Oxford Biomedica plc (OXB) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the Oxford BioMedica preliminary results webcast and conference call. [Operator Instructions] I must also advise you the conference is being recorded today. Now I would like to hand the conference over to Catherine Isted, Head of Corporate Development and Investor Relations. Please go ahead, madam.

Good afternoon or good morning. Welcome to Oxford BioMedica's results presentation for the full year ending the 31st of December 2019. We're all living in unprecedented times due to COVID-19, and we want to thank you all for joining us today on what will be a slightly different results day briefing to normal. We hope that everyone is keeping safe and well, and we look forward to a time that we can meet you again in person. On the call today is John Dawson, our CEO; and Stuart Paynter, our CFO. As a reminder, there will be an opportunity at the end of the call to field questions. With that, I'd like to hand over to our CEO, John Dawson, to start the presentation.

Thank you, Catherine. I'd like to welcome you all to this call in these unprecedented times to talk about our prelim results to the year ended 31/12/2019. Moving forward to Slide 2. I'll be making forward-looking statements during the presentation, which cannot be relied upon. On to Slide 3. And before I start talking about Slide 3, I just want to go through some highlights for the year. Partnership agreements, we saw our wonderful Novartis contract extended for a further 5 years, going from 2 to 5 drugs and another drug added in Q1 '20, so now 6 drugs from 2 previously. We signed a deal with Santen around an undisclosed inherited retinal disease. And moving on to talk about OxBox, we completed OxBox manufacturing site, construction-wise, in December. We're now validating and plan to make our first batch there in the first half of the year. We've got a fantastic investment from a great shareholder, Novo Holdings, during the year of GBP 53.5 million. And this allows us to pay back our Oaktree loan facility of GBP 43.6 million in totality. Post period, we'll come to this in some detail later on, we signed a deal with BMS Juno around the CAR-T, TCR-T programs. And also, we joined the consortium in Oxford working on a COVID vaccine, which we'll update you on later on as well. Going to Slide 3 here. This talks about our strategy around the LentiVector platform. And this has 4 main pillars we always talk about. First of all, the IP, patents and know-how, is how we get our long-term [ orders ] from our deals that we do. Expertise is really important to the business and it's why we're so good at what we do. We have now 550 people, but that's been growing very quickly. Back in January '14, I think it was 60; end of '17, about 320; end of '18, about 420. So you can see the growth there, and every one of these people matters in driving our business forward. Facilities. Now we have 5 footprints now in Oxford, totaling 226,000 square feet. All of these facilities are extremely necessary, and they allow us to drive our business forward. And then the fourth pillar, it's so important to the business, it's the quality systems. And this is what differentiates us from our competitors and why people talk to us and we get so many deals into the business. This is key to how we go forward, and it is a real asset within the company. The business then splits into 2 particular parts. First of all, the CDMO side. Here, we are customer-centric, and now we have 19 partners programs, really big things for that. That's more than doubled in the last 12 months, 9 to 19. This give us -- gives us multiple revenue streams, process development fees, incentives, bioprocessing revenues and royalties, and we now have a great list of customers, and we plan to add more to this, by the way. Orchard, Novartis, Bristol Myers Squibb, Santen, Sanofi, Boehringer Ingelheim, the UK Cystic Fibrosis Gene Therapy Consortium and more recently, Oxford University. To the right-hand side, we then come to our gene therapeutics business, which is patient centric. We have 8 proprietary products. And 3 of these, we have out-licensed to other partners, Axovant and Sanofi, in the past. This gives us development funding and upfront milestones and royalties. Also, we do take our own products forward. This is a plan for the future, these wholly owned products. And we have seen from deal records that if we were to take our drugs forward into a Phase I/II, any deal value we did in the future would be a lot higher if we were to have some data behind these drugs. So again, this is a very active thing we're working on at the moment. On to Slide 4. This talks about our CDMO side here, and we are customer-centric, a leading provider of scale-up solutions and commercial supply within this business. So going to the CDMO side of the business, a bit more detail on Novartis. The deal was signed there in December 2019, extending our commercial supply agreement with them by a further 5 years, and the collaboration then was broadened from 2 to 5 programs, [ sort of ] expect that, and another program, a 6th CAR-T, was added in Q1 '20. We were delighted to sign the deal with Juno Therapeutics and BMS there in March '20. This had a [ BioWorld ] value of $227 million for a license and a 5-year critical supply agreement, and this is initially for 4 CAR-T and TCR-T programs. In June '19, we signed a deal with Santen, an R&D collaboration and option and license agreement, and this is for an undisclosed inherited retinal disease. As you're all aware, we've been building for the future, and we were very happy to finish our manufacturing facility by the -- OxBox, by the end of 2019. Validation is ongoing, and this first week will be operational in the first half of this year. And very recently, we joined the consortium led by the Jenner Institute, Oxford University, to rapidly develop, scale up and manufacture potential candidate for COVID-19. And again, I think it's really important to point out, again, we have doubled, more than doubled, our partner programs in the last 12 months from 9 to 19, and the key of how we can do this is OxBox. It will deliver bioprocessing capacity to meet future demand. On to Slide 6. This shows the CDMO pipeline, and I'm really pleased to say it now takes 2 pages to talk about that and we plan to have these extending further in the future. First of all, [ we've got ] Novartis, we have the 6 programs listed up there. Only one I can talk about by name is Kymriah for pediatric leukemia and diffuse large B-cell lymphoma, and this is going extremely well. AXO-Lenti-PD, we'll talk about this later on, again, in Axovant's hands now moving forward. And of course, now 4 drugs, which we can't say what exactly what they are at this point in time, with Bristol Myers Squibb in CAR-Ts and TCR-Ts. On to Slide 7. Orchard Therapeutics, we have 3 drugs with them at the moment, ADA-SCID, MPS-IIIA and one undisclosed. We have our Factor VIII and Factor IX work with hemophilia A and B with Sanofi. We're working with the CFTR gene for cystic fibrosis. Our first work in inhaled lenti there with Boehringer Ingelheim and the UK Cystic Fibrosis Gene Therapy Consortium. And we also have the Santen asset, inherited retinal disease. Bottom one is our working the COVID-19 vaccine with Oxford University and now AstraZeneca as well. On to Slide 8. Here, I'm talking about the Novartis partnership. The first deal we placed there was 2014. Our first commercial supply agreement was signed back in 2017 and we now have a 5-year extension to this, taking us up to 5 programs at that point, with another one coming in Q1 '20. We supply both clinical and commercial vector to them. We have an IP license in place, royalties, as you well know. And the new deal brings us GBP 75 million at least in manufacturing of vectors, including a mid-single-digit reservation fee for one of our GMP suites. This will be supplemented, of course, by undisclosed process development fees. [ Kymriah ] is now launched in 20 countries in at least one of the indications and reimbursed in each of those for at least one of the indications as well. And there are now 130 approved treatment centers. And the estimate of sales for Kymriah by 2025 is $1.2 billion. On to Slide 9. Again, the deal, which we think diversified our customer base significantly back in March is that with Juno and BMS. Here, we receive sales royalties. We're going to work on, at this point in time, 4 CAR-T and TCR-T programs and some nonexclusive license. The deal value here was $227 million, $10 million upfront, $86 million here relating to development and regulatory-related milestones and a further $131 million related to sales milestones. We have a 5-year clinical supply agreement and we'll receive undisclosed process development and batch revenues. On Slide 10, we move across now to gene therapeutics and the patient-centric approach to doing this, leveraging our expertise to deliver lentiviral vector-based gene therapies. With Slide 11, updating on the year and the post period highlights. Axovant, very active in the year. They reported 3-month data from the first cohort of AXO-Lenti-PD and progressed to the second cohort. And treatment to the first patient, this triggered a $15 million milestone for Oxford Biomedica. In January '20, they released the 12-month data from the first cohort, having demonstrated a continued favorable safety profile and a 37% improvement in motor function based upon the UPDRS Part III OFF Score. This was compared to the score at 6 months of 29%. So a good uplift there. For the rest of the year, we expect to see 6-month data from the first and second cohort as well as the sham-controlled part of the portion of the study being commenced before the year-end. On to our proprietary in-house product development. Here we have completely reviewed our in-house pipeline, worked out where we best spend our investment. The lead asset now for the company is OXB-302, targeting hematological tumors with a CAR-T 5T4. Advanced preclinical work is ongoing here and is moving towards the clinic. We're also working on OXB-203 in preclinical studies targeting wet AMD, and it's using our vectors to deliver aflibercept or genetic EYLEA. This program builds on our long-term gene expression data seen for its predecessor, 201, which has now been halted. The other areas we're working in are OXB-204 and LCA10, 103 for ALS and we're now working a liver indication in preclin, OXB-401. On Slide 12, we set out our gene therapeutics pipeline. And at the top of the page there, you see Axovant moving forward into the later stages of trial. So there we have 2 drugs still, Stargardt and Usher syndrome 1B, and the intention here is for them to be licenses, and we would expect to be the manufacturing partner when that happens. The bottom part of the page shows the proprietary unencumbered programs we have: 302 for hematological malignancies; 203 for wet AMD; 204, LCA10; 103, ALS; and 401 for a new liver indication. That point, I'm going to pass across to Stuart to talk about the platform and the finances.

