Thermo Fisher Scientific Inc

NYSE:TMO

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2020 Third Quarter Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to your moderator today, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin your call.

[Kenneth Apicerno, VP, IR]

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 Web site thermofisher.com, under the heading Webcasts and Presentations until November 6, 2020. A copy of the press release of our third quarter 2020 earnings is available in the Investors Section of our Web site under the heading Financial Results.

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 quarterly report on Form 10-Q for the quarter ended June 27, 2020, under the caption Risk Factors, which is also on file with the Securities and Exchange Commission, and is also available in the Investors section of our Web site under the heading SEC filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also, during this call, we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2020 earnings, and also in the Investors section of our Web site under the heading Financial Information.

So, with that, I'll turn the call over to Marc.

[Marc Casper, Chairman, President and CEO]

Thanks, Ken, and good morning everyone. Thank you for joining us today for our 2020 third quarter call. As you saw in our press release, we delivered exceptional performance again in Q3 as we continue to build on the significant progress we made last quarter. I continue to be humbled by the incredible efforts of our team as they answer the call to help our customers and society manage through this unprecedented time. Not only did they expand our leading role in supporting the Global COVID-19 response, but they also effectively managed through this environment to return our base business to growth. The work we're doing today is clearly having a profound impact on the world, and for that we can be very proud.

But it's important to note that our efforts are also strengthening Thermo Fisher for the future, and making us a more valuable partner for our customers. I see many positive trends from this period that will increase our contributions to healthcare. A few examples that I referenced during our recent analyst meeting are worth repeating. We're seeing much greater collaboration among industry and governments globally. Funding for research diagnostics and development of therapies and vaccines will increase to prepare for future health threats. We'll see more focus on supply chain security and the building of national stockpiles as well, and all of this has put a significant spotlight on the need for a stronger commitment to improving healthcare systems globally.

We're already seeing the impact of these trends on our business, and I'll give you a number of examples later in my remarks, but first, I'll review our financial performance and give you some color on what we're seeing in our end markets. From a financial perspective, in Q3, we continue to work with speed at scale to support our customers, generating approximately $2 billion of COVID-19-related revenue in the quarter. At the same time, our teams did excellent work to grow our base business. This led to exceptional performance across all of our key financial metrics. Our reported revenue increased 36% in Q3 year-over-year to $8.52 billion. Adjusted operating income grew 97%, to $2.80 billion.

Our adjusted operating margin increased to 32.9%, and we grew our adjusted EPS by 91%, to $5.63 per share in the quarter. We're continuing to manage the company appropriately in a very fluid environment, exercising the cost discipline that you'd expect from us, while investing significantly in new products, services, and capabilities that will create value over the longer-term. Turning to our end markets, our performance was a combination of our significant pandemic response and the return to growth in our base business. Starting with pharma and biotech, the largest of our four end markets, we delivered an excellent Q3, growing 20%.

We've performed very well in this end market for many years, and we further accelerated our growth by helping these customers to ramp up development of COVID-19 therapies and vaccines. The combination of strong market fundamentals and pandemic-related activities led to strength across all of the businesses servicing this end market, particularly bioproduction, pharma services, biosciences, and our research and safety market channel. In academic and government we grew in the low single digits in Q3. We captured opportunities as more of these customers returned to work and their research activities increased. Turning to industrial and applied, while we declined in the low single digits during the quarter, we saw a meaningful sequential improvement from Q2.

Last, in diagnostics and healthcare, we had an incredible quarter, delivering 130% growth. While we continue to see the impact of a lower level of routine doctor visits and related testing, demand did improve from Q2 levels and our COVID-related testing revenue grew significantly during the quarter. We saw the benefits of these dynamics across our Life Sciences Solutions and Specialty Diagnostics businesses. As you know, our involvement here includes providing both proprietary COVID-19 diagnostic test kits as well as reagents used for laboratory-developed tests, along with sample collection products and instrumentation.

So, in summary, our teams put forth an amazing effort in Q3, not only increasing our response to the pandemic but also returning our base business the growth. The combination resulted in performance that positions us to deliver our best year yet.

Turning to our business highlights for the quarter, as you know, we continue to increase our capabilities so we can the best partner for our customers and strengthen our competitive position. In Q3, we worked with speed at scale to address the critical needs brought on by the pandemic, while making great progress in executing our growth strategy across our businesses. Let me cover a few of the highlights. In terms of our pandemic response, we continue to expand our role as a trusted partner for industry and governments around the world. It's important to note that while this has clearly driven exceptional growth for us so far this year, much of what we're putting in place now will create sustainable value longer-term.

First, as you know, we have the leading position in providing COVID-19 diagnostic test kits given our gold standard PCR-based tests and our industry-leading install base of instruments, and we continue to expand our presence by bringing new solutions to the market that help the medical community ramp up testing capacity, and enable society's return to work and school. In September, we launched a new highly automated solution called Amplitude that helps laboratories quickly scale up to meet testing volumes. This platform is based on our TaqPath combo kit and the QuantStudio 7 PCR instruments, and has the highest sample throughput in the industry. We're seeing strong demand for this innovative solution, and we've already completed installation at several customer sites.

