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

Good morning, everyone. Welcome to Bank of America's 2023 Healthcare Conference coming to you live from the Encore in Las Vegas. Kicking off our session today is Thermo Fisher Scientific. And with us is Marc Casper, Chairman, President and CEO. I'm Derik De Bruin, the senior life sciences and diagnostics tools analyst for you who don't know me. And it's always a pleasure to have you here. Thank you, Marc, for making the trip out to Las Vegas.

Great to be here, Derik. Thanks for the invitation. It's nice to see so many familiar faces and friends in the audience today.

So Marc, just -- you reported your quarter in April -- was it in April? I don't remember any more. It's been such a long time. Do you want to make any opening remarks on things before we jump into Q&A?

Yes. So when I reflect on the first few months of the year, we're off to a good start, right? And it's been a noisy quarter for the economy, a noisy quarter for the industry, but a good start to the year. Core growth was good. The P&L was strong, and we're navigating the environment effectively. So I think this is good place to start. I'm sure we'll get into all of that in the dialogue today.

So Marc, you first joined Thermo Electron back in 2001, which means you've been at the same company a lot longer than most of the other CEOs in the life sciences tool sector. How are you sort of thinking about this business and operating through different cycles when you think about thinking about the great financial crisis, the patent expiries, interest rates, there's the 2011 sort of like changes that went on there? Can you sort of talk to us about what your experience in sort of looking at this business and being there so long and thinking about the current market versus that -- versus what you've seen in the past?

Yes. So Derik, what a privilege to be able to serve the colleagues and the stakeholders of Thermo Fisher Scientific for the last 20-plus years. I'm so privileged and so grateful for the team, for the great results. I'm so excited for the future, right? So if I think back, right, and I've had the good fortune of navigating many different types of environments. And we have a very clear set of principles no matter what the environment is, right? And the first principle is we're going to deliver differentiated short-term performance and differentiated in the positive light, that we're going to do a great job in the short term; second, that we are going to do a great job for our customers; and then third, we're going to strengthen the company's long-term position, right? And those principles allow you to prioritize how do you navigate whatever the environment is. If I think about -- I think about the challenging environments, the financial crisis, the early days of the pandemic, those periods, you just had clarity about what to do. And if you think about how the company is coming out of those periods, remarkably different and remarkably stronger. When I think about this environment and how well positioned we are, we've evolved the company's portfolio, we've evolved our end markets. So we're incredibly well positioned as a company, right, with more than 80% of our revenue is recurring in nature, and pharmaceutical and biotech represents more than half of our revenue. So we have a very attractive set of capabilities to serve the markets. And the market is still good, right? The market is actually growing reasonably well, not to the same extent that it was. And so I think there's great opportunities in an environment like this where you're seeing others stumble. And our job is to do a great job short term and navigate and come out a much better industry leader long term.

So following up on that, I think some of the conversations we've had with investors coming out of your Q1 earnings, I think you made a couple of comments on the call that probably need a little bit more clarification. The first is on what you meant by stating that the macro environment has become slightly more challenging. I think people took that as -- are you talking about the life sciences tools market or are you talking about the macro? I think the second one is describing your full year 2023 guidance as ambitious. I think, can you sort of like clarify those points?

Yes. So Derik, when I think about the environment, and we try to have incredible transparency, and there's always opportunities to be more effective, right, in terms of getting the messaging out. The slightly more challenging -- I was talking about like the environment, I wasn't talking about life science tools. Just the fact of higher interest rates, the likely effect on credit through the banking crisis and clearly, a very heightened set of geopolitical tensions, even since February 1, when we gave our guidance, the world is more challenging, right? It's -- so that is -- and that has an effect on every industry to a different extent -- different effects in our industry, I think a lot less than most, but you definitely see some caution, right, with spend in certain customer sets. And when I think about ambition, and using that view, we do look at everybody else in terms of what's their guidance and all of those things to understand how investors are going to see the world. And you've heard me say and many have heard me say, it's our job. We're paid to create difficult comparisons for ourselves. That's actually what we're paid to do, right? We're not paid to set low targets. We're not paid to do a less than excellent job. So we want to remind folks that when we said 7% core growth, that's a worthy goal. And a lot of the others, not all, set goals that really weren't that exciting, especially when you look at comparisons. So we set a high bar for the industry, we're focused on delivering against it, and we'll see how others do.

