Thermo Fisher Scientific Inc

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2021 first 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 during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to introduce our moderator for the call, Mr. Rafael Tejada. Vice President, Investor Relations. Mr. Tejada, 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 this call is being webcast live and will be archived on the investor section of our website, thermalfisher.com. under the heading Webcasts and Presentations until May 14, 2021. A copy of the press release of our first quarter 2021 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, which is on file with the SEC and available in the Inventors section of our website under the heading SEC Filings. When 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 this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2021 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, Raf. Good morning, everyone. Thank you for joining us for our Q1 call. As you saw in our press release, we had a very strong start to the year. We delivered another quarter of outstanding financial performance with excellent growth on both the top and bottom line. As you know, we're playing a significant role in enabling society's response to the pandemic, including a rapidly expanding role in supporting vaccine production. In our base business, we meaningfully accelerated growth across all our businesses in the first quarter. We had very strong execution of our growth strategy, including launching a number of innovative new products, capitalizing on our leadership in the high growth and emerging markets, strengthening our unique customer value proposition, and we're already starting to see the benefits of the accelerated investments we initiated in 2020. We continue to execute our capital deployment strategy, completing our acquisition of a European viral vector business and NASA Biotech, a rapid point-of-care molecular diagnostics company. We also return capital to our shareholders through stock buybacks and dividends. As I'm sure you saw, shortly after the quarter closed, we announced our agreement to acquire PPD, a leading provider of clinical research services serving pharma and biotech customers, our fastest-growing end market. So another great quarter of delivering for our stakeholders in the near term while investing organically and inorganically for a great future. I'll cover each of these topics in more depth in my remarks, but first let me recap the financials. Our revenue in Q1 grew 59% year-over-year to $9.91 billion. Our adjusted operating income for the first quarter increased 155% to $3.51 billion. and our adjusted operating margin expanded 13 percentage points in Q1 to 35.4%. Finally, we delivered another quarter of strong adjusted EPS performance, achieving a 145% increase to $7.21 per share. Turning to our end markets, conditions were very robust, driven by three factors. The strong fundamentals in life sciences, ramping of economic activity globally, and the role our industry is playing in the pandemic response. Our unique competitive position has allowed us to deliver another fantastic quarter. So starting a firm in biotech. We have outstanding performance with growth of approximately 35%, driven by strong underlying market dynamics, the benefits of our unique customer value proposition, and our leading role in supporting our customers across a wide range of exciting therapeutic areas, including our significant role in supporting COVID-19 vaccines and therapies. We saw excellent growth across all businesses serving these customers, including bioproduction, pharma services, biosciences, chromatography and mass spectrometry, and in our research and safety market channel. We're clearly benefiting from our trusted partner status that we've earned over many years with these customers. In academic and government, we had very strong performance and grew 20%, driven by robust customer activity globally. In Q1, we saw strong growth across a number of our businesses supporting this customer base, particularly in biosciences, chromatography and mass spectrometry, and electron microscopy. Turning to industrial and applied, we grew in the low double digits in the first quarter. The team continues to execute at a very high level to capture opportunities as more customers increase their activity level. During the quarter, it was good to see strong growth across all of our instruments businesses. And finally, diagnostics and healthcare. We had another outstanding quarter, delivering approximately 150% growth. demand for our COVID-19 testing solutions was very strong. In our base business, while demand is still below pre-pandemic levels, it was encouraging to see our immunodiagnostics business return to strong growth in the quarter. To summarize our performance, our teams capitalized on improving conditions in our end markets, and we continue to gain market share. Now, let me give you an update on our role in supporting the pandemic response. Once again, this quarter, General Fisher played a very meaningful role in fighting COVID-19 globally. We generated $2.9 billion in COVID-19 response revenue in Q1. Demand for our PCR testing solutions was strong, and our role in the development and production of vaccines and therapies continues to ramp even faster than we expected. Coming into the year, we expected our role in supporting vaccines and therapies to represent $1 billion in revenue. Based on our orders and at the speed at which our capacity expansions are coming online, we now expect to deliver $1.5 billion in vaccine and therapy revenue in 2021. We also continue to leverage our expertise to bring new solutions to the fight against COVID. One example in the quarter was our launch of the thermoscientific aerosol scent sampler, a new air monitoring system to help facilities such as hospitals, schools, and businesses identify the presence of in-air pathogens, including the virus that causes COVID-19. As more people return to public spaces, the aerosol scent sampler will complement other safety protocols. We also acquired Mesa Biotech, which adds simple and rapid PCR testing to decentralized settings, including doctors' offices, pharmacies, and to support a number of back-to-life applications. Customer interest is very high, and we're using our PPI business system to scale the manufacturing of the rapid diagnostic cartridges used by Mesa. We expect to generate $200 million this year from these capabilities and are very excited about the potential for this molecular diagnostic technology