Thanks very much, John. Good afternoon, good morning, to everyone. So if we can advance to Slide 13, I get the opportunity to speak to you guys about our platform. And John has mentioned that our CDMO is customer-centric and our gene therapeutics is patient-centric. Well, our platform is innovation-centric. And the goal of the platform is to drive the industrialization of lentiviral vectors. And I'll just take you through a few of the initiatives which we are currently looking at in order to drive this area forward and retain our market leadership position. So if we move on to Slide 14. We continue to push forward and push the boundaries on the next generation of lentiviral vectors. So as most people know, we've moved from the adherent manufacturing process, which is now largely retired and the 200-liter suspension process is standard. That is what we consider to be the first step in this evolution. There will be many more to come. And I'll take you through some of those. In 2019, we signed an R&D partnership with Microsoft. And what we are aiming to do there is to -- in a collaboration, essentially get yield and quality of the next-generation therapy vectors up and understand more about them through machine learning and artificial intelligence. It's a very exciting partnership. And we continue to learn a lot from that particular partnership. The in-house innovation, which is ongoing, I'll take you through on the next page, but we have many, many different initiatives, so we're attacking it from a number of different angles because whilst one -- the move from process A to process B can generate a tenfold increase in vector and a tenfold efficiency, as we move further and further down the efficiency pathway, we will probably need more and more different technologies to get us to the next tenfold. And so we are attacking this from a significant number of different angles. And just before I move on to this, John mentioned building the future earlier in terms of finalizing and validating the OxBox facility. Towards the end of 2018, beginning of 2019, we took the lease on the building next door to our main building in Oxford, and we are looking to expand the lab space there in order to fully future-proof both our manufacturing and our laboratory footprints and look at how we create a lab of the future because these innovations need state-of-the-art laboratories in order to make them successful. So on to Slide 15, which is our innovation wheel. We are working, like I said, on a number of different initiatives in order to generate new IP, which ultimately becomes licensable and usable in our own programs and also to increase our know-how. And we are working on everything from regulation and targeting of the next-generation of vectors, stable packaging and producer cell lines. We've heard about the TRiPSystem in the past. We've got a number of different patent applications in, one being SecNuc, all the way through to what I talked about with Microsoft, which is machine learning, AI and the general automation of the process. So taking -- investing in those machines, which will take away the manual burden and the manual errors in analytics and processing. So this is an extremely wide-ranging scientific effort. Kyriacos Mitrophanous, our Chief Scientist Officer, is leading a lot of this. And we believe we'll be in a good position to keep the news flow and keep announcing progress in these areas. So that's all important. Innovation is key. We are in an embryonic business where we've only got a few launched products, there are many more coming. And as we attack some of the bigger indications, these innovations are going to be crucial to both bring some of the bigger vector need indications through and also to make this, these therapeutics, more accessible to more people around the world. But if we move on to Slide 16. What we're talking about here is know-how in particular. When you consider the areas, the therapeutic areas, in which gene therapy is most prevalent, we are fairly unique amongst the gene therapy companies in having significant experience in process development and manufacturing across lots of different therapeutic areas, targeting lots of different tissue types. And we are working in gene-modified cell therapies with Orchard, CNS disorders with Axovant, liver diseases with Sanofi and respiratory diseases with Boehringer and the UK Cystic Fibrosis Consortium. And of course, ocular disease, we've had a long history in. And I mean that really does cover a large gamut of what's going on. So we believe with our know-how and that innovation, we have some very nice unique selling points to our customers and our potential customers to come to us to partner with us so we can help solve their issues. And those issues would be the process design and scale up, all the way through to manufacturing for their products. So it's very exciting. It's a further validation. I mean Juno gives us further validation, as John talked about earlier. So a little bit on the financials. So I'm going to skip through Slide 17 to Slide 18 to give you some of the 2019 selected highlights. I'll also let you read these. I'll just pick out the ones which I think are most relevant here. Of course, the most relevant is that we continue to grow our business in the high double digits, even with the capacity constraints in the business. So we are showing we are being more operationally efficient within the business in doing that. And we're also, at the same time, obviously expanding that capacity for the next stage of the evolution of Oxford Biomedica and their revenues. The last is milestones and royalties are, by their very nature, quite lumpy. So we've seen some ups and downs in those, and we've been messaging that for a long time. We want to grow our way out of this with the consistent revenue streams, which are the bioprocessing and commercial development revenue streams. As they grow, the lumpiness drops, obviously. But we want our business development team to make that a difficulty for us as well by keeping on signing new deals, attaining those milestones and for those royalties to grow very strongly, as we're seeing they're doing with Kymriah. And in terms of operating EBITDA, we incurred a loss of GBP 5.2 million in the year as opposed to a profit the year before. Again, we've been messaging this is not going to be a smooth ride. We continue to make those investments in our facilities and those innovations because that is the right thing to do to generate value at Oxford Biomedica. It's setting the infrastructure for the future. When we can be properly operationally efficient is when we have multiple commercial products that we are