Interview with David Martyr, CEO

We see M&A as a catalyst to our core business and to support our evolution to be able to offer total solutions.

Dr. David Martyr

Tecan Group CEO Dr David Martyr joined the company in October 2012. He took the opportunity to talk about his first full year in this position and his view on the strategy and future of Tecan.

2013 was your first full year with Tecan. How would you summarize it?

I view 2013, at least in part, as a transition year for Tecan. We have focused strongly on key business priorities and have made important progress, however, from a financial point of view it was a year with difficult market conditions and as you have seen in our Letter to the Shareholders, our financial targets were only partly achieved. I think our progress in operational improvements in 2013 starts to build a firm foundation for Tecan. One of the highlights of the year was certainly bringing the Dako Omnis to a successful end of development and into commercialization.

This is an important partnership for Tecan and a product we hope to build on in the future. I have also been impressed during the year at many of the technical competencies and the breadth of the capabilities that we have throughout the company worldwide, however I am also a relatively impatient person to see progress and believe there is more we can do to pick up speed within the company as we move forward. The considerable customer contact that I have had during the course of the year has underscored for me personally the tremendous strength of the Tecan brand and it is our job to build on that strong loyalty we enjoy from our customers by accelerating innovation a s w e s trengthen l eadership f or Tecan in the market place.

You refined the corporate strategy. What are the key elements?

An important and immediate element of our corporate strategy is delivering on the major projects that we have on hand and ensuring we see a strong commercialization and the ramp-up of those projects. This has been very much reflected in the selection of our 2013 and 2014 priorities. However, beyond that, we have also been looking at how we can drive inorganic growth to complement the organic growth that we plan within the company and how we can further expand our sales growth in Asia. We see a very good runway, particularly in China going forward. Our Partnering Business has enjoyed growth now for several years and we are especially working on expanding our existing Partnering Business relationships as well as adding new partners Worldwide. In our Life Science Business we have also clearly defined that we wish to carefully evolve into a total solutions business with more recurring revenues as well as thoughtfully expanding into close adjacencies to our current product domains.

M&A plays an important role in your strategy. Where are you in this process?

The priority in 2013 was getting the right team together and we now have that completed. Klaus Lun, the Head of Corporate Development, joined us in June 2013. Klaus and I both worked at Danaher businesses and successfully completed a number of acquisitions together during that time. Since September we have a complete team covering the range of critical skills and experience: scientific understanding, deep industry knowledge, financial expertise, project management and deal experience.

Our M&A process will be very structured and disciplined. Our corporate strategy defines the areas in which we will focus. Therefore we have done a lot of market work and now have a good understanding of the areas we will look at. This is our primary filter if we are approached with an opportunity: if we do not like the market, we pass it on. The next step is to evaluate if a specific company or asset is the right entry point into this market and if there is a runway to complement this acquisition with additional deals to build a strong position in this area. We have already built structured funnel lists and additionally have an extensive catalogue of companies we are watching. We have already engaged in detail in some specific opportunities. Those companies were in the right area for our strategy, but the assets were not necessarily the right ones, as we concluded that the risks or valuation expectations were too high – which underscores our structured and disciplined approach.

What companies and markets are you targeting?

We see M&A as a catalyst to our core business and to support our evolution to be able to offer total solutions – where total solutions include not only the instruments and dedicated software, but also the consumables and enabling reagents for targeted applications. Therefore some of our target companies will have high consumables or reagents content. Just to clarify, we are not interested to invest in commoditized reagents, but rather focus on applications where Tecan can be an advantaged owner of the solution. We are looking into adjacent markets, not too far from what we do today. Tecan is a key enabler in numerous workflows in the Life Science industry. A focus continues to be around sample preparation in general and more specifically we are focused on sample preparation in some of the high growth segments like next generation sequencing, mass spectrometry and some others. In those areas, there are a lot of companies – often privately owned – that cover one specific niche of an application or they are limited to a certain region. Here we see the potential, perhaps in a series of deals, to assemble an interesting product portfolio which can leverage our worldwide reach. Let me point out that we are rather looking for enabling reagents mostly in research and applied markets – and we do not plan to compete with our Partnering Business customers for diagnostic tests.

Besides those adjacent markets we are also looking into some instrument segments to expand our current offering by adding a third or fourth pillar to our existing portfolio of liquid handling and detection products.

How is Tecan positioned for M&A and what about the valuations you see?

We think we are positioned well. We have the financial ability and are big enough to execute on deals and to ensure a successful integration and worldwide commercialization. For example, there are many targets that generate up to 50 million Swiss francs in sales which might be very attractive to us, whereas for some of the large conglomerates it would not move their needle and thus they may not look so closely at such targets. It is our aim, through our market work and selected cultivation of targets, to place ourselves in a leading position when such targets come up for sale. In some private companies for example, it might be the owner who is planning for retirement or the company is limited to expand regionally. We believe we have a strong case to show that we could be the advantaged owner for such assets, as well as being an attractive acquirer in the seller’s eyes. From a financial point of view, we are looking for companies with a good underlying profitability as we do not wish a deal to dilute our margins. It is our intention to see a good return on our investment and therefore we are following a very structured and disciplined process and are not willing to overpay!

The 2015 medium-term target is a significant step up compared to the last years. How will Tecan get there?

We believe we have clearly defined a set of building blocks that will take us from our current performance to our 2015 medium-term targets. These growth drivers were set out early in 2013 and are largely unaffected by the 2013 market headwinds. In summary, these blocks are: delivery on our large Partnering Business projects, in particular the ramp up in sales of the Dako Omnis and ORTHO Vision™ instruments; continued execution in China; continuing to build out our consumables and service business, it is about recovery in our Life Sciences Business and growth from the launch of new products into those portfolios; continued growth in our components business; and it is around additional Partnering Business projects, some of which were won in 2013 and will start to come into commercialization in 2015. Taken together, these opportunities provide really solid and tangible opportunities which lead us to feel very comfortable about this medium-term growth target.