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spk05: Ladies and gentlemen, thank you for standing by and welcome to Centrogeny Q3 2021 Earnings Results. At this time, all participants are in list and only mode. After the speaker presentation, there will be a question and answer session. I would now like to end the conference of your speaker today, Lennart Streibl. Please go ahead, sir.
spk06: Thanks, Roberto. Hello and welcome. Thank you for joining us to discuss our third quarter 2021 results, which were reported earlier today. You can view the presentation of the related press release on Centogene's website. For those unable to view the webcast, you'll find the corresponding slides at investors.centogene.com. Referring to slide two, before we begin, I would like to remind everyone that statements we make on this conference call will include forward-looking statements within the meaning of the US securities laws, including those regarding our strategic plans, development programs, 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, November 24th, 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. If you turn to slide three, it is my pleasure to introduce you to today's speakers, our Chief Executive Officer, Andrin Oswald, and Rene Juist, our Chief Financial Officer. We will first begin with a general business update, followed by a summary of our financial results for the last fiscal quarter ending September 30th. We will then open up the call to Q&A session before closing remarks. We kindly request already that you ask a maximum of three questions. I would now like to turn the call over to Andrin. Please turn to slide four. Andrin.
spk04: Thank you, Leonard. And hello, everyone. Thank you for joining. As Leonard said, I will start with a business update on our core business and also some updates on the progress we're making on implementing our strategy as presented at the June investor event. As it relates to our COVID business and our plans with that one going forward, and also how we plan to restructure the company to be fitter for future growth, Those two elements Rene will address in financial review. And then we will end with outlook and, of course, the Q&A. So, Q3. Our Q3 performance reflects progress in our core business execution, making meaningful strides on our strategic priorities, which we outlined in the investor event. As mentioned, we are continuously expanding our data-driven approach to reinventing rare diseases throughout this current development. In this last quarter, we saw solid revenue performance, delivering core business growth for the second consecutive quarter. The core business, which is our diagnostic and pharma segment, together grew 13% versus two or three last year. We are very happy to see that core business is back to growth. While COVID-19 testing revenues did not continue to contribute to our overall top line, we are seeing a shift in COVID testing landscape and are acting proactively. and during our efforts are focused on our core business, informant diagnostics. This is in line with what we have communicated previously. Foremost, we are excited about the continued growth of our core diagnostic business segment observed in Q3. In that period, we added approximately 22,000 new individuals to our expenses by a data bank and continue to demonstrate our commitment to secure diagnostic offerings for rare diseases. This is a steady increase towards our goal of having one million patients in our Biobank in the next couple of years. I will now discuss a bit more in detail the different segments. Please turn to slide six. Here on the graph, you can see the mentioned 13% revenue in our core business. More specifically, on the diagnostic segment, in Q3, we reported order intake of 14,770 up 46% over the previous quarter. Within this segment, we have seen the business return to growth up 43% year over year. We have indicated this trend in the last quarters, and it is nice to see the business return. This is our fifth consecutive quarter of diagnostic segment growth. We believe we currently offer the broadest diagnostic testing portfolio for rare diseases globally, covering the widest range of genes with unique value propositions in test. Turning to our pharma segments, we are still experiencing a protracted recovery as compared to the diagnostic segment. Pharma business segment revenue is down year over year. But as we have highlighted in the past, this is mostly the result of a delay of revenues as it relates to the time it takes from signing a new contract with a pharma partner until that contract translates into revenues. However, we have now 67 active collaborations, just 16 new ones started in recent quarters, and they're all advanced towards revenue generations. So we are quite confident that the farmer business will return back to growth starting with Q4. I will share some further details on that later on. Please turn to slide seven. Here, a look at our knowledge repository. The number of sample or order index in our core business, meaning diagnostic and pharma, is up 12%. If growth was driven primarily by increasing diagnostic business, the test requests were 46% versus the same period in 2022. The pulse of pharma contributed. Overall, we're making progress on growing our bi-data bank, which includes samples as well as data and cell lines. On the graph on the right, you see the number of individuals in our data repository. Over the course of 2021, we added about 70,000 new individuals to our rare disease-centric data bank. We believe our biodata bank to be the core of our differentiation and our basis for revolutionizing the development and eventually the discovery of rare diseases. As we stated in previous quarters, we kicked off an initiative in 2021 to review and upgrade the biodata bank. It's a bi-data bank that by now has data back, I suppose, like 16 years. So you can imagine that it was the right time to look at it, clean it up, and strengthen its content in the way that you can mine the data. This improves setting up good data governance, as well as making sure our approach to growing devices is truly strategic. At our inventory event in June, our CTO and data officer, Bettina Goerner, shared with you insights in how we plan to upgrade our data bank, and I want to give