Thermo Fisher Scientific Inc

Good morning, ladies and gentlemen, and welcome to the Fermo Fisher Scientific 2023 First Quarter Conference Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypads. I would like to introduce our moderator for today's call, Mr. Rafael Tejada, Vice President of 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, ThermoFisher.com, under the heading News and Events until May 12, 2023. A copy of the press release of our first quarter 2023 earnings is available in the investor section of our website under the heading financials. 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 Investors section of our website under the heading Financials 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 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 2023 earnings and also available in the investor section of our website under the heading financials. So with that, I'll now turn the call over to Mark.

Thank you, Raph. Good morning, everyone, and thanks for joining us today for our first quarter call. As you saw in our press release, we had a very strong start to the year. We delivered another quarter of very strong financial performance. Our core business is performing very well. I'm pleased with the team's great execution and the share gain we saw across our company, especially within the context of a slightly more challenging macro environment. Our continued success is the result of our proven growth strategy, the trusted partner status that we've earned with our customers, and our PPI business system, which is a differentiator for us and enables operational excellence within the company. So let me first recap the financials. Our revenue in the quarter was $10.71 billion. Our adjusted operating income was $2.33 billion, and we delivered another quarter of strong adjusted EPS performance, achieving $5.03 per share. At the beginning of the year, We set out appropriately ambitious guidance for 2023, and Q1 demonstrates that we're delivering against that. Let me turn to our end markets. We delivered very strong performance at Q1, driven by outstanding execution from our team, resulting in meaningful share gain. Pandemic-related activity performed as we had expected during the quarter. As a reminder, the impact of a headwind from the revenue runoff can be seen in pharma and biotech due to vaccines and therapies and in diagnostics and healthcare due to COVID-19 testing. Let me give you some color on our end markets. Starting with pharma and biotech, we delivered growth in the mid single digits for the quarter. During the quarter, we had very strong performance in our pharma services, clinical research, and chromatography and mass spectrometry businesses. In academic and government, we grew in the high single digits in the quarter. We delivered strong growth across a range of our businesses, including chromatography and mass spectrometry, electron microscopy, as well as the research and safety market channel. Academic and government demand was strong in all regions. In industrial and applied, we grew in the high single digits for the quarter. We saw strong growth in all of our analytical instrument businesses, including electron microscopy, chemical analysis, and chromatography and mass spectrometry. Finally, in diagnostics and healthcare, in Q1, revenue was approximately 45% lower than the prior year quarter. The team delivered very good core business growth during the quarter, led by our immunodiagnostics, microbiology, and transplant diagnostic businesses. I'll now turn to our proven growth strategy, which enables us to continue to deliver differentiated performance and setting us up for an even brighter future. As a reminder, Our growth strategy consists of three pillars, developing high-impact innovative new products, leveraging our scale in the high growth and emerging markets, and delivering a unique value proposition to our customers. Starting with the first pillar, innovation, we had an excellent start to the year as we launched a number of high-impact new products across our businesses during the first quarter. These technologies are further strengthening our industry leadership by enabling our customers to break new ground their important work in elemental analysis we launched the thermoscientific icap rq plus icp ms analyzer this icp mass spectrometry system simplifies analysis of trace elements in complicated samples including the identification of heavy metals and soil and water as well as toxic elements in food and beverage in genetic sciences we launched the applied biosystems quant studio absolute q auto-run DPCR suite, an automated digital PCR solution to increase productivity for molecular research, including cell and gene therapy and cancer research. In our biosciences business, we launched the Invitrogen Dynagreen microplastic-free magnetic beads for protein purification. This new product will help our customers to reduce the environmental impact of life science research and builds on our long history of innovation and market leadership in bioscience reagents. And in our clinical diagnostics business, we launched the thermoscientific DRI tramadol assay, which broadens our extensive toxicology portfolio with a new drug of abuse assay to help fight the opioid crisis. These are just a few examples of the innovation going on across our company, and I'm excited about the robust pipeline of products that will be launched throughout the year. We also recently learned that Thermo Fisher was ranked number 22 on Fortune's most innovative companies list. This is a new award launched in 2023 based on product and process innovation and the company's culture. A really nice recognition of our team and their track record. The second pillar of our growth strategy is leveraging our scale and the high growth in emerging markets to create a differentiated experience for our customers. We continue to strengthen our capabilities serving these markets by opening a new GIPCO cell culture rapid prototyping facility at our existing site in Suzhou, China. This facility will help regional customers