Tecan Group AG (TECN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm [indiscernible], and I'm a member of the JPMorgan Investment Banking Healthcare Team. This morning, we have Achim presenting, CEO of Tecan. Over to you.

Thank you very much, and good morning from my side. And yes, thank you for your interest in this update on Tecan. Before I go into the presentation, as always, please acknowledge our safe harbor statement, and you find materials also downloadable on the JPMorgan website. Now we continue to live through quite dynamic times, and we, as a company are certainly seeing specific trends and macro environments that facilitate and fuel our growth trajectory. So when looking at maybe, for examples, we see and continue to see investments in biological discoveries. And we've seen an explosion of biological knowledge addressing more specific disease types around the world. Second part is we see increasingly growing in some areas, but also aging population, which means we see the demand and the pull of innovation into the health care system for scalable and affordable health care solutions that address the need for economy at scale, but also the deployment of technologies that are utilized in mitigating health care costs. The other factor that we see in our world is that we see the shortage of labor is playing increasingly into the needs of productivity and cost saving of laboratories that we're serving around the world. On the other side, we see massive investments in novel treatments and novel modalities to treat patients. We see that, of course, now from the history of small to large molecules, we see that now moving into areas like cell and gene therapy and modern and more innovative medical procedures. Now nevertheless, all these novel treatments and novel options need scale, and they need to reach patients economically and not just technically, otherwise, innovations fall short. And lastly, we see a kind of unprecedented rush of digital solutions and deployment, including tools like AI, also in our space that is offering new approaches for prevention, diagnosis, treatment and treatment monitoring over time. So in all, we see very good investment and rising investment horizon, specifically in diagnostics and prevention. Now Tecan comes in as a company that drives innovation to scale. And this is what we do, it's throughout our company history. We firstly see innovation accelerates discovery with our solutions. So we see a lot of what's coming down the pipeline of potentially interesting innovation solutions. We then move these innovations into the pre-clinical space. So we help the adoption of solutions in the preclinical space into compliant solutions that can fit the FDA footprint. And then we deliver those clinical solutions at scale on a global basis, improving patient outcomes around the world [indiscernible]. Now we have a very strong track record of performance over the last 10 years. As you see on this slide, we have a long substantial period of organic sales growth that is outpacing the average growth rate of the underlying end markets. We have made 6 bolt-on acquisitions predominantly in the space of reagents and consumables and we have made one transformative deal with the acquisition of Paramit in 2021, that now also gives us access to the medical devices market. We have seen a very strong growth based on increased global demand for lab automation in key application areas, obviously, also including the COVID rush to PCR testing and sequencing but also since 2021, as I said, we are benefiting from growth in the medical devices area. Our profitability has grown slightly faster than the revenue profile, which allowed us and continues to allow us to reinvest into the company, both from an organic perspective but also from an inorganic perspective going forward. So when I look now at 2023, and we have published preliminary revenue results for 2023, and we will update on the rest of the financial set in March of this year, we have seen a quite substantial underlying sales growth in local currencies in our full year and also very strong performance in the second half. Now underlying means that we are extrapolating and normalizing for the exceptional effects of COVID-related revenues as well as what we call pass-through revenues where we are charging and invoicing elevated inflationary costs to our clients, and if you normalize them out, we arrived at 6.3% underlying growth. And looking at the divisions, both came in quite strongly and the growth profile in Life Sciences is around 4.9%, and the partnering business came in at around 7.4%. And all in local currencies, when you then include the comparable basis of COVID and pass-through revenues, we achieved minus 1.3% in the second half, 1.0% positive growth all in. Now when I just quickly reiterate Tecan for those who don't know the company that well, we are, as I said, an illustrated, driven and benefiting from macroeconomic trends that fuel our business model and our strategy. We are in business for more than 4 decades. We have been founded 42 years ago and have since been the leader in laboratory automation and robotic solutions, serving the life sciences, diagnostics and pharma markets and with the acquisition of Paramit, we then expanded also in the medical devices or we specified as a medical mechatronics market segment. We are operating in 2 very highly synergistic business units where we inherently implemented the opportunity to transition solutions from the non-regulated spaces into the regulated FDA relevant space, and I will give you a little bit more detail later on. We are operating quite intense and expansive global sales and service network, where we're constantly looking also at opportunities to increase our