Categories Earnings Call Transcripts, Health Care

Centogene N.V.  (NASDAQ: CNTG) Q1 2020 Earnings Call Transcript

CNTG Earnings Call - Final Transcript

Centogene N.V.  (CNTG) Q1 2020 earnings call dated June 15, 2020

Corporate Participants:

Sun Kim — Chief Strategy & Investor Relations Officer, Chief Business Officer (ad interim)

Arndt Rolfs — Chief Executive Officer

Richard Stoffelen — Chief Financial Officer

Analysts:

Sung Ji Nam — BTIG — Analyst

Puneet Souda — SVB Leerink — Analyst

Luke Sergott — Evercore ISI — Analyst

Tom Peterson — Baird — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Centogene First Quarter 2020 Earnings Results Conference Call. [Operator Instructions] And I’d now turn the conference over to your speaker today, Sun Kim. Please go ahead.

Sun Kim — Chief Strategy & Investor Relations Officer, Chief Business Officer (ad interim)

Thank you. Hello and welcome. Thank you for joining us to discuss our Q1 2020 results, which were issued earlier today. You can view this presentation and the related press release on Centogene’s website. For those not able to view the webcast, you can find the relevant slides on www.investors.centogene.com. Our speakers today are Centogene’s Chief Executive Officer, Professor Arndt Rolfs; and Richard 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 this call that are not historical statements may be forward-looking statements, and as such, may be subject to risks and uncertainties, which, if they materialize, could materially affect our actual results. The forward-looking statements in this presentation speak only as of today, and we undertake no obligation to update or revise any of the statements to reflect future events or developments, except as required by the law. Additional information regarding these statements appears in our SEC filings.

Following our presentation, we will also open up the call to Q&A. We kindly ask that you ask only a maximum of three questions. I will now hand the presentation over to Arndt. Please turn to Slide 3.

Arndt Rolfs — Chief Executive Officer

Thank you, Sun, and hello, everyone. Thank you for joining our call today, especially during these unprecedented times. We hope everyone is staying healthy and safe, and our thoughts are with those affected by the COVID-19 pandemic.

Before we dive into our Q1 2020 performance, let me quickly update you on the current situation regarding COVID-19 for Centogene. As we publicly announced in April, we have reopened our offices in a carefully measured manner, providing all of our employees with viral testing twice per week, gives us the confidence that we have better management over the situation as our employees have begun to return to the office. We also strengthened some safety protocols to be extra careful, and for the most part, Centogene is fully operational.

Now, let us tell you about our Q1 2020 performance and also provide you with a broader update on our business. I’ll start by touching upon key aspects of our business. And then, Richard will take you through the financials.

Let’s turn to Slide 4. Before we get into the performance of the business, let me take this opportunity to remind you of Centogene’s scope. I think it is always good to put things into context. And for me, that means looking at recent achievements with our long-term goal in mind. Our ultimate goal is to provide precise medical diagnosis of inherited diseases at the earliest possible moment by transforming medical expertise and analytical information into actionable results for physicians, patients and pharmaceutical partners.

As you are aware, we accomplished this by using a multi-dimensional approach to analyze patient data and by harnessing our knowledge of rare diseases to help physicians more easily diagnose patients and support biotech and pharma companies to develop new treatment options. Everyone at Centogene remains passionate about achieving this goal. And this is why it is so rewarding to be a part of this company.

Now, let’s dive into today’s presentation starting on Slide 5. During the first quarter, we continued to deliver on multiple fronts, while making important adjustments in the face of a global pandemic that has affected our industry and many others.

First, we have demonstrated strong financial and operational performance. We grew our top line by approximately 13% in Q1 2020. Both segments, Pharma and Diagnostics, exhibited a double-digit growth. This is despite facing some headwinds in late March caused by COVID-19.

Second, we are proud of how Centogene has responded to the COVID-19 crisis. Internally, we have reacted quickly to keep everyone safe, while driving our operations with minimal disruption. In addition, we have quickly diverted resources to develop COVID-19 testing capabilities.

Finally, I would like to make a few comments on the impact COVID-19 began to have on our business toward the first quarter and as we entered the second quarter. Let me first say that the fundamentals of our business remain strong and we are increasingly being looked at by partners as a leader in providing molecular insights in order to accelerate drug development for rare diseases and guide patient stratification, identification and monitoring.

