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

Thanks, everyone, for joining us. For those of you who don't know me, my name is Mike Ryskin on BofA life science tools and diagnostics team. And I'm thrilled to kick off the Bank of America Las Vegas Healthcare Conference. Joining us for our first session fittingly is Marc Casper, CEO of Thermo Fisher Scientific. Marc, thanks so much for joining us.

Mike, it's a pleasure. Good morning, everyone. Nice to see everybody here in Las Vegas.

Usual format will be a 30 minutes Q&A fireside chat, and then we'll pop in for some questions from the audience at the end.

But just to kick things off, Marc, let's start by discussing underlying market conditions as you see them here in May for 2024. Thermo is well recognized as the leader in the industry and the various markets you play in. So I think it would be a really good starting point to talk about sort of like the state of the union, the state of the industry from your perspective, your latest view on 2024 and how things are progressing.

Yes. So Mike, probably the best way to frame things, I'll start from a little bit about kind of long term, a little bit about Thermo Fisher and then quickly about what's going on in the short term. Well, long term, the industry is phenomenal, right? When I think about the drivers in our industry, drug pipeline, scientific discoveries, unmet health care needs, advances in technologies like semiconductors and batteries, all of which, our capabilities -- our industry's capability support, the long-term growth here is very strong. When I think about the shorter-term environment, really, the first quarter played out exactly as we had expected in our guidance. We saw a high level of, I'll call it, predictability in the markets. And we also saw the signs embedded in our view for this year, which I think is largely the view across the industry, which is that the markets will improve modestly as the year progresses, as economic activity picks up in our end markets. And the 2 factors that happened in the first quarter that supports that would be China announcing a stimulus program and the improvements in biotech funding that we saw pick up nicely at the very end of 2023 and into the first quarter '24. So those things will be consistent with the view that the economic activity in our end markets pick up. And we had a really good start to the year. Team executed extraordinarily well. It came in well ahead of our guidance. We were able to both raise our outlook for the year and derisk our outlook at the same point. So we felt very good about the start to the year and how the team's executing in markets that we've had pretty good visibility to.

Okay. Great. That's a good starting point. And I'm going follow up on something you just said about markets improving as you go through the year and the potential for upside at the end of the year. Broadly, there's a view that second half of 2024 will be better than the first half, and you're going to be exiting at a better rate than you entered it. So maybe we'll get a little risky here and start asking about 2025 already. Any early views on what things will look like as you exit and as you enter next year? Any early views on how you think next year could shape up relative to the Thermo LRP?

Yes. So Mike, I know that Derik planted that question. I know he's in the audience. And after a 20-year phenomenal run, he's really the leading analyst. It's great to have seen him this morning and phenomenal to work with you. So when I think about 2025, obviously, we're going to wait until we get there to really predict. But what I can say is what's implied in our guidance, what does that mean if it plays out the way that we see it? So what we're assuming is that the market is improving modestly as the year progresses. In terms of underlying activities, the comparisons also get easier as well. And those -- both of those factors should have us with stronger growth in the second half. When I think if that plays out as expected, then what it would imply for 2025 is not quite back-to-normal market conditions but much closer than we've seen over the last couple of years. And normal market conditions we say is 4% to 6% growth, and what's implied in our guidance, I would say, it's just slightly below that in terms of what the phasing is. But obviously, we'll get a lot smarter as the year unfolds, and we'll lay that out in January on our earnings call where we give the outlook for 2025.

Great. That's helpful. And then talking about that LRP and that 7% to 9%, I mean, like you said, a lot of it is the underlying market of 4% to 6%, but then you've also got the 200 to 300 bps of share gains that Thermo has been able to deliver year after year after year. So both of those factors, the underlying market growth and the share gains, just sort of what are the key factors that underpin that?

