Hey, everyone. Good morning. I'm Tejas Sawant. I cover life sciences here at Morgan Stanley. Before we kick it off, for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures, and if you have any questions, do reach out to your sales rep, so it's my pleasure today to host Thermo Fisher, and from the company, we have Chairman, President, and CEO, Marc Casper, so Marc, welcome again to Morgan Stanley.
Great to be here. Thanks, Tejas, for having us.
Of course. Maybe, just to kick things off, it's been a very dynamic environment over the last few years for the life sciences. It'd be great to just, you know, kick off the conversation by discussing the evolution of your end market so far in 2024. What trends are you seeing, and how is Thermo delivering differentiated performance?
Yeah. So, as we sit here, in early September, and I think back to how 2024 has played out, the first point is, it's played out in line with our expectations in terms of the market, right? So we, we came through a period of really significant volatility in 2023, where visibility wasn't strong, and that was really an outlier, right? Because in our industry, usually visibility is pretty good, and 2024, you know, really has been playing out the way we expected, and, you know, as each quarter has passed, the end markets are slowly improving, so sequentially, they keep getting better.
And the team at Thermo Fisher has done a good job of driving market share gain, delivering differentiated performance, and really proud of the fact that we were able to raise our guidance, twice during the course of the year. And we feel, really good about the outlook in terms of what we talked about back in July and in terms of what we plan on delivering for 2024.
Perfect. Let's switch to end market, starting with pharma and biotech. So about 60% of your revenue comes from this end market. Thermo is a very good pulse on customer demand for consumables, instruments, and services. Can you just remind us on your performance serving this end market in the first half of the year?
Yeah. So when I think about the role that we play in the pharmaceutical and biotech industry, you know, we play an extraordinarily large role, and we talk about it as the trusted partner. And what that really means is that we're working every day with the leadership all the way to the bench scientist down to the manufacturing floor, up to the head of manufacturing, in terms of enabling the success of the industry. When I look at performance in the end market, first in aggregate this year, it too is playing out the way that we thought it would play out. So we will have a decline of low single digits.
That's driven by a mid-single-digit headwind- of the runoff of vaccine and therapy revenue. So when you kind of do the math together, it basically means that we're going to get slow growth, in the market when you net out the impact of COVID. And when I look at the subsegments, you're definitely seeing biotech pick up, right.
In terms of, the segment that had been most affected by, funding challenges in 2023, and you're seeing, you know, the end of last year, early this year, some of the funding improve. You're seeing, the pipeline of clinical research improving. We saw authorizations pick up in clinical research, and you're seeing that activity level build, which is encouraging. And then on the pharma side, which is the larger of the two, in terms of the revenue contribution, you know, I, I would say that there was certainly, you know, the adjustments made to the IRA over the last couple of years. I feel like that's fully embedded in, in the pipelines and the decision-making at the companies.
You're seeing what I would say is a more normal distribution, company-specific, where you have a couple companies that the world is extraordinarily good, and you have a couple companies that are restructuring and, you know, setting up for the future, and many companies in between. We're quite bullish on what the outlook is in the midterm for pharma, the pharmaceutical sector.
Got it. So just a quick follow-up there. You know, recently there was commentary from one of the large preclinical CROs around a shift in pharma, especially on the large cap side in June and July. Have you seen that sort of bubble up in your conversations with these customers on IRA, patent cliff, or some other concern?
Yeah, when I think about the random data point that happens in our industry, right? When you think about our 60% of our revenue, you know, that's, you know, what, $25 billion of revenue, and then you get a company that is, you know, whatever, one-tenth of our size, less than that, and then they make a comment, and you really can extrapolate nothing from the comment. You know, activity feels reasonable, right?
So in terms of the activity in clinical research, it feels fine. Sometimes, you know, I see that, and we've had that with other small companies. A small bioproduction company has a good quarter, a bad quarter, and I'm like: well, that's... You know, that shift is, did we have one sales rep have a good month or not? Like, it's, it's irrelevant data points, but, but for investors, it's important data points. I don't minimize that, but I feel good about the health of the end market.
