Thermo Fisher Scientific Inc

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher scientific 2020 first quarter conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised, today's conference is being recorded. If you require any further assistance, please press star zero. I would like to introduce our moderator for the call, Mr. Kenneth Episcerno, Vice President Investor Relations. Mr. Episcerno, you may begin the call.

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 that this call is being webcast live and will be archived on the investor section of our website, thermo fisher.com, under the heading Webcasts and Presentations until May 8, 2020. A copy of the press release of our first quarter 2020 earnings and future expectations is available in the investor section of our website under the heading Financial Results. So before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's annual report on Form 10-K for the year ended December 31, 2019, under the caption Risk Factors, and also the company's current report on Form 8-K filed on March 23, 2020, which are on file with the Securities and Exchange Commission and also available in the investor section of our website under the heading SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to view so, even if our estimates change. Therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also during this call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAP. A reconciliation of these non-GAP financial measures to the most directly comparable GAP measures is available in the press release of our first quarter 2020 earnings and future expectations and also in the investor section of our website under the heading Financial Information. So, with that, I'll turn the call over to

Mark. Thank you, Ken. Good morning, everyone. Thank you for joining us today for our 2020 first quarter call. Let me start by saying that I hope all of you and your families are faring as well as can be expected in this extraordinary time. We're all doing fine here as a leadership team and following the protocols to stay safe. Obviously, the world has changed dramatically since our last earnings call, so in addition to the normal topics we cover, we'll make a few modifications to our format this morning. One is that I'll begin my remarks by explaining our guiding principles for managing through this unique situation. In my high-level financial overview, I'll briefly turn it over to our CFO, Stephen Williamson, to give you a little more color specifically on our revenue performance in the quarter. I'm also going to abbreviate my typical growth strategy highlights and use most of that section to talk about our involvement in supporting society's COVID-19 response. Let me also just say right up front that I'm incredibly humbled by the way our colleagues around the world stepped up to deliver a very good quarter under tough circumstances. It really highlights the commitment of our teams and the strength of our company. So, starting with our guiding principles, our approach for managing through the pandemic is threefold. One, make sure our colleagues are safe. Two, keep our business running so we can serve our customers. And three, manage our company appropriately so we can come out stronger. Let me delve into each of these a little more deeply. First is ensuring the safety of our colleagues. This is paramount. While a significant number of our colleagues are working at home, many of us are coming to our facilities to make sure we can continue to serve our customers at a time when they need us most. We've implemented numerous health and safety protocols at our sites following CDC guidance and local regulations, and we've also assembled an outside panel of medical experts that's giving us additional insights. I couldn't be prouder of our 75,000 colleagues for working together as one team to fulfill our company's mission, which is to enable our customers to make the world healthier, cleaner, and safer. Our mission has never been more relevant than it is right now. Our second guiding principle is to maintain business continuity so we can support our customers, whether they're directly responding to COVID-19 or continuing their work more broadly. Once the pandemic hit, we immediately established incident response teams to create a process for managing new protocols at our sites and navigating the challenges presented by this situation. I'm pleased to say that every one of our sites has continued to operate during this period, and our supply chains have experienced minimal disruption. This achievement speaks to the amazing dedication of our teams and the strong operational foundation we've built through our PPI business system. Our industry-leading scale is also a significant advantage in ensuring we can continue to serve our customers. The overwhelming appreciation we're hearing from our customers during this time has been especially gratifying. Our third guiding principle is to manage the company appropriately so we come through this period an even stronger industry leader. We have the benefit of a very experienced team that successfully managed the company through the financial crisis of 2008 to 2009 and other periods of disruption around the world. We start with a strong focus on executing our long-term growth strategy while ensuring that we successfully navigate the short-term challenges and also generate new opportunities as well. In this case, when the pandemic put China in lockdown, we quickly mobilized our global team to help our customers respond to the crisis. We also pivoted our teams to accelerate their short-term growth plans in other regions of the world. In addition, we continued our strong focus on innovation, stepped up the impact of our PPI business system, and continued to execute a -thought-out capital deployment strategy. All of these activities will allow us to come out of this period even stronger. Turning to our financial results, as you saw in our press release, our reported revenue increased 2% in Q1 year over year to $6.23 billion. Adjusted operating income increased 1% to $1.38 billion. And our adjusted operating margin was .1% in Q1. Finally, we grew adjusted EPS to $2.94 per share in the quarter, which is a 5% increase over last year. At this point, I'll briefly turn it over to Stephen to provide some color on how we assessed our Q1 revenue performance. Stephen?

Thanks, Mark, and good morning, everyone. I hope that you and your families are safe and healthy. As I look at our Q1 organic growth performance, I think it's best to break it down into three elements. First are the unique revenue tailwinds that we've been able to create due to COVID-19. This is where we've been able to quickly respond to customer needs around protection, testing, and additional specific research. Then there's the headwind caused by COVID-19, mainly where customers have been unable to work or have been shut down completely. The final element is essentially the rest of our organic revenue growth. And as best as we can assess, we believe that in Q1, the tailwind from COVID-19 was around 3% of revenue growth. And the headwinds of COVID-19 were around 6%, largely driven by customer shutdowns in China. So all in, COVID was around about a 3% net headwind in the quarter. I think we work really well to capture the tailwinds and to drive strong performance across the business to help offset the headwinds from COVID-19 to deliver 2% organic growth for the quarter. It's also worth mentioning that Q1 reflected one less selling day versus Q1 of last year, a headwind of just under 1% on total revenue. I'll give you more detail on that performance later on. For now, I'll hand it back over to Mark.

