Thanks everyone for joining us. For those of you that don't know me, my name is Michael Ryskin on the B of A Life Science Tools and Diagnostics team, and I'm thrilled to kick off the Bank of America Las Vegas Healthcare Conference. Joining us for our first session, fittingly, is Marc Casper, CEO of Thermo Fisher Scientific. Mark, thanks so much for joining us.
Mike, it's a pleasure. Good morning, everyone. Nice to see, everybody here in Las Vegas.
Usual format will be a 30-minute Q&A, fireside chat, and then we'll pop in for some questions from the audience at the end. But just to kick things off, Marc, let's start by you know, discussing underlying market conditions as you see them, you know, here in May for 2024. Thermo is well recognized as the leader in the industry and the various markets you play in. So I think it'd be a really good starting point to talk about sort of like, the state of the union, the state of the industry.
Mm-hmm.
From your perspective, you know, your latest view on 2024 and how things are progressing?
Yeah. So, so Mike, probably the best way to frame things, I'll start from, a little bit about kind of the long term, a little bit about Thermo Fisher, and then quickly about what's going on in the short term. Long term, the industry is phenomenal, right? When I think about the drivers in our industry of drug pipelines, scientific discoveries, unmet healthcare needs, advances in technologies like semiconductors and batteries, all of which are capabilities and our industry's capability support, the long-term growth here is very strong. When I think about, the shorter-term environment, really the first quarter, played out exactly as we had expected in our guidance.
We saw a high level of, I'll call it, predictability in the markets, and we also saw the signs embedded in our view for this year, which I think is largely the view across the industry, which is that the markets will improve modestly as the year progresses, as economic activity picks up in our end markets. And the two factors that happened in the first quarter that supports that would be China announcing a stimulus program and the improvements in biotech funding that we saw pick up, you know, nicely at the very end of 2023 and into the first quarter of 2024. So those things will be consistent with the view that the economic activity in our end markets pick up. And we had a really good start to the year. Team executed extraordinarily well. Came in well ahead of our guidance.
We were able to both raise our outlook for the year and de-risk our outlook at the same point. So felt very good about the start to the year and how the team's executing in markets that we've had pretty good visibility to.
Okay. Great. That's a good starting point. And I'm gonna follow up on something you just said about markets improving as you go through the year.
Mm-hmm.
The potential for upset at the end of the year. You know, broadly, there's a view that second half of 2024 will be better than the first half.
Mm-hmm.
You're gonna be exiting at a better rate than you than you entered it. So, maybe we'll get a little risky here and, and start asking about 2025 already. Any early views on, you know, what things will look like as you exit and as you enter next year? Any early views on how you think next year could shape up relative to the Thermo LRP?
Yeah. So, Mike, I know that Derik planted that question. I know he's in the audience and, after a 20-year phenomenal run as really the leading analyst, it's great to have seen him this morning and phenomenal to work with you. So when I think about 2025, obviously we're gonna wait until we get there to really predict. But what I can say is, what's implied in our guidance, what does that mean, you know, if it plays out the way that we see it? So what we're assuming is that the market is improving modestly as the year progresses. In terms of underlying activities, the comparisons also get easier as well. And those both of those factors should have us with stronger growth in the second half.
When I think if that plays out as expected, then what it would imply for 2025 is not quite back to normal market conditions, but much closer than we've seen over the last couple of years. In normal market conditions, we say it's 4%-6% growth, and, and what's implied in our guidance would say it's just slightly below that in terms of what, what the phasing is. But obviously we'll get a lot smarter, as the year unfolds, and, and we'll lay that out in January on our earnings call, where we give the outlook for 2025.
Great. That's helpful. And then talking about that LRP and that 7%-9%, I mean, like you said, a lot of it is the underlying market of 4%-6%, but then you've also got the 200-300 bips of share gains that Thermo's been able to deliver.
Mm-hmm.
Year after year after year. Sort of both of those factors, the underlying market growth and the share gains, just sort of what are the key factors that underpin that?
Yeah. So when you think about the context of market, and I'll do that first, right? For many years, we talked about our markets as being 3%-5% grower based on the mix of our company's revenue. In 2021, through the actions that we took, not about our change on the view of the markets, but actually a much larger exposure to pharma and biotech, you know, almost 60% of our revenue, sort of the weighted average math takes that 3%-5% and makes it 4%-6%, right? So when I think about our served market, you know, it's a 4%-6% growth end market. We obviously have the benefit, and I certainly have the benefit of more than two decades at the company and coming in on about 30 years in the industry, despite my youthful. Yeah.
