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

All right. Good morning, everybody. I'm Doug Schenkel. I lead the Life Science Tools and Diagnostics Group here at Wolfe Research. It's my pleasure to welcome all of you to the sixth annual Wolfe Annual Healthcare Conference, my first conference here at the firm. So I'm really excited to be here with all of you. And what better way to kick off today's event, for the next couple of days, than to sit down here with my old friend, Marc Casper, CEO of Thermo Fisher Scientific. So Marc, thank you very much for being here.

I guess my pleasure and thank you for having us.

Of course. So just to give everybody a roadmap for the next half hour, I thought what we would do is maybe really just start with a state of the union, state of the state, whatever you want to call it, on Thermo. Of course, the timing has become really interesting for this conference with the events of -- a few things happened last week. So I thought we would talk a little bit about the election and some early thoughts there and then we could get into some of the more traditional thoughts as we head into year-end on Thermo in terms of share gains, capital deployment and market conditions and just thinking about momentum heading into 2025. So with that, Thermo is one of the undisputed, if not the undisputed global leader in life science tools. I think the audience would welcome a, again, a state of the union on Thermo and to an extent, by definition, almost the state of the state, the state of the industry, especially as we've wrapped up Q3 earnings and head into year-end.

So Doug, pleasure to be here. Nice to see so many familiar faces in the crowd here in New York today. So let me start with a view. I'm going to -- let's do everything from sort of November 1 -- up until November 1 and I'm sure we'll talk about what's happened in the subsequent couple of weeks because I think it's helpful to focus first on what's going on in the industry, what's going on at the company as the grounding. So if I start with the industry, right, what we expected this year to be was a year of improving market conditions, modestly getting better sequentially quarter over quarter over quarter. And that's exactly how the year has played out. The end markets have been very predictable. The businesses have been very predictable in that environment. We've continued share gain momentum and have been able to consistently raise EPS -- environment or in our outlook. At the same point in time, it's been incredibly volatile year. So why is that the case, right? If the markets are predictable and playing out as we expected. I think if you go back to January and you take a look at the variety of companies and how they set expectations for the year, you had very differing outlooks. There are a few companies that had somewhat consistent views with ours, you had the second largest company in the field with a much more bullish recovery later in the year, some smaller companies doing that as well. So in every earnings season, at least half the companies had really bad results versus expectations, right? So you had 3 quarters in a row of really quite volatile, in a way, self-imposed market conditions as opposed to something was unpredictable or not happening. But actually, the markets are getting stronger. And when I think about the fourth quarter and at least what our outlook is, we returned to organic growth and what's implied in our guidance is about a 2.5% organic growth. We feel good about that. It gives us a solid sort of exit momentum going into the future. And if you think about in the noise that was happening in the earnings season through the early -- end of October, early November, the space gave up quite a bit of value, right? For us, roughly trading from about $600 a share to about $550 a share. And so despite the fact that our results were effectively in line and raised EPS a little bit. So that's the context of a noisy period but actually one from our perspective, just kind of executing well and gaining share and delivering on our commitments.

So the group's been weak really going back to the middle of earnings season. That obviously picked up steam with the election last week and some of the news about the plan -- about plans to nominate folks like RFK Jr. to lead HHS. Even over the last few days, I think Thermo is down almost 10% subsequent to these events, which had nothing to do with Thermo specifically. So a few questions here. What are your early thoughts on the reelection of President Trump and what that means for the industry and your business? And then maybe we can unpack it a little bit in terms of thinking about things like NIH exposure, tariffs, pharma regulatory reform. I expect you to have all the answers given it's been like a week. So that would be perfect.

So what's happened subsequent to the first part of the thoughts. What I would say is, first, a fairly significant rebalancing of portfolios outside of the space because of unknowns, right? And as the most liquid company by far, we've traded down roughly, as you said, 10% off of the noise of Q3 in the industry. So when I think about that, what has changed fundamentally, right? And then we can talk about the -- what do we know and what do we don't know. President Trump is going to be more business friendly. It's going to likely be a more benign FTC M&A environment. It's going to likely be a more favorable tax environment and a more favorable U.S. jobs environment. So -- and we'll talk about the other parts of it, too. So if I think about what happened on election day, holding aside sort of maybe the social context of it but actually how do you think about as CEO of 125,000-person organization, effectively you're entering a period that is going to have a more business-friendly tone to it. It's a good thing. The second thing is, when I think about our own lens, we worked really well with the Trump administration and we worked really well with the Biden administration. Our job is to support the various administration policies and to be a resource and share perspectives and serve in a way that's useful. So I look forward to those dialogue as we get into the new year. When I look at the rotation out of the space, I think there are a couple of dynamics, right? One is, what is known or unknown around HHS policy or Health and Human Services, potentially and what are the implications with China. Which, in our space, China for the industry is roughly 15% of the revenue. For us, it's about 8%. So we actually have half the exposure in terms of the average of the industry. But those are the 2 dynamics of unknowns that has effectively led to, I think, a sell off to maybe others but I think those are the 2 material ones. And my perspective is, science is unbelievably important and fundamental and the medical breakthroughs that are going on right now are profound. What we do is not discretionary. And there is no company better positioned to serve our customers to navigate this environment. And I'm incredibly bullish for what the future holds. So.

