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

We're pleased to be joined with me here on stage, Marc Casper, Chairman, President and CEO of Thermo Fisher. I'm going to first say thank you, Marc, for coming.

Of course. Glad to be here.

We appreciate it. Eileen Pattinson sitting here in the front row. So I thought, Marc, maybe you can just kick it off with some opening remarks, and then we'll go into Q&A.

Sure. So thanks, Dan, for having us. It's great to be back. I was telling Eileen on the way, and this was the very first investor conference that I ever did, which was back in 2002, and there was 3 people in the audience and one of which was looking for a job. So it was -- we've grown a lot in the company and certainly Cowen -- TD Cowen has changed a lot over the years. So in terms of -- that was not the most important message. But in terms of the highlights. So the company is a well-positioned industry leader. Our industry has incredibly strong long-term tailwinds, and we've been able to gain market share consistently over the last decade plus. When I think about the company today, I think the thing that's super differentiated about the company is the relationships we have with our customers as far as -- as spokes were coming in, one of our customers kind of came sprinting down the room to say hello, knowing that we were here and that says something about sort of the relationships that we build.

Terrific. Well, you've been CEO now for, I think, almost 15 years. And over this period, I think, inarguably, the performance has been exceptional. You led the company through many different economic periods and environments. So what strategic actions do you look back on as the ones that most materially strengthen the company's value proposition as a trusted partner to the industry.

So Dan, I think the thing that really has differentiated Thermo Fisher is about culture, right? And Actually, when we focus the company strategy, it was all about success was on -- we do a good job for our customers, then we're going to have a bright future, right? Now what company says we're going to do a bad job for our customers, right? It's not the philosophy, but rather it's actually deeply ingraining that about how you recognize people, reward people and what you have is important, right? And when you do that day in and day out, you get no short-term benefit for that, but that's the long game, right, of how you build a business. But what that has translated to over time is our ability to expand our served capabilities for our customers. And if you think about how we serve the pharmaceutical biotech industry, we started out as an instrument provider. Then we added all of the consumables, we added the channel, so we represent other companies. We were able to build out one of the largest contract developer manufacturer of medicines. And today, we will be the second largest clinical research organization as well. That's all because our customers embrace doing more with us, right? They have a choice, right? And they're choosing to do more with us. And that's really been the thing that has set the company up for a flywheel effect of continually being able to grow more quickly, gain more market share, reinvest and create a bright future.

Terrific. So maybe looking forward then, related to that, I shouldn't have put the questions down. How do you repeat the success you've had over that time frame?

Yes. History is interesting. The future is more important. And -- so the things that, as I look to the future, one, we're much stronger today than we've ever been, right? So in terms of the relationships we have, the capabilities we have, the differentiation, all of that creates wonderful opportunities to continue to grow the business at an industry differentiated rate of performance for the long term. And when I think about the other aspects, I'm sure we'll delve into that, the industry continues to be fragmented. So there's opportunities to build the capabilities through capital deployment as well. So we'll continue to strengthen our offering both organically and inorganically. And we have a great management team. So we're excited about what the future holds.

So with '22 now behind us, can you discuss the benefit in hindsight, how do you play it out, say, versus original expectations? I mean the industry did well. Many of the companies are here today, Thermo grew 14%. That even stands out in a really attractive industry.

Yes. So Dan, when I think about 2022, the year turned out to be just a spectacular year, right? And -- so the first thing is, is that the end markets were good, right? And you can look across the industry and the end markets were definitely strong. And at the same point in time, we were able to give a differentiated performance. I think the things that worked out for us, in particular, was the integration of PPD went extremely well. So it was our largest acquisition in our company's history. We closed it in December of 2021, and doing phenomenally well. That business grew in the high teens from a core perspective. So it was very, very strong. But the rest of the company grew at a very high rate of growth. And it turned out to be a year where we were able to raise guidance throughout and meaningfully beat the EPS number and invested very significantly for the future. So we exit the year with a strong order book as well as a really incredible competitive position.

So from a high level, how does '23 look? And what are some of the notable areas of opportunities and risks? I mean, in particular, what's the confidence in the 7% organic growth you guided to, particularly in light of the very tough comp that the company is facing?

