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    Thermo Fisher Scientific Inc (TMO)

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    Business Description

    Thermo Fisher Scientific Inc. is a global leader in serving science, dedicated to enabling customers to make the world healthier, cleaner, and safer . The company operates through four main segments, offering a diverse range of products and services that cater to various end markets, including pharmaceutical and biotech, academic and government, industrial and applied, as well as healthcare and diagnostics . Thermo Fisher's product offerings include reagents, instruments, consumables, diagnostic test kits, and laboratory products, supported by a strong global presence and a comprehensive portfolio .

    1. Laboratory Products and Biopharma Services - Offers a comprehensive range of laboratory products and outsourced services for drug development, clinical research, and manufacturing.
    2. Life Sciences Solutions - Provides reagents, instruments, and consumables used in biological and medical research, drug and vaccine discovery and production, and disease diagnosis. Includes sub-segments such as Biosciences, Genetic Sciences, and BioProduction.
    3. Analytical Instruments - Offers a broad range of instruments and supporting consumables, software, and services for laboratory and field applications, serving markets including pharmaceutical, biotechnology, academic, government, and industrial.
    4. Specialty Diagnostics - Provides diagnostic test kits, reagents, culture media, and instruments for healthcare, clinical, pharmaceutical, industrial, and food safety laboratories.

    Q3 2024 Summary

    Initial Price$553.45July 1, 2024
    Final Price$612.94October 1, 2024
    Price Change$59.49
    % Change+10.75%

    What went well

    • Thermo Fisher anticipates a return to organic growth in Q4 and is well-positioned to deliver differentiated performance in 2025, with end markets modestly improving and the company executing well on its growth strategy.
    • The company is poised to benefit from stimulus programs in China in 2025, leveraging its strong relationships and long-standing presence in the country to capitalize on market opportunities as the Chinese economy improves.
    • Innovation in high-end technologies, particularly in analytical instruments, is driving strong adoption and differential performance for Thermo Fisher, with products like the Orbitrap Astral Mass Spectrometer and the Iliad Scanning Transmission Electron Microscope contributing to growth.

    What went wrong

    • The market recovery is only modest and sequential, with no major acceleration expected in the near term, indicating continued growth challenges.
    • Economic activity in China remains muted, and despite government stimulus programs, the impact is yet to materialize, potentially delaying significant contributions from this key market.
    • The runoff of pandemic-related revenue continues to be a headwind and is expected to persist into 2025, potentially hindering overall growth.

    Q&A Summary

    1. 2025 Outlook
      Q: Will the gradual recovery continue into 2025?
      A: Marc Casper noted that the end markets are modestly improving throughout the year and expects the fourth quarter to return to organic growth. For 2025, he anticipates it will be the final year of the runoff of pandemic-related activity, which will still be a headwind but less than in 2024. While he is excited for 2025, detailed guidance will be provided in January.

    2. Pharma and Biotech Segments
      Q: How are pharma and biotech customer groups performing?
      A: Marc Casper stated that the pharma and biotech segments are seeing sequential improvement. Confidence in biotech is improving, with funding modestly increasing and meaningfully better than in 2023. Large pharma shows a normal distribution of performance, with some companies doing extraordinarily well. Customers are adjusting to the Inflation Reduction Act (IRA), leading to a more muted growth environment.

    3. China Outlook
      Q: What is the impact of China's economic activity and stimulus plans?
      A: Marc Casper mentioned that China has not progressed in terms of economic activity and remains muted. The government announced stimulus programs, including equipment stimulus and loan programs, which are expected to positively affect their industry in 2025 and beyond. He also highlighted their strong position in China due to deep customer relationships and government engagement.

    4. PPD Recovery and Growth
      Q: What is the outlook for PPD and its recovery into 2025?
      A: Marc Casper indicated that their clinical research business, including PPD, is performing well and delivered growth in the quarter despite headwinds from the runoff of vaccines and therapies. They have a slightly larger position serving biotech than pharma within clinical research, with biotech customers more quickly adopting unified capabilities. While not providing specific 2025 guidance, he expressed optimism about their momentum.

