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Edited Transcript of HZD.L earnings conference call or presentation 16-Sep-19 11:00am GMT

Half Year 2019 Horizon Discovery Group PLC Earnings Call

CAMBRIDGE Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Horizon Discovery Group PLC earnings conference call or presentation Monday, September 16, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jayesh Pankhania

Horizon Discovery Group plc - CFO, Secretary & Director

* Terence William Pizzie

Horizon Discovery Group plc - CEO & Director

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Conference Call Participants

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* Adam Joseph Wieschhaus

Cowen and Company, LLC, Research Division - Associate

* Charles Robert Weston

RBC Capital Markets, LLC, Research Division - Analyst

* James Francis Thomas Mainwaring

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

* Max Stephen Herrmann

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

* Michael Thomas Dudley Cooper

Trinity Delta Research Limited - Research Analyst

* Miles Dixon

Peel Hunt LLP, Research Division - Analyst

* Paul Cuddon

Numis Securities Limited, Research Division - Director for Healthcare Equity Research

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Presentation

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [1]

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Hello, everyone, again, and welcome. Thanks for coming out to see us. So we would like to review our first 6 months performance this morning. So have I got control of the slides? I have, haven't I? Here we go. So usual disclaimers, obviously, are in place. We're going to start with the highlights of the position so far and talk a bit about how we see ourselves as an organization going forward. We've heard the messaging frequently that our story is too complex, and we're trying to get that to a more simple, more understandable position. And then Jayesh will cover the financial results. And then I'll come back and do the business unit review.

You know that we've moved to a business unit structure now. And what you're going to see is a lot of information in here that should help you bridge from where we were last time we spoke to this time. So some of the slides are current events and I won't go through them all in detail. But it's there because it gives you the information you need, I think, to help you understand the business.

Review our projects and how we're doing in kind of building our capability. Obviously, scientific leadership is still very close to our heart, so we'll cover that, and then finish with a summary.

So the highlights of 2019 first half. Revenues, GBP 28.6 million, that's a growth of 13.9% compared to GBP 25.1 in 2018; 8.8% growth of constant currency. Gross margin, we are very pleased with, increased to 68.5% as compared to 63.2% in H1 2018. Adjusted EBITDA loss of GBP 0.9 million as opposed to GBP 2.2 million in 2018. And a cash position which is flat compared to last year at GBP 24.8 million. Business unit performance, as I say, we'll bridge you back into products and services later in the slide deck, but this is the way we want to run the business, been seen to be running the business going forward. Research reagents revenues of GBP 16.5 million, that's a growth of 11.5%, compared to GBP 14.8 million in 2018, or a constant currency growth of 6.8%. Screening revenues, very strong, GBP 4.3 million. That's a growth of 38.7%. I'll talk about that further as we go into that area. Bear in mind, revenue is a lag in this area. The orders are pretty exciting.

But the growth in screening, constant currency, 32.3%. Bioproduction, very pleased with the revenue in the first half of bioproduction, growth 154.5% compared to GBP 1.1 million last year, constant currency growth of 14 -- 145.5%. Diagnostics is a little disappointing, I'll come onto that one a bit further later. GBP 2.5 million, that's down 28.6% compared to GBP 3.5 million in 2018. That's a decline of 31.4% on constant currency. And in vivo, revenue GBP 2.5 million, down 3.8% compared to the same period last year, a decline of 11.5% in constant currency, and again, we'll give you a bit more clarity on that one as we go. Post period, very pleased that we can announce that we have a -- Celyad has got through to the FDA acceptance on their CAR-T therapy, which includes our shRNA, and so they're filing, an IND filing gone through so that triggers milestone payment.

So the go-to provider of cell engineering solutions. That's how we see ourselves, and we kind of tried to analyze as to what we think is the key parts of the organization that make us stand out from the crowd.

So robust market-leading portfolio of gene modulation and editing tools and services. Beyond any other organization with all of those capabilities together, that puts us at a very exciting position. Able to alter any -- pretty well any gene and modulate its function in the pursuit of understanding disease and developing therapy.

And focused on high-growth opportunities. So we have high-growth opportunities in screening of bioproduction, as you've seen from numbers. But it's underlined by a more predictable and kind of -- same with mature, it's still growing. So it's still a nice market, the research reagents market and so that gives us the basis to be able to more firmly predict, forecast the business going forward, gives us a good base to work from. And we've worked on these deep relationships with top 20 pharma, and that's really starting to pay off now with a key account position that we have. Experienced management team with a proven ability to sustainably grow successful biotech tools services company.

I guess we're beginning to see that now is that as we industrialize processes, as we get very much more commercially focused, you are starting to see the predictability of the business and the growth of the business coming through. So this is an area kind of or as a tagline that we consider was probably very appropriate for us at the moment. I was in this building couple of months ago, and I was on a panel with a couple of pharmaceutical types and the questions were coming for them as like, how much money they needed to invest in order to take a pharmaceutical therapeutic through.

And they were saying about the hundreds of millions that cost. Well, those hundreds of millions get spent somewhere; they get spent with tools and services companies. So powering the therapeutic ecosystem, we have tools and services that are helping those guys go towards therapy or towards diagnostics, which is pretty exciting place to be, and it puts us in a very buoyant kind of market area.

