Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2021 First Quarter Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call.

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 Webcast and Presentations until May 14, 2021. A copy of the press release of our first quarter 2021 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, which is on file with the SEC and available in the Investors section of our website under the heading SEC Filings. While we may like to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also during this call, we will 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 first quarter 2021 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, Raf. Good morning, everyone. Thank you for joining us for our Q1 call. As you saw in our press release, we had a very strong start to the year. We delivered another quarter of outstanding financial performance with excellent growth on both the top and bottom line. As you know, we're playing a significant role in enabling society's response to the pandemic, including a rapidly expanding role in supporting vaccine production. In our base business, we meaningfully accelerated growth across all our businesses in the first quarter. We had very strong execution of our growth strategy, including launching a number of innovative new products, capitalizing on our leadership in the high-growth and emerging markets, strengthening our unique customer value proposition. And we're already starting to see the benefits of the accelerated investments we initiated in 2020. We continue to execute our capital deployment strategy, completing our acquisition of a European viral vector business and Mesa Biotech, a rapid point-of-care molecular diagnostics company. We also returned capital to our shareholders through stock buybacks and dividends. As I'm sure you saw shortly after the quarter closed, we announced our agreement to acquire PPD, a leading provider of clinical research services serving pharma and biotech customers, our fastest-growing end market. So another great quarter of delivering for our stakeholders in the near term, while investing organically and inorganically for a great future. I'll cover each of these topics in more depth in my remarks, but first, let me recap the financials. Our revenue in Q1 grew 59% year-over-year to $9.91 billion. Our adjusted operating income for the first quarter increased 155% to $3.51 billion. And our adjusted operating margin expanded 13 percentage points in Q1 to 35.4%. Finally, we delivered another quarter of strong adjusted EPS performance, achieving 145% increase to $7.21…

Thanks, Marc, and good morning, everyone. I'll begin with a high-level summary of our Q1 performance. As Marc mentioned, we had another exceptional quarter and grew our revenue 59%, including 53% organic growth. We delivered $2.9 billion of COVID-19 response revenue and accelerated the growth of our base business 13%. So a great start to the year on the top line. We also had an excellent start to the year on adjusted EPS growing 145% in Q1 to $7.21. This was $0.70 higher than our expectations for Q1 at the time of our last earnings call driven by great operational execution, the timing of expenses within the year and a higher tailwind from FX. Overall, exceptional financial results in Q1, continuing our momentum from 2020. Let me now provide you with some additional details on our Q1 performance. GAAP EPS in the quarter was $5.88, up 198% from Q1 last year. On the top line, our Q1 reported revenue grew 59% year-over-year. The components of our Q1 reported revenue increase included 53% organic growth, a 4% tailwind from foreign exchange and 2% from acquisitions. As a reminder, we had 3 extra selling days in Q1, which represents a tailwind of approximately 3%. Looking ahead, we have 4 fewer days in Q4. Turning to our performance by geography during the quarter. All regions delivered very strong growth. North America, Europe and Asia Pacific all grew approximately 50%. China grew 60%, and the rest of the world grew over 80%. Turning to our operational performance. Q1 adjusted operating income increased 155%, and adjusted operating margin was 35.4%, 13 percentage points higher than Q1 last year. In the quarter, our PPI Business System enabled us to drive exceptional volume leverage and strong productivity. We also had favorable business mix and a tailwind from…

Thank you. Operator, we're ready to take questions.

[Operator Instructions] Your first question comes from the line of Jack Meehan with Nephron Research.

I was wondering if you could start and talk about PPD. They got off to a strong start to the year, a lot of momentum. Can you talk about how the initial integration planning is going to ensure they keep that momentum going? And you mentioned some of the customer feedback. Can you talk about maybe from a therapeutic perspective where customers are seeing the value?

Jack, thanks for the question. We're, as you know, very excited about the combination of PPD and our offering to our pharma and biotech customers. And as you know, the CRO market is very -- it's got very good characteristics of strong growth because of the relevance of that offering and the trend for more and more of the activity to go to the biotech area, where there's less of those capabilities in-house. So you've got good market and PPD off to a very good start to the year. Financial performance and authorizations backlog, very encouraging. It's a great business performing at a very high level. We're just starting that process of planning the combination. And we've had very good, collaborative dialogue with the leadership there. And over the coming months, we'll be working on that process. But for the colleagues there, we can't wait to welcome them. And it really is largely business as usual and bringing new ways to add more value to our customers. So very encouraging. And customers are very excited. The customers I've interacted with, they get it. They understand the logic and they like the fact that we're going to have more capabilities to help them navigate the important things that they're doing. In terms of therapeutic areas, PPD covers the full range of the therapy classes and as does Thermo Fisher. So we'll be able to support our customers and the important work that they're doing.

