Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2020 Second 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.

Good morning and thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note, this call is being webcast live and will be archived on the Investors Section of our website thermofisher.com, under the heading Webcasts and Presentations until July 31, 2020. A copy of the press release of our second quarter 2020 earnings and future expectations is available in the Investors Section of our website under the heading Financial Results. So, before we begin, I will 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 annual report on Form 10-Q for the quarter ended March 28, 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 website 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. So, 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 second quarter 2020 earnings and future expectations, and also in the Investors section of our website under the heading Financial Information. So, with that, I'll turn the call over to Marc.

Thank you, Ken. Good morning, everyone. Thank you for joining us today for our 2020 second quarter call. What an incredible quarter we just had. When we gave our update during our Q1 call, we provided our best thinking on our Q2 expectations in an environment no one had ever seen before. We were prepared for the most difficult quarter we've seen in the 18 years I've been with Thermo Fisher, and we successfully navigated the environment to deliver truly extraordinary performance. Our teams did a remarkable job of helping our customers respond to the pandemic. Their tireless effort and determination drove very strong results, generating material COVID-19 tailwinds, while minimizing the impact of customer disruption created by lockdowns around the world. Our performance in Q2 put a spotlight on the talent of our team, the advantage of our industry-leading scale and depth of capabilities, and the importance of our role in supporting our customers and society. We continuously built on our strengths. And what we've accomplished in the past few months shows that Thermo Fisher can perform extremely well, even in the most difficult circumstances. I know I’ll always think back on this period as among our most -- our finest moments as a team and as a company. I look forward to covering some of the many highlights of the quarter with you this morning. So, I'll start with our financial results, which exceeded our expectations across the board. As you saw in our press release, our reported revenue increased 10% in Q2 year-over-year to $6.92 billion. Adjusted operating income grew 26% to $1.86 billion. And our adjusted operating margin increased to 27% in Q2, which was 350 basis points of expansion. Finally, we grew adjusted EPS by 28% to $3.89 per share in the quarter. We delivered…

Thanks, Marc, and good morning, everyone. I'll begin by framing our Q2 organic growth performance. As Marc mentioned, we had an outstanding quarter and we grew organically 11%. I think, it is best to break the growth into two elements. The first is the scale of the COVID-19-related revenue tailwinds that we generated during the quarter; and the second is the performance of the rest of our business, including share gain and market growth, as well as the headwinds from COVID-19 caused by disruptions to customer activity. We estimate that the tailwinds from COVID-19 were approximately $1.3 billion or 21% of growth in the quarter, largely driven by testing-related kits and instruments. The tailwinds were significantly stronger than we originally expected, driven by the increased scale and duration of the pandemic, and the speed at which we were able to ramp up our response and extend our relevant offerings to our customers. The rest of the business, excluding the COVID-19 tailwinds performed just about the high end of our initial range of expectations for the quarter. The team executed really well to serve all of our customers throughout Q2. The result is that we delivered outstanding top-line growth in the quarter. We are able to manage the Company very effectively during a period of significant economic disruption and translate that top line growth into excellent bottom line growth. We appropriately managed the businesses with the strongest headwinds while maximizing the tailwind opportunities and continuing to invest for really bright future. All of this enabled us to deliver 26% growth in adjusted operating income and 28% growth in adjusted earnings per share, an excellent quarter overall. I'll now give you some more details of the second quarter results for the total Company, then provide some color on our four segments and…

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

[Operator Instructions] Your first question comes from the line of Tycho Peterson from JP Morgan. Your line is open.

Hey, thanks. Congrats on the quarter. I appreciate you guys kind of quantifying the COVID tailwinds. I think, as we look a little bit further out in securities market, how you think about the durability on the COVID testing side? You noted the PCR test is now approved and other instruments. You talked about the respiratory panel. So, can you talk a little bit about is that a move forward more automated systems, rolling it into the syndromic panel? And do you need to build out more of a panel for example, into the physician office market? Thanks.

Yes. Tycho, thanks for the question. As I look to the COVID -- impact of COVID going forward, the largest determinant this year and the impact is going to be related to the testing demand. And certainly, as you get into 2021, you're going to see a larger and larger impact of the activities we do in our pharma services business to support the therapy and vaccine development and ramp up, or we get some of that now. When I look at the going forward for COVID-19 testing, we obviously have a leading position in PCR platform. Around the world, our response has been a very significant ramp-up in capacity. And we anticipate that the demand certainly in Q3 will continue to be at a very strong level. And, most of us are obviously very dominated by U.S. headlines, but what you see is generally demand picking up further in the U.S. but you also see demand weakening in other geographies. Europe, we have lower demand as you saw in Q2. That may change. But the net of it is fairly similar revenues to what we saw in Q2 is what we're expecting for Q3.

