Q2 2020 Thermo Fisher Scientific Inc Earnings Call
I'm all participants are in listen only mode. After the speakers presentations will be a question and answer session to ask the question. During the session you need to press star one on your telephone if you require any further assistance. Please press star zero I would like to turn the conference over to your moderator today Mr. Kenneth Efird.
Vice President Investor Relations Mr. I'm sure you may begin.
Good morning, Thank you for joining us on the call with me today is more 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 slides will be archived on the investor section of our website Thermo Fisher dot com under the heading Webcasts and presentations until July 31st 120.
A copy of the press release of our second quarter 2020 earnings and future expectations is available in the Investor section of our website under the heading financial results.
So before we begin I will briefly cover our safe Harbor statement.
Various remarks, you wouldn't it make about the company's future expectations plans and prospects constitute forward looking statements for purposes of the Safe Harbor provisions under this private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result to various important factors, including those discussed in the Companys annual report on form 10-Q, two the quarter ended March 28, 2020 under the caption risk factors, which is also on file with the securities.
Exchange Commission is also available on the Investor section of our web site under the heading FCC 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. So therefore, you should not rely on these forward looking statements is representing our views as of any date subsequent should today.
Also during this call will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles for gap.
Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our second quarter 2020 earnings and future expectations and also any investor section of our website under the heading financial information.
So with that I will turn the call over to more.
Thank you Ken Good morning, everyone. Thank you for joining us today for 2022nd quarter call.
What an incredible quarter, we just had.
When we gave an update during our Q1 called we provided or best thinking on our Q2 expectations in an environment No one has never seen before.
We were prepared for the most difficult quarter, we've seen in the 18 years I've been with Thermo Fisher.
And we successfully navigated the environment to deliver truly extraordinary performance or teams did a remarkable job, helping our customers respond to the pandemic.
Their tireless effort and determination drove very strong results generating material cobot 19, tailwinds, while minimizing the impact of customer disruption created by locked down to around the world.
At performance in Q2 put a spotlight on the talent of our team the advantage of our industry, leading scale and depth of capabilities and the importance of a role in supporting our customers and society.
We continuously built on our screens and what we've accomplished in the past few months shows a thermo Fisher can perform extremely well even in the most difficult circumstances.
No I always think back from this period as a member most of our finest moments as a team and as a company.
I look forward to covering some of the many carlo to the quarter with you. This morning.
Sure I'll start with our financial results, which exceeded our expectations across the board.
As you sort of press released our reported revenue increased 10% in Q2 year over year to $6.92 billion. Adjusted operating income grew 26% to $1.86 billion and our adjusted operating margin increased to 27% in Q2, which was 350 basis points of expansion.
Finally, we grew adjusted EPS by 28% to $3.89 per share in the quarter.
We delivered such outstanding financial performance in Q2, because we work with the speed at scale and quickly mobilized our resources to help our customers respond to the pandemic across the globe.
Or solutions met their needs generating approximately $1.3 billion of cold <unk> revenue Tailwinds.
Our teams also getting excellent job of mitigating the headwinds in other parts of our company.
And we manage the company aggressively and appropriately in a very poor department to set ourselves up for an even brighter future.
Turning to our performance by end market, let me start with an overall comment for context.
As you know the pandemic has generated both significant headwinds and tailwinds in our industry.
And this impacted each of our end markets to varying degrees.
On one hand, we saw greatly reduced customer activity due to work disruptions and all the other we benefited significantly from our cobot 19 response.
We manage the company very effectively through these dynamics to deliver an exceptional quarter.
So starting with pharma and biotech the largest of our core end markets.
There's another great quarter, and we continued to perform very well here in Q2 going just under 10%.
You had particularly strong performance in our Bioproduction and pharma services businesses.
Turning to industrial and applied we saw a decline of just over 10% in Q2, while an academic and government we declined approximately 20%.
Customers in these two end markets were significantly affected by business disruptions during the quarter due to the pandemic.
Finally in diagnostics in health care, while we saw significant headwinds in this market due to decrease in doctor visits unrelated testing, we met the incredible demand for coal would make team testing and were able to deliver growth of just over 70% in Q2.
We are providing customers with our proprietary diagnostic test kits instrumentation and viral transport media as well as reagents used for laboratory developed tests I'll talk more about our involvement later in my remarks.
To wrap up or end market commentary, our teams to put forth an amazing effort supporting our customers and meeting the societal response to the pandemic, while the effectively managing the company to deliver outstanding growth in Q2.
Turning to the business highlights for the quarter.
Q1 call I'd supported for my typical agenda bed and talked about the three guiding principles were falling to manage through these unprecedented times.
To remind you the first is ensuring the safety of our colleagues our second guiding principle is to maintain business continuity. So we can see continuous support our customers whether the directly responding to the pandemic, we're continuing to work more broadly.
And third we manage our company appropriately so we come out of this period and even stronger industry leader.
As I reflect on Q2, those guiding principles have served us very well.
We've successfully implemented numerous safety protocols that are sites that has kept our business running so we can continue to serve our customers at a time when they need us most.
Let me focus today on the last guiding principle, managing the company appropriately and to reiterate it's a combination of relentless focus on executing a long term growth strategy, while ensuring that we successfully navigate the short term challenges and generate new opportunities as well.
During this time, we've been carefully managing costs, while confidently investing to position the business for long term share gain an accelerated growth.
This includes continued to invest in key R&D programs, even a parts of the business where demand is temporarily impacted for example, we had a great showing at the virtual American Society of mass spectrometry Conference in June where we launched two new Orbitrap explores instruments to advanced Biotherapeutic research.
