Abcam PLC (ABCM) 2018 Q2 法說會逐字稿

Welcome, everyone, and good morning. I'm Alan Hirzel, Chief Executive of Abcam. And I'm joined today by Gavin Wood and our new Head of Investor Relations, James Staveley, who's here in the front.

Hopefully, you're here because you know we're reporting our interim results for the 6 months ended December 2017. And like many of our presentations, what I say today is covered by the safe harbor agreement.

Our agenda today is, as previously, I'm going to say a few words of introduction about our performance in the first half. Gavin will then give further detail on the financial movements underlying that performance. And then I'm going to spend a bit more time perhaps than I have recently just talking about some of the operational updates in each of the 5 goal areas that we have for the business. And as always, we'll leave time at the end for questions -- your questions and our responses.

Our performance in the first half of the financial year -- fiscal year '18, I think, represents a continuation of the kind of sustainable profitable growth story that we have long been building at Abcam. And the above-market growth rates are indicative of our ability to continue to gain market share around the world in what are very attractive markets. There's rarely, I think, been a time in my experience so far at Abcam where we've had more positive news about funding environments and really the excitement around life sciences and biology. And this revenue growth and share gain in the context of those markets is giving us a chance to translate that into high growth of our earnings per share and dividends.

And I would -- we see and we continue to see many opportunities to continue to grow this business, both in deepening our relationships with customers wanting the best antibodies for research but also broadening the portfolio of the products that we have beyond that original core. Now these opportunities we see and the performance we make in the business also give us confidence that we can invest in this business, and we certainly are doing that to improve our capabilities globally and to sustain the growth beyond these 6-month periods that we talk about.

And whilst not everything has gone our way and there are areas where I think we could be doing more and like to do more faster, I certainly feel confident about the outlook for the year. And you'll have seen from the statement this morning that we've upgraded our outlook for the year from 10% to 11% growth at the top line.

So I want to thank all of our customers globally who've made that possible and certainly all of our team. And without them, of course, none of this would be happening.

I always talk about customers at the end -- at the beginning of our presentations. I won't change that this time. It's our -- everything we do in this business is organized towards the audacious vision, if you like, about becoming the most influential life sciences company in the marketplace.

The kind of feedback that you see here from Japan is indicative of hundreds of pieces of feedback we get every month from our customers around the world where they're telling us what matters is that we get them the products they need quickly that work every time. And if we get it wrong -- when we get it wrong, as we sometimes do, it's generally the opposite of that. We haven't moved fast enough. We haven't met their expectations for speed and performance. And it's those areas where we continue to look for improvement in our business. Thankfully, I think the recent recognition that you see appear from CiteAb and from our customers globally suggests that we're on a journey of making improvements in those areas and the business is strengthening from a customer perspective.

And you start to see those -- the evidence of how that translates then into financial performance in the highlights of the first half year. Now because we did a trading update in January, there's not a lot of new news here. I think there's an additional decimal point on the growth numbers. We went -- 11.2% is the full year impact of the total revenue growth and the Catalogue growth at 11.5% constant currency. As I said earlier, if you look at where we were guiding for the year, it was 10% overall, and we're now looking at 11%. That includes both the benefits of about 0.5 percentage point from the Roche acquisition that we made and also just the -- what we're seeing in the business in the underlying growth opportunities in the company.

We're not upgrading the KPIs at all, and those numbers haven't changed since the January update. And I look forward to updating you all at the full year in September as to how we've performed on those for the year, but we're not changing our outlook for those.

I'm now going to hand you over to Gavin, who's going to take you through more depth on the financial details, and I'll be back in a few minutes.

Thank you, Alan, and good morning, everybody. Apologize slightly first. I got a little cold this morning, so if I'm a bit gravelly, I apologize in advance.

As Alan said, the headline for the half is that we've continued to see strong financial performance across all our key financial KPIs. Constant-currency revenue growth on the Catalogue was around 11.5%, and total revenue grew 11.2%. As we've seen, sterling's recovered some of the ground it lost following Brexit, and our reported growth is a little lower than constant currency at 10% and 9.8%, respectively.

I'm pleased to report that growth of our revenues continues that multiyear pattern of growing ahead of the market growth rates in all the countries in which we operate. And as Alan's just alluded to, following the good first half performance and the licensing with Spring Bioscience, we are upping our guidance of full year constant-currency growth to 11%.

