Centogene N.V. (CNTG) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the CENTOGENE Q2 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I would now like to hand the conference over to your first speaker today, Lennart Streibel. Please go ahead.
Lennart Streibel: Thank you, Sharon, hello, and welcome. Thank you for joining us to discuss our second quarter 2021 results, which were issued earlier today. You can view this presentation and the related press release on CENTOGENE's website. For those unable to view the webcast, you can find the relevant slides on investors.centogene.com. 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 U.S. securities laws, including those regarding our strategic plans, development programs and future financial results. Statements made during this call that are not historical statements may be forward-looking statements, and as such, may be subject to risks and uncertainties, which if they materialize, could materially affect our actual results. The forward-looking statements in this presentation speak only as of today, September 7, 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. It's now my pleasure to introduce you to today's speakers, our Chief Executive Officer, Andrin Oswald; and René Just, our Chief Financial Officer. Following our presentation, we will open up the call to Q&A. We kindly request that you ask a maximum of three questions. I will now hand the presentation over to Andrin. Please turn to Slide 4.
Andrin Oswald: Thank you, Lennart. Hello, everyone. Today, I will begin by walking you through our operational performance during the second quarter of 2021. I will then update you on the progress of our core business, meaning the Pharma and Clinical Diagnostics segments and provide you with further insights into our company and its key assets. René will then take you through the financials, including what we have been able to achieve in our commercial COVID-19 testing segment. We will then provide our financial guidance for 2021 and the business outlook. Afterwards, we will open up for Q&A. Let's please turn to Slide 5. Let me first highlight the key messages for today. We delivered a strong quarter on the top line and made meaningful progress on our strategic priorities, which we outlined at our investor event in June. As mentioned at the event, we are continuously expanding our data-driven approach to reinventing where we see drug discovery and development. Since June, we have further added to our new management team with the most recent addition of Patrice Denèfle, as our Chief Scientific Officer, who will lead our efforts in drug discovery and development. I'm very excited to have Patrice on board and on the team. We delivered a very strong performance from a revenue perspective, surpassing €50 million in revenues for the quarter. This still reflects the strong contribution from the COVID-19 testing. But most importantly, we are seeing the return of growth in our core business with year-over-year growth of 25%. We are also pleased to see positive segment adjusted EBITDA in all operating segments. Our Bio/Databank also demonstrated growth with approximately 25,000 new patients added in Q2 2021. This is a steady increase towards our goal of having 1 million patients in our Bio/Databank. We have shown that we are committed to offering superior diagnostics. We currently offer the broadest diagnostic testing portfolio focused on rare diseases, covering over 19,000 genes using over 10,000 different tests. Within this segment, we have seen the business return to solid growth, up 82% year-over-year. We have indicated this trend in the last quarters, and it's nice to see the business to continue to steady growth. In the Pharma segment, we are continuing to leverage the compounding value of our leading and continuously growing Bio/Databank. While the revenue is down year-over-year, we believe this reflects the lumpiness of this kind of revenue stream. We now have 53 active collaborations for the end of the quarter, and our contract value signed in the first half of 2020 alone already exceeds what we signed in full year 2020. So we believe the expansion of the pharma partnership contract continues. Overall, I want to underline that our firm focus remains on our core business for rare disease in 2021 and beyond. We have built a strong foundation and are set to deliver against our mission of enabling the cure of 100 rare diseases within the next 10 years. This will be reflected in solid core business growth across both segments towards the end of the year. This statement is indicative of our strong belief in the recovery of our Pharma business in the second half of the year. Let us now discuss the company's performance in detail. Please turn to Slide 6. Our revenues more than quadrupled in Q2 2021 compared to Q2 . This increase was driven by COVID-19 testing, which accounted for €42.4 million as well as a strong recovery of our core business, which includes Diagnostics and Pharma. Our core business grew by 25% to €9.5 million. As a recap, we experienced headwinds from the COVID-19 pandemic that impacted our core business segments, particularly in the second quarter of 2020. The core business trends gradually recovered towards the end last year and early this year. One of the ways CENTOGENE was looking at the order intake trends, which we communicated investors at prior earning calls. We are now pleased to see that recovery trends in the Diagnostics segment confirm and report that Diagnostics revenues increased 82% compared to Q2 2020, reaching €6.7 million versus €3.5 million in Q2 last year. Pharma revenue decreased year-over-year from €3.9 million to €2.8 million in Q2 2021. As discussed on prior update calls, the Pharma business has a longer sales cycle, so rebuilding that pipeline and recovery in the business takes more time. On top of that, we are cognizant that revenue in the segment is lumpy. But based on the contract value in the first half of 2021, we believe our view of accelerating Pharma momentum towards the end of the year