Tecan Group AG (TECN) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the 41st Annual JPMorgan Healthcare Conference and to Tecan presentation. My name is Hechmi Kilani, I'm an associate in the EMEA Healthcare Investment Banking team. And I'm pleased to introduce you to today's presenter, Achim von Leoprechting, CEO of Tecan. Before I hand it over to Achim, note that the session is 40 minutes long, that will have Q&A at the end. There'll be a microphone going around for question in the room. And for those watching this on the webcast, you'll be able to submit your question through the Q&A tool. Now I'll leave the floor to Achim.

All right. Thank you very much for the kind introduction, and welcome to the update on Tecan and thanks for your interest in the company. So before giving you a quick update on where we stand and where we're heading, of course, I have to draw your attention to our safe harbor statement, which is also documented in the materials released in the webcast. Now we as a company, we scale health care innovation. And we scale health care innovations across the continuum of research -- biological research, clinical research, all the way into pharma drug discovery, into drug development, further on into diagnostics and then ultimately into the medical setting and the operation room. So this is what drives the company. And we believe scaling innovation is absolutely critical to create the impact that the innovators out there in the field want to achieve in the clinical setting. Now as a company, we are engaged in a wide range of end markets, in life sciences, in pharma, in the in vitro diagnostics. And recently, through our largest acquisition to date with a company called Paramit, we also entered the medical devices space. We are a pioneer and global leader for more than 4 decades now in what we do and started off in laboratory automation and robotic processes. We see quite a number of trends fueling innovation and, therefore, the growth of the company, which, of course, is not a big surprise to everyone, is kind of pulling on this notion of a century of biology coming out of COVID right now, where we played a very active part. This is probably kind of very close to everyone's mind. But of course, we, as a business, engage not just in infectious disease area but also in oncology, metabolic disorders, neonatal and other applications and disease areas. As a company, we are organized globally. So we have a quite extensive sales and service network in 52 countries. Headquartered in Switzerland, but by now, with the acquisition of Paramit, balanced very equally from an operations and R&D footprint between the U.S. and Europe and Asia, where normally, we are 1/3, 1/3 and 1/3 now with our R&D and operational footprint. Our company size is around 3,500 employees. Revenues generated last year exceed CHF 1 billion and our profitability is exceeding CHF 200 million. And we are listed at the Swiss Stock Exchange. Now the way we are organized is basically in 2 highly synergistically operating divisions. In Life Sciences, we are commercializing products under the Tecan brand name. We run these through our own sales and service organizations. And we're scaling laboratory workflows in proteomics, in genomics and cell and tissue analytics in the areas of research, pharma, drug discovery, production and the LDT clear clinical environment. So our end markets split in our Life Science division is more or less 50-50 in the research or pharma part and then 50% in the more regulated or semi-regulated IVD and LDT parts. And our revenue contribution in instruments versus recurring revenues are approximately equal, a little bit more overweighted now on the recurring revenue side, which includes reagents, consumables, spare parts and services. Now in contrast, our Partnering Business focuses on all OEM market opportunities. So this is where we are partnering with leading companies that bring products that we develop and manufacture under their own brand name into the end markets, and this is where we're scaling predominantly diagnostic and medical workflow. So end markets, as expected, heavily weighted towards IVD and LDT markets. The second largest market segment is the medical device segment. And then thirdly, a smaller portion is going into the life sciences and applied markets. Recurring revenues, as expected, are, of course, more heavy on the instrumentation side with only 20% in the recurring revenue bucket. Now going into the description of what we do and where the value comes from that we create with our solutions, maybe just a little bit [ goes ] into what does the laboratory workflow really look like. So typically, the workflow, it consists of 3 elements: one is the pre-analytical steps and sample logistics; secondly, sample preparation; and thirdly, there is a step in detection and analytics. So those who are familiar with advanced genomics or sequencing, so this is where you, in the sample preparation step, extract the nucleic acids out of blood, either kind of liquid biopsies or tissues or viral DNA. Then in sample preparation, you're preparing the library, and ultimately then in the detection step, you're handing it over to sequence or detection device. So we bring a lot of robustness and scale into this process, replacing a large portion of what is still done manual, with all the downsides of manual work, now adding solutions of scale, robustness, precision. We're