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

Perfect. Good morning, everyone. This is Rachel Vatnsdal from the life science tools and diagnostics team here at JPMorgan. Thank you so much for joining us today. I am joined by Marc Casper, CEO of Thermo Fisher. This will be a 40-minute session. Roughly, the first half will be a presentation followed by 20 minutes of Q&A. And so with that, Marc, I will pass it off to you.

Rachel, thank you for having us, and nice to see so many familiar faces here in San Francisco. It's nice to be back. I'm joined today with Sandy Pound, our Chief Communications Officer; and Raf Tejada, our Vice President of Investor Relations, and we're looking forward to the discussion today. So when I think about kicking off the year, what I always like to start is, what is the takeaways, what are -- what is the focus of the day. And obviously, we respect the safe harbor statement and the use of non-GAAP financials, which you can find on our website. So when I think about 2024, we delivered differentiated performance, and it was a strong performance, right? And we look forward to reporting our results in a couple of weeks' time. So -- and then when I think about the future, we are an incredibly well-positioned industry leader, right? And we have leading businesses that enable our customer success. We're incredibly relevant, and we have a business that's gaining market share. We serve attractive end markets, right, and I'll talk more about them. When I think about the long term, the drivers of long-term growth are incredibly sound and create a bright future for our industry and for our company. For Thermo Fisher, we've been executing a growth strategy, which is proven, right, and it's driving share gain. We have a capital deployment approach that creates tremendous value, and all of this is powered by our PPI Business System, and I'll update you on some of the things that are going on in the deeply ingrained operational excellence and execution of the company and the passion for being better today than we were yesterday in creating a brighter future tomorrow. We have an experienced leadership team that delivers differentiated value creation to our stakeholders. And then when I think about our financial performance, we have an outstanding track record. And most importantly, when I think to the future, we have an excellent short-term outlook as well as long-term outlook for financial performance, right? So that's what I want to talk about this morning. When I look at the company, I always think it's helpful to orient you, right? And I'll do that very quickly to remind you of who Thermo Fisher Scientific is, is we are unique in our competitive position. We serve science. In fact, we're the world leader in serving science, right? And when you look at that, we have unmatched scale, over $42 billion in revenue, 120,000 amazing colleagues. We invest $1.3 billion in our product companies, about $1.5 billion in CapEx in our Services businesses. And that leads to unmatched depth of capabilities that are incredibly strong and respected by our customers. And we do that in a sustainable way in terms of value creation by having a positive societal impact and a very comprehensive corporate social responsibility set of activities that make a real difference in the world and positions the company for a bright future, right, and passionately about being better today. When I think about our purpose of the company, we enable our customers to make the world healthier, cleaner and safer. If you take away sort of one thing from the overview is the choice of words. We serve science, we enable our customers, right? We're the company behind the scenes that's making it happen, but our customers are doing the exciting work, right? That's incredible privilege that we have as an organization. When I think about the opportunities we have to enable our customer success, we serve attractive end markets. Just under 60% of our revenue is serving pharmaceutical and biotech, and we're able to enable our customers from a scientific idea all the way through an approved medicine, and then helping those customers then scale up commercially those medicines. And our other 3 end markets, they're roughly all the same size. Diagnostics and health care, enabling cost-effective, better patient outcomes. When I think about academic and government, we're delivering new scientific advances to create breakthroughs. And then from an industrial and applied, we are facilitating the advancement of advanced materials through our technologies. When I look at our market, it's large, $235 billion served market, which means we have roughly 20% market share in terms of the market we have, and that's the leading position in the industry. And the long-term growth prospects continue to be 4% to 6%. I'll talk more about that. So when I think about the long term, if I think about investor interactions over the last couple of years, when you have markets that are well off of the long-term trend line, right, you have a discussion, has the world changed permanently or is it temporal, right? I think it's a very valid question. All right. And having spent my career in this industry and understanding the drivers of the industry, I couldn't be more optimistic for what the future holds, right, in terms of what the long term is. And if you think about it, demographics are driving increased health care demand, right? China is getting older, Western World aging population, that drives health care demand. That's the first driver. And when you think about that and you complement that with the scientific advances that are happening in life sciences, the confluence of those 2 things creates real excitement in what's going on in the biotech and pharmaceutical industry in terms of the opportunity to advance their pipelines to meet the demand for health care needs. And you see that, for us, a larger shift to biologics, which is much more life science tools and diagnostics intensive than small molecule. And you're seeing blockbuster drugs. And who would have thought if we were sitting here in 2019 that you would have 2 totally different transformative set of medicines that were