Thermo Fisher Scientific Inc

Welcome to the Thermo Fisher Scientific 2023 Third Quarter Conference Call. My name is Ellen and I'll be the operator of today's call. During the presentation, all lines will be on mute. However, there will be an opportunity for question and answer session at the end. To register a question, please press star followed by one on your telephone keypad. I'd now like to introduce our moderator for the 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 Steven 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, Events, and Presentations until November 10, 2023. A copy of the press release of our third quarter 2023 earnings is available in the investor section of our website under the heading financials. So before we begin, let me briefly cover a safe harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are on file with the SEC, and available in the investor section of our website under the heading Financials SEC Violence. 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 measure is available in the press release of our third quarter 2023 earnings and also 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, Raf. Good morning, everyone, and thanks for joining us today for our third quarter call. Let me recap our financial performance for the quarter, and then I'll provide additional context on what we're seeing play out in the macro economy and the implications for our guidance. In the third quarter, our revenue was $10.57 billion. our adjusted operating income grew 8% to $2.56 billion. And we expanded our adjusted operating margin 200 basis points to 24.2%. And we delivered excellent growth in adjusted EPS, achieving a 12% increase to $5.69 per share. We delivered a very strong third quarter. In the quarter, the market environment continued to get more challenging. So I thought that it would be best to update you on what we're seeing and the implications on our guidance for the full year. As a reminder, coming out of the second quarter, we assumed core market growth to be in the 0% to 2% range for the year, driven by two factors, cautious customer spending and low economic activity in China. As we indicated in September, those same two factors increased in impact, and we now expect core market growth to be slightly negative for the year. Our team did a good job capitalizing on the available opportunities in the quarter, and we continue to expect to grow faster than the market for the full year and to once again deliver share gain in 2023. Factoring in the current macroeconomic conditions that I discussed, as well as the related increase in FX headwinds, we're revising our revenue and adjusted EPS guidance for 2023. We now expect revenue to be $42.7 billion and adjusted EPS to be $21.50 per share. Stephen will outline the underlying assumptions later in the call, along with some thoughts to help frame 2024. So as I look ahead, the combination of our proven growth strategy and PPI business system will enable us to successfully navigate dynamic times, positioning us to deliver differentiated short-term performance and simultaneously strengthening our long-term competitive position and outlook. The long-term prospects for our industry remain as bright as ever. Science continues to advance at a rapid pace, and our tools are used by scientists for the most important work that they do. providing the foundation for the scientific breakthroughs they enable. And our capabilities enable the pharma and biotech industry, which is addressing so many unmet healthcare needs. Let me now turn to our Q3 revenue performance in the context of our end markets. Starting with pharma and biotech, growth declined 1% for the quarter. The COVID-19 vaccine and therapy revenue runoff performed as expected during the quarter. resulting in a headwind in this customer segment. In Q3, performance in this end market was led by our pharma services business. In academic and government, we grew in the high single digits in the quarter. We delivered very strong growth in our electron microscopy and chromatography and mass spectrometry businesses. In industrial and applied, growth was flat for the third quarter. Performance in this end market was led by our electron microscopy business. And finally, diagnostics and healthcare in Q3, revenue was approximately 20% lower than the prior year quarter. In this end market, the team delivered good core business growth, highlighted by our immunodiagnostics, microbiology, and transplant diagnostics businesses. We made strong progress on our growth strategy in Q3. As a reminder, our strategy consists of three pillars, high-impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with innovation, it was another great quarter for the company. We launched a number of high-impact new products across our businesses that are further strengthening our industry leadership and providing our customers with new technologies to enable breakthroughs in their work. Let me start with a brief update on the groundbreaking thermoscientific Astro, which we launched at the American Society of Mass Spectrometry in June. Demand has been very strong. And it's great to see these instruments being so quickly adopted by our customers for their protein discovery research. In the quarter, we launched the XENT solution in Europe after receiving IVDR certification. It's the latest innovation from our protein diagnostics business, which as you know, became part of Thermo Fisher with the acquisition of the binding site at the beginning of the year. XENT compliments our leading portfolio of assays that help to diagnose and monitor blood protein abnormalities related to multiple myeloma and other disorders. In our bioproduction business, we introduced the GIPCO CTS detachable dynabase, our next-generation dynabase platform to accelerate manufacturing of life-changing cell therapies. And in our electron microscopy business, we launched a thermoscientific hydrobioplasma-focused ion beam, providing