Thermo Fisher Scientific Inc

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2020 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question at that time, please press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. I would like to introduce our moderator for the call today, Mr. Kenneth Apicerno, Vice President of Investor Relations. Mr. Apicerno, you may begin.

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 investor section of our website, thermofisher.com, under the heading Webcasts and Presentations, until February 12, 2021. A copy of the press release of our fourth quarter 2020 earnings 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 most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are on file with the SEC 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 do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also during the call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP, A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our fourth quarter 2020 earnings and also in the investor section of our website under the heading Financial Information. So with that, I'll now turn the call over to Mark.

Thanks, Ken. Good morning, everyone. Thank you for joining us today for our 2020 fourth quarter call and a wrap-up of what's been a truly exceptional year for Thermo Fisher Scientific. I hope that you and your families are staying healthy as we all work to get beyond the pandemic. Before I cover many of the highlights from the quarter and the year, I want to share some news about our investor relations team. This will be Ken's last earnings call as he plans to retire at the end of March. You've all come to know Ken very well over the years. He's been leading the IR function since 2005 and is concluding a remarkable 25-year career at Thermo Fisher. Ken has been the voice of our company to the street, and he excels in that role. He conveys his extensive knowledge of our company, our markets, and our opportunities in a way that's informative and engaging. In fact, you voted Ken the best IR professional in our industry multiple times over the years. And I couldn't agree more. He's been a terrific partner to me and Stephen. Ken, thank you for a truly stellar contribution to Thermo Fisher. Looking ahead, we're very fortunate to have Raf Tejada here to take the reins in March. Raf's been a part of the Thermo Fisher investor relations team for five years, and many of you knew him during his time on Wall Street, most recently at Bank of America as an analyst supporting Derek DeBrown. I know Raph and the team will carry forward Ken's legacy of excellence in investor relations. Please join me in congratulating Raph on his new role and in wishing Ken all the best in his well-deserved retirement. So moving on to our results for 2020, an unprecedented year by any measure. I'm pleased to report that we delivered the strongest year in our company's history. That speaks to the incredible work of our 80,000 colleagues around the world. Through their tireless efforts, we led the industry in supporting our customers globally, enabling the societal response to the pandemic. We delivered outstanding results by working with speed at scale to meet our customers' evolving needs. This included generating $6.6 billion of COVID-19 response revenue and quickly returning the base business to growth after the disruption seen across the globe earlier in 2020. The strength of our response activities allowed us to significantly accelerate investments in our company to create an even brighter future with a focus on talent, R&D, and new capabilities and capacity. We also generated significant free cash flow during 2020 and were good stewards of capital, creating shareholder value through share buybacks and dividends, building a strong M&A pipeline, and reducing our net debt. I'll share some of the many highlights from the quarter and the year later in my remarks, but first I'll cover the financials at a high level. Starting with the quarter, our revenue grew 54% in Q4 year over year to $10.55 billion. Adjusted operating income increased 107% to $3.51 billion, and our adjusted operating margin expanded 840 basis points in Q4 to 33.3%. Finally, adjusted EPS increased 100% to $7.09 per share in the quarter. Turning to our results for the full year, we grew revenue by 26% to $32.22 billion in 2020. Adjusted operating income increased 60% to $9.56 billion. We expanded our adjusted operating margin by 630 basis points to 29.7%. and we delivered a 58% increase in adjusted EPS to $19.55 per share. Both our fourth quarter and full year financial performance were truly exceptional on all metrics and demonstrated the strength of our growth strategy and our ability to move with speed at scale in responding to rapidly evolving customer needs. Let me now turn to our end markets and give you some color on our performance for the quarter and the year. Starting with pharma and biotech. We had outstanding performance again in the SEND market, delivering approximately 25% growth during Q4. We saw very robust growth across all businesses serving these customers, particularly bioproduction, pharma services, biosciences, and our research and safety market channel. Our Q4 results tapped off an excellent year of growth in the mid-teens. Our strong performance is being driven by our leading role in supporting our customers across a wide range of exciting therapeutic areas, including our significant role in supporting COVID-19 vaccines and therapies. In academic and government, we grew in the high single digits in the quarter as customers across the globe ramped up activity. We saw good growth across a range of our businesses, particularly chromatography and mass spectrometry, and our research and safety market channel. Similarly, in industrial and applied, the team's strong execution helped us return this end market to growth in Q4. We grew in the low single digits during the quarter, and it was good to see our electron microscopy business return to growth. Given the significant impact of the pandemic on customer activity earlier in 2020, both the academic and government and the industrial applied ed markets declined in the mid-single digit growth for the full year. Finally, in diagnostics and healthcare, we had another incredible quarter, delivering more than 200% growth. Our COVID-19 testing revenue continued to accelerate in the quarter as customer demand for our sample preparation, PCR solutions, and viral transport media remained very robust. For the full year, diagnostics and healthcare grew by more than 100%, driven by our leading role in supporting COVID-19 testing around the world. Our outstanding performance was the result of having the right technologies and the ability to rapidly scale up manufacturing, which was enabled by our PPI business system. As I think back to this call a year ago and how quickly conditions evolved during the year, I'm humbled by the incredible impact our team had in navigating the environment while supporting so many aspects of the pandemic response. As a reminder, very early in the year, our cryo-electron microscopes were used by researchers to create the first 3D image of the virus. We were a critical supplier of PPE, leveraging our strong channel relationships to secure these products when supplied for scarce. We enabled COVID-19 testing at an unprecedented level, creating a market-leading molecular diagnostics business in just a few months to support hundreds of millions of PCR tests around the world. And as you know, we've built trusted relationships with the pharma and biotech industry over many years and have provided them with the right set of products and services. As a result, these customers engage with us on a significant number of projects to help develop and produce vaccines and therapies. In 2020, this led to $500 million in COVID-19 vaccine and therapy revenue, and we expect that to increase to $1 billion in 2021. Our comprehensive response to the pandemic demonstrates the unique capabilities of Thermo Fisher Scientific. Now let me turn to a business update framed by our growth strategy and highlight just a few of our many achievements. As a reminder, there are three pillars