Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2021 Fourth Quarter Conference Call. My name is Katie, 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 Investors section of our website, thermofisher.com, under the heading News and Events until February 11, 2022. A copy of the press release of our fourth quarter 2021 earnings is available in the Investors section of our website under the heading Financials.

So, before we begin, let me briefly cover our Safe Harbor statement. Various words 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 reports on Form 10-Q, which are on file with the SEC and available in the Investors 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 fourth quarter and full year 2021 earnings and also in the Investors 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 fourth quarter call and a wrap-up of a truly exceptional year for Thermo Fisher Scientific. We delivered another quarter of very strong results. And as I reflect on the year, three things stand out to me.

Our proven growth strategy powered by our PPI Business System continues to drive outstanding financial performance. Customer demand is strong. Our core business is performing very well, we're gaining market share and we continue to play a leading role in the societal response to COVID-19.

And finally, we continue to build on our trusted partner status with our customers. All of this gives me great confidence in a very bright future as we continue to create sustainable value for all of our stakeholders. I'll get into more detail in my remarks later, but first, let me recap the financials.

Starting with the quarter, our revenue was $10.7 billion. Adjusted operating income was $3.16 billion. And our adjusted operating margin was 29.5%. Adjusted EPS was $6.54 per share. Turning to our results for the full year, we grew revenue by 22% to $39.21 billion in 2021. Adjusted operating income increased 27% to $12.14 billion.

We expanded our adjusted operating margin by 130 basis points to 31%. And we delivered a 28% increase in adjusted EPS to $25.13 per share. Building on the tremendous success that we had in 2020, I'm incredibly proud of our team's stellar performance in 2021.

It's really a testament to the strength of our global team and our proven growth strategy, resulting in another year of exceptional financial results and share gain. Let me now give you a color on the results for the quarter and the year, starting with pharma and biotech.

We had outstanding performance delivering growth over 20% in the fourth quarter and over 25% for the full year.

In addition to strong market dynamics, these results were driven by a unique customer value proposition and our leading goal in supporting our customers across a wide range of exciting therapeutic areas, including our role in supporting COVID-19 vaccines and therapies.

During the year, we saw broad-based strength across our businesses in this end market, including our bioproduction, pharma services, biosciences, chromatography and mass spectrometry businesses as well as in the research and safety market channel.

In academic and government, we declined in the low single-digits during in the quarter against strong demand in the year-ago period and grew in the low double digits for the full year. During the year, we saw very good growth across a range of our businesses, particularly biosciences, electron microscopy and our research and safety market channel.

Turning to industrial and applied, we grew in the low teens during the quarter, and we grew in the high teens for the full year. During the year, we saw strong growth in our electron microscopy, and chromatography and mass spectrometry businesses as well as in the research and safety market channel.

Finally, in diagnostics and health care, Q4 revenue was 30% lower than the prior year quarter, and revenue grew in the high single digits for the full year. Throughout the year the team executed really well to support customers' testing needs.

And in the base business, we had strong growth in our immunodiagnostics and transplant diagnostics businesses. Before I move to our growth strategy, let me provide a few comments on our role in the pandemic response. In the quarter, we generated $2.45 billion in COVID-19 response related revenue.

This was driven by the emergence of the Omicron variant, which led to strong testing demand as well as our significant role in enabling vaccine and therapy production.

Throughout 2021, we continue to operate with speed at scale to meet our customers' needs related to COVID-19 and generated total response revenue of over $9 billion, of which $2 billion were from vaccines and therapies. I'm very proud of the role that we continue to play around the world to enable our customers and governments to fight the pandemic.

At the same time, we're executing our core business strategy incredibly well.

Let me provide an update on the progress we made in 2021, executing our proven growth strategy, which consists of three elements, as you know, developing high-impact innovative new products, leveraging our scale in the high-growth and emerging markets, and delivering a unique value proposition to our customers. We made outstanding progress in 2021.

Let me share a few of the highlights. Starting with the first pillar. It was a fantastic year of high-impact innovation. In 2021, we launched a number of new products across our businesses, strengthening our industry leadership and enabling our customers to advance their important work.

In our bioproduction business, we launched a high-performer DynaDrive single-use bioreactor.

Available in sizes up to 5,000 liters, this latest advancement in our DynaDrive single-use bioreactor technology brings the benefits of single-use technologies to unprecedented volumes and performance and ensures consistent scalability from pilot scale studies through commercial production.

In chromatography and mass spectrometry, we continue to innovate across life sciences research and biopharmaceutical development. During the year, we extended the impact of our industry-leading Orbitrap platform to bring high-resolution analysis to a range of applications, including toxicology and metabolomics.

And during the fourth quarter, we launched the Thermo Scientific Orbitrap Exploris MX mass detector, providing high-throughput analysis to improve the development and production of biopharmaceutical.

In electron microscopy, we introduced the Thermo Scientific Helios 5EXL wafer dual beam scanning electron microscope to support the development of increasingly smaller and more complex semiconductors.

And in genetic sciences, our new Applied Biosystems' QuantStudio 7 Pro Dx real-time PCR system, launched in Q4, enables clinical testing laboratories to accelerate molecular diagnostics. The second pillar of our growth strategy is leveraging our scale in the high-growth emerging markets to create a differentiated experience for our customers.

