Thermo Fisher Scientific Inc (TMO) — Q2 2020 Earnings Call Transcript

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 thermofisher.com, under the heading Webcasts and Presentations until July 31, 2020. A copy of the press release of our second quarter 2020 earnings and future expectations is available in the Investors Section of our website under the heading Financial Results. So, before we begin, I will briefly cover our Safe Harbor statement. Various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company's annual report on Form 10-Q for the quarter ended March 28, 2020 under the caption Risk Factors, which is also on file with the Securities and Exchange Commission, and is also available in the Investors section of our website under the heading 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. So, 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'll 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 second quarter 2020 earnings and future expectations, and also in the Investors section of our website under the heading Financial Information. So, with that, I'll turn the call over to Marc.

Thank you, Ken. Good morning, everyone. Thank you for joining us today for our 2020 second quarter call. What an incredible quarter we just had. When we provided our update during our Q1 call, we shared our best thinking on our Q2 expectations in an unprecedented environment. We were ready for the most challenging quarter I've experienced in my 18 years at Thermo Fisher, and we managed to navigate this environment successfully, delivering extraordinary performance. Our teams did an outstanding job supporting our customers in their pandemic response. Their relentless efforts and dedication led to strong results, creating significant COVID-19 tailwinds while minimizing the disruptions caused by global lockdowns. Our Q2 performance showcased the talent within our team, the advantages of our industry-leading scale and capabilities, and the essential role we play in supporting our customers and society. We built on our strengths, and what we achieved in recent months demonstrates that Thermo Fisher can excel even in the toughest circumstances. I will always remember this period as one of our finest moments as a team and as a company. I look forward to discussing many highlights from the quarter with you this morning, starting with our financial results, which surpassed our expectations across the board. As you saw in our press release, our reported revenue increased by 10% year-over-year in Q2 to $6.92 billion. Adjusted operating income grew by 26% to $1.86 billion, and our adjusted operating margin rose to 27%, representing a 350 basis point increase. Lastly, we increased adjusted EPS by 28% to $3.89 per share in the quarter. Our outstanding financial performance in Q2 was due to our rapid scale and our ability to mobilize resources swiftly to help our customers respond to the pandemic globally. Our solutions addressed their needs, generating around $1.3 billion in COVID-related revenue. Our teams also effectively managed the challenges in other areas of the Company, strategically navigating the fluid environment to position ourselves for an even brighter future. Moving on to our performance by end markets, I want to provide some context. The pandemic brought both significant challenges and opportunities within our industry, affecting each of our end markets in different ways. On one side, we faced reduced customer activity due to work disruptions; on the other, we benefited from our COVID-19 response. We effectively managed the Company through this dynamic to deliver an exceptional quarter. In pharmaceuticals and biotechnology, the largest of our four end markets, we had another strong quarter in Q2 with growth of just under 10%. Our bioproduction and pharma services businesses performed particularly well. In the industrial and applied markets, we experienced a decline of just over 10% in Q2, while in academic and government, we saw a decrease of approximately 20%. These two end markets were significantly impacted by pandemic-related business disruptions. In diagnostics and healthcare, although we faced challenges from reduced doctor visits and related testing, we saw an incredible demand for COVID-19 testing, resulting in over 70% growth in Q2. We provided our proprietary diagnostic test kits, instrumentation, viral transport media, and reagents used for laboratory-developed tests. I will discuss our involvement in more detail later. Overall, our teams made remarkable efforts to support our customers and meet the societal challenges of the pandemic while effectively managing the Company to achieve outstanding growth in Q2. Now, moving to business highlights for the quarter. During our Q1 call, I deviated from my usual agenda and spoke about the three guiding principles we are following to navigate these unprecedented times. First, ensuring the safety of our colleagues; second, maintaining business continuity to support our customers in responding to the pandemic and continuing their broader work; and third, managing the Company appropriately to emerge even stronger as an industry leader. Reflecting on Q2, these guiding principles have served us well. We implemented numerous safety protocols at our sites that kept our operations running, allowing us to serve our customers when they needed us most. Focusing on the last guiding principle—managing the Company appropriately—entails a relentless focus on executing a long-term growth strategy while successfully addressing short-term challenges and creating new opportunities. During this time, we have been strategically managing costs while confidently investing to prepare the business for long-term share growth and accelerated expansion. This includes investing in key R&D programs, even in areas where demand is temporarily impacted. For instance, we had a strong presence at the virtual American Society of Mass Spectrometry conference in June, where we launched two new Orbitrap Exploris instruments aimed at advancing biotherapeutic research. These types of investments throughout our businesses will position us well to capture opportunities as customer activity returns to more normal levels. The second quarter reinforced why we are recognized as a global leader in serving science. I have been truly impressed with the outreach we have received from top government officials around the world, leaders of healthcare institutions, and executives from major companies. They are all facing challenges that have never been experienced before, whether it’s about workplace safety or managing the high volume of testing to understand the virus, identify therapies, and accelerate vaccine development. We are well positioned to help them meet these challenges because we are maintaining our focus on executing our growth strategy through continuous innovation, leveraging our scale, and enhancing our unique customer value proposition. We are engaged in nearly every aspect of the pandemic response—from providing research tools to personal protective equipment, diagnostics, and supporting the development and production of therapies and vaccines. Our mission is to empower our customers to make the world healthier, cleaner, and safer, highlighting the critical role we play. This morning, I will focus on two key