to our growth strategy. First, we're committed to high-impact innovation. Second, we leverage our scale and high growth in emerging markets. And third, we deliver a unique value proposition to our customers. Starting with the first pillar, it was an extraordinary year of high-impact innovation. In response to the pandemic, we established worldwide leadership in COVID-19 testing. We quickly developed and gained regulatory approval to launch the TACPATH COVID-19 Combo Kit in March, providing gold standard PCR-based tests for our customers at a scale our industry has never seen before. We also significantly expanded our portfolio of COVID-19-related products, including our Amplitude solution for high-throughput PCR-based testing and our TAC-Check PCR test for asymptomatic health surveillance. In addition, we launched a number of highly innovative products across our base business to strengthen our leading positions in analytical instruments, biosciences, and bioproduction. For example, in mass spectrometry, we extended our industry-leading Orbitrap franchise with two new-generation Explorys mass spectrometers. In our electron microscopy business, we launched two Selectris imaging filters for our cryo-electron microscopes, and in Q4, We introduced the Tundra cryo-electron microscope, and these are just some of the examples of how we're continuing to expand the benefits of this groundbreaking technology and democratize its use. The second pillar of our growth strategy is leveraging our scale in high-growth and emerging markets. Our actions in the region are a great example of how our ongoing investments and the differentiated customer experience we've created sets us up to further capitalize on the significant growth opportunities there. In China, we further accelerated from our strong Q3 results, growing 30% in Q4. To continue to strengthen our presence in China and support the local biotech industry, during the year, we localized the manufacturing of single-use bioproduction technologies at our Center of Excellence in Suzhou. And in the quarter, we announced the formation of a joint venture to establish a biological drug development and manufacturing facility in Hangzhou. Last, I want to touch on the third pillar of our strategy, our unique customer value proposition. Entering 2021, our relationships with customers and governments around the world have never been stronger. Let me give you some examples. When the pandemic hit, we were uniquely positioned to help our pharma and biotech customers develop and eventually produce COVID-19 vaccine-related therapies and vaccines because of the trusted relationships we've built over many years. We moved quickly and invested significantly in our infrastructure, scaling up to support the volumes needed, as well as adding capabilities for new modalities, such as mRNA. The broad and fast response helped deepen our already strong customer relationships, and this positioned us incredibly well to help them with their near-term COVID-19 needs, as well as the longer-term needs for future vaccines and therapies for other diseases. And through our extensive work in molecular diagnostics, clinical labs now have an even greater appreciation of our leading offering in specialty diagnostics. We've dramatically increased our PCR and sample preparation instrument install base, and our customers have seen how strong a partner we are in addressing their needs. Bringing this all together, we execute our proven growth strategy using our PPI business system that enables our teams to operate with speed and scale and was a key differentiator in our success last year. PPI is our operational discipline and enables us to translate the top-line growth into strong growth and earnings and free cash flow. We entered 2020 with excellent long-term growth prospects as a company. The way we executed for our customers throughout the year further unlocked our growth potential, which will benefit us in 2021 and beyond. Let me give you some color on the increased investments we were able to make because of our strong performance. In innovation, we ramped up our R&D investment by approximately 20% to $1.2 billion. In emerging markets, we expanded our localized capacity and capabilities to further advance our leadership. And to enhance our unique customer value proposition, we invested significant capex in our high-growth bioproduction, pharma services, and biosciences businesses, as well as in commercial capabilities to further differentiate the customer experience. In total, last year we invested an additional $1 billion to accelerate our long-term growth, roughly half in CapEx and half in P&L investments. These actions, combined with a substantial investments plan for 2021, will position our company for a very bright future. Turning now to capital deployment. We have a strong track record of creating value for our shareholders, and we continue to execute our strategy in 2020. During the year, we returned a total of $1.8 billion in capital to our shareholders through share buybacks and a growing dividend. As you know, we announced several strategic bolt-on acquisitions. In our pharma services business, we entered into a strategic partnership with CSL to expand our biologics capacity for this rapidly growing market. We acquired Phytonics to enhance our flow cytometry offering for cell analysis. Shortly after year end, we acquired the European Viral Vector Manufacturing Business from Novicep. And we signed an agreement to acquire Mesa Biotech to enhance our PCR-based diagnostics, adding gold standard technology in a rapid point-of-care testing format. We had a 2021 with a very strong balance sheet and an active deal pipeline. As always, we'll continue to apply our disciplined approach to opportunities and continue to be good stewards of our capital. Before I turn to guidance, 2020 was also a significant year of progress in terms of environmental, social, and governance priorities. We've always been a company that's focused on having a positive impact on the world. That's the true embodiment of our mission, which is to enable our customers to make the world healthier, cleaner, and safer. I'll highlight a couple of the initiatives that are having a big social impact. One is that we launched and significantly funded the Thermo Fisher Foundation for Science, expanding our STEM education programs to benefit underserved communities. Another is that we established the Just Project, a collaboration with historically black colleges and universities where we've invested in a COVID-19 testing program, allowing students and faculty to safely return to campus. I'm proud of these and the many steps our teams are taking to make a difference in our communities around the world. Taking a step back and reflecting on the year as a whole, by all measures, we delivered an outstanding year. Now looking ahead to 2021. Stephen will outline the assumptions that factor into our revenue and earnings guidance, but let me quickly cover the highlights. In terms of our revenue guidance, we expect to deliver $35.1 billion in 2021. which would result in reported revenue growth of 9%. We're initiating adjusted EPS guidance of $21.62 per share for the full year. That's 11% growth year over year and a continuation of our outstanding track record. Before I hand the call over to Stephen, I'll leave you with my key takeaways for the year. The success of our growth strategy clearly sets us apart as the unrivaled leader in our industry. 2020 truly demonstrated the power of who and what we are as a company. During a unique time of need, we stepped up for our customers, enabling their important contributions to society and helping them navigate the recessionary impact of the pandemic. As a result, we were able to gain significant market share and solidify Thermo Fisher as their partner of choice. At the same time, we stayed focused on driving strong returns from existing investments and made additional investments to accelerate our future growth. While I'm very proud of our accomplishments during the past year, as I look ahead, I couldn't be more excited about our opportunities in 2021 and beyond. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen?

