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Operator: 00:05 Good day, and thank you for standing by. Welcome to the second quarter twenty twenty one Genetron Health Earnings Conference Call. At this time, all participants are in listen-only mode.

And after the speakers presentation there will be a question and answer session. [Operator Instructions] And please be advised that today's conference is being recorded. [Operator Instructions] Now, I like to hand the conference over to your first speaker for today Ms. Hoki Luk. Thank you.

Please go ahead, ma'am.

Hoki Luk: 00:41 Thank you. Hello, everyone, and welcome to Genetron Health Second quarter twenty twenty one earnings conference Call. The company's earnings release was issued earlier today and is available on the company's IR website. 00:54 During this call, 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 nineteen ninety five. 01:08 Statements 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. 01:21 Further information regarding these and other risks is included in Genetron Health’s filings with the SEC. All information provider 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 on the applicable law. 01:41 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. 01:53 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. 02:05 Evan Xu, our CFO will provide financial highlights related to the unaudited second quarter results outlined in today's release, as well as twenty twenty one.

Following management's prepared remarks, we’ll open up the call to questions. During the Q and 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.

02:35 With that said, I would now like to turn the call over to Mr. Sizhen Wang, CEO of Genetron Health. Sizhen, please go ahead.

Sizhen Wang: 02:44 Thank you, Hoki. Good morning good evening, everyone.

Thank you for joining our second quarter twenty twenty one earnings conference call. So, I would like to directly do the supplemental earnings presentation with the Investor Relations website and begin on slide two. 03:01 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 cancer management. Our products will allow our customers to address patient needs and challenges from early screening, diagnosis and treatment recommendations as well as disease monitoring. 03:26 If you turn in to slide four in the second quarter, we delivered strong results.

With thirty eight point one percent top line year over year growth reaching revenue of RMB one hundred and forty point five million. Our revenue growth was also accompanied by notable margin improvements with gross margin at sixty seven percent compared to sixty three percent in the second quarter of last year. Thanks to improvements in both LDT and IVD business lines. 03:57 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.

04:12 However, recent 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 the world. Health officials in China have continued to stay on high alert, implementing stringent strategies to contain the spread. 04:37 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 by strict testing and other requirements. Trouble within areas where cases has have been reported, it also is also discouraged with quarantine rules in place.

04:58 As a result of these measures in Beijing and other high risk areas, such as Shanghai, Jiangning and Guizhou Provinces. Our business has been affected over the past few weeks. Particularly our LDT segment, which we realized on patient traffic. 05:16 So 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 normalize in 4Q, we do expect patient activity to improve from current levels similar to the rebound and the pent-up demand that we have experienced a few times over the last year.

05:39 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 [indiscernible]. In addition, our IVD segment has been growing stronger than our internal forecast. So 4q normalizes IVD sales traction expected to continue. The despite could be the 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. 06:20 Turning to Page five and six for our early screening business, we have begun the prep work for our NMPA registrational trial during the second quarter, the head-to-head trial which compares to HCCscreen versus ultrasound plus AFP remains on track with our plans to proceed with the enrollment this year.

And we continued the project potential NMPA approval of HCCscreen in twenty twenty three. 06:48 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. 07:04 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 its Guizhou Province’s Dafang County authorities by utilizing our HCCscreen assay. But 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.

07:31 The project seeks to bring leading cancer early screening products and service into China's rural markets enabling better technology and a more affordable healthcare options for more people in the country. 07:44 These types of initiatives are consistent with other supportive measures laid out and then being implemented by the Chinese central and other local governments. Under China’s State Council’s Healthy China twenty thirty plan, the goal is to increase five year cancer survival rate from the current roughly forty percent to over forty six percent or a fifteen percent growth rate. 08:08 As a leading NGS player in China, the rapid emergence of target [indiscernible] will increase demand for our diagnostics and monitoring business, as well as our biopharma services, whereas early detection particularly liver cancer also remains a focus for the government. 08:30 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 Genetron to be a continued beneficiaries from policy tailwinds. 08:55 So now turning to page seven on MRD side, our efforts are progressing well for Seq-MRD in blood cancer, this panel continues to be well received by our Biopharma partners. So, recently Seq-MRD 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. 09:25 Our broader LDT launch to the clinical setting, including and hospitals is expected to take place in the next couple of months.

Other studies in solid tumors including liver and lung cancer ongoing, and we look forward to sharing some initial data later this year or next year. 09:46 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 Onco Panscan, FusionScan, etcetera. We're also collaborating with biopharma companies co-developed CDx kit for their innovative drug candidates. 10:08 For example, our collaboration with system for the CDx test for Avapritinib has entered the priority review and approval processing in China.