accelerate the transition of their cell culture media production into current good manufacturing practices. It will also ensure patients receive therapies manufactured at the highest level of safety, effectiveness, quality, and purity. Turning to the third pillar of our growth strategy, we continue to enhance our customer value proposition by strengthening our capabilities to enable our customers to make the world healthier, cleaner, and safer. I've had the opportunity to meet with dozens of our pharmaceutical and biotech customers since the beginning of the year, and our value proposition is clearly resonating. Our trusted partner status gives us an early understanding of customers' unmet needs and the ability to generate insights that allow for deep collaborations that continue to advance scientific breakthrough. During Q1, we achieved an exciting milestone in our strategic partnership with the University of California, San Francisco, with the opening of a new cell therapy CGMP manufacturing and collaboration center to accelerate the development of breakthrough therapies for glioblastoma, multiple myeloma, and other cancers. In this facility, we offer UCSF and other customers solutions for cell therapy development from discovery to clinical research through to commercial manufacturing. Partnerships like this have the potential to transform clinical care. Another example of our customer value proposition and the trusted partner status that we have established with our pharma and biotech customers can be seen in the excellent performance of our clinical research business, which drove very strong growth in the quarter. I'm very excited by the revenue synergies that will drive both short-term and longer-term growth in the business. The momentum is continuing to build and is benefiting both our clinical research business and other parts of the company. We're also working with very engaged customers on longer-term projects to explore ways to reduce the time and cost of bringing drugs to market. By bringing our capabilities and expertise within our pharma services and clinical research businesses together, we are working to improve the effectiveness of the drug development process, benefiting both our customers and their patients. We have an exciting pilot underway that is utilizing dedicated resources and best in class technologies and capabilities to provide enhanced visibility and real time data to the customer. This improves the speed of decision making and reduces potential delays from development to manufacturing to clinical trials. It can also help our customers take cost out of the process by reducing waste in the clinical supply process. This is really a nice example of why We are the trusted partner. As always, our PPI business system and our mission-driven culture enabled our success during the quarter. PPI engages and empowers all of our colleagues to find a better way every day, and it enables us to improve quality, productivity, and the customer experience, while also helping us to navigate a dynamic environment. You can see the positive impact of our PPI business system in our results in Q1. It has also allowed us to capitalize on the strong demand from customers for analytical instrumentation and has also helped us to effectively address the runoff and pandemic related activity and appropriately manage our costs. Moving to capital deployment, we've had an active start to the year, both in strategic M&A and returning capital to our shareholders. We closed the acquisition of the binding site at the beginning of the year. It's great to have this business now as part of the company. The business is a fantastic fit with our specialty diagnostics business, and we're leveraging our capabilities to take an excellent business and make it even better. The integration is going very smoothly, and the business is performing very well, tracking ahead of plan. Our team is focused on advancing the diagnosis and management of patients with multiple myeloma and immune disorders, and the innovation pipeline looks great. We're excited by the opportunity to further advance patient care in this area. In terms of return of capital during the quarter, we repurchased $3 billion of stock and increased our dividend by 17%. So overall, a great start to the year from capital deployment. During the quarter, we also advanced our environmental, social and governance priorities, including securing agreements to power all current U.S. sites with 100% renewable energy by 2026. This is a significant contribution to our 2030 commitment to a 50% reduction in Scope 1 and 2 greenhouse gas emissions. As we continue to transition away from fossil fuels and adopt renewable energy, we're also accelerating our progress towards our commitment to net zero carbon emissions by 2050. We'll be releasing our latest Corporate Social Responsibility Report later this quarter, and we'll give our stakeholders a really substantive view on our continuous improvement and the positive impact that we're having. Let me now turn to our guidance. Since the beginning of the year, the macro environment has become slightly more challenging. We're stepping up to that challenge, and our proven growth strategy powered by our PPI business system is enabling us to maintain our ambitious full-year outlook with revenues of $45.3 billion and adjusted EPS of $23.70. Stephen will take you through the details in his remarks. So to summarize our key takeaways from the first quarter. Our very strong results in Q1 were driven by our proven growth strategy and PPI business system. Our business is performing very well. Our unique customer value proposition is further elevating our trusted partner status and we're continuing to gain market share. We effectively deployed capital to create significant value for our customers and shareholders. And we're incredibly well positioned to deliver differentiated performance, and an excellent 2023 as we continue to create value for all of our stakeholders and build an even brighter future for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen.