aspects of our involvement: diagnostic testing and the development and manufacturing of vaccines and therapeutics. First, regarding testing, we had an exceptional quarter due to our role in COVID-19 diagnostics. We established a major business line in just a few months and have continued to expand our capabilities. To highlight a few points, our industry-leading PCR franchise has played a crucial role for our customers in providing lab-developed tests. Our reagents and consumables are essential for many COVID-19 tests in use globally, and our role expanded significantly when we received regulatory approvals in March for our TaqPath COVID-19 combo kit. This PCR-based workflow is widely used in 50 countries and is regarded as the gold standard due to its high accuracy. In April, we focused on ramping up manufacturing while assisting our customers in preparing their labs for the increased testing volume. Our teams rapidly scaled production and ended the quarter with the capacity to produce over 10 million tests per week, if necessary. Our field services and application specialists excelled at supporting our customers in their transition to COVID-19 testing. In May, we received an expanded emergency use authorization from the U.S. FDA, which allowed more of our PCR instruments to run these tests in response to high demand, providing clients with greater options and flexibility in their testing workflows. The overwhelming need for testing created pressure on the industry’s supply of sample collection materials such as swabs, vials, and media. The U.S. government sought our assistance, and recognizing the challenge, we collaborated with them to significantly increase production of specialized viral transport media to meet this need. This media ensures the accuracy of COVID-19 test results and must be manufactured in a sterile environment. We designed and built a new factory in Lenexa, Kansas, within six weeks, producing our first viral transport media vials on July 4, the target date we set in our ambitious project plan. This achievement was thrilling for our teams. Whether in Lenexa or through other COVID-related ramp-up projects, our industry-leading scale and the strength of our PPI business system were critical in accomplishing these milestones efficiently while meeting all regulatory standards. Looking ahead, in addition to our PCR-based TaqPath kit that confirms active infections, we are planning to launch additional tests. We are developing a serological test to determine if a patient has been exposed to the virus and a respiratory panel to help identify whether a person has COVID-19 or another respiratory illness, with plans to roll out this panel before flu season. We are navigating the regulatory processes to make both tests available globally. Another significant aspect of our efforts is our work supporting pharma and biotech customers to launch COVID-19 therapeutics and vaccines. We lead the development and production of vaccines, antivirals, and other therapies through our pharma services division, currently involved in over 200 COVID-related projects worldwide. We are leveraging our global network to aid governments and customers in expediting these initiatives, including those in human clinical trials, by offering critical capacity and expertise to deliver new products to market and subsequently to patients. For instance, we are significantly contributing to the U.S. government’s pandemic countermeasure program, managed by BARDA. We received funding to enhance our manufacturing capacity for sterile injectables that can be used for high volumes of vaccine doses. Additionally, we are expanding capacity for customers developing COVID-19 therapies, including promising antivirals, to expedite timelines in preparation for an anticipated surge in demand. While we continue to increase support for pandemic response, we are also expanding our pharma services capacity globally to ensure the timely delivery of essential medicines for treating various serious health conditions. I want to highlight two examples from the quarter. The first is the new site we are establishing in Plainville, Massachusetts, which will essentially double our viral vector manufacturing capacity. This is part of our series of expansions in the U.S. to meet the need for gene therapy development and production. The second example is our strategic partnership with CSL, the global biotech company, to meet the high demand for biologics. We will support CSL's product portfolio by utilizing our entire network, including drug development, production, packaging, and clinical trials. Under a long-term agreement, we will also take over CSL's state-of-the-art biologics facility in Lengnau, Switzerland, which is currently under construction and expected to be completed in 2021. This site will incorporate both high-volume stainless steel and highly flexible single-use bioproduction technologies, and we plan to expand its use to support multiple customers. All these strategic investments will ensure we deliver on our value proposition for pharma and biotech clients, combining expertise, flexibility, and scale. Now, regarding capital deployment, I want to briefly discuss our pending acquisition of Qiagen. As stated in our press release last Thursday, we have renegotiated certain aspects of our acquisition agreement. Given the significant changes in industry dynamics since our initial announcement in early March, we revised our offer. Qiagen is making a meaningful contribution to the global pandemic response, and our new all-cash offer of €43 per share reflects the business' full and fair value in the current environment while generating solid returns for both sets of shareholders. We are enthusiastic about this transaction and look forward to integrating our complementary offerings to help customers combat the ongoing pandemic and address other infectious diseases and health needs. For our shareholders, we expect favorable returns and believe the accretion will be slightly more advantageous than what we communicated in early March. Although much work remains in the upcoming months, we are on track with the regulatory process and anticipate completing the transaction in the first half of 2021. Qiagen aligns well with our Company, and we’re excited about the new opportunities that will arise following the close. Now, a quick update on guidance. As you know, we withdrew our 2020 annual guidance in early April due to uncertainties surrounding the pandemic and its potential effects on our customers. Now, late in July, we still face considerable uncertainty. Similar to Q1, while we aren’t prepared to reinstate annual guidance, we want to provide clarity on our expectations for the current quarter. Stephen will detail the specifics in his remarks, including organic growth expectations and key assumptions for Q3. Before passing the call to Stephen, let me share a few key takeaways. We are playing a vital role in helping our customers respond to the pandemic and making a significant societal impact. Our teams are managing the business effectively during these tumultuous times, mitigating challenges and creating new opportunities. We are actively executing our growth strategy to position Thermo Fisher for a brighter future. With that, I will now hand the call over to our CFO, Stephen Williamson.

