Abcam PLC (ABCM) 2021 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Abcam Interim Results Conference Call for the 12 months ended June 30, 2021. (Operator Instructions) I must inform you that this call is being recorded. I would now like to hand over to James Staveley, Vice President of Investor Relations at Abcam. James, please go ahead.

Thank you, Nadia. Good afternoon and good morning, everyone, and welcome to Abcam's interim results call for the 6- and 12-month period ended June 30, 2021. On the call today are Alan Hirzel, our Chief Executive Officer; and Michael Baldock, Chief Financial Officer. If you've not received a copy of our earnings press release or slide presentation, you may find copies of them on the Investors section of our website at corporate.abcam.com/investors. Please note, this call is being webcast and will also be made available on our investor website.

Before we begin, I would like to turn to Slide 2 and remind everyone of the safe harbor statements that we have outlined in our press release issued earlier today and also those in our regulatory filings. Statements or comments made on this call will include forward-looking statements, which may include but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in our regulatory filings. Any forward-looking statements made today represent our views as of today, and you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During the call, non-IFRS adjusted financial measures are used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable IFRS measures are available in the company's press release. And now I'd like to turn the call over to Alan. Alan?

Thank you, James. Good morning and good afternoon, everyone. Thanks for joining our update. The primary objective of this session is to provide an interim update on the most recent trading period and share our progress toward our 2024 strategic, operating and financial goals. And whilst we'll say a lot today, I think quite simply, there's 2 major inflections affecting and impacting Abcam today that are worth exploring. The first is, as we transition in our strategy, we're about 2 years in the investment phase of strategy. We've been installing a lot of things -- transition to driving more of the results from that. We're going to talk a little bit about that today. And then the other major transition and inflection point we're going through is seeing the back of COVID and the transition we're in the middle there.

So on Page 3, if we could just turn to that, I'm going to spend about 15 minutes on the performance headlines and business review. Michael will cover the financials, and we'll make sure we offer plenty of time for questions and discussion.

Page 4. We're really pleased with the progress of the 12 months of 2021 through the end of June. And whilst we're in the middle of changing our financial reporting, hopefully, it's clear in terms of comparables, we had a really strong second half revenue that accelerated in terms of top line growth, with the gradual return of the research workforce plus a significant market outperformance and share gains through our own products.

And you can see this outcome in the chart. Our own revenue grew at 48% top line for the last 6 months and 37% overall at the CER level for the year. Big part of our strategy has been to invest in our own products and we're certainly pleased with that progress.

Our teams and customers continue to work together through difficult aspects of COVID, some of which persist today, including the impact of social distancing on lab productivity, health and shortages in supply, and of course, the emotional toll of the ongoing situation. And I certainly admire the perseverance of all -- everyone who's been involved, both the customer side and Abcam employees and particularly impressed by the dedication our team has shown to our customers, and that certainly shows up in things like our transactional Net Promoter Score, where we're tracking -- continue to track and improve there up to 58% last -- this past year, up 2 points.

Strategically, we're achieving a lot of the milestones that we set out in 2019 in order to drive a durable long-term growth story for Abcam. But as I said, importantly, we're transitioning from this phase of installing capabilities and putting a lot of capital to work to refining and improving what we've installed to realize benefits. And whilst we're not quite done with all the installation, we're certainly starting to see the end of the major milestones and that transition happening over the next year.

Two of the bigger things that we achieved in this past year, although not all of them, first was the U.S. listing on NASDAQ. That was important for our -- for this thing as we look to the U.S. for more financial and investor support and that was very successful. And also the announcement we recently made on the acquisition of BioVision. But there's a lot of change going on, and as I will talk to in a moment, I'm going to highlight some of these other areas shortly.

Overall, I remain confident in the dynamics of our market. They're very attractive. A lot of interest in life sciences but also investment in funding life science research. We have, at Abcam, some -- the benefit of some extraordinary positions within our core markets in antibodies and related products. And we have, through our cash generation, the ability to invest wisely back into growth. And we're starting to see the benefits of that already to create a sustainable and durable story for investors and everyone involved.

Slide 5, please. I just want to talk for a moment a bit about how we're seeing lab activity and its impact on Abcam. The chart in front of you here is showing our catalog revenues by quarters since the very early days of the business through the end of June 2021. And you can see that the COVID impact is definitely there, and also that we've seen some recovery. Now that recovery now looks like a V shape. When we were in the middle of it, we weren't quite sure where it was going but certainly feel like we're emerging from the significant impact of COVID.

That said, what we know from our own research and experience is that we're still operating with some constraints on academic lab activity levels. We've seen most of the significant negative impact behind us for now, but in markets like Japan or in Continental Europe, where there have been either gradual releases of the vaccination program or cycles of more social distancing constraints, that's had an impact on lab productivity activity in those regions, and they're still not quite back to full levels from our perspective.

So the biopharma market really, those end-use markets doing very well. Certainly, some of the research institutes that are focused on COVID are doing very well, but we're -- we just wanted to make sure everyone understood that well. Whilst we're probably not going to be talking about COVID, hopefully much more, and our revenues and performance of the business certainly gotten back to the levels we'd expect, we're still operating in an environment where there's a gradual return to activity.

