Thermo Fisher Scientific Inc (TMO) — Q1 2022 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 Investor Section of our website thermofisher.com under the heading news and events until May 13, 2022. A copy of the press release of our first quarter 2022 earnings is available in the investor section of our website under the heading financials. So, before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are on file with the SEC and available in the investor 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 subsequent date. 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 and full-year 2022 earnings and also in the investor section of our website under the heading financials. So, with that, I'll now turn the call over to Marc.

Thank you, Raf. Good morning, everyone. And thanks for joining us today for our first quarter call. As you saw in our press release, we had a very strong start to the year. We delivered another quarter of excellent financial performance. Our core business is performing very well. That strength is broad-based, including PPD, our clinical research business, where the integration is going smoothly and we're even more excited about the opportunities we have to further enable the success of our pharma and biotech customers. As I reflect on the quarter, I'm very pleased with the team's great execution and the share gain we saw across our business. Our continued success is the result of our proven growth strategy and our PPI business system, which continues to be a differentiator for us. It enables our team to further strengthen our company by finding a better way every day. When I think about the macro events, much has changed since the start of the year: the war in Ukraine, rising inflation, COVID lockdowns in China. What hasn't changed is our ability to navigate a dynamic landscape and deliver exceptional performance. You'll see that in our first quarter results and outlook for the year. So let me recap the financials. Our revenue in the quarter grew 19% year-over-year to $11.82 billion. Our adjusted operating income was $3.45 billion. Our adjusted operating margin in the first quarter was 29.2%. And we delivered another quarter of strong adjusted EPS performance, achieving $7.25 per share. Let me now give you some color on the performance by our end markets. Building on the momentum from 2021, we delivered excellent performance to start the year. Our outstanding results this quarter were due to our team’s strong execution, good market conditions, and share gain. We also had meaningful contributions from COVID-19 testing as we continue to support our customers’ needs. Starting with pharma and biotech, we had another outstanding quarter of performance delivering growth in the mid-teens. We had broad base strength in this end market, as our customers value our trusted partner status. In the academic and government market, we grew in the mid-single digits during the quarter, with good growth in biosciences, electron microscopy, and our research and safety market channel. Turning to industrial and applied, we grew in the mid-teens during the quarter. We saw strong growth in all of our analytical instrument businesses: electron microscopy, chromatography, mass spectrometry, and chemical analysis, as well as in the research and safety market channel. And finally, in diagnostics and healthcare, Q1 revenue declined in the mid-teens. In the core business, we saw strong growth in clinical diagnostics, transplant diagnostics, and the healthcare market channel. During the quarter, the team executed really well to support COVID-19 testing needs. Let me now provide an update on the progress we made in Q1, executing our proven growth strategy, which consists of three elements: a commitment to high-impact innovation, scale in the high-growth and emerging markets, and a unique value proposition to our customers. We made great progress in the first quarter, and I'll share just a few of the highlights. Starting with the first pillar, it was a fantastic quarter for high-impact innovation, as we launched a number of new products that will help our customers break new ground in our important work. A few of the highlights include: in our genetic sciences business, we launched our Applied Biosystems SeqStudio Flex Series genetic analyzer to improve clinical research and advance scientific discovery. In Analytical Instruments, we launched four new Gas Chromatography and GC-MS instruments to advance analytical testing for food, environmental, industrial, and pharmaceutical applications. This includes the Thermo Scientific TRACE 1600 Series Gas Chromatograph, which incorporates enhanced automation for instrument health monitoring and offers flexibility for customers to optimize their workflow. In bioproduction, we launched the Gibco CTS Xenon Electroporation system for the efficient delivery of genetic material into cells, as part of cell therapy manufacturing. Additionally, we signed an agreement with precision diagnostic company Oncocyte to develop two new assays for our Ion Torrent Genexus System to improve cancer tumor profiling and advance precision medicine. This is just a small sampling of the outstanding innovation going on across our company, enabling our customer success and strengthening our position as the world leader in serving science. The second pillar of our growth strategy is leveraging our scale in high-growth emerging markets to create a differentiated experience for our customers. We had strong performance in these markets, including China, which grew double digits in the quarter. Our Analytical Instruments business is being used around the world to advance scientific research, including in high-growth and emerging markets. For example, in Beijing, the National Institute of Biological Sciences is using our mass spectrometers to accelerate their research in structural biology. In Korea, our electron microscopes are enabling researchers at Pusan National University to establish a bioimaging center to accelerate virus