you, based on that here, some first updates or insights into the data bank. In the past, we have communicated the number of patients at the summary matrix. With the newly defined data bank, we will share some deeper insights going forward. As of today, November 24th, we have about 650,000 patients, active patients, and samples in our repository. At the end of Q3, we speak about approximately 630,000. Some of you will remember that we had already communicated the number of about 650,000 previously. However, after the recent review and reclassification, the cleanup of the biodata bank, we have now improved the more robust number, ensuring that what is in there is really of the quality that we needed to have the ability to mine it and come up with other insights. Additionally, we are now also going to provide you with some more metrics as it relates to the content and the growth of the biobank. Turn to slide eight. Here you can see some of the metrics we developed that we believe show in more detail what's in the data bank and how it's progressing going forward. We have total number of individuals, of course, as previously discussed. We have the dried blood spots, and that's why it's much of a data, but a biodata bank. so the dry blood samples that are stored in our databanks that allow us also to go back to the sample and do further analysis. And we have the number of full genome and exome sequence versus data where we just have done a gene panel, for example. And we also have the percentage of research content that allows us not to use the samples and the data just for diagnostics, but also for full research on the discovery pharma side with the potential, of course, to commercialize that. Then we have our cell line. I think this is an important addition. Cell lines are critical for our future discovery efforts. And, of course, all this is built on an active network of physicians that we engage in and that work with us for getting access to past but also future patients. You can see the numbers here on the slide and also how which developed in the recent quarter. With this, we are now also providing more details, and we plan to do that going forward. We believe, and this is a way by which we better appreciate the relevance of the value of our data banks going forward. Please turn to slide nine. Here you can see a closer look and in terms of where we have particularly strong data and samples as it relates to disease areas. And this is in metabolic and neurological diseases. This is also reflected in the increasing number of pharma partners that we have established in that area. As shown by the revenue contribution, most of our collaborations are relatively small in nature, and however, we believe it's something that will grow in the future. the partners may start with a rather small specific research question or a research collaboration that we have, which may be low in initial revenues. Those partnerships, while the research and the underlying draft discovery progresses, we believe these partnerships will expand and so will our revenue. Please turn to slide 10. We've shown that slide at our June event, but I would like to highlight again why we think here uniquely positioned in the rare disease space. Here are some companies that are also in the data-driven insight space, and we believe we clearly differentiate from them and have unique competitive advantages. On one side, we are a rare disease company. We have been 16 years ago in rare diseases and have started collecting samples and insights and have built a brand and a network over 16 years. Some of those other companies have also more recently expressed interest in rare diseases, but they do not have the bandwidth, the brand, nor the repository that we do. Technically, I also want to highlight our geographic footprint that makes us unique. Of course, it is highly valuable to have a good, strong presence in the U.S., especially if it relates to commercial revenues from a diagnostic business. However, overall, we believe our geographic global footprint is absolutely critical for rare diseases. Rare diseases are by nature a global challenge, and to collect patient data and generate sufficient patient data for the right insight and a global footprint in our minds is required, and that's what we have. Let's go to slide 11. This is to remind you of our business model and our patient-centric business model with the BioData Bank at our core and using the BioData Bank and our omics and AI tools to generate insights for superior clinical diagnostics, for pharma services, for patient identification and clinical trial support, and last but not least, to develop a discovery platform to enable drug discovery, orphan drug discovery in the residency space. So let's go to slide 12. I just want to highlight a few updates along those pieces continuum that we have done in the recent quarter. Scientific progress, our diagnostic footprint, impact we have in pharma, and what we plan to do in discovery. So let's start with slide 13. As you know, and I'm sure you've seen over the recent quarter, we have quite a leading presence, a number of scientific publications in the rare disease space. I just want to highlight here a recent one in the Journal of Medicine. We view our contribution to better understanding rare diseases at the core of our commitment to rare disease patients around the world. Not all of those, of course, as you for sure know, will immediately translate into revenues, but I do believe that they highlight our scientific expertise, the depth of our biodatabank, and of course, our attractiveness as a partner in universities is covered. Taking a closer look at this effort here. The study here utilized data percentages by a databank, There are an international team, including the Ready Children's Institute of Genomic Medicine and ASTAR, that have analyzed data on a range of families to create a deeper understanding of syndromic structural birth defects and pave the way to advance pharmacological treatment for that unique medical condition. Now, if this method and what has been demonstrated translates into robustness It offers a unique opportunity for drug developers to capitalize on the insights and with clinical programs, potentially create new approaches to find treatments for what to date