Thermo Fisher Scientific Inc. (TMO) Earnings Call Transcript & Summary

Hi, good morning, everyone. This is Derik De Bruin, the Bank of America life sciences and diagnostics tools analyst. Welcome to the second day of Bank of America's 2020 Virtual Vegas Health Care Conference. Appreciate everyone being here. Also on the phone with me today is my associate, Mike Ryskin. And we're happy to kick off the second day section with Thermo Fisher Scientific. With us today is Marc Casper, Chairman, President and CEO of Thermo Fisher. Always great to have you here. Marc, welcome.

Derik, thank you. Thanks for having us today.

Great. As a reminder, for those of you that are logged into the Veracast site, you can chat us questions. And with that, let's get right into it.

Marc, obviously, the disruption we've seen with the COVID-19 is unprecedented. Can you just give us a quick update on how things unfold at the beginning? And how Thermo responded? And most importantly, an update since the situation on the April 22 earnings call, which seems like a lifetime ago. You had an 8-K out this morning actually making things sound a little bit better than what's going on. So we'd love to sort of just jump right in and get to the details.

Yes, Derik. Thanks. Maybe I'll start with just recapping some of the things that we said on the earnings call just to get everybody grounded and then talk about what's happened subsequent to the third week of April. So because we have a large presence in China, we've been responding to COVID-19 really since the beginning of the year. And that has helped us navigate this the best that, I think, a company possibly can. We also obviously have benefited from having an experienced management team that's effectively managed the business through other points of disruptions. And our goal right from the start was to make sure we navigate a difficult period and come out a stronger industry leader. So when you step back and say, as the pandemic started to lockdown things in China, the first thing we actually did beyond the -- keeping our colleagues safe was to mobilize our global team to focus on driving strong financial performance around the world before it had spread, right? And when I think back about the first quarter, we had good performance because we had great performance in North America and Europe offsetting many of the headwinds that we faced in China. When I think about the story in Q1, we really had 4 approaches to how to respond to the pandemic in supporting our customers' work because a lot of what Thermo Fisher does is enable the societal response, right? And those 4 things were: First, it was around protecting health care workers by providing PPE, or personal protective equipment, through our research and safety market channels and our health care market channel. So we were very involved in doing that. And then the second thing was really around helping our customers understand the virus, and our resource tools such as cryo-electron microscopes are used to understand how one could address the virus from a therapeutic and vaccine perspective. And then we put a huge amount of energy in the diagnostic testing strategy to help countries ultimately be able to diagnose whether somebody has the disease. And we very quickly ramped up and developed our Applied Biosystems TaqPath COVID-19 Combo Kit, and had started the process to ramp up our manufacturing capacity to 5 million test kits a week. And then finally, started to reach out to biotech and pharmaceutical customers to help them with developing therapies and vaccines, right? And that's, in a nutshell, what happened in Q1. As the quarter ended, you saw the impact just starting to unfold in Europe and North America. And as we look to the second quarter, the way we thought about the world was effectively, we had given a range of outlook for Q2 on just organic revenue growth, and that range was flat to negative 15%, right? Embedded in that flat to negative 15% was a headwind of 10% to 25% based on customer disruption, lab shutdowns, things of that sort, partially offset by tailwinds from the COVID-related products that we had in -- on the positive, about 6% to 12% growth from COVID-related products, right? So that's where we started the view in the third week of April. Since then, a few things have happened. Basically, on the disruption side, the headwinds that customers are facing, things have not deteriorated since the third week of April. So as we get through the first 6 weeks of the quarter, the conditions have been, while depressed, have been relatively in line with what we were seeing in the first few weeks of April. So that really hasn't changed for the worst. And at the same point, we're seeing more tailwinds from our COVID-related activities and feel comfortable that the range of organic growth for this quarter is likely to be in the range of 0% to negative 10% or basically about 1/3 of the risk we feel as retired as we get a little further into the quarter. And we've had some really good business development events happen as well. The first of which is we got an expansion from the FDA on emergency use authorization. And that has expanded the number of instrument lines that are approved to use our kits, and effectively all of our qPCR platforms are now effectively able to use the kits from an FDA perspective, and that increases the installed base substantially in the U.S. And then the second thing is, today, we announced a partnership with WuXi Diagnostics and the Mayo Clinic to develop a serology-based test for the detection of COVID-19 antibodies as well. So it's obviously lots of challenges with the environment we're living in, but things are getting better as we sit here in the middle of May.