These types of investments across our businesses will position us well to capture the opportunities as customer activity returns to more normal levels.
The second quarter reinforced why were recognized as the world leader in serving size.
I've been overwhelmed by the outreach we've had from the most senior government officials around the globe to the leaders of healthcare institutions to the top executives of the world's largest companies.
<unk> all navigating challenges never experienced before whether they are protecting the safety of their own workforce or communities managing the incredible volume of testing, we're trying to understand the virus to identify identify therapies and accelerate the development of vaccines.
We are in the best positioned to help them meet these challenges because we remain focused on executing our growth strategy by continuously innovating leveraging our scale and enhancing our unique customer value proposition. We're involved in virtually every aspect of the pandemic response from providing research tools to personal.
Then the diagnostics as well supporting the development and production of therapies and vaccines or mission is to enable our customers to make the will of healthier cleaner and safer and it highlights the critical role we play.
This morning, I'm going to focus on the two most prominent aspects of our involvement diagnostic testing kind of development and manufacturing of vaccines and therapeutics.
First testing it was an exceptional quarter for us given the role we play in coping make teen diagnostics.
We created a major business finding a few months and have continued to expand our capabilities I'll cover just some of the highlights.
As you know our industry, leading PCR franchise has always played a role in our customers' ability to provide lab developed tests and our reagents and consumable support many cobot 90 tests can use around the world.
I will significantly expanded when we receive regulatory approvals back in March Spartech, Pep Cobot 19 combo Kid.
Our PCR based workflow is widely used and 50 countries and these tests are considered the gold standard given their high level of accuracy.
April it's all about ramping up manufacturing and help and getting our customers to get their lab ready to handle the significant volume of testing.
Our teams rapidly scale production at an incredible pace and we ended the quarter with enough capacity to produce more than 10 million tests per week should our customers need that level of testing.
Our field services team an application specialists did a remarkable job of getting our customers ramped up to cope with 19 testing.
In May we received an expanded emergency use authorization or eat away from the U.S. food and drug administration that allowed more of our PCR instruments to run these tests to help address the huge demand.
Anyway also provided more options for reagents, and consumables, which provides customers with greater flexibility and testing workflow.
The overwhelming demand for testing created significant strain on the industry supply of sample collection materials. The swabs files immediate needed to effectively collect and transport the specimens to testing lab for processing.
The U.S. government came to us for health and given our understanding of the challenge we work with them to significantly ramp up production of highly specialized specialized viral transport media or B T M to address this need.
BTM as a critical to try the accuracy of Koeppen 18 test results I must be manufactured in dispensing the vials and an ace uptick environment.
We designed and built a new factory in Lenexa, Kansas and about six weeks and we produced our first VTM bio at this new facility on the fourth of July the exact date, we set out in our ambitious project plan.
It was a very exciting accomplishment for our teams.
Whether within Lenexa all of the other ramp up projects related to coal that our industry, leading scale and the power of our PPI business system were key enablers in achieving these milestones in such a short period of time, while managing enormous complexity meeting all the regulatory requirements.
Looking forward in addition to our PCR based tech path kit, which it terms of a patient has an active infection. We plan on launching additional tests, we're developing a serological test I can tell if a patient has ever been exposed to the virus and in addition, we're developing a respiratory panel to help doctors determine whether a person has cobot 19 or dip.
Respiratory disease and our goal is to launch this panel echo the flu season.
We're working through the regulatory processes to make both of these tests available to customers globally.
The other significant aspect of our involvement is the work we're doing to support our pharma and biotech customers in the waste to launch Cobot 19 therapeutics in vaccines as you know, we're a leader in the development and production of vaccines anti viral and other therapies to our pharma services business and we're currently working on more than 200 coal.
Related projects globally.
We're leveraging our global network to support governments and customers as they accelerate these projects, including some that are undergoing human clinical trials part by providing critical capacity and expertise to get new products to market and ultimately the patients.
To give me. One example will playing a key role in the U.S. government pandemic countermeasure program managed by the Biomedical Advanced research and development authority better known as BARDA. We've received funding to support the expansion or manufacturing capacity for sterile injectables, which can be used to fill a high volume of vaccine doses.
In addition, we're expanding capacity for customers were developing koeppen 18 therapies, including promising anti virus to compress timelines to meet the expected surge in demand.
While we continue to increase our support of the pandemic response, we're also expanding our pharma services capacity globally to ensure that we can deliver critical medicines for treating a range of serious health conditions I'll highlight two examples from the quarter. What is the new site, we're building and Plainville, Massachusetts, which will essentially double our viral vector.
<unk> manufacturing capacity.
This is another series of expansions in the U.S. that will help us meet demand for the development and production of gene therapies.
Other development is our strategic partnership with CSL, a global biotech company to help meet high demand for biologics.
We will support to yourselves product portfolio by leveraging our entire network, including drug development production packaging and clinical trials and under a long term agreement will also take over CSL state of the arc biologics facility and like now, Switzerland, which is currently under construction and expected to be completed in mid 2021.
This site will feature both high volume stainless steel and highly flexible single use Bioproduction technologies and our plan is to expand that choose to support a number of customers.
All of these strategic investments will ensure that we can deliver on our value proposition for pharma and biotech customers, who are powerful combination of expertise flexibility and scale.
Turning now to capital deployment I'll make a couple of comments on our pending acquisition.
As you saw in our press release last Thursday, we announced that we renegotiated certain aspects of our acquisition agreement.