are almost 4 million infants every year that are born with such birth defects. We think that research highlights why Sympathy and Inspire Data Bank can be a unique partner, not just for the academic institutions, but also for pharmaceutical organizations collaborate to actually translate, find the findings, and translate them into drug development. Slide 14. In our clinical diagnostic business, we have signed an exciting partnership with Twist Bioscience that we had recently announced. Together, we will develop and commercialize custom assay kits for rare disease genetic diagnostics. The product offering will combine our expertise powered by our data bank with the manufacturing adeptness and cost and sequencing kicks of Twist BioScience to deliver multiple assays. We are excited to have kicked off this collaboration and the next major milestone will be progress on assay key development followed by a commercial launch together with Twist that we plan for next year. This collaboration enables us to address the ongoing trends of decentralization in the testing era. It is our belief that offering decentralized solutions will play a pivotal role in making genetic testing more accessible and with the help of partner laboratories to deliver rapid and reliable top quality genetic diagnostics for rare disease patients. We expect some announcements around our efforts there related also on the progress of our central cloud product offering in the coming months. Now let's look at our pharma progress on slide 15. I have mentioned that the pharma revenue recovery is clearly taking more time than on the agnostic side, but that we are confident that with recent partnerships, we are on track to get there. So one I want to highlight here is the partnership we have with Alexcor. We signed the deal early in 2021, and we have announced that. We have now started patient enrollment just a couple of weeks ago for that large-scale 3,000 to 4,000 patient study. And it's an exciting study that I think highlights a few things from our side. First of all, of course, that it takes time from signing a contract to actually start seeing the enrollment of patients and mostly the revenues that are associated then with that. but it also highlights that finding ready these patients in the right red these patients the key competitive advantage that central gene has that the customers have a high interest in and also highlights that our business model and while we do such collaborations actually allows us to accelerate our bio data band and this partnership here for example will help us to build up a a unique cohort of front-to-tempo dementia patients in our biodatabank, similar to what we had on ROADPAD with Denali, that can be further mined and further insights can be generated for future customers who are working with us in the neurological disease space. Overall, we have signed quite a number of new contracts to date in the year. And actually, when you look at the cumulative value of this contract, it is a multiple of what the company was able to sign in 2022. So that large volume of new contracts that we had signed, not just the electorate, to give you some confidence, for sure, it gives us that starting from Q4, we think that the pharma business will also be back on the growth track. Please return to slide 16. Here's just a short update on our discovery efforts and how we plan to use our Biobeta bank for discovery partnerships going forward. I would like to focus on the development of our resumes and avatars. We have mentioned to you this effort in our June event. And I think our aspiration for us to be able to enable the cure of a hundred rare diseases in the coming years. So with Patrice, we have made quite some progress to accelerate that work and make sure that the team is fully developed and on board to accelerate the work we do in that regard. Well, what exactly is a disease avatar? You may have heard of the term digital twin. which is essentially a virtual copy of a physical body structure that physicians can use, for example, to train surgery or to model how a certain treatment would impact the anatomy of a patient. So the disease avatar is the digital platform on a whole disease by which we have an aspiration to actually virtually model the whole disease such that it can be used by researchers to mine that data, to come up with hypotheses on how the disease can be better diagnosed or potentially treated, and then test those hypotheses in the actual model. We believe that we need at least 100 rare disease patients to be able to develop such an avatar. We, of course, won't stop when we have 100, but we think that once we are above 100, we have enough diversity and data to start for these avatars to really generate And as you know, on some diseases, we have already clearly exceeded that milestone. And the disease avatar also is linked to cell models. And we think at least 10 up to maybe 20 patient-derived cell models will be part of the avatar to actually make the digital model complete. At the forefront of this initiative is Patrice Deneville, our chief scientific officer, who you were introduced to on our last earnings call. And I would like to pass on his excitement around our disease avatars and how we enable and recapitulate human disease in a dish. Generating insights from hypotheses and validating these via real patient-derived cell models ultimately leads to better understanding of disease practice physiology and enables us to take hands-on approach on testing drug candidates in red with these human models the way we could never have done before. With these initiatives in place, Patris has further strengthened the focus on our three first key priority avatars, Gaucher and Nieman-Peake, and genetic Parkinson's, to accelerate progress we make on those three in the coming quarters. All of these three will be significant opportunities for sentencing to drive a shortened value and potentially partner those avatars with pharmaceutical partners. We will of course not stop there. And on the success of those three, we have a range of prioritized diseases that we plan then to work on and to accelerate in the next few years to come. With that overall update on our core business and the progress we make on our strategy, I would like to hand over to Bernie.