Turning now to the kind of overall business on Page 6. Beyond the areas that I've discussed, I think it's important for everyone to understand there is a considerable amount of change going on across the company. And we are still doing a lot of business building, but I wanted to give you some updates on where we are in terms of our implementation and the strategy and the business performance.

Page 7. At the start, I mentioned we're starting to make this transition of what we're doing in the company. I think the most important transition that I'm looking at right now is when we started out -- when I started the year, I started talking about Abcam's mission, that we're here to help researchers achieve their research missions faster than they might otherwise. I'm absolutely confident that the feedback we're getting from the market supports that we're doing a great job there. And you can see it in journal citations. You can see it in the strength of our antibody portfolio.

What interests me the most in terms of how the company is transitioning is we're just starting to get glimpses of the idea that we can influence and be the most influential company in life sciences for researchers worldwide and really starting to see that happen in the partnerships that we're forming and the kind of ability to connect early discovery researchers with translational medicine activities and platforms into clinical players, and to be able to make our products make those transitions across those different phases and across different organizations is allowing us to have an impact on the speed and pace of research making a difference in society.

And that's really exciting. We can start to operationalize and build a business around our vision and move from the more kind of narrow definition of Abcam as a product retailer to one where we're able to influence and bring these connections to have a bigger impact through partnerships, so I think that's very exciting.

Page 8. Just wanted to make a few comments about what we've been up to. So in 2019, we announced the ambition to invest in this company to drive significant improvements in a number of areas. That's involved a lot of installation. And we could have very easily had the cover page of this material be work in progress, under construction. And I'll talk a few minutes about facilities, but there's -- it's not just facilities. We have been reengineering and redesigning almost every aspect of Abcam over the last couple of years. And we're now -- with some of the things that we've installed like live online chat or some of the algorithms that go behind that, we're refining and improving, and we're on version 2 or 3 of some of the things we installed in the last couple of years.

And all of this and all of our attention is driving on outcomes, where we're really trying to make sure that, as I was just saying a moment ago, working with Abcam gets better social -- society health impact outcomes faster than working with anyone else. And where we've seen this work is in its best form, Abcam has been involved in providing and designing antibodies and assays that can be used in diagnostics, and that's getting to clinic within a cycle time of 4 years or less. We know that's best in class, and we're really proud of some of that activity and the work that we've been doing with researchers and diagnostic platforms in those areas.

In other areas where in terms of what do we see where that's not happening all perfectly in the marketplace, those cycle times can be 10 years or more because people have used the wrong products or technologies or didn't have rights over IP. And in this particular picture here, you're seeing an example where patients are going to have a better life because of the research and work that was done on Barrett's disease and esophageal cancers, and having the right antibodies that go with that diagnostic technique now is going to provide that kind of improved care for patients. And that's the kind of thing that motivates us and gets us excited is bringing those reagents to those kind of clinical applications more quickly.

Page 9. Just a few comments on where we are in terms of our 6 goals that we outlined in 2019. We feel we've made progress on all of these areas and achieved the in-year milestones that we have set out for ourselves as well as we feel confident that we're on track with our multiyear plans, both operationally in terms of the things we're trying to get done but also financially with the performance in the business. And Michael is going to talk a little bit later just about some of the revenue mix and breadth impacts of what we're doing.

But in all of these areas, whether it's extending our leadership in research antibodies or some of the investments that we're making in proteins and cell lines and conjugations in our product mix, making sure that's appealing to a broader customer segment in terms of biopharma and the way that I've just been talking about and then the investments we're making in digital. And the facilities, in order to realize those benefits at scale -- all of these things are incredibly helpful. And to be able to do that whilst we're also tucking in acquisitions like Expedeon and hopefully now, BioVision, in the next few months, very important, comprehensive, complex change going on underneath these results, which we feel very good about.

Page 10. Let me just share some of the data on what we're seeing in terms of our extension of leadership in research antibodies. We continue to gain share in the global antibody research citations. That's now up another 2 points versus the prior year. And that CiteAb database is based on 300,000 citations as of 2020 -- sorry, through 2020 as of July 2021. And that's fueled by our in-house product development, which the rate of that was up 50% year-on-year, with a combination of a lot of novel antibodies and products with some line extensions into different formats like different buffers, different conjugations. And whilst that number is going to bounce up and down, we're very excited about the productivity and level of new product development. And our recombinant antibody portfolio now has over 26,000 products that are made by Abcam that which we control the full supply chain and value for.

We've made a lot of progress on our quality initiatives. I think that continues to be very satisfying and we've got record product satisfaction rates in the company. And that kind of quality is making it possible then for us to shape and influence the work that we're doing on proteomic discovery platforms and in companion diagnostics or complementary diagnostics partners.

