Q1 2021 Thermo Fisher Scientific Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher scientific 2021 first quarter conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Good question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded I would now like to introduce our moderator for the call. Mr. Raphael Bajada, Vice President Investor Relations. Mr. <unk>, you may begin the call.

Good morning, and thank you for joining us on the call with me today is Marc Casper, Our chairman, President and Chief Executive Officer, and Stephen Williamson Senior Vice President and Chief Financial Officer. Please.

Please note this call is being webcast live and will be archived on the investors section of our website for bonefish for dot com under the heading Webcasts and presentations until May 14 2021.

A copy of the press release of our first quarter 2021 earnings is available and the investors section of our website under the heading financial results.

So before we begin let me briefly cover our safe Harbor statement.

Various remarks that we may make about the company's future expectations plans and prospects constitute forward looking statements for purposes of the safe Harbor provisions under the private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed and the company's most recent annual report on form 10-K, which is on file with the FCC and available and the investors section.

Our web site under the heading asset T SEC filings.

While we may like to update forward looking statements at some point in the future. We specifically disclaim any obligation to do so even if our estimates change and therefore, you should not rely on these forward looking statements as representing our views as and as of any date subsequent to today.

Also during this call and we won't 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 for the most directly comparable GAAP measures is available and a press.

Release of our first quarter 2021 earnings and also and be as investors section of our website under the heading financial information and so with that I'll now turn the call over to Mark. Thanks.

Thanks, Ralph good.

Morning, everyone. Thank you for joining us for our Q1 call.

As you saw in our press release, we had a very strong start to the year.

We delivered another quarter of outstanding financial performance with excellent growth on both the top and bottom line.

And as you know, we're playing a significant role and enabling society's response to the pandemic, including rapidly expanding role and supporting vaccine production and.

And our base business, we meaningfully accelerated growth across all our businesses and the first quarter.

We had very strong execution of our growth strategy, including launching a number of innovative new products and capitalizing on our leadership and the high growth and emerging markets strengthening our unique customer value proposition and we're already starting to see the benefits of the accelerated investments we initiated in 2020.

We continue to execute our capital deployment strategy, completing our acquisition or European viral vector business and Mesa biotech a rapid point of care and molecular diagnostics company.

We also returned capital to our shareholders through stock buybacks and dividends and.

As I'm sure you saw shortly after the quarter closed we announced our agreement to acquire a P. P. J, a leading provider of clinical research services, serving pharma and biotech customers our fastest growing end market.

So another great quarter of delivering for our stakeholders in the near term, while investing organically and inorganically for a great future.

And I'll cover each of these topics in more depth and my remarks, but first let me recap the financials.

Our revenue in Q1 grew 59% year over year to $9 $91 billion.

Our adjusted operating income for the first quarter increased 155% to $351 billion.

And our adjusted operating margin expanded 13 percentage points and Q1 to 35, 4%.

Finally, we delivered another quarter of strong adjusted EPS performance, achieving 145 per cent increase to $7 and 21 per share.

Turning to our end markets conditions were very robust driven by three factors the strong fundamentals and life sciences ramping of economic activity globally and the role our industry is playing independent Mark response.

Our unique competitive position has allowed us to deliver another fantastic quarter, so starting with pharma and biotech with outstanding performance with growth of approximately 35% driven by strong underlying market dynamics, the benefits of our unique customer value proposition and our leading role in supporting our customers across a wide.

Range of exciting therapeutic areas, including our significant role and supporting COVID-19 vaccines and therapies.

Saw excellent growth across all businesses, serving these customers, including bio production pharma services, Biosciences, chromatography, and mass spectrometry, and and and our research and safety market channel.

We're clearly benefiting from our trusted partner status that we've earned over many years with these customers.

And academic and government, we had very strong performance and grew 20% driven by robust customer activity globally and Q1, we saw strong growth across a number of our businesses supporting this customer base, particularly and biosciences chromatography and mass spectrometry and electron microscopy.

Turning to industrial and applied we grew and the low double digits and the first quarter. The team continues to execute at a very high level to capture opportunities as more customers increased their activity activity level.

During the quarter. It was good to see strong growth across all of our instruments businesses.

And finally in diagnostics and healthcare, we had another outstanding quarter, delivering approximately 150% growth demand for our COVID-19 testing solutions was very strong and our base business. While demand is still below pre pandemic levels. It was encouraging to see our immuno diagnostics business returned to strong growth and the quarter.

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To summarize our performance our teams capitalized on improving conditions and markets and we continue to gain market share.

Now let me give you an update on our role in supporting the pandemic response and once again this quarter and Thermo Fisher played a very meaningful role and fighting COVID-19 globally.

We generated $2 $9 billion and COVID-19 response revenue in Q1.

Demand for our PCR testing solutions was strong and our role and the development and production of vaccines and therapies continues to ramp even faster than we expected.

Coming into the year, we expected our role in supporting vaccines and therapies to represent $1 billion and revenue.

Based on our orders and at the speed at which our capacity expansions are coming online, we now expect to deliver $1 $5 billion and vaccine and therapy revenue and 2021.

We also continue to leverage our expertise to bring new solutions to the fight against COVID-19. One example, and the quarter was our launch of the Thermo scientific aerosol sent sampler, a new air monitoring system to help facilities, such as hospitals schools and businesses identify the presence of in there in air pathogens, including the virus that causes COVID-19.

And as more people returned to public spaces, the aerosol sense sampler will complement other safety protocols.

