Thermo Fisher Scientific Inc. Q3 FY2021 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2021 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the Q&A, please follow the operator's instructions. Please be advised that today's conference is being recorded. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the 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 website, thermofisher.com under the heading, News & Events until November 12th, 2021. A copy of the press release of our third quarter 2021 earnings is available in the Investors section of our website under the heading Financials. 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 most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are on file with the SEC and available in the investor section of our website under the heading Financials: 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 will 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, 2021 earnings, and also in the investors section of our website under the heading Financials. So with that, I'll now turn the call over to Marc.

Thanks, Raf. Good morning everyone, and thanks for joining us today for our Third Quarter call. We delivered another outstanding quarter, achieving exceptional financial performance while continuing to effectively execute our growth strategy to make Thermo Fisher Scientific an even stronger partner for our customers. As I reflect on the year so far, three things stand out to me. Our proven growth strategy powered by our PPI Business System is driving outstanding financial performance. Our base business is performing very well and we're playing a leading role in our industry's response to COVID-19. And we continue to build on our trusted partner status with innovative new products and expanded capabilities to further enhance our unique customer value proposition. All of this gives me great confidence and a very bright future as we continue to create sustainable value for all of our stakeholders. I will get into more detail on these in my remarks later. But first, let me recap the financials. Our revenue in Q3 increased to $9.33 billion, growing 9% year-over-year. Our adjusted operating income for the third quarter was $2.78 billion and our adjusted operating margin was 29.8% for the quarter. Finally, we increased adjusted EPS by 2% to $5.76 per share. So another outstanding quarter. Turning to our end markets in Q3, market conditions were strong and our team executed well to deliver another fantastic quarter. Starting with Pharma and Biotech, we continue to have outstanding performance in this end market with growth of just over 20% driven once again by strong market dynamics, our unique customer value proposition, and our leading role in supporting our customers across a wide range of exciting therapeutic areas including our significant role in supporting COVID-19 vaccines and therapies. Our trusted partner status earned over many years with these customers continues to drive robust growth. In this end market, we saw broad-based strength, including in our bioproduction, pharma services, biosciences, chromatography, and mass spectrometry businesses, as well as in the Research and Safety market channel. In academic and government we grew in the mid-single-digits in the quarter with very good growth in biosciences and the Research and Safety market channel. Turning to industrial and applied, we grew in the mid-teens. In Q3, we had particularly strong growth in our electron microscopy business and in the Research and Safety market channel. Finally, in diagnostics and healthcare, we declined 11%. Performance in our base business was strong, driven by immunodiagnostics, clinical diagnostics, and transplant diagnostics. The team also executed very well to support customers' COVID-19 testing needs, delivering $1.55 billion of revenue this quarter versus $1.8 billion in Q3 last year. Before I move on to our growth strategy, let me provide a few comments on our industry-leading role in the pandemic response. In the quarter, we generated $2.05 billion in COVID-19 response-related revenue. With the surge in the Delta variant, we saw strong testing demand around the world in Q3. We also played a very meaningful role in vaccines and therapies for COVID-19, generating just over $500 million in the quarter from these activities. The underlying demand for our product and service offerings used in the production and development of vaccines is very robust and over time, we expect this demand to transition to non-COVID revenue. Our industry-leading response to the pandemic has enabled us to accelerate our growth strategy, strengthen customer relationships, and accelerate investments, which contributed to our ability to raise our long-term core organic growth guidance to 7% to 9% as we communicated at our recent Investor Day. Let me now give you an update on our growth strategy, which consists of three elements: continuously developing high-impact innovative new products, leveraging our scale in high-growth and emerging markets, and delivering a unique value proposition to our customers. Let me provide a few examples of how we're delivering on our growth strategy. Starting with innovation, we launched a number of new products across our businesses to further strengthen our industry leadership and enable our customers to accelerate scientific breakthroughs and make the world a better place. In our genetic sciences business, we launched the Applied Biosystems QuantStudio Absolute Q Digital PCR system. This is the first fully integrated digital PCR system featuring simplified workflows and designed to provide highly accurate results in only 90 minutes. This system will help our customers' innovation efforts in areas like oncology and cell and gene therapy. In chromatography and mass spectrometry, we launched three new Thermo Fisher Scientific TSQ Plus triple quadrupole mass spectrometers to address the growing need for faster throughput and increased sensitivity across a range of applications in biopharma and applied science, including clinical research for large and small molecules, toxicology, food safety and environmental analysis. We also launched the Thermo Scientific