January 18, 2022

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Thermo Fisher Scientific Inc. (TMO) CEO Marc Casper Presents at JPMorgan 40th Annual Healthcare Conference (Transcript)

Thermo Fisher Scientific Inc. (NYSE:TMO) JPMorgan 40th Annual Healthcare Conference Call January 11, 2022 8:15 AM ET

Company Participants

Marc Casper – Chairman, President and Chief Executive Officer

Conference Call Participants

Tycho Peterson – JPMorgan

Tycho Peterson

Good morning, everybody. Welcome to Day 2 of the healthcare conference. I am Tycho Peterson from the life science team. It’s my pleasure to introduce our next company this morning, Thermo Fisher Scientific. Just a quick reminder, if you have questions, you can submit them through the website. And with that, I’ll turn it over to Marc.

Marc Casper

Tycho, good morning. Nice to be with you at the healthcare conference to kickoff 2022. What I thought today is before we get to the Q&A session, I split the presentation into two parts. I would reorient everybody on Thermo Fisher Scientific and cover some of the key points about the company, our strategy, our performance and then talk about how we did in 2021 qualitatively as well as our goals for 2022 in terms of some of the non-financial goals that we have, which has really been the approach that we have taken over many years at the JPMorgan Conference here in January.

So to start with our Safe Harbor statement and the use of non-GAAP financial measures, they are up on the explanations are here on the slide in terms of the Safe Harbor and reconciliation between GAAP and non-GAAP and where to find that on our website. So I’ll let you peruse that for a few seconds as I turn to the beginning of the presentation.

So, key takeaways for today. As a company, we delivered an outstanding performance in 2021. It reflected the benefit of our proven growth strategy and our PPI business system. As a company, we are an incredibly well-positioned industry leader, with serving very attractive end markets. I will highlight that in a bit. We have an outstanding financial track record and outlook with long-term high single-digit organic growth prospects. We lead the industry in the COVID response while enhancing our competitive position and we are exceptionally well-positioned for 2022.

So the company today, we continue to grow and we continue to strengthen our industry leadership. We are the world leader in serving science. Our customers know us for our exceptionally strong brands. We have $40 billion in revenue, over 100 and 1000 amazing colleagues and we invest about $1.4 billion from research and development on our product portfolio. We have industry leading scale. We have unmatched depth of capabilities. That’s how our customers know us. And all of this is powered by our PPI business system, practical process improvement, which allows us to continue to make the company better everyday.

As a company, our mission, it’s our purpose. We truly enable our customers to make the world healthier, cleaner and safer. We enabled the biotech and pharmaceutical industry, developing vaccines and therapies. We help government agencies control air pollution. We provide law enforcement with the tools to make the world a safer place as examples of sort of how our services and products are used by our customers to make a real impact on society. Over the last 5 years, we have evolved the end-market presence that we have as a company. And if you look back as we have doubled the scale of our core revenue from 2016 to 2021, on a pro forma basis, what you see is that our pharma and biotech exposure has gone from about 30% of our revenue to just under 60% of our revenue, while we still serve three other important end markets, diagnostics and healthcare, industrial and applied and academic and government each of those are roughly equivalent in terms of the scale of presence. So, this mix shift has allowed us to continue to accelerate the growth of the company as well.

The end markets we serve are very attractive. It’s a large market, $170 billion with long-term market growth of 4% to 6%. That’s driven by really a series of trends that are very favorable, demographics work in the favor of this industry, the scientific advances that you read about and hear about really in the life sciences research really propels growth in our industry, the funding environment, and biotech and pharmaceutical continues to be strong. Our customers as new modalities of drug development comes out, our customers want to partner more, because they can’t do it all themselves. And that has created great opportunities to expand our serve market and drive great growth in our industry. And it certainly has allowed Thermo Fisher to capitalize on that trend. And then COVID-19 in and of itself has had the investment outlook in our industry, because of the requirements of supply chain security, infectious disease research, spending on mRNA, all of these things bode well for the future growth of our industry.