And my point of all that is the vast majority of years actually plays out in that range, right? And if I think about, you know and then you can think of exceptions, the Great Financial Crisis, the two years in COVID where we had 25% organic growth, 17% organic growth, the couple of years thereafter where we're below the average. But when you actually look at the periods of time, the 4%-6% is a pretty good proxy for what the market is. And when I look to the future, I feel good about that.
The factors that will say, "Are you at 4% or are you at 6% market growth?" are really gonna be driven by the strength of the pharmaceutical and biotech end markets and to some extent, what's going on in the general economy and sort of the industrial and applied and academic and government funding. So that's the 4%-6%. Our ability to gain market share, has been quite consistent over a number of years, and even the way you frame the question sort of frames it that way. Our confidence in our growth strategy's ability to grow 2-3 points consistently faster than the market, is definitely something that we have a high degree of confidence in.
The fact that we have a very strong track record and outlook for innovation, the trusted partner status that we have developed with our pharmaceutical and biotech customers over many, many years, and the, you know, unparalleled commercial engine that we have that drives share gain in supporting those customers gives us high confidence that we'll grow 2-3 points faster than the market. That formula leads to long-term 7%-9% growth. Then the PPI Business System translates that growth into very strong margins and ultimately earnings growth. So that's, that's kind of it in a nutshell as I look to the future.
That's a really helpful overview. Okay. Let's drill in a little bit on some of the more near-term questions or debates in the space. One, have to ask about China.
Sure.
It's obviously a major focus point for the company and for the industry, and you just flagged it earlier as one of the potential swing factors as you go through the year.
Mm-hmm.
In terms of China stimulus. So can you provide a little bit more color on sort of what changed in the last couple of months in your view on China as you go through the year and then the stimulus itself? Where would you see the benefit? How would you see the benefit? Sort of how would it flow through to, to your company?
Yeah. So when I think about China, if I take the very sort of long historical view, very strong growth market because of the importance of what our enabling technologies are for Chinese societal priorities, you know, cleaner water, cleaner air, better food supply, you know, improved health of Chinese citizens, those factors have driven long-term historical growth. When I think about the long-term future, those growth drivers remain very much intact, although I think the rate of growth of the Chinese economy is not going to be nearly as robust in the years in the long-term years ahead than it was, say, in the previous decades. So our view has been growth will be above average for the market in China, but certainly not as strong as it was 2010 to 2019. So that's kind of the framing of it.
When I think about the short term, I think the world was surprised by how quickly the economic conditions deteriorated in 2023. And the question that I certainly had, from the lens of being the chair of the US-China Business Council and my many years of working in China is, when would the government take actions to instill business confidence and to boost growth? And we were pleased to see in April that that was announced or late March, April, where a meaningful multi-year fiscal stimulus program focused on capital equipment, was put in place. And that is multi-year to give confidence to the customer base that the government's gonna support funding. So we feel that that also is a sign of how weak the Chinese economy is, but it's an action to spur shorter-term growth.
The way the stimulus is focused is capital equipment, you know, which for us means primarily our analytical instrument segment. We get some benefit in genetic sciences, some benefit in lab equipment. Our expectation on timing is in terms of revenue late in the year, and into 2025 because right now proposals are going out. Customers have to secure both provincial and central government funding, and allocate budgets to it. So I think by the time you get through the process, you know, you're probably looking at, you know, somewhere in the late Q3, Q4 where revenue shows up and into 2025. So that's hopefully helpful. And we're well positioned to support our customers, to capitalize on the stimulus dollars that are out there.
And you, I mean, you did just flag that it's a multi-year stimulus, but still just thinking about how quickly things fell off and surprised in 2023.
Sure.
Is this one of those things where at some point down the road, you'll need another stimulus and another stimulus and another stimulus? Just kinda comparing it to the U.S. and, and Europe, it seems like those markets are more self-sustaining where it feels like China is more stimulus-dependent. Is that a near-term phenomenon, or do you think that'll continue where you'll need a stimulus to, to get, you know, to kick-start it every year?