remains fully intact. To provide a quick recap of the signed deals in first half of 2021, we initiated a new collaboration with immune-neurology pioneer Alector to accelerate the diagnosis for patients with frontotemporal dementia and genetic neurodegenerative disease. We extended our partnership with Takeda. We extended the global Parkinson’s disease study of ROPAD, aiming to recruit and genetically test additional 2,500 patients for Parkinson's, one of CENTOGENE's key prioritized diseases. In 2018, CENTOGENE entered also into a strategic collaboration with Denali Therapeutics for the targeted global identification and recruitment of Parkinson's disease patients with mutations in LRRK2 gene. So this expansion is part of that deal. And we currently lead 12 ongoing observational and longitudinal observational clinical studies to validate/monitor biomarkers, covering several disease categories such as Parkinson’s, transthyretin amyloidosis and inborn errors of metabolism. So as we look ahead into the second half of 2021, I'm fully confident that we will return to solid core growth, not only in Diagnostics, but also in Pharma. Now please turn to Slide 7. The number of sample order intakes in our core business, meaning Diagnostics and Pharma is up 15%. Given the discussed Pharma revenue, the growth was driven by increase in the Diagnostics business, where test requests were up 40% versus the same period in 2020. Overall, we are making progress on growing our Bio/Databank, 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 the first 2 quarters in 2021, we added almost 50,000 individuals to our rare disease-centric database in biobank, which is our core asset. I will provide an update on this later. Turning to Slide 8. In addition to growing our Bio/Databank, we have also ramped up our R&D initiatives. We have recently reached a milestone of publishing 200 scientific papers and which we would like to use as a basis to discuss our continuous striving for excellence and leadership in rare disease diagnostics and insight generation for differentiated drug development. The graph shows the exponential growth in the past 2 years in our published papers, and this momentum is reflected not just by these mere numbers of 18 author peer-reviewed scientific reputations alone in Q2 2021 but also how we are focused on generating critical insights into diseases, including Parkinson's as well as advancements in genetic sequencing and technology. Our scientific progress in part in the publication is clearly creating impact. Sets us. We have published advanced research which led to discovery of 6 new rare diseases which are now incorporated to our diagnostic offering and immediately enable the diagnosis of over 90 patients by leveraging existing data from our biobank. On the product side, we have launched an enhanced Whole Exome Sequencing called NEW CentoXome, coupling insights from our unique rare disease-centric Bio/Databank with superior omics technology which increases diagnostic yields up by 20% compared to a conventional Whole Exome Sequencing. We view our contribution to better understanding rare diseases at the core of our commitment to patients around the world, aiming to provide the best diagnosis possible and unlocking the complexity of rare diseases to enable differentiated orphan drug development. Let's turn to Slide 9. At the core of what we do is our aim to revolutionize the understanding of rare diseases by connecting patients around the world and connecting their biology. We have shown today how we have continuously managed to grow our unique Bio/Databank as an asset, both in terms of volume and the quality of the data. This allows us to address different use cases for value creation. Now nearly 650,000 samples in our Bio/Databank have already been mentioned. But it has also grown in depth. In doing more specific testing and going beyond genomics, we have also been able to accumulate depth of data on each of the specific diseases that we have been prioritizing. If we take a deeper look at how this translates into numbers, we have diagnosed over 2,500 rare diseases to date, which is a remarkably high number considering that only 4 subset of rare diseases and genetic link is actually currently known. Our mutation database CentoMD includes more than 31 million variants. For patient identification of their trial support, the Bio/Databank is valuable as we can provide insights on patient cohorts for certain diseases and geographies. We have more than 300 diseases with at least 20 diagnosed patients and about 100 with over 100 patients. Again, that's a high number considering that rare diseases have a very low prevalence. They're rare after all. Our large physician network also encompasses 20,000 physicians with active contracts over the last couple of years. All of these things add up and make us the world's #1 rare disease partner for life science companies working on rare disease. On the other end of the spectrum, our Bio/Databank supports drug discovery and development. Overall, this structure allows us to grow in both core segments, while driving novel medical solutions. Please turn to Slide 10. We really believe in a data-driven approach. And for this reason, we believe we are positioned like no other company to unlock the complexities of patients’ biology and understand as well as treat rare disease by acting as a partner of choice in target identification orphan drug discovery and development. We are constantly improving our data tools, artificial intelligence and stability to manage data in an unprecedented way to not only analyze public available data, but to combine our unique patient cell and derived data with the data sets in the public sphere. To ramp up our data-driven approach to reinvent rare disease drug discovery and development, we appointed Patrice Denèfle as Chief Scientific Officer. Patrice is one of the few people in the industry who has successfully applied unique data-driven approaches to drug discovery and development. With his deep scientific expertise and credentials