Thermo Fisher Scientific Inc. (TMO) Presents at 2019 Barclays Global Healthcare Conference (Transcript)

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About: Thermo Fisher Scientific Inc. (TMO)
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Earning Call Audio

Call Starts: 08:00 January 1, 0000 8:25 AM ET

Thermo Fisher Scientific Inc. (NYSE:TMO)

2019 Barclays Global Healthcare Conference

March 13, 2019 08:00 AM ET

Company Participants

Marc Casper - Chief Executive Officer

Conference Call Participants

Jack Meehan - Barclays

Jack Meehan

Good and good morning, everyone. Thanks for joining us for presentation of Wednesday. I'm Jack Meehan. I'm the Barclays Life Science Tools and Diagnostics Analyst. And pleased to be joined this morning by Thermo Fisher CEO Marc Casper and from the Investor Relations team Raf Tejada. Before we kick it off, we have three audience response questions. So we'll kick that off. Please use the Blackberry's tape devices in front of you. Question one, what do you view as Thermo Fisher's organic growth profile over the next three years? Perhaps, a preview for the analysts.

Here we go.

Jack Meehan

Right down the middle, mid single-digits 72%. Question two, how confident are you in the outlook for China?

They're from very confident to not at all confident.

Give you a sense for sentiment there.

A little bit more uncertain, we would say. And then finally, how would you like to see if Mark deploy capital in 2019?

Another surprise, proven consolidator focus on M&A. So with that Mark, I mean, intro comment.

Marc Casper

Sure, Jack. Thank you and thanks for joining us this morning here in Miami. It's great to be back. So we finished a really exciting year in 2018, right. It's a combination of more than a decade of executing the strategy of really focusing on enabling our customer success. And you saw a real acceleration in organic growth, driven by the strategy as well as the markets. And as we enter, and almost at the end of Q1, we feel really good about 2019, and feel that the end-markets continue to be strong, and the benefits of our strategy continue to resonate really well with our customers.

For me, I spent the first quarter each year traveling around the world, visiting our customers, interacting with our sales teams around the world. I see thousands of our sales reps in this time of the year and get a good sense of tone. And the tone is incredibly strong. So it's nice to see the results that we delivered, but I'm more excited about the results ahead.

Question-and-Answer Session

Jack Meehan

Great. So I think that's one thing that’s really stood at us is the customer value proposition appears to be resonating and the organic growth is strengthened. What do you view is kind of competitive advantages in the business model versus be a perk some of your peers have taken?

Marc Casper

Yes, we've had a very consistent strategy with our value proposition which is you can sell a broad range of capabilities to the customer base if you demonstrate success niche of the product lines. And because of our track record and innovation in areas like mass spectrometry, chromatography to doing a great job in serving their scientific needs with our fisher scientific channel, what has happened over time is that we have a library of case studies of how we help our customers be successful. And they just want to do more and more business with us. And at the same point we have access or we have access to the decision makers on a track record. And that opens up new dialogues. And when I think about the typical pharmaceutical company analysis and acquisition, we're right in there, right. And we're saying, while we're not going to divulge information that's confidential from the other company, we can say we already are working on a white paper that will help you on day one be prepare to drive synergies where we see opportunities where there are best practices and are really use that access to create value for our customers, and that has resonated very strong growth. In Pharmaceutical and Biotech with our 40% of our revenue, we're growing double digit growth and we've been growing much faster than the market post-recession, basically.

Jack Meehan

Great. And let's continue on there. So biopharma, it’s your largest end market. It’s been a real growth engine you've been building out the capabilities. Just at a high level, how sustainable do you view market growth? And what are some of the leading indicators you look at in biopharma services?

Marc Casper

Yes. So in terms of the market growth, we're in a good cycle within the biotech and pharmaceutical industries. So the underlying growth of the market is strong, actually because the science is good, right. I mean, if you are interacting with the emerging biotech companies or even the larger pharma companies, they are super excited about how patients are going to benefit from the science that they are working on right now. And that has led to good funding cycle and ultimately has fuel good market growth. And with that good market growth, we have that unique value proposition which has allowed us to grow at a much faster rate than others in the double digit growth as far in excess of what others are delivering.

Jack Meehan

Do you -- so there's been some activity in bio production, historically, you've been very strong in the upstream markets. Do you think that some of the deal activity changes the competitive position at all? And is a priority that extend your own capabilities in the downstream?

