Thermo Fisher Scientific Inc (TMO) — Q3 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 Investors section of our website, thermofisher.com, under the heading News Events and Presentations until November 10, 2023. A copy of the press release of our third quarter 2023 earnings is available in the Investors section of our website under the heading Financials. So before we begin, let me briefly cover our safe harbor statement. 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 Investors section of our website under the heading Financials, SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any dates 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 measure is available in the press release of our third quarter 2023 earnings and also in the Investors 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 third quarter call. Let me recap our financial performance for the quarter and then I'll provide additional context on what we're seeing play out in the macro-economy and the implications for our guidance. In the third quarter, our revenue was $10.57 billion. Our adjusted operating income grew 8% to $2.56 billion, and we expanded our adjusted operating margin by 200 basis points to 24.2%. We delivered excellent growth in adjusted EPS, achieving a 12% increase to $5.69 per share. We delivered a very strong third quarter. In the quarter, the market environment continued to get more challenging. So I thought that it would be best to update you on what we're seeing and the implications on our guidance for the full year. As a reminder, coming out of the second quarter, we assumed core market growth to be in the zero to 2% range for the year, driven by two factors: cautious customer spending and low economic activity in China. As we indicated in September, those same two factors increased in impact and we now expect core market growth to be slightly negative for the year. Our team did a good job capitalizing on the available opportunities in the quarter and we continue to expect to grow faster than the market for the full year and to once again deliver share gain in 2023. Factoring in the current macroeconomic conditions that I discussed, as well as the related increase in FX headwinds, we're revising our revenue and adjusted EPS guidance for 2023. We now expect revenue to be $42.7 billion and adjusted EPS to be $21.50 per share. Stephen will outline the underlying assumptions later in the call, along with some thoughts to help frame 2024. As I look ahead, the combination of our proven growth strategy and PPI Business System will enable us to successfully navigate dynamic times, positioning us to deliver differentiated short-term performance while simultaneously strengthening our long-term competitive position and outlook. The long-term prospects for our industry remain as bright as ever. Science continues to advance at a rapid pace and our tools are used by scientists for the most important work that they do, providing the foundation for the scientific breakthroughs they enable. Our capabilities enable the pharma and biotech industry, which is addressing so many unmet healthcare needs. Let me now turn to our Q3 revenue performance in the context of our end markets. Starting with pharma and biotech, growth declined 1% for the quarter. The COVID-19 vaccine and therapy revenue runoff performed as expected during the quarter, resulting in a headwind in this customer segment. In Q3, performance in this end-market was led by our pharma services business. In academic and government, we grew in the high single-digits in the quarter. We delivered very strong growth in our electron microscopy and chromatography and mass spectrometry businesses. In industrial and applied, growth was flat for the third quarter, and performance in this end-market was led by our electron microscopy business. Finally, diagnostics and healthcare, in Q3 revenue was approximately 20% lower than the prior-year quarter. We made strong progress on our growth strategy in Q3. As a reminder, our strategy consists of three pillars: high-impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with innovation, it was another great quarter for the company. We launched a number of high-impact new products across our businesses that are further strengthening our industry leadership and providing our customers with new technologies to enable breakthroughs in their work. Let me start with a brief update on the groundbreaking Thermo Scientific Astral, which we launched at the American Society of Mass Spectrometry in June. Demand has been very strong and it's great to see these instruments being so quickly adopted by our customers for their protein discovery research. In the quarter, we launched the EXENT Solution in Europe after receiving IVDR certification. It's the latest innovation from our protein diagnostics business, which as you know became part of Thermo Fisher with the acquisition of The Binding Site at the beginning of the year. EXENT complements our leading portfolio of assays that help to diagnose and monitor blood protein abnormalities related to multiple myeloma and other disorders. In our bioproduction business, we introduced the Gibco CTS Detachable Dynabeads, our next-generation Dynabeads platform to accelerate manufacturing of life-changing cell therapies. In our electron microscopy business, we launched the Thermo Scientific Hydro Bio Plasma focused ion beam, providing high-resolution imaging along with a simplified workflow for cell biologists. Earlier this week, Time Magazine selected Thermo Fisher's preeclampsia test as one of Time's 2023 best inventions. This is the first and only immunoassay to aid in the risk assessment and clinical management of preeclampsia, and it received FDA breakthrough designation and clearance earlier in the year. Now turning to the trusted partner status we've earned with our customers. This unique relationship gives us early insights into our customers' unmet needs and enables us to bring our industry-leading products, services, and expertise together in ways that no one else can. We continue