as well as his proven track record in industry, Patrice will be an outstanding scientific leader for CENTOGENE. And I'm very much looking forward to work with Patrice to accelerate our work for patients. Initially, we are focusing on 2 metabolomic diseases, Gaucher and Niemann-Pick Type C and on genetic Parkinson's and neurological disorders. Looking to the future, we will focus on more diseases in these areas and expand our data base strategically to develop further full disease models. Full disease model for us is in the range of 100 to 500 diagnosed patients with a full omics data set and 10 to 20 cell lines for validation and to be able to discover druggable targets and biomarkers. In achieving this, we will be enabled to cure 100 diseases in the next 10 years. Let us please turn to Slide 11. Lastly, I would like to provide a quick recap on why we believe we are uniquely positioned in the rare disease ecosystem and why we feel confident in delivering against our mission. We are starting from a very solid base. I believe we have been one of the first rare disease genetic testing companies in the world, and we stayed the course, building a unique asset over many years. We are now a leading genomic rare disease expert that is recognized around the world as a strong brand, and we are respected for that. We have been able to develop a unique by Bio/Databank, allowing not just access to past diagnosis but to access to stored samples, ensuring further analysis can be done and new tools and insights become available. And we have a truly global footprint, particularly strong in some areas also like the Middle East or certain parts of Asia because we have followed geographies where rare diseases are prevalent and thus genetic testing was needed. And we think that this global footprint really differentiate us from companies who may have started doing genetic testing much later or only in a high-income country. And importantly, as discussed before, our approach relies on multi omics, bringing together the detailed phenotypical curation with genetic and eventually multi-omics insights. And while this is important for our research activities, we constantly strive to bring the new benefits to patients and into the market, also improving our diagnostics insight. With CentoMetabolic, our multi-omic panel for diagnosis of rare metabolic diseases, we believe we are truly one of the pioneers that is putting cutting-edge multi-omics products onto the market for physicians today to better diagnose their patients. Bringing this together, we believe positions us in the ecosystem as the player for data-driven insights, focused on rare diseases. You can see the companies that we compare ourselves within the table. We truly think that we are unique in the sense that we are fully focused on rare disease, have the most comprehensive rare disease Bio/Databank and tools, and have a geographic presence that really means that we can lead in data mining and insights generations around the world. With that said, let me hand over to René to walk you through the financials in more detail. René, over to you.
René Just: Thank you, Andrin. Let's please turn to Slide 13. Our Q2 revenues grew by an impressive 434% year-on-year to €51.9 million. This growth was mainly driven by the COVID-19 testing, creating €42.3 million in revenues in Q2 2021. Q1 and Q2 combined, our revenues climbed to €116.8 million compared to €21.8 million in first half 2020. This makes the first half of 2021 the most successful half year in CENTOGENE's history in terms of revenue. Focusing on the core business, which includes our Diagnostics and Pharma segment, this expanded by 25% in Q2 2021 year-over-year to €9.5 million compared to €7.6 million for the same quarter in 2020. This growth was mainly driven by the strong uptake of the Clinical Diagnostics business, which recorded €6.7 million in Q2 2021, representing 82% growth compared to the same quarter in 2020. Pharma revenues decreased year-over-year from €3.9 million to €2.8 million in Q2 2021, reflecting a decrease of 28% compared to the previous year period. The decrease was primarily due to the impact of the COVID-19 pandemic, which 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 the Pharma contracts signed in the first half of 2021 already exceeds the value of the deals signed for the full year of 2020, indicating a strong uptick in Pharma revenues in the second half of 2021 and beyond. Please turn to Slide 14. We achieved a strong segment adjusted EBITDA of €7.5 million in Q2 2021 compared to €1 million for the same quarter last year. Our segment adjusted EBITDA includes our Diagnostic, Pharma and COVID-19 segments. As it is the case for our revenue segment adjusted EBITDA was driven mainly by the contribution from the COVID-19 business. The picture for our 2 core business segment is mixed. Adjusted EBITDA for the Diagnostics segment turned from minus €1.6 million in Q2 2020 into a positive adjusted EBITDA of €0.6 million. Adjusted EBITDA of our Pharma segment decreased to €0.6 million compared to €1.8 million in Q2 2020. The decrease was primarily attributable to lower revenues as well as product mix. Total core business segment adjusted EBITDA grew to €1.2 million, up from €0.2 million in Q2 2020, indicating the strong uptake of the Diagnostic business after COVID-19 hit in 2020. Now let's look at a further breakdown of the revenue in our core segment. Please turn to Slide 16 -- oh, Slide 15, sorry. CENTOGENE's Pharma revenue in the first half of 2021 were still affected by the COVID-19 pandemic. We see in the graph that Pharma revenue decreased to €6.4 million in first half of 2021 compared to €8.5 million in first half of 2020. The decline in revenues is mainly due to the successful completion of contracts by the end of 2020. The main drivers of revenues are patient identification and clinical trial support partnerships. The large increase of signed contract in the first half of 2021 compared to the COVID-19 focused full year 2020 is assigned strong Pharma business rebound towards