research. Now turning to the third pillar of our growth strategy, our unique customer value proposition. We continue to enhance our capabilities, so we can be an even stronger partner and industry leader. To help our customers advance cell and gene therapies, we opened a new biorepository in Vacaville, California. This facility will provide specialized biological sample storage and cell therapy logistics. In bioproduction, our network expansion is going well. During the quarter, we brought on additional capacity online for single-use bioprocess containers and cell culture media. Reflecting our trusted partner status with pharma and biotech customers, we entered a 15-year strategic collaboration agreement with Moderna to establish large-scale U.S. manufacturing of mRNA-based vaccines and therapies. Under this agreement, we'll provide dedicated capacity for a range of aseptic fill-finish services, along with inspection, labeling, and final packaging. During the quarter, I had the chance to visit our Greenville, North Carolina campus, where we've invested significantly over the past couple of years to expand our capacity and capabilities. The new building that will support Moderna’s pipeline is truly impressive. Now, turning to capital deployment. I'd like to share some of the other steps we've taken to further strengthen our customer value proposition and build our future. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. Given this was the first full quarter of contribution from PPD, our new clinical research business, I'd like to update you on our progress. The business is performing very well and running ahead of the deal model. The strong start and outlook for the year is allowing us to increase our expectations for the business. Stephen will cover these details in his remarks. In terms of the integration, it's going very smoothly. Our customers are seeing the value of the combination, and we have realized our first commercial synergies securing new authorizations from pharma and biotech customers who value the combination of our capabilities. This bodes well for our long-term revenue synergies. To further fuel growth and support increasing demand from our biopharma customers, we've also invested to expand our clinical research operations in Richmond, Virginia. Finally, I've been very impressed with the team, as I've visited different sites. Together, we're taking the business to the next level as part of Thermo Fisher to become an even stronger partner for our customers. As I mentioned on our last call, we closed on PeproTech, a leading provider of bioscience reagents late last year. I'm pleased to note that that business has also had a great start, and the integration is going incredibly well. During Q1, we completed a small bolt-on deal in analytical instruments to enhance our materials and structural analysis offerings for our customers. During the quarter, we also returned significant capital to our shareholders. We purchased $2 billion of our shares and increased our dividend by 15%. Turning now to a brief update on our ESG initiatives. We marked a significant milestone during the first quarter, exceeding one million readily recyclable paper coolers shipped to transport cold chain products without the use of traditional polystyrene foam coolers. This builds on our commitment to environmental stewardship and enabling broad adoption of sustainable solutions. In addition, we recently announced our partnership with the University of California in San Diego to advance innovation, sustainability, and talent development. This 10-year partnership will establish a network of technology centers focused on accelerating collaborative research and advancing innovations in a range of scientific fields. It will also accelerate educational opportunities, especially for under-resourced students, by engaging in joint STEM and community outreach programs and supporting curriculum development, scholarships, fellowships, career mentoring, and recruitment. Before covering guidance, I'd like to end my comments with a reflection on the events that are impacting our colleagues and the world at large. As always, our top priority is the health and safety of our colleagues. We're supporting our colleagues displaced from Ukraine with a variety of needs, and together with our colleagues globally, we've made substantial donations to relief organizations responding in Ukraine and enabling safe-haven countries. In China, where many of our colleagues are facing lengthy lockdowns and disruptions in daily life due to the pandemic, we're providing care packages to residents in Shanghai who have faced limited food supplies. We also recognize that inflation is challenging for our team, and we're going to provide a special payment this summer to our colleagues. Now, I'd like to review our 2022 guidance at a high level, and then Stephen will take you through the details. We're meaningfully raising our full-year guidance. We're increasing our revenue guidance by $450 million to $42.45 billion, which would result in 8% reported revenue growth over 2021. And we're raising our 2022 adjusted EPS guidance by $0.22 to $22.65 per share. This guidance factors in our excellent Q1, includes a very strong core business outlook for the remainder of the year, and incorporates the expected impact of the recent macroeconomic dynamics. Our Q1 results and our increased guidance for the year reflect how well the team is navigating these dynamic times. So, to summarize our key takeaways from the first quarter: our outstanding results in Q1 were driven by our proven growth strategy and PPI business system. Our business is performing very well, and we’re gaining market share. The PPD acquisition is generating strong returns, and we're really well positioned to continue to differentiate ourselves for all of our stakeholders. All of this has enabled us to raise our outlook for 2022 and further solidify our incredibly bright future. With that, I'll now hand the call over to our CFO, Stephen Williamson.