Great. And then everyone is focused on the durability of the COVID benefit, appreciate all the color so far. I guess I'm curious based on the core recovery and the increased outlook on the vaccine and therapeutic side, do you think The Street forecast in 2022 are a good baseline? And can you just talk about the level of visibility on that interplay between COVID and core?

Yes. When I think about the COVID response, the first quarter was exactly how we thought it was going to play out. And when we look at the outlook for the year, we've assumed parts of that response. Within the parts of -- growing parts of it will be less. And in aggregate, we feel very comfortable with the outlook of the same number, the $7.1 billion that we started with at the beginning of the year and added $200 million for Mesa. So that's been our view and -- 3 months into the year, that continues to be a view that we think makes sense. Thanks, Jack.

Our next question comes from the line of Tycho Peterson with JPMorgan.

Marc, you proactively brought up the benefits of accelerated investments a number of times in your comments. I know you took R&D up 20% last year, and it was up 31% first quarter. Can you maybe just give us a little sense of where the incremental R&D investments are going and how you think about some of the payoff there?

Yes. So it would go in areas as you would expect, right, where we -- where our R&D budget is largely deployed. So increases in mass spectrometry, electron microscopy would be 2 of the big areas, bioscience reagents, as well as clinical sequencing. Those are all the areas that got good investments. And when I look at our results, obviously, new products take time to have the big impact, but those businesses are performing at a very high level. And you saw from the press release and some of my comments, we had a very good strong start to the year, our new product launches, 2 mass spectrometers, building on our leadership in Orbitrap, another exciting electron microscopy offering. This one particularly for material science applications that we launched in the quarter. We had good launches around our clinical sequencing business. And then one, to me, the societal need. Probably not a huge revenue opportunity, but an incredible need, which is how do you know if COVID is present in an indoor space? And because of our very deep scientific knowledge about air monitoring, we were able to launch a very relevant solution for that application, which will also have applications in the past. And things that we learned from anthrax challenges of years in the past, we were able to deploy here. So bringing out solutions that are relevant for our customers.

Yes. And Tycho, about the OpEx view and then CapEx, we substantially increased the CapEx for the last couple of years and we're seeing the benefits of those coming online starting now. So Marc highlighted a couple in his prepared remarks, and there'll be more of those coming along as we go through this year and next year.

And then, Stephen, for the follow-up, 2 on the model. I'm just curious, as we look a little bit further out, if you can give us any sort of rough guidance on how we should think about normalized ex COVID margins 2022 and beyond? And then any preliminary thoughts on the tax rate, given what's on the table here will perform longer term?

Yes. So we started -- before the pandemic, we had a strong margin profile as a company. We'll exit the pandemic with a higher revenue base, which will come through at a higher margin. So margins will be elevated from when we went into this pandemic and look forward to giving more details about that at the appropriate time. In terms of tax, we continue to follow closely what's happening in D.C. There's various different proposals being made. As we've done in prior times of change, we remain active in terms of advocating for -- if there's a change to happen that is the right change and there's no unintended consequences, then we'll manage the company appropriately through that period of time. We have a competitive tax rate versus others, and we'll remain with that competitive tax position through whatever change happens is the way I think about it.

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

Congrats on a nice [ quarter ]. Two from me. Maybe I'll start one on the guidance, Stephen. What is the base business growth in the Q1? Was it high single? So I just want to clarify that. And when you speak about $1.5 billion of vaccine revenues, does that assume any contribution from booster opportunity or perhaps a pediatric label indication?

So Vijay, I'll start. So base business was 13% in the quarter. And as a reminder, the days are favorable in Q1, less favorable in Q4. But we raised our base business -- the $250 million organic raise is based on the base business performance. So the base business organic growth also goes up from 7% to 8% from that perspective. On the $1.5 billion of vaccine and therapy revenue, it's -- the demand is very strong. It's probably not tied actually to the label. It's really a combination that orders are very large and we've been able to get the manufacturing capacity to ramp up more quickly than we originally anticipated. It's really the benefits of the PPI Business System. So that means that for '21, we have a big increase in expectation. And my take on the discussions with our customers, and certainly what we understand from the medical side of things, the vaccine and therapy revenue is likely to be quite -- have quite a bit of duration well beyond '21. So as you get more indications, a potential need for boosters or even annual vaccinations, you could imagine that the demand for vaccine revenue to be well into '22 and beyond.