Vanquish NEO UHPLC system and the Thermo Scientific Acclaim NEO UHPLC columns designed for use in proteomics, precision medicine, and translational research. Turning to the second pillar of our growth strategy, we continue to leverage our scale to create an outstanding experience for customers and drive high growth in emerging markets. This has contributed to the excellent performance we are delivering across Asia-Pacific, where we delivered growth in the low double-digits during the quarter. We continue to build our presence and capabilities in the region. During the quarter, we opened a bioprocess design center in South Korea. This facility features laboratory and educational space and more than 100 instruments that support pharmaceutical research and manufacturing processes. This center will help our pharma and biotech customers advance their important work. Our performance across the region demonstrates that we're creating a differentiated experience for our customers, and the significant investments we've made in these markets are fueling growth. The third pillar of our growth strategy is our customer value proposition. We continue to increase our capabilities and capacity to be an even better partner for our customers and help them achieve their goals faster and more efficiently. As I mentioned last quarter, we're executing on over $2.5 billion in CapEx this year. Let me give you a brief update on our progress. Building our pharma services capabilities, in Q3 we brought on additional capacity online to support vaccine and therapy production. As part of the previously announced strategic partnership with CSL Limited, we assumed operating responsibility for their new state-of-the-art biologics site. The site will feature highly flexible bioproduction technologies, including single-use and stainless steel, to provide a pathway from development to large-scale production as customers' needs evolve. To support growing demand in the biopharmaceutical industry, we announced plans to open a new bioproduction facility in Nashville, Tennessee to manufacture single-use technologies. The facility will be one of our largest single-use technology sites in the world. In addition to supporting disease research and diagnostic testing, we announced our commitment to co-invest with the U.S. government in building a state-of-the-art facility to manufacture pipette tips. The new facility will be located in North Carolina and designed in line with Thermo Fisher Scientific's carbon neutrality goals. These investments and our customer value proposition demonstrate our commitment to our customers who rely on us as an essential partner in public health. Now, let me give you a brief update on capital deployment. We continue to successfully execute our disciplined strategy for capital deployment, which is a combination of strategic M&A and returning capital to our shareholders. In terms of M&A, we are very excited about the acquisition of PPD. The business is performing well. The regulatory process is on track, and we expect to close by year-end. As a reminder, PPD will establish Thermo Fisher as a leader in the attractive and high-growth clinical research services industry and add highly complementary services for our fastest-growing end market. Integration planning is going very well. Financing is largely complete, and we're looking forward to welcoming our PPD colleagues to Thermo Fisher later this year. Before turning to our guidance, let me update you on the progress we're making on our ESG initiatives. As the world leader in life sciences, we know we have a responsibility to use our industry leadership position to make the world a better place. To that end, we continue to advance our sustainability and social impact initiatives. During the quarter we committed to expand our use of ACT product labeling to include our entire cold storage portfolio by the end of the year. ACT labeling clearly details environmental impact of the product, empowering our customers to make sustainable choices and ultimately helping them achieve their own goals for environmental stewardship. Our 90,000 colleagues are also passionate about the difference they can make. Our local site-based community action councils support a number of charitable and STEM education activities throughout the year. We have amplified our support for these efforts by investing an additional $15 million in our foundation for science. We continue to support historically black colleges and universities to deliver accurate COVID-19 testing to students and staff, helping to ensure campus safety and the ability to confidently deliver in-person learning. With that, I'd like to review our guidance at a high level, and then Stephen will take you through the details. As you saw on our press release, we're raising both our revenue and earnings guidance for the full year. This increase is a result of our strong Q3 operational performance in our base business and the continued strength of our COVID-19 response revenue. We're raising our revenue guidance by $1.2 billion to $37.1 billion, which would result in 15% revenue growth over 2020. In terms of adjusted EPS, we're raising our guidance by $1.30 to $23.37 per share, which represents 20% growth year-over-year. The increase in the 2022 guidance reflects the increased outlook for the core business and adds to the very strong outlook that we shared with you at our Investor Day. We're raising our 2022 full-year revenue guidance by $200 million to $40.5 billion, and increasing our 2022 adjusted EPS guidance by $0.20 to $21.36. To summarize our key takeaways from Q3, we executed very well to continue our growth momentum and deliver excellent revenue and earnings performance. Our business is performing very well and we continue to play a leading role in the pandemic response. We continue to expand our trusted partner status with innovative new products and expanding capabilities to further enhance our customer value proposition. Our exceptional performance through the third quarter enabled us to raise our outlook for the year and sets us up for an even brighter future. With that, I will now hand the call over to our CFO, Stephen Williamson.