reducing operating costs of laboratories, avoiding cost of human error, which is very important. But we're also offering solutions that now kind of achieve compliance with GLP, GMP and IVD environments. On the detection analytical side, we have 2 offerings. One is we create our own solutions, either on the detection range or the readout stage for a variety of processes, but we're also creating a whole range of OEM solutions that can be complementary to the workflows that we're supplying to the labs. But overall, we see a very reinforced trend after the COVID period to the adoption of laboratory automation workflows in general. Now when we think about our Partnering division, and I mentioned before the acquisition of Paramit, we now really completed the portfolio of capabilities from Synergence's Cavro into Paramit. And the way we think about this is we are offering, for our OEM clients, the opportunities to either consult and work with us on an entire system development program. which is spanning from conceptual design, industrialization and manufacturing of devices. With Cavro, we're offering the supply of building blocks in fluidics and robotics for those companies that want to leverage their own R&D and manufacturing footprint. And then with Paramit, we're offering now a very dedicated service for contract development and manufacturing, specifically geared towards regulated products. What is important to note that we're leveraging synergies across all these 3 business elements by using similar or identical sales structures, manufacturing structure, R&D footprint and quality regulatory teams. So there's a high degree of now synergistic leverage of the new capabilities that we brought in with Paramit. Now as we kind of address significant market segments in Life Sciences' in vitro diagnostics historically, we quantified each of them being approximately CHF 4 billion to CHF 5 billion in addressable market for us. And of course, there's always a difference between the addressable market in terms of instrumentation and reagents that capture there. But as you can see, with the addition of Paramit now, that brings us into the medical device or more specifically the medical mechatronics market, which is, in aggregate, twice as large as the addressable market that we could before. So very important also strategic expansion into the medical device space. Now maybe just to take you a little bit to the illustration of how we now strategically engage and grow into these various market segments. Now first starting with Life Sciences, where, in number one, we are, of course, in a very long-term supplier and innovator in the lab automation space. We continue to add solutions in lab automation, both from a liquid handling and detection standpoint, both in our Life Sciences side, but we also do these 4 OEM partners that, like I mentioned before, bring these solutions to market under their own brand names. We are also adding the vector 2, which is an increased portfolio of detection and analytical devices from nano dispensing, all the way to mass spectrometry sampling and processing. And this is another area where we're also very active, not just organically but also from our inorganic and M&A considerations. And then thirdly, maybe the most important area of expansion both organically and inorganically, is in the range of reagents and consumables, where we are adding portfolio for genomic, proteomic and cell and tissue analytics, increasingly complementing our legacy business around plastic consumable tips, with reagents for sequence and library preparation for mass spectrometry sample preparation, and so on and so on. So very important area for expansion, both organically and inorganically. Now on the diagnostic workflow side, similar pattern. We are constantly adding new solutions into the Life Sciences business that caters, like I mentioned before, to the LDT and clear segment, we do the same on the Partnering side. You are familiar with quite a few of the partner names. They range from companion diagnostic systems that we produce and develop for Agilent, for example, but also span the entire spectrum into transfusion medicine with the family of products that we develop and supply for quite some while into [ Quidel ] also in a more than 20-year partnership. But there is a whole range of new solutions that we're coming -- brought to market in the recent years, but also we'll bring to market in 2023 and going forward. On the vector 3, we are also adding into these portfolios, consumables. We are less able to bring in reagents for the reasons that typically brought into the portfolio by our partners, but we are very also extensive on the consumable range that we can bring into these workflows. And then four, indicates also on the instrumentation side, we are entering more and more the near patient and point-of-care markets, with bespoke developments and production around point-of-care devices and specific clinical analysis. And then lastly on the medical devices segment or we call it or we dub it mechatronics to illustrate the proximity to robotics and automation workflows. This is where we are, with Paramit, now entering the space of supply of critical components and entire assemblies around robotic surgery, energy-based systems and devices, cardiovascular controllers, home hemodialysis systems, patient monitoring, telemedicine devices and many more. So