Thermo Fisher Scientific Inc. (TMO) Q1 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Thermo Fisher Scientific 2022 First Quarter Conference Call. My name is Nadia, and I'll be coordinating your call today. [Operator instructions] I would 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 Investor Section of our website thermofisher.com under the heading news and events until May 13, 2022. A copy of the press release of our first quarter 2022 earnings is available in the investor section of our website under the heading financials. 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 premium statements for purposes of the safe harbor provisions under the Private Security 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 reports on Form 10-Q, which are on file with the SEC and available in the investor section of our website under the heading financials 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 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 and full-year 2022 earnings and also in the investor section of our website under the heading financials. So, with that, I'll now turn the call over to Marc.

Thank you, Raf. Good morning, everyone. And thanks for joining us today for our first quarter call. As you saw in our press release, we had a very strong start to the year. We delivered another quarter of excellent financial performance. Our core business is performing very well. That strength is broad based, including PPD, our clinical research business, where the integration is going smoothly and we're even more excited about the opportunities we have to further enable the success of our pharma and biotech customers. As I reflect on the quarter, I'm very pleased with the team's great execution and the share gain we saw across our business. Our continued success as the result of our proven growth strategy and our PPI business system, which continues to be a differentiator for us. It enables our team to further strengthen our company by finding a better way every day. When I think about the macro events much has changed since the start of the year. The war Ukraine, rising inflation, COVID lockdowns in China. What hasn't changed is our ability to navigate a dynamic landscape and deliver exceptional performance. You'll see that in our first quarter results and outlook for the year. So let me recap the financials. Our revenue in the quarter grew 19% year-over-year $11.82 billion. Our adjusted operating income was $3.45 billion. Our adjusted operating margin in the first quarter was 29.2%. And we delivered another quarter of strong adjusted EPS performance, achieving $7.25 per share. Let me now give you to color on the performance by our end markets. Building on the momentum from 2021 we delivered excellent performance to start the year. Our outstanding results this quarter were due to our team’s strong execution, good market conditions, and share gain. We also had meaningful contribution from COVID-19 testing as we continue to support our customers’ needs. Starting with pharma and biotech, we had another outstanding quarter of performance delivering growth in the mid-teens. We broad base strength in this end market, as our customers value our trusted partner status. In the academic and government, we grew in the mid-single digit during the quarter, with good growth in biosciences, electron microscopy, and our research and safety market channel. Turning to industrial and applied, we grew in the mid-teens during the quarter. We saw strong growth in all of our analytical instrument businesses. Electron microscopy, chromatography, mass spectrometry and chemical analysis, as well as in the research and safety market channel. And finally in diagnostics and healthcare, Q1 revenue declined in the mid-teens. In the core business we saw strong growth in clinical diagnostics, transplant diagnostics, and the healthcare market channel. During the quarter the team executed really well to support COVID-19 testing needs. Let me now provide an update in the progress we made in Q1, executing our proven growth strategy, which consists of three elements, a commitment to high impact innovation, scale in the high growth and emerging markets and a unique value proposition to our customers. We made great progress in the first quarter, and I'll share just a few of the highlights. Starting with the first pillar, it was a fantastic quarter for high-impact innovation, as we launched a number of new products that will help our customers break new ground in our important work. A few of the highlights. In our genetic sciences business, we launched our Applied Biosystems SeqStudio Flex Series genetic analyzer to improve clinical research and advanced scientific discovery. In Analytical Instruments, we launched four new Gas Chromatography and GCMS instruments to advance analytical testing for food, environmental, industrial, and pharmaceutical applications. This includes the Thermo Scientific TRACE 1600 Series Gas Chromatograph, which incorporates enhanced automation for instrument health monitoring, and offers flexibility for customers to optimize their workflow. In bioproduction, we launched the Gibco CTS Xenon Electroporation system for the efficient delivery of genetic material into cells, as part of cell therapy manufacturing. In addition, we signed an agreement with precision diagnostic company Oncocyte, to develop two new assays for our Ion Torrent Genexus System to improve cancer tumor profiling, and advanced precision medicine. This is just a small sampling of the outstanding innovation going on across our company, enabling our customer success and strengthening our position as the world leader in serving science. The second pillar of our growth strategy is leveraging our scale and high growth in emerging markets to create a differentiated experience for our customers. We had strong performance in these markets, including China, which grew double-digits in the quarter. Our Analytical Instruments business are being used around the world to advance scientific research, including the high growth and emerging markets. For example, in Beijing, the National Institute of Biological Sciences is using our mass spectrometers to accelerate their research in structural biology. And