Thanks, Stephen. To summarize, we performed well in Q1, even though the impact of the pandemic became more significant as the quarter played out. As I've mentioned in the past, we always maintain contingency plans that we can execute to buffer against potential downside. When the virus began to spread from China to other countries, we took quick and decisive action to further control costs and offset some of the negative revenue impact. At the same time, we accelerated development of our COVID-19 diagnostic test, we received authorization for emergency use, and began to ramp up production to meet growing global demand. I'll cover more of these details later in my remarks. Turning to our performance by end market, let me start with a couple of overall comments for context. Our underlying growth in Q1 was very good, and we had strong momentum early in the year before the outbreak in China. As you'd expect, our business in China was affected most in the quarter, down approximately 25%. North America and Europe actually did quite well in the quarter, and we didn't see the impact in those geographies until very late in March. I'll give you some more color on how the quarter played out in our end markets. Pharma and biotech, the largest of our four end markets, was essentially unaffected by the pandemic in Q1, and we had another very strong quarter with high single-digit growth. We saw especially strong performance in our bioproduction and pharma services businesses. In diagnostics and healthcare, we grew in the low double digits. We had good performance across our businesses, and this end market also benefited the most from our COVID-19 response. This included rapid uptake of our diagnostic kits, which leverage our assays and real-time PCR instruments and molecular controls. Turning to industrial and applied, growth in this end market declined 10% in Q1. Our performance here was primarily affected by -19-related shutdowns in China. Finally, in academic and government, we declined in the mid-single digits in Q1, as academic labs began to close, first in China, and then in other countries later in the quarter. To wrap up our end market commentary, we managed to all the dynamics and executed very well to drive good growth in Q1. Turning to our growth strategy, the pandemic has put a spotlight on the significance of what we do as a company, and much of what I'll cover this morning demonstrates the success of our strategy. The three elements of our growth strategy clearly set us apart as the unrivaled leader in our industry. Our commitment to continuously innovating, leveraging scale in emerging markets, and delivering our unique customer value proposition has made us the company that governments and healthcare institutions around the world have turned to for solutions to stop the spread of the pandemic. Before I cover our involvement here, let me quickly mention that our growth initiatives are progressing well across the company. We launched a number of new products in Q1, and I'll pick two highlights. In our chromatography and mass spectrometry business, we introduced the thermoscientific Vankuish Core HPLC system to increase customer productivity in applied markets. The Vankuish Core further expands our successful HPLC instrument lineup. And in our bioproduction business, we launched the thermoscientific LabTainer Pro bioprocess container to accelerate production of new therapies and vaccines. But the most important story in Q1 was our role in helping customers respond to the pandemic. This is obviously a complex challenge, and we've been working closely at the highest levels of governments and healthcare agencies around the world, as well as with the pharmaceutical and biotech industry to support their efforts. To simplify the overview, I'll frame our contributions in four key areas of focus. The first is to protect healthcare and other essential workers. We're providing a range of personal protective equipment through our research and safety market channel and our healthcare market channel. Everything from masks to face shields, respirators to gloves, and hand sanitizer. The second focus area is analyzing the virus to understand how it interacts and how to neutralize it. In China, we immediately mobilized a 24-7 service to support the Chinese Centers for Disease Control and Prevention, as well as hospitals and independent clinical labs across the country. Scientists and medical professionals relied on our PCR instruments, pre-filled plates and kits to detect the virus, and our next-generation sequencing instruments to understand it. Around the world, researchers used our thermoscientific cryo-electron microscope to determine the structure of the virus' spike protein and its cellular receptor during infection. These findings are paving the way for accelerating the development of treatments and vaccines. The third area of focus is enabling the development of a diagnostic testing strategy, which is critical to stop the spread and help get the economy back up and running. We knew the most important activity in the short term was ramping up our diagnostic testing capability. So, based on what we were seeing early on in China, we quickly developed the applied biosystems TACPATH COVID-19 combo kit for use by clinical and public health laboratories. This critical development was a real team effort involving incredible collaboration with regulatory bodies around the world. We received U.S. FDA emergency use authorization in mid-March, followed by the CE mark in Europe, and that led to authorizations in a number of other countries, ranging from Canada to Brazil, India, and Australia. Today, nearly 50 countries have authorized the use of our PCR-based COVID-19 diagnostic tests. We're now producing more than 5 million of these tests per week, and our PCR-based workflow is widely used across the globe as the gold standard, given its high level of accuracy. We also launched the AcroMetrics COVID-19 RNA control in our specialty diagnostics business to monitor and validate the tests. But it's important to know that our involvement went beyond developing and producing the tests. We've worked side by side with governments around the world and in the U.S. at both the federal and state level to educate them about the options, help develop testing strategies, and design effective testing protocols. In close collaboration with governments, we've been implementing our workflow in public health labs, hospitals, and reference labs. It's truly remarkable how much progress we've made in the last four weeks, but more still needs to be done to further expand testing capacity to facilitate the reopening of the economy. Based on everything we've learned, knowing whether or not a person has the virus will continue to be very important until vaccines are available. That leads me to the fourth area of focus, which is the development of treatments and vaccines. We're partnering with a number of pharma and biotech customers who are working on dozens of top pandemic-related projects. Our involvement includes leveraging our pharma services network to produce existing drugs that are showing some effectiveness in treating COVID-19. We're also supporting some of the most promising short-term solutions here. We're helping our customers develop new therapies and vaccines as well. We're working to accelerate the expansion of our sterile fill-finish capacity to support production once a successful vaccine is developed. In addition, our bioproduction business is providing a scalable purification solution to accelerate vaccine production. While significant progress has been made as we all learn more about COVID-19, there's still much more to be done collectively, and ThermoFish will play a leading role in combating the disease. Let me now turn to capital deployment. It was a very active quarter for us on that front too. Starting with return of capital, we brought back $1.5 billion of our stock during the quarter and increased our dividend by 16%. In terms of M&A, on March 3rd, we announced our acquisition of Kaigen for $11.5 billion. The transaction is an excellent fit with ThermoFisher, and given all that's happened in the world since we announced the deal, we're even more excited about adding their capabilities to our company. From a strategic perspective as a leading global provider of molecular diagnostics and sample preparation technologies, Kaigen is a perfect complement to our specialty diagnostics and life sciences capabilities. From a customer lens, our clinical customers will have access to a wider range of tests for infectious disease. Kaigen's quantiferon tuberculosis test is very well regarded. And I'm sure you've seen in the news that the company also plays a role in diagnosing COVID-19, and their solution is very complementary to ours. Our life sciences customers will benefit from the collaboration of our biosciences and genetic analysis offering with Kaigen's complementary sample preparation and assay technologies. And the transaction will also create excellent returns for our shareholders. We expect strong accretion to our adjusted EPS immediately after close, and we expect to achieve $200 million in total synergies by year three after close. In terms of the next steps here, we're moving through the regulatory process. We've completed a portion of our financing with US and Euro bond offerings, and we're beginning the integration planning. So we're still on track to complete the transaction in the first half of 2021. At this point in my prepared remarks, I would usually give you a high level view of our guidance for the year. But as you know, a few weeks ago, we withdrew our 2020 annual guidance due to the evolving COVID-19 pandemic and related customer impact. There are many unique variables that make forecasting in the current environment very challenging. This is the case for most companies, I'm sure equally so for our investors and analysts. While Stephen won't be providing specific annual guidance today, he will provide some commentary on how we're thinking about a range of potential outcomes for Q2 organic growth. He will also provide an update on some of the elements of our guidance that are less dependent on how COVID-19 plays out. We're trying to be as transparent as we can to help you in your own assessment of the range of outcomes for us in 2020. As we gain clarity, we will provide you with a more substantive update later in the year. Before I turn the call over to Stephen, let me give you a few takeaways. We're managing the business very well through this unprecedented time, protecting our colleagues, supporting our customers and making a huge impact on society. We're continuing to execute our growth strategy and strengthening our position by effectively deploying our capital. I'm very excited about QIAGEN and looking forward to adding their capabilities to our company. The long-term fundamentals of our industry continue to be very positive, and we're determined to come out of this period an even stronger industry leader. With that, I'm now going to hand the call back over to Stephen.