Marc Casper

Yes. So we -- there are four basic workflows within the bio production market segment. And all of those workflows have experienced attractive rates of growth. We are the market leader in cell culture where you grow the cells to produce a product, and we are the market leader in single use technologies, which is all of the storage systems that allow you to produce the drugs in a very cost efficient way as opposed to massive capital investments effectively you use a disposable concept for manufacturing. So we are leader in two of the four segments and then there is filtration and purification and there's been M&A activity in that filtration and purification space. So customers buy best-of-breed because the way that they look at is how does my product interact with these media? How does my product interact with each of the process steps? We don't think about it across the whole workflow access we got to optimize the pieces because the drug is so valuable relative to the cost of what the industry provides to them. So I don't see any changes coming from the M&A landscape.

Jack Meehan

Great. One last one on biopharma. So you've built out a biopharma services platform with API and the logistics business. It seems like every week goes by and there's another gene or cell therapy deal will end. I'm just curious how you think that business is positioned for some of the growth in that market? And do you -- how much visibility do you have into that growth in that segment?

Marc Casper

Yes. So we built -- we've had capabilities in the contract development and manufacturing space for -- since the early 2000s -- from the 2000s through our clinical trials' capabilities. And we extended in 2017 adding development and manufacturing capabilities as well, so from early development all the way through commercial manufacturing. We can support our Biotech and pharmaceutical customers. When I look at the dynamics in that business, we think it’s truly the golden age for the CDMO space. And why do I say that? If two really interesting dynamics that have played out over the last couple of years, which is changing the way the industry is working. The vast majority -- north of 75% of all molecules are in the small and emerging biotech companies that don't have -- and that don't have the capabilities of manufacturing and the later stage development, right. So they are looking to the CDMO industry to help them through that process because that's a key factor in why the growth rates have really picked up significantly for the CDMO space. And interestingly enough because of the way the capital markets are shifted, these companies are actually going later through the process as opposed to selling out very early, just selling out in later stage. And once the product is fairly late stage, you never move it, right. So you wind up with much more of a pipeline of commercial drugs in the CDMO market. So we're very excited about that. At the same point, the new science modalities have lead pharmaceutical companies to have the wrong manufacturing networks. So they have manufacturing networks that are mismatched with their demand. And actually the amount of interactions we're having in the large pharma because of all the trust we have there to actually look at new ways of working with them and helping them develop the manufactured drugs is really the pipeline is incredible. So we're very excited about what the future holds in that part of our business.

Jack Meehan

Yes, I think, it's a great example of the customer value proposition all in. Maybe turning to the industrial and market, we've seen some moderating PMIs. And I think that there's a little bit more, at least from the investor community, there's been a little bit more caution there. Just, what's your outlook for these customers? And how much visibility do you think you have into the order book?

Marc Casper

Yes. So what we've assumed for this year in our guidance is that our industrial and applied markets would be growing in the low- to mid single-digits this year. And our assumption is this because we do have about six months of visibility, is that the back half of the year will be weaker than the front half of the year. That's an assumption, right. It's not something we're seeing. It's something that just leading the PMI and other things, right. It might slow. But what we can see right now is incredibly robust, right. So actually the markets are very strong. And our industry typically lags by about six months. So actually my team might wind up being very strong even if industrial slow. So it's hard to read, but at least the first half looks very good.

Jack Meehan

So geographically we'll turn next to China. It’s an important growth driver for the company, and I think it’s a scenario where your customer value propositions really resonated. Just what do you view is differentiated about the go-to market strategy? And any updated thoughts on the political trade and tariff to be?

Marc Casper

Yes. So I appreciate the question on China, appreciate all the questions. The question on China is helpful, because if you take the lens of investor or business person, I think that the scattered gram will be exactly how I would think about of one-off high uncertainty. If you take for lens of a company that's been doing business in China for 40 years, is by far the largest life science tools and diagnostics company domestically in China. You had a different level of insight into the specifics of our industry and our competitive position. And the outlook looks very good, right. And that doesn't mean that GDP growth isn’t slowing? It is, right. You see it in the spillover effects in the German economy. So it's not as if there aren’t challenges in China. But if you think about what's important to the government, right, which is -- it appear slowing GDP growth, the real mantra has been that the quality of GDP growth has improved. Was that mean? That you can breathe the air, you can drink the water, you can eat the food, right. And it's that straightforward. And their mom or dad can get access to a doctor if they're ill. And when you look at what we do, we help the government monitor to the air supply. We are involved in food safety, the expansion of healthcare network. And demand has been incredibly robust. And we finished the 20% growth last year, and we're expecting mid teens or better growth this year in China. And we feel good is that having interacted with the Chinese leadership team and adding to China in a couple of weeks' time. Things look very strong for us.