We continue to strengthen our capabilities serving these markets, and I'll highlight a few examples. To increase our capacity for single-use technology, we opened new manufacturing sites in China and Singapore to serve both local and global demand from biopharma customers.

In South Korea, we continue to enhance our own capabilities with customer-focused innovation centers for both the semiconductor industry and our biopharma customers. These additional capabilities position us really well to support our customers' needs. The third pillar of our growth strategy is our unique customer value proposition.

We've continued to significantly accelerate organic investments in our capabilities and added capacity to be an even better partner for our customers. In 2021, we invested $2.5 billion in capital to meet short- and long-term customer demand.

Highlights included expansion of our sterile fill/finish network, bioproduction, enzymes, nucleotide, plasmids and lab products capacity. As always, our PPI Business System and our mission-driven culture were major factors in our success during the year.

They enable the rapid execution of our capital investments and help us find a better way every day so we can continue to bring innovative new solutions to our customers, work more efficiently and effectively, and operate with speed at scale to create even greater value for all of our stakeholders.

Turning to capital deployment, we were very active again this year, which further strengthened our customer value proposition. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders.

In 2021, we were very active, investing $24 billion in M&A and completing ten transactions to further strengthen our customer value proposition. This was highlighted by the addition of PPD, which we closed in December.

We're super excited to have our PPD colleagues as part of the company and share their expertise as we work together to enhance innovation and productivity for our pharma and biotech customers. PPD is performing at a very high level.

The business delivered great results in 2021 and is entering 2022 with outstanding momentum, significantly ahead of our original expectations at the time of the deal announcement. The customer feedback has been extremely positive and we're excited about the pipeline of opportunities that we're building.

We're executing our proven integration methodology, which is a key element of our PPI Business System to create value for all of our stakeholders. We're well positioned to deliver year three cost synergies of $75 million and $50 million in operating income from revenue synergies. And we're on track to deliver $40 million in cost synergies in 2022.

At the end of the year, we completed the acquisition of PeproTech, a leading provider of recombinant proteins, which is an excellent complement to our industry-leading biosciences business. In 2021, we also returned $2.4 billion of capital to our shareholders through stock buybacks and dividends.

Turning to a brief update on the progress of our ESG priorities, I'm very proud that over the past year we significantly advanced our environmental, social and governance initiatives. Our mission, to enable our customers to make the world healthier, cleaner and safer has never been more relevant.

Highlights this year include our commitment to achieve carbon neutrality by 2050. This builds on our earlier goal to reduce greenhouse gas emissions by 30% across our operations by 2030. Enhancing the reporting and transparency through our expanded corporate social responsibility report and alignment of multiple ESG reporting frameworks.

And we're actively engaging with our community. Our Foundation for Science reached more than 100,000 students globally through our STEM education programs. Our goal is to make a very positive impact in the communities in which we live and work.

With that, I'd like to now review our 2022 guidance at a high level, and then Stephen will take you through the details. We're significantly raising both our revenue and earnings guidance. This increase is a result of both the strong performance of our core business and an increase in the assumption for COVID-19 testing-related revenue.

We're raising our 2022 full year revenue guidance by $1.5 billion to $42 billion, which would result in 7% revenue growth over 2021. And we're increasing our 2022 adjusted EPS guidance by $1.07 to $22.43 per share.

So to summarize our key takeaways from 2021; we executed very well to continue our growth momentum and deliver outstanding financial performance. Our business is performing very well, and we're gaining market share.

Our exceptional performance in 2021 and momentum entering 2022, enabled us to raise our outlook for 2022, and we're incredibly well positioned for the future. Our proven growth strategy positions us to deliver long-term core organic revenue growth of 7% to 9%. 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, in Q4, we delivered an excellent quarter, capping off another outstanding year. For the full year 2021, we delivered 17% organic growth that included 14% organic base business growth and $9.2 billion of COVID-19 response revenue.

We delivered 28% growth in adjusted earnings per share in 2021 and over $7 billion of free cash flow, all while significantly investing in our company to enable a really bright future. I'm very proud of what the team accomplished this year. These results are significantly ahead of our prior guidance.

So let me walk you through the key elements of the beat. We delivered $2.1 billion more revenue than included in our prior guide. This included $1.5 billion higher COVID-19 response revenue, $375 million of revenue from the PPD acquisition and $200 million higher base business revenue.

On our last earnings call, we derisked testing response revenue in our guidance. And we said that if for any additional opportunities to support customers' testing needs, we'll be ready to do so and flow the benefits through our P&L, and that's exactly what we did in Q4. Let me turn to the base business.

In Q4, we delivered 8% base business organic growth, which was 3 percentage points higher than assumed in the prior guide. This is very good performance, particularly given the four fewer selling days in the quarter. So excellent momentum on the top line.

Our core business is on a great growth trajectory, and we continue to step up and meet our customers' testing needs. Our PPI Business System enabled us to generate great pull-through on the very strong revenue performance in Q4, leading to excellent adjusted EPS performance.

We delivered $6.54 of adjusted EPS in the quarter and $25.13 for the full year; this was $1.76 ahead of our prior guide. So a broad-based beat to round out an outstanding year. Let me now provide you with some more details on our performance. Beginning with our earnings results, and as I mentioned we delivered $6.54 of adjusted EPS in the quarter.