Thanks, Mark. I'll begin with an overview of our first quarter results for the total company, then provide some color on the four segments, and I'll finish with some comments around guidance as Mark just outlined. So onto Q1 performance, starting with our earnings results. As you saw in the press release, we grew adjusted EPS in Q1 by 5% to $2.94. Gap EPS in the quarter was $1.97, down 2% from Q1 last year. On the top line, our reported revenue grew 3% year over year. The components of our Q1 by 2% year over year. The components of our Q1 reported revenue increase included 2% organic growth, approximately 1% growth from the net of acquisitions and divestitures, and a foreign exchange headwind of approximately 1%. And as a reminder, we had one less selling day in Q1 this year, an impact of just under 1%. Turning to our growth by geography during the quarter, North America grew in the mid single digits. Europe grew approximately 10%. Asia-Pacific declined in the mid teens, driven by a decline of approximately 25% in China, as Mark previously mentioned, and rest of the world grew in the low single digits. Looking at our operational performance, Q1 adjusted operating income increased 1%, an adjusted operating margin was 22.1%, 30 basis points lower than Q1 last year. As expected, the reinvestment of the benefits of last year's debt refinancing and the investment phasing in our recent acquisitions had a negative impact on margins of about 50 basis points in Q1. In addition, the team drove strong impact from our PPI business system to more than offset the impact on margins from COVID-19. As a reminder, our divestiture of the anatomical pathology business at the end of Q2 2019 was 4 cents dilutive in Q1 2020, and a -over-year headwind of approximately $50 million on revenue, $17 million on adjusted operating income, and about 10 basis points on adjusted operating margin. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 46%, down 30 basis points from Q1 the prior year, with similar drivers to those I just mentioned for our adjusted operating margin. Adjusted SG&A in the quarter was 20% of revenue, an increase of 10 basis points versus Q1 2019. Total R&D expense came in at .9% of revenue, 10 basis points lower than Q1 last year. And R&D as a percent of our manufacturing revenue in Q1 was 6.9%. Looking at our results below the line for the quarter, our net interest expense was $90 million, down $32 million from Q1 last year. The reduction in net interest expense was largely driven by our 2019 refinancing actions. The debt we issued just before the end of this quarter had an immaterial impact on the Q1 results. Adjusted other income and expense was a net income in the quarter of $25 million, higher than Q1 2019 by $13 million, primarily due to changes in non-operating foreign exchange related to our cash pooling arrangements. Our adjusted tax rate in the quarter was 10.5%, up 40 basis points versus Q1 last year and in line with our expectations. And average diluted shares of $400 million in Q1, $3 million lower year over year, driven by the net impact of share repurchases and option dilution. Turning to cash flow in the balance sheet, cash flow from continuing operations through Q1 was $360 million and free cash flow was $110 million after deducting net capital expenses of approximately $250 million. During Q1, we returned capital to shareholders with $1.5 billion of share buybacks and approximately $75 million in dividends. In Q1, we started the process of securing permanent financing for the Kaizen acquisition. In late March, we raised $2.2 billion through the issuance of US dollar denominated senior notes. And we ended the quarter with approximately $3 billion in cash and $20 billion of total debt. Our leverage ratio at the end of the quarter was three times gross debt to adjusted EBITDA, 2.6 times on a net debt basis. Shortly after the quarter end, we raised an additional $1.2 billion through the issuance of euro denominated senior notes. Wrapping up my comments on our total company performance, adjusted ROIC was 11.8%, up 70 basis points from Q1 last year as we continue to generate very strong returns. Now I'll provide you with some color on the performance of our four business segments for the quarter. Before I get into those details, I wanted to note that COVID-19 had different levels of impacts on organic growth in the segments in the quarter. The net of the COVID-19 revenue tailwinds and headwinds resulted in a slight tailwind for life science solutions and specialty diagnostics, a mid-teens headwind for analytical instruments, and a slight headwind for lab products and services. To break that into the two pieces, starting with the tailwinds, a little more than half of the tailwinds were realized in life science solutions, mainly relating to testing kits. The rest of the tailwinds were spread evenly between specialty diagnostics and lab products and services. Moving to the headwinds, approximately half were incurred in our analytical instrument segment, largely driven by the scale of that business in China. About a quarter of the headwinds were in life science solutions, and the rest spread among the remaining two segments. So moving on to the segment details, starting with life science solutions, in Q1 reported revenue in this segment increased 10%, and organic revenue growth was 12%. In the quarter, we continued to see strong growth in this segment, led by genetic sciences and by production businesses. In Q1, adjusted operating income in life science solutions increased 20%, and adjusted operating margin was 38%, up 310 basis points year over year. In the quarter, we drove very strong volume pull-through and productivity, which was partially upset by strategic investments and business mix. In the analytical instrument segment, reported revenue decreased by 17% in Q1, and organic revenue declined 16%. As I mentioned earlier, the negative impact of COVID-19 was significant to the businesses in this segment, and as was the case in the past couple of quarters, we also had very strong prior growth comps for all the businesses in this segment. Q1 adjusted operating income in analytical instruments decreased 40%, and adjusted operating margin was 15.5%, down 580 basis points year over year. In the quarter, we saw very strong productivity, which was more than upset by pull-through on the lower volumes and business mix. Turning to the specialty diagnostic segment, as a reminder, this is the segment that previously included the anatomical pathology business, which we divested at the end of Q2 2019. We saw strong growth in this segment, led by a healthcare market channel and a transplant and clinical diagnostics businesses. Adjusted operating income decreased 2%, which included a 7% headwind from the divestiture. Adjusted operating margin was 24.7%, down 60 basis points from the prior year. In the quarter, we saw strong