in Korea, our electron microscopes are enabling researchers at Pusan National University to establish a bio imaging center to accelerate virus research. Now turning to the third pillar of our growth strategy, our unique customer value proposition. We continue to enhance our capabilities, so we can be an even stronger partner and industry leader. To help our customers advance cell and gene therapies we opened a new bio repository in Vacaville, California. This facility will provide specialized biological sample storage and cell therapy logistics. In bioproduction our network expansion is going well. During the quarter, we brought on additional capacity online for single use bio process containers and cell culture media. Reflecting our trusted partner status with pharma and biotech customers, we entered a 15-year strategic collaboration agreement with Moderna to establish large scale U.S. manufacturing of mRNA-based vaccine and therapies. Under this agreement, we'll provide dedicated capacity for a range of aseptic fill-finish services, along with inspection labeling and final packaging. During the quarter, I had the chance to visit our Greenville, North Carolina campus, where we've invested significantly over the past couple of years to expand our capacity and capabilities. And the new building that will support Moderna’s pipeline, it's truly impressive. Now, turning to capital deployment. I'd like to share some of the other steps we've taken to further strengthen our customer value proposition and build our future. We continue to successfully execute our discipline capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. Given this was the first a full quarter of contribution from PPD, our new clinical research business, I'd like to update you on our progress. The business is performing very well and running ahead of the deal model, the strong start and outlook for the year is allowing us to increase our expectations for the business. Stephen will cover these details in his remarks. In terms of the integration, it's going very smoothly. Our customers are seeing the value of the combination, and we have realized our first commercial synergies securing new authorizations from pharma and biotech customers who value the combination of our capabilities, this bodes well for our long-term revenue synergies. To further fuel growth and support increasing demand from our biopharma customers, we've also invested to expand our clinical research operations in Richmond, Virginia. Finally, I've been super impressed with the team, as I've visited different sites. And together we're taking the business to the next level as part of Thermo Fisher to become an even stronger partner for our customers. As I mentioned on our last call, we closed on PeproTech, a leading provider of bioscience reagents late last year. I'm pleased to note that that business is also a great start and the integration is going incredibly well. During Q1, we completed a small bolt-on deal in analytical instruments to enhance our materials and structural analysis offering for our customers. And during the quarter, we also returned significant capitals for our shareholders. We purchasing $2 billion of our shares and increasing our dividend by 15%. Turning now to a brief update on our ESG initiatives. We marked a significant milestone during the first quarter, exceeding one million readily recyclable paper coolers ship to transport coal chain products without the use of traditional polystyrene foam coolers. This builds on our commitment to environmental stewardship and enabling broad adoption of sustainable solutions. In addition, we recently announced our partnership with the University of California in San Diego to advance an innovation, sustainability and talent development. This 10-year partnership will establish a network tech of technology centers focused on accelerating collaborative research and advancing innovations in a range of scientific fields. It will also accelerate educational opportunities, especially for under resource students, by engaging in joint stem and community outreach programs and supporting curriculum development, scholarships, fellowships, career mentoring, and recruitment Before covering guidance. I'd like to end my comments with a reflection on the events that are impacting our colleagues and the world at large. As always our top priority is the health and safety of our colleagues. We're supporting our colleagues, displaced from Ukraine with a variety of needs and together with our colleagues globally, we've made substantial donations to relief organizations, responding in Ukraine and enabling safe-haven countries. In China, where many of our colleagues are facing lengthy lockdowns and disruption in daily life due to the pandemic. We're providing care packages to residents in Shanghai who have faced limited food supplies. We're also recognize that inflation is challenging for our team, and we're going to provide a special payment this summer to our colleagues. Now, I'd like to review our 2022 guidance at a high level, and then Stephen will take you through the details. We're meaningfully raising our full year guidance. We're increasing our revenue guidance by $450 million to $42.45 billion, which would result in 8% reported revenue growth over 2021. And we're raising our 2022 adjusted EPS guidance by $0.22 to $22.65 per share. This guidance factors in are excellent Q1, includes a very strong core business outlook for the remainder of the year. And it incorporates the expected impact of the recent macroeconomic dynamics. Our Q1 results and our increased guide for the year reflects, how well the team is navigating these dynamic times. So to summarize our key takeaways from the first quarter. Our outstanding results in Q1 were driven by our proven growth strategy and PPI business system. Our business is performing very well and we’re gaining market share. The PPD acquisition is generating strong returns, and we're really well positioned to continue to differentiate ourselves for all of our stakeholders. All of this has enabled us to raise our outlook for 2022 and further solidify our incredibly bright future. With that I'll now hand the call over to our CFO, Stephen Williamson. Stephen?

