Thermo Fisher Scientific Inc (TMO) — Q1 2023 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 & Events until May 12th, 2023. A copy of the press release of our first quarter 2023 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, which is 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 date subsequent to today. Also during this call we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter 2023 earnings and also available in the 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 very strong financial performance. Our core business is performing very well. I'm pleased with the team's great execution and the share gain we saw across our company, especially within the context of a slightly more challenging macro environment. Our continued success is the result of our proven growth strategy that trusted partner status that we've earned with our customers and our PPI Business System, which is a differentiator for us and enables operational excellence within the company. So let me first recap the financials. Our revenue in the quarter was $10.71 billion. Our adjusted operating income was $2.33 billion and we delivered another quarter of strong adjusted EPS performance, achieving $5.03 per share. At the beginning of the year, we set out appropriately ambitious guidance for 2023 and Q1 demonstrates that we're delivering against that. Let me turn to our end markets. We delivered very strong performance in Q1, driven by outstanding execution from our team, resulting in meaningful share gain. Pandemic-related activity performed as we had expected during the quarter. As a reminder, the impact of the headwind from the revenue runoff can be seen in pharma and biotech due to vaccines and therapies and in diagnostics and healthcare due to COVID-19 testing. Let me give you some color on our end markets. Starting with pharma and biotech. We delivered growth in the mid-single digits for the quarter. During the quarter, we had very strong performance in our pharma services, clinical research, and chromatography and mass spectrometry businesses. In academic and government, we grew in the high-single digits in the quarter. We delivered strong growth across a range of our businesses, including chromatography, mass spectrometry, electron microscopy, as well as the research and safety market channel. Academic and government demand were strong in all regions. In industrial and applied, we grew in the high-single digits for the quarter. We saw strong growth in all of our analytical instrument businesses, including electron microscopy, chemical analysis, and chromatography and mass spectrometry. Finally, in diagnostics and healthcare, in Q1, revenue was approximately 45% lower than the prior year quarter. The team delivered very good core business growth during the quarter led by our immunodiagnostics, microbiology, and transplant diagnostic businesses. I'll now turn to our proven growth strategy, which enables us to continue to deliver differentiated performance and setting us up for an even brighter future. As a reminder, our growth strategy consists of three pillars: developing high impact, innovative new products, leveraging our scale and the high growth in emerging markets, and delivering a unique value proposition to our customers. Starting with the first pillar, innovation. We had an excellent start to the year as we launched a number of high impact new products across our businesses during the first quarter. These technologies are further strengthening our industry leadership by enabling our customers to break new ground in their important work. In elemental analysis, we launched the Thermo Scientific iCAP RQ Plus ICP-MS Analyzer. This ICP mass spectrometry system simplifies analysis of trace elements in complicated samples, including the identification of heavy metals in soil and water as well as toxic elements in food and beverage. In Genetic Sciences, we launched the Applied Biosystems QuantStudio Absolute Q AutoRun dPCR Suite, an automated digital PCR solution to increase productivity for molecular research, including cell and gene therapy and cancer research. In our Biosciences business, we launched the Invitrogen DynaGreen, microplastic-free magnetic beads for protein purification. This new product will help our customers to reduce the environmental impact of life science research and builds on our long history of innovation and market leadership in bioscience reagents. And in our Clinical Diagnostics business, we launched the Thermo Scientific DRI Tramadol assay, which broadens our extensive toxicology portfolio with a new drug of abuse assay to help fight the opioid crisis. These are just a few examples of the innovation going on across our company, and I'm excited about the robust pipeline of products that will be launched throughout the year. We also recently learned that Thermo Fisher was ranked number 22 on Fortune's Most Innovative Companies List. This is a new award launched in 2023 based on product and process innovation and a company's culture. A really nice recognition of our team and their track record. The second pillar of our growth strategy is leveraging our scale and the high growth in emerging markets to create a differentiated experience for our customers. We continue to strengthen our capabilities serving these markets by opening a new Gibco cell culture rapid prototyping facility at our existing site in Suzhou, China. This facility will help regional customers accelerate the transition of their cell culture media production into current good manufacturing practices. It will also ensure patients receive therapies manufactured to the highest level of safety, effectiveness, quality, and purity. Turning to the third pillar of our growth strategy. We continue to enhance our customer value