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Edited Transcript of CLIN.L earnings conference call or presentation 27-Sep-18 7:30am GMT

Full Year 2018 Clinigen Group PLC Earnings Call

Staffordshire Oct 10, 2018 (Thomson StreetEvents) -- Edited Transcript of Clinigen Group PLC earnings conference call or presentation Thursday, September 27, 2018 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Abell

Clinigen Group Plc - CFO & Director

* Shaun Edward Chilton

Clinigen Group Plc - CEO & Director

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Conference Call Participants

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* Charles Robert Weston

Joh. Berenberg, Gossler & Co. KG, Research Division - Research Analyst

* Christopher Ian Glasper

Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst

* Max Stephen Herrmann

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

* Nicholas Keher

RBC Capital Markets, LLC, Research Division - Analyst

* Stefan John Hamill

Numis Securities Limited, Research Division - Director of Equity Research

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Presentation

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [1]

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Good morning, everybody. I've been given the thumbs up. This is being recorded, and there are people dialing in from various points of the campus. I'm told it will be available on the website afterwards as well. So that should be relatively straightforward to find in the IR part of the Clinigen website. So good morning.

You'll be pleased to know I've got about 75 slides to get through, so it will take about 3.5 hours. No, it won't, in all seriousness. It is quite a large deck of slides, but there is a large amount of detail as you'd expect because this is the full year results for full year '18 for Clinigen, but also, we are announcing a couple of acquisitions this morning as well. So quite a lot of information, quite a lot of detail. There is a large amount of appendix supporting material for the full year results.

So again, I'm not going to cover all the slides. Martin and I are not going to cover all the slides, but there is a large amount of information. We'll get through the full year results. We'll talk about the acquisitions and then try and make as much time for Q&A as is possible.

As the starting point, you can't fault Clinigen's ambition, I don't think. So we continue to build out a platform that looks to realize this vision that you all know by now to be the trusted global leader in access to medicine. So bear in mind, the statement on the front of the slide, a global life cycle partner, because we'll come back to that because it informs not just the results, but it also informs the point and the intent behind the acquisitions.

So that's the agenda. Brief overview from me. I'll let Martin talk you through the finer points of the financials and the balance sheet. A very brief overview, business by business, picking out the key points. And I will set the scene and contextualize the acquisitions and then give you more detail on those, summary and then Q&A.

So you've seen this slide before, I think. It's the key metrics for the business, the key financial metrics. GP, EBITDA and EPS all going in the right direction. A strong financial performance, good double-digit growth underpinned by Commercial Medicines. That strategy for diversifying, owning, licensing and managing commercial IP is definitely starting to pay long-term dividends. Really pleasing that we've got regional growth because, again, when we bought Link 3 years ago, I'm not sure people were entirely convinced at that point about the wisdom of the transaction, but it continues to perform very well. Long-term growth regions. And of course, we added Quantum and IMMC in the year. Very pleased with both of them, particularly Quantum. Martin will give you a little bit more information.

So without further ado, I will hand over to Martin, the CFO.

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Martin Abell, Clinigen Group Plc - CFO & Director [2]

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Thank you, Shaun. Good morning. The financial highlights shown on this slide are adjusted to exclude amortization of acquired intangibles and products and non -- other non-underlying items relating to acquisitions, which I'll take you through later in the presentation. The growth in revenue and gross profits is as disclosed in the July trading update.

The increase in revenues is higher than the growth in gross profit due to an increase in the amounts of pass-through costs within the early access part of the unlicensed business. Gross profit, which we view as the best measure of top line growth, increased 16% on a constant currency basis. Growth was driven by an excellent performance by Commercial Medicines and 8 months' contribution from Quantum. The adverse currency effect was driven by the appreciation of sterling against our major overseas currencies, in particular, the U.S. dollar. In the appendices, we've included some analysis of revenue, gross profit and admin expenses by currency and the exchange rate movements during the year.

Due to disciplined cost control and GBP 1.1 million of cost synergies from the Quantum acquisition over the 8 months, admin expenses increased a significantly slower pace than gross profit, driving improved profit leverage. As a result, EBITDA was up 19% on a constant currency basis to GBP 76 million, a touch ahead of consensus. A large part of EBITDA growth was driven by the Quantum acquisition, which contributed GBP 10.2 million in EBITDA included in the synergies. The Quantum performance was significantly ahead of our original acquisition case.

Our effective tax rate on adjusted profits decreased from 22.5% to 21% due to the higher proportion of earnings in the U.K. in the period and the reduction in the U.K. tax rate. EPS increased by 10% to 45.4p, and the dividend for the full year has been increased by 12% to 5.6p.

On this slide, we summarized the gross profit performance of the operating divisions. Commercial Medicines was the biggest driver of the gross profit, increasing gross profits by 37% on a constant currency basis due to an excellent performance across the portfolio and the contribution from Quantum. The main weakness in the group performance as discussed at length at the interims was CTS.

By region, the strongest performance was the AAA region, Africa, Australia and Asia Pacific, which is the legacy Link acquisition. The profits from the Link business are now over 2x level when we acquired the business 3 years ago, demonstrating our ability to integrate and significantly drive value from bolt-on acquisitions. Shaun will take you through the performance of each of the respective operations in the operational review.

On this slide, we reconciled adjusted profit before tax to reported profit before tax. The main reconciling items in the year are GBP 22.1 million of amortization costs relating to acquired intangibles and product licenses, GBP 3.9 million of acquisition costs and GBP 5.3 million of restructuring costs relating to the acquisitions. Most of this is redundancy costs driven by the streamlining of management teams and removal of duplication of functions following the acquisitions.

Here, we have summarized the key components of the cash flow performance. Cash flow from operations was GBP 65.8 million after GBP 10.2 million outflow from working capital. The increase in working capital reflects an increase in the number of paid-for Managed Access programs in H2 and the timing of cash flows around the year-end. We then deduct tax and interest, add the dividends from the JV and the non-cash share-based payment charge to provide a free cash flow of GBP 54 million. This underlines that Clinigen is a highly cash-generative business.

On the right-hand side, we show you how we've used the cash that we generated, and the main uses were: GBP 89.7 million for the acquisitions, taking into account the net debt acquired and cost of settling the Quantum share award schemes; and GBP 38.7 million for the final deferred payment on the Link acquisition as provided in the previous year's accounts. Net debt at the 30th of June 2018 was GBP 136.5 million, representing a net debt-to-EBITDA ratio of 1.8x. Net debt this year increases following the product acquisitions announced in July and the acquisitions announced today, which we will discuss shortly.