Thanks Marc, and good morning, everyone. As you saw in our press release, we started the year with an excellent Q1. In the quarter, we delivered 16% core organic growth, $1.68 billion of COVID-19 testing revenue, $7.25 for adjusted earnings per share, and $1.6 billion of free cash flow. Revenue in Q1 was just over $1 billion higher than we'd incorporated in our previous 2022 guidance, with $700 million driven by a very strong start of the year for the core business and just under $400 million from testing. The strength of the core was brought-based across businesses and markets and geographies. Our PPI business system enabled us to generate very strong pull through on this revenue and adjusted EPS for Q1 was $0.84 higher than included in our previous guidance. So broad-based beat to start the year. Let me now provide you with some more details on our performance. Beginning with our earnings results, and as I mentioned we delivered $7.25 of adjusted EPS in Q1, up 1% versus the prior year. GAAP EPS in the quarter was $5.61 down 5% versus the prior year. On the top line, a Q1 reported revenue grew 19% year-over-year. The components of our Q1 reported revenue increase included 3% organic revenue growth and 18% contribution from acquisitions and a headwind of 2% from foreign exchange. Core organic revenue growth in the quarter was 16% and as I mentioned, we delivered $1.68 billion of COVID-19 testing revenue. Turning to our organic revenue performance by geography. The organic growth rates by region are skewed by the COVID-19 testing revenue in the current and prior year. In Q1, North America grew in the low-single digits. Europe was flat. Asia Pacific grew in the mid-teens, with China growing in the low-double digits. And rest of the world declined in low-single digits. With respect to our operational performance, adjusted operating income in the quarter decreased 2% and adjusted operating margin was 29.2%, 620 basis points lower than Q1 last year. Adjusted operating margins came in slightly higher than we'd have anticipated in our prior guidance for Q1 reflecting how well our growth strategy and PPI business system enables us to manage dynamic times. We executed strong pricing realization, productivity and volume leveraging the core business enabling us to appropriately address higher inflation, and this was more than offset by the expected impacts of incorporating PPD into our financials, lower testing volumes and the impact of strategic investments including continued investments in our colleagues. Moving on to the details of the P&L, total company adjusted gross margin in the quarter came in at 47.5%, 660 basis points lower than Q1 last year. For the first quarter, the change in gross margin was due to the same drivers as those of our adjusted operating margin. Adjusted SG&A in the quarter was 15.2% of revenue, a decrease of 20 basis points versus Q1 2021. Total R&D expense was approximately $360 million in Q1 representing growth of 14% over the prior year, reflecting our ongoing investments in high impact innovation to fuel future growth. Looking at results below the lines of the quarter, our net interest expense was $118 million, $5 million higher than Q1 last year largely due to acquisition financing activities. Our adjusted tax rate in the quarter was 14.1%. This was a 190 basis points lower than Q1 last year, driven by a tax planning initiative. Average diluted shares with $395 million in Q1, approximately $3 million lower year-over-year driven by share purchases, net of option dilution. Turning to cash flow on the balance sheet. Cash flow was another strong highlight for the quarter. Our PPI business system enables to deliver significant cash flow from the very strong top line performance. Cash flow from operating activities in Q1 was $2.2 billion, and free cash flow for the quarter was $1.6 billion. Our capacity and capability investments are progressing well and this quarter's net capital expenditures with $640 million. In January we returned $2 billion of the capital to shareholders through buybacks. Also during the quarter we increased our dividend by 15%. We ended Q1 with approximately $2.8 billion in cash and $33.3 billion of total debt. Our leverage ratio at the end of the quarter was 2.6 times gross debt-to-adjusted EBITDA, and 2.4 times on net debt basis. And concluding my comments and our total company performance, adjusted ROIC with 18% reflecting the strong returns on investments that we're generating across the company. Now provide some color on the performance about four business segments. Let me start with a couple of framing comments. The scale and margin profile of our COVID-19 testing revenue varies by segment and testing revenue was significantly higher in the prior year quarter, so that does skew some of the reported segment margins. And as previously mentioned we're referring to the acquired PPD business as our clinical research business, and that resides in the laboratory products and biopharma services segment. So moving onto the segment details, starting with Life Sciences Solutions. Q1 reported revenue in this segment increased 1% and organic revenue was 1% lower than the prior year quarter. In Q1 we delivered very strong growth in our bioproduction and biosciences businesses. This was upset by lower revenue in the genetic sciences business driven by lower testing revenue versus the year ago quarter. Q1 adjusted operating income and Life Science Solutions decreased 5% and adjusted operating margin was 51.4% down to 280 basis points year-over-year. In the quarter, we delivered strong productivity that was more than offset by business mix and strategic investments. In the Analytical Instruments Segment reported revenue increased 9% in Q1 and organic growth was 12%. The strong growth in the segment this quarter was led by electron microscopy and chromatography and mass spectrometry businesses. Q1 adjusted operating income in a segment increased 10% and adjusted operating margin was 19.8% up 20 basis points year-over-year. During the quarter, we delivered strong volume pull through and productivity, that was offset by strategic investments we're making across this segment. Turning to Specialty Diagnostics. In Q1 