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

Good morning, everyone. Let's go ahead and get started. My name is Eve Burstein, and I'm a new analyst at Bernstein. No relation, even though the names sound similar. I'm pre launch. I'll be launching on U.S. life science tools and diagnostics in a few months. I'm thrilled to have Thermo Fisher Scientific with us here today and Marc. So Marc, thanks for being here. Marc joined Thermo back in 2001 when it was Thermo Electron Corporation, so before Fisher was even on the scene. And after more than 2 decades, he's now Chairman of the Board, CEO and President of the company. So thrilled to have him here. Also really thrilled to have Raf Tejada, the Head of Investor Relations. He's hiding, but he and his team have been really helpful to us in preparing, so appreciate it. Also appreciate all of you being here. Thanks so much for your time. A quick reminder that we'll be monitoring questions on the Pigeonhole app. So if there's anything that you want to ask, please send in your questions. All right. With that, let's go ahead and get started. Marc, I know this is Thermo's first year at the conference, and you wanted to start us off with some comments.

Yes. I'm going to start the presentation, Eve, and just kind of give everybody a little bit of an orientation of Thermo Fisher Scientific, and then we'll get into the Q&A.

Right.

So good morning, everyone. Thanks for having us, Eve. It's great to be here. What I thought I'd do is recap some of the highlights of our Investor Day from last week, put Thermo Fisher in a brief presentation on who we are and why we're excited for the future, and I look forward to the questions. So safe harbor statement and the use of non-GAAP financials. The details are on our Investor Relations section of our website, so feel free to take a look at that. In terms of the key takeaways that we had from our Investor Day, which was last Wednesday, incredibly well-positioned industry leader. Our businesses are also industry-leading businesses and the fact that we're in that position is because what we do every day is enabling our customer success. Science is advancing at a huge and incredibly positive pace, and our industry is both resilient and has great long-term prospects. As a company, we have a proven growth strategy. We have a capital deployment approach that has created tremendous value, and they are powered by our PPI Business System. Our leadership team is experienced and we're focused on creating value for all of our stakeholders, and I'll talk about that at the end of my remarks, we have an ESG strategy that drives competitive advantage, and then finally, we have an outstanding track record of financial performance and an excellent long-term outlook as well. So that's what we talked about at a high level last week, and I think it's worthwhile for our investors and prospective investors to just get an understanding of the company, why we're so excited for the future, right? So Thermo Fisher Scientific, in a nutshell, industry leader, world leader in serving science. We are a company with very strong brands that our customers appreciate. We have $44 billion in revenue, 125,000 phenomenal colleagues. We invest about $1.5 billion every year in research and development, about $2 billion to $2.5 billion a year in capital, all to ensure a bright future. Our customers know us for our industry-leading scale, our unmatched depth of capabilities and a sustainable value creation methodology that ultimately is powered by our business system. What inspires our colleagues and all of us to be our very best every day is our mission. It's the purpose of the company. We enable our customers to make the world healthier, cleaner and safer, and it was great to see one of our important customers in the presentation before this, right? And just deep relationships and supporting our customers every day. And our customers are truly -- they're curing cancer and they're tackling the toughest diseases. They're putting pediatricians with the right diagnosis and the right diagnostic tools to help their patients. We're helping ensure we have a cleaner world, right, through helping with decarbonization with our technologies or from -- a safer world and helping law enforcement identify criminals. All of our technologies are used to make the world a better place. When you look at the revenue profile of the company, it's a very attractive revenue profile. About a little over 70% of our revenue serving pharmaceutical and biotech and academic and government, all focused on powering the golden age of biology. That's what we do, right? When you think about the diagnostics and health care, we enable precision medicine. And when you look at industrial and applied markets, we're really enabling advanced materials through our technologies that are powering the digital economy and the clean energy transition, a very recurring in nature business with about 80% of our revenue in services and consumables, and we have a commercial engine that reaches customers in every part of the world. When you look at our segments, we have 4 segments that have industry-leading businesses within them, starting with our Life Science Solutions. We have a leading portfolio of life science material -- life sciences research, bioproduction and clinical market in terms of what we serve, leadership in the specialty diagnostics area to help our customers cost effectively improve patient care. In Laboratory Products and Biopharma Services, we enable the biopharma industry with our leading laboratory products as well as our services, including clinical research, development and manufacturing services. And in Analytical Instruments, we have leading analytical technologies that are enabling scientific breakthroughs and solving the toughest analytical challenges. So that's our businesses. And we've been able, through consistent execution, to deliver very strong financial performance. If you look back over the last 10 years, we've been able to grow our revenue by the mid-teens, adjusted EPS a little bit faster than that and free cash flow in the mid-teens as well. You can go back longer and you would see similar trends. And at the end, I'll talk a little bit about the future, which looks incredibly bright as well. So when I think about the