So we're involved in the research side of actually understanding disease, we're involved in helping them develop solutions to disease, and we're even involved in the therapeutic side as we help them with bioproduction, producing the molecules that are going to help cure disease. So we're very active in all parts of that drug development pipeline, which it puts us in a very, very interesting position. It underlines the fact that why we need that key account structure in our go-to-market kind of approach that we're taking. So the customers that we're out there supporting, obviously we've got the academic research groups, and there they're buying kind of gene modulation, gene editing tools and some services from us. They tend to be smaller transaction values, but thousands of them. So that gives you a nice predictable business, and it gives you a base of understanding disease, and these people are frequently funded by pharmaceutical companies anyway, so there's connectivity through there.

Diagnostic test developers, where we're producing cells that emulate disease to help people develop a diagnostic test or quality control a diagnostic test. Pharma biotech, when they're looking to discover drugs to actually develop drugs and using our tools and services to help in that process. And especially in the screening area, I'll come onto more detail later. And then the pharma biotech bioproduction groups, who are using CHO cells to produce biological drugs. And we obviously have a good position there as well. And at the far end, you can see those transactions tend to be fewer but they tend to be very high value. It's not uncommon for us to be now dealing with million pound orders.

So I'm going to pass over to Jayesh to look in more detail at the financial highlights.

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Jayesh Pankhania, Horizon Discovery Group plc - CFO, Secretary & Director [2]

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Thank you, Terry. Morning, everyone. So I'll just quickly talk through our financial performance for the half year. So I'm pleased to report a strong set of results, revenue up 13.9% at GBP 28.6 million, and on a constant-currency basis, that's 8.8%. That's driven mainly by bioproduction screening, which had a really good performance. Gross margins up 500 basis points to 68.5%. Again, the impact of bioproduction, which is traditionally very good margins, and also improving margins in research reagents.

Cash is broadly flat half year to half year, and that reflects some of the cost discipline we brought to the business, the high-margin mix to the results, but also better sort of working capital management and improved debtor collection. Our adjusted EBITDA is a loss of a GBP 0.9 million. That had the benefit of GBP 1.3 million through the adoption of IFRS 16 leases. And so on a like-for-like basis, half year to half year, we're broadly flat again.

We've got a strong order book for half 2 2019. So I anticipate a positive adjusted EBITDA for full year. In terms of our reporting structure, we've now moved from reporting between services and products into the business units, as Terry highlighted, and this change is -- have been put in place to reflect common channels to market, common customers. And this slide shows how each of the businesses match; so for example, you can see In Vivo was split into products and services, and now it's its own business unit, and that for us is a much more logical way of managing the business.

Terry will come onto explaining each of those business units in his section later on. In terms of adjusted EBITDA, as I said we've moved from negative GBP 2.2 million last year to negative GBP 0.9 million this year. In terms of the key components of that movement, the improved revenue contributed GBP 2.2 million to adjusted EBITDA and the margin improvement contributed GBP 1.3 million to adjusted EBITDA. I've already mentioned the GBP 1.3 million impact of IFRS 16 as well.

And in terms of our OpEx, we did increase OpEx by about GBP 3.5 million. And that -- there were a number of reasons for that. We did have above inflation pay rises this year particularly for more junior staff, who were below the lower quartile. We're bringing them in line to the medium, and that's had an impact of reducing our staff turnover in -- at those levels in the first half. The commercial team was fully in place by -- at the start of the year so there's a full year effect in terms of the OpEx spend. And we've had investment in corporate, including additional IT, finance, legal and project management support.

In terms of the balance sheet, sort of again, a robust balance sheet. The key movements from the half year last year are the goodwill and intangibles have reduced. Again that reflects the noncash impairment of the In Vivo cash generating unit at the end of 2018. The property and plant and equipment has increased by about GBP 11 million. That's primarily due to the impact of IFRS 16, where we're recapitalizing mainly property leases in both our U.S. and U.K. operations.

As I say, we've got a healthy cash balance that's broadly flat, and we've -- the improved collection of debtors has resulted in reduction in trade and others receivables, and we have a -- that's been offset by a corporation tax receivable, just as part of our sort of tax management. The current and noncurrent liabilities increases are generally due to the IFRS 16 and the associated liability you have to record.

In terms of cash, we're showing a positive cash flow of GBP 1.3 million -- sorry, operating cash flow of GBP 1.3 million, that's after returning GBP 1.7 million of the cash that was received at the end of last year. So a great performance there, which I'm really happy with. In terms of investing activities, we've had about GBP 2.3 million of CapEx, and investments include generally laboratory equipment and computer equipment, but also capitalized costs for our OneWeb project, which is on track.

Financing activities now includes around almost GBP 1 million of the principal element of lease payment; again, that's an impact of adopting IFRS 16.

I'll leave you with our track record of growth over the last 9 half-year periods, 6-month periods, we've grown at rate of 38% on a compound annual basis and our margins improved by 53% on a compound annual basis, so pretty happy with that. I'll now hand over to Terry to go through the business units.

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [3]

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Thanks, Jayesh. I think you can see the impact Jayesh and his team have had in our ability to get more clarity to numbers, the speed that we can actually get numbers out, the quality of forecasting, et cetera. So that's made a hell of difference. So business unit review. So the slides you're going to see are very busy, and I'm not going to go through each one of them in detail, but we felt the detail was important to allow you to try and figure out how things bridge from last year to this year.

So we went to a business unit structure to give us a lot more drive within each of those businesses. I think as I explained before, previously, the CFO and the CEO were the only people had sleepless nights about any particular part of the business. And that's just plain wrong. You want someone else have sleepless nights about parts of the business. So having a person responsible for each of these areas gives focus, they're focused on the competition, they're focused on is the pricing, right? They're voice of the customer back into what we should actually produce next. All of those kind of things you get with this focus.

