Thermo Fisher: 800-Pound Gorilla in Life Science
Thermo Fisher Scientific (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, suggests growth stock expert Peter Staas, contributing editor to Capitalist Times.
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.
The company provides everything from mass spectrometers, cryo-electron microscopes and other advanced research equipment; it has the largest installed base in the industry, while its newest generation of tools tie into the cloud to enable collaboration and analysis.
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.
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.
Acquisitions also remain a big part of the company’s growth story; in mid-2016, the company announced an agreement to purchase FEI Co, a leader in high-end electron microscopy.
FEI Co’s innovative cryo-electron microscope technology enables high-resolution analysis of proteins—a key to better understanding how cells function that could have important implications for how we study cancer or infectious diseases.
More recently, Thermo Fisher Scientific purchased Patheon, one of the largest players in contract drug development and manufacturing services.
Management estimates that only 25 to 30 percent of the $140 billion that the biopharmaceutical industry spends annually on formulation, development and manufacturing is outsourced to a contractor. This proportion should grow over time, providing Patheon with a strong tailwind.
Thermo Fisher Scientific generates significant free cash flow from recurring revenue and offers exposure to several powerful growth trends. The stock trades at an elevated, but not overly demanding valuation.
The stock rates a buy up to $195; prospective investors may want to ease into the position to take advantage of any weakness that could result from concerns about research budgets at universities and the National Institutes of Health.