Q1 2022 Thermo Fisher Scientific Inc Earnings Call

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Good morning, ladies and gentlemen, and welcome to the Stanley Fisher Scientific 2022 first quarter Conference call. My name is no idea and I'll be coordinating the call today, if you would like to ask a question at the end of the presentation. Please press star followed by the number one I'll go to the thank you Pat I would like to introduce our moderator for the coal Mr. Buffet out Heather Vice President Investor.

Relations Ms. <unk> you may begin Nicole.

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 note this call is being webcast live and will be archived on the investors section of our website.

Fisher Dot com under the heading news and events so until May 13 2022.

A copy of the press release of our first quarter 2022 earnings is available in the investors section of our website under the heading financials. So before we begin let me briefly cover our safe Harbor statement berries.

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 doses cause in the company's most recent annual report on Form 10-K , which is on file with the FCC and available in the investors section of our website under the heading financials.

<unk> SEC filings.

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

Also during this call we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.

Constantly Asian up these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter and full year 2020 to earnings and also on the investors section of our website under the heading financials. So with that I'll now turn the call over to Mark.

Thank you Ralph good morning, everyone and thanks for joining us today for our first quarter call.

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

We delivered another quarter of excellent financial performance.

Our core business is performing very well that strength is broad based including PPD, our clinical research business, where the integration is going smoothly and we're even more excited about the opportunities we have to further enable the success of our pharma and biotech customers as I reflect on the quarter I'm very pleased with.

The team's great execution in a share gain we saw across our business. Our continued success is the result of our proven growth strategy and our PPI business system, which continues to be a differentiator for us and enables our team to further strengthen our company by finding a better way every day.

When I think about the macro events much has changed since the start of the year The war in Ukraine, rising inflation Covid Lockdowns in China.

What hasn't changed is our ability to navigate a dynamic landscape and deliver exceptional performance, you'll see that in our first quarter results and outlook for the year.

So let me recap the financials.

Our revenue in the quarter grew 19% year over year to 11, eight 2 billion. Our adjusted operating income was $345 billion. Our adjusted operating margin in the first quarter was 49, 2% and we delivered another quarter of strong adjusted EPS performance achieving seven.

<unk> 25 per share.

Let me now give you the color on the performance by our end markets.

Building on the momentum from 2021, we delivered excellent performance to start the year. Our outstanding results. This quarter were due to our team's strong execution good market conditions and share gains. We also had meaningful contribution from COVID-19 testing as we continue to support our customers' needs.

Starting with pharma and biotech we had another outstanding quarter performance delivering growth in the mid teens. We saw strong we saw broad based strength in this end market as our customers value our trusted partner status.

In academic and government, we grow in the mid single digits during the quarter with good growth in biosciences electron microscopy, and our research and safety market channel.

Turning to industrial and applied we grew in the mid teens during the quarter. We saw strong growth in all of our analytical instrument businesses electron microscopy chromatography mass spectrometry and chemical analysis as well as in the research and safety market channel and finally in diagnostics and health care Q1 revenue declined in the mid teens.

In the core business, we saw strong growth in clinical diagnostics transplant diagnostics and the health care market channel during the quarter the team executed really well to support COVID-19 testing needs.

Let me now provide an update on the progress we made in Q1 executing our proven growth strategy, which consists of three elements a commitment to high impact innovation scale in the high growth and emerging markets and a unique value proposition to our customers. We made great progress in the first quarter and I'll share just a few of the highlights.

Starting with the first pillar it was a fantastic quarter for high impact innovation as we launched a number of new products that will help our customers break new ground in their important work a few of the highlights in our genetic sciences business, we launched our applied biosystems seek studio flex series genetic analyzer to improve clinical research.

And advanced scientific discovery.

In analytical instruments, we launched four new gas chromatography, and GC Ms instruments to advanced analytical testing for food environmental industrial and pharmaceutical applications. This includes the thermo scientific trade 600 series gas chromatograph, which incorporates enhanced automation for instrument health monitoring and offers flexibility.

For customers to optimize their workflow.

Bio production, we launched the good co Cts xenon electroporation system for the efficient delivery of genetic material into cells as part of cell therapy manufacturing.

In addition, we signed an agreement with precision diagnostic company anchor site to develop two new assays for ion torrent <unk> system to improve cancer tumor profiling and advanced precision medicine.

This is just a small sampling of the outstanding innovation going on across our company, enabling our customer success and strengthening our position as the world leader in serving science.

The second pillar of our growth strategy is leveraging our scale in high growth and emerging markets to create a differentiated experience for our customers.

We had strong performance in these markets, including China, which grew double digits in the quarter.

Our analytical instrument business are being used around the world to advance scientific research, including the high growth and emerging markets. For example in Beijing. The National Institute of Biological Sciences is using our mass spectrometers to accelerate their research construct for biology and in Korea, our electron microscopes are enabling researchers at Pusan nationally.

Diversity to establish a bio imaging center to accelerate virus research.

Now turning to the third pillar of our growth strategy, our unique customer value proposition.

We continue to enhance our capabilities. So we can be an even stronger partner and industry leader.

