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Edited Transcript of OXB.L earnings conference call or presentation 4-Sep-19 12:00pm GMT

Half Year 2019 Oxford BioMedica PLC Earnings Call

Oxford Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxford BioMedica PLC earnings conference call or presentation Wednesday, September 4, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine Isted

Oxford BioMedica plc - Head of Corporate Development & IR

* John Dawson

Oxford BioMedica plc - CEO & Executive Director

* Kyriacos Mitrophanous

Oxford BioMedica plc - Chief Scientific Officer

* Stuart Paynter

Oxford BioMedica plc - CFO, Company Secretary & Director

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Conference Call Participants

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* Amy Lucinda Walker

Peel Hunt LLP, Research Division - Analyst

* Brian Templeton White

Cantor Fitzgerald Europe, Research Division - Research Analyst

* Charles Robert Weston

RBC Capital Markets, LLC, Research Division - Analyst

* Joseph Pantginis

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Julie Simmonds

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

* Sean Conroy

Edison Investment Research Limited - Analyst

* Stefan John Hamill

Numis Securities Limited, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Oxford Biomedica interim results for the 6 months ended 2019 -- June 2019. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday the 4th of September, 2019. (Operator Instructions)

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Catherine Isted, Oxford BioMedica plc - Head of Corporate Development & IR [2]

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Good afternoon, and welcome to Oxford Biomedica's interim results for the 6 months ending the 30th of June, 2019. I'd like to thank everybody in the room for joining us today as well as those on the line.

The first half of the year has been a very busy year for Oxford Biomedica. We signed collaborations with Microsoft and Santen, and the expansion of our manufacturing facilities is continuing very well and is progressing as planned, to be completed by the end of the year.

Financially, our balance sheet is on a far firmer footing. We have paid down our GBP 43 million loan. And we have a new investor, Novo Holdings; they invested GBP 53 million. Through this growth in our capacity and our staff, we look to take full advantage of the opportunity that we see ahead.

With that, I'd like to hand over to our CEO, John Dawson; our CFO, Stuart Paynter; and our Chief Scientific Officer, Kyri Mitrophanous, to go through the presentation.

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [3]

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Thanks, Cathy. So it is great to see you all today. Thank you all for coming, and we always appreciate the turnout we get at these meetings. During the presentation today, I'll be making forward-looking statements, which cannot be relied upon.

So if we move to the meat of the presentation, first of all, the half 1 highlights. And Catherine mentioned there, several of the deals we've done. And these have been very exciting for us to get these 2 into the books. First of all, an R&D collaboration with Santen around an undisclosed inherited retinal eye disorder, which is moving forward quite nicely at this point in time. And here, we are going to be in a place where we have an option and license agreement, which could turn into much bigger things later on.

Our collaboration with Microsoft, which we announced in the period as well, has been very exciting for us, using machine learning and artificial intelligence to actually get better yield and quality for the next-generation of vectors we're working on.

Again, with our partners, great progress there as well. We saw Axovant report the 3-month data on cohort 1 for AXO-Lenti-PD; and then treat the first patient in cohort 2, which triggered the first payment to us, a milestone of $15 million, which is a great place to be there as well. Very happy with the way that program is going.

And again, with Novartis, the rollout of Kymriah, very exciting there. Now in 19 countries in at least 1 of the indications, pediatric leukemia or DLBCL, in each of those territories -- reimbursement for that as well. So that's continued to grow nicely. We work hard with Novartis and it's a great partner to have.

Going back to, as Catherine's mentioned, we have Novo Holdings, a great investor to have on the books. We were very pleased to get them on board. And that was a big investment to come as well of GBP 53.5 million, leaving us with 10.1% of the company after that raise.

Again, this gave us the ability then to pay down the Oaktree debt, something we've had in our books a very long time in various forms. And we're very happy now to have the company which has scientific risk, but no financial risk. So very pleased to be in that position.

Okay. Looking forward, we talked about these things before. OxBox is now in motion towards its conclusion of build. So by the end of '19, we expect that to have fully built and be ready to start validating it. And probably running batches there -- validated batches by the middle of '20.

And like our factories, our GMP suites were constrained by capacity, we were getting that way with other bioreactors as well. So we've now bought or leased, I should say, Windrush Innovation Center next door to Windrush Court, which gives us more flexibility around non-GMP laboratories, which is a great place to be because this was beginning to limit our business.