future and why we're so excited for what's ahead, really, there are 5 things that we're focused on. First is the markets that we serve, right? They're very attractive, and we have a leadership position in that market. Second is we have a proven growth strategy that consistently has driven share gain. Third, we have a capital deployment approach that creates tremendous value. It's powered by our PPI Business System, and we do business the right way, and that creates sustainable value creation and competitive differentiation. I'll hit briefly each of those 5 points about how we think about it and why we're so excited for the future. Starting with the markets that we serve. For those of you that follow the space over the last 3 or 4 months, been a choppier period of time in terms of the dynamic of the industry. But I think in a choppier period of time, I think it's really important to understand where's the long-term perspective on this. And you can look back over the last couple of decades, and this industry has grown in the 4% to 6% and it's likely to continue to grow in that because the market growth here has incredible tailwinds behind it, right, which is demographics clearly are increasing the demand for health care, right? And our technologies are used to bring out new breakthrough medicines. Scientific research is bringing out incredible new knowledge, and that's attracting funding in the life sciences research. Medicines are getting more complicated in how they're made and what the modality is, and that leads to customers looking to partner with experts, and that's where we come in, in terms of enabling the next generation of medicines. Material science, equally as exciting in terms of the breakthroughs there to enable the rapid growth of semiconductors material science as well as the clean energy transition. And finally, a lot of learnings from the pandemic, and investments we made both in science funding and in resiliency to infrastructure that play very favorably to this industry, and our served market is large at $240 billion and growing rapidly. Growth strategy, right, which is based on 3 elements. Our long-term growth targets are 7% to 9%. We've grown faster than that in the last few years, but we think this is a good proxy for what our long-term growth will be. It's driven by high-impact innovation, the fact that we are the trusted partner to our customers because of our industry-leading product services and expertise and our unparalleled commercial engine that we have. And I'll highlight that in a bit more detail. So when you think about innovation, you think about the industry and you look backwards first, right? Thermo Fisher Scientific has played an incredibly important role for the industry and for our customers to unleash the genomics revolution, to transform the understanding of biological molecules and to transform the cost of producing medicines, right? And these are historical things that we've done in the last couple of decades that have made a huge difference to the health care industry, more broadly, whether it was enabling the Human Genome Project with the first sequencer or whether it is decentralizing gene editing or democratizing gene editing. In understanding biological molecules, our instrumentation is really unleashing an incredible set of knowledge, and we were the company that pioneered a lower cost way of producing biological medicines. All of those historical drivers actually have attractive growth in the future, but it's not just those. These are some of the things that we're focused on today, and there'll be others, right, which is -- it really is the golden age of biology. And we're enabling cutting-edge research. We're reducing the time and cost of bringing medicines to market. In precision medicine, it's really about cost-effective diagnostics to help doctors have the right therapy for their patient, and in advanced materials, supporting the next generation of semiconductors through our electron microscopy technologies, all roles that we play in serving incredibly important parts of society. We have an approach to innovation that leads to success, and we have a great track record of getting strong returns on our innovation investments. And it's all about our historical track record. It's based on the fact that our businesses have the scientific thought leaders in the field so that our customers actually want to collaborate with us. It gives us unique insights about what the big unmet challenges our customers are facing, and then we leverage our total company capabilities and do it at scale to be able to bring out incredibly high-impact new products. The second aspect of our growth strategy is being the trusted partner, and I selected an example in how we serve the biopharmaceutical industry. Trusted partner, it sounds cool. What does that actually mean, right, which is very -- in a very straightforward way, we're highly relevant in the capabilities that we have for our customers. We have an incredible track record of actually enabling the individual customer success. We have very strong and deep senior executive relationships with those customers just based over years of working with them, and our capabilities keep getting better through the investments we're making organically and through acquisitions so that we have new things to help our customers solve their next generation of challenges. What that has led to is incredibly strong growth in serving the biopharmaceutical industry. And this is the organic growth we delivered over the last 10 years. In the first part of that period, we averaged high single-digit growth; in the second part, mid-teens growth. And we'll deliver great growth in the future here as well. The final aspect of our growth strategy is about our unparalleled commercial engine. We can reach every customer anywhere in the world in a way that brings our expertise to them so that they can benefit from our knowledge, our capabilities, so they can advance the important work they're doing, whether it's our commercial team, our e-commerce capabilities, our customer experience centers that are strategically positioned around the world, where customers will bring their samples in and run them in our labs, or it's our many thousands of colleagues that are working at our customer sites every day