to strengthen our capabilities to be an even stronger partner for our customers. As you know, we've had strong demand for our biologics drug substance manufacturing capabilities. During the quarter, we completed an expansion of our site in St. Louis, Missouri. This facility supports therapies for a wide range of diseases, including cancer, autoimmune conditions, and rare genetic disorders. It features our new Thermo Scientific high-performing DynaDrive 5,000-liter single-use bioreactor, which is a significant advancement in single-use technology. The DynaDrive offers better performance and is scalable to much larger volumes than previous generation bioreactors. We further strengthened our clinical research offering by opening a facility in Ohio to produce sample collection kits for clinical trials. This enables us to deliver customized kits to our clients and provide greater supply-chain stability to support their trucks. As always, our PPI Business System in our mission-driven culture enabled our success during the quarter. PPI engages and powers all of our colleagues to find a better way every day and it enables us to improve quality, productivity, and customer regions while also helping us to navigate a dynamic environment. I am proud of our team's efforts, which resulted in strong operating margin expansion in the quarter. We continue to successfully execute our disciplined capital deployment strategy, which includes a combination of strategic M&A and returning capital to shareholders. It's been a very active year. As I mentioned earlier, we closed on The Binding Site in January. The business is performing exceedingly well. During the quarter, we completed our acquisition of CorEvitas, a leading provider of regulatory-grade real-world evidence for approved medical treatments and therapies. As a reminder, real-world evidence is the collection and use of data from patient health outcomes gathered through routine clinical care. This is a high-growth market segment, as pharmaceutical and biotechnology customers, as well as regulatory bodies, are increasingly looking to monitor and evaluate the safety of approved medicines and examine their effectiveness and value in the post-approval setting. The business is now part of our clinical research business and it's off to a great start. Shortly after the close of the quarter, we announced the agreement to acquire Olink, a company that is accelerating proteomics. Olink's products enable leading academic researchers and biopharmaceutical companies to understand disease at the protein level rapidly and efficiently. Its proprietary technology, Proximity Extension Assay, provides high-throughput protein analysis. The acquisition of Olink underscores the profound impact that proteomics is having as our customers continue to advance life science research and precision medicine. This technology is highly complementary to our leading mass spectrometry and life sciences platforms, and we're uniquely positioned to rapidly bring this technology to customers. We expect to deliver $125 million in adjusted operating income synergies in year five, driven by revenue synergies and cost efficiencies. We expect this business to be a mid-teens revenue growth business for us well into the future. The transaction is targeted to be closed by mid-2024, subject to customary closing conditions including regulatory approvals. So, 2023 has been an active year of M&A that further strengthened Thermo Fisher Scientific for the future. During the quarter, we continued to advance our environmental, social, and governance priorities. This included launching a collaboration with the National Minority Quality Forum, a not-for-profit research and education organization to help bring clinical research to historically underserved patient populations through their alliance with representative clinical trials. The collaboration supports pharma and biotech customers in meeting regulatory expectations to enroll and retain patients in clinical trials, who more fully reflect real-world populations experiencing the disease or health condition being studied. It also helps to enable our customers to meet US Food and Drug Administration requirements around diversity action plans. In terms of our environmental sustainability efforts, we've officially surpassed our original goal to reduce greenhouse gas emissions by 30% by 2030. As we previously announced, we've increased our target to a 50% reduction by 2030, and we're well on our way to achieving that goal. I'm very proud of the way we're making a difference, not only by enabling our customer success but also by creating a greater work environment for our colleagues and making a positive impact for society. So to summarize our key takeaways from the third quarter. We delivered a strong operating performance in Q3, driven by our team's execution and the power of our PPI Business System. Given the more challenging macroeconomic environment, we're taking the right actions and appropriately managing the company, and we're incredibly focused on delivering differentiated short-term performance while simultaneously strengthening our long-term competitive position and outlook. The attractive long-term outlook for the life sciences industry remains unchanged and we're uniquely positioned to help our customers navigate the current environment, capture incremental opportunities and exit this period an even stronger industry leader with a very 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 and as Marc just outlined, while the macroeconomic environment became more challenging in the third quarter, we continued to deliver differentiated performance. In Q3, we delivered $10.6 billion of revenue, which included 1% core organic revenue growth. Our PPI Business System enabled us to generate 200 basis points of adjusted operating margin expansion and we delivered $5.69 of adjusted EPS, a 12% increase over Q3 last year. We're continuing to successfully navigate the current environment. Let me now provide you with some additional details on our performance, beginning with our earnings results. As I mentioned, we delivered $5.69 of adjusted EPS in Q3. GAAP EPS in the quarter was $4.42. On the top line, reported revenue was 1% lower year-over-year. The components of our Q3 reported revenue included 3% lower organic revenue, 1% contribution from acquisitions, and a tailwind of 1% from foreign exchange. 