With our proven growth strategy, we are able to translate that 4% to 6% market growth into 7% to 9% core organic growth. And that’s our outlook that we highlighted back in September of 2021 at our Analyst Day about what our longer term growth aspirations are, in fact, our core organic growth expectation for 2022 as we highlighted back then is 8% right in the middle of that range. When you look at our growth strategy that we have been executing for a number of years, it’s really based on three tenets, the first of which is our commitment to high impact innovation, right an incredible track record of launching highly relevant products that are coveted by our customers, leveraging the scale that we have in high growth and emerging markets to create a superior customer experience, making it rational for customers to want to do more business with us in those markets. And then finally, our unique customer value proposition, which really resonates with our pharma and biotech customers, where they see how we enable their success, how we help them improve their quality, productivity and innovation and really allows for unique ways of working with our customers. And combination of those three elements has allowed us to gain share over a consistent period of time. That strategy, coupled with our PPI business system, has led to phenomenal growth.

Looking back over the last decade plus, we have averaged 30% growth in revenue, 20% growth in adjusted EPS, and 19% growth in free cash flow, so very strong track record, and we are very excited about our financial future, which we have highlighted in our Analyst Day back in September and we are looking forward to giving you the details of our guidance for 2022 at the beginning of February on our Q4 earnings call. We have closed on our acquisition of PPD, let me just remind you of how that enhances our customer value proposition. It establishes Thermo Fisher Scientific as the global leader in the attractive high growth, clinical research services industry. It’s a natural extension of our capabilities to the pharmaceutical and biotech industry, which is our largest and fastest growing end market. In fact, as we thought about what was needed by our customers to help them accelerate their innovation and improve their productivity, adding a clinical research services capability became very clear in the dialogue with our customers over the last few years and became a natural extension for us and then our customers will see the benefit from that.

The acquisition gives us the opportunity to partner with our customers to really go now from the beginning of a scientific idea all the way through the approved medicine, equipping their labs with cutting edge research tools, helping them in designing the clinical trials and executing them, helping them develop the compounds and ultimately, the successful compounds scaling them up in our manufacturing network. We have a real opportunity to reduce the time and cost of bringing innovative therapies to market. We are looking forward to co-creating that with our customers over time. We will generate substantial synergies and create financial benefit for all of our shareholders in this process as well.

In terms of the status on the transaction, we closed on December 8, so we have owned the business for about a month. The integration has come very smoothly. We have plenty of time to plan it from the time of announcement to close. Teams are doing a great job. We expect to continue to realize $125 million of synergies by year 3, $75 million of cost synergies, $50 million of adjusted operating income benefit from revenue-related synergies. And this year, as we guided back in October, we expect to contribute at least $1.50 to our adjusted EPS in 2022, so a very attractive transaction. Because of the week at JPMorgan and the ecosystem that goes around this conference, we have been actively engaged with our customers this week and I had the opportunity to do that yesterday and continue during the course of the week and the feedback about PPD and the feedback about the combination, has been exquisite. And we are so excited about the opportunities ahead to create value for our customers, ultimately, for our colleagues and shareholders.

The last of the main topics that I wanted to cover before giving you an update on 2021 and 2022 is really around environmental, social and governance topics and are focused on doing business the right way, right. If you think about our mission, we enable our customers to make the world healthier, cleaner and safer and our products and technologies and services, they benefit society, right. So when you think about ESG what the company does, it represents ESG, but then how we operate magnifies the positive effects of it, right and our culture and our PPI business system allows us to execute our priorities and driving operational excellence and continually improving the company operating the right way. One of our four values as a company is integrity. It’s just fundamental to who we are. Right. We are very focused on the best team, they win and developing and harnessing our colleagues’ talent. And we have an incredibly diverse and inclusive team and then making sure that we are enabling our customer success. So, when we do those things which we do, we deliver value for all of our stakeholders, our shareholders, our customers, our colleagues and our communities. And when you think about the spotlight in 2021, every year, you put a little bit more emphasis on certain aspects of it.