We also recently introduced two new Thermo Scientific antibody tests, our OmniPath ELISA test received emergency use authorization from FDA for the qualitative detection of total antibodies, and our new EliA test is now available to run on our Phadia 250 instrument so customers can tap into the extensive install base worldwide. Both tests can be used in the U.S. as well as Europe, and other countries accepting the CE mark. As I reflect on the long-term, we're now recognized by our customers as a scale player in infectious disease testing. We've significantly increased our install base of sample preparation and PCR instruments over the last nine months, and that will create new opportunities for us going forward.

Another example of sustainable value is that we continue to ramp up production of supplies that are essential to the testing process, such as liquid handling plastics and the specialized viral transport media used in sample collection. We highlighted the opening of our new viral transport media facility, in Kansas, last quarter, and in Q3, we announced plans to further expand our global capacity by building a new facility in Scotland to support the European market. We're also significantly expanding capacity for our lab plastics to meet surging demand which will put us in a great position long-term as well, and important point that I want to make here is that our PPI business system is a key advantage in our ability to scale our operations quickly and cost-effectively to meet our customers' needs and drive growth.

One more example of sustainable value creation is our support of new therapies and vaccines. We're significantly adding capacity across our biosciences, bioproduction, and former services businesses, creating an infrastructure that will position us incredibly well for the future. In our biosciences business, we're significantly investing in our global capacity to increase the manufacturing of enzymes and nucleotides used in vaccines. In pharma services, last week we announced our partnership with the Economic Development Board of Singapore to expand our sterile fill finish capacity by building our first facility there. Once operational in 2022, the facility will include the only high-speed filling line for live viruses in Singapore and help meet the demand across the Asia-Pacific region.

This is another great example of how we're working with speed with governments to help them respond effectively to health emergencies in the future. In addition to government-funded projects, including our BARDA project to increase capacity in the U.S., that we highlighted last quarter, we've committed more than $700 million in CapEx to add global capacity to meet COVID-related demand.

In summary, all of this work is clearly essential to helping our customers navigate the pandemic, and it's also giving us new capabilities and capacity that will be repurposed to meet future demand for vaccines and therapies. While our COVID-19 response contributed significantly to our performance, we are also continuing to make great progress in executing our growth strategy across the business.

I'll give you just a few highlights from the quarter. In terms of innovation, we launched a number of significant new products in Q3. Let me pick a couple to highlight, one from our electron microscopy business and one from bioproduction. Our new Thermo Scientific Selectris X Imaging Filters are breakthrough advances in cryo-EM for structural biology applications. These new filters allow scientists to view protein structures in unprecedented detail and in less time than what was previously possible. This will not only accelerate research but also accelerate the adoption of cryo-EM, and another new product is our Thermo Scientific POROS Oligo resin which is used to purify and isolate mRNA for the development of vaccines and therapies. As mRNA production accelerates, the needs of highly scalable purification technology will be critical. In emerging markets our leading scale continues to be an advantage for us, and we are expanding our presence to meet customer demand.

During the quarter we celebrated the grand opening of a new factory in Suzhou, China, for our single use bio-production technologies. As you know, we already have a well-established lab products operation in Suzhou, and this expansion is our first bio-production facility in the Asia-Pacific region, which will help meet increasing demand there for biologics. Our teams in China have effectively managed through the pandemic while positioning the business for growth, and we were pleased to deliver 18% growth in China in Q3.

The last part I want to highlight around the progress we are making across our business is tied to our unique value proposition. Our customers recognize that we stepped up in a major way to help them navigate the challenging environment and that's creating new opportunities to build on our already strong relationships. This is very evident in forming biotech as you know, and now increasingly so with healthcare and diagnostic customers as well. During this time, the advantage of our leading scale and depth of capabilities has never been more evident, and this will lead to share gain opportunities longer term. Before I turn to our guidance, I'll make a quick a comment on capital deployment.

As you know, our capital deployment strategy is a combination of returning capital through buybacks and dividends and strategic M&A. In terms of our view on M&A, we continue to have an active deal pipeline. We have a very strong balance sheet, and as always, we'll apply disciplined quiet approach the opportunities that meet our criteria for creating shareholder value.

Turning to our guidance, there has obviously been a tremendous effort in supporting the COVID-19 response this year, and we've also executed well to grow our base business. This combination led to extraordinary growth and performance in Q3, and we expect that to continue to Q4. With that context, we expect to grow full-year 2020 revenue by 20% to approximately $30.5 billion, and we expect to grow our full-year 2020 adjusted EPS by 48% to $18.27 per share.

Stephen will give you more of the details, but clearly, we are on track to achieve our truly spectacular year. Before I turn the call over to Stephen, let me leave you with a couple of takeaways. We continue to expand our leading role in responding to the pandemic, and we are having a profound impact on society. We are executing very well to capture new opportunities, gain market share, and drive growth across our businesses. Our efforts this year are significantly strengthening our company and positioning us very well for the long term.

With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen?

[Stephen Williamson, SVP and CFO]

Thanks, Marc, and good morning everyone. I'll begin with a high level summary of our Q3 performance. As Marc mentioned, we have another exceptional quarter and grew organically 34%. I'll break this down into two elements. The first is the scale of our COVID-19 response revenue that we generated during the quarter, and the second is the performance of the base business.