high-resolution imaging along with a simplified workflow for cell biologists. And earlier this week, Time Magazine selected Thermo Fisher's preeclampsia test as one of Time's 2023 best inventions. As you may recall, this is the first and only immunoassay to aid in the risk assessment and clinical management of preeclampsia, and it received FDA breakthrough designation and clearance earlier in the year. Now turning to the trusted partner status we've earned with our customers. This unique relationship gives us early insights into our customers' unmet needs and enables us to bring our industry-leading products, services, and expertise together in ways that no one else can. We continue to strengthen our capabilities to be an even stronger partner for our customers. As you know, we've had strong demand for our biologics drug substance manufacturing capabilities. And during the quarter, we completed an expansion of our site in St. Louis, Missouri. This facility supports therapies for a wide range of diseases, including cancer, autoimmune conditions, and rare genetic disorders. It features our new thermoscientific high-performer Dynadrive 5000 liter single-use bioreactor, which is a significant advancement in single-use technology. The Dynadrive offers better performance and is scalable to much larger volumes than previous generation bioreactors. We also further strengthened our clinical research offering by opening a facility in Ohio to produce sample collection kits for clinical trials. This enables us to deliver customized kits to our clients and provide greater supply chain stability to support their trials. 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 customer allegiance while also helping us to navigate a dynamic environment. I'm proud of our team's efforts, which resulted in strong operating margin expansion in the quarter. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to shareholders. It's been a very active year. As I mentioned earlier, we closed the binding site in January. The business is performing exceedingly well. During the quarter, we completed our acquisition of Core Avitas, a leading provider of regulatory-grade real-world evidence for approved medical treatments and therapies. As a reminder, real-world evidence is the collection and use of data from patient health outcomes gathered through routine clinical care. This is a high-growth market segment as pharmaceutical and biotechnology customers, as well as regulating bodies, are increasingly looking to monitor and evaluate the safety of approved medicines and examine their effectiveness and value in the post-approval setting. The business is now part of our clinical research business, and it's off to a great start. Shortly after the close of the quarter, we announced the agreement to acquire Olink, a company that is accelerating proteomics. Olink's products enable leading academic researchers and the biopharmaceutical companies to gain an understanding of disease at the protein level rapidly and efficiently. It's proprietary technology proximity extension assay provides high-throughput protein analysis. The acquisition of O-Link underscores the profound impact that proteomics is having as our customers continue to advance life science research and precision medicine. This technology is highly complementary to our leading mass spectrometry and life sciences platforms, and we're uniquely positioned to rapidly bring this technology to customers. We expect to deliver $125 million and adjusted operating income synergies in year five, driven by revenue synergies and cost efficiencies. We expect this business to be a mid-teens revenue growth business for us well into the future. The transaction is targeted to be closed by mid-2024, subject to customary closing conditions, including regulatory approvals. So, 2023 has been an active year of M&A that further strengthens Thermo Fisher Scientific for the future. During the quarter, we continue to advance our environmental, social, and governance priorities. This included launching a collaboration with the National Minority Quality Forum, a not-for-profit research and education organization, to help bring clinical research to historically underserved patient populations through their alliance for representative clinical trials. The collaboration supports pharma and biotech customers in meeting regulatory expectations to enroll and retain patients in clinical trials who more fully reflect real-world populations experiencing the disease or health condition being studied. It also helps to enable our customers to meet US Food and Drug Administration requirements around diversity action plans. In terms of our environmental sustainability efforts, we've officially surpassed our original goal to reduce greenhouse gas emissions by 30% by 2030. As we previously announced, we've increased our target to a 50% reduction by 2030. and we're well on our way to achieving that goal. I'm very proud of the way we're making a difference, not only by enabling our customer success, but also by creating a greater work environment for our colleagues and making a positive impact for society. So to summarize our key takeaways from the third quarter, we delivered strong operating performance in Q3, driven by our team's execution and the power of our PPI business system. Given the more challenging macroeconomic environment, we're taking the right actions and appropriately managing the company. And we're incredibly focused on delivering differentiated short-term performance while simultaneously strengthening our long-term competitive position and outlook. The attractive long-term outlook for the life sciences industry remains unchanged. And we're uniquely positioned to help our customers navigate the current environment, capture incremental opportunities, and exit this period an even stronger industry leader with a very bright future. With that, I'll now hand the call over to our CFO, Steven Williamson. Steven.