• Energy and Income Advisor
  • Conrads Utility Investor
  • Capitalist Times
  • Twitter
  • Seeking Alpha

Health Care Stocks

Equipping the Biopharma Revolution

By Elliott H. Gue, on Sep. 28, 2017

Thermo Fisher Scientific (NYSE: TMO) has built itself into the 800-pound gorilla in life-science tools and diagnostics through constant innovation and a history of savvy acquisitions that offer exposure to powerful secular growth trends.

The company last year generated $18.7 billion in revenue from four end-markets: pharmaceuticals and biotechnology (34 percent), academic and government (25 percent), diagnostics and health care (24 percent), and industrial and applied materials (20 percent).

Most of the tailwinds expected to drive Thermo Fisher Scientific’s above-market revenue growth of 4 to 6 percent come from the pharmaceutical and biotechnology side of the business.

On the instrument side of the business, the company provides everything from mass spectrometers, cryo-electron microscopes and other advanced research equipment to Erlenmeyer flasks, reagents and pipettes. Thermo Fisher Scientific has the largest installed base in the industry, while its newest generation of tools tie into the cloud to enable collaboration and analysis.

The equipment and instrument business generates strong recurring revenue from consumables and single-use items, as do the company’s service offerings, which include handling clinical trials and contract drug development, manufacturing, and packaging.

Management has built a behemoth that aims to grow its revenue by 4 to 6 percent annually through 2020 and its adjusted earnings per share by 12 to 15 percent.

Favorable dynamics in the pharmaceutical and biotechnology industries will drive much of this growth. Aging populations and longer life expectancies in the developed world will fuel drug demand, a boon for Thermo Fisher Dynamic’s volume-based services. Meanwhile, pressure on health care reimbursement incentivizes pharmaceutical companies big and small to outsource more of their operations.

A revolution is also underway in the pharmaceutical industry, with companies increasingly focused on developing biologics—drugs synthesized using biological processes such as fermentation. The complexity of discovering, developing and manufacturing these treatments drives increased demand for equipment, consumables and outsourced services.

Thermo Fisher Scientific also provides investors with leverage to the emerging trend of precision medicine, a practice that considers a person’s genetic traits to diagnose health problems earlier and develop a personalized treatment regimen. Rapid advances in genetic testing over the past decade have lowered costs and brought these technologies into the midstream, providing Thermo Fisher Scientific with a durable tailwind.

The company has also established an impressive footprint in emerging markets where rising household incomes have increased demand for health care services, fueling ongoing investment in lab equipment and instruments. Consider that many of the diagnostic tests we take for granted in the developed world have yet to be ported over to emerging markets. China accounts for about half of Thermo Fisher Scientific’s emerging-market revenue and 10 percent of its overall sales, which continue to grow in the high single digits for life science tools and diagnostics.

Further upside comes from increasing regulation of air, water and food quality; Thermo Fisher Scientific produces equipment that tests for and removes contaminants.

Consolidation Station

Acquisitions also remain a big part of the company’s growth story, with management focused on opportunities where its global scale and existing platform can unlock significant synergies. Management also deserves plaudit for the timing and strategic merit of two of Thermo Fisher Scientific’s larger recent deals.

Ready to discover your investing potential?
Try Capitalist Times Premium Risk-Free Today