Thermo Fisher Scientific Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2021

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 20 21 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 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.

Operator

Mr. Tejada, you may begin the call.

Speaker 1

Good morning and thank you for joining us. On the call with me today is Mark 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 and Events until November 12, 2021. A copy of the press release of our Q3 2021 earnings is available in the Investors section of our website 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 ks and subsequent quarterly reports On Form 10Q, which are on file with the SEC and available in the Investors 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.

Speaker 1

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 It's available in the press release of our Q3 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 Mark.

Speaker 2

Thanks, Rob. Good morning, everyone, and thanks for joining us today for our Q3 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 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.

Speaker 2

All of this gives me great confidence in 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 $9,330,000,000 Growing 9% year over year. Our adjusted operating income for the 3rd quarter was $2,780,000,000 And our adjusted operating margin was 29.8 percent for the quarter. Finally, we increased adjusted EPS by 2% to $5.76 per share, so another outstanding quarter.

Speaker 2

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-nineteen 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.

Speaker 2

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-nineteen testing needs, Delivering $1,550,000,000 of revenue this quarter versus $1,800,000,000 in Q3 last year.

Speaker 2

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 $500,000,000 in COVID-nineteen 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-nineteen generating just over $500,000,000 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.

Speaker 2

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 Continuously developing high impact innovative new products, leveraging our scale in the 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 In our genetic sciences business, we launched the Applied Biosystems' QuantStudio Absolute Q Digital PCR System. This is the 1st fully integrated digital PCR system featuring simplified workflows and designed to provide highly accurate results in only 90 minutes. This system will help advance our customers' innovation efforts in areas like oncology and cell and gene therapy.

Speaker 2

In chromatography and mass spectrometry, we launched 3 new Thermo Scientific TSP Plus Triple Quadruple Mass Spectrometers to address the growing need for faster throughput and increased sensitivity across a range of applications in biopharma and applied settings, including clinical research for large and small molecules, toxicology, food safety and environmental analysis. We also launched the Thermo Scientific Vanquish Neo PLC System and the Thermo Scientific PEP MAP Neo PLC 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 in the high growth and 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

Speaker 3

the quarter. We

Speaker 2

continue to build on 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.

Speaker 2

The 3rd pillar of our growth strategy is our customer value proposition, and we continue to increase our capabilities and capacity to be an even better partner for our customers to help them achieve their goals faster and more efficiently. As I mentioned last quarter, we're executing on over $2,500,000,000 in CapEx this year. Let me give you a brief update on our progress. Building on our pharma services capabilities in Q3, we brought additional capacity online to support vaccine and therapy production. And as part of the previously announced strategic partnership with CSL Limited, we assumed Operating responsibility for our new state of the art biologic site in Langnow, Switzerland.

Speaker 2

This 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 SQT sites in the world. In addition to support disease research and Diagnostic testing, we announced our commitment to co invest with the U. S.

Speaker 2

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 in our value proposition demonstrate our commitment to our customers who rely on us as an essential partner in network.

Speaker 3

Now let me give you

Speaker 2

a brief update on capital deployment. We continue to successfully execute our disciplined strategy for capital deployment, which is a combination of strategic M and A and returning Capital to our shareholders. In terms of M and A, we are super excited for our acquisition of PPD. The business is performing well. The regulatory process is on track and we expect to close by year end.

Speaker 2

As a reminder, PPD will establish Thermo Fisher for our fastest growing end market. Integration planning is going very well, financing is largely complete, and we're looking forward to welcoming our PPT colleagues to Thermo Fisher later this year. Before turning to our guidance, let me update you on our progress we're making on our ESG initiatives. As the world leader in serving science, we know we have a responsibility to use our industry leadership position to make the world a better place. And to that end, we continue to advance our sustainability and social impact initiatives.

Speaker 2

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 the 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 and our local site based community action councils support a number Charitable and STEM education activities throughout the year. We have amplified our support of these efforts By investing an additional $15,000,000 in our foundation for science. And we continue to support the historically black colleges and universities to deliver accurate COVID-nineteen testing to students and staff, helping to ensure campus safety and the ability to confidently deliver in person learning.

