Q1 2023 Thermo Fisher Scientific Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the Sun Life Fisher scientific 'twenty to 'twenty three first quarter Conference call. My name is Charlie and I'll be coordinating the call. Today, you will have the opportunity to ask questions at the end of the presentation, if you'd like to register a question. Please press star followed by one or your telephone keypad.
I would like to introduce our moderator for todays call Mr. Rafael Bajada, Vice President of Investor Relations. Mr. <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 Thermo Fisher dot com under the heading news and events until May 12 2023.
A copy of the press release of our first quarter 2023 earnings is available in the investors section of our website under the heading financials.
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 dose discussed 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 SEC filings.
While we may elect to update forward looking statements at some point in the future. We specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward looking statements as representing our views as of any date subsequent to today.
Also during this call we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2023 earnings and also available in the investors section of our website under the heading financials.
So with that I'll now turn the call over to Mark.
Thank you Rob good morning, everyone and thanks for joining us today for our first quarter call.
As you saw on our press release, we had a very strong start to the year, we delivered another quarter of very strong financial performance.
Our core business is performing very well.
Pleased with the team's great execution and the share gains we saw across our company, especially within the context of a slightly more challenging macro environment.
Our continued success is the result of our proven growth strategy. The trusted partner status that we've earned with our customers and our PPI business system, which is a differentiator for us and enables operational excellence within the company.
So let me first recap the financials our revenue in the quarter was $10 71 billion.
Adjusted operating income was $2 three $3 billion and we delivered another quarter of strong adjusted EPS performance, achieving $5 <unk> per share.
At the beginning of the year, we set out appropriately ambitious guidance for 2023, and Q Q1 demonstrates that we're delivering against that.
Let me turn to our end markets, we delivered very strong performance in Q1, driven by outstanding execution from our team, resulting in meaningful share gains.
Pandemic related activity performed as we had expected during the quarter.
As a reminder, the impact of the headwind from the revenue run off can be seen in pharma and biotech due to vaccines and therapies and in diagnostics and health care due to COVID-19 testing.
Let me give you some color on our end markets, starting with pharma and biotech we delivered growth in the mid single digits for the quarter.
During the quarter, we had very strong performance in our pharma services clinical research in chromatography and mass spectrometry businesses.
In academic and government we grew in the high single digits in the quarter, we delivered strong growth across a range of our businesses, including chromatography and mass spectrometry electron microscopy as well as the research and safety market channel.
<unk> and government demand was strong in all regions.
In industrial and applied we grew in the high single digits for the quarter. We saw strong growth in all of our analytical instrument businesses, including electron microscopy, chemical analysis, and chromatography and mass spectrometry.
Finally in diagnostics and healthcare in Q1 revenue was approximately 45% lower than the prior year quarter. The team delivered very good core business growth during the quarter led by our immuno diagnostics microbiology and transplant diagnostics businesses.
I'll now turn to our proven growth strategy, which enables us to continue to deliver differentiated performance and setting us up for an even brighter future as a reminder, our growth strategy consists of three pillars.
Developing high impact innovative new products.
Leveraging our scale in the high growth and emerging markets.
And delivering a unique value proposition to our customers.
Starting with the first pillar innovation, we had an excellent start to the year as we launched a number of high impact new products across our businesses during the first quarter.
These technologies are further strengthening our industry leadership by enabling our customers to break new ground in their important work.
In elemental analysis, we launched the thermo scientific recap, our Q plus ICP Ms analyzer.
This ICP mass spectrometry system simplifies analysis of trace elements and complicated samples, including the identification of heavy metals and sort of in soil and water as well as toxic elements in food and beverage.
In genetic sciences, we launched the applied Biosystems Quant studio absolute Q auto run DTC, our suite and automated digital PCR solutions to increase productivity for molecular research, including cell and gene therapy and cancer research.
In our Biosciences business, we launched the in vitro Jin diner Green micro plastic free magnetic beads for protein purification.
This new product will help our customers to reduce the environmental impact of life Science research and builds on our long history of innovation and market leadership and Bioscience reagents.
And in our clinical diagnostics business, we launched the thermo scientific Cri Tramadol assay.
Which broadens our extensive toxicology portfolio with a new drug of abuse assay to help fight the opioid crisis.
These are just a few examples of the innovation going on across our company and I'm excited about the robust pipeline of products that will be launched throughout the year.
We also recently learned that Thermo Fisher was ranked number 22. Unfortunately, most innovative companies list. This is a new award launched in 2023 based on product and process innovation and a company's culture, a really nice recognition of our team and their track record.
The second pillar of our growth strategy is leveraging our scale in our high growth and emerging markets to create a differentiated experience for our customers.
We continue to strengthen our capability serving these markets by opening a new gift code cell culture rapid prototyping facility at our existing site in Suzhou China.