We also acquired my niece of biotech, which adds simple and rapid PCR testing to decentralize testing to decentralized settings, including doctors' offices pharmacies and to support a number of back to life applications.

Customer interest is very high and we're using our PPI business system to scale the manufacturing of the rapid diagnostic cartridges used by Mesa, we expect to generate $200 million. This year from these capabilities and are very excited about the potential for this molecular diagnostic technology post pandemic.

The other point I would like to make is that because of our leading role that we played and the pandemic response growing 2020 and our outstanding financial performance, we were able to significantly accelerate our investment programs last year, and R&D and commercial enablement as well as capability and capacity expansions these accelerated investments.

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For a glimpse into the early momentum building for these investments let me turn to the great progress. We made in Q1 on our growth strategy, which is based on three pillars.

Watching high impact innovative new products, leveraging our scale and high growth and emerging markets and delivering our unique value proposition for our customers I'll now share a few examples that demonstrate how we use this strategy to continue to build on our success and create value for our customers.

Starting with innovation during the quarter, we launched a number of new products across our businesses to strengthen our leading position and to enable our customers to break new ground and achieve their goals. Let me highlight just a few.

And chromatography and mass spectrometry, we launched two new thermo scientific orbit trap, which for us Chiesi mass spectrometers, which further extend the impact of our industry, leading or be truck franchise to bring high resolution analysis to a range of applications, including toxicology and metabolomics.

And materials and structural analysis, we launched the thermo scientific spectrum ultra our new generation scanning transmission electron microscope for materials science applications, which provides insights and atomic scale resolution to accelerate research and improved manufacturing productivity.

And then and our Biosciences business, we launched the kingfisher apex purification system for high throughput sample preparation.

Turning to the second pillar for our growth strategy, we're leveraging our scale to create and outstanding experience for our customers and the high growth and emerging markets.

We're seeing excellent growth, particularly in China, where customer activity has returned to pre pandemic levels and we grew more than 60 per cent.

And we continue to strengthen our capabilities serving these markets as an example, and the quarter. We started shipping products from our new single use facility in Suzhou, which localize the bio production manufacturing for biotech customers in China, and our investment and of our production capabilities and Singapore and single use capacity for pharma.

And biotech customers globally.

So we have strong momentum and high growth and emerging markets and we continue to strengthen our position.

Turning to the third pillar of our growth strategy, our customer value proposition, we continue to increase our capabilities and capacity to be and even better partner for our customers and help them achieve their goals.

Let me update you on our progress and serving our pharma and biotech customers.

Our upcoming acquisition of P. P D. A leader and clinical trial management services is a great complement to the role we play and supporting research and development clinical trials and production.

These combined capabilities, along with a complementary reputation for excellent quality and service will further enhance thermo Fisher value proposition for pharma and biotech customers importantly, our customers will be able to more efficiently access these services, which are key enablers of their success.

And interacting with a number of our customers since the announcement and they're excited about the new capabilities that P. P. D will bring for Thermo Fisher scientific by.

By adding these highly complementary services to our portfolio, we will be able to we'll be able to further advance our strategic partnership as our customers work to bring a scientific idea to and improve medicine. It will also provide terrific career opportunities for our colleagues and create significant shareholder value.

Our organic investments are also building capability and capacity for our pharma and biotech customers one lens, which highlights. This is to support the scale up of mrna vaccines, which are in high demand globally for COVID-19 today, but also for many other diseases going forward.

As you know where and important supplier in this area and we have continued to invest to scale, our capacity, including and our Biosciences business. We're building additional capacity for our central raw materials and different regions of the World. We're also expanding our by our production purification Reds and capacity.

Which is used and the mrna manufacturing process.

And finally, we're ensuring expanded and regionally available sterile flow finish capacity to produce final drug product and as always our PPI business system helped to drive our success during the quarter, enabling us to find solutions and better ways to serve our customers work more efficiently and effectively and create even greater value for all of our.

Stakeholders.

Now I'll give you a quick summary of our capital deployment activities. So far this year.

It had a very active start closing $1 $4 billion and acquisitions and the quarter and as I just mentioned entering into an agreement to acquire a P. P. D for $17 $4 billion plus the assumption of approximately three and a half million dollars of net debt.

We also returned significant capital to our shareholders during the quarter repurchasing $2 billion of our shares and increasing our dividend by 18%. So we've had a great start to the euro and capital deployment front and our M&A pipeline remains very active.

Turning to a brief update on the progress of our ESG initiatives, our mission to enable our customers to make the world healthier cleaner and safer has never been more relevant and in addition, we want to make a very positive impact and the communities and which we live and work and.

Proud that over the past share we've significantly increased our social impact and in the first quarter, we committed to and impact investment of $25 million to support financial institutions, serving black and minority communities and businesses.

Just like the <unk> project and our foundation for Science, which we launched last year. This more recent investment is meant to help create opportunities for all.

Turning to our guidance for 2020 one.

Driven by a very strong start to the year and our confidence in the full year outlook, we're raising both our revenue and earnings guidance for the full year.

Stephen will get into the assumptions behind our guidance and I'll cover the highlights we're raising our revenue guidance by $550 million to $35 6 billion, which represents 10% reported growth over 2020.

In terms of adjusted EPS, we're raising our guidance by 35 cents to.

For $21.97, which would represent 12% growth over 2020.

Before I turn the call over to Stephen Let me summarize our key takeaways from Q1.

We delivered another excellent quarter of financial performance for both the top and bottom line.