Got it. You mentioned that pharma and biotech are now about 20% -- 50% of your total sales. Can you just talk a little bit about that customer group right now and sort of what you're thinking as -- particularly as that group comes out of the pandemic? And also, there was a lot of debate about emerging biotech customers, the funding environment. Can you sort of talk about those sort of categories? And how do you define that group? Because there's different definitions and just -- big take since it's now -- going back to think about when I first picked up the company in 2003, I mean, you were hardly in pharma and biotech back then. And now it's -- you're the big kahuna in this.

Yes. So I think the first aspect of pharmaceutical and biotech, it is an awesome end market to serve, right? The long-term prospects here are fantastic, right? And when you think about where the science is, where the pipelines are, where there are new medicines, whether it's GLP-1 or the many different cures for cancer and treatments, the tailwinds here for the long term are outstanding. So that one is always a good backdrop, right? When I think about for us, right, and we've gained share consistently now for more than a decade in serving that market in terms of growing organically faster than the served market, and that's allowed us to build out the position, and we've supplemented with M&A. Our expectation for this year is that growth is going to be good, but would moderate from last year. And in our guidance, we grew 14% core growth last year for the total company, all end markets. Pharma and biotech was around that in the mid-teens. This year, we're expecting 7% core growth in pharma and biotech likely around that as well in terms of the outlook. So we're expecting just a moderation largely because you have less pandemic-related vaccine therapies and just where we thought we were in the funding cycle and so forth. So from my perspective, at the end of the first quarter, the end markets actually played out largely as we expected. We'll talk a little bit about bioproduction. A little bit of a nuance there, but I will say, actually, in the whole end market, actually, the industry played out largely as I would have expected with -- we had mid-single-digit growth in the quarter. And on the small emerging biotech, obviously, there are some companies that are challenged and -- but we didn't see a huge pattern like it wasn't dramatically different. There are companies that close. They always do. There's some of that. And there are companies that manage their funding tightly. But the dynamic seemed pretty similar to what we had seen over the last few quarters. So that's how we saw the market at the end of Q1.

So turning to bioproduction, I mean, obviously, there's been a lot of different comments on that end market. You're positioned just a bit differently than others in your -- terms of portfolio. Can you sort of talk about what makes you different? Why haven't you seen some of the inventory issues? And just specifically, I think we had a lot of questions about the bioproduction headwinds in the LSS segment. And just sort of like what's the -- how is that business growing ex -- we sort of -- those numbers are difficult to sort of like back into as we look at it. So just some bigger take on why have you not seen some of the inventory destocking issues that some of your peers have.

Sure. So maybe best to start with the framing, right? So bioproduction, a little less than 10% of our revenue. It sits within the Life Science Solutions segment. We are the market leader in single-use technologies and the market leader in cell culture media. We have a rapidly growing purification business. So that's actually what the business is. We get the benefit of seeing most of the other companies' reported results just given how others report. When I look at 2022, we were the fastest of the growing businesses in the field. So we had an incredibly strong year last year, and that's been pretty consistent now for a few years. When I thought about guidance for this year, we expect that the growth would moderate significantly relative to that based on primarily COVID demand, which wasn't huge for us, but we'd expect that to effectively wane down to 0 in terms of the usage there. And so that's what we expected on February 1, and what we said at the end of April when we reported our results. It was actually a little bit softer than our expectations. And primarily, our best take on what happened is we brought our lead times down, right? They got -- across the industry, they got hugely extended during the pandemic with all of the demand that was out there. And what we wound up doing was bringing on new capacity. And as an example, we used to say you had to quote 30 weeks in advance to get a product. Now we're back to normal, we say, 15 weeks. There is a period of time where customers don't have to order as quickly to be able to effectively get to the situation that their inventory is at the right level to the new normal lead times. And we expect that the growth will be better in the second half, just based on our dialogue with our customers in bioproduction. From a company perspective, we've been able to offset it because analytical instruments, especially diagnostics actually started the year stronger. So we felt good about the total package of what we're doing with it, what's going on there.

Got it. And what about -- there's been, I think, some of the customers are focusing a little bit more on managing working capital from the pharma customers and such. And then going back, and we saw this sort of during the financial crisis where there's a lot of suddenly everybody sort of worrying about cash flows as we're managing this. But destocking in the LPS business and the catalog business, channel business, anything there?