Jack Meehan

Great. Up next, want to move over to electron microscopy with FEI, which you've done a lot of great deals over time, but this one certainly shined, maybe just talk about some of the initiatives you're putting in places for the growth in Cryo-EM and any update on the Gatan deal?

Marc Casper

Yes. So Jack -- so we bought FEI Company in 2016. And we had been in dialogue for a long period of time. And as a leading instruments company and a leading life sciences company, what we were looking for with FEI was when was a tool that was traditionally used in material sciences going to jump significantly into the life science market because once that happened, we knew we would be the right company to really try commercialization. So we have been watching it for a number of years, we made the acquisition in 2016, and it's been a great acquisition. The life sciences market has really picked up, customers really see the benefits of using electron microscopy in the drug discovery process. And for biology applications, which has taken a business that was growing in the low- to mid single digits, typically more on the low side of growth for the whole company, is now growing -- is growing in the double digits consistently since our acquisition. We've helped expand the life sciences applications, but we also helped enhance the material science applications where that business historically had great strength. Our PPI business system really changed the way they manufacture the way we manufacture those products, which has made the business much more competitive. And that combination of the events is really led to a business that has delivered.

Jack Meehan

Great. Next one, want to get your latest views on the academic end market, has there been any impact from the U.S. Government shutdown that you've seen? And how do you feel about maybe just for global outlook for life science research?

Marc Casper

Yes. So the government's shutdown because of the way the funding mechanisms work. The agencies that are important to our industry and importantly Thermo Fisher were funded. So they were not affected. And the fact that the government is back open, that doesn't seem to have a significant impact. The NIH is -- it's got a budget growth this year in the fiscal year that ends in September, and Congress continues to be quite supportive of investing in NIH. But around the world, quickly, Horizon Europe, which is the program that the EU has put post Horizon 2020, has a big commitment to scientific research, which is good. Having that with two of the ministers in the UK Government really talking about the life sciences industry, they're focused on making sure that the UK in a post-Brexit world remains a force in the life sciences. So I think that Europe, probably more moderate growth than last year in terms of academic and governments aligned with GDP, but should be reasonable. China continues to be strong and that rounds up most of the world.

Jack Meehan

Yes. Great. Maybe moving to healthcare, could you give us an update on some of new products with Cascadion as well as in clinical NGS? And just maybe what are some of the near-term priorities that continue accelerating the growth in the Specialty Diagnostics Segment?

Marc Casper

Yes, so we are a leading specialty diagnostics player, and we've picked the niches that we play in and have a very profitable moderately growing business. What we have been doing is investing in some very key R&D programs that leverage the strengths of the company. And at a simplistic level, taking technologies that are very strong in life science research, applying them in high value added clinical settings to expand the market. And we have three programs that we have been driving. The most mature of those programs is in clinical next-gen sequencing, where our sequencers are used by doctors to guide therapies for your particular type of cancer. That business has grown very rapidly, and has led for all of our sequencing businesses to grow double-digit type growth as well. So that's going well, and we have an exciting suite of products that you'll see us launch and continue on that momentum over the next year or so.

In terms of mass spectrometry, we have two late-stage development programs that we've talked about, and they are getting feedback from customers. And one effectively would look like and act like a traditional immunoassay analyzer. So you would take a blood sample in and you would get a result, and the detector happens to be a mass spectrometer. And that is truly revolutionary, right. Today, mass spectrometry is used in highly skilled clinical labs, the Mayo Clinics, the LabCorps of the world, but it's not routinely used because you need to have an expert user. And the concept here is the medical information you get from a mass spectrometer is highly valuable, but it's too difficult in use. So we have developed a walk away system and we're going through that trial process to work at all the different challenges to make sure that those super robust. And our intention is to see revenues build during the course of this year and in the later part of the year and into 2020. And the pilot program is we have a companion program in microbiology applications for the mass spectrometry space, and one that is also we're very excited about. And that’s more of a year away or so.

Jack Meehan

Take that up in the breakout.

Marc Casper

Sure.