Given the considerable changes in industry dynamics since we originally announced the transaction. The early March we revised our offer.
Hi, just making a significant contribution to the global pandemic response, and we believe our new all cash offer a 43 euros per share reflects the full and fair value of the business and the current environment, while generating strong returns for both sets of shareholders.
We're very excited about this transaction, we look forward to bringing together our complementary offerings to help our customers by the ongoing pandemic combat other infectious diseases and emerging healthcare needs for our shareholders. We expect strong returns I believe that the accretion will be slightly more favorable than what we articulated in early.
In March.
Well, there's still much work to be done over the next several months, we're on track with the regulatory process and expect to complete the transaction in the first half of 2021 Cajuns excellence or for a company. We're excited about the new opportunities we'll have following the close.
Now I'll make a quick comment on guidance as you know we withdrew our 2020 annual guidance in early April do the uncertainty around the pandemic tennis potential impact on our customers.
Now here, we are in late July and it's obviously still a very uncertain time similar to Q1, while we're not ready to reinstate annual guidance, we want to provide you with as much color as possible our expectations for the current quarter Stephen will review the specifics in his remarks, including our organic growth expectations and key assumption for Q3.
Before I turn the call the Steven Let me leave you with a few takeaways.
Well take a significant role in helping our customers respond to the pandemic and making a huge impact on society.
Our teams are managing the business very well through the some precedent to time to mitigate the headwinds and create new opportunities, we're continuing to execute our growth strategy to position Thermo Fisher from even brighter future with that I'll now hand, the call over to our CFO Stephen Williamson Steven.
Thanks, Mark and good morning, everyone I'll begin by framing out Q2 organic growth performance as Mark mentioned, we had an outstanding quarter and we grew organically 11% I.
I think it's best to break the growth into two elements. The first is the scale of the cobot 19 related revenue tailwinds that we generated during the quarter.
Second as the performance of the rest about business, including share gain in market growth.
Well as a headwind from cobot 19 caused by disruptions to customer activity.
We estimate of the Tailwinds from Cobot, 19 were approximately $1.3 billion or 21% of growth in the quarter.
Largely driven by testing related kits and instruments.
The tailwinds with significantly stronger than we originally expected driven by the increased scale and duration of the pandemic and the speed at which we were able to ramp up our response and extend our relevant offerings to our customers.
The rest of the business, excluding the cobot 19 tailwind performed just above the high end of our initial range of expectations for the quarter. The team executed really well to so all that I customers throughout Q2.
The result is that we delivered outstanding topline growth in the quarter.
We were able to manage the company very effectively during a period of significant economic disruption and translate that topline growth and to excellent bottom line growth, we appropriately manage the businesses.
With the strongest headwinds, while maximizing the tailwind opportunities and continuing to invest for really bright future.
All of this enabled us to deliver 26% growth in adjusted operating income and 28% growth in adjusted earnings per share an excellent quarter overall.
I'll now be some more details of the second quarter.
The total companies that provide some color on a four segments I conclude with some comments around guidance.
Starting with our Q2 earnings results just throwing a press release, we grew adjusted EPS, 28% to $3, making nine cents GAAP EPS in the quarter with $2.90.
The sense from Q2 last year.
On the topline acute you reported revenue grew 10% year over year.
Components about Q2 reported revenue increase included 11% organic growth and a foreign exchange headwind of approximately 1%.
Turning to our growth by geography during the quarter North America grew 10% Europe grew into high teens Asia Pacific was flat with China down approximately 15% and the rest of the world grew 50%.
Look at our operational performance Q2, adjusted operating income increased 26% from adjusted operating margin was 27% 350 basis points higher in Q2 last year.
We saw very strong volume contribution positive business mix and continued productivity investments at the improvements driven by a PPI business system, including appropriate cost controls given the headwinds from cobot 19.
During the quarter, we continued to make strategic investments in the businesses.
This is the last quarter of impact from our divestiture of the anatomical pathology business, which we sold at the end of Q2 2019.
Divestiture was approximately two cents dilutive in the quarter and with the year over year headwind of approximately $50 million on revenue $12 million, an adjusted operating income on a negligible impact on adjusted operating margin.
Moving onto the detailed the piano total company adjusted gross margin in the quarter came in at 50.6% up 390 basis points from Q2 of the prior year.
Gross margin expansion was driven by the same factors as our adjusted operating margin expansion.
Adjusted that sooner in the quarter was 19.9% of revenue an increase of 50 basis points versus Q3 29 team total R&D expense came in at 3.8% of revenue and R&D as a percent by manufacturing revenue in Q2, which is 5.6%.
Looking at our results below the line for the quarter. Our net interest expense was $129 billion $8 million higher than Q2 last year.
Adjusted other income and expense was net income in the quarter of $16 million similar to Q2 29 team.
Our adjusted tax rate in the quarter was 11.5% up 50 basis points versus Q2 last year.
And average diluted shares despite 398 million in Q2 5 million lower year over year, driven by the net impact of share repurchases option dilution.
Turning to cash flow in the balance sheet cash flow from continuing operations was very strong in the first half of the totaling $2.2 billion and free cash flow was $1.7 billion. After deducting net capital expenditures of approximately 500 million dollar.
We returned approximately $85 million to shareholders through dividends in the quarter.
This reflects the 16% dividend increase we announced in February.
We ended the quarter with approximately $5.8 billion in cash and $21.3 billion, a total debt as we prepare for the financing of the content acquisition.
During the quarter be raised 1.2 billion euros to the issuance of Euro denominated senior note.