The end markets are strong we committed to execute will continue to execute our proven growth strategy to be and even stronger partner for our customers.

We effectively deploy capital to create significant value for our customers and our shareholders.

And we couldnt be more excited about our plans to acquire a P. P T.

I'm very much looking forward to welcoming PPD is 27000 colleagues to thermo Fisher, which we expect to do later this year.

Finally, I'd like to thank my 80000 colleagues to thermo Fisher for their dedication to our company our customers and for once again, delivering another fantastic quarter and now I'll turn the call over to our CFO Stephen Williamson Stephen.

Thanks, Mark and good morning, everyone I'll begin with a high level summary of our Q1 performance.

As Mark mentioned, we had another exceptional quarter and grew our revenue, 59%, including 53% organic growth, we delivered $2 $9 billion of COVID-19 response revenue and accelerated the growth of our base business, 13%. So a great start to the year on the topline.

We also had an excellent start to the air and adjusted EPS growing, 145% and Q1 to $7 and 21.

This was 70 cents higher than our expectations for Q1 at the time of our last earnings call driven by great operational execution and the timing of expenses within the year and at higher tailwind from FX.

Overall exceptional financial results and Q1, continuing our momentum from 2020.

Let me now do with some additional details on our Q1 performance.

GAAP EPS in the quarter was $5 and 88 and up 198% from Q1 last year.

On the top line, our Q1 reported revenue grew 59% year over year. The components about Q1 reported revenue increase included 53% organic growth and 4% tailwind from foreign exchange and a 2% from acquisitions.

And as a reminder, we had three extra selling days in Q1, which represents a tailwind of approximately 3% and.

Looking ahead, we have for fewer days in Q4.

Turning to our performance by geography during the quarter all regions delivered very strong growth North America, Europe, and Asia Pacific All grew approximately 50%.

China grew 60% and the rest of the world grew over 80%.

Turning to our operational performance Q1, adjusted operating income increased 155% and adjusted operating margin was 35, 4% 13 percentage points higher than Q1 last year.

And the quarter, our PPI business system enabled us to drive exceptional volume leverage and strong productivity. We also had favorable business mix and a tailwind from FX. This was partially offset by strategic investments across our businesses to support our near and long term growth.

Moving on to the details of the P&L total company adjusted gross margin and the quarter came in at 54, 1% up 810 basis points from Q1 at the prior year.

The increase in gross margin had very similar drivers as those of our adjusted operating margin.

Adjusted SG&A in the quarter was 15, 4% of revenue a decrease of 460 basis points versus Q1, 2020, reflecting strong volume leverage total R&D expense was $320 million representing growth of 31% over Q1, 2020 for.

Selecting our increased investments and high impact innovation to fuel future growth.

Looking at results below the line for the quarter and net interest expense was $113 million $23 million higher than Q1 last year.

Adjusted other income and expense was a net income in the quarter of approximately $14 million $11 million lower than Q1, 2020, mainly due to changes and non operating FX.

In line with our expectations, our adjusted tax rate and the quarter was 16% up 550 basis points versus Q1 last year due to the substantial increase and pretax profit.

Average diluted shares were 397 million and Q1 about $2 5 million lower year over year, driven by share repurchases net of option dilution.

Turning to cash flow and the balance sheet cash flow was another strong highlight for the quarter, our PPI business system enabled us to deliver significant cash flow from the very strong top line performance.

And cash flow for continuing operations was $2 billion and free cash flow was $1 $4 billion and.

And our capacity and capability investments are proceeding very well and this quarter net capital expenditures were $620 million.

And the quarter, we returned $2 billion for capital to shareholders through buybacks, one 5 billion in January and a further 500 million and March during the quarter. We also increased our dividend by 18%.

We deployed $1 $4 billion and acquisitions, and Q1, including Mesa biotech and the acquisition of a European based viral vector business. Shortly after the quarter and we also announced an agreement to acquire PPD.

Early in the quarter, we completed the redemption of $2 $6 billion of senior notes and we ended Q1 with approximately $5 6 billion and cash and $18 $6 billion and total debt.

Our leverage ratio at the end of the quarter was one five times gross debt to adjusted EBITDA and one one times and a net debt basis.

And concluding my comments and our total company performance adjusted ROIC was 21, 4% up 960 basis points from Q1 last year as we continued to generate exceptional returns.

And I'll provide some color on the performance about for business segments.

And much of the last few quarters I'll start with some framing thoughts on the impacts of the COVID-19 response and our segment results.

From a revenue standpoint as was the case and the last two quarters. The majority of the COVID-19 response revenue is recognized and life science solutions with the remainder recognized and specialty diagnostics and the laboratory products and services segment.

From a margin standpoint, the impact of COVID-19 differed across the segments based on the scale of the response revenue and the different levels of profitability on that revenue.

In addition, during the quarter, we continued to make strategic investments across all of our businesses that included investments and commercial R&D and production capacity and the size of those investments does not necessarily align with the COVID-19 response revenue in each segment and so that does skew some of the reported segment margins.

So a lot of moving parts from a segment margin standpoint, and it reflects a very active management for the company successfully navigating the current environment and position the company for an even brighter future.

So moving on to the segment details starting with life Sciences solutions in Q1 reported revenue and the segment increased 137% and organic growth was 129% and the quarter, we saw exceptionally strong growth and our genetic sciences biosciences and bio production businesses.

Q1, adjusted operating income and life Sciences solutions increased 238% and.

