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Edited Transcript of LIO1.DE earnings conference call or presentation 24-Apr-20 1:00pm GMT

Full Year 2019 4Basebio AG Earnings Call

Heidelberg May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of 4Basebio AG earnings conference call or presentation Friday, April 24, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Roth

4basebio AG - CFO & Member of Management Board

* Heikki Lanckriet

4basebio AG - CEO, Chief Scientific Officer & Member of Management Board

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Conference Call Participants

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* Christian Orquera

First Berlin Equity Research GmbH - Analyst

* Leon Boros

Equity Strategies Ltd. - MD

* William Partridge;Perdix Capital;Director

* Freddie Ahad;Ahad Family Office;Owner

* Mark Lauber;Irongate Capital;Managing Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome. And thank you for joining the 4basebio Full Year Results 2019 Conference Call. (Operator Instructions)

I would now like to turn the conference over to Dr. Heikki Lanckriet, our CEO. Please go ahead.

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [2]

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Thank you. And welcome, everyone to annual results conference call. I think you'll agree with me that 2019 had been another significant year in the development of the company. And David and I are keen to update you on the achievement from last year and give you some more insights into our objectives for 2020 and beyond. But before we start, there's a few bits of housekeeping that we have to get through.

So firstly, an apology, because due to the problem restrictions in place as a result of the COVID-19 outbreak, we've become very reliant on the strength of our home Internet connection. So I do apologize should there be the crackle and interruption on the line. And finally, we also have to share with you our usual disclaimer, which most of you are probably very familiar with by now. I'll just give you a second to read through that.

All right. So today, we'll start off with a good overview and our strategy going forward, after which, I'll hand over to David, who will take you through the financial review and guidance for 2020. And once that's all completed, we'll be taking your questions, should there be any.

So first of all, moving on now to Slide 6. The conference call from today is really mainly centered around the performance of the company being Expedeon in 2019. But as you're all aware, we've, of course, sold the majority of our business to Abcam through a transaction that closed on the 1st of January 2020. And whilst, I think, you will all be pleased to see that we've met our guidance in terms of revenue and profit objectives for 2019, to some extent, this has little bearing on the future success of the company. So I'm sure that you're probably more keen to find out about our strategies and objectives going forward. And another factor, we've included a few slides further down to provide a little more complex line, the value creation objectives and the growth opportunities that we've identified and that we are now actively pursuing.

So the next slide really is more of an overview slide and a bit of a team-setting slide, so to kind of go back and show you where Expedeon AG was coming from. So Expedeon AG was created through the Buy and Build strategy, a process which we started in July 2016 through the merger of then SYGNIS AG and Expedeon Holdings Limited. Now this merged entity then became the platform for us to build a profitable, high-growth and technology-driven life science stores and reagent company from, and that was achieved through 2 things really: on the one hand, through strong internal development, our products and our technologies and our customer base; but alongside that, through acquisition and then the integration -- subsequent integration of those assets into a comprehensive, vertically integrated entity, which became Expedeon AG.

So if on the next slide, we look at the shape of Expedeon AG in 2019. We can see a company that was really focused on supplying life science researches with innovation and technology to advance their workflows. And to do that, the company had really pulled that technology into a range of products and services and offer that to both academia and industry. But more and more as well, we could see that translate into a company becoming very successful at integrating technologies into third-party products and solutions that the kind of OEM business that we used to refer to, and that, I think, has become a very strong growth segment for the company.

Now within that market -- within that life sciences research market, the company's expertise and technologies, focused mainly on premium space, highly growth, highly buoyant space and our ability to facilitate multitude of assays and enable multi-mix analysis to our customer base is really the driving force there for our growth prospects.

Now geographically, the heart of the company at that time was then based in the U.K. And we came into the U.K. with over half of our staff locally live at that site in Cambridge. And that, of course, is complemented with several operations across the world, as be our San Diego office in the U.S. and our site in Adelaide, Australia; the site in Spain, in Madrid and then the minor operations in Germany and in Asia.

Now on the next slide, Slide 9, you can see some of the achievements of 2019. And 2019 has been a year of many, many achievements, right? So on this slide, we've only highlighted a few more notable commercial deals and product launches that we felt were very prominent in terms of driving prospects and revenue growth. But obviously, the disposal of the proteomics and the immunology business in late 2019 to Abcam definitely takes the center stage here. And in the next few slides, I will put a little more context around that transaction and what it means for the organization going forward.

So as a reminder, on Slide 10 is an overview of the group's legal structure prior to the Abcam transaction. So you can see there at the top, we have Expedeon AG, which is the listed vehicle on the Frankfurt Exchange. And that entity was the 100% owner of Expedeon Holdings Limited in the U.K. and Expedeon Biosciences GmbH and Expedeon Verwaltungs GmbH in Germany and Expedeon S.L.U. in Spain. Now underneath that, it's been the home and has turned earned a lot of trading entities. In particular, Expedeon Limited, the driving force, as I mentioned, behind the organization in Cambridge and Expedeon, Inc. in the U.S. as well as the trading entities, TGR Biosciences in Australia and Expedeon in Asia and Singapore. And you know the Biosciences Limited is still a legal entity, but in all -- honestly, that was a (inaudible) company as that had been fully integrated in Expedeon Limited following its acquisition in May 2017.

Now on the next slide, you can see what happened in the last part of the Abcam transaction and which entities were transferred to Abcam and which legal entities we retained. And you'll note that if you look at Expedeon Holdings Limited, whilst the ownership of Expedeon Holdings Limited was transferred to Abcam, Expedeon Inc. that was actually sitting underneath that, have been transferred out of Expedeon Holdings Limited into Expedeon AG. Additionally, you can see another new company appear in there. A new legal entity in the U.K. was created to really facilitate and enable the employment of the full U.K.-based employees that weren't transferring to Abcam, and then those employees were basically myself and David, our personal assistants and then a good accountant who is a very valuable to group operations.