To help our customers advance Celgene therapies, we opened a new bio repository in Vacaville, California. This facility will provide specialized biological sample storage and cell therapy logistics.

And bio production our network expansion is going well during the quarter. We brought on additional capacity online for single use bioprocess containers and cell culture media.

Reflecting our trusted partner status with pharma and biotech customers. We entered a 15 year strategic collaboration agreement with Madonna to establish large scale U S manufacturing of mrna based vaccine and therapies under this agreement will provide dedicated capacity for a range of <unk> fill finish services along with inspection labeling.

And final packaging.

During the quarter I had the chance to visit our Greenville, North Carolina campus, where we've invested significantly over the past couple of years to expand our capacity and capabilities and the new building that will support Maduro pipeline, it's truly impressive.

Now turning to capital deployment.

Like to share some of the other steps we've taken to further strengthen our customer value proposition and build our future.

We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders.

Given this was the first full quarter of contribution from PPD or new clinical research business I'd like to update you on our progress.

The business is performing very well and running ahead of the deal model. The strong start in outlook for the year is allowing us to increase our expectations for the business Steven will cover these details in his remarks.

In terms of the integration, it's going very smoothly our customers are seeing the value of the combination and we have realized our first commercial synergies secure new authorizations from pharma and biotech customers who value the combination of our capabilities. This bodes well for our long term revenue synergies.

To further fuel growth and support increasing demand from our Biopharma customers. We've also invested to expand our clinical research operations in Richmond, Virginia.

Finally, I've been Super impressed with the team as I visited different sites and together, we're taking the business to the next level as part of Thermo Fisher to become an even stronger partner for our customers.

As I mentioned on our last call we closed on Pepper Tech a leading provider of bioscience reagents late last year I'm pleased to note that that business is off to a great start and the integration is going incredibly well.

During Q1, we completed a small bolt on deal in analytical instruments to enhance our materials and structural analysis offering for our customers and.

During the quarter. We also returned significant capital to our shareholders repurchasing $2 billion of our shares and increasing our dividend by 15%.

Turning now to a brief update on our ESG initiatives, we marked a significant milestone during the first quarter exceeding $1 million readily recyclable paper coolers shipped to transport cold chain products without the use of traditional polystyrene foam coolers. This builds on our commitment to environmental stewardship and.

The broad adoption of sustainable solutions.

In addition, we recently announced our partnership with the University of California in San Diego to advance innovation sustainability and talent development.

This 10 year partnership will establish a network of technology centers focused on accelerating collaborative research and advancing innovation in a range of scientific feels it will also accelerate educational opportunities, especially for under resource students by engaging in joint stem and community outreach programs and supporting curriculum.

Development scholarships fellowships career mentoring and recruitment.

Before covering guidance I'd like to end my comments with a reflection on the events that are impacting our colleagues in the world at large.

As always our top priority is the health and safety of our colleagues.

We're supporting our colleagues displaced from Ukraine, with a variety of needs and.

And together with our colleagues globally, we've made substantial donations to relief organizations responding in Ukraine, and the neighboring Safe Haven countries.

In China, where many of our colleagues are facing lengthy lockdowns and disruption in daily life due to the pandemic, we are providing care packages to residents in Shanghai, where face limited food supplies.

We're also recognize that inflation is challenging for our team and we're going to provide a special payment this summer to our colleagues.

Now I'd like to review, our 2022 guidance at a high level and then Steven will take you through the details.

We are meaningfully raising our full year guidance.

We are increasing our revenue guidance by $450 million.

To $40 billion to $45 billion.

Which would result in 8% reported revenue growth over 2021.

And we are raising our 2022 adjusted EPS guidance by 'twenty two to.

To $22 65 per share.

This guidance factors in our excellent Q1.

Includes over a very strong core business outlook for the remainder of the year.

And and incorporates the expected impact of the recent macroeconomic dynamics.

Our Q1 results and our increased guide for the year reflects how well the team is navigating these dynamic times.

So to summarize our key takeaways from the first quarter our outstanding.

<unk> results in Q1 were driven by our proven growth strategy and PPI business system. Our business is performing very well and we're gaining market share. The PPD acquisition is generating strong returns and we're really well positioned to continue to differentiate ourselves for all of our stakeholders. All of this has enabled us to raise our <unk>.

Outlook for 2022, and further solidify our incredibly bright future.

With that I'll now hand, the call over to our CFO Stephen Williamson Stephen.

Thanks, Mark and good morning, everyone. As you saw in our press release, we started the year with an excellent Q1.

In the quarter, we delivered 16% core organic growth.

$168 billion of COVID-19 testing revenue $7 25 of adjusted earnings per share and $1 $6 billion of free cash flow.

Revenue in Q1 was just over $1 billion higher than wed incorporated in our previous 2022 guidance with.

With $700 million driven by a very strong start to the year for the core business.

And just under $400 million from testing.

The strength of the core was broad based across businesses and markets and geographies.

Our PPI business system enabled us to generate very strong pull through on this revenue and adjusted EPS for Q1 was 84% higher than included in that previous guidance.

So broad based beat to start the year let.