Thanks, Mark, and good morning, everyone. As you saw in our press release, we started the year with a very strong Q1. Our growth strategy powered by our PPI business system is enabling us to continue to very effectively navigate the company through a dynamic macro environment. manage the runoff in pandemic-related revenue, and drive excellent core organic revenue growth and share gains. In the quarter, we delivered $10.7 billion of revenue, which included 6% core organic revenue growth. We delivered $5.03 of adjusted EPS. Our core organic revenue growth was 1% higher than we'd incorporated in our previous 2023 guidance, and adjusted EPS was 2 cents ahead, so a very strong start to the year. Let me now provide you with some more details on our performance. So beginning with our earnings results, as I mentioned, we delivered $5.03 of adjusted EPS in Q1, gap EPS in the quarter was $3.32. On the top line, reported revenue was 9% lower year over year. The components of our Q1 reported revenue included 8% lower organic revenue, a 1% contribution from acquisitions, and a headwind of 2% from foreign exchange. Pandemic-related revenue came in as we expected in Q1. This is comprised of $140 million of testing revenue and $180 million of vaccines and therapies revenue. As I mentioned earlier, core organic revenue growth in the quarter was 6%. As a reminder, core organic revenue growth continues to include the change in our COVID-19 vaccines and therapies revenue, which was a headwind of approximately 3% in the quarter. So very strong core performance, showing the continued strength of our business. Turning to our organic revenue performance by geography, the organic growth rates by region are skewed by the pandemic-related revenue in the current and prior year. In Q1, North America declined high single digits. Europe declined in the low double digits. Asia-Pacific grew in the low single digits, with China declining slightly. And rest of the world declined high single digits. With respect to our operational performance, adjusted operating income in the quarter decreased 32% and adjusted operating margin was 21.8%, 740 basis points lower than Q1 last year. In the quarter, we achieved strong price realization to effectively address inflation while also driving strong productivity. This was more than offset by lower pandemic-related revenue and continued strategic investments. Total company adjusted gross margin in the quarter came in at 40.3%, 720 basis points lower than Q1 last year. For the first quarter, the change in gross margin was due to the same drivers as those for adjusted operating margin. Moving on to the details of P&L, adjusted SG&A in the quarter was 15.3% of our revenue. Total R&D expense was $350 million in Q1, reflecting our ongoing investments in high-impact innovation. R&D as a percent of manufacturing revenue was 6.9% in the quarter. Looking at our results below the line for the quarter, our net interest expense was $154 million, which is $36 million higher than Q1 last year, mainly due to capital deployments. Our adjusted tax rate in the quarter was 10%. This is 410 basis points lower than Q1 last year, reflecting the results of our tax planning activities. Average diluted shares were $388 million in Q1, approximately $6 million lower year over year, driven by share repurchases, net of option dilution. Turning to cash flow on the balance sheet, cash flow from operations was $730 million. Free cash flow for Q1 was $280 million after investing $450 million in net capital expenditures. During the quarter, we deployed $5.8 billion of capital. This included $2.7 billion for the acquisition of the binding site and $3.1 billion of capital to return to shareholders through buybacks and dividends. We ended the quarter with $3.5 billion in cash and $35.3 billion of total debt. A leverage ratio at the end of the quarter was 3.2 times gross debt to adjusted EBITDA and 2.9 times on a net debt basis. Concluding my comments on our total company performance, suggested ROIC was 12.2%, reflecting the strong returns on investment that we're generating across the company. Now provide some color on the performance of our four business segments. Let me start with a couple of framing comments. The scale and margin profile of our pandemic-related revenue varies by segment, and that revenue was significantly higher in the prior year. That does skew some of the reported segment growth rates and margins. We continue to execute strong pricing realization across all segments to address higher inflation. Moving on to the segment details, starting with life science solutions. Q1 reported revenue in this segment declined 38%, and organic revenue was 37% lower than the prior year quarter. This was driven by the moderation in pandemic-related revenue in the segment versus the year-ago quarter. Q1 adjusted operating income in life science solutions decreased 62%, and adjusted operating margin was 32%, down 19 percentage points versus prior year quarter. In the quarter, we delivered good productivity, which was more than offset by unfavorable volume mix due to the significantly higher pandemic-related revenue in Q1 2022. In the analytical instrument segment, reported revenue increased 14% in Q1, and organic growth was 17%. The strong growth was broad-based in the segment. This quarter, led by chromatography and mass spectrometry, and the electron microscopy businesses. Q1 adjusted operating income in the segment increased 40%, and adjusted operating margin was 24.4%, up 460 basis points year over year. In the quarter, we delivered strong volume pull-through, strong productivity, and favorable business mix. This was partially upset by strategic investments. Sending to specialty diagnostics, in Q1, reported revenue declined 25%, and organic revenue was 28% lower than the prior year quarter. In Q1, we continue to see strong underlying growth in the core, led by our immunodiagnostics, microbiology, and transplant diagnostics businesses. This is offset by lower pandemic-related revenue versus the year-ago quarter. Q1 adjusted operating income decreased 21% in the quarter, and adjusted operating margin was 25.3%, which is 140 basis points higher than Q1 2022. During the quarter, we delivered favorable business mix and strong productivity, which was partially offset by the impact of lower COVID-19 testing volume. Finally, in the laboratory products and biopharma services segment, Q1 reported revenue increased 6%, and organic growth was 7%. During Q1, organic revenue growth in this segment was led by the pharma services and clinical research businesses. Q1 adjusted operating income in the segment increased 28% and adjusted operating margin was 13.8%, which is 240 basis points higher than Q1 2022. In the quarter, we delivered strong productivity and volume pull through. This is partially offset by strategic investments. Let me now turn to guidance. And as Mark outlined, we're maintaining our guidance for full year 2023, consisting of revenue guidance of $45.3 billion, including 7% core organic revenue growth, and adjusted EPS guidance of $23.70. There's no net change overall in our guidance, but how we expect to achieve this guidance is different from the way we planned at the start of the year, and it demonstrates our ability to effectively navigate the dynamic macro environment and maintain a very strong financial outlook. Since our initial guide, we see $0.25 of additional headwinds to adjust the DPS, $0.15 from business mix, and $0.10 from FX. We're actively offsetting all of this headwind, about $0.20 through cost management and $0.05 through actions below the line. So no net change overall. The PPI business system is enabling us to navigate the company very effectively through a dynamic macro environment. As I mentioned, the 2023 guidance reflects a very strong financial outlook. Let me remind you of some of the key underlying assumptions that remain unchanged from the previous guidance. We continue to assume 7% core organic revenue growth from market growth of 4% to 6%. Within our core revenue, we expect $500 million of vaccines and therapies revenue in 2023. This is $1.2 billion less than the prior year, a 3% impact on core organic revenue growth. It's worth noting that the majority of our vaccine and therapy revenue in 2023 is expected to be in our pharma services business. With regards to testing revenue, we continue to assume $400 million for 2023. We're assuming the binding site acquisition will contribute approximately $250 million to our reported revenue growth this year. Below the line, we expect net interest expense in 2023 to be approximately $480 million. We continue to assume that net capital expenditures will be approximately $2 billion in 2023, and free cash flow is assumed to be $6.9 billion for the year. Our guidance includes $3 billion of share buybacks, which were already completed in January. We estimate the full year average diluted share count will be approximately 388 million shares. And we're assuming we'll return approximately $540 million of capital to shareholders this year through dividends a 17% increase over 2022. So turning now to the assumptions that have changed, as I mentioned earlier, our FX assumption for the year has changed. We still expect FX to be a tailwind to revenue of approximately $100 million, or 0.2%. However, we now expect it to be a headwind to adjusted EPS of $0.06. That's $0.10 more of a headwind than the previous guidance due to changes in rates and the expected mix of our currencies. Guidance assumes adjusted operating margins for 2023 to be in the range of 23.8% to 23.9% for the year. When the adjusted tax rate assumption has improved slightly from our initial guide, we now expect it to be 10.8% for the full year. And finally, I wanted to touch on quarterly phasing for the year. Compared to our initial phasing assumptions, we now expect a slightly higher weighting of revenue and adjusted EPS in the second half of the year. We're currently assuming that the first half of the year represents approximately 48% of our full-year revenue dollars and 44% of our full-year adjusted EPS dollars. Q2 core organic growth is expected to be mid-single digits, probably best to model at a slightly lower than Q1. To conclude, we delivered a very strong start to the year, and we're in great position to deliver differentiated performance for all our stakeholders in 2023. With that, I'll turn the call back over to Rhett.

