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Edited Transcript of ABC.L earnings conference call or presentation 9-Sep-19 10:59am GMT

Full Year 2019 Abcam PLC Earnings Presentation

Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Abcam PLC earnings conference call or presentation Monday, September 9, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Thomas Hirzel

Abcam plc - CEO & Executive Director

* Gavin Hilary James Wood

Abcam plc - CFO & Executive Director

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Conference Call Participants

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* Andrew Mark Whitney

Investec Bank plc, Research Division - Analyst

* Charles Robert Weston

RBC Capital Markets, LLC, Research Division - Analyst

* David James Adlington

JP Morgan Chase & Co, Research Division - Head of Medical Technology and Services Equity Research

* James Francis Thomas Mainwaring

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Julie Simmonds

Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare

* Max Stephen Herrmann

Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD

* Michael Ruzic-Gauthier

Joh. Berenberg, Gossler & Co. KG, 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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Operator [1]

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Ladies and gentlemen, thank you for joining us today for the Abcam plc preliminary results for the year ended the 30th of June 2019. We are now going live to the venue, where you will hear background noise until the call begins.

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

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Well, good morning, everyone. Thank you for coming. Today, we're here to talk about the 2019 full year results for Abcam. I'm Alan Hirzel, Chief Executive; and I'm joined by Gavin Wood. And we're delighted you're here. So thank you. As ever, our comments today are covered by a disclaimer, which normally is there, but it's gone. So for any forward-looking statements, please read the detail on the presentation.

Today marks 5 years of a successful implementation of the strategy I set out in 2014. And of course, we'll recap a few of the highlights from this past financial year today. But most of the 40 minutes or so that Gavin and I are going to speak today will be focused on where we go from here and the opportunities we see to continue to grow this business and to the environment that we're so lucky to serve.

The conversations about Abcam always start with what's our purpose and what are we trying to achieve, what's our ambition. These things are not changing. It doesn't matter what we talk about today. The reason why everyone at Abcam and I'm certainly here is to help scientists achieve their mission faster than they would otherwise. And the ambition that drives us is thinking about how we help them get clinical outcomes more effectively and efficiently into market with better antibodies that are in diagnostics and drugs. And we're delighted to have that purpose and ambition.

And of course, we're energized by the work that we do with customers, helping them in their labs. The group that you see behind me right now is a group at John Hopkins. And we don't ask them to tweet these things, but we love it when they do. And in this example, they had an antibody they had been working with for 10 years that they developed in-house they were very proudly sharing with the entire field to help open up new areas of science. When we were working with them as a team to bring them a new product that might help them advance their research faster, they were open to that idea. And certainly, the rabbit monoclonal antibodies that they helped us validate and develop is helping them achieve that end. And I love the fact that they're calling it wicked good.

And of course, it's not just that they think it is wicked good, but that they're sharing that observation with other people in their field, and they're influencing the outcomes of the field. And on their web page in the lab, you'll see them talk about how important this particular product is to what they and others in their field are doing. This is how you scale Abcam. And this is how we think about scaling Abcam. It's one customer at a time, one field at a time, and it's how we're being successful.

And of course, it's our global team that also makes us successful. These results that we're going to talk about today wouldn't be possible if we didn't have over 1,200 people around the world helping customers day in, day out, shipping product, innovating and developing new products. And in this past year, this team has done more than simply run our business. They have helped us move to a new headquarters facility. They have helped us finish up a very extensive IT investment innovation in our back-office systems. They've helped us in many ways deliver everything that we're going to talk about today. And I'm very thankful for the work that they've done.

With the investment that we've made in the team and the organization and innovation over the last 5 years, we think we've delivered results. And when I think back to what we set out to do, the company has more than achieved what I had thought possible and what we'd agreed with the Board we would do at Abcam in 2014. We've improved the brand by any measure in terms of the awareness and what it stands for, the quality of the products, the customer experience, the range of products that we offer.

We've upgraded our organization, not just in terms of roles and functions but in the kind of talent that we have and the training that we deliver. Our systems have been improved. Our facilities are better. We've gained market share. We continue to grow this company at roughly 2x market growth. We've improved the quality of revenue by adding more of our own content. And I'm going to come back to this point later. But our own products help us get closer to customers and really get control of our IP and be able to take the whole journey from discovery to licensing.

We've completed 5 tuck-in acquisitions, and all of that work whilst continually driving a return on capital that exceeds the cost of capital over the period of about 20% return on capital and our cost of capital is in single digits. Total shareholder return has been 3x over that period. And revenue growth, we've doubled in the period.

And then it's on that basis that we look quite optimistically then to what else can we do with this company and how do we continue to build on that successful track record. And that's what I'll come back to in a few moments. Of course, this year's financial results come in the context of this 5-year story. And Gavin will now turn to this past year, fiscal year.

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [3]

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Thank you, Alan, and good morning, everybody. Financial headline is we've delivered another year of solid top line growth whilst continue to invest in our strategy, to invest in our people, product innovation, infrastructure and facilities. That's improving how we serve our customers and that remains at the heart of what we're doing.

On a constant currency basis, our total revenue is up by 9.2%. And Catalogue revenue, which is 93% of our total revenues, grew 9.8%, well ahead of the global market growth rate, which we estimate to be around about 4%. Of course, sterling has moved around a little bit, particularly in the latter half of the period under review. In result of sterling's weakening against particularly the dollar, our reported revenues were up 11.4% and our Catalogue revenues were up a reported 12%.

Our gross margin for the year increased by 60 basis points to 70.5% driven by favorable product mix on our in-house proprietary products, which are higher margin, offsetting the regional mix within the Catalogue. As we set out at the start of the year, we made some strategic investments. And as a result, our EBITDA increased by about 4.6% to GBP 92 million, an EBITDA margin of about 35.6% and in line with our guidance at the start of the year.

We continue to be highly cash-generative. And free cash flow increased by 28% in the year. This is the cash that we used to reinvest back into our business as well as to make small tuck-ins. And we completed another acquisition during the year, the purchase of Calico Biolabs. Our adjusted diluted earnings per share was in line with last year at 32.6p. And the Board proposed a final dividend of 8.58p, which if approved by shareholders at the AGM will bring the total annual dividend 2019 to 12.13p per share, an increase in line with our -- the increase in our adjusted profits.

To begin to look at all revenue now by products, we're pleased to report another year of Catalogue growth significantly ahead of market growth rates, again driven by our higher-margin proprietary recombinant antibodies and immunoassays. Total primary and secondary antibodies grew by 8.7% constant currency and is a little faster than last year. And you can see that recombinant antibodies grew at 22% in the year.

Turning to other Catalogue product revenue. And this line includes all of our kits and assays, our proteins, lysates and other RUO products. It's a fairly diverse portfolio and there's a significant element of OEM products in here to simply say it grew at nearly 15%. Within this line is a strategically important growing range of immunoassays. And this again increased by about 22% in the year, largely driven by our own in-house immunoassay offering.

Overall, revenue growth was impacted by the Custom Products & Licensing line, which is flat year-over-year on a constant currency basis after growing by about 17% last year. And as many of you know, we've been guiding that this will be fairly lumpy over the next 2 to 3 years. Our royalty income and IVD revenue grew strongly as anticipated within this line. However, the -- it was held back by the timing and completion of a number of custom service projects. So whilst we remain confident in the long-term potential of the business line, we do continue to expect to be some volatility in it.