Page 11. As I said, we're expanding into new product adjacencies. A lot of activity here. Our revenue in what we would call non-primary antibody areas or all these other areas is up over 5x what it was in [2020 for] and the year-on-year constant currency growth was 37% for this portfolio of other products other than primary antibodies, our core. And whilst we're doing that, we are completing the integration of conjugation chemistries at Expedeon. We've got our first customers now testing BrickBio's technology. Marker Gene has been a helpful addition as well in terms of our chemistry capabilities.

We've developed and launched our first portfolios of bioactive proteins and we're very excited about the uptake of those. A lot of biopharma customers looking for that product portfolio. We've got our first group of in-house developed engineered cell lines. We've made further progress with scaling up the mid-plex high-throughput detection with multiplexed detection of FirePlex. And we're expanding our operational capacity with loads of new facilities and capabilities. So it's been a super busy time in terms of product adjacencies.

On Page 12, just the footprint activity that's going on. We have opened or expanded new facilities in Waltham, Massachusetts; Hangzhou, China; in Shanghai; in Netherlands; and in Fremont, California all in this period, and that would be an incredible agenda of doing that without COVID. It certainly was a challenge the team rose to in getting it done in those areas. And we have a couple more that we're working on right now, 1 expansion in Eugene, which we hope to be moving into in the next month or so and a relocation of our capabilities in Southeast Asia into Singapore during this year. So super busy period across our global footprint.

Page 13. None of this would have happened without the extraordinary commitment and dedication of our team. We continue to try and build our capabilities through hiring the right talent, retaining the right talent, building the right culture for the organization, and we're pleased to be recognized as the #3 employer in the U.K. by Glassdoor. We think we got pretty good engagement and feedback from our team throughout COVID, making sure that we're communicating well, continuing to make promotions, continue to make salary adjustments. Hired over 500 people in the COVID period, really strong building of talent, culture and capabilities.

And then we've also started to make progress on our diversity and inclusion agenda, where we've launched employee resource groups across a number of areas and hired our first Head of Diversity and Inclusion and so on. So it's a pretty full agenda, and we're pleased to have been recognized again this year for being a great place to work and some of the other activities that we're involved in worldwide.

Page 14. We know from a lot of quality feedback from our shareholders that growing a responsible and sustainable business is important. We've continued to build on the commitments we made in these areas throughout the year. And this is the first time I think we're starting to disclose some of the measures that we are watching in this area. And in all of them, we made improvements, with the exception of days lost to health and safety, where this year, we had a couple of incidents that we would have liked to avoid. They were minor but we're looking to improve our reporting of near misses in order to keep that number down.

But across the board in the rest of the areas, a real strong improvement. We will be disclosing our carbon intensity and waste landfill data for 2021 later this year when that analysis is done. But our expectation is that, that will also be directionally improved. So you can see, as I said, a lot going on in the business. I'd like to make sure we have time for Michael to cover his area. So Michael, I'm going to turn it over to you, and then I'm happy to come back later with questions if there are any for me. Michael?

Great. Thank you, Alan, and good morning, good afternoon, everyone. Thank you for joining us. It's amazing. I was listening to Alan and sometimes, you get sucked into a company and you've got your head down, and you forget how much stuff is actually going on here until you listen to it. And when you think about it, it's still not 2 years in to when we launched this 5-year growth plan. And it was shortly after that, that I joined. And this is a particularly exciting period for me to talk through some of our results because we are actually starting to see the translation of the investment and the time and effort that our teams are putting into, we're starting to see those results in our financial results.

And so it's exciting for me to take you through those right now as well as some of the things that -- some of the major important facts that you may not have picked up.

The RNS has a lot of information in it, both on the 6 months and the 12 months ended June 2021. I'm going to focus mostly on the last 6 months for obvious reasons. You all know we've changed our financial year to calendar year. And so as of December 31, we will report on a full calendar year for 2021. So I'm going to talk about the first 6 months of this year. For the U.K., we will report on an 18-month year ended December 2021.

So if you will flip to Page 16, I'd like to take you through the financial highlights for the last 6 months. First, we're really happy with the performance of the business in the last half. And while the market in academic research is still not fully recovered, we've seen an acceleration in growth as our customer activity continues to recover.

Before I walk through the growth rates, it's helpful in context to remember that the 6 months to which we're comparing, that is the 6 months ended June 2020, contains the 3 most -- the 3 months most affected by COVID. The last 6 months saw sales increase 29% at constant currency rates and 23% at reported rates after a 6% foreign exchange headwind due to the strength in sterling. If exchange rates remain the same, our reported growth will see a similar FX headwind in the current half.

Revenues were also impacted by a 3% headwind from products that we delisted during the year as part of our quality initiative, and many of you have heard us talk about this before. While we will continue to pare back our current portfolio of third-party products, we don't expect this magnitude -- this order of magnitude in the future, and we do not expect the impact to be nearly as significant going forward.

Importantly, revenue growth is being driven by demand for our in-house products, with sales of these products increasing over 40% at constant currency rates, representing 58% of total sales, up from 53% for the 6 months last year. This trend in higher volumes helped improve our gross margin by 250 basis points to 71.4%, and we hope and think this trend will continue. Our adjusted operating margin for the period was about -- up about 4% in the half to just over 13%. And we'd expect this continued margin progression from here as we pass the peak of the investment rate for the 2019 to 2024 growth strategy.

