Centogene N.V.

Ladies and gentlemen, thank you for standing by, and welcome to the Center Team H1 2020 earnings conference call. At this time, all participants are in a listening-only mode. After the speaker presentation, there will be a question-and-answer session, and to ask a question during the Q&A session, you will need to press star and 1 in your telephone. I must advise you that this conference is being recorded today, 23rd of September, 2020. I'd now like to hand the conference over to our first speaker today, Mr. Son Kim. Thank you and please go ahead.

Thank you. Hello and welcome. Thank you for joining us to discuss our H1 2020 results, which were issued earlier today. You can view this presentation and the related press release on CentoGene's website. For those not able to view the webcast, you can find the relevant slides on www.investors.centogene.com. Our speakers today are Centogene's Chief Executive Officer, Professor Arndt Rolfs, and Richard Stoffelin, Centogene's Chief Financial Officer. Before we begin, please refer to slide two of our presentation, which provides information about certain statements to be made today that may be considered forward-looking statements within the meaning of the U.S. securities laws. including those regarding our strategic plans, development programs, and future financial results. Statements made during this call that are not historical statements may be forward-looking statements and, as such, may be subject to risks and uncertainties, which, if they materialize, could materially affect our actual results. The forward-looking statements in this presentation speak only as of today and we undertake no obligation to update or revise any of these statements to reflect future events or developments, except as required by the law. Additional information regarding these statements appears in our SEC filings. Following our presentation, we will also open up the call to Q&A. We currently ask that you ask only a maximum of three questions. I will now hand the presentation over to Arndt. Please turn to slide three.