quite extensive range of end applications and products with a common capability in producing, designing entire systems or subsystems for the medical devices segment. Now I mentioned before that we are in a quite dynamic environment and privileged situation that we see quite a number of larger trends playing into our investment profiles. So I listed several key trends or we call them megatrends on this slide. First of all, of course, with growth of population and aging population, there is more people coming into the health care system demanding more economic solutions, therefore more bespoke treatments and diagnosis. We also see a shortage of skilled labor, which for us is indicating that we see more demand for automated workstations and the automation processes around workflows. We see high investments in health care overall, particularly now gearing towards prevention and therapy monitoring. In addition to immediate or acute diagnostic procedures, we see the development of targeted pharmaceuticals and innovative surgical procedures. A part of what we also kind of follow as a company and facilitate is that leverage of biological knowledge, not just in the health care side, but also in the, for example, adjacent market, like the food industry. So quite a few of our solutions now end up in food companies that develop bespoke nutrition, for example, on the basis of sequencing results for metabolic disease management and so on. We see testing modalities migrating from central labs more upstream into the near-patient environment. And this is, of course, something not new, has been potentially accelerated due to COVID, but it's also applicable to a number of additional workflows outside of the infectious disease area. And then lastly, we see a continuation of digitalization in our environment where, again, we a key innovator in digital solutions, both from a user interface and a lab connectivity standpoint. So this, in aggregate, needs -- fuels the need for innovation in our space in the entire continuum of biological research, all the way into drug discovery, drug production, diagnostics, treatment modalities and, ultimately, in regimes that cater to the prevention of diseases overall, but the underlying technologies are very similar. So how did these megatrends translate into the financial profile of Tecan. So I listed here or just gave you the anchor points between 2013 and 2021, where you see that we very successfully grew the company in this time frame of around 11.8%, but even outpaced the development of profitability gains from operating profit all the way into operating cash flow and net profit. So we are, I think, taking quite significant advantage of these opportunities globally. And we see that also going on for the foreseeable future. Now what makes our world a little bit easier to digest is that we see a very broad scale of common capabilities that we can leverage into a very broad spectrum of disease areas that we can cater to. So for example, we are engaged in literally every disease area like cancer, infectious disorders, hereditary disorders, metabolic disorders and so on, because the underlying applications of product use cases are quite common. So when you look at the health care areas, for example, the deployment of genomic workflows or proteomic workflows or cell and tissue workflows have a high degree of technical commonality against the questions that are asked in these individual disease areas. So we span workflows in genomics from traditional PCR all the way into next-generation sequencing, from a sample size, from a single cell all the way into complete tissues, from liquid biopsies into the traditional biopsy fingerprinting. From the proteomic profile, we span from immunodiagnostics all the way into mass spectrometry, and cell and tissue from traditional staining techniques all the way into molecular staining. So a very broad range of capabilities that we have assembled over the past years that we deploy against these disease areas, and complemented this with additional use cases now from the medical field, from transfusion medicine, all the way into robotic surgery, reconstructive surgery, patient monitoring and so on. And the commonalities of the Tecan side are pretty well applicable to all these disease areas and workflows that I just mentioned. Now when thinking about concrete examples where this translation or bridging from research into the clinic is happening, I wanted to describe briefly the workflows around next-generation sequencing in our world. So we have a very long history of automating workflows around sequencing with research clients, where we typically cover work flow steps with our solutions that then leads to the better understanding of disease mechanisms, either in pathway analysis or specific mutations that lead to the origins of cancer. Now we take these platforms into then the regulated markets, like in the clear and LDT environment, where we are scaling up sequencing to industrial level. So this is where you find dozens of our equipment and solutions alongside consumables and software solutions in LDT or genetic testing labs, the new sequencing at industrial scales in 24/7 operational mode to, for example, questions around hereditary cancer origins, genetic profiling of tumors, for example, and many others. So this is where we learn how the industrialization of workflows really have a clinical impact, but also we