賽默飛世爾科技 (TMO) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2019 Third Quarter Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I'd now like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President of Investor Relations.

Mr. Apicerno, you may begin the call.

Good morning, and thank you for joining us.

On the call with me today is Marc Casper, our President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer.

Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading Webcasts and Presentations until November 8, 2019.

A copy of the press release of our third quarter 2019 earnings and future expectations is available in the Investors section of our website under the heading Financial Results.

So before we begin, let me briefly cover our safe harbor statement.

Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's quarterly report on Form 10-Q for the quarter-ended June 29, 2019, under the caption, Risk Factors, which is on file with the Securities and Exchange Commission and is also available on the Investors section of our website under the heading SEC Filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change.

Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

Also during this call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2019 earnings and future expectations and also in the Investors section of our website under the heading Financial Information.

So with that, I'll now turn the call over to Marc.

Thank you, Ken.

Hello, and good morning, everyone.

Thanks for joining us today for our Q3 call.

We delivered another great quarter, achieving strong financial performance while continuing to effectively execute our growth strategy to make Thermo Fisher Scientific an even stronger partner for our customers.

As you saw in our press release, we delivered excellent revenue and earnings growth.

It was another active quarter for new product innovation and we expanded our global capabilities to enhance our unique customer value proposition.

We also continued to execute our capital deployment strategy, completing strategic M&A to further strengthening our offering and return capital to shareholders through stock buybacks and dividends.

We carried our strong growth momentum into Q3 by capitalizing on the continued strength of our end markets and the opportunities we had to gain share with our customers.

We have a lot of highlights to cover this morning, so let me begin with an overview of our Q3 financial performance.

First, we delivered excellent growth in adjusted EPS, achieving a 12% increase to $2.94 per share.

Our revenue in Q3 increased to $6.27 billion, growing 6% year-over-year.

Our adjusted operating income increased 9% to $1.42 billion.

And we expanded our adjusted operating margin by 60 basis points to 22.7% in the third quarter.

So by all measures, it was another excellent quarter for us.

Now I'll give you more color on the quarter, starting with an overview of our performance in our end markets.

In Q3, market conditions continued to be strong and we delivered excellent growth.

In Pharma & Biotech, we had very strong performance in Q3.

We delivered another quarter of double-digit growth with strength across all of our businesses serving this end market.

We continued our excellent momentum here by leveraging our unique value proposition to help our customers accelerate their innovation pipelines and increase productivity.

In academic and government, we delivered mid-single-digit growth in Q3 and saw good growth in this end market across all of our major geographies.

Turning to industrial and applied, as we expected, growth here was flat in the quarter due to the very strong growth we delivered in Q3 last year in our industrially focused businesses.

It was good to see continued strong demand in our chromatography and mass spectrometry business from this customer set.

Finally, in diagnostics and health care, we grew in the high single digits in Q3.

We saw broad-based growth in our businesses serving this end market led by transplant diagnostics and immunodiagnostics.

So in summary, our teams continued to successfully execute our growth strategy.

We're clearly gaining market share and that's reflected in our strong results.

That's a good segue to a more detailed discussion of our growth strategy, which, as you know, consists of 3 elements: continuously developing high-impact, innovative new products; leveraging our scale in the high-growth and emerging markets; and delivering a unique value proposition to our customers.

We continued to make great progress in each of these areas in Q3 and let me cover some of the highlights.

First, in terms of new product innovation, we're focused on creating significant value from our leading R&D investment.

We are committed to helping our customers advance their work by continuously raising the bar on speed, accuracy and ease-of-use.

Q3 was another productive quarter for innovation, and we kicked it off with a strong showing at 2 major industry conferences in early August.

First, at the American Association for Clinical Chemistry, we launched new analytical instruments for the diagnostic laboratory that ultimately help clinicians make better decisions for their patients.

Our Thermo Scientific portfolio of U.S. FDA Class I devices now includes 3 new systems, the TSQ Altis and Quantis MD mass spectrometers and the Vanquish MD HPLC.

These instruments help customers in clinical labs meet their goals for sensitivity and throughput in a regulated environment.