launched. One, response to COVID, both vaccine and therapy. And then secondly, to follow up with GLP-1s, just massive insight and adoption, and that creates the excitement around what the future holds in the industry about what's next, whether it's Alzheimer's, the focus on cancer. There are incredible opportunities ahead to make a huge difference on the human condition. When I think about the complexity that our customers are going through, they need expertise, right? It's no longer just large molecule, small molecule, but it's all the advanced modalities, more partner increase, more demand in our industry. And then finally, in our material science applications, we're living in the digital age and we're enabling the semiconductor industry in advanced materials, renewable energy, all using our technology to really get the next breakthrough. So the trends are very powerful. The numbers, some random snippets, but all kind of in that case of the facts behind our enthusiasm for the long-term growth. When I think about our company and what we're known for, the practical process improvement business system is fundamental, right? And what it's really doing is our culture on mindset for our colleagues to engage every colleague to find a better way every day, right? And think about the power of that, to have 120,000 colleagues that the first thing they do when they show up to work is say, "How do I actually do my job better?" And a culture that enables it, expects it, recognizes it, it's incredible, the progress we make because of it. And that really delivers major results, right, in terms of the competitive advantage we create, the ability to successfully acquire companies and ultimately deliver differentiated financial performance. All of that excitement for good markets, a disciplined operationally, a competitive strategy has delivered a very strong track record of long-term historical growth in the top line, in the bottom line and the cash flow generation. So when I think about each year, right, that's the setup, if you will, to the company, we set out goals. And we've used the JPMorgan conference for the last 15-plus years to set up the nonfinancial goals for the year. And then we use our earnings call, which is on January 30 this year, to set up the financial goals that marry to the nonfinancial goals. So this is what I said back a year ago, right? Our goals for the year, and then I'll give you a quick review on the year, right, we're going to execute our proven growth strategy to our share gain. We were going to operate the company with excellence, leveraging PPI Business System. We're going to effectively execute our capital deployment strategy, close the acquisition of Olink and continue to develop our pipeline of M&A and return capital and then progress our corporate social responsibility initiatives. So that's what we said we would set out for last year. I'll give you the highlights of how we did, and then I'll talk about what we want to accomplish in 2025. So it turned out on the execution of the strategy, the tactical things we wanted to accomplish, it is actually a spectacular year in 2024, right? And when I think about, first, the progress on the growth strategy, the ability to gain market share was very clear through the first 9 months of the year that we were clearly growing faster than our peers, right? I don't get excited about a year where our guidance has flat growth, but relative to a market that declined 2% to 3% last year, it's the right performance in that context and it sets us up for continued momentum going forward. So we are enabling the golden age of biology. Our launches last year were spectacular. The adoption, incredibly strong. You saw that in our results of our analytical instruments business. We're enabling precision medicine. You saw a number of announcements about companion diagnostics, works with the National Cancer Institute around our clinical sequencing business, which continues to do well. A number of 510(k) clearances around our assays for important diagnostics, whether it's in precursors to multiple myeloma, transplant risk assessment, very strong. And then we continue to push the envelope on what's possible in material sciences, primarily driven through our electron microscopy business. So very positive contribution from innovation last year. When I think about the second element of our growth strategy, which is our trusted partner status, sounds cool. But what trusted partner means is that if you think about what a pharmaceutical and biotech customers are doing, they're doing really hard things, right? They're trying to develop incredibly complex medicines that safely treat some of the most devastating diseases. And over many, many years, we've built a unique position in enabling our customer success. And when I look at that, I'll highlight just a second of the pillars which is in October, we officially announced our accelerated drug development. It's basically taking the capabilities from our clinical research organization and our clinical development and manufacturing organization and taking the insights from both when we're working with a client to actually shave time out of the development process of a medicine. And a week or 2 during the course of the development can be worth an enormous amount of money for our clients because, effectively, that's the extension of the exclusivity period that they will have with those medicines. And the faster you can identify a medicine that's going to fail, huge savings for a customer. And we spent 3 years developing these capabilities, piloting it with customers. And until we were confident that it really makes a huge impact, we would never announce this as a methodology. And now we have the self confidence to do that, and we're excited about what the future holds. So we continue to advance our trusted partner status with our customers. And the third element of our growth strategy really is around our unparalleled commercial engine. And what I would focus on here, we're always expanding our infrastructure to serve our customers better around the world. But we're also applying artificial intelligence to have our commercial teams be more