Now on the next slide, you can see what happens and as part of the transaction. And maybe the first point to make here is the name change. So as part of the immunology and proteomics assets disposal process, we also rebranded the remaining business to 4basebio. So in part, this was done to highlight our new focus on DNA. And for those of you who have a bit of a background in DNA, you will know that GMP is built out of 4 bases, hence the name 4bases. And we do a lot of biology with that, so the name makes a lot of sense. So -- and really highlighted our new focus on genomics and DNA.

Now moreover as well, the Expedeon brand really was mainly associated with the company's proteomics and immunology activities. And therefore, this isn't really that relevant for us anymore, but it was also relevant to Abcam and to enable them to continue with that brand, and that brand essentially was sold off as part of the transaction to Abcam.

So -- and if you look at it in generally, post transaction, our legal structure is quite a bit slimmer compared to what it was before, with 4basebio AG now being the rebranded business that's in Germany, owning the divisions in the U.K., Spain and the U.S.A.

Moving on to the next slide, you will see what we actually do in these different entities. So you'll see the activities in the different entities. And in a post transaction-wise, 4basebio AG, the German entity is really focusing -- and to those -- the U.K. entity as well, they are really focusing on investor and corporate relation activities, with the center of the group of -- central gravity of the group now having transferred to Spain, where the 4basebio genomics research and development division is based. So that's based out of Madrid in Spain. Now this entity is focused on enzyme development and production as well as the development and optimization of the DNA production processes using these enzymes. Now currently, we're evaluating as to where we want to expand our commercial activities and build further scale -- production scale. But in any event, it's become clear to us that our U.S. office in San Diego had become non-core to our future strategy. And following a strategic review, it was decided that we will see the activity in San Diego as of 30th of June 2020. So in the next few months, we will be closing down in San Diego.

So finally, on the next slide, maybe a few words on the proceeds of the transaction. It's obvious that the Abcam transaction was a sizable one for the company, with proceeds of EUR 120 million and net of debt, tax and cash. I would also like to highlight that this was an all-cash transaction, with EUR 105.6 million paid out in closing and EUR 14.4 million retained in an escrow account with JP Morgan, where it will be held for 2 years against potential claims.

Now on to the future and our strategy going forward. So on Slide 16, you can see how we intend to deploy and use the proceeds of the Abcam transaction. And we -- essentially, we have 3 objectives. So first, and most importantly, as mentioned a little bit before, we've identified this high-growth opportunity in DNA manufacturing, focusing on gene therapies and gene vaccines. And we want and need to develop our manufacturing capabilities, so that we can really take full advantage of that mega trend that is rushing toward us. So to make that happen, we roughly expect to be spending about EUR 50 million over the next couple of years to facilitate this.

And secondly, just like before, we want to create an enhanced value creation through the Grow, Buy and Build strategy. I mean if you look at the Abcam transaction, we've acquired assets for about EUR 40 million and disposed of this for EUR 120 million. You can see that, that can be a very profitable kind of endeavor if you acquire the right assets and the right value. So in this case now, we see our DNA manufacturing platform as the center of the business. And it's our objective to expand both upstream and downstream along that value chain through really targeted acquisitions.

Now in practice, what does that mean? It's really that we -- perhaps, we'll look at companies or technologies that will enable us in an upstream-wise to control supply and the cost of the raw materials that we will need to make the DNA products. On the other hand, if we look at it from a downstream perspective, we will be looking at technologies or companies that can help us deliver those DNA products into patients. So delivery systems, typically, currently, most systems are in a viral base, but really, we will probably be more keen to look at non-viral-based delivery systems. That will enable us to safely and efficiently deploy the DNA products that we've made into patients. In any event, just as before, we -- really, we are looking for technology-driven companies or assets, which, in addition to that strategic fit, should also bring revenue growth and enhance or, at least, bring forward the profitability of the group.

And then the final element, as I said, there's 3 elements, really. So one was building up our own platform. Second one is the Buy and Build. And then finally, we are open to deploy capital and share buyback programs. And in fact, for those of you who have been following the company, you'll know that we've already realized one program where we bought back 10% of the issued shares. And just this week, we also announced that we will redeem those shares and through a capital deduction. Now depending on how the share price goes, going forward, we could consider similar programs or alternative share buyback programs. It might not be a one-off block. It could be a continuous program buying in the market. We haven't really decided yet. But in any event, we'll require shareholder approval before we can commence with a new program, as we've exhausted up our existing approval.

Now on the next slide, Slide 17, a little more on the genomics future that we envisage for ourselves and the large-scale DNA manufacturing for very clinical and, ultimately, of course, commercial use in gene therapies and gene vaccines. Now I think it's very important to realize that we're not planning to become a therapy developer. Therapy development, as you all know, it's -- is an expensive and risky business. But our business model is fundamentally different and somewhat de-risked in that we supply the developers -- the drug developers throughout their development process, whether that's preclinical or clinical trials and ultimately into commercial product. It's actually one of the most important valuable components in the treatment that they are developing. So to some extent now, we're generating revenue along the development program, and we've taken no risk on the therapy becoming ultimately a success or not, as we are generating these early-on revenues as people are going through development.

On the next -- so how we intend to break through this business segment is via our market-leading business segment -- sorry, via our market-leading DNA amplification technology, TruePrime. And this really is quite critical because it allows us to transition from a conventional process, which is pure fermentation-driven, to fully synthetic and thematically-driven process, thereby delivering a product, which is not only high performing, but also lower in cost and much safer to use. And I'll explain a little bit more in the next few slides as well.

Now we recognize that we have a process, which works on a lab scale, but we also recognize we're not there yet in terms of commercialization, so we need to scale our processes. And we also need to get it GMP-certified, so that the product actually becomes suitable for clinical and therapeutic use.

On the next slide, on Slide 18, you can see the markets that we will be targeting. And it's clear that the therapeutics market segment is, by far, our core kind of focus. So the market segment delivering DNA in gene in some of those therapies is what we're going for. This is a nascent, high-growth market segment that really drives that need for large quantities of high-quality, clinical-grade DNA, which we intend to supply. But again, these processes that we have running now to make DNA, they're driven by enzymes. And these proprietary enzymes can be used for a lot of different things. In particular, there's good applications in diagnostics. And the market for diagnostic test, for instance, for infection diseases is currently valued at EUR 15 billion per annum. But this is also something where we can expect some serious growth given the recent COVID pandemic. In fact, earlier this week, we announced that we're already collaborating in the development of a rapid COVID test. And alongside this, we see lots of opportunities to supply and assist many of the diagnostic developers in their rush to build testing capabilities, and then we can feel -- we feel we can really add some value there. But again, our main focus is regenerative medicine and advanced therapies.