This facility will help regional customers accelerate the transition of their cell culture media production into current good manufacturing practices. It will also ensure patients receive therapies manufacturer to the highest level of safety effectiveness quality and purity.
Turning to the third pillar of our growth strategy, we continue to enhance our customer value proposition by strengthening our capabilities to enable our customers to make the world healthier cleaner and safer.
I've had the opportunity to meet with dozens of our pharmaceutical and biotech customers since the beginning of the year and our value proposition is clearly resonating our trusted partner status gives us an early understanding of customers' unmet needs and the ability to generate insights that allow for deep collaborations that continue to <unk>.
Vance scientific breakthroughs.
During Q1, we achieved an exciting milestone in our strategic partnership with the University of California, San Francisco with the opening of a new cell therapy, cgmp manufacturing and collaboration center to accelerate the development of breakthrough therapies for Globus stoma multiple myeloma and other cancers.
And this facility, we offer UCSF and other customer solutions for cell therapy development from discovery to clinical research through the commercial manufacturing partnerships like this have the potential to transform clinical care.
Another example of our customer value proposition and the trusted partner status that we have established with our pharma and biotech customers can be seen in the excellent performance of our clinical research business, which drove very strong growth in the quarter.
I'm very excited by the revenue synergies that will drive both short term and longer term growth in the business. The momentum is continuing to build and is benefiting both our clinical research business in other parts of the company.
We're also working with very engaged customers on longer term projects to explore ways to reduce the time and cost of bringing drugs to market.
By bringing our capabilities and expertise within our pharma services and clinical research businesses. Together, we are working to improve the effectiveness of the drug development process benefiting both our customers and their patients.
We have an exciting pilot underway that is utilizing dedicated resources.
Best in class technologies and capabilities to provide enhanced visibility and real time data to the customer.
This improves the speed of decision, making and reduces potential delays from development to manufacturing to clinical trials.
It can also help our customers take cost out of the process by reducing waste in the clinical supply process. This is really a nice example of why we are the trusted partner.
As always our PPI business system, and our mission driven culture enabled our success during the quarter.
<unk> engages and empowers all of our colleagues to find a better way every day and it enables us to improve quality productivity and the customer experience, while also helping us to navigate a dynamic environment.
You can see the positive impact you can see the positive impact of our PPI business system and our results in Q1.
It has also allowed us to capitalize on the strong demand from customers for analytical instrumentation and has also helped us to effectively address the run off in pandemic related activity and appropriately manage our costs.
Moving to capital deployment, we've had an active start to the year, both in strategic M&A and returning capital to our shareholders. We closed the acquisition of the binding site at the beginning of the year. It's.
It's great to have this business now as part of the company. The business is a fantastic fit with our specialty diagnostics business and we're leveraging our capabilities to take an excellent business and make it even better the integration is going very smoothly and the business is performing very well tracking ahead of plan.
Our team is focused on advancing the diagnosis and management of patients with multiple myeloma and immune disorders.
Innovation pipeline looks great. We're excited by the opportunity to further advance.
Patient care in this area.
In terms of return of capital during the quarter, we repurchased $3 billion of stock and increased our dividend by 17%. So overall, a great start to the year from capital deployment.
During the quarter, we also advanced our environmental social and governance priorities, including securing agreements to power all current U S sites with 100% renewable energy by 2026.
This is a significant contribution to our 2030 commitment to a 50% reduction in scope, one and two greenhouse gas emissions as we continue to transition away from fossil fuels and adopt renewable energy. We're also accelerating our progress towards our commitment to net zero carbon emissions by 2050 will.
We will be releasing our latest corporate social responsibility report later this quarter and we will give our stakeholders are really substantive view on our continuous improvement and the positive impact that we're having.
Let me now turn to our guidance.
Since the beginning of the year the macro environment has become slightly more challenging we're stepping up to that challenge and our proven growth strategy powered by our PPI business system is enabling us to maintain our ambitious full year outlook with revenues of $45 3 billion and adjusted EPS of $23.
70.
Stephen will take you through the details in his remarks.
So to summarize our key takeaways from the first quarter.
Our very strong results in Q1 was driven by our proven growth strategy and PPI business system. Our business is performing very well our unique customer value proposition is further elevating our trusted partner status and we're continuing to gain market share.
We effectively deploy capital to create significant value for our customers and shareholders.
And we're incredibly well positioned to deliver differentiated performance and an excellent 2023.
We continue to create value for all of our stakeholders and build an even brighter future for our company.
With that I'll now hand, the call over to our CFO Stephen Williamson Stephen.
Thanks, Mark and good morning, everyone. As you saw in our press release, we started the year with a very strong Q1.
Our growth strategy powered by our PPI business system is enabling it to continue to very effectively navigate the company through a dynamic macro environment manage the runoff in pandemic related revenue and drive excellent core organic revenue growth and share gains.