We put a lot of emphasis on two things. One is around net zero climate strategy, and second is about reporting with more transparency, right, really important. And from a net zero perspective, we set science-based targets. We set the goal to achieve net zero by 2050. We’ve already had the goal to reduce our emissions this decade in Scope 1 and 2 by 30%, and we’re working on the efficiency of our facilities, the use of renewable energy and collaborating with our suppliers and customers to make that reality. And we enhanced our reporting for all of our stakeholders. And that transparency included sharing enhanced diversity data so that you can see the progress that we are making as well as using more of the frameworks and reporting mechanisms for our stakeholders as well, including SASB, GRI, TCFD, the United Nations’ Sustainable Development Goals, all these things to really give you a really wonderful spotlight on the progress that we are making. And ultimately, I encourage you to take a look at the corporate social responsibility report that we just released that gives you a highlight on some of the progress that we’ve recently had in this area. So going back a year ago, this was the goals that we set out for 2021, right? And it was around significantly enabling the societal response to the pandemic. It was around continuing our share gain momentum, converting a top line from both the societal response and the share gain to strong operating performance, leveraging our speed at scale and operational excellence to deliver great financial performance. We have capital deployment goals to continue to strengthen the company through M&A, share buybacks, dividends and invest in the business to fuel the trajectory of our growth strategy and then finally, as I just highlighted, to execute one of our ESG priorities. So those are the goals that we had. I thought I would highlight some of the progress that we made briefly in 2021 in the non-financial perspective on things.

So starting with our COVID response, based on our guidance as of October 27, we increased our role in responding to the pandemic, both in enabling COVID-19 PCR diagnostic testing around the world. Probably in the range of 20% to 25% of all the PCR tests around the world have been running on our platforms and playing a major role in supporting pretty much all of the COVID-19 vaccine therapy projects worldwide. Our services technologies have been used in those products and technologies, and it’s been a remarkable journey that we’ve had in terms of enabling the societal response. The financial benefit of that, we’ve been able to invest, to accelerate our growth strategy, strengthening our customer relationships, accelerating our investments in our commercial capabilities, R&D, expanding capacity. We were active on the M&A front and made really meaningful investments in our colleagues and communities, all to create value for all of our stakeholders in this period of time and come ahead of the pandemic a much stronger industry leader. And we were excited to highlight the details of that at our Analyst Day because we were able, through these actions, to accelerate our growth aspirations as a company.

When I think about the share gain last year, an incredibly strong year of new product launches, we invest significantly in industry-leading level of investment, and you saw a number of highlights throughout the year, and here’s just a sampling of them, and new mass spectrometers. In this case, the Orbitrap Exploris MS, on scaling up our processing of very innovative set of technologies with our DynaDrive system, which allows you to go further with the scale-up of the use of single-use bioreactors. Typically would have been used at a 2,000 liter scale, now can be used at a 5,000 liter scale, that allows us to be very competitive with stainless steel. Continuing to innovate our electro microscopes. Playing a very large role in the COVID response, so making sure we have the right test for our customers, precision medicine with our next-gen sequencers and launching a digital PCR systems watch, some of the really outstanding examples of our innovation strategy at work.

Capital deployment, our most active year in our company’s history. We deployed $24 billion on M&A, $20 billion on PPD, which I highlighted, $4 billion on bolt-on M&A. The industry is incredibly fragmented, and lots of opportunities to expand our capabilities. And here is just a sampling of some of the transactions that we did last year. Adding to our European Viral Vector Manufacturing business, here allowing us to really support gene therapy and cell therapy work around the world. Adding self-sorting technologies to our company, rapid PCR systems, digital PCR systems. Expand our global biologics network with a partnership with CSL where we acquired a brand-new state-of-the-art longer volume biologics facility and at the end of the year, acquiring PeproTech, which is a leading provider of recombinant proteins, a great addition to our biosciences business. At the same point in time, we invested in capital into our business to fuel our long-term growth strategy, delivering very high returns on investments, and we invested between $2.5 billion and $2.7 billion last year. And all while doing those things to grow the company, we were able to return just under $2.5 billion of capital to our shareholders through a – share repurchases as well as an increasing dividends. So really, an incredibly active year. All of that bodes well for 2022, right? It’s just super exciting.