That's helpful, Marc. And then one follow-up, maybe a bigger picture question on the testing. There's been some chatter from your peers saying, look, as we get past the peak of the pandemic, perhaps testing is going to consolidate on more automated platforms. And I think the implication is perhaps your systems are not as automated. Maybe could you talk about that, Marc, on how does Thermo stack up versus peers in that space? And another piece is -- I mean, I look at your guidance, it looks like testing, you guys are faring much better than competition. So it seems to be slightly confusing on the messaging versus what we're seeing on the numbers.

Vijay, thanks for the question. So when I think about our role in the response, right, we understand customer needs. We have an incredible team of people that respond to it. We have the largest COVID response revenue last year by a huge margin, right? And we've had these discussions in the past, where people in March bet that Thermo Fisher would have done the best job in supporting the industry, probably not on that particular dimension. Broadly, yes, but on molecular diagnostics, we didn't go in with the strongest hand, if you will, but we made a huge difference. And the demand in the first quarter, as you see, the $2.9 billion was extremely good for us. And so we're assuming that we'll play a role in both symptomatic and asymptomatic testing. And remember, it's quite a global business, right? Our installed base is around the world. So that's the view. Now we expect that there'll be less testing, right, in Q2 and in the second half, exactly as we said back in January, right? That as more vaccinations happen, the testing will come down a bit. And that's embedded in our guidance for sure. So I'm very enthusiastic about the role we're playing. And to be honest, I'm looking forward to the world where we don't have so much testing because it means that we're going to sporting events and now we're traveling around the world and all the good things that come with it. And what happens when that happens is our base business really picks up as well. So hopefully, that gives you a sense of where we are.

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

Marc, on bioproduction, obviously, you guys have quite a bit going on there in terms of expansion activity, you touched on that. I think the press release from March talked about $600 million in investments there. Are you able to sort of just crystallize for us what kind of incremental revenue capacity you think you'll be adding by the time all is said and done if we just sort of look 12 to 18 months down the road? I mean it feels like if you're looking for where the base business might be most different in 2022 or 2023, that's sort of a good place to start. So I'm wondering if you might be able to just put some numbers around that.

Yes. So the way that I think about the investments in bioproduction, that's always been a very rapid growth, double -- strong double-digit growth historically, right? And you can glean from the comments over the many years that when we look at the other companies in the field reporting and we're comfortable saying we're growing faster or gaining share, that means that while we don't get down to the micro detail of how each of our sub-business is performing there, we're doing very well. And the expansion of $600 million of capacity supports that growth for a number of years. We're pulling forward programs that we had online so that we can sustain very strong growth for many years to come. And when I look at the Q1 performance for bioproduction, the business has been extremely robust. And that takes account what others have reported so far.

Okay. Maybe just as a follow-up on federal research funding. You've usually got a better-than-average line of sight into what's being talked about in Washington. Any views on the NIH budget next year and how that shapes up? The President's proposal is obviously pretty encouraging. It does have that ARPA-H program in there. I'm curious to get your view on that, the appetite for that and whether you think that, that might actually end up translating to fund availability for basic research if that does come to fruition?

Yes. I mean, historically, there's been bipartisan support for National Institute of Health funding. And as the former Vice President and as the President, my -- based -- I also listened to his remarks last night, I would expect him to be a real advocate for NIH. And he is a champion of tackling cancer, and the NIH plays a real role in that. And I think that bodes well for funding. So we'll see, obviously, but I would expect that the NIH should be in good stead, which means good news for our academic and government customers for sure.

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

Doug? Doug, you're on mute. All right. We'll go to the next question and then come back around to Doug.

And your next question comes from the line of Derik De Bruin with Bank of America.

Derik, we don't hear you, unfortunately. We'll go to the next question and see if we can sort out the technical challenges. Operator?

And your next question comes from the line of Puneet Souda with SVB Leerink.

Yes. Marc, can you hear me?

Yes.

Okay. So just wanted to get your view in terms of post-pandemic PCR installed base, you obviously have a very large installed base here. Obviously, you're pointing out decline in COVID testing in line with your previous comments. But as we think about that larger instrument installed base and some of that is automated amplitude and others, how should we think about menu expansion on that? How can you monetize that further into a broader diagnostics offering around the world?