And for the full year, adjusted EPS was $25.13, up 28% compared to last year. GAAP EPS in the quarter was $4.17. And for the full year 2021, GAAP EPS was $19.46, up 22% versus the prior year. On the top line, our Q4 reported revenue grew 1% year-over-year.

The components of our Q4 revenue increase included a 4% organic revenue decrease, a 6% contribution from acquisitions and a headwind of 1% from foreign exchange. And as I mentioned, the base business organic revenue growth in the quarter was 8%.

For the full year 2021, reported revenue increased 22%, this includes 17% organic growth, a 3% contribution from acquisitions and a 2% tailwind from foreign exchange. The full year base business organic growth was 14%.

And in 2021, we delivered $9.23 billion of COVID-19 response revenue, which includes $2 billion of vaccines and therapy support revenue. Turning to our performance by geography.

The organic growth rates by region are skewed by the response revenue in the current and prior year as well as four fewer selling days in Q4 2021 versus the prior year quarter. For Q4, North America declined in the low teens. Europe grew high single digits. Asia Pacific and China grew in the high single digits.

And rest of the world grew mid-single digits. For the full year, North America grew low double digits. Europe grew over 25%. Asia Pacific grew over 20%, including just under 20% growth in China. And rest of the world grew mid-teens. Turning to our operational performance.

Q4 adjusted operating income decreased 10% and adjusted operating margin was 29.5%, 380 basis points lower than Q4 last year. For the full year, adjusted operating income increased 27% and adjusted operating margin was 31%, which is 130 basis points higher than 2020.

In the quarter, our PPI Business System enables to deliver strong volume leverage on the base business, and strong productivity. This was more than offset by the impact of lower testing response revenue and our ongoing strategic investments across our business to support our near- and long-term growth.

For the full year, we drove positive volume leverage and productivity. We also had favorable business mix. This was partially offset by our strategic investments. Moving on to the details of the P&L. Total Company adjusted gross margin in the quarter came in at 50.5%, 340 basis points lower than Q4 last year.

And for the full year, adjusted gross margin was 51.6%, up 40 basis points versus the prior year. For both the fourth quarter and full year, the change in gross margin was due to the same drivers as those for our adjusted operating margin. Adjusted SG&A in Q4 was 17.3% of revenue.

And for the full year, adjusted SG&A was 17.1% of revenue, an improvement of 80 basis points compared to 2020. Total R&D expense was approximately $390 million in Q4. And for the full year, R&D expense was $1.4 billion, representing growth of 19% over the prior year, reflecting our ongoing investments in high-impact innovation to fuel future growth.

Looking at our results below the line for the quarter and net interest expense was $150 million, $16 million higher than Q4 last year, largely due to the PPD financing activities? Net interest expense for the full year was $493 million, an increase of $5 million from 2020.

Adjusted other income and expense was a net income in the quarter of $7 million, $8 million higher than Q4 2020, mainly due to changes in non-operating FX. For the full year, adjusted other income and expense was a net income of $38 million, which is $8 million lower than the prior year. Our adjusted tax rate in the quarter was 13.8%.

This was 220 basis points lower than Q4 last year, mainly due to the different levels of pretax profitability year-over-year. For the full year, the adjusted tax rate was 14.6% or 30 basis points higher than 2020.

Average diluted shares were 398 million in Q4, approximately 2 million lower year-over-year driven by share repurchases, net of option dilution. And for the full year, the average diluted shares were 397 million. Turning to cash flow and the balance sheet. Cash flow was another great highlight for the year.

Cash flow from operating activities in 2021 was $9.5 billion, up 15% over the prior year. And free cash flow for the year was $7 billion after investing $2.5 billion of net capital expenditure. This reflects strong returns we're generating in the short-term and the investments that we'll make for the long-term.

During the year, we returned approximately $2.4 million of capital to shareholders through stock buybacks and dividends and we ended Q4 with $4.5 billion in cash. Our total debt at the end of Q4 was $34.9 billion, up $13.2 billion sequentially from Q3, largely as a result of the financing activities related to the PPD acquisition.

Our leverage ratio at the end of the quarter was 2.7 times gross debt-to-adjusted EBITDA and 2.3 times on a net debt basis. And concluding my comments on our total company performance, adjusted ROIC was 19.8%, up 180 basis points from Q4 last year as we continue to generate exceptional returns.

So I'll now provide some color on the performance of our four business segments, and let me start with a few framing comments. The scale and margin profile of our COVID-19 response revenue varies by segments that has been consistent throughout the year. We continue to make strategic investments across all of our businesses.

The size of those investments does not necessarily align with the response revenue in each segment that does skew some of the reported segment margins. And during Q4, we had four fewer selling days than the year-ago quarter. And finally, we recently renamed Laboratory Products segment to reflect the inclusion of the PPD acquisition.

It's now Laboratory Products in Biopharma Services segment. And also going forward, we'll refer to PPD as our clinical research business within this segment. Moving on to the segment details, starting with Life Sciences Solutions. Q4 reported revenue in the segment decreased 5% and organic revenue was 8% lower than the prior year quarter.