So when I think about our goals and what we set out to achieve really a spectacular year in 2021, and after just the most amazing 2020 in terms of the role that we play in the pandemic response and then we navigated the challenges of the early days of the pandemic. The team just did a remarkable job of continuing that momentum and setting the company up for such a bright future. So for 2022, it should feel very familiar, right? Gain share, strong year of high-impact innovation in front of us, doing a great job with our value proposition to enable our customer success and continue to create a differentiated experience in high growth and emerging markets through our depth of capabilities and our scale that will allow us to gain share. From a PPD perspective, successfully drive growth, integrate the business and capture the synergies from year 1. Make it real for our customers, and we’re excited about the opportunity there. We’ll continue to play a role in enabling the societal response to the pandemic with the pandemic still being present around the world, that role is going to continue a bit longer, obviously. We’ll execute on our ESG priorities from a – taking all of that top line performance, we’ll turn that into strong financial performance. And then ultimately, from a capital deployment perspective, we’ll execute effectively on strategic M&A, share buybacks and dividends. So we are very excited about what holds in 2022. We’ll get into the details of our financial outlook in less than about 3 weeks’ time.

So let me wrap up before we go to the Q&A with the takeaways from the presentation, which is, really, 2021 was awesome. It reflected the benefits of our proven cost strategy and our PPI business system. We are an incredibly well-positioned industry leader, and we serve very attractive markets. Great financial track record and outlook. We are continuing to play a leading role in responding to pandemic from a societal perspective, and we’re incredibly well-positioned as we enter 2022.

So with that, I’ll turn it back to you, Tycho, for the Q&A session.

Question-and-Answer Session

Q – Tycho Peterson

Thanks, Marc. Great overview. Maybe I’ll start with PPD. I mean, look, you’ve only owned it a month, but you mentioned customer conversations. I’m curious what you’ve learned that may have surprised you? What customer – what’s really resonating with customers, what they’re excited about? Just talk a little bit about the feedback you’ve gotten as you’ve been out kind of marketing the combined business?

Marc Casper

Yes. So PPD is a very well respected industry-leading CRO. Great customer relationships, reputation. And so the early day feedback has been really compelling because – I’ll put customers in two different camps, right? Active PPD customers and customers that haven’t really used PPD very much, right, so the active PPD customers, what that dialogue is about is what are the other opportunities now that we have because of the full range of Thermo Fisher capabilities. And how do we co-create a better process, where are the ways to really create more value for us as a biotech pharmaceutical customer. And there’s a lot of excitement there, right? Because you have really bright customers that are thinking about the race to bringing a medicine to market and how can we do it more cost effectively or more quickly. For the non-customers, right, where Thermo Fisher, because we work with, really, every biotech pharmaceutical company around the world and often in a scaled way. There is a real interest in saying, okay, Thermo Fisher, we trust that you bought the right CRO, right? We know that you’re thoughtful and that you bought the right company, and therefore, we’re interested in learning more and we’re interested in giving you an opportunity to show us how relevant you are. And we had this experience when we bought Patheon in 2017. Where customers trusted us, they tried Patheon, they tried our pharma services capability and then we really flourished. And it’s going to happen here, right? We’ll bring new customers to PPD. And over time, we’ll do a great job serving them, and that will create share gain opportunity for our business.

Tycho Peterson

And can you maybe talk about the strategy? I mean, the top line acceleration there could be through kind of cross-selling and share gains, as you noted. But on the margins, you also talked about the opportunity to improve the margins. Can you maybe talk through the strategy there, especially as we think about wage inflation, and higher costs?