Thank you, Son, and hello, everyone. Thank you for joining our call today, especially during these unprecedented times. We hope everyone is staying healthy and safe, and our thoughts are with those affected by the COVID-19 pandemic. Today, I will first walk through our operational performance during the first half of the year, with more focus on Q2, as we already discussed Q1 performance in June. In addition to the progress of our core business, I will provide an update on our COVID-19 testing activities in Region 1. Richard will then walk you through the financials and provide our view on how we see the rest of the year. Afterwards, we will open up the call for Q&A. I will remind you of some requests for everyone to only ask two or three questions so that we have enough time to address as many questions as possible. Let this turn to slide four. Before we get into the performance each quarter, we always start our presentation with CentuGene's goal. I think it is always good to put things into context, and for me, that means looking at recent achievements with our long-term goal in mind. Our ultimate goal is to provide precise medical diagnosis of inherited rare diseases at the earliest possible moment, by transforming medical expertise and analytical information into actionable results for physicians, patients, and pharmaceutical partners. Importantly, over the last few months, we have been able to leverage that expertise to help address the COVID-19 pandemic. This is being driven by Centurgy in doing its part in the fight against the unprecedented global challenge and adapting to an environment where our partners and customers needed time to adjust to the pandemic. This has by no means changed the long-term direction of the company, but has narrowly demonstrated our resilience by leveraging our diagnostics expertise to successfully generate an additional near-term source of revenue during these unprecedented times. You will see from today's presentation that we remain dedicated to and focus on our goals. Now let's dive into today's presentation starting on slide five. Let me first highlight the key message for today. Firstly, we believe the worst of the COVID-19 pandemic is behind us. The months of April and May were a difficult period for our core business in which our pharma partnership discussions stalled and clinical diagnostic volumes decreased by more than 50%. Since then, our core business has started to recover and both segments remain on the recovery trajectory. Over the first six months of 2020, our revenues were largely flat compared to the prior year with a decline of 0.4%. While even a small decline is disappointing, San Jose has been able to weather the pandemic with resilience, and I'm very proud of what we have been able to achieve. Secondly, we have continued to drive growth in our COVID-19 testing efforts. In particular, our activities at Frankfurt Airport, which I will discuss in more detail later on, have picked up significantly in July, August and September. Finally, I would like to reiterate the financial resilience of Centurgy. Given the uncertainty of the COVID-19 pandemic, we have taken steps to further strengthen our balance sheet through a follow-on offering which closed in July 2020. In addition, with the help of commercial COVID-19 testing, We anticipate our 2020 revenues to be in line with our strong growth trajectory in recent years. Richard will cover these topics later in the section of the presentation. Let us now discuss these points in more detail. Please turn to slide 6. In Age 1 2020, our revenues decreased by less than 1% compared to Age 1 2019 to approximately 21.8 million euros. This was driven by an approximately 2% decline in the pharma segment and a 1% growth in the diagnostic segment. The worst of the pandemic impact hit us during April and May, and we began to observe recovery in June. Nonetheless, this difficult period translated to 13% revenues decline in Q1 2020. Let me take a moment to step back and put things in perspective. In light of the challenges presented in 2020, I think these results demonstrate resilience and the strong determination of all CentuGene employees. I would like to take this time to thank the entire CentuGene family for their extraordinary efforts over the past several months. Please turn to slide 7. As mentioned earlier, our core business is gradually recovering, both in terms of clinical diagnostics and pharma partnership discussions. I wanted to put that into context of larger the trends we are seeing in the market overall. On the left side of this slide, you will see the number of active pharma clinical trials from late March until late August. As you can see, the industry hit the trough in late April to mid-May, and it has gradually recovered since then. Based on this clinical trial data, pharma industry investment level appears to have returned close to pre-pandemic levels. On the right side is Sendogene's weekly order intake volume in approximately the same time period, exhibiting a similar trend. If the current trend continues, we anticipate gathering back to pre-pandemic level in Q4. I hope these indicators give you a sense of the gradual recovery we are seeing in our core business. With this trend in mind, let us look specifically at our operating metrics. Please turn to slide eight. Let me first focus on our pharma segments. The first metric is the number of pharma collaborations, which increased by three compared to 12 months ago. This is a smaller increase compared to recent periods, and that is a consequence of the challenges we faced during the first half of this year. With many pharma conversations stalling in April and May, our progress during the first half of the year was relatively limited. However, as I mentioned before, Our activities have started to pick up since June. These conversations have led to six new partnerships being signed during the month of August, demonstrating that we are getting back on track. Other metrics have also demonstrated slower growth compared to prior periods, such as the number of disease areas and the number of biomarkers under partnership. With the acceleration of partnership discussions, we anticipate demonstrating a more robust performance in the near future again. Please turn to slide 9, where I will speak about the progress made in our diagnostic segment. Now shifting gears to our diagnostic segment. This is a critical part of our business, as it enables us to access data and knowledge that we then translate into extremely valuable medical insights. As you can see from the chart on the left, we have added 119,000 patients to our database in the last 12 months. This is still robust growth, even it is at a slightly slower pace than we have observed in recent periods. This is also a result of the slowdown of business activities we saw in Q2. On the right hand side, we report the number of sample order intakes during the six month period of 2019 and 2020. We observed an 18% reduction in order volume during the first half of this year compared to the same period in 2019. This is a good illustration of how serious the pandemic situation was. And I'm glad that we are able to offset some of this impact with commercial COVID-19 testing. Now please turn to slide 10 for an update on our COVID-19 testing activities. Since our last update in June, we have made progress on multiple fronts regarding our COVID-19 testing. We received emergency use authorization from the US FDA and expanded into multiple testing partnerships. On-site testing at airports has turned out to be the biggest success in terms of financial returns. Let me focus on Frankfurt Airport, where we started to provide testing towards the end of June. Testing allows travelers to travel safely and reduces the likelihood of transmission of COVID-19 internationally to these travelers. you can see the increased test volume over the first few months. We have recently opened our second airport testing service at Hamburg Airport, and yesterday we are proud to realize that we have opened Düsseldorf Airport as well. It is too early to tell if the volume uptake will follow the same trajectory as at Frankfurt Airport, but we are pleased to expand our presence to meet the urgent need presented by COVID-19. We are looking into further expansion to other airports, amongst other locations, and we will update you further if and when we do. Please turn to slide 11. As I conclude the business performance section, let me provide you with the latest update on the status of our business. First, as I mentioned earlier, pharma partnership discussions have picked up since June. Many of these companies have expressed their desire to get their R&D programs back on track, and see SensuGene as a way to achieve the goal. As a result, we have signed six new partnerships in the month of August. This is a good signal, given that these are the first new partnerships that we have signed since the COVID-19 pandemic hit. Second, our co-genetic business within the diagnostic segment has started to recover. The trough of weekly sample volume was observed in late April, which had dropped to below 50% of pre-pandemic levels. As we showed earlier, the volume has been on a gradual recovery trend since the end of May. If the current trend continues, we anticipate getting back to pre-pandemic levels in Q4. In addition to our core business, as I mentioned earlier, we plan on further expanding our COVID-19 testing to meet the continued demand in the market. At this point in time, we believe we can make up any revenue shortfall caused by the COVID-19 pandemic by the end of the year and get back to our growth trajectory. Let me hand it over to Richard here to provide further details.