So in summary, we've achieved a decent cash flow performance to go alongside the strong P&L performance.

I'll now pass you back across to Shaun.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [3]

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So I'm going to take you through the 3 businesses with some highlights, and I think it will also help to contextualize again some parts of the acquisitions. So Commercial Medicines, strong growth. Why is it happening? Why do we think it's going to carry on? So we're doing 3 things now across this business. Historically, as you know, which we continue to do, we look at older, more mature, noncore type of assets and we bring them back to growth. So we acquired another 2, Proleukin and Imukin, recently to make it 7.

The interesting thing about Proleukin and Imukin are they're biologics, so very difficult to copy. So I think, from a longevity perspective, the potential for competitive threat is significantly mitigated. They're classic Clinigen products in terms of being niche, specialist long-term difficult to treat disease. Proleukin itself is very interesting. There's always a story because it's Clinigen. When we bought Cardioxane from Novartis 3 or 4 years ago, we actually wanted Proleukin and Cardioxane at the same time for good reason, frankly, because if you look at interleukin-2 as its generic, if you like, is named, it's a significant part of immuno-oncological treatment. So Proleukin is being used in some 80-plus clinical trials. It is a very interesting drug. So it's a perfect fit for Clinigen, certainly has longevity. So we are going to continue to look at those assets, continue to build out the footprint that will enable those to grow. And that is a nod to both the acquisitions that we'll talk about in the future.

The other 2 pieces are really an extension of that strategy, so making the infrastructure work harder and trying to drive, if you like, more of our own IP. So the licensing fees is utilizing our infrastructure in the likes of South Africa through sub-Saharan Africa, Southeast Asia including Australia, New Zealand, Japan. And we are making progress. We announced the Bristol-Myers Squibb collaboration with some 28, 30 products in Africa and then with Eisai, which sometimes people miss. They're a midsized Japanese pharmaceutical business. We are extending our relationship with them. So it isn't just about the headline BMS piece. We actually do have tens of other marketing authorizations throughout the region. So it's easy to not see past the headline, but the actual strategy, the actual execution of that is really starting to play out. The developed product piece is the capability that we've got with Quantum.

And unfortunately, because we've got quite a lot to get through, we would've probably gone into this in more detail. But in the appendix, I think it is Slide 56, no less, there is a graphic to show and give more detail on the quality, the value and the time indication of the pipeline currently as it stands. So I think, Martin and I and the Clinigen team are very happy with what the Quantum guys have done, and that's one marker of it. That was the main thrust of the acquisition, and that will play out over the next 2 or 3 years. The current product, glycopyrronium, if you like, the Quantum Foscavir, has done very well in the year.

There is a point that I do need to make. So on each of these slides, you will see a reference to a Senior Vice President or a leader. Some of them, you might already be aware of, Terry Walsh in CTS. But I have completed the set in terms of commercial and unlicensed. So in commercial, I've moved Benjamin Miny, who some of you might have remembered from the Capital Markets Day 2 years ago, who was very successfully running Africa. I've now promoted him to run Commercial Medicines. He's based out in the U.K. out of Weybridge. So he's been here since March. So he is enjoying life in the Southeast of England and doing a very good job. He has a potential star in the future and doing a very good job.

Unlicensed Medicines. Again, for clarity, for people who are relatively new to the story, this is an amalgamation of a bunch of different unlicensed services now. Same regulatory pathway, a lot of the same underlying supply and distribution infrastructure. But it's early access, or Managed Access; longer-term access, or Global Access; the unlicensed parts of Quantum; IMMC in Japan; and then the other regional parts to complete that global picture.

So again, working backwards from the bottom of the slide, there is a need for a senior leader to pull it all together. So I've hired a gentleman called James Winterman, who is known to Clinigen. I've known him a long time. He has been a client of Clinigen's in the past. He comes from Astellas. So he has commercial, pharma and market access background, has been here 4 weeks. That's about the honeymoon period you get in Clinigen. He is doing very well, and I've got high hopes that he will bring that entire business together and continue to make it grow because there are lots of very positive future indicators for this business. We started 15 new Managed Access programs in the half, giving us really good momentum coming into this year. So we are now running 110 different Managed Access programs.

We continue to look at more exclusive on demand, or these Global Access, as we would badge it, type agreements. Again, significantly up on last year, and we continue to target at any onetime at least 10 of these agreements to convert in the year.

I think there's a couple of things to take a step back with this because there are a lot of moving parts. Really, it comes down to product, access to product. And that early access, Managed Access, piece is 110 products, is the jewel in that particular crown because you'll remember there is sort of a contract of 2 or 3 years' duration. We want to extend as many of those as possible to be a longer-term duration and then add more products where demand dictates that around the world.

So the other parts of it is the customer, which can be either the pharmaceutical company supplying a product or hospital physician or pharmacist. And then you've got the platform, which is on and off-line. So we've got supply and distribution hubs around the world, and we are going to continue to fill out that footprint. But no surprise, the digital platform, some would have it the Amazon of unlicensed medicines, Cliniport, is an important part of that, allowing scale and driving growth. So again, in the interest of driving for the future, I've hired a Head of Digital, Clinigen's first digital expert, a gentleman called Simon Harper, who's been here about 4 weeks. So he will be predominantly responsible for turning that vision into reality, of the Amazon of medicines.

And if you look at the activity of being conducted on Cliniport, it's meaningfully moving up. So it's about 30% of activity in Unlicensed Medicines in 2017 gone up to 40%. We've got over 10,000, somewhere between 10,000 and 11,000 hospital pharmacists and institutions now onboard and using the platform. So there's lots and lots of positive metrics. And again, the finishing touch to that is having an experienced leader to pull all that together. So very hopeful that, that will continue to grow significantly.

CTS, some people would call it the problem child. I would object to that like any good parent. I think the interesting piece about CTS was it plainly had a difficult half 1. We said at the half that it would increase in performance in the second half. In plain financial terms, it did. It was GBP 6.7 million of gross profit at the first half, GBP 7.3 million in the second half. So there was an improvement. But why is there hope for the future? Well, Terry Walsh came on board only in March. He had a final quarter to get his head around the business, and I think he has. And he's making a meaningful difference, I think, both from a business development perspective and a client-facing piece but also behind the scenes, which won't be apparent yet in terms of the other side of the equation, working with the strategic sourcing team to improve the procurement and sourcing of medicines and the terms that we drive with those. That will become apparent, I think, as we go forward in the future. But he's been very good. I'm very happy with what Terry has done.