Adjusted operating margin was 54, 2% up 16 percentage points year over year.

And the quarter, we drove very strong volume pull through and positive business mix and we continue to make strategic investments across all businesses and this segment. We also had a tailwind on margins from FX and the segments and Q1.

And the analytical instruments segment reported revenue increased 26% and Q1 and organic growth was 22%.

During the quarter, we saw a strong growth and both the chromatography and mass spectrometry and the materials and structural analysis businesses and it was good to see chemical analysis returned to growth.

Q1, adjusted operating income and analytical instruments increased 59% and adjusted operating margin was 19, 6% up 410 basis points year over year.

And the quarter, we drove very strong volume leverage and productivity, which more than offset strategic investments.

Turning to specialty diagnostics segment, and Q1 reported revenue increased by 69% organic revenue growth was <unk> 65 per cent.

COVID-19 response enabled us to deliver very strong growth and our microbiology health care market channel and clinical diagnostics businesses and.

In addition, it was good to see immuno diagnostics business returned to growth and Q1.

Adjusted operating income increased 81% and the quarter and adjusted operating margin was 26, 5% up 180 basis points from the prior year.

And in Q1, we drove very strong volume leverage, which was partially offset by unfavorable business mix and strategic investments.

Lastly, and the laboratory products and services segment Q1 reported revenue increased 32% organic growth was 26% and the quarter. We saw very strong growth and all of our businesses and this segment adjusted operating income and the segment increased 18% and adjusted operating margin was 14 eight.

8%, which is 400 basis points higher than the prior yeah, and the quarter, we'd live and strong volume pull through and productivity, partially offset by strategic investments.

So with that let me now turn to our updated 2021 guidance.

System with the approach we took with our initial guidance, we're providing a point outlook rather than a range. We think this is the most helpful approach given there are a multitude of different potential customer demand outcomes for yeah.

As Mark mentioned, we're raising both our revenue and adjusted EPS guidance, Let me walk you through the details.

I'll begin with revenue, we're raising our revenue guidance by $550 million to $35 $6 billion, which represents 10% reported growth over 2020, including 8% organic growth.

This increase was driven by three factors.

$250 million of the increase is due to an improved organic growth outlook for the base business. The strong start to the year, enabling us to increase base business organic growth from 7% to 8% for the full year.

$225 million, the increase comes and the higher impact of acquisitions, reflecting the acquisition of Mesa biotech, which was not included in our initial guidance.

And a good start for the year for our European viral vector business.

And the final element and an increase of $75 million for the higher FX tailwind.

Turning to adjusted earnings per share, we're increasing our annual adjusted EPS guidance by 35 cents to $21 97.

Which would result, and 12% growth over 2020.

The increase reflects 20 and from improved operational outlook for the year 10 cents for FX and five cents from capital deployment.

To break down the five cent increase and the impact for capital deployment versus our initial guide I'm now, including Tencent and some additional interest cost in Q4 as a placeholder for pre financing for the PPD acquisition and.

And this is more than offset by <unk> <unk> benefit from the $500 million stock buyback undertaken in March and and <unk> benefit from acquisitions.

So after a great start in Q1 were able to increase our outlook for the full year.

Let me now provide you with some additional assumptions behind our updated our updated guidance.

And now assuming that will deliver seven $3 billion of COVID-19 response revenue and 2021. This is $200 million higher than the initial guidance, reflecting the acquisition of Mesa biotech.

Within the $7 $3 billion, we're now assuming vaccine and therapy related revenue of approximately $1 5 billion for the year. This is $500 million higher than our initial guidance assumptions, reflecting strong customer demand and progress with our capacity expansion projects.

And that's still remains a large range of outcomes for testing demand and we remain well positioned to support our customers.

But they've got to FX, we're now assuming a year over year tailwind of $475 million for a one 5% of revenue and 24 for one 2% of adjusted EPS.

And we're assuming the completed acquisitions contribute $350 million to our reported revenue growth and 2021 or one one per cent.

The guidance does not include any operational benefit and 2021 from the acquisition of P. P D.

And when we get more clarity on the actual close date will provide an estimate of the likely 2021 impact.

As mentioned earlier I've included $40 million or 10 cents for adjusted EPS impact of higher interest costs in the guide as a placeholder for the pre financing of the P. P D transaction.

So we now expect net interest expense and 2021 to be approximately $510 million.

We continue to expect the adjusted income tax rate to be 14% and 2021 no change from prior guidance.

We're assuming net capital expenditures of approximately $2 five to $2 $7 billion, which is $300 million higher than the initial guidance for the year as we continue to identify opportunities.

To support future customer demand without capacity and capability expansions and our pharma services by production Biosciences and laboratory products businesses.

Free cash flow is expected to be approximately $7 billion and 2021 no change from prior guidance.

Our guidance now includes $3 $8 billion of capital deployment $2 billion of share buybacks, which were completed in Q1 and $1 $4 billion for completed M&A and $400 million for capital return to shareholders through dividends.

We estimate that the full year average diluted share count will be 397 million shares.

And finally I wanted to touch on quarterly phasing for the year and give you a reminder of the factors that I outlined when I gave the initial guidance.

First as mentioned earlier, we had three extra selling days in Q1, and we'll have for fewer days in Q4.

The COVID-19 response revenue and the guidance is more significantly weighted to the first half of the year.

And the 2020 comparisons and significantly easier at the beginning of the year.

That sets up for very strong growth and the first half for the year and given the revenue phasing. The adjusted EPS is weighted more to the first half of the year.

