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

Good morning. Dan Brennan. Welcome to the 42nd Annual Healthcare Conference here at Cowen. Pleased to be here. Obviously, my first year participating covering life science tools and diagnostics. With me on the virtual podium who needs no introduction, Marc Casper, Chairman, President and CEO of Thermo Fisher. So first off, Marc, welcome, and thank you for participating with us here today. And I thought it would be nice to have you kind of make some opening comments.

Dan, thank you. Thanks for having me. It's great to be with all of our investors in -- at the Cowen conference, and I look forward to returning back to person in the hopefully not-too-distant future. So thank you for the opportunity to make a quick opening comments. I was actually going to start with Ukraine. And like many of you on the call today, I certainly watch the crisis in Ukraine with great concern as many lives have been lost and more than 1.5 million people have been displaced. And what we're focused on is the safety of our colleagues in the region, and we're monitoring the circumstances and providing targeted support. We have 300 colleagues in the Ukraine. From a business perspective, the revenue exposure is very small, right? In Russia, it's about 0.5% of our revenue. In Ukraine, it's much smaller than that. So really, what it's really focused on is along the lines with our mission, which is doing right by society. We donated $1 million in terms of humanitarian aid, and our colleagues have actually donated a significant amount of money in addition to that as well. And we join the international community in hoping for a peaceful resolution and a short end to the crisis so that -- so we can get to a better place. So I thought that would be a good place to start and I'll turn it back to you.

Perfect. So I thought I'd hit a couple of high-level questions, Marc, and then we can dig in some of the key end markets and geographies and really drilling in on biopharma, I think where a lot of the focus and attention is given the growth. But maybe going back to last September, with the 7% to 9% long-term growth rate, which was, I think, a notable positive surprise and really well received. Can you help us think through as we kind of walk through your four different customer end groups, obviously, I'm sure biopharma will be the highlight, but just how do we think about what's kind of baked in along the 7% to 9%? And what could enable Thermo to deliver towards the high end of that range?

So thanks for the question. So when I think about back to September when we had our Analyst Day and articulated the long-term outlook and we came out at the highest end of the industry in terms of what the outlook is at 7% to 9% growth. And as you certainly know, the culture of the company is we put numbers out that we believe we can achieve or exceed, right? So that's sort of the philosophy. But then you get into the details. So underneath it, we're in an awesome time for the life science tools industry, right? So you just start with the industry. The industry is growing very strongly. 4% to 6% would be our view on the long-term outlook. And we're incredibly well positioned as an industry leader with a value proposition that is really resonating with our customers and has allowed us to continue to drive meaningful share gains, right? We had them going into the pandemic. We've had exceptional performance during the pandemic and allowed us to reinvest at an accelerated rate, which allows us to come out of the pandemic or into an endemic phase, a faster-growing company. In the four end markets, pharma and biotech, very strong, growth above the company average. Really good funding cycle that has been through because the scientific discoveries and breakthroughs have been so meaningful. In terms of academic and government, you're seeing good level of investment across the world in supporting academic research. I actually think the pandemic actually highlighted the importance of fundamental understanding of disease and investments there. Health care and diagnostics largely have returned to the pre-pandemic levels in terms of activities and demographics, favorable -- favored to good growth. And for us, in industrial and applied, which is our smallest end market, we do a lot of business within support in the semiconductor industry with our electron microscopes. And that obviously has been super robust based on the demand profile there. So we're very bullish about what the outlook is for the company for the short term and for the long term.

Great. Thanks, Marc. So you kind of touched upon in your opening remarks the exposure to Russia, which is very small, and Ukraine, really nonexistent from a revenue basis. But nonetheless, I just wanted to ask a question on the potential impact on your business. Obviously, this is unprecedented for tens and tens of years. So maybe just from a customer or geographic demand standpoint, just how do we think about -- how should investors think about the dislocation or potential dislocation that it's causing on maybe decision-making or confidence, business decisions, anything like that relative to your 2022 guidance?