Our COVID-19 response revenue in the third quarter was $2 billion and contributed 31% to growth; largely driven by testing related products and instruments. Our base business excluding the COVID-19 revenue grew organically 3%. We are very pleased to deliver a 13-point improvement from Q2 driven by a higher customer activity levels and great commercial execution. The 34% organic growth for the quarter was higher than the updated our recent analyst meeting, as we continue to have robust demand for testing, and the potential risks around the level of customer activity did not materialize.

Our PPI business system enabled excellent pull through on the 34% organic growth, a combination of fixed cost leverage and operating with speed at scale enabled us to deliver 91% growth in adjusted earnings per share on the quarter, a truly exceptional result.

I'll now provide more details on our third quarter results then provide some color on our four segments and conclude with some comments around guidance. Starting with our Q3 earnings results, as I mentioned we grew adjusted EPS by 91% to $5.63. GAAP EPS in the quarter was $4.84 up 157% from Q3 last year.

On the top line, our Q3 reported revenue grew 36% year-over-year. The components of our Q3 reported revenue increased included 34% organic growth, a foreign exchange tailwind of 1% and 1% growth from acquisitions.

Turning to our growth by geography during the quarter, North America grew 40%, Europe grew 25%, Asia Pacific grew just under 20% as the China and rest of the world grew 65%.

Looking at our operational performance, Q3 adjusted operating income increased to 97% and adjusted operating margin was 32.9%, 10 percentage points higher than Q3 last year. In the quarter, our PPI business system enabled it to drive exceptional volume leverage and strong productivity, and we had a favorable business mix. At the same time, we continue to make some significant strategic investments across the businesses.

Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 52.3%, up 620 basis points from Q3 of the prior year. The increase in gross margin had similar drivers to those I just mentioned for our adjusted operating margin. Adjusted SG&A in the quarter was 16% of revenue, a decrease of 350 basis points versus Q3 2019 reflecting the very strong volume leverage. Total R&D expense was $296 million, 20% higher than Q3 2019 and R&D as a percent of our manufacturing revenue in Q3 was 5.2%.

Looking our results below the line for the quarter, net interest expense was $135 million, $24 million higher than Q3 last year, primarily due to increased debt levels. Adjusted other income and expense with net income in the quarter was approximately $2 million, $24 million lower than Q3 2019, mainly due to changes in non-operating foreign exchange. Our adjusted tax rate in the quarter was 15.7%. This is up 450 basis points versus Q3 last year due to the substantial increase in pre-tax profit year-over-year coming in at our marginal tax rates. Average diluted shares were $399 million in Q3 about $5 million lower year-over-year driven by the net impact of share repurchases and option dilution.

Turning to cash flow in the balance sheet, cash flow was another great highlight for the quarter. Our PPI business system is enabling us to deliver great cash pull through on the very strong top line performance. For the first nine months, cash flow from continuing operations was $5 billion and free cash flow was $4.1 billion after deducting net capital expenditures of approximately $900 million. We returned approximately $90 million to shareholders through dividends in the quarter, and we ended Q3 with approximately $7.5 billion in cash and $21.1 billion of total debt. Our leverage ratio at the end of the quarter was 2.5 times gross debt to adjusted EBITDA and 1.6 times on a net basis. Concluding my comments and our total company performance, adjusted ROIC was 14.9%, up 330 basis points from Q3 last year, as we continue to generate a very strong return.

Now to provide some color on the performance of our four business segments, similar to last quarter, I'll start with some framing thoughts around the impact of COVID-19 response had on the segment results. From a revenue standpoint in Q3, the majority of the COVID-19 response revenue is reflected in Life Science Solutions. This is revenue from testing kits, instruments, sample preparation and reagents for lab developed tests recognized in the genetic sciences and biosciences businesses. It also includes revenue from therapy and vaccine production supplies recognized in the bioproduction business.

The Specialty Diagnostics segments include revenue and the clinical diagnostics business from the molecular controls that go into testing kits. We also recognized revenue to viral transport media in the microbiology business and for tests and PP&E in the healthcare market channel.

Laboratory Products and Services segment includes revenue for therapy and vaccine support biopharma services business. The segment also includes revenue for PPE in the recession safety market channel as well as plastics used in testing workflows and cold storage equipment manufactured by a lab products business. So, a lot of detail to take in, but I think it really demonstrates the breadth of our societal response to the pandemic.

From a margin standpoint, the impact of COVID-19 was varied across the segments, based on the scale of the response revenue, and the different levels of profitability on that revenue. In addition, during the quarter, we continue to make strategic investments in our businesses, even though that we're not benefiting from COVID-19 response revenue. This included investments in our colleagues in terms of incentive compensation recognition, as well as commercial R&D and production capability investments. We are able to do this given the strength of the company's overall performance. The size of these investments does not necessarily align with COVID-19 response revenue in each segment. So that does skew some of the reported segment margins. So, a lot of moving parts from a segment margin standpoint, it reflects the very active management of the company, successfully navigating the current environment and positioning the company for an even brighter future.

Moving on to segment details, starting with Life Sciences Solutions, in Q3, reported revenue increased 101%, and organic revenue growth was 100%. We saw exceptionally strong growth in our genetic sciences and biosciences businesses, as well as very strong growth in our bioproduction business. In Q3, adjusted operating income and lifestyle solutions increased 221%, and adjusted operating margin was 54.9%, up 20 percentage points year-over-year. In the quarter, we drove very strong volume pull through at public business mix and continue to make strategic investments across the businesses in the segment.

