Tecan Group AG (TECN) Earnings Call Transcript & Summary

Thank you. One minute.

Thank you. All right, can everyone hear me? Yes? Excellent. All right, welcome everyone to our Fireside Chat with Tecan. I'm Aisyah Noor, Head of European MedTech Research at Morgan Stanley, and it's my pleasure to host for our first time Tecan CEO, Monica Manotas, today. Before we start, I'm obligated to inform you to check `ms.com/researchdisclosures` for important disclosures. And [Operator Instructions]. With that, welcome, Monica. It's great to have you here at our conference in New York. If we first start off with the bigger picture and some introductory remarks from yourself, this is our first MS Fireside in New York with Tecan, so very proud to host your inaugural session. I imagine there are a good amount of newcomers to the Tecan investment case in the room today. So could you start with introducing in a few words, the Tecan business and equity story?

All right, so thank you for having me here, Aisyah, and I'm excited to talk to you about our story, so thanks for your interest. So maybe at the highest levels, Tecan is a player in the life sciences tool space, with a leadership position in laboratory automation. So if you think about pharma customers doing a screening of compounds or diagnostics players processing patient samples, or maybe a scientist sequencing a genome, it is highly likely that they're doing that, leveraging the Tecan technology in their liquid handling, their detection or generally in their sample preparation. Maybe a little bit about myself, I have been the Tecan CEO for about a year, joined the Board a year before that. I've been in the life sciences tool space for over 25 years, and I have been associated with Tecan even before, you know, I actually joined the Board, which allowed me the opportunity to know them very much like a customer, right? And that allowed me to have an understanding of their overall strength. When I joined the Board, it was a tough time for Tecan, if you think, 2024, 2025. And as I got to know them a little bit from the inside, it allowed me to also confirm what I knew were the strengths of the company, you know, strong product portfolio, strong brands, great customer relationships, really good teams. And it was a matter of really taking advantage of that foundation to get them to a place where we were executing ahead of where the markets actually were, which is why that led us to, you know, launching our transformation program called Rewired earlier this year. And what we're doing there is we keep saying that we're going to, through that program, future-proof Tecan so we can be sure that we are executing to be ahead of where the markets are, always outperforming the markets. When you put that in perspective and maybe connecting that to what is our equity story, I would summarize it in three areas, right? Very strong leadership position in the laboratory automation and particularly in liquid handling. You ask any customer in our space who Tecan is, they will likely tell you we are the gold standard in liquid handling automation particularly. So that strength and leadership position is number 1. We service markets that are very attractive. So, granted, they've had a little bit of some uncertainties in the last couple of years, but when you actually look at the fundamentals for growth, they're very much intact. And then number 3 is the opportunity that we have now in these markets as it relates to technologies like AI coming into play in how the customers are now seeing that for them to truly be able to take advantage of the what AI brings to them, automation is no longer a nice to have, it's much more of an essential. So all these components make the Tecan story an exciting one that you should all be considering.

Okay. That's a great segue into my first question then. I wanted to start with, you know, the AI theme because it's caught the attention of many people since the headlines first came out. Can you talk about the 2 AI-based partnerships that you've signed this year, how they differ from each other, how it applies to your product offering, and then how it benefits either party? And why do you think too...