post-pandemic. The other point I would like to make is that because of our leading role that we played in the pandemic response during 2020 and our outstanding financial performance, we were able to significantly accelerate our investment programs last year in R&D, commercial enablement, as well as capability and capacity expansions. These accelerated investments are really positioning thermal fissure for an even brighter future. For a glimpse into the early momentum building from these investments, let me turn to the great progress we made in Q1 on our growth strategy, which is based on three pillars. Launching high-impact innovative new products, leveraging our scale and high growth in emerging markets, and delivering a unique value proposition for our customers. I'll now share a few examples that demonstrate how we use this strategy to continue to build on our success and create value for our customers. Starting with innovation, during the quarter, we launched a number of new products across our businesses to strengthen our leading position and to enable our customers to break new ground and achieve their goals. Let me highlight just a few. In chromatography and mass spectrometry, we launched two new thermoscientific Orbitrap Explorers GC mass spectrometers, which further extend the impact of our industry-leading Orbitrap franchise to bring high-resolution analysis to a range of applications, including toxicology and metabolomics. In materials and structural analysis, we launched the Thermoscientific Spectra Ultra, a new generation scanning transmission electron microscope for material science applications, which provides insights at atomic scale resolution to accelerate research and improve manufacturing productivity. And in our biosciences business, we launched the Kingfisher Apex Purification System for high throughput sample preparation. Turning to the second pillar of our growth strategy, we're leveraging our scale to create an outstanding experience for our customers in the high growth and emerging markets. We're seeing excellent growth, particularly in China, where customer activity has returned to pre-pandemic levels, and we grew more than 60%. And we continue to strengthen our capabilities serving these markets. As an example, in the quarter, we started shipping product from our new single-use facility in Suzhou. which localized the bioproduction manufacturing for biotech customers in China, and our investment in our bioproduction capabilities in Singapore and its single-use capacity for pharma and biotech customers globally. So we have strong momentum and high growth in emerging markets, and we continue to strengthen our position. Turning to the third pillar of our growth strategy, our customer value proposition, we continue to increase our capabilities and capacity to be an even better partner for our customers and help them achieve their goals. Let me update you on our progress in serving our pharma and biotech customers. Our upcoming acquisition of PPD, a leader in clinical trial management services, is a great complement to the role we play in supporting research and development, clinical trials, and production. These combined capabilities, along with a complementary reputation for excellent quality and service, will further enhance Thermo Fisher's value proposition for pharma and biotech customers. Importantly, our customers will be able to more efficiently access these services, which are key enablers of their success. I've interacted with a number of our customers since the announcement, and they're excited about the new capabilities that PPD will bring to Thermo Fisher Scientific. By adding these highly complementary services to our portfolio, we'll be able to further advance our strategic partnership as our customers work to bring a scientific idea to an improved medicine. It will also provide terrific career opportunities for our colleagues and will create significant shareholder value. Our organic investments are also building capability and capacity for our pharma and biotech customers. One lens which highlights this is the support of a scale-up of mRNA vaccines, which are in high demand globally for COVID-19 today, but also for many other diseases going forward. As you know, we're an important supplier in this area, and we have continued to invest to scale our capacity, including in our biosciences business. We're building additional capacity for essential raw materials in different regions of the world. We're also expanding our bioproduction purification resin capacity, which is used in the mRNA manufacturing process. And finally, we're ensuring expanded and regionally available sterile full finish capacity to produce final drug product. As always, our PPI business system helped to drive our success during the quarter, enabling us to find solutions and better ways to serve our customers, work more efficiently and effectively, and create even greater value for all of our stakeholders. Now I'll give you a quick summary of our capital deployment activities so far this year. We've had a very active start, closing $1.4 billion in acquisitions in the quarter, and as I just mentioned, entering into an agreement to acquire PPD for $17.4 billion, plus the assumption of approximately $3.5 billion of net debt. We also returned significant capital to our shareholders during the quarter, repurchasing $2 billion of our shares and increasing our dividend by 18%. So we've had a great start to the year on capital deployment front, and our M&A pipeline remains very active. Turning to a brief update on the progress of our ESG initiatives, our mission to enable our customers to make the world healthier, cleaner, and safer has never been more relevant. And in addition, we want to make a very positive impact in the communities in which we live and work. I'm very proud that over the past year we've significantly increased our social impact, and in the first quarter we committed to an impact investment of $25 million to support financial institutions serving black and minority communities and businesses. Just like the Just Project and our Foundation for Science, which we launched last year, this more recent investment is meant to help create opportunities for all. Turning to our guidance for 2021. Driven by our very strong start to the year and our confidence in the full-year outlook, we're raising both our revenue and earnings guidance for the full year. Stephen will get into the assumptions behind our guidance, and I'll cover the highlights. We're raising our revenue guidance by $550 million to $35.6 billion, which represents 