Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2023 Second Quarter Conference Call. My name is Ellen, and I'll be coordinating the call for today. [Operator Instructions] I would now like to introduce our moderator to the call, Mr. Rafael Tejada, Vice President of Investor Relations. Mr.

Tejada, you may now 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 & Events until August 11th, 2023. A copy of the press release of our second quarter 2023 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 forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q, which is 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 date subsequent to today.

Also during this call we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our second quarter 2023 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..

high impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. Starting with the first pillar innovation. We had a really spectacular quarter. We launched high impact new products that are further strengthening our industry leadership by enabling our customers to break new ground in their important work.

We had a great showing at the American Society for mass spectrometry conference, where we featured the groundbreaking Thermo Fish -- Thermo Scientific Orbitrap Astral mass spectrometer, which is the most significant advancement in mass spectrometry 15-years.

The Orbitrap Astral combines speed, high sensitivity, and deep proteome coverage to enable researchers to uncover proteins that previously evaded detection. This will enable breakthroughs that could lead to the development of new targeted therapies for a range of diseases, from cardiovascular disease to cancer.

We've already started to deliver the Astral to our customers and we're very pleased with the strong bookings performance to-date. In our electron microscopy business, we launched the Thermo Scientific Metrios 6, scanning transmission electron microscope. The latest innovation in our leading line of instruments designed for the semiconductor industry.

This fully automated system enables our customers to rapidly obtain large volume, high quality data from increasingly complex semiconductors to accelerate development. In our biosciences business, we introduced the Gibco OncoPro Tumoroid Culture Medium Kit. It accelerates development of novel cancer therapies.

These kits support the culture of tumor cells derived from individual patients providing a better disease model for research and drug development that could potentially improve clinical trial success and help bring drug candidates to market faster and more cost effectively.

And in specialty diagnostics, we launched the first and only immunoassay to help doctors stratify a mother's risk of developing preeclampsia, a serious complication that can develop in pregnancy in the postpartum period, endangering both mother and baby.

We receive breakthrough designation and FDA clearance for assessing a patient's risk of developing severe preeclampsia enabling doctors to better manage care. These are just a few examples of the exciting innovation going on across our company, which will make a significant difference for our customers and drive future growth.

The second pillar of our growth strategy is the trusted partner status that we have built with our customers. This unique relationship gives us early insights into our customers' unmet needs and enables us to bring our industry leading products, services, and expertise together in ways that no one else can.

We continue to strengthen our capabilities to be an even stronger partner for our customers. For example, in our Pharma Services business, we added an early development hub at our site in Bourgoin, France enabling early development in addition to commercial manufacturing. The third pillar of our growth strategy is our unparalleled commercial engine.

We have a meaningful commercial advantage, due to the deep engagement that we're able to have with our customers across the globe. A great example of our progress here is further strengthening our commercial capabilities with the opening of a state-of the-art customer center of excellence in Milan.

It features a customer application development lab to showcase our industry leading products, services, and expertise. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to shareholders.

During the quarter, we completed a small bolt-on acquisition of MarqMetrix, a developer of Ramen based spectroscopy solutions for in line process analytics. This technology expands our capabilities to help our customers make precise and accurate measurements throughout their manufacturing processes in a wide range of applications including biopharma.

This business is a nice complement to our analytical instruments business. Let me give you a quick update on the binding site acquisitions, which we closed at the beginning of the year. Our protein diagnostics business has delivered outstanding growth and the integration is going incredibly well.

Our team is progressing the innovation pipeline to advance the diagnosis and management of patients both multiple myeloma and immune disorders. And just after the close of the quarter, we announced an agreement to acquire CorEvitas, a leading provider of regulatory grade real world evidence for approved medical treatments and therapies.

Real world evidence is the collection and use of data from patient health outcomes gathered through routine clinical care.

This is a high growth market segment as pharmaceutical and biotechnology customers, as well as regulating bodies are increasingly looking to monitor and evaluate the safety of approved medicines and examine their effectiveness and value in a post approval setting.

CorEvitas will further strengthen our capabilities to serve our pharma and biotech customers. It's an excellent strategic fit for our company and highly complementary to our clinical research business. There is strong market demand for real world evidence, which improves decision making and reduces the time and cost associated with drug development.