In a certain respect, such a large proportion of the economy is government in a way. It may not look like government, but it is. Stimulus is more vernacular to get also the private sector to understand what the government's intentions are. So I think this one is both to get funding to the government bodies, you know, academic institutions, as an example, but also to say to the private sector in China that the government is focused on economic growth to spur business confidence. So if that plays out probably as the Chinese government expects, you have less need for one stimulus program after another and sort of the economy gets going. But if the economic growth doesn't pick up, say, in a few years from now, then I'm sure the Chinese government has that opportunity to do it again if it needs to.
Okay. And staying on China for a second longer, you know, I wanna talk about some of the geopolitical tension between the U.S. and China. Not a new topic in 2024. It's been going on for almost a decade now. But more recently, you have the BIOSECURE Act. There were some updates on it, just this weekend, I believe. So, you know, on the one hand, you have a positive tone about underlying market demand.
Mm-hmm.
In China, an opportunity. On the other hand, you have the geopolitical tensions.
Mm-hmm.
How do you see those two factors playing out?
Yeah. I mean, there's definitely a transformation of the relationship between China and a number of Western countries that's come out in the last few years. And it's actually, at least from a U.S. and China perspective, I think in a better spot than where it was, you know, a year or so ago, but certainly different than it was many, you know, many years past. When I think about the BIOSECURE Act, you know, it's hard to know exactly how that ultimately plays out. But whether it is enacted or not, what it makes for certainly U.S. and, in a way, Western, any pharmaceutical and biotech company that wants to access the U.S. market needs to think about where its partners are on development and manufacturing. And it probably means that more activity is gonna happen outside of China, might complement China footprint.
It might be a way that it plays out. But you'll see that, you know, have an effect on, you know, not as much of a reliance on China, I would think, because of the potential for legislation at some point in the future, whether it happens or not. And our lens is that we support our customers in, you know, both in China and around the world and help them navigate the environment. We feel good about our ability to do that. And when I think about where our footprint is in our contract development and manufacturing operations, we have about, you know, over 50 sites. They're effectively all in the West. So we're, we're there to support our customers in whatever way they need us to help.
Okay. All right. I wanna pivot a little bit and, and touch on a few specific business units or, or end markets, where there've been a lot of questions. First, on bioproduction or bioprocessing. It's a little less than 10% of total company revenues, but there's been a lot of debate and tools, in terms of inventory levels, you know, and how that's trended over the past year, versus underlying demands. Starting to get a little bit of positive commentary in this space. Just the tone is starting to shift.
Mm-hmm.
Looks like its inventories are finally turning a corner. Could you just talk us through what you saw as the first quarter progressed and sort of what your expectations are on inventories as you go through the year?
Yeah. So, so Mike, I probably'll start by framing our business, right, which is our bioproduction business. We are the market leader in cell culture media and single-use technologies, which enable the production of biotech medicines. And we have a fast-growing purification business as well. And, you know, we've been growing above the market for a long period of time, and it's been a strong contributor to growth. When we look at the last couple of quarters, we definitely have seen a nice pickup in orders, a couple quarters in a row of sequentially you're seeing the pickup. Book-to-bill has improved nicely. And as I, you know, each company has a different level of disclosure based on their scale in the industry. At least our best read is that we're proud of how we're performing, in terms of, you know, we've had a great historical track record.
But actually, when I look at the last couple of quarters, I feel very good about what our performance is relative to the commentary that others have talked about.
Okay. And then, in bioproduction specifically, there's always questions on, you know, share gains, share shifts between the various players. We tend to think about most tools businesses being relatively sticky, but bioproduction is especially sticky.
Yep.
So have you noticed any new entrants come up or any meaningful share gains? Or sort of is there any change in competitive landscape there, or, you know, you mentioned you're growing well in purification. So sort of how are you positioning your markets, and what are you seeing from others?
Yeah. So, so I, we haven't seen anything meaningful in terms of new entrants or new participants, right? So you have a, a number of well-established, strong companies in the field that are well-run. When I think about, you know, why things are sticky, you know, effectively in the U.S., in Western Europe, it's very hard to change once you have a molecule going through the development process. There are a couple markets where you can change, but they're not large in terms of volume. So, so once you're specked in, you-you're pretty much dependent on how a molecule does. Our purification business has been winning a meaningful share of early molecules. So and we're seeing the benefit of that, right? And that will be a tailwind for a long time into the future. But it takes a long time, right?