Marc Casper

Yes. So when you think about the business, it comes into the company at mid-teens operating margins. We’ll get into all the details in a few weeks, but commonly that’s where the starting point is. And we’ll be able to take it to the high teens. And you get obviously the benefit of the synergies, right, which will increase the margins, and so that happens to the reduction of public company costs. There’s quite a bit of actually sourcing-related savings that come out as well. So there’s some obvious areas where you get efficiencies and that expands margins. And then you get the benefits of our PPI business system, particularly in the lab part of that business. There is real opportunities there. And you get volume leverage, where the business in a typical year can expand margins say, 20, 25 basis points. We are stripping out PPI, stripping out synergies, and that combination will get you from the mid-teens to the high teens operating margins. And that’s a strongly performing CRO and with great growth prospects.

Tycho Peterson

Yes. You talked about this came – as a relative customer feedback over the years, and you can kind of service the full continuum. Has your thinking on pre-clinical changed at all? I mean, that still is a bit of a gap, right, in the portfolio in terms of pre-clinical CRO Any appetite or desire to have more exposure there?

Marc Casper

I think we’re happy with where we are right now in terms of the set of capabilities, right? It’s a space we understand and think about, but we’re happy in what we serve. So right now, it’s really just about doing a great job of operating PPD and making the synergies real, right? So the customers want to do more business from us. That’s what we’re focused on.

Tycho Peterson

As we kind of think about some of the takeaways at the Analyst Day, the 7% to 9% guidance, obviously, very impressive, and above the kind of the long-term market growth of 4% to 6%. Can you maybe just talk at how you arrived at 7% to 9%, and your confidence that that’s sustainable?

Marc Casper

Yes. So Tycho, one of the things that is just core to our philosophy is when you put out the long-term expectations, you have to be operating at those levels, right that companies have different philosophies. So, there is a pronounced way to say we’re going to get there through a plan. And we’ve always taken the approach that I would rather be conservative, demonstrate that we can deliver it, and then you can then commit to it, right? So when you look at how we’re operating, we’re operating in this range now. And then the question is, so why are we comfortable sustaining it, right? And when I think about the market growth, it’s clearly better than what it was pre-pandemic, and the drivers are likely to stay. So that contributes say a point or so to the step up in the growth rate. And our ability to gain share, our customer value proposition and how well we’re doing with pharma biotech, it’s really compelling, right? We’ve been driving double-digit growth and it’s been accelerating in serving the pharma and biotech industry for the last 5 years. And as that becomes just under 60% of our revenue, that really helps drive really outstanding performance. And when you think about things like industrial markets for us, where we play there, we enable semiconductor. We enable battery technology. We enable cutting-edge material science. So you have good growth in some of the underlying markets as well, and that combination gets you to the 7% to 9% on a sustainable basis.

Tycho Peterson

Thinking a little bit more in the near-term, you’ve done a nice job, I think, on COVID kind of breaking out the testing piece and kind of reminding people that the vaccine and therapy piece is going to be more durable. And you’ve obviously lifted the vaccine piece by $60 million up to the $2 billion for this year. How do you think about durability there? I mean, what are you hearing from your customers on the vaccine side? Presumably you rolled it into core because you do think it’s durable. But how are you thinking about kind of the longer-term trends there?

Marc Casper

Yes. What it seems like – and it’s very hard to know, right? Who would have thought that this conference would be virtual, right? I mean, so once true – predictability is hard. But what I think governments and certainly the customer base seems to be preparing for is that it’s at least relevant into 2023. That doesn’t mean it’s not relevant in 2024. It just means that when you think about the planning cycle and what people are using and planning to produce, that gives you that. When we think about our own contracts and thinking about what technologies we are using to support vaccines and therapies, they are transferable to other medicines effectively. We did a big expansion of our sterile fill/finish network, which can be used for any biologic or any vaccine. So, you won’t transition in a day, right, if you are not producing as much vaccine. But over a couple or few quarters at most, we have the base of business and the customer base that will absorb that volume. So, we are excited about our ability to transition that. And the same thing is on our bioproduction business, where we are doing the single-use technologies, a cell-culture media, the purification resins. They can be redeployed to other medicines as well. And again, there is a little bit of transition time. So, we think you have a good couple of years minimum in terms of demand for vaccines, and then harder to tell beyond that and the ability to transition. I think there is a scenario, which I know others have talked about, which is that you are thinking of this like the flow, where you kind of have this in perpetuity. And I don’t want making that call one way or another, but it sort of does matter in a way, right. You never have to transition away to other things, that’s fine. And if you do have to transition away at some point, you will do it in sterile fill-finish.