In the quarter, we delivered $10 $7 billion of revenue, which included 6% core organic revenue growth.
Live at $5 <unk> of adjusted EPS.
Core organic revenue growth was 1% higher than we've incorporated in our previous 2023 guidance and adjusted EPS was <unk> <unk> ahead sorry.
Strong start to the year.
Let me now provide you with some more details on our performance.
So beginning with our earnings results as I mentioned, we delivered $5 three of adjusted EPS in Q1, GAAP EPS in the quarter was $3 32.
On the top line reported revenue was 9% lower year over year. The components of our Q1 reported revenue included 8% lower organic revenue a 1% contribution from acquisitions.
And a headwind of 2% from foreign exchange.
And then related revenue came in as we expected in Q1. This is comprised of $140 million of testing revenue and $180 million of vaccines and therapies revenue.
As I mentioned earlier core organic revenue growth in the quarter was 6%.
As a reminder, core organic revenue growth continues to.
To include the change in our COVID-19, vaccines and therapies revenue, which was a headwind of approximately 3% in the quarter. So very strong core performance showing the continued strength of our business.
Turning to our organic revenue performance by geography, the organic growth rates by region are skewed by the pandemic related revenue in the current and prior year in Q1, North America declined high single digits Europe declined in the low double digits Asia Pacific grew in the low single digits with China declining slightly and rest of world decline.
And high single digits.
With respect to our operational performance adjusted operating income in the quarter decreased 32% and adjusted operating margin was 21, 8% 740 basis points lower than Q1 last year.
In the quarter, we achieved strong price realization to effectively address inflation, while also driving strong productivity. This was more than offset by lower pandemic related revenue and continued strategic investments.
Total company adjusted gross margin in the quarter came in at 43% 720 basis points lower than Q1 last year for.
For the first quarter the change in gross margin was due to the same drivers as those for our adjusted operating margin.
Moving onto the details of the P&L adjusted SG&A in the quarter was 15, 3% of our revenue.
R&D expenses $350 million in Q1, reflecting our ongoing investments in high impact innovation.
R&D as a percent of manufacturing revenue was <unk>.
Six 9% in the quarter.
Looking at our results below the line for the quarter. Our net interest expense was $154 million, which is $36 million higher than Q1 last year, mainly due to capital deployment.
Our adjusted tax rate in the quarter was 10%. This is 410 basis points lower than Q1 last year, reflecting the results of our tax planning activities.
Average diluted shares were $388 million in Q1, approximately $6 million lower year over year, driven by share repurchases net of option dilution.
Turning to cash flow and the balance sheet cash flow from operations was $730 million free.
Free cash flow for Q1 was 280 million after investing $450 million and net capital expenditures.
During the quarter, we deployed $5 $8 billion of capital.
<unk> two $7 billion for the acquisition of the binding site and $3 1 billion of capital to return to shareholders through buybacks and dividends.
We ended the quarter with $3 5 billion in cash and $35 3 billion of total debt.
Our leverage ratio at the end of the quarter was three two times gross debt to adjusted EBITDA and two nine times on a net debt basis.
Concluding my comments on our total company performance suggested ROIC was 12, 2%, reflecting the strong returns on investments that were generating across the company.
Now I'll provide some color on the performance of asphalt business segments. Let me start with a couple of framing comments the scale and margin profile of a pandemic related revenue varies by segment.
Net revenue was significantly higher than the prior year. So that does skew some of the reported segment growth rates and margins, we continue to execute strong pricing realization across all segments to address higher inflation.
Moving on to the segment details starting with life Science solutions Q.
Q1 reported revenue in this segment declined 38% and organic revenue was 37% lower than the prior year quarter. This was driven by the moderation in pandemic related revenue in the segment versus the year ago quarter Q.
Q1, adjusted operating income in life Science solutions decreased 62% and adjusted operating margin was 32% down 19 percentage points.
Year quarter.
In the quarter, we delivered good productivity, which was more than offset by unfavorable volume mix due to the significantly higher pandemic related revenue in Q1 2022.
In the analytical instruments segment reported revenue increased 14% in Q1 and organic growth was 17%.
This strong growth was broad based in the segment this quarter led by chromatography and mass spectrometry and electron microscopy businesses Q.
Q1, adjusted operating income in this segment increased 40% and adjusted operating margin was 24, 4% up 460 basis points year over year.
In the quarter, we delivered strong volume pull through strong productivity and favorable business mix. This was partially offset by strategic investments.
Turning to specialty diagnostics in Q1 reported revenue declined 25% and organic revenue was 28% lower than the prior year quarter and.
In Q1, we continued to see strong underlying growth in the core led by our immuno diagnostics microbiology and transplants transplant diagnostics businesses.