to enable the work that they're doing. Capital deployment, another reason why we're so excited for the future. A proven methodology. We are one of the companies that's been able to successfully execute an M&A strategy over a 20-year period, which is a great, consistent track record of creating shareholder value, right? How we'll deploy our capital over time is about 2/3 to M&A and about 1/3 to return of capital. On the M&A portion of our strategy, it's very straightforward. We select the right transactions. At our scale, we basically have the opportunity to look at every single transaction that's going to happen, right? We have a set of criteria on which deals are the right ones for us, about how it strengthens our offering to the customers, how it will strengthen the company overall and, ultimately, will create meaningful shareholder value. We have very disciplined decision-making. We don't have to do any M&A, right? We do the deals we want to do where we understand the risk of the transaction and can live with the downside case of a transaction, right? It's all about not doing bad deals, and that comes through a very rigorous approach to M&A. And we have a proven methodology to integrate our businesses. Our track record here is very strong. We improved the financial performance of the businesses that we have acquired. We improved the operational performance of those businesses. We have a great track record of realizing cost and revenue synergies, and we make the businesses stronger through the decision-making that they have, and we'll continue to deploy substantial capital going forward. Our track record here is outstanding. This is just the large transactions that we've done in the last 10 years. We do smaller deals all the time, and our track record would be equally strong. The 4 multibillion-dollar transactions that we've done in the last decade, Life Technologies, FEI, Patheon and PPD, they all -- all of those businesses are meaningfully larger than they were at the time of acquisition. We've been able to accelerate the growth of those businesses meaningfully and strengthen the company overall. And when you look at what we consider success, the 2 things that are going to drive whether a deal exceeds the new return targets that we've articulated on announcement is going to be, how do you position the business to grow and actually grow it, and do you realize the synergies that you signed up for, right? And when you look at the performance, incredibly strong performance against all of the transactions. So a great track record here in terms of M&A. Thinking about how is this all possible? Why do we have a successful growth strategy? Why is our track record in M&A so strong? It's all about our business system, right? PPI, incredibly ingrained to the company. It is culturally the way we work, right? Our colleagues come to work with the understanding that we're going to be better today than we were yesterday, right? That's how we measure ourselves, right, that we expect ourselves to be better, right? And that creates this incredible dynamic, which is we're all expected to see the things we're not doing as well as we could, and we make the company better. We have a very disciplined way of doing that to some informal to very formal depending on what the particular issue is, and it has enabled great success of the company, right? We are world-class in terms of the products and services that we offer. We're able to do that very cost effectively through the productivity we drive and have very high degrees of customer loyalty because of it. And ultimately, it's delivered competitive advantage for Thermo Fisher Scientific, allowed us to successfully integrate acquisitions and differentiate the financial performance that we deliver. The final aspect of why we're so excited for the future is our ESG strategy, right? The mission obviously starts out with great alignment about doing business the right way, right? We enable our customers to make the world healthier, cleaner and safer. We hold ourselves to a high standard in our environmental impact, our social posture as well as how we govern the company, and we have a great track record. And it actually matters, right? It's not a fancy slide about what the right words are. It's actually about who we are as a company and as the individuals of the company to do business the right way, and that allows us to create value and minimize risk. So you can tell I'm excited for the future. That's the recap on that. When you think about how does all those good words turn into the financial outlook, it's pretty impressive as a compounder, right? When you look to the long-term financial model that we have going forward, we're a 7% to 9% organic growth business. Based on that 4% to 6% market growth that I outlined, that gives you 40 to 50 basis points of margin expansion each year. We're able to substantially deploy capital, which turns into mid-teens adjusted EPS. So that's the long-term financial model of the company and what we've been able to deliver historically as well. And the reason that we have such confidence in that is that we have a virtuous flywheel in terms of how we think about our stakeholders and making sure that everybody is benefiting from the success of the company. It starts with our customers. If you say, what is the most differentiated thing about Thermo Fisher Scientific, it's the culture on enabling customer success. Our customers want to work with us. They trust us, and they do more business with us. That creates a place where colleagues want to work. It is a great place to have a mission-driven career. It is an inclusive culture that people are excited to be part of that allows us to be great stewards in the communities that we live and work, right? We give back to our communities. We're active in our communities. We're focused on educating the next generation of scientists. We want our customers to be able to have deep pool of talent around the world. And ultimately, with that focus on our customers and our other stakeholders, our shareholders have benefited tremendously with an outstanding track record of financial performance and value creation, and we couldn't be more excited for what the future holds on that dynamic. With that, Eve, as a way of background, I look forward to the dialogue.