Thanks, Marc. And good morning everyone. Before we get into the details of the quarter, I'd like to begin with a quick reminder about the definition of core business. This is a term we introduced at our recent Investor Day. Core includes our base business and the vaccines and therapies response revenue, and of course core will also include the PPD acquisition. So moving on to the details in Q3, it was another excellent quarter. Let me provide a high-level view of how the quarter played out versus our expectations at the time of our last earnings call in July. We had a broad-based beat versus our prior guide. Revenue was $1.2 billion higher, driven by $900 million higher testing response revenue, $250 million higher core business revenue, and $50 million more favorable core foreign exchange. On our last earnings call, our guidance de-risked testing response revenue and we said that if there were any additional opportunities to support customers' testing needs, we'd be ready to do so and flow the benefits through our P&L. That's exactly what we did in Q3, in total delivering $1.55 billion of testing response revenue in the quarter. We also had great strength in the core business. In Q3, the base business organic growth was 10%, which is 3%, or $190 million higher than included in our prior guide. Also in the core, vaccines and therapies response revenue was $60 million higher than in that prior guide, and was $510 million for the quarter. So excellent momentum on the top-line. Our PPI Business System enabled us to generate excellent pull-through on the very strong top-line performance and, at the same time, execute really well on our significant growth investments. As a result, adjusted EPS in Q3 was $1.30 higher than included in our prior guide. The components of that overachievement were $1.00 from testing response revenue, $0.20 from the core business, and $0.10 from FX on the base business. Overall, another excellent quarter. Let me now provide some color on the Q3 performance. Beginning with our Q3 earnings results, as you saw on our press release, our GAAP EPS was $4.79, down 1% from Q3 last year, and we grew adjusted EPS by 2% in the quarter. On the top-line our Q3 reported revenue grew 9% year-over-year. The components of our Q3 reported revenue increase included 7% organic growth, a tailwind of 1% from foreign exchange, and 1% contribution from acquisitions. As I mentioned, the base business organic growth in the quarter was 10%. Looking at our performance by geography during the quarter, North America was flat. Europe grew over 20%, Asia-Pacific grew low double-digits, China grew in the low single-digits and rest of the world declined in the high single-digits. The organic growth rate by geography is skewed by the testing response revenue in the current and prior quarters, as well as the scale of the impact of the pandemic on the base business in the prior year. In total company results, Q3 adjusted operating income decreased 1% and adjusted operating margin was 29.8%, 310 basis points lower than Q3 last year. In the quarter, our PPI Business System enabled us to deliver strong productivity, which was more than offset by unfavorable business mix and the ongoing strategic investments across the businesses, including investments in our colleagues. All of these are being made to support our near- and long-term growth. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 51.4%, 90 basis points lower than Q3 last year. The decrease in gross margin had similar drivers to those I mentioned for adjusted operating margin in the quarter. Adjusted SG&A in the quarter was 17.9% of revenue, an increase of 190 basis points versus Q3 of 2020. Total R&D expense was approximately $350 million representing growth of 19% versus Q3 2020. It reflects our ongoing investments in high-impact innovation to fuel future growth. Looking at our results below the line for the quarter, net interest expense was $190 million, $17 million lower than Q3 last year, largely due to a lower average interest rate on our debt. Adjusted other income and expense had net income of $9 million, a $7 million decline versus Q3 2020, mainly due to changes in non-operating effects. The tax rate in the quarter was 14.2%, down 150 basis points versus Q3 last year due to the benefits of our tax planning initiatives. Average diluted shares were 397 million in Q3, 2 million lower year-over-year, driven by share repurchases net of option dilution. Turning to cash flow and the balance sheet, cash flow performance enabled by our PPI Business System continued to be very strong. Year-to-date cash flow from continuing operations was $6.9 billion, up 38% from the same period last year. Year-to-date free cash flow was $5.2 billion, up 27% from the same period last year, and that's after investing $1.7 billion of net capital expenditure. This reflects the strong returns we're generating in the short-term and investments we're making for the long-term. We returned over $100 million to shareholders through dividends in the quarter, which reflects the 18% dividend increase announced in February. During the quarter we issued $3.1 billion in new debt as part of the pre-financing for the PPD acquisition. We ended Q3 with $12 billion in cash and $21.7 billion in total debt. Leverage ratios at the end of the quarter were 1.6 times gross debt to adjusted EBITDA and 0.7 times on a net debt basis. Concluding my comments on total company performance, adjusted ROIC was 22.3%, up 740 basis points from Q3 last year, as we continue to generate exceptional returns. Now provide some color on the performance for the full business segments. Similar to last quarter, I'll start with some brief thoughts on the impact of COVID-19 response in the segments. From a revenue standpoint, as was the case in past quarters, the majority of our COVID-19 response revenue was recognized in Life Sciences Solutions, with the remainder recognized in our Products and Services, especially diagnostics. From a margin standpoint, the impact of COVID-19 differed 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 across all of our businesses. Those investments do not necessarily align with the COVID-19 response revenue in these segments, and that skews some of the reported