reported revenue declined 8% and organic revenue declined 7%. In the quarter, we saw a strong underlying growth in our healthcare market channel, transplant diagnostics and clinical diagnostics businesses, which was offset by lower COVID-19 testing revenue versus the year ago quarter. Q1 adjusted operating income decreased 17% in the quarter and adjusted operating margin was 23.9% down 260 basis points from the prior year. In Q1, we drove strong productivity. This was more than offset by business mix and the strategic investments in the segment. And finally in the Laboratory Products and Biopharma Services segment, in Q1 reported revenue in the segment increased 51% and organic growth was 6%. During Q1, we had strong growth in the research and safety market channel and the laboratory products, businesses. PPD, our clinical research business is performing very well. And during the quarter, it grew a few points above the company average core organic growth rate. It contributed $1.66 billion of revenue to the segment in the quarter. Q1 adjusted operating income in the segment increased 17% and adjusted operating margin was 11.4%, which is 340 basis points lower than the prior year. In the quarter, we drove strong productivity, which is more than offset by strategic investments and business mix. Let me now turn to our updated 2022 guidance, as Marc outlined, we’re raising our full year revenue guidance by $450 million to $42.45 billion. We're also raising our core organic revenue growth outlook from 8% to 9% for the year. And on the bottom line, we're increasing our adjusted EPS guidance by $0.22 to $22.65 for the year. So very strong outlook, particularly as it also factors in the notable macro developments that occurred following our last earnings call in February. Our team continues to do an excellent job navigating through a fluid macroeconomic environment to help us deliver outstanding results, reflecting the strength of our proven growth strategy and the power of the PPI Business System to operate with speed at scale. So, let me get into the details of the guidance raise, in terms of revenue there are three elements driving the raising guidance, $350 million higher assumed COVID-19 testing revenue for the year, a $200 million decrease due to the change in FX rates and a $300 million increase in the outlook for the core business. The core revenue raise incorporates a $350 million headwinds from the conflict in Ukraine and the lockdowns in China. And we chose to de-risk $600 million of vaccines and therapies revenue in the outlook, offsetting it with other core revenue. Our guidance now assumes $1.5 billion of COVID-19 vaccines and therapies revenue in total for 2022. Incorporating both of these and still being able to raise the full year outlook for the core shows that the business is performing very well. And as I mentioned previously, we're increasing the core organic growth outlook from 8% to 9% for the year. In terms of like COVID-19 testing revenue assumption, continuing the same de-risk approach to guidance as there a range of outcomes for the year. Our guidance now assumes $2.1 billion of testing revenue in 2022, which represents the $1.68 billion delivered in Q1, $225 million in Q2. And then an assumed endemic run rate level of a $100 million of revenue per quarter in the second half of the year. There are scenarios where testing demand could be higher than this level. And should that be the case? We're well positioned to support customer needs as we did in Q1 and we'll flow these benefits through our P&L, but for now we thought it was prudent to continue to take a de-risk approach to the outlook. In terms of profitability, we expected to deliver $90 million more adjusted operating income up to $450 million raise in revenue guidance. This reflects strong pull through on the additional revenue, partially offset by a $150 million of additional compensation to our colleagues to help them with the temporary impacts of insulation. We continue to expect the adjusted operating margin to be 25.4% in 2022. In terms of adjusted EPS, our stronger business outlook is enabling us to raise the 2022 adjusted EPS guidance by $0.22 from $22.43 to $22.65 further building on an already very strong outlook for the year. Let me provide you with a couple of other details on the 2022 guidance to help you with your models. PPD our clinical research business is now expected to deliver $6.7 billion in 2022 in revenue, which represents 11% core organic growth on a full year basis for this business, up three percentage points from our previous guidance. We now expect the business to deliver just over a $1 billion of adjusted operating income in 2022 and contribute a $1.98 to adjusted EPS in the year up $0.08 from our prior guidance. FX is now expected to be a year-over-year headwind of $700 million on revenue, or 1.8% and $0.54 on adjusted EPS. We continue to expect net interest expense of approximately $490 million for the year. We now expect an adjusted income tax rate of 13.1% in 2022, slightly higher than the prior guide driven by the improved earnings outlook. We continue to assume net capital expenditures of approximately $2.5 billion to $2.7 billion and free cash flow of approximately $7 billion. A guidance still assumes $2.5 billion of capital deployment, which is the $2 billion of share buybacks that we completed in January and $475 million of capital to return to shareholders through dividends. And we now estimate that the full year average diluted share count will be between 394 million and 395 million shares. And finally, a couple of comments on phasing to help you with your modeling, revenue dollars for the remainder of the year they're expected to be fairly linear with Q4 being slightly higher than Q2 and Q3. Core organic growth for Q2 is expected to be lower than Q3 and Q4 due to an estimated 200 basis point impact of lockdowns in China. And in terms of adjusted EPS phasing, we expect Q2 as a percentage of the full year to be just slightly lower than the comparable periods last year. To conclude we'd live an excellent start to the year, and we're in a great position to achieve our 2022 goals. With that, I'll turn the call back over to Raf.