Reported gross margin for the year is in line with last year around about 69.8%, and our adjusted EBITDA margin increased by a little shy of 20% to GBP 42.7 million, representing EBITDA margin of 38%. Our EPS increased by 21% to 15.55p, and we're announcing an increase to our interim dividend to 3.42p per share.

You can see here how sterling has moved against the U.S. dollar in particular, and this resulted in a modest headwind in revenue the first half. And total revenues for the first half of the year as a result were GBP 112.5 million, and Catalogue revenue on reported basis was up 10% at GBP 105.2 million.

So look forward into the second half, sterling has strengthened further against the U.S. dollar and other currencies. And at current FX rates, we expect that the headwind of reported revenue will be about 3% from our constant-currency guidance of 11%. So that's 3% revenue headwind against our reported. We continued our hedging program, and that will continue to help offset the net impact of FX on our bottom line.

The change we made in how we disclose our revenue by product here reflects the continued evolution of the business and our increased focus on key growth drivers of recombinant antibodies and immunoassays. I said we hope to be clear as possible in our reporting, and we set these at a constant-currency basis to better represent underlying business. We've included in the appendix to this presentation posted on our website the sales split out by previous product categories to a comparison with the prior years and to assist you in your modeling.

Turning to the slide. We're now breaking down our Catalogue revenues between primary and secondary antibodies and other products. Our total primary and secondary antibodies revenue line grew by 9.6%. This product line includes around about GBP 59 million core primary antibodies, which grew a little ahead of market at 4.9% CER. The other major product set included in this slide and the key growth driver for the company are our range of recombinant antibodies, which grew to over 22%.

Moving on to other Catalogue product revenue. This area includes all of our kits and assays, proteins, peptides and lysates. It's all for research use. This is a diverse portfolio, and it grew at 20% in the first half. A significant component of this range is our expanding suite of immunoassays, which grew over 23%.

Finally, turning to the Custom products & licensing revenues. This grew in line with expectations at a little under 8% and include a significant proportion of the revenues from our Abcam Inside projects.

Continued to exceed underlying market growth rates across all the regions in which we operate. Our biggest market remains America, which grew at a little over 8%, and that's about twice what we think the market is growing at. Europe's growth increased from 6.4% in the prior year to 9.7% this year, reflecting a broad recovery in the life science funding in this region.

You'll note that China continues to perform very well with growth rates in the year to over 24%. Again, we believe it is approximately twice market rate. Japan grew in high single digits in the first half, but we are seeing increasing volatility in this country and the funding environment remains challenging. And I'm pleased to report the rest of Asia-Pacific continues to deliver as we build out our direct presence in Singapore, Australia and New Zealand.

We remain absolutely committed to investing in Abcam to ensure it has the right people, processes and infrastructure to support our long-term growth of the company. We continue to expand the number of and the capabilities of our people to support our growing business. We've hired experience leaders mandated to invest in up-skill their teams to prepare for the next stage of our growth.

For example, we've now completed hiring the global manufacturing supply team -- leadership team. And we continue to invest in research and development, with an increase in the Branford AxioMx group, who are focused on innovative and recombinant antibody technologies. We're also making 2 major investments in our global ERP program and in the Cambridge head office.

Turning to transformation of our systems and processes. Long-term growth we continue to deliver places increasing demands on our legacy IT systems and business processes. As a result, we selected Oracle Fusion Cloud as our global ERP program, and the business is already benefiting from those modules, including human resources which have gone live.

Continue to focus our efforts on system testing, data, training and organizational readiness. Remain committed to a smooth deployment and quality implementation of the remaining modules. Today, more than 95% of those modules are technically complete. However, the warehousing module, which allows us to pick, pack, dispatch has taken longer to finish than we anticipated. And as a result, the full global rollout of the program will not happen this financial year. We remain fully committed to Oracle Fusion Cloud, and we're working hard to adjust to challenges around the WMS module as well as assessing the impact on the timings. I will give an update on that in due course. For modeling purposes, in the first half of the year, we incurred capitalized costs associated with this program of GBP 8 million and operating cost of GBP 3.8 million.

