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

Good morning, everyone. This is Rachel Vatnsdal from the life science tools and diagnostics team from JPMorgan. I'm joined today by Marc Casper, CEO of Thermo Fisher. So today will be a 40-minute presentation. We'll start off with 20-minute presentation from Marc. And then after that, we'll shift into Q&A. Just like all the other sessions that you've been to this week, we'll have mic runners throughout the room. So if you do have a question, please raise your hand but wait until you have a mic in your hand to ask your question. Otherwise, for those of you joining us online, feel free to answer a question via the webcast. With that, Marc, I will let you take it away.

Good morning, everyone. It is great to be back in San Francisco. Rachel, thank you for having us. I thought about this conference, it's just great to see so many people. And yesterday, it was a great day with customers and so many familiar faces in the standing room-only crowd here at the Westin. So what I thought I would do, as in every year past, is remind you of our safe harbor and the use of non-GAAP financials. The reconciliation can be found in our website under the Investor Relations section. When I thought about this conference, I thought about 2022 and what the world was like for investors, not the most pleasant of years. I thought that I would maybe share some perspective before getting into the presentation. This is, I think, my 15th JPMorgan conference, and what I wanted to do is just kind of reflect a little bit, right? As I think about Thermo Fisher Scientific, the company is consistently focused on value creation for all of our stakeholders, right? And we do that in a way that creates a sustainable strategy that allows us to be able to build value for the long term while delivering great short-term performance. As a company, we're proud of our track record of setting ambitious goals. I love getting questioned about, are they too ambitious, and then going out and consistently achieving them, and that's how we measure our success. When I think about the company, nobody has a crystal ball to what the future holds in terms of the macroeconomic environment, geopolitics and those things. But what I do know is that we're uniquely positioned to navigate whatever environment is thrown at us because we have built over many years a deep trusted partner status with our customers. They rely on us to help them navigate whatever the world is for them and make them successful in the environment. We have an experienced management team. We've seen a lot. And in each period of the different environments we've managed through, we've been able to exit those periods a stronger industry leader and proud of what we've accomplished to set the company up for long-term success. We obviously have the benefits of our leading scale and depth of capabilities which positions us well. The company, as you'll hear, has a proven growth strategy to drive share gain. It's powered by our PPI Business System. We have a disciplined capital deployment strategy that has created significant value for our shareholders over the years, and we have an outstanding track record and a sustainable formula for success, right? So when I think about the environment, our end markets are good, right? There's lots of challenges in the world, but what I think about it is we're going to navigate them extraordinarily well to deliver results that all of us can be proud of and create value for our stakeholders. So the presentation today, I'm going to have in 2 parts. I'll refresh the company for you, just give you some of the key facts, figures and a little bit about our strategy. Then I'll update you on the nonfinancial goals of 2022, lay out the goals for 2023. And on February 1, we'll give you all the numbers. So that -- and that's been the practice we've had for all of the years past because we'll have complete information and can answer all the questions at that point in time. Key takeaways from the presentation. 2022 was awesome. We delivered an outstanding year and positioned the company very well. We serve good end markets. They're very attractive. The fundamentals of them are strong. Our track record is great. Our outlook is strong. And our long-term outlook for growth is high single digits, right? That's what we signed up for in our long-term financial objectives, and we feel confident in our ability to deliver that. We did a large acquisition in December of 2021, the acquisition of PPD. We've had a little over a year of ownership. It's been awesome. The business is performing incredibly well. Synergies have been realized. And the business is very well positioned. And we're excited by the contributions that it's making and how it's made the whole company stronger. And we couldn't be more excited, which I think you can tell from me today, about what 2023 will bring to Thermo Fisher Scientific. So the company, the world leader in serving science, right? We serve our customers. Our customers know us for our leading brands, which is at the top of the slide. Our industry-leading scale with over $40 billion of revenue. 125,000 awesome colleagues. And we spend on our product business -- it's about $1.5 billion on research and development. We have unmatched depth of capabilities and we create value in a sustainable way. So we have a positive societal impact. We're focused on ESG priorities, and I'll talk about some of those as well. And all of this becomes a reality because of the strength of our PPI Business System, and I'll talk about that also. All of our company's focus starts with our mission. We enable our customers to make the world healthier, cleaner and safer, right? It sounds good, but it's actually what we do, right? When you walk through our facilities, when you talk to our colleagues, they can talk for hours about how they've helped a client advance a breakthrough medicine, how they've helped a pediatrician with a new diagnostic, how they've brought something to a government regulator to ensure that the air that we breathe is clean or the food that we eat is safe. And all of those things are what inspires all of us to bring our very best every day. We have a rich set of opportunities to enable our customer success. Pharmaceutical and biotech is our largest end market, represents about 60% of our