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Edited Transcript of ABC.L earnings conference call or presentation 9-Mar-20 9:30am GMT

Half Year 2020 Abcam PLC Earnings Call

Apr 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Abcam PLC earnings conference call or presentation Monday, March 9, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Thomas Hirzel

Abcam plc - CEO & Executive Director

* Michael Shaun Baldock

Abcam plc - CFO & Director

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Conference Call Participants

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* Alistair David Campbell

Liberum Capital Limited, Research Division - Analyst

* Charles Robert Weston

RBC Capital Markets, Research Division - Analyst

* Miles Dixon

Peel Hunt LLP, Research Division - Analyst

* Stefan John Hamill

Numis Securities Limited, Research Division - Director of Equity Research

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Presentation

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [1]

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Good morning, everyone, and welcome to Abcam's presentation of the first half results through the end of December 2019. I'm Alan Hirzel, and I'm joined very gratefully by Michael Baldock, who's entering his sixth week. He decided to join in a quiet time to see you today.

And what we'd like to do, as we usually do, I'll talk a little bit about the overview of how I think we're doing versus our strategic intent and the very long-term ambitions of the company. And then I'll turn it to Michael to talk about financial trading and performance from the first half. Obviously, we'll open up for questions, and I think we're going to take questions from the room first and then any of those on the call, and I know we have more people on the phone today than we normally do.

Everything I say today is covered by our standard disclaimer. So let's get started.

What you see in this photo is a group of Abcam employees working with a team in Malaysia to help them work on their immunohistochemistry technique. It's a training session for us to help researchers make the best use of the tools that we make. And there's a little chart in the back says The RabMAb is making a difference. But I think it's the people and our team worldwide that are helping others make a difference. And that's what, as ever, motivates everyone in our company to continue on. And the efforts that we're making to create a more engaging work environment for our people is making us more effective with customers.

When we look at the first half, it's a small step in the history of the company, and it's certainly a small step towards the 5-year strategic plans I laid out in the Capital Markets event in November. So we'll talk about, of course, progress. But as ever, it's very early days in things that we're putting in motion for the future. And I look forward to talking to you about those today, but also, I'm sure, in September, we'll have a fuller opportunity to talk more deeply about the progress we're making.

You will see in the press release this morning that we've highlighted a number of things that have been positives for the first half. Certainly, the most important, from my perspective, is that we have made broad progress across all of our strategic goals. I couldn't be happier with the level of initiation that we've been able to make across so many areas in the business. We've done that because we've had the right people working on the right things, and we've been able to fund those at a scale and a breadth that I can only dream of, I think, when we started -- or at least when I started with Abcam now over 6 years ago.

And of course, that plan, as we laid it out in November, was an organic growth plan. We were certainly talking about how we'd think about acquisitions, how they fit into the overall strategy. But at that point, we hadn't deployed much capital on acquisitions. Certainly, as we'll talk today, we'll explore some of the things that we've been able to do to put capital to work, now over GBP 120 million in acquisitions since the beginning of this financial year, in order to support the growth plans that we were so clearly laying out in November.

And in general, whilst all of that's going on, the things that make us very confident about the performance of the business and the outlook is that Abcam continues to gain market share in all of its markets and regions, primarily driven by the investments that we're making in innovative in-house products. And all of our strategy and all of our investments are disproportionately focused on that in-house capability because that's what's helping us gain share. We've been able to recruit into important open positions. Michael is an example of one of those. We've filled a wide number of roles. I'll come on to some of those details in a moment.

And in spite of what's going on in the news and all of the nervousness around the world, the fundamentals of the business in terms of how I -- how we see customer feedback, what they're telling us about our market position, what the data is telling us about our market position, the growth that we're seeing leaves us extremely confident about the underlying performance of the business and the potential of the company.

And that said, you'll hear us talk a little bit more about what's happening with COVID-19 and the impact on the business. And in this very dynamic and fluid situation, we are going to have an impact. It will -- it has already reduced our revenues year-to-date. Michael will explain a bit about that. And it will unlikely -- it will very likely continue to do so. The rate at which and the duration of that is quite difficult to predict at the moment. My work and the Board's attention and the executive team's attention has been to make sure that we're looking after our people. We have over 300 people in China. They were the first wave of folks that we were looking after. And certainly, as things spread around the world, that's our primary concern at this point.

Just a few words on strategic progress laid out at the Capital Markets event. There are 3 broad categories or strategic goals in mind. No matter what happens to Abcam, we're still going to be focused on antibodies, antibody development and getting those out to markets through online and digital marketing. It's an essential part of our growth, and we won't succeed without that. So many of the things that we've been doing have been -- our attention has been focused on those.

So we've been able to, through a variety of investments in knockout validation, but also automation, being able to more quickly validate antibodies that we're putting them out -- putting out. Today, an antibody that we're putting into market is being validated on something like 3 to 4x more tissues and application types than it was just 5 or 6 years ago, and that's come as a result of quite a lot of investment. We still see work to go there, but we've made a lot of progress in that area.

Certainly, the way that we make antibodies continues to offer opportunities for innovation. When we bought Calico Bio back in -- just a little over a year ago, one of the things that most attracted us to that acquisition was the techniques that we could bring to innovating how we make antibodies. We're now starting to take those more manual processes and ways of doing things and beginning to automate them and getting much higher throughput from our R&D portfolio as a result.

And then, of course, we are -- I think we talked about one of the constraints for making antibodies in November was the starting point, an antigen for making an antibody or a protein. We're very good at making peptides. One of the capabilities we didn't have was making a full-length proteins for antigens. We now have that capability, and it's live and helping us make new antibodies. So in all 3 of those areas, progress has been made since July 1.