Leverage ratio the ended the quarter with 3.1 times gross debt to adjusted EBIT da and 2.2 times on a net basis.
Wrapping up my comments not total company performance.
Adjusted ROI see with 12.5% 110 basis points from Q2 last year as we continue to generate very strong attack.
So now provide color on the performance of asphalt business segments.
I thought it'd be helpful to start with a couple of framing comments around the impact of cobot 19 related tailwinds on a segment results.
The complexity here shows the breadth of our response to meet the needs of our customers at this critical time.
From a revenue standpoint in Q2, approximately three quarters that the cobot 19, Tailwinds are reflected in life Sciences solutions that include testing related kits instruments from SAP sample preparation.
This is recognizing that genetic sciences and bias sciences businesses.
Especially diagnostic segment includes the revenue and the clinical diagnostics business from the molecular controls that go into testing kit.
We also recognized sales of viral transport media and the microbiology business as well as sales of tests and PPD by the healthcare market channel.
Philip archery products and services segments also includes revenue from sales to pp recorded in the respects and safety market channel.
In addition, the segment includes testing work flow related plastics made by our lab products business.
Vaccines therapy development through production support from our pharma services business.
From a margin standpoint, the impact to cobot 19 was varied across the segments.
Impact depended on the mix of revenue Tailwinds and headwinds as well as a different level to pull through on that revenue mix.
Across the company, we use that PPI business system to manage costs appropriately given the uncertain environment.
I had a positive impact in each segment.
At the same time during the quarter, we continued to make strategic investments in our businesses, even though is what cobot 19 with a net headwind.
Thats included investments in our colleagues in terms of incentive compensation and recognition.
Well, its commercial R&D and production capability investments.
We were able to do this given the strength of the company's overall performance.
Those investments do not necessarily match, where the cobot 19 related revenue tailwinds and headwinds each segment.
Does skew some of the reported margins in the segment.
So a lot of moving parts from a segment standpoint, but also reflective of very active management of the company, allowing us to navigate successfully through unprecedented times.
This thing is really well for the future.
So moving on for segment details starting with life Sciences solution in Q2 reported revenue in the segment increased 52% and organic revenue growth was 55% driven by exceptionally strong growth in that genetic sciences business as well as continued strong growth in bioproduction and biosciences businesses.
Q2, adjusted operating income and lifetime solutions increased 103% adjusted operating margin was 47.4% up 12 percentage points year over year.
In the quarter, we drove very strong volume pull through in productivity had positive business mix and continued to make significant strategic investments across the segments.
The analytical instrument segment reported a revenue decrease of 21% in Q2.
On an organic revenue decline of 20%.
Cobot 19 disruptions to our customers continued to have a significant impact to the businesses in this segment.
Two adjusted operating income and analytical instruments decreased 53% and adjusted operating margin was 12.9% down 870 basis points year over year.
In the quarter, we still have very strong productivity driven by PPI activities, which was more than offset by volume headwinds business mix and the strategic investments that I mentioned dahlia.
Turning to the specialty diagnostics segment as a reminder, this is the segment. The previously included the anatomical pathology business, which we sold in June last year in Q2 reported revenue increased by 5%.
Organic revenue growth was 12%.
Some of the businesses in this segment was significantly impacted by cobot 19 related headwinds in the quarter.
This was as a result of decrease and doctor visit unrelated testing.
Most impacted with immuno diagnostics and transplant diagnostics businesses.
That said this segment ultra so significant cobot 19 or like the Tailwinds in the quarter, we feel very strong growth in that healthcare market channel and our clinical diagnostics and microbiology businesses.
Adjusted operating income decreased 12%, which included a 5% headwind from the divestiture.
Adjusted operating margin was 21.6% down 410 basis points from the prior year in the quarter. We saw strong volume leverage from productivity. However, this was more than offset by business mix.
Strategic investments.
Finally in the battery products and services segment Q2 reported revenue increased 6% and organic revenue growth was 5%.
In the quarter approach within the segment was led by a pharma services business.
Adjusted operating income in the segment for Q2 decreased 19% and adjusted operating margin of 10.1%, which was lower than the prior year by 300 basis points.
In the quarter, we saw strong productivity and volume leverage, but this was more than offset by unfavorable business mix on the strategic investments that I mentioned earlier.
Turning to guidance.
Cobot 19 pandemic unrelated customer impact continues to excel Evault and as a result was still enough in a position to provide full year detailed guidance.
However, as I as we did last quarter I will provide you with some color on how we're viewing organic growth for the coming quarter.
Well the second full year Twentytwenty assumptions to help you in your modeling.
I'll start with organic growth.
Current estimates of the most likely outcome for Q3 organic growth is approximately 15%.
There are potential outcomes, both above and below that 15%, but could play out in Q3.
I will outline some of the factors to consider when thinking about a potential growth for the coming quarter.
That's what the case last quarter. There are two key variables that would drive by growth in Q3.
First at the scale of the Cobot 19 related revenue Tailwinds, the second to the headwind caused by cobot 19 related disruption truck customers activity.
Regarding the revenue tailwind.
Clearly that's a wide range of outcomes here, but our current estimates of the most likely outcome for Q3 is approximately $1.1 billion, the revenue, which would translate to just under 18% of growth.
The volume of Cobot 19 testing undertaken by our customers will be the most significant factor determining the extent of our revenue tailwind in Q3.
Regarding the rest of our revenue growth, which is a combination of the cobot 19 related headwinds underlying market growth and I share gain activity.
We estimate this will be in the range of approximately flat to negative 5% in Q3.
This compares to negative 10% in Q2.
