[TMO] Thermo Fisher
Most of the time the subjects of my writing are more similar than they appear. They rhyme with or operate in the same ecosystem as something I’ve looked at in the past, so I can leverage prior knowledge to understand them. But every so often, as in the case of Dow DuPont or Nvidia, I cast a fresh line into unchartered ocean. You know how acquisitive companies will sometimes make a huge “platform” acquisition and then absorb lots of smaller companies into it? Likewise, I will sometimes publish a big post in a new domain and incrementally layer knowledge around that investment. Siddhartha Mukherjee’s The Gene sparked my interest in genetics and cell biology when I encountered it some years ago and since then I’ve read just enough to place me firmly in the Dunning Kruger phase of the knowledge acquisition journey, where what I think I know vastly exceeds what I actually know. We’re about to find what happens when a generalist dummy meets a dynamic industry saturated with product names he can barely pronounce in a domain he only superficially understands.
Then why do this at all? Because I think even industries that appear inscrutable to outsiders often contain a few pockets of activity that are amenable to analysis by a committed generalist. A company can be inside one’s circle of competence even if it operates within an industry that largely falls outside it. In semiconductors I shouldn’t be analyzing companies whose investment case is predicated on a technology bet or a turn in the inventory cycle. I’m not going to be the guy who calls the bottom in memory, I get that. But that doesn’t foreclose Texas Instruments, whose hundreds of thousands of SKUs are designed into place for decades across a wide range of industries and where a 5+ year investment thesis doesn’t require vigilant comparisons of feeds and speeds. Likewise, biotech and pharma companies are mostly outside my circle. I don’t have the skillset to evaluate the progression of drug pipelines or assess the merits of new therapies. But the less sexy business of providing the instruments, ingredients, and services that pharmas and biotechs use to develop and manufacture those drugs? That could work.
(This is the first part of a two-parter, with a short part 2 touching on Danaher, which has a very similar product mix, and maybe one or two others. Most of the substantive points are going to be here in Part 1).
Thermo Fisher reports in four segments.
Life Sciences
The Life Sciences segment was established in 2014 with Thermo’s gigantic $15bn acquisition of Life Technologies, itself the product of the $7bn merger between Invitrogen and Applied Biosystems in 2008. Through this business, Thermo manufactures and sells instruments and consumables that researchers at universities, hospitals, and pharma/biotech companies use to discover, develop, and manufacture drug therapies.
You may recall the central dogma of molecular biology: information encoded in genes1 is transferred to messenger RNA (mRNA), then translated into amino acid sequences that build up to proteins. Another way to say this is that genes express themselves in mRNA molecules and proteins. Those expressions change when a cell interacts with certain drugs. Those interactions can be monitored by PCR technology, which tracks changes in the concentrations of targeted mRNA pieces2. Thermo sells more than 2mn pre-designed gene expression assays, with primers that bind to specific nucleic sequences, as well as the reagents, wash buffers, and centrifuges needed to isolate RNA from cells and remove contaminants before the PCR process can even begin.
Beside PCR instruments and consumables, Thermo also sells flow cytometers that can be used to infer the size and shape of a cell based on how the laser light interacting with it scatters, as well as differentiate cells based on the colors emitted by the fluorescently labeled proteins on the surface of a cell as it passes through the laser. These instruments are also accompanied by a host of consumables, including filters that clear out cell debris; tubes that hold a variety of suspended cells; reagents and antibody kits to label the different protein permutations so they can be detected by the lasers; fluids that transports each individual cell through the flow cytometer at a constant rate; and tubes that collect the sorted cells after they pass through the laser.
Also included Life Sciences is a next generation sequencing machine (Ion Torrent), carried over from Invitrogen/Applied Biosystems, that can be used identify genetic mutations associated with diseases or link genes to the creation of certain proteins. The viral RNA sequence of SARS-CoV-2, for instance, was famously used to identify the gene that expresses the spike protein that binds to host cells, enabling the creation of mRNA vaccines3.
Besides the instruments and consumables used to develop new drugs, Thermo sells the ingredients that pharmaceutical customers use to manufacture them. The bioproduction (or “bioprocessing”)4 work flow that converts living cells and their components into drug therapies is illustrated below:
In a process called transfection, foreign DNA or RNA is introduced into cells to produce a certain enzyme, antibody, or other protein product that can be used to treat diseases. The goal of bioproduction is to collect those products, which can be excreted by cells or contained inside the cell itself. In other words, bioprocessing manufactures the cells that in turn manufacture the molecules we want.