Construction of the Cambridge Biomedical Campus and our headquarters there is proceeding to plan. We're on track to complete the building in the last quarter of this calendar year, and we're actively planning how to move into the building without disrupting either our customers or our people. Build and fit-out costs are broadly in line with those previously guided. And during the first half, we capitalized GBP 3.2 million of costs associated with this building.

This slide works from our adjusted EBITDA of -- in the first half of 2017 of GBP 35.9 million to the first half of 2018 where we ended at GBP 42.7 million. Last year, you'll recall the upside impact to sterling's declining as a currency following the Brexit vote and was largely offset by our currency hedges. As those hedges have rolled off this year, we benefited from a positive GBP 6.2 million EBITDA uplift, around about 300 basis points.

The growth in our business delivered a constant-currency incremental gross profit of GBP 7.7 million. [Company] put this incremental profit to work by reinvesting in our people and operations globally in support of the company's growth drivers.

First, as I mentioned earlier, we invested further in our research and development capabilities, both in the AxioMx team but as well as in our immunoassay capabilities. We've continued to recruit experienced colleagues across the world. And turning to our people, having well trained and motivated team members is essential to our future success.

And we continue to invest in our teams to ensure that they -- we can attract and retain the best talent. We've also increased spending on our global training and development programs. And finally, we continue to invest in scaling up of our operations in support of top line growth.

As we look forward, we remain committed to making the investments that will enable us to capitalize on the growth drivers that we see for our business and to sustain the long-term growth that you've come to expect. As we saw earlier, our adjusted EBITDA margin expanded significantly in the first half of this year to around about 38%. As we look over the next 2 to 3 years, we expect to sustain our current levels of investment, and accordingly, we forecast our EBITDA margins to be around about current levels, 38% to 39%.

And finally, turning to cash. Abcam continues to be highly cash generative. Operating cash flows increased by nearly 10% over the first half of the year, and we continue to invest that cash in our business and our systems and our processes, our people and our headquarters as well as providing sufficient cash to make acquisitions such as the recent licensing agreement we signed with -- in January with Roche.

With that, I'd like to thank you for your time. I look forward to answering any questions you may have later. And I'll hand you back to Alan. Thank you.

Thank you, Gavin. In this update in this section, I just want to provide you with some update on the operational milestones for the year thus far, essentially guided by the goals that we've talked that are multiyear goals. Our global team continues to work on these. Everyone's annual goals are attached to them. And there's no change to those from the last time I spoke to you. I just thought I'd step through each of them and just tell you a little bit about what's going on in the company.

We sustained our antibody leadership primarily by continuing to focus on what's important to customers. And that's as simple as making sure that the products are unique, highly specific, highly repeatable. And we do that through being really clever about using our data to figure out which targets are most important but equally adding value to those, such as in knockout validation. And since we announced the knockout validation, for example, we're up over 1,200 antibodies now that have been validated with that technology. We continue to look for ways to ramping that up even more rapidly. And that's an area of R&D investment that Gavin was talking about earlier.

We have over 850 new recombinant antibodies that we introduced in the first half. And of course, we continue to look at a range of scientific targets and try to predict those more accurately based on the data that we have. So these actions are sustaining our competitive advantage in what's always been a strength for Abcam, and we feel it's really important that we continue to do that.

On the route to expanding our markets, new products without a route to market isn't a successful model, and digital has always been an important part of what we do, making it easy for people to find our products in all the languages that we operate in. We continue to invest in our China website, for example, to make sure that those terms in Mandarin are easy to search and find the right products for all the researchers that are helping us grow in China.

But equally, things that are very hard to see, they happen behind the scenes on digital in terms of how we optimize our keyword universe so that the right products pop up in organic search, how we find the right people to send the right e-mails to and make them very targeted. These are things that are helping drive traffic and conversion in our business that is essential to getting those products out to market.

In terms of expanding our market presence beyond the antibodies, we've talked about immunoassays being important. We introduced 100 new in-house antibody pairs this past year. Those antibody pairs are essential outlets for us then to expand into immunoassays with our own products, but it's also allowing us to sign agreements with organizations or to innovate our own platforms to get those antibodies into more environments.

And 2 examples you see up here are examples of agreements and collaborations that we put in place in the first half, one with TTP Labtech and the other with Molecular Devices. And what we're doing here is getting Abcam antibody pair content out to as many platforms as possible in addition to our own products like the FirePlex multiplex assays or the new high-throughput assay that we introduced using FirePlex particles or, indeed, even our singleplex ELISAs.

