Thermo Fisher Scientific Inc. (NYSE:TMO) 5th Annual Evercore ISI HealthCONx Conference 2022 November 29, 2022 10:30 AM ET
Company Participants
Marc Casper – Chairman, President and Chief Executive Officer
Conference Call Participants
Vijay Kumar – Evercore ISI
Vijay Kumar
Okay, thanks everyone for joining us this morning. It’s a pleasure to have with us Thermo Fisher. We have CEO and Chairman, Marc Casper. I think in the background we have Eileen Pattinson and Rafael Tejada from the Investor Relations team. It’s been a fascinating, fascinating year for life science companies and I think Thermo embodifies why life sciences as an industry stands out and healthcare is, in a key, organic, right, very impressive. Well may be Marc I think I’ll let you kick start, but that’s the opening remarks and then we can get into Q&A, but thank you for taking the time this morning.
Marc Casper
So Vijay, it’s great to see you. Thanks for having us at the conference as we get to the final parts of 2022. And when I think about the year, obviously we have some work to do yet to finish off what would be a fantastic year for Thermo Fisher Scientific. I’m very proud of how the company has performed, right? We’re on track to deliver 12% core organic growth, really been able to raise our outlook throughout the year.
We completed our largest acquisitions in December of 2021, acquisition of PPD and it’s doing phenomenally well. It’s doing truly phenomenally well where our clinical research business is integrated well. It’s growing well ahead of the financial model. We’ve been able to raise the short-term performance impact, but more importantly, the long-term impact. Customers appreciate the combined capabilities and we’re winning new authorizations in a way that the PPD team would have said that it would never have happened as a separate business. And so therefore, we’re adding value to make a great business even better, and that combination is terrific, right?
So the core business is doing great. Our largest acquisition is doing really well. And as I think about the environment, and I know we’ll talk about it, as we look at the world, there’s lots of scenarios of how 2023 could play out, whether it’s continuation of the awesome trends we’ve seen or challenges from recession or challenges from persistent inflation. There’s many different scenarios. But what I can say as we embark upon in the conversation is that Thermo Fisher Scientific is incredibly well positioned to navigate whatever the world throws out at us and come out of that period as a stronger industry leader while delivering fantastic results along the way and our track record in doing that is really unparalleled.
Vijay Kumar
I mean, it really is more — it’s I think you’re [indiscernible], it’s in the numbers. It’s very apparent, right? The share guarantees as it’s playing out. But perhaps what’s been topical near-term has been biopharma and it’s — I mean, the comps, I mean, it’s been phenomenal. You guys grew mid-teens coming off 25% comp, I think, maybe an average of 20% the last two years. How differentiated is Thermo? I know you touched upon this integrated offering, but what differentiates Thermo and where are you gaining? Is this across like every single biopharma end market or are there some jewels here within biopharma?
Marc Casper
Yes. So when you think about our performance in pharmaceutical and biotech, we’ve been growing mid-teens this year. And actually, if you go back over a number of years, that’s about the rate that we’ve been growing, right? So it’s not a short-term phenomenon, where our customers have really appreciated a trusted partner status that we’ve earned over many years of helping our clients achieve their innovation goals and achieving their productivity goals, whether that’s the emerging biotechs or the largest biopharmaceutical companies in the world. They’re all our clients and we help them achieve the mission that they have.
When I look within our business, today, it represents about 60% of our core business. It’s our largest end market. And we are a key enabler, whether it is our clinical research or pharma services offering, our CDMO capabilities, whether it’s equipping and stocking all of the research labs through our Fisher Scientific channel, whether it’s providing enabling technologies like our bioscience reagents or in the production side of the equation providing the bioproduction technologies that help our customers deal with the shift from small molecule to large molecule, which is much more intensive in terms of the usage of life science tools. So it really is an incredible end market, and we’ve been gaining share over a long period of time and are incredibly well positioned going forward to support that customer base.
Vijay Kumar
And I think on that last point, Marc, this bioprocessing, within the overall 60% pie, I think it’s come up — some of your peers have spoken about this, investors are focused on this. On the last call, you noted it’s maybe 10% of company revenues. But how are you — I know within that, it’s upstream, downstream, maybe at this point in Thermo plays in every — there is no upstream, downstream, but where does Thermo play in? And why should stocking dynamics not be an issue for Thermo based on where you play in the market?
