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

Welcome, and thank you for standing by. I would like to inform all participants that this conference call as well as any Q&A may be recorded. Where a company is presenting, any recording may also be posted on their website. Views and opinions expressed by any external speakers on this call are those of the speakers and not of JPMorgan. Parts of this conference call may be reproduced in JPMorgan Research. If you have any objections, you may disconnect at this time. Unless otherwise permitted by internal JPMorgan policy, members of JPMorgan Investment and Corporate Banking are not permitted on this call and should disconnect now. I would now like to turn the call over to your host.

Perfect. Good afternoon, everyone. This is Rachel Vatnsdal from the Life Science Tools & Diagnostics team here at JPMorgan. I'm joined today by Marc Casper, CEO of Thermo Fisher Scientific as a part of our JPMorgan CEO Call Series. So as we typically do with this, this will be Q&A focused, will be roughly 30 minutes. So thank you again for everyone on the line for joining us. So Marc, thank you as well for joining us today.

I wanted to kind of kick off the discussion with just kind of the lay of the land and state of the union. Obviously, this has been a really dynamic time for the broader life science tools industry, not only from a fundamental standpoint, but also from a policy perspective, the last 9 months with the new administration. So can we get your perspective on the overall market environment, how Thermo is uniquely within that? And then why should investors feel confident and excited about the opportunity within Thermo?

Rachel, thanks for doing this today. And yes, so when I think about the environment, the state of the union, if you will, I think it starts with where are we with performance, right? And Q2 was strong performance. We were able to raise our outlook. And you see the active management of the company in terms of not only focusing on driving share gain, but also on the cost management side of the equation so that we deliver strong performance, and we're excited about that. When I think about from the dynamic environment perspective, things are starting to play out in a way that are predictable, and you're seeing that step up slowly in the growth rates of the industry as well. And across the industry largely, it was a reasonable quarter as well in terms of the market conditions. So that is also encouraging because I think one of the things that's great about our industry, if you take a long perspective, is the predictability around it. So from that perspective, we feel good about it. And I think about what did we do the day after earnings call because I think it brings a little bit to life about the environment. So I actually traveled to Greenville, North Carolina, where we have our largest drug product facility and was meeting with the executive team of one of our largest customers at the site and where we produce a lot of medicines for them. And we talked about the environment, right, and how are they thinking about navigating the environment. And great enthusiasm about the opportunities ahead in their own pipeline as a large pharmaceutical company, but also some of the changes in policies and how they want to rely on Thermo Fisher to take advantage of production in the United States, where we can collaborate in an efficient way to help them navigate this environment successfully. So when we talk about things like trusted partner, which I'm sure we'll talk about, to be able to literally start the cycle for Q3 and our customers are just rolling up their sleeves with us and looking for new opportunities to work even more closely together, I'm quite enthusiastic about what lies ahead.

Perfect. I wanted to dig into some of the end market discussion.

Sure.

So maybe going off of some of the policy uncertainty, I think academic and government is an area that touches on that a lot. Academic and government is roughly 7% to 8% of Thermo Fisher's revenues. So can you walk us through how is performance within that end market tracked so far relative to your expectations? How are you thinking about your assumptions for the back half of the year? And then has your perspective on the outlook for NIH funding on 2026 changed at all given some of the recent developments, and also some of the new funding mechanisms that we're hearing about, things like multiyear funding grants as well.

Right. Yes. So when I think about the academic and government end markets, in the U.S., it's about 7% to 8% of our total revenue. And in the first half of the year, it was down mid-single digits in terms of the performance. What we've embedded in our guidance is that it gets a little bit weaker for the balance of the year, and that's been consistent for the last couple of quarters. And the view is that customers' hesitancy as they figure out exactly where their budgets are, how funding is getting released, that there'll be some level of caution through that. And that seems to be a reasonable assumption. When I think about -- we've had the opportunity to have quite a bit of interactions with the administration in this area, there's a very clear understanding of the importance of innovation in this country to our economic health and job creation and America's standing in the world. So there's actually a very high level of commitment to having policies that will foster strong investments and innovation in the country. So actually, in the midterm, I actually feel good about where direction will go. And when I think about the budget process and that's going on, it's very much as I saw it at the end of Q2, where you see that both in the House proposal, the Senate proposals, relatively flattish budgets is what's being proposed. And that stability in budget should allow for an environment that actually over time is actually going to be better than what we're facing right now. As you get to more of a flattish environment, that actually will become a tailwind for us going forward.

Got it. That's helpful. Maybe what about pharma/biotech? This is your largest end market. It's roughly 60% of your revenues at Thermo. So can you remind us of the performance this past quarter? And really, what were the drivers within that pharma/biotech segment? We have a lot of ongoing questions regarding tariffs, MFN, some of the funding volatility within biotech as well. So what are you hearing from customers? And again, remind us how does Thermo serve these customers across the pharma and biotech end market across the entire value chain.