segment margins. Moving on to the segment details, starting with Life Sciences Solutions, Q3 reported revenue in this segment increased 9%, and organic growth was 4%. In the quarter, we delivered very strong growth in our bioproduction and biosciences businesses. Q3 adjusted operating income in Life Sciences Solutions decreased 3% and adjusted operating margin was 48.9%, down 600 basis points year-over-year. In the quarter, we saw positive volume leverage, which was more than offset by strategic investments and unfavorable business mix. In the Analytical Instruments segment, reported revenue increased 11% in Q3, and organic growth was 9%. Growth in the segment this quarter was driven by the electron microscopy and chromatography and mass spectrometry businesses. Q3 adjusted operating income in Analytical Instruments increased 54%, and adjusted margin was 17.8%, up 500 basis points year-over-year. During the quarter, we delivered very strong volume pull-through and productivity, which was partially offset by the strategic investments we're making across those segments. In Diagnostics, Q3 reported revenue decreased by 5% and the segment declined organically by 5%. In the quarter, we saw strong growth in our immunodiagnostics, clinical diagnostics, and transplant diagnostic businesses, which was offset by lower COVID-19 testing revenue versus the year-ago quarter. Adjusted operating income decreased 22% in the quarter and adjusted operating margin was 22.7%, down 520 basis points from the prior year. In Q3, the positive productivity enabled by our PPI Business System was more than offset by unfavorable volume mix and strategic investments in the quarter. Finally, in the Lab Products and Services segment, Q3 reported revenue increased 12%, organic growth was 10%. In the quarter, we saw very strong growth in all of our businesses in this segment. Adjusted operating income in the segment increased 8% and adjusted operating margin was 11%, which is 40 basis points lower than the prior year. In the quarter, we drove good volume pull-through and productivity by our PPI Business System, which was more than offset by strategic investments. With that, let me now turn to our updated guidance. As Marc mentioned, we're increasing full-year guidance for both 2021 and 2022. For 2021, we're banking the Q3 beat and maintaining our prior guidance assumptions for Q4. Then for 2022, we're carrying over the base business and vaccines and therapies beat from Q3 '21 into the 2022 full-year numbers. This is enabling a strong beat-and-raise for both years reflecting the continued excellent strength of the business. I will now provide you with more detailed guidance starting with 2021. In terms of revenue, we're raising our full-year 2021 guidance by $1.2 billion to $37.1 billion, and increasing our full-year organic growth outlook from 9% to 12%. That includes an increase in the base business organic growth outlook for the full-year from 12% to 13% and an increase in COVID-19 response revenue for the year from $6.7 billion to $7.7 billion, which represents $5.8 billion of testing response revenue, and $1.9 billion of vaccines and therapies response revenue. As I mentioned previously, there are no changes in the revenue assumptions in Q4 in our revised 2021 guidance. We're continuing the same de-risked approach to guidance for COVID-19 testing response revenue, and continue to assume $450 million of testing-related revenue in Q4. There continue to be a range of outcomes we're considering in the fourth quarter and for 2022. There are scenarios where testing demand could be higher than that included in our guidance. Should that be the case, we will be well-positioned to support customer needs. And as we did in Q3, we will flow the benefits of that through our P&L. But for now, we thought it was prudent to continue to take a conservative approach to the outlook. And as a reminder, there are four fewer selling days in Q4 '21 compared to the same period last year. Incorporating our very strong Q3 performance into the revised 2021 guidance, we now expect that adjusted operating margin for the full-year will be approximately 30.4%, 70 basis points higher than both our prior guide and 2020. In terms of adjusted EPS, by banking the Q3 beat, we are raising our full-year 2021 adjusted EPS guidance by $1.30 to $23.37, which would result in 20% growth over 2020. The revised guidance assumes an adjusted income tax rate of 14.3% in 2021, slightly higher than the prior guide to reflect the marginal tax rate on our increased profitability. The rest of the assumptions underlying the 2021 guidance remain the same. To call out a few of those, we've not included any operational benefit in 2021 for the acquisition of PPD, which is assumed to close at the end of the year. We expect full-year net interest costs to be approximately $510 million. We're assuming net capital expenditures of approximately $2.5 to $2.7 billion and free cash flow of approximately $7 billion in 2021. Our guidance still includes $3.8 billion of capital deployment, which is $2 billion for share buybacks, $1.4 billion for completed M&A, and $400 million of capital returned to shareholders through dividends. We estimate the full-year average diluted share count will be 397 million shares. Now, moving on to the 2022 guidance. As I mentioned, we're carrying over the base business and vaccines and therapies beat from Q3 '21 into the 2022 full-year numbers. In terms of revenue, we're raising our full-year 2022 guidance by $200 million to $40.5 billion. That reflects a $250 million increase in core revenue, offset by a $50 million reduction due to less favorable FX tailwinds for the year. The guidance for 2022 continues to see core organic growth of 8% and $750 million of testing response revenue for the year. In terms of adjusted EPS, we're raising our full-year 2022 guidance by $0.20 to $21.36. As Marc mentioned, the 2022 guidance increase reflects the increased strength of our core business, adding to the already very strong outlook for 2022 that we shared with you at our recent Investor Day. So to conclude, we delivered another excellent quarter and are in a great position to achieve both our 2021 and 2022 goals. With that, I'll turn the call back over to Raf.

