Tecan Group AG (TECN) Earnings Call Transcript & Summary

Good morning, everyone. And welcome to today's session for the JPMorgan Healthcare Conference with Tecan Group. My name is Jonathan Pham from JPMorgan's Healthcare Investment Banking team, and it is my great pleasure to introduce you to Achim von Leoprechting, the CEO of Tecan Group, to kick things off.

Thank you very much, Jonathan, and welcome to the subject presentation. Very happy new year to all of you. And I sincerely hope that 2021 will be hopefully seeing the end of the time of what we've seen during 2020. Before I give you an update on where Tecan stands and what our direction is, let me just quickly refer you to our safe harbor statement. Obviously, I will be making forward-looking comments and assumptions in my presentation, so please, have a close read and look through these documents. So as not probably everyone is as familiar with Tecan as I could hope, I would probably just give you a quick introduction of what we do and who we are. Clearly, we are founded 40 years ago, here on Lake Zurich as a leader and pioneer in laboratory automation. In last year's annual report, we choose the headline Empowering The Century of Biology. And as you can imagine, for us, as it has been transferred for many of our colleagues in the industry, it has been probably never more tangible and concrete what that means for us in our industry. So we have been clearly engaged through our businesses. We are the leader in automation, automating processes in the research environment, in pharma and in clinical diagnostics. We have a complete range of automation solutions. But through the last years, we've added selectively through M&A and organic developments also more content on our automation solutions to offer more complete solutions. And they include immunoassays for specialty diagnostics, they include Hunter consumables for mass spectrometry specifically LCMS, and they also include a range of differentiated reagents for having preparation for next-generation sequencing, all of which are core to our application, the strategy that we're pursuing. We are, in addition to the hardware and reagents and consumables that we're offering, also very strongly innovating in the space of laboratory digital solutions. And I will come to that later in the context of how we have responded to the COVID crisis. And as an operational update, we are headquartered here in Zurich, in Switzerland. We have by now 3 manufacturing and R&D sites in Europe, 4 in the U.S., 1 through a new acquisition in Vietnam and Asia, and we're also operating a quite sizable software competence center in Germany. As a company, our size is 2,000 employees, and we run a very intensive sales and service network throughout the world. When I flip down to Slide #4, this illustrates the organizational makeup of our company. We are organized in 2 principal divisions. One is called Life Sciences. On the Life Sciences, we are commercializing our solutions under the Tecan brand name through our own sales and service networks, and they include automation instruments, detection, instrumentation, reagents, consumables, but also customer service offerings and spare parts. And the Life Sciences division contributed in 2019 approximately 57% to the CHF 637 million revenue that we generated in '19. In the Partnering division, which is the other -- nearly half of what Tecan does, we focus on OEM relationships. So this business specifically engages with leading IVD companies around the world and offering solutions ranging from components and platforms, but also bespoke system developments for the IVD industry for multiple applications. We're also complementing that offering through consumables and field service offering. So in aggregate, as I said, we generated around CHF 640 million in 2019. And our focus market segments will include Life Sciences, Pharmaceutical, Research and Development as well as probably the largest segment that we're serving with 60% total would be clinical or in vitro diagnostics. We are particularly as strong in the field that I would call translation from research to diagnostics. So many of the solutions that we are offering through our both divisions are perfectly geared and tailored to take innovation from a research environment over what is called the LDT or laboratory development into the regulated space or IVD space. So our solutions are designed and developed under the right documentation and regulatory regimes to foster and chapter on that transition. So while we're engaging on our Life Sciences side, mostly with the innovators, the biotech companies and pharmaceuticals that take on innovation to an industrial level with our solutions. We then engage obviously on the public side with those companies that have a very strong demand for innovation and solutions to answer to the most pressing health care needs in certain disease area. So we are focusing, just as examples, on areas like next-generation sequencing, mass spectrometry in the broader sense of small and large molecules, but also to upfront workflow challenges like liquid biopsy solutions circulating or single cell analytics and in several more. Other application areas will include tissue pathology, and also the innovation thrust and the proteomics field in addition to mass spectrometry would include scale-up of innovative, high sensitivity protein analytics solutions like antisense biomarker detection systems. So in aggregated, Life Science, we typically focus on specific steps of workflows and offer solutions to our clients. On the Partnering side, we typically engage in to answer solution development, where we would be a full development partner from design, concept, industrialization and manufacturing, including life cycle management support. So maybe just a quick look back to what happened last year. And we clearly had a very strong pull into the containment activities around COVID-19 around the world. We were actually 1 of the first companies in China in Wuhan supporting the identification of the virus through sequencing workflows. And then it shifted very rapidly into other application areas, including PCR testing, very high scalability and several others. So this was possible because our core strategy was always centered around offering scalable