10% reported growth over 2020. In terms of adjusted EPS, we're raising our guidance by $0.35 to $21.97, which will represent 12% growth over 2020. Before I turn the call over to Stephen, let me summarize our key takeaways from Q1. We delivered another excellent quarter of financial performance above the top and bottom line. The end markets are strong. We committed to execute or continue to execute our proven growth strategy to be an even stronger partner for our customers. We effectively deployed capital to create significant value for our customers and our shareholders, and we couldn't be more excited about our plans to acquire PPD. I'm very much looking forward to welcoming PPD's 27,000 colleagues to Thermo Fisher, which we expect to do later this year. Finally, I'd like to thank my 80,000 colleagues at Thermo Fisher for their dedication to our company, our customers, and for once again delivering another fantastic quarter. And now I'll turn 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 Q1 performance. As Mark mentioned, we have another exceptional quarter and grew our revenue 59%, including 53% organic growth. We delivered $2.9 billion of COVID-19 response revenue and accelerated the growth of our base business 13%, so a great start to the year on the top line. We also had an excellent start to the year on adjusted EPS, growing 145% in Q1 to $7.21. This was 70 cents higher than our expectations for Q1 at the time of our last earnings call, driven by great operational execution, the timing of expenses within the year, and a higher tailwind from FX. Overall, exceptional financial results in Q1, continuing our momentum from 2020. Let me now provide you with some additional details on our Q1 performance. GAAP EPS in the quarter was $5.88, up 198% from Q1 last year. On the top line, our Q1 reported revenue grew 59% year over year. The components of our Q1 reported revenue increase included 53% organic growth, a 4% tailwind from foreign exchange, and a 2% from acquisitions. As a reminder, we had three extra selling days in Q1, which represents a tailwind of approximately 3%. Looking ahead, we have four fewer days in Q4. Turning to our performance by geography during the quarter, all regions delivered very strong growth. North America, Europe, and Asia Pacific all grew approximately 50%. China grew 60%, and the rest of the world grew over 80%. Turning to our operational performance, Q1 adjusted operating income increased 155% and adjusted operating margin was 35.4%, 13 percentage points higher than Q1 last year. In the quarter, our PPI business system enabled us to drive exceptional volume leverage and strong productivity. We also had favorable business mix and a tailwind from FX. This is partially upset by strategic investments across our businesses to support our near and long-term growth. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 54.1%, up 810 basis points from Q1 of the prior year. The increase in gross margin had very similar drivers as those of our adjusted operating margins. Adjusted SG&A in the quarter was 15.4% of revenue, a decrease of 460 basis points versus Q1 2020, reflecting strong volume leverage. Total R&D expense was $320 million, representing growth of 31% over Q1 2020, reflecting our increased investments in high-impact innovations to fuel future growth. Looking at results below the line for the quarter, our net interest expense was $113 million, $23 million higher than Q1 last year. Adjusted other income and expense was a net income in the quarter of approximately $14 million, $11 million lower than Q1 2020, mainly due to changes in non-operating FX. In line with our expectations, our adjusted tax rate in the quarter was 16%, up 550 basis points versus Q1 last year, due to the substantial increase in pre-tax profit. Average diluted shares were 397 million in Q1, about 2.5 million lower year over year, driven by share repurchases net of option dilution. Turning to cash flow on the balance sheet, cash flow was another strong highlight for the quarter. Our PPI business system enabled us to deliver significant cash flow from the very strong top-line performance. The cash flow from continuing operations was $2 billion, and free cash flow was $1.4 billion. Our capacity and capability investments are proceeding very well, and this quarter, net capital expenditures were $620 million. In the quarter, we returned $2 billion of capital to shareholders through buybacks, $1.5 billion in January and a further $500 million in March. During the quarter, we also increased our dividend by 18%. We deployed $1.4 billion in acquisitions in Q1, including Mesa Biotech and the acquisition of a European-based viral vector business. Shortly after the quarter end, we also announced an agreement to acquire PPD. Early in the quarter, we completed a redemption of $2.6 billion of senior notes, and we ended Q1 with approximately $5.6 billion in cash and $18.6 billion of total debt. Our leverage ratio at the end of the quarter was 1.5 times gross debt to adjusted EBITDA and 1.1 times on a net debt basis. In concluding my comments on our total company performance, adjusted ROIC was 21.4%, up 960 basis points from Q1 last year, as we continue to generate exceptional returns. Now I'll provide some color on the performance of our four business segments. Similar to the last few quarters, I'll start with some framing thoughts on the impact of the COVID-19 response on our segment results. From a revenue standpoint, as was the case in the last two quarters, the majority of the COVID-19 response revenue is recognized in life science solutions, with the remainder recognized in specialty diagnostics and the laboratory products and services segment. From a margin standpoint, the impact of 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. That included investments in commercial, R&D, and production capacity. 