Yes. So we had a very strong performance in Q2. We had mid-single-digit growth serving pharma and biotech, a nice organic versus the prior year, a nice step-up in growth versus the prior quarter. So you're seeing that market continue to improve. And it was very broad-based for us in terms of the strength. We had very, very strong performance in bioproduction. We had very strong growth in Pharma Services. You saw clinical research turn to slightly positive growth with very strong authorizations performance, and the channel did very well, right? So when I look across our business, we really serve this customer base from facilitating what goes on in early research in the labs, right, all of the reagents and chemicals and equipment and consumables. We equip the labs and restock them, all the way through we design and execute the clinical trials on the clinical development side. We help our customers develop the physical molecule in terms of our drug Pharma Services business, all the way through commercial scale-up. And actually, from a physical standpoint, also help them supply the medicines in all of the studies that they do. So a very strong set of capabilities in serving that customer base, and we're seeing that picking up nicely, and that bodes well for the future. The tone, I mean, there's a lot that the customer base is absorbing in terms of exactly how pricing mechanisms are going to work and what does the tariff environment mean for them from a production standpoint. And when I sit down with executives in the customer base, it's actually remarkably positive, right? It's not that there won't be challenges and that there won't be issues, but they feel good about their ability to work with government to help shape policies and ultimately feel like they will come through this period successful. And probably part of that is because they're very confident in their pipelines, right? The science is good, the medical understanding is good, and they actually feel that they're going to bring new medicines to market. When I was thinking about my own experience, right, during the course of August, I had the opportunity to spend a meaningful time with the leadership of the FDA, really just discussing what their vision is and understanding that. And they're looking to make the approval process of medicines more streamlined, effective so that patients that are waiting for hope and a cure can get those medicines. They want it to be safe. They want to make sure it's effective. But the interest in doing it in a better way, I think, is incredibly compelling for what that will create for our industry.

Perfect. That's helpful. You mentioned Pharma Services. I wanted to dig into a few of your businesses here. So with your CDMO business, can you update us on how that has performed year-to-date relative to your expectations, how you're thinking about the back half and also the visibility into 2026? Another topic I wanted to touch on here was just the idea of this administration's focus on domestic manufacturing. You mentioned the Sanofi acquisition from earlier this year. So how should we think about the opportunity within Pharma Services going forward here?

Yes. So Pharma Services was a real highlight in Q2. We had high single-digit growth in the business. And when I think about the outlook here, we have an incredibly strong position in sterile fill-finish in the drug product side of incredibly important for biologics, for the GLP-1s and any of the injectables. And we're the leader in all of the clinical trials, logistics, packaging, distribution of medicines where we have very high share as well. And the demand has been incredibly robust, right? Customers trust us. They see our leading set of expertise. So we've had very strong new wins in that business, expansions of relationships. And when we talk about trusted partner, in a certain respect, it is not only to help them with the biggest challenges that a pharmaceutical company is trying to work through, but it creates new opportunities. And the Sanofi example is a good one because we have a good long-standing relationship there. They have a high-quality drug product site in North America. It's underutilized but a very talented team producing critical medicines. And they sold it to us at a win-win for both companies, where we would give them assurance of supply of their medicines and be able to leverage that site by expanding its capacity to serve the market. And given the real focus on moving medicines from outside the U.S. to the U.S., it is a great way of cost effectively serving the market by leveraging the existing footprint, just adding some lines, scaling up the facility. It's going to have really great returns for the company and solve some of the challenges that our clients are facing right now.

Yes, for sure. Along those same lines in terms of services assets, your CRO business. So the clinical research, you saw really sustained momentum within the second quarter. It was slightly above positive growth for the quarter. And you noted strong authorization activity. So can you talk about, you maintained that outlook of the flattish organic revenue growth for the year, returning to positive growth in the back half. So what trends are you really seeing within those pharma/biotech customers within the CRO? Can you give us some color on book-to-bill exiting the quarter? And then what's driving that strong authorization momentum here? And how should we think about that as we look into '26?

Yes. So Rachel, when I think about our CRO capabilities, actually, the year has been playing out as we expected, right? And there's been obviously lots of investor questions across the industry about the CRO space. But it is a business with a reasonable level of predictability. You have a view within the pipeline. And the team has done a good job of executing against its plans. And what has been really compelling is the impact of our accelerated drug discovery sort of capabilities, our drug development capabilities. And there, it's leveraging our knowledge and insights from both being one of the largest clinical research organizations and also one of the largest clinical development organizations, but how do you take time out of the clinical development process. And that is allowing us to win a lot more business. And when we talk about the strong authorizations growth, you saw authorization start to pick up in some of the larger players in the industry, and we did very favorably relative to that. So the trends are very encouraging. And it's a long cycle business, so that really means that you see that in '26 and '27 in revenue, but those authorizations position us well. But we've seen great strength there. Biotech really benefits from the accelerator on drug development capabilities because they are in a way smaller and it's easier for them to fully capitalize on what are we developing for them and then the actual clinical research process, and we're seeing really great momentum there. We have great strength in pharma, and that continues to progress well.