There's probably a couple of pieces of context, I think, because again, they will potentially inform a couple of aspects of what we're doing moving forward. To give some more clarity with the service parts of the business, both with Unlicensed Medicines, particularly in the early access piece, and with CTS, we've given more color, more detail on the forward-looking pipeline.

So on the previous slide, in Managed Access, you've got a pipeline with 40-plus assets, lifetime gross profit value of about GBP 14 million. You'll remember that lifetime is 2 or 3 years, just as true here then. So in CTS, the current pipeline, so as we stand in September, is around GBP 15 million gross profit. Now plainly, that's an unweighted pipeline. There are various elements to that, some business we've won and we're delivering, some business we've got purchase orders for and some business we've proposed. But it's quite a dynamic pipeline. As we've talked before, it's relatively fast-turnover projects. That's a meaningfully higher figure than it was last year. So that's a good indicator for the future and a good indicator that Terry and his team are making a difference.

So to answer maybe or preempt a question that we had the half year that we might get again, so what happened in CTS? Why did it go backwards over the previous year? Well, there's one indicator. If you look at a KPI, which I think is quite an important KPI, of clients that spend at least GBP 1 million a year of gross profit, whereas there was 6 in 2017 but only 3 last year. What happened to those 3? Because plainly, that's meaningful part of the gross profit. One went to away because it happens it was a West Coast biotech company whose R&D profile -- R&D program Phase III came to a natural end and there's a delay before they kick into other development programs. That happens, so that reduced their spend. Two others reduced their spend with us significantly because they wanted a broader suite of services than we were able to offer them. And that will be a nod to what CSM do partly when we got to come to that.

So we know from what's happening in the marketplace that there is a desire from pharma and biotech to have a bundle of services, a suite of services, which has always been the strategy because last year, 10% of CTS' gross profit were in these expanded services, things like packaging and labeling, just-in-time distribution. That's been the strategy for 18, 24 months. We built our own facility in Weybridge, so we understand the opportunity. We understand the potential for it. We thought we could do it ourselves, and we've made some progress, just not quick enough, and it won't be quick enough to realize the full opportunity. So while the acquisition, CSM in particular, are not just about CTS, there is undoubtedly a part of the 3 legs at Clinigen still that do inform that.

So I think it's a very strong financial performance. We are managing the business well. I think that was, a couple of years ago, was a question in terms of our management of overheads and when would costs start growing less than gross profit, which is starting to happen on a consistent basis. So I think the key metrics all are very much going in the right direction. We are set for another good year. And CTS, I think, is certainly in recovery mode.

So let me just take a minute on Slide 15. One of the things that -- I think you know me by now. I'm trying to do -- when me and my team are trying to do, is every time we meet is try to give more insight, simplify might be an overused word, but certainly try to give more context to what Clinigen does, why are there 3 bits to it, how do they fit together and what's the opportunity.

So in the annual report, we'll show the 3 businesses, what they do, what the KPI's are for instance. But what I wanted to try and show you is a couple of things graphically. One was how do medicines -- or how should medicines and relationships flow through Clinigen? How do you bind these 3 things together in a more meaningful way? How do you reinforce those links? And then also, graphically, to show you a really important point about these 2 acquisitions because if you look at them superficially, you might be forgiven for thinking that CSM is just a CTS bolt-on and iQone is just a Commercial Medicines bolt-on. Somewhat true but not anywhere near the full story. So this shows you graphically how impactful those 2 things combined will be for the business. So you could look at those 2 acquisitions in a different way. So by putting together, footprint, warehousing operations, specialty services, commercial and medical science liaison support, you virtually got Link in Europe.

So -- and just as I said, and I still remember it because I'm not that old yet. When I stood up to open the Capital Markets Day in November a couple of years ago, I think one of my first statements was that the Link acquisition would prove to be somewhat transformational to Clinigen, which, I think, hopefully people are starting to see. I will make the same claim about these acquisitions. I think they could be somewhat transformational again about what Clinigen does, and I'll explain why.

So if we talk about Clinical Trial Services for a minute, if we accept the numbers of last year that only 10% of the businesses is its expanded services, it still has somewhat of a misnomer because it's still predominantly one service, which is comparator sourcing. The pace of the clinical trial space we operate in, that is growing quicker, is about GBP 1 billion. And growing like single digit in this is this IITs piece, this Investigator-Initiated Trials, where pharmaceutical companies of all shapes and sizes are using investigators or expert physicians to look at, once they brought a product to market in 1 or 2 indications, what else the product works in. And it's a more cost- and time-effective way of driving data to submit to regulators to be rewarded with future indications.

So for one, that's the place in the market that I think CTS needs to be. The link to Unlicensed Medicines is twofold: one, the investigator, the I in IIT, is largely the same physician that comes to us to request Managed Access programs. It's the same doctor. So that pulls us into the customer base in a more meaningful way because we're offering 2 types of service. From a pharmaceutical company perspective, with the IIT piece and Managed Access, it's the same product, genuinely the same product. So again, from a client pharmaceutical product ownership perspective, it pulls us deeper into that perspective. So by being able to offer these specialist services -- and the services that underpin the IIT piece are very similar to the services that underpin the Managed Access piece. So it is supply, distribution, sourcing, specialist packaging and labeling. They're the services, the wraparound services, that the pharmaceutical clients want, and it makes it easier for the end user or the physician. So that pulls those 2 things together.

Then we transfer that unlicensed relationship into a longer term. Wherever the medicine is not going to be made available commercially, not going to be registered, not going to be marketed, we will handle that under the Global Access, or on-demand access, banner. And then ultimately, if there's enough demand in those markets, we will license it ourselves, or in the case of the Quantum piece, we will make our own versions of it. So again, with our own medicines, we still need things like packaging and labeling, which we outsource. So there is a cost and an efficiency play here because the more medicines we get, that's good on one level, but they are a niche, they are difficult-to-make, difficult-to-finish medicines.

So again, why we choose our partners carefully. It's still, I think, more in our interest the bigger we get, the more medicines we have to bring that type of activity in house, under more of our direct control. When we were smaller, it was a worthwhile thing to outsource. As we get bigger, there is value to be had -- other value to be had, other cost synergies to be had to bring that in-house.