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

Thank you. [Operator Instructions] And our first question today comes from Jack Meehan of Nephron Research. Jack, please go ahead. Your line is open.

Thank you. Good morning. Hope you guys are doing well. My question – are on the Biopharma side. First question on clinical research so PPD growing over 20%, that's well above historical levels and what peers have been reporting so far. Just what is driving the acceleration? Can you comment on industry funding and your ability to gain share?

Yes, Jack, thanks for the question. So our clinical research business, formally PPD off to a great start. As a reminder, the business had tremendous success in 2021 delivering great performance, great authorizations, even from especially after the announcement, just incredibly focused on great execution. Customers are excited about the potential and that momentum continued into Q1. Very strong performance on revenue and really good growth and authorizations. As I look at what's going on in the industry and look at some of the other companies that have reported, our results look favorable to the results that we saw. So we feel good about that, as an external reference point. And the switch strength within PPD was broad based across the different customer types, the funding environment, it was actually a great start to the year. Integration's gone really well. We feel good about that, and I'm really excited that commercial team has secured our first wins that are what I would call synergy related in the form of new authorization. So really a very cool start to the year, and we're excited about what the potential holds for our clinical research business.

Great. And as a second question, I wanted to square the new $1.5 billion target for the COVID vaccines and therapies with your ability to raise the core growth overall. So, if I look at the Patheon and bioprocessing businesses are they still growing high single digit plus is the COVID handoff taking place. And kind of, off that just, can you comment on how changing doses per vial and the new Moderna strategic relationship might factor into this?

Yes, so Jack thanks. It's a great question. We made a decision on the guidance on vaccines and therapies, actually just because the number of questions we were getting from investors relative to our enterprise value and the sort of net present value of the company was disproportionate, right? So, we just basically said, we had a really good start on vaccines and therapies for the year. We did just under $500 million of revenue, which was what we expected to do. The $2.1 billion that we put in the original guidance of vaccine therapy related revenue is actually still a number that can be achieved. I call it at the high end of the range. And as you know, we're involved in so many of the programs, we're involved in the vaccine programs and the therapy programs we're involved in the drug substance and the drug product. We're involved in the enabling technology. So it's across many of our different capabilities and we feel good about it. We chose to effectively reduce the number in the, sort of in the target because the core business is performing so well that we just wanted to take the dialogue really off the table, as you know the capacity that makes these products and provides the enabling technologies is truly repurposable to other customers and to other products within the biologic field. So, we're very encouraged by that. And then to your question, we are expecting very strong growth for our pharma services and our bioproduction business in 2022 and beyond. So Jack thanks for the questions.

Thank you. And our next question comes from Patrick Donnelly of Citi. Patrick, please go ahead. Your line is open.

Hey guys, thanks for taking my questions. Marc, maybe on the China piece, I know Stephen touched on a 200 bit headwind for 2Q. Can you just talk about what you're seeing there, which businesses are being affected more than others? Obviously we're seeing Beijing entering the conversation this week, I guess, what have you guys assumed there in terms of escalations or what's going to happen. And then again are certain businesses poised to recover more quickly than others. Just curious your perspective there.

Patrick, thanks for the question. So, the team really did an excellent job in Q1 navigating the lockdowns as started towards the end of the quarter to deliver double-digit growth and to really work with the government to be able to supply the critical products that we provide to the customer base there, even in difficult circumstances. Very impressive. What our assumption is actually fairly straightforward. We're looking at the back half of the year that Q3 and Q4 are normal in China, back to strong growth. And as you know, the business there rebounded super quickly after the Q1 of 2020 disruption. So the economy is there is quite resilient. Our assumption is in this quarter, there's a couple points of headwind. We're baking into the numbers because the number of the customers are closed. Academic institutions in Shanghai would be closed so that, it'll take, a period of time for that to rebound and as activity ramps back up. So that's how we're thinking about it in terms of the quarter. And we were able to fully bake that into our guidance and Stephen in the revenue phasing, views, try to make it clearer that what our outlook is for Q2, which is still quite good, but feels a little bit of that pressure and then Q3, Q4 picks up from there.

Sure. That's helpful. Thanks Marc. And then maybe just another one on the bioprocessing vaccine piece, appreciate the transparency in terms of what that looks like this year? Obviously to your point, it's a big investor focus even into 2023, is there a way to think of that $1.5 billion as we get into next year? I know you guys have rolled it into core and kind of thought, the rest of the bioprocessing business will mostly offset it. It's going to be a gradual decline. Has that thinking changed at all? Just wondering on your high-level perspective, how to think about that piece as we move forward. Thank you.

Yes. So, Patrick, thanks for the follow-up on that. So, I would think about it, the following, the timing of the transition and what the long-term demand for COVID there are so many scenarios, it's very hard to say which quarter, which year exactly how things play out, right? Because the capacity is re-purposable we will move that over time. And in our long-term model that Stephen presented last September, it effectively reflects that that's all transitioned by the end of the model period. So that it was part of core. It doesn't affect the 7% to 9% long-term outlook. As I looked to 2023, I mean, as a reminder, we play a role in both therapies and vaccines. So, they are on different cycles and different scenarios, which is, I think, most scenarios have the pandemic existing in some endemic form next year. And therefore, therapy demand should exist with some level of consistency and vaccines is a wide range of out outcomes. Obviously the smaller, vial, the single use actually drives more revenue per thing. So, you have a lot of moving pieces. And our job is to manage all of that, manage the transition at the right timeframe and we will. I think the one piece of new information that, I think, is interesting is one of our customers, not in the top tier of the activity level within COVID, actually just repurposed its own commitments to other therapies and activities. So that was actually made that transition even smoother for a portion of it. And basically, in the future basically is taking the commitments and say, when they don't need COVID capacity, they're going to basically use it for other thing. So, hopefully all that color gives you a sense that we'll manage that over time and will continue to deliver strong growth as a company.