Thanks Marc, and good morning, everyone. As you saw in our press release, we started the year with an excellent Q1. In the quarter, we delivered 16% core organic growth, $1.68 billion of COVID-19 testing revenue, $7.25 for adjusted earnings per share, and $1.6 billion of free cash flow. Revenue in Q1 was just over $1 billion higher than we incorporated in our previous 2022 guidance, with $700 million driven by a very strong start of the year for the core business and just under $400 million from testing. The strength of the core was broad-based across businesses and markets and geographies. Our PPI business system enabled us to generate very strong pull-through on this revenue, and adjusted EPS for Q1 was $0.84 higher than included in our previous guidance. So broad-based beat to start the year. Let me now provide you with some more details on our performance. Beginning with our earnings results, as I mentioned, we delivered $7.25 of adjusted EPS in Q1, up 1% versus the prior year. GAAP EPS in the quarter was $5.61, down 5% versus the prior year. On the top line, Q1 reported revenue grew 19% year-over-year. The components of our Q1 reported revenue increase included 3% organic revenue growth and 18% contribution from acquisitions and a headwind of 2% from foreign exchange. Core organic revenue growth in the quarter was 16%, and as I mentioned, we delivered $1.68 billion of COVID-19 testing revenue. Turning to our organic revenue performance by geography, the organic growth rates by region are skewed by the COVID-19 testing revenue in the current and prior year. In Q1, North America grew in the low single digits. Europe was flat. Asia Pacific grew in the mid-teens, with China growing in the low double digits. And the rest of the world declined in the low single digits. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 47.5%, which was 660 basis points lower than Q1 last year. For the first quarter, the change in gross margin was due to the same drivers as those of our adjusted operating margin. Adjusted SG&A in the quarter was 15.2% of revenue, a decrease of 20 basis points versus Q1 2021. Total R&D expense was approximately $360 million in Q1, representing growth of 14% over the prior year, reflecting our ongoing investments in high impact innovation to fuel future growth. Looking at results below the lines of the quarter, our net interest expense was $118 million, $5 million higher than Q1 last year, largely due to acquisition financing activities. Our adjusted tax rate in the quarter was 14.1%. This was a 190 basis points lower than Q1 last year, driven by a tax planning initiative. Average diluted shares were $395 million in Q1, approximately $3 million lower year-over-year driven by share purchases, net of option dilution. Turning to cash flow on the balance sheet, cash flow was another strong highlight for the quarter. Our PPI business system enables us to deliver significant cash flow from the very strong top-line performance. Cash flow from operating activities in Q1 was $2.2 billion, and free cash flow for the quarter was $1.6 billion. Our capacity and capability investments are progressing well, and this quarter's net capital expenditures were $640 million. We ended Q1 with approximately $2.8 billion in cash and $33.3 billion of total debt. Our leverage ratio at the end of the quarter was 2.6 times gross debt-to-adjusted EBITDA and 2.4 times on a net debt basis. To conclude my comments and our total company performance, adjusted ROIC was 18%, reflecting the strong returns on investments that we're generating across the company. Now, let me provide some color on the performance in our four business segments. Let me start with a couple of framing comments. The scale and margin profile of our COVID-19 testing revenue varies by segment and testing revenue was significantly higher in the prior year quarter, so that does skew some of the reported segment margins. Moving onto the segment details, starting with Life Sciences Solutions. Q1 reported revenue in this segment increased 1%, and organic revenue was 1% lower than the prior year quarter. Q1 we delivered very strong growth in our bioproduction and biosciences businesses. This was offset by lower revenue in the genetic sciences business driven by lower testing revenue versus the year-ago quarter. Q1 adjusted operating income in Life Science Solutions decreased 5%, and adjusted operating margin was 51.4%, down 280 basis points year-over-year. In the Analytical Instruments Segment, reported revenue increased 9% in Q1 and organic growth was 12%. The strong growth in the segment this quarter was led by electron microscopy and chromatography and mass spectrometry businesses. Q1 adjusted operating income in this segment increased 10%, and adjusted operating margin was 19.8%, up 20 basis points year-over-year. Turning to Specialty Diagnostics, in Q1 reported revenue declined 8%, and organic revenue declined 7%. In the quarter, we saw strong underlying growth in our healthcare market channel, transplant diagnostics, and clinical diagnostics businesses, which was offset by lower COVID-19 testing revenue versus the year-ago quarter. Q1 adjusted operating income decreased 17% in the quarter, and adjusted operating margin was 23.9%, down 260 basis points from the prior year. And finally, in the Laboratory Products and Biopharma Services segment, in Q1 reported revenue in the segment increased 51%, and organic growth was 6%. During Q1, we had strong growth in the research and safety market channel and the laboratory products businesses. PPD, our clinical research business, is performing very well. And during the quarter, it grew a few points above the company average core organic growth rate. It contributed $1.66 billion of revenue to the segment in the quarter. Q1 adjusted operating income in the segment increased 17%, and adjusted operating margin was 11.4%, which is 340 basis points lower than the prior year. Let me now turn to our updated 2022 guidance. As Marc outlined, we’re raising our full-year revenue guidance by $450 million to $42.45 billion. We're also raising our core organic revenue growth outlook from 8% to 9% for the year. And we are increasing our adjusted EPS guidance by $0.22 to $22.65 for the year. So very strong outlook, particularly as it also factors in the notable macro developments that occurred following our last earnings call in February. Our team continues to do an excellent job navigating through a fluid macroeconomic environment to help us deliver outstanding results, reflecting the strength of our proven growth strategy and the power of the PPI Business System to operate with speed at scale.