Thanks, Mark, and good morning, everyone. I'll begin with a high-level summary of our Q4 performance and full-year results for the total company. Then I'll provide some color on our four segments and conclude with comments around our initial 2021 guidance. As you saw in our press release, we achieved an exceptional quarter and grew organically 51% in Q4. This resulted in full-year organic growth of 25%. Similar to previous quarters, I'll break down the organic growth into two elements. The first is the performance of the base business, and the second is the scale of the COVID-19 response revenue. In Q4, the base business grew 5% organically, another quarter of sequential improvement. For the full year, the base business was essentially flat as a result of slower economic activity earlier in the year due to the pandemic, partially upset by great commercial execution. Our COVID-19 response revenue also increased significantly in the fourth quarter to $3.2 billion, bringing the full-year impact for our customers to $6.6 billion. This was largely driven by testing-related products and instruments. It's also worth noting that we generated $500 million of revenue in 2020 from support for COVID-19-related vaccines and therapies. Once again, our PPI business system enabled excellent pull-through, and we delivered 100% growth in adjusted earnings per share in Q4 and 58% for the full year. Our PPI business system also enabled us to generate extremely strong cash flow. Free cash flow for the year was $6.8 billion, up 67% versus the prior year. Overall, exceptional financial results in 2020. Let me now provide you with some more details on our performance. Starting with our Q4 earnings results, as I mentioned, we drew EPS, adjusted EPS, by 100% to $7.09. For the full year, adjusted EPS was $19.55, up 58% compared to last year. Gap EPS in the quarter was $6.24, up 151% from Q4 last year. And 2020 full year gap EPS was $15.96, up 74% versus prior year. On the top line, our Q4 reported revenue grew 54% year over year. The components of our Q4 reported revenue increase included 51% organic growth and a 3% benefit from foreign exchange. For the full year 2020, reported revenue increased 26%. This includes a 25% contribution from organic growth and a 1% tailwind in foreign exchange. Turn to our growth by geography during the quarter. All regions delivered very strong growth. North America grew just over 65%. Europe grew approximately 50%. Asia Pacific grew approximately 20%, including China, which grew 30%. And the rest of the world grew approximately 50%. For the full year, North America grew just over 30%. Europe grew over 25%. Asia Pacific grew 5%, and rest of the world grew approximately 45%. Since our operational performance, Q4 adjusted operating income increased 107%, and adjusted operating margin was 33.3%, 840 basis points higher than Q4 last year. For the full year, adjusted operating income increased 60%, and adjusted operating margin was 29.7%, which is 630 basis points higher than 2019. In the quarter and for the full year, our PPI business system enabled us to drive exceptional volume leverage, and we also had favorable business mix. This was partially offset by strategic investments across all of our businesses to support our near and long-term growth. Moving on to the details of the P&L, total company adjusted growth margin in the quarter came in at 53.9%, up 760 base points from Q4 of the prior year. For the full year, adjusted gross margin was 51.2%, up 480 basis points versus prior year. For both the fourth quarter and the full year, the increase in gross margin was due to the same drivers as those for our adjusted operating margin. Adjusted SG&A in the quarter was 17% of revenue, a decrease of 60 basis points versus Q4 2019 due to the strong volume leverage. For the full year, adjusted SG&A was 17.9% of revenue, an improvement of 120 basis points compared to 2019. Total R&D expense was $376 million for Q4 and $1.2 billion for the full year, representing growth of 44% and 18% respectively, reflecting our increased investments in high-impact innovation. Looking at our results below the line for the quarter, our net interest expense was $134 million, $37 million higher than Q4 last year, primarily due to higher level of debt. That interest expense for the full year was $488 million, an increase of $37 million from 2019. Adjusted other income and expense was a net expense in the quarter of approximately $3 million, $19 million lower than Q4 2019, mainly due to changes in non-operating FX. For the full year, adjusted other income and expense was a net income of $40 million, which was $32 million lower than the prior year. Our adjusted tax rate in the quarter was 16%, up 430 basis points versus Q4 last year. For the full year, the adjusted tax rate was 14.3%, or 320 basis points higher than 2019. The increase in the tax rate was due to the substantial increase in pre-tax profit year over year coming in at that marginal tax rate. Average diluted shares were $400 million in Q4, about $2 million lower year over year, driven by the net impact of option dilution and share repurchases. For the full year, the average diluted shares were $399 million. Turning to cash flow and the balance sheet, cash flow was another great highlight for the year. We significantly increased net capital expenditure to accelerate the execution of our growth strategy while delivering a 67% increase in free cash flow. Cash flow from continuing operations was $8.3 billion, net capital expenditures were $1.5 billion, and free cash flow was $6.8 billion. During 2020, we returned approximately $1.8 billion of capital to shareholders through stock buybacks and dividends, and we ended Q4 with approximately $10.3 billion in cash and $21.7 billion of total debt. Our leverage ratio at the end of the quarter was 2.1 times gross debt to adjusted EBITDA and 1.1 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 17.9%, up 610 basis points from Q4 last year as we generated