Thermo Fisher Scientific Inc. (TMO) CEO presents at BofA Securities 2023 Healthcare Conference Call (Transcript)

Thermo Fisher Scientific Inc. (NYSE:TMO) BofA Securities 2023 Healthcare Conference Call May 10, 2023 11:00 AM ET

Company Participants

Marc Casper - Chairman, President and Chief Executive Officer

Conference Call Participants

Derik Bruin - Bank of America Securities

Operator

Abrupt start

…2023 Healthcare Conference coming to live from the Encore in Las Vegas. Kicking off our session today is Thermo Fisher Scientific. And with us is Marc Casper, Chairman, President and CEO. I'm Derik De Bruin, the Senior Life Sciences and Diagnostics Tools Analyst for you who don't know me. And it's always a pleasure to have you here. Thank you, Marc, for making the trip out to Las Vegas.

Marc Casper

Great to be here, Derik. Thanks for the invitation. It's nice to see so many familiar faces and friends in the audience today.

Derik Bruin

So Marc, just you reported your quarter in April, was in April? I don't remember anymore. It's been since long time. Do you want to make any opening remarks on things before we start for the Q&A?

Marc Casper

Yes, so when I reflect on the first few months of the year, we're off to a good start, right. And it's been a noisy quarter for the economy and noisy quarter for the industry. But a good start to the year, core growth was good. The P&L was strong, and we're navigating the environment effectively. And so it's where I think it's good place to start. I'm sure we'll get into all of that in the dialogue today.

Question-and-Answer Session

Operator

[Operator Instructions]

Derik Bruin

So, Marc, you first joined Thermo Electron back in 2001, which means you've been at the same company a lot longer than most of the other CEOs in the life sciences tool sector. how are you sort of thinking about this business and operating through different cycles, when you think about the great financial crisis, the patent expiries, interest rates, just the 2011, sort of like changes that went over there? Can you sort of talk us about what your experience in sort of looking at this business and being there so long and thinking about the current market versus that -- versus what you see in the past?

Marc Casper

Yes, so Derik, what a privilege to be able to serve the colleagues and stakeholders of Thermo Fisher Scientific for the last 20 plus years, and I am so privileged and so grateful for the team for the great results, I'm so excited for the future. So if I think back, right, and, I've had the good fortune of navigating many different types of environments. And we have a very clear set of principles, no matter what the environment is, right. And the first principle is, we're going to deliver differentiated short term performance and differentiated in the positive light, that we're going to do a great job in the short term.

Second, that we are going to do a great job for our customers. And then third, we're going to strengthen the company's long-term position, right? And those principles allow you to prioritize, how do you navigate whatever the environment is, if I think about this, I think about the challenging environments, the financial crisis, the early days of the pandemic, those periods, you just had clarity about what to do. And if you think about how the company is coming out of those periods, remarkably different and remarkably stronger. When I think about this environment, and how well positioned we are, we've evolved the company's portfolio, we've evolved our end markets. So we're incredibly well positioned as a company right with more than 80% of our revenue is recurring in nature, and pharmaceutical and biotech represents one and a half of our revenue. So we have a very attractive set of capabilities to serve the markets and the market still good, right? The market is actually growing reasonably well, not to the same extent that it was. And so I think there's great opportunities in an environment like this where you're seeing others stumble, and our job is to do a great job short term and navigate it and come out a much better industry leader long term.

Derik Bruin

So following up on that, I think some of the conversations we've had with investors coming out of your Q1 earnings, I think you made a couple of comments on the call that probably need a little bit more clarification. The first is on what you meant by stating that the macroenvironment has become slightly more challenging. I think people took that is, are you talking about the life sciences tools market? You are talking about macro? I think the second was describing your full year 2023 guidance as ambitious. I think can you sort of like clarify those points?

Marc Casper

Yes. So, Derik, when I think about the environment, and we try to have incredible transparency, and there's always opportunities to be more effective, right, in terms of getting the message out. The slightly more challenging, I was talking about, like the environment, I was talking about life science tools, just the fact of higher interest rates, the likely effect on credit through the banking crisis, and clearly a very heightened set of geopolitical tensions. Even since February 1, when we give our guidance, the world is more challenging, right? It's so that is and it has an effect on every industry to different extent, different effects in our industry, I think a lot less than most but you definitely see some caution right with spending in certain customer sets and when I think about ambition, in using that view, we do look at everybody else in terms of what's their guidance and all of those things, to understand how investors are going to see the world.

