Thermo Fisher Scientific Inc. Q3 FY2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2020 Third Quarter Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. The operator provided instructions. I would now like to turn the conference over to your moderator today, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin your call.

Good morning and thank you for joining us. On the call with me today is Marc Casper, our Chairman, President, and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note, this call is being webcast live and will be archived on the Investors Section of our web site thermofisher.com, under the heading Webcasts and Presentations until November 6, 2020. A copy of the press release of our third quarter 2020 earnings is available in the Investors Section of our web site under the heading Financial Results. So, before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10-Q for the quarter ended June 27, 2020, under the caption Risk Factors, which is also on file with the Securities and Exchange Commission, and is also available in the Investors section of our web site under the heading SEC filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during this call, we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2020 earnings, and also in the Investors section of our web site under the heading Financial Information. So, with that, I'll turn the call over to Marc.

Thanks, Ken, and good morning everyone. Thank you for joining us today for our 2020 third quarter call. As you saw in our press release, we delivered exceptional performance again in Q3 as we continue to build on the significant progress we made last quarter. I continue to be humbled by the incredible efforts of our team as they answer the call to help our customers and society manage through this unprecedented time. Not only did they expand our leading role in supporting the global COVID-19 response, but they also effectively managed through this environment to return our base business to growth. The work we're doing today is clearly having a profound impact on the world, and for that we can be very proud. But it's important to note that our efforts are also strengthening Thermo Fisher for the future, and making us a more valuable partner for our customers. I see many positive trends from this period that will increase our contributions to healthcare. A few examples that I referenced during our recent analyst meeting are worth repeating. We're seeing much greater collaboration among industry and governments globally. Funding for research, diagnostics, and development of therapies and vaccines will increase to prepare for future health threats. We'll see more focus on supply chain security and the building of national stockpiles as well, and all of this has put a significant spotlight on the need for a stronger commitment to improving healthcare systems globally. We're already seeing the impact of these trends on our business, and I'll give you a number of examples later in my remarks, but first, I'll review our financial performance and give you some color on what we're seeing in our end markets. From a financial perspective, in Q3, we continue to work with speed at scale to support our customers, generating approximately $2 billion of COVID-19-related revenue in the quarter. At the same time, our teams did excellent work to grow our base business. This led to exceptional performance across all of our key financial metrics. Our reported revenue increased 36% in Q3 year-over-year to $8.52 billion. Adjusted operating income grew 97% to $2.80 billion. Our adjusted operating margin increased to 32.9%, and we grew our adjusted EPS by 91% to $5.63 per share in the quarter. We're continuing to manage the company appropriately in a very fluid environment, exercising the cost discipline that you'd expect from us, while investing significantly in new products, services, and capabilities that will create value over the longer term. Turning to our end markets, our performance was a combination of our significant pandemic response and the return to growth in our base business. Starting with pharma and biotech, the largest of our four end markets, we delivered an excellent Q3, growing 20%. We've performed very well in this end market for many years, and we further accelerated our growth by helping these customers to ramp up development of COVID-19 therapies and vaccines. The combination of strong market fundamentals and pandemic-related activities led to strength across all of the businesses servicing this end market, particularly bioproduction, pharma services, biosciences, and our research and safety market channel. In academic and government we grew in the low single digits in Q3. We captured opportunities as more of these customers returned to work and their research activities increased. Turning to industrial and applied, while we declined in the low single digits during the quarter, we saw a meaningful sequential improvement from Q2. Last, in diagnostics and healthcare, we had an incredible quarter, delivering 130% growth. While we continue to see the impact of a lower level of routine doctor visits and related testing, demand did improve from Q2 levels and our COVID-related testing revenue grew significantly during the quarter. We saw the benefits of these dynamics across our Life Sciences Solutions and Specialty Diagnostics businesses. As you know, our involvement here includes providing both proprietary COVID-19 diagnostic test kits as well as reagents used for laboratory-developed tests, along with sample collection products and instrumentation. So, in summary, our teams put forth an amazing effort in Q3, not only increasing our response to the pandemic but also returning our base business to growth. The combination resulted in performance that positions us to deliver our best year yet. Turning to our business highlights for the quarter, as you know, we continue to increase our capabilities so we can be the best partner for our customers and strengthen our competitive position. In Q3, we worked with speed at scale to address the critical needs brought on by the pandemic, while making great progress in executing our growth strategy across our businesses. Let me cover a few of the highlights. In terms of our pandemic response, we continue to expand our role as a trusted partner for industry and governments around the world. It's important to note that while this has clearly driven exceptional growth for us so far this year, much of what we're putting in place now will create sustainable value longer term. First, as you know, we have the leading position in providing COVID-19 diagnostic test kits given our gold standard PCR-based tests and our industry-leading install base of instruments, and we continue to expand our presence by bringing new solutions to the market that help the medical community ramp up testing capacity, and enable society's return to work and school. In September, we launched a new highly automated solution called Amplitude that helps laboratories quickly scale