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?