Got it. Switching to academic and government, that's about, you know, 15% of your revenue, Marc. What are you seeing playing out over here? And you can talk about the funding dynamics unfolding around the world, driven by some of the macro challenges, you know, the flattish NIH budget here, you know, some Horizon cuts due to defense expenditures being prioritized over in Europe?
Yeah, so, so when I think about academic government, 15% of our revenue. If you take a very long perspective, low- to mid-single-digit growth end market, right? In terms of what the funding cycle is, around the world. What drives the shorter-term funding is often how good is your innovation, right? And you'll be able to deliver, you know, low single-digit growth in the last quarter, serving this end market because our mass spectrometry launches have just been amazing, right? And customers are able to get funds for awesome technology, right? And electron microscopy has done well. So we've been able to deliver growth in a more moderate period of time.
So when I think about it, I think long term, those markets are really driven by, you know, the curiosity around what you can unlock with science, and I feel reasonable about those, the outlook there.
Got it. Switching to industrial and applied, that's another 15%. How is this portion of the business trending so far in 2024? And can you remind us how to think about your cyclical exposure here?
Yeah. So Tejas, as I look at industrial and applied, it's the end market that has evolved a lot for the company over the last decade, right? So, you know, it used to represent more than 30% of our revenue. Today, it's around 13% of our revenue, and the mix within that has also changed as we've grown. So we have less cyclical exposure in aggregate and less cyclical exposure within industrial and applied. That's driven by the strength of our competitive position in electron microscopy, where we enable the next generation of semiconductors, and we enable new technologies and material science for battery and clean energy, which have had really very strong demand. When you look at that end market, it grew in low single digits in the second quarter.
It's been flat in the first half in aggregate. And, you know, what I would say is that that typically is a market that would grow, you know, around the company average.
Got it. Let's dig into a few of your businesses now, starting with analytical instruments. We've seen mixed performance here from industry participants in this area, including, you know, pricing pressure and more flexible selling models. How is your business trending this year? And can you remind us of the visibility that you typically have in the AI segment and what your long-term expectations are?
Yes, so Tejas, when I think about our analytical instruments, you know, as the leading instrument company, right, we have incredibly strong positions in electron microscopy, in mass spectrometry, chromatography, and that has allowed us to deliver really differentiated performance. When I look at our results in the first half, we grew about 1%.
And that's against a pretty challenging comparison in the previous year because we cleared a lot of our supply chain disruptions that came from the pandemic. So hard comparison, we're able to deliver, you know, modest growth, and that clearly was very differentiated versus the peer set, and I feel that the relevance of the technologies that we have has seen strong adoption. One of the big drivers of the instruments business, because no one gets too excited about 1%, certainly we don't, is China demand which has been weak across the economy, you know, and you see that in the different sectors. So we were able, despite sort of the headwinds of China, be able to grow the business. And certainly stimulus in China will help over time in terms of picking up demand and instrumentation.
Got it. Switching to bioproduction, you know, another area where we've heard a little bit of mixed messaging from industry participants. Would be great to just understand how your bioproduction business has held up in 2024. What's the latest on customer demand? And can you talk about the stocking dynamics in this area as well, and then the long-term outlook?
Yeah. So, Tejas, maybe I start with the long term and then zoom into the short term. So when I think about the competitive position that we have, we are the industry leader in cell culture media. We are the industry leader in single-use technologies. We have a rapidly growing in scale and importance in terms of our purification business, right? And we don't play in filtration, right?
So the four segments, that's the first context. If I take a long historical view, kind of pre-pandemic, any of those dynamics out, that's a business that, you know, 15%-20% growth pretty consistently often above that, right?