A few just very specific rapid fire follow-ups, in no particular order. NIH, what is your exposure? And do you -- have you heard anything that makes you concerned about the outlook for funding from there?

I think, Doug, on any specific, nobody -- knows anything, right? No, no and I'm going to [indiscernible] but like literally, we don't know, right? I mean the first folks have to be confirmed, then they have to prioritize, they get educated on the details and then figure out what they want to do. So -- and I view that as rationality ultimately prevails on things. The NIH is an American institution supporting an American-dominated industry with high-paying jobs that are located in all 50 states in this country. It is an incredible institution. And Republicans and Democrats, in fact, Republicans largely have been stronger supporters of NIH funding than the Democratic party. That doesn't mean it won't change, right? So I am not predicting the future but I can at least extrapolate from the past that the NIH is important. When I think about our academic and government spend, the U.S. is probably 7% or 8% of the revenue and NIH probably has some indirect effect on that in the low single digits of our total revenue. So the exact number is hard to know but it's -- that's sort of how they sponsor grants and other things.

Pharma regulatory reform. We're going to talk about share gain momentum. But specific to the election, recognizing in difficult periods economically, at least in my experience, Thermo has tended to do better from a share perspective. In a period of pharmaceutical uncertainty where we don't know what's going to happen, is this actually another moment for Thermo to shine and actually maybe actually pick up more share as a partner?

Yes. The way that we talk in our strategy about our trusted partner status, it sounds cool but actually some realities who we have -- what we built, right, which is, we work with our pharmaceutical clients every day. We work with their executive teams consistently and they trust us to work on the most important things to help them navigate whatever environment there is and it is an incredible privilege to do that. When companies have gone through more challenging times, we have consistently gained meaningful share because effectively, we have more tools in the toolkit to help them. And while spend may go up or down, our share of wallet typically goes up meaningfully so that as investment rates pick up, we disproportionately benefit. So we've done well in periods of volatility in serving pharma and biotech. If I think about a couple of the companies to pick a tangible example, that have -- coming out of the recent period where they may have had the most aggressive reductions in cost, our share at those companies have meaningfully increased, meaning that, yes, they've constrained spending but they've trusted us that we're the right solution to help them navigate it. And as they're spending -- one of them is already spending -- is increasing again, we disproportionately benefit from it.

Yes. You pick up the share while folks aren't growing and [indiscernible].

Exactly you have locked in the incumbency.

Tariffs. I mean, in my humble opinion, just looking at kind of the facts, what people have actually said, trying to be dispassionate about it. Nobody knows. But I'm personally less concerned about the NIH, less concerned about pharma reform having a meaningful impact on the group. Tariffs seem -- it seems like something is going to happen. How do you think about that in terms of planning for it from the standpoint of Thermo?

Yes. So Doug, when you think about what's the advantage of scale and industry leadership, for the 8% of our revenue that we serve in China or the Chinese market, a very large percentage today is manufactured in China or manufactured in other countries around the world that are not likely to be subject to any tariff-related activity. So what that means is, the inbound into China and that is -- should be a very modest impact even if there was a response to something that the U.S. might do, right? So that's the first lens. The second lens is, what do we export out of China and of all the different investments that this group is having, this is one -- this is the one that you don't need to spend a lot of time thinking about us or so much our industry. It's not a big source of export into our industry. It's actually quite modest.

Finished goods and components.

Finished goods and components. So it's quite modest. There's some. But in terms of what -- where we've had -- I have -- tariff is call it an inflationary pressure, largely, we've been able to pass through the pricing to our customer base and those dynamics. And because of the learnings from the pandemic, we've built a pretty resilient supply chain. So if there's inflationary pressures, largely it will get passed through. But one doesn't know what's going to happen and one doesn't know sort of all the second and third order effects. But at least thinking about it sort of intellectually and some of the early planning we're doing, that's how I would think about it.

And what you just described, I know we started because of how I asked the question, framing it about China. But if there is some global tariff of some percentage, what you just described is really relevant in terms of you have flexibility on supply chain and there is demonstrated ability to pass through price if need be. Is that fair?

That is fair.