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 Q3, North America declined mid-single digits, Europe grew in the low single-digits, Asia-Pacific declined in the low single-digits with China declining in the high single-digits. With respect to our operational performance, adjusted operating income in the quarter increased 8% and adjusted operating margin was 24.2%, 200 basis points higher than Q3 last year. In the quarter, we delivered exceptionally strong productivity and achieved good price realization. This is partially offset by lower pandemic-related revenue, continued strategic investments, and FX. The strength of our productivity reflects the impact of our PPI Business System. It's enabling us to manage our cost base appropriately given the macro conditions. Total Company adjusted gross margin in the quarter came in at 42%, 30 basis points higher than Q3 last year. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 14.8% of revenue, an improvement of 140 basis points over Q3 last year. Total R&D expense was $320 million in Q3, reflecting our ongoing investments in high-impact innovation. R&D as a percent of our manufacturing revenue was 6.7% in the quarter. Looking at our results below the line for the quarter, our net interest expense was $113 million, which is similar to Q3 last year. Our adjusted tax rate in the quarter was 10%, which is 180 basis points lower than Q3 last year, reflecting results of our tax planning activities. Average diluted shares were 388 million in Q3, approximately 7 million lower year-over-year, driven by share repurchases, net of option dilution. Turning to cash flow and the balance sheet. Year-to-date cash flow from operations was $4.7 billion. Year-to-date free cash flow was $3.7 billion, after investing $1 billion of net capital expenditures. During the quarter, we returned $136 million of capital to shareholders through dividends and we deployed just over $900 million of capital for the acquisition of CorEvitas. We ended the quarter with $6.2 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 2.7 times on a net-debt basis. In concluding my comments on our total company performance, adjusted ROIC was 12%, reflecting the strong returns on investment that we're generating across the company. I'll 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 segments and that revenue was higher in the prior year. So that does skew some of the reported segment growth rates and margins. Let me continue to execute strong pricing realization across all segments to address inflation. Moving on to the segment details, starting with Life Sciences Solutions. Q3 reported revenue in this segment declined 18% and organic revenue was 19% lower than the prior-year quarter, driven predominantly by the run-off of our pandemic-related revenue in the segment versus the year-ago quarter. Q3 adjusted operating income for Life Sciences Solutions decreased 16% and adjusted operating margin was 35.9%, up 80 basis points versus the prior-year quarter. During the quarter, we delivered exceptionally strong productivity and had favorable FX, which was partially offset by unfavorable volume mix. In the Analytical Instruments segment, reported revenue increased 8% in Q3 and organic growth was also 8%. The strong growth in this segment this quarter was led by our electron microscopy business. In this segment, Q3 adjusted operating income increased 21% and adjusted operating margin was 26.7%, up 290 basis points year-over-year. In the quarter, we delivered very strong productivity and had strong volume pull-through, which is partially offset by FX and strategic investments. Turning to Specialty Diagnostics, in Q3 reported revenue increased 2% and organic revenue was 6% lower than the prior-year quarter. In Q3, 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. Q3 adjusted operating income for Specialty Diagnostics increased 29% in the quarter and adjusted operating margin was 26.1%, which is 550 basis points higher than Q3 2022. During the quarter, we delivered a favorable volume mix and very strong productivity. That was partially offset by the impact of lower COVID-19 testing volume and strategic investments. Finally, in Laboratory Products and Biopharma Services segment, Q3 reported revenue increased 3% and organic growth was 1%. During Q3, organic revenue growth in this segment was led by the pharma services business. In this segment, Q3 adjusted operating income increased 29% and adjusted operating margin was 16.4%, which is 340 basis points higher than Q3 2022. During the quarter, we delivered exceptionally strong productivity and a favorable mix, which is partially offset by FX. Let me now turn to guidance. As Marc outlined, we're revising our full-year 2023 guidance to reflect the more challenging macroeconomic environment. Our revised estimate for 2023 is revenue of $42.7 billion with core organic revenue growth of just under 1% and $21.50 of adjusted EPS. Let me now provide you with some details behind the changing guidance versus the estimate we provided on our last earnings call. Starting with revenue, our revised guidance is $850 million lower than the prior outlook. $200 million of this is driven by an increased headwind from FX. We've increased our guide by $45 million to reflect the acquisition of CorEvitas, and the rest of the change is due to our lower core revenue assumption. We now see core organic growth for the year of just under 1%, which is a little less than 2% lower than the prior guide. This is driven by the same factors that we've seen throughout the year, the weak economic conditions in China and cautious spending in general across our customer base. As we indicated during Q3, these factors increased in impact during the