Tycho Peterson

You had a slide highlighting your capacity expansion in ‘21. I mean, is ‘22 going to be another big CapEx year, kind of $2.5-plus billion?

Marc Casper

And then it starts to come back down, right. So, basically, it was a 3 year. We stepped it up in ‘20, further in ‘21, kind of level-ish in 2022 and then it starts to come back to a lower level. So, it was a 3-year program that started in the second half of 2020 based on the financial performance of the company to allow us to accelerate our growth strategy.

Tycho Peterson

Yes. And how about Mesa? Talk a little bit about – it’s a nice asset. I actually have seen the boxes in a number of kind of clinics around. What’s the strategy to kind of build out menu, to kind of push further into point of care?

Marc Casper

Yes. So, we acquired the rapid PCR system early in 2021. And the way that we thought about it is we looked at over 50 different technologies. There is a lot of interesting technologies and start-ups. And what we loved about Mesa Biotech, their rapid PCR is quality of the results is awesome. And the instrument cost is super low cost. I think the list price of the instrument is $300, right. So, which basically means you can have it everywhere, right, and super easy to use. So, what we have said is, listen, COVID-related opportunity will likely pay for the acquisition, right. Meaning that the menu development, the cost of developing the menu and the huge number of instruments that we will have around the world, it’s our opportunity that we can then capitalize on post-COVID. So we are developing and expanding the menu, taking it through the regulatory process on respiratory menu and then other molecular diagnostic tests where rapid turnaround in the decentralized view where the time matters, right. So, the doc office and the pharmacies is really where the big opportunity is longer term. So, what we would expect is that middle of this decade, you will see an impressive menu that will allow the pharmacy market to be able to offer rapid PCR tests where you can get your result while you are shopping in the store, which for certain molecular diagnostic applications, could be quite interesting.

Tycho Peterson

Yes. That makes sense. Can you spend a minute on PeproTech $1.5 billion or $1.8 billion deal? Obviously, on kind of the reagent side, but what does that bring to the portfolio?

Marc Casper

Yes. So, the number two player in recombinant proteins, very relevant for academic research and in the biotech and pharmaceutical industry including scale-up for cell therapies and gene therapies. And really, a really nice complement to the cell culture position that we have because the recombinant proteins are used in that workflow. So, a great addition to the biosciences business within the company, which is one of our largest, fastest-growing, most profitable businesses and it’s just really great technology, and we can leverage our website and all the customer relationships we have with the pharma and biotech industry to really build out a rapidly growing business and bring it to the next level.

Tycho Peterson

Maybe we could spend a minute on China. That was a little bit softer in the third quarter. You did have a tougher comp there. But I mean, I remember the days when you used to grow mid-teens on mid-teens in China regularly.

Marc Casper

Yes.

Tycho Peterson

I mean, it does seem like it slowed a bit. Can you maybe just talk to some of the gives and takes into that market?