And in U.S., our CLIA lab in Maryland is up and running providing us with a solid platform to offer services for cross-border trials and CDx developments. 10:30 With the booming Chinese biotech sector, we are optimistic about our growth in this business segment. And in second quarter, we have signed on additional three biopharma partners. Now totaling forty partners and we continue to see a strong pipeline. 10:49 And for our diagnosis business we expect to initiate the registrational trial for our tissue based large panel Onco Panscan in the next month or two.

This month, using Onco Panscan, our Beijing lab achieved full marks and was ranked first in NCCL’s External Quality Assessment of comprehensive genomic profiling panels. 11:12 We continue to be a leading LDT player in China and we're planning to providing other types of LDT assets to enrich this product business. And for the IVD segment that we just announced a new partnership with Shanghai Yikon Genomics, record that Genetron own the CDx version of the S5 instrument in China, and with this partnership, we will work with Yikon apply S5 in reproductive health field in the China market. And Yikon currently offers pre-pregnancy, prenatal on an inheritance disorder testing solutions for a network of over four hundred hospital partners in China. 11:55 Genetron will also support their commercial efforts.

Overall, we’re pleased to expand application potential of S five. 12:03 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 and in our fully elevated solutions, we offer end to end fast turnaround and the seamless workflow 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.

12:44 So, I will now turn the call over to our CFO, Mr. Evan Xu to provide more details on our second quarter financials. Evan?
Evan Xu : 12:52 Thank you, Mr. 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 that all comparisons are made on a year over year basis. 13:06 Starting on slide eleven. In the second quarter, total revenue increased by thirty eight percent to RMB one hundred and forty one million, from one hundred and two million in the same period of twenty twenty. 13:20 Diagnosis and the monetary revenue increased by thirty nine point four percent to one and thirty one million dollars in the second quarter this year, from ninety four million dollars in the same period of twenty twenty. 13:34 LDT revenue increased by fifteen percent to eighty seven million during the second quarter twenty twenty one from seventy six million dollars in twenty twenty.

LDT diagnostic tests sold in the second quarter twenty twenty one totaled approximately six thousand eight hundred and forty units compared to about six thousand seven hundred tests in the same period of twenty twenty. 14:02 Notes, that it was 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 test HCCscreen. We continue to be pleased with HCCscreen sales uptick and a growing adoption in the market. We’ll continue to support from our collaborations.

This include work while doing with JD Health [indiscernible] government. 14:38 Moving to Slide twelve. IVD revenue increased by one hundred and forty two percent to RMB forty four million in the second quarter twenty twenty one from eighteen million in the second quarter twenty twenty. 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.

15:11 As of the end of second quarter, we now have a total of fifty hospital contracts, including twenty eight IVD ones. We're pleased with the trend of hospital ads in this quarter and anticipate this to continue. I expect the installation base would drive our and overall sales in the coming quarters. 15:35 Revenue generated from development services increased by twenty two percent to RMB nine point five million in the second quarter twenty twenty one. From seven point eight million in the same period of twenty twenty.

Biopharmaceutical revenue growth increased substantially in the second quarter of twenty twenty one compared to last year. We continue to focus on increasing our higher margin biopharma services efforts. 16:03 Cost of revenue increased by twenty three percent to RMB forty six million for second quarter twenty twenty one compared to RMB thirty eight million in the same period of last year. 16:18 Moving to Slide thirteen, gross profits increased by forty seven percent to RMB ninety five million in the second quarter of twenty twenty one from sixty four million in the same period of twenty twenty. Gross margin improved to sixty seven point two percent for the second quarter twenty twenty one compared to sixty three point one percent in the same period of twenty twenty.

Thanks to improvement in both LDT and IVD business lines. 16:47 In particular, gross margin for our LDT segments was seventy one percent compared to seventy point one percent a year ago. For IVD, gross margin was seventy one point four percent versus fifty five point three percent in the second quarter last year. Due to higher margins in both instruments and assays. 17:10 Thanks to our One-Step Seq technology and our capability to manufacture the 8-gene Lung Cancer Assay with our own raw materials sources, our asset gross margin continues to improve.

17:25 Operating expenses increased by sixty six percent to RMB one hundred and ninety five million for second quarter twenty twenty one from RMB one hundred and seventeen million in the same period of twenty twenty. 17:41 Operating expenses are broken out on slide fourteen and our

as follows: Selling expenses increased by forty six percent to RMB eighty nine million in the second quarter of twenty twenty one from sixty one million in the same period of twenty twenty. Selling expenses as a percentage of revenue increased to sixty three percent slightly in this quarter, compared to approximately sixty percent in the same period of twenty twenty. The increase was primarily due to higher marketing expenses as well as employee compensation expenses. 18:22 Administrative expenses increased by ninety six percent to RMB fifty five million in the second quarter twenty one from twenty eight million in the same period of twenty twenty.