The acquisition is expected to be completed by the end of this year, and I'm very excited about what this will mean for our customers and the patients they serve. Financially, we expect the business to deliver low-double-digit growth and be accretive to adjusted EPS by $0.03 in 2024.

So overall strong progress in the second quarter for capital deployment.

During the quarter, we advanced our environmental, social and governance priorities including launching a partnership with Pfizer to increase local access to next generation sequencing based testing for lung and breast cancer patients in more than 30 countries across Latin America, Africa, the Middle East, and Asia.

These are areas where advanced genomic testing has previously been limited or unavailable. Access to local NGS testing can help to provide faster analysis of associated genes, empowering healthcare providers to select the right therapy for that individual patient.

Through the partnership, we will work with local labs using our NGS technology to ensure they meet industry standards for NGS testing for breast and lung cancer. Pfizer will work to enable affordable patient access and to raise healthcare provider awareness regarding the benefits of advanced NGS testing.

Together, we'll continue to evaluate additional geographic opportunities and to expand testing for other types of cancer. I'm very proud of the way we're making a difference, not only by enabling our customer success, but also by creating a better -- a great work environment for our colleagues and then making a positive impact for society.

So to summarize our key takeaways from the second quarter, while the macroeconomic environment has become more challenging, our team continues to leverage our PPI business system to deliver strong productivity.

We're focused on driving market share gains, and at the same time, we're advancing our proven growth strategy to be the even stronger partner for our customers. We effectively deployed capital to create significant value for our customers and our shareholders.

And the attractive long-term outlook for the Life Sciences industry and Thermo Fisher is unchanged. We're incredibly well positioned to help our customers navigate the current environment, capture incremental opportunities, and exit this period, an even stronger industry leader with the very bright future.

With that, I'll now hand the call over to our CFO, Stephen Williamson.

Stephen?.

a reduction in the assumed level of economic activity in China and an assumption that the more cautious spending that we saw across our customer base in Q2 will continue throughout the remainder of the year. In relation to China, at the beginning of the year, we saw positive momentum in the Chinese economy.

We had previously assumed that this momentum would continue through the rest of the year. However, as the second quarter progressed, economic activity in China significantly slowed, resulting in less customer activity in the quarter. We think this is appropriate to assume this condition remains in place for the remainder of the year.

With regards to customer spending patterns more broadly, in Q2 customers in our end markets began the year with somewhat cautious spending. And this is something that was not confined to our end markets, companies across most business segments were cautious with their spending given the uncertain macro conditions.

This dynamic became more challenging in Q2. We previously assumed that this would lessen an impact as the year progressed, and we now think it's appropriate to assume that the cautious spending will continue through the remainder of the year.

With strong commercial execution from our team, we expect to successfully navigate these macro dynamics and deliver 2% to 4% Core organic revenue growth for the year.

And for context, as Marc mentioned, with the changes in the macro, we're now assuming Core market growth for our industry to be in the range of 0% to 2% for 2023, through reduction of approximately 4 percentage points versus the 4% to 6% assumed previously for market growth.

When I think about the range of outcomes for the full-year, Core organic revenue growth, the largest swing factor is the extent of the budget flush at the end of the year. Should that be weaker than normal, then Core organic revenue growth would round down to 2%, and if stronger, it could round up to 4% for the year.

And if China gets traction stimulating the economy, then that could also be an upside late in the year. So moving on now to profitability. As I mentioned earlier, we're using the PPI Business System to aggressively manage our cost base. We put in place $450 million of additional cost actions to limit the impact of the expected lower revenue on the P&L.

This demonstrates our active management of the business. As a result, the high profitability pull through on the lower revenue is expected to be reduced to 35% in terms of how it flows through to the bottom line.

Factoring in this and the updated view of FX, we now expect our adjusted operating income margin to be in the range 23.2% to 23.4% for the year. Let me provide some more additional details on the updated 2023 guidance. We're assuming that we'll deliver $300 million of testing revenue in 2023.

This is $100 million lower than our prior guidance and through the half-year point we've delivered $225 million of testing revenue. Within the call, we continue to expect $500 million of vaccines and therapies revenue in 2023. This is $1.2 billion less than the prior year, a 3 percentage point impact on core organic revenue growth.

Through the half year point, we delivered $365 million of vaccines and therapies related revenue. Moving on to FX, we continue to assume that FX will be a year-over-year tailwind to revenue of approximately $100 million. And then in terms of adjusted EPS, we now expect FX to be a headwind of $0.11, which is $0.05 higher than our previous guidance.