Thanks, Marc, and good morning, everyone. I'll begin by framing our Q2 organic growth performance. As Marc mentioned, we had an outstanding quarter and we grew organically 11%. I think, it is best to break the growth into two elements. The first is the scale of the COVID-19-related revenue tailwinds that we generated during the quarter; and the second is the performance of the rest of our business, including share gain and market growth, as well as the headwinds from COVID-19 caused by disruptions to customer activity. We estimate that the tailwinds from COVID-19 were approximately $1.3 billion or 21% of growth in the quarter, largely driven by testing-related kits and instruments. The tailwinds were significantly stronger than we originally expected, driven by the increased scale and duration of the pandemic, and the speed at which we were able to ramp up our response and extend our relevant offerings to our customers. The rest of the business, excluding the COVID-19 tailwinds, performed just about at the high end of our initial range of expectations for the quarter. The team executed really well to serve all of our customers throughout Q2. The result is that we delivered outstanding top-line growth in the quarter. We are able to manage the Company very effectively during a period of significant economic disruption and translate that top line growth into excellent bottom line growth. We appropriately managed the businesses with the strongest headwinds while maximizing the tailwind opportunities and continuing to invest for a really bright future. All of this enabled us to deliver 26% growth in adjusted operating income and 28% growth in adjusted earnings per share, an excellent quarter overall. I'll now give you some more details of the second quarter results for the total Company, then provide some color on our four segments and conclude with some comments around guidance. Starting with our Q2 earnings results. As you saw in our press release, we grew adjusted EPS 28% to $3.89; GAAP EPS in the quarter was $2.90, up 5% from Q2 last year. On the top line, our Q2 reported revenue grew 10% year-over-year. The components of our Q2 reported revenue increase included 11% organic growth and the foreign exchange headwind of approximately 1%. Turning to our growth by geography during the quarter. North America grew 10%, Europe grew in the high teens, Asia Pacific was flat with China down approximately 15%, and the Rest of the World grew 50%. Looking at our operational performance. Q2 adjusted operating income increased 26% and adjusted operating margin was 27%, 350 basis points higher than Q2 last year. We saw very strong volume contributions, positive business mix and continued productivity improvements driven by our PPI business system, including appropriate cost controls, given the headwinds from COVID-19. During the quarter, we continued to make strategic investments in the businesses. This was the last quarter of impact from our divestiture of the Anatomical Pathology business, which we sold at the end of Q2 2019. The divestiture was approximately $0.02 diluted in the quarter and was a year-over-year headwind of approximately $50 million on revenue, $12 million on just the adjusted operating income and a negligible impact on adjusted operating margin. Moving on to the details of the P&L. Total Company adjusted gross margin in the quarter came in at 50.6%, up 390 basis points from Q2 of the prior year. Gross margin expansion was driven by the same factors as our adjusted operating margin expansion. Adjusted SG&A in the quarter was 19.9% of revenue, an increase of 50 basis points versus Q2 2019. Total R&D expense came in at 3.8% of revenue, and R&D as a percent of our manufacturing revenue in Q2 was 5.6%. Looking at our results below the line for the quarter. Our net interest expense was $129 million, $8 million higher than Q2 last year. Adjusted other income and expense was net income in the quarter of $16 million, similar to Q2 2019. Our adjusted tax rate in the quarter was 11.5%, up 50 basis points versus Q2 last year. And average diluted shares were 398 million in Q2, 5 million lower year-over-year driven by the net impact of share repurchases and option dilution. Turning to cash flow and the balance sheet. Cash flow from continuing operations was very strong in the first half of the year, totaling $2.2 billion and free cash flow was $1.7 billion after deducting net capital expenditures of approximately $500 million. We returned approximately $85 million to shareholders through dividends in the quarter. This reflects the 16% dividend increase we announced in February. We ended the quarter with approximately $5.8 billion in cash and $21.3 billion of total debt as we prepare for the financing of the Qiagen acquisition. During the quarter, we raised €1.2 billion through the issuance of euro-denominated senior notes. Our leverage ratio at the end of the quarter was 3.1 times gross debt to adjusted EBITDA and 2.2 times on a net debt basis. And wrapping up my comments on our total Company performance. Adjusted ROIC was 12.5%, up 110 basis points from Q2 last year, as we continue to generate very strong returns. So, now, I’ll provide some color on the performance of our four business segments. I thought it’d be helpful to start with a couple of framing comments around the impact of segment results. The complexity here shows the breadth of our response to meet the needs of our customers at this critical time. From a revenue standpoint in Q2, approximately three quarters of the COVID-19 tailwinds are reflected in Life Sciences Solutions, that includes testing-related kits, instruments and sample preparations. This is recognized in our genetic sciences and biosciences businesses. The Specialty Diagnostics segments include the revenue and the clinical diagnostics business from the molecular controls that go into testing kits. We also recognized sales of viral transport media and the microbiology business, as well as sales of tests and PPE by the healthcare market channel. The Laboratory Products and Services segment also includes revenue from sales of PPE recorded in the research and taking market channels. In addition, this segment includes testing workflow-related plastics made by our lab products business, and vaccine and therapy development and production support from our pharma services business. From a margin standpoint, the impact of COVID-19 was varied across the segments. The impact depended on the mix of revenue tailwinds and headwinds, as well as the different levels of pull-through on that revenue mix. Across the Company, we used our PPI business system to manage cost appropriately given the uncertain environment, and that had a positive impact in each segment. At the same time, during the quarter, we continued to make strategic investments in our businesses, even in those where COVID-19 was a net headwind. This included investments in our colleagues in terms of incentive compensation and recognition, as well as commercial, R&D and production capability investments. We were able to do this given the strength of the Company's overall performance. Those