The Analytical Instruments segment reported a revenue decrease of 2% in Q3, and an organic revenue decline of 3%, an increased level of customer activity and good commercial execution led to a 20 percentage point sequential improvement in the business performance from Q2, and chromatography and mass spectrometry business return to growth in the quarter.

Q3 adjusted operating income and Analytical Instruments decreased 45% and adjusted operating margin was 12.8%, down 10 percentage points year-over-year. Eight percentage points of this change was due to $100 million one-time accounting charge that we took in Q3 for a loss on a supply contract in our electron microscopy business. This was triggered by the very successful launch of our new Thermo scientific Selectris imaging filter. The remainder of the margin reduction in the quarter was driven by business mix, lower volumes and strategic investments, partially offset by strong productivity.

Turning to the Specialty Diagnostics segments, in Q3 reported revenue increased by 63%, organic revenue growth was 62%. COVID-19 response revenue was significant in the quarter, enabling us to deliver very strong growth in our microbiology healthcare market channel and clinical diagnostics businesses. The pandemic continues to impact routine diagnostic testing activity, and this is most pronounced in our immunodiagnostics and transplant diagnostics businesses in the quarter. However, it was encouraging to see a substantial pickup in activity from Q2. Adjusted operating income increased 79% and adjusted operating margin was 27.9%, up 260 basis points from the prior year. In the quarter we saw a very strong volume leverage partially offset by negative business mix and strategic investments.

Finally in Laboratory Products and Services segments, Q3 reported revenue increased 19%. Organic revenue growth was 16%. In the quarter we saw a strong growth in our research and safety market channel, pharma services and laboratory products businesses. Adjusted operating income in the segment for Q3 increased 17%, and adjusted operating margin was 11.4%, 20 basis points lower than prior year. In the quarter, the segment drove strong productivity and volume leverage, but this was more than offset by unfavorable business mix and strategic investments that I mentioned earlier.

So with that, now let me turn to guidance. I'll provide you a current view for both organic revenue growth and adjusted EPS for the fourth quarter and for the full-year 2020. I'll also provide an update on certain full-year 2020 assumptions to help you with your modeling. I'll start with organic growth. Our current estimate for Q4 organic growth is 29%. That's driven by an expected $1.75 billion of COVID-19 response revenue and organic growth in the base business of low-to-mid single digits.

The impact of the pandemic continues to evolve, and as a result, through potential outcomes both above and below the 29% that could play out in Q4. From a capacity standpoint, should that be customer demand above the 29% level, we're well positioned to be able to support our customers as we did in Q3. In terms of adjusted earnings per share, we expect considerable volume leverage from the 29% organic growth in Q4. At that level of growth, we expect to deliver approximately 60% year-over-year growth and adjusted earnings per share in Q4.

A few additional points of color on this outlook, similar to prior quarters, the volume of testing undertaken by our customers will be the most significant factor determining the extent of our COVID-19 response revenue in Q4. The outlook also includes a continued ramp in the support of therapies and vaccines. Regarding the base business growth, this assumes similar levels of activity to Q3, and the benefit of the two extra days being offset by slightly weaker year-end spend than in Q4 2019, given the current environment that seems like a reasonable assumption to start the quarter with a well-positioned to assist customers should funding availability be higher. The outlook does not anticipate to return to the lockdown seen at the height of the pandemic earlier in the year. Supporting all of this in a full-year context, our current estimate for 2020 revenue is $30.52 billion, which would represent 20% growth over 2019 including 19% organic growth. In terms of adjusted earnings per share, our current estimate for the full-year 2020 is $18.27, which represents 48% growth over 2019. We're on track for a truly spectacular year.

I will now move on to an update of some of the additional modeling elements for the full-year. With regards to FX in 2020, we're now assuming that we'll have a negligible impact on revenue based on current FX rates. We expect net interest cost for the year to be approximately $490 million. We're assuming that adjusted other net income will be about $50 million for the year and we expect the full-year adjusted income tax rate to be 14.2%.

Net capital expenditures are now expected to be approximately $1.5 billion. This includes $400 million of CapEx to support our COVID-19 response in 2020. We continue to execute while on growth related CapEx opportunities particularly in our pharma services and bioproduction businesses. These have short and long-term benefits and provide very strong returns on investment.

In terms of capital deployments, we completed the $1.5 billion a share buybacks in Q1 and assuming no further buybacks in the remainder of 2020. We're also continuing to assume that we're returning approximately $350 million of capital to shareholders this year through dividends, and we estimate that the full-year average diluted share count will be between 398 million and 400 million shares.

So, to wrap up, as you can see from our exceptional performance in Q3, we continue to manage the company extremely effectively strengthen our leadership in responding to the global pandemic, and position ourselves to deliver a spectacular year.

With that, I'll turn the call back over to Ken.

[Kenneth Apicerno, VP, IR]

Thanks, Stephen. Operator, we're ready to open it up for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Tycho Peterson from J.P. Morgan.

[Tycho Peterson, J.P. Morgan]

Hi, good morning. Congrats on the quarter, certainly impressive. Marc, I want to start with the LPS strength, 16% organic. I'm just wondering if you could provide a little bit of color on how much of this is vaccine ramp versus recovery and non-COVID-related trial work, was there any kind of catch-up benefit here in the quarter from stuff in 2Q, and how do you think about sustaining this level and ramping on the LPS side and into 4Q and 2021?