This was offset by lower pandemic related revenue versus the year ago quarter.
Q1, adjusted operating income decreased 21% in the quarter and adjusted operating margin was 25, 3%, which is a 140 basis points higher than Q1 2022.
During the quarter, we delivered favorable business mix and strong productivity, which was partially offset by the impact of lower COVID-19 testing volume.
Finally in laboratory products and Biopharma services segment, Q1 reported revenue increased 6% and organic growth was 7%.
During Q1 organic revenue growth in this segment was led by the pharma services and clinical research businesses.
Q1, adjusted operating income in this segment increased 28% and adjusted operating margin was 13, 8%, which is 240 basis points higher than Q1 2022.
In the quarter, we delivered strong productivity and volume pull through this was partially offset by strategic investments.
Let me now turn to guidance and as Mark outlined we're maintaining our guidance for full year 2023, consisting of revenue guidance of $45 3 billion.
Including 7% core organic revenue growth and adjusted EPS guidance of $23 70.
There is no net change overall in our guidance, but how we expect to achieve this guidance is different from the way we planned at the start of the year and it demonstrates our ability to effectively navigate the dynamic macro environment and maintain a very strong financial outlook.
Since our initial guide, we see 25 of additional headwinds to adjusted EPS.
<unk> from business mix and 10 from FX.
We are actively offsetting all of this headwind about 20 through cost management and <unk> through actions below the line. So no net change overall, the PPI business system is enabling us to navigate the company very effectively through a dynamic macro environment.
As I mentioned, the 2023 guidance reflects a very strong financial outlook, let me remind you of some of the key underlying assumptions remain unchanged from the previous guidance.
We continue to assume 7% core organic revenue growth from market growth of 4% to 6%.
Within our core revenue, we expect $500 million of vaccines and therapies revenue in 2023. This is $1 2 billion less than the prior year, a 3% impact on core organic revenue growth.
It's worth noting that the majority of our vaccine and therapy revenue in 2023 is expected to be in our pharma services business.
With regards to testing revenue, we continue to assume $400 million.
For 2023.
We're assuming the binding site acquisition will contribute approximately $250 million to our reported revenue growth this year.
Below the line, we expect net interest expense in 2023 to be approximately $480 million.
We continue to assume that net capital expenditures will be approximately $2 billion in 2023 and free cash flow is assumed to be $6 9 billion for the year.
This includes $3 billion of share buybacks, which were already completed in January .
We estimate the full year average diluted share count will be approximately 388 million shares.
And we're assuming we returned approximately $540 million of capital to shareholders. This year through dividends and a 17% increase over 2022.
So turning now to the assumptions that have changed as I mentioned earlier, our FX assumption for the year is changed we still expect FX to be a tailwind to revenue of approximately $100 million of point.
2%.
We now expect it to be a headwind to adjusted EPS of <unk> 10 cents more of a headwind than the previous guidance due to changes in rates and the expected mix of our currencies.
Guidance assumes adjusted operating margins for 2023 to be in the range of 23, 8% to 23, 9% for the year.
The adjusted tax rate assumption has improved slightly from our initial guide we now expect it to be 10, 8% for the full year.
And finally I wanted to touch on quarterly phasing for the year.
Compared to our initial phasing assumptions, we now expect a slightly higher weighting of revenue and adjusted EPS in the second half of the.
We're currently assuming that the first half of the year represents approximately 48% of our full year revenue dollars and 44% of our full year adjusted EPS dollars.
Q2 core organic growth is expected to be mid single digits, probably best to model at a slightly lower in Q1.
To conclude we delivered a very strong start to the year and we're in great position to deliver differentiated performance for all our stakeholders in 2023 with that I'll turn the call back over to Iraq.
Thank you Stephen operator, we're ready for the Q&A portion of the call.
Okay.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Your question. Please press star followed by two or preparing to ask a question. Please ensure you're on mute locally.
We are in the queue and opportunity to address some efficient management team. Please limit your time on the call to one question and one follow up only.
If you have additional questions. Please present the key.
Our first question comes from Jack Meehan of Nephron Research. Your line is open. Please go ahead.
Thank you. Good morning. So my question is focused on lab products Biopharma services.
First is on PPV. So we've been getting some mixed signals. So far this earnings around biotech customer demand.
Mark would love to get your perspective, how did PPD grow this quarter what does the outlook assume has that changed at all and then can you talk about award trends that Youre seeing.
Yeah. So Jack Thanks for the question good morning, our clinical research business PPD had a very strong start to the year.
Growth continues to be.
In the mid teens and.
It's doing really well.
We had strong backlog, we had good level of authorization so that.
That business is continuing to benefit from the revenue synergies.
<unk> seen that start to come into the numbers this year and.
I am very excited about the prospects seem to have a really good job of executing environment is definitely a little bit more challenging but the team is doing a good job to go out and capture the business.