In the quarter, we delivered very strong growth in our bioproduction and biosciences businesses. This was offset by lower revenue in the genetic sciences business driven by lower testing revenue versus the year-ago quarter For the full year, reported revenue in the segment increased 28% and organic revenue increased 23%.

Q4 adjusted operating income in Life Science Solutions decreased 14%, and adjusted operating margin was 48.2%, down 490 basis points year-over-year. In the quarter, we delivered strong productivity, which is more than offset by unfavorable business mix and strategic investments.

And for the full year, adjusted operating income increased 28% and adjusted operating margin was 50%, a decrease of 20 basis points versus 2020. In the Analytical Instruments segment, reported revenue increased 5% in Q4 and organic growth was 6%.

Growth in this segment this quarter was driven by electron microscopy and chromatography and mass spectrometry businesses. For the full year, reported revenue in this segment increased 18% and organic revenue increased 17%.

Q4 adjusted operating income in the segment increased 15% and adjusted operating margin was 22.1%, up 190 basis points year-over-year. During the quarter, we saw favorable business mix and delivered strong volume pull-through and productivity enabled by our PPI Business System.

That was partially offset by the strategic investments we're making across this segment. For the full year, adjusted operating income increased 48% and adjusted operating margin was 19.7%, an increase of 390 basis points versus 2020. Turning to Specialty Diagnostics.

In Q4, reported revenue and organic revenue were both 26% lower than the year-ago quarter. In the quarter, we saw a strong growth in our transplant diagnostics and immunodiagnostics businesses, which was offset by lower COVID-19 testing revenue versus the year-ago quarter.

For the full year, reported revenue in this segment increased 6% and organic revenue increased 5%. Q4 adjusted operating income decreased 43% in the quarter and adjusted operating margin was 20.5%, down 590 basis points from the prior year. In Q4, we drove positive productivity enabled by our PPI Business System.

This is more than offset by unfavorable volume mix and strategic investments in the segment. For the full year, adjusted operating income decreased 6% and adjusted operating margin was 22.6%, a decrease of 300 basis points versus 2020. Then finally, Laboratory Products and Biopharma Services segment.

In Q4, reported revenue in this segment increased 16% and organic revenue growth was 5%. During Q4, we saw strong growth in the Pharma Services and Laboratory Products businesses and we recognized $375 million of revenue for PPD to clinical research business.

For the full year, reported revenue in this segment increased 21% and organic revenue increased 15%. Q4 adjusted operating income in the segment increased 42% and adjusted operating margin was 11.5%, which is 210 basis points higher than the prior year.

In the quarter, we drove strong productivity by our PPI Business System and saw a favorable business mix, partially offset by strategic investments. For the full year, adjusted operating income increased 45%, and adjusted operating margin was 12.4%, an increase of 200 basis points versus 2020. Let me now turn to our updated 2022 guidance.

Before I get into the details, I'd like to begin with a quick reminder about our definition of core business, which we introduced at our Investor Day last year and notably transitioned to it in 2022. Core includes our base business, the vaccines and therapies response revenue and the PPD acquisition.

Given the scale of the PPD acquisition, our core organic growth calculation will include PPD on a full year basis, if we think that gives you the best view of how to look at the total company business and how it's performing.

For full transparency, we'll also continue to provide total company organic growth when reporting our actual performance in 2022. So moving on to our guidance, as Marc mentioned we're significantly increasing our full year 2022 revenue and adjusted EPS outlook.

We're raising our full year 2022 revenue guidance by $1.5 billion to $42 billion, and we're raising our adjusted EPS guidance by $1.07 to $22.43. This very strong raise reflects the excellent strength of the business and we continue to expect 8% core organic revenue growth in 2022.

Let me now provide you with additional details on the updated guidance. Starting with revenue, where there are four elements driving the $1.5 billion raise.

A $1 billion increase in the COVID-19 testing assumption, a $900 million increase for the core business, a $500 million decrease due to the change in FX rates, and $100 million increase to reflect the PeproTech acquisition, which closed just before the year-end.

In terms of our COVID-19 testing revenue assumption, we're continuing the same derisked approach to guidance under a range of outcomes for the year. Our guidance now assumes $1.75 billion of testing revenue in 2022.

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. And as we did in 2021, we'll flow the benefits of that through our P&L. But for now, we thought it was prudent to continue to take a derisked approach to the outlook.

In terms of the core revenue raise, $600 million relates to PPD and reflects the excellent strength of that business and to a lesser extent the recent GAAP changes around deferred revenue measurement for acquisitions. We now expect PPD, our new clinical research business to deliver $6.5 billion in revenue in full year 2022.

This represents 8% organic growth on a full year basis on top of 30% growth it delivered in 2021. And the remaining $300 million of the core revenue raise is to reflect the strong finish to 2021 by the rest of the core business. Our core business is in great shape.

It ended 2021 with even more scale and as I mentioned earlier, we continue to expect that it will grow 8% organically in 2022. So a very strong raise overall for our revenue guidance. And we will use our PPI Business System to generate strong pull-through on that revenue.

And we now expect adjusted operating margin to be 25.4% in 2022, that's a 20 basis points higher than what we assumed in our prior guidance. In terms of adjusted EPS. Our stronger business outlook is enabling us to raise the 2022 adjusted EPS guidance from $21.36 to $22.43, further building on an already very strong outlook for the year.