spk02: Thank you, André. Please turn to slide 18. Our overall Q3 revenues declined by 17% year-over-year to €30.2 million. This development was mainly driven by COVID-19 testing, generating only 20.2 million euros in revenue in Q3 2021 versus 27.4 million euros in Q3 2020. This reflects the decreasing importance of the non-core COVID-19 business and on the other side, the increasing importance of the core business. I will highlight the COVID business separately in a moment. With that, I would like to focus on the core business, which includes our diagnostic and pharma segments. The core business expanded by 13% in Q3 2021 year-over-year to €10 million compared to €8.9 million for the same quarter of 2020. This growth was mainly driven by the strong uptake of the clinical diagnostic business, which recorded €7.3 million in Q3 2021 representing 43% growth compared to the same quarter in 2020. Pharma revenue decreased year over year from 3.8 million euros to 2.7 million euros in Q3 2021, reflecting a decrease of 28% compared to the previous year. The decrease was primarily due to the impact of the COVID-19 pandemic, which unfortunately slowed the clinical studies of our pharmaceutical partners. In principle, we believe the recovery in pharma takes longer due to the generally longer sales cycles. However, the value of our pharma contract signed in the first nine months of 2021 already exceeds the value of deals signed for the full year of 2020. So we continue to see an acceleration in the pharma revenues in the fourth quarter. We will now be looking at COVID before going into more detailed review of the core business performance. Please turn to slide 19. I would like to take a few minutes to discuss our COVID business. In summary, Q3 2021 represents fourth quarter in a row where our portion of revenues generated by the core business increased and the portion from COVID decreased. a trend we foresee continuing. We have consistently spoken about the COVID-19 business as a non-core business, which has in the past contributed revenue and cash to Centogene to drive the strategic execution in our core business. Looking at the EBDA contribution from COVID-19, which has turned negative, we have made the executive determination to begin phasing out the business segment to focus on areas where contribution margin is anticipated to continue in order to optimize our cash spend very specifically this means that we'll phase out most covet related projects by the end of the year and some specific airport centers will follow in the first quarter of 2022 we have informed centogene staff internally of this decision and related measures which will undoubtedly be impactful as we had approximately 230 colleagues working on COVID-19 activities, which are now expected to ramp down through termination, attrition, and non-replacement of planned departures. We have agreed on an accelerated depreciation and amortization schedule for COVID-19 related assets and have carefully examined related inventory. As in previous quarters, the cost of the segment are mainly allocated to cost of goods sold. which resulted in the unusual picture of a negative gross margin overall. To give some specific details, the cost of sales incurred by our COVID-19 segment for the three months ended September 30th, 2021 represent 143% of the revenues from the segment. This was primarily due to the reduction of COVID-19 revenues. The initial steps in phasing out of the COVID business led to accelerated depreciation and amortization expenses of COVID-19-related assets, committed fixed overhead costs, as well as costs related to the shutdown of our Hamburg lab and unprofitable testing sites. Examples of fixed costs include cost of premises, including unprofitable sites that we have since shut down, IT costs and temporary wages at unprofitable sites, which have now been restructured. We are also consolidating our operations to only operate at sites that are still generating positive returns and streamlined our laboratory cost by shutting down the Hamburg lab and increasing the test outputs and efficiencies at our other labs in Rostock, Frankfurt and Munich to ensure our cost going forward is streamlined to the needs of the segment, which will allow us to generate a positive EBITDA. As we face out the COVID segment, we have reassessed the usual life of all COVID-related long-lived assets in according to our accounting policy, which resulted in a significant write-down of 3.2 million in form of accelerated depreciations and amortizations. We have also recorded a 0.6 million write-down in COVID-related inventories in the quarter. In summary, we will diligently manage the phase out of the business as the management team are highly focused on executing on the core business. With that, please turn to slide 20. Pharma revenue recovery continued to be affected by the COVID-19 pandemic in the last quarter. We see in the graph that pharma revenue decreased to 9.2 million euros in the first nine months of 2021, compared to 12.3 million euro in the same period 2020. The main drivers of pharma revenues are patient identification and clinical trial support partnership. The decline in 2021 year-to-date is mainly due to the successful completion of contracts by the end of 2020 and a slower rebound due to longer sales cycles and building contract backlog. Andren discussed earlier the increase of signed contract value we have seen in 2021. which is significantly above the full year 2020. So we remain confident in the acceleration of the farmer revenues in Q4. During the first nine months of 2021, we entered into 16 new collaborations and successfully completed 25 collaborations, resulting in a total of 57 active collaborations as of September 30th, 2021. Revenues from our new collaboration total 2.1 million euros for the three months ended September 30th, 2021 with no upfront payments. I previously mentioned the 57 active collaborations on the pharma side. If you take a look at the pie chart in the bottom of the right corner, you will see that we currently have one large patient identification collaboration, which reflect disease fields where commercial state products are already available. In this case, our contract with Takeda. Most of our collaborations continue to be in the clinical development stage with clinical trial support. All of these are based upon the setup we already have. Clinical development stage collaboration can be used to support clinical trials or clinical studies like we do with our Denali collaboration or the collaboration with Arceus and Denali highlighted in recent press releases announcements. Andrin spoke about our R&D efforts on building the disease avatars earlier. So through leveraging our Biodata Bank for unique data-driven insights, we expect to sign more collaborations in the R&D states in the future. As discussed at our investor event in due in detail, this is an area where we will expand and expect to have the first value share deal added over the