the end of the year. During the 6 months ended June 30, 2021, we entered into 12 new collaborations and successfully completed 25 collaborations resulting in a total of 53 active collaborations as of June 30, 2021. Revenue from our new collaborations totaled €2 million for the 3 months ended June 30, 2021 with no upfront payments. I previously mentioned the 53 active collaborations on the Pharma side. To give a little bit more perspective into the type of collaboration we have in place, take a look at the pie chart in the bottom right corner. We have 1 large patient identification collaboration, which reflects disease fields where commercial stage products are already available. In this case, our contract with Takeda. Currently, most of our collaborations are in the clinical development stage with clinical trial support. All of those are based on the setup we already have. Clinical development stage collaborations can be used to support clinical trials or clinical studies like we do with our Denali collaboration. As part of our strategy, you will see our increasing focus in the earlier parts of the drug development cycle. And with leveraging on the Bio/Databank for unique data-driven insights, we will look to sign collaborations in the R&D stage where you currently only see 1 collaboration. As discussed at our investment event in June in detail, this is an area where we will expand and expect to have the first value share deal added in the next 12 months. Those collaborations would generally include a value share for CENTOGENE where when historically these may have been small contracts only for distinct research questions. Please move to Slide 16. While the take up in revenue in the Pharma segment is taking a bit longer, we are pleased to see the Diagnostics business has shown strong growth. Revenues from our Diagnostics segment were €6.7 million for the 3 months ended June 30, 2021, an increase of €3 million or 82.3% from €3.7 million for the 3 months ended June 30, 2020. We received approximately 13,900 test requests in our Diagnostics segment, representing an increase of approximately 90.4% as compared to approximately 7,300 test requests received for the 3 months ended June 30, 2020. The increase in revenues was primarily related to an increase in test requests for Whole Exome Sequencing and Whole Genome Sequencing during the 3 months ended June 30, 2021. Total revenues for the 2 areas -- or for the 2 sequencing amounted to €3.3 million, representing an increase of 67% as compared to Q2 2020. In total, this reflects that the WES and WGS accounts for approximately 30% of the number of test requests in the Diagnostics segment 2021 to date. Please go to Slide 17. Looking at our income statement, the slide shows you Q2 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 mentioned the increase in revenues in the quarter, which drove an increase in gross profit of approximately €5.2 million in Q2 2021 compared to last year's Q2. Relative to revenues, the gross profit margin decreased overall, reflecting higher cost of sales and COVID-19 testing as well as the Pharma segment. Higher cost of sales in the Pharma segment were related to the larger portion of clinical trial related revenues. This was offset by a decrease of cost of sales in our Diagnostics segment, reflecting our investment in cost-efficient equipment in previous years. Our expenses, including other operating income increased by approximately €2.8 million for the quarter compared to Q2 last year. Let me comment on the 2 biggest factors that drove this increase in expenses. Firstly, general and administrative strategic expenses increased by approximately €2.8 million. The increase is principally due to the increased personnel costs, legal and administrative costs and additional expenditure on IT support and data centers. Some of the additional costs are related to putting in place the new management team with some being a one-off nature. In addition, the corporate expenses included share-based compensation expenses of €2.2 million, an increase of €1.9 million versus prior year quarter. Second, our R&D expenses for the quarter were up approximately €0.9 million. This increase mainly represents personnel cost and IT-related expenses incurred in the biomega and AI research and development phase. This is reflective of our continued commitment to advancing our research and technology platform such as AI and multiomics tool. In total, our operating loss improved by €2.4 million to negative €7.7 million. Now please turn to Slide 18 for cash flow and balance sheet highlights. As of June 30, 2021, we had €34.8 million of cash or cash equivalents on our balance sheet. Regarding our outstanding debt, I would like to remind you that as of end of June, this includes approximately €20 million of lease liabilities. Looking at the movements. Cash flow from operating activities improved significantly compared to last year. The main drivers were the additional revenue from COVID-19 testing and its positive adjusted EBITDA margin in that segment. Having said that, we do recognize that the impact of the earlier discussed increase in cost of sales in the COVID-19 segment, leading to a lower margin contribution from the segment compared to previous quarters. We are managing that business tightly as uncertainty around COVID remains. In 2021, year-to-date, cash flow used in investing activity was €4.8 million as compared to cash flow of €6.6 million in first half of 2020. Consistently with our aforementioned attention to the COVID business the decrease is mainly due to a reduction in the COVID-19-related investment. During the 6 months ended June 30, 2021, COVID-19-related investments were €2.4 million, of which €2 million were included in property, plant and equipment and €0.4 million were related to the development of the Centogene corona test portal. Cash flow from financing activities decreased compared to 2021, mainly reflecting bank overdrafts in 2020. With that, let me hand it back to Andrin for our 2021 outlook. Please turn to Slide 20.