Yes. I mean when I think about the 7% growth, right? I like -- the whole management team were paid to create tough comparisons, right? That's what our jobs are, right? So we have a tough comparison for this year, that's okay, right? And when we think about the 7% growth, what we think about is that the markets that we serve revert to more normal conditions, right? So '21, '22, there was definitely elevated growth. Our assumption is that market is going to grow around 4% to 6%. And with that rate of growth in the market, then we're well positioned to grow 7%. If the markets continue like they continue the previous 2 years, we'll grow well above the 7%. And if the markets are worse, if the economy turns down or something of that standpoint, then we'll grow lower. But I think it's reasonable from an assumption standpoint on the 4% to 6% market growth to be able to deliver the 7%.

So from the deal environment -- sorry for the backdrop, maybe I'll move over here. [Technical Difficulty]

Yes. So the question that [ Terri ] refined Dan's question on was really around if the economy gets worse, if you think back to the global financial crisis, what is the implications on the growth of the company. And every recession -- I've been around long enough that I've seen, I think, 3 variance of recessions, and so they're all different. And when I think about it, I think it's reasonable to believe that the company will grow through a recession. But there's -- but you never know, I don't mean that flippantly, which is, if there's something that drives very different demand profile in pharma and biotech and health care, you're not going to grow. But if it's -- if I look at historical patterns, you're likely to be able to have modest growth in a very tough economic environment. So not foreshadowing that or anything, but just sort of how I think about scenarios out there for the longer term.

So stock prices in the industry are still down, certainly, from the '21 and '22 high. So good time for acquirers, though, obviously, higher rates can dampen maybe some of the return profile. So what is the environment like today and can Thermo execute on a large transaction in '23?

Yes. So Dan, I think this is a favorable M&A environment for the well-capitalized companies with a track record, right, which is valuations are down a bit. The financing costs are up. So it makes the return hurdles harder for, certainly, private equity and, certainly, for buyers that don't have the balance sheet or the track record. So from that standpoint, we have a competitive advantage along with a couple of others in terms of the ability to be able to win contested sort of type transactions. And we take the long view, right? We have not lowered or raised our return metrics over the last 20 years, right? So we didn't lower the return hurdles when the interest rates were near 0, and -- so we've been operating in an environment where we know that we can do transactions. I'm excited about the bolt-on that we completed on January 3, which is the binding site in the diagnostics field. We have a very active pipeline, right? So I think there's some really interesting things we're looking at. In terms of the large deals, you never know. It's not about the ability to afford it. It's not about the ability to do them. You just don't control the timing. They happen when they happen. So if the right large transaction happens, you'll see us do it. But those are every few years, and it's not correlated with anything other than company-specific -- is ready to be a seller.

And kind of the areas today that we would say are the key focal points from M&A for you, whether end market or type of product or capability?

Yes. From my vantage point, we have an incredible set of capabilities. So I think a lot of the M&As are building out the portfolio that we have today. So we're pretty agnostic whether it's product or service, and we certainly have great capabilities in serving pharma and biotech. So that typically would be the area of focus. But when there's the right diagnostic asset, you saw us buy one in January, occasionally, we'll head there as well.

So if we go back to your last Investor Day, I think the long-term plan, you set out to deploy nearly $50 billion in capital over the coming years. Are you confident you can achieve this level? And if not, will you return more to shareholders?

Yes. So we gave -- when we did our 3-year outlook back in last year, the $50 billion is something that the company can afford to do. And we'll do that with one caveat. And I think the caveat is always implicit. We're not going to do deals for deals' sake, right? We're going to do deals that create shareholder value, strengthen the company strategically and our value by our customers, right? So I don't wake up saying, I've got, whatever, $47 billion to go. That's not how I think about it, which is, we give you a rough view of what is the right level of affordability. We have an incredible track record of actually doing more than what we say we're going to do, but we'll only do the transactions if it makes sense for the company. And yes, we would certainly return more capital to shareholders if we didn't like the M&A opportunities out there. So I'm quite bullish about what the opportunities are, but you don't want me -- I don't have to be so committed to something that I do stupid deals to make a number.

So the regulatory environment to M&A seems less friendly -- less industry-friendly under new government leadership. How does that influence your M&A strategy?

Yes. Forever, you think about risks and transactions around antitrust, right? In different periods of time, you have less or more accommodating antitrust environment. So that factors into what kinds of transactions you're willing to do or not because when you have a -- you could either have a lengthy review or have an unsuccessful transaction. So that informs what we do. But nonetheless, the market is so large and fragmented, there's much that we can do.