    5. Margin Expansion and Operating Leverage
      Q: Can we expect outsized margin improvement as growth improves?
      A: Stephen Williamson explained that long-term, they expect 7% to 9% top-line growth, enabling 40 to 50 basis points of margin expansion. There could be some incremental benefit from the return to volumes in businesses where volumes were challenged and costs were appropriately addressed. They will provide detailed guidance in January.

    6. Bioproduction Trends
      Q: How is the bioproduction business performing?
      A: Marc Casper shared that bioproduction played out as expected in the quarter, with strong momentum in orders, both sequentially and year-over-year. Revenue continues to progress in the right direction sequentially, and bioproduction will become less of a headwind going forward and ultimately a tailwind in the not-distant future.

    7. Analytical Instruments Demand
      Q: What is the demand outlook for analytical instruments?
      A: Marc Casper noted that their Analytical Instruments segment had 3% organic growth in the quarter as expected. Innovation is driving adoption, with products like Astral and microscopy performing well. Routine capital equipment demand is muted, particularly in China, which remains a challenged market.

    8. Life Science Solutions Performance
      Q: How did the Life Science Solutions segment perform?
      A: Marc Casper stated that the segment performed in line with their expectations for the quarter. The third quarter had the largest impact from the COVID roll-off in this segment, which was anticipated. Strong momentum was seen in their clinical sequencing business, which is doing really well.

    9. Pricing Environment and Margins
      Q: What is the pricing environment and its impact on margins?
      A: Stephen Williamson mentioned that they achieved just over 1% price realization for the quarter, ahead of the normal run rate of 0.5% to 1%. Marc Casper added that the pricing environment is back to normal, with modest annual increases. Investments in sterile fill-finish capacity are ongoing, which will put pressure on margins in the short term but support growth in 2025 and beyond.

    10. Pharma R&D Spend Impact
      Q: Why isn't increased pharma R&D spend translating to better revenues?
      A: Marc Casper explained that while customers are excited about their pipelines and R&D investment is looking good, headwinds in bioproduction and the runoff of pandemic-related activities in clinical research and Pharma Services are muting growth. He believes that the optimism in R&D investment will ultimately translate into their space.

    11. Lab Products and Services Performance
      Q: How is the Lab Products and Services segment performing?
      A: Marc Casper stated that the channel is doing really well, with both the health care market channel and the research and safety market channel delivering nice growth and winning new customers. Stephen Williamson noted that underlying growth in Pharma Services and clinical research offset the significant pandemic headwinds, resulting in a net neutral organic growth.

    12. Month-by-Month Quarter Dynamics
      Q: Did the quarter's pacing reveal any notable trends?
      A: Marc Casper mentioned that growth was largely in line with their expectations. The pacing through the quarter was as expected, with no significant patterns. At the very end of the quarter, academic and government spending wasn't as strong as normally seen, but this was not material in the scale of the company.

    13. Capacity Expansion and Competition
      Q: How are you approaching capacity expansion amid market dynamics?
      A: Marc Casper discussed ongoing investments in sterile fill-finish capacity, with new lines coming online during 2025 and 2026 to support customer demand. This puts pressure on margins in the short term due to training and qualification costs but will lead to higher utilization in 2025. They also expanded capacity in Bend, Oregon, and Cincinnati, Ohio, to meet customer demand in oral solid dose development.

    14. China Stimulus Impact
      Q: Will China's stimulus have a meaningful impact in 2025?
      A: Marc Casper expects that China's stimulus programs will be a 2025 activity, with perhaps a small impact in Q4. Customers are applying for funding, and there is optimism about upcoming investments. He believes they are well-positioned to capitalize on economic improvements in China.