course of 2022. Those collaborations would generally include a value share for CentroGene, when historically these may have been small contracts only for distinct research questions. Please move to slide 21. While the ramp up in revenue in the pharma segment appears protected, we are extremely pleased to see the strong growth in our diagnostic business in Q3. Revenues from our diagnostic segments were 7.3 million euros for Q3 2021, an increase of 2.2 million euros or 43% from 5.1 million euros Q3 2020. We received an order intake of approximately 14,770 in our diagnostic segment in Q3 2021, representing an increase of approximately 46% as compared to approximately 10,150 order intakes received in Q3 2020. The increase in revenue was primarily related to an increase in test requests for panel testing as well as whole exome sequencing and whole genome sequencing during the three months ended September 30th, 2021. Total revenues from panel testing Whole exome sequencing and whole genome sequencing amounted to 5.2 million euros, representing an increase of 46% as compared to Q3 2020. Panel testing, whole exome sequencing, and whole genome sequencing account for approximately 50% of the number of test requests in the diagnostic segment 2021 year-to-date, supported by a project in the Middle East. Please turn to slide 22 for a look at our segment adjusted EBITDA. Here we see the segment adjusted EBITDA, which includes the contribution from the pharma, the DEX, the COVID-19 segments. We report a segment adjusted EBITDA loss of 2.5 million euros in Q3 2021 compared to positive 9.2 million euros for the same quarter last year. Same as for revenue, segment adjusted EBDA was driven mainly by the decline in the COVID-19 business as discussed. Total core business segment adjusted EBDA grew 1.4 million euros up from negative 0.4 million euros in Q3 2020, reflecting the strong uptake in the diagnostic business after COVID-19 hit in 2020. The picture for our two core business segments is mixed. Adjusted EBDA for the diagnostic turned from minus €1.2 million in Q3 2020 into a positive adjusted EBDA of €1.1 million. Adjusted EBDA of our pharma segment was €0.3 million compared to €0.9 million in Q3 2020. The decrease was primarily attributable to lower revenues as well as product mix. Looking at profitability, I would also comment on our organizational alignment in the core business. We will leverage the changes through the phase out of COVID to also optimize our overall organizational footprint related to the core business to free up resources for investment into our core business. This streamlining is associated with the overall small employee pace going forward but also based on an in-depth review by the new management team to ensure focus on improving processes and efficiency as well as streamlining our project portfolios. We expect the results to be saving of up to 15 million euro annualized excluding restructuring cost consisting mainly of personal related and operational expenditures and a smaller contribution from CAPEX. We expect a portion of the savings to be reinvested in the core business execution. Overall, you should therefore expect to see DNA expenses decreasing and overtime R&D expenses increasing. Correspondingly, we expect to record restructuring charges of below 2 million euros in the fourth quarter related to the core business realignment. Please turn to Slide 23 for a view of the P&L. Looking at our income statement, the slide shows UQ3 results on the left as well as year-to-date results on the right. And we will focus on the quarterly results for the purpose of this discussion and compare year over year. We have already discussed the revenue development in the quarter and highlighted the dynamic of core business versus COVID-19. I do want to spend some time on the gross profit development as this requires some explanation. On gross profit, we reported a loss of €5.4 million in Q3 2021, which compares to a gross profit of €10.2 million in Q3 2020. A negative gross profit is of course unusual and the reason behind this is again the impact of the COVID-19 business as previously discussed. Our expenses, including other operating income, increased by 1 million euros for the quarter compared to Q3 last year. Let me comment on the biggest factors that grow the increase in expenses. Firstly, general administrative expenses increased by approximately 2 million euros. The increase is principally due to the increased personal cost, administrative cost, and additional expenditure on IT support and data centers. Additionally, the corporate expenses included share-based compensation expenses of €1.9 million and increase of €0.7 million versus the prior year quarter. Second, our R&D expenses for the quarter were approximately €1 million lower than Q3 2020. This decrease mainly represents streamlining of personal cost, IT-related development cost, and then a change in the capitalization of cost last year which led to an additional expense in the p l thirdly our sales and marketing expenses for the quarter increased approximately 0.9 million euros mainly reflecting an increase in personal expenses online service expenses as well as travel expenses due to the easing of travel restrictions from covet 19 pandemic in total our operating loss was 21. 3 million euros, a decrease of 16.6 million euros compared to a loss of 4.7 million euros in Q3 2020. As previously discussed, the main change driven by the negative gross profit in the COVID business. Now please turn to slide 24 for the cash flow and balance sheet highlights. As of September 30th, 2021, we had 25.7 million euros of cash and cash equivalents on our balance sheet. In regards to our outstanding debt, I would like to remind you that as of the end of September, this includes approximately 19 million euros of leased liabilities. Looking at the movements, cash flow from operating activities improved compared to last year. The main drivers where the cash generated through our COVID-19 testing business segment in the first half of the year. Having said that, we do recognize the impact of the earlier discussed decrease in the COVID-19 business and negative gross profit, leading to fading contribution from the segment compared to previous quarters. As discussed before, we are managing that business on a cash basis to a phase-out. In 2021, year to date, the cash flow used in investing activities was €5.4 million, as compared to a cash flow of €11 million in the nine months 2020. Consistent with our aforementioned attention to the COVID business, the decrease is mainly due to a reduction in COVID-19 related investments. Cash flow from financing activities decreased compared to 2021, mainly reflecting the follow-on equity offering which contributed with €22 million in Q3 2020. Based upon this cash development, we have in our 6K also disclosed a going concern issue. With that, let me hand it back to André for our 2021 guidance and closing summary. Please turn to slide 25.
