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Thermo Fisher Scientific Inc. (TMO)

June 11, 2013 1:40 pm ET

Executives

Marc N. Casper - Chief Executive Officer, President, Director, Member of Strategy & Finance Committee and Member of Science & Technology Committee

Analysts

Isaac Ro - Goldman Sachs Group Inc., Research Division

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. Hi, everybody. Isaac Ro, Life Sciences Analyst here at Goldman. Thank you for coming. I'm happy to have the management from Thermo Fisher. And before you start, I do need to read out some disclosures. So please bear with me. We are required to make certain disclosures in public appearances about Goldman Sachs' relationships with companies that we discuss. The disclosures relates to investment banking relationships, compensation received or 1% of ownership. I am prepared to read disclosures for any issuer now or at the end of this call if anyone would like me to. However, these disclosures are available, too, in our most recent reports available to U.S. clients in firm portal itself.

With that, Marc Casper, thank you so much coming, great to have you here. I wanted to maybe touch on a few key items to your cost, general strategy, the financials and your capital allocation outlook, as well as you got from guidance. But as most of you know, Thermo recently had an analyst meeting. So hopefully, we won't be too repetitive on that. And of course, there's been a lot of news this year and there's a lot of transaction that's pending, so we'll try and work around all those items as we can.

So again, thank you.

Marc N. Casper

Isaac, thanks for having us and we're looking forward to the dialogue today.

Question-and-Answer Session

Isaac Ro - Goldman Sachs Group Inc., Research Division

Sure. So let's just start right in the beginning. The pending acquisition of Wyatt, that will create an industry juggernaut, I think that's probably the best word to use that I can think of. And as you look across the opportunity to take the combined franchise and go to your new customers, what do you think is really going to be the most compelling value proposition? And the reason I asked that question is we've seen, I think, in the past years, most notably the acquisition of Fisher Scientific is sort of the first step in that process of becoming sort of the master vendor to many of these customers. How do you think that will change your life?

Marc N. Casper

Isaac, when we look at the combined capabilities, we will be, not only the largest player in the industry with the benefits of scale, but the company with the most innovative portfolio. And our customers are looking for 2 things. They're looking for improved productivity, they're looking for accelerating innovation. On the productivity front, we've been able to use our size and we use to combine the size of the company to help have new solutions for our customers to help them continue to reduce cost and be more efficient. And on the innovation side of things, the fact that we will have the leader in genomics and the leader in proteomics in the same company will give the scientific economy even greater array of solutions over time to help them meet their challenges.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Sure. As I think back, I guess it was 2006 when the deal was announced with Fisher. At the time, it was certainly transformational. There was a lot of potential to consolidate your wallet share with the top 20 or so accounts. I think a lot of that has happened but as you look back at that experience, were there elements of that strategy that you think maybe you were early on, that haven't had come to fruition or what you hoped? And you think that will change here with Wyatt?

Marc N. Casper

What I would say is that one of the things we get most excited about with Thermo Fisher is 7 years after a large transaction, we're still generating new revenue synergies from that transaction, right? So I am a glass half full guy where you could say, why don't you get it faster? But the reality is the offering that we have today is really resonating with our customers. And we're clearly consistently gaining share. I would say, when you put Life Technologies together, we have really perfected this model of helping our customers drive their productivity. So I believe that we will do it more quickly in terms of capturing revenue synergies. Otherwise, when we announced the transaction, we actually put in modest revenue synergies in our financial assumptions where we only put in $25 million of earnings coming from revenue, which is a very, very small number. So that's one of the upsides that we'll go after quite aggressively.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. And qualitatively speaking, is there an element to your end market that you think is more -- is most receptive potentially to a combined offering, is it going to be in the core academic lab where Life had a really strong franchise? Or is there a huge untapped opportunity perhaps in biopharma?