Thank you, Stephen. Operator, we're ready to take questions.

Please stand by while we compile the Q&A roster. In order to allow everyone in queue an opportunity to address the Thermo Fisher management team, please limit your time on the call to one question and one follow-up. If you have additional questions, please return to the queue. Our first question comes from the line of Patrick Donnelly of Citi.

Great. Thanks for taking the question, guys. Marc, maybe one for you just on the guidance. Obviously encouraging to see you raise the '22 guidance and to flow through the beat so soon after providing it at the Analyst Day. Can you just talk about not bumping the Q4 number? Obviously, again, the core seemed a bit stronger in Q3, the end-market recovery seems well on its way. I certainly understand keeping the testing conservative. But maybe just on the core business, what kept you guys from flowing through a bit of that strength into Q4?

Patrick, thanks for the question. Good morning. Obviously, really outstanding Q3. When I think about the momentum in the core business going into the fourth quarter, we enter Q4 with very strong performance. As I look at the outlook for Q4, first, we felt it was prudent to keep it the same as we did last quarter. There's nothing particularly deeper about that. We have fewer selling days. So when you look at the base business results, it's very similar. It implies about 9% growth full-year, about 5% reported, and roughly 4 points for the selling days. You saw about 9% growth in Q3, so it's very similar to what you saw in Q3. For the other part of core, which is the vaccines and therapies numbers, those are at similar levels of revenue to what you saw in Q3. So we felt that was a prudent view. On the testing response, we kept the de-risked number. We're obviously going to shift to whatever our customers need and, if you think about how short the true visibility is for testing response, we de-risked at the end of July. By the time we got into August, the Delta variant had created huge demand for testing. So we feel that the $450 million number is one that we have incredibly high likelihood of achieving and we'll obviously scale up if our customers need it. That's how we've thought about it. As we talked about 2022, we carried forward the core revenue beat into the year. And as we sit here, when we give our full-year guidance for 2022 we'll look at the right level of assumptions and make adjustments as appropriate.

That's helpful. Makes sense. And then maybe just a quick follow-up on China. Low single-digit growth that you got a lot of noise in the region there between the tender process and general macro headlines. Can you just expand a bit on what you guys are seeing there? Again, it's always hard to remove a little bit of the comp noise and COVID noise. So would love just your thoughts on China and what you're expecting going forward.