productivity and volume leverage. However, this was more than upset by business mix, strategic investments, and the divestiture. Finally, in the laboratory products and services segment, Q1 reported revenue increased 9%, organic revenue growth was 6%. In the quarter, growth within the segment was led by the pharma services business and the research and safety market channel. Adjusted operating income in the segment for Q1 increased 3%, and adjusted operating margin was 10.8%, which was lower than the prior year by 50 basis points. In the quarter, we saw strong productivity and volume leverage, but this was more than upset by unfavorable business mix and strategic investments, particularly in the recent acquisitions. So turning to guidance, as Mark mentioned earlier, due to the evolving COVID-19 pandemic and related customer impact, a few weeks ago we withdrew our 2020 annual guidance. So I will not be providing you with the usual outlook and detail today. However, I thought it would be helpful to provide you some insight on how we're thinking about a range of potential outcomes for Q2 organic growth. Then later on, I'll give you an update on some of the elements of guidance that are less dependent on how the impact of COVID-19 plays out. So hopefully this will assist you in your own modeling for the year. So let me start with how we're framing Q2 organic growth. There are many variables that will drive the outcome for the quarter. A current best estimate of how these variables will play out results in a Q2 organic growth somewhere between flat and negative 15, 1.5, 15%. Let me provide you some color on the two key variables that will primarily drive the outcome for Q2. First is the scale of COVID-19 related revenue tailwinds. And second is a combination of the scale of the COVID-19 related headwinds, underlying market growth, and our share gain activity. Regarding the revenue tailwinds, we estimate the range of outcomes for Q2 to be somewhere between $400 and $750 million or an additional 6% to 12% of growth. The level of testing undertaken by our customers using our proprietary testing kits will determine where we end up in this range. We estimate the combination of COVID-19 related headwinds for Q2, our share gain activity, and the underlying market growth to be a net headwind of the range of 10% to 25%. This range is largely driven by the level of customer demand, which in turn is driven by whether they are shut down altogether or operating at a reduced level. Another factor to consider is the continuity of our supply chain, which has been largely unaffected so far this year. It's worth noting that large parts of our business are relatively unaffected by COVID-19, including our bioproduction business and the majority of our farmer services business. We still need to manage through any potential COVID-19 impact at our sites, but customer demand for these businesses is relatively unaffected. Where we end up in the range of outcomes for COVID-19 headwinds will depend on a combination of factors, including the impact of country and state restrictions, the speed in which they're lifted, how quickly our customers ramp up their activity, and the COVID-19 impact on our supply chain. We remain confident in our ability to drive share gains. In challenging times like this, you need to rely on your trusted partners, and we're seeing that playing out right now with our great relationships that we've built over the years with our customers across the globe. So when you put all this together, as I mentioned, our current estimate for the range of outcomes for Q2 organic growth is somewhere between flat and negative 15%. I understand this is a broad range, but it's our best assessment at this time, and we feel it's appropriate given the variables involved. There are circumstances where we could be outside of this range, but based on what we know now, we think this is a good way to think about the growth prospects for Q2. Looking beyond Q2, it gets harder to call. Should the global economy and customer demand begin to revert to a more normal level, we're really well positioned to capture an appropriate level of revenue growth. Throughout this crisis, we're deepening our customer relationships. It's really highlighting the strength of our customer value proposition. That puts us in an even better position when the economy improves. So now I'll move on for an update of some of the modeling elements for the full year. With regards to FX, in 2020, we're assuming that it is a -over-year headwind of $300 million, or just over 1% on revenue. This is up from .4% assumed at the start of the year due to the recent changes in FX rates. We continue to expect six cents of dilution from the sale of the anatomical pathology business, which reflects revenue and operating income headwinds of $105 million and $30 million respectively. And we're continuing to assume that the acquisitions we completed in 2019 will contribute approximately $160 million to our reported revenue growth in 2020. As a reminder of phasing, given the way the calendar falls, there's one less day in Q1, and there'll be two extra days in Q4 this year. We expect net interest costs for the year to be approximately $460 million. This is $120 million higher than the initial expectation for the year. $90 million of the increase is due to the recently completed bond offerings for the Kaizen acquisition. This pre-funding cost equates to 17 cents of impacts on adjusted earnings per share for 2020. The remainder of the increase is due to lower interest income on our cash deposits as a result of the recent reduction in interest rates. We're assuming adjusted other net income will be about $70 million for the year. We expect net capital expenditures to be in the range of $900 million to $1 billion. This is $100 million lower than the initial expectation for the year driven by the timing of projects. In terms of capital deployment, we expect a total of $1.5 billion of share buybacks in 2020, all of which were completed in Q1. This total is unchanged the guidance provided on our Q4 call. We estimate the full year average diluted share count will be between 398 and 399 million shares. This is slightly lower than our initial view for the year due to the timing of the buybacks. We're also assuming that we'll return approximately $350 million of capital to shareholders this year through dividends. This is unchanged from our original assumptions for the year. So while not being able to provide the full guidance for the year, I hope that you found the additional color helpful. To wrap things up, as you can see from our very good performance in Q1, we will manage through the current and certain times with the same strength and effectiveness as we've managed through past macro issues and will exit this period as an even stronger industry leader. With that, I'll turn the call back over to Ken.