The Binding Site acquisition is performing well and we now assume it will contribute approximately $260 million to our reported revenue growth for the year and $0.09 to adjusted EPS. Below the line, we continue to expect net interest expense in 2023 to be approximately $480 million.

The adjusted tax rate assumption for the year has improved to 10% versus our prior guidance of 10.8%, driven by our tax planning initiatives. We're now expecting net capital expenditures will be approximately $1.7 billion, and we continue to expect the free cash flow will be $6.9 billion for the year.

In terms of capital deployment, our guidance includes $3 billion of share buybacks, which were already completed in January.

We continue to assume that full-year average diluted share count will be approximately 388 million shares and that we'll return approximately $540 million of capital to shareholders this year through dividends, a 17% increase over 2022. And as is our normal convention, our guidance does not assume any future acquisitions or divestitures.

We've not included any operational benefit in 2023 for the acquisition of CorEvitas. When we get more clarity on the actual close date for that acquisition, we'll provide an estimate of any potential impact in 2023. To conclude, we recognize that the changing guidance is significant. We think it's appropriate given the change in the macro environment.

And as we said at our Investor Day, should market growth be lower than normal? We will leverage the PPI Business System and step up productivity and that's what we've done. We're well positioned to navigate the near-term environment.

And while the near-term environment may be more challenging, the long-term fundamentals supporting the growth of our end markets remains unchanged, as does the strength of our position to serve them. Now let me turn the call back over to Raf..

Thank you, Stephen. Operator, we’re ready for the Q&A portion of the call..

Thank you. We’ll now enter the Q&A session. [Operator Instructions] Our first question comes from Matt Sykes from Goldman Sachs. Matt, your line is now open. Please proceed with your question..

Hi, good morning and thanks for taking my question. Maybe just starting on the guidance, just given the significant change relative to what you talked about at the Investor Day a few months ago.

Could you maybe help us a little bit with where some of the biggest deltas in terms of your expectations relative to that time of the Investor Day and today, in terms of either end market or revenue segment, and specifically within China, were there certain categories or revenue segments or end markets where the weakness is more pronounced? I just kind of wanted to get a little more color the delta and expectations from the Investor Day to today?.

Yes. So Matt, thanks for the question. In terms of the guidance change, the way that I think about let's start from the beginning of the year.

I think it's the easiest place to start and we can talk about the Investor Day, right? So, you know, in terms of the market growth and the conditions there, right? Or what we're seeing is that China really slowed quite meaningfully in Q2, right? And that's actually somewhat surprising given the first quarter really started to rebound off of the zero COVID policies and there was government stimulus and all of a sudden Q2 really slowed down significantly and, you know, when I think about that.

And then we're assuming that for the full-year, right, in terms that it's going to continue. We've seen customer caution, I mean, I think every business, when I say this is about life science tools and diagnostics. Businesses have been cautious this year on spend and it certainly manifested itself more meaningfully in Q2, particularly in biotech.

And so when I think about it, about a point of our change in the growth outlook comes from China, about 3 points of it comes from customer caution. And within it, bioproduction is about a point or a third of the customer caution, passed back two-thirds across the rest of the business.

You know, versus sort of what the analyst day and sort of, you know, the view in May, you know, we saw China certainly soft throughout the quarter. And in our business, the final month of a quarter is actually quite meaningful across all of our businesses.

So while we certainly saw some customer caution in the beginning of the second quarter, June saw no bounce at all, right? So it just, you know, it's kind of flat through the -- you know, kind of flat through the quarter. So therefore, we just didn't see that view, which is why we've adjusted the outlook at this point in time..

Great. That's very helpful color. Thanks, Marc.

And then just for my follow-up, just on the AI segment and instruments, could you maybe just given the visibility you might have into sort of the back half this year, talk about sort of what the backlog looks like order growth and how you're feeling about sort of the moderation in instrument growth in the back half of this year that you talked about earlier this year?.

Yes, Matt. Thanks for the question. So when I think about instruments, we obviously entered the year with a strong backlog and we entered the quarter with a strong backlog. And the 10% growth is very strong performance. Orders were definitely softer than we expected in Q2 primarily driven by China, which is a large component of the business there.

And therefore, I would say we would expect that the growth rate would become more muted as the year unfolds in the analytical instruments business as we continue to work down the backlog. Thank you, Matt..