Speaker 2

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 in our press release, We are 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 And the continued strength of our COVID-nineteen response revenue. We are raising our revenue guidance by $1,200,000,000 to $37,100,000,000 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.

Speaker 2

The 2022 guidance raise 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 are raising our 2022 full year revenue guidance by $200,000,000 to $40,500,000,000 and increasing our 2022 adjusted EPS guidance by $0.20 to $21.36 So 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 expanded capabilities to further enhance our customer value proposition. And our exceptional performance through the Q3 enabled us to raise our outlook for the year and sets us up for an even brighter future.

Speaker 2

With that, I will now hand the call over

Speaker 3

to our CFO, Stephen Williamson. Stephen? Thanks, Mark, 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.

Speaker 3

Core includes our base business and the Vaccines and Therapies response revenue and post close it will also include the PPD acquisition. So moving on to the details of 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 the prior guide. Revenue was $1,200,000,000 higher driven by $900,000,000 Higher testing response revenue, dollars 250,000,000 higher core business revenue and $50,000,000 more favorable core FX.

Speaker 3

On our last earnings call, our guidance derisked testing response revenue, and we said that if there were any additional opportunities to support customers' testing needs, We'll be ready to do so and flow the benefits through our P and L. That's exactly what we did in Q3, in total delivering $1,550,000,000 of testing response Revenue in the quarter. You also had a great strength in the core business. In Q3, the base business organic growth was 10%, which is 3% or $190,000,000 higher than included in our prior guide. Also in the core, Vaccines and Therapies response revenue was $60,000,000 higher than in that prior guide and was $510,000,000 for the quarter.

Speaker 3

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. And as a result, adjusted EPS in Q3 was $1.30 higher than included in our prior guide. And the components of these overachievements are $1 from testing response revenue, dollars 0.20 from the core business and $0.10 from FX on the base business. Overall, another excellent quarter.

Speaker 3

Let me now provide some color on the Q3 performance. Beginning with our Q3 earnings results, as saw in our press release, we grew adjusted EPS by 2% to $5.76 GAAP EPS in the quarter was 4 dollars 1.79 down 1% from Q3 last year. 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%.

Speaker 3

Turning to 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 rates by GEO are skewed by the 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. Turning to our operational performance, 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, is more than offset by unfavorable business mix and the ongoing strategic investments across our businesses, including investments in our colleagues. All of these are being made to support our near and long term growth.

Speaker 3

Moving on to the details of the P and 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 has similar drivers to those I just mentioned for our adjusted operating margin in the quarter. Adjusted SG and A in the quarter was 17.9 percent of revenue, an increase of 190 basis points versus Q3 2020. Total R and D expense was approximately $350,000,000 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, our net interest expense was $119,000,000 $17,000,000 lower than Q3 last year, largely due to lower average interest rates on our debt.

Speaker 3

Adjusted other income and expense was net income in the quarter of $9,000,000 $7,000,000 higher than Q3 2020, mainly due to changes in non operating Thanks. Adjusted 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 397,000,000 in Q3, $2,000,000 lower year over year driven by the 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.

Speaker 3

Year to date cash flow from continuing operations was $6,900,000,000 up 38% from the same period last year. Year to date free cash flow was $5,200,000,000 up 27% from the same period last year, That's after investing $1,700,000,000 of net capital expenditure. This reflects the strong returns we are generating in the short term and investments we're making for the long term. We returned over $100,000,000 to shareholders through dividends in the quarter. This reflects the 18% dividend increase we announced in February.

Speaker 3

And during the quarter, we issued $3,100,000,000 in new debt as part of the pre financing for the We ended Q3 with $12,000,000,000 in cash and $21,700,000,000 of total debt. Our leverage ratio at the end of the quarter was 1.6 times gross debt to adjusted EBITDA and 0.7 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 22.3%, up 7 40 basis points from Q3 last year, we continue to generate exceptional returns. Now I'll provide some color on the performance of our 4 business segments. Similar to last quarter's, I'll start with some framing thoughts on the impact of COVID-nineteen response in our segments.