footprint in sales and service reach and in 2024, we will be going direct, for example, in South Korea, which was one of the reasons that have shown more sustainable growth over the past periods in addition to the regions where we are already direct. We are headquartered in Switzerland, where the predominant administration functions are. But with the acquisition of Paramit, we achieved the distribution of R&D and operational footprint that is representative of 1/3 in the U.S., 1/3 in Europe and 1/3 in Asia, which we believe is a very good and solid basis for continued organic growth, but also offers us very good capabilities for additional inorganic acquisitions. Company size is around 3,500 employees, and we are listed at the Swiss Stock Exchange fully floated. And this is just in a nutshell what Tecan is. We are, like I said, operating in 2 business units and maybe just a little bit of detail how you see us in the market when I look at the Life Sciences business, this is where you find our products under the Tecan brand name. We are a leader in laboratory automation, but also constantly enhance our footprint on reagents, consumables, software and services. Life Sciences makes up approximately 43% of our business profile, and we are serving the life sciences research markets through applications that are called genomics, proteomics and cell and tissue applications in the space of research, drug discovery and what I would call the pre-FDA or the clear LDT market segment where we are scaling solutions with substantial lab service providers and specific reference test laboratories. So the end-market split in Life Sciences, approximately 50% in Life Sciences and 50% in these lab service provider environments around clear LDT. Now by contrast, our partnering division is probably less visible to the outside world because this is where we're operating at Tecan [indiscernible] model working with partners around the world on specific development of solutions either through supply of distinct components that they use in their own R&D world or we take over the entire design, development and manufacturing of systems in the diagnostic space but also in the medical space right now. This is approximately 57% of what we do. And like I said, pretty well differentiated with a range of solutions that are ranging from manufacturing to engineering. And typically, we are also embedding [indiscernible] in these solutions, which gives us very good if we want profitability profile and the ability to grow margins on the partnering side as well. We are represented in the partnering business around 50% in, in vitro diagnostics, 20% in Life Science research and applied markets, and around 1/3 in the Medical segment. Now when you look at Tecan, we are obviously serving a variety of end markets and customers. So when you look at this slide, you see on the left-hand side that we are very engaged with clients from academia and clinical research from biotech pharma, genetic testing and reference labs as well as direct clinical clients. On the right-hand side, you see that we are mastering and catering to the core applications, the growth applications that we called out as most substantial and potential for us to grow and differentiate also competitively. And they include genomic applications, protein analytics as well as cell and tissue and analytical work and now also medical applications in the medical mechatronics space. And as we think about these kind of if you want, progression of innovation from research to the clinic, I would just like to take a couple of recent examples in partnerships and new products that we've launched to illustrate that journey from early innovation all the way into the regulated IVD and medical market segments and how we are differentiating also from many other companies in this space. Before I go into these examples, however, let me just quickly illustrate why it's so advantageous to operate these connected business units and what we're gaining from this. So as we think about life science research market, this is for the example of next-generation sequencing, the area where innovation started to happen. And we get typically called in when innovation needs scale. So our lab automation solutions deliver scale and eliminate human error out of the equation and allow research to prosper more rapidly. So this is a very important segment that is served through our Life Sciences Business. And then what typically happens and sequencing is a great example for this, if there is clinical value and the reimbursement potential demonstrated, then typically, these [indiscernible] solutions are picked up by lab service providers or specific testing labs that industrially scale up these workflows. So in the middle part, you see what we call lab-developed tests, and this is in the world of sequencing where we moved from single instrument deployments and research into our industrial scale automation of sequencing workflows, using dozens of instruments and the vast amount of consumables to cater to this kind of scaled-up business models. What we also gained from this is that we see the potential of the migration into the clinic because in this segment of the LDT clear market we engaged in, we see clinical validity and reimbursement potential being proven. And then it's very common that we then approach and get approached on the in vitro diagnostic side to develop with a partnership model through our partnering division, systems that are then [indiscernible] systems, and they are branded and commercialized under brand names of our OEM partners. Now again, just going back to this layout of illustration. So connecting the genomic application space with diagnostic applications in the reference testing environment, we