spk04: Thank you, René. So to round off today's call, let me touch on the financial guidance. We've seen that on the core business, we have good recovery of our diagnostic business, and we are also quite confident based on the contract values that we assigned on the pharma side that that business will return to and attract this Q4. We, of course, all by declining, have also significant contributions this year from our COVID business. And accordingly, overall, we will adjust our top-line guidance and expect growth revenue for 2021 to be between 30% to 40% versus prior year. This is mainly driven by COVID-19, however, We also expect our core business for the full year to be back to growth of mid to high single digits after a decline of 20% in 2022. Overall, with exiting the COVID business, we plan to be fully focused on our ready-to-be business strengthening execution, building the capabilities and attracting the required capital to further strengthen our leading position in the tourism fee space to create long-term value for our shareholders and stakeholders. With that, just a few summary points on slide 27. Core business recovery of 13%, 43% growth in diagnostics in the quarter, as mentioned. We plan to exit our COVID-19 testing business and we have started to implement a program to reduce cash burn in our core business. Overall, we remain confident on the step-by-step recovery we make on our core business where the overall strategic priorities have not changed. accelerating our growth in clinical diagnostics and pharma services by leveraging our unique biodata banks and strengthen our research capabilities to try to radically transform the understanding and treatment of rare diseases, starting with Gaucher, Niemann-Fried and Genetic Partners. So in closing, I would just like to express our gratitude to our partners, our employees, and of course, our shareholders, as you continue tirelessly in this profound pursuit of pure rare diseases. We remain committed to delivering the best possible business performance for our shareholders while we are adapting and capitalizing on the testing where the sea structure landscape immediately continues to evolve and grow. With that, I would like to hand it back to the operator for Q&A.
spk05: Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Our first question is for Puneet Soda from SVP Living. Please go ahead. Your line is open.
spk01: Yeah, hi, Andrea and Rene. A couple of questions given the quarter, obviously. First on gross margin, you pointed out your costs rose significantly as outlined due to COVID testing. I mean, I appreciate that you're shutting down your COVID testing operations in the first quarter. I don't think we were expecting your gross margin to be negative. So it appears to us that that would continue into the fourth quarter. But could you elaborate for us? As we look at 2022, when do you think your gross margin can return to be positive? So that's my first question. And then secondly, on cash runway, can you elaborate sort of given the current expenses, R&D increase, how long do you, you know, in terms of the cash runway, how long do you have before further potential capital growth? raises.