Next slide talks about our strategy. And again, this is built around the backbone of our company, the LentiVector delivery platform. 4 main posts hold that one up. IP in patents and know-how. Know-how's so important to us to get royalties way beyond the expiry of the patents. Facilities, there's a separate slide on that. But I talked about what we're building already, and what we're working on, doubling our space, we're working within at this point in time.

People. Now people, we're growing so quickly. I think we were, beginning of '18, about 300; end of '18, about 430; today, about 480; and by December this year, 600. And that's what we need to keep up with the business we're currently running, with the business we see coming at us and just doing what we already do. So really important place to be.

And the quality systems. Again, fantastic quality systems back at Oxford Biomedica. We have the only FDA-approved commercial -- commercially licensed production plant for LentiVector, great accolade to having that in our books. And maybe the second one, too, with Orchard in 2020.

This breaks into our partner programs and our proprietary programs. First of all, the partner programs. Here, we can get process development fees, incentives, bioprocessing revenues there and, of course, the all-important royalties. You can see on the screen the name of the guys we have working on that, we talked about them a lot before. But all very important to us. A new addition there will be Santen.

To change strategy over the last 12 months has been looking at more ideas around doing our own pipeline. We saw with Axovant this can create huge value in the business by having our own drugs. We intend now to move forward, by having chosen the right candidate into Phase I/II ourselves and take these drugs forward and create more value for shareholders. It still means, though, we will actually be out-licensing other assets sometimes as well. This gives us development funding, upfront and milestones and also ready-made manufacturing customers. So both sides of that part of the proprietary pipeline can be extremely exciting for us.

Slide 7 shows the current capacity we're working. As far as square feet are concerned, about 110,000. We have Windrush Court, the original labs -- first, we have those labs there. Harrow House, the original GMP suite there, the cell factory process. That will be mothballed later in the year -- next year, I should say, when we have OxBox. And Yarnton converted in the first quarter this year from a cell factory process suite to a bioreactor suite. And again, that played a little bit of a part and helped our capacity constraints for the first half of the year.

We'll grow to 226,000 square feet from 110,000 with these 2 new buildings. Firstly, the Windrush Innovation Center with non-GMP research laboratories and, of course, then, at the end of the year, the completed build of OxBox, 84,000 square feet there, 4 GMP suites and 2 fill and finish suites. We're only using half the capacity currently. We're fitting it out with the services to put in more GMP suites later, but this is where we'll go so far, and we'll build out further GMP suites as we need them.

Slide 9 shows you the partner programs we're working with currently. Again, 2 with Novartis, Kymriah we all know about; second one, we can't talk about, which will be in clinic this year later on.

The deal with Axovant, of course, around AXO-Lenti-PD. That's as much as a product deal, but of course, we now have the manufacturing with that as well.

Sanofi, that's hemophilia A and B, factor VIII and factor IX. Again, here we're working hard to have the clinical trial materials ready in about 12 months' time.

Orchard. Great little company, motoring forward. They're doing extremely well. ADA-SCID will have its BLA filed in 2020. And on from there, MPS-IIIA is moving through trials as well. And a third drug with them, which we can't talk about at this point in time.

Other of our deals from last year was the UK Cystic Fibrosis Gene Therapy Consortium with Boehringer working in cystic fibrosis. We're working there to have materials ready for tox studies as quick as we can. This is a very interesting approach to cystic fibrosis within (inaudible), something new to us, so risk is high. But the returns could be very significant.

Of course, the inherited retinal disease with Santen is coming through the books now as well. And effectively there, we have a new manufacturing partner as well.

At that point, I'll pass to Kyri to talk about our innovation.

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Kyriacos Mitrophanous, Oxford BioMedica plc - Chief Scientific Officer [4]

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Thank you, John. So at Oxford Biomedica, we continue to innovate the platform. So there are 3 main aspects to this. One is improving the capabilities of the vector technology. The others are to improve the -- increase the quantity of vectors manufactured and also to improve the quality of that vector made.

In terms of improving the capabilities of the vectors, we are looking at modifying the envelope proteins to allow us to target specific cell types with the lentiviral vectors and also to use technologies such as regulated switches to be able to fine tune the expression of the therapeutic protein in the target cells in order to obtain a better effect.