Let me now provide you with some more details on our performance beginning with our earnings results and as I mentioned, we delivered $7 25 of adjusted EPS in Q1 up 1% versus the prior year GAAP EPS in the quarter was $5 61.

Down 5% versus the prior year.

On the top line, our Q1 reported revenue grew 19% year over year. The components of our Q1 reported revenue increase included 3% organic revenue growth and 18% contribution from acquisitions and a headwind of 2% from foreign exchange.

Core organic revenue growth in the quarter was 16% and as I mentioned, we delivered $168 billion of COVID-19 testing revenue.

Turning to our organic revenue performance by geography, the organic growth rates by region are skewed by the COVID-19 testing revenue in the current and prior year in Q1, North America grew in the low single digits Europe was flat Asia Pacific grew in the mid teens with China growing in the low double digits and.

In rest of the world declined low single digits.

With respect to our operational performance adjusted operating income in the quarter decreased 2% and adjusted operating margin was 29, 2% 620 basis points lower than Q1 last year.

Adjusted operating margins came in slightly higher than we'd anticipated in our prior guidance for Q1, reflecting how well our growth strategy and PPI business system enables us to manage dynamic times.

We executed strong pricing realization productivity and volume leverage in the core business, enabling us to appropriately address higher inflation and this was more than offset by the expected impacts of incorporating PPD into our financials lower testing volumes and the impact of strategic investments including continued.

Investments in our colleagues.

Moving onto the details of the P&L total company adjusted gross margin in the quarter came in at 47, 5% 660 basis points lower than Q1 last year for the first quarter. The change in gross margin was due to the same drivers as those of our adjusted operating margin.

Adjusted SG&A in the quarter was 15, 2% of revenue a decrease of 20 basis points versus Q1 2021.

Total R&D expense was approximately $360 million in Q1, representing growth of 14% over the prior year, reflecting our ongoing investments in high impact innovation to fuel future growth.

Looking at our results below the line for the quarter. Our net interest expense was $118 million $5 million higher than Q1 last year, largely due to acquisition financing activities.

Our adjusted tax rate in the quarter was 14, 1%. This was 190 basis points lower than Q1 last year, driven by our tax planning initiatives.

Average diluted shares were $395 million in Q1, approximately $3 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 topline performance cash flow from operating activities in Q1 was $2 2 billion and.

And free cash flow for the quarter was $1 6 billion.

Our capacity and capability investments are progressing well in this quarter net capital expenditures were $640 million.

In January we returned $2 billion of capital to shareholders through buybacks.

Also during the quarter, we increased our dividend by 15%.

We ended Q1 with approximately $2 $8 billion in cash and $33 3 billion of total debt our leverage ratio at the end of the quarter was two six times gross debt to adjusted EBITDA and two four times on net debt basis.

In concluding my comments on our total company performance adjusted ROIC was 18%, reflecting the strong returns on investment that we are generating across the company.

Now I'll provide some color on the performance of our four business segments. Let me start with a couple of framing comments the scale and margin profile of our COVID-19 testing revenue varies by segment and testing revenue was significantly higher than the prior quarter prior year quarter. So that does skew some of the reported segment margins.

And as previously mentioned, we are referring to the acquired PPD business as our clinical research business and that resides in the laboratory products and Biopharma services segment.

So moving on to the segment details starting with life Sciences solutions Q1 reported revenue in this segment increased 1% and organic organic revenue was 1% lower than the prior year quarter.

In Q1, we delivered very strong growth in our bio production and biosciences businesses.

This was offset by lower revenue in the genetic sciences business, driven by lower testing revenue versus the year ago quarter.

Q1, adjusted operating income in life Science solutions decreased 5%.

And adjusted operating margin was 51, 4% down 290 basis points year over year.

In the quarter, we delivered strong productivity that was more than offset by business mix and strategic investments.

In the analytical instruments segment reported revenue increased 9% in Q1 and organic growth was 12% with strong growth. In this segment. This quarter was led by electron microscopy, and chromatography and mass spectrometry businesses Q.

Q1, adjusted operating income in this segment increased 10% and adjusted operating margin was 19, 8% up 20 basis points year over year.

During the quarter, we delivered strong volume pull through and productivity that was offset by strategic investments, we're making across this segment.

Turning to specialty diagnostics in Q1 reported revenue declined 8% and organic revenue declined 7% in the quarter. We saw strong underlying growth in our healthcare market channel transplant diagnostics and clinical diagnostics businesses, which was offset by lower COVID-19 testing revenue versus the year ago quarter.

Sure.

Q1, adjusted operating income decreased 17% in the quarter and adjusted operating margin was 23, 9% down 260 basis points from the prior year and.

In Q1, we drove strong productivity this was more than offset by business mix and strategic investments in this segment.

And finally in the biotech products and Biopharma services segment in Q1 reported revenue in this segment increased 51% and organic growth was 6%.

During Q1, we had strong growth in the research and safety market channel and the laboratory products businesses.

PPD, our clinical research business is performing very well and during the quarter. It grew a few points above the company average core organic growth rate.

It contributed $1 $66 billion of revenue to this segment in the quarter.