spk02: Thank you. Maybe I can comment on the first one. The reason you are seeing this drop in the gross profit that are twofold in or they're seeing the negative gross profit in the COVID business mainly due to the development of COVID business. Our core business, this is very important, is actually developing very positively compared to last year. So you see an increase in the quarter compared to last year in the gross profit in our core business from 840,000 to 3.2 million quarter versus quarter. And year to date, the core has improved from 8.1 million in gross profit last year to 9.9 million this year. So the underlying business of our core activity is actually improving. Having said that, it's of course correct, as the gross profit in total is negative, and that is mainly coming from the negative gross profit in COVID with 8.6 million. And there are two reasons for that. As we have told you about the, how should I put it, the decreased level of activity, as you have also seen in the presentation, has basically decreased from Q4 2020 into Q1, Q2, in 2021 and this has also continued in Q3. In Q3 we have then initiated, if I may put it like that, the ramp down of the activity and reducing the employer cost and so on. Here we have not reacted fast enough compared to the revenue decline. But due to the revenue decline in Q3, we have then made the decision that we will ramp down the COVID business in full until year end for the major part of the activities, except to airports that will continue into Q1 2022. Having said that, then you can say, of course, will the negative gross profit development continue due to these accelerated amortization and depreciations? And it's a little bit difficult for me to answer exactly. But I can tell you in the month of October, we have seen an increased activity in the COVID business. So we are actually very cash positive and EBITDA positive in the month of October. And we expect this to continue for the Q4 in 2020 based upon the development in COVID. in the infection rates and so on, you see, first of all, of course, in Germany, but also around the world. So we expect that this will be very cash positive in Q4. So, no, I would not, I mean, this, how should I put it, this negative gross profit development you have seen, we do not expect that to continue on a cash basis, if I may put it like that, in the Q4 and the Q1 of 2022. I believe that was the answer to your first question. And then the second question was, how long do you expect that our cash will last, if I may put it like that? First of all, I have to say that we have disclosed a going concern issue. This means that currently our cash position cannot cover the burn rate for the coming year based upon the current activities. Therefore, we have also started a streamlining project, as I explained, where we will reduce the cost with approximately 15 million, and this has also been kicked off today. This will be implemented right now and then over Q4 and Q1 next year. So we do plan to reduce the burn rate significantly with 15 million Having said that, then we also have 26 million in cash, so there should not be any issues. I mean, the 26 million will not cover another full year, but at least it will cover far into the 2022 based upon the current burn rate. Finally, it's also important to say due to our reduced cash position, which is also typically or normal for a biotech company like ours. We have, of course, also looked into two different, what do you call it, funding opportunities that we have. And we are currently in discussion with various strategic potential partners. We are in discussions with minority investors and maybe also some other potential investors It could either be in terms of additional equity or in terms of issuing some debt. So we are, how should I put it, on top of this. And as soon as we have more information, we will, of course, disclose this to you.
spk01: Got it. Thanks, Rene. On the data bank, You reported, I believe, somewhere around 630, 632,000 patients in the database. That appears to be a step down from the 650,000 in the quarter. And I recall Andrin talking about this database should continue to increase. Obviously, this is a core part of your offering. Can you just elaborate on exactly why this decline happened and also on pharma? I totally appreciate that COVID is ongoing and that is impacting the recovery in that business, but obviously that's a core business development activity for you. Maybe just walk us through that. What are some of the parts there that are impacting on the ground level and when do you expect realistically for that pharma business to improve? Because obviously that declined sequentially as well.
spk04: Yeah, I mean, so the first one, the quarter of quarter, the new data coming into the biodata bank is increasing. So in Q3, again, I mean, we added a significant 20,000 addition slide. Let me quickly put you on that. getting the exact number on slide eight, we added another 22,000 patients to the data bank in E3 alone. So the trend is robust, increasing quarter over quarter. The reason for that step down that you highlighted, what historic nature we have with our new chief data officer started really as a mobile hall of the data bank. to not just take historical samples for granted, but really validate what we have and kick out things that we think is no longer of value. So that has led to a reset of the baseline by 40,000 patients. Nothing to do with patients from this year. I mean, this is from a historic cleanup of the samples of patients that have been in that bank coming from years ago. Just to summarize, the growth of the biodata bank samples is very strong and we expect it to accelerate. The trend as such remains absolutely robust and it's also not a secret that, of course, samples that come in today are much more valuable than samples that we had that maybe are already 10 years old. We have much of the research content at 80% level and, of course, we are also in a great position today to do genomic analysis. You can also see that that percentage of full genomes exome sequence with the patients that come in in more recent time, of course, is much higher than it was a couple of years ago. So overall, the bank remains on track to be strengthened quarter over quarter. And for the pharma, at this point in time, that the recovery is not affected by the pandemic at least not significantly it is really a result of the fact that in 2020 the company had focused its whole identity and commercial strength on covid and such close to no new partnerships had been signed in 2020 and then you know we refocused on the core business starting when i came on board and we start in progress and find the first contract and it's highlighted a contract signed in Q1 and given that you don't get when you sign the contract but mostly then we start recruiting the patients and you will see the revenues there to kick in in Q4 but then I look as we have emphasized and all the contracts we had signed already this year we feel very good that first of all the you know growth is real I mean the The year is not over, but we are very encouraged by what we see now by November 24th, that we will have a good queue for pharma. And with the contracts that we assigned to date, we also believe that that will continue into next year.
spk01: Okay. Thanks. I'll let others hop in.
spk05: Thank you for your question. The next question is from Katherine Schultz from Bayes. Please go ahead, Jelani.
spk07: Hey, guys. Thanks for the questions. I guess first, you know, there have been some additional COVID lockdowns or restrictions lately across the world as cases start to rise again. You know, how do you view that impacting your fourth quarter, both in terms of core diagnostics and then clinical trial work for pharma?