Perfect. And just book-to-bill color, if you had any color on that one, book-to-bill.

Yes, it's well over 1. We don't give out the exact number, but it was a very strong performance.

Perfect. Great to hear. Last business I wanted to touch on was just Analytical Instruments. So can you walk through how did organic revenue growth in the second quarter track relative to your expectations? And what stood out across some of those individual businesses? One question that I think we're getting on is electron microscopy, where growth seemed to be below trend given that had been such a strong performing business in prior quarters. And then looking ahead, how do you kind of see growth playing out within the Analytical Instruments business? You also highlighted some of the product releases at ASMS. So what excites you about some of those introductions? How are customers kind of viewing innovation at this part of the CapEx cycle?

Yes. So there's a lot to that question. First of all, I think at the highest level, our Analytical Instruments business played out in Q2 as we expected. It's the business that has the most headwinds from the market conditions because it has a large presence in China and it has a large academic presence, right? So when you think about funding, we were expecting more muted conditions and we declined in the mid-single digits, in line with what we would have expected for Q2. When I look at in the quarter, we had a very strong set of product launches because we typically play at the higher end of the instruments business, the $1 million price point on really breakthrough innovations. The interesting thing is, is that it's not that correlated with funding. When you have a really relevant innovation, customers actually get the money, right? And if I think about the 2 mass spectrometers that we launched at ASMS, the next generation of the Astral, Orbitrap Astral Zoom, demand has been incredibly strong. And same thing we're seeing real interest in the Excedion as well. And we also launched our next-generation cryo electron microscope, and the order book is very strong there. So when you really bring out relevant innovation, customers get the money. So I feel good about that. Electron microscopy largely played out as we expected and largely because of the comparisons. We had -- in the prior year, we had double-digit growth. And I think that part of explained the particular dynamic in Q2.

Makes sense. You touched on China. It's not a tools fireside chat if we don't dig into China.

Yes, absolutely.

So you mentioned organic growth within the region declined high singles in the second quarter. How did that play out relative to your expectations? And can you walk us through some of the specific factors that are impacting those results? Also, I know you've traveled to China recently. So what are you hearing from customers and the team in the region? And how should we think about demand in China going forward?

Yes. So I think, Rachel, starting with the context, about 8% of our revenue. It's an important market. We have about, on a percentage basis, about half the average exposure to the industry. So normally, that would be a liability. Right now, it seems to be a positive, right, in terms of the environment. We declined high single digits in the quarter. And that was actually a bit favorable to what we expected because in the beginning of the -- at the end of Q1, that was really the area where tariffs were so high that it was almost like a trade stoppage, and that quickly rolled out. So versus our expectations, China was actually a little bit better. But holding aside the tariff environment, the market growth is pressured, right? And when I think about that right now in the instrument business, it really has been -- customers are still in that recovering economic situation and really has been cautious on spending. I got to spend a week in China in the -- at the end of July into early August, had lots of meetings with both customers, our team and then with the very senior members of government. And what I came away with is a couple of things. One is our 40-plus years of history in the country really serves us well, right? We have incredibly strong relations. We're a trusted supplier to the customer base. And in an environment where there's a lot of noise and tension, that history helps us in terms of navigating it. So I feel good about our ability to continue to be successful in China, and we'll see good opportunities there. And I also come away with customers are still in that recovery mode. They don't yet have that full confidence. And our expectation is that while China market conditions are going to improve in the not-distant future, it's more about flattening out, if you will, than it is robust growth in the short term.

That makes sense. Shifting to capital deployment. You announced that you closed the Solventum deal earlier this week. So can you walk us through what you guys are seeing from an M&A pipeline currently? How should we think about size and just mix of deals as well? And then as you look across Thermo's current businesses, do you see any meaningful gaps that you'd like to address inorganically?

