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

It's time. So good morning, everyone. Thanks for joining us. I'm Andrew Cooper. Welcome to the Raymond James Institutional Investor Conference. I cover life science tools and diagnostics here for Raymond James and happy to have Thermo Fisher joining us this morning. I think most of you probably know Thermo, a leader in a broad, broad chunk of the life science tools arena from reagents, analytical instruments, diagnostics, contract research and manufacturing, et cetera. I could keep going, but I'll stop. Thrilled to be joined by CEO and Chairman, Marc Casper, for a discussion this morning. And maybe just to kick it off, the state of the union question, where are we today? And there's been a lot going on in the last -- at this point, half decade, it feels like but would just love a little bit of color on sort of how Thermo is positioned today and how you're thinking about that road ahead.

Yes. So Andrew, thanks for having us. I'm joined by Eileen Pattinson from Investor Relations. So when I think about the state of the union, we had a good 2025. I think it's always about what we actually do. When I think about the company, not only did we have strong financial performance and strong earnings growth, but we actually exited the year with a lot of momentum, right, and entered '26 in a strong point. The second thing is, that our industry is evolving in the positive direction, right? There's been a period of volatility post COVID. And last year was a much more predictable year. Even with all of the macro things that we read about and caused lots of angst, I would say, in the investor community, the reality was the year played out pretty smoothly. And so we entered this year in a position of strength as a clear industry leader, deep relationships with our customers and have been consistently gaining market share. So it's a really super exciting time for the company as we enter 2026.

Great. And then we're going to dive into a bunch of the moving parts there as we think about entering '26. But first, you talked about momentum exiting '25. I think one thing is 4Q earnings have wrapped up for the space broadly. We've seen a lot of companies in the tool space guide how the Street is thinking might be conservatively, I think especially in 1Q, and there's a little bit of a question of, is there some sort of pause in this end market recovery? Is this just conservatism or sort of what the setup for the year is. So maybe the question here is, how do you think about philosophically the way you approach guidance how we should interpret the way you laid out the '26 outlook? And help us understand sort of the balance of what's prudent to what's a pause if there is one and some of the moving parts around '26.

Yes. So I think there's a core philosophy that we've executed over a long period of time, right, which is set goals that are ambitious and worthy but goals that you're going to achieve and try to be in a consistent long-term mode of being able to slightly beat the numbers that you put out, not where you have so much room that the numbers become irrelevant, but that you're in a mode of just a series of positive news. And having been in my role for 17 years. I sort of have lived under different models, where I say what period works best, it's that. Coming out of an industry where you have lots and lots of little companies, right, with several hundred million dollars of market cap versus a couple of companies with post greater than $100 billion market cap, it can be a very noisy industry in terms of guidance. And what we did both in July is set out a couple of year framework. And then when we gave our guidance in January is we're super clear that actually the market is playing out as we expected, it's recovering. We delivered a little bit over 2% organic growth last year. We're expecting 3% to 4% growth this year on the way to ultimately longer term in the 5%, 6% range and then eventually, we think 7% plus. I mean that's sort of the progression that we've articulated. And we believe that the 3% to 4%, just given where we finished last year, is a very logical place to start. And the way we've always managed the company is you retire risk each quarter. And as long as you're performing well, you're going to raise your outlook, and that's how we're approaching the year. This is one of the first years as I've read through pretty much every earnings report or the report that everybody else has in the industry. Most companies seem to follow that approach. I don't know that factually, but just kind of reading the view we always go first or second in the cycle. And it seems like the industry took that and no good deed goes unpunished. I think the take was well, then the outlook must be bad for the industry because of that. But I actually think it's really setting the industry up for less volatility, which will be a good thing.

So safe to say, not suggesting to us that there's a major pause or anything.

No, actually, I think the industry continues to strengthen. I look at the signs of activity with biotech, what's going on with pharma, the fact that we got a budget pass on NIH. These are all good factors in our industry that would say that the market should continue to strengthen.

Perfect. And I want to jump into exactly that end market pharma and biotech. As the recovery continues, how has customer behavior, excuse me, evolved in terms of prioritization and what they're thinking about today across the drug development life cycle and where are you seeing the most momentum there?