So that's sort of how to think about the previous decade. Oversized growth in the pandemic for the industry, for us, just given so many programs were run to see whether molecules would work against the pandemic. And so you had a lot of panic buying, too. So you had that combination of really robust growth, and then you've seen the unwind of the pandemic over the last couple of years, right? And so when you put that all in context, the long term is awesome here, right? This is a business that, you know, is a, you know, a strong double-digit growth business. We have incredibly strong positions, right? And I feel very positive about that. In twenty twenty-four, it's actually played out as we expected, and in fact, the business is doing well relative to competition. When I look at the second quarter results, you saw orders continue to grow sequentially.
You also saw your orders grow year over year. You're seeing revenue improve sequentially, and when I think about discussions around customer inventories and those things, I think that's largely behind us. I don't know about others, but that's largely behind us, and I feel like we're getting into the, you know, as customers are consuming, they're buying replenishment, and we're winning new molecules. So I feel good about what the outlook is, and ultimately, that should be a nice tailwind in the coming quarters.
Got it. Clinical research, can you just remind us how PPD has been doing, and perhaps discuss how clinical authorizations are trending?
Yeah, so when I think about our clinical research business, we're almost at the three-year anniversary of the acquisition of PPD. Spectacular, right? The business has been a tremendous addition to the portfolio. And when you look at that business, the things that matter is turnover rate of colleagues, customer feedback, and the key performance metrics on how you're actually delivering the clinical studies. And we have industry-leading turnover rates, meaning on the low side. We have incredibly strong operational performance, and the customer feedback has been tremendous, right? So the context is, it's been a great addition to our portfolio, and we've been able to grow that business meaningfully. As we had a huge growth over the last few years, we said this year would be a year where comparisons would be challenging.
We also had a very large role in supporting the pandemic-related studies as well. We had core growth and pandemic-related growth being very strong, and the business actually performed a little better than what we've expected. We actually have delivered mid-single-digit growth through the first half of the year. Authorizations picked up really nicely in the second quarter. For our investors, when you win an authorization, really, you're seeing revenue a couple of years later, right? You see some activity right away, but it takes a while for the activity to be material. But that's a really good sign because it means that funding is coming back into the clinical research area.
Got it. Quick follow-up there. How is pricing holding up in the CRO market, you know, particularly from the smaller players? If the weakness, you know, flagged by, you know, some of the preclinical vendors bleeds over into clinical research, could we see some incremental deterioration in the pricing environment, do you think?
Yeah. When I think about our competitive position and what the dynamics are, you always have to be competitive on price, but at the end of the day, what customers want to know is that they're picking the best partner to deliver effectively, "My company is gonna be successful or not successful.
Right.
Right? So, we didn't see anything new in pricing. You know, there's a certain... You have to deliver the work for a certain value, but the dynamic has been stable, and I think the industry leaders really don't sell on price, they sell on capability.
Fair enough. The final business I wanna discuss is pharma services. So just any color and recent performance? And can you also comment on any, you know, share shifts in the landscape or incremental capacity investments for your CDMO business because of, you know, BIOSECURE or similar legislation, or even some of the pending M&A that's coming up here? Although, you know, the company, the CDMO, involved in that sort of situation also did call out, I think it was record new business wins in their most recent quarter.
Yeah. So from a contextual standpoint, we have, you know, a leading set of capabilities in the, you know, development and manufacturing, parts of the value chain. We do drug substance, small molecule, large molecule, and advanced therapies, drug products for those as well. And we are by far the largest clinical trial supply in managing the physical aspects of a clinical trial, for the industry. So very comprehensive set of capabilities.
When I look at the dynamic first, you have changes in the industry that really do favor, our competitive position, right? And our network is, you know, entirely in the West. And with BioSecure, there's a real premium on having, a network in places where you don't have geopolitical challenges. And when you think about one of the players being acquired by an innovator, you have capacity coming out of the market as well. And that has certainly created a pause in many customers to say: "Do I ever want to take that risk where my molecule might now be owned by a competitor?