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. It's a lot of moving parts from a segment margin standpoint, but it reflects the very active management of the company successfully navigating the current environment and positioning the company for an even brighter future. So moving on to the segment details, starting with life sciences solutions. In Q1, reported revenue in this segment increased 137%, and organic growth was 129%. In the quarter, we saw exceptionally strong growth in our genetic sciences, biosciences, and bioproduction businesses. Q1 adjusted operating income in life sciences solutions increased 238%. and adjusted operating margin with 54.2%, up 16 percentage points year over year. In the quarter, we drove very strong volume pull-through, had positive business mix, and we continued to make strategic investments across all businesses in this segment. We also had a tailwind on margins from FX in this segment in Q1. In the analytical instrument segment, reported revenue increased 26% in Q1, and organic growth was 22%. During the quarter, we saw a strong growth in both the chromatography and mass spectrometry and the materials and structural analysis businesses, and it was good to see chemical analysis return to growth. Q1 adjusted operating income in analytical instruments increased 59% and adjusted operating margins with 19.6%, up 410 basis points year-over-year. In the quarter, we drove very strong volume leverage and productivity, which more than offset strategic investments. Since the specialty diagnostics segment, in Q1, reported revenue increased by 69%, organic revenue growth was 65%. Our COVID-19 response enabled us to deliver very strong growth in our microbiology, healthcare market channel, and clinical diagnostics businesses. In addition, it was good to see our immunodiagnostics business return to growth in Q1. Adjusted operating income increased 81% in the quarter, and adjusted operating margin was 26.5%, up 180 basis points from the prior year. And in Q1, we drove very strong volume leverage, which was partially upset by unfavorable business mix and strategic investments. Lastly, in the laboratory products and services segment, Q1 reported revenue increased 32%. Organic growth was 26%. In the quarter, we saw very strong growth in all of our businesses in this segment. Adjusted operating income in the segment increased 80%, and adjusted operating margin was 14.8%, which is 400 basis points higher than the prior year. In the quarter, we delivered strong volume pull-through and productivity, partially upset by strategic investments. So with that, let me now turn to our updated 2021 guidance. Consistent with the approach we took with our initial guidance, we're providing a point outlook rather than a range. We think this is the most helpful approach given there are a multitude of different potential customer demand outcomes for the year. As Mark mentioned, we're raising both our revenue and adjusted EPS guidance. Let me walk you through the details. I'll begin with revenue. We're raising our revenue guidance by $550 million to $35.6 billion. which represents 10% reported growth over 2020, including 8% organic growth. This increase was driven by three factors. $250 million of the increase is due to an improved organic growth outlook for the base business. The strong start to the year enabling us to increase base business organic growth from 7% to 8% for the full year. $225 million of the increase comes from the higher impact of acquisitions. reflecting the acquisition of Mesa Biotech, which was not included in our initial guidance, and a good start to the year for our European viral vector business. And the final element is an increase of $75 million for the higher FX tailwind. Turning to adjusted earnings per share, we're increasing our annual adjusted EPS guidance by $0.35 to $21.97, which would result in 12% growth over 2020. The increase reflects $0.20 from improved operational outlook for the year, $0.10 for FX, and $0.05 from capital deployment. To break down the $0.05 increase in the impact of capital deployment versus our initial guide, I'm now including $0.10 of additional interest cost in Q4 as a placeholder for pre-financing for the PPD acquisition. And this is more than offset by $0.06 benefit from the $500 million stock buyback undertaken in March and a $0.09 benefit from acquisitions. So after a great start in Q1, we're able to increase our outlook for the full year. Let me now provide you with some additional assumptions behind our updated guidance. We're now assuming that we'll deliver $7.3 billion of COVID-19 response revenue in 2021. This is $200 million higher than the initial guidance, reflecting the acquisition of Mesa Biotech. Within the $7.3 billion, we're now assuming vaccine and therapy-related revenue of approximately $1.5 billion for the year. This is $500 million higher than our initial guidance assumptions, reflecting strong customer demand and progress with our capacity expansion projects. There still remains a large range of outcomes for testing demand, and we remain well-positioned to support our customers. With regard to FX, we're now assuming a year-over-year tailwind of $475 million, or 1.5% of revenue, and $0.24, or 1.2%, of adjusted EPS. We're assuming that completed acquisitions contribute $350 million to our reported revenue growth in 2021, or 1.1%. The guidance does not include any operational benefit in 2021 from the acquisition of PPD. When we get more clarity on the actual close date, we'll provide an estimate of the likely 2021 impact. As mentioned earlier, I've included $40 million, or 10 cents, with just the DPS impact of higher interest costs in the guide as a placeholder for the pre-financing of the PPD transaction. So we now expect net interest expense in 2021 to be approximately $510 million. We continue to expect the adjusted income tax rate to be 14% in 2021, no change from prior guidance. We're assuming net capital expenditures of approximately $2.5 to $2.7 billion. This is $300 million higher than the initial guidance for the year, as we continue to identify opportunities to support future customer demand with our 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, no change from prior guidance. Our guidance now includes $3.8 billion of capital deployment, $2 billion of share buybacks, which were completed in Q1, $1.4 billion for completed M&A, and $400 million of capital returned to shareholders through dividends. We estimate that the full year average diluted share count will be 397 million shares. And finally, I wanted to touch on quarterly phasing for the year and give a reminder of the factors that I outlined when I gave the initial guidance. First, as mentioned earlier, we had three extra selling days in Q1, and we'll have four fewer days in Q4. The COVID-19 response revenue in the guidance is more significantly weighted to the first half of the year, and the 2020 comparisons are significantly easier at the beginning of the year. That sets up for very strong growth in the first half of the year, and given the revenue phasing, the adjusted EPS is weighted more to the first half of the year. In summary, we started the year with an excellent Q1 and are in great position to achieve our goals for the year. With that, I'll turn the call back over to Raph.