And again, from an iQone perspective, it's a European, if you like, a virtual specialty pharmaceutical business. We have talked previously about footprint in Europe. We know with our products, SAVENE, Cardioxane, post Article 31 and if you look at Proleukin and Imukin, they do and will respond to on-the-ground support. Particularly to MSL, or Medical Science Liaison, is, I guess, what sales forces of pharmaceutical companies are now turning into. So that's more of a peer-to-peer discussion with a physician about placing therapy, about data, particularly about where to use the product properly. That's a key part of some of these new innovative medicines. Not only do we benefit our own medicines, but increasingly, pharmaceutical companies, from the Managed Access unlicensed perspective, are coming to us and say, "Can you offer us the service to where you can talk to physicians on the ground about how to use these products carefully?" So you can't promote an unlicensed medicine, but you absolutely can educate them about where to use the product that they're requesting access to, where to use it instead of how to use it. So it's an extra service that continues to differentiate us, continues to build barriers to entry because no other competitor in the unlicensed space currently, and I find it very difficult to see the future, can match that breath of service on the scale we do it. That's the reason for the acquisitions. That's how you pull the 3 businesses together. So I would myself some time in going through some of the slides so I might skip.

But let's just talk about CSM, specialist provider of packaging, labeling, warehousing and distribution services. A question because I believe I have had it over the last few days is, packaging and labeling, isn't it just easy? Why do you want it? Well, the interesting thing about CSM. So there are some very, very big players in the space. They're like Fisher Clinical Services and Catalent, but they focus very much on the larger end of the market supporting the larger clinical trials. They haven't really seen this IIT piece, but CSM have. That's why they're growing quickly. So their services are predominantly aimed at that. So if I give you an analogy on how we know that, a, we know it because we built our own facility in Weybridge, we tested the proposition. As an aside, we are partnering in a limited way already been CSM in the U.S. and in Europe because, again, our facility in Weybridge is at capacity and was only relatively small in scale. So we have had a good look at it.

Scott Houlton, the CEO, and Terry Walsh know each other very well because when Terry Walsh was that GSK, he's been a client. Scott Houlton is ex-Catalent, so he saw the opportunity, having worked at Catalent and gone through the IPO. But I do want to stress as I did on previous slide that this is an acquisition that will absolutely benefit all 3 parts of the business. It will absolutely strengthen our competitive positioning. And crucially, we'll add new customers, and I'll come back to that.

Key terms of the transaction. Again, the headlines, $150 million upfront. And I will come to that because the elephant in the room question will be that sounds quite expensive and when you look at multiples, that might sound a bit racy. Well, I'll explain why I don't believe that is the case. And we have been here before with the likes of Quantum and, potentially, even Link, and I do -- so I'd like to think we've got a track record. Whatever it looks like, a, it isn't really; and b, we turn into something else very quickly. But there is unusually -- not uncommonly, I suppose, but unusually, for a private-equity-backed business, we have constructed this as a initial cash and then contingent consideration. And as you would expect, it means they've got to grow strongly to benefit from that. But that works for both sides. So I think it's a neat and elegant solution, both sides, but the acquisition is bang in line with the strategy.

So how do you value the business? Why are we paying what we're paying? So to give you some insight, timing somewhat confuses this for everybody because their financial year is calendar. So they're plainly about to enter that quarter 4 of 2018. Historically, they've been growing significant double digit, about 20% year-on-year through 2017. The last 12 months' number is an attempt to give you some insight and, I guess, a prediction of what we think they're going to do and what they think they're going to do this year. So that last 12 months' number is up to the end of August and shows strong revenue growth on last year. I think that the EBITDA percentage largely is going to be somewhat the same as last year. So you can sort of do the maths yourself about where you think they'll end up. When you overlay that synergies, so we've identified significant synergies in year 1, you get to about 15x multiple.

So to preempt the question, 15x, is that right or not? Well, believe it or not, we spent a lot of time looking at that because that's a very reasonable and understandable question. We know people who understand this space and its related spaces well. And they tell us through intense questioning that these businesses with similar attributes are going for somewhere between 13x and 17x. So 15x is bang in the middle. I agree, on the surface, it doesn't look horrible, word, but cheap. But it is a unique business. There is no other type of business that does what it does where he does it. It's plainly going very quickly, and it's got a very experienced, high-quality management team and team of people. Why do I say that? Not just because the trajectory of growth to this point. Backlog, which you and I would probably call pipeline, currently it stands at $118 million. They have reached an inflection point, I think, towards the end of 2017, where they started to feature on people's radars, hence, the top 5 pharmaceutical company that awarded them the IIT contract. They came to them. They did not have to go looking for it.

The obvious question you might have is conversion rate. So that pipeline, that backlog, a, is probably a 12-month view. So I think, again, properly from a visibility perspective sits somewhere between where CTS has been 4, 5 months and where Managed Access often is 12, 18 months. So neatly sits in between that. So theoretically, and I would like to think we'll prove this, we'll smooth out some of the lumpiness of the service side of the business.

The conversion rate up to this point, so -- and when you look Scott in the eye and ask him the same question, is somewhere around 60%. So again, it gives you an indicator of the trajectory into next year, which is why when you start to look at those metrics, I would like to think, and my proposition is, it might have looked expensive. I'd suggest it might be a full price, but it is isn't, especially when you overlay the significant revenue and potential long-term cost synergies. What's interesting about them, and again, we'll talk about it very shortly, is their revenue breakdown by customer. So they've got, as I say, a large number of customers. But I think it's about 30% of their revenues are in the top 10. It's a well-diversified business of a customer base we have not really traditionally targeted, certainly not for a while. It's small to medium and niche pharma and biotech. And again, helpfully, from a geographic perspective, it's well diversified. I think you're going to see in percentage terms more growth in Belgium and Germany, albeit all of it's growing.

I've highlighted these things before, but again, as a summary, there are compelling strategic reasons why this fits in the business. Because fundamentally, what is Clinigen? And again, it's a lovely -- another one of those lovely off-the-cuff things people do say to me every now and again, which is sort of being damned with faint praise. People will say you are just "a supply and distribution -- a sophisticated supply and distribution engine". To which my point is, I'll take it as a compliment. Thank you very much. That's exactly what we're trying to be because that's what underpins access to medicines. So it is about supply and distribution, regulatory expertise, and what CSM do is a gap. We try to build it ourselves with some success, just not on the scale, scope and cleverness, if you like, that they do it with.

We know there's a need. We're being asked for it all the time by our clients, by pharmaceutical and biotech companies. We've talked about, from a CTS perspective, for that part of it, this focus on IITs. And I do think when you wrap what we do in CTS, what we do in Unlicensed Medicines together, you've got a preeminent, prelaunch market-leading offering that nobody else has. Fundamentally though, it will add competitive advantage on geographic expansion. I'm on Slide 20 because I keep forgetting there's people on the phone and doesn't work too well on the radio, does it?