investments do not necessarily match with the COVID-19-related revenue tailwinds and headwinds in each segment, so that does skew some of the reported margins in the segments. So, a lot of moving parts from a segment standpoint but all reflective of very active management of the Company, allowing us to navigate successfully through unprecedented times and positioning us really well for the future. So, moving on to the segment detail, starting with Life Sciences Solutions. In Q2, reported revenue in this segment increased 52% and organic revenue growth was 55%, driven by exceptionally strong growth in our genetic sciences business as well as continued strong growth in bioproduction and biosciences businesses. Q2 adjusted operating income in Life Sciences Solutions increased 103% and adjusted operating margin was 47.4%, up 12 percentage points year-over-year. In the quarter, we drove very strong volume pull-through and productivity as positive business mix and continued to make significant strategic investments across the segment. The Analytical Instruments segment reported a revenue decrease of 21% in Q2 and organic revenue decline of 20%. COVID-19 disruption to our customers continues to have a significant impact to the business in this segment. Q2 adjusted operating income in Analytical Instruments decreased 53% and adjusted operating margin was 12.9%, down 870 basis points year-over-year. In the quarter, we saw a very strong productivity driven by our PPI activities, which was more than offset by volume headwinds, business mix and the strategic investments that I mentioned earlier. Turning to the Specialty Diagnostics segments. As a reminder, this is the segment that previously included the anatomical pathology business, which we sold in June last year. In Q2, reported revenue increased by 5%, organic revenue growth was 12%. Some of the businesses in this segment were significantly impacted by COVID-19-related headwinds in the quarter. This was as a result of decrease in doctor visits and related testing. Most impacted were the immunodiagnostics and transplant diagnostics businesses. That said, this segment also saw a significant COVID-19-related tailwinds in the quarter. We saw very strong growth in our healthcare market channel and our clinical diagnostics and microbiology businesses. Adjusted operating income decreased 12%, which included a 5% headwind from the divestiture. Adjusted operating margin was 21.6%, down 410 basis points from the prior year. In the quarter, we saw a strong volume leverage in productivity. However, this was more than offset by business mix and strategic investments. Finally, in Laboratory Products and Services segments, Q2 reported revenue increased 6% and organic growth was 5%. In the quarter, growth within the segment was led by our pharma services. Adjusted operating income in the segment for Q2 decreased 19% and adjusted operating margin was 10.1%, which was lower than the prior year by 300 basis points. In the quarter, we saw a strong productivity and volume leverage. So, this was more than offset by unfavorable business mix and the strategic investments that I mentioned earlier. Turning to guidance. The COVID-19 pandemic and related customer impact continues to evolve. And as a result, we're still not in a position to provide full year detailed guidance. However, as we did last quarter, I will provide you with some color on how we're viewing organic growth for the coming quarter as well as certain full year 2020 assumptions to help you in your modeling. I'll start with organic growth. Our current estimate of the most likely outcome for Q3 organic growth is approximately 15%. There are potential outcomes, both above and below the 15% that could play out in Q3. I will outline the factors to consider when thinking about our potential growth for the coming quarter. As was the case last quarter, there are two key variables that would drive our growth in Q3. The first is the scale of the COVID-19-related revenue tailwinds; the second is the headwind caused by COVID-19-related disruption to our customers’ activity. Regarding the revenue tailwinds, clearly there is a wide range of outcomes here. But, our current estimate of the most likely outcome for Q3 is approximately $1.1 billion of revenue, which would translate to just under 18% of growth. The volume of COVID-19 testing undertaken by our customers will be the most significant factor, determining the extent of our revenue tailwinds in Q3. Regarding the rest of our revenue growth, which is a combination of the COVID-19-related headwinds, underlying market growth, and our share gain activity, we estimate this will be in the range of approximately flat to negative 5% in Q3. This compares to negative 10% in Q2. The improvement quarter-over-quarter is driven by an assumed gradual ramp in customer activity as they return more fully to the workplace. It's important to note that the range does not anticipate a return to the lockdowns seen at the height of the pandemic. So, when you put all this together, as I mentioned our current best estimate of Q3 organic growth is approximately 15%. Given the fluidity of the situation, there are potential outcomes, both above and below the 15% that could play out in Q3 with testing demand being the most significant swing factor. I will now move on to an update of some of the modeling elements for the full year. With regards to FX, in 2020, we’re now assuming that this is a year-over-year headwind on revenue of $200 million or just under 1%. There's $0.06 of dilution from the sale of the Anatomical Pathology business, which reflects revenue and operating income headwinds of $105 million and $30 million, respectively. We’re continuing to assume that the acquisitions we completed in 2019 will contribute approximately $160 million to our reported revenue growth in 2020. As a reminder, on the calendar, it was one less day in Q1 and there will be two extra days in Q4 this year. We continue to expect net interest cost for the year to be approximately $460 million. This includes the Qiagen acquisition pre-funding completed to-date. In 2020, that equates to a cost of $90 million or $0.17 to adjusted earnings per share. We will continue to look at opportunities to prefund more of the transaction during the remainder of 2020. We continue to assume that adjusted other net income will be about $70 million for the year. And with regards to net capital expenditures, we now expect to be in the range of $1.3 billion to $1.4 billion. This includes approximately $300 million of capital expenditure to support our COVID-19 response. In terms of capital deployment, we completed $1.5 billion of share buybacks in Q1 and are assuming no further buybacks in the remainder of 2020. We estimate that full year average diluted share count will be between 398 million and 400 million shares. And we continue to assume that we’ll return approximately $350 million for capital to shareholders this year through dividends. So to wrap up, as you can see from our outstanding performance in Q2, we continue to manage the Company extremely effectively in a very dynamic environment.