revenue. The other 3 end markets that we serve are all roughly the same size: academic and government, where we push the frontiers of science; and diagnostics and health care, we enable more cost-effective diagnostics and better patient care; and industrial and applied, we facilitate both quality control as well as advancing research, particularly in the materials science applications. Our market is about $225 billion. Long-term market growth is 4% to 6%. And our ability with that kind of market growth is for us to deliver 7% to 9% or better growth. Our segments create value for one another. They're related, they're linked and they are able to help our customers do things that nobody else can provide for them. Our life science solutions business is a leading portfolio of life science research tools as well as bioproduction technologies. Our analytical instruments, we have leading technologies for solving tough analytical challenges, specialty diagnostics, improving patient care. And our largest segment, laboratory products and biopharma services, we have a leading CRO, CDMO and extensive laboratory products capabilities that include our channel business. We do the clinical research, we do the development, we do the manufacturing. We equip the labs, basically take everything from a scientific idea all the way through an approved medicine for our clients. Our formula for success, right, it is well ingrained in the company. We've been executing it for a number of years and it's delivered really fantastic impact. We have a proven growth strategy that drives share gain. We have a PPI Business System that enables outstanding execution. And we have a proven capital deployment strategy. I'll highlight each of them, and what that formula allows for is consistently delivering exceptional financial performance. When you look first element, our share gain strategy, right? How do we grow the business? A high level of commitment to high-impact innovation. Each year, very strong, relevant products to push science forward, enable the impossible that our customers couldn't have done in the past because of the technologies we bring forth. We leverage the benefits we have of the scale in the high-growth and emerging markets. It creates a superior customer experience that allows us to drive share gain in those markets. And we have a unique value proposition, which I'll highlight as well, which has allowed us to build a unique trusted partner status with our customers. And that combination of those 3 elements drives 7% to 9% core organic growth in the long term. Obviously, in 2022, our guidance is 12% core. So we don't limit ourselves at this rate, but that's a good rule of thumb with 4% to 6% market growth, that we can grow sustainably faster than that for the long term. The PPI Business System has been ingrained in the company for 20 years. We celebrated its 20th anniversary in 2022. And what that allows us is to engage every colleague every day to find a better way every day. It's the culture of the company that every colleague is empowered to make Thermo Fisher Scientific a better company. That improves our quality. It improves our productivity. It improves our customer legions. And that methodology of improving the company and never being satisfied with the status quo allows us to accelerate organic growth, expand margins and deliver great cash flow. The third element is our proven capital deployment strategy. This slide is one that we've used with the exact same words for many years, but it's a good reminder of what it is, right? And it starts with -- from a strong cash flow generation and a very strong balance sheet. We focus primarily on M&A, strengthen the company, leveraging our track record to be able to create value through that. The fragmented industry that we serve, with us having about 20% total market share, gives us ample opportunity to deploy capital. We do return a lot of capital. Last year, we bought back over $3 billion worth of shares. We returned about $0.5 billion in dividends, and we consistently do that. And we'll continue to be focused on both growing our dividend and returning capital through share buybacks. And every year, it might mix a little bit -- the mix might vary a little bit. But nonetheless, it's an important part of how we deploy capital. We have substantial firepower, right? In our long-term model that we presented in May, we have about $50 billion of firepower over the next 3 years in terms of the ability to deploy capital, and we'll continue to be active and generate strong returns for our shareholders. That formula has delivered great results and positions us to continue to deliver outstanding performance. When you look at it, we've delivered over the last 10-year period 13% growth in revenue, 17% growth in adjusted EPS, 15% growth in free cash flow. A very strong track record. And you can cut the data in whatever years you want and you get to be very similar results of just very strong financial performance. Whether it's a 5-year period, 10-year period, 20-year period, we have a demonstrated track record there. And I'm super excited about what '23 will hold. ESG is ingrained in the company, right? It's a source of competitive differentiation. We're focused on it because it's the right way to run the company, it's the right way to have a sustainable long-term strategy for success. From an environmental perspective, we're focused on safeguarding the planet. We're focused on helping our customers achieve their sustainability goals. From a social perspective, we have a diverse and inclusive culture that brings out the best in our colleagues. We support our communities. We're active in our communities and volunteering. We're active in our communities through philanthropy. We're a good neighbor in the many places we work around the world. And we're focused on good governance. We have an awesome board. They hold the management team accountable and we report our results with transparency so that we can hold ourselves accountable to great performance and that all of our shareholders and stakeholders can understand how we're performing. So let me turn to a year ago. We were together at the JPMorgan conference, I think, virtually, but together nonetheless. And these were the goals, exactly the slide from the presentation that we set out for 2022: revenue growth, successfully