So Slide 21, just to touch on this for a minute. So they've got about -- they, being CSM, they've got about 100 clients. There is pretty much 0 overlap between our clients and theirs. So the cross-selling opportunity is significant. So we will, in simple terms, take Clinigen's capabilities into their client base, and we will take their capabilities into Clinigen's customer base. As I say, the top 5 pharmaceutical company that's awarded them the IITs project is a very good marker that big clients want that capability as much as small ones do. So it's significant, I think.

Obvious statement, but we have been looking at European footprint. I've said before, Europe, Middle East, Latin America. So this does give us significant operations, on Slide 22, instantly with 250 people across those 3 sites. Their U.S. facility is about 40, 50 miles down the road. All the predominant U.S. locations is 50 miles down the road from my office in Yardley, Pennsylvania.

So in summary, I think it will be quite transformational. My team certainly think that. And just to reiterate the point for about the 15th time, so what is it? Tell them, tell them, tell them again. Their capability will be deployed across the entirety of Clinigen. My first go-around on these slides by the way was almost a 2-phased approach, but it's got too complicated because it has about 60 slides as it is. First phase being CTS and Unlicensed Medicines, and then we will look at how we can utilize the capability to increase the efficiency and cost of goods on our own products.

Very -- because you can all read whether you're on the phone or in the room, Slide 24 and 25 talks about there are attractive financial metrics behind it. We do talk about a synergy figure. We haven't quantified what I genuinely -- Martin and I genuinely believe are significant revenue synergies. But over time, we will definitely look to indicate what they might be. But as I say, by just the very basic calculation of putting the 2 sets of clients together and cross-selling, hopefully, you can see the opportunity.

Return on investment, expecting more than 10% before synergies. Plainly, it's better than that post synergies.

Again, to reiterate what we're going through today, cash consideration, part funded through proposed up to GBP 80 million of share capital as a raise. And there's some details of what it does to debt, what it does to our facilities and, certainly, EBITDA to net debt covenants for those people that want to know that sort of detail. But again, the point to be made, even when you look at leverage, at 2.4x coming out the blocks, assuming the GBP 80 million is raised. We have been higher somewhat before when we bought Idis and we are a lot smaller than we are now, we went above 2x.

So again, to possibly to preempt a question, which you can ask in different ways, but ultimately, I suppose, how comfortable are we? I think, under 2.5x, because we're so cash generative, is acceptable with the caveat that it comes down quickly. And I think, as put on this slide, leverage is expected because the cash-generative nature of the business, which is not changed by the acquisitions. Leverage is expected to reduce towards 2x by 2019 and down to just somewhere between 1, 1 and a bit times by 2020, June 2020, in the absence of doing anybody anything else. And before anybody asks, no, that's not an indication of anything else in the future at this point.

So it is a compelling acquisition. I'm not going to go through those points again. I think I've made them all, but it is genuinely -- the word compelling, I think, is appropriate.

Let me talk about iQone because that is how you pronounce it. We like acquiring things that are difficult to pronounce, and I've heard lots of different variations. Again, I'm not going to say too much more about it. It's relatively small, I know that I've said that from the overall summary. It is essentially a virtual European specialty pharma business. So it was started a couple of years ago by some guys who came out of Amgen and Lilly. We have looked at European footprint in a couple of different ways. Should we buy a more formal European pharma business? Well, the difficulty with that is they're either very big and messy or very small and really only operate in one country. And the difficulty with either of those 2 scenarios is getting them to be deployed across more than one part of Clinigen. Because again, the theme of Link, the theme of Quantum, the theme of these acquisitions from a corporate perspective is they have to be able to the benefit of at 2 if not all 3 parts of Clinigen. And getting a traditional pharma business to understand unlicensed medicine is difficult. So what was attractive about these guys is they get it. They understand the unlicensed to licensed pathway.

The other piece is building ourselves. So we did look at it. Me and my team have worked in pharma for a long time. So could we do it? Theoretically, we could. The 2 questions are how long would it take and how much will it cost. Will it take you a number of years, assuming you can identify all the people? And you'd need warehousing operations and the rest of it. So you can't look at it as a standalone just building this capability. And it would cost genuinely somewhere between GBP 5 million and GBP 7.5 million. That's not a contrivance. We have done the bottom-up calculation.

So it's a rapid way of creating commercial and medical footprint in Europe. But why now? Well, I think we needed a trigger for it. And I think, again, having the warehousing is one part of it. But again, acquiring Imukin and Proleukin has just increased our stable of medicines considerably. The other piece is we have walked away from assets because we haven't been able to offer the European footprint.

Funny enough, how we came across iQone, and this is David Bryant's baby, the Chief Business Officer. He's been managing this process for about 18 months, getting to know these guys. We came across them 18, 24 months ago because they were pitching for assets that we were, the same assets which tells you they see the world in somewhat a similar way to us. They had the reverse problem of ours though. They have the developing European footprint. They just didn't anything else behind it. We have the problem of everything else behind it and no footprint. So we talked about whether we could collaborate, but in the end, it makes more sense at this point to bring it into the fold because we have now more medicines. We have the opportunity to look at whether we could bring medicines from the southern hemisphere, possibly even Japan into Europe, because we've now got the footprint. So again, it's bang in line with the strategy.

I've talked about on Slide 29 why iQone. The benefits are interesting because they're not just to our own medicines. By the way, we have road tested this. So we have, on occasion, looked at certain countries within Europe and put some promotion behind the likes of SAVENE and a bit of article -- post Article 31 Cardioxane. We know that our products respond to this. Proleukin and Imukin certainly will. But interestingly, our Managed Access clients are also coming to us to say could you provide the service on the ground with MSLs of your own, medical science liaisons of your own, so you can help the physicians at this early stage once they've been approved and gone through the regulatory approval process to make sure they use their products properly. So that is a service we are going to able to offer. So again, it comes at it from the opposite direction from CSM, start of Commercial Medicines, Phase I, and be deployed in parts of the unlicensed business, Phase II.

So I think I'm just about on time. Good results. Undoubtedly, acquisitions do feature in Clinigen. That is not a surprise. We are not ignoring organic growth. We are still very much focused on that. One of David Bryant's major roles as Chief Business Officer will be to join the dots much more effectively. And as he's been here since before me and been part of every acquisition, he does intimately understand how it should all fit together, and he's doing a lot of work in that area with the rest of the management team and the SVPs. The acquisitions are accretive. They certainly get more accretive the further on we go, but they are incredibly important. They do build out the footprint. And they are bang in line with the strategy, which is to become, as you know, I think, the global leader in access to medicines.