I think the results are explained by the comp effects. We had low single-digit growth this quarter, and in the year-ago period we had an incredibly strong COVID response revenue in China, so that drives the comparison. When I look at bookings, which gives you a sense of new orders, bookings grew about 10% in the quarter, so that activity was good. We have a strong backlog there. Reviewing what's going on with our local team, conditions continue to be good and the government is focused on initiatives that will drive strong long-term growth, focused on the biotech industry and food safety, those kinds of things. So I think China ultimately continues to be a strong growth market for the Company going forward.

Great. Thank you, Marc.

Your next question comes from the line of Tycho Peterson of JPMorgan.

Hey, good morning. Marc, first question on supply chain. I don't think anybody can ignore it's a huge risk for you guys. You obviously can handle these things well, but maybe just give us some color on what's going on on the ground. Like, are you able to pass on higher resin costs? Are there component shortages? Do you have to work down inventory? Just curious on some of the gives and takes around supply chain for you right now.

Tycho, good morning and thanks for the question. Supply chain: if you step back, the world is clearly experiencing supply chain disruptions as the pandemic evolves. The duration and the impact are still to be determined. As I think about our Company, the scale advantages we have and the strong execution capabilities we have because of our PPI Business System are a real competitive advantage. We're well-positioned to navigate these environments better than smaller or less capable companies. In Q3 there was no material impact in our results based on supply chain challenges. The areas where you see impacts are being managed with things like freight and logistics. Delivery times are a little bit slower, and there are electronic component shortages and similar items. We're managing through those things effectively, and I have high confidence in our team's ability to navigate this. I think we'll be talking about this in some fashion across the world and specifically in diagnostics, probably into 2022.

Okay, that's helpful. And then a follow-up on PPD. Last quarter, you talked about the second request from the FTC, and then you cited CMA developments. I know you reiterated timelines to close by year-end, but can you maybe just update us on how that process is going and was the CMA development expected in your view?

Tycho, in terms of PPD, it's going well and on track. We're largely complete with the U.S. FTC process and there are no surprises on the remaining couple of filings, including working with the UK government. Those were all anticipated when we announced the transaction. So that's all progressing well, and we feel confident about our ability to welcome our new colleagues during the fourth quarter to Thermo Fisher Scientific.

Okay. Thank you.

The next question comes from the line of Jack Meehan of Nephron Research.

Thank you. Good morning. Marc, can you give us an update on the durability of the investments that you've been making in testing? I want to stay conservative around the outlook for COVID, but just how are you feeling about the durability on the PCR side? Any updates you can provide around uptake at Mesa? And just a clarification: the M&A in the quarter, was that the contingent payment for Mesa?

Certainly. The M&A in the quarter reflects continued revenue from Mesa. That business is performing well.

In terms of durability, embedded in our outlook from a de-risked perspective for next year is $750 million of COVID testing-related revenue, and we'll refine that when we begin the year and see how things evolve. There are aspects of our response on the testing side that will have some level of durability, but it's a relatively modest number compared to the billions of dollars of COVID-19 PCR tests and sample prep that we provided. Areas that should have some durability include the increased installed base of qPCR instruments and sample prep instruments, which will be repurposed for other testing. We've developed respiratory panels as well, so in the future you'll see some level of physicians testing for COVID, flu, or RSV when patients present with an upper respiratory infection. Customer feedback on the Mesa Biotech technology is very positive. A large customer recently did a head-to-head versus other technologies and the users loved it and are excited about developing a broader menu over time. So those are some of the things that will increase our share of business post-COVID or in a more endemic COVID phase. Relative to the billions of dollars of revenue, it will be a more modest number.

Great. And then my second question is on Analytical Instruments. By my math, the compound growth stepped down from about 4.5% to maybe 3% in the quarter. Just curious how the order book there is shaping up and can you give any color on what the guidance implies for Q4 for that segment?

You can nitpick anything you want. I actually want to step back and look at Analytical Instruments: it was a solid quarter with very strong performance in electron microscopy. We're excited about ASMS and some of our product launches highlighted on the call with the TSQ triple quadrupole and the new UHPLC system. When you look at the details, we saw softness in parts of chemical analysis, where industrial end markets haven't fully recovered. You see great strength in areas like semiconductor materials and life sciences, which shows through across our businesses. So the softness is in some historically core industrial markets where recovery has not fully occurred over the last couple of years. Bookings were strong, which is encouraging for upcoming quarters.

