Centogene N.V.

Thanks, Roberto. Hello, and thank you for joining us for today's Q4 and fiscal year 2021 financial results and business update conference call. This morning, we issued a press release on our results, highlighting recent accomplishments and the outlook for the upcoming year. The full release can be found on the investor section of the Centogene website at centogene.com. 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 U.S. securities laws, including those regarding our strategic plan, development programs, and future 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 of today, March 30th. 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 appear in our SEC filings. Joining us on today's call are Kim Stratton, Sandwich & CEO, and Miguel Coelho, EVP Finance and appointed Interim CFO. We will first begin with a general business update, followed by a summary of our financial results for 2021. We will then open up the call to a Q&A session. The call is audio only. I would now like to turn the call over to Kim Stratton, Centergene CEO. Kim, over to you.

Thank you, Leonard, and hello, everyone. We are grateful for you joining us today, and I'm also really grateful to be here representing Centergene as the CEO. Probably I should start off with the acknowledgement of my predecessor, Andrin, thanking him for his contributions and wishing him continued success personally and also professionally in the future. I would also like to thank everyone here at Centergene for their dedicated work to build and evolve the company and for the very warm welcome I have received since joining. Since assuming the CEO role, I've met many great people, a great group of diverse and exceptionally capable professionals. all of them deeply dedicated to improving the lives of hundreds of millions of people suffering from genetic and especially rare diseases. So I joined Centergene in an interim role in January, and I was excited at the opportunity to assume the role permanently as of last month. However, I feel it's important that my experience with the company dates back to 2013, with my responsibility then as the international head for commercial business at Shire, where much of my role was focused on rare diseases. I see our successful collaboration with Shire, now Takeda, as a blueprint for Centogene's tremendous ability to partner with leading biopharma partners to provide great value for partners and rare disease patients alike. I think this serves as a prime example of where I see Centogene excelling. differentiating and positioning for future growth. But first, let's discuss the 2021 results. Let me highlight the key messages for the day. So we're really encouraged by the progress achieved in the fourth quarter of 2021. In Q4, we recorded solid quarter-over-quarter revenue growth in both core businesses of diagnostics and pharma. This growth has exceeded our prior guidance given for the full year 2021. And I think overall shows the annual core business growth of 11%. And we are positioned to strengthen our core business over the course of 2022. The management team and I are really focused on expanding and adding partnerships with Biopharma, both pipeline building and also execution. In the fourth quarter, we added approximately 24,000 new individual samples to our extensive Centogene BioData Bank. This is a steady increase towards our goal of reaching 1 million individuals overall in the Centogene BioData Bank. And even though we are strategically shifting out of the COVID business, and this is on track, by the way, the COVID segment still has contributed better than planned in quarter four. Recent highlights since 2021 also include the successful closing of a combined equity and debt financing, raising approximately $62 million to strengthen our balance sheet, strategic management appointments completed, and also expanded pharma collaborations. You saw the Pfizer announcement just this month, and we're expecting another key extension announcement to come out over the next couple of weeks. These milestones reflect effective execution by our overall team, setting a strong foundation that we can build upon throughout 2022. Now let's look a bit closer at the 2021 results. For the purposes of today, I will focus on the core business, and Miguel will later comment on the COVID-19 business separately. The core business encompasses our diagnostics and our pharma business. These are the two key drivers of CentiGene's continued growth. In the fourth quarter, we reported core business revenue growth of 34% versus the same quarter last year for 2020. This was the third consecutive quarter reporting core business growth overall. However, it was the first quarter since the start of the pandemic where we observed both growth in diagnostics and pharma. So let's first cover our diagnostics business. The diagnostics business grew 30% in the fourth quarter and 26% in the full year 2021 versus full year 2020. And I think it's important to talk about a couple of operational highlights. In Q4, we reported order intake of approximately 15,000 test requests. This represents a 30% increase compared to 12,000 in the same period for 2020. We believe we offer the broadest diagnostic testing portfolio for rare diseases globally, and we cover over 19,000 genes. In quarter four 2021, we signed the collaboration with Twist Bioscience for the development and the commercialization of custom assay kits