And you've heard me say, and many have heard me say is our job, we're paid to create difficult comparisons for ourselves. That's actually what we're paid to do, right. We're not paid to set low targets; we're not paid to do a less than excellent job. So we want to remind folks that when we said 7%, core growth, that's a worthy goal, and a lot of the others not all set goals that really weren't that exciting, especially when you look at comparison. So we set a high bar for the industry, we're focused on delivering against it, and we'll see how others do.

Derik Bruin

Got it. You mentioned that pharma and biotech are now about 20% or 50%, of your total sales. Can you just talk a little bit about that customer group right now, and sort of what your thinking is, particularly as that group comes out of the pandemic, and also there was a lot of debate about emerging biotech customers a funny environment. Can you sort of talk about those sorts of categories? And how do you how do you define that group because there's different definitions? And just yes, big take since it is now going back to think about when I first configured the company in 2003. I mean, you were hardly in pharma and biotech back then. And now it's, you're the big kahuna in this.

Marc Casper

Right. Yes. So I think, the first aspect of pharmaceutical and biotech, it is awesome end market to serve, right? The long term prospects here are fantastic, right? And when you think about where the sciences, where the pipelines are, whether new medicines, whether it's GLP-1 or the many different chores for cancer and things like the tailwinds here for the long term are outstanding. So that one is always a good backdrop, right, when I think about for us, right, and we've gained share consistently now for more than a decade, in serving the market in terms of growing organically faster than the serve market. And that's allowed us to build out the position and we've supplemented with M&A. Our expectation for this year is that growth is going to be good, but would moderate from last year, and then our guidance, we grew 14% core growth last year for the total company all end markets, pharma, biotech was around that in the mid-teens, this year, we're expecting 7% core growth and pharma, biotech likely, around that as well, in terms of the outlook.

So we are expecting just a moderation, largely because you have less pandemic related vaccine therapies, and just where we thought we were in the funding cycle, and so forth. So from my perspective, at the end of the first quarter, the end markets actually played out largely as we expected. We'll talk a little bit about buyer production, a little bit of a nuance there, but I say, yes, actually, in the whole end market, actually, the industry played out largely as I would expect it with, we had mid-single digit growth in the quarter and on the small emerging biotech. Obviously, there are some companies that are challenged, and but we didn't see a huge pattern, like it wasn't dramatically different. There are companies that close they always do, there's some of that, and there are companies that manage their funding tightly, and but the dynamic seems pretty similar to what we have seen over the last few quarters. So that's how we saw the market at the end of Q1.

Derik Bruin

So turning to bio production, I mean, obviously, there's been a lot of different comments on that end market. Your position just a bit differently the others, in your terms of portfolio, can you sort of talk about what makes you different? Why haven't you seen some of the inventory issues? And just, basically, I think we had a lot of questions about, the bioproduction headwinds in the LSS segment, and just sort of like, what's the, how was that business growing ex, sort of those numbers is difficult to sort of like back into if you sort of look at it just, so some bigger take on why have you not seen some of the inventory destocking issues that some of your peers have?

Marc Casper

Sure. So maybe best to start with the framing, right. So bio production, a little less than 10% of our revenue. It sits within the Life Science Solutions segment. We are the market leader in single use technologies, and the market leader in cell culture media. We have a rapidly growing purification business. So that's actually what the business is. We get the benefit of seeing most of the other companies reported results, just given how others report. When I look at 2022, we were the fastest of the growing businesses in the field. So we had an incredibly strong on year, last year, and it's been pretty consistent now for a few years.

When I thought about guidance for this year, we expected growth would moderate significantly relative to that, based on primarily COVID demand, which wasn't huge for us, but we'd expect that to effectively weighed down to zero in terms of the usage there. And so that's what we expected on February 1, what we set up, at the end of April, when we reported our results, was actually a little bit softer than our expectations. And primarily, our best take on what happened is, we brought our lead times down, right, they got across the industry, they got hugely extended during the pandemic, with all of the demand that was out there. And what we wound up doing was bringing on new capacity. And as an example, we used to say you had a, 30 weeks in advance to get a product. Now we're back to normally say, 15 weeks, there's a period of time where customers don't have to order as quickly to be able to effectively get to the situation that their inventory is at the right level to the new normal lead times. And we expect that the growth will be better in the second half just based on our dialogue with our customers in bio production.