In terms of improving the yield, we've seen a great benefit from transferring from an adherent process to a suspension process, from going from -- into 200 liter bioreactors. We're continuing to develop and optimize that particular technology, where we're adding in packaging and producer cell lines called LentiStable cell lines where -- and these are in great demand by -- other organizations are asking to evaluate these particular cell lines.

To improve the quality of the vector, we are improving the downstream purification technology. We are adding in capabilities such as the TRiP System and a secreted nuclease, the SecNuc. That leads to a better purity profile.

Analytics is a key part of what we do. It is -- allows us to identify the key steps during the manufacturing process and to allow us to release material for clinical trial. We are bringing in automation to be able to release batches in a much faster way.

In addition, we are carrying out a lot of analysis of the protein and RNA profile of the -- during the manufacturing process, but also the final vector products. This generates a lot of data. And for us to be able to analyze that efficiently, we have entered a collaboration with Synthace and Microsoft. And we're taking advantage of AI and machine learning to be able to understand better the manufacturing processes, so that we can modify them to make them more efficient.

In terms of the products Oxford Biomedica has been developing, gene therapy products using lentiviral vectors for a number of years, 3 of these products have been partnered. The first of these - the latest one of these to be partnered, as John mentioned, was AXO-Lenti-PD. This is partnered with Axovant, and this is a product for Parkinson's disease. The lentiviral vector is injected into part of the brain that is missing dopamine, the neurotransmitter that is important in movement in Parkinson's disease. The lentiviral vector genetically modifies those cells to make their own dopamine and thereby enabling the patients to move better. The clinical trial has started, as John mentioned. The cohort 1 data has been announced by Axovant. They're seeing a 29% improvement in the UPDRS Part II OFF Score and a 65% improvement in the PDQ-39 quality of life score. They have now initiated the cohort 2 part of that study.

We've also partnered 2 programs with Sanofi for Stargardt and Usher Type 1B, these are inherited retinal disorders where we are seeking to put back a correct version of a mutated protein in these patients. The idea is to prevent the photoreceptors degenerating in these patients. Sanofi has decided to develop these programs further by partnering and we expect in due course that we may be involved in the CDMO part of that -- of those programs.

In addition, Oxford Biomedica is developing our own products. OXB-302 is a CAR-T therapy, targeting a particular protein called 5T4 that is expressed in cancer cells, both hematological and solid. The higher the expression of the 5T4 protein, the worse the prognosis for these patients. The 5T4 protein marks off of, we believe, cancer stem cells. So this makes a very attractive target. It is not found on normal tissue and where it's found is at very low levels. And we're also developing -- we are completing the preclinical studies for OXB-302 to be able to initiate the clinical trial in the future.

We're also developing ocular products for corneal graft rejection, wet AMD and 2 inherited retinal disorders, LCA10 and RP1. And we're also developing a product for ALS, motor neuron disease.

And so in terms of the products that Oxford Biomedica has developed, as I mentioned, we have developed therapies based on gene-modified cells, ocular diseases and also CNS disorders. These typically require high-quality vector, but -- a reasonable amount of these. In the future, we believe that lentiviral vectors, because of the improvement in capabilities and improvement in the ability to manufacture greater amounts and of higher quality, we'll be able to address diseases where you need larger amounts of vector or where we're trying to modify large organs such as the liver or the lung. And these developments, we believe we can use to enable our partners to develop new products as well enabling Biomedica to develop its own.

I'll hand over to Stuart now.

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Stuart Paynter, Oxford BioMedica plc - CFO, Company Secretary & Director [5]

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Thank you, Kyri. So after hearing the interesting science stuff, you're now going to see the boring numbers stuff. So let me just take you quickly through the half 1 2019 highlights. So -- and I'll give you a bit of a briefing on -- just a reminder on how we're running our business in terms of profitability and cash.

So when you look at the underlying business, the predictability of Oxford Biomedica's revenue streams, we see that the underlying business has grown by 23% from half 1 2018. That's the commercial development and bioprocessing revenues. That's a really, really good performance by the operations team given that we converted 1 of the suites, the Yarnton facility, to a suspension process from an adherent process in the first half of this year. That's what we look at when we look at the underlying business. You'll look -- you'll see the overall revenues decreased by 9% because of the licensing revenues and some of the milestones that came in, in half 1 2018.