Q1, adjusted operating income in the segment decreased increased 17% and adjusted operating margin was 11, 4%, which is 340 basis points lower than the prior year.

In the quarter, we drove strong productivity, which was more than offset by strategic investments and business mix.

Let me now turn to our updated 2022 guidance as Mark outlined we are raising our full year revenue guidance by $450 million to $40 billion to $45 billion.

We're also raising our core organic revenue growth outlook from 8% to 9% for the year.

And on the bottom line, we are increasing our adjusted EPS guidance by 'twenty two.

To $22 65 for the.

For the year.

It's a very strong outlook, particularly as it also factors in the notable macro developments that occurred following our last earnings call in February .

<unk> continues to do an excellent job navigating through a fluid macroeconomic environment to help us to deliver outstanding results, reflecting the strength of our proven growth strategy and the power of the PPI business system to operate with speed at scale.

So let me get into the details of the guidance raise.

In terms of revenue there are three elements driving the raise in guidance.

$350 million higher assumed COVID-19 testing revenue for the year.

$200 million decreased due to the change in FX rates.

And a $300 million increase in the outlook for the core business.

The core revenue raise incorporates a $350 million headwind from the conflict in Ukraine, and the Lockdowns in China.

And we chose to Derisk $600 million of vaccines and therapies revenue in the outlook.

Offsetting it with other core revenue at <unk>.

Guidance now assumes $1 $5 billion of COVID-19, vaccines and therapies revenue in total for 2022.

Incorporating both of these and still being able to raise our full year outlook for the core shows that the business is performing very well and as I mentioned previously we're increasing the core organic growth outlook from 8% to 9% for the year.

In terms of our COVID-19 testing revenue assumption continuing the same derisked approach to guidance as a range of outcomes for the year. Our guidance now assumes $2 $1 billion of testing revenue in 2022, which represents the $168 billion delivered in Q1.

$225 million in Q2.

And then an assumed endemic run rate level of $100 million of revenue per quarter in the second half of the year.

There are scenarios, where testing demand could be higher than this level should that be the case, we're well positioned to support customer needs. As we did in Q1 and will flow these benefits through our P&L, but for now we thought it was prudent to continue to take a derisked approach to the outlook.

In terms of profitability, we expect to deliver $90 million more adjusted operating income of $450 million raise in revenue guidance. This reflects strong pull through on the additional revenue, partially offset by a $150 million of additional compensation to our colleagues to help them with the temporary impacts of installation.

We continue to expect adjusted operating margin to be 25, 4% in 2022.

In terms of adjusted EPS, a stronger business outlook is enabling us to raise the 2022 adjusted EPS guidance by 'twenty two.

From $22 43 to $22 65.

Further building on an already very strong outlook for the year.

Let me provide you with a couple of other details on the 2022 guidance to help you with your models.

PPD a clinical research business is now expected to deliver $6 7 billion.

In 2022 and revenue.

Which represented 11% core organic growth on a full year basis for this business up three percentage points from our previous guidance.

We now expect the business to deliver just over $1 billion of adjusted operating income in 2022 and contribute.

$1 98 to adjusted EPS in the year up <unk> <unk> from our prior guidance.

FX is now expected to be a year over year headwind of $700 million in revenue or one, 8% and 54% from adjusted EPS.

We continue to expect net interest expense of approximately $490 million for the year.

We now expect an adjusted income tax rate of 13, 1% in 2022 slightly higher than the prior guide driven by the improved earnings outlook.

We continue to assume net capital expenditures of approximately $2 five to $2 7 billion and.

And free cash flow of approximately $7 billion.

Our guidance still assumes two $5 billion of capital deployment, which is the $2 billion of share buybacks that we completed in January and $475 million of capital returned to shareholders through dividends.

We now estimate that the full year average diluted share count will be between $394 million and 395 million shares.

And finally, a couple of comments on phasing to help you with your modeling.

Revenue dollars for the remainder of the year. They are expected to be fairly linear with Q4 being slightly higher than Q2 and Q3.

Core organic growth for Q2 is expected to be lower than Q3, and Q4 due to an estimated 200 basis basis point impact of Lockdowns in China.

Then in terms of adjusted EPS phasing, we expect Q2 as a percentage of the full year to be just slightly lower than the comparable period last year.

To conclude we delivered an excellent start to the year and we're in great position to achieve our 2022 goals with that I will turn the call back over to Ralph.

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

Thank you if you would like to ask a question today. Please press star followed by the number one.

Pat if you choose to.

I have a question. Please press star followed by the number two on the patent to ask a question. Please I'm sure you'll find is a niche it lately in order to allow everyone in the queue and opportunity to address it that my session management team. Please limit your time on the call to one question at any one follow up if you have additional questions. Please return to the key.

And our first question today comes from Jack Meehan of Nephron Research. Please go ahead. Your line is open.

Thank you good morning.

Hope you guys are doing well.

My questions today on the Biopharma side first question on clinical research, so PPD growing over 20%, that's well above historical levels and what peers have been reporting so far just what is driving the acceleration can you comment on industry funding and your ability.

<unk> gained share.