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

Thank you. Good morning. Hope you guys are doing well. My question is on the Biopharma side. First question on clinical research so PPD growing over 20%, that's well above historical levels and what peers have been reporting so far. Just what is driving the acceleration? Can you comment on industry funding and your ability to gain share?

Yes, Jack, thanks for the question. So, our clinical research business, formerly PPD, is off to a great start. As a reminder, the business had tremendous success in 2021 delivering great performance and great authorizations, especially after the announcement. Just incredibly focused on great execution. Customers are excited about the potential, and that momentum continued into Q1. Very strong performance on revenue and really good growth in authorizations. As I look at what's going on in the industry and look at some of the other companies that have reported, our results look favorable to them. So we feel good about that, as an external reference point. In PPD, the strength was broad-based across the different customer types. The funding environment was actually a great start to the year. Integration's gone really well. We feel good about that, and I'm really excited that the commercial team has secured our first wins that are what I would call synergy-related in the form of new authorizations. So really a very cool start to the year, and we're excited about what the potential holds for our clinical research business.

Great. And as a second question, I wanted to square the new $1.5 billion target for the COVID vaccines and therapies with your ability to raise the core growth overall. So if I look at the Patheon and bioprocessing businesses, are they still growing high single digits plus? Is the COVID handoff taking place? And kind of, off that just, can you comment on how changing doses per vial and the new Moderna strategic relationship might factor into this?

Yes, so Jack, thanks. It's a great question. We made a decision on the guidance on vaccines and therapies just because the number of questions we were getting from investors relative to our enterprise value and the sort of net present value of the company was disproportionate. So, we determined we had a really good start on vaccines and therapies for the year. We did just under $500 million of revenue, which was what we expected to do. The $2.1 billion that we included in the original guidance of vaccine therapy-related revenue is still a number that can be achieved. I call it at the high end of the range. We are involved in many of the programs related to vaccines and therapies, including drug substance and drug product. We feel good about it. We chose to effectively reduce the number in the target because the core business is performing so well that we just wanted to take the dialogue off the table. The capacity that makes these products and provides the enabling technologies is truly repurposable to other customers and products within the biologic field. We're very encouraged by that. We are expecting very strong growth for our pharma services and our bioproduction business in 2022 and beyond. So Jack, thanks for the questions.

Hey guys, thanks for taking my questions. Marc, maybe on the China piece, I know Stephen touched on a 200 basis point headwind for Q2. Can you just talk about what you're seeing there, which businesses are being affected more than others? Obviously, we're seeing Beijing entering the conversation this week, I guess, what have you guys assumed there in terms of escalations or what's going to happen? And then again, are certain businesses poised to recover more quickly than others? Just curious your perspective there.