So I feel like in the last 18 months or so, maybe a couple of years, you've gotten more and more outspoken about Thermo share gains. I think -- I mean you've always said you gained share, but I feel like it's been more pronounced and this has come up on certain quarterly calls and whatnot. But just what areas of the business are you gaining the most share and then why?

Yes. So I don't know if I'm not outspoken or maybe I'm, I don't know. I think the practical side -- I do like to read transcripts and what -- yet to find many that where teams say we're -- we finished the quarter, we lost share, right? So there's a lot of noise out there in sort of how folks view their business. I've accentuated it because the facts are very clear that we've gained share, right? And so trying to say it's not in the typical noise of putting a positive spin on everything. In terms of the where, right, obviously, our instrument business has performed very well in a good market, right? So you look at it -- the market is quite good, but our growth has been -- at the mid-teens has been very strong. It's very clear that our channel business has done very well. The Fisher Scientific channel has done very well over a period of time. Bioproduction has been really strong. It's harder for investors to actually see it because it's within a segment, and it's -- there's many other businesses in that segment. But there, we've grown faster than the companies that have reported for a period of time. So that's done quite well. And then our CRO, which is young, is only a year plus in the numbers that had a great first year as part of Thermo Fisher.

Great. That's certainly a good transition to instruments, which will be a focus, I'm sure at the conference. And we're doing LC-MS panel later this afternoon, which should be interesting. But as you mentioned, it's about 15% of revenues broadly for that space, grew mid-teens. It's about a 7%, 3-year stack. So I think investors are definitely focused on what the -- what drove the upside, what drove the strength and where do we normalize to in 2023. So just give us a sense of -- a little more color about what really drove that growth for you? And are you expecting a material slowdown in '23 for yourselves? Or kind of what's the right ZIP code for that in '23?

Yes. So Dan, thanks for the question. So in terms of the instrument business, when I look at the outlook, first of all, versus the 7% view for the year, the instrument business should be accretive to the 7% growth that we're outlining. We have good visibility to the first half that is very strong based on the bookings that we had exiting the year. And what we've said -- so nothing is changing, and I'm answering the question from what we said back at our earnings call is we expect that the second half to be more moderate, we have less visibility, so -- into it in terms of that. And -- so that's how we thought about it. So a very strong first half, a little more moderate second half and above the 7% would be the rough guideline for the full year. So hopefully, that gives you a rough sense. And the second half is an assumption, right? It's an assumption on -- because you have less visibility to the order book, so it could be better than that. I don't think it will be worse. What drove it? If I think, we invested very significantly in R&D in 2020 and 2021. We preserved the R&D expenditure. We had great new launches in '22. We have a very strong pipeline in '23. So innovation matters in terms of driving growth. And then within the specifics of Thermo Fisher, our electron microscopy business is also growing very strongly. It serves material science applications. Things like battery technology is our big customers and next-generation semiconductor is also a big customers and both of them have been very strong.

How about one quick follow-up there just on LC-MS. You have a huge franchise there. Just any color on the past and then the future in terms of how we think about the '23 setup for LC-MS?

Yes. So my innovation comments were primarily around the LC-MS business. So we had very strong launches, and we have a really exciting American Society for Mass Spectrometry coming up late spring. So we're well set up for this year. That business is growing very well. It's growing above the average of the segment. So well positioned there.

So before we get into bioproduction, maybe just high-level view on biopharma R&D, right? I know the last couple of years, there's been a lot of concerns on the emerging biopharma with what's going on with capital markets now with IRA, is drug pricing having an impact on spending? Just what's kind of a high-level view of pharma R&D? Steady, worsening, improving?

Yes. So when I think about -- and it's probably worth even to say, we're one level above, which is what's our role in pharma and biotech, right? So from our historical perspective, our fastest-growing end market. The last several years growing in the teens. Our expectation in the 7% assumption for this year is the growth moderates, which is nothing surprising there, but still the faster-growing segment than the average, right? So this should be our fastest-growing end market in terms of that perspective. When I think about the R&D portion of the spend, it's clearly growing. Our expectation is it isn't probably growing at the same rate that we enjoyed the last couple of years, but still seeing a growing end market there.

And is there any impact from like the fact that maybe it's not as robust? Is that just comps coming out of COVID? Is there anything going on?

