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Morningstar | Pharmaceutical and Biotech Channel Continues to Deliver for Thermo Fisher

While bigger is not always better, Thermo Fisher nonetheless maintains its torrid pace of acquisitions, with the ultimate goal of becoming a go-to provider of life science instruments and consumables. Most recently, the firm acquired Affymetrix, FEI, and Patheon. We remain cautious regarding this growth-via-acquisition strategy; we have yet to see evidence that more than $30 billion the company spent on acquisitions since 2010 has yielded any benefits to its returns on invested capital.The acquisition strategy, however, has allowed the firm to significantly broaden its product offering, which in turn allowed it to steadily gain market share. Its one-stop shop approach affords it pricing flexibility and results in strong customer relationships. The company finds a receptive audience with large pharma clients, which see sizable benefits in the simplified procurement process Thermo Fisher offers. As a result, the firm's penetration of pharma is expanding, which we expect to continue even as we see deceleration in biopharma spending growth from its torrid current levels.Thermo Fisher's emerging-markets presence is also impressive and is growing rapidly (more than 20% of total sales). The firm significantly expanded its manufacturing footprint in these areas, allowing it to compete effectively with indigenous manufacturers, and its brand carries great power among the researchers. Given the ongoing commitment to research (particularly in life sciences) by emerging-markets governments, the company's goal of expanding its emerging-markets business by 8%-10% annually appears achievable. The firm's efforts have yielded organic market share gains, but its core strategy remains growth through acquisitions. With such an aggressive and clearly stated capital-deployment strategy, there remains a risk that the firm could overpay for yet another sizable deal, fueled by cheap financing. That said, the ever-expanding presence in virtually all areas of life science research, in part achieved by acquisitions, affords Thermo Fisher an opportunity to capitalize on the strong secular growth we expect in this sector over the next decade.