Very helpful. Thanks Marc.

Thanks.

Thank you. And our next question comes from Derik De Bruin of Bank of America. Derik, please go ahead your line is open.

Hi, good morning, everyone.

Good morning.

I've got one model question and then I've got one big picture question. So, on the model, can you walk us through the gross margin progression in 2022? We see things seems to continually sort of miss model the gross margin. Can you help us walk us through and understand the FX myths and inflation through headwinds are going through?

Yes, so Derik so let's think about the gross margins this quarter kind of another 47.5% level be slightly lower for the remainder of the year and still in the year in that kind of mid-40s. And I think what people are not fully baking in is the impact of PPD. That has sizeable change to the overall company's gross margin when you factor that in. And then FX is a little bit of negative in terms of the margin profile. But it's really the impact of testing coming down and then the benefit of having PPD in the business. I think that's probably the thing that's missing the most.

Got it. That's helpful. And I wanted ask about the Moderna agreement because it's really surprising to see 15-year agreement sitting in our space. It's just not really done. Can you talk about that in terms of like, what is sort of driving that and is there something you sort of see that you can do with other people in the biotech space? And you also mentioned some synergy wins with PPD, how should we think about that in the longer-term targets on PPD?

Yes, so, Derik, thanks for the question. So, as you know, we never really talk about specific customers unless a customer is announcing this on their own behalf, and then we're more than happy to make some high-level comments, right, because it's really, our job is to support our customers’ activity. I think that our take is that we did a really good job of supporting our clients during the course of the pandemic across all of the different activities. And that enhanced our reputation, our trusted partner status with our customers. And as in the case of Moderna they had the opportunity to work with us and decided to leverage our capabilities in Greenville, North Carolina, and our expertise to support their future pipeline from a sterile fill finish perspective. And it's super exciting in terms of the capabilities of the things that we will support longer term from them there. We have many different models of how we work with our clients in our pharma services business. And it's our job to support them in the best way that they want. We do have what we call condo models, where customers have some dedicated capacity. We have the traditional fee-for-service models. And then we have some other innovative ones. The other public one obviously was announced a couple years ago, which was CSL, right, which is, we took over one of their facilities, we're going to be manufacturing one of their new therapies and they are expanding the collaboration with us. So, it's a long menu of options and our job is to help our customers navigate their future and be really valuable to them.

Thanks Derik.

Thank you. And our next question comes from Tejas Savant of Morgan Stanley. Tejas please go ahead, your line is open.

Hi guys. Good morning. And thanks for the time here. Mark, a question for you on pricing, you've spoken in the past about taking elevated pricing increases your perhaps 2x the normalized level in 2022. Can you just refresh that assumption for us in the context of the sharper inflation here? And philosophically, how do you think about the point at which you need to be a little bit careful about starting to impact customer demand perhaps more in some segments than others?

Yes, it's a great question, right. So, when we think about living and navigating through an inflationary environment, our team is doing a good job of managing productivity and managing cost and mitigating what can be mitigated. So, I'm very pleased with that. Our expectation for pricing is – and in normally as you know, it's a half point to a point of price that we get within our business. And this year we would expect that price would be about double the high end of that range or about two points of price within our outlook for the year. So, it's our job to support our customers, to explain the inflations and where we can offset it and where we need customers to support us. And those dialogues have been constructive and positive.

Got it. That's helpful. And then one quick follow-up on PPD. Any color you can share on RFP flow, there has been a little bit of a focus on delays and cancellations, particularly among sort of midcap biotech customers here. Obviously, you had strong performance in the quarter, you are taking your numbers up for the deal. But just curious if you can pass out sort of any commentary on that specific segment of their customer base?

Yes. So, when I look at the performance, I look at the pipeline, I look at the authorizations, which is the new wins. When I look at the revenue, when I cut it by the different types of customers, we had a really strong start to the year. When I look at, I read not all, but some of the different commentary, and the differing views out there my take is, is that there was nothing abnormal in cancellations in the quarter, there was no trend to any of that. And actually we are on track to deliver very strong results, but the 11% growth that we're looking at for this year is really impressive because last year we're spectacular, right? In terms of the growth that the business delivered. So against a challenging comp that's really, really encouraging, and authorization support that for this year, but also support the long-term expectations that this is a high single digit growth business. And when we drive, synergies, it can be better than that. So, super cool times, but obviously early.

Thank you.

You're welcome.

Thank you. And our next question comes from the Vijay Kumar [Evercore]. Vijay, please go ahead. Your line is open.