Yes. So when I think about the impact, I think about it from, I would say, three lenses, right? The customer demand side of the equation, it's very, very, very small, right? So that's one I don't worry about, right? I mean, we'll offset that in the different markets that we need to. So that one is not significant. When I think about supply chain generally, I think the world is trying to figure out what are the supply chain implications. I'm not foreshadowing something, but the world is so interconnected. I think the disruptions there will need to get sorted out, and that's more of a macroeconomic issue than I would say a Thermo Fisher issue. And then inflation, right? And what is this -- we've been living in an inflationary time. And this is clearly going to put additional pressures on inflation. And I love our position as an industry and certainly as the industry leader in dealing with inflationary time because we're able to pass through pricing responsibly with our customers and explain what we're doing and why. And we'll continue to navigate that environment that we're living in. So we've -- our management team has been together a long time, and we've managed through a lot of different things, everything from recessions to the pandemic through radical moves in foreign exchange over the last 2 decades. And this is a new challenge, and we'll do a great job of exiting this period of a more inflationary environment as a stronger industry.

Great. Thanks, Marc. So maybe jumping into kind of key end markets, and we'll spend a fair amount of time here on biopharma. I want to jump into biologic drug production, but maybe just as a kickoff and something we discussed briefly on the pre-call, which is this idea of like emerging biopharma and maybe the tip of the spear with the capital markets, obviously, being relatively closed now. There's been some concern amongst investors about what the implications are for broader tools. It's come up on 1 or 2 CROs and or -- so how do we think about Thermo's position, your outlook in terms of where we stand with emerging biopharma and their funding levels?

Yes. So Dan, if you allow me, what I think I'll do is I'll start one step above and start on just kind of the broad sector and then delve into the emerging one because I think it's so important. So from a context standpoint, right, of the company this year, including our PPD business, we'll do about $20 billion worth of revenue serving pharma and biotech customers, right, which represents about half -- a little bit over half of the company's revenue. It's in an incredibly strong end market. And one that no matter what period in time historically, whether it was the last 2 years where we had 20% plus type growth or go back over the last decade, where high single-digit growth, we've always been able to deliver strong growth in serving that end market, and we continue to do so, right? So I'm very bullish about it. As you think about what our role is, right, in serving it, we have about half of that revenue, about $10 billion for simplicity, serve production, right? And that's everything from the tools and technologies that the biotech companies use to produce their medicines or develop their medicines, everything from the cell culture media, the single-use technologies, the enzymes, all of those technologies. And then we also are one of the largest of the developers and manufacturers of medicines for the industry as well. So half of that revenue is in production. That typically goes a little faster than the research side of the rate of growth. And the other half, obviously, is serving the clinical trials and serving the research part. And we have an incredibly strong position. From the day 1, two people and an idea, all the way to the large companies, we play a large role in that development of an idea to a medicine. And when I think about some of the comments that -- and questions that have happened about some of the smaller companies, we've seen very robust demand, right? So I've been asked the question in different venues, are we seeing different things from the -- is there something happening with the smaller companies? The answer is, we aren't seeing it, right? We're seeing very strong growth, orders growing faster than revenue. We saw that in our Clinical Research Group, which is our PPD business, how we call it internally. That business had an incredible 2021. It's starting off the year with very strong momentum. So we've seen a good end market and a good funding level. So from our perspective, we're very excited about what the growth prospects are in serving pharma and biotech.

Great. Thanks, Marc. So I'll ask on the base business, but I wanted to start actually with COVID within that. Vaccine therapeutics, I believe, were $2 billion in 2021. And your guidance now looks at that business kind of growing at the corporate average, right, as you look ahead in 2022. And you've commented on the fungibility of capacity to meet demand across COVID and non-COVID. But we do get a lot of questions on COVID and just what's going to happen as volumes slow. So maybe just speak to that issue like this concept of like how much of that business growing at that corporate average growth rate this year, if we were to see a more significant slowdown in vaccine demand, like does that put that business at risk? Or do you feel confident in the backlog or the orders or the visibility on the non-COVID demand picking it up?