Okay. And then, two follow-ups on Patheon. You had the press release out the other day quantifying 200 programs you're involved with. Can you just help us think about the trial delay headwinds versus the tailwinds on vaccine development for the next couple of quarters? How we should think about the trajectory for Patheon? And then, separately on China down 15%, was that in line with your expectations? Obviously, you've been on the path to recovery. So, that was a little bit worse than these models? Thanks.

Yes. So, in terms of the pharma services activity, we're very involved with a very large number of programs. And when I look at sort of the headwinds from the pandemic on clinical trials, outside of the COVID, there was some, but not meaningful. And when I look to China at a high level, we saw demand build throughout the quarter, in terms of where we were. And the way that I would think about is, China was very, very conservative on the opening up of academic institutions. So, that actually was a little bit more muted than what we would have expected back in April. But it's picking up in Q3. It looks to be more encouraging. Thank you, Tycho.

Okay. Thanks.

Your next question comes from the line of Vijay Kumar from Evercore. Your line is open.

Maybe to follow up on the prior question. Marc, can you perhaps size what the vaccine opportunity could mean for the overall life science industry? I understand, at some point, diagnostics could drop off. We've heard a multibillion dollar figure for the industry. I'm just curious on -- just given the scale of the vaccine opportunity we’re thinking, should that perhaps be over time larger than the diagnostic opportunity?

When I think about the vaccine opportunity, what's a little bit hard to quantify is what's the vaccine strategy going to be used around the world? So, I'm talking more what's the total amount of vaccine going to be produced? Are we thinking about the world getting high-risk population, are we thinking about the just the countries that can afford a vaccine, or we thinking about 7 billion people ultimately getting a vaccine? And that leads to a massively wide range of what the outcomes are. What I would expect, should there be a successful vaccine, is that, the role of a company like Thermo Fisher and certainly the CDMO industry more generally will play a significant role, based on the fact that the ramp-up under every scenario would be very dramatic. We've been very-active in those projects and many of the high-profile projects that you read about. We are either providing raw materials from our bioproduction or biosciences business to having roles in the production ultimately of what I'll call drug substance or vaccine substance in certain cases, and certainly a very meaningful role in the sterile fill-finish with a final packaging form that a vaccine would be administered. So, we expect if a vaccine is successful that it will be a meaningful tailwind over time with revenue that we've already gotten a little bit of and ramp slowly through the balance of this year and would be more meaningful in 2021-2022 should the vaccine be successful.

Understood. And then, one on margin, in the guidance for the back half. I think, you guys mentioned, perhaps the organization was prepped up for a pretty drastic outcome. So, clearly, you had outsized volume benefits. So, when you think about the incremental margins for back half, should we think about some of that spend coming back perhaps in the incremental margins, maybe tempering down a little bit? And I'm curious why perhaps we don't have an EPS floor, even if we assume Q4 to be all of the diagnostics tailwinds. So, it still seems the EPS projections here should be pretty strong. Thank you.

Yes. So, Vijay, I'll take that one. So, when you think about Q2, 11% organic growth drove 28% growth in adjusted EPS. So, it's a very strong performance. So you think about Q3, and most likely outcome based on what we’re thinking right now is 15% organic growth and that would drive very strong adjusted EPS as well. I think about Q3 to Q2, kind of the change in the mix of the business in the 15% versus the 11%. It's likely to be slightly less favorable business mix within that revenue. Obviously, this is scenario where that mix could play out to better, but I think that's a good place, a good way to think about modeling for Q3.

And then, on the EPS floor perhaps, even if we assume all of diagnostics just went away for Q4, I feel like EPS should be certainly in the double-digit range for the year, perhaps in the mid-teens. Is that a reasonable assumption now for the year?

So, we chose not to give the full year guidance because when you think about the potential mix and range of growth in each segment, to give a raise that would be useful, the number would be enormously wide. So, what we are looking at is, as we get more predictability into what the world looks like, especially in Q4 where you don't know what the virus looks like, you could have a very bullish scenario. You could actually have a pessimistic scenario, if there was a dramatic -- this current wave gets much worse, you could be more pessimistic. So, we're keeping our thinking on what the right external approach is. We feel good about our outline for Q3. And I think you've got a sense from our Q2 performance, we're going to deliver an outstanding year financially and it'll be managing through whatever environment is thrown at us, we're going to create great opportunities to drive share gains, top-line growth and extraordinary earnings performance.