In summary, we started the year with an excellent Q1, and we're in great position to achieve our goals for the year with that I'll turn the call back over to Iraq.

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

And as a reminder to ask a question you will need to press star one on your telephone to withdraw.

Question press, the pound key and order to allow everyone in the queue and opportunity.

Fisher management team. Please limit your time on the call to one question and only one follow up if you have additional questions. Please return to the queue. Please standby.

The Q&A roster.

Yeah.

Your first question comes from the line of Jack Meehan with Nephron research.

Thank you good morning, I was wondering what each other you could start.

And I was wondering if you'd start and talk about PPD and you know they got off to a strong start for the year a lot of momentum can you talk about how the initial integration planning is going to ensure they keep that momentum going and you mentioned some of the customer feedback can you talk about maybe for Mike therapeutic perspective, where customers are seeing the value.

Jack Thanks for the question as you know very excited about the combination of PPD and our offering to our pharma and biotech customers.

And as you know the CLO market is very and it's got very good characteristics of strong growth because of the relevance of that offering and and the trend for more and more of the activity that code to the biotech area, where there's less of those capabilities in house and you've got good market and PPD.

Off to a very good start to the year financial performance and authorizations.

<unk> backlog very very encouraging is a great business performing at a very high level. We're just starting that process of planning the planning the combination and we've had very good collaborative dialogue with our with the leadership there and over the coming months, we will be working on that process, but you know for.

For the colleagues there we can't wait to welcome them and it really is largely business as usual and and bringing new ways to add more value to our customers. So.

Encouraging and customers are very excited for the customers I've interacted with they get it they understand the logic and they like the fact that we're gonna have more capabilities to help them navigate the important things that they're doing in terms of therapeutic areas and PPD covers the the full range of the therapy classes and as such Thermo Fisher, So we'll be able to see.

Support our customers and important work that theyre doing.

Great and then.

And you know everyone is focused on the durability of the COVID-19 benefit and appreciate all the color. So far I guess I'm curious based on the core recovery and you know the increased outlook on the vaccine and therapeutic side.

Do you think the street forecast in 2022 or a good baseline and can you just talk about the level of visibility on that interplay between COVID-19 and core.

Yeah, you know when I think about the COVID-19 response, the first quarter was exactly how we thought it was going to play out and when we look at the outlook for the year. We've assumed parts of that response are going on within that.

And at parts of our growing parts of it will.

It will be less and in aggregate, we feel very comfortable with the outlook of the same number the $7 $1 billion that we started with at the beginning of the year and added $200 million for Mesa. So so that's been our view and three months into the year.

That continues to be our view that we think makes sense.

Thanks Jack.

Yeah.

Your next question comes from the line of.

Paul Peterson with J P. Morgan.

Hey, Thanks Mark.

And we brought up the benefits and accelerated investments.

And your comments I know you took R&D up 20% last year and it was just for clarity.

And the first quarter can you, maybe just give us a little sense of where the incremental R&D investments are going and how you think about some of the payoff there.

Yeah. So it would go and areas as you would expect right, where we were R&D budget and is largely deployed so increases and mass spectrometry electron microscopy would be two of the big areas Bioscience reagents.

And as well as clinical sequencing and those will all be areas that got good investments and you know when I look at our results. Obviously, you know new products take time to have the big impact, but those businesses are performing at a very high level and you saw from the press release and and some of my comments, we had a very good strong start to the year and new product launches to me.

Spectrometers building on our leadership and or be trapped.

Another exciting electron microscopy offering this one particularly for materials science applications that we launched in the quarter.

We had good launches around our clinical sequencing business and then one to meet a societal need probably not a huge revenue opportunity, but and incredible need which is how do you know if COVID-19 is present and a indoor space and because of our very deep scientific knowledge about air monitoring we were able to launch a very relevant.

Solution.

For that application, which will also have applications.

And the past and things that we learned from anthrax challenges of years and the past we were able to deploy here so bringing out solutions that are relevant for our customers and tyco. That's the opex and Capex were substantially increased our capex for the last couple of years and we're seeing the benefits for those coming online and starting now so and Marc highlighted.

Couple of and his prepared remarks, and there'll be more of those coming along as we go for this year and next year.

Thanks, and then Stephen for for the follow up too on the model and I'm. Just curious you know as we look a little bit further out and.

And give us any sort of rough guidance on how we should think about normalized ex COVID-19 margins 2022, and beyond and then any preliminary thoughts and the tax rate given what's on the table here with the longer term.

Yeah. So so we started before the pandemic, we had a strong margin profile as a company will exit the pandemic with a higher revenue base, which will come through at a higher margin. So margins will be elevated from where we went into this pandemic and look forward to giving you more details about that at the appropriate time and terms.

The tax rate, we continue to follow closely.

What's happening and D C and there's various different proposals being made.

And as we've done and prior prior times have changed.

Remain active and sense of advocating for and if this change to happen and that is the right change and there's no and it unintended consequences and will manage the company appropriately through through that period of time, we and we have a competitive tax rate versus others and will remain with that competitive tax position.

Through whatever change happens is the way I think about it. Thanks Tycho. Thank you.

Yeah.

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

Hey, guys, congrats and a nice linked share.

Two for me and maybe I'll start one on the guidance Stephen.

And what what is the base business and our growth and that Q1 was up high singles and I just wanted to clarify that and now you know.