Yes, Jack Thanks for the question so our clinical research business, formerly PPD.

Off to a great start as a reminder, the business had tremendous success in 2021, delivering great performance, great authorizations, even from especially after the announcement just incredibly focus on great execution customers are excited about the potential.

That momentum continued into Q1.

Very strong performance on revenue.

And really good.

Growth in authorizations as I look at what's gone on in the industry and look to some of the other companies that have reported or.

Our results were favorable to us.

The results that we saw so we feel good about that as a as an external reference point.

And the search strength within PPD was broad based across the different customer types. The funding environment. You know it was actually a great start to the year integration has gone really well.

We feel good about that and I'm really excited the commercial team has secured our first wins that are what I would call synergy related in the form of new authorization. So really a very cool start to the year and we're excited about what the potential holds for our clinical research business.

Great.

And the second question I wanted to square the new one $5 billion target for the Covid vaccines and therapies with your ability to raise the core growth overall, so if I look at the P. P. On in bio processing businesses are they still growing high single digit pluses the COVID-19 handoff taking place in.

Off that just can you comment on how changing doses per vial and the new modern is strategic relationship might factor into this.

Yes, so Jack.

It's a great question.

We made a decision on the guidance on vaccines and therapies actually just because the number of questions. We were getting from investors relative to our enterprise value and the sort of net present value of the company was disproportionate right. So we just basically said.

<unk>.

We had a really good start on vaccines and therapies for the year. We did just under $500 million of revenue, which was which is what we expected to do.

The $2 $1 billion that we put in the original guidance of vaccine and therapy related revenue is actually still a number that can be achieved at call. It at the high end of the range.

And as you know we're involved in so many of the programs we're involved in.

<unk> seen programs and the therapy programs are involved in the drug substance and the drug product were involved in the enabling technology. So so it's across many of our different capabilities and we feel good about it we chose to effectively.

<unk>.

The number in the sort of in the target because the core business performing so well that we just wanted to take the dialogue really off the table as you know the capacity that makes these products and provides the enabling technologies is truly repurpose simple to other customers and two other products within the biologics field.

So so we're very encouraged by that and then to your question, we're expecting very strong growth for our pharma services and our bio production business in 2022 and beyond so with that Jack Thanks for the questions.

Thank you and our next question comes from Patrick Donnelly of City. Patrick. Please go ahead. Your line is open.

Hey, guys. Thanks for taking the questions.

Mark maybe on the China piece I know Steven touched on the 200 bps headwind for <unk> can you just talk about what youre seeing there, which businesses are being affected more than others. Obviously, we're seeing you know Beijing entering entering the conversation. This week I guess, what have you guys assumed there in terms of escalations or what's going to happen and then again our.

Certain businesses poised to recover more quickly than others just curious your perspective there.

Patrick Thanks for the question so the.

<unk> really did an excellent job in Q1 navigating.

The lockdowns that started towards the end of the quarter to deliver double digit growth.

And to really.

Work with the government to be able to supply the critical products that we provide to the to the customer base there even in difficult circumstances.

Very impressive what our assumption is actually fairly straightforward.

We're looking at the back half of the year that Q3, and Q4 are normal in China back to strong growth and as you know the business there rebounded super quickly. After the Q1 of 2020 disruption. So the economies there is quite resilient our assumption is in this quarter.

There's a couple of points of headwind.

That we're baking into the numbers because a number of the customers are closed you know academic institutions in Shanghai will be closed so that it'll take a period of time for that to rebound as activity ramps back up. So that's how we're thinking about it in terms of the quarter and we were able to fully baked that into our guidance and Stephen in the revenue.

Phasing.

Views tried to make it clear that what our outlook is for Q2, which is still quite good but.

It was a little bit of that pressure and then Q3 Q4 picks up from there.

Sure. That's helpful. Thanks, Marc and then maybe just another one on the Bioprocess thing vaccine piece I appreciate the transparency in terms of what that looks like this year, obviously to your point, it's a big investor focus even into 'twenty. Three is there a way to think of that $1 5 billion as we get into next year. I know you guys have rolled it into.

Core and kind of thought.

The rest of the bio processing business will mostly offset it's gonna be a gradual decline has that thinking changed at all just wondering on your high level perspective, how to think about that piece as we move forward. Thank you.

Yeah, So Patrick.

Thanks for the follow up on that so.

I would think about it the following.

The timing of the transition and what the long term demand for Covid. There are so many scenarios.

It's very hard to say, which quarter, which you're exactly how things play out right because the capacity is repurpose a bowl.

We will move that over time and in our long term model that Steve presented last September .

Actively reflects that that's all transition by the end of the of that end of the model period. So that it was part of core it doesn't affect the 7% to 9% long term outlook as I look to 'twenty three I mean as a reminder, we play a role in both therapies and vaccines. So.

They are on different cycles and different scenarios, which is I think most scenarios have the pandemic existing in some endemic form next year and therefore therapy.

Demand should exist with some level of consistency and vaccines is a wide range of outcomes, obviously the smaller <unk>.

While these single use actually drives more revenue per thanks. So you have a lot of moving pieces and our job is to manage all of that managed the transition at the right time frame. Then we will I think the one piece of new information that I think is interesting is one of our customers.