Let's now have a look at our Catalogue revenue by region. It continues to exceed underlying market growth rates across all the major regions in which we trade. Our biggest region is the Americas, which had a strong year in 2019, growing by 10.3%, about 200 basis points faster than last year. We grew about 8% last year. Growth in EMEA was a little lower than last year at 6%. And whilst we've continued to grow ahead of market, there are a broad range of market dynamics across Europe.

Say, for example, we saw that Germany, our largest market, delivered strong growth ahead of the last prior year, whereas the U.K. continues to perform weaker. It's hard to know exactly what's going on with Brexit at the moment. But we are certainly seeing some impacts in our customers' purchasing behavior, particularly around disruption as researchers await clarity on how U.K. funding will operate after leaving the EU, if we leave the EU and when we leave the EU.

China continues to grow. It is a key driver for us and now contributes over 16% of our Catalogue revenue. It grew at almost 21% from last year. Japan returned to low single-digit growth in the second half of the year, which resulted in a flat year-over-year result for Japan. And we continue to expect volatility in this country, where the demographics and funding environment remain challenged. Meanwhile, rest of Asia Pac continue to deliver solid performance. And we continue to see the benefit of being direct in Singapore, Australia and New Zealand.

We continue to invest to sustain our long-term growth aspirations. And you can see this from the waterfall on this slide. This chart started last year with adjusted EBITDA of about GBP 88 million. In financial year '19, we generated incremental gross profit of about GBP 18 million after the impact of FX hedges, of which we've invested about GBP 14 million of this incremental profit back into the business. About GBP 3.4 million of that or around about 1/4 was volume-related, particularly in supply chain and manufacturing. We've then chosen to invest around about GBP 8 million in a variety of ways across the business, including our customer and digital experience, our China operations, data analytics, building out our global supply chain and manufacturing function and corporate development teams as well as incremental costs associated moving to a much larger Cambridge HQ.

Turning to our AbShare all employee share ownership scheme. We're really pleased to see about 90% of our colleagues have taken up the chance to join this scheme. The scheme has also gained external recognition for its innovative structure. And it's a core element in fostering a greater ownership mentality across the company whilst helping to retain talent. However, the scheme resulted incremental cost of approximately GBP 3.8 million over the variety of share schemes that we had operating in the prior year.

And we continue to invest in R&D during the year with a continued focus on building out our recombinant and immunoassay portfolios. Whilst total capitalized and non-capitalized R&D investment increased in the year to just over GBP 20 million, an increase in capitalized R&D following successful completions of key milestones on our AxioMx platform resulted in a fall in the year-over-year non-capitalized expense in the bridge. In result of these movements, our closing EBITDA increased by around about GBP 4 million to GBP 94 million.

We continue to make great progress against a number of significant capital projects in the year. I'm pleased to say that during the year, we completed the construction of our new global HQ in Cambridge on schedule. And in the first weeks of 2019, we successfully relocated our entire U.K. operations, including our laboratories, R&D teams, logistics and central functions from 3 old, end-of-life buildings into our new purpose-built facility. And I'm pleased to say we did that without disrupting either our own operations internally or more importantly impacting on our customers.

CapEx cost associated with building in the year came to GBP 8.4 million. And overall, the total capital cost of the building was GBP 23.6 million, in line with the original budget we set out in mid-2016. We also incurred GBP 3.7 million of dual operating costs incurred during the transition from the old buildings to the new. And we've excluded those from our adjusted results, given their nonrecurring nature.

After detailed scenario planning around potential challenges of Brexit, we made the decision to open a new logistics center in mainland Europe to ensure that our European customers would not be impacted by any supply chain disruption. This center, which is based in the Netherlands, became operational in March 2019. And we're very pleased with how that is working for us.

Another important event during the year was the go-live of our Oracle ERP finance and non-stock procurement modules in April, ahead of our plan's internal schedule and in line with the budget we set out at the start of the year. This is a major achievement for the team, particularly for the finance team who've worked exceptionally hard on it. And whilst we're still early in the post-go-live phase of implementation of these modules, we've just closed the books on the new system without any significant issues. And I'm confident this new system will give us great opportunity to grow and scale more efficiently in the future.

In the year, we incurred capitalized costs associated with this program of GBP 11.6 million and operating cost of GBP 4.5 million. With the implementation of these finance modules, we brought an end to the program we started in 2015 to upgrade our back-office systems. We've achieved a great deal since then. We've moved HR, many of our customers' experience functions as well as finance and non-stock procurement onto the Oracle cloud. And we're pleased with the improved functionality and efficiency we've gained from that.

We're now turning our attention to the next part of our IT transformation. And that's going to focus on reinventing our front-end customer experience, including our website. Whilst this program will be all about how we interact with our customers and provide an enhanced digital experience for them, it would also be interlinked to -- with how we address the last major area of our legacy systems, which are logistics and manufacturing.

As we work on designing this next phase, it's become clear that Oracle does not provide all the software solutions our business needs. And we'll be using other software providers alongside Oracle moving forward. In result of this change in scope and nature of the program and the usability and historical work performed to date on it, software development cost capitalized historically of GBP 12.8 million have been impaired. And I look forward to updating you on the progress of our digital reinvention at the half year.

Turning to our cash flow. Abcam continues to be highly cash-generative. And operating cash flows before working capital movements increased by 9% to GBP 88 million. We continue to reinvest this cash back into our business during the year. As discussed, we've moved into our new global HQ and continue to invest in our global ERP.

A core part of our strategy is building out our portfolio of high-quality, higher-margin proprietary products. And we've also accelerated this level of investment we're making in our global R&D and supply chain and manufacturing operations to ensure that we've got the infrastructure to deliver our growth strategy while improving efficiency through automation. And we've also kitted out an entirely new labs to support our in-house protein capabilities during the year. We also settled the majority of the consideration associated with Spring Bio and Calico Biolabs.

After other cash flows -- cash outflows, including investments in stock in our new Dutch distribution center as well as dividend payments of around about GBP 25 million, we ended the year with a net cash position of GBP 87 million. And finally, just as a quick reminder, we entered into a GBP 200 million revolving credit facility on the 1st of February of this year to provide additional flexibility for future acquisitions.

So having concluded this overview and backward-looking part of the presentation, Alan is going to now give you the strategic update on our plans to sustain Abcam's long-term growth. I hand you back to Alan.

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

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Thank you, Gavin. Every year, the Board and the executive team have been reviewing where are we in our strategic priorities for the business. And of course, over the last 5 years, the road map for that has been largely set and we've been tweaking.

So this year, we felt a deeper dive into what are the opportunities that awaits us ahead and how might we seize those, given the successes that we've had over the past 5 years, was an appropriate investment of time and energy. And what I thought I'd share with you now and for the next few minutes is just some of the facts that when we were looking at the last 5 years, some of the facts that we were using to give ourselves a view that this is one of the most tremendous market opportunities for Abcam ahead.