Marc N. Casper

Biopharma is going to be the area that we see the shortest term opportunity because those customers over time have evolved towards more of a business orientation to their purchases, right? And that has happened. That's allowed us to gain share. And I think the fact that we have now a very compelling life sciences offering will allow us to tap into that. Clearly, academic customers are facing a tougher funding environment and therefore, things we can do to help them navigate it will be a positive for us. I think that's more of a dealing with the current circumstances.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Sure. I think, one thing that everyone in my shoes and certainly people in the audience who follow the company, we all try to do our own homework and it's perhaps a little bit easier to get your hands on someone with purchasing authority in the academic setting, those people tend to be a little bit more dispersed and a little bit more accessible. But in the pharma side, it's a little bit opaque to get your hands on the real decision-makers. So could you maybe provide some qualitative feedback as to what your conversations within pharma have been like as it relates to, not only the last couple years, but the potential for the Life transaction because it really seems like those companies have obviously consolidated, they've got global organizations more than they ever did, they've got probably a better feel for what their procurement needs are?

Marc N. Casper

Yes. So obviously, we're still 2 separate companies, so it's more been inbound calls, congratulating us on the transaction and sharing some observations. With big pharma, our relationships are typically either at the CEO level or the Chief Procurement Officer level or both because we're such a large supplier to these companies. And the themes from the calls have been really quite consistent, which is, one, we like the fact that you have even more capabilities; two, we look forward to the transaction closing because we know that you have done a good job delivering for us. And I think that customers just expect that we'll have new offerings to help them navigate the environment. So actually, I'm quite optimistic that once we close, our large customers are going to be very interested in doing more business with us.

Isaac Ro - Goldman Sachs Group Inc., Research Division

One of the things I'm trying to do in thinking about the pharma piece of your business is how these types of products are usually acquired, purchased and chosen. And one thing that comes up when you talk to your peer companies is sort of in many cases, these purchasing items are personal decisions. It's my pipette, it's my kit, it's the way I like to do things. Have you taken a general swing at what percentage of the current portfolio that you have at Thermo Fisher? And maybe the pro forma portfolio of the combined company, how much of those products are really personal purchasing decisions versus procured at a higher level?

Marc N. Casper

I would say that instrumentation is typically more around the personal side of things because they're large capital equipment, $50,000 to $1 million, and it's harder to influence the business side of that. The business implications would be, we're just not going to give you the money, right, as opposed to we're going to tell you to buy something different. What we do on that part of the portfolio is we use our scale and our relationships to get the end users to at least listen to our pitch. So our business sponsors will let us do technical seminars, things that it's very hard to get done on a pharma campus. So we get incredible access. And that allows people to at least have an educated choice. And that's allowed us to do well. On the other products, I would say there's been so many cuts in pharma R&D over the last decade that personal preferences change quite a bit. I think there's much more of we want some level of choice, but we don't want unfettered choice. So maybe in the past, I can buy any of the pipettes. Now I can live with the fact that I can only buy 2 different ones. And that's really what has happened. We've been able to narrow the choice down collaboratively with the customer. But if a customer wants something specific for a need, we'll get them whatever product they need.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Sure. While we're on the topic of personal equipment, you mentioned the high-end stuff, you guys just had a bunch of news at ASMS this week, you've extended your leadership with the high-end with Orbitrap with the new fusion, you've got also a new entry in triple quad. Just walk us through kind of product development? And where you are in that spec, it's been a premier franchise for the company, it remains so, tell us sort of what your goals are in the business with the new product?

Marc N. Casper

Yes. So for American Society of Mass Spectrometry, which is going on right now, ending in Indianapolis, we had telegraph at the beginning of the year that we were going to have a strong offering of new instrumentation. And clearly, as we looked at all of the competitive launches that happened this week, we really did have a phenomenal conference. We launched our new flagship high-end mass spectrometer product that's called the Orbitrap fusion, which we think will be another game-changing instrument for life science research and the early customer feedback is hugely positive. So just like the Q Exactive was a couple of years ago, we built that into a hundred million dollar franchise. We see this as being a very significant launch. We also launched 2 brand new triple quadruples, which is the kind of workhorse spectrometer, a high-end one, and one targeted at environmental and food safety. And again, that's a space where there's a number of different alternatives and having the newest most robust platform is good from a share gain perspective. So we feel very good about the prospects in our mass spec business. We've been gaining share for almost a decade and we feel like these launches once again put us at the forefront in terms of technology and momentum in the marketplace.