Great. So I already got a question in, just somebody wanting to clarify. The outlook for China in the second quarter, what are you seeing there? I guess how much of that was new bookings in Q1 versus things that were delayed and then shipping in the second quarter?

Yes. I mean nothing really has changed in China from expectations from what we said a few weeks ago, which is customer activity kind of in that 60% to 70% range. Things are ramping up, planning for return to work, things in the academic segment. But not a lot of new color to add. Really, the color is really more around more tailwinds globally on our COVID-19-related response products.

Got it. I mean you classified that as something in the $400 million to $750 million range for the second quarter. What's sort of the breakout on that in like just reagents, tests and PPE? Just sort of curiosity, if you can give us some additional color on that.

Yes. I mean, Derik, the vast majority of that revenue is coming from the COVID-19-related diagnostic test kits and some instrument sales that go with that. You're also going to see some -- a minority of that number is going to be sales of PPE through our channel business, and a very small contribution in Q2 from the development activity on therapeutics and vaccines, and that obviously will ramp up more over time.

Great. So I had a question from a client, basically just wanting to know about the -- do you sell your tests directly to the federal government? I think at the White House briefing, they mentioned there were a number of unbought tests. And I think people were wondering, do you -- are they buying, the government? Basically, I guess, are you selling directly to the states? Is the government stockpiling? How do they go overseas? How actually do people do -- are buying the products from you?

It varies by country on approach. When I think about the United States, to date, most of the shipments that we've made have been directly from the end-user customer. And that could be a public health lab, that could be a hospital, that could be a clinical reference lab. As certainly, as we've gotten into April, we've gotten direct orders from the states, and we've also gotten some direct orders from the federal government as well to create kind of a buffer capacity to support the supply across the country. But up to date, it's been primarily to the end users. And now you're seeing states and the federal government also purchasing our product.

Great. So let's talk a little bit about the serology test. I mean that was one of my questions that I had on there, so you preempted me on that one with the announcement. But just reading the press release, it looks like it's an IgG, IgM combo in some ELISA test. But it runs on an open platform. I mean Thermo doesn't have a standard -- I mean you're not a big player in the immunoassay platform à la an Abbott or a Roche in that standpoint. Can you give us a little bit more color on the tests and the performance characteristics? And just sort of how you sort of see serology testing unfolding?

Yes. So a few things, right? We do have actually a large presence in the immunoassay format in our allergy and autoimmunity business. But when we looked at customer needs and our experience is these are likely to be in relatively high volume. And having effectively the 96-well plate format, when you're doing very high volume, is a very attractive method for customers, right? So in normal times, you like a closed system and effectively, one sample, one test. But given the volumes that are likely to happen here, being able to effectively do 96 tests at a time is very attractive from a customer standpoint. And therefore, we went down the path of an open architecture. We looked at our own developments we were doing. We also looked at other assays that were on the market. And we liked what we saw from WuXi and Mayo and decided to do a partnership to go through the development process. And ultimately, our intentions are to go through the FDA Emergency Use Authorization process a few weeks down the road. So it is a complement to our PCR test and obviously would help doctors have more information about whether a patient has had the disease as well as whether they actively have the disease by using a PCR test in complement to that.

And is there anything embedded in the second quarter for serology testing?

None.