[Marc Casper, Chairman, President and CEO]

Thanks, Tycho. Good morning. So, in terms of our Lab Products & Services businesses, all three of the businesses performed in the quarter. So that's pharma services, our CDMO activities, that's our customer channels group, and that's our lab products business, and we saw activity ramp up, as we did for the whole company, on the sort of normal business activity in the quarter, and at the same point, you're seeing two different types or three different types of COVID-related response embedded in those numbers. Clearly, the vaccine and therapy ramp up is happening, and you see that certainly in our pharma services business. You're also seeing very significant demand in our customer channels business for things like PPE as well as all the supplies you would use for COVID response.

And then in our lab products business, we have very strong demand for our lab plastics as well as our cold storage equipment. As you know, we're a market leader in providing cold storage for laboratory use, and effectively, when you read about some of the vaccines needed cold storage across the supply chain we're getting very, very significant demand for those products. The basis is very good, right, so that's gone well, and then obviously on top of that you're seeing the benefits of those types of activity.

[Tycho Peterson, J.P. Morgan]

Great, and then a follow-up just on the plastic side, curious on your views on the durability of that non-automated PCR business which had driven a lot of strength in the first-half of the year, and then with Amplitude, I'm just wondering if you could talk a little bit about positioning there. Obviously it's got the highest throughput, as you noted. Is the traction you're seeing now from academic labs, are you seeing interest from reference labs or hospitals, can you just talk about how you think about both the durability of non-amplified testing, and then Amplitude as well. Thanks.

[Marc Casper, Chairman, President and CEO]

Yes, so, Tycho, in terms of the demand for our PCR testing, it continues to be very strong, right, and if you think about it, gold standard performance in terms of accuracy, largest install base of instruments around the world, and we have supplied our customers and ramped up, and we have been the supplier that there's been no headaches really from a customer perspective through the pandemic. We have built our capacity ahead of demand consistently, and therefore customers have been happy, and know they can rely on us.

Amplitude is an ultra-high throughput system, over 6,000 tests per day, and we're seeing very large demand. We've seen that demand from governments, we've seen that demand from reference labs and hospital systems, right. So it is a niche application but drives enormous volumes, right, because ultra-high throughput, so those labs, those governments that are really providing the support for high volume, given our supply reliability, the quality of our tests, and the dedication that we've had throughout the pandemic, that product will be a good growth driver. In terms of durability, we believe that PCR testing is going to continue to be very relevant to our customers because it gives you the most accurate information, and therefore we're comfortable with continuing with a strong level of demand in the fourth quarter, and we expect that those products are going to be relevant in 2021 because, unfortunately, the pandemic is still with us. Thanks, Tycho.

[Tycho Peterson, J.P. Morgan]

Okay, thank you.

[Operator]

Vijay Kumar from Evercore, your line is open.

[Vijay Kumar, Evercore ISI]

Thank you, guys, and congrats, Marc, you guys are setting a new bar trying to beat that pre-announced revenue, that's really impressive. Maybe on just the Q4 guidance there, I guess we were looking $2 billion of, I guess -- $1.6 billion of COVID tailwinds for 3Q that's coming in north of $2 billion here for 3Q, so one -- and if you look at the guidance for Q4 of $1.75 billion, I'm just curious if -- if was there any tiny element, did some of the tailwinds get pulled forward to 3Q, and when you look at the base guidance of low to mid single digits maybe it looks like a lot of it is being driven by biopharma. Maybe comment on industrial and academic environment heading into Q4.

[Marc Casper, Chairman, President and CEO]

Yes, so, Vijay, thanks for the question, and it's exciting to be able to set a new bar on performance, right. So that's been an interesting time for sure. In terms of our guidance, the way that we think about the fourth quarter is base business similar to what we saw in Q3 to a little bit better, and what's assumed in there, and it's an assumption, it's not based on customer feedback, is that year-end spend is softer than it was last year, and we're well positioned to meet it if higher demand, if customers have the funding, and our logic to that was it's a little bit early to know. It's a conservative assumption, and we don't want to disappoint.

So if the funding is strong you know that, like we did in these last few quarters or many years actually, if the money is out there we're going to go out and get it, right. So that's the view on the base business, of low to mid single digit growth. When you look at the $1.75 billion, we see very strong demand right now for our COVID response. We're seeing a continued build in our vaccine and therapy role, and we are also seeing very strong demand for our testing solutions as well. You have less visibility into the month of December. So we have much better visibility, obviously, in October and November, and we just made an assumption that levels were going to be pretty similar to what we saw in the third quarter, and we came in at $1.75 billion. I wouldn't over-read into why $1.75 billion versus $2 billion, it's just that we have visibility for a couple of months, and December we have less visibility, but nonetheless it seems like demand should be strong.

[Vijay Kumar, Evercore ISI]

That's extremely helpful, Marc, and just one follow-up on, I guess, at the analyst day you made a comment about contractors orders on the vaccine worked about a billion, any update on that number?

[Marc Casper, Chairman, President and CEO]

Yes, so in terms of our role for vaccines and therapeutics, we said over the balance of this year, '21, and '22 it's about $1 billion, and than number continues to grow, so I'd call it a $1 billion-plus at this point. We're active in a significant number of projects, something in the range of over 250 projects on therapies and vaccines, and our role is quite broad, it's not just pharma services, it's bioproduction, biosciences, and -- so that will be a -- is contributing to our revenue, but will contribute more certainly as the fourth quarter, and into the next year progresses.