have commercialized now for quite some time, solution that we call Fluent Gx, which is a bespoke program and system offering unique capability of ease of use and industrialization of workflows, including sequencing in this case. And these 4 sequencing applications is used for extraction of nucleic acids but also the preparation of libraries for RNA and DNA sequencing. And like I said, you probably need to consider a hall with dozens of these instruments running 24/7 doing these reference test services around noninvasive prenatal testing, hereditary cancer test, genetic profiling of tumors, cell-free DNA testing and so on. So it's a quite important segment for us, being able to serve these platforms. And very important to recognize these are Class I medical devices that we commercialize as open systems. So our clients can modify them as these applications tend to then sometimes also evolve in the hands of these testing labs. Now flipping to what I said earlier, the regulated market environment. We're very happy to say that we were very successful to use that experience of these reference labs and the clear markets to now also attract a quite wide range of partners on the in vitro diagnostics side, where we have developed and already started commercialization and ramp-up of a bespoke sample-to-answer IVD next-generation sequencing system. Again, just as one example of an application workflow. And this is what we've done in partnership with one of the leading in vitro diagnostic companies. Unfortunately, I cannot say the name due to confidentiality reasons, but it's one of the leading in vitro diagnostic companies. And they're using this in combination with their software and reagent capabilities to address markets in oncology [indiscernible] where they're looking and deploying this for liquid biopsy and solid tumor sequencing approaches for detection of primary tumors but also the monitoring of response of treatments over time through response [indiscernible] monitoring. Now maybe just shifting gears to another application area or central preparation area that is in very high demand and growing very rapidly. And this is, as you can see, what we would call the Multiomics world. So this is not limited to genomics, proteomics and cell and tissue work. It spans the entire world from research all the way now already into the clinical space from service providers into the IVD space and very appealing to technically all the customers we're serving. And the example I'm talking about is called Phase Separator. It's a technology that accelerates and makes liquid biopsy a lot more productive and accessible to a wide range of applications. So this is where we are dealing with whole blood samples and separating plasma from cells to facilitate downstream analytical processes around utilization cases, oncology, neurology and metabolic disorders. And clearly, the downstream applications and the workflows that are facilitating with this Phase Separator liquid biopsy approach are in these spaces of genomic applications, including sequencing, but also PCR, mass spectrometry and single cell and analytical process. So it's just one of the examples where we have created kind of AI-driven software tool that we use on our platforms to basically facilitate the wide adoption and continuous increase in productivity, efficiency and accuracy for this growing application space. Now going into another field of engagement is also that we are, of course, looking at genomics as one of our most, if you want, exciting spaces of expansion and growth. And there, we are constantly also looking out for new modalities and new innovation workflows that are coming into this space. And again, when you collect now genomics with early research and customers from research all the way into reference testing labs, we're very proud of the partnership that we signed with Oxford Nanopore. Again, just one of many partnerships that we have, but a very important one that now opens up the world of long-read sequencing in a fully integrated system that we are developing for Oxford Nanopore using, and I think it's called in the Oxford Nanopore, the TurBOT system that is leveraging the MinION system as a kind of initial sequencing platform, but it's open to also host other more advanced sequencing systems as we evolve with this platform towards also clinical applications. Now maybe shifting gears a little bit to other application areas. And again, this is just meant to give you a kind of a feel and a flavor on our kind of breadth of engagements. And this is [indiscernible] as you can see, proteomics with in vitro diagnostics in the clinical setting. And this is an example that I've chosen from the blood cancer diagnostic world, again, the partnership through our OEM programs with The Binding Site, a company that is now also part of the Thermo Fisher, an environment where we created for The Binding Site, the first [indiscernible] system for blood-based cancer diagnostics with the big advantage of the system compared to previous methods that is ultimately significantly more sensitive and offers clinicians earlier options to detect and treat with multiple myeloma or generally monoclonal gammopathy diseases in this space. So again, just one of the examples where as you can see in these pictures, we are technically using in most of these examples, very common platforms and technologies to realize these workflows. Now lastly, just a comment and to round it up, I don't want to go into too many specific details, but just kind of illustrating our engagement level in the medical device space. With the acquisition of Paramit, we're now very actively moved into this segment, which is from an addressable market as big as Life Sciences and diagnostic combined in