up to meet testing volumes. This platform is based on our TaqPath combo kit and the QuantStudio 7 PCR instruments, and has the highest sample throughput in the industry. We're seeing strong demand for this innovative solution, and we've already completed installation at several customer sites. We also recently introduced two new Thermo Scientific antibody tests. Our OmniPath ELISA test received emergency use authorization from FDA for the qualitative detection of total antibodies, and our new EliA test is now available to run on our Phadia 250 instrument so customers can tap into the extensive install base worldwide. Both tests can be used in the U.S. as well as Europe and other countries accepting the CE mark. As I reflect on the long term, we're now recognized by our customers as a scale player in infectious disease testing. We've significantly increased our install base of sample preparation and PCR instruments over the last nine months, and that will create new opportunities for us going forward. Another example of sustainable value is that we continue to ramp up production of supplies that are essential to the testing process, such as liquid handling plastics and the specialized viral transport media used in sample collection. We highlighted the opening of our new viral transport media facility in Kansas last quarter, and in Q3, we announced plans to further expand our global capacity by building a new facility in Scotland to support the European market. We're also significantly expanding capacity for our lab plastics to meet surging demand which will put us in a great position long term as well. An important point that I want to make here is that our PPI business system is a key advantage in our ability to scale our operations quickly and cost-effectively to meet our customers' needs and drive growth. One more example of sustainable value creation is our support of new therapies and vaccines. We're significantly adding capacity across our biosciences, bioproduction, and pharma services businesses, creating an infrastructure that will position us incredibly well for the future. In our biosciences business, we're significantly investing in our global capacity to increase the manufacturing of enzymes and nucleotides used in vaccines. In pharma services, last week we announced our partnership with the Economic Development Board of Singapore to expand our sterile fill-finish capacity by building our first facility there. Once operational in 2022, the facility will include the only high-speed filling line for live viruses in Singapore and help meet the demand across the Asia-Pacific region. This is another great example of how we're working quickly with governments to help them respond effectively to health emergencies in the future. In addition to government-funded projects, including our BARDA project to increase capacity in the U.S. that we highlighted last quarter, we've committed more than $700 million in capital expenditures to add global capacity to meet COVID-related demand. In summary, all of this work is clearly essential to helping our customers navigate the pandemic, and it's also giving us new capabilities and capacity that will be repurposed to meet future demand for vaccines and therapies. While our COVID-19 response contributed significantly to our performance, we are also continuing to make great progress in executing our growth strategy across the business. I'll give you just a few highlights from the quarter. In terms of innovation, we launched a number of significant new products in Q3. Let me pick a couple to highlight, one from our electron microscopy business and one from bioproduction. Our new Thermo Scientific Selectris X Imaging Filters are breakthrough advances in cryo-EM for structural biology applications. These new filters allow scientists to view protein structures in unprecedented detail and in less time than what was previously possible. This will not only accelerate research but also accelerate the adoption of cryo-EM. Another new product is our Thermo Scientific POROS Oligo resin which is used to purify and isolate mRNA for the development of vaccines and therapies. As mRNA production accelerates, the needs of highly scalable purification technology will be critical. In emerging markets our leading scale continues to be an advantage for us, and we are expanding our presence to meet customer demand. During the quarter we celebrated the grand opening of a new factory in Suzhou, China, for our single-use bioproduction technologies. As you know, we already have a well-established lab products operation in Suzhou, and this expansion is our first bioproduction facility in the Asia-Pacific region, which will help meet increasing demand there for biologics. Our teams in China have effectively managed through the pandemic while positioning the business for growth, and we were pleased to deliver 18% growth in China in Q3. The last part I want to highlight around the progress we are making across our business is tied to our unique value proposition. Our customers recognize that we stepped up in a major way to help them navigate the challenging environment and that's creating new opportunities to build on our already strong relationships. This is very evident in pharma and biotech as you know, and now increasingly so with healthcare and diagnostic customers as well. During this time, the advantage of our leading scale and depth of capabilities has never been more evident, and this will lead to share gain opportunities longer term. Before I turn to our guidance, I'll make a quick comment on capital deployment. As you know, our capital deployment strategy is a combination of returning capital through buybacks and dividends and strategic M&A. In terms of our view on M&A, we continue to have an active deal pipeline. We have a very strong balance sheet, and as always, we'll apply a disciplined and quiet approach to opportunities that meet our criteria for creating shareholder value. Turning to our guidance, there has obviously been a tremendous effort in supporting the COVID-19 response this year, and we've also executed well to grow our base business. This combination led to extraordinary growth and performance in Q3, and we expect that to continue into Q4. With that context, we expect to grow full-year 2020 revenue by 20% to approximately $30.5 billion, and we expect to grow our full-year 2020 adjusted EPS by 48% to $18.27 per share. Stephen will give you more of the details, but clearly, we are on track to achieve our truly spectacular year. Before I turn the call over to Stephen, let me leave you with a couple of takeaways. We continue to expand our leading role in responding to the pandemic, and we are having a profound impact on society. We are executing very well to capture new opportunities, gain market share, and drive growth across our businesses. Our efforts this year are significantly strengthening our company and positioning us very well for the long term. With that, I'll now hand the call over to our CFO, Stephen Williamson.