With that said, similar to our peers in the broader business community, we began to observe a slowdown in our business toward the end of March that became more pronounced in April as a result of COVID-19. More specifically, we began to see a decrease in sample volume in Pharma business tied to clinical trials. Richard will provide additional details when he takes you through the financial review portion of the presentation. While our business continues to react accordingly to the COVID-19 situation, I also wanted to highlight that we began commercial COVID-19 testing in the second quarter, and we expect this may help offset some of the lost revenue as a result of the pandemic.

Let us now discuss these points in more detail. In Q1 2020, we grew our revenue by approximately 13% compared to Q1 2019 to approximately EUR12.1 million. This was driven by approximately 10% growth in the Pharma segment and 15% growth in the Diagnostics segment. I will let Richard walk through this in further detail in the financial review section. I think it is particularly noteworthy to mention that the 13% growth was despite the headwinds we started to see at the end of the first quarter resulting from the COVID-19 situation.

I would now like to discuss the operating metrics that drove our strong financial performance. Please turn to Slide 7. Let me first focus on our Pharma segment. The first metric is the number of pharma collaboration, which increased by 11 over the last 12 months. I just want to note that while we are pleased that we were able to form new pharma collaborations as compared to the same time period last year, we would not expect this figure to always increase, as some collaborations will end when key milestones are completed.

The second metric is the number of disease areas under partnership. As I have mentioned in the past, only 5% of rare diseases have an approved therapy, and we need to accelerate our knowledge into new disease areas in order to help improved the development of therapies for patients. As of March 31, 2020, we were pleased to expand into eight new rare disease indications compared to 12 months ago.

The Third metric I would like to present in the number of the biomarker partnerships. Compared to 12 months ago, the number of biomarker partnerships increased by five to 33 as of the end of Q1, 2020. Biomarkers remain a crucial element of how we can help pharma partners because they generate the molecular insights that can be used to inform the development of targeted treatment options. At Centogene, we continue to work on the discovery of numerous biomarkers.

Please turn to Slide 8, where I will speak about the progress made in our Diagnostics segments. Now, shifting gears to our Diagnostics segment, which is a critical part of our business that is fundamental in enabling us to access data from which we then gain extremely valuable knowledge. That is why volume growth is so meaningful for us. As you can see from the chart on the left, we have added 135,000 patients to what we already believe is the largest database of rare disease patients. Some of this growth comes from the Pharma segment, but we are also expanding our reach with the traditional Diagnostics business in order to keep expanding the breadth of our database.

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The acceleration of our volume growth is better depicted on the right hand side. We grew our volume by 10% in Q1 2020 compared to Q1 2019, but I also want to add that this 10% growth is mildly tempered, given the reduction in our non-invasive prenatal testing volume as we shift focus to our core genetic testing business. I believe it was and still is a good reference point to think about in terms of testing volume.

Now, please turn to Slide 9 for a closer look at our response to the COVID-19 pandemic. As the COVID-19 situation began to impact companies around the world toward the end of the first quarter, we moved quickly to ensure business continuity for Centogene. First, we took the necessary steps so that approximately 75% of our employees could work from home with the exception of those needed to keep laboratory operations running in order to support customers that are critical to the healthcare ecosystem. This required various adjustments ranging from IT systems to facility operation policies.

Simultaneously, we modified our lab operation to be able to provide testing for COVID-19. We initially provided testing to our employees and we later expanded to provide testing for essential workers in the local area as well. As the economy has begun to reopen, this testing capability has proven to be a vital asset. Not only can we manage our operation more safely by providing testing to employees twice a week, but we have also started to support local schools and nursing homes by providing testing services.

Please turn to Slide 10 to see what we have done to provide COVID-19 testing. There were several critical steps we had to take to be able to provide COVID-19 testing. The first example is the laboratory space in Hamburg, which we acquired from Provex Medical. While our testing capability was developed in-house, this laboratory allowed us to expand our testing capability without taking resources from our core business and research efforts. We now have the capacity to perform several thousand COVID-19 tests a day.

Securing necessary reagents and supplies was another critical step. For instance, testing swabs were one of the key supplies that needed to be secured. We were able to secure a stable supply of a new product called CentoSwab, which is our validated CE labeled solution for COVID-19 testing, and we now have the ability to source over 100,000 swabs a week. It is also worth noting that converting our COVID-19 testing capability into commercial testing was not an easy task. It involves diverting a portion of our commercial resources to a different customer base and completely reinventing our way of working. I’m extremely proud of the sales team’s achievements in such a short period of time.