Thanks very much..

Thank you. Our next question comes from Dan Arias from Stifel. Dan, your line is now open. Please go ahead..

Good morning, guys. Thanks for the questions.

Stephen, on the PPI commentary and just being able to leverage that, can you expand on that a little bit? I mean, should we take that to mean just sort of pressing harder on being lean in areas where you've done that in the past? Or is that more pulling some levers that have it been fully pulled, so to speak? And then relatedly, the -- you know, the EPS guide only came in about 5% or so at the midpoint.

So how do we think about mix as a factor there and how much room do you think that's left to you given the uncertainty that you're looking in the back half?.

Yes. So, Dan, I'll explain on the PPI side and then I'll get onto the, kind of, EPS for you. So it's on PPI that what we do it's how we run the company.

So this is about the first thing you do when you think about economic conditions being different and activity levels being different with our customers is prioritization in terms of what we're working on and deprioritize areas, which may be less important, push things out as appropriately and then make sure that we're investing in the right areas that we should be investing in and not titrating back any spending where that really matters.

So it's about prioritizing where we're spending our time and what we're working on. And part of that Dan is then reduction in discretionary spending, reduction in activity levels in certain areas. And use PPI to be able to help us do that and put that into operation.

We use the company scale in terms of the levers and sourcing, particularly in in-directs. You can lean on those levers when economic conditions aren't too strong and that's definitely a way of getting some of the benefits.

And then when we think about the expected slightly lower volumes and we're optimizing our manufacturing operations appropriately and generally across our businesses. We're appropriately reducing headcount where that makes sense across the business. And so all of that wraps up into $450 million of benefit this year.

And those actions have pretty much all been actioned right now in terms of the -- there's nothing significant to come. It's more they've taken the appropriate actions given the environment that we see.

Then in terms of the back half of the year, so was your question around the phasing of EPS or the range of EPS, could you just clarify?.

I guess it was a little bit of both. I mean, organic growth is going from high-singles to potentially low-singles and the EPS only actually came in pretty modest amount.

So I was just wondering how much room you think you've given yourself, given your PPI comments whether, you know, you are -- I guess, the answer is you're comfortable with it, but how comfortable actually are you given the range of outcomes in the back half?.

Yes. So we provided a range of outcomes and what you thought about what the market conditions could be and when we think about what the pull through would be on the revenue and that range of outcomes, plus the activities we're working on the cost side. I think that's an appropriate range for EPS.

And then the phasing first-half, second-half, clearly, a higher adjusted operating income margin in the second-half of the year and that's really largely driven by the impact of the cost actions. So of the $450 million, $75 million impacted the first-half and you'll have $375 million of benefit in the second-half.

And then revenue is a little bit more weighted and look at the year as a whole to the second-half versus the first-half. That's the other piece that drives the profitability in EPS difference. Thanks, Dan..

Yes. Okay, helpful..

Thank you. Our next question comes from Vijay Kumar from Evercore ISI. Vijay, your line is now open. Please proceed with your question..

Hi, guys. Thank you for taking my question. Marc, maybe one on -- you know, thanks for all the color on the assumptions are on the guide change, when you look at the quarter, maybe can you talk about how things progress? I think China was down low-teens. Overall, organic -- underlying organic was 2%. But things worsened throughout the quarter.

Because I think the implied guidance for the back half is low-singles to 2%-ish at the midpoint.

So we're just wondering if the exit rate was around 2%-ish? Or is the back half assuming some improvement from the exit rate levels of 2Q?.

Yes. So Vijay, in terms of the phasing of the quarter, I think really what was -- different was June saw none of the normal quarter-end pattern. So it was very similar to April and May. That -- in my many years of doing this, that's unusual, actually, where the last month isn't a big step-up in activity.

That's just the sort of the pattern of the industry a bit. So our assumption for the year is effectively that the market conditions that we saw in Q2 -- in aggregate, for Q2 continues to play out for the balance of the year. And you have all sorts of different comparisons within the different businesses versus the prior year and so forth.

But we felt that the 0% to 2% market growth and for us, for the full-year, the 2% to 4% core growth would be an appropriate performance. I think maybe the best color that I can give you is sort of how we think about it, right? Our best view on what happened in the market is informed by looking at all of the competitors, peers that reported in Q1.