So at this point, it's just worth mentioning that the constraining factor for Oxford Biomedica to be able to achieve some of the goals, which Kyri's just laid out in terms of innovation, is cash. And we are running our business based on a self-sufficient cash model. So we are essentially living within our means of cash. This doesn't necessarily play out in the EBITDA line.

So you'll see that we've gone from GBP 11.9 million in H1 2018 to a small loss of GBP 1.4 million in H1 '19. Profitability should not be a constraint for us at the moment in what we're building in an embryonic business. It would be suboptimal to be constrained by cash and profit. So we consider ourselves not to be constrained by EBITDA.

But cash is king. So where do we get our cash from? Well, it's worth mentioning, as John did, the Axovant milestone, which came in, in half 1, that's part of the lumpiness of the business. So that was recognized as revenue in half 1, but was outstanding as a trade receivable at the end of the half year. So that's to be received in the second half of 2019.

The Novo Holdings investment, as well as bringing a fantastic strategic health care investor on board, has enabled us to do 2 things: it's enabled us to keep plowing forward with the OxBox investment; and it's enabled us to pay off the Oaktree debt. And in that way, we're very happy and very proud to be able to clear some of those legacy issues that Oxford Biomedica was carrying from a time when we weren't as strong. And now we consider our balance sheet to be a fairly vanilla-type balance sheet. The warrants are gone, the loan has gone. So now we start on a much firmer financial footing, as John was mentioning.

We generated -- we still generated cash from the operations, you see GBP 1.3 million there. It wasn't as high as the previous year. But again, the key for us is building this business out to be as optimal as it can be in the marketplace we see ourselves in. And we are market leaders in the lentiviral vector space, and these investments are key for us to maintain and fortify that position.

And then lastly, you'll see that a huge capital investment of GBP 14.9 million on OxBox. That's, I think, by far, the biggest amount of money we've spent in a half year. That basically is the skin of -- the skin and construct of the building itself. As John mentioned, it's been run in a very collaborative and organized way between ourselves and WHP, our contractors. And we think we're going to have that ready to hand -- key handover at the end of this year for validation with EMA and MHRA and FDA towards the end of Q2 2020. So that's a lot of work we're taking on essentially in terms of managing that business and building.

So if we take to Slide 16. Really, we're highlighting here the predictable revenue streams -- in the top half, the revenue. So the blue is what we consider to be the predictable revenue streams. You'll see there are 2 sort of macro level factors at play here. Firstly, you'll see that the business is slightly seasonal because of clean downs and other things. And we tend to have a higher second half than a first half, which we are confident we can achieve again this year. And secondly, you'll see the growth in that blue bar from H1 2018 to H1 2019 at 23% growth in the underlying business.

The purple stuff are licenses, milestones, incentives, grants, they come along when they come along. And we'll make sure we execute to achieve as many of the milestones as we can. And we'll make sure that we -- our BD team sign as many deals as they can in order that we keep our purple momentum going, but it's not something that is reliable. Hence, it's not a static or growing profit story. At this point, we're not in a position to leverage the profitability of this company quite yet.

And you'll see that sort of illustrated in the bottom half of Page 16, where you'll see the big spike of H1 2018, which was the Axovant licensing fee. And apart from that, we consider ourselves to be running around breakeven, cash positive -- or cash self-sufficient should I say, in order to position ourselves in the way we need to for the future business.

So on Slide 17, we look at the segmental analysis. And we segment our business basically in 2 ways, platform and product. Platform is anything to do with our partners' programs, including licenses and milestones coming in. And product is anything we generate from our own genomes in our own envelope, so where we own the product IP essentially.

And you can see that from H1 2018 to H1 2019 on the platform segment, even though the underlying business has grown, there were milestones that came in, in 2018, the first half of 2018, which have not been replicated, but we have -- still have plenty of milestones to go for. So even that is fairly lumpy in its nature.

On the product side, again, we're profitable because of the Axovant milestone. There are many more Axovant milestones to shoot for, and we're working very hard in collaboration with Axovant to be able to achieve those. So it's -- we are not a CDMO. We are much more than a CDMO with our own product-generation business, which you can see is adding value. And to do that, we really have to make those investments, which will see us future-proofed and see us be able to take out our place as market leaders in the lentiviral vector space.

And with that, I'll hand back to John.