So immunoassays are a really important area. We're not yet done building a product portfolio out there. There's still more work to do, but we're excited about the quality of the products we're making and the feedback that we're getting from customers and the growth that we're seeing.

In terms of Abcam Inside, which is our other area we're expanding beyond the traditional core, I thought it would just be useful to reveal a little bit more about the kinds of progress we're making. Over the last 2 years, we have worked hard to get the right commercial contracts in place with the right biopharmaceutical, biotech and immunodiagnostic companies so that we can be their partner whose -- whenever they need a new project, we're ready to go and we all know the commercial terms that we're going to operate under.

And we now have, over the last 2 years, embedded 20 of those kinds of contracts in -- with our customers, such that when new things come along, new targets come along, we now know how the project will be priced, how our arrangement will be post-project, whether we'll have the rights to sell that as a research reagent and what the stake we might have in their future product revenues would be as their products hit market.

And what you see here are some examples of completed projects. And as you see from the note, there's over 75 of those that were done in the first half of the year. You can imagine a very long list of these kinds of projects at Abcam, where it wouldn't be possible for us to go through all of them. So I'd just thought I'd give you a snapshot.

The top one is interesting. So that's actually an antibody that's now in FDA's approval Phase III. It's in Phase III. It's going to be under consideration for FDA approval. It's actually a CD40 drug. It was made by Epitomics as a custom project before Abcam bought the business. And I put it up here because it's an example of a legacy contract. The value of that work is immense for patients. We're very happy that it's going to market. It's having its impact. But commercially, the value to Abcam is capped under the arrangements with Apexigen, who's our customer for that particular deal.

And in many ways, that project and others like it over the years gave me confidence that it was -- we didn't need to increase the number of projects or indeed even the quality and performance of our technology. We simply needed to find better ways of monetizing it for Abcam.

And everything that follows from that one is under the newer agreements. So for example, on PD-L1, which you've heard me talk about, what I haven't talked about is the fact that there are multiple PD-L1 antibodies that Abcam has made that have 510(k) approvals that are in market.

And for those, we're seeing now, the projects are done. So we saw the revenue from the projects. We have the rights to sell those as a research reagent. So we're seeing some benefit in the Abcam Catalogue revenue line. And we're beginning at the early days of starting to see the benefits of supply agreements and royalties in these custom products and licensing line.

And that one is probably the furthest along because that was some work that we did very early at the start of this program. Everything else below it in the range of oncology, neurobiology, infectious disease, et cetera, much newer projects, where the project revenue is just getting completed, and we're starting to see some of the revenues flow through into research Catalogue. But we're waiting to see what our customers are going to do with their own projects and whether those become a revenue stream for them that we can participate in either through supplying them with product or as a royalty payment.

So in summary, what I'm trying to give you a sense of is, we have had a long period where Abcam and the companies we've acquired have had custom product arrangements -- project arrangements with these kinds of customers. We're now focused much more on those where we've got new commercial contract terms in place to allow us to benefit from long-term economics of those customers' projects, and there are hundreds of them.

And therefore, we're placing a number of very small projects into market, and we're going to see which ones of those pop in terms of their own commercial success. The time lines are slow. If you think about a contract that we put in place 2 years ago, where we had new commercial terms, if the project took a year to complete, we're still only a year then into perhaps seeing some of the revenue into the Catalogue business, and we're probably just starting to see them translate into supply agreements or indeed into market for diagnostic products. And for drugs, it's even longer.

So it's early days. And I just wanted to give you a sense that we've got the right commercial terms. We're doing very interesting projects on high-value targets. And we're going to have to be patient to look for the long-term economics and benefit of those. But so far so good.

Roche is an example of how we've deployed our capital to strengthen our business and do the right partnerships and acquisitions for the work that we did with Roche Diagnostics and Roche in this first half year to bring in the rabbit monoclonals that they had. It's been very important for us.

Just a little bit of history here. Roche bought a business called Spring Biosciences. Spring was an early licensee of the rabbit monoclonal technology from Epitomics. And in a sense, what we've done with Roche is to bring the rabbit monoclonal technology for researchers back into Abcam, where we've got an opportunity now to manufacture those products, add value to them and get them out to more researchers faster. But we've also got an agreement placed now with Roche, where as they develop new companion diagnostics or products using rabbit monoclonals, we'll have first right of refusal for those as a research reagent.