[Vijay Kumar, Evercore ISI]

Thank you, guys.

[Marc Casper, Chairman, President and CEO]

Thanks, Vijay.

[Operator]

Steve Beuchaw from Wolfe Research, your line is open.

[Steve Beuchaw, Wolfe Research]

Hi, good morning, and thanks for the time here. I wanted to ask one on academic, just looking to unpack a little bit of the commentary in the prepared remarks, and then one just very quick follow-up on Amplitude and the broader testing landscape. My question on academic is a two-parter. I guess one is, we all watch all the headlines about what's going on in the university backdrop. I wonder if you could give your perspective on research labs within universities and broader research sort of opening up here as we progress through the back-half of the year, to what extent is that reopening necessarily contingent upon a broader university reopening, and then to your point on funding, Marc, certainly makes a lot of sense, but to what extent is that a medium-term versus a near-term perspective on funding just given all the unknowns right now, not necessarily in the U.S., but in China and Europe as it relates to how they're going about funding in research.

[Marc Casper, Chairman, President and CEO]

Yes, so, Steve, thanks for the questions. So, in terms of the academic and government, good to see the return to growth, clearly more customers came back to work, ramping up research activities, and that actually was a global phenomenon; we saw that across all three of the regions, and they all happened at different paces, but it's good to see that. When I made the comments at the very beginning of my remarks, really the funding environment I'm thinking about is the midterm, right, it's [technical difficulty] -- what I mean by that is there's such interest now in infectious disease, the pandemic, the importance, like in the U.S., of how NIH has played a huge role here. Those things are going to really, for the midterm, be very positive on a funding environment. Even short-term we're seeing quite a bit of interest from governments, and then obviously academic institutions, their own situation is probably much more impacted by their own economics, so that's going to be somewhat of a headwind, but that historically has been a low to mid single-digit growth market, and it's good to see we're already back to low single-digit growth there.

[Steve Beuchaw, Wolfe Research]

Super clear. The follow-up, building on some of the commentary around Amplitude, looks like an approach that makes a lot of sense, not just for higher acuity or symptomatic, but for screening, which should be interesting to hear how you think the market for testing PCR and more broadly evolves towards screening over the next year and beyond, given that you have a unique perspective on all sides of the market? Thanks again.

[Marc Casper, Chairman, President and CEO]

Well, Steve, in terms of the role of testing, obviously managing in a pandemic is around social distancing, mask-wearing, good hygiene, and all of those things, and testing is a valuable supplemental tool to that, and we're seeing more and more demand for testing in those applications as well for kind of return-to-life is what we call it, which is really work in school, and things like the Amplitude is going to be able to support both medical applications as well as screening. You get a very high throughput, it's very economic, and therefore customers can get results quite rapidly, and therefore it plays a role, and what you're getting with PCR is extreme levels of accuracy versus some of the other technologies out there, which also will play a role, but you are trading accuracy, and depending on what the application is that's something that there certain applications doesn't make a lot of sense for.

Operator, we'll take the next one.

[Operator]

Derik de Bruin from Bank of America, your line is open.

[Derik de Bruin, Bank of America Merrill Lynch]

Hi, great. Thank you, and good morning. So a little bit of -- can you give us a little bit more color on the split in the quarter on testing PPE in bioproduction, just how that $2 billion broke down that, and then I've got a follow-up.

[Marc Casper, Chairman, President and CEO]

Yes, Derik, good morning. So in terms of the $2 billion, the majority is the testing related portion of that, and when you think about the testing portion it's actually quite expansive, right. So the single largest piece of that is going to be on our proprietary COVID-19 TaqPath kits, PCR kits, but we also have significant revenue from instrumentation and lab-developed tests. So that's kind of the PCR ecosystem with all of the very substantial sample prep that we provide across the industry as well. We really have built tremendous momentum there. On top of that, our viral transport media business has grown very rapidly, so Q3 was a nice step up from Q2, and we expect that to continue to grow, and that is a key part of the specimen collection, sample collection and transport to a lab, and so that we'll continue to build, and we announced that we're opening up a new facility in Scotland. We broke ground on that, be able to start producing viral transport media at the end of the year to start the European market, beyond the two facilities in Europe that already do that. So that continues to be important. From the next aspect, which is probably the smallest aspect at this point, which is PPE, as you would expect there was clearly -- that's all through our channel business. There was very elevated prices in the beginning of the pandemic as there was massive supply constraints.

Volume has still be high, pricing has come down, and so, therefore while there's a moderate level of activity a lot of volume at a lower price, and that's good from a societal standpoint. It's good to see suppliers catching up with demand, and then from the -- probably the fastest-growing and building is our broad role in kind of, I'll say, vaccines and therapies, and I'm going to define it broadly because I think that sometimes because we have the most comprehensive position in the industry that we don't get clearly compared to the right activity. So the way to think about it, and Stephen was articulating it, there's what we provide to the manufacturers of a vaccine or a therapy, and historically you'd look at that as bioproduction, and that would be our leading positions in cell culture media, single-use technology, and our rapidly growing position in purification resins.