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [6]

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Thank you, Stuart. Newsflow breaks into 2 parts here: platform and partner; and product. I'll start with platform and partner into '19 first. We expect further contracts to come through into the business, both with new partners and expansion of current partners' contracts as well. Kymriah is increasing -- sales have -- increasing the therapies (inaudible) I should say, and we also see more [therapies] coming on to service there, so expect royalties to keep increasing.

In the second half of this year, we expect to see the second of Novartis' CAR-T program moving to the clinic as well.

And by the end of this year, also the build on OxBox will be complete.

So into '20 after that, again gain further contracts around the manufacturing side of things with the royalties, of course, and this long-term interest in partners' products. Completion of the validation of OxBox, we can make batches and start to commercialize with those. And also then on to Orchard, a big step for them, the BLA is filed for ADA-SCID during 2020. And in the next 12 months, we should have commercially -- sorry, clinically prepared materials for trials for hemophilia A and B with Sanofi.

Onto the product side, we expect in '19 to see the data from cohort 2, the 3-month data coming through in Q4 this year. And spin out or licensing deals around assets we're working on within the pipeline currently, but we also want to progress 2 of our own candidates forward to be into the clinic in 18 to 24 months' time.

So on to the final slide. It's clear that in the past, we've always had a better second half year than the first half year, the constraints we've talked about before, the cleaning, the translation of the suites and whatever. We expect the same to happen again this year.

We are in multiple discussions around our platform deals and feasibility, too. And we have a good vision on what we can do in the future by the feasibility we're working on. Now to remind you, these can take anywhere between 6 months and 2 years. We can never tie them down closer than that, but they tend to be quicker than 2 years in general. When we do one, we tend to get the deal after that. There's only 1 example I can think of that we didn't get the deal after we'd had successful feasibility. So expect further deals in '19 ahead in '20.

We're also thinking very hard and talking to a lot of the partners potentially about our own assets, spinning them out to other partners to take those forward structures, the likes of Axovant deal. But also working hard as well to bring things through our own portfolio and move into what I'll call 2 into Phase I/II, as I said, in the coming 2 years.

CapEx, the second half of the year will remain high without question to finish off OxBox and some work on Windrush Innovation Center there. And a higher rate than the second half of '18 without question, but at least we'll finish OxBox by the end of 2019.

Also expect to see higher operating expenses as we move towards this headcount number of 600. That does increase the cost without question. It's what we need to carry out the business we're currently doing.

I think -- in summary, I think the business -- as a group here, we are so excited about the future. We can see dynamic growth and strong growth in the cell and gene therapy sector. We are very confident now that we can deliver our shareholders significant shareholder value. Thank you.

So any questions in the room, please? Amy?

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Questions and Answers

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [1]

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It was announced early in September that Medicare has agreed to grant national coverage now for CAR-T therapies. Do you think that's meaningful? Is that going to make a needle-moving impact on demand for therapies and, therefore, on the pull for lentiviral vector? What's your view?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [2]

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Well, I mean, it has to help. We've had good reimbursement levels in that country. Then, obviously, it's going to help first of all sales and reimbursement. And therefore, the pull-through should be stronger. There are other limitations in the market, of course, but we see that a very good example of how to go forward.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [3]

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Is it likely to change the planning in terms of the quantum of offtake that Novartis needs from you guys? Or is that all set in stone for the next 12 months?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [4]

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Being very blunt, for '19, we're on capacity anyway. So for '20, yes, it can do. We're still discussing it at this point in time.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [5]

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Then I noticed that the release mentions that batch revenues for Novartis and Orchard were down slightly year-over-year. So can you just help us understand what the driver of the 23% increase overall was? Is that batch offtake for Sanofi already? Or what was the main driver?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [6]

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There are other batches we are making, of course, notably for our partner with OXB -- with AXO-Lenti-PD now, but the main driver was the commercial development piece. So the commercial development line is our process development people being charged out at very nice charge-out rates to our partners and doing work on preclinical assets essentially. So it was the Bioverativ, CF, and to a very small part, Santen, that drove the increase there.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [7]

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Okay. And then so putting those 2 answers together, thinking about the next 12 months, should we expect that this further ramp up on those parts of the -- sort of the demand that's driving your 23% in addition to further step up in the demand from Novartis? Just in terms of just thinking about where you're constrained this year, where do you start hitting a constraint again with respect to what you're investing in for the moment?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [8]

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Well, Novartis -- we don't really get constrained in commercial development by Novartis at the moment. They're very much focused on Kymriah. So Kymriah's potential constraint would be capacity. But in the U.S. now, they're licensed for the suspension process, which has 10x more efficiency than the old cell factory process. So -- and it was necessary for them to do that to satisfy the demand in the U.S. So there are many that -- we estimate fewer batches to satisfy a large demand for a larger royalty stream in the U.S. with Novartis. It's almost a question for Novartis as to how they're going to play the Medicare game. But we're confident that with a new facility online, we can satisfy any demand from our current partners.