quarter and our assumption is that the conditions we saw at the end of Q3 will continue throughout the remainder of the year, and as a result, we now expect core market growth for our industry to be slightly negative for the year. However, we continue to effectively navigate the macro-dynamics and expect to continue to deliver differentiated core organic revenue growth for the year despite the more challenging conditions. Moving on to profitability. The revised guidance assumes a pull-through on the lower revenue of just over 40%, and we now expect our adjusted operating margin to be 22.9% for the year. We continue to use the PPI Business System to manage our costs appropriately given the market conditions. From an adjusted EPS standpoint, the revised guidance is $0.17 lower due to FX and $0.69 related to the change in core revenue. We expect to deliver $21.50 of adjusted EPS in 2023, a strong result given the challenging macro-environment. Let me now provide you with some additional details of the updated 2023 guidance. We continue to assume that we'll deliver $300 million of testing revenue in 2023. We expect the total vaccines and therapies-related revenue will be $1.6 billion less than the prior year, an impact of over 4% on our core organic revenue growth. This assumes we recognized $1.3 billion of vaccine therapies revenue in 2023, $600 million of which is in our clinical research business. Moving on to FX. Given recent rate changes, we're now assuming that FX will be a year-over-year headwind to revenue of approximately $100 million. In terms of adjusted EPS, we now expect FX to be a year-over-year headwind of $0.28 which is $0.17 more of a headwind than our previous guidance. The Binding Site and CorEvitas acquisitions are performing well, and we now assume that they'll contribute approximately $300 million to our reported revenue growth for the year. Below the line, we now expect just under $500 million of net interest expense in 2023, a slight increase reflecting the acquisition of CorEvitas. We continue to assume that the adjusted tax rate for 2023 will be 10%, and we're now expecting net capital expenditures will be between $1.3 billion and $1.5 billion. We now expect the free cash flow will be between $6.7 billion and $6.9 billion for the year. In terms of capital deployment, our guidance includes $3 billion of share buybacks, which were already completed in January, $3.7 billion in acquisitions completed this year, and $3.1 billion committed to the acquisition of Olink, which we expect to close in 2024. We continue to assume that full-year average diluted share count will be approximately 388 million shares, and then we'll return approximately $540 million of capital to shareholders this year through dividends, a 17% increase over 2022. Before I conclude my prepared remarks, I thought it would be helpful to share some more detailed thoughts around how to frame 2024. At this point in time, a good starting assumption is that our core organic revenue growth in 2024 is similar to 2023, approximately 1% growth. With our proven growth strategy, we expect to continue to take share and that would mean market growth in 2024 will be similar to 2023 with the market declining by 1 to 2 points. In terms of phasing of our core organic revenue growth, it's best to assume a more challenging first half and then moderate growth in the second half. The pandemic-related revenues both testing and total vaccines and therapies are likely to be around $300 million in 2024. This is a headwind of approximately $1.3 billion, or 3% of revenue. M&A is expected to increase revenue by $175 million year-over-year. That's a combination of six months of Olink and the inorganic portion of the CorEvitas revenue in 2024. Based on current rates, we would expect FX to be a headwind to revenue in 2024 of approximately $375 million, just under 1%. So wrapping all this together, 2024 revenue dollars will be very similar to 2023. In terms of adjusted operating income dollars, with this top-line setup, we would expect to deliver similar adjusted operating income dollars to 2023. We'll continue to use the PPI Business System to manage costs very carefully but also continue to make the right long-term investments to enable us to continue to strengthen our industry leadership. Strong underlying productivity and cost controls are expected to offset the run-off in the remaining pandemic revenue, inflation, and the normalization of incentive compensation across the company along with appropriate investments in our colleagues. Below-the-line, the interest income benefit from our cash generation and an assumption of $3 billion of buybacks in 2024 would more than offset the impact of a slight increase in our tax rate to 10.5%. All of this would enable us to deliver around $21.75 of adjusted EPS for the year. So the high-level summary is that with these assumptions, we'd expect 2024 core organic revenue growth to be similar to 2023. Our proven growth strategy and PPI Business System would enable us to continue to manage the macro conditions and the run-off in pandemic revenue very effectively, so we can deliver revenue and profitability similar to 2023 and a slight increase in adjusted EPS. Should the market conditions be better than I just outlined, our growth strategy and proven execution capabilities will enable us to deliver the upside benefit. I look forward to providing you with formal guidance for 2024 on our next earnings call along with our usual supporting details for the year ahead. At that point, we'll have the insight from a full year of 2023, and we'll have a better view of the macro conditions entering 2024. In conclusion, we continue to navigate the environment really well, delivering differentiated financials and further strengthening our industry leadership. We remain really well-positioned to capitalize on additional opportunities as market growth normalizes over time. As we think about our cost base, we're really well-positioned to drive strongly accretive growth going forward. Now let me turn the call back over to Raf.