Improvement quarter over quarter is driven by an assumed gradual ramp in customer activity as a return more fully to the workplace is important to note that the range does not anticipate to return to the lockdowns seen at the height of the pandemic.
So when you put all that together as I mentioned that current best estimate the Q3 organic growth is approximately 15%.
Given the fluidity of the situation there are potential outcomes, both above and below the 15% the could play out in Q3, but testing demand being the most significant swing factor.
I will now move onto an update of some of the modeling elements for the full year.
With regards to FX and Twentytwenty, one now assuming that this is a year over year headwind on revenue of $200 million or just under 1%.
There are six cents of dilution from the sale of the anatomical pathology business, which reflects revenue and operating income headwinds at 105 million and $30 million respectively.
We're continuing to assume that the acquisitions, we completed and 29 team will contribute approximately $160 million two I reported revenue growth and Twentytwenty.
As a reminder, on the calendar with one less day in Q1 under the two extra days in Q4 this year.
We continue to expect net interest cost for the yet to be approximately $460 million. This included the Cogint acquisition acquisition Prefunding completed to date.
Twentytwenty that equates to a cost of $90 million or 17 cents adjusted earnings per share. We will continue to look at opportunities to prefund more of the transaction during the remainder of Twentytwenty.
We're continuing to assume that adjusted other net income will be about $70 million for the year.
With regards to net capital expenditures, we now expect to be in the range of 1.3 billion to $1.4 billion.
This includes approximately $300 million of capital expenditure to support that Cobot 19 response.
In terms of capital deployments, we completed $1.5 billion to share buybacks in Q1 under assuming no further buybacks in the remained a twentytwenty.
We estimate the full year average diluted share count will be between 398 and 400 million shares.
And we're continuing to assume that were 10, approximately $350 million or capital to shareholders. This year through dividends.
So to wrap up as you can see from our outstanding performance in Q2, we continue to manage the company extremely effectively in a very dynamic environment with that I'll turn the call back over to Ken.
Thanks Steven.
Operator, we're ready to open up for Q1.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Hello, everyone in the queue and opportunities to address.
Thermo Fisher management team.
At your time on the call to one question and only one follow up if you have any additional questions. Please return to the Q.
First question comes from the line of Taco Peterson from JP Morgan Your line is open.
Hey, Thanks, Congrats on the quarter I. Appreciate you guys kind of quantify Cobra Tailwinds I think as we look a little bit further out Im just curious markets. How you think about the durability on the Cobiz testing side. You noted the PCR test is now crews and other instruments you talked about the respiratory panel. So can you talk a little bit about.
Is that a move toward more automated systems rolling it into a syndromes panel and indicate that more of a channel for example, the physician office market. Thanks.
Yes, Taco things for the question.
As I look to.
The co but.
The impact of coal that going forward.
The largest determinant this year the impact is going to be related to the testing demand than certainly as you get into 2021, you're going to see a larger and larger impact of the activities. We do in our pharma services business to support.
The therapy and vaccine development to ramp up all you get some of that now.
I look at the going forward for coal than 18 testing, we obviously have a leading position PCR platform around.
Around the world or response has been.
Very significant ramp up in capacity and we anticipate that the demand certainly in Q3.
We will continue to be at a very strong level and most of US are obviously very dominated by U.S. headlines, but what you see is generally demand picking up.
Further in the U.S., but you also see demand.
Weakening.
Other geographies.
Europe would have lower demand and so you saw in Q2 that may change, but but the net of it is.
Fairly similar revenues to what we saw in Q2 is what we're expecting for Q3.
Okay, and then two quick follow up some case not yet the press release out the other day quantifying. The 2500 programs are involved with can you just help us think about trial delay headwinds versus the tailwinds on vaccine development for the next couple of quarters, how we should think about trajectory for patients and then separately on China down 15% was that in line with your ex.
The patients obviously, the then on the patch recovery, so that was a little bit worsened with model. Thanks.
So in terms of.
The pharma services.
You know activity.
We're very involved.
With a very large number programs and when I look at sort of the headwinds from the pandemic on clinical trials, while there outside of the coal that there was some.
But not not meaningful.
And when I look too.
China at a high level.
We saw demand build throughout.
Throughout the throughout the quarter.
In terms of where we were in the way that I would think about it is China was very very conservative on the opening up of academic institutions. So that actually was a little bit more muted.
Then what we would have expected back in April but.
But but is picking up in Q3.
You know it looks to be more encouraging.
Thank you take up okay. Thanks.
Your next question comes from the line.
From Evercore your line is open.
Hey, guys second that's in the release function.
Maybe a follow up on the prior question Mark.
Can you, perhaps a size what the vaccine opportunity.
Could mean for the overall life science industry understand if someone diagnostics would drop off.
For a multibillion dollar figure for the industry I'm just curious on now.
Just given the scale of.
Nothing vaccine opportunity with thinking.
Perhaps the.
Over time larger than the diagnostic opportunity.
I think about the vaccine opportunity.
What's a little bit hard to quantify is what's the vaccine strategy going to be used around the world. So I'm talking more what's the total amount of vaccine going to be produced are we thinking about the world getting high risk population are we thinking about the just the current.
Trees that can afford a vaccine are we thinking about 7 billion people ultimately getting a vaccine and that leads to a massively wide range of what the outcomes or what I would expect should there be a successful vaccine is that.
The role of a company like Thermo Fisher and certainly the CDMO industry more generally will play a significant role based on the fact that the ramp up under every scenario would be very dramatic we've been very active.