Andrin Oswald: Thank you, René. Let me summarize the presentation briefly and highlight the key takeaways from today's discussion. For the quarter and first half of the year, we had strong top line revenue of €52 million and €117 million, respectively. While this performance was driven in large part by commercial COVID-19 testing, it also highlights that our core business is on track for recovery with more than 25% growth over Q2 2020. We are excited about this trajectory in our Diagnostics segment as we believe we offer the broadest Diagnostic testing portfolio for rare diseases. Data collected from our diagnostic services and biomaterials allow us to continue to grow our repository and our CentoMD database. We have reached almost 650,000 patients by now in our Bio/Databank, which means we are continuously improving in generating rare disease-centric insights. And we continue to view the Bio/Databank as the key assets delivering value for orphan drug development to drive our long-term growth. We will deploy that asset even more strategically and sharpen the value proposition both for our Pharma partners and internal development going forward. On the corporate side, we have made great strides in the first half of the year, with 5 new members on the management team. And now I'm with Patrice Denèfle as Chief Scientific Officer joining. I'm proud of the effort, not just of the team, but of course, also of all the people of the Centogene and the work that they do for rare disease patients around the world, and I'm very confident that under new leadership, the company will prosper and create significant value in the years to come. Before we move to Q&A, let me lastly touch on the outlook for the rest of the year. For the core business, we have seen the recovery in Diagnostics and are confident that the Pharma revenue will pick up as well. Accordingly, we expect both businesses to grow solidly in 2021. With regards to the total business, we all know the pandemic continues to throw one curveball after the other, which makes predicting commercial COVID-19 testing revenue somewhat difficult. What I can tell you is that we are confident that our overall revenue for full year 2021 will clearly surpass 2020 revenues of €128 million. And we continue to make strategic investments into our core business segments to enhance our leading position in rare disease space and generate long-term value for our shareholders. With that, I would like to hand back to Lennart.
Lennart Streibel: Thank you, Andrin. As a short side on calendar for Q&A, our next conference attendance will be the Baird Global Healthcare Conference exactly a week from today. We look forward to seeing you and others from the investment community there virtually. As soon as feasible, though, management will also be on the road again in person. So looking forward to that. I'll now turn the call over to Sharon for the Q&A portion of the call. And I would like to kindly remind you to ask a maximum of three questions, so that we have enough time to address as many as possible. Thank you again for joining us today.
Operator: . Your first question today comes from Puneet Souda from SVB Leerink.
Puneet Souda: First one is really on the guide that you're providing, which is without much details in it, but I just wanted to get a sense of -- obviously, Pharma was impacted in the quarter. Do you -- Andrin, do you expect this to recover meaningfully in the second half? Or this is going to be more of a 2022 recovery in Pharma? And then on the Diagnostics segment, you recovered only 5% sequentially. So is that a pace that we should continue to expect here in the second half? Just wanted to get a sense of the core business recovery.
Andrin Oswald: Yes. Thank you for the question. So I think on the Pharma, we expect the second half of the year to significantly outpace the first half. So that overall, the Pharma revenues for the year will be significantly above last year. So that is our forward direction that we can give. I think I would also look at this as a trend. As I had said in previous call, I think the company has been focused on COVID last year, and as such, any pharma deals have been more or less put on hold. Now that we have restarted that work and have strengthened that team, we see really good progress. But of course, from the time that you negotiate until you sign a deal, and then until the deal translating revenue when the clinical -- on the outcomes trials actually start that just has a certain lead time. But I'm very confident that you will see quarter-over-quarter significant growth. And then if you extrapolate, of course, that trajectory into 2022, you will see that, that business is back on a highly attractive growth track. For Diagnostics, I think you're mentioning the 5% is a bit short term. I would say, comparison, overall, we clearly expect the diagnostic business to outpace the average genetic diagnostic market, which when we look at the benchmarks seen currently at around 10%. So we clearly have a plan to grow off that.
