Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2020 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to introduce our moderator for the call today, Mr. Kenneth Apicerno, Vice President of 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 February 12, 2021. A copy of the press release of our fourth quarter 2020 earnings is available in the Investors section of our website 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 most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q, which are on file with the SEC, and also available on 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. Therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during the 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 fourth quarter 2020 earnings, and also in the Investors section of our website under the heading Financial Information. So, with that, I'll now turn the call over to Marc.

Thanks, Ken. Good morning, everyone. Thank you for joining us today for our 2020 fourth quarter call and a wrap up of what's been a truly exceptional year for Thermo Fisher Scientific. I hope that you and your families are staying healthy as we all work to get beyond the pandemic. Before I cover many of the highlights from the quarter and the year, I want to share some news about our Investor Relations team. This will be Ken's last earnings call as he plans to retire at the end of March. You've all come to know Ken very well over the years. He's been leading the IR function since 2005 and is concluding a remarkable 25-year career at Thermo Fisher. Ken has been the voice of our company to the Street, and he excels in that role. He conveys his extensive knowledge of our company, our markets and our opportunities in a way that's informative and engaging. In fact, you voted ken the best IR professional in our industry multiple times over the year. And I couldn't agree more. He's been a terrific partner to me and Stephen. Ken, thank you for a truly stellar contribution to Thermo Fisher. Looking ahead, we're very fortunate to have Raf Tejada here to take the reins in March. Raf has been a part of the Thermo Fisher Investor Relations team for five years, and many of you knew him during his time at Wall Street, most recently at Bank of America as an analyst supporting Derik de Bruin. I know Raf and the team will carry forward Ken's legacy of excellence and Investor Relations. Please join me congratulating Raf on his new role, and wishing Ken all the best in his well deserved retirement. So moving on to our results for 2020,…

Thanks, Marc, and good morning, everyone. I'll begin with a high-level summary of our Q4 performance and full year results for the total company. Then I'll provide some color on our 4 segments and conclude with comments around our initial 2021 guidance. As you saw in our press release, we achieved an exceptional quarter and grew organically 51% in Q4. This resulted in full year organic growth of 25%. Similar to previous quarters, I'll break down the organic growth into 2 elements. The first is the performance of the base business and the second is the scale of the COVID-19 response revenue. In Q4, the base business grew 5% organically, another quarter of sequential improvement. For the full year, the base business was essentially flat as a result of slower economic activity earlier in the year due to the pandemic, partially offset by great commercial execution. Our COVID-19 response revenue also increased significantly in the fourth quarter to $3.2 billion, bringing the full year impact for our customers to $6.6 billion. This was largely driven by testing-related products and instruments. It is also worth noting that we generated $500 million of revenue in 2020 from support for COVID-19-related vaccines and therapies. Once again, our PPI Business System enabled excellent pull-through, and we delivered 100% growth in adjusted earnings per share in Q4 and 58% for the full year. Our PPI Business System also enabled us to generate extremely strong cash flow. Free cash flow for the year was $6.8 billion, up 67% versus the prior year. Overall exceptional financial results in 2020. Let me now provide you with some more details on our performance, starting with our Q4 earnings results. As I mentioned, we grew EPS -- adjusted EPS by 100% to $7.09. For the full year, adjusted EPS was…

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

[Operator Instructions]. Your first question comes from Tycho Peterson from JPMorgan.

I'll start off by wishing Ken all the best, and great to work with you over the years. Marc, your implied testing drop off is steeper than we've heard from others like Hologic and [Abbott]. I'm curious if you could talk a little bit more about that dynamic in particular. Is that just a function of the non-automated PCR testing and maybe a lower installed base of the Amplitude? And then I'm curious about Mesa Bio, thoughts on increase -- entering an increasingly crowded point-of-care market. And are you planning to materially scale the antigen test? And how could that factor into the outlook?

Tycho, thanks for the question. Yes, I'm much more optimistic than the way you frame the question, right? So if I think about our PCR installed base and the assumptions, we have really strong line of sight to the first quarter, reasonable line of sight to the second quarter. And after that, our customers just don't know, right? So we made an assumption base that we're going to see incredibly strong demand in the first quarter. And that is going to drop off somewhat in Q2. And then we made a much more conservative assumption. But the way the pandemic has played out, there are many scenarios where I see testing demand being very robust for a long period of time. The truth is, this pandemic is going to be around in some form around the world, and doctors are going to want to know whether or not a patient or a person has COVID, right? So I think you'll see as the year plays out, there's scenarios well above the testing assumption. Amplitude demand has been extraordinarily robust. Our installed base is growing, and that's been a nice adder to the growth that we saw in Q4 and the strong momentum we expect. Mesa is very exciting, right? When you think about what we've learned throughout the pandemic is that PCR testing is truly the gold standard. And the accuracy that you get is super relevant and Mesa's technology gets you a result in 30 minutes with PCR capability, and it gives you that confidence in the accuracy. And the way we think about it is there are a number of applications that are very relevant to have that rapid thing. Pharmacies would be an obvious example. The sports leagues have been using this technology. So those will be examples of where it is, and that obviously will be additive to our capabilities. It's not assumed in our guidance at this point. So thank you, Tycho.