In those projects in many of the high profile projects that you read about were either providing raw materials from our bioproduction and biosciences business to having rules in the production ultimately all well call drug substance or vaccine substance in certain key.
Since and certainly a very meaningful in the sterile finished with a final packaging form that a vaccine would be administered so we expect if a vaccine is successful.
It will be a meaningful tailwind over time with revenue that we've already gotten a little bit off and Ram slowly through the balance of this year and would be more meaningful in 2021 20 to 22 sure the vaccine be successful.
Understood and then no one one on a margin.
In the guidance there for Rob.
Back half.
You guys mentioned, perhaps you know the organization was crept up for a pretty drastic outcome.
So clearly you had outsized volume benefit so when you think about the incremental margins for back half should we think about some of that spend coming back perhaps the incremental margins, maybe tempering down below back and I'm curious why.
Perhaps you know we don't have an S floor, even if you assume Q4 to be all aside the diagnostic Tailwinds go away.
Phil teams up as Jaksich here should be pretty strong. Thank you.
Yes, the degree to I'll take that one so so when you think about Q2, new 11% organic growth drove 28% growth in adjusted EPS. So it's a very strong performance.
So you think about Q3 and.
No I'm most likely outcome based on what we were thinking right now is 15% organic growth and that would drive very strong adjusted EPS as well I think about Q3 the Q2.
The change in the mix of the business and the 15% versus the 11.
It's likely to be slightly less favorable.
Business mix within that revenue.
Obviously, that's a scenario where that mix could play out to be better, but I think thats a good place yeah. Good way to think about modeling for for Q3.
And so and then on the EPA slow and perhaps the even if you assume all of diagnostics just went away from Q4 I feel like.
EPS should be.
It should be and firmly in the doubling its range for the year.
Yes, perhaps in the mid teens inventive reasonable assumption now for the year.
So we do we chose.
Not to give the or realistic full year guidance, you know because when you think about the potential mix and range of growth in each segment.
To give a range that would be useful the number would be enormously wide.
So what we what we are looking at is as we get more predictability into what the world looks like especially in Q4, where you don't know what the virus looks like you could have a very bullish scenario you could actually have a pessimistic scenario. If there was a dramatic.
This current wave gets much worse, you could you could be more pessimistic. So we're keeping our thinking on what the right external approaches we feel good about our outline for Q3 and I think you've got a sense from our Q2 performance, we're going to deliver an outstanding year financially and it'll be managing through whatever environment.
Thrown at US, we're going to create great opportunities to drive share gain topline growth an extraordinary earnings performance.
Thanks, Mark Congrats again.
Thanks for you.
Next question comes from the line of Dr. Brough from Bank of America. Your line is open.
Hi, good morning, everyone.
Good morning, So a couple of so a couple of questions I think the first one is Ed I. Appreciate the color on Q3, I think where we're getting most of our.
Incoming questions for investors is how do we think about.
The Kobe testing tailwinds going on into 21, I mean, you know qiagen has put out.
Commentary talking about double digit growth in their business.
But then declined in Q.
Hi, and in 2022 numbers. If you look at the documents filed this morning, I guess could you just sort of talk about how would you. That's because we obviously do you think about modeling for 21 I know, it's given takes testing coming down vaccine production going up like that but I think that's sort of where the bulk of my incoming questions are from people.
So Derek thanks for the question.
Let me tell you how we're planning that's probably I think it's impossible to predict it in a certain way it feels like a month as far as these days booked.
What we were expecting from everything we know is that we're going to be living with the pandemic for a number of quarters right that.
It'll take time for a vaccine to be the market. If it's successful well therapies are making progress again that piece will take time and that the virus continues to spread in many countries around the world. So that this is not a you know it's done quickly scenario and therefore, we're expecting that 2021.
We will be navigating through both headwinds of you know disruptions of some short related to the pandemic, but also the continues to side or response needed to that and we think we're incredibly well positioned based on or quality scalability of manufacturing and very large.
Installed base and very excludes a customer relationships, we feel good about that will play a meaningful role in 2021 for the testing volumes that are needed by customers on what that number is going to be isn't very very enormous range of outcomes, but for manufacturing teams have been remarkable and the power of our.
CPI business system has been astonishing and if you think back when I was just the white house at the end of April.
So that we're working our way to be able to produce 10 million kits are weak and that was it late April and.
By the end of the quarter, our manufacturing capacity you know is above that and that doesn't mean, we're selling them any because you know demand will ebb and flow, but our ability to scale and meet whatever responses out there we feel highly confident enough.
Great and can you talk a little bit more about the academic outlook I mean, you've got a fairly big chunk of your.
Business tied to academic and colleges universities and colleges and clearly there.
Yes, there's a lot of uncertainty, particularly just resurgence about how these are going to open can you walk us through academic and government as we look at U.S., Europe, and Asia Pac and just to get a sense on on what your customers are planning and.
Hello labs or how many of your labs are still close just just I think some general color I think that's the other number one <unk> that's the other big incoming question, we'd have some investors.
Yes, so in terms of academic and government end market.
What you obviously, so disruptions around the world at the beginning of the pandemic with activity very quickly ramping down.
As you looked at Western Europe, which.
Actually started to screens and steadily throughout the quarter, the U.S., which faced depend demicks slightly later than Europe is.
A little behind but on the same type of trajectory with activity picking up the interesting country has really been China.
I was actually actually kept most of its universities close for most of the quarter that activity is picking up as well, but but actually a little bit more slowly than one would anticipate one would have anticipated.
So the impact of that is you know obviously.
The word customers able to receive instruments as easily as normal and.