It's not straightforward, putting the business unit structure in place. And you kind of see, we tripped up on one with the diagnostics, but we resolved those issues fast, and we've got the solution for that going forward. But no, it's been a hell of an evolution for the organization, and I think it puts us in a really good position going forward. So to look at them in one-by-one, so Research Reagents, that is previously the CRISPR reagents, the RNAi and cell line engineering, and cell line products are in that category. Why do we bunch them into that category? Because they are lower transactional value, higher volume, and it's going to old trend towards nonpersonal selling. So the person we've got in charge to that business unit is an expert in that nonpersonal selling, understanding analytics, customer behavior, what is that you do to go and push the buttons to go and make things happen faster, for them to buy more. So this first half, GBP 16.5 million, up 11.5% compared to the prior period. So what's actually driving the growth there? Well, the main growth areas are RNAi and the CRISPR reagents. Cell line engineering has been a bit of an anchor on that, as predicted. So when we came into this position at the beginning of the year, we explained this, that our cell line engineering proposition was not particularly competitive. We could do anything that could be done on a cell line, but we'd take a long time to do it, and we'd be expensive.

And putting it into perspective, we're talking GBP 15,000 to GBP 20,000 per engagement. And we're talking between 20, 26 weeks to actually deliver. The market was around about GBP 7,000, GBP 7,500 and 10 weeks to deliver for many cell lines. Now we still have that high-level offering because if someone wants multiple engineering project done, it was -- we're the best in the world at doing it. We can take those 26 weeks, we can charge a really good price, but they will get a very complex engineering feat done at a high quality.

So we still have that capability. We still have the products business. That's the cell line sat on the shelf, ready to ship if someone should want those cell lines. Antibody validation tends to be a good market for that. But in between there, we've introduced a restricted service offering, which looks at popular types of cell lines, offering the majority of the engineering feats that we can do, simple engineering feats, not multiple. And that captures a hell of a big part of the market, and we offer that now at GBP 7,500 and delivering in 10 weeks. So we're in the sweet spot now of where the market wants us to be. We've got there because we got that 3x increase of capacity for the same number of people, and people is the major cost in running cell line engineering. There's no automation involved in that first part, that's just doing more sensible things in manual processes. So our automation guy came in and basically said, "I'm not automating anything until we have a robust manual process," because if you automate stuff that isn't sensible, you get nonsensible automation.

So the next phase we go into now is applying automation to those manual processes. And that should give us a 5x increase in cell line engineering by Q1 of next year for the same number of people. So that puts us in an even better position to have aggressive plot pricing. As we start to run this out as well, and we get confidence in what we're doing and the success rate of what we do, you can start adding in different cell lines. You can start adding in different engineering processes so we can expand out the offering as well. So last year, our conversion rate for a salesperson, this is kind of -- this is dead, so 10% conversion rate on quotes. That wasn't good. We are now around about 15% to 17% conversion rate on quotes. So you're starting to see the recovery, takes a bit of time because we've got known for being very slow and very expensive, and we now need to go back and tell several people that we're in the game, yes, so we are working on that.

So I would anticipate the second half, we'll actually see the benefit of cell line engineering growing as well. RNAi is still -- it's become more popular. Alnylam has tweaked people's interest in RNAi. There's more kind of references out there in the literature. Yes, so we're seeing high single-digit growth in RNAi anyway. So that's the powerhouse of what keeps us going. It's a good part of the revenue of the organization, but it's nice seeing growth as well.

So screening. I know you all thought I was a lunatic when I was pushing Chris to screening originally, and it was a GBP 1 million business. Hopefully now you can see why I was doing that, why I was excited. Lucky I was right.

So GBP 4.3 million revenue in the first half, it's a 38.7% growth year-on-year. Including in this area, is CRISPR screening, pooled and arrayed, high throughput screening, and the libraries that we had to actually power screening. So we've now done or are in the process of doing 500 CRISPR screens. There's always the question is like, what's to stop the competition coming after you?

We started doing this in 2013. That's at the time when the academics were just doing it. How, it was before my time; I mean there was visionaries there at the point understanding what the potential of this market was, and actually getting involved and actually doing it at that point. So it's time in the saddle that gets you good at CRISPR screening. There were many, many pitfalls that we've learned over the period of time and 500 screens as to how to avoid them. So anyone looking to come into this market has got a challenge of actually gaining that level of experience, which is really tough to do.

Meanwhile, we're pushing the envelope. So we announced T cell screening in February of this year. We have a fair amount of T cell screening opportunities actually running through the pipe at the moment. As you can see, we actually got an order for GBP 850,000 in H2 that's just come in from a top 10 pharma. So that's our biggest screening order to date. So you can see how that is developing. Revenue is a lag. So from an orders perspective as we stand today, we have doubled the amount of orders that we did have in the same period last year.

So revenue will eventually start to catch up but it's always going to be a lag when it's a 6- to 9-month kind of project time line. So I showed this graph before so I thought for completeness, we should include it again. And the slightly darker bars shows the growth in each of those areas of screens that we've done since we last spoke and as you can see in all areas, we're gaining traction. And again, I'll come back to the fact that in 30 years' experience, I've never seen really any sophisticated technique that's used across the drug development pipeline. That just doesn't tend to happen. I mean PCO as a simple technique will. But really, I mean this is unusual, this is really impressive. And this is why we have traction with vice presidents and senior vice presidents in big pharma. So my Head of Global Commercial is flying over to the U.K. today, I think, he is. He's been called into a senior vice president meeting with a big pharma company.

Those kind of things happen. That's unusual. I've been around this industry a long time, I know how unusual that is. But it happens on a regular basis to us, which is pretty cool.