We've seen a real pickup in demand and interest in our business. We are the largest sterile fill finish CDMO in the world, and probably the largest you know in terms of production of sterile fill finished products in the world. What that means is you take the drug prod-- drug substance, you put it into the final form for dosing in a patient, and demand there has been very robust. When I think about the business this year, we have the large COVID runoff this year, so it's a business that declined slightly in the first half, and we've been building our book of business, and you know, it's performing as we'd expected. That's a business that will have tailwinds going forward.
Got it. Follow up there, what can you do today to prepare the company to fully benefit from these dynamics, right? And perhaps even shorten your time to commercial production, start-up times in a new line or site, without committing to a fixed cost outlay, you know, ahead of those concrete orders coming in.
Yeah. So one of the things that, when we look at our business, you have capacity, you know, to make reasonable returns on investment in a CDMO. You need to run fairly well utilized.
Right? And if you overbuild, you wind up, because you have to have a great quality system, trained employees, depreciating assets, you wind up with lots of pressures. So, we don't invest in a speculative way, right? We invest to tie to long-term commitments from our customers. And there are two types of investments, right? There are... You have to expand buildings, quite expensive, or add lines more affordable.
A nd in things like sterile fill finish, we've ordered a number of lines because we know that we can bring them online when we want. So we have the capacity available without a big economic commitment. And so I think we're well served to support the demand in the industry for the next few years.
Got it. Switching to China, you know, major topic this year. It'll be helpful to just get an understanding from you on how the business is progressing in the region. You just came back from a business trip as well there, so it'd be great to just have your input on what you learned.
Yeah. So, you know, I was in China for a week, about 10 days ago. And had the opportunity to see quite a number of customers, at their sites, at dinners, and just different venues. Meet with two of the leaders of the provincial governments that I was at, and lots of interactions with our colleagues. So if I take the external lens first, and, and my first sort of very clear takeaway is, we have an incredibly strong competitive position in China and, and very well respected, right? So when you, when you get down to the practical level of the relationships we have with our customers, the importance we have in the local, in the provinces, we're incredibly well positioned to serve the market long term.
Right? So, that's not new news to me, having worked in China for twenty-plus years, but it was good to see it firsthand from the most senior levels of customers and government. When I look at the short term, right, now, it's more so what were my observations and discussions. Economy is very challenged, right? That's nothing profound there, but you can see it in the different levels of activity. You know, our expectation is China was gonna be a muted short-term environment. That's how the year has played out. There is a stimulus program. We have lots of activity in terms of helping customers effectively meet and take advantage of the stimulus money. That will have some effect towards the end of this year, a bigger effect on growth in 2025. But yet the market continues to be muted in terms of the end market.
Got it. So, you know, just on that point, on the stimulus market, a lot of focus around, you know, is this just conversations, or are you starting to see orders c oming in as well? How long would the lag be for, you know, top line sort of uplift in China on the other side of that order bullet?
Yeah, so it's a multi-year program. Right. So that's the first thing. So it's not... There was a stimulus, like, I think it was a couple of years ago now. It was relatively short. It was just kind of like a nine-month program that sort of, you know, had an impact for six months. It was articulated that way, right? So it was articulated as a sort of a short-term boost. We sold a lot of instruments, and this one is more of giving the customer base confidence that they're gonna be able to access funding for important programs going forward. So that's a good thing in terms of, academic and government demand.
When I look at what the practical is, you go out, you articulate with your customers, you know, what's exciting? What are we working on that's relevant to them? What's their priorities? They go and request funding from the central government. They get some matching funds from the provincial government, this administration with that.
And it starts with the leading universities, and then it works its way down the system. We would expect. So we've had a huge amount of activity. We would expect some orders in the second half of this year, some revenue in the second half of this year, with a lot of momentum going into 2025. But it's not as if it's one and done, right? It's this first wave, and then customers will apply again for the next year and, and so forth.
Got it. And then just any sense from your meetings in China around the geopolitical temperature, if you will?
Yeah.
What can a company like Thermo do to best prepare to navigate those cross currents?