    Guidance Changes

    Quarterly guidance for Q4 2024:

    • Revenue: $11.3 billion (no prior guidance)
    • Adjusted EPS: $5.96 (no prior guidance)
    • Organic Revenue Growth: 2.5% (no prior guidance)

    Annual guidance for FY 2024:

    • Adjusted EPS: $21.35 to $22.07 (raised from $21.29 to $22.07 )
    • Revenue: $42.4 billion to $43.3 billion (no change from prior guidance )
    • Core Organic Revenue Growth: minus 1% to plus 1% (no prior guidance)
    • Adjusted Operating Income Margin: 22.5% to 22.8% (no change from prior guidance )
    • Net Interest Cost: $340 million to $380 million (lowered from $380 million to $400 million )
    • Adjusted Income Tax Rate: 10.5% (no change from prior guidance )
    • Net Capital Expenditures: $1.3 billion to $1.5 billion (no change from prior guidance )
    • Free Cash Flow: $6.5 billion to $7 billion (no change from prior guidance )
    • Share Buybacks: $3 billion (completed in January) (no change from prior guidance )
    • Capital Returned to Shareholders: $600 million through dividends (no change from prior guidance )
    • Acquisition: $3.1 billion deployed to acquire OLink (no prior guidance)
    • Average Diluted Share Count: Approximately 383 million shares (no change from prior guidance )

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Marc N. CasperChairman, President, and Chief Executive Officer2020Marc N. Casper has been serving as the Chairman, President, and Chief Executive Officer of Thermo Fisher Scientific Inc. since 2020. He initially became the President and CEO in 2009. Before that, he held various senior management roles within the company, including Executive Vice President and Chief Operating Officer from 2008 to 2009, and Executive Vice President from 2006 to 2008. Casper has been a director of the company since 2009 and also serves on the board of Synopsys, Inc. .
    Stephen WilliamsonSenior Vice President and Chief Financial Officer2015Stephen Williamson has been serving as the Senior Vice President and Chief Financial Officer of Thermo Fisher Scientific Inc. since 2015. Prior to this role, he was the Vice President of Financial Operations from 2008 to 2015 .
    Michel LagardeExecutive Vice President and Chief Operating Officer2022Michel Lagarde is the Executive Vice President and Chief Operating Officer at Thermo Fisher Scientific Inc. He was named Executive Vice President in 2019 and became Chief Operating Officer in 2022. Prior to these roles, he joined Thermo Fisher through the acquisition of Patheon in 2017, where he served as Senior Vice President and President of Pharma Services .
    Gianluca PettitiExecutive Vice President2021Gianluca Pettiti, age 45, became Executive Vice President of Thermo Fisher Scientific Inc. in December 2021. Prior to this role, he served as Senior Vice President and President of Specialty Diagnostics from 2019 to 2021, and as President of Biosciences from 2018 to 2019. He also held the position of President, China from 2015 to 2017 .
    Michael A. BoxerSenior Vice President and General Counsel2018Michael A. Boxer joined Thermo Fisher Scientific Inc. as Senior Vice President and General Counsel in January 2018. He has held the position of Senior Vice President, General Counsel, and Secretary from 2021 to 2022 .
    Lisa P. BrittSenior Vice President and Chief Human Resources Officer2017Lisa P. Britt has been serving as the Senior Vice President and Chief Human Resources Officer at Thermo Fisher Scientific Inc. since 2017 .
    Joseph R. HolmesVice President and Chief Accounting Officer2021Joseph R. Holmes has been serving as the Vice President and Chief Accounting Officer of Thermo Fisher Scientific Inc. since 2021. Prior to this role, he was the Senior Director of Technical Accounting from 2017 to 2021 .

    Questions to Ask Management

    1. Given that core growth has been flat or negative over the past few years, despite maintaining operating margins, how does management plan to achieve the long-term goal of 7% to 9% top-line growth, and when can investors expect this growth to materialize?

    2. With the recent acquisitions of The Binding Site and OLink, what specific integration challenges are you facing, and when do you anticipate these acquisitions will start significantly contributing to revenue and earnings?

    3. Considering the muted demand for routine capital equipment and challenges in the Chinese market, how is the company addressing these headwinds, and what strategies are in place to drive growth in these areas?

    4. The Analytical Instruments segment saw an adjusted operating margin decrease of 180 basis points due to unfavorable mix and strategic investments. When do you expect these investments to start delivering returns, and how will this impact margins in the near term?