proposition by strengthening our capabilities to enable our customers to make the world healthier, cleaner, and safer. I've had the opportunity to meet with dozens of our pharmaceutical and biotech customers since the beginning of the year, and our value proposition is clearly resonating. Our trusted partner status gives us an early understanding of customers unmet needs and the ability to generate insights that allow for deep collaborations that continue to advance scientific breakthroughs. During Q1, we achieved an exciting milestone in our strategic partnership with the University of California, San Francisco with the opening of a new cell therapy cGMP Manufacturing and Collaboration Center to accelerate the development of breakthrough therapies for glioblastoma, multiple myeloma, and other cancers. In this facility, we offer UCSF and other customers solutions for cell therapy development, from discovery to clinical research through to commercial manufacturing. Partnerships like this have the potential to transform clinical care. Another example of our customer value proposition and the trusted partner status that we have established with our pharma and biotech customers can be seen in the excellent performance of our clinical research business, which drove very strong growth in the quarter. I'm very excited by the revenue synergies that will drive both short-term and longer-term growth in the business. The momentum is continuing to build and is benefiting both our clinical research business and other parts of the company. We're also working with very engaged customers on longer-term projects to explore ways to reduce the time and cost of bringing drugs to market. By bringing our capabilities and expertise within our pharma services and clinical research businesses together, we are working to improve the effectiveness of the drug development process, benefiting both our customers and their patients. We have an exciting pilot underway that is utilizing dedicated resources and best-in-class technologies and capabilities to provide enhanced visibility and real-time data to the customer. This improves the speed of decision-making and reduces potential delays from development to manufacturing to clinical trials. It can also help our customers take costs out of the process by reducing waste in the clinical supply process. This is really a nice example of why we are the trusted partner. As always, our PPI Business System and our mission-driven culture enabled our success during the quarter. PPI engages and empowers all of our colleagues to find a better way every day, and it enables us to improve quality, productivity, and the customer experience while also helping us to navigate a dynamic environment. You can see the positive impact of our PPI Business System and our results in Q1. It also allowed us to capitalize on the strong demand from customers for analytical instrumentation and has also helped us to effectively address the runoff and pandemic-related activity and appropriately manage our costs. Moving to capital deployment. We've had an active start to the year both in strategic M&A and returning capital to our shareholders. We closed the acquisition of The Binding Site at the beginning of the year. It's great to have this business now as part of the company. The business is a fantastic fit with our Specialty Diagnostics business and we're leveraging our capabilities to take an excellent business and make it even better. The integration is going very smoothly and the business is performing very well, tracking ahead of plan. Our team is focused on advancing the diagnosis and management of patients with multiple myeloma and immune disorders, and the innovation pipeline looks great. We're excited by the opportunity to further advance patient care in this area. In terms of return of capital, during the quarter, we repurchased $3 billion of stock and increased our dividend by 17%. So, overall, a great start to the year from capital deployment. During the quarter, we also advanced our environmental, social, and governance priorities, including securing agreements to power all current US sites with 100% renewable energy by 2026. This is a significant contribution to our 2030 commitment to a 50% reduction in Scope 1 and 2 greenhouse gas emissions. As we continue to transition away from fossil fuels and adopt renewable energy, we're also accelerating our progress towards our commitment to net zero carbon emissions by 2050. We'll be releasing our latest Corporate Social Responsibility report later this quarter and will give our stakeholders a really substantive view on our continuous improvement and the positive impact that we're having. Let me now turn to our guidance. Since the beginning of the year, the macro environment has become slightly more challenging. We're stepping up to that challenge and our proven growth strategy, powered by our PPI Business System, is enabling us to maintain our ambitious full-year outlook with revenues of $45.3 billion and adjusted EPS of $23.70. Stephen will take you through the details in his remarks. So to summarize our key takeaways from the first quarter. Our very strong results in Q1 were driven by our proven growth strategy and PPI Business System. Our business is performing very well. Our unique customer value proposition is further elevating our trusted partner status, and we're continuing to gain market share. We effectively deployed capital to create significant value for our customers and shareholders, and we're incredibly well positioned to deliver differentiated performance and an excellent 2023 as we continue to create value for all of our stakeholders and build an even brighter future for our company. With that, I'll now hand the call over to our CFO, Stephen Williamson.