our reading. And this is where we are leveraging similar expertise and capabilities compared to what I explained before engaging in development and manufacturing of complex medical products with high robotic and/or custom electronic components. So you find us, for example, in leading robotic surgery solutions, in patient monitoring solutions, in cardiovascular controllers, home hemodialysis systems and telemedicine devices. So again, a very wide range of technologies and applications that we're supporting through our capabilities, specifically in [indiscernible]. Now maybe just us trying to kind of summarize and wrap up what I said so far. So as I've tried to illustrate, we are engaged in many disease areas, types like oncology, metabolic disorders, reproductive health, hereditary disorders. Infectious, of course, was one of the key [indiscernible] areas we engaged in before COVID and after COVID but also cardiovascular, and we're doing this by focusing our workflow solutions on the underlying applications that I also try to illustrate that are represented by genomics, proteomics applications, cell and tissue work and [indiscernible] applications. Now you could now say, well, is there not a very complex environment. So how do we avoid getting too complex and maybe kind of wound up in portfolios that are not eating up kind of all our Life Sciences life cycle management budgets. So one of the things that we focused on for quite some while, which I also believe is one of the strongest competitive differentiations of Tecan is software. So what we've done, we have created a software architecture that allows us to cater to all the application areas that I mentioned before, with technically any type of hardware configuration that we want to deploy in this space. So this software is so modular that it can work with a very high industrial scale workflow hardware solutions, but can also go down to near patient and very small [indiscernible] solutions. And as you know, there's a lot of momentum right now, not just scaling these kind of testing modalities in central labs, but also increasingly moving nearer to patients, particularly as some of these digital solutions come to fruition and allow more integrated work on the medical data side. But this modularity aspect on hardware and software gives us the opportunity to use a common R&D and operational footprint in many different application areas, covering both the life sciences and the partnering world. Now lastly, I mentioned quite a few times how important our digital footprint and our digital capabilities. So we are kind of focusing our digital efforts on one side on software architecture, as I explained it, and then driving modularity and making sure that we can very rapidly develop very cost efficiently and very confidently solutions that can cater not just through the research but also to the regulated IVD markets. And we focus our software solutions that we commercialize quite a few products in the area of service and fleet management so far. And I'm very happy to also announce today that we are also now engaging very actively with an entire new suite of software solutions around lab orchestration. So this is the area where we're offering now software solutions to boost personnel and equipment effectiveness by orchestrating the entire lab workflow from set of experiment, including also hardware and configurations in these labs that are not necessarily coming from Tecan. So this is a creation of an open ecosystem that will allow us to be the front and center of application method development, for example, for research and pharma labs as we go through the journey of increased desire of increasing efficiency of lab personnel and also deploying methods into personnel that is not necessarily highly trained. And this means, I think, for us, a very exciting addition to our software suite and something you can expect we continue to build out over time as we go. Now lastly, I would just like to conclude with the statement that we are looking at sustainability as an integral part of our strategy and the way we operate the company. And very proud to just point you to some of the [indiscernible] recently, you get a lot more flavor of what we do from our annually published sustainability report. But just to highlight that we've just been validated with our submission on the scientific-based target initiative, a very important milestone for us to now continue to reduce our carbon footprint. On the social side, very proud that we recertified as a Great Place to Work in many global locations. Again, our kind of effort to become the employer of choice in our industry. And then on governance, this is here, as you can expect as a kind of professional globally scaled company, we are focusing inherently on many processes that we want to improve and scale up, particularly as we're now increasing our global footprint into Asia as well. Now as a summary, I just hope I could transport the message that we, as a company, have a very long successful history in scaling health care innovation in many application areas, we have exposure to very attractive end markets in life sciences, in the diagnostics and in the medical field. And I can also say, looking back at '23, being exposed and a key player in this kind of wider array of market segments has been a source of quite good resilience in times where maybe some submarkets are less predictable than in previous periods. So this is something we believe we can benefit also going forward. We're offering a full spectrum of solutions from accelerating the discovery of novel medications, all the way to personalized diagnosis methods and treatment, ultimately also offering entirely new options for prevention and early detection of