Thanks, Stephen. Operator, we're ready to open it up for questions.

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In order to allow everyone in the queue an opportunity to address the thermal 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. First question comes from Doug Shenco with Cohen.

Good morning. Before I ask my questions, I just want to say thank you and thanks to all your colleagues at Thermo for working as quickly as you have to serve the needs in the current pandemic. So the first question is, Thermo has the most manufacturing capacity for molecular tests for COVID-19. Unfortunately, it seems like your solutions are a bit less automated than some of the other ones out there and it appears your install base is a bit more limited compared to some of the other solutions. So I guess the questions are, you're producing five million tests per week. Do you believe you're going to sell as many tests as you can produce over the coming months and would there be the possibility of producing more if the demand is there? If you agree with my characterization of the mismatch between install base and production capacity, what are you doing to address this, if anything? Third, can you share how many QPCR systems are out there that actually can run these kits? And then finally, are you working either internally or externally with partners to improve automation solutions?

Doug, thanks for the questions and thanks for the kind words as well. So as the high volume company in terms of kit production, we also are the company with the largest install base of QPCR instruments globally. And when I look at that, so that part of the characterization, I would have a different interpretation than you do. We have global tens of thousands of QPCR instruments in terms of that we're ramping up with customers that want to do this type of testing. So as you know, volumes for these types of tests in terms of in the normal world is relatively low. And you go from relatively low to massive usage and you have build out the ramp up of capability, train people, get all of the instruments in fewer labs, all of those things, all of those are activities that have been happening. And our expectation is that we will have demand that ultimately is an excess of our supply of test kits, that we will have an install base to do that. We are working on streamlining workflows and as well to make it easier and easier for our customers to use it. So we feel good about playing a meaningful role in society's response to ramping up testing capacity around the world.