Yeah, maybe starting with the last part of your question on why we were chosen. I think that that ties well with the reason why our customers decide to go with our technologies. And what I constantly hear from them is they really appreciate the modular approach that our technology has from both a hardware and a software perspective that allows them to have good amounts of flexibility to apply our technology into the applications that they're trying to work the technology into. So I think it was the same case as we were thinking about why they came to us for these things. And to be quite honest, in many cases, they told us themselves, our partners, that it was the customers that said, okay, for this play, you need to go talk to Tecan. So good testament of our presence in the market with our customers. When you think about the 2 partnerships, they are quite different. If you think about this whole ecosystem between the dry lab and the wet lab, I would characterize the first 1, which was the partnership that we started with NVIDIA, was the first 1 that we announced earlier this year with the first milestone of adding agentic AI capabilities into our Introspect tool announced, I think it was in May of this year. And the idea here, if you think about, again, the ecosystem of the dry and the wet lab, here it's about focusing on the wet lab and making sure 1 of the things that is important for the customers is the reliability of this wet lab to get the results that they need to then be able to actually connect into the dry lab. And that's where the Introspect tool and what we're trying to do with NVIDIA comes into play. The Introspect tool in itself, before the NVIDIA collaboration came into play, was really designed to help customers monitor their fleet of instruments, right, to be able to know that the instruments are working, that the level of utilization of consumables to total is in line, all of those different parameters. And what the tools now of agentic AI is adding to Introspect is basically making the tool smarter, right? The customers are able to now interact with Introspect through agentic AI. It just makes it a lot easier to work with the tool and monitor different things. And actually, the tool can now be a little bit more predictive on what are the things that the customers should look into and ensuring that everything in the fleet of instruments is performing as expected. So, it goes into how you make that wet lab more reliable. The second partnership is what we announced actually more recently, is the work that we're doing with Anthropic. And what Anthropic wanted to do, they launched something that they call MHS. It's the Model Hardware Standard. And what they're trying to do is support customers that are interested in automating tasks within the lab. To be able to do that, they need a way for the laboratory instrumentation to communicate to agentic AI. And that's why they developed this protocol so that, you know, if the instruments speak that language, then they will be able to connect to the agentic AI. And so the way to think about it again, if you think about the dry versus wet lab universe, this is a way to create a better or easier integration or connection between the wet lab, which is usually where we sit, and the dry lab or the in silico, right, where the AI models are. And that's where, that's where you create that closed loop that everybody talks about. And we, in addition, have another side of interest in this partnership, which is, if you think about this concept of the autonomous lab, so for us, we play there through our own integration capabilities through our Labwerx business. And we actually create those integrations between the various instruments to create the work cells or robotic work cells for the customers. But if we get to that point where truly you can have a communication standard that all these instruments are talking, I think that that changes the way we run these integrations and you can accelerate the process of eventually getting to that autonomous lab. So that's another piece by which this is an interesting partnership for us to play in. And the more we have other players actually using MHS, the more interesting this part of getting to the.

autonomous lab becomes. Okay. How do you think about the commercial model for these AI-enabled offerings? Is this a software subscription, a service layer, or is it embedded in your instrument pricing?

So it's a very interesting question. And you can see in how we have worked up until now, we have not really monetized software. Usually we see software as a way to either control the instruments, right, is what you see with like fluent control, for example. But then we also have digital tools like Introspect, that we add to the hardware sale as a way to sell more instruments. So this is what we know how to do and certainly what we've seen with Introspect initially is to be able for us to sell more of our instruments. But we're open. I mean, 1 of the things that we have been thinking now as we've added this layer of agentic AI into Introspect is, does that create another opportunity for us where maybe you say, okay, we could sell the base Introspect with the instrument. And if the customer is interested in the agentic AI, there will be a subscription model added on top. I think if we go in that direction, we will need to think about channels to market and everything because it is a bit of a different sale. But at this stage, given everything that is happening in this space, we're open to looking at the different alternatives.

So investors are obviously looking for ways to understand the materiality of autonomous labs, quote unquote, as a revenue potential for Tecan. I know it's early days, but I would love to throw some hypotheticals at you and see what you think makes sense. The first is just a broader market acceleration, growth acceleration from earlier discovery, higher efficiency. The second is automation penetration increases. What have you, as we know, generally accepted, it's about 20% of labs today are automated, quote unquote, so could that increase? The third or more near term is you get this kind of customer wins or conversions to your platform from users who want in on the Introspect digital overlay where they don't get that with your competitors today. And so that can catalyze their risk breakthrough discoveries, workflow, what have you. Have your customer discussions come that far? You know, what are you envisioning here?

Yeah, I mean, I would say that the likely outcome is probably a combination of all of them. I can't imagine 1 scenario over the other. Definitely will see more usage of automation across the board as things change in the entire drug discovery and development process. We have seen already that as our customers are actually coming up with different modalities of drugs, that is actually allowing them to start to think of automation in areas of the process where before manual methods were just fine and QC is a good example of that, whereas you have to test for more parameters, you actually need more of the use of automation. I do think that the idea that customers have is to truly disrupt the entire drug discovery and development process, right, to get it to go faster, less costly, higher yield in the end. And that will require a change at the very beginning of the process, which will likely, you know, a different role of automation within the autonomous lab and perhaps getting to that concept of the autonomous lab sooner. I think the pace at which that will happen probably depends on all of the technologies, right? And how quickly the customers can really think about how this new play, looks like and how they manage their own data to be able to you know feed these AI models and continue to to teach them as they continue their close loop.