Not in the top tier of the activity level within Covid actually just repurposed its own commitments to other therapies and activity so that was actually.

Made that transition even smoother for a portion of it and basically in the future basically has taken the commandments since they when they don't need called the capacity, they're going to basically use it for other things. So hopefully all of that call. It gives you a sense that we'll manage that.

Over time.

And we'll continue to deliver strong growth as a company.

Very helpful. Thanks, Mark.

Thanks.

Thank you and our next question comes from Derek Brown of Bank of America. Please go ahead. Your line is open.

Hi, good morning, everyone.

I've got one.

Model question, and then I've got one bigger one big picture question. So on the model can you walk us through the gross margin progression.

In 'twenty two.

<unk> continually sort of model gross margin can you help us walk us through and understand the FX.

Relation through headwinds are going through.

Yeah. So derik, so let's think about the gross margins this quarter.

47% level.

Be slightly lower for the remainder of the year and the year and that kind of mid mid Forty's and I think people are not fully baking in is the is the impact of PPD.

<unk>.

And that has sizable change to the overall company's gross margin when you factor that in.

And then it's just the FX is a little bit of a negative in terms of the margin profile.

But it's really the impact of testing coming down in and then the benefit of having PPD in the business and that's probably the thing that's missing the most.

Got it that's helpful.

I wanted to sort of asked about modernity agreement.

Really surprising to see 15 year agreements to be in those.

States since it's not really done can you talk about that.

Like what is sort of driving that and do something useful let's see.

That you can do with it.

Other people in the biotech space and also you also mentioned some some synergy wins with PPD.

How should we think about that in the longer term targets on PPD.

Yes, so derik thanks for the questions. So as you know, we never really talk about specific customers.

And let's say customers announcing this on their own behalf and then we're more than happy to make some high level comments right because.

It's really our job is to support our customers' activity.

I think that our take is that.

We did a really good job of supporting our clients during the course of the pandemic across all of the different activities.

And that enhanced our reputation our trusted partner status with our customers.

And as.

In the case of Madonna.

They had the opportunity to work with us.

And decided to leverage our capabilities in Greenville, North Carolina, and our expertise to support their future pipeline.

From a sterile fill finish perspective, and it's super exciting in terms of the capabilities of the things that we will support.

Longer term from them there.

We have many different models of how we work with our clients and our pharma services business.

And.

It's our job to support them in the best way that they want so we do have what we call condo models, where customers have some dedicated capacity we have the traditional fee for service models and then we have some other innovative ones. The other public one obviously was announced a couple of years ago, which was CSL right, which is we took over one of their facilities.

We're gonna be manufacturing one of there.

New therapies and they're expanding the collaboration with US also it's long.

Menu of options and our job is to help our customers navigate their future and be really valuable to them.

Thanks Derek.

Thank you and our next question comes from of.

From Morgan Stanley . Please go ahead your line is open.

Hi, guys good morning, and thanks for the time here.

Mark a question for you on pricing you've spoken in the past about taking elevated pricing increases you're perhaps two X the normalized level in 'twenty two.

Can you just refresh that assumption for us in the context of the shopper inflation here and philosophically how do you think about the point at which you need to be a little bit careful about starting to impact customer demand, perhaps more than in some segments than others.

Yes, it's a great question right. So when we think about.

Living in navigating through an inflationary environment.

Our team is doing a good job of.

Managing productivity managing cost.

And mitigating what can be mitigated so I'm very pleased with that.

Our expectation for pricing is in a normal year as you know, it's a half point to a point of price that we get within our business and this year, we would expect that price would be.

About double the high end of that range of about two points of price.

Within our outlook for the year so.

It's our job to support our customers to explain the Inflations and where we can offset it in and where we need new customers to support us and those dialogues have been constructive and positive.

Got it that's helpful. And then one quick follow up on PPD and.

Any color you can share on RFP flow theres been a little bit of a focus on delays and cancellations, particularly among sort of smid cap biotech customers here.

Obviously, you had strong performance in the quarter, you're taking our numbers up for the deal, but just curious if you can parse out sort of any commentary on that specific segment of their customer base.

Yeah. So when I look at the performance I look at the pipeline I look at the authorizations, which is the.

<unk> when I look at the revenue when I cut it by the different types of customers. We had a really strong start to the year.

When I look at I've read not all but some of the different commentary than.

And the differing views out there.

My take is is that there was nothing abnormal in cancellations in.

In the quarter, there was no trend to any of that and actually.

We are on track to deliver very strong results back to the 11% growth.

That we're looking at for this year.

As you know is really impressive because last year was spectacular right in terms of the growth of the business delivered so against a challenging comp that's really really encouraging and an authorization support that for this year, but also support the long term expectation is that this is a high single digit growth business.

And when we drive synergies that can be better than that so so supercool times, but obviously early.

Thank you.

Welcome.

Thank you and our next question comes from Vijay Kumar. Please go ahead. Your line is open.

Hi, guys. Thanks for taking my question and congratulations on a really strong Q1 start.

