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The Implications Behind Genetron Health's Latest Earnings Report

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Genetron Holdings Limited (NASDAQ: GTH) recently announced its latest fiscal report, elaborating its progress in the oncology genetic testing industry. The China-based company provides early tumor screening services. According to the World Health Organization, there were approximately 100 million people that had died from cancer worldwide in 2020, and the death toll caused by such diseases is projected to surge to 163 million by 2040. But research has proved that early screening medication can significantly improve the treatment and the quality of life of cancer patients while reducing mortality and treatment costs.

In terms of types, oncology genetic testing can be divided into pan-cancer early screening and single-cancer early screening. The former requires more advanced technology and can be used to test targeted people without explicit risk of having cancer, while the latter is more efficient to test people who have an evident family history of cancer and are high-risk.

Founded in 2013, Genetron Health provides services covering the entire spectrum of cancer management, including early screening, diagnosis and recurrence testing. In the promising space of early screening of cancer, the company works to promptly validate early screening products for specific cancers and then commercializes them.

For instance, its early screening assay for liver cancer, which was conducted by a prospective cohort of more than 1,600 cases, developed far ahead not only the domestic peers but also rarely seen among the global rivals in terms of scale. What’s more, the company also disclosed the data of a retrospective case-control study for its blood-based CRC early screening product, demonstrating >91% sensitivity with the specificity of 95%.

Full details are scheduled to be launched through a publication in 2022.

From the perspective of losses in recent years, despite the net margin of the company still being negative, its net loss gap is narrowing by comparing its previous earnings reports. But the improvement in profits has not yet been reflected in its stock price and market cap as its current price-to-book (PB) is 4.15, which is well below the historical average.

Single-Cancer vs. Pan-Cancer

Burning Rock Biotech Ltd (BNR. US), an enterprise that specializes in the development and research of pan-cancer testing, also released its latest financial report in the last month.

Both Burning Rock and Genetron Health both aspire to achieve the goal of early screening full-spectrum cancers though they are now struggling in two different directions on the liquid-biopsy-based cancer early screening track. Specifically, Burning Rock develops far ahead in the territory of screening for pan-cancer while Genetron Health has a more successful experience of research and faces a less challenging cash flow.

Reference to Burning Rock’s third quarter earnings report, its overall revenue only grew by 2.2% to RMB 126 million for the quarter, with laboratory testing income, a major source of revenue, dropping 12.3% over the same period of last year. It attributed the decline of revenue on the diving population that received testing amid the COVID-19 pandemic. In contrast, Genetron Health’s third-quarter results registered as good as the second quarter, which posted revenue of RMB 152 million (US$23.7 million), outperforming Burning Rock.

In terms of expense, let’s put a closer eye on the two companies’ spending on R&D. From the third quarter earnings report of Genetron Health, its investment in this part increased by 61% year-on-year to RMB 624 million (US$ 9.7 million) in the third quarter of 2021, which as a percentage of revenues increased to 41.3% in the quarter. For Burning Rock, it poured RMB 696 million (US$ 10.8 million) into R&D, though a slight increase of 0.5% year-on-year, saw a moderate decline over the second quarter, according to its third quarter results.

In terms of commercial cooperation, both companies have recently entered into major partnerships that will lay the groundwork for their future growth in cancer detection. Burning Rock announced a strategic partnership with Merck KGaA, Darmstadt, Germany, in companion diagnostics (CDx) development for a pipeline of drugs in the field of synthetic lethality.

Genetron Health signed an exclusive collaboration agreement with AstraZeneca R&D China (NASDAQ: AZN) after the announcement of the results for the co-development in China of next-generation sequencing (NGS)-based tumor-informed (personalized) minimal residual disease (MRD) tests. They will jointly invest capital for this collaboration and will work together to develop and validate the personalized, solid tumor MRD assays for cancer assessment and monitoring based on the genetic variation atlas from an individual patient’s primary tumor.

Tumors in patients’ bodies nowadays can be detected and removed through surgery earlier as the early screening technology and higher precision oncology drugs have been widely used. So far, medicine iconography technology such as computed tomography (CT), nuclear magnetic resonance (NMR) has some limitations in terms of sensitivity and specificity, but MRD detection technology show more excellent sensitivity than CT or NMR. Under its real-time monitoring mechanism for tumor recurrence, the technology can detect the remnant of tumor DNA fragments in blood earlier, and get the disease prevented and treated in the early stage of cancers in a bid to save patients’ life as much as possible. This is a huge market opportunity much bigger than the diagnostic market.

According to a survey by Leerink researchers, they estimated that the market size of MRD in the USA could be around US$ 24-30 billion, ~5x bigger than the traditional therapy selection market. The market is also sizable in China, where there is a much larger patient base and where the watchdog is aggressively promoting early screening technology and advanced oncology drugs.

Additionally, Chinese clinical specialists have been very welcoming to new technologies, including MRD. For example, the first domestic Consensus on Detection and Clinical Application of MRD in Lung Cancer was released at the 18th Lung Cancer Summit in Guangzhou, China. It was clarified that MRD of lung cancer refers to molecular abnormalities of cancer origin that cannot be detected by traditional iconography (including PET/CT) or laboratory methods after getting treatment, but can be found by liquid biopsy, such as ctDNA with an abundance ≥0.02% that can be stably detected in peripheral blood, including lung cancer driver genes or other class I/II genetic variants, representing the persistence of lung cancer and the possibility of clinical progression.

20 days ago, Genetron Health established a strategic partnership with NeoGenomics, Inc. (Nasdaq: NEO), aiming to partner globally to provide select harmonized clinical trials, global translational research for pharmaceutical groups and technology platform providers that need a China arm for global or China-focused trials. 

Overall, Burning Rock’s third-quarter financials that it achieved a gross margin of 72.3% for the quarter of 2021, compared to 73.9% in the same period last year, with a loss of RMB 170.5 million (US$ 26.5 million). In its third-quarter financials, Genetron Health, on the other hand, posted a gross margin of 69.0% for the quarter, compared to 62.2% in the same period last year, with a non-IFRS loss of RMB110 million (US$17.1 million). According to the 2021 financial guidance given by the company, it is revising its full-year 2021 revenue guidance to be around RMB 530 million, higher than the RMB 500 million given by Burning Rock, but revised down from the beginning of the year.

Owing to the heavy investment in R&D, coupled with the still-growing industry size, a few players in this sector have been reciprocated with positive financials.

Overall, Genetron Health and Burning Rock believe that their relatively small size means their market prospects and stock price still have great growth potential and aspire to grow as big as the global industry leaders such as Guardant Health (GH. N), Illumina (ILMN. N) and Exact Science (EXAS. N). But to become more competitive in the market, they need to maintain strong growth, high gross margin and achieve profitability.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. The content was purely for informational purposes only and not intended to be investing advice.

© 2021 Benzinga does not provide investment advice. All rights reserved.

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