Isaac Ro - Goldman Sachs Group Inc., Research Division

If I go back to my sort of memory banks on how you guys talked about that business in particular over the years and the franchise, in general, I remember the term vitality curve, which has actually have been used for a little while but I remember it being really important for mass spec in particular because those are technologies that have very long lifespans if you want to just use the same box for as long as you want to use it over its useful life. But the same time, again, you guys have pushed the innovation curve quite a bit, so you can really accelerate the replacement cycle quite significantly. So can you just put in context on the vitality curve and sort of the mass spec market, how much these products really help boost the growth rate in your business?

Marc N. Casper

It's a great question. It's a very important factor. For a product line like mass spec and our strategy in mass spec, which is to bring out cutting-edge technology for the researcher, you're talking about vitality for that business in the range of 40%. So it means that 40% of your revenue are from products that are launched in the last couple of years. Very different than an ultra-low temperature freezer, which might have a 7-year useful life in terms of being fresh in the marketplace plus kind of a 5 to 7 years extra use by customers. So we have different vitalities across our portfolio but mass spec would be the most churn in terms of constantly refreshing and causing a proactive replacement cycle.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. Speaking of technology change, one area where there's a lot of changes, next-gen sequencing, and at your Analyst Meeting, you talked a little bit about your recent visit with the team at Life, [indiscernible] you had from all the potential there. Can you put a little more context around what your aspirations are in sequencing, just given the asset base you're potentially going to acquire there. It's clearly a market with lots of potential, it's very -- a lot of greenfield opportunity. Life has put a ton of resources in technology, the scale potential there is very compelling. So tell us a little bit about what's changed your view there at the margin? And what your hopes are?

Marc N. Casper

Yes, I don't think my view has changed. When we did our due diligence on the acquisition of Life Technologies, we had a very transparent process with them. They gave us, really, access to anything we wanted. We studied the next-gen sequencing business closely. We obviously studied them long before we did the diligence. But what we really dove into that in detail and basically, we felt that the market is going to want to have at least 2 players, and that the technology is doing well in certain applications and felt like that it had a lot of legs and a lot of runway. What's exciting is having been to the 3 Ion Torrent sites and really meeting a huge number of the people, you cannot leave those visits without being wildly enthusiastic about the projects of the business. So sitting here today, we're even more positive about what the outlook is. And it's one of those things where we see a very bright future for the business.

Isaac Ro - Goldman Sachs Group Inc., Research Division

And if you look at it purely from a financial standpoint, there's obviously, you pointed out potential growth, a lot of growth potential in the company. I think it was -- as their most recent public comment, talking about turning the corners for profitability this year. How do you look at the returns that you need to see from that business. What do you think about the margin potential or contribution it needs to offer for you to feel like this is an investment that you need to keep pressing on?

Marc N. Casper

So right now, my view is the following, which is the team has a clear strategy on how to build out its business and the investment profile they're making to really become a standard technology using the chip-based technology. And I think the strategy makes sense. So I think, as the business grows, the financials will get more and more attractive. Over time, my expectation is it's going to be a very profitability business and I think that the strategy makes sense, we have really good leadership there. So I'd like to see this strategy play out.

Isaac Ro - Goldman Sachs Group Inc., Research Division

But can you maybe tease out a little bit about when you said that 3% growth target for Life, how much of that was to tied Ion? I mean, the reason I asked is, my own personal view, reasonable percentage of the 3% growth Life was going to see over the next few years is going to be tied to this product. So is that a fair assumption?

Marc N. Casper

So if you look at the assumptions that we made, one is for the whole company, we said 3% growth on average, which is we think are conservative assumption. Embedded in that was that Ion Torrent will grow at market rate, so say, call it 15%, which would be much lower than it's growing today. So we obviously don't aspire to see the growth rates slow but we didn't make any heroic assumptions about what the growth rates will be in the modeling to financially justify the acquisition. My belief is that, that business can continue to do well and that will be an upside to the organic growth rates that we assumed.

Isaac Ro - Goldman Sachs Group Inc., Research Division

So if they do 15% growth though, is that enough for them to turn the corner on profitability?

Marc N. Casper

It is. The question is if that was the long-term sustainable rate, would you continue to invest at the same rate. And I think that's something the team would have to fair it out. So I think the assumption is we put the maximum investment, which would drive higher growth. We've assumed lower growth and we haven't titrated the investment back. So you either would aspire to more growth over time or you'd probably recalibrate it.