effective, and I'll talk more about that. So very strong on the top line aspects of setting up the future. When I think about, once you have the top line, how do you translate that into strong earnings and cash flow, it's all about how you operate the company. And the operational excellence that we set out for 2024, PPI and the first focus is really around improving how we operate the company. And you see some of the areas that we focused on last year, whether it's in reducing our inventory, improving our supply chain performance, increasing our capacity by running our operations more effectively or improving quality, right, in terms of deviations and manufacturing medicines, a very strong year. And what 2024 also did was allow us to apply AI into our methodology. And more than half of our colleagues are active users of our generative AI platform internally, right? So it really was a foundational year for the company in terms of building our muscle, if you will, for driving more continuous improvement. And when you think about that in terms of the opportunity set, it's pervasive, right, commercially personalizing marketing for our teams, enhancing how we develop software for our products and internally within the company. Operations, great opportunities to drive productivity. And then customer support, the way I always think about it is like putting a cape on our colleagues that are interacting with customers. That gives them superpowers, right? And if you think about just how quickly you can answer a customer's question by leveraging the internal information, it's amazing what it's actually doing today for improving the customer experience. So super powerful in terms of creating a bright future, and '24 was really a milestone for the company in the adoption of AI. Capital deployment, which was the next element of our goals for the year, we closed Olink in the third quarter. Integration is progressing really well. It was exciting to spend time with the team in Sweden in the latter part of the year. And it's a business that has very strong growth prospects, and we're on track to achieve the synergies that we laid out. Some really nice commercial wins that we've gotten as well and great momentum. We also were active returners of capital last year. We deployed $4 billion on share buybacks, including $1 billion in the fourth quarter. And we increased our dividend as we've done historically, returning about $600 million to our shareholders from the dividends as well. So very active year from that perspective. And then CSR in action, right? When you think about what the company does and you think about colleagues inspired to enable the world to be healthier, cleaner and safer, corporate social responsibility is deeply ingrained in the company. And whether it's STEM education, which is one of the things that we're very passionate about, because we need the next generation of future scientists, right, and we play a role in our communities to help that, in volunteering and sponsoring science competition, these things are incredibly important. We're focused on health equity as well from our learnings from the pandemic. And then we need to be environmentally responsible, right? And we set our goals that we're well on the path to achieve, whether it's the reduction in our emissions. And since our baseline, we've reduced them about 30%, and we're well on the way to achieve a 50% reduction this decade. And the use of renewable energy, today, 44% of our energy or electricity comes to renewable sources. And we'll achieve 80% by the end of this decade, if not higher. A successful year, right? When I think about the goals that we have, I'm proud that throughout the year, we were able to deliver on our commitments through the first 9 months, raising our guidance along the way. Our expectations that we laid out in October is that we would return to growth in the fourth quarter and deliver a strong year that sets us up for great momentum as we enter 2025. So our goals for the year, nothing here should be surprising, right, which is from a revenue perspective, we're going to execute our proven growth strategy and continue to drive share gain and differentiated performance. We're going to advance our trusted partner status. And I always love coming to the JPMorgan conference because it's a great opportunity to interact with our customers, to set out the goals for the year, and that's a big part of what we do when we're here in San Francisco, and it's really a wonderful opportunity. We have an incredible pipeline of new products that we'll be launching this year, and that will bode well not only for 2025, but will bode well for the future. Our discipline on operational excellence is we're passionate about turning the top line into very strong bottom line results. We will continue to effectively deploy capital. Our pipeline is busy. And so we're actively looking at M&A. And at the same point, we'll continue to execute our return of capital strategy, and we'll make progress on our corporate social responsibility priorities during the course of 2025. When I think about the takeaway for the year, for the last couple of years, I've talked about differentiated performance in the coming year, right? And nothing changes there. We hold ourselves to the highest standard. But we're also going to deliver excellent performance this year. I'm very excited for what holds in 2025, and we set a high bar for what that financial performance will be, and we'll look forward to talking more about that when we set up our guidance in the coming weeks. So we'll do all of that, of course, while creating a brighter -- better future for the company, a brighter future for Thermo Fisher Scientific. So with that, I think you get a sense of my enthusiasm for where we are as a company, a strong 2024 behind us, incredibly well positioned for the future, serving really attractive end markets. We have a proven growth strategy and capital deployment approach with a passion to be better. We have an experienced team that will create value for our stakeholders, and we're excited about what the financial outlook is for the company. So with that, Rachel, I look forward to the dialogue.