Thank you, Arndt. Now please turn to slide 13. Looking at our performance in H1 2020, our revenues saw a slight decline of less than 1% compared to H1 2019, with the diagnostic segment growing at 1% and the pharma segment declining by 2%. As Arndt mentioned before, Our core business was significantly affected by the COVID-19 pandemic, particularly in the second quarter. The diagnostic segment was able to maintain growth, including the revenues from our COVID-19 testing. The pharma segment was impacted as new partnership discussions were initially stalled and services related to clinical trials or genetic testing slowed being impacted. This slowdown in revenues translated in a decrease in adjusted EBITDA for the period due to fixed cost elements. The diagnostic segment was also affected by the fact that costs associated with started COVID-19 testing are included, while the volume only started to pick up in Q3. We have responded effectively to challenges by COVID-19 and anticipate getting back to our growth trajectory in the second half of the year. Now, let's look at Q2 2020, when the COVID-19 impact was the most severe. Please turn to slide 14. As you can see in the graph on the left, Q2 2020 revenues declined by 13% compared to Q2 2019. Both segments' revenues declined at double-digit rates, demonstrating how severe the COVID-19 pandemic impact was during the Q2 2020 period. The adjusted EBITDA also indicates the severity of the pandemic's impact during Q2. Both segments exhibited a lower margin compared to the same period last year. We are pleased that the toughest period appears to be behind us and that our recovery can already be clearly seen. Before we move on, let's look at the revenues breakdown in more detail for H1 2020 as we anticipate the second half of the year. Please turn to slide 15. On the pharma side, we give you a breakdown of the revenues that come from new and existing contracts to provide more visibility into the future growth of our pharma segment. We typically have 20 to 25% of farmer revenues coming from contracts signed in the past 12 months. The breakdown for H1 2020 shows that 10% of our revenues came from new contracts. This is primarily due to the fact that the partnership discussions started to slow down in Q1 and continued on that trend in April and May. Since then, discussions have steadily picked up again. In addition, some of the newer contracts tied to clinical trials and genetic testing services were disrupted before they had a chance to gain traction. The revenues breakdown for the diagnostic segment is demonstrated on the right-hand side. Revenues in our core diagnostic testing, excluding NIPT, saw a modest double-digit decrease compared to H1 2019. We believe that decrease is reflective of the decrease in sample volumes, particularly in April and May, that we discussed earlier. COVID-19 testing revenues only began picking up at the very end of the period, but you can already see how it is making up for the shortfall in the core diagnostic revenues. We are glad that our organization was flexible enough to move quickly and adapt to such a challenging environment. We look forward to our core business returning to growth in the second half year and the increased uptake of our COVID-19 testing. Let us now finish discussing other key financial elements of this period. Please turn to slide 16. Despite the small decline in revenues in H1 of 2020, our expenses increased by €7.5 million as compared to H1 2019. Let me explain some of the key elements that drove the difference. A lower revenues contribution from the pharma segment compounded this impact, decreasing our gross profit by €1 million in H1 2020 compared to the previous year. Cost of sales increased as some of the fixed cost elements of the two segments were higher than those in 2019. our R&D expenses were up by 1.7 million, which is reflective of our continued commitment to rare disease patients. Despite the impact of the COVID-19 pandemic, we made a conscious decision to continue carrying out the execution of our long-term strategy to support rare disease patients. General admin expenses increased by roughly 4 million euros for two main reasons. The first is higher costs as a result of being a public company, such as the D&O insurance. The second is upfront costs associated with our COVID-19 testing efforts, such as internal employee testing to keep our company operational, as well as the upfront costs of increasing testing capacity. There was also a roughly €1.4 million increase in other operating expenses. We took the impact of the COVID-19 pandemic and a potential disruption to different businesses into consideration when assessing credit risk, particularly relating to the diagnostic segment. As a result, credit loss allowances on trade receivables increased by approximately 1.2 million euros compared to H1 2019. Now please turn to slide 17. Let us have a closer look at the cash flow and balance sheet. Cash flow used in operating activities increased compared to the same period last year due to the slower revenue growth of our core business and additional purchases of inventories in response to the COVID-19 pandemic. Cash flows from investing activities represent investments in laboratory equipment and intangible assets and increased by €3 million in H1. The cash flow from financing activities reflects the repayment of loans, lease liabilities and interest payments. As of June 30, 2020, we have €17 million of cash and cash equivalents. Regarding our debt outstanding, I would like to remind you that this value includes €22 million of lease liabilities. In addition, we raised additional capital through a follow-on offering in July that I will elaborate on in the next slide. Please turn to slide 18. We raised additional capital through our follow-on offering in early July. As you will see on our balance sheet, we had enough cash reserves for the foreseeable future. Nonetheless, given the unprecedented nature of the COVID-19 pandemic and the associated uncertainties, we believed it to be prudent to further strengthen our balance sheet. Hence, we added €24 million to our cash reserve in July. This speaks to the resilience of Centogene's team. In addition to strengthening our balance sheet, this offering increased the number of free-floating shares on the NASDAQ substantially. We believe that this will potentially attract and enable more new investors to take an interest in our company. Please turn to slide 19. Now, let us share our perspective on the full-year 2020 performance outlook. As mentioned previously, COVID-19 has impacted us significantly in Q2. The most significant impact from COVID-19 seems to have occurred in H1 2020, and we see our business growing again, with the diagnostic segmental and recovering, and the level of pharma discussions activities gaining further traction. In addition, COVID-19 testing revenues has picked up over the summer and continues to increase. This leads us to believe our full-year revenues for 2020 will get us back to our original growth trajectory. Given the complexity of navigating multiple variables, assuming there is no unprecedented and unanticipated event negatively impacting our business, we cautiously anticipate that our 2020 full-year revenues will be in the range of 60 to 65 million euros, thus ahead of the 20% growth guidance we gave at the end of last year. We will provide a further update if the situation changes, but at this time, this is our best projection for the full year 2020. With that, I'll turn back to Arndt.