Eric Criscuolo - Mizuho Securities USA Inc., Research Division

Got it. Okay. That's helpful. As we look at very big picture pricing. Pricing in this industry has sort of a very healthy 1% to 2% a year for most companies that play here. How do you feel about the ability to realize continued price gains of that magnitude? In particular, after the transaction gets closed, is there an obvious way in which you can use pricing to your favor for the combined entities?

Marc N. Casper

Pricing in this industry prerecession was typically 1% to 2%. Pricing today or since the recession '09 has been flat to maybe up 0.5%, somewhere in that range. So I think customers generally are in a funding environment that they're looking for real value and productivity. So our assumption is that we're just totally focused on creating value for our customers and doing a good job. So we haven't made any assumptions really on pricing at all post integration, just really doing a good job by serving our customers.

Isaac Ro - Goldman Sachs Group Inc., Research Division

If I could press a little bit on that, I think, qualitatively, when I look at the other companies and the public company peer group average, the pricing dynamic is a little bit higher. Seriously, that your dynamic is a little bit more in that 0 to 0.5% range because you've got the LTS business where you're dealing with a little bit broader of not commoditized but lower-end item?

Marc N. Casper

I would say that if I look at pricing by the various categories, you've got some of it there. I think that as volumes have been more muted, instrumentation has actually been more competitive, not the high-end instruments, but that $5 to $50,000 point, there's been more competition there.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. Okay. And then as you look at sort of the longer-term guidance you guys have put out there for organic growth, does the pricing environment need to improve for you to hit your goal?

Marc N. Casper

No. I think the assumption is at this level of pricing, we're still going to be at mid single-digit grower for the Thermo Fisher portfolio, and a 3% grower for the Life Technologies portfolio behind for it.

Isaac Ro - Goldman Sachs Group Inc., Research Division

And that was, to me, would assume you're going to be taking a little bit of market share?

Marc N. Casper

Yes.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. Got it. All right. If I think back to the applied bio Invitrogen deal, one of the things they, I think, did pretty well was cleanup on pricing and standardize pricing in some areas of the applied bio franchise that they acquired. Do you think there's any low-hanging fruit of that nature as you guys put the whole company together?

Marc N. Casper

We are really -- I'm actually not all that familiar with what they did on that front as they're a separate company. It's not at all assumed at all in our business strategy. We really are not focused on the pricing aspects post integration.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. The footprint of the 2 companies are pretty interesting. You guys have a huge infrastructure in China, you've been direct there for a long time. I know the team there pretty well and they have always impressed me. At the same time, Life had been sort of a little bit newer to that market in particular. And I assume the case is true elsewhere in the emerging market footprint. So do you see a lot of opportunity for you to backfill Life's footprint in emerging markets in the first couple of years? And is that the key part of what's going to allow you to grow faster in the market?

Marc N. Casper

Isaac, I literally just returned back from China a week ago, spent 8 days there visiting customers, I spent time with the Life Technologies team, did the introductions between the 2 teams from an integration perspective. I think it's a really good strong fit. Life Technologies is a smaller presence in China but a strong presence and I think the combination should put the combined company in a great position. I do agree with your question in some of the other markets, the combined scale will allow us to make some investments to better position both companies. So the Brazils and Koreas of the world, the Russias are sort of that next tier down below China. We now have enough critical mass to really build out a very strong presence. And that should accelerate growth.

Isaac Ro - Goldman Sachs Group Inc., Research Division

You mentioned China having just come back. So interest me on a couple of levels. One is just thinking about the logistics of putting the company together, getting through the regulators. If I think about the pro forma math, it's going to be something like $1 billion of sales in China, which in this industry, is significant. Do you anticipate that being getting factored to the timeline to closing the transaction? How are you approaching going into the various regulations -- regulator kind of bodies you need to go through on a regional basis?

Marc N. Casper

Yes. So we are doing -- we have great advisors here. We are doing our filings as according to the plan we had laid out during the diligence process. And things are progressing. So a country like China will be doing our filing relatively soon. And what we plan on doing, Isaac, is doing our earnings calls just to give periodic updates and our thinking is it's our standard format. So we'll give updates on how's regulatory going, what's going at financing and what's happening on integrations, kind of go through the checklist every quarter. But we anticipate things closing early in 2014.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Any reason to think parts of the business might need to be divested in order to fulfill hurdles at this point?