And on the next slide, Slide 19, you can see what this kind of market segment is currently doing. So on this slide, you can see the current activity and the growth in numbers of therapies that we expect to see in the next few years. But also, what you can see in this slide is where these therapies currently are in their development phase. And you'll note that a lot of those treatments are in fairly early stages of their development, which is a good thing for us because it allows to tap into them in very early stage. But also the global supply of the type of DNA, which is required for these applications, is already quite a limiting factor. With fermentation processes not really scaling all that easily, the problem will only become exacerbated as the demands increase for DNA as and when these therapies move through the development phase into the commercial phases. So we see a really strong opportunity for the company to extract value from this market segment, but we need to be quick. We need to rapidly build up our manufacturing capabilities and act as a CMO through these therapy developers and as well as licensing out our processes, our technologies, along with supplying these proprietary enzymes to certain customers who may want to bring the process in-house as and where they feel that, that is appropriate.

And so on the next slide, it's more of a summary slide, where you can see, we're trying to depict on where we feel we fit into the value chain. And we need to be clear again that incidentally, we're not a developer. So we are not going to try and establish which genes are acquired for a given cure. That's not our business. But once people have identified the gene and need large quantities of that gene, that's where we come into play, and we make the product that the developers need who will then assemble that into a delivery mechanism or a delivery system. And as I said, if we can go downstream, that is something that we would like to move into and that we would invest into. Then ultimately, once that DNA is assembled into the delivery system, that can then be deployed into patient. And again, that's not our business.

So finally, on Slide 21, I will try and explain a little bit more on how our process differs from the biofermentation process that I mentioned and what the benefits and the unique selling points are to our customers, why they would want to switch over to the product that we make. So if you look on the left-hand side, this is the kind of conventional approach through biofermentation. So you can see large stainless steel tanks. And in these stainless steel tanks, people will grow bacteria. They grow bugs, and these bugs will contain a plasmid. And the plasmid themselves will then contain the gene of interest. And once that fermentation is completed, they need to process a large volume of fermentation media and really try and purify it and select that DNA from the bacterial soup of contaminants. Now one big issue with this is that the bacteria also make endotoxins, which are really, really difficult to remove. And there are no-go when it comes to contaminants for air and injectable. So these things are very toxic to humans, so removal is just critical, but also very expensive.

And now the 4basebio approach, on the other hand, is completely enzymatic, so no bacteria involved. Hence, no issues with toxic contaminants that need to be removed. But more importantly, as well, we operate at a density, which is much, much higher compared to what you can do in a biofermented side. We will, in the same volume, typically produce a hundredfold more DNA compared to what is possible through a fermentation process. Now that has big impacts on our downstream processing. It becomes a lot more straightforward, a lot cheaper and a lot more scalable. So there's more advantages just on cost savings and efficiency savings on the process and scaling capabilities on the process.

On the next slide, you'll actually see some differences in terms of the type of product that we make compared to what you make in a traditional process. So the traditional process is focused on plasma DNA, where the gene of interest or the DNA piece of interest is really only a small part of the plasmid. So you can see this on the right-hand side, the blue part is the vector. So that's the big chunk of the plasmid. So the positive is up to some extent. And the purple bit it is the gene of interest. So with the plasmid approach, you have been producing a lot of bacterial DNA into your patients. And the problem with bacterial DNA is, it's immunogenic. So create immune response in the patient, which is something that you want to avoid. Also these plasmids contain antibiotic-resistant genes. Again, that will be introduced into a patient as well, which is clearly not a desirable outcome.

The 4basebio approach, on the other hand, so if you look at the second circle that we've drawn there, 95% of the DNA that you make there are -- over 95% of the DNA that we make will be the human DNA of interest with the tiny bit that's remaining being non-biologically active. So it's not bacterial. It's not immunogenic. It's just -- it's non-biological synthetic DNA. Hence, we make a product, which doesn't contain antibiotic-resistant genes, doesn't contain bacterial DNA, so it's a lot safer. And it's also going to be a lot more performance compared to a DNA, which has gone through a fermentation process, because 1 gram of DNA contains 95% of the target DNA, whereas, otherwise, 1 gram of DNA barely contains half of it and being the DNA of interest, so it becomes a lot less efficient.

So in the next slide, you can then kind of see, in summary, really reiterating that we believe that we have a very exciting growth opportunity in large-scale DNA manufacturing. I think we've established that we have some unique selling points and some clear advantages in a market, which is already under a lot of pressure and needs a lot more capacity and capabilities. But to be able to make a product for these advanced therapies, whilst we have developed the critical proprietary enzymes and the processes, we've scaled production capacity, and we need to attract GMP expertise, which we currently don't have in the organization, so that we ultimately get into a product that is suitable for clinical use.

So our main focus in 2020 is to make sure that we have made good strides in our scaling and our GMP certification, so that we're well positioned to deliver on our revenue objectives for 2022.

Then finally, my last slide, it's just a few words from the Buy and Build strategy. So really, it's just reiterating that we really want to invest heavily in our platform, and we look to invest around EUR 50 million over the next few years. But really, that goes hand-in-hand with a value creation along the upstream and downstream value chain of our core platform, as mentioned before, similar to what we've done with Expedeon in the past.

And with that said, I will now hand over to David, who will take you through our financial performance in 2019. Thank you very much.

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David Roth, 4basebio AG - CFO & Member of Management Board [3]

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Thank you, Heikki, and welcome, everyone, to the call. So the comment I will make is to take you through the financials for 2019 and also give you a bit of insights into our guidance to 2020.

In 2019, I think, as Heikki has mentioned, is, to a large extent, about the immunology and proteomics assets that have since moved on to Abcam, but continue to -- it's incumbent on us to explain the overall results and how we've done over the course of the year and then how that moves forward into what we're expected to do in 2020.