Marc Casper
Sure. So Vijay, maybe helpful for me to do a little bit of framing about what’s our role in bioproduction and then zoom into the shorter-term dynamic, right? So as you said, it represents about 10% of our revenue. We’re an industry leader in cell culture media and single-use technologies and also have a rapidly growing position in purification resins, right? So that’s where we play within the segment. And we’re a leader in two and a rapidly growing participant in the third segment.
When I go back and I think back over a long period of time, this is the fastest growing of our businesses within the biotech and pharmaceutical sector, right? So if we’re saying we’re growing mid-teens, this is growing several points faster than that and pretty consistently, sometimes a little more, sometimes a little less. But it’s accretive to the average, but it’s not like wildly different, but — so it gives you a framework to think about it. And that’s true in this year as well. That’s true in the first half, it’s true in the third quarter. The business is performing at a very high level.
So I look at what some of the other players have talked about on what’s going on and in terms of stocking dynamics and those things. And what I would say is, probably a function of what’s the mix between COVID and non-COVID within one’s portfolio. And based on the dialogues we have with our customers and what the percentage of the total was COVID, which is relatively modest for us, we think that our customers, in general, have an appropriate level of inventory to navigate the environment that they’re in.
And my assumption is that this will continue to be a very strong end market over the next year, but a phenomenal one over the next many years. That’s how I would think about it from where we are today.
Vijay Kumar
That’s helpful, Marc. And just in terms of given those carriers, that Thermo plays in cell culture, single-use, I mean, correct me if I’m wrong, but in fact in my mind that feels like these are specific products for specific drugs. They can be interchangeable, but even if someone were to stock, it’s not that I can repurpose them to other areas. Is that a fair statement?
Marc Casper
Largely true, yes. I’m sure there are certain instances where certain things are reusable, but largely, they’re for a particular production process. So when you think about who is buying our products and where the wins are and what’s the mix of revenue, we have pretty good visibility into who’s got what and why. And so therefore, we feel well positioned in terms of what our outlook is for that business.
Vijay Kumar
Understood. And just based on all of these commentary, it looks like Thermo clearly is in a different space, right, when it comes to this bioprocessing and stocking dynamics. Thermo is positioned differently. It’s seeing a different trend versus the other players, so would that be a fair statement, Marc?
Marc Casper
Yes, you know, it’s hard for me to know exactly what’s going on. Obviously, if you’re a super narrow company and this is your only business and you win a lot of COVID-related activity, you’re going to have a hangover. We have been able to manage that quite effectively, right, and in total across all of our vaccine and therapy activity across here as well as in biosciences and pharma services. Last year, we did $2 billion worth of revenue supporting those medicines and vaccines and this year, we’re on track to do $1.5 billion. And when I think about, that’s all part of core revenue. We’ve been able to migrate the first $500 million to other activities within core and deliver 12% growth, right, in core, right? So — and we’ll continue that migration as demand comes down over time. So I feel very good about our ability to navigate that.
Vijay Kumar
Yes. That’s helpful. I did have a vaccine therapeutic question, but before we get there, I want to knock off is based biopharma and CROs and CDMO space. And in the CRO space, again, it’s been pretty volatile. There have been cancellations. Again, different companies — it’s not a consistent message. Different companies are seeing different things, right? But PPD for you, it’s grown 14%. That’s above your model. Certainly, it feels like it’s about industry from my perspective. When you think about the outlook, right, is there anything on the macro side, cancellations or perhaps early stage biotech funding, et cetera, that should be a cause for worry and how should we think about this comp, 14% comp for ’23?
Marc Casper
Yes. So for us, I mean, our job, as you know, Vijay, is to create hard comps, right? That’s actually what we’re paid to do. We’re not paid to have easy comps and then therefore say, oh next year will be super easy. Right? That’s actually what we’re paid to do and that’s a good thing, right? And the good news is actually the 14% comp is easier than the one that we have versus the prior year. So it gives you a sense of how well the business is performing.
I feel very good about the outlook for this business. Our authorization performance is very strong. The book-to-bill looks really good. Actually the synergy pipeline and wins, which are kind of a longer term because it takes a while to flow into revenue, we’ve had really substantial synergies on the revenue side. And that really is coming in several different areas, right, which is why I’m so confident in the growth and performance here. We’ve had customers that are long-time loyal Thermo Fisher customers. But I would say PPD was a qualified supplier but not a large share of certain customers for whatever reason. Those customers have given us the opportunity to win business, all right?