Puneet Souda: Okay. That's helpful. And then in terms of the disease models that you mentioned, wondering if there was a -- if you're looking at it from a contribution perspective, how much was the contribution from disease models? And obviously, you're building this up as a resource just beyond the database. So how should we expect the contribution from the disease models? And also, what's been the feedback from Pharma about these disease models? And lastly, wondering if there was any contribution from iPSC work that you're doing with the partners?
Andrin Oswald: Yes. So for the disease model, you have to understand that as a solid, deep insight into a biodata set on a rare disease, which, in our mind, will be quite unique. As mentioned, this will not stand on its own. So we are basically mining literal publicly available data to understand the right outstanding medical and scientific questions that we have in certain rare disease, and then we can use our disease model to find the right answer to those. That road map to finding the answer is where we engage a partner with to align on what questions we answer, and then there is interest in a deal to actually get the work supported and funded. In terms of the exact financial contribution, I can only tell you that we expect them to be significant when you look at certain other deals of similar nature that you could reference to an industry. I think such deals, they do come with a significant upfront payment, which is in the multimillion range. But that, of course, is not the true value. The true value is that if the work delivers against its promise, we expect such deals to deliver milestones and royalties that would add up to a total deal value that can clearly be above $100 million.
Operator: Shall I go to the next question.
Andrin Oswald: Yes, please.
Operator: Your next question comes from the line of Catherine Schulte from Baird.
Catherine Schulte: I guess, first, you talked about the value of contracts signed in the first half was higher than all of those signed in 2020. Can you just give us any details on how you go about calculating those values? Does that just include kind of contracted base value? Or does it factor in your potential longer-term upside from revenue sharing or milestones and things like that?
Andrin Oswald: Those deals are to the largest extent, the number referring to is short-term revenues. So if there is a longer-term royalty from value share that wouldn't be included in that statement.
Catherine Schulte: Okay. Got it. Very helpful. And then for the 7 new pharma collaborations in the second quarter, I think that was after signing 5 in the first quarter and I believe 16 in all of 2020. How should we think about the pace of new collaborations going forward? And how meaningfully could those contribute to revenue in the back half of the year?
Andrin Oswald: So the number of deals is -- doesn't probably tell you that much because it also depends, of course, on the quality of the deal and the size of the deal. What it does tell you is that we have a broad range of collaborations. We're not just relying on 1 or 2. But with regards of the total revenue that they bring, I would have to refer you back to the initial statement. I mean the -- what we have signed in the first half of the year will bring way more new revenues than all the deals we have signed in 2022. And that's why we are very confident that this business starting from the second half of the year will be back to a very attractive growth rate.
Catherine Schulte: Okay. Got it. And then last one for me is good to see core Diagnostics gross margins staying up above 30% again this quarter. Is that sustainable going forward? And then on Pharma, just with the ramp of revenue you're expecting in the back half from your newly signed collaboration. How should we think about the gross margin profile of that segment as those contributions ramp? Should we be getting back to the 70% type gross margins you saw for Pharma in 2019 as we exit 2021?
Andrin Oswald: No. So I think on the Diagnostics side, indeed, the margin is quite attractive, and we are happy that it stayed at that level because there is a certain price pressure in genetic testing overall. We were able to insulate ourselves to some extent from that. But I do believe that the pricing pressure on what we consider more simplified genetic testing will further increase going forward as different players are making compromise on the pricing in return for getting access to patient data basically. We think that given we have a unique value proposition in rare diseases and that we are not just making a standard genetic test, but really tailor our testing with superior disease value, we believe that we can defend the margins that you currently see. And here and there, we may also to collect the appropriate data, make a certain compromise. That would be very targeted maybe in certain geographies where we know prices are low, and we still want to make sure that we get the right insights because the true value of our diagnostics business is not just that margin that you're referring to, but it's really also to remain the leader in collecting rare disease data and through that, creating the best data insights going forward. On the Pharma side, the second half of the year, revenues, I guess, in a simple way, I assume what needs to happen for the revenues to be above last year. I think last year, we had Pharma at €16.6 million. You can look at the sales in the first half, and then you can put in a number that will show that the full year will be significantly above last year. So I think that is what I can tell you. Exactly how much above that depends a bit because the business will rapidly recover in Q3 and even more so in Q4. And of course, with that much more aggressive growth, we'll see how much of it happens already in Q4 and how much of it moves then in Q1 2022 because every month or 2, of course, can make quite a difference. That's why I don't want to give you at this point in time an exact number. For the margins on the Pharma business, we think they will absolutely improve while the business grows. We don't think they will go back to, let's say, pre-pandemic level, has nothing to do with the pandemic, but it has to do with the fact that we are signing a broader set of collaborations with Pharma partners in that spirit of getting access to really highly attractive data set coming out of the clinical studies that this partnership entails. We still expect the margins to be very attractive, but maybe slightly less than what we saw before.