And really, 2019 has quite been an extremely exciting year for 4basebio. And I think that's reflected in the presentation, the financial results, assuming you can get excited about financial results, which I'll take you through over the next few slides. And I'll start with just the financial highlights on the next slide and just pick out a few points that are relevant and key.

The -- really, I suppose, the main consideration is in terms of the market guidance that we issued for 2019. And we issued guidance at the beginning of the year with respect to revenue and adjusted EBITDA. So adjusted EBITDA for us is, I suppose, a proxy for operating cash flow. Historically, our results have been quite heavily influenced by amortization charges to do with intangibles as part of purchase price allocation accounting on acquisitions and also to do with earn-out adjustments or revaluations of earn-outs also to do with acquisitions. And the real thrust of adjusted EBITDA is to try to show what the underlying performance of the business has been. And at the start of the year, we set out guidance of -- in excess of EUR 2 million. And then in October, we revised our adjusted EBITDA guidance to a range of EUR 2.5 million to EUR 3 million, following what was a very good start to the year. So overall, I'm pleased to say that we've reached that guidance. And in terms of adjusted EBITDA guidance, we're at the top end of that.

So our revenues for 2019 were EUR 15.7 million. It's a 19% growth. And then, in particular, the adjusted EBITDA at EUR 2.9 million sits right at the top end of the revised guidance from October. And it's actually just about 3x higher than the EBITDA -- adjusted EBITDA in the previous year.

Running through the table that you can see and also the little -- the chart on the right just give you a brief color on some of those numbers. So as we mentioned, the revenue and the adjusted EBITDA, you can see the net result for the year is a minus EUR 2.6 million, and this is in part why we refer to our adjusted EBITDA because if you look at that number, that actually includes around EUR 4 million of noncash charges, and I'll come on to what those charges are when I discuss some of the content of what goes into the adjusted EBITDA. But essentially, that has -- a lot of that has to do with the purchase price accounting that we do under IFRS.

Our operating cash flows for the year were EUR 1.1 million. In terms of the presentation of our cash flow, we -- frankly, our legacy matters, we present our operating cash flows, including interest and tax costs, and so they sum down as part of the calculation to the EUR 1.1 million. But that EUR 1.1 million compares very favorably with where we were in the prior year, where there was a modest cash outflow. And we closed the year with cash in hand of EUR 3.7 million, so this obviously is before outcome. And that EUR 3.7 million is down on the previous year, and that's really to do with where we are in terms of debt settlement and the payments of various obligations, and you'll see that on the balance sheet as we move through.

So turning to the next slide, the consolidated statement of comprehensive income. So over those last couple of slides, just want to present really the results in, I suppose what I'd call, a conventional approach. And I probably, as a preamble, just need to make you what they are explain some of the contents of our annual report, which will be published on the 30th of April. So as a result of the Abcam transaction and under IFRS 5, which relates to assets held for sale, some of the presentation is quite unusual insofar as our income statement and our balance sheet effectively show all those assets, which were subsequently disposed of to Abcam 1st of January. It shows a single item.

So in terms of how you judge the performance of the business in 2019, it's quite tricky to do that from the face of the primary statements that you'll see in the annual report. Alongside the financial statements, we also provided a fairly comprehensive managing report, and that really does provide a bridge. So if you're inclined to delve into the financial statements for 2019, I'd also recommend that you go through the management report, which explains how we get from a, as I say, more conventional approach to the one that we were required to develop under IFRS 5.

So the page you have here is with IFRS 5 disapplied, and it shows you really the overall consolidated results of 2019 versus 2018. And as you can see, the revenue growth was EUR 2.6 million year-on-year. And at the same time, our cost of goods held very steady, and this is really about the mix of our sales. So very high-margin immunology and proteomics products driven that revenue growth, and that's contributed to very significant gross margins.

And then if you look at the expenses and the overheads, you can see that our total operating expenditure, on the face of it, appears to have gone from EUR 13.7 million in 2018 to EUR 17.4 million into 2019. Now all that movement, which is about EUR 3.7 million, around EUR 2.4 million of that is really to do with earn-out valuations. And earn-out valuations essentially are shares that are due to shareholders of the companies we have acquired, and they're revalued depending on our share price at the close of each year. And now there's been a significant change in our share price from '18 to '19. We've had some quite dramatic swings in the valuation. So during the course of '18, we actually booked a EUR 1 million income from revaluations, and you'll see that in the operating -- other operating income line. And during this year gone, we've actually booked a EUR 1.4 million charge, which is also in that line, offset a little bit by some other operating income. So that -- of that swing of EUR 3.7 million that you see, EUR 2.4 million of it is that item.

We also then had additional amortization going through for intangibles, which is really to do with the acquisition of TGR during 2018 and the consequential PPA accounting and amortization of intangibles arising on that. So that -- really, the underlying expenditure allowing for those 2 items has really moved by about EUR 700,000 in the year compared to the increase in revenue of EUR 2.6 million.

So really, in terms of revenue versus costs, we've made significant progress in the year, and it really underscores the messages that we've given previously about -- as you begin to scale the business, significant components of your revenue start dropping to the bottom line.

I guess the final point on this page is the results from operating activities. So those results, obviously, are lower as a consequence of those charges are put through, but that really doesn't present the picture of what is really a very successful 2019 for 4basebio.

Turning to the next page, just to delve a little bit on the key metrics. So historically, we've always said that adjusted EBITDA is a key metric for us. And it's, as I say, a measure of our operating cash flow, and you can see the progress that has been made during the year. There are a lot of purchase price allocation charges flowing through. There's a lot of amortization associated with the capitalization of intangibles on purchase price allocation. And this is what we're doing in this table is we're adjusting for those items. Alongside that, there's a modest add back for share-based compensation. And finally, we also booked in 2019 some of the costs for Abcam, and these are essentially costs that we were committed to, irrespective of whether or not the transaction had proceeded. So really, on an adjusted EBITDA like-for-like basis, you can see that we made significant progress in 2019, moving from EUR 1 million to EUR 2.9 million for the year.