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

Good morning, and thank you for all the color. Marc, a bigger-picture question. Upon greater reflection, how much of your decision to raise the long-term target to 7% to 9% do you think may have been based on the environment we're in? And I was curious, do you think it's prudent for investors to think of something lower than that in the medium term?

Thank you for the question, Jack. When I consider our long-term targets, they are based on an expected growth rate of 4% to 6%. There’s no doubt about the market growing within that range, and I believe we will outpace it significantly. Over the past 10 to 15 years, we have consistently achieved superior organic growth, and this trend continues to improve relative to the market. Therefore, achieving growth that exceeds the market by 2 to 3 percentage points is not in question. So, from a 4% to 6% market outlook, we can realistically aim for 7% to 9%. Reflecting on my over 20 years in the industry, I believe that the projected long-term market growth of 4% to 6% is accurate. The current challenges in the industry do not weaken my belief in its long-term potential, which remains very promising. Although I can't predict exactly when we will see this return, the ongoing unmet healthcare needs and the factors we discussed at our Analyst Day signal a very bright future. Thank you, Jack.

Thanks. As a follow-up, what feedback are you getting from customers regarding the market deterioration we've observed since the second quarter earnings or early September? How do you assess the impact of the recent increase in the 10-year rate on the pace of recovery?

Yeah. So I've been out with customers. As you know, I do that a lot. I've been out on a definitely out there with our customer tour, both in Europe and the US, and earlier in the quarter, I was in China. So when I think about what our customers are saying, they are actually very bullish on the mid to long term, right? So there's quite a lot of opportunities for us. What I would say is short term, if you're visiting a smaller biotech customer, what you're seeing is concerns about when the funding environment is going to improve. So there's a level of caution. And I think that's generally across the customer base as customers are being cautious after a very robust pandemic period. But long term and the excitement and customers looking forward to the future with us, it's extremely positive. Anything on the non-term interest rate?

No, I wouldn't think about the long-term interest rate. I think from a funding standpoint, I think there's a spread between interest rates and then what the kind of return people are going to get on an investment. And as the valuation expectations moderate for our customers, I think the funding will start flowing better going forward. The timing of that will still be played out, but the return profile and the successful investment in biotech is still incredibly compelling. So long term, that will moderate appropriately.

Thanks, Jack.

Thank you.