Operator: And your next question comes from the line of Katie Tryhane from Credit Suisse.
Katie Tryhane: Maybe first on the COVID testing side. You mentioned that contribution should slow over the back half of the year, but just trying to get a better sense of how exactly you're thinking about contributions. Can you help us think maybe about how did volumes trend throughout the quarter? And what was the run rate as you exited the quarter as well? Anything there would be helpful.
Andrin Oswald: Yes. So I think Q2 had -- as you saw quite a substantial revenue, but more of that revenue happened in March, maybe -- sorry, not in March, in April, maybe the first half of May and then things clearly declined especially in Germany, which is by far, of course, our biggest market the testing paradigm to some extent changed and more people could rely on antigen self-testing rather than PCR high-quality tests. The revenues then -- or the testing volume has stayed more or less stable things during summer at a lower pace, let's say, maybe half of what we saw during the time before. And the question is where does it go from here? I think the business is, at this point in time, cash positive for us. So there is no need for immediate action. It's possible that while weather that's colder in fall as we saw last year, the situation may get worse again and testing volumes will increase or that may not happen. I think that's where we said, look, we simply can't predict that and would just have to be -- or you have to be a bit patient to see what happens and what it means for our revenues. Overall, our base case clearly assumes that the revenues for the second half of the year are going to be significantly lower than the first half of the year.
Katie Tryhane: Okay. Got it. That's very helpful. And then I know you mentioned that the signed contract volume or value for the Pharma business is higher in the first half versus all of 2020, but can you maybe remind us of the average lead time of when you sign a contract to when you begin generating revenue? I'm just trying to get a better sense of how these contracts will ramp over the back half of the year and into '22?
Andrin Oswald: Yes. So from signing until the actual -- so most of those contracts, and as I said, that may change in the future while we signed different research deals. But for those contracts that are largely clinical trial support contracts, revenues start to kick in when we do the testing. So there is no payment at signing or upfront milestone payment at signing. And from signing of the deal until the clinical study starts, I mean that takes an average of 6 months because from the contract signed, of course, afterwards, the study needs to be planned in details, the protocols finalized, the centers informed and educated and then eventually you can start recruiting and this is when the revenues kick in. So I think 6 months is a good average.
Operator: Your next question comes from the line of Myla Elyka Ochoco from FactSet.
Sung Ji Nam: I think this is actually, Sung Ji from BTIG. So sorry to ask another question on the Pharma contracts, signed in the first half. Just to clarify, is this the function of more deals and more contracts being signed? Or are the contract per Pharma customer also increasing over time?
Andrin Oswald: I wouldn't say that. It's not that we signed with the same cost more contracts. I think it's a combination of some contracts extensions or another contract with an existing customer and about half a new -- more new customers. So it's quite a nice mix. We did in the first half of the year sign a few contracts like the one with Alector. We clearly have a significant revenue value. I think you have seen in that press release that we are recruiting about 4,000 patients that need to be analyzed and tested. And I won't give you an exact revenue number per patient, but you can assume that this translates into quite a significant revenue stream over the year of the trial. So one thing, and I think we plan to do more of that in the future to give you a little bit more transparency on the deals is we group them into the research deals versus clinical trial support deals versus the patient identification deals, which is pretty much just doing the work to find patients on existing drugs. Now the client -- the clinic trial support deals like the one with Alector, I think we tried there to publish or share with you the numbers of patients in those trails. And over time, I think we'll be able to somewhat come up with an average of a revenue per patient for the work that we do there. The reason why we don't share the details with you is one, because it's a competitive nature. You can deduct pricing information from that, which, of course, a, we don't want to share publicly; and b, on most of those deals also the customers clearly want to keep this confidential.
Sung Ji Nam: Got you. Great. And then just the value share deal that you're talking about the first -- or at least 1 signed over the next 12 months. Could you kind of give us more color in terms of the type of feedback you're getting as you're talking to the potential pharma collaborators? What gets them excited about working with you guys? Or also maybe even what are some of the hurdles for some of the pharma as they're discussing potential partnerships with you, kind of what they would like to see more of?
