All right. Can everyone hear me? Yeah? Excellent. All right. Welcome everyone to our Fireside Chat with Tecan. I'm Aisyah Noor, Head of European Med Tech 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 for any questions, please check with your MS sales rep. With that, welcome, Monica.
Thank you.
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, with you as CEO, 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. Could you start with introducing in a few words the Tecan business and equity story?
Great. Thank you for having me here, Aisyah, and I'm excited to talk to you about our story, thanks for your interest. Maybe at the highest levels, Tecan is a player in the life sciences tools space, with a leadership position in laboratory automation. 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 have been in the life sciences tool space for over 25 years, and I have been associated with Tecan even before I actually joined the board, which allowed me the opportunity to know them very much as like a customer. 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 of 2024, 2025. 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, strong product portfolio, strong brands, great customer relationships, really good teams.
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 launching our transformation program called Rewired earlier this year. What we are doing there is we keep saying that we are 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. We have a 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 one. We service markets that are very attractive. So granted, they have had a little bit of some uncertainties in the last couple of years, but when you actually look at the fundamentals for growth, they are very much intact. Then number three is the opportunity that we have now in these markets, as it relates to technologies like AI coming into play, and how the customers are now seeing that for them to truly be able to take advantage of what AI brings to them, automation is no longer a nice-to-have. It is much more of an essential. So all these components make the Tecan story an exciting one that you should all be considering.
That is a great segue into my first question, then. I wanted to start with the AI theme because it has caught the attention of many people since the headlines first came out. Can you talk about the two AI-based partnerships that you have 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 Tecan was chosen for these use cases?
Sure. Maybe starting with the last part of your question on why we were chosen, I think that ties well with the reason why our customers decide to go with our technologies. 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. I think it was the same case as we were thinking about why they came to us for these things. 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." A good testament of our presence in the market with our customers.
When you think about the two 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 one, which was the partnership that we started with NVIDIA, was the first one 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. 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 one 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.
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. 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. Actually, the tool can now be a little bit more predictive on what are the things that the customers should look into in ensuring that everything in the fleet of instruments is performing as expected. So 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. What Anthropic wanted to do, they launched something that they call MHS. It's the Model Hardware Standard. 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 if the instruments speak that language, then they will be able to connect to the agentic AI. 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. That's where, how between those two, that's where you create that closed loop that everybody talks about.
We, in addition, have another side of interest in this partnership, which is, as you think about this concept of the autonomous lab, for us, we play there through our own integration capabilities through our Labwerx business. 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. That's another piece by which this is an interesting partnership for us to play in. 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?
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? It's what you see with a FluentControl, 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. 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.
One 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 get to 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.
Investors are obviously looking for ways to understand the materiality of "autonomous labs" as a revenue potential for Tecan. I know it's early days, but 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, it's generally accepted it's about 20% of labs today are "automated". 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. That can now catalyze their breakthrough discoveries, workflow efficiency, what have you. Have your customer discussions come that far? What are you envisioning here?
Yeah, I would say that the likely outcome is probably a combination of all of them. I can't imagine one scenario over the other. We 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 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.
That will require a change at the very beginning of the process, which will likely mean 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 feed these AI models and continue to teach them as they continue in their closed loop.
Okay. Bringing it back to the more near-term dynamics, those who are more skeptical to the AI thematic are of the view that if 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 thereabout. Could it manifest more strongly in your consumable sales, in your view? If utilization of your systems go up because of AI, then your consumable sales accelerate first before equipment. Is that one way you are thinking about it?
That is a way to think about it. I think this will ultimately have an impact on both consumables and instruments. I would say we are in early stages of all these changes, so there is a lot more to come. 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 going up. As the customers continue to actually set more of these up, as 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. Then obviously, as we bring in new innovation and new technology, that is going to drive both.
I do see that it is going to be coming both through consumables and instruments, but we are at the very early stages. I think connecting the Q2 to this is not the right way to look at it.
Okay. If we move on to the life science market, could you take us through the outlook for your life science business today? I know in the first-half result, we are starting to see green shoots from both your results and your peers in the second quarter. You saw strong biopharma, China is recovering, A&G is still a bit weak. You have Veya launching this year, which is helpful. Just talk us through what segments are doing better and what is not doing so well.
Sure. I will start with the biopharma segment, which is the largest for life sciences. There, we definitely are seeing the dynamics 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. Again, I think it is a good gauge of the health of the segment so far. That was good. I mentioned in the first half results that we saw growth in the high single digits in biopharma. This is all on the back of our life sciences business because that is where we have the presence through life sciences. All good. I mentioned I am being prudent as we look through the rest of the year because this is just the beginning, but I think the signs are all very good.