We continue to generate a significant amount of cash, and that cash generation, together with the placing in the year meant that we ended the year with a net cash position of around GBP 220 million.

Finally, and very exciting, post the period end, we announced the acquisition of BioVision, as Alan mentioned, for $340 million. There's approximately GBP 250 million which we'll fund using our cash and our revolving credit facility.

If you turn to Page 17, I'd like to talk a little bit about our revenue profile, how it's diversifying and strengthening. First, our focus on in-house innovation has driven the growth of sales from those products to now well over half of our total sales. This trend has accelerated over the last couple of years during the pandemic. We work with a great many suppliers who manufacture very good third-party products, but the overall trend of growth in sales of our in-house products is expected to continue.

We don't target a particular level of own product sales and it's unlikely will ever manufacture everything on our own, but we see the trend in own products sales continuing and enthusiastically pushing those forward. You can also see the diversification by product type and geography, with 60% of sales now originating from higher-growth product categories and 25% of sales from China and Asia Pacific, excluding Japan.

If you turn to Page 18, as you know, our strategy has been to invest in the capabilities and capacity of the organization to support sustained, scalable growth. I'll provide some further color on where that investment has been deployed in the next couple of slides. But first, let's look at some of the results that are really exciting us. You see the positive impact in both our revenue growth and, more importantly, the growth in our revenue from our own products. This in-house innovation is setting us up to pursue several major opportunities for growth in excess of 20% per year.

From a product perspective, and Alan discussed this a bit, almost 2/3 of our portfolio comprising recombinant antibodies, immunoassays and non-antibody products are growing in excess of 20% a year. From a geographic perspective, China continues to represent a major growth opportunity for the group. Today, it contributes around 18% of sales, up from about 5% in 2014, having delivered 20% annual growth over the last 5 years. And although CP&L has been more volatile, we continue to remain very optimistic about its long-term potential, particularly around in-vitro diagnostics and royalty and licensing opportunities.

If you'll turn to Page 19, I'd like to talk a little more about our global team. And as Alan mentioned, we couldn't do anything without the amazing team we put together over the last couple of years. As you know, a major component of our investor growth plan is people. Approximately 70% of our costs are employee-related, including share-based payments. The team has grown by around 500 people or almost 50% since we initiated the 2024 strategy, around 100 of these coming from acquisition. The highest areas of growth have been in R&D, including scientists for new product areas, category marketeers, sales and BD teams, supply chain and manufacturing, including logistics teams and automation engineers, digital teams working on digital infrastructure for the new ERP as well as front-end transformation and data engineers. With the exception of the Supply Chain Management Group and R&D, we expect this growth in employees to slow over the next period, and with that, a leveling off of growth in investment and an acceleration of our operating leverage over the upcoming period.

If you turn to Page 20, we can talk a little bit about how we're positioned to prioritize our investment in the near term to maximize returns. In addition to our investment in people, we've also invested a significant amount of capital expenditure in the organization across both tangible and intangible assets to support our long-term growth. This includes investments in our global digital and physical infrastructure as well as in capitalized product development and R&D.

As you can see on the chart on the left, the split of CapEx into the business since the launch of the strategy has been pretty equally split across R&D and capitalized product development, our global footprint supply chain enhancements and our digital transformation. We've made a significant amount of progress over the last 12 months on our footprint, as Alan discussed earlier. The next 6 months will see another active period of capital investment as we complete some of the remaining work on building out our R&D capacity and digital systems, after which point we expect CapEx to also start to reduce from the recent elevated levels. We expect long-term CapEx revenue rate to be in the mid- to high single digits.

I'm pleased to say that we've now commenced the global rollout of the final supply chain and manufacturing modules of the ERP system, and the initial deployments have gone according to plan. I'm excited by the opportunities for the operational efficiencies and improvements that these systems are going to open up to the business when fully deployed. As these systems are turned on, we amortize the cost of development through the P&L, and as a result, we expect our depreciation and amortization to be around GBP 17 million to GBP 18 million in the current 6-month period, so around GBP 32 million to GBP 33 million for the 12 months to December 2021. Also note, this is a figure for adjusted D&A so it's before the amortization of acquired intangibles.

If you turn to Page 21, we can talk about a question you've been asking me basically since I've joined and I'm excited to talk about -- BioVision. As you know, it's another of our strategic priorities, supplementing our organic growth with acquisitions. We were delighted to announce the acquisition of BioVision in August. As Alan mentioned, they've been a supplier of ours for a long time. We know their products really well. They're very high quality, have one of our lowest complaint rates.

BioVision is a developer and global distributor of life science tools and reagents with a focus on biochemical and cell-based assays, one of the areas of the product development strategy we laid out in 2019. BioVision has been our largest supplier for over a decade. They generated around $34 million of revenue in calendar 2020, of which 25% was sold to Abcam. They also had about $5 million of COVID-related sales, which we don't expect to recur, and about $12.6 million in operating profit for 2020.