We're in a stronger position now, having built many of the things that Gavin and I have been talking about over the 5 years. We're in a stronger position to go from where we are now than we were 5 years ago. And yet the kind of commercial and biological market activity has never been better. That's the context we're in is sort of when you think about the themes that are going on around personalized medicine, yes, much of the conversation has been about genetic diagnostics. And we certainly feel that the market and the medical environment, the research environment is pivoting towards much greater appreciation of the role of biologics in protein analysis. And of course, that's a sweet spot for Abcam. So we really do look at this as a different launch point than we did 5 years ago for both those reasons that market opportunity is better and our competitive position is better and our kind of capabilities are better.

So what are the facts? The addressable markets that we're going to talk about remain the ones that I have been discussing for the last few years. So the first point I think to make is that our leadership in research antibodies and the strengthening position we have in that marketplace is opening up the addressable market share gains that we have ahead of us. We don't see the need to add new potential markets. We're not talking about getting into instrumentation or into genomics. We see opportunities in the research use side, where the $1 billion of research antibodies. There's still opportunity in the $2 billion of other related reagents we see opportunities and beyond that into the therapeutic licensing. That early-stage position that we have still has tremendous opportunity.

And you see when we look at what has been our growth since 2014 within each of the markets that we've been talking about that are driving us, GBP 193 million of sales in a $1 billion antibody market that's been growing at 14%. We start all of our strategic discussions about opportunity there. And we still see lots of opportunity to grow in antibodies. Immunoassays has been a more recent journey. It's only been the last 5 years we've been in immunoassays. That's been growing at 30% a year compound annual growth. Still, in a $500 million market, we're only GBP 18.5 million, tremendous opportunity ahead still there to continue to gain share.

And as Gavin said, there's a whole portfolio of other products and kits and reagents that we sell, proteins and lysates and activity assays that make up about GBP 30 million of our sales last year, growing at 22% over this period largely from third-party-produced or OEM-produced products. Abcam Inside, we're very early in our journey. As I said, GBP 17 million last year. It's been growing lumpily at 14% over the period.

And across both of these areas, both research use only and in the diagnostic and therapeutic applications, China is the geographic dimension that's been driving our growth. It's been growing at 44% over that period, about GBP 40 million of our sales, still tremendous opportunity to grow in China by gaining share in the existing market but also knowing that China is committed to a much larger-scale play in the life sciences and pharmaceutical industry worldwide.

This kind of success of gaining share certainly is part of our confidence in talking to you today about the days ahead. And when we approach growth and when we're thinking about how do we grow this company, it always starts with customers first. Where are the customer needs? Based on our dedication to the mission that we've been talking about, where are they leading us to investment in the business? Where does that then take us in terms of product expansion, revenue growth opportunities? And we know when we do that well, value creation will come out of it.

From a product standpoint, product dimension, of course, it always starts with the customers who are leading us to research use, market leadership in antibodies. And when we sit today based on the position we have in antibodies, what we're seeing is the customers would like us to provide more protein. They'd like to do more knockout validation and to provide more of the products from cellular editing and the technologies that are coming there. They'd certainly like us to keep expanding antibodies.

And some of the research areas where we have the most significant strengths of market position and having the most impact, like in oncology or around neurobiology, we still uncover about 30% of all the targets that we think are relevant to the research market need. It's not like we're done yet in antibodies. We've talked before about taking those antibodies into multiplexing or more imaging conjugation technologies, labeling technologies. So we're trying to marry this vision of where is the customer need, what's the product portfolio we have and how do we take our antibody leadership and go into some of these adjacent product areas covered in the total addressable market I mentioned earlier.

Finally, the last aspect that we really spent quite a lot of time on thinking about, what's driven our success over the last 5 years and what will help us going forward, creating our own proprietary product has been improving our ability to gain share, improving the connections that we have from customers and improve the margins of our business. And these are opening up a lot more strategic opportunities as well as improving the quality of revenue. That portfolio last year was about GBP 106 million or 44% of the revenue from Catalogue sales. And it's been growing at about 20% a year over the period. This is how this company is able to continue to sustain growth. We're taking the insights from what customers need, we're building proprietary products and we can go from early discovery all the way through licensing. And we have the ability to combine these products, these antibodies and these assays and some of these other product areas into proprietary portfolios to help them in the lab for those same customers.

The approach that we're taking is gaining market share in primary antibodies and in immunoassays, where we've had the most success over the last few years in terms of building our portfolio. You see here the market share citations. Our citations here of primary antibodies was 21.5% last year. As a percentage of all papers that were published that cite using an antibody, we had 21.5% of those. Revenue share is slightly higher. There's a lag between when revenue is realized and when the papers come out. And that's the difference between these 2 numbers. More importantly, I think in new areas, like ELISAs or the immunoassays, you can see that we've gone from almost nowhere in that marketplace to at 16% this past year. So again, it gives us confidence that we know how to grow into new and related areas in the research market.

Those market share gains arise obviously from innovations and investments in innovation but also from the organization, systems and facilities around the world that deliver it. So from our perspective, what's driven our success is not just new product lines and new products but also the business that can support its scale around the world in order to deliver to customers.

The results scorecard from the last few years suggests we've made good choices. Our customer influence, when we measure both by antibody citations and by Net Promoter Scores, both of those are up, 3x in terms of the antibody citations now. Almost 30,000 publications last year cited an Abcam antibody. Our Net Promoter Score on a constant basis of measuring it is up by 10 points in that period.

Employees. There's a real opportunity to increase employee engagement. We didn't disclose what our Net Promoter Score was when I started. But it's up 45 points when we ask employees, "Would you recommend Abcam as a place to work?" And it was a lot of hard work going on behind the scenes to make that happen. The only thing you could see in the public domain is the Glassdoor rating. And that's gone from 4.1 to 4.7 in the period.

RabMAb and immunoassay growth have been the 2 areas for which I've asked you to track our strategic progress that we're really delivering that competitive advantage by making our own products. Those products have gone from GBP 23 million to GBP 80 million in sales in that period, 29% compound annual growth. And we've talked about the financial measures, which are the consequence of those 3 things. I believe that's the outcome, and again attractive performance over the period.

So you can imagine, if you're sitting on our Board strategy review, what the question was. And the question was, "How do you do more? How do you do more faster? And what could possibly be holding this company back from continuing this journey of successful investment in growth, gaining market share and having an impact on life sciences?" And lots of industries answering this question would say it's competitive dynamics or they'd say there's regulatory issues or they'd say there's a constraint on the amount of capital available.

None of those things apply in our conversation. The thing that's holding Abcam back is us. And there are several areas where we identified that we see them as constraints to growth or things that might be holding us back, where we will be investing over the next 3 to 5 years in order to release that constraint and drive faster. And we're committed to reducing the impact of these areas so that we can make more progress on the growth of the company but also on the impact we have.

The first is having done GBP 106 million of revenue in our own products and our own innovation, what we're starting to see is there are constraints technically to how we innovate antibodies. Great antibodies start with great immunogens. That's a constraint for us. I'll come back to this point in a moment. But it's something we have to get better at. Validation has added lots of value to the antibodies we've made. We need to be able to do that at greater scale and greater throughput. For example, the knockout validation work that we started in the industry in 2015 has really helped researchers figure out when an antibody is precisely targeting the things it's supposed to. We want to do a lot more of that faster.