Jack Meehan

So next, maybe talk about the channel business, which I think is really core to that customer value proposition, maybe you can talk about how market trends have been there? And any investments you're making in e-commerce?

Marc Casper

Sure. So Jack -- so we are the leading channel to the -- in the scientific supplies industry. And what does that really mean that a customer -- there are literally millions of SKUs that are used in laboratories. And it is so overwhelming for a customer to figure out what to actually buy and use. And so the industry has over time evolved towards a couple channels to market through that aggregation and simplification for the customer base. And so the trends there have been good. We've had good growth. We’ve gain market share. We have invested substantially in e-commerce and have a very high proportion of our transactions. We done electronically with our customers and we continue to invest heavily there. And we have a purpose-built distribution system that gets the products in a very timely cost effective fashion to the customer base. The way to visualize this, we are the Amazon of scientific supplies, right. We designed the system to optimize how you buy these products. And the reason that is unique in this industry is you have hazardous chemicals, frozen, high value added refrigerated, temperature control, you have a whole variety of things that you have to manage for your customer base that allows you or requires you to have a very specifically designed system to handle that.

Jack Meehan

Great. One of your strategic priorities for 2019, on the slide was share gain -- share gain, share gain.

Marc Casper

Yes.

Jack Meehan

So as we sit here in Miami Beach, where are you bringing the heat?

Marc Casper

Yes. You know it’s a good thing. It's funny as in this part of the year throughout in front of your sales force, right. And these folks have worked with the company 18 years. So you get to know someone in the team really well, right. And someone will say Mark, great, congratulations on a great year. And I'll say now congratulations and thank you for delivering it. And then they say oh, we have a difficult comparison or maybe it won't be as good. And I say, wait a minute, we don't have 100% market share, right. We first ignore the market conditions and keep the team totally focused on there. And that's the mentality which is until we get to all of it, then we haven't done our job yet, we’re not done. And when I look at it, we're gaining share in chromatography, we are gaining share in mass spectrometry, in our bioscience reagents, in our Fisher Scientific channel, in our clinical logistics, clinical trials logistics business, very broad-based across the company. And that's the mentality is that the market opportunity is so large that we have to go out and just earn it every day. And that's what we're trying to do.

Jack Meehan

Maybe speaking about the market opportunity and some of the fragmentation in terms of the capital deployment, so how does the environment to you look today for M&A? How do you feel about your positioning at the moment and from the actions from the other consolidators and your leverage flexibility?

Marc Casper

Yes, last year, we did a couple of deals and we delevered. So we entered this year with a very strong balance sheet, tremendous amount of capacity. And as disciplined or more disciplined than we will ever be, right, which is, we have a great track record of knowing, which deals to do and which deals not to do. And so we have -- we will be active this year in looking, but have no idea whether will be active and doing, right. And that's the way I think about it every year. And so I feel good about the environment, right. There's definitely companies that are thinking about doing different things. And we have the capital and the capacity to build our business for the right transactions.

Jack Meehan

Maybe just toeing in a little bit more on the biopharma services business, how do you way the different options that you have between build versus buy CDMO maybe versus buy assets from a customer? Are you indifferent across them? How do you pick and choose?

Marc Casper

Yes, it's a return on investment so to trade off. So the greatest return within reason is leveraging your existing network by basically filling up the buildings, adding marginal capital to really drive capacity. So you've seen us do a number of announcements and expanding St. Louis, expanding a facility in Germany, expanding our sterile fill/finish network in Europe. So we're making those investments. We have a number of dialogues with pharmaceutical companies on potential acquisitions. We also have some interesting dialogues in the CDMO space with standalone companies. So we'll look at those different ones, and we'll do the transactions we feel best about, right.

Jack Meehan

So maybe to close we'll get back to the first question we asked today about the near-term growth trajectory. You've had a long-term organic growth profile 4% to 6%. You've been doing better than that. You've been leading the portfolio toward faster growing areas. Do you still view that as the right level of growth? What do you think are the various puts and takes as you look out over the next few years?

Marc Casper

Yes, it's a question that I get a lot, and I was so until we deliver more than six and we know how to really discuss it, but then we delivered eight last year. So when we have our Analyst Day, we'll talk about the range. We're taking a bunch of actions, as you said, to accelerate the growth rate and the outlook for the company. So that's the topic that we'll certainly consider.

Jack Meehan

Okay. Well, thank you for all the insights. We're going to take the breakout next in Poinciana 4.

Marc Casper

Thank you, Jack.