solutions for molecular testing. So they include, obviously, PCR and next-generation sequencing with PCR probably being highest demand as we speak. We have scaled up solutions, particularly for regulated environments, which I know COVID was sometimes a little bit shortcut by emergency approvals. But clearly, our solutions are clinical -- are great and relevant for the regulated diagnostic industry. We do have some digital tools at our disposal that helped in this scale at venture, particularly newer labs that have never dealt with this type of complexity before to manage that infrastructure and generate thousands of test results with high confidence and high reproducibility in the clinical setting environment. So this was a clear enabler for us in addition to our more hardware and consumable related solutions that we could pull into the infectious disease containment activities. Clearly, the other aspect that we were able to support customers globally with our service network and this journey took us around from China all the way through Israel, the Middle East, India, Russia and then ultimately, Europe and the U.S., where a lot of these territories are still in the phase to scale up most hardware and testing infrastructure as well as increasing testing demand, which puts our consumable support. We have, obviously, for a long time, supported infectious disease screening. So we have these systems and solutions ready for deployment, both in our Life Science division and in our Partnering division. Now clearly, as we look at a COVID, it's not all just about testing for acute infections through PCR. We also -- and I mentioned this before, engaged in virus research. Now what became more tangible to us was the quest to differentiate and sequence for virus variants. We have been engaged for quite some time in the vaccine development. And as you see on this Slide #6 here, a picture from [indiscernible] featuring one of our solutions, supporting them and others in the vaccine development quest for some time. Viral [indiscernible] clearly is core of our capabilities and competencies and the other element that may become more relevant as we go throughout the containment and the rollout of the vaccines is our suite of solutions for serology testing, I believe, in searching for the immunogenicity [indiscernible] population. So in hindsight, I mean, the ability to leverage into this market clearly comes from our strategic strength in molecular testing and proteomics, if you want to run in Sweden. Just to give you a bit more kind of tangible impressions on how that looked like last year on Life Sciences, you see a couple of our colleagues in full protective gear installing instrumentation in our direct client phased through Life Sciences, which would be hospital labs or big service led chains around the world. And you see -- and you have seen and continue to see us being very active in that environment. On the public side, we're equally active, again, probably more indirect through supporting partners like Abbott Molecular and many more through the supply of instrumentation and plastic consumable tips for testing, but also the variety and a range of new partnerships in China, and also in the western geographies that also used our platform to scale up testing under their own brand names and using our platforms, our consumables and, in some cases, also our field service support, handing them to therapy systems and to keep them in operation. Now as I'm sure several have seen the news that we broadcasted in H2 last year, we entered into a partnership with Thermo Fisher Scientific to develop and supply the Amplitude system to the COVID testing market. This is the highest capacity testing system available to date, being able to process more than 6,000 samples per day. It is a very complex system. And I cannot be more proud of the speed of development and implementation. Again, in logic, and this is a clinical testing system approved through the emergency approval scheme in the U.S. and the CE regulatory environment in Europe. But clearly, I think, developed and brought to market in unprecedented speed and pulling on the experience and the historic availability of infrastructure from platforms like Fluent that are deployed in this environment, but also our plastic consumable tips and the digital suite of products that we call Introspect helping our customers to get as fast as possible operational and creating reliable result in such magnitude of output. So we're very, very happy this partnership, which is one additional element, of course, of our suite of solutions that we're bringing to market either directly, or in this case, together with Thermo Fisher Scientific. Now let me probably take the step back and reflect back on what I said earlier. I mean one of the reasons that we were able to respond so quickly was our availability to deploy solutions and platforms that are quite universal in their utility. So we are deriving our strategic investments and our development plans from health care needs. So when I -- when we look at the markets, we identify, of course, high-growth segments like cancer oncology, infectious diseases, metabolic disorders, hereditary diseases, rare diseases and others as kind of guiding light of our investments in our strategic direction in which, again, we would aim to support researchers to identify disease mechanisms, scale them up through biotech or LTD environments and then item supporting pharmaceutical companies to use these learnings in the development of new vaccines and then urgently deploying similar workers and technologies for the use in the IVD industry to better and more precise diagnose patients in these disease environment. So we are refocusing on -- and again, maybe just for those who follow the slides, manually I'm on Slide 9. We have identified the underlying key application areas with genomics, protein analytics and sending tissue analysis as core to where we want to sell it and in the spaces we want to differentiate in. We are mastering the underlying techniques and technologies from sampling to detection quite well, and we continue to engage either through our own R&D programs or from M&A to further equip our tool set with capabilities from instrumentation or reagents to consumables to even better and more