Your next question comes from the line of Derik de Bruin from Bank of America. Your line is open.

Hi. Good morning, everyone. So, a couple of questions. I think the first one is, I appreciate the color on Q3. I think, where we're getting most of our incoming questions for investors is how do we think about the COVID testing tailwinds going on into ‘21? I mean, Qiagen has put out commentary, talking about double-digit growth in their business, but then decline in 2022 numbers, if you look at the documents filed this morning. I guess, could you just sort of talk about how we do this? Because we obviously -- if you think about modeling for ‘21, I know it's given testing coming down, vaccine production going up like that. But, I think that that's sort of where the bulk of my incoming questions are from people.

So, Derik, thanks for the question. Let me tell you how we're planning. That's probably -- it's impossible to predict in a certain way. It feels like a month as far as these days. But, what we're expecting from everything we know is that we're going to be living with the pandemic for a number of quarters. It'll take time for a vaccine to be in the market if it's successful. Well, therapies are making progress again that these will take time and that the virus continues to spread in many countries around the world. So, that this is not a, it's done quickly scenario. And therefore, we're expecting that 2021, we’ll be navigating through both, headwinds of disruptions of some sort related to the pandemic, but also the continued societal response needed to that. And we think we're incredibly well-positioned, based on our quality, scalability of manufacturing and very large installed base and very exquisite customer relationships. We feel good about that will play a meaningful role in 2021 for the testing volumes that are needed by customers. And what that number is going to be, is a very, very enormous range of outcomes. But our manufacturing teams have been remarkable and the power of our PPI business system has been astonishing. And if you think back, when I was at the White House at the end of April, I said that we're working our way to be able to produce 10 million kits a week. And that was late April. And by the end of the quarter, our manufacturing capacity is about that. And that doesn't mean we're selling them any because demand will ebb and flow, but our ability to scale and meet whatever response is out there, we feel highly confident in that.

Great. And could you talk a little bit more about the academic outlook? I mean, you've got a fairly big chunk of your business tied to academic and university and colleges. And clearly there's a lot of uncertainty to deal with this resurgence about how these are going to open. Can you walk us through academic and government as we look at U.S, Europe, APAC and just to get a sense on what your customers are planning and how labs are, -- how many of your labs you still closed? Just I think some general color. I think that's the other number one -- that's the other big incoming question we have from investors.

Yes. So, in terms of academic and government end market, you obviously saw disruptions around the world at the beginning of the pandemic with activity very quickly ramping down. As you look at Western Europe, which actually started to strengthen steadily throughout the quarter. The U.S. which faced the pandemic slightly later than Europe is a little behind, but on the same type of trajectory with activity picking up. The interesting country has really been China, was -- actually kept most of its universities closed for most of the quarter. That activity is picking up as well, but actually a little bit more slowly than one would anticipate -- one would have anticipated. So the impact of that is obviously, they weren’t customers able to receive instruments as easily as normal. And so, we would expect that as academic and government customers reopen in that setting, you'll see instruments demand start to pick up as well.

Great. I'll get back into Thank you.

Thank you.

Your next question comes from the line of Jack Meehan from Nephron. Your line is open.

Thank you. Good morning.

Good morning.

Marc, I was curious to get your take on how much the tailwind and share gains that you're seeing in the business right now. Do you think we're going to end up proving to be more permanent over time versus kind of the outsized benefit you're seeing right now? And I know it's difficult to provide a three-year view when we don't have a one year view. But just given all the moving parts, how do you think your position versus the 5% to 7% target you laid out a year ago?

Yes. So Jack, when the team’s view, right, when we were sitting in February and looking at the situation in China, the team's view was having a very clear set of guiding principles, right, which was the obvious. Keep your colleagues safe, support your customers activity, and the third is manage the Company appropriately in this environment. And we came with a very clear view of what that meant, which is, of course, manage costs tightly because there's going to be disruption to demand, but be very aggressive to position the Company for a brighter future to solidify and strengthen and hopefully even increase the growth outlook of the Company for the longer term. Normal for us is 5% to 7% growth, and we've been taking actions to create an even brighter future. So, we need to get higher in that range when you're in a normal environment or above that range. And we have no idea now. But I know we're taking the actions to strengthen the long-term outlook of the Company. And because we've been able to respond so aggressively to help our customers navigate the pandemic, we're obviously in the midst of an incredibly strong year as well. So, we're -- at this point, obviously we had about 7% organic growth when you look at the first half, so at the high end of our normal range. And obviously with the Q3, this could be a very significant year as well in terms of performance.