Bioproduction, it's done very well in the first half, GBP 2.8 million, 154% growth. What's driving that? If you recall, bioproduction in the past has been -- you go and sell someone a CHO cell line to test. So we'd take GBP 20,000 or GBP 30,000, they would take the CHO cell line for 6 months to see if they could live with it in their context, then at the end of that, they would take the big license. So you always had a long period, lag period before you got some money. Well, now we've got 5 INDs, 3 in the U.S. and 2 in China. We've got people that are willing to be references for us to other customers. Six months testing a CHO cell line takes the customer time and effort. And we've got to the point now is, why do you want to do that? So what we're now finding is they're going straight to license, so that speeded the process up by 6 months. You're getting the money a lot, lot quicker. So that's why H1 had that effect. We hope it's an ongoing trend. There's no reason to suppose it isn't.

H2 is a difficult comparison to last year because we had 2 GBP 1 million deals in H2 last year. We're not that confirmed. We think we're going to be in good shape by the end of the year. It was a knockout year last year. I would imagine we're going to be somewhere in similar to that, maybe even slightly above that this year. So it's a pretty cool position to be in.

Diagnostics. We -- well, GBP 2.5 million, 28% decline year-on-year. This is the one that didn't work out so well, introducing a business unit structure here caused some problems. We saw it early. We took action to deal with it. We've now got someone in who's kind of pretty well-known in the industry to run that business unit. We would expect a recovery in the second half, and I would say probably year-on-year, we're going to be marginally above where we were last year, but if you consider how down we are in the first half, that's a pretty good recovery.

This doesn't reflect the change in the market, this is us getting in our way. But we've dealt with it and we're moving forward.

In Vivo, GBP 2.5 million, 3.8% decline compared to last year. This is a market, I think we've discussed before, it's a difficult market for us to be in. We are tiny compared to the entrenched competitors like Charles River. They have huge scale, they've got huge offering, difficult market to exist in. And also, you need a specialty sales organization to address it. So we are still in the process of evaluating options for this business. We will come to a conclusion in the second half of this year. So building capability, we've talked about various projects we're embarking on last time round, and how we were going to basically reinvest for growth. And these are some of the results. On the people side, we invested in business unit structure, and that's given us much better focus, much better drive in each of those business areas, so that's been pretty cool.

Automation, we spoke about. We've delivered on the 3x increase in capacity in cell line engineering. We will now go on to do the 5x increasing capacity by Q1 2020.

Data, we got better financial data that's helping run the business more accurately, more efficient data handling enhancing the customer journey. We became a very complex business to do business with. An example, previously on cell line engineering, there might be 5 milestone payments that a customer would have to pay for a cell line engineering project. I mean if you don't put a customer off on the basis you're slow and you're expensive, tell him that you're going to bill him 5 times for the same project over a period of time is going to -- that'll end it. We don't do that anymore. So we're learning. Why was it done? Well, over a period of time, it probably seemed like a good idea at the time. But from a commercial point of view, you've got to be customer friendly, customer centric. So we're resolving those issues as well.

Digitization, the OneWeb, bringing together the Horizon Dharmacon web that will launch in October. So we're just in the final kind of bug fixing, final throes of testing that one. That's going to help drive the especially nonpersonal selling business.

And innovation, we launched the first T cell, CRISPR screen. Base editing, we're in the middle of the evaluation or towards the end of the evaluation in that, I'll come to that one in a bit. And also single guide CRISPR library we're working on, and I'll explain that in a second.

So beginning of this year, we said we'd be investing about GBP 5 million over 18 months. We're a way into that, and I'm very pleased with the results we've seen today.

So maintaining scientific leadership. So we've got Cambridge as the driving force from an R&D point of view, but also Boulder, Colorado, formerly the Dharmacon site. In Cambridge, we've got 10 years of experience; in Boulder, we've got 20 years of experience. So the organization has kind of deep experience in various areas, and they're working really closely together, so the head of R&D for example, is in Boulder. So we're becoming more and more a global organization that's capable of working very nicely together.

So just some highlights of what we're working on. Single guide CRISPR library, this is produced in the Boulder facility, or will be produced. And so primary cells are becoming much more important as a closer proxy to going towards the human than working with immortalized cells. And what's been found is it's much easier to have a single guide library do the job with [the guard], so CRISPR library, than it is with our current 2-part system. So this is something we should -- is important for the market. No one else has this available on the market. We should launch the first part of this in probably the back end of this year, and the full genome single guide library next year. And it puts us at the cutting edge still of developing products that are supporting CRISPR screening.

ShRNA, we've spoken about this before with the Celyad relationship. So they got a CAR-T therapy, the shRNA technology that we've got enables that CAR-T therapy to be more effective. So they are making good progress with regard to getting an IND and going to clinical trials, and that produces some milestone payments for us along the way.

More importantly, it's tweaked people's interest into shRNA. Other companies are approaching us with regard to is this a potential for them as well. So that's been an interesting development.

Base editing, very interesting area. So what here you're trying to do is CRISPR has many off-target effects, base editing can reduce that to [round] about 98%, so it puts it in line as a potential therapeutic solution. And so the moment, the only outfit out there with this technology and kept it for themselves is Beam Therapeutics. I think they have sister company they have a license to as well. But it's not on the general release to the market. So we were approached by Rutgers, wanted to bring base editing into the general market, saw us as a good outfit to work with. We're at the end now, the validation of that process, and we will make the decision fairly shortly, do we license or do we not license? And it's looking very positive so far. Up until that licensing point, any work we did would be returnable to Rutgers, so you can understand you're cautious as how much work you put in to that point.