making vector for. At the moment, we have one. The right thing to do now is to attract more customers with those innovations, and we'll continue to invest the money we generate back into those investments and those infrastructural investments, which will set us fair for the future. And you can see that when we talk about the capital expenditure. We spent almost GBP 26 million in 2019. That obviously was going to be the heavier spend because it was the major year of OxBox investment, but we have a world-class facility, which we can't wait to show everyone. There was to be a grand opening, which has now been deferred, for obvious reasons. But when we're in a position to get together again, we will be showing this off. We're very proud of the new facility and its capacity. And from a cash perspective, we had a cash position at the end of the year of just over GBP 16 million; at the 30th of April, a couple of days ago, just over GBP 17 million. So we are good for cash. We will come on to talk later about COVID and some other things, but we are a strong, robust company, and we'll give you the reasons why that is the case later on in the presentation. And John has already touched on this, but the last point there is very important from the balance sheet perspective, was clearing the Oaktree loan facility, which was taken initially, the debt was taken initially in 2015 when Oberland, when the company was in a very different financial position. And that was the correct decision at the time in order to build the infrastructure necessary to service Novartis. But we considered that, that level of debt was no longer appropriate for a company of our financial strength and standing in the middle of 2019. So we were delighted that we could bring an investor like Novo Holdings on board and clear that debt at the same time. Again, when we talk about validation of our business, it's important we get those from new customers and from our existing customers expanding their programs. And it's also important we get that from the investment community and Novo are well-known for investing in some of the high-tech, high-growth areas, and we're delighted to have them and a new director on Board representing them. Moving on to Slide 19. This is our standard sort of graphical representation of some of those highlights you previously saw. As you can see, the blue on the top chart there, the blue, which is the predictable capacity-based revenue, continues to grow, high double-digit in 2019. It does have that seasonal effect of the clean downs, et cetera, but it continues to grow, and we look forward to fully leveraging OxBox and its new capacity to take the cap off the capacity constraint we had in order to grow that number further and further. And then you can see the purple lumpiness essentially, and you can see back in the first half of 2018, the big deal we did with Axovant. We're going to have a fair lump in the beginning of H1 2020 as well with the Juno deal. And like I said, we're not scared of that lumpiness. The lumpiness is a good sign. It doesn't make it particularly easy to predict revenue streams for us, the timing of those lumps is difficult, but it's still a vitally important part of our business in terms of the mix and funding those initiatives, which we've already talked about. And then you can see on the bottom chart the operating EBITDA. Again, largely dependent on timing of deals, but we try to keep that relatively smooth, whilst executing the Board's strategy of reinvestment, both in our innovations on the platform and our own products, and innovations on the CDMO to be best-in-class. So I'll just skip on to Slide 20 now and a slight change of tack and just give you an update on our thoughts and our actions around COVID. So as many of you will have read in the RNS this morning, we, as a company, were -- obviously had a forward cycle of the Juno deal. And as the Juno deal was coming up, the Board were considering plans for further expansion and what that would mean in terms of the funds necessary so to do. And obviously, since the middle of March, the world has changed. The company hasn't changed very much, but the world has changed enormously in terms of the COVID-19 outbreak. So the thing that the Board were very keen to do straight away was make a proper assessment of the controllables within our business and the marketplace in general, including what our customers are doing. And most importantly, perhaps, is seeing what we could do to help, given the world is now relying on the health care industry in general to get the world back to normal. And we have a bunch of skills which we thought could be applicable to some of these programs. So we assessed the marketplace, and at the moment, we are not seeing any sign of a potential large impact of COVID on our customers' demand on our services. Obviously, this is inherently uncertain as a forward-looking statement, but we remain pretty bullish about that. And there are some things obviously we can do within the business to make sure that we are controlling the cash outflows, both in terms of CapEx and OpEx, to make sure that we are giving ourselves enough time to make the Board very comfortable and the Board to make decisions based on the best data available, based on all the options that we see in front of us. So we did those 2 things. We assessed ourselves internally, and we assessed our customer and the universe of gene therapy demand. And we are, like I say, fairly bullish, we have built a bear case or a low case that we can see and we've made sure we're covering ourselves against that, although we see no sign of that currently. The second piece, and like I say, most importantly, is what can we do to help rapidly the world, in our own small way, get back to normal. And we quickly identified that our expertise and our facilities enable us to potentially rapidly scale up an adenovirus solution and the Jenner Institute, Oxford University, now joined by AstraZeneca, have got one of the furthest advanced vaccines on the market -- okay, on the market -- in development. And we quickly entered the consortium in order to see what we could do to help. Those conversations are ongoing. The vaccine is into a Phase I trial now. And we stand by to be as much help as we can, using our facilities and our skills, because it's important to, not just our business, not just our customers, but our employees and just about everyone, that we find a way through this, so the world can return to some sort of level of normality. And I'm sure there'll be some questions on that later on. So at this point, I will hand back to John to take us through the news flow and the positive outlook.