Okay. And then, I wanted to also follow up on Qiagen. Clearly unprecedented times, so I can appreciate the justification for the price increase. There have been some questions around whether €43 is enough. So, I was just hoping you could comment on your appetite or lack thereof to raise the price further? And just walk us through what happens next in the tender process.

Yes. So, Jack, thanks for the question. As everybody here knows, we're extraordinarily disciplined in terms of our capital deployment strategy and ensuring that where we deploy our capital, we're going to strengthen the Company strategically and generate strong returns for our shareholders. The dynamics are obviously, as you said, very different, from the beginning of March to now. And Qiagen has done a good job in terms of stepping up and making a real impact on society from a pandemic response. And we thought our way through that and had very good negotiations with Qiagen and came to an agreement at the €43. And we believe that's the full and fair value. In terms of our view is, we were very clear in the process, and we disclosed that this morning, I think early hours because of the German regulations. That is our best and final offer. And the process is very straightforward. The tender I believe ends around August 10th. And if we clear the 66.67% threshold, then the tender is complete, so mechanism and the deal proceeds. And if we don't get to 66.67%, the deal is over, because there's a cooling off period in Germany. So, there is no revised offer. That is what it is. And, we think it's very appropriate for both sets of shareholders. And we look forward to completing the tender process and then moving forward through the regulatory process and welcoming over 5,000 new colleagues next year into the Company.

Makes sense. Thanks Marc.

Your next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Hey. Good morning. Thanks for taking my questions. And again, thanks to the Thermo team for all your efforts over the past several months. Just in terms of my first question, what end market expectations are embedded into your Q3 financial targets, excluding COVID-19 tailwinds?

It's not a way that we manage the business quite, Doug. Let me try to get you an answer more about activity levels in the non-COVID, and make some qualitative views around it. So, for Q2 Doug, the non-COVID related businesses declined 10%, right, which was just above what the better end of our expectations that we gave in the guidance process, right? So, that's where it ended. June was down about 5%. So, you saw, April, May were worse. June was about negative five. The range of outcomes that Stephen articulated in the outlook for Q3 was a range of negative 5 to flat. The negative 5 would assume that what we saw in June continues throughout the quarter. The flat basically is a steady improvement throughout the quarter. And when you think about that in normal quarter for us is 5% to 7% growth on that business, right? So, even at flat, you're still 5 to 7 points below what we would have experienced for the last five, seven years, right? So, it's a steady increase in activity is what is assumed. And when you look at that on the non-COVID-related businesses, pharma biotech has continued to be the least impacted and would likely be the least impacted, and academic and government, industrial and applied, and the healthcare, diagnostics, they all should start to see some level of step up throughout the quarter is the way I would think about it.

Okay. That's super helpful. And building off of one thing you touched on there, Marc. I don't think, in your prepared remarks you commented on instrument versus consumable revenue growth in the quarter or the exit rates. Would you be willing to share any details on those data?

Yes. That was very skewed by the tailwinds. When you think about tailwinds at large, they're going to be consumables right now. Excluding that, I clearly instrument purchases were at a lower level of growth than consumables and services. Customer activity has been relatively low. And we expect that to pick up in the second half of the year.

Okay. And one last one, really building off of some earlier questions, but trying to get a little more granular. Glaxo has talked about selling vaccines at about $10 per unit, which in their words is around cost. Pfizer this morning just agreed to sell to the U.S. at $19.50 [ph] per unit for their vaccine, which is, I think just a smidge above cost of [Technical Difficulty]. Is there a rule of thumb we can use on what percentage of unit pricing would typically be up for grab for Thermo, whether it's on a per unit vaccine basis or using services? I mean, just using that 10 to 19.50 range, how much of that would normally end up going to Thermo as a component of cost?

It's really extraordinarily different to do. Let me just visualize it for you, which is why I really can't give you an answer. If you think about the vaccine, I can give you two different views of how it gets administered in those cases. One is single unit, meaning one vial, one vaccine; another is a vial where you put a syringe and take out the vaccine and you have 10 or 20 units of the vaccine doses in the single thing. You're going to get wildly different CDMO revenue or our revenue based on just even the filling strategy of those companies. So, very hard to do a rule of thumb until you know exactly the dosage form and so forth. And, is it -- what's the technology used in the vaccine.

Your next question comes from the line of Puneet Souda from SVB Leerink. Your line is open.

Yes. Hi. Thanks Marc. And congrats on the quarter and impressive quarter here for sure. And thanks for your commitment to both, research and improving the lives here with COVID testing and commitment to vaccines. So, first one, if I could ask on capital deployment, given the COVID benefits you're seeing on testing and the growth you expect to see from vaccines, what is your thinking, long-term thinking on capital deployment, given that the vaccines scenario is actually multiyear, as you pointed out? Are you thinking about capital deployment any differently than before?