Administrative expenses as a percentage of revenue increased to thirty eight point eight percent in this quarter, from twenty seven point four percent in the same quarter last year. The increase was mainly driven by higher headcount, higher professional fees, otherwise infrastructure costs such as IT expenses. 18:59 Research and development expenses increased by eighty eight percent to RMB fifty six million in this quarter from RMB thirty million last year. R and D expenses as a percentage of revenue increased to forty percent in the second quarter this year from twenty point three percent in the same period of last year. 19:19 The increase was driven by higher R and 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 one hundred million for this quarter compared to fifty three million last year on slide fifteen. 19:46 Net loss for the period was RMB ninety two million for this quarter compared to RMB billion in twenty twenty. This was primarily because last year, the company had close to RMB billion in fair value loss or financial instruments with preferred rights before the IPO that was now in the second quarter this year. 20:12 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 eighty million for the second quarter of twenty twenty one compared to RMB forty four million, for the prior year. 20:43 Basic loss per ordinary share was [RMB 0.20] (ph) for the second quarter this year compared to RMB seventeen point zero four for the same period of twenty twenty. Non-IFRS basic loss per ordinary share was RMB seventeen cents for the second quarter this year compared with RMB twenty six cents for the same period of twenty twenty. Diluted loss per ordinary share is equivalent to basic loss per ordinary share. 21:18 We have a strong cash position, cash and cash equivalents restricted cash and current financial assets at fair values through profit and loss were close to RMB one point two billion or U.S.

million as of June thirty, twenty twenty one. 21:42 Now moving to discuss our outlook for twenty twenty one. On slide sixteen, as Sizhen mentioned at the beginning of the call, over the last several weeks, COVID-related restriction have impacted many areas in China. 21:59 At this point, we believe the heightened situation is transitory And thus, we are maintaining our expected revenue guidance range of RMB six hundred and fifteen to six twenty five 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 through the market at that time.

22:27 This concludes the discussion of our second quarter financial results. I will now turn the call back to Sizhen.

Sizhen Wang: 22:34 Hey, thank you, Evan. In closing, we’ve had a successful first half of twenty twenty one financially and operationally. So shown on slides eighteen and nineteen, our strategic focus going forward will be to accelerate the development of 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.

23:08 So overall, not 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. 23:36 So, this concludes the prepared remarks portion of today's call. So, operator, we are now ready for questions.

Operator: 23:43 Thank you. [Operator Instructions] First question is from the line of Sung Ji Nam of BTIG. You've is open. Please go ahead. Sung

Ji Nam: 24:14 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 risk 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?

Sizhen Wang: 24:41 Hi Sung Ji. Thanks for asking the question about HCCscreen trial. So, as you know, this is one of the most trial that we're planning and 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-nineteen slowed down our pace a little bit. So, however, with everything already in place pretty much, we do still have fear high level confidence, so we can start the enrollment within this year. 25:22 With that said, if COVID-nineteen 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 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 as we unfold the clinical trials plans for the rest of this year.

But what I can say here is that we have planned registrational trial sites across the nation. 26:13 So, I would say any regional COVID-nineteen outbreaks probably would not severely delay our steps on this important trial. So, overall, I would say we're on track. So again, that 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 twenty twenty three. Sung

Ji Nam: 26:46 Got you.

Great. That's very helpful. And then just in terms of HCCscreen adoption it seems like through your leveraging your partnerships, that's also going well. Just kind of curious if you might be able to elaborate further on the different partnerships, whether one of them standing out or if they're all tracking kind of according to how you anticipated the different partnerships to really rollout out like Yikon, CTTQ, and municipal government partnership?
Sizhen Wang : 27:24 Right, as you could see that, we're setting up all these partnerships for different purposes. But we in general, folks on building the market awareness and we focus on testing a model that can be.

Right? I would say here is that the project in Wuxi, the collaboration with Wuxi government is going very smoothly. We do have a plan to the same model elsewhere in China. 28:02 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 again the healthcare economics model that we can leverage and we still plan to apply for a reimbursement coverage level or national level shortly after our kit, our assay HCCscreen assays approved in twenty twenty three. 28:46 So, all these work are really laying down the foundation for that. And we believe that with this asset being approved by NMPA with the likelihood of gaining the reimbursement coverage shortly after that.

This could represent a major revenue ramping up opportunity ahead of us. Sung

Ji Nam: 29:14 Great. And then lastly from me, congratulations on the Yikon Genomics 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 this partnership, the regular contribution side in twenty twenty three and twenty twenty two, I'm sorry and beyond?
Sizhen Wang : 29:39 You want to comment on that?