spk04: Yeah, so thanks for the question. So on COVID, we do see an uptick in testing volume. So we expect Q4 to be stronger than Q3. It's a little bit early to tell exactly how strong it will be, given a lot of dependence, of course, on December. I mean, last year, we had a tremendous uptick during the traveling season. And will holiday season and a lot of travel, will that happen this year or not? I mean, this will really depend on how strong the potential lockdown would or would not be in Germany. If traveling continues, I think we will see growth and related cash generation. Should the lockdown lead to very strong travel restrictions, then normally the testing volume would go down again. But as I said, I think we are... on track and we will execute the overall ramp down of the COVID business. But it might well be, if the testing volumes continue to be high, that during the ramp down, we generate some additional cash. As for your second question, which you have to remind me, unfortunately.
spk07: Yeah, it's more on the non-COVID side of the business, just if any of the lockdown core diagnostics or the pharmacology.
spk04: Correct. I mean, up to now, we haven't seen any impact. In Europe, I think that now is somewhat the epicenter of the current pandemic, but that may change, you know, again in a month from now. And even here, we don't see an impact right now. Should it get worse, such that hospitals start to get significantly overcrowded so that they would prioritize the more standard testing work that they do, we may see some impact or some slowdown on our testing or clinical trials. But that's pure speculation. We haven't seen any. To date, we also don't expect it to be in any way near as it happened compared to how it was last year. I mean, we do have a global business. I mean, we are not just over-presenting in one region. And given that there is different phases of the pandemic in different regions, we overall do not expect to see a substantial impact even if in Europe we were to see a smaller flow down in the months to come.
spk07: Okay, got it. And can you just talk a little bit more about what you're doing with Twist? You know, when will those custom kits be available and how do you think they'll improve or differentiate your diagnosis?
spk04: Yeah, so I cannot go further than to say the expect is to be rolled out next year. In terms of exact what quarter and what when, I think we, given that this is in a collaboration with Quist, I cannot, you know, too much before we have alignment with them. But, you know, the teams are working on that, and we expect rapid progress. And as highlighted, we expect to have a further announcement on our central cloud still this year that will give you also there some more insights into how we plan to accelerate the rollout of our decentralized testing solution.
spk05: All right, great. Thank you. Thank you for your question. We have the next question from Sui Shinam from BTIG. Please go ahead.
spk08: Hi, thanks for taking the questions. Just out of curiosity, of the new pharma contracts that you've signed this year, year to date, or even the last, I would say, 12 to 18 months or even two years, Do you have a sense of roughly what percentage is coming from, you know, the existing 30 plus customers versus percentage coming from new customers?
spk04: Yeah, so how you look at it in terms of number of contracts, the majority are from new customers. In terms of value, Some of the existing contracts, of course, have a significant size, while some of the new ones are more from by the companies and hence start smaller. And if you ask for a value split, roughly I would say about half-half. Okay, gotcha.
spk08: And for the ones that have completed their projects and have not signed on for new projects, just out of curiosity, what are the main drivers? Or do you have a sense if they're expecting – yeah, go ahead.
spk04: Some of them are, you know, by companies specifically working on the rare disease with a certain scientific approach. And then if that program fails, then of course the program stops, right? And the company, given that it will be focused on one specific project, of course, would most likely either cease to exist or at least would have other priorities and, you know, immediately start in the next collaboration with us. But overall, I would say that It's relatively rare. I mean, we have a lot of repeat customers, and I think of all the larger partnerships that we have, I think at least to date, I can, of course, not make a forward-looking statement, but to date, these partnerships, they by and large tend to continue.
spk08: Gotcha. And then just on the diagnostic side, on the core diagnostic side, Do you have the infrastructure in place currently, in your view, to be able to achieve kind of your long-term growth rate target? Or are there kind of further efforts in place or that are underway to be able to continue to drive growth there?
spk04: Infrastructure, I guess it depends what you mean. I mean, as it relates to our laboratory capacity, I think we have what it takes at least for the medium-term. If we look at our central cloud, which is, you know, call it infrastructure as it relates to working with decentralized labs, I mean, that we are building up and we will share, as I mentioned, in a couple of months and where we stand and what we can expect. The investments there are not significant, but still, I think it's an important project for us. And when you look at the commercial infrastructure, I would say we have highlighted that in the past. Where we do have the gap is in the U.S. I mean, we do have a presence in the U.S., but we consider it not to be developed at the stage that we would like. And that's also why we are exploring partnership opportunities in the U.S., because, of course, one option always is to strengthen ourselves. But I see a potential there to maybe partner with – someone who has that footprint already in the U.S. and is interested to add our disease value proposition to a co-commercialization partnership.
spk08: Great. Thank you for taking the question.
spk04: All right. We're already a little bit over here, but for a minute, should we take one more question?
spk05: There are no further questions, sir.
spk04: Oh, good. Even better. Good. All right, I think then, Leonard, we can close the call.
spk06: Yep, thanks very much for joining us and talk to you during the next quarter at the investor events as well. Thank you and goodbye. Bye-bye, everyone.
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