Speaker 3

From a revenue standpoint, As was the case in the past quarters, the majority of our COVID-nineteen response revenue was recognized in Life Sciences Solutions, with the remainder recognized in Laboratory Products and Services and Specialty Diagnostics. From a margin standpoint, the impact of COVID-nineteen differed across the segments All of our businesses. The size of those investments does not necessarily align with the COVID-nineteen response revenue in each segment, thus that does skew some of the reported segment margin. Moving on to segment details, starting with Life Sciences Solutions. Q3 reported revenue in this segment increased 9% Organic growth was 4%.

Speaker 3

In the quarter, we delivered very strong growth in our bioproduction and biosciences businesses. Q3 adjusted operating income in Life Science 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 is 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.

Speaker 3

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 in productivity, which is partially offset by the strategic investments we're making across the segments. Turning to Specialty Diagnostics. In Q3, reported revenue decreased by 5% and the segment declined organically by 5%. In the quarter, we saw a strong growth in our immunodiagnostics, clinical diagnostics and transplant diagnostics businesses, which is offset by lower COVID-nineteen testing Revenue versus the year ago quarter.

Speaker 3

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, we drove positive productivity enabled by our PPI Business System. Finally, in the Baraty Products and Services segment, Q3 reported revenue increased 12%, organic growth was 10%. In 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 As Mark mentioned, we're increasing full year guidance for both 2021 2022.

Speaker 3

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 'twenty one into the 2022 full year numbers. This is enabling a strong beat and raise for both years, reflecting the continued excellent strength of the Let me now provide you with some more detail starting with 2021. In terms of revenue, we're raising our full year 'twenty one guidance by $1,200,000,000 to $37,100,000,000 and increasing our full year organic growth outlook from 9% to 12%. An increase in the base business organic growth outlook for the full year from 12% to 13% and An increase in the COVID-nineteen response revenue for the year from $6,700,000,000 to $7,700,000,000 which represents $5,800,000,000 of testing response revenue and $1,900,000,000 of vaccines and therapies response revenue.

Speaker 3

As I mentioned previously, there are no changes in the revenue assumptions for Q4 and our revised 2021 guidance. We're continuing guidance for COVID-nineteen testing response revenue and continue to assume $450,000,000 of testing related revenue in Q4. There continue to be a range of outcomes for testing in the Q4 and for 2022. There are scenarios where testing demand could be higher than that included in our guidance. Should that be the case, we'll be well positioned to support customer needs.

Speaker 3

And as we did in Q3, we will flow the benefits of that through our P and L. For now, we thought it was prudent to continue to take a derisked approach to the outlook. And as a reminder, there are 4 fewer selling days in Q4 'twenty one both for the same period last year. Incorporating our very strong Q3 performance into the revised 2021 guidance, we now expect that adjusted operating margin Then in terms of adjusted EPS, by banking the Q3 beat, we're 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.

Speaker 3

The rest of the assumptions underlying the 2021 guidance remain the same. And 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 $510,000,000 We're assuming net capital expenditures of approximately $2,500,000,000 to $2,700,000,000 and free cash flow of approximately $7,000,000,000 in 2021. Our guidance still includes $3,800,000,000 of capital deployment, which is $2,000,000,000 of share buybacks, dollars 1,400,000,000 of completed M and A and $400,000,000 of capital returned to shareholders through dividends. And we estimate the full year average diluted share count It will be 397,000,000 shares. Now moving on to the 2022 guidance rates.

Speaker 3

As I mentioned, we are carrying over the base business and vaccines and therapies beat from Q3 'twenty one into the 2022 full year numbers. In terms of revenue, we're raising our full year 2022 guidance by $200,000,000 to $40,500,000,000 That reflects a $250,000,000 increase in core revenue, offset partially by $50,000,000 less FX tailwind for the year. The guidance for 2022 continues to assume core organic growth of 8% and $750,000,000 Testing response revenue for the year. In terms of adjusted EPS, we're raising our full year 2022 guidance by $0.20 $21.36 As Mark mentioned, the 2022 guidance increase reflects the increased strength of our core business, Adding to the already very strong outlook for 2022 that I shared with you at the recent Investor Day. So to conclude, we're delivering another delivered another excellent quarter and we are in a great position to achieve both our 2021 and 2022 goals.

Speaker 3

With that, I will turn the call back over to Rhett.