So leveraging those relationships to win new business, we won some very meaningful trial activity. right? And that will show up in the numbers in ’23 and beyond. But we’ve also won a lot of really interesting new studies where we’re bringing combined clinical trials packaging and some of the CDMO services into the offering that allows customers actually more efficiently and quicker time lines to bring a medicine through the process, and that’s winning business as well. So I feel very good about the growth outlook.
In terms of the other players in the industry, what I would say is a couple of the large players, they’re delivering really solid results. And then you have a lot of noise in some of the other players, right? So actually, I think the industry is quite healthy in terms of what the outlook is for the CRO services. And I think we’re clearly growing faster than the others and, which denotes another year of share gains for the business.
Vijay Kumar
Understood. And just maybe one last PPD question, Marc. You guys don’t disclose book-to-bill metric anymore, right? But you did bring up authorizations, new wins. So is there somewhere to put a finer description around what those wins mean? And I’m assuming given PPD’s business mix, there is no early stage or pre-revenue mix. Should be like very, very small for PPD.
Marc Casper
Yes. We actually — those are important customers for us, right? We do serve the emerging biotech. We have a compelling offering. When we look at our performance, Vijay, we’re seeing good performance in the various subsectors of the book of business being large — biopharma is doing well. But we’re also doing well in winning in the emerging biotech customer base as well. The book-to-bill is very strong, well, well, well over 1 and would give you confidence that we have a strong growth outlook for ’23 and beyond.
Vijay Kumar
Fantastic. And I think that gets us to the last piece here on the biopharma side. Years ago when Thermo acquired Patheon, and I’ll be honest, I didn’t appreciate the idea. It’s really has been — it’s been phenomenal. But again, like what some of your peers have spoken about, in an industry pulling forward delivery schedules as perhaps driving business strength. And there is some volatility in numbers here, right? Comps are an issue, et cetera. How is Thermo thinking about capacity within your CDMO space? And any sort of variables we should think of?
Marc Casper
Yes. So we’ve built something that nobody else has, right? And just like the whole company, right, we’ve been executing a very specific strategy over a long period of time. So we’ve been in the CDMO business for — since 2006, right, when we combine with Fisher Scientific. We’ve been a leader in the clinical trials, packaging, manufacturing for many, many years, right? When we acquired Patheon, we bought a platform that we thought we could scale meaningfully.
And that’s what we’ve done. So today, we have leading capabilities in both drug substance and in drug product, small molecule, large molecule, and we built out a very strong presence in advanced modalities, including viral vector services for gene therapies, cell therapy services as well as nascent positions in plasmids, strong position in mRNA. So we built out a complete suite of offerings and have been able to scale our capacity in a variety of different ways by taking over facilities from some of the larger companies that had excess capacity, doing some bolt-on acquisitions and investing in capital to expand the network so that we have just phenomenal choice for our customers on whatever their needs are.
And why am I giving you that large preamble? For the bigger customers, what they really are migrating to a relationship with us is we’re going to do x volume of relationship. And we don’t have a crystal ball, and therefore, we might sign up for sterile fill finish right now. But in three years from now, if we don’t use as much sterile full finish, then we’re going to work on other things with you and shift those commitments because you have exquisite capabilities, right? And we’re really formulating some really interesting relationships around that business. And I feel really good about our competitive position.
The business is having very strong growth, is a nice contributor to our growth this year. We’re winning some very large pieces of business that sets up for a bright future. And I really have never seen customers pulling forward demand because they don’t want excess inventory of finished products. So when I think about the — you’re in a — I wouldn’t say just in time, but during a continuous manufacturing process to keep their supply chain full. So we’re not seeing any dynamic of customers bringing in demand or creating an air pocket for the future, but rather, actually, the demand and new wins has been very steady there. So I feel great about that business.
Vijay Kumar
That’s fantastic, marc. And you did bring up vaccine and therapeutics and how Thermo has migrated that $0.5 billion of transition from vaccine to base business in fiscal ’22. What difference — is there your mix of business in the vaccine and therapeutics? How different is that versus your peers? Is it…
Marc Casper
I think it’s quite different because we actually have 3 main activities, and we actually do both vaccines and therapies, right? So when I look at it, of the $1.5 billion this year, it’s the sterile fill finish activity for the vaccine. So that’s putting the vaccine in the final dosage form, a very difficult activity to do. Actually, we’re a leader in sterile fill finish because it’s a super high-quality standard work. The second activity is providing enabling technologies for the production of vaccines and therapies. Those are the nucleotides enzymes, things of that sort that our scale biosciences business provides. And then it is the purification resins, the single-use technologies as well within bioproduction.