Thank you, Richard. Please now turn to slide 20 as I summarize today's discussion. The first half of 2020 certainly has been a period with many surprises and challenges. We believe we have weathered the bruise of the COVID-19 pandemic, while responding with agility and resilience to the circumstances. We have managed to maintain the revenues for the first half of 2020 nearly at the same level as of H1 2019. In recent months, we have been able to drive a robust recovery of all core business with six new pharma partnerships signed in the month of August. Our ability to quickly adjust to the pandemic and initiate COVID-19 testing has allowed us to drive our business operation without significant disruptions and allows us to mitigate some of the financial shortfalls through commercial COVID-19 testing. Taken together, as Richard has just mentioned, we expect full year revenue for 2020 to be ahead of the 20% guidance we provided at the beginning of the year. Beyond that, I remain confident in CentroGene's mission of supporting rare disease patients and I believe in our ability to drive a strong short and long-term growth. Our farmer partnership conversations have been more robust than ever, and I truly believe that our best years are ahead of us. With that, I will now turn the call over to the operator for the Q&A portion of our call. Thank you.

Thank you, ladies and gentlemen. If you wish to ask a question over the telephone lines, you may please press star and one in your telephone keypad. Once again, as a reminder, that is star and one if you wish to ask questions. We have our first question comes from the line of Punit Soda. Please ask your question.

Yeah, hi, thanks, Arne, Rich. First question is on the guide in the 60-65 million. I am assuming that the third quarter is going to be heavy with COVID testing, given what you're seeing, the trend that you're seeing in August. Could you help us understand how much of the COVID testing is baked into the full year guide? It appears it's going to be considerable in the second half. I just want to get a sense of that. And does that tell you, Does that make it conservative a bit for the pharma revenues? Just trying to get a better sense of the core business there in the second half as well.