Thanks, Marc, and good morning everyone. I'll begin with a high-level summary of our Q3 performance. As Marc mentioned, we have another exceptional quarter and grew organically 34%. I'll break this down into two elements. The first is the scale of our COVID-19 response revenue that we generated during the quarter, and the second is the performance of the base business. Our COVID-19 response revenue in the third quarter was $2 billion and contributed 31% to growth; largely driven by testing related products and instruments. Our base business excluding the COVID-19 revenue grew organically 3%. We are very pleased to deliver a 13-point improvement from Q2 driven by higher customer activity levels and great commercial execution. The 34% organic growth for the quarter was higher than our recent analyst meeting update, as we continue to have robust demand for testing, and the potential risks around the level of customer activity did not materialize. Our PPI business system enabled excellent pull-through on the 34% organic growth; a combination of fixed cost leverage and operating with speed at scale enabled us to deliver 91% growth in adjusted earnings per share on the quarter, a truly exceptional result. I'll now provide more details on our third quarter results then provide some color on our four segments and conclude with some comments around guidance. Starting with our Q3 earnings results, as I mentioned we grew adjusted EPS by 91% to $5.63. GAAP EPS in the quarter was $4.84 up 157% from Q3 last year. On the top line, our Q3 reported revenue grew 36% year-over-year. The components of our Q3 reported revenue growth included 34% organic growth, a foreign exchange tailwind of 1% and 1% growth from acquisitions. Turning to our growth by geography during the quarter, North America grew 40%, Europe grew 25%, Asia Pacific grew just under 20% as China and the rest of the world grew 65%. Looking at our operational performance, Q3 adjusted operating income increased 97% and adjusted operating margin was 32.9%, 10 percentage points higher than Q3 last year. In the quarter, our PPI business system enabled us to drive exceptional volume leverage and strong productivity, and we had a favorable business mix. At the same time, we continue to make some significant strategic investments across the businesses. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 52.3%, up 620 basis points from Q3 of the prior year. The increase in gross margin had similar drivers to those I just mentioned for our adjusted operating margin. Adjusted SG&A in the quarter was 16% of revenue, a decrease of 350 basis points versus Q3 2019 reflecting the very strong volume leverage. Total R&D expense was $296 million, 20% higher than Q3 2019 and R&D as a percent of our manufacturing revenue in Q3 was 5.2%. Looking at our results below the line for the quarter, net interest expense was $135 million, $24 million higher than Q3 last year, primarily due to increased debt levels. Adjusted other income and expense in the quarter was approximately $2 million, $24 million lower than Q3 2019, mainly due to changes in non-operating foreign exchange. Our adjusted tax rate in the quarter was 15.7%. This is up 450 basis points versus Q3 last year due to the substantial increase in pre-tax profit year-over-year coming in at our marginal tax rates. Average diluted shares were 399 million in Q3 about 5 million lower year-over-year driven by the net impact of share repurchases and option dilution. Turning to cash flow and the balance sheet, cash flow was another great highlight for the quarter. Our PPI business system is enabling us to deliver great cash pull-through on the very strong top-line performance. For the first nine months, cash flow from continuing operations was $5 billion and free cash flow was $4.1 billion after deducting net capital expenditures of approximately $900 million. We returned approximately $90 million to shareholders through dividends in the quarter, and we ended Q3 with approximately $7.5 billion in cash and $21.1 billion of total debt. Our leverage ratio at the end of the quarter was 2.5 times gross debt to adjusted EBITDA and 1.6 times on a net basis. Concluding my comments on our total company performance, adjusted ROIC was 14.9%, up 330 basis points from Q3 last year, as we continue to generate a very strong return. Now to provide some color on the performance of our four business