Okay. And then bringing back to the kind of more near-term dynamics, those who are more skeptical to the AI thematic are of the view that if indeed Tecan was a beneficiary of AI, it would materialize more strongly in the order demand, which, as we know, came in at flattish in the second quarter thereabouts. Could it manifest more strongly in your consumable sales, in your view? So if utilization of your systems go up because of AI, then your consumable sales accelerate first before equipment. Is that 1 way you're thinking about it?

That is a way to think about it. I think this will ultimately have an impact on both consumables and instruments, but I would say it is, we're in early stages of all these changes, so there is a lot more to come. And, you know, when you think about, again, if you get to that concept of the autonomous labs, these labs actually working 24 hours a day, you definitely see the consumption of consumables will be higher. Going up, but as the customers continue to actually fed more of these up, as, you know, there is more volumes coming in through the dry labs, then there will be more overall usage of instruments, either through new labs that get created or through the normal replacement cycles. And then obviously as we bring in new innovation and new technology, that's going to drive both. So I do see that it's going to be coming both through consumables and instruments, but we are at the very, very, early stages, so I think connecting the Q2 to this is not the right way to look at it.

If we move on then to the life science market, you know, could you take us through the outlook for your life science business today? I know we're, you know, in the first half result, we're starting to see green shoots, you know, from both your results and your peers in the second quarter. You saw strong biopharma, China's recovering, A&G's still a bit weak. We've got Veya launching this year, which is helpful. Just talk us through what segments are doing better and what's not doing so well. Thank you.

Sure. So I'll start with the biopharma segment, which is the largest for life sciences. And there we definitely are seeing the dynamics of the biopharmaceuticals of the recovery as we expected at the beginning of the year. We started to see that in Q1. What I saw difference between Q2 and Q1 was that we started to see recovery in instruments. So again, I think it's a good gauge of the health of the segment so far. So that was good. I mentioned in the first half results that we saw growth in the high single digits in Q1. Biopharma, this is all in the back of our life sciences business because that's where we have the presence in through life sciences. So all good. I mean, I've mentioned I'm being prudent as we look through the rest of the year because, you know, this is just the beginning, but I think the signs are all very good. If I look at the diagnostic side, I mean, it was overall good for life sciences. Here we have actually a touch point both through life sciences and through partnering. We saw for the overall company growth in the mid-single digits in diagnostics, but it was really contributed by both the life sciences side as well as partnering. So that was good results overall in life sciences as well. As you mentioned, academic and government, we haven't really seen the recovery just yet. I mentioned in the first half results, we saw declines in the double digits there. I mean, here it's really the presence is through life sciences, so that's where we have the connection to A&G. We're keeping an eye on the funding. I mean, we talk a lot about what's happening with NIH funding. It was good to see the growth this year, but the connection to the actual outflows or the flow of funds is not quite there, and we see still conservatism on our customer base, but that was just in the, I mean, the reality is that we saw weakness across the board. It was not great in Europe. And the only good point was Asia outside of China. We did see growth in this segment. I think for anyone that has been in the tool space for as long as I have, you know that there are cycles in this segment. So certainly 1 that we have to continue to watch because we do know that these funds will eventually come back and I always say that academia and government is the source of innovation. This is not only where the future scientists of biopharma and diagnostics are getting trained, which is why you want them to know your technology, but also it's the source for, you know, the future spin-offs that will become biotech that then are bought by biopharma. So for all those reasons, it's a very important segment for us to follow.

And then moving on to your liquid handling business, so you saw an acceleration in your liquid handling business in the second quarter, which is encouraging. How do you think about your market share in liquid handling in the context of new products from Hamilton and Beckman, and what's driving the acceleration you saw in the second quarter?

Yes, I think maybe to start with the driver for the acceleration, I do think that is on the back of what we're seeing in the biopharma side. That's the first point. When we think about our share, we see overall that we've been holding well and it's been a combination of us actually taking share in the high end of, of the overall kind of market segment. And the opportunity that we see for ourselves is to actually be able to take more share in kind of that mid-range of the segment. I mean, we see third-party reports that see us either maintaining share or maybe even taking a little bit from an overall perspective in liquid handling, which is good to see. And we certainly are making investments in that area that is our core. You know, all the investments that we're making to drive more opportunities through our Labwerx with getting into robotic work cells, I think that overall is an interesting play for us in liquid handling.

And then moving on to your largest customer. So you delivered mid-single-digit growth in MedTech in the first half. Your largest customer was also growing well. And your full year guidance is to grow flat, which implies a decline in the second half. Beyond the tough comps, how do you see your market share with your largest customer evolving over the next months and years? Do you see a path to growing at the same rate as your largest customer?