    5. The expansion of capacity in your Pharma Services business is putting pressure on margins due to costs in training and facility qualification. How are you balancing these short-term margin pressures with long-term growth objectives, and when do you expect higher utilization of this capacity to improve profitability?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateNovember 14, 2023
    End Date/DurationN/A
    Total additional amount$4.00 billion
    Remaining authorization amount$1.00 billion as of September 28, 2024
    DetailsThis authorization replaced the existing one with $1.00 billion remaining

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EPS: $21.35 to $22.07
      2. Revenue: $42.4 billion to $43.3 billion
      3. Core Organic Revenue Growth: Minus 1% to positive 1%
      4. Adjusted Operating Income Margin: 22.5% to 22.8%
      5. Net Interest Cost: $340 million to $380 million
      6. Adjusted Income Tax Rate: 10.5%
      7. Net Capital Expenditures: $1.3 billion to $1.5 billion
      8. Free Cash Flow: $6.5 billion to $7 billion
      9. Share Buybacks: $3 billion (completed in January)
      10. Capital Returned to Shareholders: $600 million through dividends
      11. Acquisition: $3.1 billion deployed to acquire OLink
      12. Average Diluted Share Count: Approximately 383 million shares
      13. Q4 Revenue: Implied to be $11.3 billion
      14. Q4 Adjusted EPS: Implied to be $5.96
      15. Q4 Organic Revenue Growth: 2.5%, with a benefit of 2 extra selling days and a headwind from vaccines and therapies of approximately 2.5% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue: $42.4 billion to $43.3 billion
      2. Adjusted EPS: $21.29 to $22.07 per share
      3. Adjusted Operating Income Margin: 22.5% to 22.8%
      4. Net Interest Cost: $380 million to $400 million
      5. Adjusted Income Tax Rate: 10.5%
      6. Net Capital Expenditures: $1.3 billion to $1.5 billion
      7. Free Cash Flow: $6.5 billion to $7 billion
      8. Share Buybacks: $3 billion (completed in January)
      9. Dividends: $600 million returned to shareholders
      10. Average Diluted Share Count: Approximately 383 million shares
      11. Quarterly Phasing: Q3 organic revenue growth expected to be 1% higher than Q2, and Q3 adjusted EPS to be just over 24% of the full year .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue: $42.3 billion to $43.3 billion
      2. Adjusted EPS: $21.14 to $22.02 per share
      3. Core Organic Revenue Growth: Minus 1% to positive 1%
      4. Adjusted Operating Income Margin: 22.4% to 22.8%
      5. Adjusted Income Tax Rate: 10.5%
      6. Net Capital Expenditures: $1.3 billion to $1.5 billion
      7. Free Cash Flow: $6.5 billion to $7 billion
      8. Share Buybacks: $3 billion (completed in January)
      9. Dividends: $600 million returned to shareholders
      10. Average Diluted Share Count: Approximately 383 million shares
      11. Pandemic-Related Revenue: Just under $100 million of testing revenue and $300 million to $400 million of vaccines and therapies-related revenue, with a year-over-year headwind of $1.3 billion to $1.4 billion
      12. FX Impact: Roughly neutral year-over-year to both revenue and adjusted EPS .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue Guidance: $42.1 billion to $43.3 billion
      2. Adjusted EPS Guidance: $20.95 to $22 per share
      3. Core Organic Revenue Growth: Minus 1% to positive 1%
      4. Pandemic-Related Revenue: Just under $100 million for testing revenue and $300 million to $400 million for vaccines and therapies-related revenue, with a year-over-year headwind of $1.3 billion to $1.4 billion
      5. M&A Impact: Increase revenue by $175 million year-over-year
      6. FX Impact: Neutral year-over-year to both revenue and adjusted EPS
      7. Adjusted Operating Income Margins: 22.3% to 22.8%
      8. Net Interest Expense: Approximately $430 million
      9. Adjusted Income Tax Rate: 10.5%
      10. Profit Elimination Related to Minority Interests: $20 million
      11. Net Capital Expenditures: $1.3 billion to $1.5 billion
      12. Free Cash Flow: $6.5 billion to $7 billion
      13. Share Buybacks: $3 billion (completed in January)
      14. Average Diluted Share Count: Approximately 383 million shares
      15. Dividends: $600 million returned to shareholders
      16. Acquisition of Olink: Expected to close by midyear
      17. Quarterly Phasing: Q1 adjusted EPS expected to be approximately 22% of the full year .