We've seen continued good performance at the business and bookings growth was strong in the quarter. The outlook for Q4 and 2022 looks very positive.

Thank you.

The next question comes from the line of Derik De Bruin of Bank of America.

Hi, good morning. A couple of questions. Just following up on Jack's question: any issues in shipping analytical instruments in the quarter and getting things installed, meaning getting into labs? Logistics remain a challenge. I'm just wondering if Q3 results could be impacted because you couldn't ship some products or get revenues recognized because of the current situation?

Nothing that jumps out at me as significant, Derik. Bookings were stronger and maybe shipping took a day or two longer, but none of our teams indicated lab readiness or shipping delays were a material factor in our deeper reviews. So possibly some timing effects, but nothing that jumped out as material. Bookings being strong is encouraging for the upcoming quarters.

Okay. And Marc, how are you thinking about wage inflation and retention? This particularly relates to PPD. There's a big war for talent in the clinical research associate population, and transitions between CROs tend to create some volatility in headcount. I'm just thinking about your biopharma services segment and how you're dealing with potential disruptions or trying to stem off headwinds there.

When I think about our team at Thermo Fisher, we have a terrific team that has delivered strong results consistently, including through the pandemic. We've been focused on ensuring this is the best place to work. We've rewarded our teams and continue to recognize strong performance through compensation actions and investments in facilities and training. We provide world-class development and training, and that focus has resulted in very strong retention. PPD is a well-run business with a great leadership team, and the business is performing well. There is no disruption to the integration; we're largely lifting and running it as is and over time will develop new solutions for customers. The feedback from the PPD team has been very positive and they're excited about joining Thermo Fisher in the fourth quarter.

If I can squeeze one more on China. How much of your portfolio is manufactured in China that would be subjected to a buy-local push? Just some idea on your manufacturing footprint there, and what's considered inside versus outside China?

We have scale manufacturing facilities in China for the China market, and we also import products into the market. If there's no local alternative, products are often imported. If there are local alternatives, they often come from our Chinese operations or other low-cost regions. That's the general way to think about it. We're well-positioned to support Chinese customers, and in areas where customers want a high degree of supply chain assuredness, such as single-use technologies, we built a very large facility in Suzhou to meet those needs.

Thank you.

You're welcome.

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

Morning, guys. Thanks for taking the questions. Marc, two questions: one on Biopharma and one on funding if I can. On Biopharma, I'm curious what you expect for year-end spending levels. Obviously plenty of nuances in that segment. Do you feel like it's more or less likely to be similar to what we've seen in non-pandemic years?

Good morning. In terms of pharma and biotech, the business performed very well with over 20% growth in the quarter. For year-end spending, we use the convention we use every year: we assume an average year-end spend across our customer base because we don't get full visibility until right after Thanksgiving. That convention has served us well; most years it's been average or above average. That's how we think about it.

And then on the ARPA-like funding dynamic, which you've usually got a pretty decent line of sight into, as we head into next year, do you have a view on the budget and how it might be allocated? Are you hearing anything about the ARPA-like funding and whether it would be accessible to basic researchers? Just any color appreciated.

It's not clear yet. The ARPA-like concept is an important idea for the U.S.; it's analogous to defense spending in that it prepares for future challenges by investing in technologies to anticipate future threats rather than just addressing known ones. I think longer-term funding that prepares for the next pandemic or other future challenges is fantastic and will spur great research. How it will be allocated exactly, I haven't seen the details yet, but other countries are discussing similar vehicles. This is one reason we're excited about future scientific funding and we are well-positioned to serve that.

Okay, I appreciate that. Thanks, Marc.

You're welcome.

Your next question comes from the line of Vijay Kumar for Evercore.

Hey guys, congrats on a nice quarter and thanks for taking my question. Marc, maybe one on the fiscal 2022 guidance being up a couple hundred million; looks like the base came up by $250 million. I'm curious where the strength is coming from. Would you say that's coming from Biopharma across the board? Or what is driving that base improvement?