When you speak about one and a half bill and a vaccine revenues does that assume any contribution from booster opportunity or perhaps a pediatric label indication.

So Vijay I'll start so base business was 13% in the quarter and.

And as a reminder, the days are favorable and Q1 less favorable in Q4, but we raised our base business the $250 million organic raise is based on the base business performance. So that the base business organic growth also goes up from.

And from seven to eight.

From that perspective on the 1 billion and a half.

So a vaccine and therapy revenue.

And the demand is very strong its probably not tied actually to the label and it's really a combination that orders are very large and we've been able to get our manufacturing capacity to ramp up more quickly than we originally anticipated. It's really the benefits of the PPI business system. So that means that for for 'twenty. One we have a <unk>.

Increase and expectation.

And my take on the discussions with our customers and certainly what we understand from the medical side of things you know the vaccine and therapy revenues likely to be quite I.

I have a quite a bit of duration well beyond 'twenty, one and so as you get more indications of potential need for.

Boosters or even annual vaccinations, you could imagine that the demand for vaccine revenue to be well into 'twenty two and beyond.

That's helpful. Mark and then one follow up maybe a bigger picture question and the testing.

There's been some chatter from your peers, saying look as we get past the peak of the pandemic, perhaps testing is going to consolidate and more automated platforms and I think.

The implication is that perhaps.

You know.

Your systems are not as automotive maybe you could you talk about that mark on.

How does thermo stack up versus our peers in that space and and other pieces that I mean I'm looking at your guidance. It looks like testing you guys are feeling much better than competition and so it seems to be a slightly confusing and the messaging versus what we're seeing on and numbers.

Vijay Thanks for the question so when I think about.

Our role and the response right, we understand customer needs, we have an incredible team and people that respond to it.

We had the largest COVID-19 response revenue last year.

By a huge margin right and we've had these discussions and the past where other people and Mark Bette that Thermo Fisher would have done the best job and supporting the industry, probably not on that particular dimension.

Yes, but on on molecular diagnostics, we didn't go and with the strongest hand, if you will.

But we made a huge difference and the demand and the first quarter as you see and the $2.9 billion was extremely good.

For us and so we're assuming that.

We will play a role in both symptomatic and asymptomatic testing and remember it's quite a global business right our installed base around the world. So so that's the view now.

We expect that there'll be less testing right in Q2, and and the second half exactly as we said back in January right.

And that as more vaccinations happen that testing will will you know will.

Come down a bit and that's embedded in our guidance you know for sure. So I'm very enthusiastic about the role we're playing and.

And to be honest I'm looking forward to the world, what and we don't have so much testing because it means that we're going to sporting events and I were traveling around the world and all the good things that come with it and what happens when that happens as our base business really picks up as well so hopefully.

And hopefully that gives you a sense of where we are.

And I appreciate the comments Marc I think you.

Can you walk and vision.

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

Good morning, guys. Thanks, Mark on bio production.

And so you guys have quite a bit going on there in terms of expansion activity touched on that I think the press release for March talked about 600 million and investments. There are you able to sort of just crystallize for us what kind of incremental revenue capacity, you think youll be adding.

By the time all of a sudden done if we just sort of look 12 months to 18 months.

On the road I mean, it feels like if youre looking for where the base business might be most different and 2022 or 2023, that's sort of a good place to start so I'm wondering what he might be able to just put some numbers around that.

So the way that I think about the investments and bio production.

That's always been.

A very rapid growth you know double digit strong double digit growth historically, right and and.

And and you can glean from the comments over the many years that when we look at the other companies and the field reporting and were comfortable saying were growing faster or gaining share that means that while we don't get down to the micro detail of how each of our salt business and are reporting they're performing there, we're doing very well and the expansion of 600.

Dollars of capacity supports that growth for.

For a number of years, we're pulling forward programs that we had online so that we can sustain and very strong growth for many many years to come and when I look at the Q1 performance for bio production. The business has been extremely robust and that takes into account what others have reported so far.

Okay, maybe just as a follow up on Federal research funding you, usually got a better than average line of sight into.

And what's being talked about in Washington, and.

And your views on the NIH budget next year, and how that shapes up.

You know the president and proposals, obviously pretty encouraging it does have that ARPA H program and there I'm curious if you can.

Do you have a view on that for your appetite for that and whether you think that that might actually end up translating to fund availability for basic research if that does come to fruition.

I mean, historically, there's been bipartisan support for.

And for National Institutes, the institutes of health funding.

And as the former Vice President and as the President and my basically and also listen to our remarks last night I would expect him to be a real advocated for NIH and he is a champion of tackling cancer and other.

The NIH plays a real role and that and I think that bodes well for funding. So we'll see obviously, but I would expect that the NIH shipping and good stead, which means good news for academic and government customers for sure.

Okay. Your next question comes from the line of Doug Schenkel with Cowen.

Doug.

Doug are you on mute.

And we will go to the next question and come back around to Doug.

Yeah.

Okay.

Your next question comes from them.

Line of Derik, Bruin, Brown, and I'm, sorry with bank of America.

Uh huh.

Good morning Derik.

Okay.

Your line is your line is open Sir.

Yeah.

And so that's good Derek we don't hear you. Unfortunately.

Yeah.

Yeah.

Well go to the next question and see if we can sort out what the technical challenges operator.

Okay.

And your next question comes from the line of.

Hello, and thank all day with SBB.

Yeah, Hi, Mark can you hear me yes.

Okay. Thanks.

Just wanted to.

Get your view in terms of post pandemic.