You know, so we're seeing it in the numbers, but these molecules have to make it through the clinical process and ultimately scale up commercially. But I feel good about that. And during the pandemic, it was the first time where supply disruptions happened, and customers were willing to entertain more second source and do some shifting. And I feel good about how we were commercially supporting our customers in that process as well. So that bodes well for the future also.
Great. That's helpful. And then let's move to analytical instruments.
Sure.
The AI portfolio. That business has posted really strong results throughout all of 2023, performed well in 1Q2024. Meanwhile, elsewhere in the space, you've seen a little bit more choppy or, or outright weak results, on anything CapEx or instrument-related. So what makes that business unique? Could you talk about your portfolio, your specific products, sort of how they're positioned.
Mm-hmm.
to their customers and why you've been able to hold up really, really well there?
Yeah. So when I think about, you know, how we're performing, we had a very strong year in 2023. And, you know, that creates challenging comparisons for this year, but actually a reasonable start, in the first quarter. When I look at underlying what's driving that, you know, our electron microscopy business is performing extraordinarily well. We are benefiting from next-generation semiconductor. We're benefiting from investments in battery technology, of which both of those tech areas are very dependent on the cutting edge of electron microscopy and customers that have invested heavily and likely to continue to have a strong investment footprint there. In our chromatography mass spectrometry business, we launched the Thermo Scientific Orbitrap Astral, a very high-end, instrument in the middle of last year and have had very strong adoption of the technology. Have built a nice-sized, installed base of that instrument.
We are more exposed to high-end research than routine analytical science. So if you think about as you look at different companies and the numbers, our chrom mass spec business and our electron microscopy business in particular are more skewed towards the higher end. And my own experience in the industry is if you have good innovation, customers find funding no matter what the environment is. And so I think we're benefiting from that, or I know we're benefiting from that.
Then finally, one of the things that I highlighted on the Q1 call more so than probably normal is just how many instruments we launched in the first quarter, really in our chemical analysis, and in our more routine areas, things like PFAS testing for contamination in water, launching new instruments there, really helping pharmaceutical companies move QA/QC of how they produce a medicine to the factory as opposed to having to do lab testing and methodologies like that and new technologies for battery production, all things that bode well for future growth for our analytical instruments business.
Yeah. Yeah. I mean, that high-end research point, I mean, I think that makes sense that if you've got something more innovative or if you're sort of pushing the boundaries on sensitivity, specificity, detection limit, you can't really forego that as a customer. You need to have it or you're obsolete, you know, things like the Astral or electron microscopy. Whereas if it's something more routine or even, like, replacement cycle products, you can always.
You can show up.
If your budgets are tight, yeah. And if your budgets are tight, you can sort of say, "Look, I'll squeeze one more year out of it.
Sure.
Hang on until budgets improve.
Right.
Okay. Let's talk about the services businesses.
Yeah.
CRO and CDMO. You know, you've acquired PPD and Patheon a number of years back. I think you tend to do those deals around the time of this conference, so.
Mm-hmm.
Fond memories of those early mornings. Thermo has not only had very strong performance in these businesses, but it's also sort of broadened the scope of your offering to your biopharma customers and biopharma partners. Now that you have that more end-to-end position that you've built out over the last couple years, how has that changed your conversation, your relationships with those companies?
Yeah. So, so when I think about the trusted partner, right, first of all, I haven't met a company that says they're the untrusted partner, right? So, so but what I what I really mean by it, we work so closely with our customers and have such a accumulated experience of understanding what they're doing that they actually come to us with their biggest challenges, their concerns, and they ask for our advice, and they look for solutions to their you know, to their problems. And, you know, years ago, it came very clear to us that there was an opportunity for a large-cap company to build out, you know, a development and manufacturing set of capabilities beyond what we were already doing in clinical trials. And we expanded meaningfully over the last 7 years , 8 years.
Based on those experiences and relationships, there was a clear unmet need for really taking the CRO capabilities to the next level. We acquired PPD about 3 years ago. It's been a spectacular success. So what we do is we bring these capabilities together in a way to make the development process, both the innovativeness of it, the cost of developing a medicine, faster and lower cost. That engenders deep collaboration with our customers and really strong growth. These businesses are top performers and great customer feedback and have a great future. It's played out really well. We're excited by how we partner with our customers.
Staying on the CDMO front.
Sure.