The second area we've identified that is holding us back is the agility and flexibility of our digital marketing. Despite 20 years of success at being one of the first market players to bring the Internet to life science tools and marketing and sales, when we compare ourselves to what a great, flexible e-commerce innovation platform looks like, there's a risk that what has been very successful for us begins to look out of date, particularly in markets like China where the advances in e-commerce are so rapidly progressing. And we don't want that to be a constraint to our future growth. And so we're going to attack this area proactively to make our e-commerce and digital front end of the business more personalized, more customized, more dynamic in order to drive better engagement with customers and better sales.

The third area that can be a constraint to the business is around operational efficiency. We've made real gains in terms of automation and robotics and other areas over the last couple of years. But there's a lot more to do when we look at our footprint of where we do things, why we do them there. Nothing has been optimized yet. And there's considerable opportunity here to get more effective in how we build out scalable production of our own products.

Finally, as Gavin mentioned, there's some legacy IT here. And we need to move ourselves off of all of it as quickly as possible. It served the company well, but it's not going to serve us well going forward, in particular in the areas around manufacturing, supply chain, but not just there, also in how the website is built and all of the connections the website has back into the accounting and supply chain systems. Across all these areas, there are skill gaps still in the business. And as we upgrade, as we move to a more dynamic content, modern e-commerce engine, it will change how we run the business. And we will need to continue to fill in gaps and capabilities in the new organization.

And then here, when we talk about investing in the company, and you're wondering, "Where's all the money going?" It's going in these 5 areas. Addressing those areas is not the end of the story. Those are important to Abcam's wider growth strategy. The strategy, I hope, is clear and simple. The first is we have to sustain and extend our antibody leadership and in how we market and sell those products through digital e-commerce. And that means offering the best binders. I know that sounds like what we've done, and you're right. That's just continue to march on, on really important research areas in antibodies and market those effectively. And we have to remove those technical constraints, like immunogens and validation, that I talked about.

But in some other areas as well, wherein how we extend those products into immunoassays and into visualizing them through other technologies. We will continue to increase over own content and IP. We know that's helping us gain share. And it's a real focus for how we're going to be guiding you as people trying to evaluate our progress going forward. And finally, as I said, we have to deliver more personalized digital customer experience. "Where's my stuff," is part of it. That's an easy kind of table stakes element of e-commerce. But what we're really trying to get to is, "Good morning, Bob or Mary. We've been thinking about your research area. And here's some things that we'd like to help you with in your lab and your research to help you get the outcome that you're looking for."

The second area is in driving beyond antibodies into some of these complementary areas. The nice thing is that many of the constraints to making a great antibody and validating it are also market commercialization opportunities in and of themselves. Let me give you a couple examples of those in a moment. We are going to stay instrument-agnostic. We're not getting into instrumentation. Things that plug in [to them all] are not for us. We're here to provide great content for everybody else's instruments. And as part of that, our explicit strategy is to get Abcam proprietary products and content on to those instrument platforms for clinical application. And that's how we see Abcam Inside. If it also happens to be for research use application, that's also good.

Finally, as I mentioned, that's a lot of investment and outlook for innovation and growth in the top line that has to be married and paired with building a long-term, sustainable growth enterprise. And we will invest in removing operational constraints to making things and where we make them. We will continue to build talent and depth and train those people that we have in the organization or hire new ones to fill capability gaps. We will complete legacy IT upgrades. And we're going to realize operational improvements and efficiencies as we roll through those things.

And this is our strategy, these 3 things. And when you dig down internally, which you're not able to do, but internally when we dig down to what's going to make that happen, we have initiatives, we have people and we have financing plans for each of them and phasing on how we're going to roll that out. And we'll have great discipline, just like we did 5 years ago when we started this last plan.

Just a couple of case studies. And what do I mean by product area that could also be sorting out a constraint for antibodies? So to make a great antibody, we need a great immunogen. That's usually a protein or a peptide. Full-length, fully folded proteins are hard to come by. And we have to purchase most of those from third parties in the marketplace. Doing that is a constraint. So if we want to make an antibody for which there's no protein available to us to buy in the marketplace, we can't do that today.

What we're going to do is build our own capabilities to make proteins and immunogens at scale for the areas of where we need them. That just so happens to be a marketplace as well. And customers would be very happy to buy from us high-quality, fully folded, biologically active proteins made by Abcam. And in fact, they're already buying GBP 8.3 million of Abcam proteins that are produced by other people for us. That part of our business has been growing at 19% over the period. This is one of those areas where we are going to plan to scale up investments to remove our innovation constraint and to build on adjacent markets.

In a related area, cellular editing. Knockout cell lines have helped us validate over 2,250 antibodies over the last few years. It's a really important tool for us in that validation, both in terms of publishing the data but also in the screening process of finding good antibodies. That also happens to be an important tool in customer labs. The addressable market is about $200 million a year worldwide. It's growing rapidly. We have, recently over the summer, acquired 2,800 diploid knockout cell lines from a company called EdiGene, which had decided that it was not going to pursue the research and diagnostic applications of that technology.

We're now buying facilities or people or capabilities. This is an asset transfer and a know-how transfer from EdiGene to Abcam. And it's now up to us to put the invest into building out the capabilities to produce those cell lines and also to innovate and continue to build out the portfolio beyond this first 2,800. And there are thousands to be made. Cell line editing is in the same stage that antibodies was in the '80s. It's very early stages. Lots of people are doing their own work in their own labs. We think we can provide a standardized tool related to antibodies and market products around them.

The right acquisitions across those product areas and technologies will help complement the organic investment story that I'm talking about here. We've, over the last few years, very clearly been working on the antibody expansion through acquisitions. Epitomics, AxioMx, Spring, Calico Biolabs, each of them brought some product portfolio and some real know-how that when we combined it with our marketing and sales and other things that we're doing in the company, we've been able to accelerate the growth of those products. We will continue to look for antibody portfolios that we can bring into the business in that way.

But beyond that, left and right, we're looking for gold standards in these verticals that will help us drive our growth and the combination of those technologies plus other things we're doing to create real value and innovation for our own products. The EdiGene opportunity with cellular editing was one. Buying Firefly BioWorks and MitoSciences has helped us get into immunoassays and multiplexing. We'll continue to look in this -- across all these areas for opportunities.

In order to help you all keep track of what we're doing, we've always had strategic KPIs. That's not going to change. I'll continue to give you some outlook as to how to think about tracking our success. In the past, we've had RabMAb growth, immunoassay growth and we've had recombinant antibody growth to help give you a sense of how quickly are we building these proprietary products. Given that we're going to expand and we are expanding the range of products beyond those 2 areas into proteins and cellular editing, we thought it would be a bit cumbersome to give you line-by-line exactly what we're doing on every one.

What we'd like to do is capture in-house product revenue growth as one measure. And the guidance for that for this year is 12% to 15% growth in revenue constant currency. Last year, it was 13.6%. What hasn't changed since the customer engagement? We still believe proprietary products plus real contact with customers and getting feedback from them is important. And we're using transactional Net Promoter Scores thousand of times a month to figure out how well are we doing with customers. Our guidance for the year on this target is 54% to 60%. This past year, it was 59%. And we continue to look for improvements in that measure every month and every year. But we're not doing it so much to the number as what they say as to why they've given us that recommendation.