Thank you, Stephen. Operator, we're ready for the Q&A portion of the call.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure you are unmuted locally. 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 one follow-up only. If you have additional questions, please return to the queue. Our first question comes from Jack Meehan of Nephron Research. Jack, your line is open. Please go ahead.

Thank you. Good morning. So my questions focus on lab products, biopharma services, First is on PPD. So we've been getting some mixed signals so far this earnings around biotech customer demand. Mark would love to get your perspective. How did PPD grow this quarter? What does the outlook assume? Has that changed at all? And then can you talk about award trends that you're seeing? Thanks.

Yeah, so Jack, thanks for the question. Good morning. Our clinical research business, PPD, had a very strong start to the year. The growth continues to be um in the mid teens and um it's doing really well um you know the we had strong backlog we had good uh level of authorization so uh that business is continuing to benefit from the revenue synergies um you've seen that start to come into the numbers this year and um i'm very excited about the prospects teams are a really good job of executing um environment's definitely a little bit more challenging but the team's doing a good job to go out and capture the business

Great. Okay. And then one more on that segment is just love to hear color around how the research channel performed this quarter. Can you just talk about core market demand and any share dynamics that you're seeing? Thank you.

You know, our channel business, Fisher Scientific Channel, has done really well, actually, consistently for quite a number of years. It plays an amazing role in Jake Hamilton, enabling our customers to do the research that they're doing and make sure they do that in an effective and efficient way and. Jake Hamilton, The business is off to a good start has had good growth, and you know our best sense on share dynamics is it continues to continues to win customers so it's a it's a well performing business.