Once we're happy that it does what we want it to do and it's looking very positive, we will sign the contract, and we will have the global license in that area. So as we've gone through this, we've started to look out into the market to say, okay, if we had this, what do people pay for this kind of access, this kind of technology? And the response we're getting is probably around about up to $5 million pay to play, then you've got milestone payments based on phases through the kind of regulation -- FDA regulations. And then a royalty payment based on the product sales subsequently. So that seems to be very exciting, very enticing position. We will announce, obviously, fairly shortly, if we are going to take the license. If we do, it won't be the fact that we have a product on the market straight away. Once we actually license it, we will then go into validation and more understanding what it is we're going to offer the customer during the next year. I would anticipate if we do that, we'll probably be working with a couple of partners who will probably be paying something for access.

We'll come back to more information on that one, but it could be a pivotal moment for the company. It puts us in a very different position, but also takes advantage of our deep reach within pharma biotech companies.

So in summary, Horizon's powering the therapeutic ecosystem. And I think if that base editing line comes through, you can see why we would be making that claim because we're providing tool services all the way through to helping therapeutic companies be successful. So gene editing, gene modulation increasingly becoming embedded in basic research through to drug discovery. We got core competency in cell line engineering that underpins all the businesses that we're in, and it forms the basis of a unique portfolio of tools and services. So commercial excellence, scientific innovation and industry know-how remain key differentiators for us, and we have a robust balance sheet. We're providing capacity for investment. So we've got a strong outlook for H2.

The 29 revenues are expected to be in line with market expectations for the moment, and we anticipate a positive adjusted EBITDA at the end of the year. At that point, I will pause for any questions, either to myself or Jayesh. If you could wait until you get the mic. Yes, so let's go.

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Questions and Answers

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [1]

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It's James Waring from Stifel. Just 2; one, you talked about higher margins in the research reagents area. Obviously [you all sort of] all about better processes kind of went through at the period end. So just kind of wondering what the -- some moving parts are sort of in that part and sort of your progression going forward?

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Jayesh Pankhania, Horizon Discovery Group plc - CFO, Secretary & Director [2]

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So I didn't -- I'd anticipate research reagents to be around about sort of 60% or 65% overall, probably near the 65%. It's really operating leverage. It's primarily Dharmacon, which has a fixed cost base, and so the more you can get through there, the better the revenues will be -- better the margins will be, sorry, yes.

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [3]

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And just on the Dharmacon sort of fixed cost, I mean when you referred to required, I mean you talked about sort of having quite a lot of -- [that's a] spare capacity within that. And there's always talk about sort of moving from a (inaudible) [beta writing] and stuff over there. I mean is that sort of still on the agenda, or have you got lots of organic sort of through the ex-Dharmacon stuff to fill out there?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [4]

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Yes, so there's a building over there, which is partially used, so there is space. They have an expertise in manufacturing, so we're constantly thinking about what is it that we do there, and nice to know we have that capacity.

But these CRISPR libraries that we're just developing, that's a pretty significant investment. Probably around about $1 million to actually invest to bring that to market, and there's a lot of work involved in that. So we're sweating the assets of that Boulder facility at the moment, but there is more kind of room, and we are getting a bit squashed in Cambridge, yes.

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [5]

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And then finally, on base editing, and you talk about all your valuation work you're doing. I'm just wondering if that is really just about whether the technology works? Or whether you're looking at different sort of areas of life science tools you could also buy that in?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [6]

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So at this stage, it's whether the technology works through a degree it should, and what you're looking for is off-target effects, but also experience with RNA. I mean we've seen some of the base editing kind of the literature has recently cited challenges in the RNA side of things.

So we need to check out all of those situations. I think when we pull the trigger, it's not going to be a completely finished project, but we're going to know enough that we are confident we can work with it. Beam Therapeutics has had their technology available for a number of years, so those refinements that you make that are going to make it more accurate, better producing over a period of time. But we'll know that we're capable of doing that by the time we actually pull the trigger on it, yes.

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [7]

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So -- sorry, Miles Dixon from Peel Hunt. On the Celyad deal that you briefly touched upon, I thought I heard you say that it was the effectiveness of the therapy that's being approved? Is it really effectiveness or is it duration of effect?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [8]

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Sorry, so what it -- shRNA seems to have a knock-down effect on what would be interfering with the CAR-T therapy. Yes, so it seems to elongate the CAR-T therapy's active period is my understanding.

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Miles Dixon, Peel Hunt LLP, Research Division - Analyst [9]

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Brilliant. No, no, no, and on that point, without actually saying with the other, given the excitement in that area and the emerging signs that there are issues with the duration of effect, would you change your downstream commercial terms with other partners if they were to come forward?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [10]

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Compared to Celyad, yes. Yes, I think it's always -- when you get involved in these situations, you tend to be in a collaborative situation initially because no one knows if it's going to work, which is fair enough. But once you actually prove it works, then you have the ability to -- you're more confident about charging for it the second time around, yes. But some of our guys have just come back from a conference in Boston, and they're picking up, there is an amount of interest from other companies, and Celyad wants to encourage that as well because they view the fact that more people are interested in pushing that direction, the more the FDA is going to be aware and open to that. So that's an interesting one.

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

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Charles Weston from RBC. Just one for me, please. Do you view Abcam's acquisition of the EdiGene portfolio as an increased competitive threat?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [12]

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That's exactly what I'm trying to get away from. The problem -- if you're an antibody validation outfit, it may be appropriate to own some assets in the areas to validate your antibodies. The problem you face with cell lines on the shelf is, is anyone ever going to buy them? Or are they going to buy them more than once? And it's a really interesting kind of evolution. Going back to last year, we would look upon RNAi as a product sale. Now that's a service, it's a customized service.