Nothing. Okay. So that's upside on the back. Great. So I think a lot of the debate has been going on with investors to sort of think about how long testing tailwinds to all the various companies are going to last. So I have 2 questions for you: One is, what do you think is going to be the new normal for testing? And the other one is, as people think about going back to work and getting people back to same, how is Thermo actually going to use -- utilized testing at the company to sort of guide your decisions on when to start staffing and who to put in place?

Yes. So Derik, I think in the environment that we have, with no vaccine, not a clear understanding of immunity if you've had the disease, and a limited repertoire of therapeutics, testing, my take is going to be very important in the next phase of opening the economy. And if I look at the activity level with states and countries about ramping up infrastructure, preparing for the fall, preparing for identifying spikes in their communities, that seems to be a widely held view that ramping testing capability is going to be important for a while. And then the question becomes, what does a normal period look like? And when does it taper off? And that's harder to get a handle on. But I would say, certainly, we've had ranges of requests from a couple of months to greater than a year, right, in terms of interest, in terms of supply commitments. So I think it varies, right? But it feels like it's not a super short-term phenomenon. It's going to be with us for a while.

And what are your thoughts on sort of the second wave situation? And this is going to lead into a question about -- I mean we're already starting to see some -- University of California system said they were going to suspend classes. And I'm just sort of curious about second wave phenomenons and how you're thinking about the impact to your business and particularly on your academic and government exposures.

Yes. So in terms of second wave, the first thing is, if I think about it, we're planning to have employee testing capability within Thermo Fisher for our own colleagues, right? We obviously have kept our sites operational throughout this, and we've been taking customer orders, shipping and responding to the pandemic. But part of the way you deal with spikes in the virus is that you have information to be able to quarantine folks that test positively. So that's going to be part of our scaling up, if you will, of the workforce. In terms of the second wave, I think some aspects of the second wave are going to be similar to what the first wave was, which is there's going to be some level of customer disruption, not 100% activity level. But at the same point, the world is going to be a lot more prepared for it, right? If you think about it, in the first wave, there was not even any approved tests, right? So you're flying totally blind. There was huge shortages of PPE. No social distancing plans. The second wave is going to have mature PPE availability, better understanding of the virus, better understanding of effectively how to do -- how to prevent it and widely available testing infrastructure across the world. So I think if you get a second wave, it's one that society is going to be in a better position to respond to. It doesn't mean it's not going to be disruptive, but it should be not as disruptive than what we saw the first time around. At least that's my instinct on how governments are responding to this.

And your thoughts on sort of like your academic and government infrastructure, your exposure. I mean, clearly, some labs are still closed. There's -- on the flip side, we've got -- on the one side, we've got labs are closed. On the other side, there's significant amount of money now being targeted to NIH, the recent stimulus packages. So I'm just sort of thinking about how do you think about your academic exposure around the world. And also, how do you think about some of the funding things going on? As clearly, someone will benefit, but is this going to be -- do you think from what your conversations with Washington are, is this going to be something that's sustainable? Or is it going to be more like a one-and-done like it was during with the ARRA during the great financial crisis?

Yes. So in terms of the academic customer base, you basically have 3 different things going on: you have some labs very busy, because they're doing COVID response or something that you couldn't not work in this environment. You have some labs that are really in reduced activity; and then others, obviously, just totally shuttered at the -- that's kind of the current state. The planning activity for safely reramping is very high. So customers are planning for that around the world. About how do you get back? How do you do it safely? We've -- I've had shift scenarios, right, of labs where you have staggered shift. All these different concepts that are being put in place. So people are preparing for a re-engagement where those labs are at lower activity or not active right now. So that's encouraging. And then in terms of the funding environment, obviously, substantial funding to the NIH, CDC, BARDA, that will spur significant activity for a while. The NIH is very important in terms of basic research. So I think that, that environment will continue to be good. I think there's been a lot of focus on the importance of this. And interestingly enough, at least in the U.S., right, where the federal government came out is, actually, they're asking NIH to lead the response on how do you drive the best thinking going forward on some of the testing and all these different things. NIH has been super engaged on this. And so from that perspective, it feels like we should have a decent environment. And it should last a while, right? And people aren't going to forget about COVID-19 for a while. So I don't think it's like ARRA, the last one, which was a lot of shovel-ready projects that came and went. This feels like it's going to be more -- with more longevity, I would say.