Let me now hand it over to Richard who will discuss our financials in more detail.

Richard Stoffelen — Chief Financial Officer

Thank you, Arndt. Now please turn to Slide 12. Looking at our performance in Q1 2020, we have grown our top line by approximately 13% compared to Q1 2019 with the Diagnostics business growing at approximately 15% and the Pharma business growing at approximately 10% compared to Q1 2019. While we were pleased with that performance, the growth rate was somewhat tempered due to the slowdown we observed in the latter part of March as a result of COVID-19.

On the profitability side, you will notice adjusted EBITDA for the Diagnostics segment improved, yet the Pharma segment adjusted EBITDA decreased as compared to the same time last year. The Pharma business is clearly the more profitable segment, and a small decrease in margin is in line with the observations in the prior quarter. Our Pharma business profitability will always be a balance between the revenue coming in and the cost of the services that we provide, and this may fluctuate to a degree. At this point in time, we believe the profitability of the Pharma segment has converged to a steady state.

Now, let’s look at the revenue performance in more detail in Q1 2020 on Slide 13. On the Pharma side, we wanted to give you a breakdown of the revenue that comes from new and existing contracts. Revenue from new contracts was approximately flat in Q1 2020 compared to Q1 2019. When we look at the portion of total revenues coming from new contracts, approximately one fifth of total Pharma revenue comes from new contracts. We believe that demonstrates our ability to bring in new business despite headwinds due to the COVID-19 pandemic, whilst maintaining a solid revenue base generated by existing contracts.

On the Diagnostic side, if you focus on core genetic diagnostics, excluding NIPT, our growth rate was approximately 25% in Q1 2020 compared to Q1 2019. As we have mentioned before, the NIPT offering is not central to our business or our mission of generating medical insights around rare diseases. And we are clearly focused on growing our core genetic diagnostics business.

In summary, we are growing even faster in those areas of focus that will generate future growth for the Company, both in monetary terms as well as medical knowledge. This positions us very well for our business to continue to advance once the world gets past the COVID-19 pandemic.

Now, please turn to Slide 14. Slide 14 shows our Q1 2019 and Q1 2020 P&L. Our results for Q1 2020 were impacted by a few drivers, which I’ll briefly review now. Firstly, with improvement in the product mix, gross profit increased by 28% year-on-year.

Secondly, G&A expenses increased by approximately EUR2 million, mainly due to increase in personnel costs and operating expense as a result of the expansion. Cost of operating as a public company such as additional legal, accounting, corporate governance and Investor Relations, as well as higher insurance premiums also contributed to G&A expense increase.

Thirdly, an increase in R&D investments of approximately EUR1 million represents an acceleration of efforts such as biomarker development and data generation, which is directly linked to the future growth of the Company.

In summary, our cost base grew faster than our top line. As discussed in previous earnings calls, we are continuing to make investments to accelerate our growth, and we are confident that this is the right strategy.

Now please turn to Slide 15. Now let’s have a closer look at the cash flow and balance sheet. Cash flow used in operating activities increased compared to the same period last year, mainly due to the additional purchase of inventories in response to COVID-19 pandemic. Cash flows from investing activities represent investments in intangible assets and laboratory equipment and were flat compared to Q1 2019. The cash flow from financing activities reflects a repayment of loans, lease liabilities and interest payments.

As you will recall, on the balance sheet as of December 31, 2019, our cash and cash equivalents included the proceeds from the IPO. As mentioned in our full year earnings call, debt outstanding now accounts for the lease liability for the next eight years according to IFRS 16, an accounting policy effective from January 1 of this year. This represents roughly EUR20 million.

Taking all these factors into account, you can see that our balance sheet is robust. As a CFO, having a robust balance sheet is a reliable asset, especially during uncertain times such as these.

Please turn to Slide 16. While we are not providing any financial guidance for the year ending December 31, 2020 as a result of COVID-19, I did want to provide transparency into what we have been observing with the business. Beginning at the end of March, we started to see a slowdown in our business. On the Diagnostics side, sample volume decreased considerably, and in late April when the slowdown was at its worst, the sample volume fell below 50% of that before the crisis. Since that time, sample volume has been on a modest recovery trend.

The Pharma business is composed of different types of partnerships, as you know. Obviously, there’s little impact to fixed fee-type partnerships, but clinical trial related services have slowed. For your information, roughly one third of the Pharma revenue is clinical trial related.