Great. Okay, and then one more on that segment is just would love to hear your color around how the research channel performed this quarter can.
Can you just talk about core market demand and any share dynamics that youre seeing thank you.
Our channel business.
Scientific channel.
Really well actually consistently for quite a number of years.
It plays an amazing role in enabling our customers to do the research that they are doing and make sure they do that.
The effective and efficient way and the business is off to a good start it's had good growth in our.
Our best sense on share dynamics as it continues to.
Continues to win customers.
It's a well performing business.
Super Thank you.
Thanks, Jack Thanks, Jack.
Thank you. Our next question comes from Rachel fashion style of J P. Morgan ratio. Your line is open. Please go ahead.
Okay. Good morning, Thanks for taking the question and so first two year periods of recently talked about visibility within bio processing being pressured to more like three to six months I think the ability of our historical 9% to top line. So can you just walk us through what's your current level of visibility yet and is that different between customers back within large farm out of our system.
These emerging biotech customers and then also how did PPD and having that business impact your level of visibility there.
Sure. So Richard good morning, Thanks for the question.
Maybe I'll step up a level first and then I'll talk about the specifics of the question because as.
As I look and read some of the other industry participants reports, so far clearly a noisy quarter in the industry.
And when I frame that as a reminder, when we started the year, we set out ambitious goals for 2023, alright, and we do that every year for us 7% core growth.
From an organic perspective against a 14% comparison.
And also have very strong earnings so that's sort of as we came into the year. So what's different in.
In late April versus February 1st when we set up our guidance. While the first thing is we delivered a great start to the year alright, great Great Q1.
Second the macroeconomic environment is more challenging and that leads to a slightly more cautious spend in all sectors of the economy nothing to do with life science tools and pharma services.
But we also see that in some of our customers as well in terms of the caution.
Within our own company a couple of our businesses are performing slightly better than our original guidance and that's our analytical instruments business.
Had an excellent Q1, and we now have more visibility into Q3 for that business and that looks encouraging the second business is doing a little bit better than our original guidance for specialty diagnostics is off to a strong start.
<unk> production, which is where your questions.
Really focused.
We're going to see in the first half more headwinds than our original expectation, it's driven really by the customers are benefiting from the improved lead times that we are delivering against because we brought our.
Our network expansion right so customers.
Can get products more quickly and our view is this is a temporary phenomenon.
And we feel good about the long term prospects here in terms of the specifics on in terms of visibility and by customer sets and those things I think the way that I think about it is long term. This is an incredible market with great growth, it's grown very high for many years in the past.
His incredible tailwind.
It has a reasonably good visibility because it's related to customer production and our.
Our expectation is that the second half of the year is better than the <unk>.
Better than the first half of the year.
In terms of the view as a reminder ratio it represents 10% of our revenue. So I think it's important to keep that in the context as well.
Great. Thank you and then maybe just one on instrument analytical instruments grew 17% during the corner and you flagged that thats one of the areas that's been better than expected so far versus your initial guidance for the year. So can you walk us through what are your latest expectations for analytical instrument growth for the year.
And then are there any end markets within AI that are just growing faster than expected.
Yes, so in terms of our instruments business, we really are benefiting from very strong adoption of our innovation right. We just continue to bring out great products. As a reminder, during the pandemic, we continue to fuel and accelerate our R&D pipeline and youre seeing the benefit of it.
We are capitalizing on the semiconductor desire to move to the next generation of Nos, which uses our electron microscopy, where a key enabler for battery technology, with our microscopes and or chromatography mass spectrometry business doing incredibly well. So so the strength here is broad base.
Obviously, the 17% growth in the quarter.
Very strong we would expect.
Good level of growth in Q2 than what we had said at the beginning of the year. So that would moderate in the second half and we think that moderation will be less than we originally expected in Q3. So we expect it to be a solid Q.
Q3, and we'll obviously have more visibility to Q4, when we report in July so.
We're assuming that model because we are a little better than we expected in Q4 is as we expected at this point because that's what we have visibility to.
Thanks Rachel.
Thank you. Our next question comes from Derik de Bruin of Bank of America. Derrick. Your line is open. Please proceed.
Hi, good morning.
Hey.
I'm curious you talked about ambitious guide in the markets be a little bit tougher.
Yes, you are maintaining guidance because you're offsetting some things right now I guess is there additional wiggle room to do further offsets if the market deteriorates further.
They are basically it's a question about your confidence in that guide and how much sort of like <unk> has built into it.
Yeah, So derik the way that we manage the company.
<unk> is the first thing.
We wanted to deliver differentiated performance in a given year.
That we would be proud of delivering and strengthen the company for the long term and that's the first set of principles and that set of principles have served us very well for many years and when you look at our track record.
Do a good job of delivering short term and strengthen in the long term.