exceptional returns in 2020. Now I'll provide some color on the performance of our four business segments. And similar to last quarter, I'll start with some framing thoughts on the impact that our COVID-19 response had on our segment results. From a revenue standpoint, the majority of the COVID-19 response revenue is recognized in life science solutions. This is revenue from testing kits, instruments, sample preparation, and reagents for lab-developed tests, recognized in the genetic sciences and biosciences businesses, This segment also includes revenue from vaccine and therapy production supplies recognized in the bioproduction and biosciences businesses. The specialty diagnostics segment includes revenue in the clinical diagnostics business from the molecular controls that go into testing kits. We also recognize revenue for viral transport media in the microbiology business and for tests and PPE in the healthcare market channel. Laboratory products and services segment includes revenue from vaccine and therapy services from our pharma services business. This segment also includes revenue for PPE in the research and safety market channel, as well as plastics used in testing workflows and cold storage equipment manufactured by our lab products businesses. From a margin standpoint, the impact of the COVID-19 differed across the segments based on the scale of the response revenue and the different levels of profitability on that revenue. In addition, during the quarter, we continued to make strategic investments across all of our businesses. This included investments in our colleagues in terms of incentive compensation and recognition, as well as commercial, R&D, and production capability investments. The size of those investments does not necessarily align with the COVID-19 response revenue in each segment, and so that does skew some of the reported segment margins. So a lot of moving parts from a segment margin standpoint reflects the very active management of the company successfully navigating the current environment and positioning the company for an even brighter future. Moving on to the segment details, starting with life science solutions. In Q4, reported revenue increased 138% and organic revenue growth was 134%. In the quarter, we saw exceptionally strong growth in our genetic sciences business and biosciences and bioproduction businesses. for the full year reported in organic revenue growth was 77%. Q4 adjusted operating income and lifetime solutions increased 236%, and adjusted operating margin was 53.1%, up 16 percentage points year over year. In the quarter, we drove very strong volume pull-through and positive business mix, and we continue to make strategic investments across all businesses in this segment. We also had a tailwind on margins from FX. For the full year, adjusted operating income increased 150%, and adjusted operating margin was 50.2%, an increase of 15 percentage points over 2019. In the analytical instrument segment, reported revenue increased 8% in Q4, and organic revenue growth was 5%. End markets for chemical analysis remain muted, but this was more than upset by strong growth in both chromatography and mass spectrometry, and the materials and structural analysis businesses. We continued to see increased levels of customer activity in these businesses and drove strong commercial execution. So the full year reported revenue in the segment declined 7%, and organic revenue decreased 8%. Q4 adjusted operating income in analytical instruments decreased 16%, and adjusted operating margin was 20.2%, down 580 basis points year over year. In the quarter, we drove very strong productivity that was more than offset by the strategic investments that I mentioned earlier. We also had a headwind to margins from FX in this segment. For the full year, adjusted operating income decreased 37%, and adjusted operating margin was 15.8%, a decline of 730 basis points versus prior year. Since the specialty diagnostics segment, in Q4, reported revenue increased by 109%, organic revenue growth was 107%. Our COVID-19 response revenue was significant in the quarter, enabling us to deliver very strong growth in our microbiology, healthcare market channel, and clinical diagnostics businesses. The level of routine diagnostics testing activity was higher in Q4 than Q3, but still remains below pre-pandemic levels, particularly for our immunodiagnostics and transplant diagnostics businesses. For the full year, reported revenue was 44% higher than the prior year, and organic revenue growth was 48%. Adjusted operating income increased 134% in the quarter, and adjusted operating margin was 26.4%, up 270 basis points from the prior year. In Q4, we drove very strong volume leverage, which was partially upset by negative business mix and strategic investments. For the full year, adjusted operating income increased by 47%, and adjusted operating margin was 25.6%, an improvement of 60 basis points versus prior year. And finally, in the laboratory products and services segment, Q4 reported revenue increased 28%, organic revenue growth was 25%. In the quarter, we saw a strong growth in all our businesses in this segment, the research and safety market channel, the laboratory products, and pharma services. For the full year, reported revenue was 16% higher than 2019, and organic revenue growth was 13%. In Q4, adjusted operating income in the segment decreased 13%, and adjusted operating margin was 9.4%, which is 440 basis points lower than the prior year. In the quarter, strong productivity and volume leverage was more than offset by unfavorable business mix and strategic investments. For the full year, adjusted operating income declined 4% and adjusted operating margin was 10.4%, 210 basis points lower than the prior year. With that, I'll turn to our initial 2021 guidance. We're starting the year with annual guidance of 7% organic growth and adjusted EPS of $21.62, which will result in 11% growth over 2020. So another year of very