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Amy Lucinda Walker, Peel Hunt LLP, Research Division - Analyst [9]

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Okay. One more before I hand over to somebody else. Just on the Bioverativ deal. I think there was a 5 million upfront, but up to 100 million of milestones. And if I've understood the results today correctly, by far the biggest part of the milestone payment was actually the Axovant milestone that came in. So that 100 million is still waiting in the wings. I know you can't be discrete about what's happening when, but on a 12- to 18-month view, would that be a realistic time frame for maybe 1 of those milestones to start coming through?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [10]

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Yes, yes.

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Catherine Isted, Oxford BioMedica plc - Head of Corporate Development & IR [11]

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So can I just say, can you please state your name and where you come from as well just for the people on the line? And also, we will go to the phones after we've asked questions in the room.

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [12]

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Who you work for rather than where you were born.

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Catherine Isted, Oxford BioMedica plc - Head of Corporate Development & IR [13]

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Obviously. So Julie, I think.

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Julie Simmonds, Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare [14]

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Julie Simmonds, Panmure Gordon. Firstly, just slightly leading on from the question on the sort of commercial development contract, how is that going to affect margins? Because, clearly, you've got the milestone payment from Axovant in the first half, but also the bioprocessing facility not functioning. So what happens to the margins in the second half and going forwards?

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Stuart Paynter, Oxford BioMedica plc - CFO, Company Secretary & Director [15]

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Well, margins can only really be looked at in disaggregated revenues. So we always say that the margins we make on bioprocessing is, second quarter, between 25% and 50% depending on the product and the contract essentially. We make very good margins on commercial development. So the commercial development margins typically are third quarter, between 50% and 75% depending on the -- again, the work that we're doing. So there's a mix element going on between those 2 predictable lines. The more commercial development we do, theoretically, the higher the margin gets pushed up. So yes, it doesn't -- it's not a hindrance. But yes, I mean, the other thing to mention is as we -- a good example being Novartis there. As we move our existing customers and bring on new customers into the latest innovations, so the suspension process, process B as we call it, and then there's some other things that Kyri and the team are working on for the next-generation of vector production, that means that for less of our capacity, we can generate more patient doses. And it's the royalty per batch, essentially, or royalty per capacity goes up. So we can become a lot more efficient in terms of the overall margins as we move forward and some of these things hit commerciality.

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Julie Simmonds, Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare [16]

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So margins in the second half should look better than margins in the first half?

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Stuart Paynter, Oxford BioMedica plc - CFO, Company Secretary & Director [17]

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I would say. I would say they would. Yes.

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Julie Simmonds, Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare [18]

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Okay. And just, secondly, continuing on Novartis, clearly, the last contract you signed with them was 2017 to 2020, where have you got to in terms of renegotiations because I'm guessing that must be in progress now?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [19]

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At this point in time, probably all we can say. But we are very confident about the deal.

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Catherine Isted, Oxford BioMedica plc - Head of Corporate Development & IR [20]

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Stefan?

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

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Stefan Hamill from Numis Securities. Born in Glasgow. Two questions. So you mentioned that you're constrained on commercial batch manufacturing. And then it looks like the 23% growth has been particularly driven by process development work. There's been a big step-up on head count. Are you constrained at all in process development? It does sound like there's a lot going on there.

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [22]

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Hence having the Windrush Innovation Center coming on board with new labs as well. So a lot of the work we're doing is actually in process development alongside the manufacturing, the bioprocessing. So we are expanding to make sure we can keep up with all of the needs of our current customers, plus those we are talking to currently as well.

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

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So there's no constraint in terms of taking on work there but it might take a bit longer. Is that the situation?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [24]

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Well, it's had to do is with that move we've made in the last 6 to 8 months.