Speaker 1

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

Operator

In order to allow everyone in queue an opportunity to address the Thermo Fisher management team, please limit your time on the call Our first question comes from the line of Patrick Donnelly of Citi.

Speaker 4

Great. Thanks for taking the questions, guys. Mark, maybe one for you just on the guidance. Obviously, encouraging to see you raise the 'twenty two guidance going to flow through the beat so soon after providing at the Analyst Day. Can you just talk about not bumping the 4Q number?

Speaker 4

Obviously, again, the core seemed a bit stronger in 3Q. 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 4Q?

Speaker 2

Patrick, thanks for the question. Good morning. So, obviously, really outstanding Q3. When I think about The momentum in the core business in the 4th quarter, we obviously entered the 4th quarter With very strong performance, as I look at the outlook for Q4, First of all, we thought it was prudent to keep it at the same that we did last quarter. There's nothing particularly deep about that.

Speaker 2

We have 4 less selling days. So when you look at the base business results, it's very similar, right? It implies about 9% growth, 5% reported and you had about 4 points for the day. So you had about 9% growth, so very similar to what you saw in Q3. And when you look at The other part of core, which is the vaccine and therapy numbers, similar levels of revenue to what you saw in Q3 there.

Speaker 2

So we felt that was a prudent view. On the testing response, we kept The de risk number, we're obviously going to shift whatever our customers need. And if you think about how Sure. The true visibility is for testing response, right, which is we derisked at the end of July And by the time we got into August, the Delta variant had created huge demand for testing. So We feel like the $450,000,000 number is one that we have incredibly high likelihood of achieving and will obviously shift meaningfully more other than that if customers need Right.

Speaker 2

So that's how we thought about it. And as we thought about 2022, we carry forward the core revenue into the year. And As we sit here at the end of January when we give our full year final guidance for the year, we'll look at what is the right level of assumptions and make adjustments as appropriate.

Speaker 3

Okay.

Speaker 4

That's helpful. Makes sense. And then maybe just a quick follow-up on China. Low single digit growth You guys are a lot of noise in the region between the tender process, general macro headlines. Can you just expand a bit on what you guys are seeing there?

Speaker 4

Again, it's always hard to remove a little The comp noise and COVID noise, so would love to see your thoughts on China and what you're expecting on the go forward?

Speaker 3

Yes, I think even the way you frame them to the

Speaker 2

second part of that question sort of For us, it explains what's going on, right, which is we had low single digit growth. In the year ago period, we had incredibly strong COVID response revenue In China, so that drives that. When I look at bookings, which gives you a sense of kind of new orders, that grew about 10% in the quarter. So That activity was good. We have a strong backlog there.

Speaker 2

And then reviewing what's going on with our local team, Conditions actually continue to be good and the government is focused on some of the initiatives that would drive strong long term growth, the focus on biotech Industry and food safety, those kinds of things. So I think China ultimately continues to be a nice strong growth market

Speaker 3

for the company going forward.

Speaker 4

Great. Thank you, Mark.

Operator

Your next question comes from the line of Tycho Peterson of

Speaker 2

JPMorgan. Hey, good morning.

Speaker 5

Mark, first question on supply chain. I don't Anybody, it's a huge risk for you guys. You obviously can handle these things well. But can you maybe just give us some color on what's going on in the ground? Like are you able to pass on higher resin costs?

Speaker 5

Are there component shortages and do you have to kind of work down inventory? Just kind of curious on some of the gives and takes around supply chain for you guys right now.

Speaker 2

Tycho, good morning and thanks for the question. Yes, so supply chain, as you step back and I'll start on a level above Thermo Fisher and then get The world is clearly experiencing supply chain disruptions, right? And really as the pandemic is unwinding, We're all seeing that and the duration and the impact of that still to be determined, right? And As I think about our company, it's really the scale advantages we have and the incredibly strong execution Capabilities we have because of our PPI business system, it's a real competitive advantage, right? And we're well positioned to navigate these environments Better than the smaller, less capable companies.

Speaker 2

So that's how I think about it. As I think about Q3, there was no material impact in our results Based on supply chain challenges, the areas that you see them that are being managed, things like freight and logistics, Delivery times are a little bit slower, so you have things like that that you have to manage through and components, things of that sort, and we're managing through those things effectively. And I have high confidence in our team's ability to navigate it In a very well in a very strong way and I think we'll be talking about this in some fashion across the world, not across Pacific with that science tools and diagnostics Probably into 2022.