So I've got 4 questions coming in. Basically, can you please discuss the opportunity for therapeutic and vaccine manufacturing for Thermo for the Patheon business? And I guess, interesting question. I mean we don't have a vaccine yet, but clearly, people have to start ramping up infrastructure to make vaccines. I guess just sort of how you're engaged. Have you signed any contracts? How's your conversations with customers in thinking about therapeutic ramps and particularly vaccine ramps and the benefit potentially for Thermo?

Yes. So as the leading company in terms of contract development and manufacturing capabilities for the pharma and biotech industry, we've been extraordinarily active. On the therapeutic side, quite a bit of activity on clinical trials, leveraging our leading position there to effectively take existing medications and look for efficacy in response to COVID-19. So we've seen that. We also manufacture some of the promising therapeutics for our innovative clients. And we would expect in the second half to benefit from the drug product work that we do there. On the vaccine side, we've been involved in both the development work as well as being the leading sterile fill/finish company, which is basically, when you think about a vaccine, you have the vaccine substance, the active aspect of the vaccine, and then you have the actual -- how do you deliver it to a patient in a vial effectively? And we're the leading company in doing that. So we've had tremendous amount of interest in leveraging our capabilities from both governments and innovative companies, and would expect to play a significant role in those vaccines as they're developed. And we have some contracts that we've secured and others are in discussion as well.

Great. The -- a lot of questions and a lot of concerns, obviously, about going into recession, and people are asking about cyclical exposure. I mean you -- Thermo is obviously -- well, in some ways, you've reduced your capital equipment exposure. You've reduced your recession exposure since the great financial crisis, but you've also increased your capital equipment exposure because of FEI. So how are you thinking about the potential for a global recession? How should we think about the -- your more macro-sensitive end markets? Can you just sort of clarify what that exposure is in thinking about your ability to sort of grow through a prolonged macro downturn?

Yes. So Derik, we're in a recession, right? And the question is, what's the duration? It's unknown at this point, obviously. 20% of our revenue is industrial and applied. And roughly half of that, 10% of our revenue, is what I'll call as industrially focused. And that covers many different end markets. And within that, you have semiconductor material sciences, which -- certainly semiconductor of the various industrial exposure should be on the better side of things, I would think. And then you have sort of just manufacturing exposure to the QA/QC labs across many, many industries, probably more sensitive to GDP growth or GDP situation. So our view is, at a company level, we have a very different mix than what we had in the last recession. We have much smaller exposure to instrumentation, much smaller exposure to industrial. It's roughly half the exposure that we had the last time around. So we feel well positioned to navigate through this environment. And obviously, because of the substantial role we're playing societally in the COVID response, we've been able to generate very meaningful tailwinds in helping society respond to COVID-19.

Great. Speaking about, I mentioned FEI, speaking of acquisitions. Can you please give us an update on where you stand with QIAGEN and the regulatory review process?

Yes. So Derik, thanks. QIAGEN, we're very excited about the acquisition. We are on track to close the transaction in the first half of 2021, which is where we articulated it when we announced this in early March. We're working through the tender offer, the regulatory filings, the financing process. All that's going on track. And we're beginning the integration planning process as well. So all of that has been -- has gone smoothly. And we're looking forward to closing the transaction and welcoming our 5,100 colleagues in terms of -- new colleagues when that transaction closes. Interestingly enough, I've been reading -- I read a couple of articles about the price and all these different things about was -- is the price appropriate and all of that. And my take is that QIAGEN is very much like what Life Technologies was or even FEI, that the business as a stand-alone entity, has much less bright prospects than as part of Thermo Fisher because of the benefits of our global commercial reach, our R&D prowess. And that, effectively, as a stand-alone entity, the prospects were not nearly as good as the prospects as part of the company. So we're excited about the acquisition and are paying a price that's attractive to their shareholders, and it's also attractive to our shareholders, a true win-win.