Yes. So when you think about the context of market, and I'll do that first, right, for many years, we talked about our markets as being 3% to 5% grower based on the mix of our company's revenue. In 2021, through the actions that we took, not about our change on the view of the markets but actually a much larger exposure to pharma and biotech, almost 60% of our revenue, sort of weighted average math takes that 3% to 5% and makes it 4% to 6%, right? So when I think about our served market, it's a 4% to 6% growth end market. We obviously have the benefit and I certainly have the benefit of more than 2 decades at the company and coming in on about 30 years in the industry, despite my youthful -- and my point of all that is the vast majority of years actually plays out in that range, right? And if I think about -- and then you can think of exceptions: the great financial crisis; the 2 years in COVID, where we had 25% organic growth, 17% organic growth, a couple of years thereafter, where we're below the average. But when you actually look at the periods of time, the 4% to 6% is a pretty good proxy for what the market is. And when I look to the future, I feel good about that. And the factors that will say are you at 4% or 6% market growth are really going to be driven by the strength of the pharmaceutical and biotech end markets, and to some extent, what's going on in the general economy and sort of the industrial and applied and academic and government funding. So that's the 4% to 6%. Our ability to gain market share has been quite consistent over a number of years, and even the way you framed the question sort of frames it that way. And our confidence in our growth strategy's ability to grow 2 to 3 points consistently faster than the market is definitely something that we have a high degree of confidence in. The fact that we have a very strong track record and outlook for innovation, the trusted partner status that we have developed with our pharmaceutical and biotech customers over many, many years, and the unparalleled commercial engine that we have that drives share gain in supporting those customers gives us high confidence that we'll grow 2 to 3 points faster than the market. And that formula leads to long-term 7% to 9% growth. And then the PPI Business System translates that growth into very strong margins, and ultimately, earnings growth. So that's kind of in a nutshell as I look to the future.

That's really helpful overview. Okay. Let's drill in a little bit on some of the more near-term questions or debates in the space. One, I have to ask about China. It's obviously a major focus point for the company and for the industry. And you just flagged it earlier as one of the potential swing factors as you go through the year in terms of China stimulus. So can you provide a little bit more color on sort of what changed in the last couple of months in your view on China as you go through the year? And then the stimulus itself, where would you see the benefit? How would you see the benefits, how would it flow through to your company?

Yes. So when I think about China, if I take the very sort of long historical view, very strong growth market because of the importance of what our enabling technologies are for Chinese societal priorities. Cleaner water, cleaner air, better food supply, improved health of Chinese citizens, those factors have driven long-term historical growth. When I think about the long-term future, those growth drivers remain very much intact, although I think the rate of growth of the Chinese economy is not going to be nearly as robust in the years -- in the long-term years ahead than it was, say, in the previous decade. So our view has been growth will be above average for the market in China but certainly not as strong as it was 2010 to 2019. So that's kind of the framing of it. When I think about the short term, I think the world was surprised by how quickly the economic conditions deteriorated in 2023. And the question that I certainly had from the lens of being the Chair of the U.S. China Business Council and my many years of working in China is when would the government take actions to instill business confidence and to boost growth. And we were pleased to see in April that, that was announced for late March, April, where a meaningful multiyear fiscal stimulus program focused on capital equipment was put in place. And that is multiyear to give confidence to the customer base that the government is going to support funding. So we feel that, that also is a sign of how weak the Chinese economy is, but it's an action to spur shorter-term growth. And the way the stimulus is focused is capital equipment, which for us means primarily our Analytical Instruments segment. We get some benefit in genetic sciences, some benefit in lab equipment. Our expectation on timing is in terms of revenue late in the year and into 2025 because right now, proposals are going out, customers have to secure both provincial and central government funding and allocate budgets to it. So I think by the time you get through the process, you're probably looking at somewhere in the late Q3, Q4 where revenue shows up and into 2025. So that's hopefully helpful. And we're well positioned to support our customers to capitalize on the stimulus dollars that are out there.

And you did just flag that it's a multiyear stimulus, but still just think about how quickly things fell off and surprised in Q3. Is this one of those things where, at some point down the road, you'll need another stimulus and another stimulus and another stimulus? Just kind of comparing it to the U.S. and Europe, it seems like those markets are more self-sustaining, where it feels like China is more stimulus-dependent. Is that a near-term phenomenon? Or do you think that will continue, where you'll need a stimulus to get -- to kickstart it every year?