Speaker 5

Okay, that's helpful. And then follow-up on PPD. Last quarter, you talked A second request from the FTC. Since then, you've had that recent CMA developments. I know you reiterated the 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?

Speaker 2

Yes. So Tycho, in terms of PPD, It's going well and on track. So we're largely complete with the U. S. FTC process and There's no surprises on the remaining couple of filings, including working with the U.

Speaker 2

K. Government. So Those are all anticipated when we announced the transaction. So that's all progressing well and we feel confident in our ability to Have the opportunity to welcome our new colleagues during the Q4 to Thermo Fisher Scientific.

Speaker 5

Okay. Thank you. You're welcome.

Operator

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

Speaker 6

Thank you. Good morning. Mark,

Speaker 5

should you

Speaker 6

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 Dave, you can provide around uptake at Mesa. And just a clarification, the M and A in the quarter, was that the contingent payment for Mesa?

Speaker 3

So from the M and A in the quarter, that's just continued revenue from Macy's. That business is performing well.

Speaker 2

Yes. So, in terms of the durability, embedded in our outlook From a derisk perspective for next year is $750,000,000 of COVID testing related revenue and we'll obviously Refine that when we give our we start the year, see what the world looks like. There's obviously certain 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 1,000,000,000 of dollars of COVID-nineteen QPCR test and sample prep that we provided. The areas that you would expect that have long Gevity is going to be the increased installed base of qPCR instruments and sample prep instruments, which will get repurposed for other testing. We've obviously developed respiratory panels as well.

Speaker 2

So likely for the future, you'll see some level of People presenting with an upper respiratory infection and doctors will want to know whether it's COVID or flu or RSV. So you'll have some of that Duration and customer feedback on the Amazae Biotech technology, super positive. Was talking to a large customer a couple of days ago and they did a head to head versus some other technologies and basically said the users just love it and Are excited about working on developing a broader menu over time as well. So those are some of the things that will increase our share of business Post COVID or more endemic COVID phase and that's business that we really didn't have pre pandemic. So I think that's pretty cold, But relative to the $1,000,000,000 of revenue, it will be a more modest number.

Speaker 6

Great. And then my second question is on analytical instruments. I Hate to nitpick small numbers. The compounded growth by MyMath stepped down from like 4.5% to maybe 3% in the quarter. Just curious how the order book there is shaping up?

Speaker 6

And can you give any color on what the guidance implies for the Q4 for that segment?

Speaker 2

Yes. So, Kevin, you can nip anything you want. It's good to focus on the areas that aren't clear. So actually when I step back and look at analytical instruments, Actually, a very solid quarter, very strong performance in electron microscopy. Chroma Mespected very well.

Speaker 2

We're super excited about ASMS, which is just upon us and exciting product launches. I highlighted a few of them on the call with the TSQ quadripole mass Photometers, I will update it all 3, our new HPLC system. So when you actually look and say, you look at the details of the numbers, We saw softness in parts of chemical analysis. That's really what's in there and you haven't seen the full recovery in some of the industrial end markets. You see great strength in things that are semiconductor, material, financial agents that shows through across our businesses.

Speaker 2

But in some of the, what I call, Historically, core industrial, you haven't seen a full recovery over the last couple of years. So that's what is kind of embedded in the numbers.

Speaker 6

Got it. Stephen, any color on 4Q for the segment?

Speaker 3

No, it's continued good performance Bookings were strong in the quarter and outlook for Q4 and 'twenty two looks very positive. Thank you. Thanks, Jay.

Operator

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

Speaker 2

Hi, Derek.

Speaker 7

Hi, good morning. A couple of questions. So just to take it a little bit, follow-up on Jack's question there. And any sort of issues in shipping Analytical instruments in the quarter and getting things installed, I mean, just getting into labs or logistics are moving around. Just wondering if I mean, 3Q is always a little bit of a squirrely quarter anyway given seasonality.

Speaker 7

I just was wondering if The results are something compounded just in terms of not being able to ship some products or get some things out the door, get some revenues recognized because of the current situation?