Great. Thank you so much. Let's start off with a softball, broad question. So you talked a lot about what you're excited about for the future. Maybe looking backwards, given the time that you've had at Thermo, how do you think it's evolved? And what surprised you the most about the time that you've been leading?

Yes. So when I think at the company, in a way, a very simple strategy, right, which is a company focused on enabling customer success. Like every company wants customers to benefit, but in a high technology business and a high-touch service business, if you actually say what only matters is that you do the right things for your customers that, that will pay off. When we started the strategy in 2001, 2002, everyone was very skeptical that it would work. And I took many years of ingraining all of the processes into the organization to do that. But the thing that's incredibly cool is if you disaggregate the company and you go into our segments and then you go into our businesses, pretty much every single business of the company is gaining market share and have been consistently gaining market share over a number of years, right? And that's the thing that when I look back is that just discipline to run your businesses really well, add value to the whole, help your customers be successful and you'll be rewarded. That methodology has worked very well and has positioned the company incredibly well for the future.

Great. So when you think about life sciences, you think about mostly a lot of very fragmented players and then 2 scale players. And you've talked about your business, and I hate to ask you to compare yourself to Danaher, but we do have some generalists here. Can you just talk about why Thermo -- how you compare to Danaher?

Two great companies, right, when I think about the 2 industry leaders here in Thermo Fisher Scientific and Danaher. So from that perspective, it's all positive. The companies have different strategies and different approaches, and they both work. So that's the way I would think about it. The way that we run the business is a very integrated business, meaning that our businesses work together horizontally across to create solutions that are differentiated for our customers, right? So we see in all of the power of having a contract development organization and a contract research organization in the same company, working for the same customer, helping them try to shorten the time to bring a medicine to market. That's how we operate, very much from a horizontal perspective of bringing capabilities together to add value to your customers and that nobody else in our industry tries to do. And we have a great track record. And when I think about the words the trusted partner, in general, we're the only company that's really meeting with the senior executive teams of our customers. So we have such scale in what the customers are doing with us that we have unique access, and that's put us in a great position. We're the fastest-growing company in the field, right, in terms of the larger players consistently in terms of organic growth. So from our lens, it's working well.

So you're talking a lot about the value of an integrated business and how you really position yourself as a company that enables customer success. But on the flip side, one of the things that generalists learn when they're learning about tools is that individual products are very, very entrenched, right, because they get specced into protocols, because you get trained on the methods that you grew up with in the lab that you did your post doc. So in an industry where the products are very entrenched, it seems a little bit counterintuitive that someone who brings all of those together would be more competitive. So can you talk a little bit about why does having that scale make you valuable?