As Arndt mentioned previously, we have initiated commercial COVID-19 testing, and such additional revenues may help offset the slowdown in our core business. Recent developments have been encouraging, but it is simply too early for us to fully quantify the commercial impact. We understand that the COVID-19 situation is weighing on investors’ minds, and we will continue to update you once the potential impact on our business becomes clearer and more quantifiable.

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With that, I’ll turn the call back to Arndt.

Arndt Rolfs — Chief Executive Officer

Thank you, Richard. Please now turn to Slide 18. Let me briefly summarize today’s discussion. Centogene delivered a strong quarter of growth, both from a financial and an operating metrics perspective, despite the challenges from the COVID-19 situation. In light of the challenges associated with COVID-19, we acted quickly to keep core operations running and initiated COVID-19 testing to help society begin to return to a new normal and mitigate the impact on our core business. We will continue to rise to the challenge and further build on our efforts to date on COVID-19 testing.

We will also continue to execute against our strategy to build on our core business of helping pharma companies improve therapies for rare disease patients. Although the situation is difficult for many of these companies now, COVID-19 will pass one day. When that day comes, pharma companies will be looking to reaccelerate their development programs. Centogene is uniquely qualified to help those in the rare disease space, and we want to make sure we are ready to do just that.

Let me end by thanking all of Centogene’s employees for rising up and meeting the challenge. I have never been proud of our company than I’ve been in the past few months. I would also thank you all for joining our call and supporting our company. These are challenging times, but I know we will come out stronger and more resilient on the other side. Thank you again for all the actions you are each taking to support the well-being of us all.

With that, I will now turn the call over to the operator for the Q&A portion of our call. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Sung Ji Nam from BTIG. Please go ahead. Your line is now open.

Sung Ji Nam — BTIG — Analyst

Hi. Thanks for taking the questions. Firstly, I just want to make sure, was there any benefits from COVID testing in the first quarter?

Richard Stoffelen — Chief Financial Officer

There was a very small amount of revenues, really de minimis in Q1, Sung Ji.

Sung Ji Nam — BTIG — Analyst

Okay. And then, Richard, you talked about obviously some impact on the clinical trial side of the Pharma business. Was curious — and to the extent possible, would you share kind of what kind of trends are you seeing throughout May and June to date? Are you seeing some recovery there as well? Or just kind of curious. Thank you.

Richard Stoffelen — Chief Financial Officer

Yeah. Thank you for asking that question Sung Ji. We saw a very nice rise again subsequent to the slowdown. It’s still not up to the prior level, but it’s going up nicely for every project that we do in that sphere.

Sung Ji Nam — BTIG — Analyst

Okay. And then lastly, would you be able to share what’s the testing capacity in your Hamburg facility for COVID testing? And also the CentoSwab, is that just for your use? Or can that be deployed for other laboratories as well?

Richard Stoffelen — Chief Financial Officer

Interesting question. Thank you for asking. The capacity we have depends very much on the demand that we are to meet. We can scale it up very rapidly. So it’s not necessarily a number that we can give you today because we can scale up so quickly, given the Hamburg lab that we established, but it is more than 5,000 already per day that we can easily do, and we could quadruple that relatively easy.

When you talk about the CentoSwab, that is a swab that can be used by other labs as well and just not limited to us. We have just made sure that in the pandemic at its highest push position that we were able to make sure that we can actually keep on running the tests because there was a shortage of any testing materials, particularly the consumables, and in this case also such a swab is obviously a consumable because you can only use it once.

Sung Ji Nam — BTIG — Analyst

Great. Thank you so much.

Richard Stoffelen — Chief Financial Officer

My pleasure.

Operator

Thank you. Your next question comes from the line of Puneet Souda from SVB Leerink. Please go ahead. Your line is now open.

Puneet Souda — SVB Leerink — Analyst

Yeah. Hi, Arndt, Rich. Thanks. So first question is, I appreciate you providing the trough impact in late April, but I’m just trying to understand in terms of the improvement in clinical trials since then. Anything you’re seeing that gives you a sense of these trials should continue to improve? Or are you likely to continue to see a rare disease trials impacted for the near term? Just help us understand sort of what’s your expectation there, maybe even qualitatively.

Richard Stoffelen — Chief Financial Officer

Thank you for asking the question, Puneet. As it is an unprecedented situation, it is difficult to predict exactly how this will evolve. But we have seen a very nice pickup and actually an accelerated pickup in the last two weeks in particular both in the clinical trials, as well as in the DX, also in the Pfizer TTR project. So we feel that it will pick up completely again, and then the exact timing cannot be determined as it is unprecedented. So there is not another timetable or another graph that we can use as a comparison.