segments, similar to last quarter, I'll start with some framing thoughts around the impact COVID-19 response had on the segment results. From a revenue standpoint in Q3, the majority of the COVID-19 response revenue is reflected in Life Sciences Solutions. This is revenue from testing kits, instruments, sample preparation and reagents for lab developed tests recognized in the genetic sciences and biosciences businesses. It also includes revenue from therapy and vaccine production supplies recognized in the bioproduction business. The Specialty Diagnostics segment includes revenue in the clinical diagnostics business from the molecular controls that go into testing kits. We also recognized revenue for viral transport media in the microbiology business and for tests and PP&E in the healthcare market channel. Laboratory Products and Services segment includes revenue for therapy and vaccine support in the biopharma services business. The segment also includes revenue for PPE in the research safety market channel as well as plastics used in testing workflows and cold storage equipment manufactured by the lab products business. So, a lot of detail to take in, but I think it really demonstrates the breadth of our societal response to the pandemic. From a margin standpoint, the impact of COVID-19 was varied across the segments, based on the scale of the response revenue, and the different levels of profitability on that revenue. In addition, during the quarter, we continue to make strategic investments in our businesses, even though we're not benefiting from COVID-19 response revenue in some areas. This included investments in our colleagues in terms of incentive compensation recognition, as well as commercial R&D and production capability investments. We are able to do this given the strength of the company's overall performance. The size of these investments does not necessarily align with COVID-19 response revenue in each segment, so that skews some of the reported segment margins. So, a lot of moving parts from a segment margin standpoint; it reflects the very active management of the company, successfully navigating the current environment and positioning the company for an even brighter future. Moving on to segment details, starting with Life Sciences Solutions, in Q3, reported revenue increased 101%, and organic revenue growth was 100%. We saw exceptionally strong growth in our genetic sciences and biosciences businesses, as well as very strong growth in our bioproduction business. In Q3, adjusted operating income in Life Sciences Solutions increased 221%, and adjusted operating margin was 54.9%, up 20 percentage points year-over-year. In the quarter, we drove very strong volume pull-through and favorable business mix and continued to make strategic investments across the businesses in the segment. The Analytical Instruments segment reported a revenue decrease of 2% in Q3, and an organic revenue decline of 3%. An increased level of customer activity and good commercial execution led to a 20 percentage point sequential improvement in the business performance from Q2, and chromatography and mass spectrometry businesses returned to growth in the quarter. Q3 adjusted operating income in Analytical Instruments decreased 45% and adjusted operating margin was 12.8%, down 10 percentage points year-over-year. Eight percentage points of this change was due to a $100 million one-time accounting charge that we took in Q3 for a loss on a supply contract in our electron microscopy business. This was triggered by the very successful launch of our new Thermo Scientific Selectris imaging filter. The remainder of the margin reduction in the quarter was driven by business mix, lower volumes and strategic investments, partially offset by strong productivity. Turning to the Specialty Diagnostics segment, in Q3 reported revenue increased by 63%, organic revenue growth was 62%. COVID-19 response revenue was significant in the quarter, enabling us to deliver very strong growth in our microbiology, healthcare market channel and clinical diagnostics businesses. The pandemic continues to impact routine diagnostic testing activity, and this is most pronounced in our immunodiagnostics and transplant diagnostics businesses in the quarter. However, it was encouraging to see a substantial pickup in activity from Q2. Adjusted operating income increased 79% and adjusted operating