Marc Casper

Yes. So, probably a couple of framing comments first, Tycho, right. So, when you pro forma a PPD into the company, China represents about 8% of revenue, right. So, it gives you the framework. So, it’s a little less than it used to be just because of the mix of PPD. I would expect it to continue to be our fastest-growing end market from a geographic perspective. Some of the other end markets have increased in the rate of growth, which is great, but I still think China has got really strong market growth outlook. My expectation is the ability to deliver double-digit growth over the long-term there is – continues to be an achievable goal, and it may be better than that. But I think there is enough noise in the system around tensions around the world and restricted entities and all these different things that you probably have a slightly slower growth in the industry than you might have had in the previous decade. We create a really amazing experience. So, when we think about for our customers there, we localized our single-use technologies in bioproduction. We have significant factories in China, for China, to support the customer base. So, our business is performing quite well, right. And the reason that the results are a little bit softer than some of the other geographies is that we don’t do a lot of COVID-related activity in the country. I mean our qPCR instruments are used, but the reagents are not regulated. The government hasn’t approved the use of COVID testing of a foreign company. So, when you look relative to some of the other geographies where COVID has benefited them, China has not benefited.

Tycho Peterson

Got it. And I am going to hit on a couple that came in on e-mail. One was just to clarify the CapEx investments in ‘22 will be more skewed on manufacturing, you are not scaling up COVID testing, is that…?

Marc Casper

No. It’s purely around bioproduction, pharma services, just finishing up the projects that we have in flight over the last couple of years.

Tycho Peterson

And then another question on how easy is it to switch away from COVID-related fill/finish work to kind of non-COVID work? Is it seamless, or does it take a quarter or two quarters?

Marc Casper

I mean, just with everything because you have to do tech transfer, you have to do validation lots. It’s seamless, but it takes some time, right. It’s just the way it is. But we have a lot of visibility, right. Customers – we have visibility into what our order pattern is on our COVID-related vaccine and therapy revenue. So, you get some time to do that, and it may take a little bit of time to navigate that whenever that happens, but we will be able to do that with transparency.

Tycho Peterson

How about gap from the bioprocess portfolio? I mean you have done a great job obviously rolling up a lot of assets. But as you kind of look across your product suite today, are there still gaps you can identify?

Marc Casper

Yes. I think a lot of it’s the organic development. I mean, it was nice to be able to build out a much larger purification business. Historically, we were a niche player. We have grown that business a lot through the organic investments and the R&D investments that we have made there, so that’s been good. We obviously set up, kind of adjacent to it, a plasmid set of capabilities that we are doing organically as well, which is we built a facility in Carlsbad to produce plasmids, so – which is kind of a blend between pharma services and bioproduction what we are doing there. So, different examples, I don’t think there is going to be a tremendous amount of M&A, but really, more organically building out the portfolio.

Tycho Peterson

Got it. Supply chain, you have also scaled up a little bit like things like pipette tips and stuff to help address some of the shortages. But maybe talk on your own supply chain. You haven’t had issues that you flagged. It seemed like you got to 3Q unscathed, but anything that’s gotten worse at the year-end last year?

Marc Casper

Yes. So, there is a real advantage of scale, right. In terms of our PPI business system, the supplier relationships we have. The supply chain issues, they are real, they are challenging, right. It’s taken effort, but we have been able to keep the challenges immaterial, right. It’s impressive what the team has been able to do in terms of navigating the various shortages that we read about and making that pretty largely invisible to our customer base. So, that’s what we are doing. And then some of the things like our expansion of bioproduction is to help our own actions to – in terms of capacity to respond to the incredible level of demand, right. So, you have some of that where you have to make investments to deal with it. But the most part, we have been able to navigate it well and make it immaterial in terms of the headaches that are happening. We don’t see, right. You see it in inflation, you see it in the availability of different things and we are doing a good job of navigating them.

Tycho Peterson

And I know you are going to give us more color when you guide, but – and from a high level, it sounds like pricing, you will maybe be a little bit more aggressive this year given inflationary inputs. Maybe can you just talk a little bit about the philosophy behind that? How much will you push it? We kind of test it in geographies and then kind of roll it out. How do you think about your ability to push through more pricing next year in an inflationary environment?