If I look at the diagnostics side, it was overall good for life sciences. Here we have actually a touchpoint, 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. That was good results overall in life sciences as well. If you mentioned academic and government, we have not really seen the recovery just yet. I mentioned in the first half results we saw declines in the double digits there. Here the presence is through life sciences, so that is where we have the connection to A&G. We are keeping an eye on the funding. We talk a lot about what is 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. That was just in the U.S. I mean, the reality is that we saw weakness across the board. It was not great in Europe. 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. Certainly one that we have to continue to watch because we do know that these funds will eventually come back. 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 is the source for the future spin-offs that will become biotechs that then are bought by biopharma. So for all those reasons, it is a very important segment for us to follow.
Okay. 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 is driving the acceleration you saw in the second quarter?
Yeah, I think maybe to start with the driver for the acceleration, I do think that is on the back of what we are seeing in the biopharma side. So that is the first point. When we think about our share, we see overall that we have been holding well, and it has been a combination of us actually taking share in the high end of the overall kind of market segment. 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. 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.
All the investments that we are 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.
Okay. Moving on to your largest customer. You delivered mid-single-digit growth in med tech 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, and do you see a path to growing at the same rate as your largest customer?
So maybe a couple of things to unpack there. I think you know that our content is different between what we support the customer with in their old model versus the new, which is why as they see the ramp-up of the new model versus the ramp-down of the old, we see the performance that we see with them. I think I would say the health of the relationship is very good. We are in the preferred supplier category. I mean, as they have grown, had to take some decisions around risk management because they can't have full supplier sourcing in some areas, and that's what they've done as they came out with the new version.
We work very closely with them to understand their needs, particularly when you are in the period where we have the ramp-up and the ramp-down, which is why in the latest numbers that we've seen, a clear picture of what the mix is looking like, because this is what drives a lot of what we end up delivering to that customer. That's where we see that, okay, it's going to be a slight decline this year. But what I think I'm the most excited about here is what the CDMO business is doing to really gain other customers, and this is why they will be able to actually make up that change with the largest customer, with other customers where they see growth, and overall for their contribution to Tecan total, that part doesn't change at all.
One of the things that I talked about early on in my tenure was the need to get the team on the partnering side, this is both the OEM and the CDMO side, back and building the funnel. And they've been doing a very good job, which is why we get the business back to growing outside of the dynamics of the largest customer.
Okay. That ties into my next question as well, actually. Your partnering business today is about 60% of your total sales, and it is organized around these three, Synergence, Cavro, and Paramit. How do you think about the right long-term mix between these three sub-segments, and where do you see the highest growth opportunities across the three?
Yeah, they are very connected because, particularly for the IVD life sciences subset of customers, the value proposition that we are bringing today with the CDMO added to the equation is a lot stronger, to the point that we are now able to propose new projects for our customers on the OEM side with the option of manufacturing in two different locations, whereas it was something that we couldn't do in the past. So there is definitely a connection in all three. In the world where I could be selfish and I could get what I wanted, obviously, I would say that I want the OEM to be a larger proportion because from a profitability perspective, it makes much more sense for us from a mix in total. But the reality is that the CDMO side brings that value to the equation.
And one of the things that we are doing as part of our Rewired program is actually leveraging that capability for our life sciences business so that we can improve the profitability there as well.
Okay. Just one more on Cavro. This business saw some supply issues in the second quarter 2026. You have called out, it will take some time to resolve. What are some of these supply disruptions, and what kind of structural changes are you making to prevent this from happening again?
Yeah, I think the genesis of the issues that we see today really come from the point where we decided to move the business from their original site in California over to Malaysia. Maybe some errors in the planning of the inventory needed as part of this that now have led to some issues that we see with some of the suppliers, where we either have product obsolescence or the supplier has moved and doesn't have this product anymore and has led to us making some decisions around having to come up with the secondary sourcing or just a completely new source for some of these components.
This is something that we're taking very, very seriously because these components are very strategic to the instruments that our partners are manufacturing, and that includes our own, because we use these components, both for our life sciences and for the Synergence offering, which is why it's very important for us to go through these very transparently with our customers, and in some cases, having to work with them on decisions around prioritization, given the supply limitations. It's something that will take probably the entire second half to resolve, but we're working through it.
Okay. Then I guess last one on growth. Asia was the main growth driver in the first half from a regional perspective, and you've talked about very strong results in Japan. China, mid-single-digit growth. How sustainable is this region as a growth driver for you midterm, and how are you thinking about China risk from a competitive perspective, demand, supply chain perspective?
Yeah. Truly, Asia was a star performer for us in the first half. When we looked at the performance, it wasn't a single country. We had good performance out of China but very strong performance out of Japan. Korea did very well. We had really good performance in Australia. All of that is good. I'm not sure that we can keep it to that high level, but given what we're seeing in some of these markets, I talked about the trend that we're seeing with the biofoundries in Japan that works exactly to our sweet spot. We see something similar actually going on in Korea, so there's a lot of opportunities there. We've now made the investments to go direct in India, to further penetrate the biopharma segment. So I do expect Asia to continue to be a contributor of growth going forward.