I think about the outlook.
For the year end.
So where we are.
We feel good about the full year guidance at this point in time based on how.
Q1 has played out and the changes in.
And we've laid out some of the assumptions around that for the balance of the year and if those assumptions are largely the way the year plays out we're going to be in great position.
Assumptions are too Conservative we'll beat these numbers if those if those assumptions are too aggressive.
Then we will appropriately adjust guidance over time right.
Shy about any of those dynamics, we tried to give you a total transparency and I feel good about our outlook based on Q1 and the assumptions that we're making.
Got it.
Going back I mean, because obviously getting a lot of questions on the whole bio processing and inventory issues I.
I know your business is more upstream focused in downstream and it looks like you are maintaining the.
The expectations you have for the Covid vaccine relevant but can you just talk a little bit more about some of the dynamics in that space and.
Why your business is a little bit different and familiar ones and also just.
The you talked about some moderating in bio production, just a little bit more clarity on that.
Yes sure.
They are just kind of level set for a second on the actual revenue for 2023 of the $500 million of vaccines and therapies, that's pretty much all in summer.
In our pharma services business is not an entire production business.
Got it okay, yes.
When I think about.
<unk>.
The dynamics here.
On the Covid vaccines as Stephen said.
I take is.
It's played out almost exactly I think Q1 was exactly what we anticipated when we look at our visibility to the $500 million I feel very good about that in terms of it because we know the contracts that we have and what activity has been.
<unk> been book, there, so that's pretty straightforward.
When I think about the bio production.
More generally.
What I would say is.
In a very practical dynamics.
If you go back to the pandemic right huge demand right for.
These products and those companies that were successful and unsuccessful in trying to bring out therapies and vaccines for.
<unk> response to the pandemic that stressed lead times for everybody. Obviously it varies differently by how much capacity, how well companies are always different dynamics, but but lead times got super extended right.
For us the nature of our products our leadership in cell culture media and single use.
Customers don't really order extra it's not one of these things where you want to be stockpiling and stuff because they are very specific to the campaigns that you're running.
So the dynamic becomes very simple if we have a 30 week lead time, which was extended during the pandemic New order 30 weeks with 30 weeks visibility when we bring that lead time back into normal to say 15 weeks for simplicity.
<unk> will work through what they order because they don't have to order as quickly because they know we're going to give them the product right and one of the themes that we said throughout the pandemic was we work super closely with our customers like incredible amount of dialogue. So they trust that we're going to deliver when we say so.
Didn't over order in the time when lead times got extended in the ordering appropriately now so can you call that to the month no of course, not but while we have a reasonable view that the first half is going to be a little bit softer.
When we originally had.
Putting our expectations that the second half starts to pick up and the good news is between instruments, especially diagnostics that's offsetting that at this point so hopefully that's helpful.
Great. Thanks.
Youre welcome.
Our next question comes from Dan Brennan of Cowen. Your line is open. Please go ahead.
Great. Thank you thanks for the questions.
Mark where we had to wait for the conference call to get the core organic guide reiteration for Fairmount <unk>.
The jets, one out to you by giving us Aaron Rodgers trade before the draft fans have to be excited for the year I Hope you are.
So maybe.
Just on bio production a question there.
Would you be willing to share with us just some color within the context of your Biopharma outlook for 2023.
How youre thinking about the growth rate for your consumables business, the <unk> and PPD I know on the last call you gave us PPD, but just trying to get a breakdown or a sense of the different components of your biopharma outlook for the year.
Yes, so Dan Thanks for the question in this in the spring Hope always springs eternal in football because snap hasn't been made yet but.
Effectively from my perspective.
Pharma and biotech is a good question Ray if you take those.
Let's focus on the market itself right.
When I think about the quarter.
We delivered mid single digit growth right and.
When you think about what's embedded in that.
As obviously, that's where the vaccine and therapy roll off is from the prior year. So we did exactly as we expected.
So that basically you'd had double digit growth on a big normalization guys, but.
Just to try to make it simple.
If you didn't have a vaccine and therapy roll off you'd have double digit growth in that segment. So most of the change from trajectory is around that I think the second thing to remember is that last year, we grew 14% this year.
We're expecting to grow 7%.
The expectation obviously is therefore, our growth while outstanding is going to be more moderate than last year and given our pharma and biotech is our largest customer segment. Obviously, our expectation is that growth will moderate.
I would say largely Q1 was pretty similar to what we thought it would be with bio production being a little bit softer you can say there is a little bit more caution in the smaller biotech customers, but do I think it's like dramatically different.
I don't right and so we're working through that and we have strength in other parts of our mix and that's kind of where we are on all of the details of each of the businesses by customer size, we don't really manage that way.
And on the bio production side as well.
Little bit earlier.
In total represents about 10% of our revenue.