On the following slides there, we have the balance sheet. And then after this slide, I'll take you a little bit on to the share structure and where we are on that. But in terms of the balance sheet, again, this is on an IFRS 5 disapplied basis. That is to say all those items that are showing are not held at disposal. And you can see that overall, really, where the balance sheet hasn't actually moved that much. The 2 main features of it that you will see is within current assets. Our current assets dropped a little bit, and that's really a consequence of cash and a similar situation in terms of our current liabilities and non-current liabilities, and that's really again what to do with debt. And you can see that the one really mattered the other and not where our cash has been applied during the course of 2019. Overall, shareholder equity is 77% of the asset base. And really, in terms of the overall debt position, how do we continue with the Abcam transactions, that also would have shown the significant improvement on previous years.

And so overall, in terms of numbers, we're very pleased to report a strong revenue, strong profitability growth. And we ended the year with significant cash balances before the Abcam transaction took effect.

Moving then on to our shareholder structure and shares. So as of the end of March, we have 53 million shares on issue. The market cap at that point around middle of April was about EUR 89 million. And I think I've checked it earlier today, and I think we're just a little over EUR 100 million now, so things can move quickly. And you can see that in terms of our shareholder base, we have a small number of significant investors. In particular, we have the investment from Deutsche Balaton, I think, 15.5% directly of our shares as of at this point in time. But we also have a free float. So those are defined as shareholders who hold less than 3% individually. We have a free float of 76% at this point in time.

In terms of our reporting, clearly, we're reporting our financial for 2019 now. We will be publishing our annual report on the 30th of April. And then without very little delay, we're moving into reporting on 2020.

So Q1 results will be announced on the 14th of May. And we've also then looked at the timing of our Annual General Meeting. So under recent legislation in Germany, it's permitted to move AGMs online. This is something we're looking at given the travel restrictions and the difficulties associated with convening large meetings. And as a result of that, we are planning -- subject to final confirmation, but we're planning to hold our AGM on the 17th of June and to do that online as now permitted under German legislation.

So that really was about 2019 and the results. And it's fair to say that a large proportion of those assets have since been disposed of to Abcam. The large portion of our revenue and in terms of our assets and profit-generating base is driven by those assets that have now moved in terms of the immunology and proteomics businesses. As Heikki has described, we're really refocusing our efforts in terms of the work we're doing around genomics and building out our DNA manufacturing capacity over the next couple of years. So as a result of that, the company has clearly changed a lot. And I think as a result of that, we've also moved away a little bit from the conventional guidance that we've given previously. So although, clearly, it's important to give our shareholders and prospective investors information about where we see the business going, adjusted EBITDA as a metric of the business over the next couple of years is probably less useful than it was, and so that's not a feature of our guidance going forward. But in the immediate future, really what we're looking to do is to give you an indication of how we will measure progress around the development of our DNA manufacturing and how this will affect our revenues and cash flows and cost base.

So on the guidance slide, you can see it's a pretty, hopefully, detailed amount of guidance. We've gone a little bit further than a traditional couple of numbers. And really, there are a couple of different features of our guidance for 2020. Inevitably, there's going to be a significant accounting profit from the Abcam transaction. That's in the process of being calculated. The reason we haven't disclosed it so far is that this is something we need to really want signed off by our accountants before we make that public. But effectively, we do expect that to do a significant accounting profit. And then thereafter, we do expect to incur operating losses and cash flows as we reinvest and expand activities to focus on DNA manufacturing. So if we exclude the effects of the Abcam transaction, we expect an operating cash flow of between EUR 2.5 million and EUR 3 million during the course of 2020. And we are not focused on revenue generation at this point in time, and so the revenue target is in practice below EUR 1 million. The key milestones for us is really about the development of that DNA manufacturing. And so perhaps the most important feature of our guidance over the next 2 years, we expect to invest up to EUR 15 million in the ongoing development of the DNA manufacturing. And alongside that, we also expect to continue with our buy-and-build strategy to move us in upstream and downstream, as Heikki mentioned. And really, this is clearly a significant step change from where we were in 2019. But as a management team, Heikki and I are very enthusiastic about this opportunity. We think it's a very exciting opportunity. And we generally believe that in due course, this opportunity will be able to deliver more than the recent Abcam transaction. And that is really what we're focused on doing as a management team.

So that concludes the presentation from Heikki and myself. Thank you very much for listening to the presentation. And Heikki and I are now happy to take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from the line of Leon Boros from Equity Strategies.

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Leon Boros, Equity Strategies Ltd. - MD [2]

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That was a great presentation and great results for 2019 and very successful disposal. My question is really focused on the future, though, and the three financial questions. The first is, do you have an approximate split of the EUR 15 million you expect to spend over the next 2 years between OpEx and CapEx, including capitalized R&D?

Second question relates to the conditions attached to the escrow. I understand that it's going to be held in escrow, that part of the proceeds for 2 years. It'd be interesting to see what the risks associated with that are.

And finally, are there any corporate taxes that have to be paid on the sale of the Expedeon businesses?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [3]

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Okay. Leon, good to hear from you. So this is Heikki. So I'll answer the first question. Maybe we don't have a massively detailed budget on whether OpEx and the CapEx will be and to some extent will depend a little bit on the IFRS rules, what can be capitalized with them and what cannot be capitalized. But clearly, of that EUR 15 million, a significant portion will be OpEx and will go through the P&L. And I mean, roughly, if I would have to guess now, it's probably going to be half of OpEx and half CapEx.

I'll refer to David on the tax question. David?

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David Roth, 4basebio AG - CFO & Member of Management Board [4]

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Yes. So on the tax question, we have reviewed in quite a bit detail the prospective tax on the transaction. And we expect -- well, we -- it's actually going to be less than EUR 0.5 million, and that's a consequence of the legacy tax position of 4basebio AG as well Expedeon AG as well SYGNIS with losses and release that has available to it. So yes, overall, a very modest tax impact.

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Leon Boros, Equity Strategies Ltd. - MD [5]

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Could you say something about the escrow?