Yes. So one of the things that when we think about the role that we play in supporting vaccines and therapies, right, it's actually -- we play a significant role, right? And we have right from the beginning of the pandemic, right, through the early work and the clinical trials, logistics and all of that work, all the way through ultimately for those that were successful, we manufacture a number of both the therapies and vaccines. So it's a broad-based portfolio on the pandemic response and represented about $2 billion of revenue, as you said, last year. We deliberately, back in September, put it in our core going forward. So why do we do that, right? Because we have -- the capacity is truly fungible. It doesn't mean like in a week, you can switch it from A to B. You have the tech transfer, but we've had such strong demand across our biotech and pharmaceutical customer base that whenever there is less demand for those vaccines and therapies, we believe that we'll be able to reposition it to other capacity. And that gives us confidence in our ability to take that $2 billion of revenue and continue to be able to drive that and grow it as part of core. And if you noticed last week, we had an announcement with Moderna. I only talk about specific customers when they're public. And Moderna made an announcement, which I think gives you at least an indication of how different companies are thinking about it, which is they signed a long-term sterile fill/finish agreement with us for their pipeline of activities, right, that basically, they have a very robust pipeline of therapies and vaccines they're working on. And they're going to use us for the sterile fill/finish through the clinical process and for those that are successful, ultimately, commercially. So they've already worked through that sort of -- we have a lot of COVID activity, but what's after COVID and then Thermo Fisher playing a very meaningful role going forward. So that's how we see it, and we have a high degree of confidence that as demand changes, we'll be there. There's some upside cases, right? That's the sort of defensive posture. But if you think about the upside, if you will, which is historically, the flu vaccine, which we don't know whether mRNA will ultimately be used or not, but certainly, there's a lot of work going on. Those have been largely manufactured within the innovators' networks. And if mRNA becomes a meaningful player in terms of the technology used for flu or a flu-COVID combo going forward, that bodes well for companies like ourselves, which historically would have done much less activity on flu. And in that case, you wouldn't be transitioning volume, right? You'd basically just be moving it from a COVID vaccine to a flu or a combo vaccine, and that may play out or may not. We're not baking into our base case assumptions. But that would be the sort of upside case where you never really have to transition much of the volume away from COVID over time.

Great. Thanks, Marc. So bigger picture then on your kind of -- just on the overall bioproduction business you talked about a few minutes ago. That business grows above the 7% to 9%. The R&D portion of biopharma goes below the 7% to 9%.

Probably even grows above -- that could even probably grow above the 7% to 9%. It's just that the production goes a little faster than that is the way to think about it.

Right, right, right. So I mean, as we're looking at implied in your 7% to 9%, we were thinking more like a mid-teens level for bioproduction from what we can gather from looking at peers and industry stats. But maybe that's not the right way to look at it. I mean maybe I'm splitting hairs, but just trying to think through because there is such an intense focus on bioproduction given your competitive positioning and where we are with pipeline still being on 50% biologic. So as we think about the longevity or the durability of that growth, is it kind of teens -- mid-teens the right ZIP code? Or is it something below that? I don't know, just maybe help us think through what the outlook is for that business.

Yes. When I think about the growth rate for pharma and biotech, we continue to increase our penetration. It's definitely in the aggregate going to be faster than the 7% to 9% growth for the company with the production being a little faster than that. I don't get so hung up, to be honest, on exactly what all the components are to get there. I mean, we do a great job of supporting our customers. I think you're assertion that the bioproduction side of things that is going to be one of your fastest-growing segments, I think, is a reasonable assumption, right, around that. And so I'm super bullish about what the growth prospects are for the biotech and pharmaceutical customer base and driven by a combination of our unique value proposition, right? We really help customers all the way throughout the value -- the development of the medicine, and they leverage our expertise and our capabilities, and it's super unique and that's allowed us to perform at a very high level.

Great. So maybe sticking in biopharma. So PPD, the commentary and the integration has been very constructive as we would expect given Thermo's acumen with deals. But net-net, could you maybe speak to a little bit about like just how that deal has gone for you? Customer feedback? And what do you think is the most important aspect for people to appreciate about Thermo Fisher now owning PPD, this combined entity, like what it could do?

So we're super excited, right? It's been a few months now. We also had the benefit of a number of months to plan for it. Integration is going extremely well, right? So this is a business that had very strong growth last year, grew about 30%. And it enters with a very strong backlog of work. Business is off to a good start. And when I think about it, the customer feedback, right? So you have -- I'm going to bucket customers in two categories. They've been using PPD. They've been happy with PPD. They're putting a lot of work there. There's been a continuation, right? That's going fine. But customers that now are saying, you know what, Thermo Fisher, why did you buy PPD? I haven't used them as much. Give me a rationale to explain it. Feedback has been hugely positive. There's just a lot of interest, and the pipeline for revenue synergies is building really well. And that bodes well, right? The way we think about it is you take a business that is growing in that high single-digit range, and our goal is ultimately to be able to grow it faster than that, right, and sustainably. The industry is huge. So if we do a good job, then the ability to sustain really high rates of growth are very high. So early days, really positive, and we look forward to really getting into it. We're going to do a comprehensive update at some point in the not-that-distant future about what's going on in our PPD-related business.