strong financial performance. The dynamics around the pandemic continue to be fluid, but we thought it was important to give you our initial view of the full year, along with the associated assumptions to help frame how we're positioning the company for another successful year. We've chosen to go with a point outlook rather than a range because there are a multitude of different potential customer demand outcomes for the year, especially around testing. we remain incredibly well positioned to operate with speed at scale to uniquely serve our customers under any demand scenarios that actually plays out this year. And at the same time, we'll continue to invest aggressively for very exciting near and long-term growth opportunities while delivering exceptional financial performance for shareholders. So just as we did in 2020, in 2021, we will maximize the opportunity to drive short and long-term value for all our stakeholders. Let me now provide you with the assumptions behind our initial guidance. In terms of revenue, our guidance is $35.1 billion, which represents approximately 9% reported growth over 2020, including 7% organic growth. There are two key elements to the organic growth assumption. First, the base business. Here we're assuming 7% organic growth in 2021. The second element is the COVID-19 response. Here we're starting the year with an assumption of $7.1 billion of revenue for 2021. This reflects testing-related revenue that's roughly the same as we delivered in 2020, plus approximately $1 billion of vaccine therapy-related revenue in 2021, which is double the level we generated last year. Let me give you some color on the phasing of the COVID-19 response revenue. We're assuming that vaccine and therapy revenue is fairly linear in 2021. The testing-related revenue is assumed to be very front-end loaded, with Q1 levels similar to Q4 2020. Our guidance then assumes testing demand may begin to moderate in Q2 and potentially moderate further as the year progresses. Should the pandemic be longer lasting and the need for testing maintained, then there's sizable upside to the $7.1 billion, particularly in the second half of the year. We're really well positioned to support our customers should demand levels be higher than this initial guidance assumption. We'll have more clarity on the actual second half demand levels later in the year. With regards to FX, we're assuming a year-over-year tailwind of approximately $400 million of revenue or 1.2%. and 14 cents to adjust the DPS, or 1%. We're assuming that acquisitions will contribute approximately $125 million to our reported revenue growth in 2021. The initial guidance assumes an adjusted operating margin of 29.8%, 10 basis points higher than last year. Our PPI business system will continue to drive strong volume pull-through and productivity benefits would be partially upset by significant strategic investments, adding to those made in 2020 that Mark outlined earlier. Moving below the line, we expect net interest expense in 2021 to be approximately $470 million. This is $20 million lower than 2020 due to lower average net debt. It includes the impact of the $2.6 billion debt paydown that we completed in January. We're assuming adjusted other net income will be about $8 million, lower by $32 million from 2020, mainly due to changes in non-operating FX. We expect the adjusted income tax rate to be 14% in 2021. The improvement from that 14.3% prior year tax rate is primarily driven by the benefits of that tax planning initiative. We're assuming net capital expenditures of approximately 2.2 to $2.4 billion. The midpoint represents an increased investment of $800 million over 2020, driven by capacity and capability expansions in our pharma services, bioproduction, biosciences, and laboratory products businesses. Free cash flow is expected to be approximately $7 billion in 2021. The increase over 2020 is primarily driven by expected earnings growth, partially offset by the increase in capital expenditure investments. Our guidance includes $2.8 billion of capital deployment. This consists of $1.5 billion of share buybacks, which we completed in January, $880 million for the recently completed acquisition of Novicep's European viral vector business, and it assumes approximately $400 million of capital return to shareholders this year through dividends. We estimate that the full-year average diluted share count will be approximately 398 million shares. And our guidance does not assume any future acquisitions or debasages. So it does not include the acquisition of Mesa Biotech, which is expected to close later in Q1. And finally, I wanted to touch on quarterly phasing for the year. There are several factors to consider. First note that we have three extra selling days in Q1 and four fewer days in Q4 in 2021, resulting in one less day for the full year. And as I mentioned earlier, the COVID-19 response revenue included in the initial guidance is more significantly weighted to the first half of the year. And as a reminder, the 2020 comparisons are significantly easier in the first half of the year. So a lot of dynamics impacting the top-line growth by quarter, with very strong growth expected in the beginning of the year. From an adjusted EPS standpoint, we're expecting approximately 54% of the year's total in the first half of the year, and 46% in the second half, reflecting very strong operational execution throughout the year. And then from a near-term standpoint, taking into account all of these factors, we're expecting Q1 organic growth and operating margin, the profile, though, to be similar to Q4 2020. So at a high level, we're starting the year with guidance of 7% organic revenue growth and 11% adjusted EPS growth, a continuation of our excellent long-term financial performance track record. As always, we'll strive to live for the best possible results, and I look forward to updating you on our progress as we go through the year. With that, I'll send the call back over to Ken.