Thanks, Marc, and good morning, everyone. As you saw in our press release, we started the year with a very strong Q1. Our growth strategy powered by our PPI Business System is enabling us to continue to very effectively navigate the company through a dynamic macro environment, manage the runoff in pandemic-related revenue, and drive excellent core organic revenue growth and share gains. In the quarter, we delivered $10.7 billion of revenue, which included 6% core organic revenue growth. We delivered $5.03 of adjusted EPS. Our core organic revenue growth was 1% higher than we had incorporated in our previous 2023 guidance, and adjusted EPS was $0.02 ahead. So a very strong start to the year. Let me now provide you with some more details on our performance. So beginning with our earnings results, as I mentioned, we delivered $5.03 of adjusted EPS in Q1. GAAP EPS in the quarter was $3.32. On the top line, reported revenue was 9% lower year-over-year. The components of our Q1 reported revenue included 8% lower organic revenue, a 1% contribution from acquisitions, and a headwind of 2% from foreign exchange. Pandemic-related revenue came in as we expected in Q1. This is comprised of $140 million of testing revenue and $180 million of vaccines and therapies revenue. As I mentioned earlier, core organic revenue growth in the quarter was 6%. And as a reminder, core organic revenue growth continues to include the change in our COVID-19 vaccines and therapies revenue, which was a headwind of approximately 3% in the quarter. So very strong core performance showing the continued strength of our business. Turning to our organic revenue performance by geography. The organic growth rates by region are skewed by the pandemic-related revenue in the current and prior year. In Q1, North America declined high-single digits. Europe declined in the low-double digits. Asia Pacific grew in the low-single digits, with China declining slightly and Rest of World declined high-single digits. With respect to our operational performance, adjusted operating income in the quarter decreased 32% and adjusted operating margin was 21.8%, 740 basis points lower than Q1 last year. In the quarter, we achieved strong price realization to effectively address inflation while also driving strong productivity. This was more than offset by lower pandemic-related revenue and continued strategic investments. Total company adjusted gross margin in the quarter came in at 40.3%, 720 basis points lower than Q1 last year. For the first quarter, the change in gross margin was due to the same drivers as those for our adjusted operating margin. Moving on to the details of P&L. Adjusted SG&A in the quarter was 15.3% of revenue. Total R&D expense was $350 million in Q1, reflecting our ongoing investments in high impact innovation. R&D as a percent of manufacturing revenue was 6.9% in the quarter. Looking at our results below the line for the quarter, net interest expense was $154 million, which is $36 million higher than Q1 last year, mainly due to capital deployment. Our adjusted tax rate in the quarter was 10%. This is 410 basis points lower than Q1 last year, reflecting the results of our tax planning activities. Average diluted shares were $388 million in Q1, approximately $6 million lower year-over-year, driven by share repurchases, net of option dilution. Turning to cash flow on the balance sheet. Cash flow from operations was $730 million. Free cash flow for Q1 was $280 million after investing $450 million in net capital expenditures. During the quarter, we deployed $5.8 billion of capital. This included $2.7 billion for the acquisition of The Binding Site and $3.1 billion of capital to return to shareholders through buybacks and dividends. We ended the quarter with $3.5 billion in cash and $35.3 billion of total debt. Our leverage ratio at the end of the quarter was 3.2 times gross debt to adjusted EBITDA and 2.9 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 12.2%, reflecting the strong returns on investment that were generated across the company. Now provide some color on the performance of our four business segments. Let me start with a couple of framing comments. The scale and margin profile of our pandemic-related revenue varies by segment, and that revenue was significantly higher in the prior year. So that does skew some of the reported segment growth rates and margins. We continue to execute strong pricing realization across all segments to address higher inflation. Moving on to the segment details starting with Life Science Solutions. Q1 reported revenue in the segment declined 38% and organic revenue was 37% lower than the prior year quarter. This was driven by the moderation in pandemic-related revenue in the segment versus the year ago quarter. Q1 adjusted operating income in Life Science Solutions decreased 62% and adjusted operating margin was 32%, down 19 percentage points versus the prior year quarter. In the quarter, we delivered good productivity, which was more than offset by unfavorable volume mix due to the significantly higher pandemic-related revenue in Q1 2022. In the Analytical Instruments segment, reported revenue