Great. So maybe just kind of -- just touching upon some of the other areas, if you will. So academic and government, there were some pressure points from some of the smaller players in 4Q and 1Q, given Omicron. You guys powered through that. But just trying to get a sense of the mid-single-digit type growth that you've outlined for 2022 following really strong growth last year. Just how do you view -- like you talked about it at the onset, the funding environment is solid. We're hopefully getting through the worst of Omicron now. Just how do we think about like that mid-single digit? And is that durable beyond kind of '22?

Yes. So Dan, if I take a long-term historical view, right, and pre-pandemic, right, academic and government, 3% type growth market, maybe a little more sort of what the global growth was, right? And you would have a little faster growth in China and maybe slower growth in Western Europe, right? And it would vary year-to-year, but that was a fairly moderate growth market. And historically, we might grow a little faster than that. What the pandemic has really done is it's kind of really solidified funding interestingly enough, right, which is there's a real interest in the basic understanding of life sciences, medicines, health care. And the truth is, is that, that is much less costly than dealing with treatment after the fact, right, the sort of basic understanding early. So I'm actually quite bullish about the funding environment for academic and government going forward. And in my discussions with governments around the world, there is a real commitment to continuing that going forward. And you have different ideas. In the U.S., you have the ARPA-H concept. It's almost like a defense concept where you're spending money to prepare for different scenarios in the future so that you can navigate a challenging world. And I think things like that will bode well for funding. So I think we're well positioned as an industry and Thermo Fisher is obviously in a strong position.

Great. So maybe in health care and diagnostics, you were super successful, obviously, with marshaling resources on COVID testing, unprecedented. Historically, you've been not a broad-based player in diagnostics, I would say. Like you've been very selective in identifying areas where you could really have a differentiated solution and been successful with that. Does your success in what you've done with COVID, does it alter your view of diagnostics at all? Does it get you more interested in investing more aggressively there, whether organically or inorganically? Just discuss maybe your diagnostic strategy going forward.

Yes. So Dan, the team has done an unbelievable job in supporting the molecular diagnostic ramp-up, right? And it's been incredible on how we have supported sample preparation as well as COVID-19 testing, right? And so when I think about the implications of that longer term, historically, we obviously always had a molecular diagnostic set of capabilities through our GPCR base. And it's -- it will be larger permanently because of COVID and the expansion of the installed base. And it probably, in an endemic phase, where we're not living with -- talking about COVID all the time, but it's sort of in the background, it's probably a $400 million larger business than -- on an annual basis than certainly pre-pandemic, right? So it's meaningful in terms of that increase. And we've added capabilities organically and through M&A, right? So we bought Mesa Biotech to give us a rapid diagnostic system, which is a rapid PCR system that can be used in the pharmacies or doctor offices, and we're expanding the menu there as well as we also launched super high-volume capabilities as well. So listen, we just built out our molecular diagnostics capability. And in the rest of our portfolio, we're a leader in allergy, autoimmunity, transplant diagnostics, some of the areas, we continue to invest to make sure we have a bright future as well.

Great. So maybe jumping over to China. So a really nice rebound in '21, I believe, growing nearly 20%. You've been continually very constructive on that market opportunity and the longevity of Thermo's position there and how you're viewed as locals. Net-net, from the outside, it does feel like the risk profile is higher in China, just given maybe some of the soured nation-nation relationships as well as China looking at this, maybe China 2030 or whatever the name is, about doing more of local content for some areas. So net-net, just how do we -- have you seen any change in your China business? What's your view on this risk profile and the growth profile going forward for China?