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

Okay, thank you. In order to allow everyone in the queue an opportunity to address the Thermo Fisher Management Team, please limit your time on the call to one question and only one follow-up. If you have any additional questions, please return to the queue. Your first question comes from Tycho Peterson from J.P. Morgan. Your line is open.

Hey, good morning. I'll start off by wishing Ken all the best. It's been great to work with you over the years. Mark, your implied testing drop-off is steeper than we've heard from others, like whole object and habit. I'm curious if you could talk a little bit more about that dynamic in particular. Is that just a function of... you know, the non-automated PCR testing and maybe, you know, a lower installed base of amplitude. And then I'm curious about Mesa Bio, you know, thoughts on it, you know, entering an increasingly crowded point-of-care market. And, you know, are you planning to materially scale the antigen test? And then how could that factor into the outlook?

Tycho, thanks for the question. Yeah, I'm much more optimistic than the way you framed the question, right? So if I think about our PCR install base and the assumptions, you know, we have a really strong line of sight to the first quarter, reasonable line of sight to the second quarter, and after that, our customers just don't know, right? So we made an assumption based that You know, we're going to see incredibly strong demand in the first quarter and that it's going to drop off somewhat in Q2. And then we made a much more conservative assumption. But, you know, the way the pandemic has played out, there are many scenarios where I see testing demand being very robust for a long period of time. This pandemic is going to be around in some form around the world, and doctors are going to want to know whether or not a patient or a person has COVID. So I think you'll see, as the year plays out, there are scenarios of the testing assumption. Amplitude demand has been extraordinarily robust. Our install base is growing, and that's been a nice adder to the growth that you saw in Q4 and the strong momentum we expect. Mesa's very exciting, right? When you think about... what we've learned throughout the pandemic is that pcr testing is truly the gold standard and the accuracy that you get is super relevant and mesas technology gets you a result in 30 minutes with pcr capability and it gives you that confidence in the accuracy and the way we think about it is there are a number of applications that are you know very uh relevant to have that rapid thing Pharmacies would be an obvious example. The sports leagues have been using this technology. So those would be examples of where it is, and that obviously would be additive to our capabilities. It's not assumed in our guidance at this point. So thank you, Taika. Thank you.

Thanks. And then one follow-up for Stephen just on the margins, you know, understanding the 29.8% operating margin guidance. As we think about the gives and takes around, you know, the COVID tailwinds, can you maybe just talk as we think about, you know, COVID eventually wearing off, how much do you expect to retain in terms of some of the margin uplift you've seen over the past year?

When I think about the margin profile that's embedded in this guide, as I mentioned, Q1, similar to Q4 of 2020, and then the other three quarters are roughly the same in terms of margin profiles, a combination of loss contribution from the testing revenue drop-off and then the timing of investment. So that gives you an indication. Thanks, Tycho. Thank you. Thanks, Tycho.

Your next question comes from Derek DeBrown from Bank of America. Your line is open.

Hi, good morning, and I'll extend my congratulations to Ken and Raf. Stephen, I just wanted to sort of follow up on Tycho's comment there. I mean, for most of, I would say for a lot of the end of 2020, a lot of the incoming calls from investors were, oh my God, Thermo has this huge COVID tailwind. It's going to create these really difficult comps. They're not going to be able to grow earnings. Obviously, that's not the case in 2021, but it sort of flips the question now over to 2022? And I realize it's too early in a certain extent to really answer that question given all the uncertainty. But I mean, all of my incoming questions this morning from investors are, well, the guide for 21 looks great. How do they think about 2022? And I don't know any initial thoughts on how you can talk about that or if you can talk about getting potential for earnings growth in 2022. Thanks.

So, Derek, I've been around this one a while. I've never been at the next year's guidance on the opening one, but it's a great question, and it's one that is a very fair one as well. So the way I think about it is the following. Think about the way we've managed the company throughout 2020, right, which was drive very substantial growth in our financial performance, earnings, cash flow, while dramatically accelerating the reinvestment rate in the business, right? New opportunities were open during the course of the year because of the pandemic, because of how we responded, because of the relationships we solidified and built. And we were able to put a billion dollars of additional reinvestment in the business above the normal increases that we have every year. And we're stepping that up again in 2021. So what does that mean for the future? It means that the company is positioned to grow more rapidly. And that obviously will drive good earnings off of that increased kind of base business activity. And much of the investments that we made that are supporting COVID are going to be applied to other applications. So, obviously, vaccines and therapies we expect will continue to be very relevant in 2022. But at some point, they'll be less relevant. And that capacity, that all converts over to non-COVID-related activities. On the molecular diagnostic side, the installed base increase in sample prep and the installed increase in qPCR creates the opportunity to build out an even larger molecular diagnostic business. We increased our installed base hugely during the course of the year, and more importantly, we satisfy customers. The reason that some of the others in this industry have relatively flat straight through the year results for COVID is because they couldn't get manufacturing capacity up, right? We were able to do that in months. Others are talking about level loaded demand. That's because the supply has been so constrained with others. So we're excited about our prospects. And obviously, we'll see what the economy is, what the growth is, all of those things. And as it gets much closer to 2022, we'll figure it out. But But I'm extremely bullish about the long-term prospects of the company.

Great. Thanks, Mark. I know it's a lot of this what have you done for me lately sort of conversations, but I hear you. You already answered my molecular diagnosis question, so I just have one quick follow-up. And just to clarify, the CapEx step up in 2021, you would expect those levels to sort of fall off in 2022 and beyond, right? That's not a new base level to CapEx spending.

No, we would expect, and Stephen will join, we would expect it to start to wind back down over time. Obviously, if there are new opportunities that come up, we'll obviously support them because we'll take the returns. But effectively, the step up in 2020 and the further step up in 2021 really support the opportunities that materialize in the long-term acceleration of our growth.