Yes. So when you look at pharma and biotech, it's our largest end market, about 60% of our revenue. Last year, we grew mid-single digits in serving that end market. We ended the year in the fourth quarter with high single-digit growth. So we've had strong momentum. Our business is clearly gaining market share. A lot of what we talk about as we describe the company is that we're the trusted partner to pharma and biotech. And what does that really mean? We have such a unique set of capabilities that we're working with the management teams of our pharmaceutical and biotech customers almost on a daily basis in some fashion. And that allows us to understand evolving trends understand how we're performing and ultimately opens up new opportunities. So our business has great momentum in certain pharma and biotech, and I'm certainly excited about it. One of the things that we've done is effectively been building out our capabilities, right? And over the last roughly 10 years, we built out a meaningful service business, right, in serving pharma and biotech beyond our product businesses that serve it. And having both clinical research and in clinical development, meaning that we design the clinical trials, we execute them to determine the efficacy and safety of medicines. We develop the physical medicines all the way up through scaling up the commercial production and we're the largest company that does that set of activities. When I look at what has happened is when a customer selects us, we're actually able to do it faster than anybody else, right? There's just insights on all of the handoffs that happen in the development of a medicine that has allowed us to ultimately win significant new business, and that positions us really well for the future.

Great. And one kind of big topic of the last, call it, handful of months at this point, has been reshoring and the potential impact there. I think you called out on the fourth quarter call some new contracts in terms of U.S. manufacturing needs. Can you step back and share how you see that trend evolving from here? And where are customers in the process today of trying to reshore? And how do you think it plays out in the next, call it, few years?

Yes. So the larger biopharmaceutical companies have made significant commitments to reshore manufacturing to the U.S. And in exchange for that, they've been able to negotiate exemptions from tariffs as well as pricing mechanisms for the medicine. So there's a direction of travel in our industry of a lot more activity. And when you look at that, we also -- because we're a contract developer of medicines have made a $2 billion commitment to the U.S. government in terms of additional capacity to produce medicines here. And we've won a meaningful number of new contracts to fill that capacity. And effectively for many customers, it's more economical to rent the capacity from us than building a whole new facility. So we've seen that. That revenue will show up faster than the greenfield revenues that would show up in our pharma and biotech customers. And when you think about it, we would expect '27, '28, even into '29, you should see a nice step-up in growth above the trend line, if you will, from that activity. The way a new facility works, and there will be a significant number of them built in the U.S. is we play a role in equipping the facilities, we stock the labs. Our position in bioproduction of enabling technologies to produce medicines is much stronger today than it was when the old plants were built 15, 20 years ago. So we're likely to have a much higher market share of the activity as well. So it's really -- it's quite a positive trend for Thermo Fisher and for the industry more broadly.

Great. Now touching on something you mentioned a little bit in the prior question. You launched Accelerator, I think, at the end of 2024, which integrates that contract research side with the contract manufacturing side to, like you said, streamline some of the timing there, reduce costs, et cetera. So as that solution sort of picks up traction, how should we think about that offering driving growth across your pharma services and clinical research business? And is it changing the nature of the relationships and the nature of the engagements with the customers you're working with?

Yes. So if you think about what we're doing, right? You have -- in developing a medicine, you're going through the clinical trial process, which is around safety and efficacy, and then you actually have to be able to manufacture the medicine, right? And we play a meaningful scale role in both. If you're a biotech company, right, and you have neither the capabilities of executing the trial or the capabilities to manufacture the medicines, it's incredibly compelling actually in the case studies that we've developed, the studies that were put out by Tufts University about how much time this process is saved through using the combination of the capabilities, and we're able to implement it that works for our customers. And the reason that the adoption has been so strong and you see it in the authorizations and contract wins that we've gotten over the last 6 quarters since we've offered it is effectively the value creation in the biotech and pharmaceutical industry is how long is the period of exclusivity and who's first to market for a new medicine. And we're able to impact both, right? The faster you can go, effectively, the longer your economic benefit is as a client as well as derisking that your second or third class of medicine. So it's really been incredible in terms of the momentum. And you've seen our clinical research business, which is roughly an $8 billion business, has really been gaining very meaningful share, and you see that through the numbers as we publish them.