Those are the 3 set of activities. And when I look at the mix of COVID versus non-COVID, we were able to manage as such that COVID never became such a large proportion of the total that we’ve been able to transition smoothly the first $0.5 billion of revenue to other core. And as demand comes down over time in ’23 and beyond, we will continue that evolution within the core. And all that was modeled in our long-term 7% to 9% growth. So we assume that by the end of ’25, all of that had transitioned and it will — we’ll manage through that effectively.
Vijay Kumar
Got you. And since you brought up the transition, this year, we saw $0.5 billion transitioning, right? I think your peers are assuming maybe a 50% drop. Is that how we should think about Thermo business, of $1.5 billion going to $750 million for next year? And is that transition manageable?
Marc Casper
I mean, we’ll know the — we’ll have a really good — just like this year, we had a really good hand on the number. If I think about the $1.5 billion — we’re at $1.3 billion at the end of September, right? So we’re on track to hit $1.5 billion. And we’ll have really good visibility at the end of January when we do our guidance for the year about what is the customer demand patterns, and then we’ll manage through that transition. So you can make whatever assumption you want and assume that we’ll be able to do a good job of migrating it during the course of the year to other activities.
Vijay Kumar
Understood, understood. And then you did bring up the macro, Marc. Industrial and applied, again, it’s growing very strong at a mid-teens clip. What’s driven the SaaS trend rate? And when I think about the last cycle versus the current cycle, I know as a percentage of revenues, it’s smaller. But has the mix within the segment itself changed? And how should we think about the segment in a recessionary environment?
Marc Casper
Yes. So Vijay, so let’s start with how the business has shifted. What is it today and then sort of what are the prospects, right? So in the — going into the last recession or the financial crisis, it was roughly 30% of our revenue, industrial and applied. It’s 13% of our revenue today, right? So a very — a much smaller exposure. And secondly, the mix of the business is quite different, right? And the way I would think about it is you have — a meaningful part of that business is around semiconductor and material science, kind of new materials, batteries, the energy grid transition driven by electromicroscopy.
And that’s on a different cycle actually than the economy, right? Because it’s semiconductor R&D and its energy transition is driving that. So it’s not even the demand for semiconductors, but actually how nodes are developing is what drives the demand for that business. So that business has performed very well as good prospects. And then the rest, you could just say, is a smattering of QA/QC labs and food safety, environmental monitoring, all of the different things. And that’s more, I’d call it, GDP-focused, right?
And that business, obviously, has been doing well, right? And if the economy changes, then it will feel some differential pressures, but at least through the third quarter when we reported last, that business is coming, right? So it hasn’t translated into any particular change in trajectory. So it’s a good business for us. It’s not a huge proportion of our total, and we’ll do a good job navigating whatever the economic environment might be.
Vijay Kumar
Understood. And sorry, one last one, that 13% would you say like half of that is semi and battery testing, which is on a different part of the cycle, which should be unrelated to GDP, any sense of sizing on what that says?
Marc Casper
I’d say a little less than half is the way we [indiscernible].
Vijay Kumar
Okay. That’s extremely helpful. And then since we’re on this macro topic, I think slowdown in Europe is something some of your peers who brought up. Any — what trends is Thermo seeing in the region?
Marc Casper
Yes. And maybe this might be a good point to step back for a minute, right? And if I think about the third quarter in aggregate, right? And I always look at what’s others in the industry, what are they saying, right? And obviously, if you look at our results, it was an excellent third quarter, right? And broad-based strength, no matter how you cut the business, pretty much everything was, right? And that’s been similar to the previous 3 quarters.
But when I look at the industry and I look at company-specific commentary, how do they deal with guidance, did they meet or not meet, did they raise or not raise just kind of the view, Q3 was super noisy, right? So there’s lots of questions. If you take out Danaher, right, excellent company scale and you take all of the companies are sort of reported by like the first week of November and you look at all the noise and the thing and you added up the market caps, so all those companies are smaller in ours, right?