margin was 27.9%, up 260 basis points from the prior year. In the quarter we saw a very strong volume leverage partially offset by negative business mix and strategic investments. Finally in Laboratory Products and Services segment, Q3 reported revenue increased 19%. Organic revenue growth was 16%. In the quarter we saw strong growth in our research and safety market channel, pharma services and laboratory products businesses. Adjusted operating income in the segment for Q3 increased 17%, and adjusted operating margin was 11.4%, 20 basis points lower than prior year. In the quarter, the segment drove strong productivity and volume leverage, but this was more than offset by unfavorable business mix and strategic investments that I mentioned earlier. So with that, now let me turn to guidance. I'll provide you a current view for both organic revenue growth and adjusted EPS for the fourth quarter and for the full-year 2020. I'll also provide an update on certain full-year 2020 assumptions to help you with your modeling. I'll start with organic growth. Our current estimate for Q4 organic growth is 29%. That's driven by an expected $1.75 billion of COVID-19 response revenue and organic growth in the base business of low-to-mid single digits. The impact of the pandemic continues to evolve, and as a result, a range of potential outcomes both above and below the 29% could play out in Q4. From a capacity standpoint, should customer demand be above the 29% level, we're well positioned to support our customers as we did in Q3. In terms of adjusted earnings per share, we expect considerable volume leverage from the 29% organic growth in Q4. At that level of growth, we expect to deliver approximately 60% year-over-year growth in adjusted earnings per share in Q4. A few additional points of color on this outlook: similar to prior quarters, the volume of testing undertaken by our customers will be the most significant factor determining the extent of our COVID-19 response revenue in Q4. The outlook also includes a continued ramp in the support of therapies and vaccines. Regarding the base business growth, this assumes similar levels of activity to Q3, and the benefit of the two extra days being offset by slightly weaker year-end spend than in Q4 2019, given the current environment. That seems like a reasonable assumption to start the quarter with and we are well-positioned to assist customers should funding availability be higher. The outlook does not anticipate a return to the lockdown seen at the height of the pandemic earlier in the year. Supporting all of this in a full-year context, our current estimate for 2020 revenue is $30.52 billion, which would represent 20% growth over 2019 including 19% organic growth. In terms of adjusted earnings per share, our current estimate for the full-year 2020 is $18.27, which represents 48% growth over 2019. We're on track for a truly spectacular year. I will now move on to an update of some of the additional modeling elements for the full-year. With regards to FX in 2020, we're now assuming that we'll have a negligible impact on revenue based on current FX rates. We expect net interest cost for the year to be approximately $490 million. We're assuming that adjusted other net income will be about $50 million for the year and we expect the full-year adjusted income tax rate to be 14.2%. Net capital expenditures are now expected to be approximately $1.5 billion. This includes $400 million of CapEx to support our COVID-19 response in 2020. We continue to execute on growth related CapEx opportunities particularly in our pharma services and bioproduction businesses. These have short- and long-term benefits and provide very strong returns on investment. In terms of capital deployments, we completed the $1.5 billion share buyback in Q1 and are assuming no further buybacks in the remainder of 2020. We're also continuing to assume that we're returning approximately $350 million of capital to shareholders this year through dividends, and we estimate that the full-year average diluted share count will be between 398 million and 400 million shares. So, to wrap up, as you can see from our exceptional performance in Q3, we continue to manage the company extremely effectively, strengthen our leadership in responding to the global pandemic, and position ourselves to deliver a spectacular year. With that, I'll turn the call back over to Ken.