And then one follow-up for Stephen, just on the margins, understanding the 29.8% operating margin guidance. As we think about the gives and takes around the COVID tailwinds, can you maybe just talk as we think about COVID eventually wearing off, how much you expect to retain in terms of some of the margin uplift you've seen over the past year?

Yes. So when I think about the margin profile that's embedded in this guide, as I mentioned, Q1 similar to Q4 of 2020 and then the other 3 quarters are roughly the same in terms of margin profile. It's a combination of kind of lost contribution from the testing revenue drop off and then the timing of investments. So that gives you an indication.

Your next question comes from Derik de Bruin from Bank of America.

And I'll extend my congratulations to Ken and Raf. Stephen, I just wanted to sort of follow up on Tycho's comment there. I mean for most of -- I would say, for a lot of the end of 2020, a lot of the incoming calls from investors were, oh my God, Thermo has this huge COVID tailwind. It's going to create these really difficult comps. They're not going to be able to grow earnings. Obviously, that's not the case in 2021, but it sort of flips the question now over to 2022. And I realize it's too early and a certain extent to really answer that question given all the uncertainty. But I mean all of my incoming questions this morning from investors are, well, the guide for '21 looks great. What -- how do they think about 2022? And I just -- I don't know any initial thoughts on how you can talk about that or if you can talk about potential for earnings growth in 2022?

So Derik, I've been around the -- I've been around this one a while. I've never been at the next year's guidance on the opening one, but it's a great question and it's one that is a very fair one as well. So the way I think about it is the following: First, think about the way we've managed the company throughout 2020, right, which was drive very substantial growth in our financial performance, earnings cash flow while dramatically accelerating the reinvestment rate in the business, right? New opportunities were opened during the course of the year because of the pandemic, because of how we responded, because of the relationships we solidified and build. And we were able to put $1 billion of additional reinvestment in the business above the normal increases that we have every year. And we're stepping that up again in 2021. So what does that mean for the future? It means that the company is positioned to grow more rapidly. And that obviously will drive good earnings off of that increased kind of base business activity. And much of the investments that we made that are supporting COVID are going to be applied to other applications. So obviously, vaccines and therapies we expect will continue to be very relevant in 2022. But at some point, they'll be less relevant. And that capacity, that all converts over to non-COVID-related activities. On the molecular diagnostics side, the installed base increase in sample prep and the installed increase in QPCR creates the opportunity to build out an even larger molecular diagnostic business. We increased our installed base hugely during the course of the year. And more importantly, we satisfy customers. The reason that some of the others in this industry have relatively flat straight-through the year results for COVID is because they couldn't get manufacturing capacity up, right? We were able to do that in months. Others are talking about level-loaded demand that's because the supply has been so constrained with others. So we're excited about our prospects. And obviously, we'll see what the economy is, what the growth is, all of those things. And as it gets much closer to 2022, we'll figure it out. But I'm extremely bullish about the long-term prospects of the company.

Great. I know it's a lot of this, what have you done for me lately sort of conversations. But you already took my -- you already answered my molecular diagnostics question. So I just have one quick follow-up. And just to clarify, the CapEx step-up in '21 -- 2021, that we would expect those levels to sort of fall off in 2022 and beyond, right? That's not a new base level CapEx spending.

No, we would expect -- I think Stephen will add, we would expect it to start to wind back down over time. Obviously, if there are new opportunities that come up, obviously support them because we'll take the returns. But effectively, the step-up in 2020 and the further step-up in '21 really support the opportunities that materialize and the long-term acceleration of our growth.

Yes. I think it's kind of a long, long-term modeling. It's really around about 3% to 3.5% of revenue is a good way to think about the profile of the company right now.

And your next question will come from Jack Meehan from Nephron Research.

And also, congratulations, Ken; congrats, Raf. Well deserved. So wanted to dig into the guidance a little bit more. So around the assumption for vaccine therapeutic revenue fairly linear throughout the year, though we're obviously seeing the vaccine manufacturers scaling capacity into 2021. So could you just give a little bit more color around the framework behind the assumption? And are there any takes that you're assuming throughout the year?

So I think one framing is we were at that run rate already in Q4. So this is kind of how we're seeing the year play out with a continuation of where we are. So a very high level of support for our customers. And then can you just clarify the last part of your question about the take?

Yes. Are there any projects that you think drop off throughout the year?