You know, you mentioned the BIOSECURE Act and potential ramifications to WuXi. You've also got the Catalent and Novo deal. So there's a lot of moving pieces in terms of, in terms of the landscape here. How do you see Patheon and Thermo evolving through that? Sort of how do you see the landscape shaken out over the last couple years and will you be a beneficiary, point blank?
Yeah. In the way that I think about it is it's our job to support our customers, right? And the landscape has become more uncertain for our customers, certainly, with an acquisition of one of the more meaningful standalone competitors. And that's where the geography of where you do your production or development now becomes even more important. And being the trusted partner with the set of capabilities that we have, that bodes well for how we can support our customers. And, you know, when I think about sterile fill-finish, which is when you take a biologic or any injectable and put it into its final form, it's an area where we're the market leader. It's an area where we have an incredibly strong reputation. And it's been very tight on capacity.
And it will become tighter on capacity when the Novo acquisition closes and those three sites that Catalent will move to Novo Nordisk. And, you know, we'll be there to support our customers, right? And we, and so we'll do a good job. And that should bode well for the long-term growth of that business.
Okay. It's kind of transitioning to the capital deployment part of things. You consistently generate very strong free cash flow.
Mm-hmm.
And you've in the past had an appetite for both M&A and share buybacks and dividends. You know, you've got Olink, transaction still pending.
Mm-hmm.
Still expected to close later this year. After that, how do you think about capital deployment? Sort of what's the landscape in terms of valuation, seller appetite, regulatory? Just walk us through those moving pieces.
Yeah. So we're looking forward first to finishing the regulatory process in Olink. And we're on track for the middle of the year. When I think about, I'm just excited to welcome the colleagues and have that offering for our customers. When I look at the pipeline, we're continuing to be active in evaluating. Our criteria is unchanged. We're on strengthening the strategic position of our company, a transaction being highly valued by our customers and generating strong returns for our shareholders, reflective of ROICs and IRRs. And so we'll be disciplined, right? We're active. We're looking. If we see transactions that meet our criteria, you'll see us do that. Our industry is large. It's fragmented. So we have a good track record of being able to continue to add through M&A. And I think you'll see us continue to do that methodically over time.
You know, return of capital continues to be a meaningful part of our capital deployment strategy with, you know, roughly 35%-40% of our capital deployment going to return of capital. And this year, we were able to increase our dividend double digits and also buy back $3 billion worth of shares, kind of consistent with the last few years in terms of return of capital.
Yep. And you already closed those buybacks in 1Q.
They're done. Yeah.
We're entering the bottom of the hour, so only got a couple minutes left. I guess I'll just ask to close out on the investor day. You know, you typically hold it sort of late May. You just announced that, it's in September. So first of all, any underlying reason for the shift there? And then kind of follow up to that is that analyst day is usually your opportunity to provide a state of the industry.
Sure.
Which we just talked about, but also to refresh your, your LRP, your long-term plan. So are you are you anticipating doing that in September?
Sure. Yeah. September 19th. Mark it down. Best day of the year, or at least my best day of the year. And, you know, it's a great opportunity to talk about the long term for the company and the prospects. You know, we've largely always done it in May. We've done it in September a few times. The way that we thought about it, and it was a while back, we thought we would have more information about what the end markets are. This conference is not about the short term. It's not about what are you seeing in that moment. It's not about the next year's guidance. It's about the long term. But we felt that having six months behind us in terms of reported numbers would be a better backdrop than just after Q1. So in general, we prefer May.
But this particular year, we thought September would be more valuable to our investors. We'll focus on the long term. We'll probably do a deep dive on our businesses in terms of giving you a little bit more insight about how strong they are, why our customers choose us, and, get you some exposure to the team as well. So I think it's, it'll be an exciting an exciting morning with Thermo Fisher.
Okay. Great. And, I guess the last question. Thermo's very well-known and very well-recognized company. But still, our default question is something along the lines of, what do you feel is most underappreciated or misunderstood? You know, what questions do you keep getting from investors that you wanna try to clarify a little bit?
Yeah. So, so what I would say is for many, many years, our investors didn't have to think twice. Last year, we made our investors think. We don't like doing that. It's not that we want you to actively, you know, you know, think about the investment. But, you know, that was an anomaly that was very painful to us. And we're just fully focused on delivering great results consistently. And that's where we are. I think our shareholders understand that. And we're very confident in the future.
Great. Thanks so much. With that, thank you, everyone.
Thank you, Mike.
Mark, appreciate it.