From a company perspective, we've been able to offset it because analytical instruments, especially diagnostics actually started the year stronger. So we felt good about the total package of what we're doing. But that's what's going on there.

Derik Bruin

Got it. And what about there's been I think some of the customers are focusing a little bit more on managing working capital from the former customers in session and going back and, we saw this through during the financial crisis, or rather we saw a lot of suddenly everybody will start worrying about cash flows since you are managing this, but destocking in the LPS business in the catalog business, channel business, making there.

Marc Casper

Yes, so when our Fisher Scientific business, which is a leading customer channel, which basically manages the complexity of all of the suppliers for R&D labs, and QA QC labs for manufacturing, we often, if not, most times, actually have onsite personnel, working at our customers, usually with customer badges. We have no incentive to add inventory to take it from our central warehouses and then move it to the customer side, there's not an incentive. So when I think about customer stocking and those things that, we manage that well for our customers, probably the only area that there's probably a little bit is my lab pipette just because have pipette just because of COVID. It's not about COVID. But there was such a shortage across the world. And effectively, there's probably too many pipette tips out there. But that is pretty small in the scheme of glucose on a lab supplies.

Derik Bruin

So staying on your farm and biotech exposure. I think we've had a lot of questions about the fact that you over the years you've gone beyond research, and you've added CD ROM and CRO capabilities via Patheon and CPD. When we had you on the road in the UK recently when Stephen was on the road. I mean, I think 75% of conversations were tied to that chunk of the market that you're talking about. Can you talk about your strategic rationale for Andy's capabilities? How these businesses are performing now they're part of Thermo opportunities, risks, and what are you doing? How are you having conversations with your customers that you didn't have before?

Marc Casper

Yes, so we've been in the contract development manufacturing segment since 2006 when we combined with Fisher Scientific, we expanded meaningfully in 2017 through the acquisition of Patheon and then expanded our service line further in 2021, with the acquisition of PPD. So when I think about the rationale, first of all, if you look at the company, all of our businesses are leading businesses, right? We are typically one or two in every segment in our product businesses or service businesses. So we wanted to build leading capability with the hypothesis that under our ownership, a great business would be even better, right. So we bought Patheon which was an excellent business doing well. And you've seen, over the previous five years or so, the business has accelerated its growth meaningfully. It's still a very strong financial performance well ahead of the deal model. And customers are relying on us more and more to develop and manufacture medicines. They trust us. They trust that Thermo Fisher is going to do a good job. They saw us having the right to be in that industry. And with the momentum that we delivered, we had the right to expand into the clinical research business, which allowed us to acquire PPD.

And while we've only owned it for five quarters or so a little more than that, the business off to an awesome start, right. I mean, the team did a great job, coming into the acquisitions with business had momentum, there was no disruption as on a high bar. But none of that happened. But if you look at the acceleration of the growth to be able to deliver mid-teens growth in that segment, it's been fantastic. We're winning new business with business that when you ask our legacy PPD colleagues, they never would have wanted without being part of the company. So it's just been a great thing. And what's really excited is not what happened, but actually what's ahead, which is we have some exciting pilots going on with our customers that are focused on bringing those capabilities together to take time and cost out of the drug development process. And it'll be a bespoke to each of the customers. But we're excited about that, because that means further growth and even bigger differentiation for Thermo Fisher in serving our customers.

Derik Bruin

And what are you doing in the cell and gene therapy world? I mean, you bought Brammer, you have, they are. Sarepta called you out on their earnings call the other day, and they were doing stuff back with you and doing it. Can you sort of talk about that, because I think that -- I think we all understand monoclonal antibody markets, I think cell and gene therapy is sort of who the hell k knows.