Thanks, Stephen. Operator, we're ready to open it up for Q&A.

The operator provided instructions for the question-and-answer session.

Hi, good morning. Congrats on the quarter, certainly impressive. Marc, I want to start with the LPS strength, 16% organic. I'm just wondering if you could provide a little bit of color on how much of this is vaccine ramp versus recovery and non-COVID-related trial work, was there any kind of catch-up benefit here in the quarter from stuff in Q2, and how do you think about sustaining this level and ramping on the LPS side and into Q4 and 2021?

Thanks, Tycho. Good morning. In terms of our Lab Products & Services businesses, all three of the businesses performed in the quarter: pharma services and our CDMO activities, our customer channels group, and our lab products business. We saw activity ramp up, as we did for the whole company, on normal business activity in the quarter, and at the same time, there were three distinct COVID-related elements embedded in those numbers. Clearly, the vaccine and therapy ramp-up is happening, and you see that in our pharma services business. You're also seeing very significant demand in our customer channels business for things like PPE as well as supplies used for COVID response. In our lab products business, we have very strong demand for our lab plastics as well as our cold storage equipment. We're a market leader in providing cold storage for laboratory use, and given the cold storage needs across the vaccine supply chain we're getting very significant demand for those products. The base is very good, and on top of that you're seeing the benefits of these pandemic-related activities.

Great, and then a follow-up just on the plastic side, curious on your views on the durability of that non-automated PCR business which had driven a lot of strength in the first half of the year, and then with Amplitude, I'm just wondering if you could talk a little bit about positioning there. Obviously it's got the highest throughput, as you noted. Is the traction you're seeing now from academic labs, are you seeing interest from reference labs or hospitals, can you just talk about how you think about both the durability of PCR testing, and then Amplitude as well. Thanks.

Tycho, in terms of the demand for our PCR testing, it continues to be very strong. PCR provides gold standard performance in terms of accuracy. We have the largest install base of instruments around the world and we've supplied our customers reliably through the pandemic. We have built our capacity ahead of demand consistently, and customers know they can rely on us. Amplitude is an ultra-high throughput system, over 6,000 tests per day, and we're seeing very large demand. We've seen that demand from governments, reference labs, and hospital systems. It is a niche application but drives enormous volumes because of its throughput, so those labs and governments that are providing high-volume testing find it valuable. In terms of durability, we believe PCR testing will continue to be very relevant to our customers because it gives the most accurate information, and therefore we're comfortable with strong demand in the fourth quarter and into 2021 because the pandemic remains a significant issue.

Okay, thank you.

Thank you, guys, and congrats, Marc, you guys are setting a new bar trying to beat that pre-announced revenue, that's really impressive. Maybe on just the Q4 guidance there, I guess we were looking $1.6 billion of COVID tailwinds for Q3 that's coming in north of $2 billion here for Q3, so when you look at the guidance for Q4 of $1.75 billion, I'm just curious if some of the tailwinds got pulled forward to Q3, and when you look at the base guidance of low- to mid-single digits maybe it looks like a lot of it is being driven by biopharma. Maybe comment on industrial and academic environment heading into Q4.

Vijay, thanks. In terms of Q4 guidance, the base business assumption is similar or a little better than Q3, and we assumed year-end spend is softer than last year; that is a conservative assumption because December visibility is limited. If funding is stronger, we're positioned to support higher demand. Regarding the $1.75 billion estimate for COVID response revenue in Q4, we see very strong demand now for testing and a continued build in our vaccine and therapy support. We have better visibility for October and November than for December, so the $1.75 billion is a conservative midpoint based on current visibility. I wouldn't over-read the exact dollar difference versus Q3; it's primarily about visibility and timing.

That's extremely helpful, Marc, and just one follow-up on, I guess, at the analyst day you made a comment about contract work on vaccines being about a billion, any update on that number?

Yes. In terms of our role for vaccines and therapeutics, we said over the balance of this year, 2021, and 2022 it's about $1 billion, and that number continues to grow, so I'd call it $1 billion-plus at this point. We're active in a significant number of projects, over 250 projects on therapies and vaccines. Our role is broad: not just pharma services, but bioproduction and biosciences as well. This is contributing to our revenue and will contribute more as the fourth quarter and next year progress.