Hi guys. Thanks for taking my question and congratulations in a really strong Q1 start. Maybe one on guidance here, perhaps for Stephen. I think your prior guidance call for high singles and that high singles was consistent across base vaccine and PPD [ph] just given, given a vaccine outlook is now I think down 15%, 20% versus last year. How much is the core, base going up and how much is PPD going up under the new guidance assumptions?

Yes. So, Vijay, so outline in the prepared remarks, the strength of the PPD business is going up to 11% for the year. So that would be a strong contribution and can you characterize the vaccines and therapies, and then we're offsetting that all of that from vaccines therapy and it increasing our guidance. So the core business is increasing $350 million in the raise. So going up to 8% to 9% strong performance. And that's obviously taking into an account and that switching back in the therapies to core, and offsetting the impact of the macroeconomic implications in China and situation in Ukraine.

That's helpful Stephen and Marc maybe one for you here. I know that the street is worried about the outlook just given the macro, the 16% core and Q1 versus a 13% comp. And we're looking at stock comp of close to 30%. I mean, these are really, really strong, and I understand pharma biotech, perhaps being strong but looks like all segments are on fire. Maybe just talk about end markets health of end markets, and when you think about the upcoming Analyst Day, what kind of approach should we expect from Thermo, will vaccines be get rest will it be the rest approach or any thoughts and what we can expect into the analyst? It will be helpful.

Yes. I mean, I can't wait until May 18. It'll be super cool. We're going to have it back in person. It'll be a great way to showcase our team and showcase the great things going on at the company. And we'll explain some of the stuff today in some more detail. And so it'll be very positive from that perspective. When I think about the business, right, we highlighted some of the macroeconomic dynamics, right? Because if you watch TV, you read the papers, you're on the internet, whatever it is that you get the external world, it's a bumpy time in the world, but when you get within our four walls right now, it is awesome. I mean, it is an amazing time of the company the momentum is huge. The customers are doing well, we are gaining markets share, and it is super cool. And so, when I think about that environment of delivering 16% core growth against, a very challenging comparison, right? I think from recollection, we had 53% organic growth last year, and I think 13% base growth, and we had bookings that were even stronger than our revenue. So it gives you a sense of how good things are and all the geographies, all of the end markets were actually quite good. Right. So, I feel good about the outlook. I feel good about the momentum we were able to de-risk the vaccines and therapies, even though, I think there are scenarios that is going to be above that sort of de-risk level. And so I think, the world is super positive and, when I think about the macro, I worry about our colleagues. Like I worry about our colleagues in China. I worry about our 300 colleagues in Ukraine. That's the kind of stuff that when I read about macro, that's really where my concern is. It's less about the business self associated with it.

It's helpful perspective, Marc. Thank you.

Thanks Vijay.

Thank you. And then next question comes from Rachel [indiscernible] of JPMorgan. Rachel, please go ahead. Your line is open.

Great. Thanks and congrats on the quarter. So question on China, you flag the guidance incorporates the $350 million headwind from Ukraine and China. So could you just break out how much of that is specifically in China? And then can you talk about your approach to guidance just in terms of future lockdowns and how we should think about China growth return in 2023?

Yes, so roughly, Rachel, roughly half of that is related to China. And as Marc said it earlier on that China bounced back from the original depth of the pandemic pretty fast, and it's pretty resilient economy. So, we've learned from that to help our customers get a pack up and running where they've been out of the out of the workplace. And we're very focused on enabling that success when they're able to get back to positions of work.

Our guidance assumes it's all in Q2 in terms of construction for China.

Great. Thanks. And then could you spend a minute talking about what you're seeing in the clinical environment in terms of hospital capacity constraints and how funding is trending as well? Thanks.

Yes. So in terms of healthcare and diagnostics the core there was actually quite good. When I think about we had broad-based strength in terms of core growth there in the high single digits. So, I feel good about that. And there was obviously some level of COVID disruptions and things of that sort, but in aggregate, the results were strong across healthcare and diagnostics. And obviously we had less revenue in the testing, which is why the customer base is down, down roughly 15%, but underlying that the core is – was quite good and feels like that outlook will continue to be positive. Thanks for asking the questions.

Thank you. And our next question comes from Puneet Souda of SVB Leerink Securities. Puneet, please go ahead. Your line is open.

Yes. Hi, Marc. Thanks for taking the questions. So first one it really from your vantage point which is obviously fairly large across pharma end markets, could you provide us a view into this growing question that investors have been asking around biotech funding overall? I mean, if you look at the quarter and what you are projecting in the outlook, one would say that's not the case at all. There are no questions on biotech funding, but if you look at the early stages of pre-clinical and clinical and maybe clinical trials overall, maybe could you outline for us what you're seeing here near-to-midterm and pay down [indiscernible], PPD and other businesses across the board?