PCR installed base, you, obviously have a very large installed base here.

And obviously you're pointing out.

Decline and COVID-19 testing and in line with your previous comments, but as we think about that larger and.

Instrument installed base and some of that is automated amplitude and others. How should we think about menu expansion on that how can you monetize that further and.

So our broader diagnostics operating around the world.

Yeah, so pretty thanks for the question when.

When I think about it.

Post pandemic, right and I'm going to give a holistic answer including the specifics around the question that you asked right one of the things that we said back a year ago.

As we manage the company and such a way that we exited the pandemic with a meaningfully stronger industry leadership and when we went in and obviously, we and and we went and with a very strong position.

And if I think about the actions that we've taken.

We've accelerated our investments in operating expenses R&D and.

And capex to be a faster growing company organically exiting the pandemic right. So that's the overarching thing that we've done right. So we didn't necessarily say, let's put all the money where the pandemic stuff was were rather where's the best opportunities to make a difference for your customers long term. So the first thing, we expect and whether its 22 or 23, whatever the timeframe is.

The pandemic you know wanes.

Is to expect that we will be a faster growing company.

At the same point, we've made very significant investments and our pharma services and buyer and production business there very strong performing in their normal activities across many therapeutic classes, but that capacity will easily shift from COVID-19 related demand to non COVID-19 related therapy classes. So when you think about those investments the.

The city is usable for the different the different area. So again, you'll see that those investments transitioning from one type of used for the other.

And when you think about the molecular diagnostics business and.

And you think about what's happened, where obviously you're going to exit a much stronger player than where we were when we started we have a much expanded install base of PCR instruments. We also have a refreshed base of a PCR instruments and those instruments are very good for lab developed tests and where customers are looking for.

Excellent economics and to customize their work and were a major component supplier and will also be adding regulated content on top of that as well, so you'll see respiratory panels and overtime and things of that sort.

We've dramatically increased our installed base of sample preparation.

Instrumentation, and we've gained very meaningful share and.

And we're well positioned to have a much stronger.

Business going forward. The two other things that have changed is that our lab plastics business, let plastics essentials, the pipette tips. The micro hydro place all the things you use for testing we've expanded capacity, we have alleviated supply chain issues across the industry.

And we put ourselves and are positioned to have a bigger business coming out of the pandemic and and finally, we were a tiny player and specimen collection and we will have a nice business and things like viral transport media, obviously at a much smaller level than the pandemic and spend it on.

Precedented, but demand for viral transport media during the pandemic, but we built low cost capacity and two in two countries to be able to serve the world and and that's going to be a nice smaller but nice profitable business that serves you know customer needs. So we will exit the pandemic period at some point in time with a stronger.

Molecular diagnostic business, and we had coming into it and I feel great about it the big numbers are going to come from the organic growth of the company and the Repurposing of the capacity for our bio production and pharma services and that's probably the way to think about the question.

Got it that's very helpful Marc and.

Thank you.

Thanks Puneet.

And your next question comes from the line of Doug Schenkel with Cowen.

Good morning can you give me Doug for me now perfect.

Okay excellent excellent well. Thank you for taking my questions. The first thing I want to talk about is just you know really trends and your capital exposed business and then I want to go back to.

Guidance.

Mark.

Mark how much of the strength, you're seeing and your more capital exposed businesses, what you talked about in your prepared remarks.

Our recapture of demand from earlier.

Earlier drivers that maybe got pushed off because of the pandemic versus other.

A real sign that things are improving here can you give us some sense of are you seeing backlog build and and in turn are you now expecting capital equipment demand.

That trend better than you might have a few months ago over the balance of 2021. So that's the first topic.

Let's do that one and won't they won't hit the second one so okay.

So Doug Thank you for that question and and.

When I think about our analytical instruments business off to a very strong start.

And obviously against an easy comparison right, but nonetheless, very good to see demand.

Build excellent growth and.

Chroma mass spec business.

And very strong growth and electron microscopy, and <unk> and very good growth actually and chemical analysis, all three businesses did well with chrome and mass spec doing the best.

Bookings orders, where were meaningfully ahead of the revenue so part of the outlook, while we don't do segment level out and part of our confidence and and raising our organic outlook as other instrument business.

And is well positioned after the start of the year to to have a strong.

2021, it's hard to know whether that was activity that just didn't happen last year that it's hard to know exactly why but.

Activity is robust around the world and and that's very encouraging.

Okay.

Super helpful.

So thanks for that and then on.

Our guidance and.

And maybe this is overdoing things, but at a simple but important level Q1 revenue growth was better than your target Q1 earnings was over 50 cents better than street expectations. However, while you increased full year revenue targets by more than the magnitude or for Q1 revenue beat you increased for you.

Our EPS targets by less and the magnitude of the Q1 beat.

And you did provide and.

EPS guidance change bridge and your prepared remarks, and thanks for that Stephen. So this is maybe where I'm over thinking things, but I am wondering yeah.

This is also a reflection of this change and EPS and the fact that you're seeing a base business trending a lot better than you expected coming into the year and you are now taking a more conservative stance on COVID-19 for revenue and given the ladder is higher margin, but this is going to have some impact.

On earnings maybe that was intended to be clear or maybe I'm, just wrong, but I'd I'd love. It if you could just talk about that a little debt. Thank you.

So Derek it's a simpler than that so we're basically banking the great performance on the base business and Q1 for the full year.

Both on the organic growth that goes into the revenue and then the day adjusted EPS and ROE.