Okay. Capital deployment. So along the lines of what we talked about with opportunities to pick up share over the years, I haven't gone back and chartered this but it has felt like in difficult periods, you've actually played offense even more aggressively from an M&A standpoint. That hasn't happened as much the last few years. How much of that is a function of what's been going on with the pandemic, what's been going on with rates? And then maybe relevant to what we just finished up talking about the FTC regulatory environment?

Yes. So the industry is very fragmented. Even as the largest player in the field, we have roughly high-teens market share, right? And so -- and we love the served market that we're in. It's a great market with great long-term prospects. We have a very active pipeline. We know what we would buy. So we have -- there's plenty of targets. There's plenty of engagement. And usually, the 2 dynamics -- and we're not -- we're never working on things that we think there's going to be a high degree of FTC concern because total waste of time, right? So you're working on the things where you have very high confidence that they are going to be approvable or clear transactions, right? So what's -- my view is what has happened is nobody likes to sell in a period of -- if the good news is right around the corner, why sell until you're not in the good news period. I actually think the volatility that has happened actually creates an interesting time because there's more unknown. So -- and because of that, I think sellers -- I think there's more likelihood to see some transactions happen. That's my -- at least for us, that's my opinion. And at the same point in time, I think valuations have reset in a way that even with a large premium you can get to very attractive returns. So I'm optimistic about what the M&A environment is going to be going forward. And we stay disciplined, right? We're a company with almost $45 billion in revenue, we don't need to get bigger because of M&A, right? We're only going to do M&A because it's going to make the company stronger. It's going to be valued by our customers and we want to generate great returns for our shareholders, right? So we're always going to be disciplined and when we see the right deals where we can get great returns, we'll do that. Because we know what we want to buy, right? The shopping list is clear. But we don't prioritize, I mean we have like A, B and C in terms of categories. But we're indifferent about what to do and what sequence because you want to be truly opportunistic about what's available. That's how we've done M&A in the past. Like, when we bought Life Technologies, it was coming out of sequestration, where the company was a great company, fell out of favor with investors and we were able to buy it and it's been spectacular, right? And FEI was going through its cycle with semiconductor and its growth had slown, an amazing company that we've been able to really take advantage of in '16. So we did that. So in many of the deals we've done, there's some level of context that has allowed a seller to be comfortable that this was the right time to sell. And I think this is an environment that looks a lot like that.

And then going back to what we talked about earlier, in a more business-friendly administration, potentially a more relaxed FTC environment, presumably, that helps as well.

It does.

Okay. Maybe an obvious question but just want to give you -- I want to give you an opportunity to just provide a voice over for the recently announced, I think it was $4 billion buyback.

Yes. So when we had our Investor Day in September, we reiterated our long-standing capital deployment strategy, right, which is roughly 1/3 of our deployed capital, it's a little range but call it a 1/3 is return of capital, primarily through share buybacks and supported with a growing dividend. And the other 2/3 is roughly M&A. We announced our authorization for share buybacks, which we do usually around that time each year, a $4 billion authorization. If I think back about what we have done in 2024, we've deployed over $6 billion in capital, $3 billion of buybacks, $0.5 billion in dividends, a little over $3 billion in M&A. So not a -- not an atypical year for us.

Just rattling through a view on key end markets and key product categories. Pharma and biotech as an end market is your largest. It's about 55%, 60% of sales. Understandably, the investment community is trying to get a better handle on what is going on in that end market and that was in advance of the election. As we sit here today, building off of something we talked about at the very beginning, just to be clear, things are improving slowly but surely at the pace you expected. Is that fair?

It is. And in pharma and biotech, if I look at our performance in serving that market and if I exclude -- I'm not a guy that likes to exclude anything but I think the context is helpful. If you take out all pandemic-related activity in pharma and biotech, you look quarter over quarter over quarter, the base business has strengthened year-over-year in that dynamic. So each quarter has gotten better in terms of the growth. And what would imply is that market, excluding COVID related activities, is growing for us low single digits already from that perspective. And so you're seeing activity pick up. You've heard us comment about our clinical research business, PPD has done well this year on authorizations. We had extraordinary level of activity during the pandemic. So it's nice to see that getting refilled in terms of new wins and -- so the health there is improving. And if you think about what the dynamic has been because that is a high-growth market and a lot of the things of the IRA, weaker biotech funding in '23, '22, those dynamics are all kind of events that are improving, right? Customers don't look at the IRA and reprioritize portfolios twice. They do it once. You've seen the effect on budgets. Now you're seeing budgets grow off of that. Biotech funding is improving. It's not robust but it's improving. Deals are happening. So as we're exiting this year, pharma and biotech is continuing to strengthen. And actually the best leading indicator, the pipelines are super cool, it's like amazing. Like there's nothing better than the success of GLP-1s, right? Because it basically says if you have great science that meets an unmet medical need, enormous market opportunity, right? And if you think about Alzheimer's and so many aspects of cancer, there's so much that the industry is going after, it's super exciting times.