Yeah, I think it's kind of long, long-term modeling. It's really around about 3% to 3.5% of revenue is a good way to think about the profile of the company right now.

Perfect. That's just what I wanted. Thank you very much. Thanks, sir.

And your next question will come from Jack Meehan from Nefron Research. Your line is open.

Thank you. Good morning. And also, congratulations, Ken. Congrats, Raph. Well deserved. Thank you. Wanted to dig into the guidance a little bit more. So around the assumption for vaccine and therapeutic revenue fairly linear throughout the year. Though we're obviously seeing the vaccine manufacturers scaling capacity into 2021. So could you just give a little bit more color around the framework behind the assumption? Are there any takes that you're assuming throughout the year?

So I think one framing is we're at that run rate already in Q4. So this is kind of how we're seeing the year play out with a continuation of where we are. So a very high level of support for our customers.

And then can you just clarify the last part of your question about the take?

Yeah. Are there any projects that you think drop off throughout the year?

Oh, yeah. I mean, there's always, you know, we obviously have supported a lot of development work of which some of those therapies or vaccines will be unsuccessful. So those projects conclude embedded in the number, but obviously the demand for the successful ones increase. So, you know, that kind of run rate we're at is not going to be the exact same products throughout the year. It ebbs and flows. Great.

And then I wanted to turn to analytical instruments. As you reflected over the last six months versus the first six months of 2020, how do you think the purchasing demand translated throughout the year? Could there have been some catch-up in the second half? And then maybe looking forward, what are your assumptions around that segment for 2021?

Yeah, so in terms of... The demand profile, obviously there was very substantial disruptions both in customers' ability to order or even receive an instrument during the first part of the year and obviously all of the other challenges that the pandemic brought. You know, we saw activity start to pick up at a much higher rate. stronger level, particularly in material and structural analysis, which is largely our electronic cross-suite business and our chrome and mass spec business. So Q4 was strong in those regards. Chemical analysis is still soft, although bookings did improve. So, you know, what I would expect is that you'll see continued strengthening this year and that analytical instruments would grow above the company average. That's how I would think about it. Thanks, Mark.

And your next question will come from Doug Shanko from Cowan. Your line is open.

All right. Good morning, everybody. Thanks for taking my questions. Before I get into it, once again, Ken, best wishes on the next stage. You deserve all the best. And congrats to RAP. We have always enjoyed working with you both and look forward to working with you both, well, at least RAP moving forward and hearing about what Ken's doing on the beach. So first topic is, again, on guidance. 2021 guidance assumes a base business growth rate of 7%. According to our math, this implies a two-year stacked growth rate of around 3.5%, which is well below your longer-term growth rate target and also the Q4 core growth rate. How would you characterize the conservatism embedded into 2021 guidance, or is this kind of balancing – Early in the year conservatism, which is typical for you with maybe just seeing some increased headwinds related to COVID-19 restrictions in certain parts of your business.

So when I think about the base business, I feel good about the implied step up in growth that we saw from Q4 for the full year, going from roughly 5% growth in the fourth quarter to 7% growth in the base business for the full year. And what's assumed in there is still there's some level of disruption based on the pandemic. Let me just visualize it. Our specialty diagnostic business, routine doctor visits are still well down, right? So there's parts of the business where you don't see that recovery for a while, but we still feel confident in growing at a good rate. And I see scenarios that are above the 7%, right? So it's not as if that's the only scenario that plays out. So I think it's an appropriate start. I don't know if it's conservative or not, but we measure ourselves at the end of the year. Did we do a great job? So we're going to look at how did everybody else in the industry report, and we need to make sure that we're gaining market share. And if the 7% reflects market share gains, then we're going to be satisfied. And if there's more opportunity to go faster than that, then you're going to see us deliver it.

Okay, that's helpful. And then let me just pivot to China. China growth rebounded strongly in the fourth quarter. Actually, we were looking back to our model over the years, and I think this represents the highest growth rate for at least the past decade in China on a quarterly basis. What drove the strength in China? Did you see some benefit of catch-up in spending And then you made some comments in your prepared remarks, which prompted me to, I guess, prompted some curiosity about how your large molecule investments in China are actually impacting growth. And I guess the last part of this would be what's embedded for China growth in 2021. Thank you.

Yeah, so China, it was good to see, you know, obviously very disrupted first half of the year, 20%-ish organic growth in Q3 and 30% organic growth in Q4. So nice step up, and Q4 was very strong. There was definitely some catch-up spend, right? I mean, you know, obviously customers getting back to work and all those things. So there was some of that in there, and that's pretty much impossible to quantify exactly what that is. But bookings were stronger than revenue growth, right? So we're excited about the growth prospects for China for this year, right? So China should be one of our fastest-growing geographies in 2021. So that would be the expectation. In terms of biologics and large molecule growth, You know, we've talked about it a lot on these calls over the years. You know, the emergence of a local biotech industry for the Chinese market has become larger and larger over time. We've done a good job serving that customer base. I'm excited that we were able to localize our capacity for single-use technologies to support the local customer base and give them assurance of supply. And at the same point, we're very excited about the partnership and the joint venture we're forming in Hangzhou to actually produce biologic drug substance and drug products. So we're well positioned there and biotech is a nice driver of our growth. We also saw nice growth in other segments, academic and government was quite strong in the quarter as well. So hopefully that gives you a little bit of a flavor for what happened in China and what the strong outlook looks like.