So as an investor, like, “Holy cow, there’s all this noise.” And at Thermo Fisher is our duo navigate whatever the environment is and do it better than anybody else and just deliver great results for our shareholders. And we hold ourselves accountable to that. So when I think about just the level of noise and you’re just trying to figure out what is going on in the industry I think a lot of it can be execution, right? Some of it — I’m sure there are real challenges, but some of it is just some companies execute better than others and you’re seeing a pattern of noise.
Europe, when you take out the testing revenue because we have very high testing share in Europe and look at core, core is actually very strong in Europe, right? It’s been very strong all year, right? So the basic activity of research, the 60% of the revenue that’s pharmaceutical and biotech in Europe has been very strong. So Europe, the numbers are good, right? The macroeconomic situation in Europe is very challenging, right? So for sure, right, you’ve got a war, you have energy disruption, you have inflation. You have all of those challenges. Our end markets where we’re exposed has been very strong, right? And that doesn’t mean it won’t change at some point in time.
But at this point, Europe has been a good market for us. And we’ve been able to manage through the various challenges in terms of energy supply to our sites and all of those things that a global company will do. And I feel reasonable that we’ll navigate a European environment that clearly will be challenged, at least in the first quarter of ’23 in terms of the winter and those issues.
Vijay Kumar
Got you. And then switching gears more to academic and down end markets Thermo Fisher. It’s been more Steady Eddie, mid-singles, and I always thought about this as NIH budgets as being a proxy. Is that mid-single digit outlook, is that something that’s seen as sustainable just given your exposure to NIH or any variables we should be thinking of?
Marc Casper
Yes. If I think back about academic and government, I take a 20-year perspective. It’s a low to mid-single-digit end market. It’s pretty much always a low to mid-single-digit end market. Yes, I can point to a couple of years over the ’20 that it was less than that, this frustration year. I think that was in ’13, something like that. I mean, occasionally, it varies off of that, but it’s in that range. When I think to ’23, three good facts, right, that I think are positive. The CHIPS and Science Bill is a good thing, right, in terms of funding for the academic research market in some of the fields for our industry. That’s a positive.
The European budget around Horizon Europe is planned to be up a couple of points. So in what is the most challenged of the economic environment, that budget is growing. And China, which is also an important market from an academic and government perspective, they have a large stimulus program going on right now for the academic institution. So I think those are three good factors that says that the environment that we’ve been seeing has some nice kind of green shoots, if you will, going into ’23.
Vijay Kumar
That’s helpful. I know last time around we had sequestration, but it looks like that none of that should be an issue, at least as we look at ’23.
Marc Casper
I bring up sequestration, not about the budget. I bring it up that literally over my 20 years, I can think of 1 year that it was sort of off of the trend line of the sort of low to mid-single-digit growth, not the specifics of that. So that gives you a sense of the resiliency. And obviously, there are times a little stronger, there’s times it’s a little weaker. But at least the things that we can look at now seems like the environment should be reasonable. It also represents about 14% of our revenue. So I think that gives you at least some framing as well.
Vijay Kumar
Absolutely. And I know some others have spoken about customers taking vacation, lab activity sort of a slowdown more. I mean, I’m looking at — you’ve got Thermo’s numbers, it’s not apparent, but just maybe address the topic.
Marc Casper
Yes. I mean, through the third quarter, which is the last time we reported, activity was strong. So there’s nothing to read into that. I mean, we’ll report the fourth quarter in another couple of months.
Vijay Kumar
Got you. And then maybe on the last end market here, health care and diagnostics. It’s a little bit harder for me to understand what’s going on with the business just given COVID comps, make it very hard. Once we strip our COVID diagnostics, do we know what the underlying core growth has been for the segment?
Marc Casper
It’s bouncing between mid- and high single-digit core. So if you think about what’s going on, we’ll do about $2.8 billion worth of COVID testing-related revenue this year. We’re assuming that the fourth quarter moves down to the endemic run rate of about $100 million a quarter so that we get down to that sort of bottoming out. And so it’s been an important societal contributor in this year was obviously much larger in the previous couple of years. So we’re working our way through that. But the underlying business has been strong, right? And that is the sepsis biomarker or leading allergy and autoimmunity franchise, transplant diagnostics. And I’m super excited about binding site get added to the portfolio in the first half of next year.
Vijay Kumar
Understood. And how should we think about utilization environment, Marc? I know allergy testing, et cetera, given travel restrictions, perhaps we’re still below pre-pandemic levels. Should we think about a normalized environment next year for that part of the market?