Puneet Souda — SVB Leerink — Analyst

Okay. That’s very helpful. And then on the 11 pharma collaboration that you had noted, can you walk us through those and help us just understand what were added and sort of what’s your expectation of those turning into revenue in the next couple of quarters?

Richard Stoffelen — Chief Financial Officer

It’s a variety of collaborations and maybe it would be best to hand that to Sun, who’s at interim also leading our BD efforts in that respect. So Sun, would you please give a little bit more color?

Sun Kim — Chief Strategy & Investor Relations Officer, Chief Business Officer (ad interim)

Let me get back to you, Puneet, separately on specific collaboration. We do not disclose specific collaboration by name. But on the overall trend, there are always deals that end because we meet the milestones, but we also continue to sign new deals and in — particularly, in quarter one, we did sign new deals despite the slowdown that you observed through the COVID. But specific details of each partnership for that variety of reasons, we can’t disclose over this call.

Richard Stoffelen — Chief Financial Officer

Puneet, you might recall in earlier conversations that we always need to specifically ask for permission to share such details, which we don’t always do because very often, it’s an expansion of an existing contract, so not a new partner, but still a new collaboration with the partner.

Puneet Souda — SVB Leerink — Analyst

Okay. Thanks for that. Arndt, if I could ask on COVID testing and how much Centogene is participating in Germany, can you give us a view of maybe where the market for RT-PCR [Indecipherable] currently stands and sort of what’s your contribution into that market at this point? It appears that widespread testing is — an asymptomatic testing is already being conducted widely there and Germany has managed to do this well. So just wanted to get a sense of what your contribution into that is.

And tell us if you could, the EUR2 million to EUR3 million that you pointed out here in the coming months, should we assume all of that is going to lend into the next quarter and if there is potential for upside here? And I’m asking a few more questions. And I appreciate you providing on that. If you could also give us any ASP and COGS trend, maybe even nationally there, I appreciate it. Thank you.

Arndt Rolfs — Chief Executive Officer

Thank you. Richard, would you like to start with the second half of the question regarding the EUR2 million to EUR3million?

Richard Stoffelen — Chief Financial Officer

Yeah. The anticipation is indeed that that will be mostly in Q2 becoming to fruition in our revenues. And then, I hand back to you Arndt.

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Arndt Rolfs — Chief Executive Officer

Thank you. Thanks for the question. I guess you are totally right, Germany is doing rather well because Germany has a significant impact by the significant increase of the numbers of tests that have been developed very quickly at the beginning on the one side and on the other side also by the understanding of the importance of the preventive testing, which means in our understanding, testing even of asymptomatic individuals that are, for sure, spreading around the virus. And that’s exactly the focus of Centogene. And based on that strategic positioning, we have in the meanwhile a lot of collaborations with different partners. We are for today not yet able to announce clearly in that direction, but all of these collaborations are exactly based on the understanding and the importance of the understanding that the preventive testing allows the companies to come back to normalcy exactly in the way as Centogene is doing this in the meanwhile. I have mentioned in my short intro to that story that we are in the meanwhile working completely normally based on the operations and based on the twice per week testing, and that’s exactly the model we are continuously developing with our strategic partners.

Puneet Souda — SVB Leerink — Analyst

Okay. Thank you.

Arndt Rolfs — Chief Executive Officer

You’re welcome.

Operator

Thank you. And your next question comes from the line of Luke Sergott from Evercore ISI. Please go ahead. Your line is now open.

Luke Sergott — Evercore ISI — Analyst

Thanks. Hey, guys. Just real quick. So Richard, you talked about pharma here becoming steady state. Can you just give us an idea of kind of puts and takes there that is ultimately giving you that type of confidence this early in the game?

Richard Stoffelen — Chief Financial Officer

The thing we are mentioning and referring to in that sense is the margin in that business. We believe that we have a relatively stable basis now as a mix of fixed fees, upfront, knowledge transfer versus clinical trials. Obviously, it is very hard to exactly say what will come in what quarter. But nonetheless, we believe that this is a fair reflection of what one could expect in the future to come.

Luke Sergott — Evercore ISI — Analyst

Okay. And then, so you guys added 11 new collaborations. You’ve talked briefly on that. Can you give us an idea of the overall impact to your business development side on the biopharma piece? So how much of that is moving away from face-to-face interactions and what you guys are doing there to keep the funnel open and clicking?