Marc N. Casper

I think, our view is we're well-advised and we're confident that we'll successfully navigate through the regulatory process.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. Got it. Sequester, hard to get around that topic. It's clearly an element that hit everyone in the industry to varying degrees. And we look through just cash flow dynamics of how government funding will work, it seems like this quarter and the next quarter really going to be the peak quarters of impact, you guys really, I think, deserve credit for having been among the most conservative and right on sort of the impact this year. Is it fair to say that you guys expect the biggest headwind this quarter and next and then hopefully an abatement as we move into the end of the year?

Marc N. Casper

Yes. I think, our view is, as you say, that the next 2 quarters will be the most challenging. I think, our view is that we're going to live under a continued resolution, authority approach for the fourth quarter. So that we're not assuming that a budget gets passed. So if we get a budget and it gets passed, that's probably an upside. But we're not banking on that one.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Yes, I wouldn't either. Okay. Japan. Currency issues are what they are, but on an underlying basis, one thing I've asked the other companies in this space is their expectations around stimulus. Hopefully, you get a little bit of tailwind there in the back half. Is that your assumption and what are you seeing on the ground so far about underlying budget trends?

Marc N. Casper

There's certainly stimulus spending going on in Japan. We're definitely seeing demand for instrumentation picking up by government program. So that actually should be a nice tailwind going forward.

Isaac Ro - Goldman Sachs Group Inc., Research Division

I've asked a bunch of questions, let me stop for a minute to see if there's any question from the audience, and please don't be shy. I'll call names eventually. I'll call names, eventually. If we look at sort of how much you made the very beginning, innovation, the reasons why some of your partners look to you, not beyond just scale but also innovation. At the same time, you guys have had what I would call modestly lower percentage of sales spend on R&D, granted the absolute number is impressive. But how do you look at the need to deploy capital towards your R&D initiative to sort of sustain that above market growth rate for the long term?

Marc N. Casper

So we spend about 5% of sales on our manufacturing revenue, right? So there's quite a bit of a revenue that doesn't have R&D associated with it, our services business or channel business. So it's about 5% of sales. And in that 5%, it varies by product line from about 2% on the low end to about 10% on the high end aspect beyond -- on a high end of it. So we are quite disciplined about how we deploy capital. And we are always willing to spend more on R&D if we like the projects, right? So over time, you've seen us kind of pick it up about 10 basis points a year. So modest but -- so as we see opportunities we get excited about, we're willing to spend a little bit more and redeploy things from like G&A to R&D. But I feel good about the aggregate level. We didn't assume any R&D synergies between the combined companies. And I think having a $750 million R&D portfolio is going to allow us to optimize that, not reduce it, but basically put the money where we think it's going to get the best growth prospects and we feel good about that.

Isaac Ro - Goldman Sachs Group Inc., Research Division

If I was [indiscernible] one of your other senior R&D scientist, what am I most excited about? When they come to you and e-mail you and say, "Hey, I'm really excited about what do we do with Life on the R&D," are there a couple of obvious product categories where you think you can really out-innovate the market and change the way workflows are done on way the technologies apply?

Marc N. Casper

Companion diagnostics will be very compelling. It's not going to be a big short-term revenue number but if you think about what a pharmaceutical company is looking for in companion diagnostics, there's 2 things. They're looking for whatever companion diagnostics has found that there's a commercial organization that can get it to every lab so that it can be tested for a prospective patient, that's one. And two, is they are really technology agnostic what they want to figure out is what is the right technology to measure the diagnostic that's needed. And the fact that we have mass spec, a full range of immunoassays and sequencing of one company is really quite exciting. So that will be one area that there's a lot of excitement. I would say, the other area, this is moving life science tools into the clinic, mass spectrometry sequencing will big areas of focus for us.

Isaac Ro - Goldman Sachs Group Inc., Research Division

All right. I want to make sure, I want to come to the mass spec item but on the first you point you made regarding companion, you have all the technologies more or less that one might need to make that a business. How do you feel about your regulatory sort of channel reach? I mean, you have the bodies you need to sort of go to the payors, go to the FDA, go to pharma and catalyze all that.