increased 14% in Q1 and organic growth was 17%. The strong growth was broad-based in the segment this quarter led by chromatography and mass spectrometry and the electron microscopy businesses. Q1 adjusted operating income in the segment increased 40% and adjusted operating margin was 24.4%, up 460 basis points year-over-year. In the quarter, we delivered strong volume pull-through, strong productivity and favorable business mix. This was partially offset by strategic investments. Turning to Specialty Diagnostics. In Q1, reported revenue declined 25% and organic revenue was 28% lower than the prior year quarter. In Q1, we continued to see strong underlying growth in the core led by our immunodiagnostics, microbiology and transplant diagnostics businesses. This was offset by lower pandemic-related revenue versus the year ago quarter. Q1 adjusted operating income decreased 21% in the quarter and adjusted operating margin was 25.3%, which is 140 basis points higher than Q1 2022. During the quarter, we delivered favorable business mix and strong productivity, which is partially offset by the impact of lower COVID-19 testing volumes. Finally, in Laboratory Products and Biopharma Services segment. Q1 reported revenue increased 6% and organic growth was 7%. During Q1, organic revenue growth in this segment was led by the pharma services and clinical research businesses. Q1 adjusted operating income in the segment increased 28% and adjusted operating margin was 13.8%, which is 240 basis points higher than Q1 2022. In the quarter, we delivered strong productivity and volume pull-through. This was partially offset by strategic investments. Let me now turn to guidance. And as Marc outlined, we're maintaining our guidance for full year 2023, consisting of revenue guidance of $45.3 billion, including 7% core organic revenue growth and adjusted EPS guidance of $23.70. There's no net change overall in our guidance, but how we expect to achieve this guidance is different from the way we planned at the start of the year, and it demonstrates our ability to effectively navigate the dynamic macro environment and maintain a very strong financial outlook. Since our initial guide, we see $0.25 of additional headwinds to adjusted EPS, $0.15 from business mix and $0.10 from FX. We're actively offsetting all of this headwind about $0.20 through cost management and $0.05 through actions below the line. So no net change overall. The PPI Business System is enabling us to navigate the company very effectively through a dynamic macro environment. As I mentioned, the 2023 guidance reflects a very strong financial outlook. Let me remind you of some of the key underlying assumptions that remain unchanged from the previous guidance. We continue to assume 7% core organic revenue growth from market growth of 4% to 6%. Within that core revenue, we expect $500 million of vaccines and therapies revenue in 2023. This is $1.2 billion less than the prior year, a 3% impact on core organic revenue growth. It's worth noting that the majority of our vaccine and therapy revenue in 2023 is expected to be in our pharma services business. With regards to testing revenue, we continue to assume $400 million for 2023. We're assuming The Binding Site acquisition will contribute approximately $250 million to our reported revenue growth this year. Below the line, we expect net interest expense in 2023 to be approximately $480 million. We continue to assume that net capital expenditures will be approximately $2 billion in 2023 and free cash flow is assumed to be $6.9 billion for the year. Our guidance includes $3 billion of share buybacks, which were already completed in January. We estimate the full year average diluted share count will be approximately 388 million shares. And we're assuming we return approximately $540 million of capital to shareholders this year through dividends, a 17% increase over 2022. So turning now to the assumptions that have changed. As I mentioned earlier, our FX assumption for the year has changed. We still expect FX to be a tailwind to revenue of approximately $100 million or 0.2%. However, we now expect it to be a headwind to adjusted EPS of $0.06. That's $0.10 more of a headwind than the previous guidance due to changes in rates and the expected mix of our currencies. Guidance assumes adjusted operating margins for 2023 to be in the range of 23.8% to 23.9% for the year. The adjusted tax rate assumption has improved slightly from our initial guide. We now expect it to be 10.8% for the full year. And finally, I wanted to touch on quarterly phasing for the year. Compared to our initial phasing assumptions, we now expect a slightly higher weighting of revenue and adjusted EPS in the second half of the year. We're currently assuming that the first half of the year represents approximately 48% of our full year revenue dollars and 44% of our full year adjusted EPS dollars. Q2 core organic growth is expected to be mid-single digits, probably best to model at a slightly lower than Q1. To conclude, we delivered a very strong start to the year and we're in great position to deliver differentiated performance for all our stakeholders in 2023.