Thank you for the questions, everyone. Marc and Stephen, it's a bit challenging to reconcile the scale of the market weakness considering the structural appeal of the customer drivers. Could you provide some insight into the outlook for 2024, starting with a geographic perspective on China? How significant is it as a driver in comparison to other factors? Additionally, it would be helpful to understand more about your largest customer base in biopharma and the underlying elements contributing to the weak growth in bioprocess and pharma R&D. Marc, you mentioned the pre-commercial biotech space; could you elaborate on what's influencing the contracted growth outlook?

Thank you for the question, Dan. Stephen and I considered how to provide an early perspective on 2024 without completing our operating plan process, which occurs in December. We typically establish guidance based on how the previous year concludes, evaluating all details by business and geography. Drawing on our industry experience, we examined current market conditions and developed assumptions regarding 2024. For next year, we aim to clarify the impact of COVID on our figures. We anticipate a reduction of $1.3 billion in COVID-related revenue in 2024, leaving us with $300 million in revenue that we have good visibility on. Our second assumption is about the base business, excluding COVID-related revenue, which we expect to grow a little over 3%. These two factors contribute to our core number. It’s important to consider that testing will also contribute to a decline. Additionally, we have to consider comparisons; the first half of the year will have tougher comparisons due to customer caution, while the second half should see moderate growth. For example, our insurance business benefited this year from supply chain disruptions in previous years, allowing us to fulfill delayed orders. This growth is unlikely to repeat next year. We accounted for these factors and believe our core is likely to remain similar next year. We look forward to providing detailed guidance at the end of January or early February during our earnings call, where we will have more insights. We wanted to share our current perspective with the analyst community because there is a significant discrepancy between the numbers circulating for 2024 and our current estimates.

Great. Thanks, Marc. Maybe just a follow-up on biopharma since it's…

Thanks, Dan.

I'm sorry about that. Maybe just a follow-up on biopharma since it is your biggest customer base and such a key driver. Could you just give us a little bit of a window, just maybe what you're seeing in Q3, kind of how you're thinking about Q4 as maybe a jumping-off point for '24, large pharma R&D spending, bioprocess, PPD? Can you give us some flavor on your key customer segments and kind of what the trends look like right now, and that will give us some vantage point for how we think about '24 there as well? Thank you.

Dan, I believe your colleagues are quite critical of your question today. You're asking a lot, but I’ll address the main points and leave some details for others. To begin with, let's look at the revenue from our biopharma sector in Q3 and discuss some underlying dynamics. The revenue this quarter was very similar to the previous one, showing a decline of 1%. Overall, the long-term outlook remains strong, as we mentioned earlier. There has been a slight increase in customer caution, particularly noticeable in the biotech and pharma sectors, which reflects a broader trend across our customer base. Regarding our expectations for Q4, one key assumption was that our bioprocessing business would see a stabilization of orders in Q3, which unfortunately did not happen. The primary driver for the projections for Q4 is tied to bioproduction, where we did not observe the order normalization we anticipated. Typically, this business has a lead time of about 13 weeks, so if orders don’t materialize in Q3, we won’t see a revenue increase in Q4. I hope this helps clarify things.

Hi. Thank you, and good morning. Thanks for taking my question. Marc, you usually haven't mentioned the impact of COVID on the biopharma services business in the past. Could you clarify what that impact was in 2022 and 2023 overall? Also, considering that Pfizer and Moderna are significant customers for you and have both announced some reductions in R&D, how should we consider how that might affect your business? Are there any vaccine revenues in that segment, such as take-or-pay contracts? I realize that's a lot to cover, but I'd like to start there.

Thank you for the questions. Let's discuss clinical research at a higher level, and then I will address your specific inquiries. We are approaching the two-year mark since acquiring PPD, which was finalized in early December 2021. The business is performing exceptionally well, making it a fantastic acquisition. In December 2021, PPD excelled in expanding its core business and significantly contributed to clinical trials for vaccines and therapies, showcasing impressive capabilities that highlighted its strong reputation in the industry. Since taking ownership, we've understood that this part of the business would face a decline, and indeed, it has been a challenge for our core organic growth. Without this factor, our organic growth rate would likely have been higher. We had anticipated good end-market growth in this business, expecting it to grow despite challenges, which we included in our guidance. As customers in pharmaceuticals and biotech have become more cautious, the growth rates of our non-COVID business have started to slow. We wanted to make it clear to our investors that while this is a healthy process, we are experiencing the decline related to vaccines and therapies. To illustrate, our 2023 forecast includes a $600 million decrease in revenue from vaccines and therapies, which corresponds to $600 million in activity this year. Unlike typical take-or-pay scenarios, clinical trials involve patient enrollment, and this revenue will phase out steadily over the next few years, based on our guidance of $300 million in total revenue from all pandemic-related activities. Most of this revenue is associated with work in clinical research, along with a small portion from pharmaceutical services and minimal testing. I hope this clarifies the situation.