Thank you, operator. We're ready to take questions.

As a reminder, to ask a question, you will need to press for one on your telephone. To withdraw your question, press the pound key. 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 additional questions, please return to the queue. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jack Meehan with Nifrin Research.

Thank you. Good morning. I was wondering if you could start and talk about PPD. You know, they got off to a strong start to the year, a lot of momentum. Can you talk about how the initial integration planning is going to ensure they keep that momentum going? And you mentioned some of the customer feedback. Can you talk about maybe from a therapeutic perspective where customers are seeing the value?

Jack, thanks for the question. We're, as you know, very excited about the combination of PPD and our offering to our pharma and biotech customers. And as you know, the CRO market has very good characteristics of strong growth. because of the relevance of that offering and the trend for more and more of the activity to go to the biotech area where there's less of those capabilities in-house. So you've got good market and PPD off to a very good start to the year financial performance and authorizations backlog, very encouraging. It's a great business performing at a very high level. We're just starting that process of planning the combination, and we've had very good collaborative dialogue with the leadership there, and over the coming months we'll be working on that process. But, you know, for the colleagues there, we can't wait to welcome them, and it really is – largely business as usual and bringing new ways to add more value to our customers. So very encouraging. And customers are very excited. The customers I've interacted with, they get it. They understand the logic, and they like the fact that we're going to have more capabilities to help them navigate the important things that they're doing. In terms of therapeutic areas, you know, PPD covers the full range of the therapy classes, as does Thelma Fisher. So we'll be able to support our customers in the important work that they're doing.

Great.

And then, you know, everyone is focused on the durability and the COVID benefit. Appreciate all the color so far. I guess I'm curious, based on the COVID recovery and, you know, the increased outlook on the vaccine and therapeutic side, do you think the street forecasts in 2022 are a good baseline? And can you just talk about the level of visibility on that interplay between COVID and COVID?

Yeah. You know, when I think about the COVID response, the first quarter was exactly how we thought it was going to play out. And when we look at the outlook for the year, you know, we've assumed parts of that response are going to go within it, parts of it, growing parts of it will be less. And in aggregate, we feel very comfortable with the outlook of the same number, the $7.1 billion that we started with at the beginning of the year, and added $200 million from ASA. So that's been, you know, our view. And three months into the year, that continues to be a view that we think makes sense. Thanks, Jack.

Our next question comes from the line of Tycho Peterson with J.P. Morgan.

Hey, thanks. Mark, you practically brought up the benefits of accelerated investments a number of times in your comments. I know you took R&D up 20% last year, and it was up 31% in the first quarter. Can you maybe just give us a little sense of where the incremental R&D investments are going and how you think about some of the payoff there?

Yeah, so, you know, it would go in areas, as you would expect, right, where R&D budget is largely deployed. So increases in mass spectrometry, electron microscopy would be two of the big areas, bioscience reagents, as well as clinical sequencing. Those would all be areas that got good investment. And You know, when I look at our results, obviously, you know, new products take time to have the big impact, but those businesses are performing at a very high level. And you saw from the press release and some of my comments, we had a very good strong start to the year on new product launches, two mass spectrometers, you know, building on our leadership in Orbitrap, another exciting electron microscopy offering, this one particularly for material science applications that we launched in the quarter. You know, we've had good launches around our clinical sequencing business. And then one, to meet a societal need, probably not a huge revenue opportunity, but an incredible need, which is how do you know if COVID is present, you know, in an indoor space? And because of our, you know, very deep scientific knowledge about air monitoring, we were able to launch a very relevant solution for that application, which will also have applications in the past and things that we learned from COVID. anthrax challenges of years in the past we were able to deploy here. So, you know, bringing out solutions that are relevant for our customers.

Yeah, and, Taika, that's the OpEx view, and then CapEx. We've substantially increased our CapEx for the last couple of years, and we're seeing the benefits of those coming online starting now. So Mark highlighted a couple in his prepared remarks, and there will be more of those coming along as we go through this year and next year.

Thanks. And then, Stephen, for the follow-up, two on the model, I'm just curious, you know, as we look a little bit further out, if you can give us any sort of rough guidance on how we should think about normalized, you know, ex-COVID margins 2022 and beyond, and then any preliminary thoughts on the tax rate, you know, given what's on the table here with reform longer term?

Yeah, so we started before the pandemic. We had a strong margin profile as a company. We'll exit the pandemic with a higher revenue base, which will come through at a higher margin. So margins will be elevated from where we went into this pandemic and look forward to getting more details about that at the appropriate time. In terms of tax, we continue to follow closely what's happening in D.C. There's various different proposals being made. As we've done in prior times of change, we remain active in advocating for if there's change to happen, that it's the right change and there's no unintended consequences, and we'll manage the company appropriately through that period of time. We have a competitive tax rate versus others, and we'll remain with that competitive tax position through whatever change happens is the way I think about it. Thanks, Teiko. Thank you.

And your next question comes from the line of Vijay Kumar with Evercore.

Hey, guys. Congrats and a nice venture to offer me. Maybe I'll start one on the guidance, Stephen. you know, growth in Q1 was a tight signal. So I just want to clarify that. And, you know, when you speak about, you know, one and a half billion of vaccine revenues, does that assume any contribution from booster opportunity or perhaps a pediatric label indication?