Then in terms of the portfolio itself, beyond antibodies, we continue to expand the portfolio of products that we already had underway like ELISAs or immunoassays. We produced our 1,000th ELISA kit this year as a new product in the portfolio. Again, just a reminder, that started from virtually 0 in-house ELISAs back in 2014. So every year, we're adding a couple of hundred, and very proud and pleased with the progress there. I think CiteAb recently said that we're at #2 or 3 in the ELISA market now, having come from nowhere in that market in terms of citation share.

We also introduced a high-throughput screening technique for -- screen bio samples and tissues through the FirePlex platform. So despite the fact that immunoassays now we've been working on for some time, I guess the point I'm trying to make is we're still innovating and still building on that portfolio, and that will help drive future growth in that area. In addition to that, some of the other areas that we're investing in and expanding are related to investments we're making in antibodies. So whether it's validation investments that have given us lysates and cell lines, we've been able to launch a portfolio of lysates, over 2,800 of those, where they've had genes edited and they've been knocked out for a particular gene. Those are important controls. People are buying them. So we're very happy with that. That got launched in about November.

We launched our edited cell lines in January, first batch of those, and already those are beginning to sell. And we launched our first group of 40 full-length bioactive proteins in January as well. And again, those are beginning to sell. So it's very early days, as I said, but I'm pleased that we're basically doing what we said. We would invest in these technologies, either in-house or through acquisitions, and that would help drive innovation in the portfolio, and that's actually happening. And of course, a number of acquisitions that helped that, and I'll leave Michael to explain where those are.

And the final part of the strategy is building the organization that's capable of making use of all these because we know we can only do as much as we have team and people and capabilities to make that happen. And we certainly added those capabilities, not just the 2 senior hires in IT and CFO, but we've substantially improved and extended our sales force capabilities for selling some of these advanced products into more complex environments. We've built up a number of our teams regionally. And as ever, we continue to hire great talent into the business. And being recognized as the #6 employer or Top 10 in the Glassdoor ratings is, I think, just another reflection of the kind of quality of environment we're trying to build to attract and retain talent.

We have still a lot of work on IT to be done. But since we last spoke, we've completed the design phase of some -- 2 of the more important areas around supply chain, manufacturing, but also in the new way of using our website to market products. And once design is finished, then we can get on to beginning to prototype and implement, and that's what will be carrying us on for the next couple of periods.

We've had to expand our facilities in the United States, in particular, our largest market in order to keep up with our production and new product development ambitions. So we've signed a lease for 100,000 square foot facility in -- that's roughly 100,000 in the Boston area, and we'll be moving out of the Kendall Square facility where we currently are, which is about 1/3 of that size and expanding into a much lower-cost and much better facility on the edge of Boston. That will help us provide the space we need for some of these areas we're investing in. We're also expanding our footprint in Eugene, Oregon, where we've had a facility for quite some time, and we have outgrown that. That facility is mostly doing immunoassay development. And as I said, because of the growth in that area, we also need growth in footprint.

And then finally, in terms of team, what I think we've recognized is we need more of our people to be able to develop in order to lead the company in the future. And we certainly have an ambition to develop more of our talent from within and not have to rely so much in the external market. We're investing more in the development of our people and leadership programs and training programs and incentive programs in order to develop and retain talent to run the company in the future. So those are some of the highlights of what we've been up to since we laid out the plan for the year. And as I said, this is a small step towards a multiyear plan, and it's early days, but we're very happy with how things are going.

I thought I'd just talk for a couple of minutes because -- about the Expedeon acquisition, we haven't had a chance to really just describe that to you as a group. That acquisition closed in January. And as we laid out in the November Strategy Day, what we're looking for are capabilities to help us make more value from all the work that we're putting into recombinant antibodies, in particular, from our in-house development. And within Expedeon, there were 2 technologies that we were really interested in and have known for some time. And there's the Innova group, which has primarily developed ways of conjugating fluorophores and other compounds to proteins, and they do that very well. It's one of the best technologies and kits available. We have been reselling those kits as -- under the Abcam brand for some time.

But as a capability, we're very interested in being able to provide our customers with not just the antibody, but the antibody conjugated to the oligonucleotide or to the fluorophore or whatever they want as a package. And that is not just our interest, but we've had customers extensively say to us, hey, look, it would be great Abcam, if you could do some of this for us so that we're not having to buy conjugation chemistry from one source and your antibodies from another and managing the complexities and effectiveness of that themselves. And now we're a couple of months into owning this business, I can say with great confidence that all of the partners with whom we're working and have large instrument platforms, where they're counting on us for antibodies, are definitely excited that we're now able to provide them with not just the antibody, but the antibody conjugated to the things that they want. So we're delighted with the strategic fit of that aspect of the Expedeon acquisition.

The other part of the Expedeon acquisition was a company called TGR. It's a small group that is based in Adelaide, Australia. And since we started the ELISA -- SimpleStep ELISA immunoassay platform, we have been using the TGR technology in our one -- single-wash ELISA kits. It's been an important part of the technical advantage of our ELISAs. So in effect, buying TGR technology allowed us to bring in-house what's an incredibly important chemical component of how those assays are made. But it also comes with some interesting and attractive customer relationships, again, in platforms where maybe we hadn't been selling antibodies, but the TGR chemistry was there. Now we're able to have a conversation with those companies that says, hey, look, not only can we provide you with the TGR chemistry for your assays, but we can provide you with antibodies. And that -- it may surprise you that those conversations hadn't happened, but they had, and it's very rewarding to see those opportunities open up. So that's the strategic fit.