Marc Casper

You know a lot about it. But what I would say is, we basically participate in two different ways for both cell and gene therapy. We provide all the key life science research tools that you would use in bringing for a new cell therapy or gene therapy to market so if I think about where we have a huge presence, it's all our in vitro reagents, it's all of the instrumentation, the cell therapy systems from Gibco, all of those things that every company that's pursuing the field is using us to do so that's business that's like any other modality where we play a huge role. And because there's been a lot of funding in cell and gene therapy, that's been a big driver. We've also built out the service capabilities, both on the clinical trials, but more significantly on the development and manufacturing. So we have scaled viral vector production, which is the key enabler within the gene therapy and many cell therapies as well. And we also have a development and commercialization facility for cell therapies in collaboration with UCSF in the Bay Area. So we're very active. The really cool thing is because really what the challenge is not about the efficacy of the medicines, but what is the cost of those medicines? And can you get it to a point where you can go after larger indications. So we're taking all of our expertise, and trying to drive the cost down so that our clients can then talk to bigger patient populations. And that'd be a long journey. But actually, the work that our team is doing, the investments we're making I think it’s going to make a real difference.

Derik Bruin

Great. Let's turn our focus now to the Analytical Instruments segment, unprecedented demand over the last couple of years, I believe you just put up a 17% growth number in analytical instruments compare that with company reported yesterday morning, it was negative three in their instrument business, and another company that sort of like in the low single digits in that range. And so what the heck's going on there? And can you talk about backlog trends? And how much of this is tied to the FEI business?

Marc Casper

Yes. So when I think about the instruments business, first for the industry, right, it's been in a good part of a cycle, right, which is investments are strong, pricing has been good. There clearly was some disruption back in 2020 with demand, so I don't think there's a huge multiyear effect on catch up, but all of those things play into a good environment in ’22, ’23, right, you got just, you got that environment was a positive. When I look at our business, we have had very broad base strength, right. So our largest of the three businesses [inaudible] businesses, chromatography, mass spectrometry is the fastest of the ones growing in the quarter. Electron microscopy which is the second largest also extraordinarily strong growth and chemical analysis, really good growth as well, the smallest of the three.

So strength has been broad based. In fact, what we said back in February during our guidance is that we have pretty good visibility to the first half of the year which is going to be very strong. And then we assumed in our guidance that the growth would moderate pretty meaningfully in the second half of the year because you just don't have that much visibility. We have better visibility into Q3, so we expect Q3 actually a little better than what we expected back in February and space on the order pattern. And so I feel good about our competitive position, I think we're benefiting from innovation. We've invested significantly over the last few years; we have great products. And we have a very unique position in electron microscopy in terms of supporting the next generation of semiconductors. You need to use our tools, if you want to get to the next node. If you want to push battery research to the next generation, you're using our tools, so demand, there has also been very strong as it has been for the life sciences applications and EM. So but it's not, right now that's not differential versus a chroma mass spect business, both growing extraordinarily at high rates.

Derik Bruin

And your STMS business when you look at that, I mean, are you -- do you have more better visibility on that? Because I think that was some of the questions just given, going back to some of the comments of some of your peers have made.

Marc Casper

You have the most visibility to electron microscopy, given what the lead times are. Chrom mass spect would be next. And then chemical analysis is a shorter cycle. We have pretty good visibility, certainly into Q2 into probably Q3 in chrom, mass spect.

Derik Bruin

Got you. And can we talk a little about China? How did you do in Q1? Are you worried about some of the geopolitical tensions there? What happened as we've plan to COVID zero?

Marc Casper

Yes, so China, again, from a framing perspective, it's a market probably around $4 billion or so of revenue for us. Historically, it's been very rapid growth, my expectation for the future is they'll still be a rapidly growing market, probably the gap between China and the next fastest market narrows a bit in terms of what its future growth is, but still strong. In the first quarter actually played out pretty much exactly as we expected. We declined low single digits, which was really driven by the COVID comparison, and the first month of the quarter disruption of zero COVID. If you look at the core growth, which kind of reflects the day to day activity, it was high single digit growth. So the quarter actually played out, as we expected, as we guided. And our expectation is that China strengthens during the course of the year, and should have a very solid year. Geopolitical tensions are real. Not likely to ease meaningfully in the short term. And therefore, we factor that into our outlook that every multinational has to navigate the challenges, and we've been in the market for more than 40 years, and we have an experienced team that will know how to navigate that appropriately.

Derik Bruin

So let’s turned out a little bit of capital deployment. So for years, one of the complaints we've heard about Thermo is that you're getting too big to buy anything that has meaningfully moved the needle, your regulatory concerns, do you need to continue to do deals or like deliver on that 7% to 9%? Growth target?