Yes. So we had a strong year of performance in 2021 in China, right? We grew just under 20%. We ended the year with stronger orders than revenue growth. So we start the year strongly. There's clearly trade tensions, right? What you read about and see, they exist. There's no doubt. Our industry has not been a big focus of it, right? And certainly, we have good relations in China and a good scale presence in China, and we've been able to navigate it as we've navigated the various challenges over the world. And customers in China, they select us because we provide a really excellent experience. We've invested in the applications labs, the service support, the logistics network so that customers have a preference towards us. And so the business is performing at a good level, and we've enjoyed good growth in the biotech industry. So I feel good about it. The revenue is about 8% of our sales, right? So it's significant, but it's not huge, right? And it should be our fastest-growing end market long term is the way I think about it. And there'll be ups and downs, I have no doubt, but I feel good about the outlook there.

Great. So kind of on cap deployment, you've done a tremendous job with your deals over the last 5 or 10 years. And on people's minds, it's with a steep sell-off in stocks. Obviously, it potentially makes it much more attractive environment for acquirers with the balance sheet and the capabilities. So just I think I would love to get your update on thinking on the pipeline of deals today and whether or not the sell-off in stocks does create a more attractive opportunity and just kind of what the pipeline looks like, particularly maybe for larger deals?

Yes. So Dan, a few things. Obviously, we had a busy year last year, right? So we put $24 billion to work. We put $4 billion on bolt-ons, $20 billion of PPD and we're going to do a great job of executing against those transactions. We do have a busy pipeline, so we're active. And I think it takes a while for valuation expectations to align with whatever the current environment is. So -- but that will play out over time. So we're continuing to be active and looking and focusing on doing a great job of executing on what we did. And for the right transactions, you'll see us be active. And we're always patient and thoughtful and aggressive at the same point in time, right? So that we don't have to do any deals, but we're ready to and we're actively looking.

And like the regulatory environment for M&A, it looks like -- or it does -- I think it's pretty factual, the antitrust approach in the U.S. has gotten more stringent, maybe more difficult under new government leadership. Does that influence your M&A strategy at all?

Yes. So if you think about our criteria, we always think about risk as part of the criteria, right, because we need to be able to deliver good shareholder returns in the downside case, right? And the downside case can be driven by lots of things. It can be driven by regulatory. It could be driven by macroeconomics. It will be how we execute an integration, whatever it is. So when there's a tougher antitrust environment, that weighs into which types of transactions that we do, right? So that you look at those transactions where you're really going to have a lower likelihood of meaningful antitrust issues weighs more favorably on the economics of those transactions. We have an incredible track record of getting things done and PPD went smoothly. And we're excited about just given how hugely fragmented this industry is, there are plenty of things we can do. And we'll do the ones that we have a high degree of confidence that we can close without issue.

And then maybe one question is on margins. The guidance this year calls for kind of mid 25%, I think it's 25.4% specifically, which is down materially year-on-year, but obviously, it's still well ahead of where you were pre-COVID, 200 basis points. So a nice meaningful expansion there. Just that was a key concern, I think last year, as COVID rolled off, where would margins reset. So from these levels, is the idea that 40 to 50 basis points per year, that's kind of where we traject off of to your business plan from the 2022 level given again just trying to unpack this COVID dynamic?

Yes. So we have an incredible track record over time of expanding margins, right? And if I think about the dynamic here, the timing of the PPD acquisition and our assumptions around how testing migrates to a more endemic level, the revenues are fairly -- the decline in testing is pretty much offset or more than offset by the PPD revenues, but you trade at different margin structure, right? So this year, we expect to be at 25.4% and then to grow from there, right? I mean, that's the way to think about it. And so I always like the context when I joined the company, our operating margins were 10%, right? And we just -- over those 2 decades, just kind of every year, a focus on 50 basis points or more, better. And we've done a really strong job of doing that, and we'll continue to do that off of the 25.5% level. And over the next 3 years, we'll continue to get higher and higher into the 20s in terms of our margin structure.

Great. So we have about a minute left. So maybe just a two-part final question would be, I guess, what excites you most as we look out? Or what should excite investors most about the Thermo Fisher story? And kind of what message do you want to leave investors with here today?

Yes. I mean, company is performing at a high level. We entered this year with great momentum. We're gaining market share and our customers are excited to be doing more business with us. And no matter what the choppiness of the world and the challenges of the world, we will manage it better than anybody else in our industry and emerge from this period of time a stronger industry leader.

Great. Marc, with that, thank you very much for being here. Thanks, everyone on the video and hope you have a great conference. And have a good rest of the week as well.

Thank you so much, Dan.

Okay. Take care.