So, Vijay, I'll start. So base business was 13% in the quarter. And as a reminder, the days are favorable in Q1, less favorable in Q4. But we raised our base business. The $250 million organic raise is based on the base business performance. So the base business organic growth also goes up from seven to eight from that perspective. On the billion and a half, dollars of vaccine and therapy revenue. The demand is very strong. It's probably not tied, actually, to the label. It's really a combination that orders are very large, and we've been able to get our manufacturing capacity to ramp up more quickly than we originally anticipated. It's really the benefits of the PPI business system. So, you know, that means that for 21, we have, you know, a big increase in expectation. And my take on the discussions with our customers and certainly what we understand from the medical side of things, you know, the vaccine and therapy revenue is likely to have quite a bit of duration well beyond 21. So as you get more indications of potential need for, you know, boosters or even annual vaccinations, you could imagine that the demand for vaccine revenue to be, you know, well into 22 and beyond.

That's helpful, Mark. And then one follow-up, maybe a bigger picture question on the testing. You know, there's been some chatter from your peers saying, look, as we get past the peak of the pandemic, perhaps testing is going to consolidate on more automated platforms. And I think the implication is that perhaps, you know, your systems are not as automated. Maybe could you talk about that, Mark, on testing? uh you know how does thermal stack up versus uh appears in the space and and other pieces that i mean i'm look at your guidance it looks like testing you guys are feeling much better than competition so it seems to be slightly confusing on the messaging versus what we're seeing on the numbers vj thanks for the question you know so when i think about um

our role in the response, right? We understand customer needs. We have, you know, an incredible team of people that respond to it. We had the largest COVID, you know, response revenue last year. by a huge margin, right? And we've had these discussions in the past. Would have people in March bet that Thermo Fisher would have done the best job in supporting the industry? Probably not on that particular dimension. Broadly, yes. But on molecular diagnostics, we didn't go in with the strongest hand, if you will. But we made a huge difference. And the demand in the first quarter, as you see in the $2.9 billion, was extremely good. for us. And so, you know, we're assuming that, you know, we'll play a role in both symptomatic and asymptomatic testing. And remember, it's quite a global business, right? Our installed bases around the world. So that's the view. Now, we expect that there'll be, you know, less testing, right, in Q2 and in the second half, exactly as we said back in January, right, that, you know, that as more vaccinations happen, that testing will, you know, will come down a bit. And that's embedded in our guidance, you know, for sure. So I'm very enthusiastic about the role we're playing. And to be honest, I'm looking forward to the world when we don't have so much testing, because it means that, you know, we're going to sporting events, you know, we're traveling around the world and all the good things that come with it. And What happens when that happens is our base business really picks up as well. So, you know, hopefully that gives you a sense of where we are.

I appreciate the comments, Mark. Thank you. You're welcome.

And your next question comes from the line of Dan Arias with Stiefel.

Good morning, guys. Thanks. Mark, on bioproduction, Obviously, you guys have quite a bit going on there in terms of expansion activity. You touched on that. I think the press release from March talked about $600 million in investments there. Are you able to sort of just crystallize for us what kind of incremental revenue capacity you think you'll be adding by the time all is said and done if we just sort of look 12 to 18 months down the road? I mean, it feels like if you're looking for where the base business might be most different in 2022 or 2023 – That's sort of a good place to start, so I'm wondering if you might be able to just put some numbers around that.

Yeah, so the way that I think about the investments in bioproduction, that's always been, you know, a very rapid growth, you know, strong double-digit growth historically, right? And you can glean from the comments over the many years that, that when we look at the other companies in the field reporting and we're comfortable saying we're growing faster or we're gaining share, that means that while we don't get down to the micro detail of how each of our sub-businesses are performing there, we're doing very well. And the expansion of $600 million of capacity supports that growth for a number of years. We're pulling forward programs that we had online so that we can, you know, sustain very strong growth for many, many years to come. And when I look at the Q1 performance for bioproduction, the business has been extremely robust, and that takes into account what others have reported so far.

Okay. Maybe just as a follow-up on federal research funding, you've usually got a better than average line of sight into the what's being talked about in Washington. Any views on the NIH budget next year and how that shapes up? You know, the president's proposal is obviously pretty encouraging. It does have that ARPA-H program in there. I'm curious to get a view on that, the appetite for that, and whether you think that that might actually end up translating to fund availability for basic research if that does come to fruition.

Yeah, I mean, historically, there's been bipartisan support for National Institutes of Health funding. And as the former vice president and as the president, I also listened to his remarks last night, I would expect him to be a real advocate for NIH. I mean, he's a champion of of tackling cancer, and the NIH plays a real role in that, and I think that bodes well for funding. So we'll see, obviously, but I would expect that the NIH should be in good stead, which means good news for academic and government customers, for sure.

Your next question comes from the line of Doug Schinkel with Cowan.

Doug? Doug, are you on mute? All right, maybe we'll go to the next question and then come back around to Doug.

And your next question comes from the line of Derrick Brown with Bank of America. Good morning, Derrick. Your line is open, sir.

Derek, we don't hear you, unfortunately. We'll go to the next question and see if we can sort out what the technical challenge is. Operator.

Okay. And your next question comes from the line of with SVB Lyric.

Hi, Mark. Can you hear me? Yes. okay uh thanks um so um just wanted to um get your view in terms of post pandemic um um pcr install base you obviously have a very large install base here um obviously you're pointing out um you know decline in covid testing uh in line with your previous comments but as we think about that larger um instrument install base and some of that is uh automated amplitude and others how should we think about menu expansion on that how can you monetize that further into a broader diagnostics operating around the world?