Thanks for that, Stuart. So on to Slide 21. Looking at our news flow in '19 broken down to 2 parts, partner programs and proprietary pipeline. First of all, thinking about the partner programs, we would expect to sign 2 further deals this year, 2 further contracts. It's very important to us that we do that, to keep growing the business we spoke about. And I will share here how busy we are in BD, looking at new deals, looking at the feasibility studies. And I would say we've never been busier, and a lot of people are talking to us currently. So we would hope that would be achievable. Look at the new facility, operation in half 1 '20, post completion of the build work back in December '19. We expect to see Novartis CAR-T programs progressing through development in 2020. And of course, in Q3 '20, we'll see the Oxford COVID-19 vaccine consortium initial trial data, and that will be very important to know what part we'll play in that process going forward. For the proprietary pipeline, we're targeting a spin-out or out-license of one of our in-house products during 2020. We expect to see the Axovant 6-month efficacy data from 6 patients, dosing cohort 1 and 2, from their SUNRISE-PD study by Q4 '20. And also expect to see Axovant initialize the randomized sham-controlled part of the SUNRISE study by the end of 2020. Also, we want to progress 2 candidates from discovery into our portfolio by the end of the year as well. So looking forward, we have a very positive outlook for the rest of 2020. We expect an improved financial performance in 2020, built on the growth of bioprocessing and commercial development partnerships. Of course, this is heavily fueled by the fact we have more capacity coming on stream from OxBox. You have to remember that the numbers in '18 and '19 were very comparable from -- as far as what we had capacity wise to run on because we hadn't had any expansion by then. This will all change in 2020. Getting back to our CDMO partner discussions, we are very busy there, with feasibility studies, too. We aim to increase, not only the number of partners, but the number of drugs within each partner program we're working with, hence why we talked about the 9 to 19 programs earlier in the presentation. And again, I would just reiterate, we plan to do 2 further deals this year. We'd also like to attract third-party funding for our proprietary products, targeting one deal there this year as well. CapEx will be anticipated to be low, of course, with the first phase of OxBox construction now complete. And we expect as a group to see an increase in operating expenses due to the increases in employee scale. So I think in summary, despite the COVID-19 crisis, as a group, we're very excited about capitalizing on our leading global lentiviral vector market position within the dynamic and fast-growing cell and gene therapy sector. So at that point, we'd like to take any questions, please.