In a certain respect, such a large proportion of the economy is government in a way. It may not look like government, but it is. Stimulus is more vernacular to get also the private sector to understand what the government's intentions are. So I think this one is both to get funding to the government bodies or academic institutions, as an example, but also to say to the private sector in China that the government is focused on economic growth to spur business confidence. So if that plays out probably as the Chinese government expects, you have less need for one stimulus program after another and sort of the economy gets going. But if the economic growth doesn't pick up, say, a few years from now then, I'm sure the Chinese government has that opportunity to do it again if it needs to.

Okay. And staying on China for a second longer, I want to talk about some of the geopolitical tension between the U.S. and China. Not a new topic in 2024. It's been going on for almost a decade now. But more recently, you have the BIOSECURE Act. There are some updates on it just this weekend, I believe. So on the one hand, you have a positive tone about underlying demand in China and opportunity. On the other hand, you have the geopolitical tensions. How do you see those 2 factors playing out?

I mean there's definitely a transformation of the relationship between China and a number of Western countries that's come out in the last few years. And it's actually, at least from a U.S. and China perspective, I think, in a better spot than where it was a year or so ago. But certainly, different than it was many years past. When I think about the BIOSECURE Act, it's hard to know exactly how that ultimately plays out. But whether it is enacted or not, what it makes for certainly U.S. and, in a way, any pharmaceutical and biotech company that wants to access the U.S. market, needs to think about where its partners are on development and manufacturing. And it probably means that more activity is going to happen outside of China, might complement China footprint. It might be a way that it plays out. But you'll see that have an effect on not as much of a reliance on China, I would think because of the potential for legislation at some point in the future, whether it happens or not. And our lens is that we support our customers in -- both in China and around the world and help them navigate the environment. We feel good about our ability to do that. And when I think about where our footprint is in our contract development and manufacturing operations, we have about -- over 50 sites. They're effectively all in the West. So we're there to support our customers in whatever way they need us to help.

Okay. All right. I want to tip it a little bit and touch on a few specific business units or end markets, where there've been a lot of questions. First, on bioproduction or bioprocessing. It's a little less than 10% of total company revenues, but there's been a lot of debate and tools in terms of inventory levels and how that's trended over the past year versus underlying demands. Starting to get a little bit of positive commentary in the space, just the tone is starting to shift. It looks like it's -- inventories are finally turning the corner. Could you just talk us through what you saw as the first quarter progressed, what your expectations are in inventories as you go through the year?

Yes. So Mike, probably I'll start by framing our business, right, which is our bioproduction business. We are the market leader in cell culture media and single-use technologies, which enable the production of biotech medicines. And we have a fast-growing purification business as well. And we've been growing above the market for a long period of time and it's been a strong contributor to growth. When we look at the last couple of quarters, we definitely have seen a nice pickup in orders. A couple of quarters in a row sequentially, you're seeing them pick up. Book-to-bill has improved nicely. And as I -- each company has a different level of disclosure based on their scale in the industry. At least our best read is that we're proud of how we're performing in terms of we've had a great historical track record. But actually, when I look at the last couple of quarters, I feel very good about what our performance is relative to the commentary that others have talked about.

Okay. And then in bioproduction specifically, there's always questions on share gains, share shift between the various players. We tend to think about most tools businesses being sticky, but bioproduction is especially sticky. So have you noticed any new entrants come up or any meaningful share gains? Or sort of is there any change in competitive landscape there? Or -- you mentioned you're growing well in purification. So how are you positioned in your markets? And what are you seeing from others?

Yes. So we haven't seen anything meaningful in terms of new entrants or new participants, right? So you have a number of well-established strong companies in the field that are well run. When I think about why things are sticky, effectively in the U.S., in Western Europe, it's very hard to change once you have a molecule going through the development process. There are a couple of markets where you can change, but they're not large in terms of volume. So once you're specced in, you're pretty much dependent on how a molecule does. Our purification business has been winning a meaningful share of early molecules. So -- and we're seeing the benefit of that, right? And that will be a tailwind for a long time into the future. But it takes a long time, right? So we're seeing it in the numbers. But these molecules have to make it through the clinical process and ultimately scale up commercially, but I feel good about that. And during the pandemic, it was the first time where supply disruptions happened and customers were willing to entertain more second source and do some shifting, and I feel good about how we were commercially supporting our customers in that process as well. So that bodes well for the future also.