So thank you for your attention. I guess we'll take questions from the floor and try and also mix in questions from -- on the phone.

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Questions and Answers

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Nicholas Keher, RBC Capital Markets, LLC, Research Division - Analyst [1]

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It's Nick Keher from RBC. I've got 3 questions. Just looking historically a little bit at Quantum. Obviously, you've got the profit figure delivered via the EBITDA of GBP 10.2 million, and you talked about the pipeline coming through. Now you've had the business for nearly a year. Are there any further synergies you can see coming from that? And how is the pipeline evolving with a move to taking products outside of the U.K. and actually internationalizing them?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [2]

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So let me answer the second question, and I'll let Martin answer the synergies piece and the perspective on that. So there is now a team of people that is representative of the operational functions but from a commercial perspective, the relevant parts of the world that we operate in, so the regional piece that plugs into that. And that meets every month and that's constantly feeding and assessing opportunities to put into that pipeline. So I'm really happy that there's a sort of very solid process that we started quite early. As with any pipeline, the first job was to rationalize what we saw in it. And I think, those are paying attention, numerically, there are less numbers in those pipeline than it was originally, and there's a reason for that. That's just part of the process. That's not necessarily a comment that the pipeline wasn't that high quality. But you have to focus on the ones that you think are going to return and get -- and make it through. And I think, as I say, the diagram will show that the first product through that pipeline is due in the first half at some point next year calendar, which could, and I do use the word could, potentially perform financially in a way that glycopyrronium has. So I think we got a good process. We're feeding in the right intelligence, and I'd like to think that's a pretty good view of the next 2 or 3 years in terms of what it might deliver. But do you want to talk about...

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Martin Abell, Clinigen Group Plc - CFO & Director [3]

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Yes. So on the cost energy side, I said we'd done GBP 1.1 million in the 8 months. So if you annualize that, that takes us to about GBP 1.5 million for the 12 months' current run rate. I think we've achieved most of the cost energy that we are going to get from there. But against the backdrop of this was sort of a GBP 10 million EBITDA business that we bought GBP 1.5 million annualized, as I think, is a good achievement. As Shaun said, I think the next step up in value that we get from that Quantum business will come from the products coming through the unlicensed to licensed pathway in the pipeline.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [4]

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Yes, we've moved parts of it into Weybridge. It's a lot more integrated. And they've been great. The people have been really, really excited, and they're high-quality people. So pretty pleased, frankly.

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Nicholas Keher, RBC Capital Markets, LLC, Research Division - Analyst [5]

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Just to challenge that one of the cost synergy point because obviously, you've now got, with the acquisition you're proposing today, you're going to have quite a bit footprint not just in the U.K. but across Europe as well. So actually, with that in mind, could do you actually see that going further?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [6]

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Nothing's going to change the here and now. There's no reason why it should. I mean, ultimately, nobody knows, and amazingly, it's taken us about 50-odd minutes and nobody's mentioned the B word yet? But I think we have to see a couple of things. One, there's a sort of reason why all the warehouses work because they do somewhat different things in some way. So there's no rush at all to look to consolidate. As long as they all fit in the business and they all perform and they all work, then it will carry on as it is.

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Nicholas Keher, RBC Capital Markets, LLC, Research Division - Analyst [7]

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And then I'll just do one and I'll pass on. Just on iQone, because I'm sure that people are going to talk about CSM. But for iQone, it kind of is taking you in a new area. I mean, obviously, the sort of going to the IITs more as well. But this is going to potentially open up more Commercial Medicines opportunities in terms of in-licensing. It also brings you up against new competitors, arguably, as well. So I mean, in terms of that competitive tension, who are the -- are there any major risks there for going up against these new guys who might try now replicate what you're doing in MA? And then for the future and what it could bring in, could you give us an idea of actually how many products you think you may have lost because you didn't have the service?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [8]

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Yes. So first question, and I think you hit on the key point. Ultimately, most of the competition isn't really competition. And of course, it depends on the asset, but because there is that combination of licensed and unlicensed markets. So there's very few companies that can do that under the same roof. So I think traditional competition, traditional spec pharma, is less of an issue competitively. And if you look at the any of the unlicensed medicines companies, the reality is, with the exception maybe of a company like Swedish Orphan Bio, don't do what we do, either. So I think, again, if you look at the continuum of services that we now have started to offer and also linking Europe to the southern hemisphere because, again, with these assets, it's not usually just Europe. Certainly, if it is initially, there is opportunity to manage other parts of the world. Again, that combination of licensed and unlicensed, then I think we've got a differentiated position than pretty much anybody else. And the second question...

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Nicholas Keher, RBC Capital Markets, LLC, Research Division - Analyst [9]

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Number of products you've...

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [10]

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It's certainly more than one. I mean, to be honest, I could give you a number. But the reality is some of them, we would have walked away from anyway because of price justification or we just didn't think we can revitalize it. But it's certainly handful in the last 18, 24 months.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [11]

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Max Herrmann from Stifel. Just quickly on iQone again. In terms of your current portfolio because, I mean, obviously, you haven't primarily put any -- you've done KOL sort of support but not more. And clearly, having -- you said some of these products are detail sensitive or sort of MSL sensitive. So in terms of something like Foscavir, are there are opportunities there for iQone? What -- if you looked to your portfolio, where do you see potential to drive growth in your current portfolio? And what sort of capacity does iQone have? Is that -- do you need to expand the capacity, add MSLs to do that? And in terms of what MSL -- what iQone is currently promoting, is there competition there? Is there going to be issues there as well?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [12]