[Operator Instructions] Your first question comes from Amy Walker from Peel Hunt.

I have a few for you. I'll start with 2 and let some others have a chance, and I'll ask them each individually so you don't have to memorize them. Stuart, the first was you alluded to lumpy payments through the course of this year. And we know about the upfront now from the Bristol Myers deal, which was fantastic. Could you give us an indication of at the moment, if everything goes according to the plans that you've got in front of you, whether there are any other material ones that we should be considering or looking out for over the rest of 2020?

I'll pass that question to Stuart, I think.

Yes. Thanks for starting with a trick question, Amy, that's very kind of you. And we've -- in terms of prediction of deals, it is very difficult. And to make -- as John just suggested, we want to keep on signing deals. We've got 2 further deals we're aiming for this year. And we are fairly bullish about the opportunity to do that with the pipeline that John referred to. In terms of being able to forward forecast lumps of cash coming in both through licenses and milestones, it is not easy at the best of times. It gets more difficult with the high level of uncertainty we're seeing with COVID. So it's a question that I can't really answer. Suffice to say that, John, I, the Board, remain extremely bullish about the company's opportunities in the marketplace and the financing in general.

Okay. Understood. And then my next question was just around the vaccine collaboration. I wondered if you could give us a bit of color on what additional work, if any, relative to your existing plans for this year, that's likely to require of you and when that would start. And what the gating factors are? And if there are any economics, either in terms of payments or additional expenses, that we should be thinking about around the vaccine collaboration?

That's a really good question. And obviously, we're working within the consortium and new to that now, into that deal, is AstraZeneca as well. So we're working out with AstraZeneca exactly where we sit in this particular consortium. It's clear AZ want to [ align ] consortium, certainly in the short to medium term, for some form of manufacturing, and we will do all we can to help with that. Now as far as the batches are concerned, we're talking about scale-up in manufacture, we would not charge our normal rates for such a proposition because we think we're going to try and help the public spirit here and move forward, but we'll charge a rate that covers our costs. So I think that's fair to say. So if you think about that part, you'd see some revenues coming from that, if we make batches for the consortium. On from there, the CapEx side of things, we are looking into ways of helping [ with which ] aren't yet shall we say, equipped, and we're looking to ways we can deal with that. But I wouldn't expect there to be much cash flow going through Oxford Biomedica to pay for that, probably is the best way I can answer the question.