And overall, in terms of the scale of the opportunity, when we were reviewing the opportunities ahead of Abcam, we believe there's every potential and we're confident in the potential of building us to GBP 450 million to GBP 500 million turnover business over the next 5 years. And the things that are going to drive that are -- we have to believe in the continued environment for global R&D funding in life sciences. Our confidence there is as strong as it can be. This is a great market environment today and the fundamentals are strong. We believe -- we have to believe that we can continue to gain share in research use only antibodies. It's a really important part of our product portfolio. We've not given up on that. We're committed to making that happen.

We have to make some of these adjacent market opportunities successful. And we're building on the success already in terms of proteins, where we've had strong market growth with third-party products. And now we're going to add our own technology. The Abcam Inside relationships that we have, need to continue to create some opportunities. And these are hard to forecast. But we've seen enough success in terms of the conversion of either Catalogue antibodies to a licensed opportunity or a custom project into license for us to have confidence that there's a real opportunity here for Abcam. And that's going well for us despite the volatility in the project revenue. And that we continue to invest in the capacity and capabilities to deliver and that we don't let the organization, the systems, the facilities become a constraint for the company's growth. If we do those things, which I'm confident we will do, this company will have another successful 5-year run, and I look forward to making it happen.

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [5]

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Thank you, Alan. As Alan said, we look forward to many opportunities to create more values for our shareholders. We've got a talented team, which we've been talking about. And we need to continue to invest and develop our existing colleagues as well as attract the very best people to Abcam to help us build the company to significantly greater scale. It will allow us to exploit these investment opportunities that Alan has just been calling out. And we can expand into the large addressable markets that we serve.

We're highly disciplined in our approach to capital allocation. As we accelerate our rate of investment over the next few years, we've invested in creating a strategic program office to ensure that all the initiatives and projects that we see are carefully assessed against 2 critical hurdles. The first is the financial return as a multiple of our weighted cost of capital. And secondly and probably as importantly, projects are only to be funded when there's a skilled team in place, which is dedicated to delivering against the project plan. This new strategic program office will also track progress to the projects against a scorecard of KPIs, including financial measures. This investment discipline and focus on the right talent is central to our philosophy. As a result, we believe it creates greater shareholder returns over the medium to long term as well as delivering more diversified, sustainable revenue streams.

This slide sets out our capital allocation priorities. And they're fourfold. First, we'll continue to reinvest into the long-term growth drivers of the business. That is sustaining our leadership in research antibodies as well as building out new capabilities in proteomics, such as in-house proteins and editing cell lines that Alan has just taken us through as a case study. In light of this, we will continue to invest in the foundations of our scalable company. We've touched on key areas of investment this morning, including systems and processes, particularly focusing on customer end-to-end experience and website delivery. And we started a journey of investment in automation. And as our team capabilities increase, we expect to accelerate the automation of our manufacturing sites. And this is likely to go hand-in-hand with investing further in our facilities and footprint.

Third, we'll continue to explore M&A both to identify and in-source complementary portfolios of best-in-class products as well as acquisitions that support and accelerate our core growth strategy. And to support this, we're building out a business development function under the leadership of Cheri Walker to ensure we can systematically identify, execute and integrate these M&A opportunities. Finally, we'll continue to be highly disciplined in how we allocate capital across these priorities with a strong balance sheet and a focus on ROCE as a key measure for assessment of organic and inorganic opportunities.

Turning to outlook for the next year and for the longer term. To trying to aid comparability, we've restated our 2018/'19 reported results here to reflect IFRS 16. The net effect of IFRS 16 is to reduce our ROCE by about 3 percentage points and increase our EBITDA by about the same amount going forward. You'll see the impacts on adjusted EBIT is negligible. We've provided a detailed reconciliation in the appendix to this presentation that will be available on the website later today. As we look forward, we see multiple growth opportunities for Abcam to grow attractive returns of around 3x our cost of capital. And whilst we've limited outlook on this slide to a 5-year horizon, it's important to understand that many of the investments that we're making will continue to generate returns over a very much longer period than that.

Turning to our long-term financial aspirations. Our priority is to invest now to build a business that can deliver revenue in the range of GBP 450 million to GBP 500 million in 5 years with adjusted operating margins in the low 30s, broadly where they are now. Pace of our investment will be governed by the speed with which we identify key talents to execute against the opportunities we've identified in a capital-disciplined way. And as a result, we'd expect ROCE to exceed 18% under new IFRS 16 accounting rules. Over the next 5 years, we expect to invest accumulative CapEx in the range of GBP 175 million to GBP 225 million.

Again, the exact timing of spend will depend on how quickly we can get going on the opportunities and initiatives that we have in front of us. This CapEx outlook also includes the IT transformation project we've touched on and averages at about 10% of our total revenues over the 5-year period, though the phasing of the spend is front-end weighted. It's also worth noting that the investments we intend to make over the next 5 years, both OpEx and CapEx, are all internally funded. At the end of the period, we expect to have more than quadrupled our cash balances, absent any M&A activity.

Turning to 2020 in a little more detail. We expect revenues will be in the range of GBP 288 million to GBP 294 million at our budgeted rates. As you'll be aware, top line guidance is more difficult this year, given the uncertainty around Brexit. And the final decision either way may have a profound impact on the strength of sterling. We've maintained our hedging policy throughout the course of this year, where we'd expect to offset any upside or downside by between 60% and 70% at the bottom line. On a constant currency basis, we expect our revenues to increase between 9% and 11%.

Turning to adjusted operating margin. We expect this to be in the range of 25% to 28%. Again, the actual result will be driven by our ability to hire great people on to the financially attractive projects that we see and get going. And capital expenditure will be in the range of GBP 30 million to GBP 50 million, including investments in digital transformation, infrastructure, new product development and automation.

So in summary, these are exciting times in the life science industry and for our customers. We operate in a large and growing market. Indeed, the life sciences have never been more buoyant. And we see multiple opportunities to grow Abcam's core business as well as to leverage our leading position in antibodies and its related markets. We spent the last 5 years building an enhanced platform from which to build the next phase of Abcam's growth.

And the core business remains highly profitable and cash-generative, given the capacity to invest in a disciplined way over the coming years to accelerate our current growth levels and build a bigger, more capable organization. And whilst this strategy, we believe, will deliver continued value creation to our shareholders over the 5-year horizon, many of the investments that we will make over the next few years will continue to generate rate -- returns over the next 2 decades.

Alan and the team and I look forward to welcoming you to our new headquarters in Cambridge on the 14th of November to meet the management team and to learn more about our plans for Abcam's future. And with that, I'd like to thank you for your time and attention, and we'll open the floor up to any questions you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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David James Adlington, JP Morgan Chase & Co, Research Division - Head of Medical Technology and Services Equity Research [2]

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David Adlington, JPMorgan. Three questions, please. So just on the margin for this year, it's quite a wide range. Maybe you could just talk to the drivers of the breadth of that range?

On the longer term, the GBP 450 million to GBP 500 million, does that include any assumed M&A or is it purely organic? And then just an operational, more -- I suppose more operational one, in terms of integrating the alternative software providers that you're bringing to work alongside Oracle, what are the risks around integrating those different providers?