Vijay, good morning. As we thought about 2022, we saw strength across the Company in Q3 and flowed that into the next year. We saw very strong performance in pharma and biotech, which is a large driver, but we also saw performance across different parts of our business. So the uplift reflects the portfolio of activities in the core business.

Just to clarify that more: the base now includes vaccine contribution, but what you're saying is this is across the board and not just vaccine outlook improvement, correct?

To clarify, the $250 million increase in the core for next year includes approximately $190 million from the base and $60 million more from vaccines and therapies. The combination of those is the $250 million for the core, with a slight offset from less favorable FX tailwinds.

That's helpful, Steve. And then one quick one on the tax side. How should we think about any potential tax reform changes' impact to Thermo?

The guidance we've given does not assume any significant U.S. tax reform or other tax reform across the world. We continue to monitor the dynamics in Washington closely and advocate for changes to be done thoughtfully to avoid unintended consequences. We expect our competitive position to remain strong through any reasonable changes.

Thank you, guys.

Your next question comes from the line of Dan Brennan.

Great. Thanks for taking the question, Marc. It's hard to find anything negative to point out. First question is on bioproduction. Maybe I missed it in the prepared remarks. Can you discuss what the base growth did this quarter, excluding the COVID contribution, and what's implied in Q4 and 2022? Any color on trends there would be helpful.

In bioproduction, the business is extremely robust and doing very well. At the biopharma and pharmaceutical level we had a little over 20% growth in the quarter, with $510 million of vaccine and therapy revenue. We saw very strong growth excluding the contribution from vaccines and therapies as well. We would expect bioproduction to continue to be very strong and to deliver meaningful growth in 2022. Customer demand is good, interest in our clinical trial, packaging and logistics capabilities is strong, and we are well-positioned to capitalize on this demand. One thing investors may not fully appreciate: upon close of PPD we'll have about $20 billion of revenue serving pharmaceutical and biotech, and roughly half of that serves production. We have the largest position serving the production market by far, and attractive positions in clinical trials and research activities as well. So we're well-positioned to deliver great growth into the future.

Great. Thanks for that. Then a quick follow-up on Analyst Day guidance: obviously the 7% to 9% growth outlook was stronger than many expected. Historically Thermo has set a conservative bar and executed well. Should we think about the 7% to 9% similarly as conservative, and can you help us think through the drivers or details of that guidance?

That made me smile. The philosophy behind 7% to 9% is the same philosophy we've used historically: we set targets we have confidence in and that we can deliver, based on demonstrated capability. We have great confidence in our ability to deliver 7% to 9% growth. We won't cap ourselves at that range; we'll continue to focus on delivering as much as we can and set appropriate annual targets as we evaluate end-market strength and share gains. We felt 7% to 9% was an appropriate number we have high confidence in delivering, with the goal of achieving the best possible performance over time.

Thank you.

Your next question comes from the line of Puneet Souda of Leerink.

Thanks, Marc. First, a clarification: the 5 to 11 year-old vaccinations were recommended by a panel yesterday. Is that already contemplated in this guidance? I know that was a later event, so likely not, but I wanted to confirm. And also on boosters, is that contemplated in Q4 and increased for vaccines in 2022?

When we build our outlook for vaccines and therapies, it's based on dialogue with customers and the orders they give us. It's less about specific policy events and more about the activity our customers are signaling through orders. That said, factors like approvals for 5 to 11 year-olds, booster recommendations, and mandates all add to the durability of demand for vaccines and therapies. We're largely operating with our capacity, so short-term swings based on new pronouncements tend to flow through over time. That's how we thought about it.

Great. Thanks. Last question: on capacity expansion, could you provide a view into the need for further capacity expansion in bioproduction at this point? You've opened the Switzerland biologics site and have other expansions. Overall just wondering what you're hearing from biotherapeutics customers in terms of demand and any need to further expand capacity post-COVID.

In general, we have the in-flight activities needed to meet anticipated demand. We're completing many projects during 2022, with some extending into 2023. We've been aggressive to position ourselves to meet customers' future needs. If specific new opportunities arise that align with our long-term roadmap, we'll evaluate them, but there's not a long list of further immediate expansions beyond what we've already committed to. The commitments we've made put us in a great spot.

Great, thank you.

Thanks everyone for participating. With a strong nine months behind us, we're in a great position to achieve another excellent year. As always, thank you for your support of Thermo Fisher Scientific and we look forward to updating you early in 2022. Thanks everyone.

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