integrate PPD, enable the societal response to the pandemic, execute on our ESG priorities, drive margins and below-the-line performance, and effectively deploy capital. Those were our goals. It was a great year. I'll hit some of the highlights. But really, when I look back at '22, one of our best years ever. Great product launches, right? When I think about the growth strategy, I wanted to highlight just we increased our investment in R&D during the pandemic. We generated significant revenue from the pandemic response and we were able to accelerate R&D and we're seeing the benefits, right, of it, whether it was in genetic analysis with our SeqStudio Flex, whether it was the products we launched in next-gen sequencing, whether it was in our analytical instruments business, whether it's chromatography or mass spectrometry, just great launches, as well as in specialty diagnostics and our bioscience reagents. Really strong year in 2022. We advanced our customer value proposition, right? We've done -- you can see some of the headlines on the chart. One that I'm particularly proud of is with Moderna, right? They got to work with a number of players during the pandemic. They selected us for their pipeline of activities going forward, right? The activities of what's in their therapeutic pipeline. Long-standing relationship, leveraging our capabilities in Greenville, North Carolina to do the sterile fill finish activities for them going forward. It's an example of customers recognizing the performance that they had seen from us. But many other highlights with universities around the world, collaborations to advance the value proposition that we have. The second expectation for '22 was to deliver on PPD. We did an incredible job. I thank the team and all of the colleagues for their relentless focus on customer success, achieving the integration goals and delivering great financial performance. The business is on track to deliver 14% core growth during the course of 2022, generate just under $7 billion of revenue, contributed over $2 to our adjusted earnings per share. We were able to leverage those relationships to grow the business very strongly, create significant revenue synergies and the integration now is largely complete. We will achieve the $175 million of synergies by year 3, $100 million from costs, $75 million or greater from the operating income from the revenue synergies. So really, really strong performance on the PPD acquisition. PPI Business System. While you think about what year that was like in a way, for the society broadly or for the economy broadly, what a nightmare, right? You think about it, right, supply chain, labor shortages, you think about inflation, all of these things that were new, right? And you didn't hear us talk about that at all during the earnings calls. The PPI Business System allowed us to effectively navigate that because of our supply chain resiliency and our ability to adjust to challenges, the ability to drive incremental cost management in a more inflationary environment and to be able to appropriately price and use the analytics and the customer relationships we have to be able to navigate the inflationary environment very effectively while increasing our customer allegiance with our customers. And then ESG, a very strong year. We increased our carbon reduction goals for this decade to 50% reduction for our Scope 1 and 2, and we're on track to achieve that. By next year, we will have 50% of our U.S. energy based on renewable sources. And we continue also to invest significantly in our colleagues and our communities. From a colleague perspective, as you know, we were able to recognize the colleagues' contribution to our success through additional payments because of that during the pandemic. We also were able to do payments to help offset the impacts of inflation in terms of onetime payments. And it really is about creating a sustainable business model for the long term. So really a very strong year from an ESG perspective. So we gave ourselves a green checkmark. But most importantly, all of that hard and smart work positions us with incredible momentum as we enter 2023. So our goals for the year, nothing here is going to surprise you, right? We're going to go out and gain share, right? That's our goal. That's how we measure success, right? We're excited by it. We have momentum. We're going to continue to do that. We have a proven track record. We're going to leverage our PPI Business System to effectively navigate the dynamic macro environment, right? Our end markets have been good. The economy has many risks. We continue to see strength. We'll navigate whether it's strong or different, we'll come through it with great results and well positioned for the future. We'll continue to effectively execute our capital deployment strategy. We'll deliver the PPD synergies. We will successfully integrate the Binding Site, which we closed on January 3. I'll give you a highlight on that in a moment. And we'll continue to execute our M&A and return of capital strategy. We'll make progress on our ESG priorities as well. And we look forward throughout the year to report the momentum we have across all of those dimensions. We acquired the Binding Site. We announced it at the beginning of the fourth quarter. We closed it on January 3. It brings a leading company in specialty diagnostics for the management of blood cancers and immune system disorders. It's a great company with incredible technology that together, we'll be able to continue to push the science and the medicine forward to be able to help those that are struggling with multiple myeloma. It really is incredibly compelling. It will contribute about $0.07 to our adjusted EPS this year, and we're excited that we're able to get started on the first business day of 2023 with this acquisition. And we'll update you on our progress during the course of the year. So I'll end where I started with the key takeaways of the day. '22 was special. We're even more excited about '23. We're incredibly well positioned, industry leader serving attractive markets. We've got a great financial track record and outlook. Our largest acquisition in the company's history is performing incredibly well. And '23 will be another special year for Thermo Fisher Scientific. Thank you for your support, and we look forward to your questions.