Maybe one on guidance, you're up perhaps were up Steven.

I think your prior guidance called for high singles in that high singles is consistent across base vaccine in PPD I, just given given your vaccine outflow because now I think down 15% to 20% versus last year.

How much is the core.

Base going up and how much is PPD I going up under do you.

Guidance assumptions.

Yes, so vijay.

Outlined in the prepared remarks, the strength of the PPD business going up too.

11% for the year.

So that would be a strong contribution.

Can you characterize the vaccines and therapies and then we're offsetting that that all of that through Vaccinotherapy honestly, increasing our guidance. So the core business is increasing.

$350 million in the rates, so going up to 8% to 9%.

Strong performance.

And that's obviously taken into ticket intended cabinet switched from vaccines and therapies to corn and offsetting the impact of the.

The macroeconomic implications in China situation in Ukraine.

That's helpful. Steve and then Mark maybe one for you here.

I know the dispute is worried about the outlook just given the macro.

The 16% core in Q1 versus a 13% comp and we're looking at stack comp of up close to 30% of the diesel really really strong and I understand.

Pharma biotech, perhaps be strong, but it looks like all segments are on fire, maybe just talk about end markets.

Health of end markets and when you think about the upcoming analyst day away what kind of approach should we expect that from thermo vaccines.

Excuse me depressed and.

Will it be a derisked approach or any thoughts on what we can expect into the analyst day will be helpful.

Yeah, I mean, I can't wait until May 18th is Super cool, we're going to have it back in person.

And it'll be a great way to showcase our team and showcase the great things going on at the company in.

We will explain some of the stuff today in some more detail so it'll be very positive.

From that perspective.

And I think about that.

The business right.

We highlighted.

Some of the macro macroeconomic dynamics right because.

If you watch TV you read the papers, you're on the internet or whatever it is that you get the external world.

It's a bumpy time in the world.

But when you get within our four walls right now it is awesome I mean, it is an amazing time of the company. The momentum is huge the customers are doing well, we are gaining market share and it is super cool.

So when I think about that environment of delivering 16% core growth against.

A very challenging comparison right I think from recollection, we had 53% organic growth last year, and I think 13% base growth.

And we had bookings that were even stronger than our revenue. So it gives you a sense of how good things are and all of the geographies all of the end markets were actually quite good alright. So I feel good about the outlook I feel good about the momentum we were able to derisk.

You know the vaccines and therapies, even though.

I think there are scenarios that it was going to be.

Love that sort of de risk level, and so I think the world is super positive and when I think about the macro I worry about our colleagues I worry about our colleagues in China I worry about our 300 colleagues in Ukraine, that's the kind of stuff that when I read about macro that's really where my concern is it's less about the <unk>.

Self associated with it.

That's helpful perspective, Mark Thank you.

Okay.

Thanks for you Jamie.

And our next question comes from Rachel <unk> of J P. Morgan Rachel. Please go ahead. Your line is open.

Great. Thanks, and congrats on the quarter. So question on China, you flagged the guidance incorporates a 350 million headwind from your crane in China. So can you just break out how much of that is specifically in China and then can you talk about your approach to guidance just in terms of future of Lockdowns and how we should think about China growth returning in 2023.

Yes.

That ratio to that roughly half of that is related to China.

And as Mark said.

They're on the China bounce back from the original depths of the pandemic pretty fast and pretty resilient economy. So we've learned from that to help our customers get back up and running whether they've been out of the out of the workplace.

Very focused on enabling that success when they are able to get back to positions of what our guidance assumes it's all in Q2 in terms of the constructions for China.

Great. Thanks, and then can you spend a minute talking about what you're seeing in the clinical environment.

In terms of hospital capacity constraints, and how funding is trending as well.

Yes.

Yes, so in terms of health care and diagnostics.

The core there was actually quite good.

When I think about.

We had broad based strength in terms of core growth.

They're in the in the high single digits, So I feel good about that in.

There was obviously some level of COVID-19 disruptions and things of that sort, but in aggregate. The results were strong across healthcare and diagnostics and obviously we had less.

Less revenue in the testing, which is why the customer basis down down roughly 15%, but underlying that the course was quite good.

Feels like that outlook will continue to be positive.

Richard Thanks for the questions.

Thank you and our next question comes from Puneet <unk> with SBB Leerink Securities. Please go ahead. Your line is open.

Yeah, Hi, Mark.

Thanks for taking the questions. So first one really from your vantage point, which is obviously a fairly large across pharma end markets.

Could you provide us a view into this growing question that.

Investors have been asking around.

Biotech funding overall I mean, if you look at the quarter and what you're projecting in the outlook. One would say that's not the case at all there are no questions on biotech funding, but if.

If you look at the early stages of preclinical and clinical and maybe clinical trials. The world maybe could you outline for us what youre seeing here.

Near to midterm and paid down brammer PPD and other businesses across the board.

Okay.

Yes, so puneet.

What I would say is.

The end market pharma biotech incredibly strong.

With the mid teens growth.

Organically.

And if you because we do everything on an organic basis as opposed to in our end market description as opposed to a core organic as it gets too confusing to think about all the history, but if you included the PPD numbers in that end market it would be even better than the mid teens.