And in terms of transition of this deal from announcement, which we made in January, to operations, those products are now available as of February 21 on Abcam's website, and we are the supplier of those products. And that transition is going very smoothly.

But in a sense, it's -- if I go through our list of kinds of deals that we wanted to do, this has ticked off all of the opportunities: the gold standard reagents, highly accretive, something we can add value to and help research. And that's been very satisfying.

So if I were to summarize, the investment thesis for Abcam, I think, continues to be -- we as a company are operating in an exciting life sciences market where we've got a leadership position in antibodies for researchers where we're the global leader and our position is strengthening as we continue to gain market share in these markets.

We're using that knowhow and those relationships with customers to expand beyond that original core into other attractive and related markets. We're excited about that. And that progress and the opportunities we see in combining our relationships with customers and our technology is giving us confidence to invest in this business for long-term sustained growth. And to the extent we can use that as a platform to add on related products through acquisition, we're definitely looking to do that.

Thank you very much for your time, today. And Gavin and I look forward to answering your questions.

I think we're going to take questions from the room first, and then we'll go to the phones if there are any.

Charles Weston from Berenberg. A couple of questions, please. First of all, on the number of third-party products that you added perhaps on a gross basis or on a net basis, if you could just talk about the -- your focus on that. Obviously, you talked very much about your own products being added. But what's happened to that sort of older-style Abcam model as well? And secondly, could you update us on the multiplexing market and how FirePlex is competing that?

Good. Thanks, Charles. The supply of antibodies that we get is still very important to Abcam. Our antibody business, roughly 55% of our revenue in the first half was from that source of products that we get from partners or our suppliers of those products. And there are many antibodies that Abcam is not able to make nor do we have a desire to make. For example, I think I've talked in the past, there are people who are very good at making chicken polyclonal antibodies. We're going to supply those -- get those in as -- from others. There are many examples like that. There are -- and what we're doing is -- that's different perhaps from the history of the business is to be a lot more precise about the role of the suppliers, what products they make, giving them input and guidance on which targets they want -- might want to make and being more selective about which products and targets to make it for. And we're continuing to increase our quality threshold and what it takes to be an Abcam supplier. And if we add fewer products, which we are, it's because those 3 things, being more targeted, more specific and higher quality threshold, are leading us to better additions to the Catalogue. And we're no longer focused on number of things we have each year but more just the quality and impact. On multiplexing, if I can move to that, science is rapidly moving towards looking at multiple protein targets and pathways in the interaction of genomics and proteomics and epigenetics and a number of other fields through multiplex methods. And for us, it's incredibly important, as we think about our role, is to help researchers study the pathway, everything that happens from transcription to phenotype in the cell that were there, providing those tools in the ways that they want them. And it's an exciting period where there are a lot of different competing technologies for how to provide that multiplex analysis. Our view is that we want to be -- we want to use FirePlex as a way of learning and demonstrating the performance of our antibodies and to use it where it's really successful. That is where people want to go from crude biofluids to results in a quick time. But we appreciate that there are many other platforms out there that have different segmentations in terms of their panel, breadth or their adoption or the sensitivity or speed. And therefore, you see us making agreements with organizations like nanoString, which we talked about at JPMorgan; or TTP Labtech, which I talked about this morning, to make that antibody content available on more multiplex platforms. And we're going to use both avenues. We'll push FirePlex as far as we can on our own, and that's doing really well. But we appreciate there are other platforms out there.

It's Amy Walker from Peel Hunt. I've got 3 questions if I can, please, guys. Firstly, maybe just sort of [always] following on from Charles' question. I think your press release mentions that you're increasing the proportion of in-house manufactured products. Is that having any impact on your growth or EBITDA margins? And if it is, can you quantify the extent of that? The second question is, within your constant exchange-rate growth, can you break out the volume versus the price and mix component in that and how is that different today to what it was, let's say, 2 years ago, please. And then lastly, on Abcam Inside, Alan, I think if I understood you correctly, your pipeline includes a mix of both therapeutic candidates ultimately and companion diagnostics. Can you give us an idea of what the anticipated difference in the lifetime value of those 2 different types of projects would be and what the sort of mix roughly in the pipeline is, please?