for rare diseases. And in January 2022, we released the SEM2Cloud globally. It's our cloud-based bioinformatics solution which enables decentralized analysis, interpretation, and quality reporting for laboratories all over the world. I think it's important to note that our diagnostics business was abruptly shut and significantly impacted in quarter two of 2020, with sales decline of almost 50%. Since then, diagnostic revenues have grown consecutively each quarter to recover to the current level of 7.5 million euros. Please note that this is at the same level as a quarter one 2020, which was the record quarter in diagnostic sales in the company's history. I think we can report that we have now recovered to pre-pandemic levels in our diagnostics business. I would like to take this opportunity to thank Matt Schmidt and our diagnostics team, as well as Florian Vogel and our laboratory team for this turnaround performance. And we will not stop here. Our diagnostic business remains a key pillar of our strategy and will provide a stable base for our business It keeps us close to both patients and physicians, and it will continue to fuel CentiGene's biodata bank. Now let's turn to our pharma business. Our pharma business grew 40% in the fourth quarter versus Q4 2020. For the full year 2021, pharma revenue was 15.6 million euros. Yes, it was still below the prior year. We believe this year-over-year trend reflects a longer recovery time in the pharma segment as compared to diagnostics. It's important to remember that prior to the pandemic, CentiGene had been on a solid growth trajectory, averaging around 20% annual revenue growth in the years leading up to 2019. The impact of COVID-19 pandemic on Centogene in 2021 and 2020 was twofold. Internally, the company deployed great efforts to set up and opportunistically pioneer commercial COVID-19 testing in Europe. It was really needed. This was a significant driver of revenue, and it certainly was also a service to the health system and to society. However, it did also mean that some of the focus shifted away from execution in the core diagnostics and pharma businesses. Externally, the pandemic also slowed down or stalled commercial and clinical development programs and studies at biopharma companies, leading to a contraction of the company's business pipeline. While Centogene experienced this decline, we know this impact was also felt by the broader industry. For example, in 2021, the annual sponsor survey by Jefferies reported that 60% of new trials and 40% of existing trials were either delayed or paused due to pandemic-related disruption. Looking forward, a return to normality provides an opportunity for Centogene in 2022 and beyond, a potential tailwind for catch-up and additional activities in the industry. We are positioning the company to proactively identify the relevant trials and parties and address them as part of our business development and partnership pipeline expansion. The key 2021 pharma highlights are Q4 revenues was the first comparative growth quarter since Q1 2020. We also announced the following. We enrolled the first patients in the clinical study partnered with Elector, targeting data-rich genetic testing for more than 3,000 frontotemporal dementia or FTD patients. We expanded the clinical development partnership with Agios Pharmaceuticals to provide genomics and central lab support for Agios' three global pivotal trials in thalassemia and sickle cell disease. And more recently, a few more milestones. As we announced just a couple of weeks ago, we expanded the data access and collaboration R&D agreement with Pfizer to advance the discovery and validation of novel genetic targets as candidates for the development of new therapies for rare diseases. We know that providing insights into these types of partnerships is of tremendous value for our investors and for the public, and we are committed to improving transparency in this regard. On the research side, we have joined forces within Silico Medicine. The partnership is leveraging the Centogene Biodata Bank and artificial intelligence together with Insilico's AI-based drug discovery platform to identify new targets and accelerate orphan drug development, in this case, for Niemann-Pick type C, or NPC, which is an ultra-rare disease for which no FDA-approved treatment exists at the moment. So we're looking forward to the outcomes in the second half of 2022. Now, before handing to Miguel for the financial section, I'd like to take a moment to recognize Rene Jus, our outgoing CFO. On behalf of the company and the board, I would like to thank Rene for his contributions during his tenure, including internal process improvements, the cost reduction process, accelerating our annual reporting cycle, and also to thank him for securing a strong financial foundation for CenterGene with the financing that closed in February. Rene has been fully engaged with the transition of CFO responsibilities to Miguel, including the preparation of our 2021 report. We wish Rene all the best in his future endeavors. And in the same spirit, it's a privilege to welcome Miguel Coelho to the CenterGene team as interim CFO. I've worked with Miguel in previous roles, and with his more than a decade of experience in senior finance roles in the biopharma sector, I can personally attest that Miguel brings great expertise for the role. And with that, I would like to turn over to Miguel. Miguel.