Patrick, thanks for the question. The team really did an excellent job in Q1 navigating the lockdowns, as they started towards the end of the quarter to deliver double-digit growth and to really work with the government to be able to supply the critical products that we provide to the customer base there, even in difficult circumstances. Our assumption is actually fairly straightforward. We're looking at the back half of the year; Q3 and Q4 are expected to return to normal in China with strong growth. The economy there is quite resilient. We're baking a couple of points of headwind into the numbers because many of the customers are closed. Academic institutions in Shanghai would be closed, which will take a period of time for that to rebound as activity ramps back up. So, that's how we're thinking about it in terms of the quarter. We were able to fully incorporate that into our guidance, and Stephen has tried to clarify what our outlook is for Q2, which is still quite good but feels a bit of that pressure, and then Q3 and Q4 should pick up from there.

Sure. That's helpful. Thanks, Marc. And then maybe just another one on the bioprocessing vaccine piece. I appreciate the transparency in terms of what that looks like this year. Obviously, to your point, it's a big investor focus even into 2023. Is there a way to think of that $1.5 billion as we get into next year? I know you guys have rolled it into core and kind of thought the rest of the bioprocessing business will mostly offset it. Is it going to be a gradual decline? Has that thinking changed at all? Just wondering on your high-level perspective on how to think about that piece as we move forward. Thank you.

Yes. So, Patrick, thanks for the follow-up on that. I would think about it as follows: the timing of the transition and what the long-term demand for COVID looks like. There are many scenarios, making it hard to specify which quarter or year exactly how things play out. The capacity is repurposable, and we will move that over time. In our long-term model that Stephen presented last September, it reflects that transition by the end of the model period. It doesn't affect the 7% to 9% long-term outlook. As I look to 2023, many scenarios have the pandemic existing in some endemic form next year, meaning therapy demand should exist with a level of consistency and vaccines will have a wide range of outcomes. The smaller vial or single-use actually drives more revenue per unit. Therefore, we have a lot of moving pieces, and our job is to manage that at the right timeframe, and we will. One piece of new information: one of our customers, not in the top tier of the COVID activity level, just repurposed its own commitments to other therapies, making that transition even smoother for a portion of it. Hopefully, all that color gives you a sense that we'll manage that over time and will continue to deliver strong growth as a company. Thanks.

Hi, good morning, everyone.

Good morning.

I've got one model question and then I've got one big picture question. So, on the model, can you walk us through the gross margin progression in 2022? We see things seem to continually sort of miss model gross margin. Can you help us walk us through and understand the FX and inflation headwinds you're going through?

Yes, so Derik, let's think about the gross margins this quarter. The level was around 47.5%, which will be slightly lower for the remainder of the year, still in the mid-40s. What people are not fully baking in is the impact of PPD. That has had a sizeable change on the overall company's gross margin when you factor that in. And then FX is a little bit negative in terms of margin profile. But it's really the impact of testing coming down and then the benefit of having PPD in the business. I think that's the thing that's missing the most.

Got it. That's helpful. And I wanted to ask about the Moderna agreement because it's surprising to see a 15-year agreement sitting in our space. It's just not really done. Can you talk about that in terms of what is driving that, and do you see opportunities to replicate this with others in the biotech space? You also mentioned some synergy wins with PPD; how should we think about that in the longer-term targets for PPD?

Yes, so, Derik, thanks for the question. As you know, we never really talk about specific customers unless a customer is announcing this on their own behalf, and then we're happy to make some high-level comments. Our take is that we did a really good job of supporting our clients during the course of the pandemic across all of the different activities. That enhanced our reputation, our trusted partner status with our customers. In the case of Moderna, they had the opportunity to work with us and decided to leverage our capabilities in Greenville, North Carolina, and our expertise to support their future pipeline from a sterile fill-finish perspective. It's exciting in terms of the capabilities and support that we'll provide longer term for them. We have many different models of how we work with our clients in our pharma services business. We do have dedicated capacity models where customers have some dedicated capacity, traditional fee-for-service models, and some other innovative options. The public one we announced a couple of years ago, which was with CSL, is an example of us taking over one of their facilities to manufacture one of their new therapies, and they are expanding the collaboration with us. So we have a long menu of options, and our job is to help our customers navigate their future and be really valuable to them.

Thanks, Derik.