Obviously, that goes well into May. All of our internal data about what's going on in the market, our extensive dialogue with customers and the few companies that reported so far, right? So that informs the 0% to 2%. The way we think about this and the standard is -- it's our job to gain market share.

We put in 2 points of growth faster than that assumption. We're going to hold ourselves to that standard, meaning if we're too conservative on the market outlook, then we will have higher expectations of what good looks like in terms of the year, but that's our best view.

When you look at the script and the comments that Stephen and I made, we made no comments about share gain in Q2, because when you deliver 2% growth, we're not going to pat ourselves on the back. At least looking at the first few companies that have reported, it appears that our performance is actually quite good and that we're growing faster.

There's a lot of companies yet to report, but it actually looks like on a relative basis, we actually had a solid quarter of growth. So hopefully, that gives you some context of where things are, but we're going to keep studying it and make sure we got a good handle on our performance.

And when we end ‘23, that we will be proud that we navigated the environment extremely well, deliver differentiated performance and set the company up for long-term success..

That's extremely helpful color, Marc. And maybe one follow-up here.

The updated guidance, is it assuming China to remain decline for the rest of the year? And what was PPI's growth in the quarter?.

So Vijay, the decline will lessen on a reported basis because of the run-up in testing factor therapy is a little bit there in terms of the support of the pandemic that we did in the back half of the year last year.

So we're assuming basically the same market conditions, not just China, but for the rest of the world, as well as we saw in Q2 for the remainder of the year..

Clinical research, double-digit growth. Thank you, Vijay..

Fantastic. Thank you, guys..

Thanks..

Thank you. Our next question comes from Dan Brennan from TD Cowen. Dan, your line is now open. Please proceed with your question..

Great. Thanks, guys. Marc, Jets are hoping out and Rogers can navigate through a difficult schedule, certainly hope and expect you'll navigate Thermo through these more difficult macro times here. Maybe just the first one, would love to get more color on China.

Could you just walk us through just more color across your major customer segments, kind of unpack, kind of how the quarter played out from that perspective? And then specifically, I would also love to hear color on bioproduction in China..

Yes. So in terms of China, when I think about it, we had a decline on an organic basis a little over 10%. Core was about flat in terms of it, and I'm just trying to give some flavor. So you, obviously, have the COVID testing. What we saw in China -- and it was very different than what our team expected, what we expected.

And if I think about that, that's an unusual comment coming from us. Actually, our leadership team from China came to the U.S. and the opportunity to sit down and chat with what are they seeing? So -- and I'm heading over to China in a few weeks as well for a week. So it's an important market. It really does feel like it is broad economic based.

And -- so we saw that across our different businesses, not limited to one. Clearly, bioproduction was soft in China. So consistent with some of the other comments that you've heard from others. But we saw the slowdown really cut across the portfolio, if you will, and it seems to be economic activity.

We always assume, hey, are we doing something wrong? Are we losing share? All of those things, because I think that's sort of the PPI discipline, which is fact-based, hold yourself accountable to a high standard, at least on what we're seeing, it just feels like customers got extraordinarily cautious in China, activity slowed and it showed up across the portfolio.

And while I haven't had a moment to distract myself on some fun activities, I look forward to, at some point, some football and seeing if the Jets actually make an improvement..

Dan, I can't comment on the Jets. But when I think about China, it is way broader than life science tools. This is a Chinese economy. They're clearly having problems getting that economy back up and running post-COVID. And they have a history of being able to do that.

So -- but we're not counting on that for the remainder of the year as a way to frame it from a wider economic viewpoint. Thanks, Dan..

And then maybe just on the end market, 4% to 6%, which you took down to 0% to 2% right now under your planning for 2023, kind of from what you see today? Is that 0% to 2% the best starting point as we think about modeling out Thermo's top line for 2024?.

Do you want to talk a little bit about, Stephen?.

Yes. So just broadly on 2024, when I think about what you need to do to model the company going forward, there's two factors. One is the jumping off point for the 2023 margins and then what's the macro conditions assumption you used for 2024.

So obviously, on the macro, we're assuming that the near-term conditions stay the same throughout the remainder of the year. You will need to make your own assumption around what that market growth is for next year. We'll have more clarity on that when we get towards the end of this year and know what the macro conditions are like.