In terms of progress, there are about 70 people in -- over here in Britain, in Cambridgeshire, who were hoping many of them will move over to our U.K. facilities. They're in the middle of a tippy process, so I can't really comment too much further on that, but the integration process is going well. And the team in Adelaide is continuing to do what it needs to do, and we're delighted to have everyone on board.

In terms of our progress overall, many of you asked me, how will you know when you're becoming the most influential company in life sciences? How are you going to measure that? And I said, it's quite difficult, but I'll know it when I see it. A couple of things that we think are interesting signals for you to look at. One is just the share of citations of papers that are being published around the world in life sciences. Abcam has gone from about 35% of share of every paper having some Abcam product in it, now having over 50% of all paper cited have an Abcam product in it. That's both satisfying and -- in terms of the progress, but it's also -- it reminds me of the opportunity yet ahead because there's no reason why that number can't continue to go up.

CiteAb every year recognizes Abcam for something. This year, we've been recognized for having the best knockout validation. They didn't award it this year, but I can also tell you that 2019 was the first year that Abcam had the most citations worldwide for antibodies. And given that citations tend to lag revenues by a few years, we were waiting when the citation share was going to catch up with revenue share, and that happened in 2019. And then BioCompare has nearly 1,000 researchers around the world on 10 characteristics, which is your favorite antibody provider, and Abcam was 9 out of 10, was #1, and we were #2 on one of those. Again, that's a tremendous achievement for the company because that's not where we came from. So those things happen, I believe, because of the investments we're making in proprietary products and improving our website and also improving our talent and capabilities in the company.

H1 performance in terms of the strategic measures, again, this has been well signaled now both through a trading update and the numbers this morning. So there's no new information here in terms of the growth rates. But still, if you wonder why are we optimistic about Abcam's future, 14% revenue growth in our own product portfolio, which is now 45% of the Catalogue revenue and nearly 50% overall, that's the growth driver and engine for Abcam today and in the future. And a lot of these investments are going to continue to drive that number.

And in the second half, this is our -- whilst we're going through all this change in investment, are we still delighting customers? And the number you see here is not the half year number. This is year-to-date through the end of February, I believe. And we're running at just at the lower end of the range. We actually had a couple of hiccups in October with some technology in terms of how we're surveying and our response times. We fixed those now, and that's why the number is trending up, and we remain confident to the full year range on transactional NPS.

So I'm going to turn it over to Michael now to give the financial report for the first half. And as I said, I'm happy to take questions at the end. Thank you.

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Michael Shaun Baldock, Abcam plc - CFO & Director [2]

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Thank you, Alan, and good morning, everyone. So as most of you probably know, I'm 5 weeks into this. So there are a few things you're going to have to forgive me for. One is that I'm going to walk you through something you've already read, so don't blame me for the content and being boring. I'll try and spice it up and lend you a few insights into what you've already read. The second is they're still trying to beat the American out of me. So if I mention dollars -- everything I'm talking about today is pounds. So if I say dollars, just substitute it for pounds unless I explicitly tell you I want you to think in dollars.

So I will walk you through the numbers in a second because they're important, and I think they're important because they really are an indicator of how well this company is doing and how well we are doing according to the plan that we laid out for you on the Capital Markets Day for the next 5 years. But I thought I'd take a few seconds to also give you a little bit of insight into the human element of this company because I think, ultimately, it is what makes this company a really unique beast. And I've been banking health care companies for a very long banking career now, and it's the first time I ever thought about joining one. And I was fortunate enough that Alan and I had known each other and he invited me to join this company.

And I can honestly tell you that as excited as I was about this company as an adviser, and when I was offered the job, I'm even more excited now having been there for 5 weeks. It is really unique. And I know a lot of companies say that, but you have to actually dig below the surface of this company to understand what a unique mission it has, how well it's been able to execute on that, and that is really because of the people that are there. And I hope all of you, at some point in time, get to spend some time around the company because you will begin to see the unique group of individuals that make it up and the impact that they're having on driving our business forward. And we will absolutely succeed in this 5-year plan, and that's because there is a very large group of individuals there that is hell-bent on making it happen. And they're really committed to the mission that they're undertaking. And I found that so invigorating, and it's been -- and people mock me because I'd say this all the time, I'm having so much fun.

And I never thought I'd say this at my age and a new job, but I can't wait to get in the morning, and sometimes I don't leave at night. So I think it's really important you have that perspective. And there are couple of just little -- I know James is -- he can't wait to get the hell out of there at night when I'm sitting there. So I mean, one of the things that Alan mentioned that I think is really important that -- an indicator of why this company is unique and the people is the Glassdoor award that we received last year, which is an employee -- it's voted on by the employees, and we were the #6 best place to work in the U.K. And that, I think, that is not to be underestimated in terms of how this company is going to drive its mission.

So on that note, I can see if I can make this go the right way. As Alan mentioned, we've started it very quickly on initiating and implementing the 5-year growth strategy. As we said in the RAS -- our RNS last -- the last 6 months, we invested $10 million (sic) [GBP 10 million] in strategic initiatives, including product innovation, customer experience, digital transformation and our teams. He described a bunch of those. I'll talk about the acquisitions in a minute, but I wanted to just lay out exactly how we'd spent that money.