Hi guys. Good morning. And thanks for the time here. Mark, a question for you on pricing; you've spoken in the past about taking elevated pricing increases, perhaps twice the normalized level in 2022. Can you just refresh that assumption for us in the context of the sharper inflation here? And philosophically, how do you think about the point at which you need to be a little bit careful about starting to impact customer demand, perhaps more in some segments than others?

Yes, it's a great question. When we think about navigating through an inflationary environment, our team is doing a good job of managing productivity and mitigating costs where possible. Our expectation for pricing is usually around a half point to a point of price increase within our business, and this year we would expect that price would be about double that, around two points, in our outlook for the year. It's our job to support our customers, to explain the inflationary pressures and address where we can offset it, and where we need customer support. Those dialogues have been constructive and positive.

Got it. That's helpful. And then one quick follow-up on PPD. Any color you can share on RFP flow? There has been a little bit of a focus on delays and cancellations, particularly among mid-cap biotech customers here. Obviously, you had strong performance in the quarter, and you are taking your numbers up for the deal. But just curious if you can provide any commentary on that specific segment of their customer base?

Yes. When I look at the performance, the pipeline, and the authorizations, which represent new wins, when I look at the revenue cut by customer types, we had a really strong start to the year. There has been nothing abnormal in cancellations in the quarter, and we are on track to deliver strong results. The 11% growth we are expecting for this year is impressive, and last year's performance was spectacular, which makes that even more commendable. Authorizations support this year's outlook and support long-term expectations that this is a high single-digit growth business. Synergies might elevate that further. So, it's an exciting time ahead, but it's still early.

Thanks for the questions.

Hi guys. Thanks for taking my question and congratulations on a really strong Q1 start. Maybe one on guidance here, perhaps for Stephen. I think your prior guidance called for high single-digit growth, and that growth was consistent across base vaccines and PPD because the vaccine outlook is now down 15% to 20% versus last year. How much is the core base going up, and how much is PPD going up under the new guidance assumptions?

Yes, Vijay, as outlined in the prepared remarks, the strength of the PPD business is going up to 11% for the year, which will provide a strong contribution. The core business is increasing by $350 million in the raise. That will take it up to 8% to 9% strong performance, factoring in the vaccine and therapy impact and the macroeconomic implications in China and the situation in Ukraine.

That's helpful, Stephen. And Marc, maybe one for you here. I know that the street is worried about the outlook, just given the macro. The 16% core and Q1 versus a 13% comp. and we're looking at stock comp of close to 30%. I mean, these are remarkably strong, and I understand pharma biotech is perhaps being strong, but it looks like all segments are on fire. Maybe just talk about the health of end markets, and when you think about the upcoming Analyst Day, what kind of approach should we expect from Thermo? Will vaccines be a focal point, or will it be the rest approach or any thoughts on what we can expect at the Analyst Day? It would be helpful.

I can't wait until May 18 will be super cool. We're going to have it back in person. It'll be a great way to showcase our team and the great things going on at the company. We'll explain some of the stuff today in more detail, and it'll be very positive from that perspective. When I think about the business, we highlighted some of the macroeconomic dynamics. The external world is bumpy right now, but within our four walls, it is a great time for the company. The momentum is huge, our customers are doing well, and we're gaining market share. When I think about the environment and delivering 16% core growth against a very challenging comparison, it gives you a sense of how good things are, and all our geographies and end markets are performing quite well. I feel good about our outlook and momentum. We de-risked the vaccines and therapies even though I think there are scenarios that suggest we will be above that de-risk level. So I see the world as super positive, and when I think about macro dynamics, I worry about our colleagues, especially those in China and Ukraine.

It's a helpful perspective, Marc. Thank you.

Thank you. And then next question comes from Rachel of JPMorgan. Rachel, please go ahead. Your line is open.

Great. Thanks and congrats on the quarter. So, question on China: you flagged the guidance incorporates the $350 million headwind from Ukraine and China. So, could you just break out how much of that is specifically in China? And then can you talk about your approach to guidance just in terms of future lockdowns and how we should think about China growth return in 2023?

Yes, Rachel, roughly half of that is related to China. As Marc said earlier, China has bounced back from the original depth of the pandemic pretty fast, and it's pretty resilient. We learned from that to help our customers get back up and running where they've been out of the workplace. We're focused on enabling their success when they're able to return.

Our guidance assumes all the impact is in Q2 due to the situation in China.