Perfect, thank you.

Thank you, Doug.

The next question comes from Vijay Kumar from Epicor. Your line is open.

Hey guys, thanks for taking my question and congrats to Ken and Raf. Mark, maybe a big picture question for you. Is there a view that the Bay's business should be accelerating or perhaps have gotten stronger emerging from the pandemic? You know, some of the feedback we've been getting is higher in-store base, you know, biopharma, you know, accelerating. So perhaps some thoughts on what the base, I know the LRP pre-pandemic was 5 to 7. Is that LRP itself that not changing because the business has emerged more stronger from the pandemic?

Yeah, so, Vijay, thanks for the question. And, yeah, you've heard us talk about really starting in the Q3 call and the analyst meeting in September about how we're thinking about the longer term, right, which goes back to the guiding principle that we had through the pandemic, which is make the decisions, investments, and run the company to set ourselves up for a brighter future. We created new opportunities, and new opportunities were created just in the market as well because of the pandemic. And when I think about that, we're positioning the company to exit the pandemic phase as a faster-growing company than what we grew in. The exact numbers we'll figure out over time. But, you know, the way I think about it is, you know, our – The percent of our business in pharma and biotech continues to increase. That's our fastest-growing end market. So that's a market-driven, weighted average-type growth. But our value proposition, the increased investments in our innovation, you know, the investments we're making in emerging markets, those things will all help us drive very strong growth going forward. So I'm very bullish about the long-term prospects for accelerated share gain into the long term.

That's helpful. And one, perhaps enough, the cash flows, the guidance $7 billion, that sort of flattens up slightly year on year. If I just look at your cap deployment assumptions for the year. uh it's about uh you know close to three billion ish uh considering uh uh you know you guys have 10 billion plus on the balance sheet plus the seven you're generating and i don't think thermal has ever uh had two consecutive years of 10 billion plus of uh cash lying on the balance sheet so i'm curious when why uh you know free cash perhaps uh you know why is it seven um any one of items and uh any thoughts on capital farming

So, Vijay, let me just clarify on the free cash flow. That includes a very significant increase in CapEx. So if you think about cash from operations, that's 13% growth year over year, which I think is incredibly strong and appropriately strong. And then we're choosing to deploy a large chunk of that towards these great opportunities in terms of CapEx. So that kind of gets you to the $7 billion of free cash flow. And then Mark, in terms of capacity?

Yeah, so we have had substantial capacity even when the company is more levered. And we've talked about that when we give our three-year models. We always have these numbers that are stagnantly large. We can deploy $30 billion, whatever the numbers were historically back in 18 or 19 when we would talk about them. And when I think about where we are today, we have a lot of firepower. And you're seeing us be active right now with bolt-ons. We have a very busy industry. And we're going to be good stewards of capital because we're going to be disciplined. We'll do the right things. We'll pass on the things that we don't think are the right. It was good to get some return of capital already completed this year with a billion and a half of buyback. So, you know, we don't look at the calendar and say in any particular year you have to do X or Y, but I would expect us to be able to deploy that capital over time and be a nice adder to the strong financials that you're seeing in the initial guidance.

Exactly.

Thanks, CJ.

Operator, we have time for one more.

Okay, so your final question for today then will be from Dan Brennan from UBS. Your line is open.

Great, thank you. Thanks for taking the question. Ken, obviously it's been great working with you, and best of luck. Same thing with RAP. Look forward to going forward. And Mark, a quick plug, things are looking up for our jets here. So I wanted to ask a first question on vaccine and therapeutics. I know you've addressed a few comments here thus far. I think on the last call you discussed this billion-dollar revenue cumulatively. Looking at 4Q, 21, and 22, and I know to Derek's question, you addressed the outlook of some color on 22. I'm just wondering if you can help us think through, you know, kind of the durability. Obviously, there's a lot of moving pieces, but, you know, there's a billion dollars you're dining for 21. You know, presumably, there's going to be a, you know, pretty decent tail of this vaccine opportunity. Any way to help us think through that opportunity and how it breaks down between your tools business and pay panel?

So, Dan, thanks for the question, and You know, the Jets, not the best of years. But at least we were focused on a lot of things at Thermo Fisher, so I didn't suffer the pain too much. So when I think about vaccines and therapies, as you know, kind of our philosophy, which is, you know, articulate the numbers and the outlook on what you can see and don't create a lot of hype around things. So when we started out, you know, some months ago, we talked about a billion-dollar opportunity in total, right? That was contracted revenue that we saw. Obviously, as the pandemic continued, as our position continued, as we won more and more parts of the business, you know, even what we committed to, if it all went to zero at the end of this upcoming year, it would be a billion and a half, because we did a half billion last year, a billion this year. And based on what we see with the pandemic and what our customers are telling us, we would expect demand for everything. COVID-19 therapies and vaccines to be very substantial in 22 and likely to have some level of revenue going into 23 and maybe even longer. So it's going to be a large contribution based on the strength of our bioproduction business and our pharma services capabilities. Thank you for the question. Let me wrap here with a few things. First, as all of our analysts expressed on behalf of all 80,000 colleagues, Ken, thank you for a job incredibly well done and wishing you the happiest of retirements. It's been awesome. From a company perspective, we delivered an exceptional year, and we're even more excited about the opportunities ahead of us. We're looking forward to updating you during the course of 2021, and as always, Thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.

Thank you, everyone, for joining us today. This will conclude today's conference call. You may now disconnect.