If you then look at the fact that we've invested about GBP 120 million in acquisitions, with the largest being Expedeon, you get a feel for how much investment we were actually able to make in the first 6 months. And you'll understand why the margin is slightly below, although not much, just slightly below what people had expected. I'd like to remind you that what we did say in the beginning of the year was that our margins were going to be very volatile because of the fact that we weren't sure how quickly we'd be able to actually make these investments. And I think that the important thing about making them early is that we're going to have a good long time to actually get those technologies seated in and that they will help us long term, drive the growth of our underlying business.

It's also important to remember that a year ago, we were about 1,150 people. As of yesterday, post the Expedeon closure, we will be about 1,300 people. So there's a very, very rapid growth in the number of people that we've added through these acquisitions and technologies, and that has had a significant impact on our margins to date.

Alan told you a little bit about some of the technologies. I'll just run through them quickly, so you have a little more context in what we've been buying and why and the implications it has for our long-term business. Expedeon, as he mentioned, was about GBP 102 million, and it's given us significant conjugation capabilities, which we're already putting -- starting to use.

Edigene, which was a range of edited cell lines, which we're already starting to use for our knockout validation, is becoming very important. The gene editing platform and oncology product portfolio of Applied StemCells with life science research and diagnostics market was added recently. We've made 2 small investments: one in a company called BrickBio where we got rights, but at a small equity stake, and got rights to their technology -- conjugation technology platform for research and diagnostic uses; and SomaServe, which was a seed investment, where we also got an exclusive right to their live cell staining and delivery system for research and diagnostic markets.

And finally, you may have read last week, we made another acquisition of a company called Marker Gene Technologies, which is an additional component of our conjugation strategy, and they actually are an adjacent space to our facility in Eugene, we think it's going to be a very easy integration. We're not going to stop now. We've got a lot of things we'd like to add. We're focused on very high quality, and we're going to continue to build the pipeline as we integrate these technologies and look for other external technologies to drive our core underlying growth.

So now I'll take you to the real -- the financial highlights, most of which you've already read. But we continue to grow and gain share in our markets while initiating our investment in the long-term growth plans. And I think it's important to remember that the underlying business has been driven and growing while we've been making all these investments.

Total revenue growth was about 10.8% on a reported basis, including a foreign exchange tailwind of about 2.5% from weakness in sterling. The foreign exchange rates, as you know and particularly after this morning, are very volatile. At the current rates, we think we'll have a modest headwind to reported growth in the second half.

Our gross margins were broadly level with the prior year. There was a modest decline, predominantly as a result of our geographic mix, some headwinds from the foreign currency and slightly lower CP&L revenue partially offset by a favorable product mix on the Catalogue.

As we set out last September, our operating margin was likely to be volatile, as I said, again, because of the level of investment. And we're actually very excited about the level of investment we've been able to make. We've been pleased with the pace of progress, and it's reflected in our operating margin of about 24.2%, which was slightly under the 25% to 28% range we set out. If you take the small decline in our gross margin, that's about 50 basis points. And then the rest is a small product and geographic mix difference, and then add on all the incremental operating costs from the companies that we bought.

After interest relating to the revolving credit facility, our profit before tax was GBP 32.8 million. As you've also read, we maintained our interim dividend at 3.55p for the first half. And as stated in the RNS, which some of you picked up this morning, the Board is currently evaluating its future capital allocation priorities with respect to maximizing our long-term interest of the business and shareholders, including the appropriate distribution of future dividends. And we intend to consult with our shareholders over the coming months about that.

We continue to generate significant cash and ended the period in a strong cash position. And I think that's really important to remember that as we initiate these growth prospects, it's -- we are in a phenomenal position. We've got a very strong balance sheet. We've got very good cash flow, and we are very focused on how we adequately allocate the capital resources to deliver the 5-year plan that we've laid out for all of you.

So if we switch to revenue performance, I'll just run briefly down through the different lines that you look at. Catalogue revenue contributed approximately 95% of our total revenues, and it grew at about 9.1% constant currency. It was largely driven by growth, and we're very proud of this, our in-house products, growing at about 13.8%, which is to the top end of the range we set out for you of 12% to 15%.

Our in-house products now comprise 45% of our Catalogue revenue, which is a very significant change from where this company started out some years ago, with that increase driven by 24% constant currency growth across our in-house recombinant antibodies and immunoassay product ranges. Our third-party revenues grew at about 5.4%, which is a little bit ahead of market, which we think is about 3% to 5%.

Our Custom Products & Licensing business is made up of really 3 buckets of revenue, each with their own distinct dynamics, being royalty income revenue, revenue from in vitro diagnostic products and the customer service business. These areas accounted for about 5% of revenue. Overall, CP&L revenue declined 1.3% on a reported basis in the first half to GBP 7.6 million. This was lower than the expected range due to the phasing of certain IVD orders, and the phasing of this revenue is expected to remain uneven as it continues to mature. Overall, the group currently anticipates that CP&L revenue for the year will be broadly in line with the prior year.

So CP&L is really -- we've been describing it as a business. It is really 3 separate product lines, and we are going to be thinking about, over the next period, of how we report that because it's really very 3 separate lines of revenue. There's royalty revenues, which we think is a very long-term annuity base. There is an in vitro diagnostic business, which was the one business that has been really highly volatile. And then there is the customer services business. It's worth noting that both the customer service business and the royalty business have actually grown quite significantly. It's the in vitro diagnostics business that has been so volatile. We're going to think about how we report this business over the next 6 months. And we'll probably end up reporting it as we manage it, which is as separate revenue lines.