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Yes. So I think, virtually all of the products, I mean, Totect is a U.S. product, so I guess you have to exclude that. But the other products, if you -- again, you include Proleukin and Imukin, will all somewhat benefit from this type of support, even Foscavir. But again, I think, the balance to be struck is because as you know, our current model is to talk to opinion leaders, ensure the product's on guidelines, and then we have a customer services function that talks to hospitals all the time. So this a supplement to that as well, so there's no point in duplicating effort. So we would look to deploy the resource on target areas that adds to that. So -- but I think they all potentially could benefit from it. But it will be our assessment about what's the priorities and how do you divide the time up between those things. We -- SAVENE, we know the nursing practitioners that responds well to promotion to them about where to use SAVENE extravasation. Plainly, we've got the post Article 31 world of Cardioxane. So -- but I do think even Foscavir could potentially benefit. In terms of future investment, Max, it's a good point. And yes, we will add more people. They currently cover 4 or 5 European countries. The good thing about the type of people they are, because they basically focused on oncology and hematology. And of course, the reason why they've done that is because the R&D pipeline of pharma is dominated by that. And again, the products that we have are somewhat dominated by that. So you don't need enormous numbers of people from an MSL perspective to cover quite a large area because there are, in the -- even in the biggest countries, a certain number of centers that you can target to generate influence. But undoubtedly, over the next 2 or 3 years, we will continue to add more MSLs into that mix. But the good thing is that we've got more and more new products to justify doing so. In terms of what they currently do, no, there isn't really any conflict at all, and they will be very focused on the Clinigen product. So there isn't really any issue around competing with those.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [13]

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Stefan Hamill from Numis. Three-part question on CSM, yes. To what extent does it make you now a one-stop shop in the clinical trial arena? I'm interested in -- I presume that they have some supply revenues already. I'm just interested in the proportion of supply.

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Martin Abell, Clinigen Group Plc - CFO & Director [14]

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[I mean], it's is pretty small. You mean as a comparator sourcing type?

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [15]

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Yes.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [16]

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Yes, they don't actively promote it. They, I guess, as you'd expect, get asked for it regularly. Sometimes, they just ignore or have ignored it and just said, "We don't do it. Pass on." I guess, for their more important customers, they'll find a different solution, which is whoever. So it's not a dominant part of their business at all. But of course, the question I've posted, which is, I guess you would if you were me, is, all right, so you don't promote it now, but if you did, you can make a very logical assumption that they all need it so they're getting it from somewhere. So I do believe that with a very small tweak to what they're currently carrying around in their bag that we can drive some decent growth that way.

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

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Okay. So did you say it was less than 10%?

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Martin Abell, Clinigen Group Plc - CFO & Director [18]

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Yes. 2017, in terms of the revenue just comparator sourcing. And the Clinigen CTS business, it's exactly the reverse, so 90% comparator.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [19]

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So to answer your question about being a one-stop shop. In the sense that drug sourcing and supply, distribution, packaging and labeling, in terms of the IIT piece, it's a pretty comprehensive service offering, yes. In the grand scheme of clinical trials, no, it isn't, but it never has been. But it is, for that subsegment that's growing quite quickly, is pretty much the end-to-end service that's required.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [20]

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So it sounds like it's 10-90 supply, value add. And I guess my hunch is that, that value add is much more recurring-type revenue. Have you got a number for the amount of recurring revenues they have?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [21]

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Well, they're growing very quickly, and 30% of their current business in the top 10. So I'm not sure I can give you an accurate recurring number, but it's -- there is a underlying repeat business there. Interestingly, from a gross profit percentage perspective, roughly, what CSM do is double the percentage margin of what CTS does.

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Martin Abell, Clinigen Group Plc - CFO & Director [22]

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I think what would help to give them sort of more linear grave projection than perhaps we see of CTS business is they've got a very broad-based customer base. So their top 10 customers is around 1/3 of their business, and their biggest customer is around 7% of revenue. So it's nicely broad-based, diversified.

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

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Okay. And you talked about the issues, this prior 2 -- you talked about the issues that afflicted your CTS business this year, and you mentioned 2 large contracts. Could you have retained those with CSM onboard?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [24]

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Yes.

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

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What's the service that they provide that you couldn't...

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [26]

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Their packaging and labeling in particular is something that these 2 clients as well as others because I have had in my team had conversations with quite a few of them. Ideally, and this was the base reason why we built the Weybridge facility as much as anything, or the part of the way of the facility, was because of that demand. So the clients, ideally, given the choice, would like to wrap those services of sourcing, distribution, supply, packaging and labeling under one roof, us. So absolutely, they would not be -- and they're not necessarily lost yet either because some of them are forward-looking in saying, "Look, we are looking to make these decisions in the next few months. You currently don't have what we've got. So if you did, great. If you don't, you're unnoticed."

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Martin Abell, Clinigen Group Plc - CFO & Director [27]

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I'll that a step further and say there's a number of contracts that we didn't win because we didn't the one-stop shop facility, if you like, to extent that other people, had we had CSM alongside us, we think we would have won those contracts. And when we did the analysis on that, it's multimillions of gross profit over the last few years.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [28]

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And then just third part, so it sounds to me like the bulk of what they're doing is in the clinical trial arena. Is that fair? So is there any unlicensed? Or would all of that be synergy?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [29]

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So they don't do any unlicensed because it's just not a space they're aware of, but it's a very easy transition. The actual base capability is the same irrespective of -- they just don't target those customers. What they have been asked to do that they've decided not to do just for reasons of priority are commercial distribution. So they have been approached a lot. They've just been very focused on building the business, and they're in a sweet spot in the clinical space so they've decided just not too. But again, by deploying it to our own products, you create the base and the momentum and the understanding for them and you build it out from there. I think the important point, also, which we haven't necessarily touched on and it might preempt a question and it might be one of your other ones, is how much capacity have they got. So they do have capacity, particularly in Europe. So again, they have -- probably because there can't we're catching them slightly earlier than maybe they were prepared to in terms of exit from the private equity ownership perspective, they have been investing for growth. So they're a smart business, they're well run. So it's not one of these, dare I say it, very lean, stripped-down cost-backed businesses. It definitely is investing for growth.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [30]

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So very last one. So to what extent do they have capacity? And can you quantify at all?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [31]

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It's a decent percentage. If I give you a number, it's going to be -- I'm going be hoisted by my own petard. But it's a good amount of capacity.-- a.

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Martin Abell, Clinigen Group Plc - CFO & Director [32]

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Yes. From my point of view, where I see it, is we bought this business at an earlier stage of the piece -- ownership. I think they were looking to sell it 12, 18 months down the line, so they're still at the point where they have spare capacity because have the view they're trying to bring it to max capacity sort of 12, 18 months' time down the line. So I think what you're going to see over the next 12, 18 months, you're going to get really nice operating profit leverage as gross profit flows through. The overhead shouldn't increase anything like the same pace, and you'll get a nice step-up in EBITDA.

