Centogene NV (CNTG) 2019 Q3 法說會逐字稿

Hello and welcome. Thank you for joining us to discuss our third-quarter 2019 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 investors. Centogene.com. Our speakers today are Centogene's Chief Executive Officer, Prof. Arndt Rolfs and Richard Stoffelen, Centogene's Chief Financial Officer.

Before we begin, please refer to slide 2 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 US securities laws, including those regarding our strategic plans, development program and future financial results.

Statements made during the 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 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 request that you only ask a maximum of two questions. I will now hand the presentation over to Arndt. Please turn to slide 3.

Thank you, Sun, and hello, everyone. This is our first quarterly results call as a public company and we are pleased to share with you our third-quarter 2019 results demonstrating Centogene's strong execution towards our mission. I will first share an overall business update and then Richard will take you through the financials.

Let's turn to slide 5. Before we present our business update let me remind you of our business model. We have two segments of our business: Clinical Diagnostics and Pharmaceutical Partnerships. Starting from the right hand side is our Clinical Diagnostics business, which is working with our global physician network to help diagnose patients with rare diseases.

This business allowed us to build our knowledge base and bio repository around rare diseases. And this leads into the other segment of our business on the left side hand, leveraging our knowledge and insights with partner with pharmaceutical companies to help them improve therapies for rare disease patients. I want to emphasize that both of these segments serve our mission to help patients with rare diseases.

Now let me update you on how we performed in the third quarter of this year on slide 6. We will focus the presentation on three key areas today. First, we will review our continued performance around execution. We have grown our top line by approximately 10% and nine months ended September 30, 2019. I will also share some key metrics that demonstrate solid operational execution beyond the financials.

Second, I want to highlight some new pharma collaboration agreements, particularly a joint research collaboration with Pfizer. This is an important milestone for us as it demonstrates our continued efforts to expand our pharmaceutical partnerships in the rare disease space, but also speaks to the deep experience that Centogene has built up over the year.

Finally, [receipt] of the IPO as well as the sale and leaseback of the headquarter building indicate our intention to invest in our future. I will talk more about this in a few minutes. I'm very proud of our team's ability to remain focused on our mission and commitment to our patients.

Please turn to slide 7. Let me update you on key financials first. Our nine months ended September 30, 2019 revenue grew at 10% compared to the prior year period. Centogene has been growing at a faster rate than this, but the nine-month close rate was tempered due to large one-time upfront fees we received Q3 last year from certain pharmaceutical partnerships. I will let Richard walk through this in further detail in the financial review section.

Another noteworthy financial [win] was the loan repayment through a sale and leaseback of our headquarter building. This was a decision we made to ensure that we have enough capital to invest in the growth of the Company. This will be discussed further later in the presentation.

Please turn to slide 8. I mentioned before that our Q3 performance was solid. To demonstrate this I would like to highlight some operational metrics that exhibit our solid performance. First is the continued expansion of our client base, for example, the number of partners in the pharmaceutical segment.

As revenue from some of these partnerships are currently small, it is much easier to expand the partnerships than to establish a new partner relationship. Hence I believe we have been doing the right thing by continuing to develop our partnerships.

Second, we have been diligent in building our knowledge base. One metric you can look at is the number of cases in our database. If you look at the quota of 125,000 patient cases added to our repository over the past year, you'll appreciate the acceleration of the growing database. I want to emphasize that this knowledge base is the heart of our Company and this demonstrates the continued growth of our Company.

Finally, our volume growth across all our sample order intake grew at approximately 27% over the year. This growth demonstrates the solid expansion of our business platform.

Please turn to slide 9. I want to talk about the joint research partnerships we entered with Pfizer recently. I'm truly excited about the prospect of the partnership and also what is demonstrated in terms of Centogene's expertise and capability. This agreement is a further research collaboration agreement leveraging Centogene's database and repository into potential discovery and validation of novel targets for new therapies in the rare disease space.