Andrin Oswald: Yes. So the -- what gets them excited is the deep understanding of the disease, the clarity on what type of biomarker or potential pathway understanding would lead to a new drug target, identification of a drug target that they can afterwards leverage for further development. The discussions we have, at least since I joined, I mean, they're getting better pretty much by the month. Why do they get better? For 2 reasons. One of it is that we have invested significantly to make our Bio/Databank be able to deliver more tailored answers to some of those questions. The Bio/Databank has grown over years, initially more coming out of the clinic diagnostic setting. So there's a lot of data, there are a lot of samples there. But the granularity in terms of how the data has been recorded or what type of genetic testing has done varies to some extent. So now that we prioritize the diseases, we have a clear understanding of what can we try to learn here for drug discovering development, we really clean up this data set. Sometimes you go back and do additional testing, also make sure that we clean up the respective phenotypes. You have a lot of phenotype information. So the more this data gets better, I think the more the customers are excited. And then the second one is our understanding of drug discovery. The company has been a genetic testing company historically. And let's not forget that the idea is to use this unique drove of information and check it up for drug discovery development is relatively new. So that clearly means there is a learning curve. And I think we have made great progress in also strengthening the competence in there within Centogene because you can't go to a partner and say, "Hey, I have some data here. I don't know what it means. Is it interesting to you." And that's also why I'm super excited now that Patrice has joined us, I mean, he is a well-recognized discovery industry leader. And under him, I think we have started to build up comprehensive scientific program leaders that can really come up with what I have described the clear road map from our Bio/Databank, the data we have, and then over a reasonable amount of time, what type of insights we can generate. And then, of course, it's a negotiation with a partner. I mean some partners will say, "Well, why don't you create the data and the insights and then come and talk to me when you have them." Some of them, they clearly understand that they want to wait that long or shouldn't wait that long because once you have a new drug target or an insight fully on the table, then of course, the competition for that -- while the value is higher for us, but the competition for the assets will also increase. So that turns them into a negotiation where we try to find the right balance in terms of signing a deal, signing up with a partner at the time when we know that we can extract the value in the negotiation. So we don't want to do it too early, but also not too late. And that's why one of the key reasons why I can't give you an exact kind of commitment to say within 4 months that deal will be here. But in principle, on each of those data assets that we have, the longer we wait, the higher the value of the asset because we invest, of course, in the research and the work that needs to be done to really extract the value for Pharma. So the longer we wait, the higher the value of the deal for us then we sign it. But of course, we don't want to wait too long either as some of these deals we see them also as a validation for the attractiveness of the customers in terms of what we're doing. And we absolutely know that investors are looking for that as well as an external validation of the work that we do.
Sung Ji Nam: Got you. And then just lastly for me, could you talk about for your second half outlook, whether or not the impact from the Delta variant has been factored in? And would love to kind of hear what you guys are seeing, how that's impacting your business, both on the Diagnostic and on the Pharma side globally year-to-date?
Andrin Oswald: Yes. So on the core business, we haven't seen any impact to date. I mean the -- overall, in most of our key markets, I mean, the clinical diagnostic testing goes on as in the past. Now this could change if you get again to hospitals being overcrowded and hospital physicians delaying some of the more routine work because they need to prioritize COVID patients. I mean this is what led last year to the reduction in the testing volume given that some of those diagnostic work has been then postponed or delayed. Up to now, we don't see that in a significant way. And I hope that most countries have the pandemic control and strengthened enough that we don't get there. But there is a minimal risk to that. But at this point in time, I'm not worried about it. So that's why we expect our core business to continue without a significant impact of the pandemic going forward. If there was some impact from the dynamic, purely from a financial point of view, that could be mitigated by, in return, some higher-than-anticipated COVID testing revenue. So we have a little of a natural hedge, not that we liked it from a pandemic point of view. But from a financial point of view, that's what you somewhat see. And I think our base plan is that in the second half, COVID goes down. So we slowly see less of that. But in return, we see more core business. And from a financial point of view, that gives us the transition we're looking for. In a worse case scenario, this would be somewhat delayed, and we would see more COVID revenues and a bit less core revenues in the second half. But again, at this point in time, we have no reason to believe that, that will happen.
Operator: There are no further questions. I will hand the call back to you, sir, for closing remarks.
Andrin Oswald: Thank you. Thank you all for listening and joining in. Thank you for your interest in the company and your questions. I hope you're able to answer them to your satisfaction. Please feel free to reach out even after the call if you do have specific questions, Lennart and the team are very happy to take them up and respond to you as quickly as possible. I want to again assure you that our core business is in solid shape for future growth second half of the year, and we will keep you updated the quarter as we materialize on our new strategy with a new very competent management team that is going to deliver against creating the value with our Bio/Databank for rare disease patients in the quarters, but also the years to come. Thank you all, and have a good day or a good afternoon.
Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
