Derik de Bruin: Stephen not €“ is not to pick on the margin point, but I do want to sort of clarify something. I mean, I €“ looking at the 40 basis points to 50 basis points of expansion. So let’s say you do a 100 next couple of years. I mean, at your Analyst Day in May, you talked about a 26 percent-ish adjusted operating margin, excluding the impact of capital deployment. Or I mean, can you sort of just walk us through sort of like how you’re thinking about the 2025 outlook that you provided and sort of like general thoughts around that and then there? Thanks.
Marc Casper: Go ahead, Stephen.
Stephen Williamson: Yes, when I think about margin profile, it’s in combination with revenue dollars. So our revenue dollars are materially higher than we then incorporated into my long-term model. And a combination of that plus the margin gets you to a very strong operating income dollars, and that’s what’s driving EPS. So I’m €“ we’re well positioned with the long-term model.
Derik de Bruin: Great. That’s what I thought I just wanted to clarify that as well. And then just one quick follow-up. I assume there’s some residual COVID business in your PPD. You talked about core growth being 20%. What is the headwind in the PPD business from leftover COVID going from 2023 to €“ 2022 to 2023?
Marc Casper: Yes, there’s some activity of studies that will roll off over multiple years in terms of required follow on studies and activity there that the team as those studies come off, they just have moved to other areas of the therapeutic range. So that really has been done quite seamlessly. And as you know, with the business scaling the way it is having a large capable team is a great way to be able to be ready to serve the next set of customer work. So pretty straightforward.
Derik de Bruin: And so if I can €“ also can I squeeze one more in CapEx sort of outlook as we go from 2023, and you have been adding a lot of facilities, can you sort of talk about what you’re thinking about 2023, 2024?
Marc Casper: So 2023, Stephen said it’s a couple billion dollars and we’ll continue to €“ it will kind of go down to a glide path back to that 3.5% €“ 3% to 3.5% from over time. So nothing’s changed in that assumption.
Derik de Bruin: Great. Thank you.
Marc Casper: Thanks, Derik.
Operator: Thank you. Our next question comes from Dan Brennan of Cowen. Your line is now open Dan.
Dan Brennan: Great, thank you. Maybe Marc to kick it off, just I’m all in on Aaron Rodgers if the Jets can get him. That’d be like a struggling company getting €“ that’d be like a struggling company getting you as a CEO would be a great deal I think so. So that’s one of my questions here. Maybe the first one, just obviously, there’s a lot of concerns in the industry broadly on the near-term drag on revenue growth for biologic drug products. Given the inventory, depletion that’s ongoing in the industry, you’ve been pretty confident that for various reasons, Thermo is really not seeing this. Just would be interesting to get an update on kind of just on your thinking there and kind of what you’re assuming in your outlook for 7% growth for your businesses both on the consumable side and on the Patheon services side?
Marc Casper: Yes, so in terms of football, Hope Springs Eternal until the first snap. In terms of the bioproduction business what I would say is a few points. Obviously not every single player has reported, but a couple of them have. So we have a sense of how the industry did and what others have said. When I think about last year, our bioproduction business just crushed it again, right? It just phenomenal performance well above the rate of growth of our pharma and biotech customer set. And that’s three years in a row of really very strong growth. Very proud of how the team has executed. When I think about 2023 against tougher comparisons, obviously, the growth will normalize a bit. And I would expect that based on some of the COVID comparisons of the first half of 2022, that you’ll see more normalization in the first half, stronger in the second half is the pattern, but it’s a good business with incredibly bright prospects.
So from that perspective, I feel good about how the team’s managing it, what the €“ what 2023 will contribute and what the long term is going to be fantastic. Pharma Services businesses has had a very good year, very strong growth, has brought its capacity online very effectively and winning a lot of new business. We still have activity this year that’s meaningful in the vaccine therapies for COVID. And then as those wind down at some point in time, it’s hard to know what the longer-term visibility is for that capacity just gets repurposed on the thing. So we do that in an orderly fashion. So that’s how I think about it. But a really strong year and some really nice meaningful wins throughout 2022 that sets up the Pharma Services business .
Dan Brennan: Got it. And then €“ and maybe this is a follow-up. Obviously, your business mix is a lot less cyclical today than it was back in the prior downturn. I’m just wondering implicit in the seven, and Rachel asked the question on industrial business. But just to what extent does your guide bacon some cushion for potential slowdown that could unfold given weaker macro?