So so we would expect that as academic and government customers reopen in that setting you'll see instrument demand start to pick up as well.
Great I'll get back into queue. Thank you. Thank you.
Next question comes from the line of Jack Me here.
Your line is open.
Thank you good morning.
Good morning.
Mark I was curious to get your take on how much the tailwinds and share gains that you're seeing in the business right. Now do you think are going to end up proving to be more permanent over time versus kind of the outsized benefit you're seeing right now and I know it's difficult to provide a three year view when we don't have a one year view, but.
Just given all the moving parts, how do you think you're positioned versus the 5% to 7% target you laid out a year ago.
Yes so.
Jack.
When.
The teams view right when we were sitting in February and looking at the situation in China.
The teams view was having the very clear set of guiding principles right, which was the obvious keep it colleague safe search support your customers activity and the third as manage the company appropriately in this environment.
And we came with a very clear view of what that meant which is of course manage costs tightly because there's going to be disruption to demand, but be very aggressive to position the company for a brighter future to solidify strengthen and hopefully even increase the growth outlook of the company for the longer term ride we normal for us as part of.
7% growth and we've been taking actions to create that even brighter future right. So that means you get higher in that range, what you're in a normal environment or or above that range and we have no idea now, but I know, we're taking the actions to strengthen the long term outlook of the company and because we've been able to respond so aggressively.
To help our customers navigate the pandemic, we're obviously in the midst of an incredibly strong year.
As well so we're at this point, obviously you know we had about 7% organic growth. When you look at the first half. So what are the high end of our normal range and obviously with the Q3 outlook. This.
Could be a very significant year as well in terms of performance.
Okay.
And then one of the also follow up on tie engine clearly unprecedented times. So I can appreciate the justification for the price increase.
I have been some questions around weather 43 euros enough. So I was just hoping you could comment on your appetite or lack thereof to raise the price further and just walk us through what happens next.
In the tender process.
Yes, so Jack Thanks for the question as everybody here knows were extraordinarily disciplined in terms of our capital deployment strategy and ensuring.
That where we deploy our capital we're going to strengthen the company strategically and generate strong returns for our shareholders. The dynamics are obviously as you said very different from the beginning of March to now and cages done a good job in terms of stepping up and making it will impact on society from a pandemic response.
Hans.
And we thought our way through that.
And had.
Very good faith negotiations with Qiagen and came to an agreement at the 43 euros and we believe that still full and fair value in terms of our view is we were very clear in the process and we disclose that this morning I think early hours.
Because in German regulations.
That is our best and final offer in the process was very straightforward. The tender I believe ends around August 10th and if we clear the 66.67% threshold than the tender is complete and this some mechanisms in the deal proceeds.
And if we don't get the 66.67% the deal is over because there's a cooling off period in Germany. So there is no revised offer that is what it is and.
We think it's very appropriate set to shareholders and we look forward to completing the tender process and then moving forward through the regulatory process and welcoming our over 5000, new colleagues next year into the company.
Makes sense thanks Mark.
Your next question comes from the line of Doug Schenkel some color.
And.
Hey, good morning, Thanks for taking my questions and again, thanks for the Thermo team for all your efforts over the past several months.
Just just in terms of my first question what end market expectations are embedded into your Q3 financial targets, excluding covert 19 tailwind.
You know, it's not a way that we manage so this is quite that whether its let me try to get through an answer more about activity levels in the non coal and make some qualitative views around it.
So for Q2, Doug.
The non koby related businesses declined 10%.
Which was just above.
The better end of our expectations that we gave in the in the guidance process right. So that's where it ended June.
Was down about 5%. So you saw was April may were worse June was about negative five the range of outcomes at Steven articulated.
In the outlook for Q3 was a range of negative five to flat the negative five would assume that what we saw in June continues throughout the quarter. The flat basically is a steady improvement throughout the quarter.
And when do you think about that a normal quarter for us is 5% to 7% growth on that business right. So even at flat you are still five to seven points below what we would have experience for the last five seven years right. So it's a steady increase in activity is what is assumed and when you look at that on the noncash.
Hi, good related businesses pharma biotech has continued to be the least impacted it would likely be.
The least impacted in academic and government industrial and applied in the healthcare in diagnostics.
They all should start to see.
Some level of step up throughout the quarter as to where we think about it.
Okay, that's super helpful and building off of.
One thing you touched on their mark.
I don't I don't think in your prepared remarks, you commented on instrument versus consumable revenue growth in the quarter or the exit rates would you be willing to share any any details on on those data.
Yes, so it is very skewed by.
By the Tailwinds soon we think about to Tailwinds are largely going to be consumables right now excluding that now clearly instrument purchases, where you know it at a lower level of growth and then consumables and services now its customer activity has been relatively low.
We expect that to pick up in the second half of the.
Okay, and one one last one.
You don't really building off of some earlier questions, but trying to get a little more granular.
Glaxo has talked about selling vaccines at about $10 per unit, which isn't there words is around cost.
Pfizer. This morning, just agreed to sell to the US at night deep per unit for their vaccine, which as I think just a smidge about profitable.
Is there a rule of thumb, we can use on what percentage of unit pricing would typically be up for grabs for thermo, whether it's on a per unit vaccine basis or using services. I mean, just using that tend to 1950 range. How much of that would normally you don't end up going to thermo. It's a you know as a component of costs.
It's really extraordinarily different to do it let me just visualize it for usage, which is why I really can't give you an answer if you think about the vaccine.
Can give you two different views of how it gets administered in those cases, one is single units.