Yeah. I spent two years as the Chair of the US-China Business Council, right? And now I have the greatest title in the world, Chair Emeritus of the US-China Business Council. Not even a smile out of the group today. It was a lot of stressful work. And the purpose was to help find the win-wins for the two countries, right? There's many challenges and many tensions, but there are opportunities where cooperation is actually in the beneficial interest of both countries, right? And, and that's where we spent our time. The tone, and which is, and I do have optimism for China. The tone is friendly towards foreign business, right? They, they are absolutely looking for investment. They are looking for employment. We have seven thousand colleagues that work in China for the company.
They're excited to be part of the company and build out the future. So there's lots of tensions. There are areas that you can't do business. There'll be flare-ups for sure, but the two countries are so intertwined on supply chains that finding the path to collaboration where relevant is important, and our company plays a role in that, and we'll continue to support the economy from that perspective and create good jobs here in the U.S.
Got it. So speaking of, you know, politics closer to home, you have an election coming up. A few different things in our mind. You've got the IRA, sort of drug pricing negotiations, the Chinese relationship, tax rates, and then obviously, you know, what happens with the antitrust landscape and that framework. Are there any others on your mind? Perhaps even more important, you know, the election outcome is ultimately an exogenous variable, right? What, if anything, can you do to prepare Thermo for either outcome in November?
Yeah, so when I think about our role is to help our customers navigate whatever environment they face and to support whichever administration a new administration is in place at the U.S. And we always work closely with the U.S. government, so whichever party wins, we will be there to support those initiatives and help our customers navigate it. And, you know, when I think about our role in helping, you know, innovation in the pharmaceutical and biotech industry, we're gonna play a big role no matter which administration is in place, and we'll navigate whatever the world throws at us.
Fair enough. Artificial intelligence, big theme, you know, for the last couple of years now. Can you just share a couple of specific examples where, you know, you're deploying it at Thermo today, and are you seeing sort of tangible benefit on either the top line or productivity?
It's awesome. Amazing, right? In terms of the impact that it's having. Right, the way that, you know, our company operates, right, is around a business system called Practical Process Improvement. It's been in place since 2002. Incredibly ingrained. It does two things: one, it creates the culture that every colleague owns in the success of the company, and we all are expected to find a better way every day, right? So that there is no complacency in the company. And the adoption of AI has been, you know, aggressively adopted long even before generative AI which is more of a newer trend, but we've used it in product development for a number of years in terms of how we develop our products.
And if I think about some of the really interesting examples from a customer service perspective, the ability to have what I call the super agent, human in terms of the agent, but just the ability to have knowledge right to that phone call or right to that chat, it's incredible in terms of what it's enabling. And, one of our senior executives and I, this is how you spend a Saturday morning, we were putting in our own internal system, hypothetical questions on how to fix a qPCR instrument, and the two of us would be lucky if we could identify the instrument.
Literally, we posed questions, we knew what the right answer was to the question, and we got the right answer. I mean, it's unbelievable in terms of if you do the prompts right with our internal systems, the amount of knowledge, so it's making us a lot more productive. Administrative costs will come down, and ultimately, it'll be a meaningful contributor to our margin expansion goals in the years ahead.
Fair enough. I want to switch to the financials a little bit.
Sure.
I've had a bunch of inbounds on just how to think about market growth and your financial performance in 2025. Any preliminary thoughts that you can share with us in terms of how to think about next year?
Yeah. So let me segregate it into two different things, right? What's the long-term market growth, and then how do I think about twenty twenty-five, right?
So when I think about the long term, right, and I relax the particular year, you know, this industry, you know, you know, for us, is a 4-6% market growth industry. And if you take the different periods and you take this five-year period that we've been in for a minute and clear from your memory, and you look back over a very long period of time, there's nothing surprising about the 4-6. If you look at the, you know, the period that we've been in, you had two years of extraordinary growth in the industry. For us, it was 25% organic growth and 17% organic growth.