Thank you, Stephen. Operator, we're ready for the Q&A portion of the call.

Thank you. Good morning. So my question is focused on lab products, biopharma services. First is on PPD. So we've been getting some mixed signals so far this earnings around biotech customer demand. Marc, I would love to get your perspective. How did PPD grow this quarter? What does the outlook assume? Has that changed at all? And then can you talk about award trends that you're seeing? Thanks.

Yes. So Jack, thanks for the question. Good morning. Our clinical research business, PPD had a very strong start to the year. The growth continues to be in the mid-teens. And it's doing really well, we had strong backlog. We had good level of authorization. So that business is continuing to benefit from the revenue synergies. You've seen that start to come into the numbers this year and I'm very excited about the prospect. Team is doing a really good job of executing. Environment is definitely a little bit more challenging, but the team is doing a good job to go out and capture the business.

Great. Okay. And then one more on that segment is just would love to hear your color around how the research channel performed this quarter. Can you just talk about core market demand and any share dynamics that you're seeing? Thank you.

Our channel business, Fisher Scientific channel has done really well actually consistently for quite a number of years. It plays an amazing role in enabling our customers to do the research that they're doing and make sure they do that in an effective and efficient way. And the business is off to a good start. It has had good growth. And our best sense on share dynamics is it continues to win customers. So it's a well-performing business.

Thanks, Jack.

Perfect. Good morning. Thanks for taking the question. And so first half, two of your peers have recently talked about visibility within bioprocessing being pressured to more like three to six months of visibility versus historical nine to twelve months. So can you just walk us through what's your current level of visibility? And is that different between customer sets within large pharma versus some of these emerging biotech customers? And then also, how does PPD and having that business impact your level of visibility there?

Sure. So, Rachel, good morning. Thanks for the question. Maybe I'll step up a level first, and then I'll talk about the specifics of the question because as I look and read some of the other industry participants' reports so far, clearly, a noisy quarter in the industry. And when I frame that, as a reminder, when we started the year, we set out ambitious goals for 2023, right? And we do that every year. For us, a 7% core growth from an organic perspective against a 14% comparison and also have very strong earnings. So that's sort of as we came into the year. So what's different in late April versus February 1st when we set out our guidance? Well, the first thing is, we delivered a great chart to the year, right? Great Q1. Second, the macroeconomic environment is more challenging, right? And that leads to a slightly more cautious spend in all sectors of the economy, nothing to do with life science tools and pharma services. But we also see that in some of our customers as well in terms of the caution. Within our own company, a couple of our businesses are performing slightly better than our original guidance, and that's our analytical instruments business which had an excellent Q1 and we now have more visibility into Q3 for that business and that looks encouraging. The second business is doing a little bit better than our original guidance with Specialty Diagnostics is also a strong start. Bioproduction, which is where your question is really focused, we're going to see in the first half more headwinds than our original expectation. It's driven really by the customers are benefiting from the improved lead times that we're delivering against because we completed our network expansion, right? So customers can get products more quickly. And our view is this is a temporal phenomenon, and we feel good about what the long-term prospects are here. In terms of the specifics in terms of visibility and by customer sets and those things. I think the way that I think about it is, long-term, this is an incredible market with great growth. It's grown very high for many years in the past and has incredible tailwinds. It has a reasonably good visibility because it's related to customer production. And our expectation is that the second half of the year is better than the first half of the year in terms of the view. As a reminder, Rachel, it represents 10% of our revenue. So I think it's important to keep that in the context as well.

Great. Thank you. And then maybe just one on instruments. Analytical Instruments grew 17% during the quarter. You flagged that that's one of the areas that's been better than expected so far versus your initial guidance for the year. So can you walk us through what are your latest expectations for Analytical Instrument growth for the year? And then are there any end markets within AI that are just growing faster than expected? Thanks.

Yes. So in terms of our instruments business, we really are benefiting from very strong adoption of our innovation, right? We just continue to bring out great products. As a reminder, during the pandemic, we continue to fuel and accelerate our R&D pipeline, and you're seeing the benefit of it. We are capitalizing on the semiconductor desire to move to the next generation of nodes, which uses our electromicroscopy. We're a key enabler for battery technology with our microscopes and our chromatography and mass spectrometry business doing incredibly well. So the strength here is broad-based. Obviously, the 17% growth in the quarter is very strong. We would expect a good level of growth in Q2. And what we had said at the beginning of the year is that, that would moderate in the second half, and we think that moderation will be less than we originally expected in Q3. So we expect it to be a solid Q3, and we'll obviously have more visibility to Q4 when we report in July. So we're assuming that Q3 is a little better than we expected and Q4 as we expected at this point because that's what we have visibility to. Thanks, Rachel.