Yes. So when I think about capital deployment, I always -- the strategy has been consistently executed for a very long period of time. And it's around -- for M&A, it's following a disciplined criteria of does the transaction strengthen the company strategically? Does it help our customers and would it be valued by our customers? And does it generate strong returns for our shareholders in terms of strong returns on invested capital, strong internal rates of return so that we are creating value? And our track record here is excellent. We are incredibly disciplined. We look at many transactions. We pick a few. You're here in a perfect week because we closed 2 transactions this week: both Solventum, as you noted; and the Sanofi transaction both closed at the beginning of the week. When I think about those transactions, the tangible ones, these are ones that our customers are excited by. I already talked about the Sanofi one. On Solventum, we have a very strong position in bioproduction. This adds filtration to the capabilities. Our customers are excited to build out the presence further with us, and we will take a very strong position and make it an even faster-growing business over time. So we're excited about that. When I look to the future, we have an active pipeline. We have a strong balance sheet. We serve a very fragmented market. And you'll continue to see us actively evaluate the opportunities out there. And when the right ones generate the right returns, you'll see us continue to be very active in terms of capital deployment. So I feel good about what our pipeline looks like and our ability to continue to build out our portfolio and capabilities, and that will be incredibly valued by our customers. Our customers are excited when we add new capabilities because it helps them have even more opportunity to achieve their goals and leverage a trusted partner.

And are there any gaps in the portfolio that you currently [ want to talk about ]?

Yes. I don't really think so much as gaps as I think about how do we strengthen our offering, right? We have an incredibly strong set of positions. In the vast majority of what we do, we're the #1 or #2 player in the market. So I think about there are opportunities in our Specialty Diagnostics businesses. There are opportunities in our Life Science Solutions business to continue to build out our product offerings there. So...

That's helpful. Shifting to some financial questions. So you guys gave us a lot of information on the second quarter earnings call in terms of financial framing. You laid out expectations of 3% to 6% organic growth in 2026 and 2027 and then 7-plus percent organic growth in 2028 and beyond. So can you walk us through why is 3% to 6% the right range for the next 2 years? And what gives you confidence in achieving that 7-plus percent long term? And then also on margins, I think this is an area that comes up a lot. What are the key drivers of the margin expansion in the next 2 years? And how should we think about margin progression in the context of that 7-plus percent long-term growth?

So Rachel, when we thought about going into the Q2 call, what we wanted to do was give our best view of what does the shorter-term environment look like and how are we managing the company? And today, when you look at where are we operating at, we're operating around the 3% range on an organic perspective. And while we don't have a crystal ball as exactly 8 quarters ahead, over the next couple of years, assuming that the conditions are similar, just the absence of the negatives, meaning that academic and government stabilized even at 0, that the authorizations that we're winning in clinical research just flows into revenue and that China slowly stabilizes from meaningful declines of mid-single-digit decline to getting a bit better, you move very progressively through the 3% to the 6% range, right? And so we understand that the world doesn't have to be particularly different to operate within that range. And with that assumption, we want to deliver really strong earnings growth. And we're putting our time about driving the productivity and the cost management to actively manage the company so that this is a great place to invest, right? And which is why we talked about the mid- to high single-digit earnings growth before capital deployment because in this environment that we are in right now, that's what we're going to focus on. Obviously, if there's more growth opportunities, we're going to seize them, right? So it's not that not. But when we think about it, we see the opportunity to drive compelling investment returns in this environment. Our belief is that the fundamentals of our industry, the demand for health care, the unmet health care needs is compelling. What's going on in the understanding of science within our pharmaceutical and biotech customers drives the market growth and the opportunity. So do we believe that 7% plus is the right midterm growth of the business? We do, right? And our view is that what's embedded in that is that the market growth returns to around 4% and that we continue to drive share gain of the 2- to 3-plus points on top of that. And we feel that from our experience in the industry and understanding our customer dynamics that, that's a very reasonable set of assumptions for the not-that-distant future. So we'll be able to deliver very strong earnings growth off of both of those top line scenarios. And when I think about margins, in the shorter term, we think that the 50 to 70 basis points of margin expansion seems like the right set of objectives. And then longer term, you're probably in that 40, 50 basis points when you're in that 7% plus because you're at a slightly higher reinvestment rate cycle if the markets are supporting the higher growth rates.

Yes. That's helpful. Maybe just in the final few minutes here, just in closing, what do you think is the most underappreciated aspect of the Thermo Fisher story today?

Yes. So when I think about the reflections on the company, actually, it's one of the few times where I say that we haven't yet articulated to our investors just how compelling of an investment Thermo Fisher is. When I think about the strength of our market position, the long-term fundamentals that are attractive in our industry and the proven track record of just consistently gaining share, executing a growth strategy and a capital deployment strategy that works, this is an incredibly exciting time. And we're going to manage the company very actively in the short term to deliver great results while strengthening for an even brighter future down the road as well. So this is really an exciting time. Our customers are enthusiastic about working with us and the opportunities we have to help them navigate this environment successfully in a way that they will thrive, and we'll be behind the scenes helping them do that and seizing new opportunities. And so it's an incredibly exciting time at the company, and it's one that we're leaning in, in an incredible way to make sure that we do a great job for our customers and create meaningful shareholder value for our investors.

That sounds great. With that, we are unfortunately out of time. So Marc, thank you so much for joining us today. And everyone on the line, thank you for joining as well. Hope you have a great rest of your afternoon.

Thank you, Rachel.