Let me now provide you with a couple of other details on the 2022 guidance to help you with your models. As I mentioned PPD is expected to deliver $6.5 billion of revenue and $1 billion of adjusted operating income in 2022. This acquisition is now expected to contribute $1.90 to adjusted EPS in the year.

PeproTech is expected to deliver revenue of just over $100 million in 2022 and $0.05 of adjusted EPS. FX is now expected to be a year-over-year headwind of $500 million in revenue or 1.3% and $0.31 from adjusted EPS. We continue to assume an adjusted income tax rate of 13% in 2022.

We now expect full year net interest cost to be approximately $490 million and other income to be $10 million. We continue to assume net capital expenditures of approximately $2.5 billion to $2.7 billion and free cash flow of approximately $7 billion.

Our guidance still assumes $2.5 billion of capital deployment, which is $2 billion of share buybacks to be already completed in January and $475 million of capital returned to shareholders through dividends. We now estimate that the full year average diluted share count will be between 395 million and 396 million shares.

And finally, a couple of comments on phasing to help you with your modeling. In terms of revenue dollars, the assumption in the guide is the revenue dollars are fairly linear for the year, with Q1 and Q4 being slightly higher than Q2 and Q3.

The derisked assumption for COVID-19 testing used in this guidance assumes that this revenue is very front-end loaded in the first half of the year, and then as an assumed endemic run rate level of $100 million of revenue per quarter in the second half of the year.

Organic growth of the core business is expected to be fairly consistent throughout the year. And then in terms of adjusted EPS phasing, this guidance assumes slightly more weighting towards the first half of the year than the phasing we had last year, with Q1 being about the same percentage of the full year as we had in 2021.

To conclude, we delivered another outstanding year, and we're in 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] We take our first question from Jack Meehan from Nephron Research. Jack, please go ahead..

Thank you and good morning..

Good morning, Jack..

Wanted to start with PPD and the higher – good morning, Marc. Wanted to start with PPD and the higher 2022 growth trajectory here. Can you provide some more color around just your confidence in the handoff from the COVID-related work last year to other projects? PPD has been one of the leaders in biotech.

So was curious to get your thought if some of that confidence is driven by some of the large Phase 3 mRNA studies, which are getting kicked off?.

So Jack thanks for the question. Our clinical research business, PPD has really had a really excellent 2021 with 30% growth. And it was broad-based strength across biotech, biopharma, all the very important therapy areas that they're focused on, including work in the support of COVID-19 vaccines and therapies.

As we look at the authorizations, we're very strong last year, which gives the business great momentum coming into 2022 and 2023. And we feel good to be able to grow that business in line with our core average of about 8% this year. So we feel very good about the outlook for the business..

Great. And then for both you and Stephen, a big area of focus has been inflation in the market.

So was wondering what your assumption is for pricing for 2022? Where you able to capture that across the portfolio? And how is that translating to revenue and earnings growth for the year?.

Yes. So Jack, so we have been very active on using the pricing lever as part of our PPI Business System, and we have a great team that helps our businesses do that in a very appropriate way.

And we've seen basically in the second half of 2021, and as we project forward to 2022, pricing around about 2 times the normal level given the inflationary environment we're facing. So that's in aggregate across the whole portfolio.

It's different by different areas of the business, but that's the aggregate result, and we're offsetting the impact of inflation through that pricing activity..

Thank you, guys..

Thanks Jack..

We take our next question from Patrick Donnelly from Citi. Please go ahead..

Great. Thanks for taking the question guys. Marc, maybe just on the guidance raise, that core $400 million raise or so.

Can you just talk through; I guess the end markets that you're seeing where you're feeling incrementally better going into 2022 versus a few months ago at the Analyst Day and then obviously, the 3Q update as well? Just kind of curious the confidence level going into 2022, you guys obviously sound quite bullish for the year.

But maybe if you can just talk through some of the upside levers as we go into this year?.

Yes. So Patrick, we really ended the year with really strong performance. And you see that in the 17% organic growth that we delivered for the full year. You see that in the very strong base business growth of 14%. And bookings in the fourth quarter was once again ahead of revenue. So we enter the year with very strong momentum.

As we thought about the outlook for the year, obviously we were quite bullish with the 8% back in September with the Analyst Day. And the way that we thought about it was all of the additional revenue in the core; we're basically going to grow that. We're going to keep that and then grow that by 8% as well.

And that's sort of what's implied in the guidance. So we feel very well positioned given what our outlook was in September, how the business finished the fourth quarter, the strength of the bookings, and therefore, 2022 should be another quite year for the company..

Yes. And Patrick, that – the extra – days was pretty broad across the business when I think about the impact in Q4..

Understood. Okay. And then maybe just one on the capital deployment side. Obviously, you guys have been very active, another $2 billion to start the year here on the share repo. You kind of talked about the $7 billion free cash flow for the year.

Can you just talk about the pipeline of opportunities on the deal side? Again, PeproTech seems like a nice fit. How active we should expect you to be, again, leverage seasonable at 2.3 coming out.

So maybe just talk about the pipeline and the expectations for the year there?.