Hi. Good morning. So I'm curious you've talked about ambitious guidance and the markets being a little bit tougher. Yes, you're maintaining guidance because you're offsetting some things right now. I guess, is there additional little room to do further offsets if the market curates further there? Basically, it's a question about your confidence in that guide and how much sort of like leeway is built into it? Thanks.

Yes. So Derek, the way that we manage the company, right, is the first thing we want to deliver differentiated performance in a given year that we would be proud of delivering and strengthen the company for the long-term, right? And that's the first set of principles. And that set of principles has served us very well for many years. And when you look at our track record, we do a good job of delivering short-term and strength in the long-term. When I think about the outlook for the year and where we are we feel good about the full year guidance at this point in time based on how Q1 has played out and the changes and we've laid out some of the assumptions around that for the balance of the year. And if those assumptions are largely the way the year plays out, we're going to be in a great position. If those assumptions are too conservative, we'll beat these numbers. If those assumptions are too aggressive, then we will appropriately adjust guidance over time, right? And I'm not shy about any of those dynamics. We try to give you total transparency and I feel good about our outlook based on Q1 and the assumptions that we're making.

Got it. And going back, I mean, because we're obviously getting a lot of questions on the whole bioprocessing and inventory issues. I know your business is more upstream focused on downstream, and it looks like you're maintaining the expectations you have for the COVID vaccine element. But can you just talk a little bit more about some of the dynamics in that space? And why your business is a little bit different than some other ones? And also just you talked about some moderating in bioproduction. Just a little bit more clarity on that. Thanks.

Yeah, sure. Stephen?

Just can I level set for a second on the actual revenue for 2023, the $500 million of vaccines and therapies. That's pretty much all in our pharma services business, it's not in the bioproduction business.

Yes, when I consider the situation with the COVID vaccine, it has unfolded almost as we expected. In the first quarter, our projections aligning with the $500 million expectation look solid due to our confirmed contracts and booked activities. Regarding bioproduction, reflecting on the pandemic, there was an enormous demand for these products. Companies that succeeded and those that didn't in launching therapies and vaccines created significant stress on lead times. The extent varied based on each company's capacity and other factors, but lead times became quite long. For our specific products, customers typically don’t place extra orders since they are tailored to specific campaigns. Thus, the process is quite clear: if the lead time is extended to 30 weeks, customers order based on that timeframe. Returning to a normal lead time of 15 weeks means customers can adjust their orders since they know we will supply what they need. Throughout the pandemic, we maintained strong communication with our customers, building trust that we would deliver on time. Consequently, they did not over-order during the longer lead times and are placing orders accordingly now. While we can’t predict the exact timing, we believe the first half will be slightly softer than initially anticipated, but the second half should see an increase. Fortunately, the demand in diagnostics is currently balancing things out.

Great. Thanks.

You're welcome.

Great. Thank you. Thanks for the questions. Marc, while we had to wait for the conference call to get the core organic guide reiteration for Thermo. The Jets went up to you by giving us Aaron Rodgers trade before the draft. Fans have to be excited for the year. I hope you are. So maybe just on bioproduction, a question there. Would you be willing to share with us just some color within the context of your biopharma outlook for 2023. How you're thinking about the growth rates for your consumables business, the CDMO, and PPD. I know on the last call, you gave us PPD, but just trying to get a breakdown or a sense of the different components for your biopharma outlook for the year?

Yes, Dan, thank you for the question. In the spring, there's always hope in football because nothing has been finalized yet. Regarding pharma and biotech, if we focus on the market itself, we achieved mid-single digit growth this quarter. It's important to note that this includes the expected decline from vaccines and therapies compared to the previous year. Essentially, without the impact of this decline, we would have seen double-digit growth in that segment. Most of the changes in growth trajectories are linked to this. Additionally, last year we experienced a 14% growth, while this year we anticipate a 7% growth. Although our growth remains strong, it is expected to be more moderate than last year's. Since pharma and biotech is our largest customer segment, we expect this growth to slow down. Overall, Q1 performed as we anticipated, although bioproduction was a bit softer. There seems to be additional caution among smaller biotech customers, but I don't see a dramatic difference. We are managing through this and maintaining strength in other areas of our business. As for the specifics of each business segment, we don't manage them that way. On the bioproduction side, it represents about 10% of our total revenue.