So it's not macro within our industry, it's the macro in terms of the overall economic situation across the globe. So we'll have a clearer view on that towards the end of this year. As Marc said earlier, we'll hold ourselves to the standard of delivering a couple of points higher than what the market growth is when we think about that.

So as you leave in what assumption you have, I think the assumption is we'll be driving a couple of points of share gain above that. And then from a margin standpoint, a normal assumption for the year, we start with 50 basis points of expansion on top of what we just ended the year.

And then when you think about my guide for this year, will be some small benefit of the carryover of the cost actions into 2023 as well. So that will help you think about the margin profile for ‘24 at this point and provide you a more refined view on that when we give the guidance for ‘24 in more detail. Thanks, Dan..

Thank you. Our next question comes from Derik De Bruin from Bank of America. Derik, your line is now open. Please go ahead..

Hi, thank you and good morning. So Dan sort of asked so the question I wanted to talk to you about on ‘24.

I guess, Marc, what's your view that we're not entering a more prolonged downturn in the life sciences tools market? And I'm just sort of thinking about this from a historical perspective when we've, sort of, seen some resets in the market, and it's taken a while for this to sort of like wash through the system.

So it's like what's your confidence that we're not in a situation where we've got a couple -- we've got a period where the growth is going to be sort of back in that lower range?.

Yes. So Derik, it's a great question. So if I step back from the crystal ball for the which moment and say, what's the drivers here. This is an unbelievable industry with incredible tailwinds.

And even since the Analyst Day, if you look about the progress on approved medicines that are going on and the cycle that, that creates of more funding to fuel the pharmaceutical and biotech industry.

It's extraordinarily encouraging for the long term, right? So when I think about 4% to 6% market growth for the long term, as bullish as ever, right, in terms of that.

When I think about the dynamics, most of what is going on is around the macroeconomic environment, not the life science tools, diagnostics, pharma services, right, in terms of caution in the economy, credit availability, all of that cycle higher interest rates and, therefore, less funding going into higher growth business, all of that dynamic is a macro within our own industry, you clearly have the pandemic unwind, right, that's shaking out.

And as you look at the industry's numbers, and even if you look at our numbers, the pandemic-related activity will be relatively modest this year. So most of that will have washed out in the industry this year.

So when I think about ‘24, as Stephen said, it's really going to be what's the macro, not the life sciences tools macro, that I think is the big driver. Because the science can be explosive. Great things going on in pharma biotech. There'll be great new discoveries. All of that will attract funding.

It's just a question of, is this a kind of a stabilization year for the economy and then it balances? That's the bull case. Or is this a more prolonged period? And then that obviously is more of the bearish case on sort of what the macro is.

While we won't have a perfect crystal ball as we get into our guidance in '24, we'll have a much better sense of what the conditions are we are navigating. Hopefully, that's helpful..

Yes, it is. It is. So just a follow-up on this is, like how much of the pharma and biotech slowdown is just this digestion of the excess COVID spending? And clearly, there was frothy biotech markets and people worry about supply chain.

So there was -- a lot of money that went into the system as people did this? How much is this just digesting that extra spend versus -- are you seeing new concerns? Are these customers seeing new concerns of a regulatory environment, drug pricing, patent expirations? Are you seeing any signs of slowing clinical trial activity or higher cancellations rates? Just some sort of thought on what's just a hangover period from COVID versus new trepidation in the space?.

Sure. So Derik, the way I would think about it is, if you go back to the beginning of the year and sort of how we talked about our guidance, pharma and biotech, right, as a company, as a reminder, our core organic growth was 14% in 2022. Within that, vaccines and therapies were essentially flat.

So actually, the -- whatever the stripping that out, we actually grew faster than that. Pharma Biotech, incredibly strong in 2022. Our view was, while the market would be a good end market in 2023, but given the comparisons, it would moderate meaningfully.

That's not a negative comment, it's just such an oversized growth and our very strong growth in the prior year period, we knew that growth would slow. And when you look at the Q2 results, you're flat and 5 points of headwind, which actually performed literally exactly as we had forecasted for the quarter.

So kind of 5% growth, excluding the sort of vaccine and therapy runoff this year. That gives you a sense of what the sort of base activity is in that market, which actually is reasonable. It's slower than some other periods. But given the comparison, it actually is a reasonable view.

In terms of the color and all of those things, pharma's doing fine, right, I mean in terms of what's happening there.