Marc N. Casper

So we have obviously, clearly, the pharma relationships better than anybody. We have the regulatory infrastructure in place and what I know you're very familiar with, the audiences less so, is several of our diagnostic businesses are very high share businesses, 75%, 80% share businesses, which effectively means that every lab or every major lab is a Thermo Fisher customer, right? So we don't need to be the biggest diagnostic company to have the reach, right? And that's always been our strategy, which is we want to be in all the hospitals by having very high share positions but we don't have a desire to be in the commoditized segments of diagnostics because we don't like the returns on invested capital. So we clearly have the reach. We have the technology, we have the regulatory and we have the relationships. So we think we're quite well-positioned to compete there.

Isaac Ro - Goldman Sachs Group Inc., Research Division

On the lab point, there was a notable transaction last week with one of the major lab companies working with one of their key vendors and sort of work towards, I think, on the lab side of things, slimming down their vendor list, and for the vendors, sort of an opportunity to gain some footprint, some market share. And you're obviously working with all these labs very closely. What's your thought on how the lab market is going to try and rein in their expenses to try and deal with the new normal in terms of their reimbursement profile, their volume profile?

Marc N. Casper

I believe that you'll see industry -- that industry continue to standardize on its vendors. So companies that can help drive their productivity are going to really have been in good stead. We have exquisite relationships with the major players globally in that field.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. And you guys were, in the middle, I think, of building out a very sizable diagnostics franchise for the Life transaction. The way I look at it, there were still plenty that you could do. Is that a fair assumption once you get past the 2015, '16 timeframe and your balance sheet leverage looks a little bit more flexible?

Marc N. Casper

We're focused right now on just closing the Life transaction and then successfully executing against the plan. In that process, we'll delever. And once we've successfully done what we're supposed to do, we'll worry where the opportunities lie in 2016 and beyond.

Isaac Ro - Goldman Sachs Group Inc., Research Division

One last question for me in diagnostics. Just you mentioned mass spec, I thought it's -- obvious type of a classic life science technology that can find its way more broadly into the hospital, we look at companies like Brooker, they've got a few hundred of their [indiscernible] out there in the hospitals. But really, even after a few years, still pretty lightly penetrated. How do you feel about your opportunity to put your mass spec technology into the hands of every hospital in the U.S.? What would it take?

Marc N. Casper

I would say that it's going to be driven by 2 things. One, simplicity and ease of use for the customer. And two is the killer app where the medical information is valuable enough that customers are going to take on a new technology. Now the good news is that both of those things are achievable and I think that you'll see, over time, us build quite a large clinical franchise of mass spectrometries. So we understand the unmet needs and we understand how the to make the instrument effectively a black box where it's sample in, data out.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Is there a price tag you need to hit? Is there a portability portion you need to hit?

Marc N. Casper

It's not a portability one. The price tag is something that we can achieve. If you're selling in the range of a triple quad price tag, those economics would work for a clinical customer, given the volume characteristics, provided that the instrument was extraordinarily easy to use and robust.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Is there a way to productize it so that there's a recurring revenue stream?

Marc N. Casper

I think there's opportunities there. There is some consumables you can do that. There's also leasing options that we get but we just won't.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. Next few months, you're obviously getting in execution mode to get the deal closed and all that. [indiscernible] You mentioned being in China, meeting with the Life team, is it more of that sort of regional going around and sort kicking the tires into various parts of the business?

Marc N. Casper

Yes. I spend a significant amount of time with the customers, right? Somewhere between 1/3 and 40% of my time is focused on customers. Right now, I'm still doing that, it's obviously mission-critical. I'm spending a lot of time getting to know the Life Technologies team, make sure that the integration is starting on the right note, going through the things during the town halls with the employees and those types of things. And then still doing obviously the other things we need to do with Thermo Fisher. So it's an intense period but it's quite exciting. What I would say is over time, it's all about having the best team that can manage through that and we have a great team so I'm quite confident in how things will shape out.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. We have 5 minutes left. Anyone with questions, please raise your hand. We have mics and all that in the back. Okay. Let's just get back to the OPS business. You guys have that huge channel. When you bought Fisher, it was huge percentage of sales have come down pretty steadily. How much room is left to really bring a lot more of those revenues and how to boost the margin to sort of drive more control over that business?