Yes. So when our Fisher Scientific business, which is a leading customer channel, which basically manages the complexity of all of the suppliers for R&D labs and QA/QC labs for manufacturing, we often, if not most times, actually have on-site personnel working at our customers, usually with customer badges. We have no incentive to add inventory -- to take it from our central warehouses and then move it to the customer site. There's not an incentive. So when I think about customer stocking and those things that -- we manage that well for our customers. Probably the only area that there's probably a little bit is in like lab pipettes just because -- pipette tips just because of COVID. It's not about COVID, but there was such a shortage across the world that effectively, there's probably too many pipette tips out there, but that is pretty small in the scheme of what goes on in lab supplies.

So staying on your pharma and biotech exposure, I think we've had a lot of questions about the fact that you -- over the years, you've gone beyond research and you've added CDMO and CRO capabilities via Patheon and PPD. We had you on the road in the U.K. recently, when Stephen was on the road, I mean, I think 75% of the conversations were tied to that chunk of the market that you're talking about. Can you talk about your strategic rationale for any of these capabilities, how these businesses are performing now they're part of Thermo, opportunities, risks? And what are you doing -- how are you having conversations with your customers that you didn't have before?

Yes. So we've been in the contract development and manufacturing segment since 2006 when we combined with Fisher Scientific. We expanded it meaningfully in 2017 through the acquisition of Patheon and then expand our service line further in 2021 with the acquisition of PPD. So when I think about the rationale, first of all, if you look at the company, all of our businesses are leading businesses, right? We are typically 1 or 2 in every segment in our product businesses, our service businesses. So we wanted to build leading capability with the hypothesis that under our ownership, a great business would be even better, right? So we bought Patheon, which was an excellent business doing well. And you've seen over the previous 5 years or so, the business has accelerated its growth meaningfully. It's still got very strong financial performance, well ahead of the deal model. And customers are relying on us more and more to develop and manufacture their medicines. They trust us. They trust that Thermo Fisher is going to do a good job. They saw us having the right to be in that industry. And with the momentum that we delivered, we had the right to expand into the clinical research business, which allowed us to acquire PPD. And while we've only owned it for 5 quarters or so, a little more than that, the business is off to an awesome start, right? I mean the team did a great job for coming into the acquisition. The business had momentum. There was no disruption that's on a high bar, but none of that happened. But if you look at the acceleration of the growth be able to deliver mid-teens growth in that segment, it's been fantastic. We're winning new business, business that when you ask our legacy PPD colleagues, they never would have won it without being part of the company. So it's just been a great thing. And what's really exciting is not what's happened but actually what's ahead, which is we have some exciting pilots going on with our customers that are focused on bringing those capabilities together to take time and cost out of the drug development process. And it will be bespoke to each of the customers, but we're excited about that because that means further growth and even bigger differentiation for Thermo Fisher and serving our customers.

And what are you doing in the cell and gene therapy world? I mean you bought Brammer, you do this -- their -- Sarepta called you out on their earnings call the other day, and said they were doing stuff back with you and doing it. Can you sort of talk about that? Because I think that -- I think we all understand monoclonal antibody markets, but I think cell and gene therapy is sort of a, who the hell knows?

You know a lot about it. But what I would say is we basically participate in 2 different ways for both cell and gene therapy. We provide all of the key life science research tools that you would use in bringing forth a new cell therapy or gene therapy to market. So if I think about where we have a huge presence, it's all of our in vitro and reagents, it's all of the instrumentation, the cell therapy systems from Gibco, all of those things that every company that's pursuing the field is using us to do. So that's a business that's like any other modality, where we play a huge role. And because there's been a lot of funding in cell gene therapy. That's been a big driver. We've also built out the service capabilities, both on the clinical trials, but more significantly on the development and manufacturing. So we have scale viral vector production, which is the key enabler within the gene therapy and many cell therapies as well. And we also have a development and commercialization facility for cell therapies in collaboration with UCSF in the Bay Area. So we're very active. The really cool thing is because, really, what the challenge is, is not about the efficacy of the medicines, but what is the cost of those medicines and can you get it to a point where you can go after a larger indication. So we're taking all of our expertise and trying to drive the cost down so that our clients can then target bigger patient populations. And that will be a long journey, but actually, the work that our team is doing, the investments we're making, I think, is going to make a real difference.