With that I'll turn the call back over to Ken.

Hey, thanks. Congrats on the quarter. I appreciate you guys quantifying the COVID tailwinds. I think, as we look a little bit further out in securities market, how you think about the durability on the COVID testing side? You noted the PCR test is now approved and other instruments. You talked about the respiratory panel. So, can you talk a little bit about is that a move forward more automated systems, rolling it into the syndromic panel? And do you need to build out more of a panel for example, into the physician office market? Thanks.

Thank you for the question, Tycho. Looking ahead at the impact of COVID, the key factor this year will be related to testing demand. As we move into 2021, we'll see a greater influence from our pharma services business as we support therapy and vaccine development. Currently, we're witnessing an increase in our PCR platform's capacity globally. We expect strong demand to persist in Q3. While much of the attention is on U.S. trends, demand is increasing domestically, though it's softer in other regions. In Europe, we experienced lower demand in Q2, and while this could change, we are anticipating revenues in Q3 to be fairly consistent with what we saw in Q2.

Okay. And then, two follow-ups on Patheon. You had the press release out the other day quantifying 200 programs you're involved with. Can you just help us think about the trial delay headwinds versus the tailwinds on vaccine development for the next couple of quarters? How we should think about the trajectory for Patheon? And then, separately on China down 15%, was that in line with your expectations? Obviously, you've been on the path to recovery. So, that was a little bit worse than these models? Thanks.

Yes. So, in terms of the pharma services activity, we're very involved with a very large number of programs. And when I look at sort of the headwinds from the pandemic on clinical trials, outside of the COVID, there was some, but not meaningful. And when I look to China at a high level, we saw demand build throughout the quarter, in terms of where we were. And the way that I would think about is, China was very, very conservative on the opening up of academic institutions. So, that actually was a little bit more muted than what we would have expected back in April. But it's picking up in Q3. It looks to be more encouraging. Thank you, Tycho.

Could you elaborate on the potential impact of the vaccine opportunity on the overall life science industry? I recognize that diagnostic revenues may decline at some point, and we’ve heard estimates of the industry being worth several billion dollars. Given the significant scale of the vaccine opportunity we are considering, might it eventually surpass the diagnostic market?

When I think about the vaccine opportunity, what's a little bit hard to quantify is what's the vaccine strategy going to be used around the world? So, I'm talking more about what's the total amount of vaccine going to be produced? Are we thinking about the world getting high-risk population, are we thinking about the just the countries that can afford a vaccine, or are we thinking about 7 billion people ultimately getting a vaccine? And that leads to a massively wide range of what the outcomes are. What I would expect, should there be a successful vaccine, is that, the role of a company like Thermo Fisher and certainly the CDMO industry more generally will play a significant role, based on the fact that the ramp-up under every scenario would be very dramatic. We've been very active in those projects and many of the high-profile projects that you read about. We are either providing raw materials from our bioproduction or biosciences business to having roles in the production ultimately of what I'll call drug substance or vaccine substance in certain cases, and certainly a very meaningful role in the sterile fill-finish with a final packaging form that a vaccine would be administered. So, we expect if a vaccine is successful that it will be a meaningful tailwind over time with revenue that we've already gotten a little bit of and ramp slowly through the balance of this year and would be more meaningful in 2021-2022 should the vaccine be successful.