Marc Casper
Yes. What I would say is there’s some level of lower activity on routine medical procedures, and there have been some level of COVID disruption. So that probably means there should be more volume, a little bit higher volume than what we saw in this current year, and I think we’ll see how reimbursement other factors are. But we haven’t fully recovered in all lines to prepandemic, but we’re largely there is where I would think about it.
Vijay Kumar
Got you. Got you. And you brought up the $100 million of net run rate for Q4. We have seen sporadic bursts just from fluid like respiratory spikes here in Q4, $100 million seems conservative. But given that’s where the guidance is, should we be — should I just analyze that number and think of that as the end of next year for next year?
Marc Casper
I think that’s a reasonable assumption is to annualize the $100 million. We’re obviously going to support whatever our customers needs. If it’s a little bit more, then we’ll obviously flow that through and that flows through at about 40% on the positives. I think you’d have to see the pandemic take a radically different turn for a wildly different number, right, where you’d say, no, it’s not $400 million, it’s some multiple of that, right? Could it be a little more, a little less sure? But I think it gives you enough of a, you can model something around that and say, I got it, and that’s sort of what it is and I’m knocking on the table. Hopefully, it’s not different than that, meaning that pandemic has taken a really bad turn and volumes are way up.
Vijay Kumar
Got you, and sticking on to diagnostics, Marc, since you brought the binding side, this is — the headlines, right, can be sometimes misleading. For me, when I looked at 10x revenue multiple, that didn’t sound like a Thermo kind of deal. But clearly, I’m missing something. So help us understand why that Thermo is excited about binding site?
Marc Casper
Yes. So first of all, it’s a business that we’ve tracked for more than a decade, right? So it is a great specialty diagnostic business. Patients benefit hugely from its differentiated capability. It’s the standard in the medical journals around multiple myeloma. And it’s a business that has $220 million of revenue. It’s growing around 10% a year. It has very strong operating margins, well above our company average. And it will be an acquisition that is accretive by about $0.07 in the first year of ownership. So that’s a nice fit.
But what’s really interesting about the transaction is when I think about — we always have a busy pipeline, right? And we know what we would buy. And sometimes, it’s about what are the circumstances of when you can do a transaction when it’s an overlap between buyer and seller. And you have a really interesting dynamic where it’s a U.K.-based company, so the costs are largely pound-denominated.
The revenue is largely dollar and euro-denominated. And we were able to take advantage of the weak pound, and we’re able to buy the transaction what we think at a favorable moment time, in terms of what the exchange rates were. We’re able to deploy our pounds to buy the business. And so I think that was interesting in terms of the moment. But also in an environment where interest rates have really gone up, the other competing bidders are often private equity, right? It’s been owned by private equity for a while and they were not there, right?
So we were like the fire in town. We were proactive in terms of it, and we knew that we would have a favorable environment from a competition standpoint and we think a favorable moment in time on when to do the transaction. So we’re excited about it. We understand the business well. We know the management team well, and we look forward to welcoming the colleagues of the binding site to our company in the near future.
Vijay Kumar
Got you. That’s helpful perspective and context. Sticking on to that M&A topic more, you did mention pipeline, it’s always active, and you also did mention the circumstances in the bid as spread whether, has it narrowed down? I know earlier on there had been an issue, where it’s been 12 months and some of these stocks are down 50% to 75%. Is the market environment more amenable to see some large deals in life science tools space?
Marc Casper
Vijay we’re always busy, right? And we’re always looking at things. We’re always in dialogue, and there are periods of time when things get done and there are periods of time when it’s slower. And I like this environment, right? Our company is over 100 years old. Our plan is to be a leader for generations ahead, right? So we worry less about what’s the momentary timing of the economy or so forth. But if you’re a seller, there’s actually quite a wide range of outcomes of what the next couple of years look like. And if your time horizon is not in the many decades but rather in a few years, I do think you’ll see some companies that are willing to transact, right?
And others that have a long horizon, will say, no I’ll wait it out and things will get better at some point in time or it won’t play out as a negative. But there’ll be companies that I believe ultimately will say, the scenarios I don’t like, and I’d rather take my chips off the table. And for a company like Thermo Fisher incredibly strong balance sheet, a great track record and have been actively evaluating the industry for an incredible long period of time, we’re well positioned to capitalize on this opportunity.