Thank you very much, Puneet, for the question. This is Richard here. Happy to give you a little bit more on the guidance. As mentioned, we've seen recovery in both the pharma and diagnostic segments since the trough in April. as well as growth in our commercial COVID-19 testing. And if there are indeed no further significant unanticipated disruptions or events that would negatively impact our business, we are cautiously optimistic that we will be in that range. Once we have a clearer picture of full-year revenues, we will update you in the next earnings announcement. In brief, indeed, we do see that uptick in both DX and Pharma. But a good part of the total revenues will indeed be contributed by COVID-19 commercial, as the numbers on one of the slides for Frankfurt Airport depicted earlier.

Okay. Those looking at the, you know, last second quarter and the July and August volumes that you have presented here for COVID testing, it appears that at least in the Second quarter, and correct me if I'm wrong, that the ASP appears to be lower than the 60 euros that you had pointed out to. So I just wanted to understand that. And then could you give us a sense of where the pricing of the test stands now as you think about the mix of the test, you know, from normal turnaround time to rapid turnaround time? You're charging two different prices there. So just trying to understand what is the ASP for COVID test in the third quarter here.

Thank you for that question as well. As you correctly did the math for Q2, we were below the range that we indicated earlier, partly due to a massive contract in the province that we are active, that we are based in. There was a fixed fee and a variable component in there. It was kind of a launching customer perspective. If you look at Q3, we see a mixture of, as we call it, normal timing as well as the so-called Snell, as in fast test, which is a higher price, a premium price. It is hard to predict how that will exactly evolve over time, so how many people want to have the fast one, the fast track versus the normal track. So we remain close to the guidance that we had given before of the summer around 60%.

Okay. And I just wanted to clarify on that point, there's a decline in other testing. There's significant decline that we're seeing. Is that associated with the point that you just made? Or could you help us clarify what is in that other testing bucket?

I don't know which graph you would be referring to at this point, Puneet. So either we have to take it offline or you have to point it out now.

Yeah, so this is the chart you provided in the release where there's other collaborations for COVID accounts for 36,500 tests in June, and that number then declined significantly in July and then in August again.

Okay, you are in the release now. Let me go to the release for a second. So I have the same graph in front of me.

I forgot to point out the picture one.

Yeah, let me just find it, Stephanie, bear with me for a second, please. Yeah, the other collaborations, they go down because they are not related to the airport, and we had more of that in the beginning than we have currently. So the vast majority at the moment would be airport.

Okay, I'm just trying to understand the dynamic there. Is that because you have more competition in the broader school and asymptomatic and broad testing market, non-airport testing market, or is there something else that's driving that?

It's mainly because the airport is so massive, so that's why the other aspect is a bit smaller. It's nothing to do with the other aspect not being relevant. It's simply that the airport grows so much quicker, and if you then make that comparison... the weighted part of the airports is so much bigger.

Okay. Thanks. And if I could ask in the core business, you added six partners here. Could you just clarify those are individual six new partnerships with new additional partners or are those six additional projects with existing or new partners?

maybe I can interject here there are multiple partners but there also were a couple of products with one partner and these were mostly many of these partners we've had long discussions with but some of these are new customers as well so in brief three new ones and three additional ones

Okay, thanks for that. And then last one, on the 551,000 CentoMD repository number where you currently are at, could you describe if the new additions, were they in line with the prior indications of the CentoMD database mix, or are the indications here for the patients and for additional new patients, is that, are those indications increasing? If you could just maybe elaborate to us what, you know, what is the mix of the, sort of the growth that you saw reaching to 551,000 data points in the central MD repository?

Thank you for the question. We see more or less the progress of the numbers absolutely in line what we have seen in different indications in the past based on the collaboration with different partners. And you can imagine what I'm talking about. We see a higher percentage for cardiogenetic and cardiological indications on the one side. And also onco indications are a little bit faster growing than the rest of the indications. But in general, it's absolutely in line what we have seen also in the last quarters.

Okay, great. Thanks. I'll hop back into the queue.

Thank you. And your next question comes from the line of , please ask your question.