Marc N. Casper

We have a great set of external relationships with our suppliers and we don't anticipate significant changes to the portfolio. I think we've really driven a lot of the optimization that we wanted to drive and we want to make sure that our customers have great amount of choice. And we have a core set of suppliers that we work with and we're excited about supporting them. So I think, there, it's really about it's business as usual for us.

Isaac Ro - Goldman Sachs Group Inc., Research Division

And so there isn't really in your mind that a long-term walk towards a new goal on percentage of sales and how it's manufactured?

Marc N. Casper

No, I'm comfortable with where we're at, at this point.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. On the financing of the Life transaction earlier, last week, you guys raised some equity. Just walk us through [indiscernible] the timing there? And sort as you look at the balance of the year, the rates environment moving around a little bit, what are some of the moving parts on the financing that you want us to keep in mind?

Marc N. Casper

Right. So we announced the transaction in the middle of April, and at the time, we said that we would use up to about $4 billion of equity, the rest would be cash and debt. As we refine the cash flow forecast for the combined business, we were able to continue the same leverage ratios assumed but actually just raised $3.25 billion worth of debt. So we have been moving quite quickly to get the transaction financed, but in a way that it's not value-destroying. We're not trying to pick up lots of cost this year until we're at the time where the transaction is going to close. So last week, and then yesterday, we completed an equity financing of $2.5 billion, and through a forward mechanism, such that we will settle that forward right before the transaction closes. And that allows us to avoid any dilution or any material dilution to our earnings this year, but also derisk the transaction by getting that equity done. We have about $750 million left to raise on equity, which we'll do through some sort of, at least the plan is to do some sort of equity-linked security or some sort of convertible is what we're thinking about. We finalized the bank financing, a $5 billion facility that is all set. And then the last thing that we have to do is just the bond financing, which we are doing some process of locking in some rates. And we'll do that much closer to the transaction close.

Isaac Ro - Goldman Sachs Group Inc., Research Division

So where do you think you'll end up on total borrowing cost?

Marc N. Casper

What we said is somewhere in the range of 3.25%, 3.5%.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. So good time to be raising money.

Marc N. Casper

It's a good time to raise money.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Yes. Got it. I think, last one for me has to do with the next 6, 12 months period where you're in the process of closing and then your competitors are all clearly trying to ingle around and figure out a strategy as to how to compete with Wal-mart, right? Or -- a full base offering. How do you manage through the risk at the margin, with the Life management team in transition, you guys are busy, that you see a little bit of ankle biters trying to take away share, try to steal contracts, try to disrupt your business in the short term? How do you manage that?

Marc N. Casper

All of us in the management team are focused on keeping our organization, paying attention to our customers, listening to our customers, helping them to be successful. I think, I've met now, through town halls, about 2,500 of the 10,000 Life Technologies team. And basically, what I have said over and over is focus on your customers, it's business as usual. Of the 50,000 employees we have globally, about 200 are going to work on integration. So for 49,800 people, just do what you're doing and that's what's going to put us in good stead. So there's always a risk of share losses, always a risk of distraction. We've done a lot of integration, they've done a lot of integration, our job is to navigate that such that we don't lose share.

Isaac Ro - Goldman Sachs Group Inc., Research Division

If I remember Life having about I think 700 sales rep globally, you guys have, I can't remember how many, but the combined sales force number is fairly significant, right?

Marc N. Casper

It's in the range of about 10,000 people working with customers everyday.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Right. Combined companies.

Marc N. Casper

Yes.

Isaac Ro - Goldman Sachs Group Inc., Research Division

And that's a significant channel advantage. And I think, Pete, and you've both have been very consistent about wanting to not disrupt customer relationships in the short-term. But is there any reason why the sales force needs to be that big in this industry relative to the next -- I mean, if I look at the next couple of companies, they're nowhere near that size?

Marc N. Casper

I think the fact that we are able to serve our customers as well is a huge advantage. And that's our focus, right. It's about driving incremental revenue and giving customers different choices on how to buy it, whether it's through our channel business, whether it's through our websites or whether it's through direct sales force. So all in all, we give customers lots of choice and we give them outstanding customer service. So as with you. So Isaac, thanks again for having us.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Yes. Great to have you. Thank you. We're out of time, but thank you guys for participating.

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Source: Thermo Fisher Scientific, Inc. Presents at Goldman Sachs 34th Annual Global Healthcare Conference, Jun-11-2013 10:40 AM
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