The deal process is moving ahead as planned, and we now expect to be able to close the transaction sometime in October. Until it does close, we'll have very limited access to the company and won't be in a position to give you any further guidance on what we expect from the acquisition. We'll likely give you more guidance when we release full year results in March. We can tell you that BioVision products we sell are continuing to perform at their past levels.

I'm also pleased to say that the integration of Expedeon is now fully complete, and as Alan mentioned earlier, is performing in line with our plans. And finally, as you might expect, we will continue to actively seek out attractive portfolios of high-quality reagents to support our strategic ambitions.

If you turn to Page 22, we'll talk a little bit about outlook and guidance. I wanted to briefly cover the guidance that we set out earlier in our earnings statement. As you can see, based on our own customer data, global lab activity continues to recover but it's still continuing. We've seen good mid-teens constant currency growth in the first couple of months of this half, but recall that at current exchange rates, there will be a headwind of around 6% of those rates that reported -- at a reported level.

From a cost perspective, as I mentioned earlier, depreciation and amortization charges will step up again in the current period as we deploy the final stages of the ERP and open sites. As this has happened, we've seen a step-up in depreciation of about GBP 3 million per half. So I think it's safe to assume that you'll continue to see a similar step-up in each half of next year, at which point depreciation should level out.

Excluding D&A costs, we expect underlying costs will grow at mid- to high single-digit rate over the first half. Recall -- which recall, were just over GBP 72 million. As we move through the remainder of this year and hopefully have a few more normalized months of trading, we'll aim to provide further detail on the outlook for 2022 when we report next spring.

If you turn to Page 23. The last 6 months has been a really exciting period and a particularly busy 1 for us as we continue to execute on our long-term strategy. We have an incredible team in place and they're doing amazing things for science, and I'm energized by what I see happening around me in this business every day. As you know, we completed our NASDAQ listing in the U.S. in October last year, and I've seen the number of ADRs traded in the U.S. market double since that time. We're really pleased by the reception we've had there, by the additional research coverage that we're now getting in the U.S., by a new core group of life science investors and by enhanced liquidity in our shares. These are all really helpful as we continue our focus in the U.S. market, our U.S. reporting and our preparation for compliance to the Sarbanes-Oxley reporting requirements there.

From a financial perspective, I'm pleased to say that we're growing in every product category and region. And as we pull out of this pandemic, we're confident that the investments we're making are helping us build a stronger, more sustainable global business that will deliver long-term durable and profitable revenue growth. We are committed to and confident in our goal of generating GBP 425 million to GBP 500 million of revenue by 2024, and as I've stated earlier, expect our rates of investment through 2024 to decline from here and margins to begin to improve. That being said, as always, we continue to retain our appetite to invest in long-term growth opportunities.

And with that, I'd like to thank you and ask the operator to open it up for questions.

(Operator Instructions)

And your first question comes from the line of Puneet Souda from SVB Leerink.

Maybe first for Alan or Michael. Just in terms of -- I know look, you're emerging out of COVID. You have a number of tailwinds here, obviously BioVision contributing inorganically at first -- for the first year, though. I appreciate that overall the comments that Alan is making in terms of installing and now that's turning into outcomes and the growth there and the investments you have made. And it seems to me that the growth that you should expect in this business should be meaningfully higher going forward from the sort of the mid-teens that you are expecting in these next few months here. So maybe just on that, what can you provide us? Are you at least comfortable with the fiscal '22 consensus numbers? What can you provide us in terms of the sort of the growth profile here going into the next year? And I appreciate you're provided for and confirmed that for the 2024 numbers.

Puneet, thank you. So there's a lot in there. Are we comfortable with -- let's talk about 2021 for right now. And if you look at the growth rates that we have delivered and what we're talking after the business -- the rest of 2021, I think we're fairly comfortable. I think that we are seeing continued really good growth rate. And assuming that COVID continues to work its way out of the system and the academic market will continue to return to full growth, we're comfortable with mid-double-digit growth in the business.

From a BioVision perspective, it is a similar product line to what we have now. As you know, it's additive. We carry their products now. It's our highest-growing third-party product. And in addition to picking up the revenues that aren't coming to us, we're getting significantly enhanced gross margins from the 25% of revenue that they were selling -- sales they were making to us. So I think we're very comfortable with the direction the business is going, and we're very comfortable right now that barring unforeseen circumstances, that we will reach our goal of GBP 425 million to GBP 500 million of revenue by the end of 2024. The shape of that, it's still tough for us to predict the shape of it but we're comfortable that it's going to get there.

Got it. And then on -- just on growth in operating margins. Obviously, BioVision really helps here in terms of margin profile overall. But just it looks like the investments are near completion, and as you pointed out, CapEx is declining as well. So overall, just looking at the next year or so, margin profile, it appears, should improve across both core and operating margins. So anything you can provide that early sort of glimpse into that? I think that continues to be an important question. Obviously, I appreciate that you are still investing into growth and fully recognize that, but just want to get a sense on the -- especially on the operating profile improvements.