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Kyriacos Mitrophanous, Oxford BioMedica plc - Chief Scientific Officer [25]

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And from a human point of view, because space isn't the only constraint. It's actually the people to do the work. We -- this is part of the increase that John was talking about. Firstly, we've got the increase on bringing people into OxBox towards the end of the year to actually start producing the validation batches, getting trained up. But secondly, we are -- we continue to hire in the commercial development space.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [26]

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And then the Santen deal is very interesting, I guess, signed almost immediately after the Novo deal, where the balance sheet was much, much stronger. Looks like the structuring is different. It almost seems like a product-type economics with seemingly a very low upfront. So are we starting to see you guys sort of optimize for NPV rather than the need to raise cash?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [27]

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I think you have to look at that far more closely. I think the Santen deal does reflect a different approach. We've actually gone for co-development and co-marketing, potentially rights in the future in Europe and the U.S., which is something we haven't done before. But also, we've looked at taking a lower upfront for having a better return as we go through this deal. Because the need -- the desperate need for cash we had has now passed.

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Stuart Paynter, Oxford BioMedica plc - CFO, Company Secretary & Director [28]

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It's the optionality that's critical because depending on who your customer is and their needs, if you're with a small startup and they've got a great scientific idea, they're not going to want to give you a big upfront. They're going to want to point you to share the bet. And if you -- so our scientists believe in that, we can do that now. We've got the flexibility to be able to do that. If a big pharma guy comes to you, typically they want -- don't want you really sharing in too much downstream benefit. They've got the money to pay you upfront. So it just enables us to work with both and to really adapt to customer needs, which is sort of critical in getting some of these deals across the line.

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

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Just to sort of follow on. I guess the cost of capital when you're looking at the NPV on such deals is a lot higher than the potential cost of capital of a new debt facility. So there seems to be -- the balance sheet still isn't hugely strong, but would you just consider using cheaper debt to facilitate higher NPV deals from now on?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [30]

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Not something we're thinking about currently, I have to say.

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [31]

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Okay. So is it a clear statement then?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [32]

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If you're going to give us a tax-free loan, Stefan...

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Stefan John Hamill, Numis Securities Limited, Research Division - Director of Equity Research [33]

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Yes. The government might...

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [34]

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No. I mean, it's true that as a business because we do have revenue streams, royalty streams and assets, we can take on some debt. I think that it's something that bears thinking about in the future. For the time being, I think we're just going to enjoy being debt free. But if there was a fantastic deal to be done that needed fast funding that we wouldn't -- we certainly wouldn't rule it out. Again, our balance sheet could be better optimized, I agree with you. But for the time being, it's take a breath after being encumbered by an all-encompassing debt for the last 3, 4 years, an expensive one. And then take a breath and then we'll move forward with balance sheet restructuring as we listen to the next year.

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Stuart Paynter, Oxford BioMedica plc - CFO, Company Secretary & Director [35]

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And importantly, I think it's in line with what our major shareholders like at this point in time. So I think that's quite important, too.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [36]

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Charles Weston from RBC. And if we're sharing personal data, Sagittarius. Question for Kyri, please. We've gone from process A to process B. You're talking about -- you've got TRiP. You're talking about the Microsoft deal to sort of do further analytics on that. Thinking about a sort of 3- to 5-year time frame, how low can you go? How cheap can you make this -- for this process that will then enable larger indications to be sort of commercially viable for health care systems?

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Kyriacos Mitrophanous, Oxford BioMedica plc - Chief Scientific Officer [37]

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So going from process A to process B, we saw a tenfold increase in productivity. For our process C, we're targeting above a further tenfold improvement in productivity. So the cost of a dose will go down considerably. But as you're able to manufacture more vector more cheaply, you can then begin to address conditions such as the liver or the lung and then the cost to those because you're needing so much of vector is climbing up. So we will continue to innovate beyond that even if for the current therapies, the cost might be quite cheap. For other bigger conditions, we still need to bring the costs further down.

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Charles Robert Weston, RBC Capital Markets, LLC, Research Division - Analyst [38]

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So you say there's a lot more to play for after process C. And specifically on the Microsoft deal, what sort of insights are you hoping to gain from that?

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Kyriacos Mitrophanous, Oxford BioMedica plc - Chief Scientific Officer [39]

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So if we look at the vector particles that we're generating, there are thousands of different proteins in there. The cell lines themselves have, obviously, lots of different proteins, lots of different RNA molecules. Some of those, for example, increase titer, you need more of them. And some of them are detrimental: you want to get rid of them in terms of purity and also increase yield. There are things -- these are the kind of things that we can identify and then engineer to remove.