Right. So if we just think about underlying growth of the core PPD business, just sort of like, what's your embedded number for this year, and sort of like the working assumption for next year? Just, as I said, there's just a lot of variables. I think just some clarity would help.

Certainly. We will discuss that in more detail. While we do not break down our guidance by business unit, I can provide an overview of our expectations. Since the acquisition, we have consistently indicated that the long-term growth outlook for this business is in the high-single-digits, plus the additional impact from synergies. This long-term forecast has not changed. We initially anticipated a decline from the 20% and double-digit growth rates, followed by a dip below that level before rebounding, particularly due to the decrease in COVID-related activities over the coming year. I hope this information assists you in modeling our performance.

Yeah.

Thanks, Derik.

Hey, good morning, and thanks for taking the questions. So appreciate all the color that you've given us today on 2024, but for two areas that I wanted to follow up on. First, how do you see China playing out next year? At this point, is growth in the region going to be reasonable in 2024? Are we going to be looking at declines? And now you've noted that 2024 is also going to be more of a back-half weighted story given those market dynamics. So could you walk us through the magnitude of the step-up that you're expecting between the first half and second half? And how much of that is really going to be driven by easier comps in the back half versus an expected rebound in the market?

Thank you, Rachel. Let me start with China, as it's important for the community to understand our perspective on the situation there. It was great to return to China in August, and I left feeling more optimistic about the long term. I approached my visit from two different roles: as the Chair of the US-China Business Council, where I had discussions with senior members of the Chinese government, including the premier, and as CEO of Thermo Fisher Scientific, allowing me to meet with our colleagues, visit various locations, and connect with customers. From my visit, I observed that while the economy is facing challenges and conditions are deteriorating, the government is actively seeking to enhance business confidence and improve the environment for foreign investment. In terms of the macroeconomic outlook, it presents short-term challenges. However, I was pleasantly surprised by the emphasis on creating a better environment for foreign companies, which is promising for the future. We did notice the impact of the declining economy in our results, and we anticipate this trend will continue. While we can't precisely predict market movements, we know that comparisons will ease in the second half of the year as we transition past some of the more difficult comparisons. As we consider the broader picture for the year, we look forward to addressing this in early 2024.

Yeah. But, Rachel, that kind of set up what I put in the prepared remarks, is kind of a mirror image of this year as a starting point, kind of more challenging in the first half and then modest growth in the second half. Thanks, Rachel.

Great. And then if I could squeeze one more just on instrumentation. That was a great spot this quarter at 8% growth. You've noted that you're over-indexed to instrumentation in China, and you've also highlighted some of the incremental weakness there. So can you just walk us through what exactly you're seeing in that portfolio? What was instrument growth in China versus the rest of the world? And then how should we think about that setup for instrumentation next year given you're going to face some of these difficult comps in the first three quarters?

I'll probably keep it at a pretty high level. Awesome quarter in Analytical Instruments, 8% growth. Team is doing a good job. Our electron microscopy business is performing extremely well. It's great to see the uptake on Astral, which is our breakthrough mass spectrometer, that we launched in June. Those are the highlights. Our guidance for this year and our framing for next year reflects the customer caution and the non-repeat of some of the disruptions of the pandemic on the supply chain. So that's embedded in the outlook for the year.

And then Rachel, just on the kind of the additional kind of weakness we saw in China in Q3, some of that came through in revenue in Q3, but it's going to be more in terms of revenue in Q4 because of a lag in terms of bookings profile for an instrumentation business. So that's part of that dynamic of why Q4 is more impacted by the change profile that we saw in China.

Thanks, Rachel.