Thank you, guys.

Hi, good morning, and thanks for the time here. I wanted to ask one on academic, just looking to unpack a little bit of the commentary in the prepared remarks, and then one very quick follow-up on Amplitude and the broader testing landscape. My question on academic is two-part. One, we all watch the headlines about what's going on with universities. I wonder if you could give your perspective on research labs within universities and broader research opening up here as we progress through the back half of the year. To what extent is that reopening contingent upon broader university reopening, and then to your point on funding, Marc, is that more of a medium-term versus near-term perspective on funding given all the unknowns right now in the U.S., China and Europe?

Steve, thanks. In terms of academic and government, it's good to see the return to growth. More customers returned to work and ramped up research activities; this happened globally at different paces. The funding environment I'm referring to is the medium term: there's renewed interest globally in infectious disease, and governments and institutions are likely to increase funding for research and preparation for future health threats. Short-term, we're seeing interest from governments, and academic institutions are somewhat impacted by their own economic situations which can be a headwind, but historically academic has been a low- to mid-single-digit growth market, and it's good to see we're back to low-single-digit growth there.

Super clear. The follow-up: building on the commentary around Amplitude, it seems to make a lot of sense not just for higher-acuity testing but for screening, which should be interesting. How do you think the market for testing, PCR more broadly, evolves toward screening over the next year and beyond, given you have a unique perspective on all sides of the market? Thanks again.

Steve, in terms of the role of testing, managing a pandemic is around social distancing, mask-wearing, good hygiene, and testing is a valuable supplemental tool. We're seeing more demand for testing to support return-to-life activities like work and school. Amplitude can support both medical applications and screening because it provides very high throughput and rapid results, and PCR offers extreme accuracy versus some other technologies, which will make it valuable for many applications. Other technologies may play a role where rapid screening at lower accuracy is acceptable, but PCR's accuracy is often required for critical applications.

Your next question comes from the line of Derik de Bruin from Bank of America.

Hi, great. Thank you, and good morning. Can you give us a little bit more color on the split in the quarter on testing, PPE and bioproduction — how that $2 billion broke down — and then I have a follow-up.

Derik, good morning. The majority of the $2 billion is testing related. Within testing, the single largest piece is our proprietary TaqPath PCR kits, but we also had significant revenue from instrumentation and lab-developed tests, and substantial sample prep products. Our viral transport media business also grew very rapidly in Q3 and was a meaningful contributor; it's part of specimen collection and transport and we announced a new facility in Scotland to support Europe. PPE was a smaller portion relative to testing; volumes remain high but prices have come down from the peak. The fastest-growing area is our broad role in vaccines and therapies. That includes bioproduction supplies — cell culture media, single-use technologies, purification resins — and our biosciences business with enzymes and nucleotides. It also includes our pharma services business, such as sterile fill-finish and drug substance capacity. We're well-positioned across these needs and are seeing strong and growing demand.

Right, and just one quick follow-up: you talked about your analytical instrumentation business essentially roughly flat — are you dealing with back orders from the first half of the year, or are you seeing new orders for LC-MS? And as an appendix, what's your PCR base instrument install base up year-over-year, if you can give a sense?

Orders are growing faster than revenue in the analytical instruments business, so we're building backlog due to stronger bookings. That sequential improvement versus Q2 reflects increasing customer activity, particularly in life sciences mass spec and chromatography, which returned to growth in the quarter. Areas that are more economically sensitive, like chemical analysis, are improving but lagging life sciences. Regarding the PCR install base, we're shipping in a quarter roughly what we would normally ship in a year — that gives you the sense of magnitude of the ramp.

Thank you.

Your next question comes from the line of Doug Schenkel from Cowen.

Good morning, everybody. Thanks for taking our questions. Marc, during the Analyst Day last month, you commented in response to a question that COVID-19 tailwinds could be lower, about the same, or higher on a year-over-year basis in 2021. Do you have any updated thoughts on this given higher-than-expected COVID-19 contributions in Q3 and what you're seeing on the bioproduction side? And building off that longer term beyond 2021, do you think the investments you're making to support COVID-19 demand today and in 2021 will lead to at least stable levels of revenue in these product categories even when the pandemic abates?