While we have been working with Pfizer for a number of years, this new agreement is a much broader partnership and is a testament to the depth and robustness of CentoMD and our medical knowledge in this field and I will now spend some time to explain why.

CentoMD, with more than 375,000 courageous cases in the database, we believe is to be the world's largest database of rare disease cases with genetic, proteomic, metabolomic and clinical information. This database has a few notable features that make it really powerful.

First, it has a concentration of rare disease patients from a wide range of ethnic backgrounds across over 120 countries. Second, it is the clinical information that is included in a structured manner allowing us to query the data. Finally, having not just genetic information but also proteomic and metabolomic information gives us much deeper insights and flexibility for research. I think this extension of our Pfizer collaboration will truly bring great innovation for the rare disease patients.

Now please turn to slide 10 for a closer look at our milestone event, our IPO. Centogene's shares were listed on the NASDAQ on November 7. As the founder of this Company in 2006, I'm grateful for the hard work and dedication of the entire Centogene team who have helped to build the Company into what it is today.

Let me also speak to what this milestone means for Centogene going forward. The proceeds from offering our shares on NASDAQ will go to crucial investments we want to make for the future of the Company such as the biomarker development programs.

Additionally, we believe that the increased visibility that we will get as a public company, and the credibility that comes along with meeting US SEC requirements, will go a long way in accelerating partnership discussions. Let me now hand it over to Richard who will discuss our financials in more detail.

Thank you, Arndt. Now please turn to slide 12. Looking at our year-to-date performance, we have grown our top line by 10% versus prior year. Looking more specifically at individual business segments, the Diagnostics business continued double-digit growth while the Pharma business remained flat. This is largely due to the non-recurrence in Q3 2019 of the one-time upfront fee items we had in Q3 of last year which I will describe in more detail. Hence, let's dive more closely into quarterly performance on slide 13.

Our quarterly revenue was lower by approximately 13% on paper. Our Pharma segment revenue decreased by approximately 33% and our Diagnostics business grew at 11%. These figures do not tell the whole story. There were large one-time upfront fees in the Pharma business in Q3 2018 which were not matched in Q3 2019. These one-time upfront fees in Q3 2018 amounted to EUR4 million, and I'm sure you can appreciate the impact this has when comparing it to Q3 2019.

In our diagnostics business, on the other hand, the different dynamics between our core genetic Diagnostics business and non-invasive prenatal testing, NIPT, were at play. Let me walk through these one-time upfront fees on slide 14 and explain our overall performance.

First the Pharma business. For those of you that studied our F1 filing in detail, I would like to remind you that there were one-time upfront fee payments received from our Pharma partners, Denali and Evotec in Q3 2018 which totaled up to EUR4 million. This is one item that we should account for in understanding the overall performance. If you excluded this from Q3 2018, our Pharma business would have grown at 49%, which I believe is quite impressive.

On the Diagnostics side, if you focus on the core genetic diagnostics excluding NIPT, our quarterly growth rate is approximately 35%. The NIPT business is not a core of our business, nor central to our mission of generating medical insights around rare diseases. Whilst we previously entered this space for certain strategic reasons, this year we have shifted our focus to growing our core genetic Diagnostics business.

In summary, we grew our core business at an approximately 35% to 50% level and I believe this better represents our performance. Now please turn to slide 15.

Slide 15 shows our quarterly and year-to-date P&L. Our quarterly results were impacted mainly by the lower third-quarter revenues from Pharma segment as discussed earlier, as well as an increase in investments in R&D. Our year-to-date operating results were mainly impacted by an increase in R&D investments by EUR2.3 million as well as real estate tax expenses incurred relating to the sale and lease back of EUR1.2 million. Our general admin expenses increased by approximately EUR2 million, which mainly reflects our investment in IT infrastructure such as further improving the protection and privacy of data.

Now please turn to slide 16. As Arndt had mentioned before, our IPO was an important milestone in Centogene's journey. Arndt spoke about a strategic aspect, but let me provide some financial details.