That's great. A very reassuring answer and definitely an instance where I'm happy that that you didn't agree with my characterization. I guess just to pivot back to Q1, I don't think you guys talked about stocking at the end of the quarter. If you did, I missed that. I guess I'm just curious to what extent do you believe stocking was a factor as people maybe tried to build up supply inventories at the end of the quarter? And I'm curious if this was a dynamic, if it was most evident in the life science solution division presumably? And then I guess looking ahead, would you expect that to reverse in any way over the balance of the year?

If you exclude all of the COVID related things, we didn't see any unusual stocking or orders for our products towards the end of the quarter. Meaning that in kind of the normal business, we didn't see any real increase in kind of one-time events. In terms of COVID, we have lots and lots of orders at the end of the quarter, but obviously as we were ramping up supply, there would be really none of the sort of too much supply in any particular location. So I don't think there was a real stocking phenomenon in our results.

Yeah, I'd say around the edges on PPE, no orders within the channel. It's a little bit of that, but it's noise in terms of the results.

Okay. And one last one. We've talked a lot about molecular testing. You talked about vaccine production. I don't think you talked about your involvement in serology testing. We know that you private label many of your reagents and controls for major IVD companies through OEM arrangements. Are you doing similar things on the antibody test side?

So Doug, thank you for the final question. I would say in serology testing, we are looking at some different options and different partnerships because we have a very large install base of instruments and a reach to the market. We just want to make sure that anything we put our brand on is something that's going to be world-class in quality, and that's what we're thinking our way through. Thank you.

Okay. Thank you.

Next question comes from Tycho Peterson, JP Morgan.

Okay. Thanks. Mark, given that we're in a little bit of a unique situation, I'm wondering if you're able to comment all on April trends and how things have progressed the last couple of weeks versus the last two weeks of March. And looking ahead, there is chatter we could get an NIH component to one of the stimulus packages. You tend to be pretty close to DC, so just curious on your views there.

Yeah. So Tycho, thanks for the question. When we reflected upon what is the right guidance range, we reflected on our results for all of Q1, the final two weeks of March, the first two weeks of April. So that's all embedded in the range of our outlook. When I think about Q2, here's how I would characterize the dynamics as we see them in the end markets. If you look at our four end markets, start with pharma and biotech. It's our largest end market. We would expect to see good activity on production side, additional demand generated by the COVID-19 response within pharma and biotech, and some softer impact on R&D spend as certain customers have ramped down R&D activities just based on the site restrictions, et cetera. So in our largest market, that's how I would characterize it. Healthcare and diagnostics will get significant benefit from our COVID-19 activities based on what we've seen towards the end of March and early April. And we're obviously going to face a headwind in this part of the business because general testing for -COVID-related or -COVID-related things are going to be impacted until you get to some more degree of normalcy in the healthcare system. And then in academic and government and industrial applied, we think the results are largely going to be driven by the pace of the reopening of the economy and easing of government restrictions. So hopefully that's helpful.

Yeah, and the last one, how would you handicap the risk of universities not opening in the fall? I know it's early, but there is some talk they may open in January. Is that something you're hearing from customers?

So customers, you have, and I'll use our China experience, it's probably most helpful. The universities haven't reopened yet. The economy has been reopening, but research activities at the universities are starting to reopen. Even at universities, not every university, but even at universities where it's closed, you're starting to see the reopening of research activity. And when I think about what we're hearing from customers in other parts of the world, they're asking us to help think through what does a return to school strategy look like. On the one hand, that's a September view, but they're also starting aggressive discussions about how do they think about getting their research activities back up and running if they had shut them down. So it's evolving, but that's our best view right now.

And then lastly, I appreciate your commentary on the COVID headwinds and tailwinds for 2Q, but as we think about Paytion and capabilities there, can you just talk a little bit about vaccine development and how you think Paytion is positioned there and is there incremental scale-up that's needed on your end to kind of support the needs in the market now?

Yeah, if you think about the four areas of focus, our pharma services capability is the one that is likely to ramp up meaningfully as the year unfolds. So we have an enormous amount of projects that we're working on, and we're actually trying to get some governmental guidance about how to think about which ones to prioritize and so forth. And we're ramping up our sterile fill finish capabilities, which is ultimately with a vaccine, that's how you would deliver it. So whoever the successful innovator is, you're going to need to be able to put it in a form that can be administered around the world. So we're working with governments to help in that process. So we do believe that this could be very meaningful activity over time. Activity level, not dollars, right now is very high, and we expect that because of our relationships that will play a meaningful role in part of the solution here. Thanks, Tyker. Okay, thank you.

As a reminder, please limit your time on the call to one question. Your next question comes from Vijay Kumar with Evercore ISI.