Speaker 2

Yes. Nothing that jumped out as me as being significant, Derek. When I think about Bookings were stronger and maybe shipping took a day or 2 longer. So, I guess there could be some math in that, but none of our teams talked about lab not ready, shipping delays. Nobody used this as a discussion Topic in our deep reviews with the business.

Speaker 2

So, is it possible? Yes, but nothing that jumped out is being material from that perspective. Bookings were strong, so I think that's encouraging for the upcoming few quarters.

Speaker 7

Okay. And Mark, how are you thinking about wage inflation and retention? And particularly, this is as it relates So as you think about PPD, I mean, obviously, there's a big war for talent in the clinical research associate population, Transitions between acquisitions of CROs tend to create some volatility in terms of headcount. And I'm sort of just sort of thinking about on your Biopharma Services segment, how you're sort of Dealing with potential disruptions or trying to stem off some of the headwinds you could see there?

Speaker 2

Yes. So when I think about our team, let's start with the Thermo Fisher Scientific team and I'll make a brief comment about PPD, we have a terrific team, right? They have delivered These spectacular results for year in, year out, quarter in, quarter out, including in very trying times of the pandemic. And They make a difference and we have done a really we've been really focused on ensuring that this is Best place to work and we've rewarded our teams. We talked last quarter about some of the additional compensation actions we've taken.

Speaker 2

We continue to do that to recognize the strong performance. We've invested in our facilities, training, we have recognized for World class development training, these are things that we continue to focus on and that really has allowed us to have very, very strong retention of our teams. PPD is a very well run business with a great leadership team that's navigating the environment well, the business is performing very well. There is no disruption to the integration, right? We're literally lifting it as it is And running it as it is going forward and over time we're going to come up with some great new solutions that will make a difference for customers, but this is a growth oriented, customer oriented The Patients Benefit acquisition, so the feedback that the PPD team is that's getting on their colleagues is super positive and super excited and We're looking forward to the transition to our company in the Q4.

Speaker 7

And if I can squeeze one more in on China. How much of your portfolio is manufactured in China that would not be subjected The buy or would be sort of would be part of the buy local sort of like push there? Just sort of some idea on your manufacturing footprint there And what we consider as being outside versus inside China?

Speaker 3

Yes, I mean, we have

Speaker 2

very scale Manufacturing facilities in China for China, and we also import A number of products into the market and the way you can almost think about it is, if there is no local alternative For the products, you often see them imported into the country. If there is local alternatives, They often come from either our Chinese operations or other low cost regions around the world, right? That's the way to think about it. It's not 100% accurate because I'm sure there's some things that I look for competition that could shift into the country, but that's the strategy at a high level and That served us well. We are well positioned to support our Chinese customers.

Speaker 2

And in areas where The Chinese customers really want high degree of supply chain assuredness, things like single use technologies. We built a very scaled facility in Suzhou To be able to meet those needs.

Speaker 7

Thank you.

Speaker 2

You're welcome.

Operator

Next question comes from the line of Dan Arias of Stifel.

Speaker 8

Good morning, guys. Thanks for the questions. Mark, two questions for you, 1 on biopharma and 1 on the NIH, if I can. On biopharma, I'm just curious what your expectations are for flush Spending at the end of the year here obviously playing nuances in that segment. So do you feel like it's more or less likely to be Just sort of similar to what we've seen in non pandemic years?

Speaker 2

Yes. So, Dan, good morning. In terms of Pharma and Biotech, this is performing really well, right, in terms of the growth that we are delivering with the 20% better than 20% growth in the quarter. What we're assuming which is the convention we use every year, we're assuming an average year end spend across our customer base and We really don't get visibility until right after the Thanksgiving holidays. So, we use that convention And that served us well.

Speaker 2

I think most years it's been average or above average. It was one year that it was below average from recollection over the last number. So that's how we think about it.

Speaker 8

Okay. And then maybe on the NIH funding dynamic, which you've usually got a pretty decent line of As we head into next year, I'm just curious if you have a view on the budget in the way that it looks like it might be allocated just given that you have that Core budget and that ARPA H component, are you hearing anything about the ARPA H funding and whether it will sort of Just be accessible to basic researchers. I mean, I don't want to come out of left field with that one, if that's what it sounds like. It seems like that is sort of a question in the academic world and there really aren't too many good people to ask about that. So, I figured I'd throw it out there.