Understood. And then, one on margin in the guidance for the back half. I think you guys mentioned, perhaps the organization was prepped up for a pretty drastic outcome. So, clearly, you had outsized volume benefits. So, when you think about the incremental margins for back half, should we think about some of that spend coming back perhaps in the incremental margins, maybe tempering down a little bit? And I'm curious why perhaps we don't have an EPS floor, even if we assume Q4 to be all of the diagnostics tailwinds. So, it still seems the EPS projections here should be pretty strong. Thank you.

Yes. So, Vijay, I'll take that one. So, when you think about Q2, 11% organic growth drove 28% growth in adjusted EPS. So, it's a very strong performance. So you think about Q3, and most likely outcome based on what we’re thinking right now is 15% organic growth and that would drive very strong adjusted EPS as well. I think about Q3 to Q2, kind of the change in the mix of the business in the 15% versus the 11%. It's likely to be slightly less favorable business mix within that revenue. Obviously, this is a scenario where that mix could play out to better, but I think that's a good place, a good way to think about modeling for Q3.

And then, on the EPS floor perhaps, even if we assume all of diagnostics just went away for Q4, I feel like EPS should be certainly in the double-digit range for the year, perhaps in the mid-teens. Is that a reasonable assumption now for the year?

We decided not to provide full-year guidance because the potential mix and range of growth in each segment could result in an excessively broad estimate. As we gain more clarity about the future, particularly in Q4, there are various scenarios we could face. There could be a very optimistic outcome, or if the current situation worsens, a more pessimistic one. We're considering the right external approach as we move forward. We're confident about our plans for Q3, and our performance in Q2 indicates that we are set to achieve an excellent financial year. We will navigate whatever challenges come our way and seize great opportunities to enhance our market share, drive revenue growth, and deliver exceptional earnings.

Hi. Good morning, everyone. I have a couple of questions. First, I appreciate the insights on Q3. Most of the questions I've been receiving from investors are about the COVID testing tailwinds moving into 2021. Qiagen has mentioned double-digit growth in their business, but there are indications of a decline in 2022 numbers based on the documents filed this morning. Could you discuss how we approach this? As we model for 2021, considering testing will decrease while vaccine production increases, that's where most of my inquiries are coming from.

Thank you for the question, Derik. Let me explain our plans. Predicting the future is challenging. It feels like we're living day by day right now. Based on what we know, we expect to be dealing with the pandemic for several quarters. It will take time for a vaccine to become available, if it proves effective. Although therapies are progressing, they will also require time, and the virus is still spreading in many countries. This situation won’t resolve quickly. Therefore, in 2021, we anticipate that we’ll face disruptions related to the pandemic, alongside society's ongoing response to it. We believe we are in an excellent position due to our quality, scalable manufacturing capabilities, extensive installed base, and strong customer relationships. We are optimistic about playing a significant role in 2021 regarding the testing volumes our customers will need. The exact numbers will vary widely, but our manufacturing teams have excelled, and the effectiveness of our PPI business system has been impressive. I previously mentioned that by the end of April, we aimed to produce 10 million kits a week, and we have achieved that manufacturing capacity by the end of the quarter. This doesn’t necessarily mean we are selling that many since demand can fluctuate, but we are confident in our ability to scale and respond to the necessary demands.

Great. Could you provide more insight into the academic outlook? A significant portion of your business is connected to academic institutions and colleges. There appears to be considerable uncertainty regarding their reopening plans. Can you explain the situation for academic and government sectors in the U.S., Europe, and APAC? It would be helpful to understand your customers' plans and the status of your labs, specifically how many are still closed. This is a key question we're receiving from investors.

Yes. In the academic and government sectors, there were significant disruptions worldwide at the start of the pandemic, leading to a quick decline in activity. In Western Europe, there has been a steady improvement throughout the quarter. The U.S. is slightly behind, experiencing the pandemic a bit later than Europe, but is on a similar upward trend with activity increasing. China is particularly noteworthy, as most universities remained closed for much of the quarter. While activity is beginning to increase there, it is happening at a slower pace than expected. Consequently, customers in this sector have faced challenges in receiving instruments as easily as usual. As academic and government customers gradually reopen, we anticipate that the demand for instruments will also begin to rise.

Thank you. Good morning.

Good morning.

Marc, I was curious to get your take on how much the tailwind and share gains that you're seeing in the business right now. Do you think we're going to end up proving to be more permanent over time versus kind of the outsized benefit you're seeing right now? And I know it's difficult to provide a three-year view when we don't have a one year view. But just given all the moving parts, how do you think your position versus the 5% to 7% target you laid out a year ago?