Maybe when you just maybe think of it logically makes so much sense. Why have we not seen more players follow suit and try to more tightly align a CRO business and a CDMO business to make it easier and to be able to, frankly, keep up with what you're able to offer?

You have to do it at scale. It has to be done at scale because of the complexity, right? So that really limits who the opportunity set is available to. And like everything, it takes a while for the industry to understand the changes. And ultimately, we have a huge first-mover advantage. So that's really been the reason that we had the concept, we didn't overpromise to our customers, and ultimately, they've been super pleased, and that positions us well for the future.

And now the topic that no one can escape. Let's jump into the AI question. I think there's a lot of excitement about what AI can do for drug development. A lot of the market has looked at that as scary for life science tools. So especially the CRO landscape, can you help us think about how you view AI as changing or maybe not changing the long-term profile for that -- this industry and where you think Thermo Fisher is sort of positioned to play in a world where AI is a bigger part of what we're doing?

So Andrew, it's a great question. Thank you for asking it. So let me start with the 30-year view, right, and having seen many evolutions of technologies and many evolutions of change, right, which is in our industry and the customer base we serve, the better the technology that advances scientific discovery, the better the capabilities to bring medicines out more effectively has always led to a reinvestment cycle in the industry, right? So inefficiency that comes out effectively leads to more money coming in to go after the big opportunity because human health and the challenges globally is so enormous that, that has been the ecosystem that as we've seen it. I think the capabilities around AI are incredibly profound, right? And when I think about how we use AI in just running the company, it's making us meaningfully more efficient, right? It's creating a better customer experience. That's not going to differentiate any company, but it becomes a sort of -- it's here, it's -- we're living it. We're driving it. But in clinical development, which is one of the areas that is the most cost intensive for our customers, developing a medicine, the ability to shave time out, the ability to generate reports more quickly, more effectively, to select the right sites and the right patients it creates meaningful value, right? And the only way you do that is by who owns the data, right? And we have -- and 1 or 2 of the other large CROs have the most data, if you will, on how to ultimately do the development better. So you can think about it as an enabling technology to leverage our insight to do a better job. What is it going to mean over time? A couple of things. You're going to have molecules that are more likely to be successful going into clinical development. That's great because it means waste comes out. And two, you're going to be able to do it more quickly, right? And when I think about our own economics and all of the modeling of that we win, right, through that process, right? While we make some money on things that fail, ultimately, the reality is we make most of our money actually in the things that are successful, right? And therefore, we're energized about it. The things that have made the company successful, scale, a unique portfolio, a trusted partner status and outstanding execution every day, quarter in and quarter out, year in, year out. AI plays to the strength of that, right? It actually is an accelerator and a multiplier. So this is the most exciting time, right, in terms of leading the company in terms of going through a change evolution, revolution on certain things, evolution on other things, it's awesome, right? And I'm excited about how well positioned we are to win and it's our job to execute well and help our clients be successful.

Perfect. And shifting a little bit to the bioproduction space. We get a lot of questions about it. I think you do as well. Maybe first, just help us understand how Thermo fits into that because I think a lot of people use the word in a lot of different ways.

Bioproduction in our vernacular which is generally the industry vernacular is the enabling technologies to produce biologic medicines and there are major categories of technologies, right? There are the cell culture media, the supplements, effectively the things you would add to grow a medicine. There other single-use technologies, the capabilities you need to be able to produce it in a sterile fashion. You have the purification capabilities that you need and then ultimately the filtration. Those are the 4 major categories in bioproduction. We're the industry leader in 2 of those categories, in cell culture media and in single-use technologies. We have a rapidly growing purification business. And while we're not the industry leader there, we're winning a very large share of new molecules. So business with a lot of long-term tailwind. And we acquired from Solventum their filtration business to give us a foothold in that category. And we're excited about how that integration is going. We're in our first year of ownership. So it's a business that's growing the fastest in the company. It's been growing the fastest in the company for the last 15, 20 years. We're well respected by our customer base and things like the reshoring efforts that you asked about earlier are real positives for this business. So we're well positioned here.