Someone types in what they want, it gets made and shipped within 24 hours. It's a service, [productized] service. Cell line engineering, you have a large number of different cell lines you can possibly work on like heart, lung, whatever, different cells, and lots of engineering processes you can do. So the variables are huge. Trying to second-guess what anyone wants is really tough and every time you make anything and put it on the shelf, they want something slightly different. So you're faced -- if you want to produce a serious service to the market, you have to produce what the customer wants. But then you're faced with trying to figure out how to do it in a timely fashion, cost-effectively and at the right price, which I think we've now done. And I think where we were before, you were kind of -- you weren't really serving any great ability to grow the business. You had cell line products and you had very, very expensive services, and we let that market evolve without us involved. So it's really important that we are now involved. That could be a very interesting growth area for us. So no, it -- does it bother me? No, God bless them.

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Paul Cuddon, Numis Securities Limited, Research Division - Director for Healthcare Equity Research [13]

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Paul Cuddon from Numis. Just going (inaudible) divisions on Slide 12. I'm just wondering if any of the kind of moves materially altered the growth rates in the reported divisions. So research products last year, for example, did 3% growth and research reagents now has done 7%. So have any of your moves between divisions actually caused that acceleration in number? Or is that more of an underlying performance improvement?

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Jayesh Pankhania, Horizon Discovery Group plc - CFO, Secretary & Director [14]

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I don't think that's as a result of cutting the numbers a different way, that's a real economic improvement.

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Paul Cuddon, Numis Securities Limited, Research Division - Director for Healthcare Equity Research [15]

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Okay. And then within the research reagents, did you say cell line engineering was a drag on the growth in...

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [16]

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Slight drag, yes. [Certainly] the engineering services was, yes. So we foresaw the death spiral. I mean, when you are so expensive and slow -- so slow to market, you're only ever going to corner a very small part of that market, and it was diminishing. So we saw that was going to happen, that but we needed the 3x increased capacity. So it will take off now, and the sales organization are much more motivated. You know as a sales guy when 9 out of 10 of your quotes that you get involved in, those conversations you have (inaudible) the customers will be excited about the offering and 9 out of 10 of them fail. That's a crusher for a sales organization. And eventually, they go gun shy on it. Like why would you bother? But now we've got something that is totally competitive in the market. We've got the quality stamp. We've got the reputation. We got the right price at the right speed. Now we can really change it up. It takes a bit of time because you need to get people persuaded that we are different to deal with now, but this could be a very exciting area to actually go into now.

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Paul Cuddon, Numis Securities Limited, Research Division - Director for Healthcare Equity Research [17]

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Okay. Are you able to help us with the H2 business unit splits of revenue by each of the units?

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Jayesh Pankhania, Horizon Discovery Group plc - CFO, Secretary & Director [18]

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Yes. So we kind of look at it as in terms of the percentage of the revenue in half 1 and half 2 so if I can just quickly talk through. In 2018, the new research reagents business unit was roughly 49-51. And I'd imagine it's about the same this year. In Vivo was 55-45. I think it's probably going to be about the same, 50-50 this year. Screening was 43-57 last year. And it's probably going to be a little bit more second half weighted, but about the same, a little bit better.

Diagnostics was 56-44 in 2018. This year, given the sort of disappointing performance in the first half, and we think we're going to be flat or slightly positive. It's probably going to be more like, more second -- much more second half weighted, maybe sort of up to 60% in the second half, I think, just while we're trying to recover that.

Biop was almost 90% second half last year. But given that we're seeing more contracts being signed immediately, I'd think that would soften a little bit, so I'd be anticipating maybe sort of 2/3 in the second half, 1/3 in first half, so that kind of magnitude. So overall, we think -- so it'd be about the same overall with 2018. It was 43-57 in the first half. I think it's going to be those kind of levels again in the second half.

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Paul Cuddon, Numis Securities Limited, Research Division - Director for Healthcare Equity Research [19]

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Okay, excellent. And then on the screening business, and as you say, the CRISPR screening, the T cell screening appears to be really taking off. So with the size of the market opportunity, and the generally broad availability of kind of CRISPR IP to screen, I mean what differentiates Horizon beyond the fact you've been doing it for longer?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [20]

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I think depth of experience is probably the biggest. When you're pushing the cutting edge, you don't make kind of economic decisions about efficiency, but as we go through, there's a lot of screens that are becoming more routine now. What we've got to do is learn our lesson from cell line engineering and don't do that one again. So as we move to make things more robust, more productized, those services, on the simpler screens, we can do that, we can start to think about introducing automation into those areas as well.

Always at the cutting edge, it's going to be challenging. You don't think that way, you just think about how you can actually deliver a great solution to a customer that no one else has ever done in the world before. But on the simpler screens is where the competitive threat potentially can come from. And what we need to do now is to double down in our efforts to basically own that market and industrialize the processes now where we can going with that mindset. I think that's going to put us in a very good position going forward. So there's other screens to come. There's other very novel screens they're working on, which are still going to be stretching the envelope. We're even impressing big pharma that have their own screening capability. Some of those come to us for T-cell screening because they don't get involved in that, it's too difficult.