Richard Stoffelen — Chief Financial Officer

Well, first of all, obviously, travel and face-to-face had been hampered massively in the pandemic, not the least in the US recently, given that we all saw that contamination obviously is highest when people meet. So we’ve had less face-to-face interaction, but that also led to a situation where we had a couple of hundred Pfizer salespeople in a video call and training them for the TTR screening program, which we would never have had as an option or a possibility if these people had been on the road all the time. So you see some negatives, you see some positives. People are a bit distracted. But after a very short period, most people got used to working from home, and video conferencing proved to be very effective in keeping the line open. As we’ve always seen, obviously, the number of partnerships towards the end of the year increases more than one would expect in Q1.

Luke Sergott — Evercore ISI — Analyst

Yeah. Okay. And then I guess the last one, as you think about the new facility that you guys are building up for the COVID testing and that will add EUR2 million to EUR3 million, I guess, over the next — like you said next couple months, as you think about the long term growth rate of that 20% or 25% that you guys talked about, how does this factor into achieving that? Was this something that was already in the plans you just decided to accelerate maybe a year or two?

Richard Stoffelen — Chief Financial Officer

Unfortunately — or let me put it better, fortunately, nobody was able to predict this pandemic. Nobody had expected it. So we did not predict opening a COVID lab in the past. We did not plan for it. We did not schedule it, and we had hoped that it would never have been necessary. But now that it came to fruition, we’ve acted swiftly yet very decisive on setting up this testing capability, first being able to do the test to begin with, to define the test, and then to be able to do it in a high volume which then led us to open this lab. So to us, it would be a situation that is only caused by the pandemic and that we only expect to continue throughout the pandemic and resolving it.

Luke Sergott — Evercore ISI — Analyst

Okay. It’s understandable. That’s all from me. Thanks.

Operator

[Operator Instructions] Your next question comes from the line of Catherine Schulte from Baird. Please go ahead. Your line is now open.

Tom Peterson — Baird — Analyst

Hi, everyone. This is actually Tom Peterson on for Catherine. Fair amount of my questions, particularly related to COVID testing, have been asked. So I’ll keep it short. I was just curious from a margin standpoint, and I know you guys have called out sort of steady state on pharma. I just wanted to know if there are any other onetime items and how we should be thinking about the COVID testing impact on margins. Just generally, how do you think that trends over the next couple of quarters?

Richard Stoffelen — Chief Financial Officer

Well, whilst we are not at liberty to share any future-looking statement because of the unprecedented nature of this pandemic, we can give you a little bit of perspective that as you’ve seen in the past as this closing materials on various contracts, as well as margins related to the various contracts, it is difficult to say exactly what contract will be signed in what quarter with what margin because a knowledge transfer — a sole knowledge transfer would be close to 100%, whereas a clinical trial would be much more costly to us and much lower margin. Overall, I’ve addressed the question before, why we expect a steady state, so that should address that concern.

If you look at the margin in the DX segment, we’ve alluded to the margin improving due to the lowering of number of NIPT samples, which historically have had a very low margin. And we believe that the COVID commercial testing will have a positive contribution to the margin of the DX segment.

Tom Peterson — Baird — Analyst

Okay, great. And then, just trying to get an idea on the demand side of things from a COVID testing perspective. At this point, I know you guys have said that you have the capacity to ramp up quickly. Now the market is a little bit more flex with testing. Are you seeing a little bit of a normalization between supply and demand? Or do you still think at this point that demand is just kind of outstripping things from your perspective?

Richard Stoffelen — Chief Financial Officer

Again, let me rephrase once more that it is unprecedented. So, one can read a lot about demand. One can read a lot about potential supply. They don’t appear to be balanced out yet and we cannot see that it is balanced out yet either. That’s all I can say at this stage based on the general market information, presentations, as well as our own observations.

Tom Peterson — Baird — Analyst

All right. Helpful, guys. Thanks, appreciate it.

Operator

Thank you. There are no further questions. Please continue.

Sun Kim — Chief Strategy & Investor Relations Officer, Chief Business Officer (ad interim)

Great. If there are no more questions, we want to thank all the folks who dialed in for this call and wish everyone good health in these times. And once again, thank you for joining our Q1 2020 call.

Richard Stoffelen — Chief Financial Officer

Thank you very much.

Arndt Rolfs — Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

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