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David Roth, 4basebio AG - CFO & Member of Management Board [6]

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Yes. Apologies. So the escrow is effectively held for the purpose of any prospective warranty claims, and it has a 2-year duration. It's -- as we sit here now, we're expecting that money to be recovered in full in 2 years' time.

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Operator [7]

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The next question comes from the line of Christian Orquera from First Berlin.

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Christian Orquera, First Berlin Equity Research GmbH - Analyst [8]

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I have a few questions, if I may, on the financial and the technology itself. The first question, let's start with the financials. The one would be a follow-up question from the previous one. You mentioned OpEx, CapEx. If I take the 2019 as reference where you had about a EUR 5 million OpEx on the continuing operations, roughly, it was about 20% marketing, 70% admin and 10% R&D. I assume this mix would change a lot as there will be more R&D. Can you give some feeling about how would probably admin will change R&D?

And probably, I would like to put marketing in scope of your new strategy and revenues. You showed a guidance of EUR 0.5 million to EUR 1 million of revenue guidance. And 2019, you had about EUR 1 million. So can you give some more background? Will it still be the consumables that you keep selling? Where is it coming from? And would you just keep marketing it to Abcam or other channels? So just to understand that a bit better.

One more question is regarding the debt. On the operations, you have about EUR 2.5 million of long term -- of -- sorry, short term and EUR 1.5 million of long term. And can you give a bit of feedback how do you expect that to change over 2020?

And then I have two questions regarding the technology. TruePrime had clear strengths for the purpose now of producing DNA. Can you please, Heikki, explain a bit more about -- I mean I see the advantage of amplification against the bioreactor. Can you explain a bit more how is it that it allows you to engineer the vector with a smaller size so that you have a lower gene-to-vector ratio? That's something I cannot fully follow up.

And the next one is with regard to your vector -- potentially vector technology, you said in the past that you probably will focus on DNA. And in today's presentation, you mentioned that you may go towards vector technology. So can I understand correctly that you have thoughts or have plans on probably doing acquisitions also on vector-production technology?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [9]

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Okay. Thanks, Christian. That's a bunch of questions. I'll try and answer them all. So the first one on the split on the OpEx between R&D, marketing and admin. So if you look at the business that we had in the past, that was the life sciences tools and reagent company, and these companies all have very similar kind of splits between sales and marketing, R&D, admin and also gross margin. These businesses are very similar in terms of how they operate. The business that we're building now is fundamentally different. Whilst we're still supplying tools, the market that we supply into is completely different. We won't be supplying directly to end users anymore. In the past, we had 10,000, 50,000 customers using our products. And that required a lot of marketing expense, that required a lot of sales and marketing effort.

So sales and marketing was a big chunk of our OpEx expense in the past while in the future, it's really going to be much more driven by partnerships and collaborations, and we'll probably only have 20, 30 customers which will have much, much higher turnover with those customers.

So in terms of the sales and marketing infrastructure that you need for that, that's fundamentally different than it's much more business development driven. So sales and marketing as a percentage of costs will be very modest compared to what we have to do for the tools and reagent business that we have just sold off to Abcam.

Now you're right, R&D expenses will go up substantially, so the OpEx increase will predominantly be R&D expense. And that's why it's really difficult to say what's going to be OpEx and CapEx because under IFRS rules, it's very unclear for me right now to tell you, "Well, this is going to be capitalized, and this is going to go through the P&L." But if you look at the expense, where the expense is going to go, if you don't look at it from a balance sheet or P&L kind of movement, there's an R&D expense where we develop infrastructure expertise, technology, people that will enable to make -- enable us to make the product that we want to sell into the market. So the next -- I hope that answers the question.

So the next question was about the revenue. And our revenue guidance for this year is fairly modest at EUR 0.5 million. And all -- it could be higher, but it's not something where we have a massive focus on this year. As you know, we've sold off our sales and marketing team. So our core focus right now is to make sure that we scale and build the organization so that we have product to sell into that high-growth opportunity that we see.

Now there is opportunities in the diagnostic space. As I mentioned, we're developing this test. There's a lot of other diagnostics, developers are coming towards us and require enzymes. So there's opportunities to OEM and onboard some of our technology into some of these tests or some of these products that customers want. But it's not something -- I mean we're putting a little bit of effort into it, but it's not something we're throwing a huge amounts of money and resource behind because we think that's a short-term objective but doesn't really fuel the future long-term growth potential of the technology that we have inside of the organization. So we really want to focus our efforts on making sure that we drive forward that high-growth opportunity that we have in mind.

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Christian Orquera, First Berlin Equity Research GmbH - Analyst [10]

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And that's also your old business consumables, right?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [11]

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It's not -- it's enzymes, really. It's not -- yes. Everything we make is consumables, right? So -- but yes, so the enzyme business -- if you look at it, we have an enzyme business. And the enzyme business, we can deploy these enzymes into these processes that we're developing ourselves to make DNA, and other people have uses for these enzymes, too. So we sell bulk enzymes to lots of different people alongside with expertise on how to use these enzymes or how to deploy those enzymes in different applications. So that's really the revenue generation that we have. Alongside that, there's also a little bit of revenue that we will generate from the business in San Diego. That was still turning over a little bit of cash. So there's probably, I don't know, maybe $0.5 million coming through from that. And then the rest is just revenue that will come through from the enzyme business.

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Christian Orquera, First Berlin Equity Research GmbH - Analyst [12]

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Okay. And now that you're closing San Diego, that means that disappears after June.

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [13]

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Yes. That's right. Yes. And that -- I mean the lease in San Diego runs until, what is it, September 2020. So the lease will run a little bit longer, but the activities essentially will cease as of June 20 -- 30. I mean that's the plan. COVID is making things a little more complicated down there. So it's not as easy to close down as it would have been under normal circumstances because of restrictions in place. But we're still confident that we can get that facility shut down by end of June, by end of half year, okay?

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Christian Orquera, First Berlin Equity Research GmbH - Analyst [14]

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Yes.