So yes, it's technological advantage. It's belief. We have people that will say that we do a great job for them. They come back time and time again. I talked about in the past about getting towards that conservative circle around a pharmaceutical company and making sure you're in it, not outside of it. Because if you're in it, it's very difficult for someone to come and bust you out. So we're doing a great job on that and my hat off to -- especially to the key account folks. But now we're going into the broader market and the small- to medium-sized Pharma Biotech. We're seeing opportunities come from those guys without them ever trying to do CRISPR screening themselves. They realize it's too difficult to get good at it, so they're looking to outsource immediately. And there, we just have to keep that emphasis up that we own this market and they come to us, yes.

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Michael Thomas Dudley Cooper, Trinity Delta Research Limited - Research Analyst [21]

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Mick from Trinity Delta. A couple of questions. Firstly following on from Paul's question and the screening. What proportion of that GBP 1.6 billion opportunity is currently done, the CRISPR screening?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [22]

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It's an interesting question because obviously, it's a much smaller part. But if you go into somewhere like Pfizer, they have a CRISPR group that's nearly 100 people. If you go into AstraZeneca, they've got a CRISPR screening organization under Steve Rees, which is kind of super advanced.

So there's a ton of work that's being done in-house. So it's a difficult one to answer what the potential market could be. What I would predict is in 2 to 3 years, once the pharmaceutical company understands the front end, the mechanism of action of doing the work and the data handling at the back end, they will realize it's too expensive for them to carry on doing it themselves, and then they'll outsource it. I mean that classically happens every time. And so I think at that point, you're going to have suddenly a lot more opportunity in the services business than we have today from big pharma. But small-to-medium size, there's a huge opportunity as well. And trying to speculate what the size of that market is at the moment is not easy because of the amount that's done in-house. If it was all done out of house, I would say it's towards a couple of hundred million at this point, but it's going to take some time to actually spring that out of the pharmaceutical companies.

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Michael Thomas Dudley Cooper, Trinity Delta Research Limited - Research Analyst [23]

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And with the sales, is it -- where's the focus, on educating people about CRISPR screening or actually people understand CRISPR screening, and you're selling Horizon Discovery?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [24]

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Yes, again, a very interesting point. Last year, for the big pharma, it was engaging our really high-level scientists with their high-level scientists to understand where this is going. What we've figured out this year, deploying a high-level scientist into small- to medium-sized Pharma Biotech actually slows the process down. What you want to do more is to give them a solution to a problem, not another problem. And I think the conversations can get very technical very quickly. So what we're working towards now is to use customers to educate customers. So the best way to move that forward now is to get small- to medium-sized Pharma Biotech speaking to other small- to medium-sized Pharma Biotech. So we have -- we're in the process of putting together a seminar for -- in November, I believe it is, in Boston, and that should be around 70 people, and that's aimed at having that level of communication, customers talking to customers. Because to get over that inertia hump is kind of tough.

The other thing to think about, if someone spends 200,000, 300,000 on a CRISPR screen with you, that's probably a GBP 2 million to GBP 3 million decision they've made. And I think that's always got to think about that because the upstream and downstream work that comes from a CRISPR screen is significant. So they're committing to a very big project, and that's why you need to be in at very a high level talking to these guys. It's not like I'd buy this, and then move on. It's like I buy this, then there's consequences because I need to figure out what I'm going to do with the data.

And as, I think as education kind of progresses, more and more people are going to get comfortable with this. It's become part of the drug development pipeline. It's become a standardized part. What we now probably need to be doing is looking at each of those parts of the drug development pipeline and figuring out how you're going to sell each of those types of customers because every one of them is different. So that's the other thing kind of we work towards now. So yes, it's a really exciting area, and it's got a lot, lot further to go than it's at, at the moment. We're in an acceleration phase.

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Michael Thomas Dudley Cooper, Trinity Delta Research Limited - Research Analyst [25]

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And just one final quick question. Woodford was a major shareholder of Horizon, could you update me where his shareholding is now?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [26]

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He has no shares in Horizon Discovery.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [27]

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It's Max Herrmann from Stifel. Just a quick question on the bioproduction. Just trying to understand what the kind of long-term outlook is on that business. Obviously, you've been selling, I guess against the larger players here. You've now got INDs out there. You've got more validation to your cell lines. I know you're working on enhanced cell lines as well. Are you seeing, are you able to get more traction in terms of pricing? What sort of customers are you getting? Are you getting more kind of let's say U.S. kind of larger, better-known companies? How's the business evolving?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [28]

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Well, this is a truly fascinating one. It's not often you get a situation where your sales team comes back and says, "We want the price to go up."

And it's real, because when you're in the process of proving your products, you have to be a bit cautious on pricing. Now it's proven, and people are coming in. The conversation is like, can we increase the price? Because when you go out and you allow people to do multiple INDs based on one selling price, you don't come back selling the same products again. So it's a limited market you're going to get. Salespeople are aware of that, and they're also aware of the value they're bringing to the market. So from that point of view, some of the negotiations we have at the moment are going to a higher price because it's a proven technology and there's not the risk that -- profile there was there before. That is the existing biop 3.

We need to be working on the other, like biop 4 or whatever it's going to be in the future. We are working on those, both in-house but also potentially licensing technology as well. It's interesting, when you've got kind of 2 major outfits, Lonza and Sigma that own the market, dominate the market, they've been looking at ways of basically pushing the market in [meter and feed], trying to find different ways to extract money from the customer from the same kind of engagement. No one's really heavily looked at what other CHO cell types can you bring to the market? And there is a potential, there's specialist CHO cells out there, that we can look into bringing into the market and have a fleet of CHO cell type solutions.