Yes. I mean there's always -- we obviously have supported a lot of development work of which some of those therapies or vaccines will be unsuccessful. So those projects conclude, but..

Embedded in that.

Embedded in the number, but obviously, the demand for the successful ones increase. So that kind of run rate we're at is not going to be the exact same products throughout the year. It ebbs and flows.

Great. And then I wanted to turn to analytical instruments. As you reflected over the last 6 months, can you -- versus the first 6 months of 2020, how do you think could be purchasing demand translated throughout the year? Could there have been some catch-up in the second half? And then maybe looking forward, how does -- what are your assumptions around that segment for 2021?

Yes. So in terms of the demand profile, obviously, there was very substantial disruptions both in customers' ability to order or even receive an instrument during the first part of the year, and obviously, all of the other challenges that the pandemic brought. We saw activity start to pick up at a much stronger level, particularly in material and structural analysis, which is largely our electronic microscopy business and our chrome and mass spec business. So Q4, we're strong in those regards. Chemical analysis is still soft, though the bookings did improve. So what I would expect is that you'll see continued strengthening this year, and that analytical instruments would grow above the company average. That's how I would think about it.

And your next question will come from Doug Schenkel from Cowen.

Before I get into it, once again, Ken, best wishes on the next stage. You deserve all the best, and congrats to Raf. We have always enjoyed working with you both and look forward to working with you both. Well, at least Raf moving forward and hearing about what Ken is doing on the beach. So first topic is, again, on guidance. 2021 guidance assumes a base business growth rate of 7%. According to our math, this implies a 2-year stacked growth rate of around 3.5%, which is well below your longer-term growth rate target and also the Q4 core growth rate. How would you characterize the conservatism embedded into 2021 guidance? Or is this kind of balancing early in the year conservatism, which is typical for you with maybe just seeing some increased headwinds related to COVID-19 restrictions in certain parts of your business?

Yes, Doug. So when I think about the base business, I feel good about the implied step-up in growth that we saw from Q4 for the full year, right, going from roughly 5% growth in the fourth quarter to 7% growth in the base business for the full year. And what's assumed in there is still there's some level of disruption based on the pandemic. Let me just visualize it. Our Specialty Diagnostics business, routine doctor business are still well down, right? So there's parts of the business where you don't see that recovery for a while. But we still feel confident in growing at a good rate. And I see scenarios that are above the 7%, right? So it's not as if that's the only scenario that plays out. So I don't know if -- I think it's an appropriate start. I don't know if it's conservative or not, but we measure ourselves at the end of the year, did we do a great job? So we're going to look at how did everybody else in the industry report, and we need to make sure that we're gaining market share. And if the 7% reflects market share gains, then we're going to be satisfied. And if there's more opportunity to go faster than that, then you're going to see us deliver it.

Okay. That's helpful. And then let me just pivot to China. China growth rebounded strongly in the fourth quarter. Actually, I -- we were looking back to our model over the years, and I think this represents the highest growth rate for at least the past decade in China on a quarterly basis. What drove the strength in China? Did you see some benefit of catch-up in spending? And then you made some comments in your prepared remarks, which prompted me to -- I guess prompted some curiosity about how your large molecule investments in China are actually impacting growth. And I guess the last part of this would be what's embedded for China growth in 2021?

Yes. So China, it was good to see, obviously, very disruptive first half of the year, 20%-ish organic growth in Q3 and 30% organic growth in Q4. So nice step-up, and Q4 was very strong. There was definitely some catch-up spend, right? I mean, obviously, customers getting back to work and all those things. So there was some of that in there. And that's pretty much impossible to quantify exactly what that is. But bookings were stronger than revenue growth, right? So we're excited about the growth prospects for China for this year, right? So China should be one of our fastest-growing geographies in 2021. So that would be the expectation. In terms of biologics and large molecule, we've talked about a lot on these calls over the years, the emergence of a local biotech industry for the Chinese market has become larger and larger over time. We've done a good job serving that customer base. I'm excited that we were able to localize our capacity for single-use technologies to support the local customer base and give them assurance of supply. And at the same point, we're very excited about the partnership and the joint venture reforming in Hangzhou to actually produce biologic drug substance and drug products. So we're well positioned there. And biotech is a nice driver of our growth. We also saw nice growth in other segments. Academic and government was quite strong in the quarter as well. So I hope that gives you a little bit of a flavor for what happened in China and what the strong outlook looks like.

Your next question comes from Vijay Kumar from Evercore.

Congrats to Ken and Raf. Marc, maybe a big picture question for you. Is there a view that the base business should be accelerating or perhaps has gotten stronger emerging from the pandemic? Some of the feedback we've been getting is higher installed base, biopharma accelerating. So perhaps some thoughts on what the base? I know the LRP pre-pandemic was 5 to 7. Is that LRP itself that math changing because the business is emerging more stronger from the pandemic?