Geographically, we continue to exceed our underlying market growth rates across all major regions in which we trade. The Americas, which is our largest region, contributed about 40% of revenues. It grew at 6.5% last year, which is still well above market, but it's tough to compare because last year, we grew at about 10%. So we still are very happy with the 6.5% we got in the first 6 months. We think that we'll -- we're seeing decent momentum in the territory, and we expect a stronger second half performance.

EMEA delivered a solid performance of 7.5% growth, which is a better performance in the U.K. and particularly strong performance in Switzerland.

China, as you know, now contributes over 18% of Catalogue revenue and grew at over 17% in the first half, twice the market growth rate. We've obviously seen a coronavirus impact in the second half. And it's too early to say what we think that impact will be during the extended closures in February. We estimate we lost about GBP 3 million of revenue, as we laid out in the RNS.

Japan delivered a very strong performance for the region after a challenging year last year. There's no real change to the market dynamics there, and we expect to see continued volatility in this country where the demographics and funding environment remain difficult. The rest of Asia Pacific delivered a very strong performance as well. So another thing we're likely to do in the coming months and will talk about at year-end is consider combining Japan with the rest of Asia into a single reporting region since that's now how we actually manage the business.

I thought it'd help give you some perspective on how we've stepped up our rate of investment under the 5-year plan if we look at this adjusted operating profit bridge. This waterfall shows the stepped-up investment under the 5-year plan that we're using to deliver our revenue aspirations. The chart starts with last year's adjusted operating profit of about GBP 40.8 million. And then if you look at the incremental gross profit, we generated in the first half of about GBP 7.5 million after foreign exchange.

From the total of GBP 48 million, we've then invested GBP 14 million back into the business. About GBP 4 million, around 1/4 of the spend was volume related, particularly in supply chain and manufacturing. We invested around GBP 10 million across a range of initiatives that we've discussed, including new product innovation such as proteins, cell lines and advanced antibodies, transforming our IT systems and scaling up our global footprint, including our new U.K. headquarters. This GBP 10 million includes GBP 2.8 million relating to the share scheme that we introduced, as you'll recall, Abshares, which was introduced in October 2018 and was launched as an all-employee share scheme. We've seen over 90% takeup in the share plan and is a core element of fostering a greater ownership mentality across the workforce while helping to retain talent.

So finally, before changes from IFRS 16, our full year adjusted operating profit for the first half was about $34 million -- GBP 34 million, first time though. Was it twice? Damn, you're counting.

To focus on cash flow, as I said earlier, we're continuing to be highly cash generative. We generated cash from operations of about GBP 45.5 million, which was an 8% increase over last -- first half last year. We've invested around GBP 19 million in capital investments, including our global ERP program, new product development and kitting out our labs to support new product development capabilities, including proteins and cell lines.

Expect CapEx in the second half to be a similar amount. We drew down GBP 101.4 million on the RCF ahead of our purchase of Expedeon and, after dividend outflows to shareholders of GBP 17 million, ended the period with a net cash position of GBP 89 million. Post the end -- the close of the first half, we paid GBP 102 million approximately for Expedeon. And in February, we paid down another GBP 20 million of the RCF, leaving us with an RCF of about GBP 82 million.

So I'd like to reiterate a couple of things Alan said and we said in the RCF about -- or RNS about COVID-19. First, our priority remains on doing everything we can to look after our employees and our customers. I'd like to point out how, I think, stellar and hard for us it is to actually contemplate what was going on in Asia over the first few months, and particularly China, but it also is a real testament to the stellar work performance and commitment of our employees. We were down for a very short period of time. It was government-mandated. And during that time, most of our employees were working from home to the extent they could. To date, we've lost around GBP 3 million of revenue, predominantly originating from the spread of the virus in China. But following -- and following the government-mandated shutdowns in China, our operations began reopening on February 14. To date, around 50% of our workforce are back on site. And from a supply chain perspective, we held enough stocks in multiple locations around the world. And so we've had seen very marginal impact on both supply -- on supply chain to date.

Clearly, the global situation is fluid. The full financial impact is uncertain at this time and will depend on the spread of the virus and policy choices made in each market over the coming weeks and months. We've relied immensely on our employee base to work from home, and the commitment level has been incredible. In China, people were going back as soon as they could get back to work. The ones who couldn't were working from home. And that's why we've actually seen the -- it lessened the impact that we felt over the first few months. We continue to monitor the situation carefully, and we'll update the market in due course when we have more clarity.

In summary, we're very pleased with the progress we've made in the first half, and we remain very confident about the future prospects of this company. We are looking at things in 5- to 10-year chunks. And if you look at the incredible progress that we've made in 6 months, we couldn't be happier with what we've been able to accomplish so far and are really confident of where these investments and progress is going to take us.

We've talked a lot about our growth strategy. And I remember at the Capital Markets Day, one of the biggest concerns was, will we be able to spend the money and find things to invest in? And I think you've seen that we found some phenomenal technologies, we're bringing them in and we're beginning to execute on them. We have talked a lot about it, and it's at a very early stage, and you always run the risk of pulling things up by the roots to see if they're still growing. I can tell you, I think we'll have a lot more to discuss about them in September when some of these technologies have started to take root.