John, that's understood. And then just one more. On the pipeline, I noticed that you're still showing the Bioverativ-derived hemophilia A project very early stage, so it's preclinical into Phase I. Reviewing the materials from some of the other people working on that, Sanofi and Sobi, I think, are both showing that's in Phase III now with a 150 patient trial, either in progress or just about to go into progress. I wondered, has something changed around the timing on that? And do you expect a material increase in batch requirements for that movement on the hemophilia A project? Any color you could give us on the progress of that would be appreciated.

Certainly, I'd say the deals with Sanofi are progressing very well. We will generally let them talk about their time lines rather than us. I think it would be wrong of me to do so. So yes, we can tell you we are very happy the way -- way we are progressing with that particular piece of work with Sanofi, but I wouldn't want to go further than that.

Amy, Catherine Isted here. I think that particular program is actually, it's a different program to the one that we're working on with them.

Okay. Okay, great. I'll take that offline with you.

And just one pitch for lenti as I'm flying the lenti flag here, just to remind everyone that the major difference between the Sanofi program and the other gene therapy programs for hemophilia that are out there is that we believe that lenti has some sort of unique properties which will enable the program to be a bit more sticky when it finally gets into the clinic. That's to be proven, but lenti offers more of an integration, which is important with the turnover of [ the liver ].

And your next question comes from Joe Pantginis from H.C. Wainwright.

A few questions as well. First, I want to talk about the internal side with regard to your employees. And I'm not fully aware of all the different regulations in the U.K. with regard to COVID restrictions, but from an employee side, what you're doing to keep everyone safe and be able to deliver on the CDMO side of the business?

We have a comprehensive program in place -- hi, Joe -- so we have a comprehensive program in place. We have a daily management meeting here to make sure we're aware of all the government actions and actions within the company. We are making sure that anybody who can work at home does work at home. So we have restricted a number of staff in the various premises at the moment. And of course, we are keeping a very active dialogue to make sure people are isolated when they need to be. Now we can say at this point in time, we have not had to curtail any of our manufacturing operations as we go forward. That's always a possibility if things were to happen in one of the teams. But for example, we have split the teams down to the bare minimums and split them down in 2. So some come in at one time, some come in another time. And we are taking all actions possible to make sure that we maintain an active but safe workforce.

That's actually really helpful. Thank you, John. I'm glad to hear that. And then with regard to one of your pipeline assets that you mentioned, OXB-203 with regard to aflibercept, obviously, there's different, I guess, important patent expirations coming up for aflibercept and then also some longer term. So I'm just curious, do you have any potential impediments or licensure that you need to seek from Regeneron?

That I'll have to take offline with you, and I'll need to get an answer to that question.

Sure thing. And then lastly, with regard to your overall business and how you're portraying sort of both your arms, you're obviously very busy in expanding on the CDMO side quite significantly. So I guess, how would you characterize the amount of effort which is taking up most of your efforts right now on the CDMO side versus the level of resources that you're putting into the proprietary pipeline?

I think that's a really good question, Joe. And I would go back to history and think about when we were doing Novartis and Orchard originally, we had to make sure we succeeded with those. So we did switch to a heavy, heavy concentration towards the CDMO side. As we've got more robust with our balance sheet, as we move forward, we've now been able to actually look back again as our discovery and research and we now are in a great place to bring drugs forward because we know so much about the various indications here. So we are now putting more resource into that. And I would be the first to say that we won't, in the current environment, be spending as much as we first thought on that in 2020 until we know where we are going with our cash flow, and we know where the COVID crisis sits.

Your next question comes from Julie Simmonds from Panmure Gordon.

Just a quick question on margins for the year. The gross margin in the second half looks considerably lower. And I know a part of that is on an overall basis because you've got more licensing in the first half. But even when you take that out, there still seems to be a bit of a drop in the margin. I was just wondering what was behind that?

I'll let Stuart take that one.

Yes. Julie, I think we've been at pains to say in the past that the margins perhaps aren't as clear as they could be, given the dual revenue mix we have of both bioprocessing and commercial development and the difference in those particular 2 margins. So there's a mix issue there. And also, it's worth remembering that we are going through a bit of a change in our facility footprint from the old adherent process to the new suspension process. And it also matters who we're making those batches for. So the pricing and the complications and the raw materials around certain different batches produce slightly different margins. So it's all wrapped up in a bit of a mix. And what I would say is going forward, we are looking to provide more granularity around those margins so people can fully understand the bits of the business much better. But for the time being, I'm going to have to hide behind a bit of a mix story there, and it's one of those where being in transition between facilities and processes is going to throw out these slight anomalies.