Perfect. Thank you, Marc. So as a reminder, everyone, if you do have a question, feel free to raise your hand. And then we have the mic runners around the room. Maybe so just to kick it off here. You guys have had a really impressive year across the portfolio, but notably biopharma, PPD, also instrument strength. So can you just walk us through, how were you able to do that despite all the macro noise? How much of it was market acceleration versus really true share gains from Thermo?

Yes. I would start, Rachel, with the markets were good, right? The markets were definitely strong. And the industry benefited from that, for sure. It's clear, as you look at our results and the long-term targets and even the 12% guidance that we gave in the third quarter, that we've set a higher bar in terms of what good looks like from our perspective versus others. So I feel very good about that. When I look at biopharma, it was clear that the value proposition that we have really resonated, right, in terms of -- you saw it in our PPD results, you saw it across the portfolio, very strong growth. So the trusted partner status, it sounds good in words, but the reality is it's driving very meaningful share gain for the company. The instruments business really benefited from the acceleration in R&D in 2020 and 2021. As we had some of the financial benefit of COVID, we reinvested in the business. You saw very strong product launches. And you saw in a good market set of conditions in the instrument businesses for the industry, we were able to deliver very strong growth.

Helpful. And then maybe just on the topic of biopharma, bioprocessing de-stocking. So it's been a dynamic that many of your peers have called out. Thermo so far hasn't really called out any of that softness that other players have been seeing from an orders perspective. So can you just walk us through why have those issues not translated to Thermo's portfolio? Is there something -- is it your ability to have that services component? Or what makes Thermo's portfolio more resilient when it comes to any of these stocking concerns your peers have called out?

Yes. So I think when I look at bioproduction, right, I think it's always good to put things in context, right? It represents about 10% of our company's revenue. And if you look back over the last 15 years, it would be our fastest-growing business on average, right? So very strong market. And in the good years, the challenging years, it typically is always in the same spot as being the fastest or one of the fastest-growing businesses. When I looked at last year and looked at the performance of the business through the third quarter and when I looked at it, pharma and biotech was growing for us about 15%, right, for that whole end market. The bioproduction business was growing meaningfully faster than that, right? So we delivered very strong performance, and I feel very good about that. When I see a lot of the industry commentary, I think a lot of it has to do with COVID and what percent of a company's portfolio was COVID-related, right? And on a relative basis within bioproduction, it wasn't a very large percentage of our portfolio. So I think a lot of the stocking dynamics is probably related to that. And I'm sure there are customers that may have more inventory that they'll work down than they want, but we've continued to deliver very strong growth and feel good about the outlook.

Great. Helpful. Maybe just sticking on that trend of pharma biotech. During your Analyst Day in May, you noted that you expect this end market to grow above that 7% to 9% long-term growth that you've laid out. So can you just talk about your confidence in pharma and biotech today? Obviously, we had some of the biotech funding concerns earlier in the year, and there's been broad discussion on is that going to slow the pipeline in the next few years. But then biosimilars hitting the pipeline also, these weight loss drugs, Alzheimer's, so walk us through those puts and takes. Do you feel like the biopharma and pharma end market has really slowed down? Or has it sped up in your opinion?

Yes. The end market has been very strong. And while there's clearly lots of noise in the investment community, customer activity is very high, right? So if I look at authorizations in our clinical research business, if I look at bookings, if I look at the pipeline of activity, if I just even think about what I'm hearing from customers in the meetings they have, customers are advancing their pipelines. That's what they're focused on, right? So the end market continues to be very strong. We saw certainly a period in 2020, 2021 where if you had a good PowerPoint presentation, you could get funding, right? And I'm not sure that, that is -- that's not necessarily the best environment. That has shook out. And -- but that's not having a material effect on the end market, right? And when you think about some of the potential blockbusters, whether it's Alzheimer's or weight loss, that bodes well also for what the industry's future is.