Great. Thank you for that market and then and then maybe as a follow up on an earlier question on instruments, you talked about better visibility. So what is.
You talked a lot about share gains as well. So maybe you could just give us a sense of how you are.
Bucking the trend that the other peers are seeing after a strong couple of years, you're still seeing above corporate average growth others are kind of society more comps. So what's what's driving you know between FDIC L. CMS in any geographies or anything you want to share with us about the <unk>.
<unk> in Europe .
AI business for 2023.
Yes. The team is doing a good job executing right, they're doing a good job on.
Navigating the various supply chain things that happened over the last couple of years.
Our shipments are at a high level, and we're going out and winning business.
The strategy that the team has executed at around <unk>.
Breakthrough innovation.
Customers find money when the products are really relevant I mean, that's been my experience.
Over long periods of time, or if you have great products customers want them. So that's that's been.
A positive dynamic certainly for the instruments business.
What I would say is.
We definitely have challenging comparisons this year, we're off to a good start.
I would expect that growth will moderate a bit in the second half, but but Q3 being a little bit better than we originally expected.
Great. Thank you Mark.
Sure.
Okay.
Okay.
Thank you. Our next question comes from Mac Sykes of Goldman Sachs. Your line is open. Please proceed.
Hi, good morning, Thanks, taking my questions maybe.
Maybe Marc or Stephen just first on sort of regional trends Stephen you outlined some of the growth in the quarter for Europe , and China, but just any incremental color on what you're seeing particularly in China across your business and how you think that.
Those trends play out over the course of this year.
Yeah. So Matt Thanks for the question I'm trying to actually played out pretty much as we expected in the quarter right. So our expectation for Q1 was it was going to be slightly better than Q4, then you would still see some of the impact of the unwind of the zero of Covid policy and that as the year progresses.
It will continue to strengthen from there.
When I look at the first quarter in China. The business was down slightly the core growth actually was high single digits in the quarter. So.
That felt good.
What I would say is we expected stimulus to happen in the first quarter.
It did happen in the first quarter.
So so that played out was good to see the Chinese government released money to the academic institutions, we see that in our instrument.
Business and so that played out well and so I feel good about the outlook, obviously, the geopolitical tensions are real and.
That's an environment that is going to be around I would suspect for a while and we will navigate through it with China should be a good market for us this year.
It has been historically Stephen anything on that.
On the other end markets and I think there's a lot of noise from the pandemic unwind, but when I kind of see through that good growth really across all the main geographies, so nothing really to call out there.
Got it and then just maybe one high level on PPD, you talked about the growth there and obviously, it's been outgrowing peers can we attribute any of that outsized growth to sort of the value proposition that.
Being a part of thermo might represent for your customer base or is it still too early to kind of see that potential growth impact come in and this is just PPD executing.
As it has been.
I think our team is doing a great job of executing right.
Out there serving customers and patients so.
Customers, making a great choice to work they are doing a really good job.
We clearly have a high level of new authorizations because of the combination of what thermal official brings and what PPD brought together right. So there's a lot of customer interest. It shows up in authorizations is showing up in our revenue now that continues to build in.
I am excited next year will be.
Year, three and as a reminder, that's $250 million of revenue that we're assuming from a revenue synergy next year. So so it's really exciting in terms of where it is.
I feel good about the performance of the business and the outlook.
Thank you.
Thanks Pam.
Yeah.
Thank you. Our next question comes from Vijay Kumar of Evercore P. J. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my question and congrats on the steady print here.
Mark My first question for you high level I think your prior guidance for Biopharma end market was slightly north of five corporate above 7% or.
Or thereabouts.
Did that change at all Mark and if they did change, whereas the <unk> coming from between.
<unk> are owned by our processing and could you just remind us what is <unk> exposure to early stage biotech emerging biopharma.
Yes, so vijay.
We gave like 80000 foot directional views on the markets at the end of the at the beginning of the year to set the guidance context.
And when I think about the additional color that Stephen and I have provided today.
It really says that its more business focused which is actually how we manage our company.
Instrument, especially in the diagnosis of a little bit stronger.
Bio production, a little bit softer on primarily in the first half so.
That translates probably into a tiny little changes within the end markets, but nothing that really jumps jumps out as something meaningfully different.
What I would say is in terms of.
The early biotech.
<unk>.
Those are a great customer set that we have done a fantastic job serving.
Yesterday, I was actually talking to roughly 400 members of that community.
<unk> had a customer event here in the greater Boston area and the room was buzzing not because I was speaking, but rather just let me walking in and this is such energy and excitement. So why is that because they're bringing food tours that are going to be such an enormous difference the sciences a nominal so.
There's clearly going to be more caution in that segment, depending on the funding environment, but the science is great passion is extraordinary.
We are the company that people come to two advanced the molecule from a scientific idea to an approved medicine. So.