In terms of what's recovering at what pace, it sounds like larger biotech, larger pharma is coming back more quickly than, say, earlier stage, largely, I think, because of the funding dynamics that we talked about.

But the confidence in the smaller companies is much, much higher. So if I say, what's the tone -- why are they -- why is pipelines building on clinical research? Why is consumables, those things starting to pick up. There's a confidence that funding is going to be available to that customer set. So actually, if I say, where's the biggest change? Actually, it's been that confidence level in the smaller companies has really picked up quite substantially.

You've done better than some of your peers within analytical instrumentation. And some of that is where there are just -- there's not really great competition areas like cryo-EM. But I think you've also done better in some of the more traditional separation analysis businesses. Why do you think that is?

Yes. So as the largest analytical instruments company in the world, innovation matters, right? And if you look at -- during the pandemic, right, we continue to invest heavily in R&D, right? Because our solutions were used to support pandemic-related responses in other parts of the company, we stayed firmly committed to the importance of R&D. And you're seeing every quarter a steady stream of new products launching, right? And those products are getting adopted, whether it was the Astral, which is the most revolutionary mass spectrometer launched in the last 15 years. And actually, one of the R&D awards actually literally said that. It was -- before that award came out actually this is what I said. So it was kind of cool to see somebody other than myself, talk about it that way. It's amazing in terms of the capabilities. At $1 million apiece, we're just getting a huge orders, right? And that matters. We followed that up with a translational instrument that's got really big interest called the Stellar in the EM business, where we have very high market share, electromicroscopy. We just launched a product called the Iliad and I was just in the Czech Republic with our team last week just going through the R&D pipeline and it's awesome in terms of what's yet to come. So that has allowed us to consistently grow in the low single digits despite the fact that China is incredibly weak in terms of analytical instruments and China is the largest segment, relative to any of the segments, China is very large, not like the U.S. large but very meaningful, very weak and yet we're still able to power through that and continue to pick up share. So innovation matters.

Anything to do on China stimulus?

On stimulus, no, we've seen a high level of activity. We're not expecting anything meaningful in the results in the fourth quarter and I would expect that, that flows primarily in 2025 and beyond.

Okay. During the third quarter earnings call, there were 1 or 2 questions trying to get at the outlook for 2025. And as usual, you gave us a little bit but understandably pointed us to the typical fourth quarter call timing or when we hear about the outlook for next year. That said, any high-level thoughts that you can share with us regarding how the markets are evolving, how to think about share gain momentum heading into next year, just things that we should be taking into consideration as we update our models.

Yes. So I'm even more glad that I didn't make pretty [indiscernible] then. So when I think about -- when you look to next year, right, what will be different? One is, the headwind of the roll-off, as we've talked about, the headwind of the roll-off pandemic-related activity will be meaningfully less in 2025. So this year, we had about $1.3 billion of runoff of revenue, about 3% of our revenue. Next year, if you take the simplistic assumption that there's none and that's probably too simplistic, we'll have done about $500 million of revenue this year and all pandemic-related. So it's about a 1 point headwind or 2% less headwind 1 year versus [indiscernible].

If that went to 0.

If it went to 0. And I'm not saying it will go to 0 but assume some low level activity, so call it 1 point. So that's less of a headwind. And then our share gain has actually been incredibly strong this year, right, in terms of -- which is not a surprise as we are consistent there but we have great momentum in terms of the wins we've had, some new contracts that go into effect next year. So I'm excited for the position that we have as we enter the year. And there's no company that's better positioned with a better track record of navigating volatility or the unknowns better than Thermo Fisher, right, in terms of how we will capitalize on helping our customers in whatever environment. And whether you take how fast we were to help our customers navigate the pandemic, how we helped our customers in the great financial crisis, right, which was actually a period where we gained meaningful share coming out of it. I mean -- so it could be the worst of times, it can be a science-driven time, we'll be there to help our customers. I'm excited for what '25 holds.

Do you think we're missing anything as we think about Thermo heading into next year and thinking about the company longer term? What do you think the biggest misconceptions are?

Yes. So when I think about the company's ability to consistently grow share. We've done that now for more than 1 decade. A clear strategy. We've translated that into really strong earnings growth through the PPI business system. And I've been CEO for about 15 years. And I'm excited about what's ahead. And I understand that in a period of unknowns, that can be nerve-racking for investors. The management team here looks at that and says, there are customers to serve, help them through that, there's an administration that's going to want to create American jobs and strengthen the outlook for the U.S. and there is no company better positioned to do that. And the environment is actually going to get better, right, in terms of deploying capital, better taxes, probably and a more benign business environment. It's exciting times ahead for the company.

That seems like a great place to leave it. Thank you very much, Marc. I appreciate it.

You're welcome.