elegantly offer solutions in these spaces. Now this is all based, obviously, on Tecan's enabling competencies. And as I said, we are a leading automation company for decades now. But probably more recently also added a lot more competencies in software development and digitalization. Because we believe this is a key element of our future growth and also competitive positioning. And then lastly, we also added more consumer and reagents to round up the solution to be offered to more bespoke or turnkey solutions to our clients. Now this is more possible because we have a very good and flexible operational footprint, and this served us really well during COVID. And then, of course, we have been -- as many has been challenged with supply and trading all these circumstances during the lockdown situations, but I would say we've been very well prepared as a company that is used to work in the diagnostic environment in leveraging second source supply chains and alternative routing of our products around the world. And this is all, obviously, in our strategic thinking, complemented essentially with the deep knowledge of the regulatory environments that we are interacting with. So this only gives us the opportunity to be that chapter 1 from research all the way into the IVD segment that I mentioned several times before. Tecan is in, strategic, I think, very dynamic environment and a very rewarding environment. We are typically looking at longer-term trends and trajectories and in addition to the health care use areas that I mentioned before, clearly, we're also seeing a couple of larger or macro trends that work to our advantage. And they include topics like the aging and growing population around the world. Clearly, more people come into the health care systems requiring better, more scalable, more economic solutions. We see high levels of investment in health care and in life science research, also now in emerging markets, but also clearly on very high and robust levels in the western geographies. We see development -- increased development of targeted pharmaceuticals requiring companion diagnostics, again, a very important theme for us in our ability to offer scalable competitive diagnostic testing solutions to the IVD industry. And then other areas, of course, include the explosion of biological knowledge into, I would say, non-life sides in the diagnostics basis. Like in this case, I would mention, sequencing technology that's been increasingly deployed in the food market. And again, that is something that is maybe a little bit more distant of our core focus areas, but still, I think, very interesting and important area of potential expansion for us in the future and already deploying quite some resources in these applied segments, leveraging these techniques and technologies. And then lastly, of course, there is a growing trend and to us to deploy testing directly to customers and in larger scale population sequencing programs, I probably should say that during 2020, clearly, those have been severely affected by the lockdown activities, but we believe that they will rebound and to drive some of the macro investments going forward again. So in summary, this is all kind of reasons to believe that there is a higher need for leveraged automation. There will be increased test volumes around the world. And increasing need for productivity, for reproducibility and standardization, for precision, robust processes, but also clearly for the mastering of regulatory processes, and they include also sometimes rapid changes in the regulatory environment like now with the IVDR implementation in Europe that is supposed to be live in 2022, requiring quite some adaptation and changes to the supplies and players in that industry. So all of this, just to say that we see a very clear path to increased demand or leverage to automation. Clearly, the area that we want to excel in and want to continue to lead in going forward. Now on Slide #11, I just summarized what that meant historically. And we have been able successfully to translate these growth opportunities into real growth. From a top line and profitability perspective, as you see on this slide, we have been growing since 2013 with a CAGR at around 8.6%, and this includes approximately 2/3 of organic growth and 1/3 of inorganic and M&A derived growth. So I think a very healthy contribution from both parts of the expansion space. And this is underlying also very good and I think continued success in expanding profits both through operational efforts, but also, of course, through the leverage of volume throughout our organization footprint, which is quite well leveraged by top line growth. And lastly, we are quite cash-generative business, and this allows us again to reinvest healthily into our own development programs, our own infrastructure, but also have made considerable efforts in the M&A side to add out and boost our strategic ambitions through M&A, which we've done in now 6 cases throughout the last 6 years and will continue also to focus on in the foreseeable future. Now maybe just a quick reflection back on the financial highlights of H1 2020. And obviously, we, as a company, are reporting our financial results for the full year in March 2021. So just in a couple of weeks from now. So this is why I just wanted to relate us back with a couple of comments to H1 of last year where, clearly, we've seen the impact of COVID starting off in the first 6 months with a quite significant effect on our business, both from a headwind and tailwind perspective. So clearly, some parts of our business that are noninfectious related has seen a quite significant slowdown in demand. But on the other side and overcompensating that headwind, we've seen a very strong impact and demand both from a life sciences business and also Partnering business perspective for automation solutions and plastic consumers. So we ended first half with a record backlog and, I think, very healthy revenue growth despite the headwinds that we've seen in the non-COVID businesses. And we, I think, can or also very strongly from a profit expansion standpoint and the progress we made on the operations side. Despite the changes of COVID, I would also say, and looking back, were quite remarkable. So with this, that probably would go and maybe