It's customers that we love, we're going to do well and we obviously generate the vast majority of our revenue from a large pharma and biotech customers and theyre doing well and we've got a strong position there. So hopefully that at least gives you the qualitative context.
Context of how to think about.
That's helpful perspective, Mark and Steve One quick follow up for you our second quarter guidance mid single I think you said second quarter, perhaps below Q1, the comps do get easier for you in <unk>. So maybe just walk us through on Q2 your thought process.
It really isn't.
The main piece is just the timing on the bio production.
Instrumentation and be stronger in Q3 as mark outlined in terms of the change to our guidance assumptions.
Fantastic Thanks, guys.
Thanks PJ. Thanks.
Yeah.
Our next question comes from Don <unk> of Stifel. Your line is open. Please go ahead.
Good morning, guys. Thanks for the questions Mark on the services side I'm just curious how the <unk> business is performing in light of this sort of sustain.
Sustained period of instrument demand that we're seeing here is acceleration.
You can expect there or is.
This is more of a sort of a steady state growth rate at this point.
Yes so.
Dan Thanks for the question when I think about.
<unk>.
Instrument and equipment services business.
What that businesses as a reminder, for our investors as we service our.
Fleets of instruments, we also.
Work at <unk>.
<unk> biotech campuses, where for our customers to.
Manage their inventory.
To those activities help them with some of the things that they need done to run their labs as well as service other people's equipment and instrumentation. So that's what we do.
In general that is a steady nicely growing business, because we've had very significant growth in the volume of our instruments over the last couple of years.
That becomes a trailing tailwind for the business because you have a year or so of warranty. So you don't get any additional revenue effectively but as the warranty rolls off that does actually drive incremental demand for your your hypothesis. There is correct, but thats one that continues to strengthen at this part of the cycle.
Yeah, and then particularly on the on the electron microscopy business, where our customers' customers can't service them themselves. So you can have some customers that can be efficiently service from other kind of lower end instrumentation from electron microscopy standpoint there.
They are really looking for us to step up and help them with that so that continues as mark said that continue.
Tailwind is very significant.
Okay helpful and.
And then Stephen while I have you just on the variables of the equation that have changed slightly underneath an unchanged guide overall is there anything in terms of the evolving expectations for the business units themselves. Marc made mention of some things some businesses that are doing better than others. So just sort of wanted to.
Summing that up when we think about the segment trajectory and just modeling those going forward, yes, I think we outlined the key changes I think one thing that's hard for people to model is kind of where the vaccines and therapies changes I want to think about Q1 that was all in the life Science solutions segment.
Biosciences business as well as by our production so from a year over year change that was I think about an eight percentage point impact on the segment.
That lessens as the head as a headwind when I think about that going forward, but it's still most of that change in that revenue stream is in that segment as I think about the year as a whole.
Significant changing underneath other than we've already identified in terms of the overall guide.
Operator, we have time for one more question. Please.
Of course, our final question today comes from Puneet Suiter of STB Securities Puneet. Your line is open. Please go ahead.
Yeah, Hi, Mark good morning, and congrats here.
Just.
Stick to one and maybe one final question.
Capital deployment 2022 you did two deals pepper Tech earlier in there then binding site wondering.
How the outlook is looking for capital deployment this year.
Maybe talk a little bit about your expectations for what Youre seeing from market participants in both public and private markets and then just briefly on the inflation reduction Act.
Could you outline what youre hearing from your larger pharma customers and wondering if they are changing how they're allocating their R&D going forward. Thank you.
Yes, so puneet thanks for the questions in terms of the IRI.
Customers are working through that in terms of what the implications and does that adjust any of their long term decision, making about what our preferred and what's their clinical trial strategy, we havent seen anything.
Material change at this point I know, there's certainly a lot of dialogue with government I'm trying to make sure those policies.
<unk>.
Do what they were intended to do from.
From a capital deployment perspective.
This is a good environment from my perspective, because you have less competition because of higher interest rates.
Certainly private equity and so forth. So I think there's always competition, but I think thats good because.
That helps you pick and choose and.
And get things are at an appropriate valuation so.
I think we will continue to be active our pipeline is super busy like so I'm very excited about what we're looking at you never know how these things actually play out in reality, but.
There's plenty going on in.
We will be aggressive at the right transactions available to us so.
The benefit of the company performing well on a great track record of creating value through capital deployment. So thanks for the questions I think at this point.
I'll do a quick wrap up so.
Thanks, everyone for joining us on the call today, we're very pleased to deliver a strong quarter.
We are incredibly well positioned to continue to deliver differentiated performance as we continue to create value for all of our stakeholders and built an even brighter future for our company I'm looking forward to updating you on our upcoming Investor day on May 24th in New York City or virtually and as always thank you.
Port of Thermo Fisher scientific.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
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