Fair enough. And do you think that something that's still going to be -- there's going to be a lot of variation in 2020, whilst you're still -- you're essentially going to be running 2 facilities and presumably different programs are going to be, some of them will move to OxBox and some of them will stay where they are. And so that's going to be something that we'll see during 2020 as well with the stabilization beyond that?

Yes. And obviously, the acceleration of the workforce, because we're having to staff up OxBox, obviously, to do validation batches and in preparation for batches going in there. So there is a bit of a mismatch between costs and revenues. And as John mentioned earlier, if we with the consortium end up making sort of noncommercial rate batches for COVID, that's obviously going to be, going to skew the mix as well. So there is going to be some variability. We are still focused, at this stage, on the innovations, which are going to make the big differences to margin over time and obviously getting the capacity up and running and fully utilized. And during that transition, we will live with that variability because we -- the end game is clear. CDMO can make good margins on as many commercial products as we can muster. That will be done by building the business in those drugs we're working on today, the 9 to 19 John was talking about earlier.

And your next question comes from Charles Weston from RBC.

Three topics, please. On the first one, can you quantify the R&D investments into your own in-house pipeline in 2019? And looking forward to OXB-302, which you've highlighted is the candidate that you're looking at putting the most focus on, can you quantify the investment that you might be making in that -- you want to make in that over the next 2 or 3 years and the potential time lines with regard to clinical development?

In the presentation -- in the first -- for the first part, the time lines, we hope to be in the clinic in around 18 months. I wouldn't want to be held to that, but that's our estimate we're going there. I'll let Stuart take the investment part, but I don't think we say too much publicly about what we spend in these areas currently.

That's right to a degree, John. Charles, so I would categorize it without breaking any confidences here is 2019 in the low single-digit millions of pounds because there's a lot of preclinical stuff that we can do very cheaply in bringing these forward to the end of preclinical. That's what we've been focused on and really assessing the pipeline and making sure that we are taking the right candidates all with the right opportunities commercially. In regards to 302, I think John has already hinted at it, is that the plans we had at the start of the year have changed somewhat. As the COVID crisis has brought about a little bit of a change of focus of the Board, I mean we are fully focused on satisfying customer demand and delivering customer innovations in 2020. And as John mentioned, we have large -- not largely -- we have deferred some of that spend to kick off those programs into a time when we have more certainty over the access to the clinic and access to CROs and all those other things. So we have made some sensible decisions in pushing back things that will benefit us in the long, long term, like program -- like the, like these -- some project developments to focus on 2020. So the number this year, unless COVID suddenly goes away, is going to be relatively low too as we push it forward in a sensible manner, whilst we're assessing the marketplace in general. So it's a bit wooly, Charles, and I apologize for that. But the strategy is clear, that we have a dual-pronged approach of the CDMO and the gene therapeutics arm. In terms of the balance, as John just talked about previously, I mean we really are in the very short to medium term, focused on that CDMO as being the revenue-generating arm, that we're dealing with scarce resources internally, both in terms of cash and in terms of people, as various people are being reassigned and we have to maintain spacing in the laboratories and the suites and all the rest. So the Board have taken sensible steps, we believe that's the right step, but it is going to make the initial planned amounts on our own programs slightly less in 2020.

That's clear. My second question is on -- is actually extending Julie's question and picking up on your comment of good margins and asking you to sort of help us understand what good means. Obviously, there are a number of CDMOs one can benchmark you against. Obviously, you have a higher IP content, so presumably you'd have a higher gross margin on a sort of a longer-term, say, 3- or 4-year basis. But clearly, you have to support that with ongoing R&D. And I just wonder if you can help us think about how you benchmark your own CDMO activities against your peers?

I'll give that to Stuart, I think.

Yes. No, it's a great question, Charles. I mean what we say is that when you look at our 2 recurring revenue streams, bioprocessing, we say that we are making, we'd like to make, we're targeting, a second quartile margin, gross margin to be between 25% and 50% depending on the product, the ease of making the product, the amount of raw materials going into it, the time it takes in the clean room. On the commercial development side, we're targeting a third quartile margin, so somewhere between 50% and 75%, again depending on the work we're doing and the complications around that. And so that's what I was suggesting to Julie, is a mix between -- the royalties come, in the long term in the royalties line, like you can see with Novartis, and that really is considered a bonus. So when we are putting the -- what we consider to be our pricing together for our customers, the IP is monetized through royalties as is usual. But we still look to make those sorts of margins on both batches and commercial development. So all 3 things really have to be added in, in the long run to assess a margin for a particular customer. But we -- with our multiple revenue streams and our multiple opportunities to create revenue for our customers and the royalty streams when we help our customers to achieve their goals, we believe we are well set to be a profitable business in the long run when we can essentially actualize more commercial deals with our partners, which is what we're working hard on right now. At the moment, we've got one and 18 possibilities. We want to convert those over time to multiple commercial deals, which is when CDMOs can really be efficient and profitable.