Banking, the Q1 strong FX stronger than we had anticipated this and timing of expense of about $100 million and expenses and convenient and more Q2 Q3 than we expected in Q1.

And then we're adding in 10 cents of impact of interest cost in Q4 for the acquisition of PPD.

And the response revenue, it's basically to increase response revenue, we've added and Mesa or biotech for the year and kept the 7.1 the same plus makes us a 7.3, that's the way to think about the guide Doug the way and the way you framed the question. It's really the 10 cents a P. P T.

Interest costs, obviously, you had a little bit of favorability.

Favorable and the other aspects of it that was probably what the the differences and there is nothing as Stephen just said on the there's nothing to read into the COVID-19 response revenue in terms of the guidance on EPS.

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

And your next question comes from the line of Derik de Bruin from Bank of America.

Cherokee there.

Yeah I'm here can you hear them awesome, while we can.

Great. So mark I won't ask you on 22 and at times. So you could have I think I got it Wouldnt Puneet asked it so I think I tried to get it there.

Yes.

But I do want to I do want to follow up on.

Some of the macro rebounds, and the recovery and in that and just can we talk a little bit at the I mean, you called out for electron microscopy business.

I mean is that still mostly cry OEM that you've seen have you seen any sort of pick up in.

And in the.

And in the semi side of the business, obviously, there's a lot of semiconductor shortages and concerns about that can you talk about.

What sort of opportunity is that for you and your sort of like near line testing.

Yeah, So derik.

And electron microscopy business performed very well and broad based strength and material science and life Sciences.

Applications.

So and and obviously within materials science because of all of what we read about chip shortages and capacity expansions.

We typically benefit from the capital investment cycle that will be coming online in the semiconductor industry is one of the material science applications. So I would think thats encouraging them and we're seeing good good activity and strong bookings.

Across across the board there so off to a good start.

Got it and and just as a follow up.

You know the Mesa acquisition was interest just because you historically have not done deals like that and I'm just sort of wondering if you could just pontificate on.

Point of care versus central lab testing and and sort of how you see it given you've got your fingers and bad debt I mean, how do you see sort of and mix.

That evolving as we go for it I mean, it's one of the it's one of the debates and the diagnostic industry right. Now is there like what is ultimately that central lab portion going to be and how much of that is going to go to the POC and.

And is this an area, where you would see some incremental potentially capital deployment in that space.

Thanks, Derik in terms of Mesa, one other things, obviously that the pandemic drove was testing happening and totally different ways and and in different locations and it was pre pandemic right and.

And certainly there was also back to life applications, which historically.

And wouldn't have had any testing if you think about it.

And we got inundated with technology companies.

Coming to us for either distribution partnerships or acquisition opportunities a huge number and I stopped counting I think to get 50 or 60 different ones that we looked at extensively and we were very impressed with the Mesa technology in terms of ease of use and accuracy.

And already having the 500 10-K on the respiratory tests.

We saw it as a really interesting addition to the portfolio and that actually its role and COVID-19 on back to life applications.

With the 30 minutes PCR answer.

Very easy to use.

A lot of what COVID-19 will do will pay for the acquisition and then you've got an option on the upside for its application as you build out a menu over time, that's how we thought about it. So it was probably less about a huge change in strategy or a huge move.

Move from our point of care standpoint, other than a technology that we like we're extremely capable and PCR and said this is a really natural extension of our offerings and the visit after and I start which is great.

Thanks Derek.

Thank you.

Operator, we have time for one more question.

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

Great. Thanks for thanks for taking the question.

Mark I wanted to just ask you a question and I'll start off with a question on COVID-19 testing and then just wanted to ask you just to give us a look around the world that what's happening with the reopening, but just non COVID-19 testing kits and import.

And a question that we get I know Derek.

And on 22 of them.

And even looking beyond 'twenty, two state and twenty-three how do we just.

And we'll just to frame, where thermo business could go as things normalize obviously, there's a ton of assumptions that go into it we've had a lot of conversations with investors just trying to figure out where this could go so let's say for $6 1 billion that you did in 2020 any sense of you know as we look out and we get to a normal state of testing a couple of years out.

Some level of that could be and then the second question was just related to.

And just you've talked about the really strong rebound in China, just could you give us a sense of kind of what's baked in within your new 2021 guidance kind of regionally.

<unk>.

Yeah. So in terms of geographic view.

Carnival strength across the world and with all the regions growing greater than and around 50% and rest of the world was 80% and China was 60 per cent really broad based strength.

And we're.

We're seeing encouraging obviously and encouraging outlook and.

From a geographic perspective and from a testing perspective, we're going to play.

A larger role and what we would've played back in 2019 based on the comments around a larger specimen collection business for larger installed base of PCR instruments, that's also refreshed as well as meaningfully.

Meaningfully higher share and sample prep and add.

Adding content to that installed base over time.

Very hard to quantify what it is and twenty-three because you really have to make an assumption of what the pandemic looks like as it is.

Is it a history or are we still fighting new variants and those things and depending on that and you could have an incredibly wide range of outcomes. So we'll keep updating you periodically overtime. So thank you Dan let me just wrap it up here.

And with a quick comment which is you know.

As I think about the quarter you know mark conditions are strong and we're off to an excellent start and we are on track to deliver really another outstanding year.

We look forward to updating you on our Q2 call and please continue to stay safe and as always thank you for your ongoing support of Thermo Fisher scientific thanks, everyone.

Yes.

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