Jake Hamilton, super Thank you.

Jake Hamilton, Thanks thanks jack.

Thank you. Our next question comes from Rachel Vattenstahl of JP Morgan. Rachel, your line is open. Please go ahead.

Perfect. Good morning. Thanks for taking the questions. So first off, two of your peers have recently talked about visibility within bioprocessing being pressured to more like three to six months of visibility versus historical nine to 12 months. So can you just walk us through what's your current level of visibility and is that different between customer sets within large pharma versus some of these emerging biotech customers? And then also, how does PPD and having that business impact your level of visibility there?

Sure. So, Rachel, good morning. Thanks for the question. Maybe I'll step up a level first and then I'll talk about the specifics of the question because, you know, as I look and read some of the other industry participants' reports so far, clearly a noisy quarter in the industry. And when I frame that, you know, as a reminder, when we started the year, we set out ambitious goals for 2023, right? And we do that every year. For us, you know, it's 7% core growth from an organic perspective against a 14% comparison and also have very strong earnings. So that's sort of as we came into the year. So what's different? you know, in late April versus February 1st when we set up our guidance. Well, the first thing is we delivered a great start to the year, right? Great Q1. Second, the macroeconomic environment is more challenging, right? And that leads to a slightly more cautious spend in all sectors of the economy, nothing to do with life science tools and pharma services. But we also see that in some of our customers as well in terms of the caution. Within our own company, a couple of our businesses are performing slightly better than our original guidance, and that's our analytical instruments business. We've had an excellent Q1, and we now have more visibility into Q3 for that business, and that looks encouraging. The second business that's doing a little bit better than our original guidance with specialty diagnostics is off to a strong start. Bioproduction, which is where your question's really focused, you know, we're going to see in the first half more headwinds than our original expectation. It's driven really by the customers are benefiting from the improved lead times that we're delivering against because we brought our, you know, completed our network expansion, right? So customers can get products more quickly. And our view is this is a temporal phenomenon. And we feel good about what the long-term prospects here. In terms of the specifics on terms of visibility and by customer sets and those things, I think the way that I think about it is, Long term, this is an incredible market with great growth. It's grown very high for many years in the past and has incredible tailwinds. It has reasonably good visibility because it's related to customer production. And our expectation is that the second half of the year is better than the first half of the year in terms of the view. As a reminder, Rachel, it represents 10% of our revenue. So I think it's important to keep that in the context as well.

Great, thank you. And then maybe just one on instruments. Analytical instruments grew 17% during the quarter. You flagged that that's one of the areas that's been better than expected so far versus your initial guidance for the year. So can you walk us through what are your latest expectations for analytical instrument growth for the year? And then are there any end markets within AI that are just growing faster than expected? Thanks.

Yeah, so in terms of our instruments business, we really are benefiting from very strong adoption of our innovation right we just continue to bring out great products as a reminder during the pandemic we continue to fuel and accelerate our r d pipeline and you're seeing the benefit of it we are capitalizing on the semiconductor desire to move to the next generation of nodes which uses our electron microscopy we're a key enabler for battery technology with our microscopes and our chromatography mass spectrometry business doing incredibly well. So the strength here is broad-based. Obviously, the 17% growth in the quarter, very strong. We would expect a good level of growth in Q2. And what we had said at the beginning of the year is that that would moderate in the second half. And we think that moderation will be less than we originally expected in Q3. So we expect it to be a solid Q3. And we'll obviously have more visibility to Q4 when we report in July. So We're assuming that Q3 is a little better than we expected and Q4 is as we expected at this point because that's what we have visibility to. Thanks, Rachel.

Thank you. Our next question comes from Derek De Bruyne of Bank of America. Derek, your line is open. Please proceed. Hi, good morning.

Hey, so I'm curious, you know, you've talked about ambitious guide and the markets being a little bit tougher. Yes, you're maintaining guidance because you're offsetting some things right now. I guess, is there additional wiggle room to do further offsets if the market deteriorates further? Basically, it's a question about your competence in that guide and how much sort of like leeway is built into it. Thanks.

Yeah, so Derek, the way that we manage the company Right. Is the first thing. We want to deliver differentiated performance in a given year that we would be proud of delivering and strengthen the company for the long term. Right. And that's the first set of principles. And that set of principles has served us very well for many years. And when you look at our track record, you know, we do a good job of delivering short term and strengthen in the long term. When I think about the outlook William Newburry, M.D.: : You know, for the year, and you know where we are, you know we feel good about the full year guidance at this point in time, based on how. William Newburry, M.D.: : You know Q1 has played out in the changes and you know and we've laid out some of the assumptions around that for the balance of the year and if those assumptions are largely. William Newburry, M.D.: : The way the year plays out we're going to be in great position if those assumptions are too conservative will beat these numbers of those those assumptions are too aggressive. then we will appropriately adjust guidance over time, right? And I'm not shy about any of those dynamics. We try to give you total transparency, and I feel good about our outlook based on Q1 and the assumptions that we're making.