Thanks for taking the questions. Just a few questions on COVID testing. Would you be able to comment on kind of what your testing capacity is or, you know, your projections are for the remainder of the year?

Hi, , thank you for asking that question. Yeah, we have a testing capacity roughly of some 25,000 tests a day at the moment, but we can scale that up very rapidly. So a projection towards the end of the year is hard to give because it depends on what new contracts we would sign. For now, we're roughly at that level.

Okay. And then in terms of your guidance, just to clarify, are you – or just in general, do you anticipate – testing demand coming from outside of Germany, outside of Europe. I think you have a contract with OESIS that you announced. Just kind of curious, what are your assumptions for kind of the broader global testing demand?

For the COVID-19 testing that we have taken into consideration when providing the guidance, we have mainly looked at the contracts at hand. Hence, we use the word cautious guidance, and those will be mainly based in in Germany, whilst we do have some outside Germany, like you just referred to Oasis, the schools in the US, but we also have some business collaborations in other countries as well. And Denmark, for example.

Okay. And then just lastly from me, I was wondering if you could elaborate a bit more on margins and also your OPEX expectations related to COVID testing going forward. from a margin standpoint, obviously lower margins, is there opportunity for it to, is there, you know, potential for operating leverage there going forward, or do you expect to continue to increase spending related to COVID testing? How do you think about OPEX spending for the remainder of the year, essentially?

Yeah, we expect that we don't need to increase OPEX with a further volume increase in the same speed. So depending on the volumes, OPEX has a percentage of sales will go down or go up as quite some of it is a fixed portion. That's as much as we can say right now. And as soon as we have more guidance for Q3, we will let you know.

Okay, great. Thank you so much.

Ari, thank you once again. As a reminder to those who wish to ask a question, you may please press star and 1. Your next question comes from the line of Catherine Schultz. Please ask your question.

Hey, guys. Thanks for the questions. I guess first on your core business, great for your activity levels around new farmer partners picking up again. On the six that you signed in August, can you give us any details on the structure or indications on those deals and how much you're expecting them to contribute in 2021?

Thank you for the question, Catherine. Great to hear your voice again. It's relative small contracts to begin with that we signed. So it doesn't make too much sense to split them out over the different categories, even though it is a mixture. And the revenue contribution for the year will just also be relatively limited.

Okay, great. And then I guess what's implied in the guidance for, you know, the relative contribution of COVID testing in the fourth quarter? You know, do you expect moderation in volumes as we head into the end of the year? Or do you think activity levels really stay steady? And maybe as a broader question, you know, how do you expect the COVID testing landscape to evolve over time? the next six to 12 months, how does the mix evolve between TPR testing and really rapid testing in the future?

That's a lot of questions in one question. I'm seriously noting that you realize you are only allowed to ask three questions. Let me try to address them nonetheless. One, we are cautious in our guidance, which means that we have taken a lower volume of for COVID testing in Q4 into consideration than we anticipate currently for the full third quarter. Technology progresses, yes, different tests all being considered, but very hard to make any assessment for today when and how that will impact the transition from the current PCR testing, which is what we do, to what we will do going forward in a combination of the different tests. I hope that addresses your questions in this respect, Catherine.

Yes, absolutely. So I guess just anything on that last question on just kind of how you anticipate evolving over the next six to 12 months?

Again, Catherine, we know it will evolve. We know that PCR is the so-called gold standard, but we also know there is other tests in the work. We evaluate all alternatives that come to market, to assess the value they would bring to society, to opening up economies, as well as the economic aspects of it. But it is too early to give you any guidance in that respect.

And maybe, Richard, it's fair to add that for sure, per today, the PCR test is the best evaluated and most stable and best reproducible test system with a high sensitivity. So, with highest likelihood, we will see a further diversification of the market's according to the need and according to the situation where the test has to be done.

All right, great. Thank you.

Thank you, Catherine.

We thank you. There are no further questions at this time. Please continue.

Great. Then I'd like to take this time to thank everyone for joining our call. And then I wish everyone a very healthy and successful great rest of the week. Thank you.

Thank you very much. Thank you.

Thank you, everyone. Let us conclude our conference for today. Thank you all for participating. You may all disconnect.