And it's really biotech, every quarter that funding has been a little bit more challenged or not as strong as the past, companies get more conservative, because they think about what's their runway on spending, and that really picked up in terms of the headwinds in Q2 against an incredibly difficult comparison in the prior year period.

The final point I would make here is that there are some green shoots starting to happen in biotech, right? In terms of new company formation, some of the funding, actually, Q2 started to show some signs of positivity. That, obviously, takes a while to flow through the numbers. But actually, that's an encouraging data point as well.

Hopefully, that level of context gives you some of how to think about it..

Great. Thanks, Marc..

Thanks, Derik..

Thank you. Our next question comes from Rachel Vatnsdal from JPMorgan. Rachel, your line is now open. Please go ahead..

Perfect. Hey, guys. Thank you for taking the question this morning. So I just wanted to dig a little bit deeper on that guidance kind of how you guys are bucketing where the cut was really coming from.

So you said that of the 400 basis points, 1 point was really from China, 3 points were around customer spending, with one of that coming from bioproduction. So can you just give us a bit more color on where the remaining 2 points a weaker customer spend is happening? It sounds like PPD growth was strong.

So where else are you seeing weakness in the portfolio? And then also from an end market perspective, is this really all just weakness in pharma biotech or is there some additional weakness in industrial, for example?.

Yes. So when I think about customer caution, sort of, a macroeconomic view, you see that across all types of customers. So it's not limited to one segment. It's more pronounced than biotech, but we saw it in some industrial customers and certainly, we saw in some of the other customers that we serve, academic and government so forth.

So it's not limited to one view. In terms of the growth where the impact and the change of growth is in the other segments, clearly, with -- our view is that the instruments business will slow in the second-half of the year. So that's probably one of the changes.

And then some of the run rate activity that you would see in things like bioscience reagents or customer channels, which actually -- those are great businesses. We think customers will be a little bit more muted in spending.

So it's really not pin to one area, but just a spread across the portfolio, probably with instruments feeling most of the impact..

Operator, we're ready for -- we'll take one last question..

Okay, thank you. Our next question comes from Jack Meehan from Nephron Research. Jack, your line is now open. Please proceed..

Thank you. Good morning. I wanted to ask about M&A. These dynamic times, historically, have a way of creating new opportunities. There's been a few larger assets talked about in the press. Just would love to get your thoughts.

Do you expect to be active if something materialized?.

Yes. Jack, thanks for the question. So in terms of capital deployment and M&A, we've been active on return of capital, both through the increase in the dividend and the share buybacks earlier in the year. We've also been active on M&A, with closing the Binding Site to start the year. We're excited about CorEvitas.

And we have a lot of firepower, and we're very active, right? I do agree with your sentiment that, in these periods, there are opportunities. So we're actively looking at a number of things. And we're only going to do transactions that fit our criteria, which is, ultimately, going to strengthen our offering from a customer perspective.

It's going to clearly add shareholder value in terms of the returns that we generate from the transaction. So you'll see us be active. And whether that happens in terms of the second half of the year or into ‘24, we're certainly busy is the way I would think about it..

Great. And I have one follow-up on Pharma Services. It sounds like that business grew faster than PPD this quarter. Can you talk about how the demand profile is holding up there? And I need to ask about the Tornado that hit Rocky Mount.

Does that have any material impact on the market as you see it?.

Yes. So Pharma Services, really strong performance, in terms of growth and the way you'd characterize it as accurate. So very strong growth in that business. When I think about new wins and some of the things that we're securing for the future, the team is doing a nice job of building out a strong backlog for the future.

So that business is in a good spot. When I think about the Tornado that hit in North Carolina, the good news is that nobody was injured at least in our discussions with the customer and they're assessing the issues from a market perspective.

And we stand ready to help our customers as we do in any situation, and we never view that as a business opportunity. We always view it as we have very material relationships with our customers. And our colleagues are there to support them, and we will support in any way that is helpful as they work through the natural disaster.

So thank you, Jack, for the question. And thanks, everyone, for the questions today. Let me wrap up with -- thanks for joining us. We're very well positioned to deliver and continue to deliver differentiated performance, which we'll do. And as always, thank you for your support of Thermo Fisher Scientific, and we'll keep you updated on our progress.

Thanks, everyone..

That concludes today's conference call. Thank you, everybody, for joining. You may now disconnect your lines. Have a lovely rest of your day..