Yes. So if you reflect back on last year, right, very active year with 10 transactions, and the bolt-ons about $4 billion worth of transactions, $20 billion roughly for PPD. So actually a really nice year of bolt-on activity.

And if this was any other quarter in the fourth quarter, we actually were talking about PeproTech quite a bit, right, in terms of classic bolt-on, great growth prospects, good technology that is already performing well and will flourish under our ownership and the strength of our Biosciences business.

So that's kind of the look back, right? And it gives you a sense that there's plenty of opportunity. Our pipeline is busy, right? We have plenty of financial capacity. We'll be incredibly disciplined to make sure that it fits our strict criteria, it creates shareholder value and that it really is additive to the portfolio.

But we're actively looking at a number of transactions, and we'll see how they play out. The return of capital is also an important part of our strategy. And as you noted, we deployed already $2 billion on buybacks in the beginning of the year and we're excited to be able to do that for our shareholders as well..

Great. Thanks Marc..

You are welcome..

Our next question comes from Dan Arias from Stifel. Dan, please go ahead..

Good morning, guys. Thanks for the question. Marc, maybe just following up on Patrick's M&A question there. I'm just curious about whether or not you're actually seeing assets become more attractive these days given the market moves? I mean, we've all seen valuations in the public markets come in.

So it feels tempting to say, yes, but I imagine that the management teams of these companies remember their stocks being a lot higher, not too long ago. And on the private side maybe sort of a similar thing relative to the last raise or something.

So I guess the question is, are assets any more approachable than they used to be in reality or not really?.

Yes. I think it's early to see that that changes increases the pool, if you will of potential actionable transactions, right? And because it takes a while for valuation expectations to really settle down. And obviously, the stock market has bounced around a bunch. So it's – I think it will take a while for expectations to change.

Our pipeline is busy, right? And we are truly disciplined. And you've heard me say in the past, right, when valuations are more elevated, you're going to think about businesses that have a very favorable risk reward profile. So you don't have scenarios where the businesses that you acquire aren't creating shareholder value.

And obviously, if you get in a period where valuations are more favorable from an M&A perspective, then that's going to open up the pool, right? But I don't think that happens in the first month or two of the year. I think it's more of a, we'll see how the year plays out..

Yes. Okay. That makes sense. And then maybe on the clinical channel, how would you describe the spending environment in the hospital landscape right now when it just comes to sort of non-COVID-related items as we start off the year? It seems like things were normalizing, but then we did get some hospital capacity constraints as Omicron surged.

So just curious how you're seeing things trend and how spending priorities are looking in demand overall in the clinical segment?.

Yes. So when I think about the core health care and diagnostics portion of the business, I look back at last year, we had solid growth in the – in that routine activity or Specialty Diagnostics.

What I would say is its better than it's growing again, but there's still some level of noise in terms of volume disruption, right? So it's not at the consistent growth that you would have seen in 2018, 2019. You lose two or three weeks because of Omicron that has some minor effect.

It's fully baked into our numbers, and it would be truly in the noise level for us in terms of what our outlook is. But you're not yet at sort of maximum diagnostic growth outside of COVID testing until you really have no capacity utilization in the hospitals..

Got it. Okay. Thanks Marc..

The next question comes from Derik De Bruin from Bank of America. Please go ahead..

Hey good morning..

Good morning..

So, Marc I don't know if you can do this, but it's the question we're getting from investors.

But if you look at that 25.4% operating margin guide for 2022, what's the – I guess, can you do – can you talk to the push and takes on contributions or – what's the FX headwind? What's the decrease from PPD? And just – and basically in COVID sort of walk through the basis on what's sort of like the underlying margin? I think we're getting a lot of questions on that as people sort of think about sort of like the future trajectory..

Let me give you the 80,000 foot and I will not bridge you and Stephen will. We increased our operating margin outlook from the Investor Day. Actually, I think at the Investor Day, we did a really nice job of explaining, you bring PPD in at a lower margin in year one and margins expand.

We talked a little bit about how the COVID would unwind, but also actually the longer-term view. So, we're kind of in a way, so let's go to the endpoint in the next three-year model or four-year model. And so that you can take all of the COVID out and you see the growth in margins off of that level.

So actually, I'm super excited to come here and actually, we've been able to increase it. But Stephen, maybe you might want to add a little bit more..

Yes. So, in terms of the long-term model, we said margins are greater than 26%. And that's all incorporated in this guidance as we think about 2022 as the year in that three-year long-term model. So, we raised our guidance for revenue. PPD is part of that, which is kind of mid-teens margin.

FX is slightly more of a hurt in terms of the change versus the prior guide. And then the higher testing and the higher core business growth is coming through the decent margin. So that's the kind of puts and takes that gets you the 20 basis point increase. And it's all in line.

It's actually slightly higher than what included in that full year model that we gave out at the Investor Day..

Great. And Marc, your APAC and China business actually ended the year quite strong. Do you sort of like give us your current thoughts on sort of like how you see China moving forward in 2022 and 2023 and just your high-growth markets in general, just how things are tracking there? Thank you..

Yes. So, Derik thanks for the question. So, we had very strong growth in APAC, about 20% for the year and China just below, I think, 19%. So, it's kind of in the same range. When I look at the outlook, China being the largest of the countries in that region, it represents about 8% of our total revenue despite context.