Yes. So Jack, when the team’s view, right, when we were sitting in February and looking at the situation in China, the team's view was having a very clear set of guiding principles, right, which was the obvious. Keep your colleagues safe, support your customers activity, and the third is manage the Company appropriately in this environment. And we came with a very clear view of what that meant, which is, of course, manage costs tightly because there's going to be disruption to demand, but be very aggressive to position the Company for a brighter future to solidify and strengthen and hopefully even increase the growth outlook of the Company for the longer term. Normal for us is 5% to 7% growth, and we've been taking actions to create an even brighter future. So, we need to get higher in that range when you're in a normal environment or above that range. And we have no idea now. But I know we're taking the actions to strengthen the long-term outlook of the Company. And because we've been able to respond so aggressively to help our customers navigate the pandemic, we're obviously in the midst of an incredibly strong year as well. So, at this point, obviously we had about 7% organic growth when you look at the first half, so at the high end of our normal range. And obviously with the Q3, this could be a very significant year as well in terms of performance.

Okay. And then, I wanted to also follow up on Qiagen. Clearly unprecedented times, so I can appreciate the justification for the price increase. There have been some questions around whether €43 is enough. So, I was just hoping you could comment on your appetite or lack thereof to raise the price further? And just walk us through what happens next in the tender process.

Yes. So, Jack, thanks for the question. As everybody here knows, we're extraordinarily disciplined in terms of our capital deployment strategy and ensuring that where we deploy our capital, we're going to strengthen the Company strategically and generate strong returns for our shareholders. The dynamics are obviously, as you said, very different, from the beginning of March to now. And Qiagen has done a good job in terms of stepping up and making a real impact on society from a pandemic response. And we thought our way through that and had very good negotiations with Qiagen and came to an agreement at the €43. And we believe that's the full and fair value. In terms of our view is, we were very clear in the process, and we disclosed that this morning, I think early hours because of the German regulations. That is our best and final offer. And the process is very straightforward. The tender I believe ends around August 10th. And if we clear the 66.67% threshold, then the tender is complete, so mechanism and the deal proceeds. And if we don't get to 66.67%, the deal is over, because there's a cooling off period in Germany. So, there is no revised offer. That is what it is. And, we think it's very appropriate for both sets of shareholders. And we look forward to completing the tender process and then moving forward through the regulatory process and welcoming over 5,000 new colleagues next year into the Company.

Hey. Good morning. Thanks for taking my questions. And again, thanks to the Thermo team for all your efforts over the past several months. Just in terms of my first question, what end market expectations are embedded into your Q3 financial targets, excluding COVID-19 tailwinds?

It's not a way that we manage the business quite, Doug. Let me try to get you an answer more about activity levels in the non-COVID, and make some qualitative views around it. So, for Q2 Doug, the non-COVID related businesses declined 10%, right, which was just above what the better end of our expectations that we gave in the guidance process, right? So, that's where it ended. June was down about 5%. So, you saw, April, May were worse. June was about negative five. The range of outcomes that Stephen articulated in the outlook for Q3 was a range of negative 5 to flat. The negative 5 would assume that what we saw in June continues throughout the quarter. The flat basically is a steady improvement throughout the quarter. And when you think about that in normal quarter for us is 5% to 7% growth on that business, right? So, even at flat, you're still 5 to 7 points below what we would have experienced for the last five, seven years, right? So, it's a steady increase in activity is what is assumed. And when you look at that on the non-COVID-related businesses, pharma biotech has continued to be the least impacted and would likely be the least impacted, and academic and government, industrial and applied, and the healthcare, diagnostics, they all should start to see some level of step up throughout the quarter is the way I would think about it.

Okay. That's super helpful. And building off of one thing you touched on there, Marc. I don't think, in your prepared remarks you commented on instrument versus consumable revenue growth in the quarter or the exit rates. Would you be willing to share any details on those data?

Yes. That was very skewed by the tailwinds. When you think about tailwinds at large, they're going to be consumables right now. Excluding that, I clearly instrument purchases were at a lower level of growth than consumables and services. Customer activity has been relatively low. And we expect that to pick up in the second half of the year.

Okay. And one last one, really building off of some earlier questions, but trying to get a little more granular. Glaxo has talked about selling vaccines at about $10 per unit, which in their words is around cost. Pfizer this morning just agreed to sell to the U.S. at $19.50 per unit for their vaccine, which is, I think just a smidge above cost. Is there a rule of thumb we can use on what percentage of unit pricing would typically be up for grabs for Thermo, whether it's on a per unit vaccine basis or using services? I mean, just using that 10 to 19.50 range, how much of that would normally end up going to Thermo as a component of cost?

It's really quite different to manage. Let me explain it better, which is why I can't provide a specific answer. If you consider the vaccine, there are two ways it can be administered. One is a single unit, meaning one vial for one vaccine dose; the other involves a vial where you use a syringe to extract the vaccine, resulting in 10 or 20 doses from a single vial. This variation will lead to significantly different revenue for our contract manufacturing organization depending on the filling strategy employed by the companies. Therefore, it's challenging to establish a general rule until we know the specific dosage form and the technology used in the vaccine.