And just thinking about that, you have delivered really strong performance there. I think it's been -- there's been periods of noise for various pockets of the end market at times. What have been the key differentiators for Thermo to deliver that strong performance even in some of these more kind of challenged times?

Yes. So I think we talk about trusted partner. And if you get down to the practical aspect of it, right, we're a large developer of medicines. We also are a large supplier to the competitors of those developers of medicines. Coming out of the pandemic, our largest competitor in the field called me and said, "You are our best supplier for the enabling technologies throughout the pandemic. You put the care to our success, unlike any other player in the industry". And that's why we're the trusted partner because I'm sure there are people at that particular company that feared and said, well, if there's a limit of supply, then Thermo Fisher is going to prefer their own internal capability. But the reality is those customers have put their life to work with us, right? And if we do great work for them, they will be loyal forever. And that's been the differentiator. We have great technologies but we have a mindset that if we help our customers successful, they'll open up new opportunities. And if I just think about the first 6 months or so with Solventum in the filtration business, we're getting very meaningful trial of the capability, meaning that customers know we spend $4 billion. They know that that's a big commitment of capital. and they want to know why, right? They want to test out the product and they're going to ultimately adopt it. So it's a great time for the company.

Great. Shifting gears a little. Analytical instruments, excuse me, were ahead of expectations in the fourth quarter and delivered a solid kind of overall year. And innovation was a really big part of that. I think you had Astral Zoom and mass spec. You had some big launches in electron microscopy over the last couple of years. As you look ahead, how do you think about the growth trajectory in I want to say AI, but I probably shouldn't do that to confuse anybody, but in analytical instruments in '26 and more broadly sort of the pace of innovation and what's needed and what it contributes to that segment longer term?

Yes. So when you think about Thermo Fisher Scientific, we have 4 values that have been deeply ingrained in the company. The first of those values is integrity. The second is innovation. Our customers expect the best products and services. They just do, right? You're trying to develop a medicine, you're trying to diagnose a sick child. You want the best technology. We spend $1.4 billion on R&D in our product businesses. And our instrument business is known as the innovation leader in the industry. So whether it's the new mass spectrometers that we launched, the Astral Zoom, whether it's the suite of electron microscopes that we launched around both in the life sciences setting, the Krios 5 or the automated technologies in semiconductor yield ramp that use our electron microscopes. We've been just launching a suite of incredible products, and we're driving good adoption, gaining market share. And that's a business that was most pressured even though our results were decent. You had pressures from China, pressures from academic funding, the area of tariffs, a lot of what could go wrong and actually the business did reasonably well and enters this year with incredible momentum. So it's an exciting time for the business, and we'll have a really good set of launches coming up as the year progresses.

Maybe now is a good time to touch on academic and government markets a little bit, ones that have been certainly noisy over the last couple of years as well. I think the general sense is things are more getting better than anything else, but we just love sort of the lay of the land today, knowing what we know about NIH budgets, knowing what we know about sort of the way folks are thinking, what you're seeing in the field.

Yes. So you have a period of 2025, lots of anxiety amongst the customer base in the U.S. with whether it was [ DoD ], whether it was what was going to be funded on NIH. And yet our view was that NIH was going to be okay in terms of what the budget was and it ultimately was in terms of slight growth that was passed. And customers are still a bit cautious, but that will improve over time. You don't have the shock anymore. Now there's more stability and customers are getting back into the cycle of reinvesting and upgrading fleets of instruments and so forth. So I would expect that market gradually improves and get to a better spot. Europe has been good, interestingly enough, actually in terms of the academic markets. There's been a good commitment to spurring innovation across the continent. So there's been a bit of an offset.

Great. And now maybe touching on capital deployment. You're in sort of the mid-2s from a leverage perspective. You already did $3 billion of buybacks this quarter. You've got a $9 billion or so acquisition pending. So as that kind of slides leverage higher in the near term, how should we think about capital deployment both sort of near term and then what you're seeing in the M&A market as you sit today?