Speaker 2

So, Dan, it's not clear yet. And I think that ARPA H concept is a really important concept for the U. S, right? The way to think about it You have defense spending, right? And defense spending prepares for all of what could happen, right, and you invest in different technologies ARPA age is the healthcare equivalent, right?

Speaker 2

It's investments in things to anticipate Future challenges, right, as opposed to typically our researchers solving clearly known challenges. The fact that we're going to have longer term funding That we're prepared for the next pandemic or other future challenges, I think it's fantastic and will spur great research. How that exactly is going to be allocated? I haven't seen any

Speaker 3

It will come out, but I haven't seen

Speaker 2

the details of how that's going to be done. And I know that the U. S. Is not the only country That's talking about using vehicles like this. So I think this is one of the reasons that we're so excited about what the scientific funding is going to be like Going forward in our industry and we're incredibly well positioned to serve that.

Speaker 8

Okay. Appreciate that. Thanks, Mark.

Speaker 2

You're welcome.

Operator

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

Speaker 9

Hey, guys. Congrats on a nice print and thanks for taking my question. Mark, maybe one on the fiscal 'twenty two guidance raise here by a couple of 100,000,000 Looks like the base came up by 250. I'm curious where the strength is coming from. Would you say that's coming from biopharma across What is driving that base improvement?

Speaker 2

Yes. So, Vijay, good morning. Thanks for the question. As I thought about The 2022, we obviously saw strength across our company in Q3 and In the core, and we flowed that entirely into the next year. And obviously, Very strong performance in Pharma Biotech.

Speaker 2

So that's very encouraging and is obviously a large driver of that. But we saw we could serve the performance Across the different parts of our business. So I don't want to say it reflects the portfolio of activities that we have is the way to think about the strength of the core.

Speaker 9

And just I think to clarify that more, I think the base now includes vaccine contribution, but this is I guess what you're saying is this is across the board. This is not just vaccine outlook improving, correct?

Speaker 3

Yes, Subishi, just to clarify. So Core and base, so within the guidance rate for next year, it's basically up $250,000,000 which includes $190,000,000 from the base plus $60,000,000 more vaccine and therapies, the combination of all of that is $250,000,000 for the core And then slightly decreased because of FX left tailwind. So it's kind of strengthened the base business and the Vaccines and Therapies that's been carried forward into

Speaker 9

That's helpful, Steve. And then just one quick one on the tax side. How should we think about any potential tax

Speaker 3

Yes. So the guidance we've given here doesn't assume any Significant U. S. Tax reform or other tax reform across the world. And we continue to monitor The changing dynamics closely in DC and advocate for a change needs to happen that the right change happens with Without unintended consequences, so that we actually understand revenue raise is being paid for, but let's make sure that that's been done in a logical way.

Speaker 3

The company has a competitive advantage in that tax position versus other well run companies, and we expect that competitive advantage to be Continued forward through whatever changes potentially can happen. So that's the best way to think about tax for the company.

Speaker 9

Thank you, guys.

Speaker 3

Thanks, Vijay.

Operator

Your next question comes from the line of Dan Brennan of Cowen.

Speaker 10

Great. Thanks for taking the question. Mark, it's hard to find anything positive to shout out to the Jes at this point. So The first question is on bioproduction. So can maybe I missed it in the prepared remarks.

Speaker 10

Can you just discuss what the base growth did this quarter, so ex COVID contribution and kind of what's implied in 4Q and 'twenty two and any color on trends there?

Speaker 2

Yes. So Dan, thanks for the question. And in terms of the jets, yes, painful for sure. In terms of bioproduction, exactly the opposite of that, which is things are extremely robust and doing very well. So When I think about the I'll give it at the sort of the biotech and pharmaceutical level, Right.