We expect it to be and continue to be one of our fastest-growing end markets. Significant investment in pharma and biotech, biotech in particular, in the country. We're well positioned to continue to serve that very well. So, the team in China is bullish about the outlook. There are clearly geopolitical tensions and we'll. Navigate those appropriately.

And so that's part of it. And so, we feel good about what the outlook is there. And then we've had really good strength beyond China, right? South Korea continues to perform at a really good level. We played very strong role in India, and that's expanding nicely.

The region has been good for us, and I'm very proud of how the team has performed in Asia-Pacific and obviously around the world..

Great. And if I can sneak one more in.

The academic and government number in Q4, was that four less selling days and people not being back in the lab, some COVID headwinds just sort of talking, if you can sort of talk about that number?.

Yes. So obviously, for the year, with the low double-digit growth, very strong. We had low single-digit decline, as you said, in the fourth quarter. Really, it's the combination, as you said, four selling days less. We also had a very strong comparison in academic and government in the prior year period.

So that's probably the other factor beyond any Omicron-type disruption. So, as I thought about it, there was not much to read into it in terms of what the activity level was, what customers are talking about, pipeline stuff seems fairly normal..

And then Derik, just reflecting on the margin – Derik, just reflecting on your margin question, when I think about the additional guide in terms of revenue for testing, that's assumed to come through at the average for the pull-through of the rest of the company as well. So not a significantly high margin profile, so I guess is the [indiscernible]..

Thanks, Derik..

Great, helpful..

We take our next question from Luke Sergott from Barclays. Please go ahead..

Hey guys, good morning. I think everybody right now is trying to figure out the industry's capacity to absorb the COVID vaccine roll off. And given you guys supply, also manufacture and then do the clinical side, your thoughts here would be really helpful.

But really just trying to figure out what indications or technologies are you guys are looking at that can replace any of that roll off?.

Luke thanks for the question. So, when I think about the demand profile and capacity expansions, obviously, there has been very significant demand across the industry for supporting all of the COVID therapy and vaccine activity. And the industry, obviously, utilization went up hugely, probably unsustainably high.

So, some of the investments you're seeing within our own company and sure, across others, is to bring utilization rates back to normal, right. So, that's the first thing to remind.

Within our own business, if I think about the investments, I think about the nature of the customer contracts, I think about who the customers are, what else they have in their pipelines, our ability to transition the COVID-related activity to other therapeutic areas is something that we have a high degree of confidence in the ability to do that.

You don't do it necessarily in one quarter, right. It takes a few quarters to get all of that smooth out. But we have good line of sight in terms of how to backfill when COVID demand is, God willing, less needed around the world, right, as we all hope that it's something that, at some point, wanes to a certain extent.

So, our ability to do that, and you can think about a visualize right, sterile fill-finish activities, really all of the biologics that are used for any indication run through that capacity, right? So, we've added capacity and we're running flat out.

And if there's less of a need longer term for vaccines, then you would see that capacity go to other critical areas. So that would be – you can visualize it that way. The capacity is truly generic to all of the indications out there..

All right that's really helpful. And then lastly, as you guys look at that $1.75 billion on testing, Mesa appears to have had a really strong quarter. Can you just give us a sense of the number of customers there? I know it's such a small product line, but it's a key new platform for you.

So, as you think about number of customers, placements and as the menu kind of expands there..

Yes, so you have two different things going on with our rapid diagnostic systems, our PCR, that we acquired early in 2021. You have the long-term menu expenditure beyond the respiratory panel and the COVID-19 test. That's a multiyear investment that really leverages the technology for the long term.

And we're excited about that, right? When I think about – the second aspect of it is the role in COVID response, demand there has been very, very high.

And while I could say the exact number of customers, you would see it in the pharmacies, is a natural application where it's been used, you see it in the doctor offices, as well as in number of back-to-life settings.

I've been to meetings where that technology has been used to clear people to be able to attend the meeting and you get a result in 30 minutes. So, it's an exclusive technology to get a PCR result that quickly. So, I feel good about the acquisition, how the technology road map is developing and how it's performing..

Great, thanks..

The next question comes from Vijay Kumar from Evercore. Vijay your line is open..

Hey guys thanks for taking my questions. Stephen, maybe one on the guidance here. Good morning to you. On the guide here, 8% core, I guess, I heard you say in your core revenues was raised by $300 million, $400 million-ish. Shouldn't you core be 9%? Like it feels like it's improved versus your last guidance.

Is that the right way to think about your core accelerating?.

So, Vijay, good morning. The raise is because of the scale of the business has gotten larger in 2021, and then we're growing that at 8% going forward in 2022. So, the growth rate is still the same as our prior guidance for core, which is a very strong 8%.

But the base in which it's growing is actually larger because of the way that we finished in the end of 2021..

Understood. And then one on margins in bioprocessing. Did your COVID testing margin assumptions change. I'm curious Marc on this DynaDrive single-use bioprocessing reactor. Do you expect any share shift in the industry? It looks like you guys are quite optimistic about this product.

So, I'm curious if this is a share gain opportunity for Thermo?.