Maybe I'll take a crack at it first and then leave the second and third to Alan. So on our gross margin and in-house, the in-house has expanded. We're probably a little bit over half on that now. The margin profile of that is better than the OEM products. This year -- for this half year, you saw that gross margin is roughly flat to where we were previous half. Last year, we expanded about 90 basis points. I think for the balance of this year, we're probably targeting somewhere around about half of that gross margin expansion. And we remain committed to over the sort of 3- to 5-year horizon expanding our gross margins 71%, 72%, that sort of range. That being said, it's not linear. And you tend to see movements in and out of gross margin in a 6-month period. But certainly, as we continue to focus on expanding our in-house manufacturing, then that is accretive to gross margin. Turning to sort of the growth in the price versus mix, the pricing environment hasn't really changed as to an annual price rise in our space of about a couple of percentage points. And that's been the case ever since there were paper catalogs, and there's a lot more that goes into it and -- at a product level, and we've got some fairly complex algorithms. But overall, it's probably worth a couple of percentage points per annum and the rest come from mix. And perhaps Alan, Abcam Inside.

Yes. And let me just add on the gross margin point. I think when I said not everything is going our way, you saw the gross margins didn't increase this period. I do think where we continue to invest in supply chain, automation, systems, we -- that will help us longer-term improve our gross margins. Part of Abcam growing up as a company that didn't manufacture and now making the transition to one where we manufacture half our business is we're in a stage of professionalizing and improving our supply chain. And we will see benefits from that longer term. Right now, we're still making improvements and changes there. Abcam Inside, I think I'll go back to what I said earlier. I'm afraid it's too early to be disclosing too much detail. And part of it's because there just isn't a lot of news to share. We're not disclosing the mix of data that you're looking for. And I think it's also just too early to start to model and forecast out beyond the growth that we're getting from adding new projects and a little bit of trickle of other revenues. When it gets time and we start to see some of that coming through, we'll tell you more about that. But right now, it's a great list of projects with really good technical performance leading to good research reagents and additional contracts with customers with the right setup.

Stefan Hamill from Numis. In the custom products & licensing business, is there a sort of drag there from any royalty expirations in the year? Or is that trued-up trend to underlying rate now, the growth that you're seeing there?

I think last year, there was a significant roll-off which we did call out, Stefan. This year, there is some, but it's not worth breaking out into detail.

It's mostly underlying growth.

Okay. And then in the other products -- in your other products category, I appreciate the immunoassays part of that as a growth driver, but actually the other part was pretty impressive as well. Can you just give us some color on what's going on in that part of the business?

Well, we've had -- we've made the decision to expand the range of the company's portfolio into other products in about 2013, really starting to push into proteins, lysates. Certainly, the acquisition of Ascent got us into the biochemicals range a little bit earlier than that. What you're seeing is the benefits of having added a wider range of products to cross-sell that to our existing customers. There's not that much new product division, innovation there. We've got the portfolio largely that we need. I think the biggest component of that tends to be in kits and assays that don't have antibodies in them, and we've got a wide range there that's gone really successfully. And we're happy to see it. But the reason we call out immunoassays is, I think, that's where we've got unique strength to play. And certainly, the combination of antibody leadership and immunoassays is a sensible one. Connecting that also with proteins and then FirePlex as a platform is helping.

And then just last one on Spring Bio. When we think about product growth, you've obviously provided some guidance for the sort of immediate FY '18/'19. How should we think about the longer-term growth? I guess it's quite different from RabMAbs and your ability to add new products. But it seems to me like you can add new products in the kits area and that you have to take Roche's existing product group in the antibodies area. Is that the way to think about this?

Well, I guess, the way to think about it, it is a another group of RabMAb. Some of then we'd always been selling, but we were selling as a customer at Spring Bio where we didn't have full control over buffers, conjugations of dyes, putting them into other products. So now we have the ability to vary those products and combine them with other products we have -- we might have for research and in as many ways as we like. We -- they're essentially ours to do that with. So I think the way to think about them is, it's roughly 240 products with their own revenue margin profile as defined in how they're being used today. And we will seek to grow and expand our influence in selling more of those and see the benefits from higher gross margin and being a producer of them rather than a buyer of them. And then we will seek to combine them with other features and products to get -- extend them into other applications. But it's mainly to get control over quality, consistency, range, if you like. As I said then, the other part of the transaction of the deal is, as and when Roche develops things, we'll bring those in under those same terms for the research use market. And I think for Roche and for us to be able to talk about their pipeline, our pipeline, what we see as a useful relationship -- collaboration.