Other aspects include understanding how the manufacturing process happens, what is the optimal timings for certain things, the medias, the (inaudible), supplements and what should we be adding more of and adding less of. And those things are being -- I expect to come out of this kind of analysis.

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Sean Conroy, Edison Investment Research Limited - Analyst [40]

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Sean Conroy, Edison. Just have a couple of questions around Axovant. Are you expecting any more development milestones this year, particularly with the data you're expecting from the second cohort in SUNRISE-PD?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [41]

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Couldn't get into that level of detail. What I can tell you is when we signed the deal, we said within 24 months, we'd see another $55 million, and we've just had $15 million. So that's probably as much as I can say.

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Sean Conroy, Edison Investment Research Limited - Analyst [42]

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And then sort of I suppose second question is, with them agreeing a new CDMO with Yposkesi for their AAV-based gene therapies initially, how do you see the manufacturing partnership evolving as, hopefully, AXO-Lenti-PD reaches the market?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [43]

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We'd like to think we'd be taking it all the way through to commercialization. So that's what we would expect at this point in time.

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Brian Templeton White, Cantor Fitzgerald Europe, Research Division - Research Analyst [44]

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Brian White from Cantor Fitzgerald. A couple of questions on the proprietary pipeline. I was thinking about the commentary you made on prioritization. And I guess, the -- I was wondering whether or not that prioritization is based on the likelihood of clinical success or commentary from perhaps some partnering discussions you've had already? And then as a second part to that, how far would you be prepared to take proprietary products to development?

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [45]

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A very good question. As far as what we sought to be the right for us to take forward, there are a whole range of criteria. We look at scientific risk, obviously; path to market; number of trials needed; cost to market; sales; competition we think will be around at that point in time; pricing. All of those will come into play what we want to take forward ourselves. And all of that, we're currently working on. I couldn't give you the exact answer today.

What I would say is doing the Phase I/II is the first step. And if we had great data -- let's say, for example, we had AXO-Lenti-PD is our drug, there's great Phase I/II data. Are you signing if you had a drug, which is going to go to market, potentially based on a Phase II trial? You don't know that unmet medical need. It might get there.

If you could do that, would you then push forward? Well, obviously, I talk to shareholders, talk to the Board, the Board would recommend what we try and do, talk to key shareholders and think about the best way forward at that point in time. I'd never rule out going further, but I wouldn't commit to it either, if that makes sense.

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Catherine Isted, Oxford BioMedica plc - Head of Corporate Development & IR [46]

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Any more questions from the room? No? If not, let's go to the phones. We can always come back to the room at the end.

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Operator [47]

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(Operator Instructions) Your first question comes from the line of Joe Pantginis from H.C. Wainwright.

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Joseph Pantginis, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [48]

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Most of my questions have been answered. So thanks for that. I wanted to take forward all the discussion about capacity. You really addressed a lot of the underlying questions that are there and you're taking forward what I would call your established track record in being able to deliver capacity when needed. So I'll go off of your comment, John, when you said you currently have the ability to address all of your partners' needs. So I'll translate that also into saying that you have the ability to address the commercial needs for Orchard following their filing next year.

So what I'll do right now then is with your upcoming capacity with Windrush and OxBox, what kind of discussions do you have with potential partners at this point to say this is the capacity, we can address your needs now or we need to do XYZ? I guess, it's more of the forward-looking type of question, how you portray your current and expected capacity to future partners.

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [49]

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In most cases of doing deals, we find we would do 6 to 9 months of work on post development before we start going to our GMP suites. So by the very nature of having OxBox with us and up and running by the middle of '20, we'll have that capacity by the time we need it for new partners we sign as of now.

For current partners, we have the ability to meet their needs until such time as OxBox onlines -- is online. So I think we are covered with currents; and new ones, the way the process normally works, we'd be in time with our new capacity to suit those as needed.

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Operator [50]

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(Operator Instructions) There are no further audio questions. Please continue.

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Catherine Isted, Oxford BioMedica plc - Head of Corporate Development & IR [51]

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Is there any final questions from the room? No.

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John Dawson, Oxford BioMedica plc - CEO & Executive Director [52]

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Thank you all very much. Great to see you all. Thank you.