So very strong orders, which is a good indication of the future was really strong right. So the activity level is very good and the outlook is very strong and when we have our we have completed all of our business reviews, and we talk about what are they seeing within those different customer base actually the outlook is good so.

One way to think about it is.

At a company level, if you take a long term perspective, we say, our 7% to 9% core organic growth.

Pharma and biotech you know we'll be above that.

But when you kind of work your way through the math around the assumptions.

It doesn't nearly need to be the rate that its growing at to drive 7% to 9% growth rate.

A 15% growth in pharma biotech and we grew 16% in the quarter right. So when you have.

<unk> strong growth.

In that end market given that it's a little more than half our revenue it really flows through hugely and given the last 10 plus years, even longer than that of the growth we've been able to deliver in pharma biotech I'm Super bullish about what our outlook is and I can never remember ours here with the patent cliffs like years and years.

And years and years ago, and we actually grew well through those because we helped our customers navigate productivity challenges that they were facing that was a large pharma dynamic.

Dynamic in a long time ago, but.

We're so attuned to our customer needs, we help them through it so.

That's how I think about it and I feel great about what the outlook is.

That's super helpful Mark.

A clarification that Steven on the analytical technologies that obviously came in strong you pointed to electron microscope chromatography and mass spec a couple of those elements, but maybe could you elaborate what's driving this growth I mean, when we looked at it even with the normal seasonality of the fourth quarter to first quarter. This was meaningfully.

The strong so what's driving the strength of the instruments in the first quarter. When you look at the end markets and customers. Thank you.

Yes.

Great question, So I think about Amazon instruments, as we've had great bookings.

For few quarters now for the business and as Mark mentioned at the beginning three strength across all three aspects of that of that segment.

And then I highlighted the two the most significant contributors electron microscopy is out in a great position in terms of serving life science customers as well as materials science applications, including very strong growth in semiconductor applications for that customer set and a great growth in chromatography and mass spectrometry as well. So they are really broad based.

<unk> across there and no funding environment has been good for those end markets.

Thanks for that.

Alright, thanks, guys.

Thank you and our next question comes from Dan Arias of Stifel. Please go ahead. Your line is open.

Good morning, guys. Thanks for the questions Mark on bio production beyond Covid are there any shifts or noticeable trends that are taking place when it comes to upstream versus downstream work in the portfolios that you have there I mean, obviously.

Obviously, the cell culture pieces, driving a lot of what's going on but just across the portfolio I'm curious, whether there was any nuance to what youre seeing.

No actually the performance was.

Was very strong I looked at obviously the other companies that reported I feel good about our performance.

In.

The bio production defined that way.

We had good strengthen.

So culture media purification resins farm analytics and single use technologies actually no. There is nothing there that sort of.

We cleaned.

Terms of the some different so actually quite broad based strength.

Yes, Okay, and then maybe just on the share gains that you mentioned, how does China stack up there in terms of the opportunity and what <unk> seen just with the thought being that sometimes you have these global disruptions tend to shake out some of the.

The smaller or the less agile players I'm wondering if regionally, that's becoming more noticeable or whether it's just sort of.

The baseline operating scenario that you see.

Yeah.

We're still looking at how others performed in China in the quarter. So.

I feel good about our double digit growth and the team's doing a nice job in the <unk>.

<unk> has broad base so.

Our customers do value the scale and the depth of capabilities that we have like we really create a spectacular experience of our customers in China.

So it doesn't surprise me that the business is performing well and we will help them navigate this very challenging time with the pandemic.

And then get back to.

Business as usual.

As that wanes.

Operator, we have time for one more question.

Thank you our last question today comes from Matt <unk> of Goldman Sachs. Please go ahead. Your line is open.

Great. Thanks, Mark Steve and congrats on the quarter I, just wanted to drill down a little bit more on the industrial applied end market as it relates to instruments you had another strong quarter.

Are there some secular growth drivers that you think are being underappreciated by the market. That's driving this growth above and beyond maybe some of the pent up demand. We saw last year and maybe just maybe talk about some of the secular growth drivers. If you can identify them.

Yeah, So Matt Thanks for the thanks for the final question here, So as Stephen said, the analytical insurance business had a really.

Really good start to the year.

Good growth in revenue and really strong growth in bookings.

I would say that the one end market, that's really really humming.

Is what I call broadly the materials science applications semiconductor.

Advanced materials battery technologies.

Really very strong growth that's unemployment the life science is very healthy and doing well and the business is doing really well, but I'd say that continued demand and outlook for the materials science related business is really strong.

That bodes really well for the growth of our instruments business this year.

And into next so so it would be the thing I'd probably highlight.

Yeah. Thanks for the question today, and let me do a quick wrap up.

So thanks, everyone for joining the call.

We're very pleased with the strong start and we're in a very good position to achieve another excellent year and I look forward to updating you at our upcoming Investor day on May 18th and as always thank you for your support of Thermo Fisher scientific thanks, everyone.

Thank you ladies and gentlemen. This concludes today's call. Thank you all for joining you may now disconnect your lines.

Okay.