Thermo Fisher Scientific updated its annual profit forecast on Wednesday, raising the lower end of its earnings projection for the third time this year. The company is betting on stronger demand for its tools and services in drug development. Known for its laboratory equipment and supplies, as well as its testing services for the pharmaceutical industry, Thermo Fisher reported second-quarter profits that exceeded expectations, though revenue remained unchanged from the previous year.
Fitch says the company’s strong FCF generation and leading market positions in key growth markets should support robust EPS growth over the outlook period. Its diverse portfolio of products and services, with a high proportion of consumables and service revenues and steady end-market demand, reduces its cyclicality relative to peers.
Despite a more positive outlook, Fitch maintains Thermo Fisher’s rating at ‘A-‘ with a stable outlook. The agency notes that The agency notes that Thermo Fisher’s FCF generation should be sufficient to fund dividends, share buybacks, and bolt-on acquisitions while maintaining financial flexibility.
Fitch expects Thermo Fisher to continue to employ aggressive capital deployment, particularly concerning strategic M&A. Although this has historically contributed to higher debt levels and deterioration of credit metrics in the aftermath of leveraging transactions, Thermo Fisher consistently demonstrates a commitment to paying down large amounts of debt in the wake of these deals. This, along with a track record of consistently generating sufficient FCF to cover debt payments, has reduced the risk that the balance sheet will become strained from these initiatives over time.
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Contract drug manufacturers witnessed reduced spending from biotech clients in 2023 amid rising interest rates that led to a slowdown in the public funding environment for early-stage companies. However, some analysts expect a recovery in the sector as borrowing costs ease following expected interest cuts from the Federal Reserve later this year.
Biotech suppliers, including Thermo Fisher, Danaher, and Sartorius, benefit from renewed optimism in the sector as investors take a more positive view of the industry’s prospects. However, the industry faces broader challenges, such as the lagging Chinese market and global economic policy uncertainty.
Thermo Fisher, which generates more than $6 billion in annual FCF before significant acquisitions and divestitures, will have ample liquidity to fund operations and repurchase shares. The company has $3.1 billion of cash on hand and no borrowings under its $5 billion revolving credit facility, which matures in January 2027.
Thermo Fisher will retain steady access to the capital markets, allowing it to refinance most of its senior notes at maturity or sooner, Fitch notes. It will also have the flexibility to use its FCF to accelerate the repayment of outstanding debt. Excess debt repayment will be reserved for sizable acquisitions. Fitch views these as credit positives that help mitigate the negative impact of a potential credit market disruption. Ladder-structured maturity schedules and the presence of a revolving credit facility will also ensure that Thermo Fisher has the option to reduce its leverage. Thermo Fisher’s credit profile is further supported by a diverse, diversified product and service offering that spans geographies and end markets, reducing the risk of a material slowdown in the overall life sciences industry.