Got it. And going back, I mean, because we're obviously getting a lot of questions on the whole bioprocessing and inventory issues. I know your business is more upstream focused and downstream, and it looks like you're maintaining the expectations you have for the COVID pandemic. vaccine realignment. But can you just talk a little bit more about some of the dynamics in that space and why your business is a little bit different than some of the other ones? And also just, you talked about some moderating and bioproduction, just a little bit more clarity on that. Thanks.

Yeah, sure.

Just to kind of level set for a second on the actual revenue for 2023, the $500 million of vaccines and therapies, that's pretty much all in our pharma services business. It's not in the bioproduction business. Got it.

Okay. Yeah. So when I think about the dynamics here, on the COVID vaccines, as Stephen said, my take is it's played out almost exactly. I think Q1 was exactly where we anticipated it. When we look at our visibility to the $500 million, I feel very good about that in terms of it because we know the contracts that we have and what activity has been booked there. So that's pretty straightforward. When I think about the bioproduction more generally, what I would say is in the very practical dynamics, if you go back to the pandemic, huge demand for these products, those companies that were successful and unsuccessful in trying to bring out therapies and vaccines for response to the pandemic. That stressed lead times for everybody. Obviously, it varies differently by how much capacity, how well companies are, all these different dynamics, but lead times got super extended, right? For us and the nature of our products, our leadership and self-culture media and single use, customers don't really order extra. It's not one of these things where you want to be stockpiling this stuff because they're very specific to the campaigns that you're running. Right? So the dynamic becomes very simple. If we have a 30 week lead time, which was extended during the pandemic, you order 30 weeks, you know, with 30 weeks visibility. When we bring that lead time back into normal to say 15 weeks for simplicity, you know, customers will work through what they ordered, because they don't have to order as quickly, because they know we're going to give them the product, right. And one of the themes that we said throughout the pandemic was, we work super closely with our customers, like incredible amount of dialogue. So they trust that we're going to deliver when we say so they didn't over order in the time when we times got extended and the ordering appropriately now. So can you call that to the month? No, of course not. But But we have a reasonable view that the first half is going to be a little bit softer than we originally had put in our expectations, that the second half starts to pick up. And the good news is between instruments, especially diagnostics, it's offsetting it at this point. So hopefully that's helpful.

Great. Thanks.

You're welcome.

Our next question comes from Dan Brennan of Cowen. Dan, your line is open. Please go ahead.

great thank you uh thanks for the questions um mark while we had to wait for the conference call to get the core organic guide reiteration for thermo the jets won up to you by giving us aaron rogers trade before the draft fans have to be excited for the year i hope you are um so maybe um just on bioproduction a question there would you be willing to share with us just some color within the context of your biopharma outlook for 2023 how you're thinking about the growth rates for your consumables business, the CDMO and PPD. I know on the last call you gave us PPD, but just trying to get a breakdown or a sense of, you know, the different components for your biopharma outlook for the year.

Yeah. So Dan, thanks for the question. And in the spring, hope always springs eternal in football because snap hasn't been made yet, but, um, you know, effectively from my perspective, Um, permanent biotech is a good question, right? If you think of this, let's focus on the market itself, right? When I think about the quarter, um, we delivered mid single digit growth, right? And, um, when you think about what's embedded in that, um, is obviously that's where the vaccine and therapy roll off is from the prior year. So we did exactly as we expected. Um, so that basically you'd have double digit growth, not a big normalization guys, but just to try to make it simple. If you didn't have a vaccine and therapy roll off, you'd have double digit growth in that segment. So most of the change from trajectory is around that. I think the second thing to remember is that last year we grew 14%. This year we're expecting to grow 7%. The expectation obviously is therefore our growth, while outstanding, is going to be more moderate than last year. And given that pharma and biotech is our largest customer segment, obviously our expectation is that growth will moderate. I would say largely Q1 was pretty similar to what we thought it would be with bioproduction being a little bit softer. You can say there's a little bit more caution in the smaller biotech customers, but do I think it's like dramatically different? I don't, right? And, you know, so we're working through that and, you know, we have strength in other parts of our mix and that's kind of where we are. You know, and all the details of, you know, each of the businesses by customer side, we don't really manage that way. And on the bioproduction side, as I said a little bit earlier, in total it represents about 10% of our revenue.

Great. Thank you for that, Mark. And then maybe as a follow-up on an earlier question on instruments, you talked about better visibility. So what is – you talked a lot about share gains as well. So maybe could you give us a sense of how you're somewhat bucking the trend that the other peers are seeing after a strong couple years you're still seeing? above corporate average growth. Others are kind of citing more comps. So what's driving, you know, between FEIC, LCMS, and, you know, any geographies or anything you want to share with us about, you know, the strength in your AI business for 2023?