Perfect. Thank you, Marc. So I think the key takeaway from that presentation was differentiated performance. I think at the same time, though, there seems to be this disconnect in terms of Thermo's fundamental performance and really how investors are valuing Thermo Fisher shares at this point. So given that financial track record, some of your industry leadership and also the long-term outlook, why do you think investors should be excited about investing in Thermo at this point?

Yes. So Rachel, if I think back over the last couple of years, right, pre-pandemic, if you think about investing in life science tools, diagnostics, pharma services, there was really no debate about what the market growth was going to be. Then in the pandemic, you had a period with outsized growth, and we had extraordinary growth, right, in that period. And then you had a couple of year period now where the industry was in decline, working off the unwind of the pandemic, whether they're direct or indirect. And investors rightly step back and say, "How fast is that going to happen and so forth?" So while we have been outperforming the peers in terms of how the shares are performed, the shares are still down, right? And so I don't get too excited about it. And effectively, investors have been waiting for the transition to a brighter future in the industry. And I feel like we're getting there, right? With the fourth quarter for the industry appears to have returned to growth. And each quarter got a little bit better sequentially in terms of end market conditions. We're starting to get to the point that '25 feels like it's a bridge to the long term, which is good, right? It's that progression. I don't get a lot of questions about our unique position, right? If I think about our ability to gain share, our ability to convert that into strong margins, not a lot of concern. But what I want all of our investors to understand is that we're passionate about delivering excellent short-term performance and kind of sees control of what the bottom line is under whatever the top line environment might be.

Yes, that's helpful. I think another key topic that investors have been discussing in the last few months is just the new administration and some of the election dynamics that we've seen. I think everyone is trying to understand what is the impact of the new administration, not only to life sciences and health care, but overall. And so I was wondering, can you walk us through how do you foresee some of these potential impact areas like pharma and biotech under the new administration? Also, U.S. academic and government funding is another area that Thermo is exposed to. And then lastly, just tariffs in terms of the inputs and then impact to customer demand. So given that backdrop, I know that's a mouthful, but how do you think about some of the investment and what that could mean from a Trump administration? And how does that read to Thermo in the broader industry?

So there's some things that one can have a very high confidence and then there were some areas that one just doesn't know, right, so one that speculates a lot. But what I think we all have high confidence is, is that there's going to be a focus for a better business environment, right? So that's actually -- if I think about what is business confidence is going to be, that helps us. What's the M&A environment in terms of regulatory? That's clearly going to be better. It couldn't be worse, right? So from that perspective, that will be a big positive. And you're going to have a focus on a pro-growth environment from a taxation perspective as well. So when I think about that, the broad environment is going to be positive. When I think about health care and academia, when I look at the priorities and sort of where is change high on the agenda versus where is it less on the agenda, actually, our industry is less on the agenda. That doesn't mean there won't be implications or changes that have to be navigated. But if I think about talking to our customers, even over the last 2 days, we've had a lot of interactions, there's quite a bit of enthusiasm. There's not a bit -- there's not a lot of what ifs, right, on sort of what's the end market, what does it mean for pharma and biotech. And there are things that will have to be navigated with HHS, or Health and Human Services, but I remain confident that we will help our customers navigate whatever the environment is. And then on tariffs, I think we all learned a lot from the last round of tariffs, and we also learned a lot about supply chain through the pandemic. And my take there is that whichever tariffs happen, we will be well positioned given our global footprint to navigate that as effectively or more effectively than anybody and help our customers do that as well.