Thank you for that, Marc. As a follow-up on the earlier question regarding instruments, you mentioned better visibility and share gains. Can you provide insight into how you're differentiating from other peers who are experiencing challenges after a strong period? While others are noting increased comparisons, you are still achieving growth above the corporate average. What factors are contributing to the strength in your AI business for 2023, particularly regarding FEIC, LC-MS, and any specific geographies you would like to highlight?

Yes. The team is doing a good job executing, right? They're doing a good job on navigating the various supply chain things that happened over the last couple of years and our shipments are at a high level. We're going out and winning business. I think the strategy that the team has executed around breakthrough innovation. Customers find money when the products are really relevant. I mean that's been my experience. Over long periods of time, if you have great products, customers want them. So that's been a positive dynamic certainly for the instruments business. And what I would say is we definitely have challenging comparisons this year. We're off to a good start. I would expect that growth will moderate a bit in the second half, but Q3 being a little bit better than we originally expected.

Hi. Good morning. Thanks for taking my questions. Maybe Marc or Stephen, just first on sort of regional trends. Stephen, you outlined some of the growth in the quarter for Europe and China, but just any incremental color on what you're seeing, particularly in China across your business and how you think that those trends play out over the course of this year?

Yes, Matt, thank you for your question. China performed largely as we anticipated this quarter. We had expected Q1 to be slightly better than Q4, with ongoing effects from the unwinding of the Zero COVID policy, and we believe it will continue to improve as the year progresses. In the first quarter, our business in China saw a slight decline, but core growth was in the high single digits, which is promising. We anticipated that stimulus would be implemented in Q1, and it was, which was encouraging to witness as the Chinese government provided funding to academic institutions—this positively impacted our instrument business. Overall, I feel optimistic about our outlook in China, despite the persistent geopolitical tensions that are likely to remain for some time. We are prepared to navigate these challenges, and historically, China has been a strong market for us this year as well. Stephen, do you have anything to add?

Yes. So Matt, on the other end markets, when I think there's a lot of noise from the pandemic unwind, but when I kind of see through that, good growth really across all of the main geographies. So nothing really to call out there.

Hi Marc. Good morning and congrats here. Just I'll stick to one maybe sort of 1.5 question. Capital deployment, 2022, you did two deals, PeproTech earlier in there and then Binding Site. Wondering how the outlook is looking for capital deployment this year. Maybe talk a little bit about your expectations for what you're seeing from market participants in both public and private markets. And then just briefly on the Inflation Reduction Act. Could you outline what you're hearing from your larger pharma customers? I'm wondering if they're changing how they're allocating their R&D going forward? Thank you.

Yes. So, Puneet, thanks for the questions. In terms of the IRA, I think customers are working through that in terms of what the implications and does that adjust any of the long-term decision making about what our preferred and what's their clinical trial strategy. We haven't seen anything material change at this point? I know there's certainly a lot of dialogue with government. I'm trying to make sure those policies do what they were intended to do. From a capital deployment perspective, this is a good environment from my perspective because you have less competition because of higher interest rates. From certainly private equity and so forth. So I think there's always competition, but I think that's good because that helps you pick and choose and get things at an appropriate valuation. So I think we'll continue to be active. Our pipeline is super busy like so I'm very excited about what we're looking at. You never know how these things actually play out in reality. But there's plenty going on and we'll be aggressive if the right transaction is available to us. So that's the benefit of the company performing well and a great track record of creating value through capital deployment. So thanks for the questions. I think at this point I'll do a quick wrap up. So, thanks, everyone, for joining us on the call today. We're very pleased to deliver a strong quarter. We're incredibly well positioned to continue to deliver differentiated performance as we continue to create value for all of our stakeholders and build an even brighter future for our company. I'm looking forward to updating you on our upcoming Investor Day on May 24th. See you in New York City or virtually. And as always, thank you for your support at Thermo Fisher Scientific.