Yes. So, Vijay in terms of the bioproduction activity. So, in that we say the word bioproduction, what we're meaning here is our cell culture media, our single-use technologies, our purification resins.

That's part of a much bigger set of production activities for pharma and biotech, which includes pharma services and our bioscience reagents, some of those activities.

I called out the DynaDrive specifically because today, when you think about a customer choice for most probably 70% to 75% of medicines and indications that are biologics, you can use single-use technology. That doesn't mean that that's the share that is used, which you can economically and the alternative is stainless steel.

And that's a 2,000-liter scale. Our technology allows you to go to 5,000-liter scale. That effectively opens it up for almost all medicines could be made. And it's probably a couple of very high-volume ones want to do a stainless steel. Now how fast customers will ultimately adopt it? Will take some time.

We've obviously adopted it in one of our biologics facilities. And we're super excited about the capability because the economics and the quality is fantastic. So, I think the technology is exquisite, and it's unique to us. So yes, I think it allows us to grow our share over time..

Basically, it expands our served end market in effect..

Yes..

Got you.

And Stephen, sorry, did your COVID testing margin assumptions change versus the last guide?.

In terms of the 2022 version, no. There is an assumption that it's going to contribute – come in the contribution margin around about the company average..

Understood. Thank you, guys..

Thanks, Vijay..

The next question is from Dan Brennan from Cowen. Please go ahead..

Great, thanks for taking the questions. Marc, just a quick just comment, just kick it off. I'm still unsure on Zach, what knowing [indiscernible] the last five means certainly gives me some hope. I just wanted to ask a question on the base biologics business, ex-COVID. I didn't hear it in the prepared remarks, but you may have discussed it.

So how did that business grow in the quarter? Could you give some color on what the bookings trends were in the quarter? And kind of what's assumed implied in the 2022 growth for that business?.

Yes. So, Dan, when I think about our biologics, our production activities, I think, it's probably good to put it into the macro context. Roughly $20 billion of our revenue today including PPD serves, pharma and biotech.

About half of it is in the production part of the business, right? And in general, the production goes a little faster than the other activities we do in pharma and biotech.

And when you look at the company's long-term 7% to 9% core organic growth outlook, pharma and biotech will be the fastest of the growing end markets are growing faster than that on average going forward. So, we entered the year, obviously with very strong momentum, right, with 25% growth in pharma and biotech for the full year, a very special year.

And we're excited about the growth prospects we have this year with the 8% core growth..

Got it. And then maybe as a follow-up, just on the diagnostic testing side, you guys are obviously tremendously successful with COVID testing. I'm just wondering if you can comment on all the PCR platforms that you've expanded globally.

What's the strategy? And what's some of the revenue contribution as COVID flows to kind of monetize maybe some content on those boxes? Is there something baked in to the base business or just how do we think about that opportunity for Thermo?.

Yes. So, Dan, one of the things that we get questions – your question we get periodically.

So, we try to at least frame it a bit in Stephen's remarks, where we expect in an endemic phase of COVID, about $100 million a quarter, $400 million a year of molecular diagnostics revenue related to the increased installed base, supporting COVID testing, the increased sample prep installed base. So that's a rough number.

We'll give it more precision when we're actually in the endemic phase, but that's the view. When that exactly happens, we just assume that that starts in Q3, but that's an assumption, just like all of our testing things. We'll update that as we see how the pandemic plays out..

Operator, we have time for one more question..

Thanks Dan..

Thank you, Dan..

Thank you. So, our final question comes from Tejas Savant from Morgan Stanley. Please go ahead..

Hey guys good morning. And thanks for squeezing me in here. Marc, one question for you on the M&A pipeline. I know it came up earlier in the call as well.

But just curious as to philosophically get your view on how do you think of growth assets, specifically if an asset is not sort of minor EPS accretive near term, is that still sort of something that you would look at over here? Or would you sort of prefer kind of like the more PPD flavor of M&A?.

Yes, so it's a great question, right. The way we think about acquisitions is really along our criteria, right. We start with is it strengthen the company strategically? Would our customers value it? And ultimately, does it create shareholder value? We start with the return on invested capital, the internal rates of returns.

Before we get into the EPS or any of that stuff, we just say, is this a good long-term investment, right? And if it is, then we'll look at the shorter-term financials and say, is that an acceptable risk reward to us to take the activity? So, as you know, if you think about the many deals we have done, we actually haven't focused on, is it accretive to our organic growth or we've actually just focused on, is it a really strategic fit that strengthens the company that will create shareholder value.

And we have an incredible track record of accelerating the growth of the businesses we acquire, right? So that's the cool thing. And you've seen us where over the years, we bought businesses like Life Technologies that was growing slower than the company average. Obviously, it's been unbelievable in terms of how fast it's grown in terms of at scale.

And we're excited about PeproTech, which is a higher growth business, and we're excited about the prospects around PPD. So, thank you for the question..

So, let me wrap up and thank everybody for participating. We're obviously pleased with how we performed in 2021. We're in a really great position to achieve another excellent year in 2022. And as always, thank you for your support of Thermo Fisher Scientific, and we look forward to updating you as the year progresses. Thanks, everyone..

Thank you all for joining today's call. This now concludes. You may now disconnect your lines..