Speaker 2

With a little bit over 20% growth in the quarter, you had the $510,000,000 of vaccine And therapy revenues, so you saw very strong growth, excluding the contribution from vaccines and therapies As well, when you look to the outlook, while we don't guide obviously by segment, we would expect that Pharmavate continues to be very strong and We're expecting a meaningful level of growth coming from that in 2022 as The end market looks very robust. The scientific discoveries are very strong. Customer demand is good. We're seeing strong interest in our Clinical trials, packaging, logistics capabilities, so that bodes well. So I'd say the cycle is very good and We're well positioned to capitalize on.

Speaker 2

I think one of the things that maybe investors don't have a 100% understanding of, If you think about what the company looks like upon close of PPD, we have about $20,000,000,000 of revenue serving pharmaceutical and biotech, about half of that It's actually serving production. And when you think about that, that is the largest position certainly in the production market by far. And then we obviously have very attractive positions in serving both clinical trials and the research activities as well. So we're well positioned to deliver Great growth into the future.

Speaker 10

Great. Thank you for that. And then maybe just a high level follow-up. At the Analyst Day, obviously, the 7% to 9% growth outlook was stronger than expected. And I know at the time you discussed execution, healthy end markets to support that outlook.

Speaker 10

We certainly feel the questions from investors regarding Thermo typically has set a reasonably conservative bar and executed well against that. So Maybe just wondering the 7% to 9%, should we think about that similarly having any concerns The drivers or details of that guidance. Thanks, Mark.

Speaker 2

So you made me smile, which is good. We haven't even gotten into the period yet, so which we'll get there in terms of still working on 2021 right When I think about around the 7% to 9% that we had when we had the continued increase in growth over time of the company, Which is you sign up for targets when you're able to do when you demonstrated you're delivering it, right? And you have confidence Our ability to deliver the 7% to 9% growth. We're not going to cap ourselves at the 7% to 9%, right? So, we're going to focus on delivering as much as we can, We delivered great performance and we'll look at the strength of our end markets and what our share gains look like And set the appropriate annual targets, but we felt that 7% to 9% was an appropriate number, one that we have a high degree of And the ability to deliver and with the goal to work to the biggest possible number we can over time.

Speaker 10

Thank you.

Speaker 3

Welcome, Dan.

Operator

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

Speaker 11

Yes. Thanks, Mark. Thanks for taking the question. First one, just a clarification. I know 5 to 11 year olds' vaccinations Voted positively by the panel yesterday.

Speaker 11

So just wondering if that's already contemplated into this guidance. I know that was a little bit later So likely not, but I just wanted to confirm. And also on the boosters, wanted to confirm if that is also contemplated in the 4th Quarter and increase for vaccines in 2022?

Speaker 2

So Puneet, when I think about How we've done our outlook on vaccine and therapy, it really is based on Dialogue with our customers and orders that they have given us. So some of it's not 100% on the orders because some of them say,

Speaker 1

hey, we're going to give you the

Speaker 2

orders, we're working on And some of it is, I mean the orders. So, it's less about children or boosters or those things and actually what our customers are The activity that they want, but obviously things like vaccine mandates and booster shots and Children adds to the durability of the demand for vaccines and therapies. We're largely operating With our capacity, so you don't get short term swings in the volumes based on new pronouncements, right, you get them over time. So, that's how we thought about it.

Speaker 11

Great. Thanks. And the last question for me Just on capacity expansion, could you provide a view into the need for further capacity expansion in bioproduction at this Point, you opened the Switzerland site for biologics production, larger vessels, pipette tit production as well, that's Coming on board, key facility expansions that have happened. So overall, just wondering what you're hearing from the biotherapeutics customers Overall and from the C suites there in terms of the demand and your need to Further expand the capacity at this point of in the cycle of sort of post COVID?

Speaker 2

In general, Puneet, we have in flight the activities That we need to meet the anticipated demand. Obviously, we're going to complete a lot of these projects during the course of 2022, a little bit goes into 2023, But it's largely what we have started already. If there are specific opportunities That are part of our longer term roadmap that makes a difference. You may see us evaluate them, but there's not a long list of those, right? And we've been Very aggressive to position ourselves to meet our customers' future needs and the commitments we've gotten and that puts us in a great spot.

Speaker 2

So that's how we thought about it. So let me wrap it up here. I want to thank everybody for participating and with a strong 9 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.

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Earnings Conference Call
Thermo Fisher Scientific Q3 2021
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