Yes. So Vijay, thanks for the question. And yes, you've heard us talk about really starting in the Q3 call and the Analyst Meeting in September about how we're thinking about the longer term, right. And -- which goes back to the guiding principle that we have through the pandemic, which is make the decisions, investments and run the company to set ourselves up for a brighter future. We created new opportunities and new opportunities were created just in the market as well because of the pandemic. And when I think about that, we're positioning the company to exit the pandemic phase as a faster-growing company than what we grew, and the exact numbers will figure out over time. But the way I think about it is our -- the percent of our business in pharma and biotech continues to increase. That's our fastest-growing end market. So that's a market-driven weighted average type growth. But our value proposition, the increased investments in our innovation, the investments we're making in emerging markets, those things will all help us drive very strong growth going forward. So I'm very bullish about the long-term prospects for accelerated share gain into the long-term.

That's helpful. And one perhaps on free cash flows. The guidance, $7 billion, that's sort of flattish to up slightly year-on-year. If I just look at your cap deployment assumptions for the year, it's about close to $3 billion-ish, considering you guys have $10 billion plus on the balance sheet plus the $7 billion you're generating. And I don't think Thermo has ever -- had 2 consecutive years of $10 billion plus of cash lying on the balance sheet. I'm curious why free cash perhaps -- why is it $7 billion? Any one-off items? And any thoughts on cap deployment?

So Vijay, let me just clarify on the free cash flow. I think that includes a very significant increase in CapEx. So if you look about cash from operations, that's 13% growth year-over-year, which I think is incredibly strong and appropriately strong. And then we're choosing to deploy a large chunk of that towards these great opportunities in terms of CapEx. So that's kind of the -- get you to the $7 billion of free cash flow and the market in terms of capacity.

Yes. So we have had substantial capacity even when the company is more levered. And we've talked about that when we gave our 3-year models. We always have these numbers that are stagnantly large. We can deploy $30 billion wherever the numbers were historically back in '18 or '19 when we would talk about them. And when I think about where we are today, we have a lot of firepower. And you're seeing us be active right now with bolt-ons. We have a very busy pipeline, and we're going to be good stewards of capital. I mean we're going to be disciplined. We'll do the right things. We'll pass some of the things that we don't think are the right. It was good to get some return of capital already completed this year with $1.5 billion of buyback. So we don't look at the calendar and say, "In any particular year, you have to do x or y." But I would expect us to be able to deploy that capital over time and be a nice adder to the strong financials that you're seeing in the initial guidance.

Operator, we have time for one more.

Okay. So your final question for today then will be from Dan Brennan from UBS.

Ken, obviously, have been great working with you and best of walk. The same thing with Raf, look forward to going forward. And Marc, a quick plug, things are looking up for our jets here. So I wanted to ask a first question on vaccine and therapeutics. I know you've addressed a few comments here thus far. I think on the last call, you discussed this $1 billion revenue cumulatively looking at 4Q '21 and '22. And I know to Derik's question, you addressed the outlook of some color on '22. I'm just wondering if you can help us think through kind of the durability. Obviously, there's a lot of moving pieces, but this $1 billion you're guiding for '21, presumably, there's going to be a pretty decent tail of this vaccine opportunity. Any way to help us think through that opportunity and how it breaks down between your tools business and [PPI]?

So Dan, thanks for the question, and the jets, not the best of years. But at least we were focused on a lot of things at Thermo Fisher. So I didn't suffer the pain too much. So when I think about vaccines and therapies, as you know, kind of our philosophy, which is articulate the numbers and the outlook on what you can see and don't create a lot of hype around things. So when we started out some months ago, we talked about $1 billion opportunity in total, right? That was contracted revenue that we saw. Obviously, as the pandemic continued, as our position continued, as we won more and more parts of the business, even what we committed to, if it all went to zero at the end of this upcoming year, it would be $1.5 billion because we did $0.5 billion last year, $1 billion this year. And based on what we see with the pandemic and what our customers are telling us, we would expect demand for COVID-19 therapies and vaccines to be very substantial in '22 and likely to have some level of revenue going into '23 and maybe even longer. So it's going to be a large contribution based on the strength of our bioproduction business and our pharma services capability. So thank you for the question.

Let me wrap here with a few things. First, as all of our analysts expressed and on behalf of all 80,000 colleagues, Ken, thank you for a job incredibly well done and wishing you the happiest of retirements. It's been awesome. From a company perspective, we delivered an exceptional year and we're even more excited about the opportunities ahead of us. We're looking forward to updating you during the course of 2021. And as always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.

Thank you, everyone, for joining us today. This will conclude today's conference call. You may now disconnect.