Yes. So when I think about our capital deployment strategy, we are an industry consolidator. We have a very clear approach that's been consistently deployed, which is we do a balance of M&A and return of capital with M&A being the priority. And over long periods of time, about 2/3 of our capital goes to M&A and about 1/3 of return of capital. We are very clear on acquisition, what the strategy is. It has to make the company stronger. It has to be highly valued by our customers of transaction and ultimately has to deliver strong returns as measured by returns on invested capital, internal rates of return, so that we clearly are generating shareholder value through those activities. Last year was a good year, right, in terms of the targets that were available to us, and we were more active because they were good fits. We announced the acquisition of Clario which we are expecting to close in the second quarter. And that's a $9 billion transaction. It's a business that is the leader in endpoint solution generation. What that means in English is when you're doing clinical research, you need to know the safety profile, so the cardiac profile on a patient that's taken a medicine you need to know what's going on in terms of the body from the physiology of the medicine. You need to know what the patient is saying to the doctor. It's called the clinical outcome assessment. Clario has the best set of technologies for those capabilities. The fourth thing that you need to know is what's going on physically in the body from the blood or whatever biological sample. We're already the #2 player in that. We will integrate that into a unified endpoint for our clients, and they can do those trials themselves. They can do that through our CRO or anybody else, but we believe we'll have the best solution. It's going to be a high-growth business. And so we're focused on closing that doing a great job with it. That's our priority for 2026. We're actively looking at things. We have a strong management team. We've got balance sheet flexibility. And if the right transaction is available to us, we certainly would consider it. But I always like to focus on what we actually are in the middle of doing and this is a really exciting time for the company.

Great. And the next one I want to ask is admittedly more of a philosophical question probably than anything else. But whether it's trade policy, tariffs, general sort of policy impacts on life science tools, it's never been, I'd say, more -- there's never been more going on, and it's never been changing as quickly as it has been. So just philosophically, how do you think about navigating that, knowing that what's here today may not be what's here tomorrow and thinking about the here and now, but also the long term and the decisions you have to make for that time period as well.

I think one of the things that there's headline and then there's reality. And this has been by far the noisiest headline period. Actually, the amount of change actually has been more modest, actually, than what might appear, right? If I think about the health of the industry, it's actually quite strong in terms of the end markets, what's going on in pharma and biotech, how some of the larger players in serving those customers are positioned. It's actually a good time. And we're in the room, right? We have access to the governments around the world. We are the largest domestic producer of these capabilities in every major market around the world. So whether we're in Germany or whether we're in the U.K. or the United States or Finland or China, we are the largest player and that allows us to be able to educate, inform and ultimately advance human health in a way. So I actually think this is a really interesting period of time where -- you're seeing some things that have been challenges for the industry in terms of some of the concerns around pricing that seems to have worked well in terms of how pharma has navigated it. So I'm actually quite bullish on what the prospects are for our industry.

Great. And with just a minute or 2 left, maybe the classic closing question of what would you most want investors to take away about Thermo Fisher? What do you think the markets are most underappreciating about the story today and how you see the trajectory longer term?

Yes. So when I think about the company and how I perceive our investors understanding, I think actually, our investors understand the strength that we have, right, as an industry leader understand the consistent growth strategy, the good stewards of our shareholders' capital. So the fundamental who Thermo Fisher is, I think, is largely pretty well understood and our discipline about driving earnings growth and gaining market share. Those are the things that are well understood. I think where investors have struggled broadly in the industry is actually the question you asked about sort of the environment. What I would say is that we have a really good handle on the environment, and we try to articulate to the investment community how we see the world playing out. And our track record has been pretty good about that. Right now, I think there are 2 different factors that investors are trying to get their heads around. The guidance question, less about us and sort of what is the outlook for the industry. I think the outlook for the industry is actually quite good, right? It's actually progressing in a stable way and improving. So I think that one will just shake out over time as results come out across the industry and our results as we continue to deliver strong performance. And then the second is you see the volatility around AI in sectors that we would all say, why would AI affect transportation or something else, right? There is a bit of -- you take a headline, you extrapolate doomsday. The reality is we're incredibly well positioned as the industry leader to adopt AI and strengthen the moat around our business. And that's what we're doing. And it's an incredibly exciting time to lead the company and to ensure we're doing a fabulous job for our customers. So I think ultimately, it's the performance that matters, and we're well positioned to deliver a great 2026.

Fantastic. I appreciate the time and looking forward to the breakout downstairs. Thank you.