Yes. So -- when you look at our individual businesses, they're terrific businesses, right? And for those of you that might not have seen our Investor Day last week, we gave a little bit more depth on each of our businesses. So you get a sense of what they are and how strong they are. The really fascinating thing is, is that they grow faster than the other players, right? They're gaining market share, right? So yes, it is a sticky industry, but customers actually value hugely the expertise that their partners bring and the culture that we're going to make it work, we're going to make it right no matter what so that a customer is successful. That methodology, that approach that's deeply ingrained, has put us in a position that we're able to be successful long term. So that has allowed us to gain share. One of the things that I think is very important from a Thermo Fisher lens is actually don't want the customers to feel that this is so sticky that once they're with us, they can't leave us. I actually want customers to say, "Thermo Fisher has got to earn it every day. And if Thermo Fisher earns it every day, I'm actually going to reward them with more business because they're doing a great job." So a lot of others in the industry talk about the sticky business model. If you're sitting on the customer side and saying, sticky, it means, "Hey, I'm trapped," right? That doesn't feel so good, right? So we're very much in the mode of trying to earn it every day, and that's put us in a good spot.

And so following up on that, one question we've had from the audience, you've talked about gaining share and you guided to 7% to 9% core organic growth. But basically, all life science tools and diagnostics say they are growing faster than industry average. So if you are growing faster than industry average and if you're gaining share, who's losing in this equation?

Yes. So forget the marketing. Look at the numbers, right? We are growing faster than the other players. You can look at the companies, you can look over long periods of time, and you can look at the individual years. We grow faster than the others. I think it's very hard for a company to say, "Hey, we'll lose a share again this year." Who wants to talk to investors that way? So you put whatever angle on it that you want to put on it. But the reality is, just look at the numbers with us, and you see the growth. It's just faster than the large players. It's faster than the small -- I'm sure there's some small company that's out there in the field that versus -- is growing faster than us, but consistently, the growth that we've delivered is the top.

I think that's fair. And I hope that answers the question. Let's talk about PPI. So you brought up PPI. And in my prior life back in the day, I used to run performance improvement and transformations for health care companies. And what I know is that pretty much every company says that they do this and also it's really, really, really hard to actually do this. So you talked about your culture as one thing that enables it. What really makes it run? And how are you going to maintain that as you continue to grow?

Yes. So in terms of continuous improvement, our Practical Process Improvement Business System, it was introduced in the company in 2002, right? And it has evolved and strengthened and, when we buy a business, gets very quickly adopted because what it's all about is valuing every colleague's experience and perspective, right? It is all of what you observe every day at work to step back and think and say, "You know what, I'm actually being paid to make the company more competitive and better and not just do it the way it was historically." That's what actually creates job security for our colleagues, right? If we're growing our market share, we create job security. If we're losing market share, we don't. We can say whatever we want to say about how this is a great place to work, but we want to be able to tell our colleagues they're creating a broader future, and it's in their interest to do it. And they get rewarded for it and recognized for it. And it's easy, right? We've trained people. If you have a suggestion, if you're on the manufacturing floor, you put the suggestion on the daily tier board. The supervisor will look at it, depending on what it is. We'll get back in a few days with, yes, we're going to do it. We're not going to do it now, but we are going to do it, and here's the sequence of it. Or for these reasons, we're not doing it, but please keep suggesting ideas, right? And it's just incredibly ingrained. It's not just manufacturing. It's all aspects of the business.

One question from the audience, building off of this. To the extent that you can, can you talk about how PPI differs from Danaher's business system?

Yes. I think DBS has an incredible track record and is an excellent methodology, right? For us, I can't -- having not worked at Danaher, I can't give you the sort of the field difference. What I can say is our approach is very focused on taking activity and action that enables customer success, right? It's very focused on what is the customer experience? How do you make it better? How do you make sure our economics are such that we can be competitive? And that's really driven from that outside view in.