Hey, guys, thanks for taking my question, and congrats on the solid one-queue print. Just maybe on that, the guidance commentary here, for Q2 to appreciate the color, the net headwinds of flag to minus 15, what does minus 15 bake? Is that assuming a shutdown for all of May, April, and May, maybe some details? And maybe a related one to that is how should we think about the detrimental margins in that minus 15 scenario? Related to that, Mark, I think you mentioned how the business performed in OA. I think the portfolio is much different now versus OA to maybe talk about the resiliency of thermal portfolio to a severe economic recession exiting the shutdown period. Thank you.

Vijay, thanks for the questions. It's funny, I would say, maybe it was a year ago, I can't remember now. We had lots of dialogue about what does recession planning look like, resiliency of our portfolio, and we have consciously actively managed the portfolio so that we're extremely well positioned to navigate whatever economic headwinds are thrown at us. We didn't think we'd planning for it. If you remember with the portfolio that we had back in the last recession, it was sort of a negative 3% result for the organic for that period of time. We were heavily industrially focused and heavily instrument focused. Obviously, we have a much more consumable nature, biopharma, et cetera. So the portfolio is quite strong. In terms of the drivers of the range of outcomes on the top line, Stephen will talk about how we think about the impact of that. It's largely going to be on two factors, which is how rapidly do our customer base return to work and what does return to work look like in terms of activity levels relative to normal. That's part of the driver. And then how strong is the adoption of our COVID-related solutions in Q2, within the period of time? Because we know there's going to be a ramp up. The question is, how does that all play out? And we gave the range there. And I think the broad range we have outlined covers the likely range of scenarios, meaning that if customer ramp up is relatively moderate, you're at the lower end of the range. And if customer ramp up as the quarter unfolds, starts to return a little bit more, not to normal, but a little bit more normal, you get to the higher end of the range. Our aspiration, right? It's not guidance. Our aspiration and what we're trying to do, as you know, is always to do a great job managing through any environment. And we would like to deliver flat growth or even a little bit positive. But it's going to take fabulous execution and some things to go the right way to get there. And we're hoping that the range helps you. Stephen, do you want to make any comments about margins or anything there? Yes.

So margins. So you think about the revenue side, the range of outcomes is broad because of the number of variables involved. And when you get down to them, the margin level gets even harder to call a range because it's really dependent on the mix of revenue, where that revenue is, how our customers actually come back to work, do they come back to work. So it's a really, really broad range. And I'd love to give you a lot of detail and detailed answer with the right precision. But with COVID-19 really created a ton of variability and new unknowns. And that's the reason why we withdrew our guidance for the full year. So we'll continue to provide you kind of the usual level of candid detail in our actual performance. And I look forward to providing more forward looking clarity as the impact of COVID-19 reduces or normalizes. Thanks, Vijay.

Next question comes from Derek DeBrown with Bank of America.

Hey, good morning. And thanks for all the color. And I'm glad everybody that's safe and best of luck in this environment. A couple of questions. I think first one, can you talk a little bit about your instrument backlog? I'm curious as to what orders you have basically just sitting there waiting to be shipped and installed? And to some of your expectations, I mean, realize, of course, it's dependent upon lab timing, but just wondering what sort of sitting there that's just waiting on Doc to go out. And I guess, have you seen any cancellations on orders? And this particularly goes on looking at on the more recession sensitive side of the business.

Yeah, Derek, thanks for the question. You know, we have a strong order book for both instruments and our test kits. And we're ramping up capacity to do that. And, you know, we will, you know, so we have a good sense of what our backlog is. And we're working to make sure our customers are being well served. Our field service engineers and our clinical application specialists, they are societal heroes. I have so many emails from customers thanking us for our colleagues who are working, you know, around, each, you know, the weekends, whatever it takes to get labs up and running. So it's been remarkable collaboration to ramp those things up. In terms of cancellation of orders, the only area that we would really expect any potential there is going to be in analytical instruments. And it's probably more around deferral. Let me give you an example. Labs not open, labs not ready for a new cryo EM facility, construction might have been delayed. So I think it's less about cancellation of orders than it would likely be some delay in patterns of when you can convert orders to revenue. And we're really seeing very minimal of that right now. But you know, that from our experience, but been in the instrument business, that those are the kinds of things you would look at.

Great. And just a pending, there's been some noise out of Germany recently, as basically looking to protect some what they consider strategic assets. I realize this is more of an anti hostile takeover provision. But I'm just curious, can you talk a little bit more about the regulatory situation with kaiogen? You know, you alluded to a little bit to it, we should talk about if you've identified, you know, products that need to be divested, and basically just sort of, you know, does the current COVID situation make the regulatory environment a little bit more complicated?

Yeah, you know, what I would say is, first of all, we're very well advised, we have a strong team, a good track record. And one of the things that's been amazing about this period is the amount of governmental relationships across the world that we have developed in being part of the societal solution. So if you'd say, you know, pre this world, most governments would have known of us really in the health or their academic research areas, most governments at the most senior levels of leadership know us, and would consider us a really good collaborative company trying to do the you know, the right things. I think that helps us ultimately, as we go through the regulatory process. That's my instinct based on all of the interactions that myself, Mark Stevens and others have had with, you know, Prime Minister's, presidents, etc.