At the same point, our biosciences business actually has a very meaningful role in that as well through the enzyme and nucleotide production, and we're doing very substantial expansions of capacity to support those needs as well. So, that's one set of activity. The second set of the activity is obviously around our pharma services business, and you would see that in our sterile fill-finish network, where you do the filling of a vaccine or a biologic, but you also see that in our drug substance or biologics plants, and even with some of the antivirals that are small molecules, you can see them in our API facility. So, we're incredibly well-positioned in a very skill way to serve the vaccine and therapy opportunities, and you're already starting to see that build, and that will continue to build in Q4 and into next year.

[Derik de Bruin, Bank of America Merrill Lynch]

Right, and just one quick follow-up, so you talked about your analytical instrumentation business, essentially back, you know, essentially roughly flat, are you dealing with back orders from the first-half of the year, or are you seeing new orders for LCMS, and then a appendix on that one is, what's your PCR base instrument install base up year-over-year, if you can get a sense?

[Marc Casper, Chairman, President and CEO]

So, in terms of the revenue, the really strong sequential improvement in revenue for Q3 versus Q2, the answer there is our orders are growing much faster than the revenue. So, we're actually building backlog. So, I don't think it is much of shifting from Q2 to Q3, just customer activity is really been picking up. You see that most quickly in our life science mass spec business and chromatography business. That business returned to growth in the quarter from a revenue perspective, and bookings were stronger than that. So, that's very encouraging, and then, as you would expect on the flip side, those areas that are very economically sensitive like chemical analysis, that's lagging, right, improved substantially, but lagging relative to the life sciences mass spec, and we have from a install base of sample prep and qPCR, we're shipping in a quarter what we would normally ship in a year. So, it doesn't give you the exact number, but it gives you the sense of the magnitude of how big that's been.

[Derik de Bruin, Bank of America Merrill Lynch]

Thank you.

[Marc Casper, Chairman, President and CEO]

You are welcome.

[Operator]

Doug Schenkel from Cowen, your line is open.

[Doug Schenkel, Cowen & Company]

Good morning, everybody. Thanks for taking our questions. Marc, during the Analyst Day last month, you commented I think in response to a question that COVID-19 tailwinds could be lower, about the same or higher on a year-over-year basis in 2021, do you have any updated thoughts on this, at this point, particularly in light of higher than expected COVID-19 contributions in Q3 and incorporating what you're seeing especially on the bioproduction side, given demand there has materialized a bit more recently, relative to diagnostics, and then, kind of building off of that longer-term meeting really beyond 2021. Do you think the investments you're making to support COVID-19 demand in each today and in 2021 will lead to at least stable levels of revenue in these product categories, even when the pandemic abates?

[Marc Casper, Chairman, President and CEO]

Yes. So, Doug, what I can say is that on the first one, I have to be 100%, right on the answer, right, if it's either up down or flat, then I…

[Doug Schenkel, Cowen & Company]

Yes, yes.

[Marc Casper, Chairman, President and CEO]

[Multiple speakers] -- 100% accuracy on. So, those are two great questions, right? So, if I think about things that are building, clearly the broadly, you know, position and bioproduction, our pharma services business or biosciences nucleotide, that's all building, right? So, and then that's better than three or four weeks ago. It doesn't -- as you know, these things are very long cycle, they're moving at a much faster pace, but it takes a while for these products to get through the clinical process with approvals, and looking for efficacy. So, we see that building, and that's good for us in terms of what the outlook is.

In terms of -- you know, unfortunately every day and week that we're still living with the pandemic means that things like testing are likely to be more durable, right? So that, you know, even six weeks or so after the analyst meeting, we're really in the same boat with actually more cases in Europe and a lot of increases in the pandemic. That usually adds to the view that there's going to be more durability to this going into '21, but we'll know more as we get into the year.

So, in terms of the longer-term investments, a great question, right, the way to think about it is, we're investing significantly, you know $700 million is almost what we normally put in capital in the year roughly, right, so it's additional. We are it doing quickly, right. If you think about the pace that we are actually bringing facilities online gives you sense of the power of the PPI Business System. Pretty much everything that you are seeing we are going to repurpose longer term to other markets that are not pandemic-related, right, and some of them are very easy to visualize, right, which is think about start for finish, we have commitments for the expansions that we have done for vaccines and therapies, and we are also already getting commitments from customers -- large customers that basically say when that demand is freed up, we want to put other products in that demand, right.

So, we have that in a number of our facilities. So, you'll that sort of at some point, the therapies and vaccines related to pandemic will unwind, and you'll then see us able to backfill the capacity because it's perfectly useable. Some of the stuff that might not be as intuitive, if you think about lab plastics, where we have been expanding our capacity, not a category we talk a lot about. For simplicity, say, we have 20% market share globally, the expansion in capacity is going to be able to be repurposed for the typical lab demands, right. So, we are going to have a stronger manufacturing footprint, more cost-effective, more modern than we had going into it. We'll meet the surge from COVID, and then we'll go out and we'll backfill that with other demand. So, I think the actions we are taking is setting us up for a bright future with growth. Opportunities that really were more conceptual pre-pandemic are now realities through the actions we are taking, and that's why we are so excited for the long-term future that we have.

[Doug Schenkel, Cowen & Company]

Okay, and I'll leave it there, and let others ask other questions. Thank you very much.

[Marc Casper, Chairman, President and CEO]

Thanks Doug.