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Christopher Ian Glasper, Nplus1 Singer Capital Markets Limited, Research Division - Senior Research Analyst [33]

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Chris Glasper from Nplus1 Singer. Just a few questions for Martin, really. Can you give us an idea of how the deferred consideration payments are structured and what we should expect, what you expect to pay? Is it an all-or-nothing deferred, or is there a ratchet, if you like? Historically, can you talk a little bit about the organic growth rate? So obviously, if we back out Quantum and, presumably, some of the other activities, it looks like EBITDA was pretty flat year-on-year. And final one just around amortization and capitalization of development. You obviously adjust out GBP 3.7 million of amortization relating to product sales at the moment. Is that purely all these stuff you acquired historically? Or is there any of the stuff you've capitalized internally in that number?

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Martin Abell, Clinigen Group Plc - CFO & Director [34]

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Everything we strip out on the amortization is products that we've acquired. In terms of going forward to the extent that products come through the pipeline at Quantum under our ownership, we'll show the amortization relating to those products in our underlying EPS calculations. If I can just address the organic growth bit within the group. First, so we gave the Quantum contribution GBP 10.2 million constant currency number as well. If you do the calculations through that, where you get to is EBITDA growth on an organic basis of 3% to 4% in the year just passed. It's not at our usual levels, but against the backdrop where CTS had a very tough year, actually, from where I was sitting, still getting to the 3% 4% EBITDA growth was a pretty good result and reflects the strength in the diversity of the portfolio. In terms of deferred consideration, I'll take CSM first. So there's a different consideration or earnout opportunity for calendar year 2019 for the vendor. This was very much to bridge the valuation that they wanted based on next year versus the valuation we wanted to pay on this, what they've currently earned at the moment. It's a mechanism that worked well for Link. It's predicated on the same multiple as we've been paid for the initial consideration, so it's that broadly 15x that Shaun talked about. It's set up so the more that we pay, the more EPS accretive the acquisition will be. We've put a cap in the SP&A because you got to put it somewhere. We've positioned that at $90 million. We'll be thrilled to pay that because if they do that, it's a fantastic achievement in terms of underlying earnings. My expectation is it may well be we pay less than half of that, and that assumes that they get significant growth, incremental growth, in '19 versus '18. iQone's set up a little bit differently, and it goes further out, viewing that this is very much an acquisition that's for the future, longer term. And the earnout is based on calendar years 2022 and 2023. It's very much of a different order of magnitude. So the initial consideration was EUR 7.5 million on iQone. My instinct is -- and it's very hard to judge, but my instinct is, and at some point, I'm going to have to make an accounting judgment in terms of what we assume, but I think, it will be single digit millions in the deferred consideration for iQone rather than north of that.

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Operator [35]

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Okay. We now go back to you Charles. Charles Wilson -- Weston, over to you.

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Charles Robert Weston, Joh. Berenberg, Gossler & Co. KG, Research Division - Research Analyst [36]

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I've got a few questions on CSM, please. First of all, what's the gross margin?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [37]

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The gross margin is around 40%.

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Charles Robert Weston, Joh. Berenberg, Gossler & Co. KG, Research Division - Research Analyst [38]

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Okay. And in terms of the synergies, you talked about CSM not really promoting the supply of comparators. This is clearly a near-term revenue opportunity. What -- can you size that revenue opportunity if you just cross-sell comparator sourcing to the existing 120-or-so customers that are already using CSM? What order of magnitude are we talking about?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [39]

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Good question. I'm not sure I'm not necessarily going to be able to give you a number. But let me try and start to answer that question. Martin might want to comment himself. Go back to the point that Martin made. So we asked the team to look at the last couple of years, what business would we have won and what wouldn't we have lost. And that is some multi -- some millions of gross profit. And of course, that's a combination of the comparative work and, potentially, the specialist service work. So if we do this properly and we cross-sell effectively, there should be a decent level of revenue growth for both CSM's business, but they're pushing big growth already, but certainly, decent growth in CTS that we wouldn't necessarily have found ourselves. Martin, I don't know if you want to...

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Martin Abell, Clinigen Group Plc - CFO & Director [40]

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Yes, [it seems like that]. We got comfortable quantifying the cost synergy. We can absolutely itemize that line by line and see where it's coming from, and we said that's going to be around GBP 1 million in the first full financial year. Revenue synergies, much rather talk about it after we've achieved them because it's a tougher one to quantify. But I would certainly say it's absolutely our expectation and the expectation of the CSM team that those synergies will be considerably in excess of the cost synergies we achieved. I think that's where we'll get the real value from the synergies. It will be on the revenue side, and it won't just play into our CTS business.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [41]

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And again, the benefit, of course, is that's it's a wraparound service, one fits into the other. I think, if you were just selling -- again, selling the 1-dimensional comparator sourcing piece we've done well, and we continue to do pretty well at it. But undoubtedly, when you put the 2 together, it's a more compelling offering. And therefore, in my opinion, it's what the broader use of -- the broader client base will want more of.

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Charles Robert Weston, Joh. Berenberg, Gossler & Co. KG, Research Division - Research Analyst [42]

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Okay. And then just 2 more. First of all, you talked about the return on capital being over 10% within 3 years. Can I just make sure I understand the definition of that. Is that EBITDA over the amount that you paid?

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Martin Abell, Clinigen Group Plc - CFO & Director [43]

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No. It's based on a profit-after-tax calculation versus what we expect to pay over the 3 years, which is a combination of the initial consideration and an estimate of where we think the deferred consideration will end.

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Charles Robert Weston, Joh. Berenberg, Gossler & Co. KG, Research Division - Research Analyst [44]

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Great. And lastly, is the management locked in at CSM?

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [45]

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Yes. So the vast majority will be. I think there may well be certain roles that are duplicative at the very senior level that may well fall the way at some point next year. But in the absolute main, yes, they're all staying. Certainly, I mean, I talked to Scott, he likes the fit with Clinigen. He thinks it's a very good fit. He could see a long-term future for it. So I think, that's again always a consideration, Charles, as you'll have seen with Link. And again, I promoted Benjamin and moved him up to the U.K. There's high quality -- I think Quantum's got high quality people, so it's one of the big markers. So we will take the necessary steps from a long-term incentive perspective to make sure the key people are appropriately incentivized. I do think they can definitely see that being part of Clinigen is an exciting future. And of course, whatever you do financially, there still has to be a purpose, and I think that's a big attraction for them.

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Shaun Edward Chilton, Clinigen Group Plc - CEO & Director [46]

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All right. Ladies and gentlemen. Thank you. I mean, we're around all day, here all week. So if anybody's got any further questions or on the phone, e-mail, call or try and catch us today. Thank you.