Okay. And my last question is on out-licensing. Given you sort of put yourself on the hook with investors by saying you're going to out-license something this year. Could we infer from that, that you must be in quite late-stage discussions? And have you hedged yourself, i.e., are you in those late-stage discussions with more than one asset? Or is there one key asset that you're focused on here?

So I'll take the last part of the question first, we're always looking at all of our assets. So if we have people talking to us and we see a fair bit of interest around our assets, then we would talk to them. I wouldn't want to comment whether we're in late-stage or not at this point in time, but we do have a lot of interest in certainly a couple of the key assets we see as important to us.

And your next question comes from Alistair Campbell from Liberum.

I've got a couple of questions, if that's okay. The first question really relates to Bristol Myers and Novartis because after that Juno deal, you're essentially now working with, I'd say, 2 of the sort of 4 or 5 biggest players in CAR-T now, but that clearly does create the risk of conflicts in terms of what they want to develop from their pipeline. An example is today, I saw Bristol's liso-cel got kicked down the road by 3 months by the FDA, but that's a potential competitor to Kymriah. And I know you would have been working on that project per se, but maybe you could discuss how you sort of manage that Chinese wall, what sort of restrictions you might have in terms of programs you can work with, with either partner? My second question is fairly straightforward. It's just really on next-generation bioprocessing. I think moving to process C, it is going to be important to unlock some of your programs in terms of getting that yield. So I wonder if you could give us a sense of with the technologies you've now got, how far down the road you are in terms of moving from process B to process C?

The first part, talking about how we would work with our large customers, I think by the time we sign a contract with them, we are very clear what we can work on and what we can't, and they are very clear as well. So we have no, should we say, ambiguity around the contracts we sign. They're very clearly defined, both parties would want that and some of the legal departments we deal with would definitely want that. So we don't see an issue with that. And we are willing to talk to either parties or any of the parties we're working with to have some scope in those deals should it prove necessary or actually favorable for partners to go forward like that. So it's not something with the Chinese wall we don't worry about on that front because we have run our processes on that front very, very rigorously. On to process C, we are -- we've been talking about TRiPSystem for quite a long time now. We spent a lot more investment over the last 18 months, I would say, on the platform. So SecNuc, LentiStable, all these other new things coming as well. TRiP is more established. Some of the other patents are still going through. And I would say that TRiP, we are very happy to actually include in deals now because it has been included in several deals we've signed. And if some of these deals were to use TRiP in the manufacturing process, then you'll find our royalties would increase based upon the further embedded IP. On the other front, the new things coming as well, some of them make quite significant steps forward in our yield and our purity of our batches. So in these things being applied, we would expect further deals maybe to have these built in and have maybe a change of royalty status in there as well, if that were to be the case.

And your final question comes from Stefan Hamill from Numis.

Just got 2 left. Both on this COVID-19 vaccine program and implications there. So I guess of the consortium partners, my understanding is that post OxBox, you've got the most viral manufacturing capacity of all of them, even including AstraZeneca, so how flexible is your capacity there? Could you bring in the second part of OxBox? Or could you bring in for those who need to, bioreactors into existing clean rooms relatively quickly? Or would it be more involved? How quickly do you think you can move if that program goes well?

We can move fairly quickly. We can bring in bioreactors into several suites that aren't fully kitted out yet, so that's quite feasible. And if we were asked to, and we haven't been asked to, by the way, at this point in time. If we're asked to, we could actually fit a 1,000-liter bioreactor into the second half of OxBox, which lies fallow at the moment. So we have plenty of opportunities here to help, and that's what we want to do.

And then just, I guess, the other notable thing about it is that it's an adenovirus vaccine. So you've moved beyond a sole lentiviral focus here. Should we view that as a one-off? Or is this a sort of strategic inflection now for the business?

That's a really good question. We have discussed this at Board level a number of times over the last few years. And it's something we believe we were very right to do at one point in time, to be a lenti specializing company. With the right opportunities, for example, if we get involved with adeno and we have work in our GMP suites, there's no reason why we couldn't work on that further. And we have in the past, with opportunities, AAV as well, we just haven't chosen to take that path just yet.

But Stefan, we are not pretending that this is a strategic -- this is certainly opportunistic rather than strategic, to get involved and help. I mean what John said is perfectly true. I mean as we look to further expand, it is one of those viable options to go further. We have the lead in lenti, how can we leverage that into the rest of the gene therapy universe, is a very valid question for the Board to consider.

Well, thank you very much for tuning in and listening to us. And any other questions, please contact us directly. And please, all of you, stay safe and well. Thank you. Bye-bye.

Thank you. That does conclude our conference. Thank you all for joining. You may now disconnect.