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [3]

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So on the -- thank you, David. On the margin range, what drives that really is the ability to get going with skilled people on the project initiatives that we've identified. And broadly, the slower we are getting going on those, the higher the margin is likely to be in this year. And so we're focused on getting going and driving those forward as quickly as possible.

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

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And if I could add, I mean -- it's -- we're holding the funding for initiatives very tightly, essentially. Gavin and I are basically holding on all the money rather than budgeting it out. So we're asking teams to come to us with milestone plans that we then fund and we'll release funds to. I suppose the issue here is demonstrating 28%, 25% is -- we may not be able to move as quickly as some of the milestones because we just can't find the right people or the plan head robot can -- is going to take another month. That's what this reflects. Now if you were in my shoes and you can see GBP 450 million to GBP 500 million out there, you want to move as fast as you possibly can. So for me, success is -- we actually drive it down as far as we can because that means we moved quickly. And of course, when we come back in March, we'll be able to give you a better sense of where we are because we're starting a lot of these initiatives from scratch for this year. They're in an earlier stage than it might be if we were simply going at these figures. Just to pick on your other question, GBP 450 million to GBP 500 million is organic. And in terms of integrating software, yes, it's an issue of one of the investments we're making and have made already is in upgrading and transforming our integration layer so that we can do that. So that's going live now.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [5]

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Charles Weston from RBC. Two questions for me please. First of all, in terms of your focus on capital allocation, you have been running a cash balance for some time. You're looking to quadruple that potentially over the next 4 years -- 5 years, sorry. So clearly, you're able to keep your powder dry for M&A. Have you seen and passed on deals that would have utilized all of that and your debt facility? Yes. And the reason you pass on those is just returns-based or outcompeted from a pricing perspective?

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

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I think that's 2 elements of the same, isn't it? We have price discipline. We won't go above the threshold level that we set for ourselves, and whether it was completed or we walked away is the same.

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

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Okay. And secondly, on pricing dynamics, could you just talk about the pricing dynamics in the market and whether that's changed and your specific focus on pricing for your own products and versus your competitors?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [8]

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Well, I will answer that question within the regulatory boundary which I can answer it. I mean the pricing dynamics of the industry are unchanged from where they've been.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [9]

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There are several areas where you hold a substantial premium over and above your competitors. That doesn't seem to stop your own growth. How do you think about your ability to be able to continue to put prices up? And what is it dependent on from a sort of service perspective as well?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [10]

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Well, premium pricing in this industry comes from adding value to products that are relatively -- that are new to market that don't have a track record of validation, may not have many images or features attached to them, are the lowest priced in the market. And it's not just for Abcam, it's just how the market works. So the more features that we can add to get a product launch, if we can come out with a new product that has key opinion leaders who publish with it that we have added, knockout validation or other types of validation and there's lots of images there, that's a head start towards getting more premium pricing. If that takes off quickly and people begin to publish with it rapidly, that gives more opportunity for value pricing. And that's how we've always approached the market and in that sense, there's no difference from where we've been.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [11]

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It's Andrew Whitney from Investec. Just one question for me on the in-house Catalogue revenue growth. It looks like it's been 20% over the last few years versus the top line at 11%. I was wondering if you could just help me understand the driver there. That's not a product number phenomenon? That is an actual per products, the revenue growth is better per product because they're either more tailored or more insightful or you've used the stuff that you've learned from clients to give them the products that they want?

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

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It's both, right? It takes -- it can take 2 to 3 years before a product begins to take off in a field, like for the one that -- it's an -- unusual that a lab like the John Hopkins lab promotes for us to a field. So oftentimes, we have to do a lot more of that work, getting out to researchers telling them, "Hey, look, we've got something new." That can take a couple of years to get out to all of them, to all the conferences. They start to use it and they tell all their friends. So when you look at our growth, in fact, I think it's in the appendix, on Page 37, you'll see the cohorts addition drives growth, right, adding more products drives growth. But also, past cohorts take 2 to 3 years to get to a kind of level of first-wave maturity and then grow a little bit more slowly beyond that, that's pretty typical of how this works. So we're -- the thing -- all the products that we're going to introduce this year are new to the Catalogue. The real revenue potential is 2, 3 years out. Hence, the problem of when we think about what kind of business are we investing in, we're investing in a business that is always quite long term in terms of its commercial realization from innovation.

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Julie Simmonds, Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare [13]

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Julie Simmonds, Panmure Gordon. Just a quick question on the customer engagement score. Clearly, you're changing slightly the mechanism by which you're measuring that because you've got a note down the bottom, which indicates that it looks like sort of 62% to 68%, the guidance for next year. Can you give us some idea of what you're changing in terms of the measurement there?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [14]

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Yes. Thank you. Well spotted. We changed the method that we collect the data in October. That made it a lot easier for customers to respond to our surveys. And the immediate benefit of that was we got -- we're running at about 4% of surveys that we send out being responded to, which is really good, and about twice where we were before we changed. The net impact of that on the score is that we're seeing people who might have not otherwise been bothered to start to respond. In the past, you might have said, people who felt really strongly about loving Abcam or really strongly about not loving Abcam responded, but we failed to get the neutrals. We're getting more neutrals now and that's had an adjustment on the score. But the great news is it's easier to respond to Abcam survey, and we're getting a lot more feedback about how we're doing. But your assessment on the impact on the scores is absolutely right, like-for-like basis, about 8-point change.

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [15]

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Miles Dixon from Peel Hunt. Just very quickly on the proteins and the idea that you're going to build your own capability for physiological protein manufacturer is probably related to the 2-year revenue point, but can you give us any idea of the speed at which you're going to build those teams to generate your own proteins in-house and what the read across is into the CP&L revenue line? Is there the same interest from your biopharmaceutical partners for those proteins and enzymes, as there is to your antibodies?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [16]

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Good. Thanks, Miles. So the first objective is to build proteins for our own use, and our investment so far has been to do that. We've already hired the teams and built a lab for that purpose. And we're seeing how that goes. So they would be producing their first batches. We haven't launched anything commercially special with Abcam yet. I hope this year we do something along those lines, but stage 1 was to satisfy our own needs. Our focus in terms of research use versus clinical applications is on research use. We're not at this point trying to build proteins for clinical applications. It's not to say that we would never do that, but it's not our first wave.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [17]

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Stefan Hamill from Numis. I think I've got 4 questions. Just trying to get a sense of where you are in this program because, I guess, if we look at FY '19, you've already invested some margin in that year. I'm just wondering, you talked about an acceleration in the top line. My gut feel is that, that might take 1 or 2 years to start to emerge, but I'm just sort of trying to gauge where you are in this program and could that happen a bit earlier, that acceleration?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [18]

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I think your estimate of the deferred timing is right. In a sense, Gavin has given you the guidance for the year ahead. That's mostly driven by things that we did last year and the year before and how we're marketing this year. If we want to change the trajectory of growth by releasing constraints or adding new product lines, the work people do this year will have an impact the year afterwards and beyond that. So I think your assessment of the timing and phasing is right.