On November 7 we offered 4 million new shares on NASDAQ raising $56 million, this represents approximately 20% of Centogene's currently outstanding shares. We intend to invest the majority of the net proceeds from the offering to further accelerate the growth of the Company and aid in the development of the treatments in rare diseases. In particular, these include development and clinical validation of biomarkers, development of our knowledge driven platforms such as with new IT technology and artificial intelligence.

Now please turn to slide 17. On the slide you will see the picture of our headquarter building in beautiful Rostock, Germany. In the third quarter of this year we entered into an agreement to sell the building and lease it back for multiple years going forward. We believe this was the right thing to do as it allowed us to reduce our leverage and invest more in the future of our business.

In relation to the sale and lease back, we also used a portion of the sales proceeds to repay the debt associated with the construction of the building of approximately EUR11 million. With this transaction and our IPO, I believe we are well-positioned to make the necessary investments that are vital to our future. Speaking of investments, let's take a look at our cash flow and balance sheet on slide 18.

Moving to slide 18 we are looking at key cash flow and balance sheet items. On cash flow for the nine months ended September 30, 2019 we had EUR13.5 million cash inflows from investing activities representing the proceeds from the sale of the Rostock headquarters net of investments in intangible assets and laboratory equipment. The cash flow from finance activities reflects the repayments of the loan as well as additional interest resulting from the early repayment of the loans.

On the balance sheet as of September 30, 2019, our debt included a lease liability totaling EUR40 million relating to the lease of the Rostock headquarters, which is accounted for according to IFRS 16, an accounting policy effective since January 1 of this year.

I also wanted to reiterate the revenue guidance for the full year 2019. As announced earlier this week, we anticipate our 2019 revenue growth to be approximately 20% when compared to the full year 2018. With that I'm turning the call back to Arndt.

Thank you, Richard. Please now turn to slide 20. We have made solid progress so far in 2019. Many years from now I'm confident we will look back at 2019 as a transformative year that made our vision of the future of Centogene possible. Let me summarize my key takeaways here.

First, I would like to revisit the IPO. Additional funding and the public visibility and credibility is obviously a huge benefit in my opinion. In addition, this event will also push Centogene to manage its business as a mature public company, which I think will be more important to the long-term future of the Company.

Second, I believe Richard and I were able to demonstrate to you that we are driving solid performance that is much better than what it might appear on paper. I hope you will also agree with me that we are focusing on the right things and managing our business.

Lastly, we believe the Pfizer joint research agreement speaks to the unique capability we have been able to develop in the rare disease space. I am confident that we will be the partner of choice that can help our pharmaceutical partners bring about better therapies faster to the patients which is truly our mission.

I want to thank the audience for joining Centogene's first earnings call as a public company. We appreciate your support and will continue on our lifelong commitment to our patients. With that I will now turn the call over to the operator for the Q&A portion of our call. Thank you.

(Operator Instructions). Puneet Souda.

So, first question I have, first -- quick ones first. Can you describe the test mix between Pharma and Diagnostic? Just wanted to make sure if you had volume from Pharma. And if you could provide gross margins on both Diagnostic and Pharma segments. I know you provided the corporate gross margins, but just wanted to see if you could provide Diagnostics and Pharma margins there.

In Pharma our gross margin was about 81. The number of samples growth in Pharma was about 51% out of the total to answer your question, Puneet.

Okay and on the gross margin front you said 81%?

Well, 76% to be exact for the Pharma segment.

Okay. And I wanted to see if you could provide us your assumptions for the fourth quarter. I mean this implies a growth rate here of 28% sequentially. So, just wanted to understand your confidence in terms of the Pharma agreements.

I know you highlighted Pfizer and PTC and I just wanted to get your view as to sort out how much are you expecting, how much contribution are you expecting in the fourth quarter there. And how much potentially moves over to the first quarter or maybe to the first half next year?