Marc Casper

No. They are totally unrelated activities, right. So the 7% to 9% long term core growth is the portfolio that we have today, right? And there, you've covered the company for 20 years, right? You've seen us raise our outlook multiple times, you've seen us lower our outlook, after M&A, right. So when we bought Life Technologies, we actually took the business from 4% to 6% to 3% to 5%, because we bought a large business that was going slower. So the 7% to 9% is what we have today. And we feel great about it and our ability to deliver it on an M&A perspective, we always assume that we're not going to do anything. But history has shown that the market is incredibly fragmented, and that there is always a significant opportunity. And we put in our long term model that we would expect to do $40 billion to $50 billion of capital deployed on M&A in the upcoming years. So we think there'll be plenty of opportunities to do that. We will be very disciplined, right? We are, M&A is a lot of work. So you got to get paid for that work right in terms of generating return for the shareholders. And so you'll see us be very active and working, you'll be seen us be very selective of what we actually do. And then we will do a phenomenal job with what we buy. And that's been our track record. And that's earned us the right to do more M&A when we think it's the right M&A over time.

Derik Bruin

Any questions from the audience? No. So going back to that 7% to 9% outlook, it's like what are the swing factors? What's the – what’s 7%, what's 9%?

Marc Casper

Yes, so I think maybe the first thing to discuss is that what 7% to 9% means is that market growth is assumed to be 4% to 6%, right. And we always say the 7% to 9% is a long term view, because I think 4% to 6% is a very good, reasonable assumption of what the end market growth is going to be in the long term. That doesn't mean in a given year, that it'll be 4% to 6%, or that will be 7% to 9%, right. And if you think about last year, the market growth was clearly well above 4% to 6%, we grew 14%, we didn't constrain ourselves, I mean, and if the world gets much harder, and it's not 4% to 6%, then we'll grow differentially on the slower side. So I don't get anxious about that. What drives our ability in normal market conditions to deliver 7% to 9% is really the proven growth strategy, right, which is, we have an incredible track record of innovation. And you think about the pioneering work that we've done across our portfolio, it's remarkable how we, enabled single use technologies in bio production, the Orbitrap mass spectrometer, the first sequencer, all these things come out of the company, our track record here is unparalleled.

The second thing is really around the trusted partner status that we have been able to generate for our customers. And that's been incredible in terms of ability to gain share and serving pharma and biotech in particular, it’s a great end markets, we feel good about that. And then we just have unparalleled commercial reach and commercial engine, that's incredible. And that gives you the opportunity to just go out and know where the money is, and make an impact for your customers and drive great growth. So we've consistently delivered share gain, and we're well positioned to continue to do that.

Derik Bruin

Got it, you've got an Investor Day coming up, I think on the 24th. Yes. Want to give us a sneak preview.

Marc Casper

Yes, so first is the best day of the year, right. Actually, other than my wedding anniversary, my wife, she is listening is my wedding anniversary is the best day world. But other than that, May 24, New York City it's live, there will also be, there'll be webcast as well, a virtual, we will give you a deeper dive into our business segments are awesome. And we'll give you some feel because the company's gone a lot over the last year or so. And we'll give you an example of what this trusted partner mean. Just as an example, for a customer that just kind of brings it to life about how you can solve a customer challenge and make a difference. And we'll talk about our financial outlook and give you an update on strategy and those things as well.

Derik Bruin

Well. Got it. Last call for questions before I do my final one. So, Marc, you've been doing this enough with me over the years and you know what my final question is, like, what's underappreciated about Thermo, what don't we understand about the company? What don't we get?

Marc Casper

Yes, first of all, I think investors have a good feel for the company. I think that what I would highlight in a noisy period of time, which we certainly are right now. This is the place to be, right. We have a track record of gaining share, delivering great results, differentiated performance, and we manage the complexity, meaning that there's always ups and downs within the business, and it's our job to manage it, will do a good job managing it. And I think when you read so many nuanced explanations of what's going on in the industry, I think you can get lost on who is the industry leader? Why are they the industry leader? And why have they created so much shareholder value consistently over the last 20 years? Sometimes that gets lost in a noisy period of time. So I'm super excited about what we are and what our future holds.

Derik Bruin

Great. With that thank you and thank everyone. And I'd be at miss not to remind you that II season’s coming up and vote early but often we appreciate it. So thanks, everybody, and thanks Marc.