And then you've had, you know, a year of decline and a year of, you know, flatish, right? So you sort of, you know, when you get through that. But underlying, the trends are actually encouraging, and I feel very good because of the enduring drivers of this industry, that the long-term growth is four to six, and for us, that four to six translates to seven to nine. So then you say, "All right, what about twenty twenty-five? Where are we?"
If you think about this year, you know, our market will decline in low single digits, actually in terms of what it is, and, we'll grow roughly three points better than what the market outlook is. First half, a decline, second half, slight growth in terms of the end market. So we'll have an exit rate that's better than what we saw, you know, in the first half of the year. And nobody's smart enough to know at this point what 2025 end market will be.
And what we decided to do, as we've done in most years, is we're just gonna wait till January w hen we have the benefit of the year-end close, and we'll make our assumptions about what the market is, and then what our share gain on top of that is, and that will set the guidance for the year, but I feel like we're well positioned this year in terms of how we're performing to deliver on our commitments.
Got it. So you've got an Investor Day coming up on September 19. Can you just provide us with a quick sort of sneak preview on what you're likely to cover? And also, in terms of just the financial communication around the targets, is it fair to assume that you'll be discussing your financial targets similar to last year, or take a different approach?
Yeah. So awesome day coming up, September nineteenth. So, register, listen online, whatever is most convenient. But we're gonna do a few things. We're gonna dive deeper into our leading businesses, right? Our individual segments are really bigger than almost any other player in the industry, so we want to dive deeper to talk about our competitive position and why we're so excited about where we are.
And then we're gonna dive deep into our growth strategy, about the power of our innovation, the trusted partner status that we have built with our customers over decades, and the unparalleled commercial engine, how that's underpinned by our PPI business system. And then we'll talk about our financial outlook, and just as we did last year, we will reiterate the long-term financial formula for the company and explain that. I don't think there will be any surprises, right, in terms of how we think about the world. We feel good about our competitive position and the ability to deliver great top-line growth, margin expansion, and ultimately translate that into strong EPS growth.
Got it. Fair enough. One quick follow-up on that. You know, as it relates to just anchoring your targets to a specific time horizon or your EPS growth algo, one of the questions we've gotten is, just given the rate environment, would you provide that EPS growth algo on an organic basis instead, and M&A would then be upside to that target?
Yeah. We've done different things in the past, and usually you can just kind of back into the numbers about what the operating income growth is, for the company, and then you can make your own assumptions on the mix of capital deployment. And we've given the, you know, the target splits, if you will, between return of capital, which is typically between 25% and 40%, and M&A, which is 60%-75% of our deployment of capital.
You can make your own assumptions about rates and so forth. I think the one thing that, you know, we generate competitive advantage in many ways. One of the really interesting ones that is not as obvious is our borrowing cost is really lower than anybody else's. Our ability to access the global markets in terms of where we raise debt when we're doing M&A is super attractive in terms of how we're able to do that.
Got it. Fair enough. Capital deployment, you know, you've done several acquisitions over the last few years. Most recently, you closed on Olink in July. Can you just provide some insights on your deal funnel, focusing on the number of targets you're looking at, the size of those targets, and what's your latest take on the regulatory environment and how that fits into, you know, your M&A criteria?
Yeah, I'm excited about the closing of the Olink acquisition. Just an incredible complement to our position in serving the proteomics marketplace. We're active in terms of our funnel. This is an environment where in a modest growth environment a lot of the smaller players, they may not be small companies, but smaller relative to us, are having a rough road of it. And M&A is an option, and so we're exploring a number of interesting ideas. And you know, you never know what actually gets over the finish line, but I like the environment. I like the environment because we're a company that's been in business for over a hundred years. We think about the very long term while delivering excellent short-term performance, and that gives us the ability to be opportunistic on timing. We'll keep looking and figuring out what the right thing is for Thermo Fisher.
Got it. Perfect. This was a great conversation, Marc, so thank you so much for joining us this morning.
Thanks for having me.
Appreciate it.