So notwithstanding the short-term impact of COVID-19, the fundamentals of the business are very strong, and the long-term dynamics of the markets we serve are attractive. We're committed to the long-term investment plans, and we think these are really exciting times at Abcam as we continue to evolve the business and invest in order to deliver profitable long-term revenue growth. As I said at the beginning, from a personal perspective, I've known this business for a number of years as an outsider. And now after being 5 weeks in, I wanted to thank the people at Abcam for making me feel so at home as well as continuing to immerse myself in the business and continuing to getting to know both the teams and the technology. I'm beginning to think about some of my priorities over the next few months. I've already mentioned a few, like some of the way we report things, looking at our capital allocation plan, but I'd also like to continue to support the execution of our strategy by ensuring that we have capital available when necessary and that we allocate capital in the most efficient and cost-effective way. We're a company that's growing very rapidly, and I'd like to work with the rest of the team -- rest of the management team on evolving how we operate as we grow.

And finally, I'm going to review the way we report a number of revenue items to make sure that we're effectively conveying the way we manage the business to better support your understanding of the financial impacts. And finally, I'm looking forward to getting to know my colleagues better. I'm looking forward to get spending time with some of you, to getting to know our shareholders and our customers a lot better.

So at that, I'd like to thank you for coming and listening, and we will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [2]

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I think we're going to start with questions in the room, and we have a microphone coming forward. Charles?

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Charles Robert Weston, RBC Capital Markets, Research Division - Analyst [3]

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Charles Weston from RBC. Three questions, if I may. First of all, in terms of the capital allocation side. Obviously, given the strong cash flow, you've got the internal cash generation to make some of the bolt-ons that you've been making. So presumably, you're thinking about more opportunities on the larger M&A side. I'm wondering if you could sort of talk about the pipeline of opportunities you have, what sort of discussions you're having with people on the M&A side?

On the -- second question, on the investments that you're making, that GBP 10 million or GBP 10.6 million. Could you give us a sense of what that would be like if you took the current cost on a sort of annualized basis, i.e., presumably, there was a ramp-up of costs through that half, and there may well be more ramp-up in the second half, but where are we on a sort of a run rate basis?

And then lastly, the 6.5% in the U.S., acknowledging that you had a reasonable comps in the prior year. That was perhaps a little bit weaker than I'd expected, a bit weaker than you have delivered over the last few years. So if you could just explain perhaps if there were any underlying reasons for that, that will be helpful.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [4]

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Good. Why don't I take 1 and 3, and I'll leave you with number 2?

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Michael Shaun Baldock, Abcam plc - CFO & Director [5]

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Okay.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [6]

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There's no change really in the M&A pipeline discussions in the sense that we've talked before, what we're looking for are very highly validated, high-quality products that have a strong position in the market today, but perhaps where we could combine them with things that we're doing or make better growth from them because of our branding and distribution. And that's the sweet spot in terms of finding an acquisition that has revenue and profitability and how it fits with the platform in Abcam. So that could include antibodies or any of the number -- other areas we're talking about.

In terms of capabilities, there's always going to be small technology kind of like blocks of things that we think, if we had that, oh, we can make this combination. And so you're seeing a lot of that now with conjugation chemistry. We know, for multiplexing and some of our customers' needs in imaging, there were a number of these components that we needed. There are probably still small things that we will bring in over time. So both of those are in the pipeline.

And our sense is that we're beginning to see a generational shift that some of these companies that were started in the late '80s and early '90s, the founders are thinking about what they want to do, and they're bringing more of the opportunities to market because of -- they have decided that the best outcome for them is to bring them to a new owner as opposed to continuing to run them. So we're -- in terms of opportunities, there's a lot of them. All of them are contested at the larger scale. And so some -- the reason why we're hunting some of the smaller ones is they're easier to get exclusive opportunities there than through large options.

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Charles Robert Weston, RBC Capital Markets, Research Division - Analyst [7]

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So I guess, just on the capital allocation side, just to clarify, there's no particular reason why now is the time that you're looking at potentially ceasing the dividend. It's more just a case of a sort of a longer-term view on where you can get the best bang for your buck -- pound?

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Michael Shaun Baldock, Abcam plc - CFO & Director [8]

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Yes. And I think it looks -- we look very carefully at return on capital and opportunities out there. And we currently -- while we're still on a net cash position, we still -- that we now have GBP 82 million on the RCF. And if you look at it, it doesn't -- does it make sense? Depending on what we have to invest in for a company that is growing at the rate we're growing and investing the way we are to pay out GBP 25 million in dividend when we have -- when we're continuing to invest, and we have an GBP 80 million -- GBP 80-plus million RCF.

So it really comes down ultimately to the investment opportunities we have, the size and time over which they come. And I think we're planning. Now having invested the amount that we did over the last 6 months, which was ahead of plan, we're just making sure that we leave ourselves in a very strong balance sheet position and that we're actually allocating capital in the most efficient way possible. So there's nothing on the horizon that has caused us to do this. And I think that the company has always had this discussion with its shareholders that as long as we don't see opportunities to invest the money instead of build up a significant cash balance, we will pay some out as a dividend more as a level of self-discipline than anything else. But now that we've been finding opportunities to spend that, it probably -- it makes sense considering not paying it out.

The U.S. growth rate, do you want to...

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [9]

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Yes, I'll tackle the U.S. Actually, the U.S. came in exactly where we thought it would in terms of our budgeting and planning, primarily because of just a slight shift in number of days and how they fell with holidays versus prior year. First couple of months into the year, the U.S. has been doing extremely well. So I think this is just a snapshot in time of a particular phasing, not anything that we're concerned about.

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Michael Shaun Baldock, Abcam plc - CFO & Director [10]

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And then, I guess, the other question was just on sort of run rate margins. And what I'd say is, to give you guidance, is we're still comfortable with the 25% to 28% operating margin guidance over the beginning of the investment phase. We said it would be volatile because you can't control the rate at which we're investing anything. We brought in a lot of new people through the acquisitions and technologies that we've invested in the first half. And that, with just a little bit of geographic mix and a slight decline in gross margin, is what caused us to be off a bit.