It's more of a comp issue in terms of -- I don't think there's anything significant. I don't think the IRA has -- I think -- I don't think the industry knows what the longer-term implications are. You can make a bull case or a bear case around it in terms of how clinical trials are done and which indications and so forth. So I think that shakes out over time. I also think it's going to be different by companies. So I don't think that's a next year or two thing that kind of has a big impact one way or the other.

Got it. And then you already addressed or brought up, in terms of share gains, the bioproduction business. So we had that growing, and I forgot if you said this, but I know you guys give enough crumbs on your calls. We had that growing about mid-teens in '22 -- excuse me, that was broader biopharma, sorry. But in terms of the bioproduction, obviously, a key debate has been this inventory issue, which you've been pretty steadfast. You guys haven't really seen it. Just maybe a little more color on maybe why you haven't seen it to the magnitude of others and/or what are you assuming in '23 for maybe any modest inventory risk that you guys may have?

Yes. When I think about bioproduction, right, I think it's one where -- interesting, if I look at how much investor dialogue across the industry is on this topic, I think a little bit of it is the super short-term view. If you take a look over the last 5, 10 years, the industry has grown hugely. You can strip out all the COVID and all of that. It's been a great sector, right, of which we've grown our share and our competitive position meaningfully over that period of time. So we're the industry leader in cell culture media and single-use technologies. We have a rapidly growing purification business. A really strong competitive position. we've been growing in the pandemic period, not necessarily because of the activity with the pandemic, but also as the industry supply got tighter, we were able to pick up market share. We grew faster than others. It would be my take on looking at the numbers that have been reported. So when I think about 2023 and what we said in our guidance call on February 1 was we expect growth to moderate, the first half being more modest than the second half where growth will be stronger, and it is purely to do with comparisons. We had very strong growth in the first half of last year. So that's the way that we're thinking about the end market. Long term, it should be fantastic as it would be my expectation.

Okay. Maybe when you think about within that 7% to 9%, I'm sure it came up at the Investor Day, but did you bake in mid-teens, low double digit? Any color about what the durability of this over the next -- beyond '23 is for this business and Thermo's position?

Yes. We don't necessarily do the bottoms-up of every business. I mean bioproduction for simplicity is about 10% of our revenue. And historically, it's been our fastest-growing business. So the kinds of numbers that you're talking about over the long term seems like a reasonable assumption.

Okay. So leading life science tools peer was cited in a recent press article to be interested in acquiring a leading CDMO. To the extent such a deal were to occur, what type of impact could this have on you and/or the market?

Yes. So you really can't comment much on speculation out there. But what I would say is, it's a great market of which we have been in it since 2006, right? And so there's a lot of knowledge about how do you operate a contract developer manufacturer, which we have more than 15 years of experience in doing it. And so it's -- if others want to enter, it doesn't change the dynamic in any meaningful way because you have to buy something that exists, that would be an incredible competitor. So for us, that business is terrific. I think our outlook for continuing to grow the business is strong. We're investing organically in terms of the capital to grow it. And we add inorganically. Sometimes we buy smaller capabilities that are complementary to our business, and sometimes we buy sites from the industry as well. And we'll be opening up capabilities this year at our large-scale biologics facility that we acquired from CSL. So we're constantly building out the business, and there'll be more opportunity to deploy some capital to strengthen it as well.

So is there an opportunity for you to participate in further consolidation in the CDMO space? I mean given you've got this strong position with Patheon or maybe from a market share basis, certainly fill-finish. I know you guys are pretty high or strategic fit. You think M&A, particularly on the CDMO space, is less likely for Thermo?

No, I think it's -- the way I would think about M&A in the CDMO space in a way would be how I would think about it in the CRO space. You would think about M&A to strengthen the capabilities. It's not about buying share. It's really about accentuating the strengths you have. So kind of bolt-on type acquisitions. Obviously, for us, bolt-on could be quite large given our scale. But that's how I would think about it. We have an incredibly strong position there. So you would just complement it with M&A.

So maybe staying on that topic then with PPD and Patheon. I know you addressed it on the call, but just remind us, in terms of the '23 outlook for each and then -- how about from a revenue synergy basis, like where are we in terms of what you've been able to capture and has it played out in line, better or worse than kind of your expectations?