What would be very interesting for us to do, though, is to come with something that's technologically upsetting because then you can go and play the same game as Sigma and Lonza and have reach through of revenue at that point. It's difficult to do at the moment for us. I mean you potentially can think about this with a smaller outfit that might be going for multiple INDs over a period of time. That is a model that we're considering, do you charge per IND, and that way you get more engagements at a lower price, but you get a recurring revenue. So those are always things that we're considering. And now having a business unit manager who's looking at that every day of the week helps a lot to start to think about how we evolve that business. Because before, it was just, it's one of the running businesses. Now we've got someone thinking, okay, could we do this, could we do that?

And do we need to in-license this? Someone thinking all day about bioproduction, that gives you the boost on the business we're looking for. So it's going to evolve. I mean what's interesting at the moment, we do sell to big pharma. Big pharma frequently have their own CHO cell line they've evolved over years. They don't buy from Sigma or Lonza. They've got their own CHO cell line. They won't buy because they don't want to get hooked into a Sigma- or Lonza-type deal. But if you're just offering an alternative CHO cell line for a price, they've bought it and put it in the fridge because it might come in useful.

GBP 400,000 to a bioproduction unit is not a lot of money, considering how much money they go through on a weekly basis. And to have another CHO cell line in the fridge that might actually be useful, they will consider doing that, and we've had those kind of engagements.

Yes. Is there any questions on the phone?

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Operator [29]

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Yes, we do have a question from the line of Doug Schenkel of Cowen and Company.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [30]

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This is Adam Wieschhaus in for Doug. Maybe just building off the last question on bioproduction, congrats on the success in increasing, moving past the CHO cell line trialing period. We can see where that’ll allow you to more rapidly capture revenue that you would have not captured until the second half of the year if trialing had been required.

So maybe 2 questions on that subject are, is this just a transitory dynamic or do you expect growth to continue at rates that are above the historical norm? And is there a margin benefit given the lessened organizational benefit or burden associated with supporting customers during trialing?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [31]

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Yes, it's an interesting question. The latter part first, on the margin side, the answer is probably yes. We haven't analyzed that. The logic would say that you're not supporting them through a trial, therefore you're supporting them [whether] they've put the skin in the game, so that's kind of a better position to be in. So potentially, we haven't analyzed that out as yet. The first part of the question, remind me again, Adam.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [32]

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Yes. Do you think it's a transitory dynamic on the shorter or nonexistent trialing period? Or do you expect growth to return to maybe what they were in terms of the historical norm rates?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [33]

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Yes. So it certainly seems to be a trend out there that people do go straight to license, and the other advantage from a sales perspective, when you've got a population of people that suddenly decide they're going to go straight to license, it's a very powerful sales tool to go in and say to someone who's thinking of a trial, why are you doing this? Everyone else is going straight to license. So the psychology of the sale kind of changes. So you should be able to encourage more to go that way.

In the second half, I mean there's a couple of, maybe couple of big opportunities out there. They're difficult to predict because they're big and they're chunky, that may or may not come in the second half, but we're working those. So those would appear to also go straight to license. Or maybe, I can't remember if they've had the CHO cell line on trial already, but those are in the hopper as potential to convert at some point soon.

Yes, so it's a mix at the moment. It's difficult to interpret because we've only seen 1 quarter of this -- or 1 half of this happening. The last 6 months have been this way.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [34]

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And Terry, on the diagnostic side of things, can you provide any more color development on why you think that business struggled in H1 because of organizational issues and not industry or competitive pressures? And why you have conviction there could be a rebound in the second half of the year?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [35]

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Yes. So I think when you put in a business unit management structure, there is the opportunity to go down some blind alleys. We're not the most straightforward of organizations internally, and we have a project looking at the customer journey at the moment to try and simplify matters.

And as I mentioned earlier, if you got 5 milestone payments on a cell line engineering project, it shows how some things need correcting. And I think just trying to correct those things in a bit of a chaotic manner caused a bit of a seize-up of the engineering processes internally. Just got in the way of doing business, really, became too internally focused. So what we've actually got now is someone who's both very technical, but also very commercial. He understands what customers want. He's been out there with customers, understanding the issues that they face, and I think we're going to see a nice return in the second half on that business.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [36]

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Great. And last one that we had was, did the process of creating a new divisional organization and reporting structure provide you with an opportunity to evaluate the strength and weaknesses of your current portfolio as it stands? Are there areas you would say are higher on the priority list for M&A? And on the flip side, are there areas that might be better off as part of another organization?

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Terence William Pizzie, Horizon Discovery Group plc - CEO & Director [37]

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Yes. Yes, well, you can probably read between the lines that we are considering that because now we've got things a lot more under the looking glass. We need to make a decision as to what it is we want to do and what we double down in going forward. We're into some very high growth areas into the Pharma Biotech arena. And I think if we can add more into that and more efficiency gain from the same salesperson seeing the same customer offering other things of high value, that's a great place to be.

I think when you've got other businesses which are appealing to different markets, and you start to need specialty sales organizations for it, then the question is, where would you make the acquisition? Would you make an acquisition or license in into an area that is completely covered by the pharmaceutical company, biotech and our sales team?

Or do you make acquisitions into other areas that are small and specialized? I think logic will prevail over a period of time. Hopefully, you've seen over the period that kind of we've been doing this, you're starting to see a cleanup of the business. You'll see further cleanup happening over the next period as well. We're not happy yet. We know we can get this a lot more efficient, a lot more effective as an organization. So there's work to be done there yet, but we'll come back to you on that.

Any other questions? No? Any other questions in the room? Cool. Well, thank you very much for coming out, and do have any sandwiches that are left out there, yes. Cheers. Thanks. See you next time. Thank you.