So I would say that we are still comfortable with the range that we've given. As revenues tend to pick up from these technologies we're integrating, we don't see incremental costs increasing as rapidly as the revenue. So it's going to be a bit lumpy. But directionally, I think we've guided you fairly carefully.

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Charles Robert Weston, RBC Capital Markets, Research Division - Analyst [11]

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Just one on the margin point, the 25% to 28%, presumably that's pre any COVID effect?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [12]

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Yes.

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Michael Shaun Baldock, Abcam plc - CFO & Director [13]

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Yes.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [14]

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Stefan Hamill from Numis. So 6 deals since the unveiling of the 5-year plan, is there an element of catch-up? Or is this the new pace for Abcam?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [15]

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It's funny, I think the strategic initiatives would enlarge the entire portfolio, to some extent, is things that we had already been working on that, finally, we were ready to put money to work with because we have the right people and the right idea. And to some extent, that explains the deal pace as well. Like once we had decided we were not going to acquire company A for gene editing, but we wanted to get a different way there, we had already been working for 18 months on what are the different paths to get there, building it from scratch, acquire Edigene, acquire Applied StemCells. So I think the pace is kind of pent-up thinking where we were putting money to work on ideas that we already had. So I don't expect -- I'm sure I'll be pretty wrong, I don't expect that pace to continue.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [16]

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Okay. CP&L, I think, very helpful, the sort of preview to changes to the way the revenue line items will be reported there. You called out IVD has been particularly lumpy and phasing. Is there any particular product line there that's come in below expectation?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [17]

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This portfolio, which is the supply of antibodies that are used in, in vitro diagnostics is very concentrated customer base. It's a very concentrated customer base, and we had one customer in particular that was spun out of a large well-known competitor of ours. And in the transition, they simply stopped ordering. And we, unsurprisingly, had long discussions with the new management team, and we're convinced that the opportunity to continue to supply them exists. And in fact, under their new ownership and financial backing, we expect they will continue to innovate and grow.

So this is an unfortunate impact, and it was our largest customer. So that's the most -- the biggest explainer of what happened with in vitro diagnostic supply. And then Michael is right that normally, in the course of our business, those large customers will have choppy ordering patterns. And so we normally see volatility. But I think IVD supply was off by like 50% in the first half, and that's not normal.

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Michael Shaun Baldock, Abcam plc - CFO & Director [18]

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Which made -- the other 2 were up 20% each. But again, just by reporting together, just through...

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [19]

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So it's not product related, it's customer related. And actually, there could be an element of catch-up down the line, potentially?

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Michael Shaun Baldock, Abcam plc - CFO & Director [20]

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Yes.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [21]

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Yes. But they're in their own extraction.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [22]

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Their own process.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [23]

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Mother ship and setting up their own IT system. So when they'll actually come back is the question mark. So...

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [24]

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I see. And just a third one on the staff share scheme. And is it too early to have seen any sort of measurable impact on things like staff turnover, et cetera, there?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [25]

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Over the last 5 or 6 years, we've seen staff turnover coming down every year. We run our own engagement surveys. The external assessment by Glassdoor matches what we see internally, and we think it's having an impact. And what's harder to measure and what we really want out of it is a sense of ownership across everyone in the business. And I think the program that the team put in place for Abshares is unique because we have the same program delivered in the same way with the same measures available to every employee, no matter where they are, including over 300 people in China. That's really innovative. And I suspect we'll see the benefits of that in the long term that everyone feels part of the rewards and recognition as -- and part of the company in a more direct way.

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [26]

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Miles Dixon from Peel Hunt. Just if I can follow up on the CP&L line. So understanding you just said that you'll split it out for us 3 ways. I've always viewed the CP&L in general almost as a shop window or a bespoke opportunity for you to talk about and show pharma what you can do with your products. Can we expect that, that might sit within existing growth trajectories and, actually, where you really want to get to is pharma using the Catalogue rather than your CP&L line? And related to that, how is the attraction with pharma increase from the Catalogue since, say, for instance, Capital Markets Day?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [27]

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Well, Miles, there's a lot in there. Look, I think we're indifferent about how large or even small enterprises want to take Abcam products into clinical applications. If they find something like Roche often does on our Catalogue that they want to in-license and use for other applications in the clinic, we're totally happy to make that happen. And there's a very easy process for that to go. And we're seeing short-cycle times from interest to clinical development as a result. So we love that. Of course, that shows up when you're trying to trace what happens to the P&L in complex ways because it will show up as driving growth in the Catalogue as they buy those products and validate them and try them out. And then at some point, they tell us, hey, look, we're going to clinic. It's got regulatory approval, and it slips down to maybe the IVD supply for a while as we make it for them. And then when they start making it, it flips over to in-license.

So the way revenues move around the P&L can be quite complex for all the reasons you talked about. Sometimes, it starts as an off-the-shelf reagent and then finds its way through 2 other revenue streams. And that's part of what's underlying what Michael is talking about in terms of reviewing how we run the business, how we report it.

But in general, again, we haven't changed our view. The capacity for doing custom projects is fixed. Therefore, the best estimate of what happens to the revenue there that you can make is that it neither grows nor shrinks. In reality, it's going to jump all around. And whether we feed the royalties line through off-the-shelf Catalogue products that get to out-license or something that we made custom that goes out-license, I think we're relatively indifferent.