Thank you, Kim, and hello, everyone. Before we start, I would like to emphasize how excited I am to be joining CentoGene at this time. The company has set a solid financial foundation with the financing completed in the first quarter of this year, and we are in a strong position to deliver on the next step in the evolution of this strategy. I am looking forward to enhancing the value generation of Centogene by ensuring optimal resource allocation on our strategic path forward. And now we'll turn to the fiscal year 2021 financial results. Our fiscal year 2021 revenues increased by over 48% to 190 million euros in full year 2021, compared to 128.4 million euros in 2020. This development was mainly driven by the COVID-19 testing, generating 146.4 million euros in the year, up 57 million from last year. Importantly, the growth also reflects a return to honor growth in the core business. I will discuss the COVID business separately in a moment and first focus on the core business which consists of our diagnostics and pharma segments. The core business expanded by 11% in full year 2021 to 43.5 million euros compared to 39.1 million euros in full year 2020. This growth was largely driven by the material uptake of our diagnostics business. The core business will pick up significantly towards the end of 2021 demonstrated by a 34% increase in core business revenues in the fourth quarter. For the diagnostic segment, we recorded 27.9 million euros in diagnostic revenues in 2021, compared to the 23.1 million euros in 2020, representing revenue growth of 26% for the business segment. We are proud to report that this is a record year. The diagnostic segment received an order intake of 57,000 tests requested in 2021, representing an increase of 37-36% as compared to the 42,000 tests requested receiving full year 2020. The increasing revenues were primarily due to the surge in order intakes for panel testing, exome and genome screening during 2021. Total revenues from panel testing, exome and genome, augmented to approximately 20 million euros in 2021, representing an increase of 25% as compared to 15.9 million euros in 2020. The diagnostic segment revenue increase was mainly from increased demand in the Middle East in our MENA region. This leads to an increase in segment gross margin by over 22 percentage points, which you will also see reflected in the segment adjusted EBITDA. In Q4, diagnostic revenues were 7.5 million euros, up 30% versus Q4 2020. It is important to note that this is about the same as the prior record quarter in the diagnostic segment before the pandemic in Q1 2020. So it is fair to say that the DX business is truly back. Turning to the pharma segment, pharma revenues decreased 8% year-over-year from 16.9 million euros in 2020 to 15.6 million euros in 2021. The annual comparison in pharma revenues reflects the impact of the COVID pandemic and related slowdown, as Kim mentioned earlier. However, I will talk later about the positive performance in the fourth quarter and also on the value of pharma contracts signed in 2021, which significantly exceeds the value of deals signed in 2020. This is extremely encouraging as our partnership agreements are a major growth catalyst for the pharma sector. We have started a number of initiatives to accelerate the farmer recovery and growth for the year 2022. In 2021, we entered into 18 new collaborations and completed 39, resulting in a total of 45 active collaborations per year end 2021. Revenues from our new collaborations totaled €2.3 million in 2021, with upfront payments of €0.5 million related to setup fees. In the prior year, revenues from new collaborations totaled approximately €1 million, with no upfront fees included. The main drivers of pharma segment revenues were partnerships in patient identification and clinical development. This is something we expect will continue. However, we will strive to improve in a range of areas, including, first, focus on the contribution margin per contract. For example, by providing more upfront fees into new proposals and contracts, we believe this is fair to capture the value of the platform we have built and invested in. And second, improve our portfolio definition. For example, in the category of patient identification, we are actually providing a lot more value than just finding a patient. So we will want to position a set of distinct offerings under the umbrella of market access and expansion. In Q4, pharma revenues were at 6.5 million euros compared to 4.6 million in Q4 2020. So this is an increase of 40%. showing great end of the year momentum. Turning to our COVID business. Post Q3 2021, CentoGym made executive determination to begin placing out this business segment, which was communicated to our stakeholders on the last quarterly update called in November. The segment adjusted EBITDA contribution from the COVID segment was still 20.7 million euros in full year 2021, a decrease by 16.5 million euros year over year. Revenue generated for the year 2021 amounted to 146.4 million euros, with approximately 2.3 million test requests received during the year. The segment growth margin was significantly lower in 2021 compared to 2020, which also caused the overall company growth margin to drop. This significant change was driven by a range of factors, including the shift to short contractors to increase flexibility, changes in government contract structures, downturn of COVID testing in the second half of 2021, accelerated depreciation and amortization expenses, and costs related to the shutdown of our Hamburg lab and unprofitable testing sites. As a result, growth margin for the segment declined from 43% that year to 9% this year. This impact was specifically felt in Q3 2021. Afterwards, we were able to streamline operation by closing unprofitable testing sites. This resulted in improved contribution from the segment. The COVID business is on plan to phase out by the end of the current quarter. The rundown plan is being diligently executed and Q4 was actually better than planned. At the end of this activity, COVID-19 testing will have generated over 250 million euros in revenues for sentencing, mainly through airport test centers, supporting and enabling international travel, and other contracts supporting local and state governments, which might need testing solutions and capacity. The business will have delivered a total adjusted EBITDA contribution of roughly 60 million euros, and positive cash contribution