Evan Xu: 29:41 Sure. Sung Ji.

So obviously, this is a new partnership. However we view this as quite a groundbreaking because this is the first step that we're expanding beyond the oncology field, right? Our S5 will work with Yikon 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. 30:18 So, as we push forward in partnership with Yikon, we do think that this represents significant opportunity down the road. This year, this quarter obviously is a new partnership, but in year twenty twenty two or twenty three, going forward, we do expect this will be a meaningful revenue driver for us as well, S5 instruments.

Sizhen Wang: 30:52 Yeah.

I just [indiscernible] that this partnership. Yes. So Sung Ji, something – the one thing 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 generate additional revenue contribution from the S5 platform.

Sung

Ji Nam: 31:31 Great. Thank you so much.

Sizhen Wang: 31:35 Thanks.

Operator: 31:36 Thank you. Thank you.

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

Yang Huang: 31:47 Thanks. Yes.

I have two questions. First one on our IVD segment. We saw quite impressive growth year-over-year, can you give us a break down in terms of IVD? I mean the equipment and the [indiscernible] members for revenue [indiscernible]?
Evan Xu : 32:15 Yeah. Hi. So for this quarter, we had relatively balanced split between platform instruments versus [derivatives] (ph).

The instruments has slightly a little more versus that is roughly sixty forty percent of split. As I mentioned just now 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. 32:58 So, as we continue to increase the installation base, right now, we have twenty eight hospital IVD partners already. And we expect this trend, which we observe in Q2 is likely to continue in the next few quarters as we're happy to continue to drive the IVD revenue and also more importantly to drive up the contribution from the IVD assays in particular the 8-gene Lung Cancer Assay.

Yang Huang: 33:35 Okay, great. My second question is about HCCscreen commercialization. So I mean we understand [indiscernible] but if management can give us any color on the commercial progress of HCCscreen in the first half that will be great?
Sizhen Wang : 34:04 The question is about a Yikon. So question is about the commercialization or the tile?

Yang Huang: 34:10 Yeah. Commercialization of HCCscreen, well actual you know any volume color promotional thoughts, channel, which channel most significant? So, so that's kind of how [indiscernible] commercialization programs off early screen?

Evan Xu: 34:37 Right.

So right now, we're probably not in a position to give a [beat held] (ph) breakdown of the numbers. So but I can give you some color on the models that we have been setting up and then we tied to – we have been trying. And what I can say is that the partnership that was set up last year for the Yikon channel, the Health Check Chain channel, as well as the collaboration with the Wuxi Government that we launched toward the end of last year in Q4 last year. 35:22 We have seen significant progress that we were able 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, remember we emphasize the benefits of the Collaboration governments.

Not only we're going to generate the testing revenue, but also we're going to partner with the local government to create a cohort. And the closely manage cohort is a meaningful size. 36:01 Remember the cohort is intend to be eventually about one hundred and fifty thousand people, right? And all the efforts are progressing well. And just like I said, addressing Sung Ji’s question earlier that we believe that with the experience and with the data we will be able to accumulate from this very first – the meaningful skills of government collaboration project HCCscreen. 36:31 We not only will position us for a potential the national provincial reimbursement coverage application, but also in the course will actually prepare us give us more experience and data to show the other potential government regional government partners and then that we are actually working diligently on that.

36:56 And the partnerships we have been launching this year, you know with the partnership with the CTTQ and the partnership was Genetron online, and we're working hard with our partners to get through the initial phase. 37:15 So like we discussed the last earnings call, we feel that the more partner we work at this point the faster or quicker we can allocate educate the market and 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 assays formally approved sometimes into twenty twenty three. 37:44 So all-in-all, I would say we have two work stream HCCscreen, right? So one important 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 sometimes in twenty twenty three. 38:09 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 revenue when everything is ready.

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

Yang Huang: 38:49 Okay, great. Thanks a lot. Evan Xu : 38:54 And actually one thing I probably want to add here Yang is that towards your first question, right, so you could see that the number of the hospital partnerships, especially the IVD, the new hospital partnerships are I think the highest in the past quarter in Q2 among the last quarters, last of few quarters.

So, this is actually a good evidence that our focus on commercializing our molecular diagnostic solutions S5 plus lung aging cancer panel is working well. And we do expect that this trend will continue if not accelerating.

Yang Huang: 39:40 Got it Got it. Thanks for the comment.

Operator: 39:46 Thank you.

[Operator Instructions] No question as of the moment. Please continue.

Hoki Luk: 40:24 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.

Operator: 40:40 Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.

Sizhen Wang: 40:50 Thank you.

Evan Xu*: 40:51 Thanks.