Yeah. Thanks, Marc, Stephen. Thanks for taking the questions. I'll wrap two of my questions into one. First, largely on M&A. Given the environment right now, the type of deals that you're doing, the type of valuations you're doing at, could you maybe just give us a sense of what you're seeing out there? Obviously, Olink, prior to that Binding Site and CorEvitas. Is that the type of sort of midsized deals that we should continue to expect here and the opportunity base that you are seeing in M&A? And within the proteomics franchise, now with the successful Orbitrap franchise of the last 15-plus years, combining that with Olink, Marc, maybe at a high level, could you provide us your, not for lack of better word, vision on proteomics despite being in a sort of a tough market this year and next year?

Yeah. So Puneet, thanks for the question. When I think about the M&A for this year or M&A even in general, the criteria that we use is M&A that's going to be highly valued by our customers, strengthen our strategic position, generate strong returns for our shareholders. You look at what the different opportunities are and you think about it in different periods of time where it's going to skew in your favor. This year, with a more volatile macro, we've been able to add three phenomenal businesses, right, in terms of strengthening the company with incredible growth prospects and really good return profiles. So that doesn't mean that next year will look exactly like this or years where you can buy companies that are really more of a balance of cost and revenue growth in those different things and different aspects of it. But this year, to be able to get The Binding Site, CorEvitas, and Olink is fantastic. When I think about Olink, this is our first opportunity given that we had announced it during a blackout period, it's just a terrific fit, right, and you think about it as a leader in a business that has gone through that phase of being well adopted. The technology risk isn't here anymore, but it hasn't globally commercialized. It hasn't reached nearly its full potential and it's incredibly complementary to our leading position in mass spectrometry and proteomics. I really think it’s exciting. They're a leader in their field and we're excited to help bring that to the customer base in an accelerated fashion. When we look to the future, we expect this to be a long-term, mid-teens-plus growth business and be able to generate really significant adjusted operating income synergies driven by that accelerated revenue growth. Plus, just $125 million of earnings that come from the year five synergies, and that's going to generate double-digit returns for the shareholders. So super exciting time, and we'll continue to be outstanding stewards of our shareholders' capital.

Great. Thank you.

Thanks.

Hi, there. Good morning, and thanks a lot for the question. I'd love to ask about your lab products and biopharma services business unit. So the operating margin there was up right at 16%. It was higher than any point in the past. When you talk about the puts and takes there, you called out productivity and mix as some of the positive drivers. So just two questions there. One, on mix, if that was a positive driver, does that actually mean that sales of some of your really low-margin consumables were down? Other peer companies have talked about challenges there and brought down guidance in general lab products. So can you talk a little bit about those dynamics? And then secondly, on productivity gains, what is driving that? And are those going to be sustainable and recurring over time?

Thank you for the question. When I consider the margin dynamics in that segment, the mix is influenced by the challenging environment due to customer caution and the situation in China, which affects the lab products business. This general customer caution also impacts our channel business, contributing to the mix profile in that segment. Regarding productivity, we've been adjusting our cost structure within the lab products business in response to volume changes, which accounts for most of it. It's also about managing spending wisely across the entire business, but those are the two main factors to highlight. Thank you, Eve.

Great. Thanks a lot.

Perfect. We will take our last question today from Dan Leonard from UBS. Dan, your line is now open. Please go ahead.

Great. Thank you for the time and really appreciate you sharing all those framing thoughts for 2024. I have a couple of additional follow-ups on that, but I'll keep it to one. I know it's not a bottoms-up view, but I'm curious how you're thinking about the inventory effect either for your business or the market in 2024. In those areas where there's been inventory burn-down in 2023, whether it be in bioproduction or the channels business or wherever you're seeing it, what do you think is a reasonable assumption for 2024? Is it reasonable to assume the burn-down concludes and demand can match customer usage? Just any high-level thoughts. Thank you.

That's a good question. I believe the focus is mainly on bioproduction. While it's difficult to predict the exact timing, I do think that during 2024, we will see orders align with revenue at some point. With an additional three months of observations, we'll have a clearer understanding of our outlook for 2024. However, I don't anticipate discussing inventory reductions on the customer side throughout the year, as there are activities currently taking place that are utilizing the existing inventory. In conclusion, I appreciate everyone joining us today. We are well positioned to maintain our strong performance, and as always, thank you for your support of Thermo Fisher Scientific. We look forward to providing updates in the new year.