of about 50 million euros. We look forward to now refocusing our efforts to further build and scale our core business. Going further down in our P&L and gross margin by segment, overall gross margin for the company was 15% in 2021 compared to 35% in full year 2020. As discussed, this decline was caused by the COVID margins, but the core business improved. Our core business segment, Diagnostics and Pharma combined, generated total gross margin of 34% of revenues, a significant increase versus a core business gross margin of 14% in the prior year. This improvement mainly reflects the improved gross margin in the diagnostic segment, with gross margin of 38% versus 16% in the prior year, mainly reflecting the product mix toward higher margin products. The margin in the pharma segment improved from 12% in 2020 to 26% in 2021. To note, the prior year comparable reflects an impairment of 4.7 million euros to the capitalized biomarkers included in cost of sales. The total segment adjusted EBITDA was 29.5 million euros in full year 2021 compared to 41 million euros in full year 2020. Again, the decline was caused by COVID as discussed. by the core business, but the core business improved year over year and showed a stronger adjusted EBITDA contribution. Core business segment adjusted EBITDA, that is the sum of adjusted EBITDA in the diagnostic and pharma segments, was 8.9 million in full year 2021, compared to 3.8 million in full year 2020. The picture for our two core business segments is mixed. Adjusted EBITDA for the diagnostic segment turned from minus 2.4 million euros in full year 2020 into a positive adjusted EBITDA of 4 million euros. The adjusted EBITDA of our farmer segment was 4.8 million compared to 6.2 million in full year 2020, and the decrease was primarily attributable to lower revenues. The segment adjusted EBITDA leaves out the so-called corporate expenses, and I will go through the remainder of the P&L. Our expenses, including other operating income, totaled approximately 74 million euros for the year 2021, an increase of 9.3 million euros compared to last year. General administrative expenses increased by 6.6 million euros to 46.7 million euros. The increase was mainly due to an increase in personal costs, including management additions and severance costs related to the restructuring announced in November 2021. G&A also includes share-based compensation expenses of 8 million euros in 2021, an increase of 2.4 million euros as compared to 5.7 million euros for the year 2020. In addition, we saw increased costs relating to being publicly listed company, as well as an additional investment in IT support and data center costs. Second, our R&D expenses were 19.3 million euros, approximately 4.4 million higher than in 2020. This increase mainly represents software enhancement costs and research costs related to biomarker development projects that don't qualify for capitalization. On a related note, in 2021, we booked an impairment of approximately 1 million euros on biomarkers that have been deprioritized as we focus on the development of biomarkers directly linked to ongoing pharma projects or our project pipeline. The R&D expenses include extended investments in additional intelligence and database development in 2021 and associated amortizations. We believe we will see a decline of overall corporate costs in 2022, with the effects of the restructuring fully implemented and further assessments and action we are reviewing. We will share more on this in the future. Thirdly, Our selling expenses, including sales and marketing expenses for the year, were 9.8 million euros, an increase of 1.7 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 the COVID-19 pandemic. We believe investing in Salesforce is the right step. In total, our operating loss was 46 million euros, a decrease of 26.3 million euros compared to a loss of 19.7 million euros in 2020. The main driver was the lower gross profit generated in the COVID-19 testing business. Looking at profitability overall, I would like to comment that we, as the incoming management, are and will be focusing on our spending, ensuring that we are operating efficiently and spending with great accountability and investing wisely. We have kicked off a number of review initiatives to drive efficiencies in our lab and IT operation, as well as our administrative functions. It is too early for us to provide any immediate guidance, but it is our clear target to lower our corporate expenses while supporting the businesses with greater potential. Turning to cash flow and balance sheet highlights, as of December 31st, 2021, We have 17.8 million euros of cash and cash equivalents on our balance sheet. With regard to our overall debt, I would like to remind you that as of the end of December, this includes approximately 19 million euros of lease liability. Looking at the movements, cash flow used in operating activities was 21.7 million, an increase of 30.1 million euros compared to cash generated from operating activities of 8.5 million euros. This change was mainly driven by the lower contribution from the COVID-19 business segment in 2021 as discussed. Notably, contribution from COVID should be positive in Q1 2022. In 2021, class cash flow used in investment activities was 5.4 million euros as compared to cash flow used in investing of 16.2 million euros in full year 2020. Consistent with our decision on the COVID business, the decrease is mainly due to our reduction in COVID-19 related investments. Cash flow used in financing activities was 3.2 million euros in 2021, compared to cash generated of 14.8 million euros in full year 2020. Here, 2020 mainly reflected the follow-on equity offering with contributed 22 million euros in Q3 2020. Excuse me one second. Sorry. Again, let me reiterate that one of our clear targets for this year is to improve our expense structure and therefore improving our core business operational cashflow for 2022 and beyond. Please note that after the end of the year, we successfully secure approximately 55 million euros in aggregate equity and debt financing. This includes 15 million euros in a pipe financing from existing investor, as well as approximately 40 million euros in a debt financing from Oxford Finance. The financing was important to address the coin concern qualification we published in the third quarter last year, and I'm confident that this has indeed been addressed. Tentagene now has a stable balance sheet to transition