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [15]

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So the debt, I will leave for David. The question is on the debt. In terms of the TruePrime technology, the lower gene-to-vector ratio, because with the plasmid -- when you have a plasmid, a lot of the plasmid DNA that is in there is really to enable you to -- they enable the bacteria to multiply the plasmid. So you need all the DNA pieces in there to allow the plasmid to be amplified within the bacteria as and when you grow those bacteria. So we don't need any of those. So we can make a vector, which has basically only just gene of interest with a little bit of moving as it happens, as we call them, to create a much more stable product when it goes into a human. So because we don't need all the bacterial DNA required for the identification of plasmid (inaudible), our vector work is much better enhanced.

And in terms of the nonviral vectors, I mean you're right. So if we look at expanding downstream in the value chain, looking at delivery systems to deliver that DNA into a patient is something that is, of course, of interest because it allows us to cross-sell to the same party. If we have the DNA but we also have a delivery system that we can assemble that DNA into and provide a more comprehensive solution to our customers, that's something very exciting.

Now on the viral kind of DNA technology, there's a lot of companies out there already. And we're not entirely sure that long term, that's really the direction of travel of the industry because there's some issues with viral delivery systems in terms of immunogenicity and only being able to apply the therapy once, whereas if you look at some of the newer technologies popping up in the nonviral space, they have low toxicity, they have non-immunogenicity. And those are really technologies -- it's hard to say which one is going to be really successful and the driving force here. But if we were to take a position, I think we'd be much more keen to take a position on the nonviral-delivery-based system versus a viral-based delivery system where we, quite frankly, are quite late to the party already. So yes, an interest, but probably more towards nonviral-based delivery systems.

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David Roth, 4basebio AG - CFO & Member of Management Board [16]

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And Christian, in terms of the debt, so a fair proportion -- most of the third-party debt that was held by the group at the end of December effectively was entangled in subsidiaries that has now been disposed of to Abcam. So as part of that, and I think you see the reference where the proceeds are on net of debt and net of tax. As part of that, we took the opportunity to simplify the debt position by settling those outstanding obligations, and you'll see that in the Q1 numbers. So really, a lot of the debt that was there at 31 December has since moved on. We retained soft loans in Spain and there are 1 or 2 very minor balances elsewhere, but that's essentially where we are now.

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Operator [17]

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(Operator Instructions) Next question is from the line of William Partridge from Perdix Capital.

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William Partridge;Perdix Capital;Director, [18]

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Could you give a little feel to the regulatory process, how many loops do you have to go through, what the cost is, what the timetable is?

And then I think you probably answered the second question already, but just sort of who would you strike as your main competitors? And I guess in conjunction with that question, I'm trying to understand it. If you think the market opportunity is sort of here and now, why don't you spend more money, go faster?

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David Roth, 4basebio AG - CFO & Member of Management Board [19]

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Okay. All right. And so first, on the regulatory piece. So it depends on what you want to do. And we've been talking to quite a few different people about this. So there's a short-term GMP kind of accreditation we can go for, which would be for more commercial use but will allow us to get product in the clinical trials. And from what we understand, that's something that would be achievable in the next 6 to 9 months.

Now if you look at in developing product for commercial use, that's a different scale and a different level of accreditation, and that probably will take a little longer. But quite frankly, that's not something we need right now anyway, so we have more time to do this. So our main objective is really to get into a position where we can have a clinical or great product suitable for preclinical and clinical trials whilst we then look to extend that into a commercial base, which will take a little longer.

Now in terms of competitors, so there's 2 types of competitors to some extent, right? So on the one hand, we have the competitors who do the conventional kind of bioprocessing, biofermentation process. And I think our detriment is probably is our -- they're our competitors and certainly people are requiring plasmid to be made by that -- from that -- for that one. But there's other companies looking at alternative approaches as well. And I think Touchlight AAV and Touchlight, I'd say, they are probably the most advanced company in that space making Doggybone DNA, a very similar product to what we want to make. The only difference with their product is the AAV product is really focusing on the AAV viral vector. And we also see their product somewhat limited in that they have very little flexibility on how they can optimize the DNA for the different delivery systems that you might want to target and also very limited capabilities to put sort of tropism on the DNA to really do some tissue targeting with, whereas our technology really enables us to really optimize that DNA for delivery systems and for tissue targeting.

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William Partridge;Perdix Capital;Director, [20]

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And the third part of the question just in terms of just spending more money quickly, do you think the opportunity -- do you think you've got a sort of head start in the capacity, you've got a unique product, massive market, why don't you deploy more of your balance sheet in terms of...

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David Roth, 4basebio AG - CFO & Member of Management Board [21]

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Yes. So I think from where we sit now, we can see we can deploy EUR 15 million pretty rapidly and pretty aggressively to get us to points that we need to be. Now if there's the opportunity to deploy more capital and to grow quicker, obviously, we would do this and we would issue a revised statement to the market that we see opportunity and ways to deploy more capital more rapidly. But from where we're sitting right now, the rate of investment and pace of investment that we see, we feel that's comfortable, although that might change, as you say, in the future as and when we get a little bit more established.

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William Partridge;Perdix Capital;Director, [22]

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So my final one, just quickly. Actually, Touchlight is another U.K. company, are there no U.S.-type competitors here? I mean I just sort of note that sort of Thermo Fisher. I know they're different things, but people like Thermo Fisher and Genentech are spending huge amounts of their capital in terms of genomics and DNA sequencing, et cetera, et cetera.

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David Roth, 4basebio AG - CFO & Member of Management Board [23]

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Yes. So I mean Thermo Fisher has bought Brammer last year, which was a massive position that they acquired in this kind of space. Pfizer bought -- what was it they bought? They bought 1, 2 -- I forgot the name of what they bought. So most of those large companies are taking positions in this space. A lot of what people are buying has been viral delivery systems, technologies and companies. And really, in terms of the DNA production itself, it has been very much plasma driven where our devon is the main driver, and they were acquired by a private equity house last year as well. But everybody you talk to, they can see there's a clear pinch point in the market where plasma DNA isn't going to cut that, not from a safety and performance point of view and not from a production capacity point of view. So I'm sure there's other companies along as well that are looking at ways to make the types of DNA that we're making too. And I think you're right. Going quick is very important here. There's a window of opportunity. I think we're ahead of the curve somewhat because our technology is fairly well established.