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [28]

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Okay. Great. And at the Capital Markets Day, you also mentioned about under-indexing within pharma. Have you seen improvements in the sales teams that have been built for that reason?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [29]

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I think it's still true, and that's part of what gives us optimism about growth. The thing that we can do today that we couldn't do for most of Abcam's history is go to any researcher anywhere in the world and say, if you use our products, there's a rapid path -- in fact, there may be a more rapid path of you getting successfully to clinical application than if you use any other product because of the quality, because of the consistency, because of the licensing capabilities, because of the way we work with platforms. That's the package, and that's what we're excited about.

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Alistair David Campbell, Liberum Capital Limited, Research Division - Analyst [30]

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Alistair Campbell from Liberum. Can I ask a question about conjugation technologies? Just to get a sense of what volume of primary antibody you supply to customers do you think they end up doing and conjugation with and how much of that you think pulls into you doing the conjugation for them? And also, what sort of sense do you think that obviously, you'll be taking workflow from them and then performing that workflow yourselves internally, implications that has for your cost, but also your ability to charge more to get a return on that?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [31]

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Thank you. I think most researchers, individuals in labs will still do their own conjugation. And for them, we're going to be selling the Lightning-Link kits that we've always sold under Abcam name, except now, we'll have more control over the innovation and distribution of those and the gross margins, et cetera. So that part of the business will, I think, continue to be the majority of kind of how Abcam is sold on a Catalogue.

If you think back to the Capital Markets Day, we had the team from NanoString there. NanoString is, as they get into their 3D biology and special biology platform, taking Abcam into a lot of their panels. And then they're, in their hands, conjugating the chemistry that they need for their instrument to work. You can imagine that, that kind of organization would very much like for Abcam to handle for it and perhaps for its end-use customers more of that packaging of the reagent so that they don't have to because they're set up to make really brilliant instruments with great software and sell capital goods. They're not set up to do what we do, which is thousands of orders at GBP 500, GBP 600 an order.

So it's a really natural conversation to have with any organization that looks like that, that its expertise and capabilities is on instruments and equipment. And to have a partner like us that has great content and can add more value to them at very small volume distribution, that's us. So I think it's working as a concept pretty well. We'll see now over the next couple of years how well we can commercialize it. But so far, so good.

And when we looked at Expedeon in terms of the platform partners they were talking to, where they had contracts for their chemistry, they're exact overlap with ones that we are. So it's -- in effect, we're now having one conversation as one company as opposed to 2 conversations trying to solve the same problem for them independently.

Any more questions in the room? Otherwise, we can turn to the phone if there are any there. Any questions on the phone?

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Operator [32]

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We have no questions submitted, so I hand back over to you.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [33]

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Yes, Charles? Sorry.

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Charles Robert Weston, RBC Capital Markets, Research Division - Analyst [34]

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Another 2, if I can. First of all, on the immunoassays, your own immunoassays have performed really, really strongly from a revenue perspective. I was just wondering if there were any one-offs in that or whether that is now you just growing organically on the sort of a trend, and whether that means that you're taking market share away from competitors or whether you are just taking a bigger proportion of the market as it grows, if I can differentiate that.

And then lastly, you mentioned in the U.S. on trading had started well so far. I was just wondering if you could give us a group perspective, excluding COVID perhaps, how the group has performed year-to-date -- calendar year-to-date.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [35]

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Okay. The immunoassay story is, in some ways, it's the same for Abcam as the antibody story, it's just delayed. We, as a company, began to introduce ELISA assays, sourcing those from third parties and branding them Abcam. That's how the business got started. And then once we saw that we could do that and the customers bought them, we began to make our own.

That -- the snapshot in time we're at now is we have just crossed the line of we're now making more revenue from ELISA kits that are made by Abcam than by third parties, but that's only recently happened like in this last 6, 8 months. So we're still in the middle of that journey of building out our own portfolio that can appeal to customers that -- through higher performance or greater ease of use or both in a way that we can't get from our supplier or, indeed, they can't get from competitors. But the growth, therefore, is a blend of actually much higher growth than what you're seeing from our own products plus some perfectly okay growth from our third party. It's just like the antibodies, except it's much less far along.

And again, the only thing you can look at is the citation share data, and I think the most recent reports on that would have us significantly gaining share from the incumbents that have existed there. And I don't think that's surprising because we believe that the antibodies really matter in terms of performing at a very highly sensitive level and that we have really good technology for putting those into kits through TGR and our own construct. And so we remain optimistic that as we build out, we're at 1,000 now, there's still a lot more ELISAs to make ourselves that we will continue to gain share in the market because of a better-performing product.

Then we're also making those antibody pairs that are in those kits available to platforms like NanoString and others, and that's providing some of the growth of our own product in immunoassays. So I think it is the combination of gaining share from incumbents and opening up new areas of science with better antibodies that perhaps weren't well served for ELISAs in the past.

On the question about trading, I don't know if we're -- we've got a lot to say there because it's quite hard to unpick what -- how is performance ex COVID, sitting -- where we're sitting right now. But outside of China and Korea, to some extent, the business had been performing very well. But I'm guessing that in a few weeks, we'll have a different view.

Well, thank you, everybody. I appreciate those of you who braved to come in today, and it's been a pleasure to have Michael here with me. So thank you, Michael, for a good first start. And I look forward to talking to you guys in the coming period and, obviously, in September as well. Thanks.

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Michael Shaun Baldock, Abcam plc - CFO & Director [36]

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Thank you.