And I have a bunch of people that sort of want to push the price question, but I know you're not going to go there, so I'm just going to back off on that. But just because I got like 5 incoming e-mails on this as we're -- as you're sitting here answering the question. But I'm sort of curious about the regulatory process. I mean are you worried about the possible rise of anti-American sentiment in some of these other geographies or just some rise of protections and barriers in some places? And I -- sort of put this in both ways as like can you sort of talk about what's -- talk about sort of like that sort of like sentiment. And also, just from a sense of how much of Thermo's portfolio do you view as unique, embedded towards the regulatory protocols, things that ultimately can't be substituted by other manufacturers in maybe some of these other regions.

Yes. So Derik, as you know us well, a company with a good reputation focused on customer success, right? And if you look at how Thermo Fisher has responded globally, we've supported the pandemic response across the world. And my take is that we started with a very strong reputation that was well respected globally, and we enhanced that reputation through this period, right? So when you think about Thermo Fisher's standing, it's a company that is well respected through the world, and that certainly is a positive from a regulatory standpoint, right, in terms of what our reputation is, how we've responded, our global footprint. All of those things are very good. We're well advised and understand the process and feel that we will navigate that successfully, is the way I would think about it. In terms of the products and how -- what's embedded, I always believe that customers should have a choice, right, and that we have to earn our business every single day. And the minute that a customer feels captive, your future is less bright. And we have managed our business like this forever, and that's actually served us really well. The reason we gain share and grow with our pharma and biotech customers and why we're doing so well in Specialty Diagnostics is customers are choosing to do more business with us. It's not because they have to do. It's because they want to, and that's exactly how Thermo Fisher wants to respond across the world.

So I got a couple of other final questions as we're sort of like coming down to the hour. Marc, I normally ask you what doesn't the Street appreciate about Thermo. So I'm going to stop that question on this one and sort of ask, what do you think are the long-term implications of the COVID crisis? I mean is there anything about the way you're changing you do business or the way your customers are doing business that you think will persist?

Yes. I think 2 aspects I'd like to wrap up with. I think the first one is, Derik, you covered the company through the various recessions and for the tenure that I've been here. And I think investors don't have that same historical perspective which is, we went into this choppy time with a very clear view that we're going to come out of it a much stronger industry leader and gain share. And if I think about what happened in the last financial crisis, that's exactly what we did. Strong performance during, accelerated 10 years of share gain coming out, that's what we're going to do in this one. And I couldn't be more excited about what the future holds. We'll do a whole lessons learned on the pandemic and how will work change, and our PPI Business System will incorporate those lessons. There'll be more flexible work policies for sure. We'll do a lot more customer interactions virtually because they're so efficient. And then other things will stay exactly as they were as well prior to. So we'll go through that process as we get through this wave of the pandemic.

And one final one, just somebody wanted a clarification. Does the increased guide for the second quarter look -- like basically, what's that imply in terms of what your estimates are for the number of tests you'll be running or tests being utilized by the end of the second quarter?

Yes. I mean what's implied in that is that we're going to be at that higher end. The total COVID tailwinds is going to be at the higher end of the range, closer to the 750 number than it was the 400 number what -- which we articulated before, so...

Great. With that, we're out of time. Marc, always a pleasure. Thank you. And thanks, everyone, for listening. And have a good -- have some good one-on-ones, and be safe. Thanks, everybody.

Thank you, Derik. Bye-bye.

Bye.