can demonstrate, with our partners, reimbursement and clinical validity potential. And then lastly, and this is a real life example, of course, we are now translating that also into the clinical world in the in vitro diagnostics, where, again, we're handing it over from our Life Sciences teams into the Partnering division, which works with leading in vitro diagnostic companies. And there, we just brought to market a highly innovative clinical solution that for the first time now bridges the next-gen sequencing applications into the FDA environment with a fully IVD-certified workflow sample-to-answer solution. So in -- what we do is we continue to add to the portfolio. And again, just for the sake of an example, I choose the expansion that we're driving of our solution in the advanced genomics space. So this is where, historically, we have automated processes for large-scale industrial and core facilities. And now we have created solutions that go upstream from these core facilities with products like the DreamPrep NGS compact, which offer a much more economic footprint. But also with solutions like the MagicPrep NGS, which is the first personal, if you want, pipette automated workstation for library preparation on a personal investigator level range of products. So we have now created an ecosystem that really caters from the individual researcher all the way into the core facilities. And now we've taken this also, and this was a launch that happened in the second quarter last year, the program, as I just mentioned, into the clinic with an IVD-grade sequencing system that has come to market in April of 2022. So quite extensive range of solutions, and you can expect the same range of innovation solutions coming into the proteomics field as well as the cell and tissue analytical field. So one element that, of course, is also very important for us to consider is the history that we have in driving sustainability for the company that is core of, I would say, the Tecan culture and is deeply embedded in our operational processes. So we have bespoke programs around improvement of our environmental footprint. We are constantly improving our scrutiny on governance processes, particularly now that we're getting an increasingly global footprint with a significant presence also in Asia. And we constantly focus also on our social impact focus and the company culture to make sure that we get the right amount of talent that substantiates and fuels the growth that we see as a company. So again, just maybe just summarizing the financial developments, 2013 to '21, as I just outlined, average CAGR around 11.8%. Very strong operating cash flows allowed us, in this period, to not just organically but also inorganically expand the company. And the period that we have reported on, and we are reporting '22 numbers only in March 14 of this year, but what I can refer back to was, of course, also the very positive momentum and development that we've seen in the first half of '22, where we already were able to compensate a very large portion of the COVID revenues that we generated in '20 and '21 that are now going out of basically the revenue line. But as you can see we already, in the Life Sciences business, in H1, for example, generated already 4.3% organic growth in a very steep comp of the H1 2021 before. And the, also, profitability developed quite positively in that time frame. So we guided for 2022 for kind of company growth profile around mid- to high teens, and the profitability adjusted EBITDA around 20%. So again, I will give you a kind of more kind of concrete update in March 14. But what I can say at this moment that we also look into 2023 with a very high degree of confidence and positive momentum that we gained throughout 2022. And we I think see, in all geographies and all the end markets we're serving, very positive momentum and development as we speak. So I think there, I probably summarize the presentation. So I think we are coming from a period of very substantial growth over the past periods, both fueled by organic innovation, new partnerships, new products in both the Life Sciences and the Partnering side. And I think now with the Paramit expansion into the medical field, we're just tapping into an entirely new market segment that offers nearly twice as large addressable market than what we enjoyed to be able to address before. I think right now, we're also an increasingly competitive position with a very complete portfolio of solutions with also a very strong innovation, particularly in the digital and software environment. So I think we've seen a lot of these solutions coming to market, accelerated by COVID for sure, but you see the momentum now continue very strongly into '22 and '23. And as I said earlier, I think one of our core capabilities to bridge innovation from research all the way into the clinical side is something that we see as a very, very strong competitive asset. And we continue to focus on applications that we identify having the highest growth potential and impact potential for the journey from research into the clinic. And lastly, with our strong financials, we are in a very good position also to continue the reinvestment into company both from an organic R&D and sales and marketing and service perspective, but also from an inorganic M&A perspective. So with this, I thank you very much for your attention, and I think we have some time for Q&A.