So, Puneet, thanks for the question. So, from a capital deployment strategy, I don't think it really changes too much. What I would say is, over the longer period of time, it's going to be a blend return of capital and the majority being redeployed into M&A in the business. If you think about the past quarter or March forward, obviously a large acquisition in Qiagen, also a nice bolt-on acquisition, which we announced and will close next year in CSL’s biologics facility. And I think, you'll see us do a cadence of smaller and larger deals over time with a steady return of capital. So, our business is performing at a high level. Our expectations for the future is that it's going to perform at a high level. And that's going to give us very substantial cash flow to be able to redeploy.

Yes. And we’ve also increased that CapEx significantly to address capacity and capability enhancements for the COVID-19 response as well.

Okay. That's very helpful. And my second question is on, you have a unique vantage point, Marc and a global perspective, given Thermo's position and the scale and the speed that you pointed out to. As you look at research funding across the globe, there's an expectation here that the research funding is likely to grow. Magnitude is unknown at this point. But, could you give us a sense of that, given what you're seeing, given the magnitude of this crisis? What does this mean for the next five years across the life science tools industry? And more importantly for Thermo, when it relates to academic funding and research funding across the globe?

So, Puneet, thanks for the question. So, as we talk to governments and we talk to our customers and we use our experience, life science tools and diagnostics and our pharma service capabilities, it's a fantastic industry with great market growth characteristics you see in the industry perform well in this environment. My expectation is when the dust settles, the commitment to life science research, healthcare infrastructure systems is going to be even better over time than what the strong period that we enjoyed. And we're seeing some of the early excitement of the importance of the work. And so, I'm very bullish about what the long-term benefit will be. Obviously, there's going to be ebbs and flows because of the economy and affordability and those things. But, if I think the long term perspective, I'm very optimistic for what our industry holds and for the strong competitive position that we’ve built to serve in that industry.

Great, thank you.

Operator, we have time for just one more.

Your last question comes from the line of Steve Beuchaw from Wolfe Research. Your line is open.

Hi. Good morning. Thanks for letting me run the anchor leg here. I have a two-parter for Marc as it relates to a couple of subcategories within testing. And then, I have one on the financials for Stephen. Marc, there are a couple of potential drivers of testing prospectively for you and for the space broadly. One is screening. We've heard, just for example, a number of universities talk about reasonably high frequency testing of asymptomatic people on campuses. I wonder if you could speak to what extent asymptomatic screening is or is not in your plan, and whether you think there could be a material tailwind? And then, the second part of my testing question actually relates to serology. Serology did kind of quite as well as we hoped initially. It just doesn't seem to be finding as many instances as we had hoped for in the antibody signal of immunity. Can you speak to how you think that market evolves? Are there ways we could get the yields higher?

Yes. So, Steve, thanks for the question. In terms of screening or asymptomatic patients, what we would say is that's a life type activity, back to work, back to school. We see the interest level dramatically increasing with many different use cases. And we expect to play a role in a number of that. And some of that is embedded in the demand that is in Q3. And my take is that the methodology on asymptomatic screening, not the platform, but things like pooling and so forth could facilitate some of that ramp up over time as a different strategy. So, I think that will create a tailwind over time to support the activity while testing its relevant. On serology, we're developing our assay. We're taking it through the regulatory process. As the medical community better understands the immune response or what it means, serological testing becomes more relevant. And so right now, there's capacity out there. We're bringing out a high quality tests. And as customers need it, we'll be able to supply. You do have one question for Stephen quickly. We should wrap.

One question just real quick for Stephen. Can you put any commentary around cost savings that you've identified from things like, lower T&E or other expenses from being virtual that you think are sustainable? Thanks so much.

Yes. So clearly, we control costs very effectively and we're all learning to live in a different environment. And T&E expenses are going to be dramatically lower, I think for the long-term, since that’s how we are thinking about managing the Company and taking advantage of the technologies that we've invested in over time. So, it’s my guess is probably a couple of hundred million dollars over time that you get to that level of saving of ongoing costs. So, we're appropriately managing the Company both, short-term and I think the long-term opportunities.

So, we'll wrap here with -- first, thank you for joining us today. We're very pleased to have delivered an exceptional quarter during a very challenging time. We're proud of our role in helping our customers and society. And we're going to continue to manage the Company appropriately to come out of this period an even stronger industry leader. We look forward to updating you on our progress, and I hope that you stay safe. And as always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks everyone. End of Q&A:

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