Yeah, so, Puneet, thanks for the question. When I think about post-pandemic, right, I'm going to give a holistic answer, including the specifics around the question that you asked, right? One of the things that we said back a year ago was we'd manage the company in such a way that we exited the pandemic with a meaningfully stronger industry leadership than when we went in. Obviously, we went in with a very strong position. And if I think about the actions that we've taken, We've accelerated our investments in operating expenses, R&D, and CapEx to be a faster-growing company organically exiting the pandemic, right? So that's the overarching thing that we've done, right? So we didn't necessarily say let's put all of the money where the pandemic stuff was, but rather where's the best opportunities to make a difference for your customers long-term. So the first thing we expect in whether it's 22 or 23, whatever the timeframe is as the pandemic, you know, wanes, is to expect – that we will be a faster-growing company. At the same point, we've made very significant investments in our pharma services and bioproduction business. They're very strong performing in their normal activities across many therapeutic classes, but that capacity will easily shift from COVID-related demand to non-COVID-related therapy classes. So when you think about those investments, the capacity is usable for the different areas. So, again, you see those investments transitioning from one type of use to the other. When you think about the molecular diagnostics business and you think about what's happened, we're obviously going to exit a much stronger player than where we were when we started. We have a much expanded installed base of PCR instruments. We also have a refreshed database. base of the PCR instruments. And those instruments are very good for lab-developed tests where customers are looking for excellent economics and to customize their work, and we're a major component supplier. And we'll also be adding regulated content on top of that as well. So you'll see respiratory panels over time and things of that sort. We've dramatically increased our installed base of sample preparation instrumentation and we've gained very meaningful share and we're well positioned to have a much stronger business going forward. The two other things that have changed is that our lab plastics business, lab plastics essentials, the pipette tips, the microtiter plates, all the things you use for testing, we've expanded capacity, we have alleviated supply chain issues across the industry, and we put ourselves in a position to have a bigger business coming out of the pandemic. And then finally, We were a tiny player in specimen collection, and we'll have a nice business on things like viral transport media, obviously at a much smaller level than the pandemic, and it's been unprecedented, the demand for viral transport media during the pandemic. But we built low-cost capacity in two countries to be able to serve the world, and that's going to be a nice, smaller but nice, profitable business that serves, you know, customer needs. So We will exit the pandemic period at some point in time with a stronger, you know, molecular diagnostic business than we had coming into it, and I feel great about it. The big numbers are going to come from the organic growth of the company and the repurposing of the capacity for our bioproduction and pharma services. That's probably the way to think about the question. Got it. That's very helpful, Mark.

And thank you. Thanks for you.

And your next question comes from the line of Doug Schinkel with Cowan.

Good morning. Can you all hear me now? Perfect. Okay, excellent, excellent. Well, thank you for taking my questions. The first thing I want to talk about is just really trends in your capital-exposed business, and then I want to go back to guidance. So, Mark, how much of the strength you're seeing in your more capital-exposed businesses, what you talked about in your prepared remarks, was due to a recapture of demand from earlier drivers that maybe got pushed off because of the pandemic versus a real sign that things are improving here? Can you give us some sense of are you seeing backlog build and, in turn, That's the first topic I thought we were going to talk about.

Let's do that one, and then we'll hit the second one. Okay. So, Doug, thank you for that question. And, you know, when I think about our analytical instruments business, off to a very strong start. Obviously, it gets an easy comparison, right? But nonetheless, you know, very good to see demand build. Excellent growth in, you know, the chroma mass spec business and very strong growth in electron microscopy and very good growth actually in chemical analysis. All three businesses did well with chroma mass spec doing the best. Bookings orders were meaningfully ahead of the revenue. So part of the outlook, you know, while we don't do segment level outlook, part of our confidence in raising our organic outlook is that the instrument business was is well positioned after the start of the year to have a strong 2021. It's hard to know whether that was activity that just didn't happen last year. It's hard to know exactly why, but activity is robust around the world, and that's very encouraging.

Okay. That's super helpful. So thanks for that. And then on guidance, and again, maybe this is overdoing things, but at a simple but important level, Q1 revenue growth was better than your target. Q1 earnings was over 50 cents better than street expectations. However, while you increased full-year revenue targets by more than the magnitude of the Q1 revenue beat, you increased full-year EPS targets by less than the magnitude of the Q1 beat. You did provide an EPS guidance change bridge in your prepared remarks, so thanks for that, Stephen. So this is maybe where I'm overthinking things, but I am wondering if this is also a reflection, this change in EPS, of the fact that you're seeing the base business trending a lot better than you expected coming into the year, and you are now taking a more conservative stance on COVID-19 revenue, and given the latter is higher margin, that this is going to have some impact on earnings. Maybe that was intended to be clear, or maybe I'm just wrong, but I'd love it if you could just talk about that a little bit. Thank you.

So, Derek, it's simpler than that. So we're basically banking the great performance on the base business in Q1 for the full year, both on the organic growth that goes into the revenue and then the adjusted EPS. We're banking the Q1 strong FX, stronger than we had anticipated. There's some timing of expense, about $100 million of expenses. There could be now more Q2, Q3 than we expected in Q1. and then we're adding in $0.10 of impacts of interest costs in Q4 for the acquisition of PPD. Yeah, I mean, the response revenue, it's basically the increased response revenue. We've added in MESA biotech for the year and kept the 7.1 the same plus MESA, so 7.3. That's the way to think about the guys.