Great. Thanks. And then could you spend a minute talking about what you're seeing in the clinical environment in terms of hospital capacity constraints and how funding is trending as well? Thanks.

Yes. In terms of healthcare and diagnostics, the core there was actually quite good. We saw broad-based strength in core growth in the high single digits. Underlying that, the results were strong across healthcare and diagnostics. We had less revenue in the testing, which is why the customer base is down roughly 15%, but underlying that the core was quite good and feels positive moving forward. Thanks for the question.

Yes, hi, Marc. Thanks for taking the questions. So, first one really from your vantage point, which is obviously fairly large across pharma end markets, could you provide us a view into this growing question that investors have been asking around biotech funding overall? I mean, if you look at the quarter and what you are projecting in the outlook, one would say that's not the case at all. There are no questions on biotech funding, but if you look at the early stages of pre-clinical and clinical, maybe could you outline for us what you're seeing here near to midterm and pay down PPD and other businesses across the board?

Yes. The end market, pharma biotech is incredibly strong with mid-teens organic growth. Since we do everything on an organic basis in our end market descriptions, it doesn't get too confusing to think about all the history, but including PPD numbers in that end market would yield above mid-teens growth. We have had strong orders and a positive future outlook. After completing all of our business reviews, the outlook is good. From our long-term perspective, we say we have 7% to 9% core organic growth. Pharma biotech will be above that, but it doesn’t necessarily need to be the rate it grows at to drive 7% to 9% growth. We delivered a 15% growth in pharma and biotech, with 16% growth in the quarter. Strong growth in that end market is crucial since it makes up a little over half our revenue. I'm very bullish about our future outlook. We notably grew well through those times and helped our customers navigate productivity challenges.

That's super helpful, Marc. Just a clarification for Stephen on the analytical technologies; it obviously came in strong. You pointed to electron microscopy and targeted mass spec. Could you elaborate on what's driving this growth? I mean, even with the normal seasonality of the fourth quarter to first quarter, this was meaningfully strong. So what's driving the strength of the instruments in the first quarter when you look at the end markets and customers? Thank you.

Yes. A great question. I think about Analytical Instruments and how we've had great bookings for a few quarters now for the business and the strong revenue in this segment is driven by electron microscopy and chromatography, as well as mass spectrometry businesses. The growth was broad-based across all areas there, and the funding environment is good for these end markets.

Thanks for the question, Puneet.

Good morning, guys. Thanks for the questions. Marc, on bioproduction beyond COVID, are there any noticeable trends taking place when it comes to upstream versus downstream work in the portfolios that you have?

No, the performance was very strong. I looked at companies that reported, and I feel good about our performance in bio-production. We had good strength across cell culture media, purification resins, pharma analytics, and single-use technology. Overall, the outlook is quite broad-based strength.

Yes. Okay. And then maybe just on the share that you mentioned. How does China stack up there in terms of opportunity? What you've seen is that sometimes these global disruptions tend to shake out some of the smaller, less agile players? I'm wondering if regionally that's becoming more noticeable, or if it's just sort of the baseline operating scenario that you see.

We still need to look at how others performed in China in the quarter. I feel good about our double-digit growth and the team's doing a nice job. Our customers value the scale and depth of capabilities that we have. We create a great experience for our customers in China, so it doesn't surprise me that the business is performing well, and we'll help them navigate the challenges of the pandemic.

Operator, we have time for one more question.

Great, thanks, Marc and Stephen. Congrats on the quarter. I just wanted to drill down a little bit more on the industrial applied end market as it relates to instruments; yet another strong quarter. Are there secular growth drivers that you think are being underappreciated by the market, which are driving this growth above and beyond the pent-up demand we saw last year? Could you talk about some secular growth drivers if you can identify them?

Yes, Matt. Thanks for the final question. The Analytical Instruments business had a really good start to the year with strong revenue growth and bookings. The end-market that's really outstanding is broadly material science applications. Semiconductor, advanced materials, and battery technologies are showing very strong growth. The life science part is also performing well. The continued demand and outlook for material science-related businesses are strong and bode well for the growth of our instruments business this year and beyond. Thanks for the question today. Let me do a quick wrap-up. We’re very pleased with the strong start, and we’re in a very good position to achieve another excellent year. I look forward to updating you at our upcoming Investor Day on May 18th, and as always, thank you for your support of Thermo Fisher Scientific. Thanks, everyone.