Sure. So what I'd say is we're -- the rate of investment is declining. We're not decreasing our investment. We're decreasing the rate of investment. And I think it's important, particularly in the people side. If you recall, I said about 70% of our costs are people. And our hiring rate is -- the rate of hiring is declining significantly, so you will start to see real operating leverage come out of that.

And also remember that depreciation, which I think the market probably underappreciated the level of depreciation coming from our investment, particularly in our ERP system. And I gave you a pretty clear steer on what that depreciation is going to be through 2022. So if you actually start looking at the leveling out of operating margins through the current period we're in, including the depreciation numbers I've given you, I think it will give you a fairly clear steer on what 2021 is going to look like.

And then I think you can make certain assumptions on a continued growth in gross margin, which we're seeing as well as a recovery of operating margins through next year. And we will certainly come back to you, as we said, in the spring when we report and try and give more guidance if we're comfortable doing that. But you'll see the operating costs level out, and that's going to have a significant leverage -- leveraging effect on our operating margins.

Okay, great. Last one, if I could squeeze in for Alan. Overall, proteomics is growing, and that's obviously a core focus for you, with antibodies and the capabilities that you have been building, conjugation and other chemistries. Obviously, last week, one of your peers had outlined their strategy and looking at in terms of acquisitions and potentially deploying more capital in tuck-ins. Obviously, you have done that with BioVision.

So just trying to get a sense of how competitive is the market in these types of tuck-ins and opportunities where you find the right gross and operating margin profile. Just give us a sense of what you're seeing out there. And again, along the lines of proteomics, any further thoughts there in terms of expansion into some of those high-growth consumable areas in proteomics.

Yes. Puneet, I think you're right. There's absolutely a lot of interest and demand and excitement around proteomic platforms and how they might develop and antibodies and proteins will be a big part of that story. I think Abcam brings a couple of advantages to that market which are helping us. The first is we're not trying to compete with those organizations with our own platforms. And having us as a kind of neutral provider makes it a lot more authentic to say that we're going to be a partner with these kinds of organizations.

The second thing is the quality and breadth that we're able to bring in terms of innovation and products. I think that we've got very strong feedback from many of these organizations that the panels that we're providing are very high quality. And actually, their challenge to us is how can we innovate more faster because the content need on these platforms is very high. And that's an important question that we're wrestling with. But we're very excited about the opportunity and our ability to provide excellent content and -- as a great partner.

And your next question comes from the line of Matt Larew from William Blair.

Wanted to ask a bit about customer behavior here. Obviously, we're seeing number of sort of spike of COVID activity. And in your slide, you referenced a few labs, despite the gradual improvement of lab activity, a few labs being shut down. Just curious if your customers, if you're sensing that they've gotten better managing this lack of consistency, the social distancing dynamic? And then just internally, your teams potentially going into the winter here, where there may be more COVID activity, I guess how you're thinking about customer behavior and the way you're going to handle that internally.

Thanks, Matt. That's -- it's a good question and I'm not sure I have all the answers. But what I can tell you we're seeing is it's not easy. I mean, no matter how good people have gotten at dealing with COVID, there's still setbacks that happen to us and to our customers. In any given day, you might get a ping that says you've been in touch with somebody who's tested positive, what they're calling pingdemic in the U.K. It has taken whole labs out of action as they comply with those responses. Or small things like people running out of pipette sets or out of plastic -- other plasticware and consumables like caps, has caused issues across the entire supply chain from customers all the way back to suppliers.

So that's part of the reason for a little bit of caution here just about where we are in the transition that I think you're right, people learn to cope and operate around it. But I think what you saw on Page 22 of Michael's slide there of almost a little more than 30% of labs saying they're not fully operational, they're trying to reflect, "Hey, we're not -- this isn't quite normal yet."

Okay. And then just on the funding side, just curious in terms of from granting agencies, again, if your customers are seeing them act sensibly in terms of potentially handling any grant expirations -- a project that might be delayed because of COVID? And then second piece would just be if you're still sensing or seeing COVID have a positive impact on the funding environment for your academic customers long term.

We were more worried about these grant-funding transitions and whether there'd be extensions or not about 6 months ago. In practice, it's not -- it seems to have worked its way out. The funders and researchers have, on the whole, found a way to sensible adjustments. So it's not that as big an impact as we might have feared 6 months ago but certainly something we're keeping an eye on.

The general funding environment, I think, is very positive. There's a whole generation of people who have now become armchair immunologists and interested in antibodies and other things. I think the political will has also followed to show very strong investment. So that's great, and I think that's a super environment to be in. As many of you heard me talk about before, a surge in funding doesn't necessarily mean a surge in activity because lab research needs a combination of money [and people] to do. And we may see that this funding, if it's sustained, builds a larger generation of future scientists -- in the very long term, I think it's great for the outlook of the markets. And in the short term, it's good to have some liquidity.

But excess funding will tend -- if it can't be spent on doing research, it will get spent on capital goods and facilities and larger trials and other things that aren't directly related to the consumption of reagents.

And your next question comes from the line of Stefan Hamill from Numis Securities.