Perfect. Then just in terms of China, I think that's another area that's been top of mind for many of us in the room. So can you walk us through what are you seeing in your business in the near term in China and kind of the business trends there? But then also, can you talk about your latest thoughts on these China stimulus dynamics that we've been hearing of? And then last question on China. How are you foreseeing some of the geopolitical tensions? Should we see some of these U.S. enacted tariffs on the region?

Right. So if I start with kind of putting China in context, it's our second largest market. It's about 8% of our revenue. We are the largest player in China, but we actually have half the exposure of the industry. So the average company in the space has about 15% exposure to China. So if you're a China bull, then we have less exposure. If you're a China bear, then we have that less exposure from that lines. And so I think that's one fact that's helpful. I spent 2 years chairing the U.S.-China Business Council, right? And part of the reason I devoted the time to it was to help find past to navigate the tensions, right? So I was intimately involved in many dialogue with both governments and trying to create a better business environment. And so when I think about it, we built strong relationships in China. And what we do in China is largely done locally in terms of where we manufacture and supply chain. So I feel like we're able to serve that market well and have a good reputation, obviously, here in terms of how we operate. So when I think about retaliations, tariffs, tensions, they've been around forever. And certainly, they've been -- they're not as heightened as they were 18 months ago, but they're certainly high. And we will help our customers navigate whatever it is. And the economy is weak in China, for sure. It's good to see that stimulus funds started to flow, right? So we think it's mostly a '25 and '26 thing. But the fourth quarter, we had reasonable orders and revenue that started to flow from stimulus. So it went from sort of theoretical to actually the practical, and that bodes well also.

Great. It's great to see. Maybe let's pivot now to some of your businesses across the portfolio. Starting first off with the CRO business, can you provide us an update on the trends that you're seeing within there? You've seen a lot of volatility across the CRO sector. This morning even included was some updates from your peers today. So can you talk about has PPD been impacted by some of these issues cited by a few of your peers, such as things like higher cancellation rates and tougher pricing dynamics as well?

Yes. So Rachel, when I think about our clinical research business, first of all, worth putting it in some context. It's about an $8 billion business. It's had an incredible first 3 years under our ownership. And through the first 9 months, we had low single-digit growth, which was clearly strong relative to where the industry was, and had strong momentum on authorizations through that period as well. So the business is performing well. We've been able to win some important new clients as well. So -- and the combination, the accelerated drug development, which I talked a little bit about in the presentation, bodes well for what the future is for that business in terms of us having a very unique approach to adding more value in a very important part of the development of a medicine. When I think about the trends that others have talked about, we see those trends, right? Maybe to a lesser extent in some areas than others, but we certainly have seen some cancellations, and I talked about that in the third quarter. Is it outsized? No, but that trend definitely has existed. And I think that goes a lot with some of the pipeline reprioritizations that were happening across the industry. Pricing is competitive, but actually it's reasonable, right? So when I think about the pricing dynamic, I actually think that, that one is fine, and we see some price pressure, but nothing of significance. And we're continually finding a better way to do the work to lower our cost to be able to meet our customers' economic requirements. My expectation is that just as we finish the runoff of the final pandemic-related studies and some other things this year, you'll see some headwinds in that business. But in terms of what our expectations for it to be in the midterm and beyond the high single-digit growth business, I have high confidence in that.

Great. Maybe sticking on the services, but shifting over to contract manufacturing. Can you walk us through some of the details on how that portfolio is progressing within the CDMO? And then in addition, we've seen some shifts in the competitive landscape the last few months here. You've had Novo acquired Catalent. We've also seen a delay in the passing of the BIOSECURE Act. So how are you seeing some of those things potentially impact that competitive landscape?