TruePrime has been around for a while. We know the technology very well. And we know its strengths and its weaknesses very well. And the process that we are developing is, as such, not something that has come out of only a couple of months' work of research. So I think we're at the right time of the curve. We have the right capabilities behind us, and we have the finance behind us as well to go as quick as we feasibly can go. So yes, we feel very comfortable where we're at both technology-wise and financially to make sure that we can deliver on the opportunity.

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Operator [24]

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Next question is from the line of Mark Lauber from Irongate Capital Limited.

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Mark Lauber;Irongate Capital;Managing Director, [25]

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Two quick questions. One is whether there's any geographic focus on what you're trying to do, and the second is what kind of patent protection or IP you have around your processes?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [26]

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Okay. Yes. So the geographic focus. So in terms of the markets and our customers, they're mainly positioned in Europe and in the U.S. For ourselves, our focus, as I've mentioned in the presentation, currently, most of our R&D capabilities and our development capabilities are based in Spain, in Madrid. And we're looking to expand into larger manufacturing capabilities and GMP capabilities. We're looking at Germany, U.K. and Spain as our main areas to build that for obvious reasons because that's where we have presence already, that's where we have expertise and contacts and networks. So that's kind of the geographic focus that we have right now.

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Mark Lauber;Irongate Capital;Managing Director, [27]

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And patent protection?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [28]

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Yes. Sorry. So in terms of the patent protection, so all of our enzymes are proprietary enzymes and our cobots, well, the dominant enzymes that we use. Some of the enzymes in the process are not patent-protected and are more generic, but we're still manufacturing ourselves. And then the process itself as well, we have a couple of intellect property in a couple of patents where we protected certain processes as well. So we have protection on both the enzymes, but also on certain processes with those enzymes.

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Operator [29]

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Next question is from the line of [Anthony Britton].

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Unidentified Analyst, [30]

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Heikki, I just like to congratulate you and David on your stellar year last year. You've done an incredible, incredible job. My question is, have you had any feedback from potential customers as to the -- your DNA?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [31]

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[Anthony], good to hear from you, and thanks for the kind word. So I mean it's all fairly early days for us in terms of customer interactions. So we've been talking to a few smaller drug developers about setting up programs with them for this. And the same thing keeps coming back. Like people are looking for alternatives to plasma DNA, and they're looking for ways to have a high-performing product in terms of assembly, large genes that people want to enter into humans as well. And this is where the viral vectors are also a little problematic. So it's our products in conjunction with a lot of different things that come alongside it. But yes, we see a lot of positive feedback on the opportunity and people really are looking and are crying out for a tougher product that we're going to be making.

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Operator [32]

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The next question is from the line of Freddie Ahad from Ahad Family Office.

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Freddie Ahad;Ahad Family Office;Owner, [33]

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Can you hear me?

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Operator [34]

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Yes. Please go ahead.

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Freddie Ahad;Ahad Family Office;Owner, [35]

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Congratulations from my part as well, Heikki, and glad to be a new investor here. I'm just trying to extrapolate several years into the future and if eventually, we have a DNA product, which, let's say, Roche managed to use in a therapeutic that they might develop. Once we got into bed with, say, Roche at that stage, are they tied inextricably to us? Or would they be free to change their supplier of DNA? Or would that entail a whole new reregistration of whatever therapeutic they've achieved?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [36]

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Yes. So that's a very good question. So the type of DNA that we make, it's pretty specific to our process. So unless somebody else comes about with a process that can make identical types of DNA that we make, our customers are going to be pretty tied to us as a sole supplier for the product that they need. Particularly where this also involves the optimization for the delivery system or for the tissue targeting, it's going to become very difficult for customers to move away to an alternative supplier. So as we see it now, further down the line, we expect to have a lot of stickiness from our customers based on the intellectually property position that we have and the ultimate product that we will make for them.

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Freddie Ahad;Ahad Family Office;Owner, [37]

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I see. And probably a very difficult question for you to answer, so many years in advance. But are there any precedents in the marketplace that give you an idea, were you to license your DNA to Roche, let's say, what sort of percentage licenses would you hope to get? Are there precedents for that?

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [38]

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No. I'm afraid not. That's something that is very difficult to predict on whether that's going to be double digit or single digit and high single digit, low single digit, it's really hard to say. The only point to make there is that we do know is that 1 gram of DNA currently retails around EUR 0.5 million a gram. So even without royalties, you're looking at very profitable revenue streams at extremely high margin from the cost base that we will be departing from. So the licensing revenue is going to be more or less the icing on the cake. And to some extent, we might structure a deal differently where we charge less for the DNA and can get more in the royalty fee. And that's something that actually we saw in the previous business as well where you ultimately -- customers are willing to give up a certain percentage of their revenue stream. And depending on how you structure that in terms of back end through royalties or front end through upfront fees and cost of product, there usually is a cost base that you can't really go beyond. Now currently, for DNA that's probably around EUR 0.5 million a gram, but the structure of that about EUR 0.5 million a gram could be very different if you look at licensing milestones and product costs all involved in that cost. Does that make sense?

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Freddie Ahad;Ahad Family Office;Owner, [39]

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I'd say it does.

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Operator [40]

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There are no further questions at this time, and I would like to hand back to Dr. Heikki Lanckriet and David Roth for closing comments. Please go ahead.

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Heikki Lanckriet, 4basebio AG - CEO, Chief Scientific Officer & Member of Management Board [41]

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Thank you. Well, it was great to have so many of you on the call today and get so many good questions. So I think and hope we came across that dividend we're very excited about in 2019. We're very pleased with the Abcam transaction, but we're also very excited and pleased with the opportunity in front of us. And for us, the Abcam transaction more or less came at a perfect time because it really allowed us to focus on this high-growth opportunity and have the finance behind us to really deliver on that as well. And so yes, we hope that you will all stay with us on this journey, and we look forward to report back to you on the performance and the updates and the progress that we make in due course. Thank you very much and stay in touch.

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Operator [42]

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Thank you for your interest in 4basebio and we look forward to speaking with you again soon. Thank you and goodbye.