Thank you very much, Achim, for the presentation. So we'll now turn to the Q&A. And perhaps I'll kickstart and I will ask you the first question. So what are the application areas that you're most excited about and where you see the transition from research to diagnostic use?

No, I think as I tried to illustrate, I mean, sequencing is happening right now. I mean we've just launched the first full IVD system. And we see the clinical use case expanding, of course, from oncology very rapidly into metabolic disorders, infectious disease and pre- and neonatal. So maybe that's the one that is most kind of fascinating to see right now and to be able to scale that across the continuum into the clinic. I think the second one that we see very importantly is the proteomic field. And probably the way we look at it, proteomic 2.0 is maybe 5 years behind next-generation sequencing in terms of the clinical impact on what the real proteomic profiling could deliver from a clinical readout. But ultimately, what I'm also quite excited about is the combination of methodology. So when we think about liquid biopsy, we believe it's a combination of genomic and proteomic readouts that will facilitate the highest impact, let's say, for the clinician to make kind of decision on treatment regimes and then patient monitoring over the treatment. So I think these 2 are the ones that we believe and I believe are the most relevant ones.

And you just touched upon oncology. And as you know, this is the field that we touched a lot during the conference and that we're really excited about. How is Tecan involved in this field?

I mean we -- like I said, we span more or less the entire spectrum from oncology or cancer research, where researchers use our solutions, for example, to find kind of new pathway inhibitors or kind of mutation that could be kind of addressed by drugs. Then we continue our journey with the pharmaceutical industry that uses our solutions for drug screening, drug development, not just small but also large molecules. We are engaged, for example, also in the mRNA field very tangibly where, of course, now coming out of COVID, this has become kind of newer modality also outside of the vaccination space originating in the oncology space. And we then take that also into areas like companion diagnostics, which is also a very high unmet need, to really live up to this idea of precision and bespoke diagnostics and treatment monitoring opportunities. And I think we have quite some exciting opportunities and existing products in the market today. And then ultimately, with the medical field, of course, with robotic surgery and some new modalities of treatment options, we kind of now go even into the clinical spectrum, facilitating less-invasive and probably also more economically helpful procedures in the operating room with partners in that space. So I think quite complete range. And one area that we also focus on is the front end, for example, biopsy fingerprinting coming out of liquid biopsies and solid tumors. Again, I don't think it's going to be one or the other, it will be a combination. But we see very strong pull, particularly now from the liquid biopsy field, into earlier diagnosis and maybe even prediction and prevention. But probably the most tangible is in the therapy monitoring side of cancer patients under treatment. So I think there's a variety of things that we cater to and kind of engaged in right now.

And after benefiting strongly from COVID testing over the past years, we saw that Tecan did not really fall off the cliff. How did you achieve that? And does this mean that now COVID is behind you, COVID adjustment is behind you?

No. I mean clearly -- I mean, for us, as we go into '23, I mean, maybe it sounds strange, but COVID is behind us. And as you know, I mean, we -- on the peak time of COVID testing, we generated around CHF 150 million to CHF 170 million in revenue. So very substantial kind of uplift. But what we've seen after COVID started to subside was an, I would say, increased, probably even transformational, adoption of automation workflows in the end markets we're serving, particularly, of course, in the clinical and clinical service side, but also in research and some other elements. So we see that -- we saw that in 2022 developing. And then as I said, financially, we could even demonstrate in H1 already that we could kind of fill that gap quite elegantly with the underlying growth that we drove from our workflow solutions. And like I said, the other trends that we continue to see is, for example, the scarcity of labor or trained labor, again, helps us quite significantly because our solutions are increasingly geared to very low levels of training of operators. And labs, of course, now consider do I go out and try to hire 10 people that run manual processes without the downsides that I mentioned or do I purchase Tecan Fluent and then automate the process for all the upside and then the efficiency gains that they can drive. So labor scarcity for us is typically good news.

So I'll jump into this lab automation subject and asking you because I guess we mentioned that several times during the presentation, it's positively impacting the business. Do you see this as a sustainable trend?

We very much believe that's a sustainable trend. And because we see it across all the end markets and the spectrum that we're serving. It's also geographically, it's not a kind of North America or European phenomenon, we've seen that also very strongly now kind of being picked up in China, for example, where we are very successful in, for example, advanced genomic applications like synthetic biology, gene-editing workflow. So I think it's really across the board on a very, very broad basis.

Perfect. I'm going to switch now to a bit of M&A. So Tecan has closed several bolt-on acquisitions and a transformational deal in 2021. So do you continue to look for attractive M&A? And what areas are you looking for?