Doug, in the way you framed the question, it's really the $0.10 of PPD interest costs. Obviously, a little bit of favorable on the other aspects of it, but that's just probably what the difference is. And there's nothing, as Stephen just said, there's nothing to read into the COVID response revenue in terms of the guidance on EPS costs.

Okay. Super helpful. Thank you both again. Thanks, Doug.

And your next question comes from the line of Derek LeBron from Bank of America.

Derek, are you there?

I'm here.

Can you hear me? Awesome. We can.

Perfect. Great. So, Mark, I won't ask you on 22 this time.

You could have. I think I got it when Puneet asked it, so I think I tried to get it there.

Yeah. But I do want to follow up on some of the macro rebounds and the recovery in that. And just can we talk a little bit about FBI? I mean, you called out your electron microscopy business. I mean, is that still mostly cryo-EM that you're seeing? Have you seen any sort of pickup in – in the semi side of the business. Obviously, there's a lot of semiconductor shortages and concerns about that. Can you talk about what sort of opportunity is that for you in your sort of like near-line testing?

Yeah. So, Derek, the electron microscopy business performed very well. broad-based strength in material science and life sciences applications. And obviously within material science, because of all of what we read about chip shortages and capacity expansions, you know, we typically benefit from the capital investment cycle that will be coming online in the The semiconductor industry is one of the material science applications, so I would think that's encouraging, and we're seeing good activity and strong bookings across the board there. So off to a good start.

Got it. And just as a follow-up, you know, the MESA acquisition was interesting just because you historically have not done deals like that. I'm just sort of wondering if you could pontificate on that. sort of point of care versus central lab testing and sort of how you see it given you've got your fingers in both of it. I mean, how do you see sort of the mix of that evolving as we go forward? I mean, it's one of the debates in the diagnostic industry right now is sort of like what is ultimately that central lab portion going to be and how much of that's going to go to the POC, and is this an area where you would see some incremental potentially capital deployment in that space? Thanks.

Thanks, Derek. You know, in terms of Mesa, you know, one of the things, obviously, that the pandemic drove was testing happening in totally different ways and in different locations than it was pre-pandemic, right? And, you know, and certainly there was also back-to-life applications, which historically wouldn't have had any testing if you think about it. And we got inundated with technology companies, you know, coming to us for either distribution partnerships or acquisition opportunities, a huge number. And I stopped counting. I think I got 50 or 60 different ones that we looked at, you know, extensively. And we were very impressed. with the Mesa technology in terms of ease of use and accuracy, and already having the 510K on the respiratory tests, we saw it as a really interesting addition to the portfolio, and that actually its role encoded on back-to-life applications with the 30-minute PCR answer, very easy to use. A lot of what COVID will do will pay for the acquisition, and then you get an option on the upside for its application as you build out a menu over time. That's how we thought about it. So it was probably less about a huge change in strategy or a huge move from a point of care standpoint, other than a technology that we like. We're extremely capable in PCR and said this is a really natural extension of our offering. And the business off to a nice start, which is great. Thanks, Derek.

Thank you. Operator, we have time for one more question.

And your next question comes from the line of Dan Brennan with UBS.

Great. Thanks for taking the question. Mark, I wanted to just ask you a question and start off with a question on COVID testing and then just wanted to ask you just to give us a look around the world at what's happening with the reopening. But just on COVID testing, It's an important question that we get. I know Derek was pressing on 22. I'm even looking beyond 22 to 23. How do we just – is it possible just to frame where Thermo's business could go as things normalize? Obviously, there's a ton of assumptions that go into it. We've had a lot of conversations with investors just trying to figure out where this could go. So let's say the $6.1 billion that you did. in 2020? Any sense of, you know, as we look out and we get to a normal state of testing a couple of years out, what some level of that could be? And then the second question was just related to just you talked about the really strong rebound in China. Just could you give us a sense of, you know, kind of what's baked in within your new 2021 guidance kind of regionally? Thank you.

So in terms of geographic view, incredible strength across the world. With all the regions growing, around 50% and the rest of the world was 80%. China was 60%. Really broad-based strength. You know, we're seeing, you know, encouraging, you know, obviously encouraging outlook and, you know, from a geographic perspective. You know, from a testing perspective, you know, we're going to play a larger role than what we would have played back in 2019 based on the comments around a larger specimen collection business, a larger installed base of PCR instruments that's also refreshed, as well as a meaningfully higher share in sample prep and testing. you know, adding content to that install base over time, you know, very hard to quantify what it is in 23 because you really have to make an assumption of what the pandemic looks like. Is it, you know, is it history or are we still fighting new variants and those things? And depending on that, you could have an incredibly wide range of outcomes. So we'll keep updating you periodically over time. So thank you, Dan. Let me just wrap it up here. with a quick comment, which is, you know, as I think about the quarter, you know, marked conditions are strong, put off to an excellent start, and we're on track to deliver really another outstanding year. We look forward to updating you on our Q2 call, and please continue to stay safe, and as always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.

And thank you. And thank you for your participation.