Just 1 for me. I was struck by Slide 18 where you've talked about the 5 sort of 20%-plus growth engines in the business and the fact that, that includes the CP&L for Abcam Inside. And then there's some new KPLs that you've released for us on Slide 14. We've seen the number of antibodies validated in diagnostics nearly doubling to over 800. You've mentioned the lead times and I'm struggling where this business is in its evolution, given the sort of IVD growth in H1, which is quite muted and it should have had an easy comp. But just where is this business in its evolution? Is it ready to sort of start accelerating?

Well, thanks, Stefan. So first off, it's not a business as much as it is 3 lines of revenue that we've packaged together. The royalties and licenses and the Diagnostics IVD business revenue performance in this period was very strong and it was not particularly hampered by COVID at all. I mean, on the margin it was. The custom products and licensing where we're doing custom projects, that part of the revenue where you needed to have access to customers and collaborate with them on design, a lot of that was put on hold in for [the year].

So it's -- I'd love to see all 3 cylinders of that operating and not have to keep explaining why 1 of them is lagging, but I'm afraid that was the situation again for this period. Now to get to your bigger question, where are we? The fact that we're getting more and more antibodies validated for use on the platforms or in DX is incredibly important to broaden the number of options or what the Americans might call shots on goal. That's going to be valuable for the future no matter what. The rate and pace of that driving revenue is still hard to predict. But the fact is that, that portfolio is broadly keeping up with the revenue of the whole business. And if they can do that, fine. And if there's some breakouts from that in the future, great, that's all we ever asked for.

And your next question comes from the line of Charles Weston from RBC.

Congrats on the results. First of all, can I just follow up on Stefan's question there?

Charles, could you speak up just a bit, please?

Sorry, can you hear me now?

Yes, perfect.

Great. So the first question, just following up on Stefan's question, please, specifically on the number of products that you've mentioned going from sort of mid-400 to mid-800s. Historically, you've been talking about roughly 150 projects a year and not be seeking to scale that up, particularly given where you wanted to position and price the sort of the service and the royalty stream. So what changed there? And is this now a new normal of growth rates?

Thanks, Charles. Helpful to be able to clarify. So what we've learned in the last couple of years is that the quality of the products that we're putting into the catalog online is of the appropriate quality and of the right targets and the right configurations to make it possible to move what we're building for research into these platforms. And it comes back to the point I was making, right, at the start of my section.

What's really different about Abcam today is the products we're introducing to -- under our own brand and our in-house innovation have the capability of connecting discovery research and clinical and social impact not only better than what we expected but much better than anything the company could have done in the past. In fact, we couldn't have done in the past and in the early days of the company.

So a lot of what you see in terms of these antibodies validated for use on third-party platforms and diagnostics is not a custom project. It's -- we figured out the right antibody to make and the right configuration to the right target and offered the right conjugation or buffers. And we have the right partnerships in place to make the transition of what we offer to researchers into those more complex translation or diagnostic applications happen faster. And that, I'm really excited about.

Okay. So each of those still have a potential to drive and generate royalties in the future? Just to...

That's correct.

Yes, okay. And then second question, you've talked about July and August being mid-teens. What were the 2 comparable months like? Your comparable half as a whole in the sort of second calendar half was somewhat weak because of COVID, but I'm sure it moves around quite a lot during the period. So is that mid-teens essentially a guide for September to December as well?

Well, I think that, that's kind of what we're seeing, yes. So -- but we've still got -- that's what we've seen in the last couple of months. I think given what we've seen in COVID since it started, I'm loath to predict what we may see in any month in front of us right now as long as we're continuing to see the sort of the stop and go and the lower capacity in some of the labs. But that's what we're seeing right now.

Okay. My last question relates to the previous margin ambition that you talked about in 2024 of 30%. That is notable by its absence. You've clearly given some very helpful nearer-term guidance on operating costs, which is great. But is that target explicitly dropped now? And is it still achievable perhaps at the mid to upper end of the GBP 450 million to GBP 500 million revenue range that you're guiding to?

Yes, so don't read anything by its absence. We've been very consistent, I think, with the market in that achieving -- we're comfortable with achieving that revenue growth by the end of 2024. And this business, at those revenue levels, given the leveling off of operating costs is certainly capable of achieving 30%-plus margins.

That is, in absence, Charles, as we said before, of other things we may want to invest in to grow, but we'll make that decision over time, and that will be something that will be very clear to the market. So at the upper end of the range, we're very comfortable with that. And then it just depends on -- comfortable with the margin guidance. And it kind of depends on where we end up in the range. But we're very comfortable with the margins now starting to recover and get operating leverage as our operating costs level out.

And your next question comes from the line of Tejas Savant from Morgan Stanley.

This is Edmund on for Tejas. Just 2 quick ones for me. I think I've heard a few companies call out the COVID headwinds in Japan. I was wondering if you could elaborate a little bit more on what's going on there and what your expectations are coming out of that. And then the second part would be, you commented on an abnormally high delisting rate during the period. Could you elaborate on the dynamics there a little bit more?