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

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So the strategic program office that you mentioned is something that you've put in place in this current financial year. The year just past, FY '19, there's no end place rather than having to be built, I hope, this year.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [20]

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Yes. And it's something that we did in 2013, '14, '15 when we got the last strategy going. It's a discipline you need at the beginning of these programs to phase them. And as I said, the primary constraint is not cash or capital, frankly, we've got that. It's do we have the right people and the right programs at the right project plan. And we're only releasing money when those things are true. Obviously, you need to have economic return as well.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [21]

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And you're getting enough bids internally, the cash? There's enough sort of supply of ideas coming from your internal people to fuel the pipe?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [22]

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Indeed, that's the strategy. When we were talking to the Board, the situation we face is we've got an incredibly active addressable market. We've got tons of ideas and demand. There's a bunch of things in between those 2 that we need to get capital to efficiently, and the program office is helping sort out how to allocate that.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [23]

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Okay. And the next question is around this addressable market. So quite helpful you put out the citation share that you're achieving in antibodies and also in ELISAs. It's notable that ELISA share is significantly ahead of your market share in that segment. Is that a leading indicator of share to come? Or is the component that you're targeting in that market much, much smaller than the overall there?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [24]

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I think it reflects the customer mix that we have today, that a lot of our customers for ELISA products, because we started there with OEM products before we made our own, were a small volume academic researchers who were trusting the Abcam brand to do their work in ELISAs. In fact, the success they took us to then gave us confidence to invest in making our product. So I think the revenue share, longer term, will catch up with the citation share as we get higher-volume customers over time.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [25]

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Okay. And then third question is around financials. So there's this sort of dilemma where we're seeing quite significant operating leverage. So I think Slide 11 is showing the EBITDA bridge, seems to me to suggest about 60 bps intrinsic leverage at the EBITDA level every year with the decision to invest virtually 3 quarters 80% of that, so 45 bps. Is that a fair way to look at things? So the intrinsic leverage is there and you're just reinvesting that? The cost to deliver that growth today are...

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [26]

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The way we look at it, if you actually look at that element of that, the GBP 14 million we spent, only 1/4 of that GBP 14 million was in what we call volume-related, so it just means more people to come through to help out in logistics, more people to take orders, and that's where we hope over time we'll get efficiency through our systems and through automation and, hopefully, driving greater efficiency there. I'd imagine we'll probably reinvest it back into the business because of the opportunity we've seen and we talked about this morning. But we've always got the option to stop reinvesting and let margins go up.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [27]

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So if the market were to mature, it's a long, long way from being mature, it's an incredibly fast-growing market, your leverage would go up by over 0.5 percentage point a year if we just stop investing, basically?

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [28]

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Yes.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [29]

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Okay. I think my model is right then. Last question, just some helpful color on CapEx. But it's quite a broad, broad range. And I guess, historically, a bit more helpful than looking forward, so how can we see investments, particularly in this current financial year?

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [30]

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I think, again, we've tried to give a range because a lot of it will be driven by the speed of how quickly we can get going, for example, on the digital transformation program with right and heart the design phase on that. What we've moved away from, if you remember back in the day is growth monolithic, single-implementation globally into something that's a lot more agile. We want to go -- we want to test in markets. We want to get our ability to go live in one region, learn from it, run that into a different country or a different set of countries. And the speed of which we can do that, we will get a really good sense of that once we come to the global design phase, which you're right, in the half or so. So come March, I think we'll be able to talk a bit more about the deployment strategy. The other areas of CapEx investment that we put -- that drive that range, the new product development I think will run a little bit ahead of where we are this year, but we've got investments in protein. So whilst this year, we've invested in the lab, how quickly we can get going on the next phase of the protein investment, we want to invest behind the 2,800 clones that we got from EdiGene, that's going to beat how quickly we can get going on kicking out that operation and creating the cell lines. And it's a bit, again, a little bit uncertain, so we try to give a range. As I say, the higher it is, the more effective we've got going. And we'll, at the half year, we'll be able to give you a better sense of that.

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [31]

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It's James Mainwaring from Stifel. Just sort of one question, which sort of follows on to Stefan's question about revenue progression and growth. You're obviously looking to almost double your revenues over the next 5 years. I'm just trying to think about capacity. You've obviously moved into a new site. I see you have kind of a spare lab space where you can just kind of build and as we get new people and new machines, but I'm trying to get a sense of how dependent you are on the processes and increasing automation and that kind of, I say, side row where you have to get investments first and then increase your capacity later on?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [32]

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Well, look, when we think about the Cambridge facility that we have, it's a magnificent facility and it's really helping us design new products and new processes. But they do need to be scaled up, and we can't -- we're not thinking about Cambridge as being the only place in the world where we produce. And of course, when we designed that building, it wasn't designed for all the strategy we're going to produce everything where we're going to produce. So when we look at the cell lines, for example, we would be looking outside the U.K. for where we produce this. We may do -- we will do a bit of work here. But increasing this site is the kind of R&D and process improvement, process development team in the U.K. and then we will produce where it makes sense because to our market and customers. And no surprise, most of those are in North America and Asia, and so those are the 2 places we typically go.

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [33]

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And then just one -- a sort of follow-up to that, especially about the cell lines, are you hoping to think about having a site in China, which produces the same as in the U.S. I mean are they trying to really, I'd say, fairly particular about importing genetically -- different products? Are you having to think about...

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [34]

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Of course, we would think about all of these things as we think about where to produce. At this point, having just acquired the portfolio in July, we've not made a decision yet as to where we're going to be producing them or exactly how much it's going to cost and how big it's going to be, which is part of the reason why there's a range here on CapEx. What we have is a great product portfolio. We have spent money on getting licenses from the broad ERS and Merck in '04. And we began to hire a team to put together the plan on how we're going to go ahead in this area, and that's very exciting. The manufacturing side of it will come.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [35]

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It's Max Herrmann from Stifel. Just a few, hopefully, quick questions. Just firstly, just in terms of the own Catalogue versus kind of third-party manufactured or the third-party antibodies, are you effectively replacing some of the older antibodies with new, maybe, recombinant products that you're pushing through? So is there a churn as well as new products? I'm trying to understand that.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [36]

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That's been going on for a while. We've taken off about 40,000 products off Catalogue over the last few years in order to improve the clarity of best choice for a customer and improve quality. But it's not our deliberate strategy to go replace our products from our customer from -- from our suppliers. If we can get a well-designed, high-performance antibody from a supplying partner or in-license it, we will do that. But what we won't tolerate is poor quality or poor performance.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [37]

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And then just 3 other, hopefully, quick questions. Just to understand the growth, how much of that is price, how much is volume with that in terms of your top line. And then, secondly, just obviously, life sciences is quite a high kind of, I guess, inflationary base there. Are you finding kind of incremental growth in cost, particularly in the U.S. where, obviously, you have a significant presence there? And then, finally, just on Abcam Inside, just a bit more update. I think the last time we talked you had about 70 different kind of partnering collaborations, sort of which maybe 7 were therapeutic based? So I just want to get an update on where things have progressed on Abcam Inside.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [38]

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Great. The market dynamics for price and volume are pretty stable for the research use market. Typically speaking, you're looking at, aggregate, 0 to 1% population growth of people who can do science. They're getting about 1% more productive a year, so you can get to 2% volume. And generally speaking, the industry like-for-like pricing is in the range of 1% to 2%. Now China has been a specific spike for that geographically and maybe add another percent globally for China growth, given its share of the global market. But that's not really changed for the research-use-only demand drivers in the marketplace. So the way we're able to grow faster than that is primarily through volume share gains and some improvement in mix over and above like-for-like price increases. So when we add, just to get back to Charles' question, when we add features to the product, a new species, a new validation, however that comes, that can create more value for that product and that offer opportunities for better than like-for-like price increases, and we'll take those as and when we can. But perversely, in terms of average price, adding a lot of new products reduces your average price because it comes out brand-new baby, nobody knows it yet. There's a lot of things going on in mix which play around with value per unit.