Marc Casper

We always want our customers to choose to do more business with us, right. So, you want to be transparent with the customer base and – so that they understand that we are a responsible supplier partner enabler for them. And so when I think about pricing, it’s clearly going to be higher in 2022 than it has been in years past. And then given, we might have 50 basis points to 75 basis points of price on average across the portfolio, and it will be well over 1% this year, and we will get into all of the details. We have had those pricing discussions with our customers. We have explained it. What our own wage experiences, where we are seeing inflation, what we are able to offset, where we are not and the customers appreciate the transparency and we expect to be able to capture additional price so that we are able to pass through some of the cost increases where we see.

Tycho Peterson

Yes. Another one that came in on e-mail, going back to China for a minute, just on kind of future export ban in the healthcare sector, anything you would flag there as a potential risk?

Marc Casper

We are not seeing anything at this point in terms of big dialogue around export of healthcare-related stuff to China. That doesn’t mean it doesn’t change, but it’s not a topic that has been flagged to us.

Tycho Peterson

It should be a pretty good academic year. Obviously, your relative exposure there has gone down a little bit as biopharma has gone up. But as you kind of think about your analytical instrument business, how are you thinking about the setup in ‘22?

Marc Casper

It’s good. I mean very strong bookings throughout the year. We had a very good year, and a lot of questions will highlight that. But the booking momentum has been really good, right. So, it bodes well in terms of what the funding is, and it means a super strong 2022. What I would say is that there is a real interest in revitalized academic and government investments, right. I just think historically, the academic and government markets were the lower growth markets of the four segments that this industry serves, and might grow 3% in a given year kind of end market. And now it’s solidly mid-single digit growth. And there is such an interest in trying to prevent the next challenge and the basic research is required to do that. So actually, the funding environment is going to be good, and I think our instrument business will be a beneficiary of that. The other driver, obviously, is our electron microscopy business is doing incredibly well, being driven by the material science applications in semiconductor batteries, advanced materials. So, there is just super robust funding there as well as in prior.

Tycho Peterson

How are you thinking about some of these adjacent markets that are opening up that have high growth and maybe kind of to buy into now, spatial, some of the newer proteomics applications? I mean are these areas you would look to partner? We have seen some of your peers kind of make VC investments. So, how do you think about kind of participating in some of these newer markets?

Marc Casper

Yes. Often, our technologies are enabling that work, so we got a front row seat, if you will. Some of them are – we partner and some of which we are a supplier. And if we see ones that we are super excited about, obviously, we can always acquire if we think it’s the right thing. You want to have high conviction because the valuations are super robust on some of these technologies. So, you are going to really be thoughtful about where you make those kinds of moves. But occasionally, you may see us do something there as well.

Tycho Peterson

Maybe in the closing minute we could just hit on capital deployment and M&A, and actually had a question coming over email just on – PPD was an extension into kind of a newer market side. So, maybe just talk a little bit about how you are thinking about M&A, how you are thinking about kind of FTC risks in terms of where you can go and where you can’t? And then also, has this volatility kind of freed up some discussions in the last couple of months? Obviously, the market has been pretty choppy.

Marc Casper

Yes. So, we obviously deployed $4 billion on bolt-on M&A last year, right. So, it was a very active year holding aside PPT, right, and the industry fragmented. We have an active pipeline. We have been able to – any trust has been fine in terms of our ability to continue to consolidate and add capabilities, and I think you will see it be active. I think it’s too soon on the volatility to translate into maybe different valuation expectations, although you clearly have the use of companies that are willing to sell to take their chips off the table, if you will. So really, it should be a very good environment. We are excited about executing on the deals that we closed.

Tycho Peterson

And is FTC risk something that’s gotten heightened under the current administrator?

Marc Casper

We have been able to navigate the different transactions successfully, so we are well advised and confident. So, we are excited about 2022. We are well positioned to continue the great momentum and deliver another spectacular year, and we will provide all the details on our earnings call at the beginning of February.

Tycho Peterson

Awesome. Well, Marc, great to see you. Thanks for taking the time, and I will take you in a couple of weeks.

Marc Casper

Thanks, Tycho.

Tycho Peterson

Thank you.

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