Yes. So Puneet, thanks for the question. When I think about post-pandemic, right, I'm going to give a holistic answer, including the specifics around the question that you asked, right? One of the things that we said back a year ago was we've managed the company in such a way that we exited the pandemic with a meaningfully stronger industry leadership than when we went in. Obviously, we went in with a very strong position. And if I think about the actions that we've taken, we've accelerated our investments in operating expenses, R&D and CapEx to be a faster-growing company organically exiting the pandemic, right? So that's the overarching thing that we've done, right? So we didn't necessarily say let's put all of the money where the pandemic stuff was, but rather, where's the best opportunities to make a difference for our customers long term. So the first thing we expect in -- whether it's '22 or '23, whatever the time frame is, as the pandemic wanes, is to expect that we will be a faster-growing company. At the same point, we've made very significant investments in our pharma services and bioproduction business. They're very strong performing in their normal activities across many therapeutic classes, but that capacity will easily shift from COVID-related demand to non-COVID-related therapy classes. So when you think about those investments, the capacity is usable for the different areas. So again, you see that -- those investments transitioning from one type of use to the other. When you think about the molecular diagnostics business and you think about what's happened, we're obviously going to exit a much stronger player than where we were when we started. We have a much expanded installed base of PCR instruments. We also have a refreshed base of PCR instruments. And…

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

Can you hear me now?

Perfect.

Okay. Excellent. Excellent. The first thing I want to talk about is just really trends in your capital-exposed business. And then I want to go back to guidance. So Marc, how much of the strength you're seeing in your more capital-exposed businesses, which you talked about in your prepared remarks, was due to a recapture of demand from earlier drivers that maybe got pushed off because of the pandemic versus a real sign that things are improving here? Can you give us some sense of are you seeing backlog build? And in turn, are you now expecting capital equipment demand to trend better than you might have a few months ago over the balance of 2021? So that's the first topic I'd love to talk about.

Let's do that one and we'll hit the second one.

Okay. Sounds good.

So Doug, thank you for that question. And when I think about our Analytical Instruments business, off to a very strong start. Obviously, it gets an easy comparison, right? But nonetheless, very good to see demand build excellent growth in the chroma mass spec business and very strong growth in electron microscopy and very good growth actually in chemical analysis. All 3 businesses did well, with chroma mass spec doing the best. Bookings, orders, were meaningfully ahead of the revenue. So part of the outlook -- we don't do segment-level outlook, part of our confidence in raising our organic outlook is that the instrument business is well positioned after the start of the year to have a strong 2021. It's hard to know whether that was activity that just didn't happen last year. It's hard to know exactly why. But activity is robust around the world and that's very encouraging.

Okay. That's super helpful. And then on guidance -- and again, maybe this is overdoing things. But at a simple but important level, your Q1 revenue growth was better than your target. Q1 earnings was over $0.50 better than Street expectations. However, while you increased full year revenue targets by more than the magnitude of the Q1 revenue beat, you increased full year EPS targets by less than the magnitude of the Q1 beat. You did provide an EPS guidance change bridge in your prepared remarks, so thanks for that, Stephen. So this is maybe where I'm overthinking things. But I am wondering if this is also a reflection of this change in EPS, of the fact that you're seeing the base business trending a lot better than you expected coming into the year and you are now taking a more conservative stance on COVID-19 revenue. And given the latter is higher margin, that this is going to have some impact on earnings. Maybe that was intended to be clear or maybe I'm just wrong, but I'd love it if you could just talk about that a little bit.

So Doug, it's simpler than that. So we're basically banking the great performance on the base business in Q1 for the full year, both on the organic growth that goes into the revenue and then the adjusted EPS. We're banking the Q1 strong FX, stronger than we had anticipated. There's some timing of expense, about $100 million of expenses that are going to be now more Q2, Q3 than we expected in Q1. And then we're adding in $0.10 of impact of interest cost in Q4 for the acquisition of PPD.

Yes. I mean the response revenue...

We've basically increased response revenue. We've added in Mesa Biotech for the year and kept the $7.1 billion the same plus Mesa, so $7.3 billion. That's the way to think about the guide.

Doug, in the way you framed the question, it's really the $0.10 of PPD interest cost. Obviously, you had a little bit of favorability in the other aspects of it, but that's just probably what the difference is. And there's nothing -- as Stephen just said, there's nothing to read into the COVID response revenue in terms of the guidance on EPS.

And your next question comes from the line of Derik De Bruin from Bank of America.

Derik, you there?

I'm here. Can you hear me?