Great. Let's move over to innovation. So you are in the business of science. Innovation is really critical, but innovation is also really, really hard to benchmark. I know because I've tried to do this. It's hard to measure. It's hard to performance manage to it, and sometimes it's hard to even describe what it is that makes it so effective. So what makes your innovation effective? And how do you measure it and manage to it?

Yes. So when I think about our track record on innovation, we're very well respected for the products that we've launched. Whether it's in mass spectrometry or electron microscopy or genetic analysis or in the various life science reagents, we just have an incredible track record historically. So how does that come to reality? A lot of it is about the people themselves. Do you have the thought leaders that actually -- the thought leader on the customer side of the equation actually wants to discuss the issues that they're trying to solve, right? So actually, do you have the right interactions where you understand the insight, you have the credibility where customers actually want to try what you launch because they actually believe that you're focused on the right things, right? So that dynamic is very important. We do it at scale, which allows us to invest in a very substantial way, meaning that our -- we've created a great experience for our R&D scientists, over 7,000 of them that work on developing breakthrough products. This is a great place to work and to be the very best he can be. And we've launched things that have changed the world in terms of the scientific insight, right? If I even think about the COVID role, right, we were able to launch an EUA launched molecular diagnostic at scale on March 13, 2020, right, and then ultimately enabled billions of molecular diagnostic tests, even though we probably had done in the millions in our whole history of molecular diagnostics, right? So we just have a great track record of innovating on process, innovating on technology, and that's who we are.

Maybe that's a good segue into diagnostics. So on the pharma biotech side, it's clear what your strategy is, right? It is serve the customer in any way that they want to be served, molecule to medicine. But on specialty diagnostics, you've got a different portfolio. So it's more fragmented. it's assets that are typically 1 or 2 in the space, but it's different. So can you describe what the strategy is in your diagnostic portfolio?

Yes. So when -- the one thing I haven't talked really about is we're huge believers in industry structure as well, right, which is where you compete, you want to have an industry structure where the margins are going to be reasonable and that the industry isn't commoditizing, right? So when you think about diagnostics and you think about the core lab,of diagnostics, your kind of routine blood testing. There are quite a large number of players, 4 or 5. There's not a lot of combinations of the way the industry consolidated that are going to change that dynamic, and you wind up with a commoditizing segment. So our strategy in diagnostics in terms of where we play is quite different actually than where we play in certain pharmaceutical biotech. We focus on very high-value diagnostics where we have very, very strong competitive positions. So when you look at our portfolio, they are relevant to the medical specialists. They are very high market share and they have really good economics, and we make a difference. So even though we are say, a top 10 player, but we're certainly not a top 4 or 5 player, we have a seat at the table with the various health systems because of the relevance that we have. So we are the market leader in allergy and autoimmunity testing, so if you get a blood test to find out what you're allergic to, it's Thermo Fisher Scientific. If somebody that has had a transplant, the matching of the donor and the recipient. It's highly likely that Thermo Fisher Scientific has done that diagnostics. Our most recent acquisition in the space, The Binding Site, if you know somebody that has multiple myeloma, they likely have had the diagnostic from us to help with the right standard of care. So we pick disciplines where we can have a winning position, and that's how we put it together. And then in totality, it gives us a seat at the table with customers that allows us to grow our share.

And is that strategy going to work long term? Or can you see clinical diagnostics going the way of pharma biotech where the people with the larger market share, even if it's built on this commoditized core lab position really have the advantage?

In the specialties, no, because effectively, what's happened is in the subspecialties where we participate, you have to invest hugely at some point in time to get there. So if you think about it, we offer 500 different allergy tests, right, some of which are very high volumes, some of which are very low volume. Customers actually consolidate all of that under one company, which is us. So there's not really -- and no other company is going to spend the time, money and years of development to build out the menu. So that's sort of the dynamic that has played out.

Great. We're getting some good questions in. And so a reminder, if you have questions, throw them in so we can ask them. One question going back to pharma biotech. To what extent are you exposed to customers' R&D versus broader operating budgets? And are there different drivers or degrees of economic sensitivity for different customer segments?