Yeah, you know, the team's doing a good job executing, right? They're doing a good job on navigating the various supply chain things that happened over the last couple of years. And, you know, our shipments are at a high level. We're going out and winning business. You know, I think the strategy that the team has executed around, you know, breakthrough innovation, you know, customers find money when the products are really relevant. I mean, that's been my experience over long periods of time, where if you have great products, customers want them. So that's been, you know, a positive dynamic, certainly for the instruments business. And, you know, what I would say is, you know, we definitely have, you know, challenging comparisons this year. We're off to a good start and, I would expect that growth will moderate a bit in the second half, but Q3 being a little bit better than we originally expected.

Great. Thank you, Mark.

Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Matt, your line is open. Please proceed.

Hi. Good morning. Thanks for taking my questions. Maybe, Mark or Stephen, just first on sort of regional trends, Stephen, you outlined some of the growth in the quarter. for Europe and China, but just any incremental color on what you're seeing, particularly in China, across your business and how you, how you think that, um, those trends play out over the course of this year.

Yeah. So man, thanks for the question. Um, China actually played out pretty much as we expected in the quarter, right? So, um, our expectation for Q1 was it was going to be slightly better than, um, Q4 that you'd still see some of the impact of the unwind of the zero COVID policy. And as the year progresses, it will continue to strengthen from there. When I look at the first quarter in China, the business was down slightly. The core growth actually was high single digits in the quarter. So, you know, that felt good. What I would say is we expected stimulus to happen in the first quarter. It did happen in the first quarter. So that played out. It was good to see the Chinese government release money to the James Rattling Leafs, Academic institutions, we see that in our instrument business and so that played out well, and so I feel good about the outlook, obviously the geopolitical tensions are real and. James Rattling Leafs, that's an environment that you know is going to be around I would suspect for a while and will navigate through it, but China should be a good good market for us this year and. has been historically. Steve, anything on the other end?

Yeah, it's a matter on the other end, Marcus, when I think there's a lot of noise from the pandemic unwind, but when I kind of see through that, good growth really across all of the main geographies, so nothing really to call out there.

Got it. And then just maybe one high level on PPD. You talked about the growth there, and obviously it's been outgrowing peers. Can we attribute any of that outsized growth to sort of the value proposition that being a part of Thermo might represent? for your customer base, or is it still too early to kind of see that potential growth impact come in and this is just, you know, PPT executing as it has been?

I think our team is doing a great job of executing, right? They are out there serving customers and patients so that, you know, customers are making a great choice to work with us, right? They're doing a really good job. We clearly have a high level of James Meeker & New authorizations because of the combination of what thermal Fisher brings and what ppt brought together right so there's a lot of customer interest. James Meeker & It shows up and authorizations is showing up in our revenue now that continues to build and i'm excited you know next year will be. James Meeker & year three and as a reminder that's $250 million of revenue that we're assuming for revenue synergy you know next year so so it's really exciting in terms of where it is and. I feel good about the performance of the business and the outlook.

Thank you.

Thanks, man.

Thank you. Our next question comes from Vijay Kumar of Evercore. Vijay, your line is open.

Please go ahead. Hey, guys. Thanks for taking my question and congrats on the steady print here. Mark, my first question for you, high level. I think your prior guidance for biopharma in market was slightly north of corporate, about 7% or thereabouts. Did that change at all, Mark? And if it did change, where's the change coming from between CDMO, CRO, and bioprocessing? And could you just remind us, what is Thermos exposure to early stage biotech emerging biopharma?

Yeah, so Vijay, you know, We give like 80,000 foot directional views on the markets at the end of the, you know, at the beginning of the year to set the guidance context. And when I think about the additional color that Steven and I have provided today, it really says that it's more business focused, which is actually how we manage our company. Instrument specialty diagnosis a little bit stronger, bioproduction a little bit softer. primarily in the first half. So that translates probably into tiny little changes within the end markets, but nothing that really jumps out as something meaningfully different. What I would say is in terms of the early biotech, those are a great customer set that we have done a fantastic job serving. Yesterday, I was actually talking to roughly 400 members of that community at a customer event here in the greater Boston area. And like the room was buzzing, not because I was speaking, but rather just like me walking in and there's just such energy and excitement. So why is that? Because they're bringing through cures that are going to make such an enormous difference. The science is phenomenal. So, you know, there's clearly going to be more caution in that segment, you know, depending on the funding environment, but the science is great. The passion is extraordinary and, You know, we are the company that, you know, people come to to advance their molecule from a scientific idea to an improved medicine. So it's a customer set we love. We're going to do well. And we obviously generate the vast majority of our revenue from the large pharma and biotech customers. And they're doing well. And we've got a strong position there. So hopefully that at least gives you the qualitative context of how to think about it.