The guidance issued early this week is what you can use as a basis to extract the differential to be made in Q4 -- this may have been Richard.

Okay. And then if I could maybe ask a high-level question. In terms of expansion of CentoMD, Arndt, you have done quite a bit on lysosomal storage disorders, but wanted to get a view from you as to how you -- how you're thinking about expansion beyond that and into other broader disorders. What are some of the avenues, what are some of the areas where you want to have a stronger presence off the CentoMD database?

Thank you. Actually pretty (inaudible) and then they reflect about 50% coming from neurological indications that includes the neurometabolics. The percentage of this indication is going down because we are quickly growing in indications like cardiogenetics and nephrogenetics and also oncogenetics reflect in the (inaudible) about 12% to 13% of all of the cases. So, we see a very nice general spread out in all of the important medical indications.

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

Sung Ji Nam.

Thanks for taking my questions. Congratulations on being a public company. So firstly, in the prospectus you talk about your expansion plan for -- in Asia Pacific as well as in North America. And you obviously opened a laboratory in the US last year. Just curious -- would love any updates in terms of the progress you're making and plans going forward in terms of gaining more data essentially from those regions.

Thank you very much, Sung Ji, for your congratulations and for being present in this call. Our expansion geographically as well as overall is progressing nicely. And as you will be able to read in our 20-F filing next year, you will see the details on how the geo split has come out for the year. But for now we can tell you that we are increasing the samples from both regions that you mentioned earlier.

Okay great. And then just my follow up is you provided the revenue guidance for the year. Was curious in terms of operating expenses for the fourth quarter should -- are there any anticipation for a step up from where you are in the third quarter, just trying to get a better sense of how we should be modeling OpEx (multiple speakers)?

Without giving too much future guidance as we are likely to reframe from giving out as much as possible, there's nothing out of the ordinary that we anticipate at this point in time.

Okay great. Thank you.

Catherine Schulte.

Hi, thanks for the question. First, as you highlighted, you've had pretty strong growth in your whole exome and whole genome sequencing business. As we see more reimbursement and clinical support for this kind of testing in rare and undiagnosed disease, for example with the NHS, is there an opportunity for you to partner with bigger initiatives and national programs in this area?

It's a very important concept, very important idea. Let me underline that the strength of the Company results from the fact that we always guarantee the highest level of quality in the way how we are processing the samples, how we are generating the samples, number one.

Number two, what's always critical for everything what we are doing is the combination of getting access to the clinical data around the individual patients and combine the clinical knowledge with the genetic data we are generating.

So, even though there is a good idea to partner with other organizations being also active in just generating the exomes and genomes, we still believe for today that the quality we can contribute as a result of the global spread-out, and the combination of the clinical data plus the genetic data is more important also for the standardization of all the interpretation topics than partnering with other partners not being so sure how they have generated the data.

And let's not forget the global spread-out is so critical for us because we would like to understand the genetics in combination with the clinical from all ethnicities all over the globe. So, a European focus or a US American focus in generating the data is not really feeding to the same extent our databank and not really feeding to the same extent our expertise in the rare disease where we are clearly dedicated to.

All right, great. And then, Arndt, you referenced the opportunity to expand existing partnerships in addition to signing new partners. As you think about the next couple of years how do you view the growth opportunity just from going deeper and expanding with current collaborators versus signing on additional partners?

Thank you for that very interesting question, Catherine. In general we expect our Pharma business to grow at a faster pace than the [DX] business. On the back of both increased number of partnerships and, as alluded to before during the call, typically we see an expansion of the partnership itself over time. So, it will be a combination of both.

Great, thank you.

Thank you. (Operator Instructions). Currently no further questions coming through, sir.

If there are no more questions, then we would like to wholeheartedly thank the participants in the call. Thank you for your interest, thank you for your time and we look forward to meeting you again via such teleconference in the near future or face-to-face at one of the conferences. Thank you very much. Have a lovely day.

Thank you.