Doug, great questions. On the short-term direction, I can't be definitive on up, down or flat for 2021, but what we're seeing is encouraging. Bioproduction, pharma services, and biosciences are all building and demand is stronger than it was several weeks ago. These are longer-cycle activities, so they will step up over time but require clinical progress and approvals. The more weeks we live with the pandemic, the more durable testing demand becomes; cases rising in Europe and other regions add to that durability view. Regarding the longer-term investments — we're committing significant capital, roughly $700 million-plus, and doing it rapidly. Most of the capacity and capabilities we're building can be repurposed to non-pandemic markets long term. For example, fill-finish lines, bioproduction capacity, and bioscience enzyme/nucleotide capacity can support broader biologics and vaccine needs beyond COVID-19. We've already seen customer commitments that indicate they will use this expanded capacity for other products when demand shifts. So, we believe these investments create sustainable value even after the pandemic.

Okay, and I'll leave it there and let others ask questions. Thank you very much.

Your next question comes from the line of Steve Willoughby from Cleveland Research.

Hi, good morning. Two questions. One, following up on prior commentary: you said you are assuming a weaker year-end spending environment within the guidance, but you also noted customer activity is picking up and orders are growing faster than revenue. Can you provide any color on how those two observations fit together? And second, can you comment on the bioprocessing business overall and what you saw in terms of growth and order levels there?

The comment about picking up versus Q2 relates to sequential improvement; we saw that in Q3. For Q4 guidance, we assumed similar aggregate customer activity to Q3, with a conservative assumption around potentially softer year-end spend. If year-end funding is higher, we are positioned to support the demand. The sequential pickup in orders and bookings reflects improving customer activity while December visibility remains limited.

Steve, another way to frame it is that many customers are focused on operational and health priorities now, and direct conversations about year-end budgets are less common. So we set a conservative starting assumption for year-end spend, but we can scale if customers have available funding. Regarding bioprocessing: growth is very strong, stronger than our historical performance, and orders are significantly stronger than revenue, indicating robust backlog and demand. We play a major role broadly across therapies and vaccines and are seeing very strong demand for our capabilities.

Your next question comes from the line of Dan Arias from Stifel.

Good morning, guys. Thank you. Marc, maybe a follow-up on bioproduction: can you comment on visibility in terms of products and services when it comes to non-COVID work? Are companies balancing COVID and non-COVID project loads such that timing might be more uncertain than normal, or does it look steady from where you sit?

It seems pretty steady. Manufacturing across the industry has been able to produce medicines and progress development despite the pandemic. We haven't seen COVID-related disruptions in biotech and pharma manufacturing. There can be some diversion of short-term resources, but overall new quotations, development work, and clinical trial activity remain very high. Any impact to non-COVID projects is likely small relative to overall activity.

Appreciate that. Stephen, can I touch on Patheon briefly and the margin mix within LPS? The Patheon margin was about 17% at acquisition. With the current volume environment, do you expect that business to increasingly contribute to LPS segment profitability as utilization improves?

We've made great progress with margins in that business, and as we drive more utilization of capacity it will be very strong for the segment margin profile going forward.

Thanks Dan. Operator, we're going to take just one more question.

Your final question comes from the line of Jack Meehan from Nephron Research.

Thank you. Good morning. Marc, I was hoping you could comment a little bit more on the R&D investment. It's my favorite data point in the press release. Where are you over-indexing some of the incremental spend? Are you pulling forward projects or digging deeper in the pipeline, and is there a way to think about the payback on some of this incremental spend? How long should that take?

Thanks, Jack. R&D spend was up about 20% in the quarter. We're investing substantially, primarily by adding talent and accelerating work on key areas where demand has been softer so we can position for strong long-term growth. This mirrors our playbook from the financial crisis when we increased R&D investment to rebound quickly. Returns will show up over the next couple of years as these investments drive product and capability improvements. Let me wrap up with a couple of things. We are certainly proud of our role in helping our customers and society during this time. We are going to continue to manage the company appropriately to come out of this period an even stronger industry leader. We look forward to updating you on our progress at year-end. I hope that you stay safe, and as always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.

This concludes today's conference call. You may now disconnect.