Meeting one vial one vaccine another is a viral where you put a search engine and take out the vaccine and you have 10 or 20 units over the back of the vaccine doses in the single thing you're going to get wildly different.
CDMO revenue our revenue based on just even the filling strategy of those companies. So very hard to do a rule of thumb until you know exactly the dosage form and so forth and you know is it what's the technology used in the indexing.
Okay. Thank you very much.
Your next question comes from the line of 20.
From the B.
Often.
Yes, hi, thanks, Mark and congrats on the quarter, an impressive quarter good for sure and thanks for your commitment to both research and improving the lives here with Cowen testing and commitment to vaccines. So first one if I could ask them capital deployment.
Given the who would benefit you're seeing on testing and the growth do you expect to see from vaccines.
What does your.
What does your thinking long term thinking on capital deployment given that the vaccines scenario is actually multi year. As you pointed out are you thinking about capital deployment of any differently than before.
So please thanks for the question so from a capital deployment strategy I don't think it really changes too much you know what I would say is.
Over the longer period of time, it's going to be a blend of return of capital and the majority.
Being redeployed into M&A in the business, if you think about the past quarter.
Or say March forward, obviously, a large acquisition in Tiotwo and also a nice bolt on acquisition, which we announced and we'll close next year in Seo cells Biologics facility and I think you'll see us through a cadence of.
Smaller and larger deals over time.
With a steady return of capital so our business is performing at a high level our expectations for the future is that it's going to perform at a high level and thats going to give us very substantial cash flow to be able to redeploy yes, and we will also increase capex significantly to address skin capacity and capability enhancements for for the covered 19 respond.
As well.
Okay, that's very helpful.
My second question is on you have a unique vantage point, Mark and the global perspective, given their most position the scale in the speed that you pointed out too.
You look at research funding across the globe, there's an expectation here that the research funding. It is likely to grow magnitude is unknown at this point, but it could you.
Give us a sense of that given what you are seeing given the magnitude of this crisis.
What does this mean for the next five years across Lifesize towards industry and more importantly for thermo when it relates to academic funding and research funding across the globe.
So pretty thanks for the question so as.
We talked to government, so we talk to our customers and we.
User experience.
Let's say student diagnostics and are in our former service capabilities, it's a fantastic industry with great market growth characteristics, you're seeing the industry performed well in this environment. My expectation is when the dust settles the commitment to life Science research healthcare infrastructure.
There is going to be even better over time than what the strong period that we enjoyed.
And we're seeing some of the early.
Excitement at the importance of the work and so I'm very bullish about what the long term.
Benefits will be obviously, there's going to be ebbs and flows because of the economy and affordability and those things, but you know, but if I take the long term perspective, I'm very optimistic for what our industry holds and for their strong competitive position that we built consortium that industry.
Great. Thank you.
Operator, we have time for just one more.
Last question comes from the line of Steve flu shot from Wolfe Research. Your line is open.
Hi, good morning, Thanks for letting me run the of the anchor like here.
I have a two parter for mark as it relates to a couple of the subcategories within.
Testing and then I have one on the financials for Stephen.
Mark there a couple of.
Potential drivers of testing prospectively for you and for the space broadly one is screening and we've heard just for example in number of universities talk about reasonably high frequency.
Testing of asymptomatic people on campuses I Wonder if you could speak to the to what extent asymptomatic screening is or is not in your plan and whether you think that could be immaterial tailwind and then the second part of my testing question actually relates to Surajit.
We're always you just hasn't caught on quite as well as we hoped initially just doesn't seem to be finding as many.
Instances as we hope for.
And anti body signal of immunity continue speak to how you think that market evolves are there ways, we could get the yields higher.
Yes, so Steve Thanks for the question.
In terms of screening or asymptomatic pacing patients.
Well, we would say is back to life type activities back to work back to school.
We see the interest level dramatically increasing with many different use cases, and we expect to play a role.
In a number of that and some of that is embedded.
In the in the demand that is in Q3 and and my take is that the methodology to only symptomatic squeezing up not the platform but.
Things like pooling and so forth could facilitate some of that ramp up overtime and different strategy. So so I think that will create a tailwind.
Overtime to support the activity while testing as relevant on Surajit.
We are developing our assay, we're taking you through the regulatory process.
As the medical community better understands the immune response or what it means serological testing becomes more relevant and so so right now theres capacity out there. There's you know, we're bringing out a high quality test and as customers need it will be able to supply.
So we're going to its very much overlap, but did you have one question for Stephen quickly. This week, we should wrap.
One question just real quick for Stephen It's can you put any commentary around cost savings that you've identified from things like lower t. any or other expenses from being virtual that you think are sustainable. Thanks, so much.
Oh, yes, it so clearly we control costs, a very effectively and we're all learning to live in a different environments and he and the expenses are going to be dramatically lower I think for for the long term since I would think about managing the company and.
No taking advantage of the technologies that we've we've invested in over time so.
It's my guess is probably about 100 to couple hundred million dollars over time that you get to that level of savings of ongoing cost. So sober appropriately managed in the company both shorts eminent thing about the long term opportunities.
So we'll wrap up here.
The first thank you for joining us today were very pleased to have delivered an exceptional quarter during a very challenging time.
We're proud of our role in helping our customers in society and we're going to continue to manage the company appropriately to come out of this period, even stronger industry leader.
We look forward to updating you on your car on our progress and I hope that you stay safe and as always thank you for your ongoing support Thermo Fisher scientific thanks, everyone.
This concludes today's conference call.
Yes.
[music].
Oh.
[noise].
Yeah.
[music].