Yes. So when we think back, we did the acquisition of Patheon in 2017 to build out our CDMO to complement what we have with Fisher clinical services. And it's been a terrific acquisition. It's gone incredibly well. We've been able to scale the business. We far exceeded the cost and revenue synergies, far exceeded the deal model. So really a super successful acquisition. It also gave us the confidence and the right to enter the CRO space, right? Our customers valued our capabilities that we brought and we have plenty of time in the last few years to discuss whether expanding our service line to CRO would make sense and got confident that it would. And if I think about the revenue synergies associated with the acquisition of PPD, what we said at our last investor meeting was that we'll generate $250 million of revenue synergies in year 3, and we feel good about the ability to achieve those, so that's tracking well. We've won significant work, right? So the authorizations required to generate that, we're in a good spot. It's not really risk to our ability to achieve that. And I ultimately believe there will be revenue synergies that continue to grow meaningfully for our CRO in the years to come.

So maybe switching over to China. Give us a sense, I know you're -- for the shorter term, your guide assumes weakness in 1Q and then recovery. I think to [ REITs ] like 7% or kind of mid-single-digit plus for 2023. Maybe a little bit of color on the puts and takes there, kind of what you're seeing today. There's obviously a lot of excitement about stimulus and reopening. And then how does it play into the longer-term view? I think the way you've articulated in the past is China will be an above -- it'll -- that market will grow above what it's historically -- what the company's growth rate is but how much above do you see the potential?

Yes. So when I think about China and I think about historically, fastest growing end market prepandemic for the industry and certainly for us as well. When I think to the future, I still think it will be the fastest or one of the fastest growing end markets, although I think the gap will narrow versus others from that perspective. When I look at our assumption at '23, right, last year, we grew in the high single digits. The second half of the fourth quarter was disrupted because of the end of the COVID policies. Our expectation is that growth is muted in the first quarter as things continue to shake out. But at the balance of the year, should be quite positive. And the stimulus programs around instrumentation look very encouraging. And so I feel good about the ability to have good growth in China during the course of 2023.

So we have a few minutes left. So Thermo, I think, it's down a couple of percent year-to-date. Tools Group, I think might be down 5% to 10%, but lagging the broader market last year. You were about in line with the market after 5 meaningful years of outperformance. What -- everything I'm hearing here today is long-term, check; short-term, check; competitive position, check. So with the stock, where it is today, like what do you think the biggest maybe misconceptions are, if you will? Or what are people worried about maybe they shouldn't be?

Yes. So I think the challenge that we have to do at Thermo Fisher is really just communicate clearly, right, which is, we definitely, in times of anxiety, suffer from irrelevant news affecting our stock price, right? We have companies with $2 billion or $3 billion market cap that bonds out and our stock goes down $10 billion, right? And you're looking at it [indiscernible] head scratcher, right? And so a lot of our job is just deliver good, consistent results day in and day out, do a great job for customers, gain market share and that rewards our shareholders, right? And so -- and that's on us. That's not on the investors. We just didn't do a good job of communicating, answering the questions about some of the themes right? What I think about is we don't get a lot of questions, right, about is about resiliency of the industry and the particular resiliency of Thermo Fisher if you have a bearish view on the world, right, it's [ Terri's ] question, right? If you have a negative view, this is an unbelievably well-positioned company to navigate headaches, right? And I'm not saying we're going to have headaches, but this is our peak-to-trough revenue changes are very minor, right, relative to almost any part of the economy. So the downside on how we operate is minimal, and we're very levered to the great science going on in pharma biotech and enabling it. So we're quite bullish about the long term. So I'm excited about the prospects and our job is to create shareholder value day in and day out.

And then in terms of COVID obviously disrupting things, I mean underlying organic growth remained really robust. You did an amazing job during COVID on the upside and now some of the stated growth rates are obviously lower just given that comp. But when you think about the confidence in reaching your long-term targets you laid at the Investor Day, even with -- how do you feel about those today?

Yes. So we feel very good about the ability to deliver the 7% to 9% long-term core growth, and we feel very good about the mid-teens EPS growth. And we've obviously grown much faster than what we articulated in the Investor Day. So our business is bigger. But the ability to deliver the top line and to deliver the EPS, we feel very good about.

Terrific. And then final one, I went all in on Aaron Rodgers but now I'm second-guessing, maybe Derek Carr, I don't know where you stand on this one, if you have a view?

As I always say that it's good to have a distraction outside of work and the Jets are definitely a distraction, makes work look easy all the time.

Great. Well, thank you, Marc, for being here. Appreciate it. Thank you, all.

Thanks, Dan.

Okay.