Helpful. Maybe shifting gears here to China. So during 2Q, Thermo was able to grow over 20% in China despite some of the lockdowns. But also, some of that outperformance was really due to COVID-related instrument sales. So can you walk us through, first off, what are you seeing in China right now? You've had a lot of peers speak about some of the lockdowns and just the broad outbreaks that we've been seeing in recent weeks. So what's the environment there? And then can you compare and contrast that with your performance during 2Q? Is that replicable? Or was a lot of that just onetime related due to COVID?

Yes. So China, again, setting the context, China will continue to be one of the fastest, if not the fastest-growing geography for the company in the long term, right? Just the demographics, the focus on a healthier China, those things will drive strong growth, right? And we feel good about that. There'll be geopolitical tensions. There will be categories in this industry that you sell less of or you don't sell because of it, but the fundamentals are going to be positive. When I think about last year and you think about the first 3 quarters of the year, what you saw was controlled lockdowns, right, in the country and effectively the governments and local governments wanting the industry to continue to operate, right? So we were able to basically have business as usual in terms of activity. Our colleagues did a remarkable job. There was nothing usual about the environment, but many colleagues lived at factories and all of those things to ensure that customers are served because those customers are doing such important things. When you -- what you saw at the end of the year was very different, right? You saw widespread COVID infections as opposed to lockdowns. You saw -- so the economy was disrupted. So I would expect that China feels more of the impact in the super short term, but it also gets behind the country. And therefore, China, which has had a rough go from an economic standpoint, should actually rebound in terms of growth. So kind of a little bit more of a short-term pain for midterm better environment. That's my take on it.

Helpful. Maybe just since we're talking on geographies, Europe, can you talk about what you're seeing there from a capital budget standpoint? Just as the region has been facing geopolitical issues, energy costs, what are you hearing from your customers in that market?

Yes. So when I think about Europe, Europe -- actually, a strong performance last year, right, and for the company. A lot of our business, the majority of it is related to pharmaceutical and biotech, which is less economically sensitive. And so that's done well. Interestingly enough that the EU has really focused on academic and government spending, right? They've actually really committed to science investments, lessons from the pandemic. So I actually think the academic environment should be reasonable in Europe going forward as well. So clearly, there's recession challenges. Clearly, there's inflation challenges. There's many challenges in Europe. But in our industry, actually, the end market has been reasonable.

Helpful. While we're talking about capital budgets, I need to bring up instruments. So what have you been seeing from the instrument market? We've all been trying to discuss, is this market acceleration? Or really, what's happening in that instrument piece? And how sustainable is that? Analytical instruments for you guys grew 16% during 3Q. It's been robust throughout the entire year. So how are you thinking about instrument market heading into 2023 especially given some of these difficult comps?

Yes. So one of the things that I always like to remind all of our shareholders is we like difficult comps, right? Actually, that's what we're paid to create, right? We're not -- we're definitely not paid to create easy comparisons, right? So that's the -- we're used to that. When I think about the instrument business, you had good funding, good industry backdrop and the science is good. The science is good in the pharmaceutical industry. The science is exciting in terms of where the academic community is pushing. And we, as a company, specifically benefited from our commercial initiatives and from the acceleration of R&D investments, right? We had a very strong year of launches, which I highlighted some of them in the presentation. And that combination allowed us to deliver really great results in the instrument business. What's very important on the forward-looking side is orders were very strong, right? We built backlog during the year, right? So we entered the year with a strong order book. And that's a very encouraging sign.

Helpful. So how should we think about pricing heading into next year? Obviously, you did roughly 300 basis points of pricing this year. That's almost 3x of what you normally do on that 50 to 100 basis points average on an annual basis. So how do we think about pricing heading into 2023? Can you sustain these level of pricing increases? Or should we expect a more normalized level?

Yes. So when I think about pricing, this is a great industry. And every year, you see positive price, and that might vary by 50 points or 100 points. The way that we thought about last year's environment is to be able to have very clear discussions with our customers about inflation is real. We're going to drive incremental productivity to help offset as much as we can. We're going to pass through higher pricing and our customers accepted that, right? And that's really about the discipline of our PPI Business System. We were able to really do that well. We had about 3 points of price last year. What our belief is for this year is price will not revert back to normal, but it won't be as elevated as it was in 2022. It will be somewhere in between those.