It's James Mainwaring from Stifel. Just 2 sort of forward-looking questions. I mean, you also alluded to it in -- when you were talking about your antibody leadership and looking at data analysis. You've talked about using AI to look at some new areas to go into. And you'll sort of get data over that over this year. I was just sort of looking for whether internal -- looks at it have been good so far. And how you're looking at this and whether it's an ongoing tweak process and whether (inaudible) continual development? And then the second one is about your comfort on the China growth rates and what gives you comfort on that medium-term lookout? And how in a broad sense, you plan to capture?

So James' question, for those of you who aren't aware, we're using more and more machine-learning algorithms to complement the decisions we make as a business about what to offer and to whom to offer it. And we've been investing in this area for several years now to the point where the majority of our new product target decisions are defined by the interaction between a human being and a machine-learning algorithm that's using our own data and external data to help us prioritize. So the way to think about these are, it's just another tool to help us get better at using our information to predict and pick the right biological targets and make the right products to them. And one of the advantages of having our scale in this industry is that we can access more data and make more things more quickly. So we think those investments are a good use of our time and money. On China, I think the comforting factors for the outlook on China growth is that they have these 5-year planning cycles and that we're in the 13th 5-year plan now and there won't be a 14th 5-year plan for a couple years yet, where government policy is set towards investment in our research and development and largely set in terms of its attitudes towards life science funding. And we don't see any changes to the funding environment, and the funding environment in China is mostly public funding sources. And then on the ground, what we see is more and more momentum and appetite for investment in life sciences and its applications to improving the health of the public in China. And so it's just a very buoyant market to operate in. Now in terms of market growth, I think as it gets bigger, we're seeing that market growth slow each year. It's -- our sense right now is it's probably in the 10% to 12% range in terms of market growth.

David Adlington, JPMorgan. A couple questions, please. So firstly, you saw decent step-up in European growth, which sounds like it was market-driven. Just any further color you could add there and how sustainable that is. And second one for Gavin, just in terms of depreciation, maybe you could give us some help how you might expect that to evolve the next 2 to 3 years, given your increased capitalization in recent times?

Yes. Sure, (inaudible) the depreciation one. It's probably slightly less interesting than European growth rate. So certainly, if we look at depreciation charge both of FY '18 and FY '19 is likely to be lower than anticipated. A couple of drivers of that. One is, we've actually been thinking carefully about our CapEx spend, and that's a little bit lower than we'd originally guided to the start of the year, both in terms of our run rate but also the major driver, the Enable ERP program does not start depreciating until we go live. And as a result of not going live this financial year, the depreciation in this year will probably be GBP 4 million to GBP 5 million lower than consensus. Looking out into next year, I think the cumulative impact of the CapEx spend, and again, that being slightly lower than where consensus is, we're probably looking at mid-teens depreciation next year. And I think consensus is a little bit higher than that at the moment, though, doubtless, the people are working on their models at the moment. So hopefully, that's helpful, David.

On Europe, I think last couple times we talked about Europe, we said there was some softness in the Southern European markets, but that -- and a little bit of uncertainty in a short period around the U.K. following Brexit. We've seen that strengthen a little bit. So there's a bit more confidence and support in Southern Europe and the U.K. I wouldn't attribute too much of our growth, though, to market dynamics because even when it was down, I wasn't saying it was significant. We've done a little bit better job of managing some of our channels in Europe, and that's helped us. I also think there was a little bit of clearing budgets that seem to show up in the second half of European markets, where it benefited us and we saw some benefits as are competitors reporting as well. Are there any questions on the phone today?

(Operator Instructions) As there appear to be no questions from the telephone lines, I'll hand back to our speakers.

Thank you very much. And unless there are any further questions here in the room, I'll suggest we wrap up today. Thank you all for coming, giving us your full attention. As I said, looking forward to the rest of this financial year and the strength that we saw in the first half continuing. And we'll see you in September.