make a couple of comments on how we see 2021 shaping up. And clearly, this is probably even the bigger crystal ball question then and then when we look at our projection back in 2020 and in March when you gave the guidance for the year. Now I think 2021 will still be quite challenging in the sense how the markets and the demands will develop. And there's a couple of factors that clearly now indicate our impact our path forward. And what you see on Slide #13 on the graph is just the accumulative test representation of testing that's been performed in the U.S. And as you can see here, in the H1 2020, total test performed in the U.S. did exceed 32 million, while in December alone, the U.S. performed more than 55 million PCR-based COVID test. So clearly, a dramatic ramp-up in the U.S. alone, but we see similar trends around the world happening throughout the second half of the year. Now the questions are the factors that will be impacting '21 performance would include the time, of course, how long this duration, the magnitude of elevated testing levels of PCR-based testing will run into 2021. I mean there will be different dynamics in our view in terms of the build-out of how we're testing instrumentation infrastructure and then maybe a longer way to normalization when we talk about consumables, which in our view clearly take us to the end of 2021, if not beyond. I think the other factors that are quite interesting to observe will then be the shift of acute testing to more broader community or selective population testing and in reopening schools and businesses. Of course, clearly, there is a complementary play with PCR technology and the now more -- also scaled rapid test that are becoming available. The [indiscernible] serology testing will become, I think, more in focus or become more in focus during 2021, as vaccinations are rolled out. We believe also there's already ongoing discussion on multiplexing. So moving away maybe from the one COVID variant PCR test to more multiplex environments for different effects of disease and other infections and others throughout the year, particularly when the flu season is coming back in the second half of 2021. And then lastly, of course, from our business perspective, very important to see how the non-COVID business will rebound, how fast it will come back, and how about the research activities and routine diagnostics will revert back to normal and then help us drive overall growth in that environment. But in aggregate, I can say that we feel pretty good about next year, our ability to work in this environment with the flexibility and the adaptability that we've seen in 2020. Now before I close, just a quick summary on where we're heading and the environment that we are engaging in. I think we are, as a company, very well positioned for 2021 and beyond. And clearly, as I said, 2020 and the corporate response has shown the resilience and flexibility that is needed to adapt to fast growth opportunities and on a global scale we are focusing and have tried to bring this across on core and critical application areas that solve real health care problems, and we see that very strong pool of solutions for genomics, for protein analytics and cell and tissue analytics. Clearly, areas we're focusing on. And we will continue to add more differentiating reagents and consumables and software solutions to the space. As a company, we have a very strong focus on our employees. And this is also, when I look back, one of the arguments that I would make was offering us the opportunity to be successful in that environment because our 2,000 associates around the world are deeply committed to what we're doing and very passionate, which, of course, was exemplified in what I said earlier, the Amplitude development, for example, that was brought to market in unprecedented short time frame. So very proud of the employees and also their ability to mitigate through lockdown scenarios, continuing to support our clients around the world. We have a very strong focus on customer satisfaction, and we have, I think, the right tools and metrics in place to further improve on this and continue improvement. And in the long side are always there for you promise for our clients. We have, I think, a clear focus on efficiency and sustainability. Again, something we could leverage during COVID and we'll continue to focus going forward. And then the last point is probably the focus on sustainable development. Clearly, we are deeply committed to sustainability in all our development programs and our operational footprint and the way we run the company and we run also future expansion in the space of being -- contributing directly to the United Nations SDG. Some with this, I will probably close by my introductory comments here or my presentation on Slide 14. Again, just bringing back maybe the key message, I believe, Tecan is a real position partner to support academic and clinical research and a variety of disease challenges to understand disease mechanisms better support customers to scale our testing for vaccine and pharmaceutical development. And lastly, to support also the IVD industry with scalable and regulatory sound solutions to scale up testing economically in the IVD space. So with this, I thank you very much, and I would be looking forward to any questions that you may have. I'm looking at the Zoom Group chat here, as it seems there are no current questions posted. So I'll probably give it another minute or 2 to see if there's any questions that are coming in that I could answer still on this call. Otherwise, please feel free to contact us through our IR channels and then I'm more than happy to also engage on -- individually with everyone on discussions or questions that you may have. All right. So it seems like there's no questions coming in. So with this, I again would thank you very much for your interest and for your attention. The presentation material is available through the JPMorgan conference website. But as I said, you don't hesitate to reach out to our Investor Relations team or myself directly, if you want to issue any questions. So with this, thank you very much for your interest, and I look forward to, hopefully, see some -- if all of you in person in the placebo future. So stay safe, and thank you very much.