Great. And just one final question. If you think about the biopharma services business, I was surprised, you know, you have the clinical trial logistics business in there. Obviously, we're seeing some trial cancellations going around, I guess, could you talk about that part of the business and potential headwinds in that business? It doesn't sound like you were seeing much, but I'm just curious, given all the noise recently about trials being delayed or postponed.

Yeah, so you have, for sure, you're right that there'll be some impact on, you know, some level of clinical trials activity. Customers will also want to be able to reengage in clinical trials. So some of that activity, they're actually working with us to be ready. So you have some of that going on as well. You have, you know, COVID, you know, activity on clinical trials going up as well. So I think I think you got a mix, but of the pharma services portions of the business, the clinical trials activity would be the one that would have some headwind potentially in it, but, you know, it's okay.

Yeah, Derek, another element there is a lot of the trials that are actually working on are actually oncology related trials, which are less likely to be slowing down right now.

Great. Thank you for the color.

Thanks. Next question comes from Steve with Wolf Research.

Hi, good morning. I would also lead with a big thank you for everything that you're doing. On the testing front and just enabling us all to try to move forward. Really. Thank you. I'll ask an easy one, maybe a couple of easy ones compared to, you know, others, which I know have a lot of uncertainty wrapped around them. First is, I wonder if you could give us a bit of a retrospective on the last 90 days in China and what you've seen in terms of reopening, what areas have reopened faster, you know, what areas are still struggling a little bit, and maybe if you could, any sense for what you think the growth profile of China looks like relative to the rest of the world in 2Q?

Yeah. So Steve, thanks for the question. So in China, I asked the team, there's no hard number. I asked the team at the end of the quarter and I asked the team earlier in the week, how would they characterize activity level? Right. And so that's not sort of the waters or that, but just sort of relative to normal because we've got a very experienced team there. And they basically said it's 60 to 70% is where China is right now in terms of activity level, relatively, relative to normal. And that obviously it varies by the types of customers where, you know, academic, you know, is just starting to look at, you know, the research customers, researchers coming back to work, other parts of the economy more active. So, you know, and we expect that to ramp up the order unfolds provided there's not some sort of new outbreak or something that takes it off of that, off of that trend line. So that's how we would think about China.

Got it. Really appreciate that. And then my follow up relates to not necessarily test volumes, but how the tests are being delivered. When you think about where the systems versus on larger automated partner type systems and how do you see that evolving in coming months, both that dynamic as well as, you know, site of care and hospitals versus commercial labs versus, you know, eventually, hopefully more localized testing. Thank you very much.

So Steve, good question. The to our knowledge, they're running on our instruments is effectively the vast majority of the activity is what's going on because the emergency use authorization and the CE IVD approvals are on a variety of our instrument platforms. Right. And you can do other things, but having an open platform, you know, in our large install basis where we're primarily seeing that thing out. And what we're doing is ramping up the number of labs that can run our methodology. So thank you for the questions, Steve.

Operator, we're going to take just one more

question from Dan Brennan with UBS. Please go ahead.

Great. Thanks for, thanks for taking the questions, guys. Mark, I was hoping you could give us a little more color on biofarm, but you've kind of counted throughout a couple times. But could you just give us a little flavor across the different business segments? You talked about research being a little light, bio-production being strong, but like within like QA, QC, could you just walk us through how the various segments in pharma are doing? And then as a related question, you know, as we look ahead and we come out of COVID, it's possible just to think about like the health of like the large pharmaceutical companies today. Like, do you, like, would you expect this actually potentially could be a benefit for them given all the training, you know, as we begin the cycle through this acute period?

Yeah, Dan, thanks for the question. So let me, when I think about pharma and biotech, let me look first back at Q1 briefly. Very strong performance, very little impact from COVID in the first quarter. Strength, you know, in bio-production and pharma service, but also our research and safety market channel had a good quarter as well. So kind of a normal quarter, I would say, for Q1. For Q2, I normally don't try to parse through, but I'm trying to help with the forward looking, you know, we would expect similar trends on the production side of the equation, some more impact on the positive from COVID in terms of all the projects that are going on. And then because research labs, you know, activity reduced in terms of people coming to work and that kind of stuff, not shut down, but reduced around the world, we would expect that there'd be some impact, you know, in this phase as a headwind, but that will ease. And I know from the many customer conversations that I've had, they're already planning ramp up. The question is, when do you flip the switch on is the interesting question. But in terms of asking us questions like, are you ready to resupply on sites, all that stuff, those questions are coming in quite aggressively. So like ourselves, we're planning for what's the new normal look like, our customers are well. So that's the kind of short term, Q1 historical, Q2-ish time frame. You know, longer term, I think there's going to be very substantial investments in healthcare infrastructure, in, you know, responses to pandemic, it shows the importance of pharmaceutical industry and biotech industry. So I'm very bullish about what the outlook will be for that. And so, you know, as I said at the beginning of my thoughts, I'm very bullish about what the long term prospects are for the industry and how well positioned we are as a company. So thank you. Let me wrap it up with a couple of quick thoughts. From my perspective, in times like these, you know, our experience, our scale, our depth of capabilities, they're huge advantages. I have no doubt that we're going to come out of this period an even stronger industry leader. We look forward to updating you on our Q2 call. And until then, I hope you stay safe. And as always, thank you for your ongoing support of Thermal Fisher Scientific.

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