Vijay Kumar
Got you. And just given the last year transactions, Marc, we’ve been — we’ve sized up in biopharma, which is a meaningful chunk. Should we perhaps now look at the other segments? Is that perhaps — I don’t know what the right term is, less ignored children or perhaps other areas from an M&A perspective or how you’re thinking about the mix of revenue?
Marc Casper
I’m wondering a little bit less about managing to the exact mix of the different pieces. The way I think about it is the most — obviously, the criteria is the same, right, which is strengthen the company strategically, would be appreciated and valued by our customers and clearly creates shareholder value, right? So that’s high-level criteria. I mean, we’re not going to get bigger for bigger’s sake. We’re going to do things to strengthen the company, better position us with our customers and creates value for our shareholders along the way.
When I think about how we actually select, it’s really based on risk adjustment, right? What we want to make sure is that we can live with a downside case on a transaction, right? Because the ability to actually do transactions over a long period of time is don’t do bad ones and you earn the right to do the next good one, right? And if you do bad ones, you lose the right to continue on with the strategy.
So we do study extensively in diligence what can go wrong, and we will buy transactions or buy businesses that ultimately we feel that we can live with the downside case, not that we want the downside case to come through. It’s our job to avoid that. But should it happen, it’s accepted, right? And therefore, we’ve done a lot of pharma and biotech-related transactions because we knew the revenue synergies would be substantial and they’ve materialized, right?
But that doesn’t mean that there won’t be other transactions in serving health care diagnostics or industrial and applied right? It’s just going to — we would just have to characterize the risk in such a way that we feel like, yes, those will be good transactions if the downside case comes there.
Vijay Kumar
That’s extremely helpful in giving us a peek in how Thermo looks at deals. Maybe in the last couple of minutes here, Marc, we’ve had some discussions on the segments and the drivers here. When I look at all of those together, it seems like fiscal ’23 should be within that LRP framework. We shouldn’t see a big deviation from LRP framework. Is that a reasonable statement?
Marc Casper
Yes. So if I think about what’s the LRP framework, let’s fast forward for a minute to in 2025, right? We said our core growth is going to average in the 7% to 9% range, that we’re going to have the mid-teens EPS growth through that period. You’re going to have strong operating margins exiting that period, we will have transitioned all of the COVID-related activities by the end of that period and both throw it. So when I think about next year, we’ll finalize our guidance at the end of January, early February. We’ll have the best view on how the year finished, what’s our jumping off point, what’s the end markets outlook will all be embedded at that point.
The things that we have given assumptions around is testing moving to an endemic level, and we gave the flow-through on that. We talked about what FX, the pull-through was. And I think we said it’s about a $1 billion headwind at the end of October, and that flows through at about a 30% range. FX has moved a little bit more favorably in the last — it’s very volatile. Well, it’s actually less of a headwind right now. But who knows. It will be what it will be in January, and we will just translate the number, but it will be a little bit less of a headwind if we were giving guidance today.
And then the core business would flow through at — if you’re assuming in the 7% to 9% range, it flows through 40 to 50 basis points of margin. We’ll figure out the right assumption on core once we get into the year. But in general, we think about 7% to 9% is reasonable in most economic environments. If the economy was horrible, you’d be below. If the economy is as strong as we’ve enjoyed, you’d obviously be above it, right? We’re doing 12% this year. So we’re not tapping the 9%, and we’re not going to sign up to something dumb on the 7%. But I think if you’re just modeling right now, that’s a reasonable number to take.
Vijay Kumar
Fantastic, Marc. I think with that, we’re almost at the end of time here. It’s been a very helpful conversation, but if you did want to make some closing remarks, we do have a couple of minutes.
Marc Casper
Yes. So Vijay, first, thanks for doing this and inviting us. I’m super excited as we’re wrapping up ’22, the company is entering ’23 with great momentum. We have integrated a large acquisition, and the combined team has made the business better. Customers are choosing us. And what’s awesome about this industry is everybody is growing. We’re just growing faster. We’re doing it consistently. We’re gaining share. But everyone is doing okay, and we love the fact that we’re just the fastest-growing business in this industry and a great track record of capital deployment, and super excited about what the future holds. And we’ll manage through whatever the headaches of the world throws at us and turn it into an opportunity ultimately.
Vijay Kumar
I’ll look forward to tougher comps in 2023, Marc. Fantastic, thank you.
Marc Casper
Absolutely, Vijay.
Question-and-Answer Session
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