And your question about Abcam Inside, strategically, I couldn't be happier with what's going on with that part of our business. That's GBP 17 million. Roughly 40% of that last year was projects, and the rest was a mix of supply agreements, supplying product that was consumed out of those projects and royalties and licenses. And they're not -- the Abcam Inside philosophy is not limited to just projects. As I said, some of it is because we've got really good licensing agreements in place and can move things from a Catalogue to clinic. And the most notable example, I think, this past year was the decision by Roche Diagnostics to in-license the pan-TRK antibody from Abcam to become part of their immunohistochemistry companion for NTRK infusion diagnoses. And that's just a really hot and interesting area for precision or more personalized medicine. And the fact that, that's both a genetic and proteomic indication and there are treatments now that are antibody-related, it's just an interesting area for us to play. That only happens because we put great products on the Catalogue for researchers and we have really good frame agreements in place with people like -- organizations like Roche that allowed that to quickly get to out-licensing and the agreement where Roche is now producing it themselves. And so when I think about Abcam Inside, it's a combination of bespoke projects out-licensing agreements of antibodies to organizations like Roche or Leica or Agilent.

And then, finally, the other area where we're making quite a lot of progress is in making our portfolio range available to large instrument companies that need content for their platform. And we've done a lot of work and there were a couple announcements this year about it with nanoString where they've got an approach and workflow and instrument that needs antibody content, and Abcam is a big part of that story.

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Unidentified Analyst, [39]

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Just trying to get a feel for the -- of the EBIT margin profile the next sort of 5 years. Is the 25%, is that a trough, if you don't hit it this year, you'll be hitting it kind of next year? And also, how should we be thinking about the depreciation and amortization because, obviously, you're capitalizing more CapEx programs, quite a bit bigger than we were expecting. How does that feed through in terms of the profile as well?

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [40]

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Yes. I don't think we want to go into guiding to the year after next or next year just yet. I think it's likely that this year and next year, we will be investing heavily and you'll see that come through, clearly, if we don't get going quite as quickly on the project as we'd like to do this year, then they will bleed into next year. But I mean it's sort of right to come back next year and get specific guidance about that. And there is no doubt that there is a step-up in our depreciation and amortization of the investments that we've made in the building and in IT and in other areas come through. And that's why I always try to talk to EBIT rather than EBITDA. We actually got EBITDA, again, that's mixed up somewhat with IFRS 16, then the declines are lower. I think EBIT is the way to look at it and there is no doubt of the depreciation step up next year.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [41]

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But the guidance for 5 years out, of course, incorporates the assumption that we will have invested most of that CapEx that we talked about.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [42]

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Charles from RBC again. Just one follow-up in terms of KPIs. So you've announced this big CapEx spend. Your margins are going to be declining. In some sense, the faster decline and the higher your CapEx are better, we would be applauding. But that's on the input side. What can we look at from the output side over the next year or 2 that will give us an indication that you're being successful, that you're putting this money to sort of good use as opposed to just use?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [43]

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At the risk of being boring, it's revenue growth from our own products. Because a lot of this investment is going into making that portfolio broader in terms of its range, but also developing and innovating deeper in antibodies, releasing some of those constraints. So that 12% to 15% growth range. I think, first, we're topping out on that fairly, we'll also be happy because that means that the investments we're putting in are working.

I think the second thing is, obviously, customers continuing to say you're doing the right things, you're not compromising service and quality, whilst you're making this big revenue push. And the third is I think we keep coming back to that EBITDA bridge that was mentioned earlier, because you'll see how much of the investment is discretionary. And we can talk about are we failing fast or are we accelerating and you'll get a sense of where are we in that investment journey. Are we -- I think it's going our way and at the pace or not right? You'll see the leverage coming back in the business from operational efficiencies because the contribution margin from marginal growth goes up and all that kind of stuff.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [44]

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(inaudible) to debate the money that you invest now, though, as Stefan pointed out, all sort of come through from a revenue growth perspective over a couple of your period. But within that, those 2 periods, first 2 years period, will you even be able to perhaps disclose the number of products that you're actually starting to launch outside of the key antibodies as the potential metric of future growth drivers?

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [45]

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Let me think about what else we can do for you. But number is the interest, right? Because we've weaned ourselves off that. What we care about is if we only launched 5 products but they were amazing and transform science, naturally our volume growth that would be fine, right? So we'll take that into consideration. Is there anything online?

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Operator [46]

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We have a question from Michael Ruzic-Gauthier from Berenberg.

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Michael Ruzic-Gauthier, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [47]

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Just a couple for me. Firstly, on the gross margin. Can you just give us any high-level idea of where you see gross margin progressing through this new long-term plan? And then on the areas that you highlighted that you're thinking about entering, how many can you realistically attack organically? Are there any of these areas where we should be thinking about M&A to accelerate your growth? And then -- and if so, which one is most likely for you to look to add?

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [48]

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Gross margins, back in 2016, we set out the aspiration to expand our gross margin side to 300 basis points over 3 to 5 years. When we sat down, gross margins is, I think, 69.2% there to 70.5%, so that gives you a sense that there is gross margin expansion within this business, some of that comes from mix as our in-house proprietary products are higher margin, going against that is -- actually there's a slight differential of margin -- gross margin for markets served by distributors, particularly in China. But inherently, we believe that, and I don't want to give specific guidance for the 5-year, but gross margin can expand modestly in that period. Actually, for our internal modeling, we've not put too much into the gross margin expansion because we've been thinking about things and actually see that as an upside potential.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [49]

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Good. Well, on the organic versus M&A path, I think first thing is we're committed to expanding in all those areas that I laid out in terms of product categories in the presentation. We believe that those are essential for us to continue to serve customers in a way that they want us to. And there are growth areas there and we're committed in doing that. So all of those areas that I listed around antibody leadership we're going to pursue. How much of that we do organically versus our own versus acquisition is not entirely in our control, so we're starting with an organic commitment to investment positioning if we were able to accelerate any of those areas by acquiring, just as we did with EdiGene. We don't need to build the first 2,800 diploid cell lines. Then we'll take a crack at getting those in and move from there. But the plan as it stands right now is an organic plan.

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Operator [50]

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We currently have no further questions.

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Alan Thomas Hirzel, Abcam plc - CEO & Executive Director [51]

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Thank you all for making the time. I know it's a longer session today, but I hope it's given you a sense of why we're confident in the growth opportunities in this company and that we're going to invest to go realize them. And I look forward to seeing you in November.

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Gavin Hilary James Wood, Abcam plc - CFO & Executive Director [52]

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Thank you.

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Operator [53]

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Ladies and gentlemen, this concludes today's call. Thank you for joining. Have a lovely day.