Awesome. We can.

Perfect. Great. So Marc, I won't ask you on '22 this time, so...

You could have. I think I got it when Puneet asked it, so I think I tried to get it there. But...

Yes. But I do want to follow-up on some of the macro rebounds and the recovery in that. And just -- can we talk a little bit about FDI? I mean you called out your electron microscopy business. I mean is that still mostly cryo-EM that you're seeing? Have you seen any sort of pickup in the semi side of the business? Obviously, there's a lot of semiconductor shortages, concerns about that. Can you talk about -- I mean, what sort of opportunity is that for you and your sort of like [ near line ] testing?

Yes. So Derik, the electron microscopy business performed very well, broad-based strength in material science and life sciences applications. So -- and obviously, within material science, because of all of what we read about chip shortages and capacity expansions, we typically benefit from the capital investment cycle that will be coming online in the semiconductor industry as one of the material science applications. So I would think that's encouraging. And we're seeing good activity and strong bookings across the board there. So off to a good start.

Got it. And just as a follow-up, the Mesa acquisition was interesting just because you historically have not done deals like that. I'm just sort of wondering if you could pontificate on sort of point-of-care versus central lab testing and sort of how you see it, given you've got your fingers in both of it. I mean how do you see sort of the mix of that evolving as we go forward? I mean it's one of the debates in the diagnostics industry right now is sort of like what is ultimately that central lab portion going to be? And how much of that's going to go to POC? And is this an area where you would see some incremental potentially capital deployment in that space?

Thanks, Derik. In terms of Mesa, one of the things obviously that the pandemic drove was testing happening in totally different ways and in different locations than it was pre-pandemic, right? And certainly, there was also back-to-life applications, which historically wouldn't have had any testing, if you think about it. And we got inundated with technology companies coming to us for either distribution partnerships or acquisition opportunity. It's a huge number. And I stop counting, I think I got 50 or 60 different ones that we looked at extensively. And we were very impressed with the Mesa technology in terms of ease of use and accuracy. And already having the 510(k) on the respiratory tests, we saw it as a really interesting addition to the portfolio and that actually its role in COVID on back-to-life applications with the 30 minutes PCR answer, very easy to use. We -- a lot of what COVID will do will pay for the acquisition and then you get an option on the upside for its application as you build out a menu over time. That's how we thought about it. So it was probably less about a huge change in strategy or a huge move from a point-of-care standpoint other than a technology that we like. We're extremely capable in PCR and so this is a really natural extension of our offering. So -- and the business is off to a nice start, which is great. Thanks, Derik.

And your next question comes from the line of Dan Brennan with UBS.

Great. Marc, I wanted to just ask you a question -- start off with a question on COVID testing and then I just wanted to ask you just to give us a look around the world of what's happening with the reopening. But just on COVID testing, it's an important question that we get. I know Derik was pressing on '22. I'm even looking beyond '22, so like '23. How do we just -- is it possible just to frame where Thermo's business could go as things normalize? Obviously, there's a ton of assumptions that go into -- we've had a lot of conversations with investors just trying to figure out where this could go. So versus the 6.1 billion that you did in 2020, any sense of -- as you look out to a normal state of testing a couple of years out, what some level of that could be? And then the second question was just related to -- just you talked about the really strong rebound in China. Just could you give us a sense of kind of what's baked in within your new 2021 guidance kind of regionally?

Yes. So in terms of geographic view, incredible strength across the world, with all the regions growing greater than -- around 50% and rest of the world was 80%, and China was 60%, really broad-based strength. And we're seeing encouraging -- obviously, encouraging outlook and that -- from a geographic perspective. From a testing perspective, we're going to play a larger role than what we would have played back in 2019 based on the comments around a larger specimen collection business, the larger installed base of PCR instruments, that's also refreshed, as well as meaningfully higher share in sample prep and adding content to that installed base over time. Very hard to quantify what it is in '23 because you really have to make an assumption of what the pandemic looks like. Is it history? Or are we still fighting new variants and those things? And depending on that, you could have an incredibly wide range of outcome. So we'll keep updating you periodically over time. So thank you, Dan. Let me just wrap it up here with a quick comment, which is as I think about the quarter, market conditions are strong. We're off to an excellent start. And we're on track to deliver really another outstanding year. We look forward to updating you on our Q2 call, and please continue to stay safe. And as always, thank you for your ongoing support of Thermo Fisher Scientific. Thanks, everyone.

And thank you for your participation. This concludes today's conference. You may now disconnect.