability to drive growth. In regards to our financial guidance, in March, when we provided our 2022 revenue projection, we had anticipated that in challenging business environment would persist and have baked in a relatively conservative assumption. Further, in May, we are seeing some positive signs of recovery. We hope we can catch up some of the losses in the second half of the year. But at this point, we are maintaining our revenue guidance to be around RMB 585 million to RMB 638 million or around 10% to 20% of growth compared to year 2021.

We will closely monitor the COVID-19 trend and evaluate its impact to our business and provide updates in due course. This concludes the discussion of our first quarter financial results. I will now turn the call back to Sizhen.

Sizhen Wang: Thank you, Evan. In closing, we're pleased with the success we have achieved both financially or operationally in the face of adversity related to COVID.

I would like to emphasize the strong underlying long-term fundamentals of our business that position us very well to drive substantial growth through continued commercial, clinical and pipeline development execution. Shown on Slides 22 and 23, we remain focused on the development of liquid biopsy-based solutions across the full-cycle cancer management, particularly in early screening, MRD and the CDx, while continuing to ramp up our commercialization efforts and grow our core business. For our IVD in-hospital model, in addition to the expanding hospital partner base, we have also made good progress on the inclusion of the approved IVD kits into procurement systems and/or price list in more than 20 provinces. For example, with our 8-gene lung cancer assay, which represents as one of the most clinically important test for non-small cell lung cancer, we continue to believe that the government reimbursement inclusion would be -- could be established for certain regions in the next 12 to 24 months. This would represent a meaningful driver for increased penetration and market share.

In addition, as we can see on slide 24, we have a catalyst-rich pipeline over the next couple of years to create substantial opportunities for our organization. Over the past few years, our investments and expanding capabilities have positioned us as a leading player in this market and created significant long-term strategic value. Our organizational build-out is largely completed, and one of our priorities is also to improve operational excellence in order to improve margins and losses going forward. So this concludes the prepared remarks portion of today's call. Operator, so we're now ready for questions.

Operator: Thank you. [Operator Instructions] We have a question from Yang Huang with Credit Suisse. Your line is open.

Yang Huang: Thanks, management, for giving me opportunity to ask question. So I have quickly two questions.

First on 2Q performance, so I think you mentioned in March and also in April, we are seeing some revenue impact. I would like to understand what is going to be impacted to our margin for the second quarter, given lockdown and other situations? That's my first question.

Sizhen Wang: You mean the magnitude of the impact or…

Yang Huang: Yes, yes. Margin, yes.

Evan Xu: Okay.

So, yes, first of all, in second quarter, as I mentioned that April was probably the worst month so far, given the hope that was really -- some of our key markets was deeply in the lockdown mode, in particular, Shanghai and some Northeast provinces. So actually, we saw a double digit, around 30% of decrease year-over-year for April. The good sign is that, in May we see some recovery, especially in Northeast markets. So all in all -- although Shanghai was still in a lockdown mode, right, for the entire May. So all in all, for May, the situation was better compared to April, but it's still negative double digit.

So now starting from 1st of June, we will try -- Shanghai is gradually recovering, and we'll do our best to capture business opportunities and some pent-up demands in the CT. So, hopefully, by end of second quarter, which means June, we should have catch-up compared to last year in terms of LDT revenue. I think all-in-all, second quarter we -- pretty hit by the COVID in terms of volume and revenue. In terms of margin for LDT, I think that will have accordingly will be impacted as well, given a significant portion of the fixed cost remains unchanged. So it's hard to say with a precise number, but we'll have close eye on this.

Yang Huang: Okay. And so…

Sizhen Wang: Yes. To add up on that, one thing is that we have over this COVID outbreaks in Beijing. We have -- we mentioned in the earnings call that we have started participating in the government-led COVID testing programs. So therefore, some of our essentially unused lab capacity due to the impact that the COVID has been leveraged to provide the COVID testing, which means that, that part will contribute to some of the revenues in Q2 as well as share essentially some of the costs -- the fixed costs that Evan have just mentioned.

So that will serve as a stabilizing factors in terms of overall financial metrics for Q2.

Yang Huang: Yes. Thanks. My second question is about our collaboration with AZ on the MRD program. So can you give us some kind of more details on, let's say, what kind of cancer type we want to target at first? And on the cost side, are we going to kind of share development costs with AZ in terms of revenue or profit in the future? Are we going to also share with AZ? Thanks.

Sizhen Wang: Yes. So this is obviously a very important collaboration that we have developed with biopharma partners, right, especially with AZ. So, as we discussed before in previous conversations, this is in fact, a co-development partnership here, which means that both sides will invest into the development and the validation of these assays. And upon the completion of the validation of the personalized MRD in a technology platform under the test that AZ is committed to use this assay exclusively for their China-specific trials. And these assays intended to be used on the multi-cancer essentially is a pan-cancer personalized MRD assay.

Yang Huang: I see. But are we going to own the IP by ourselves or are IP also going to join owned by us and AZ?

Sizhen Wang: Yes. So, essentially, the IP of the technology platform itself is owned by us, right? So, in terms of the product, it's kind of like a joint ownership in certain cases. So, the commercialization upon – so as I mentioned, upon the completion of the validation and development of this assay, will be kind of the two-folds, right. First of all, AZ is committed to use this assay and pay for the service, essentially for the assay and the testing service, again, exclusively on all their related China-specific trials.

So, that's the first layer of the commercialization arrangement we have made. So, the other layer of the arrangement that is likely we will form a commercial partnership to promote this assay in a clinical setting. I mean, when I say clinical setting, I mean to serve the patients. So, that commercial -- the collaboration details is actually to be first discussed and to be finalized. But the both sides are excited that we will be able to co-develop this assay with essentially the technology from Genetron and samples and data from AZ plus the investment from both sides, and we see quite a bright future to incorporate this -- essentially incorporate or commercialize this assay in both the clinical trials as well as to serve the patients in the clinical setting.

And it's likely we'll be expanding this potential collaboration to a more broader market as well in the future.

Yang Huang: Got it. Thanks.

Operator: Thank you. [Operator Instructions] And I'm showing no other questions in the queue.

I'd like to turn the call back to management for any closing remarks.

Evan Xu: Okay. Thank you, operator and thank you, everyone. Thank you again for joining us for the first quarter earnings and business update call. We appreciate your ongoing support.

If you have any questions, please do not hesitate to reach out to us. Thank you.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Everyone, have a great day.