diseases I tried to illustrate in the blood case example. So going forward, you can expect both business divisions being very busy with the launch of new products and new partnerships. And of course, that is the fuel that we have inherently to drive innovation and new product at scale. We continue to focus on our life sciences world on genomics, proteomics and cell applications and also continue to build out the recurring revenue profile of our business. And in Life Sciences today, just for your benchmarking, we are approximately at 50% recurring revenues, and 50% is CapEx related [indiscernible] but we also constantly add new [indiscernible] as we see these business models pay quite well in the applications that we're focusing on. And lastly, Life Science is focusing on the state-of-the-art digital ecosystem as I tried to explain. On the partnering side, it's all around product launches and new partnerships. And we're building out also now the medical franchise where we put a lot of time and effort into building out differentiated sales and operational team that is going specifically into these medical accounts that came with the Paramit acquisition, but we identified as very important as future growth drivers. Now lastly, yes, it's all about the future and where we see the markets going, and we see where we see Tecan growing and therefore, I would like to again go back to the track record that we demonstrated over the last 10 years and our conviction that with what we do and how we're engaging in this quite well-funded exciting market segments that we will be able to continue to outgrow the underlying market segments and deliver a mid- to high single-digit percentage revenue growth over the midterm. And while we grow top line and we acquire top line leverage, we are convinced that we can also improve the bottom line performance over time with an average annual increase of the adjusted EBITDA margin at around 30 to 50 basis points. So that's, of course, not kind of year-by-year, but this is what we're aiming at and have delivered historically over time. So with this, I thank you very much for your attention. And if there's any more information or discussions you would like to have, here is the contact of our Investor Relations colleague, Martin Brandle. And with this, we are happy to take any questions that you may have.

Perhaps one for me in that case. So you mentioned COVID revenues and kind of normalization over time. What are you planning for 2024?

Yes, it is probably safe to assume that the COVID normalization is behind us. So that's why we call it still out in the '23 results because it was substantially in '22 with the profile that I mentioned, but also the normalization of supply. So that's how COVID is technically out of the system. And also from an inflationary perspective, these pass-through revenues were revenues that we could charge specific subsegments of our clients, invoicing them for the elevated material cost as an indication that demand was very solid. On the other side, inflation was hitting us, particularly on the electronics and electronic subcomponents side. But we've seen that greatly normalizing, which is why these -- what we call pass-through revenue part in '23 already came down significant and it was probably lower than what we expected. But these kind of areas are quite, I would say, back to normal or more normalized.

As you mentioned, there's in fact by inflation with increased cost of goods sold. And also, probably, we see that in the current macro situation, there might be a reducing demand. So would you be considering offering some more economical solutions to your customers, to your clients?

I mean one of our, I think, strength is that we do offer quite different levels of complexity and choices. So we offer kind of high-end configurations for automation, but you can also take that as a kind of modular system in a more stripped-down version and then grow over time, as maybe your budgets increase on that very same platform. That's one of the advantages of modularity that particularly in the research and pharma and in lab service provider field, you don't need to commit to the ultimate configuration. You can say, I start with that part, and then I continue over time, but the benefit is you have already adopted the methods, your operators are familiar with the solution. And like I said, we are already offering, particularly in the clinical space, very economic, also more nearer patient solutions based on these kind of modular footprint that we have. But what you say is, of course, very important, and customers want to have a choice. But in -- probably in our world, particularly when I think about the regulated kind of the in vitro diagnostic and medical fields, what we are seeing is a much kind of higher focus on quality, robustness and cost of ownership than on the initial purchase price because most of our clients obviously run reagent rental models in the in vitro diagnostic world. So for them, uptime is everything that counts. We are very, very rarely debating kind of the specific discounts on systems. It's mostly around whatever I said, can we offer software solutions that keep the lab in work 24/7. And this is what we learned in the COVID period where, of course, this stress was super high and productivity was everything that mattered. So I think, yes, absolutely, but we can also offer now also different business models where we not necessarily sell everything on CapEx, but we can also -- because we have content, we have reagents, we have consumables for selected accounts, we can offer also other options to maybe place instruments but then leverage reagent rental models in select areas.

I think that's all. Thank you very much.

Okay. Thank you very much.