Yes. Hi. Thanks Marc. And congrats on the quarter and impressive quarter here for sure. And thanks for your commitment to both, research and improving the lives here with COVID testing and commitment to vaccines. So, first one, if I could ask on capital deployment, given the COVID benefits you're seeing on testing and the growth you expect to see from vaccines, what is your thinking, long-term thinking on capital deployment, given that the vaccines scenario is actually multiyear, as you pointed out? Are you thinking about capital deployment any differently than before?

So, Puneet, thanks for the question. So, from a capital deployment strategy, I don't think it really changes too much. What I would say is, over the longer period of time, it's going to be a blend return of capital and the majority being redeployed into M&A in the business. If you think about the past quarter or March forward, obviously a large acquisition in Qiagen, also a nice bolt-on acquisition, which we announced and will close next year in CSL’s biologics facility. And I think, you'll see us do a cadence of smaller and larger deals over time with a steady return of capital. So, our business is performing at a high level. Our expectations for the future is that it's going to perform at a high level. And that's going to give us very substantial cash flow to be able to redeploy.

Yes. And we’ve also increased that CapEx significantly to address capacity and capability enhancements for the COVID-19 response as well.

Okay. That's very helpful. And my second question is on, you have a unique vantage point, Marc and a global perspective, given Thermo's position and the scale and the speed that you pointed out to. As you look at research funding across the globe, there's an expectation here that the research funding is likely to grow. Magnitude is unknown at this point. But, could you give us a sense of that, given what you're seeing, given the magnitude of this crisis? What does this mean for the next five years across the life science tools industry? And more importantly for Thermo, when it relates to academic funding and research funding across the globe?

So, Puneet, thanks for the question. So, as we talk to governments and we talk to our customers and we use our experience, life science tools and diagnostics and our pharma service capabilities, it's a fantastic industry with great market growth characteristics you see in the industry perform well in this environment. My expectation is when the dust settles, the commitment to life science research, healthcare infrastructure systems is going to be even better over time than what the strong period that we enjoyed. And we're seeing some of the early excitement of the importance of the work. And so, I'm very bullish about what the long-term benefit will be. Obviously, there's going to be ebbs and flows because of the economy and affordability and those things. But, if I think the long-term perspective, I'm very optimistic for what our industry holds and for the strong competitive position that we’ve built to serve in that industry.

Great, thank you.

Hi. Good morning. Thanks for letting me run the anchor leg here. I have a two-parter for Marc as it relates to a couple of subcategories within testing. And then, I have one on the financials for Stephen. Marc, there are a couple of potential drivers of testing prospectively for you and for the space broadly. One is screening. We've heard, just for example, a number of universities talk about reasonably high frequency testing of asymptomatic people on campuses. I wonder if you could speak to what extent asymptomatic screening is or is not in your plan, and whether you think there could be a material tailwind? And then, the second part of my testing question actually relates to serology. Serology did kind of quite as well as we hoped initially. It just doesn't seem to be finding as many instances as we had hoped for in the antibody signal of immunity. Can you speak to how you think that market evolves? Are there ways we could get the yields higher?

Yes. So, Steve, thanks for the question. In terms of screening or asymptomatic patients, what we would say is that's a life type activity, back to work, back to school. We see the interest level dramatically increasing with many different use cases. And we expect to play a role in several of those. And some of that is embedded in the demand that is in Q3. And my take is that the methodology on asymptomatic screening, not the platform, but things like pooling and so forth could facilitate some of that ramp up over time as a different strategy. So, I think that will create a tailwind over time to support the activity while testing its relevant. On serology, we're developing our assay. We're taking it through the regulatory process. As the medical community better understands the immune response or what it means, serological testing becomes more relevant. And so right now, there's capacity out there. We're bringing out a high quality tests. And as customers need it, we'll be able to supply.

You do have one question for Stephen quickly. We should wrap.

One question just real quick for Stephen. Can you put any commentary around cost savings that you've identified from things like, lower T&E or other expenses from being virtual that you think are sustainable? Thanks so much.

Yes. So clearly, we control costs very effectively and we're all learning to live in a different environment. And T&E expenses are going to be dramatically lower, I think for the long-term, since that’s how we are thinking about managing the Company and taking advantage of the technologies that we've invested in over time. So, it’s my guess is probably a couple of hundred million dollars over time that you get to that level of saving of ongoing costs. So, we're appropriately managing the Company both, short-term and I think the long-term opportunities.

Thank you for joining us today. We are pleased to have delivered an exceptional quarter during a challenging time. We take pride in our role in supporting our customers and society. We will continue to manage the Company effectively to emerge from this period as a stronger industry leader. We look forward to updating you on our progress, and I hope you stay safe. Thank you for your ongoing support of Thermo Fisher Scientific. Thank you, everyone.