Sure. Edmund, I'll take both of those. Japan has, I think, talked publicly about their approach and policies to COVID management. I think that led to the recent resignation of their prime minister. It's not been an easy environment for people to operate in, and they've gone through cycles of kind of relaxation and now more stringent control without the extensive vaccination program that we've enjoyed in the U.S. and in the U.K.

So if some of you were on the call with me a year ago, I said one of the critical factors that we'll be looking for is high vaccination rates and kids getting back in school, some of those things, to get the fundamentals back. Japan's not met all those conditions yet. And politically, socially, there's quite a lot of disruption and the laboratories are not immune to that environment. So Japan continues to be tricky.

And their funding is not easy to predict in the best of times without COVID, so with -- they have the ability to divert funding from budgets. It looked like they might be committed to R&D into other areas at short notice, and that's also a concern in that market is house care funding is given the additional pressures of the government budgeting process. So both of those things are conspiring to make that a difficult market. That said, we still grew there and we continue to see opportunities in Japan. It's just tricky. Remind me again your second question? I didn't write it down. Shame on me.

Sure, no problem. It was in regards to the delist in the period.

Yes. So we had 2 large suppliers who didn't comply with our standards for supply. We worked with them, tried to get them up to date. One of them was using [SiD] methods for making monoclonal antibodies, and we have no tolerance for that approach. Yes, there was simply not doing appropriate levels of quality control. And so for both of them, we delisted those suppliers and that was kind of material. They were some of our largest suppliers but important to our drive towards quality and consistency in managing an ethical and sustainable business. So they were kind of nonnegotiables.

We had contingencies and ways of backfilling and dealing with the customer demand on those. And so we made that happen during 2020. Michael, I don't know if you want to say anything more about the financial -- how to think about the financial impact other than what you already said, but those are one-off events and we're moving on.

Yes. I mean, it was -- I think it was pretty clear. I think we said about 3%. It was about GBP 6 million worth of revenue that we delisted in the 12 months. And so it was large order of magnitude, but we thought it was important for the business going forward. But I think it also -- it also points to the strength of our own products and the rest of the business, if you look at the growth rate, take that into consideration.

On the revenue line, we had a 6% foreign exchange headwind and a 3% delisting headwind. So as that worked its way through the system, I think it bodes well for the future. And we cleaned up our product portfolio a lot.

And your next question comes from the line of Michael Ryskin from Bank of America.

I have 2 quick ones, hopefully. First, I want to ask a follow-up, it was something that was touched on earlier was the -- the comps from prior July and August. You mentioned the mid-teen CER growth, but if you sort of look at, obviously, there's been a lot of volatility even month-to-month. So mid-teens sounds great but if you compare it to, for example, 29% CER in the period just ended, it's obviously a step down. So I just want to make sure we have a clear graph of the comps. From my notes, I think I have you at sort of mid-single digits prior July, August. Is that about right, sort of implying a 10% 2-year stack?

Yes, that's about right.

Okay, all right. Appreciate the clarity. And then a follow-up question real quick on China. Something you touched on throughout the call is obviously a growth driver, something we've seen play out over the last couple of years and in the period again. But if you sort of look at China and where it sits now, and I think the graphic on Slide 17 is very handy, high teens, maybe 17%, 18% of total company sales now compares to maybe 5% 5 or 6 years ago. How much further could this grow? I think you -- at this point, you're on par with a lot of the peers in the space. So as the base gets bigger, do you anticipate that the growth in China could moderate a little bit?

And sort of as an addendum to that, we've seen a lot of reports recently in China on an increased emphasis on made-in-China products, domestic companies, domestic sourcing. Obviously not so easy to do as you go across the portfolio, but is that anything that you've seen impact the business recently? Or do you have any concerns about that going forward?

Great. Well, thank you. China, the kind of fundamentals of China would suggest that funding intent and capability is there to drive higher growth for us or for them in terms of science activity and for us in terms of business. Their ambition, as they've stated in their 5-year -- latest 5-year report is to continue to invest -- well, invest more in R&D and get more benefits from that investment into better care for their society.

So I think the fundamentals are there for sustained growth. And it wouldn't surprise me that if in our lifetimes, China is rivaling the scale of the U.S. in terms of demand. I don't know -- I don't think that's going to happen overnight but it's a very attractive market. For us, we have a real commitment to doing things in China and innovating in China for that market. And we have digital teams innovating there. We have product development teams innovating. We have manufacturing there. We have marketing distribution. We do -- we're entering partnerships like those that I highlighted in the presentation earlier in China to get our products into diagnostic applications.

So it certainly would make the case that Abcam is doing a lot for China, and we're making a lot in China and there's a lot of opportunity there. It's not always easy to manage. And I appreciate there's some risk there for us, but we're very excited about the opportunities there.

Thank you. That concludes today's question-and-answer session. I would now like to turn the call back to Alan Hirzel for any closing remarks.

Well, as ever, it's a pleasure to have all of you on and to have such good questions about our business. We're very excited about the transition we're making through our strategy and COVID, and we look forward to talking to you again in the spring. Thank you.

Great. Thank you, all.

That does conclude our conference for today. Thank you for participating. Ladies and gentlemen, you may now disconnect.