[Operator]

Steve Willoughby from Cleveland Research, your line is open.

[Steve Willoughby, Cleveland Research]

Hi, good morning. Two questions for you, Marc, one just following up on some previous commentary if you don't mind, you talked about how you are assuming a weaker end of your spending environment within the guidance that you provided today, but I am curious as to your comments talking about how you are seeing customer activity really picking up, orders growing faster than revenue. Just wondering if you could provide any color on how those two -- the different comments sort of jive with each other, and then I have on follow-up for you.

[Marc Casper, Chairman, President and CEO]

Stephen, you want to talk a little bit about that?

[Stephen Williamson, SVP and CFO]

No, so the comment about picking up versus Q2 so that sequential improvement in performance, and the assumption is similar levels of aggregate customer level activity in Q4, and yes, we have made an assumption around yearend spend, but as Marc said, if it's going to be higher, then our business is well-positioned to help our customers satisfy that demand.

[Marc Casper, Chairman, President and CEO]

And Steve, another way we have a say lots of discussions with our customers. It's a little tacky right now to say, so what is your yearend budget going to look like. It's just not a topic that is where you are focused on which is -- so not helping you, right, and this is not a normal year. So, I think that's a good place to start again for the quarter.

[Steve Willoughby, Cleveland Research]

Very good, okay, and then I was just wondering if you could comment at all regarding the bioprocessing business overall, and what you saw in terms of level of growth there and maybe also maybe a level of orders for the bioprocessing business overall? Thank you.

[Marc Casper, Chairman, President and CEO]

Growth is very strong, stronger than the historically strong performance, and orders were significantly stronger than that strong growth, so very, very high level of order growth which you would expect, right. We play a major role in the therapies and vaccines broadly in all classes of disease, and we are playing a significant role in COVID. So, we are seeing very strong demand for our capabilities. Thanks Steve.

[Operator]

Your next question comes from the line of Dan Arias from Stifel. Your line is open.

[Dan Arias, Stifel Nicolaus]

Good morning, guys. Thank you. Marc, maybe just a follow-up on some color on bioproduction, can you comment on the visibility in terms of products and services when it comes to non-COVID work? I mean obviously it's all strong at a high level, but I guess I am just trying to understand the extent to which there is maybe from incremental uncertainty when you look at companies that are balancing COVID and non-COVID project loads. I mean are there error bars around the timing in some of this non-COVID campaign work that might be wider than normal as they move real fast here? Or, does it sort of all looks steady from where you sit at this point?

[Marc Casper, Chairman, President and CEO]

It seems pretty steady. I mean if think about manufacturing across the industry not our customers, has been smooth sailing through this period of time, right. Companies have been able to produce their medicines and develop their products for -- through the development process. So, we haven't seen COVID-related disruptions on the manufacturing side of biotech and pharmaceutical. It continues to grow very substantially. So, obviously there is going to be some diversion of short-term resources. So, maybe two or three years from now there is some project that has been theoretically less than what it could have been because of COVID work, but I think that's very much in the noise level, because if I look at things like new quotations and new activities, it's extraordinary high and our development work, clinical trials work. So, I think it's very good.

[Dan Arias, Stifel Nicolaus]

Okay, appreciate that. Maybe Stephen, can I just touch on Patheon for second there, and the margin mix within LPS? I think this Patheon was 17% or so at the up margin line when you bought the company. Obviously, the volume environment there looks pretty good. So, if we were to look forward, do you that business over the next couple of years can increasingly sort of provide some loss to LPS segment profitability if demand just shapes up here the way that it's look like it could?

[Stephen Williamson, SVP and CFO]

Yes. So, I think we've made great progress with the margins in that business, and future as we drive more utilization of capacity will be very strong for the margin profile. Thanks, Dan.

[Marc Casper, Chairman, President and CEO]

Thanks Dan. Operator, we are going to take just one more.

[Operator]

Jack Meehan from Nephron Research, your line is open.

[Jack Meehan, Nephron Research]

Thank you. Good morning.

[Marc Casper, Chairman, President and CEO]

Hi, Jack.

[Jack Meehan, Nephron Research]

Marc, I was hoping you could comment a little bit more on the R&D investment. It's my favorite data point in the press release. So, just where are you maybe over-indexing some of the incremental spend? Are you pulling forward projects or diving deeper down the list, and is there a way to think about the payback on some this incremental spend? How long that should take?

[Marc Casper, Chairman, President and CEO]

Yes. So, Jack, thanks for the question. R&D spend was up about 20% in the quarter. So, we're investing substantially. It's really about adding more talent is the step that we are doing, and then working on some key areas that -- where demand actually has been a little bit softer. So, what we are doing is kind of doubling down the investment to position ourselves for strong growth for the long term. Very much the exact playbook we did in the financial crisis where we had a very high focus on investing in R&D so that we would bounce back out of the downturn quickly, and we did, and so we are doing that same playbook in certain areas and returns will show up in the next couple of years is the way to think about it.

Thank you, Jack, for the question, and let me wrap up with a couple of things, first that we are certainly proud of our role in helping our customers and society during this time. We are going to continue to manage the company appropriately to come out of this period and even stronger industry leader. We look forward to updating you on our progress at yearend. I hope that you stay safe, and as always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.

[Operator]

This concludes today's conference call. You may now disconnect.