That's helpful perspective, Mark. And, Stephen, one quick follow-up for you. A second quarter guidance mid-single, I think you said a second quarter perhaps below Q1. The comps do get easier for you in Q2, so maybe just walk us through on Q2 thought process.

The main piece is just the timing on the bioproduction and instrumentation being stronger in Q3, as Mark outlined, in terms of the change by guide assumptions.

Fantastic. Thanks, guys.

Our next question comes from Dan Arias of Stifel. Dan, your line is open. Please go ahead.

Morning, guys. Thanks for the questions. Mark, on the services side, I'm just curious how the Unity business is performing in light of this sort of sustained period of instrument demand that we're seeing here. Is acceleration something that we can expect there? this more of sort of a steady state growth rate at this point?

Yeah, so, you know, Dan, thanks for the question. When I think about our, you know, instrument and equipment services business, you know, what that business is, as a reminder for our investors, is we service our fleets of instruments. We also, you know, work at, you know, pharmaceutical and biotech campuses for our customers to you know, manage their inventory, do those activities, help them with some of the things that they need done to run their labs, as well as service other people's equipment and instrumentation. So that's what we do. In general, that is a steady, nicely growing business because we've had very significant growth in the volume of our instruments over the last couple of years. That becomes a trailing tailwind for the business because you have a year or so of warranty so you don't get any additional revenue effectively but as the warranty rolls off that does actually drive incremental demand so your your hypothesis there is correct that that's one that continues to strengthen you know at this part of the cycle yeah and then dan particularly on the on the electron microscopy business where customers customers can't service them themselves so you have some customers that can be

Efficient service from other kind of lower end instrumentation, but from electron microscopy standpoint, they're really looking for us to step up and help them with that. So that continues, as Mark said, that continued tailwind is very significant.

Yeah. Okay. Helpful. And then, Stephen, while I have you, just on the variables of the equation that have changed slightly underneath an unchanged guide overall, is there anything in terms of the evolving expectations for the business units themselves Mark made mention of some things, some businesses that are doing better than others. So I just sort of wanted to sum that up when we think about segment trajectory and just modeling those going forward. Thanks.

Yeah, I think, you know, we outlined the key changes. I think one thing that's hard for people to model is kind of where the vaccines and therapies changes. When I think about Q1, that was all in the life science solution segment. That's the biosciences business as well as bioproduction. From a year-over-year change, that was, I think, about an 8 percentage point impact on the segment. That lessens as a headwind when I think about that going forward, but it's still most of that change in that revenue stream is in that segment as I think about the year as a whole. But nothing significant changing underneath, other than we've already identified it in terms of the overall guide.

Operator, we have time for one more question, please.

Of course, our final question of today comes from Puneet Sudha of SPB Securities. Puneet, your line is open. Please go ahead.

Yeah. Hi, Mark. Good morning and congrats here. Just I'll stick to one and maybe one and a half question. Capital deployment 2022, you did two deals, PepperTech earlier in there and then BindingSight. Wondering how the outlook is looking for capital deployment this year. maybe talk a little bit about your expectations for what you're seeing from market participants in both public and private markets. And then just briefly on the Inflation Reduction Act, could you outline what you're hearing from your larger pharma customers and wondering if they're changing how they're allocating their R&D going forward? Thank you.

Yeah. So, Punit, thanks for the questions. You know, in terms of the IRA, I think customers are working through that in terms of what the implications and does that, you know, adjust any of their long-term decision-making about what are preferred and what's their clinical trial strategy. We haven't seen anything material change at this point. I know there's certainly a lot of dialogue with government on trying to make sure those policies do what they were intended to do. From a capital deployment perspective, you know, this is a good environment, you know, from my perspective because you have, less competition because of higher interest rates from certainly private equity and so forth. So I think there's always competition, but I think that's good because that helps you pick and choose and get things at an appropriate valuation. So I think we'll continue to be active. Our pipeline is super busy. So I'm very excited about what we're looking at. You never know how these things actually play out in reality, but there's plenty going on and We'll be aggressive if the right transaction is available to us. So that's the benefit of the company performing well and a great track record of creating value through capital deployment. So thanks for the questions. I think at this point I'll do a quick wrap up. So thanks everyone for joining us on the call today. You know, we're very pleased to deliver a strong quarter. We're incredibly well positioned to continue to deliver differentiated performance as we continue to create value for all of our stakeholders and build an even brighter future for our company. I'm looking forward to updating you on our upcoming Investor Day on May 24th. See you in New York City or virtually. And as always, thank you for your support of Thermo Fisher Scientific.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.