Marc Casper: Yes, so what we assumed is normal market conditions, right? And if the way I would characterize last year was above normal market conditions. So normal in my definition is marked goes 4% to 6%, right? And we said that for a very, very long time. So that’s what we’re assuming for this year. If it’s materially different than that, meaning that if the market conditions look anything like they look last year, we’re going to grow well above the core guidance. If the market conditions are meaningfully worse, then what’s assumed the normal market conditions, then we’re going to grow lower than the core organic that we outlined. So nothing’s dramatic about that. And we’ll be super transparent and all our investors will understand if the world is totally different than what it looks like on February 1.
What we know is that we’re going to manage incredibly well. So whatever the world throws at us will come out with great short-term performance and a much stronger industry leader for the long term. And that’s what’s super cool about Thermo Fisher because it’s our job to manage the dynamics and do it great and do a great job for our investors. So I’m excited for what the world upholds in 2023 and beyond.
Dan Brennan: Great. Thank you.
Operator: Thank you, Dan. We now have Vijay Kumar of Evercore ISI. Please go ahead when you’re ready.
Vijay Kumar: Hey guys. Congrats on a really strong finish with the year and thanks for taking my question. I had two parts. Maybe I’ll ask them both upfront. Marc, the first part for you on when I look at this guidance and base organic excluding vaccine, I think the business did €“ the business is assuming perhaps low double-digit organic here in fiscal 2023 in that coming off of perhaps a mid-teens comp. One is that math correct that base business excluding vaccine double digit? And what is it assuming? I’m assuming €“ I’m thinking biopharma has to grow at least mid-teens to get to the 9% to 10%. And it seems pretty strong. Do those numbers make sense? And Stephen, the second part for you on margins here, what are you assuming for decremental margins on COVID and margins in FX? And did I hear you correctly on Q1 is starting at 22%, just wanted to make sure I heard the numbers right.
Marc Casper: Sure. So in terms of the guidance and the 7% core, we did not do a lot of machinations about excluding this or that. I think from the math, the way you’re doing it is that if you excluded the vaccines and therapies, it would imply that the growth was 9% or 10%, somewhere in that range is about what the growth would be on that measure of which we’re not using that particular measure. Therefore, you can’t sort of speculate on sort what all the dynamics, it’s much better to just say relative to our 7% grow pharma and biotech, we expect to grow above that, right, in terms of its contribution to the 7%. And we would assume that the industrial and applied would go around the 7% core and the other two markets are a little bit below. So that’s how you should think about the different dynamics.
Stephen Williamson: Yes, Vijay in terms of the pull through on the lower testing revenue, as I outlined in the last quarter, the assumptions are approximately 40% in aggregate for the whole year. But that doesn’t all €“ that’s not the same in every single quarter. Like the offsetting cost actions against a very significant profitability pull through, which is higher than that on a contribution margin basis that’s spread across each of the quarters. But the revenue drop is largely just in Q1. So that’s why you have the margin profile that I outlined for Q1. And the indication I gave for Q1 margin profile at this point is slightly below what has the margin in Q4. So the largest driver there is that a large drop in very profitable testing, and then the offset on the costs to get it to the 40% pull through spread throughout the year. Thanks, Vijay.
Marc Casper: Operator, we have time for one more question.
Operator: Thank you. Our final question comes from the line of Dan Arias of Stifel. Please go ahead when you’re ready.
Dan Arias: Hey, good morning, guys. Thanks for getting me in here. Marc, maybe just one on bioprocess, bioproduction. I just wanted to ask whether you’re seeing any differences in purchasing patterns and the way that inventories just appear as though they’re being managed when you look at CDMOs versus the biopharmas themselves. There has been some conversation around just timelines that look like they might materialize on destocking. So curious if you can just sort of help us what might be taking place given where you sit here?
Marc Casper: Yes, that’s sort of along the line question, really not much to add, right, which is phenomenal 2022. We created a really challenging and exciting comparison. We get paid to create those comparisons and I would expect that would show up in a more normalized growth in the first half and a little bit stronger than that in the second half. And I think there’s much color between the different customer types or that would provide much more insight on it.
Dan Arias: Okay. Thanks so much.
Marc Casper: Welcome. So let me wrap it up here. Thanks everyone for participating in the call. With another strong year behind us, we’re in a great position to achieve another excellent year in 2023. And as always, thank you for support of Thermo Fisher Scientific. And we look forward to updating you during the course of the year as it progresses. Thanks, everyone.
Operator: Thank you all for joining. That does conclude today’s call. Please have a lovely day and you may now disconnect your lines.