Yes. So Puneet, what I would say is the end market, pharma biotech incredibly strong with the mid-teens growth organically and if you – because we do everything on an organic basis in our end market description as opposed to a core organic, as it gets too confusing to think about all the history, but if you included the PPD numbers in that end market, it would be better than the mid-teens. So very strong orders which is a good indication, now the future is really strong, right? So the activity level is very good and the outlook is very strong. And when we have our – we've completed all of our business reviews and we talk about what are they seeing within those different customer base? Actually, the outlook is good. So one way to think about is at a company level, you take a long-term perspective, right? We say our 7% to 9% core organic growth. Pharma biotech will be above that, but when you kind of work your way through the math around the assumptions, it doesn't nearly need to be the rate that is growing at to drive 7% to 9% growth, right? We had a 15% growth in pharma and biotech, and we grew 16% in the quarter, right? So when you have strong growth in that end market given that it's a little more than half our revenue, it really flows through hugely. And given the last 10-plus years, even longer than that of the growth we've been able to deliver in pharma and biotech, I'm super bullish about what our outlook is. And I can even remember I was here with the patent clips like years and years and years and years ago, and we actually grew well through those because we helped our customers navigate productivity challenges that they were facing. That was a large pharma dynamic and a long-time ago, but we're so attuned to our customer needs we helped them through it. So that's how I think about it, and I feel great about what the outlook is.

That's super helpful, Marc. Just a clarification that Stephen on the analytical technologies, it obviously came in a strong you pointed to electron microscopy from targeted mass spec couple of those elements. And maybe could you elaborate what's driving this growth. I mean, when we looked at it even with the normal seasonality of the fourth quarter to first quarter, this was meaningfully strong. So what's driving the strength of the instruments in the first quarter when you look at the end markets and customers? Thank you.

Yes. So Puneet a great question. So I think about Analytical Instruments is we've had great bookings for few quarters now for the business, and as Marc mentioned at the beginning that really strength across all three aspects of that segment. And then I highlighted the two that the most significant contributors electron microscopy is in great position in terms of serving life science customers, as well as material science applications including very strong growth in semiconductor applications for, for that customer set, and a great growth in Chromatography and Mass Spectrometry as well. So it's a really broad-based strength across there and funding environment is been good for the end market.

Thanks for the question. Thanks, Puneet.

Thanks guys.

Thank you. And our next question comes from Dan Arias of Stifel. Dan, please go ahead. Your line is open.

Good morning guys. Thanks for the questions. Marc, on bio-production beyond COVID, are there any ships through noticeable trends that are taking place when it just comes to upstream versus downstream work in the portfolios that you have there? I mean, obviously the cell culture piece is driving a lot of what's going on, but just across the portfolio, I'm curious to whether there's any nuance to what you're seeing?

No, actually the performance was very strong. I looked at obviously the other companies that reported. I feel good about our performance in the bio-production defined that that way. And we had good strength in cell culture media, purification resins, pharma analytics and single-use technology. So actually, no, there's nothing there that sort of we gleaned in terms of that some difference. So actually its quite broad-based to strength.

Yes. Okay. And then maybe just on the share that you mentioned. How does China stack up there in terms of the opportunity and what you've seen just with the thought being that sometimes these global disruptions tend to shake out some of the smaller or the less agile players? I'm wondering if regionally that's becoming more noticeable or whether it's just sort of the baseline operating scenario that you see.

Yes. We're still looking at how others performed in China in the quarter. So I feel good about our double-digit growth and team's doing a nice job and the momentum is broad base. So our customers do value the scale and the depth of capabilities that we have. Like we really create a spectacular experience for our customers in China, so it doesn't surprise me that the business is performing well and we'll help them navigate the very challenging time with the pandemic and then get back to business as usual as that wanes.

Operator, we have time for one more question.

Thank you. Our last question today comes from Matt Sykes of Goldman Sachs. Matt, please go ahead. Your line is open.

Great. Thanks Marc and Stephen. Congrats on the quarter. I just wanted to drill down a little bit more on the industrial applied end market as it relates to instruments, yet another strong quarter. Are there some secular growth drivers that you think are being underappreciated by the market is driving this growth above and beyond maybe some of the pent-up demand we saw last year? And maybe just maybe talk about some of the secular growth drivers, if you can identify them?

Yes. So Matt thanks for the – thanks for the final question. Yes. So as Stephen said the Analytical Instruments business had a really good start to the year. Good growth and revenue and really strong growth in bookings. I would say that the one end-market that's really; really humming is what I call broadly the material science applications, semiconductor advanced materials, battery technologies, really very strong growth. That's not implying that the life science is very healthy and doing well, and the businesses are doing really well. But I'd say the continued demand and outlook for the material science related business is really strong and that bodes really well for the growth of our instruments business this year and into next. So that would be the thing I'd probably highlight.

Thanks for the question today. And let me do a quick wrap up. So thanks everyone for joining the call. We're very pleased with the strong start and we're in a very good position to achieve another excellent year. And I look forward to updating you at our upcoming Investor Day on May 18th, and as always, thank you for your support of Thermo Fisher Scientific. Thanks everyone.

Thank you. Ladies and gentlemen, this concludes today's call thank call. Thank you all for joining. You may now disconnect your.