Okay. Moving on then to your Rewired program. You have a target of reaching 20% EBITDA margin in constant currency by 2028, which implies 400 basis points margin expansion from 2025 as a baseline, and it does rely on a decent amount of cost-out. Can you talk through the visibility to achieving this target and how far along this journey you are, key projects you would need to undergo to get there?
Yeah, it is a very good question. Maybe as a start when we modeled how we could get the 400 basis points, we did have as a starting point that there would be a combination of operational leverage, so something where we are taking advantage of the volume as we are growing, as well as cost out, and we kind of did the math of roughly 1/3, 2/3. It is a big component of cost out, and I think this is purposeful to ensure that we are driving what needs to be driven from a cost-out perspective in areas that are fully in our control. What we see in terms of the contributions for this really come through the three pillars of what Rewired brings to the table.
So, it is the portfolio discipline and the decisions that we made already that we are executing on now for areas where they were contributing negatively to the EBITDA, so that will be costs that will be coming out. So, that will be very clear. We will continue to look at the portfolio to see what other opportunities that there needs to be from an execution perspective where we may not be the rightful owner for a certain asset, and we can use that same capital to focus in some of the other areas where we can be stronger. We have a component around commercial excellence, and this is more tied to what we expect from an operational leverage perspective in the EBITDA.
Then we have a component on the operational excellence side, which is where we are looking at where we manufacture, how much productivity we can get of the investments in R&D, where do we have a back office support. All that will be cost out, coming from the base that exists today. Those things are very much under our control. I think maybe the main watchout for me as we execute on all of this is ensuring that we keep the balance so that as the markets continue to come back, which is what we expect throughout these three years, we do not miss on any opportunities from an investment perspective, and this is why when we initially talked about Rewired, I specifically was talking about the innovation engine, the one that probably I will be the most careful about.
Okay. One quick one on cost inflation. Could you talk us through the cost outlook and the major drivers of cost headwinds to the margin? Raw materials, energy, freight, tariffs, et cetera.
Yeah. For us, when you think about the inflation that we see, it is not off of what we have seen historically. Some of the macro things that are going on now that are driving, because of the war in Iran or these things that are maybe driven by the higher oil prices or things like that, these things impact us a little bit less, probably because you think about our raw materials, it is much more sub-assemblies and components. Definitely, obviously, we always keep an eye on inflation, but it is not something that you need to model going up substantially. I think it is more kind of in line with what we have seen in the past.
Mm-hmm. Okay. If we move on then to capital allocation. You are about halfway through the CHF 120 million share buyback program you announced last year. Any scope to accelerating this given where your share price is versus history? Or conversely, could there be scope to make buybacks a more regular occurrence, given your focus on optimizing the portfolio for the time being?
Yeah. No, you are right. The program was launched about a year ago. We are about halfway through. We do not really have any plans right now to change it. I think it will run as it is, and to me, a decision to change it would tie more to decisions around our allocation of capital priorities, where we always have the organic investments as number one and M&A as number two. If there was a need for something, then we may think of a change there. But so far it's business as usual.
Okay. What's your appetite for M&A then, and what areas of the market make most sense to you? You've done a lot of bolt-on acquisitions over the years, many of which were distributor or geographic expansions. Should we expect more of the same, or, equally, you also exited some genomics assets in the first half, so are there any other areas of your business that you think could be non-core?
To the latter part of your question, this is all what the portfolio discipline initiative is all about in Rewired. We will continue to look at the portfolio with that strategic lens in mind. With that also comes opportunities for expansion. Definitely one of the ways to achieve that expansion can be through M&A, this is why I think about the M&A lens on businesses that could actually add or expand the portfolio strength that we have in our life sciences business with the proprietary products. Because I see those as an opportunity to indirectly add opportunities on the partnering side. I see potential deals, maybe in two categories, and you mentioned the last few deals have been more geographic expansions. The last one was actually the Wako Automation asset.
That's a good example of maybe something that would be more of a bolt-on in the areas where we already have expertise. In this case, it was a lab automation that allowed us a better entry into an expansion of what Labwerx already was doing with the robotic work cells. Those are really bolt-ons that add to the capabilities and the expertise in lab automation that we already have. Then maybe the second category could be a new leg that already, it's scaled enough that it can stand on its own, but it has a connection from an adjacency perspective to the workflows where the customers know us for, so it could add us additional real estate in the lab, but in areas where you can say we are the rightful owners because they touch the areas that the customers know and they respect us for.
Okay. That takes us to the end of the session. Monica, thanks so much for the insights today, and to the audience, thanks for participating. Thank you, everyone.
Thank you.