Second, during the Microscopy & Microanalysis conference, we unveiled the new-generation Krios instrument in our cryo-EM platform for structural biology applications.

The Krios G4 makes it possible to obtain high resolution images of increasingly smaller protein structures and with greater throughput and reliability.

This instrument expands the market in structural biology by adding new performance features that makes it easier to operate for both new and experienced users.

In addition, with its more compact size, the Krios G4 fits into a standard-sized lab.

These benefits will make the cutting-edge technology accessible to a broader customer base.

We also have exciting new product launches in our Life Science Solutions Segment, let me highlight a couple.

We've been leveraging our deep expertise in genetic sciences to expand our offering for molecular diagnostics.

A good example from the quarter was our Real-Time PCR pathogen detection system.

It improves the diagnosis of respiratory infections and leads to better decisions about antibiotic treatment.

And finally, to meet increasing demand for greater efficiency in bioproduction, we launched a scalable bioreactor workflow called Thermo Scientific TruBio Discovery automation system.

This solution connects bioreactor's controllers and softwares to help customers more easily transfer data and accelerate scale up as they move from research to clinical trials and into commercialization.

Turning to the second element of our growth strategy, leveraging our scale in high-growth and emerging markets, we continued to capitalize on our industry-leading presence to drive growth.

We reported strong performance in these regions in Q3, led by 13% growth in China.

Our industry is perfectly aligned with the government priorities in China's Five-Year Plan and that continues to create many opportunities for us.

Our outlook there remains very positive and we continue to invest to best serve our customers and distance ourselves from the competition.

For example, in Q3, we enhanced our pharma services and biosciences capabilities to serve the growing biopharmaceutical industry in China.

In Suzhou, we expanded our clinical trials capabilities to support the growing number of studies being conducted in China.

This new facility further strengthens our pharma services offering in the region where we've been successfully serving the growing Pharma & Biotech industry for quite some time.

It will provide high-quality primary and secondary packaging solutions for these customers, and ultimately, patients who are undergoing clinical trials.

As China encourages the formation of an innovation-driven biopharma industry locally, we see exciting prospects for continued growth.

With this investment, Suzhou will become Thermo Fisher's largest clinical trial logistics facility in the region.

It's part of our strategy to create an integrated clinical supply chain network in China with a focus on quality, cold chain logistics and advanced packaging and distribution.

In Shanghai, we opened a Biosciences Customer Exploration Center to help scientists accelerate disease and translation research.

It consists of 2 showcase Thermo Fisher Laboratories that demonstrate our complete workflow solutions for diagnostics development, immuno-oncology and disease model.

This center will serve as a hub for customers to gain hands-on product experience, customized application development and technical training.

Life science and health care continue to be key focus areas for the Chinese government, and these new capabilities enhance our already strong position in serving the needs of our customers there.

The third element of our growth strategy is our unique customer value proposition.

Our leading scale and depth of capabilities puts us in an excellent position to gain share, and it's clear that our value proposition is resonating well with our customers.

To position our company for future growth, we continue to increase our capabilities both organically and inorganically.

I'll cover the Cork acquisition in my capital deployment update, but in terms of organic developments, I'll mention 3 highlights from the quarter that I participated in.

In our pharma services business, you may recall that we announced a major expansion of our biologics facility in St.

Louis, Missouri last spring.

I recently visited the site and had the chance to recognize the team for completing the first GMP batch since the expansion was completed.

Going from breaking ground to shipping product in 18 months is an impressive accomplishment for a biologics facility.

The St.

Louis expansion has greatly increased our production capacity to support our global biologics network.

This site is now the largest CDMO in North America based on single-use bioproduction platform, which is a showcase of Thermo Fisher bioreactor single-use technologies in automated workflows.

I also had the opportunity to go to Greenville, North Carolina's pharma services facility for the opening of our new training center in Q3.

This innovative center is equipped with both virtual and augmented reality technologies.

The goal is to more effectively onboard and train colleagues who will work on sterile injectable production lines, which are complex and require extensive training.

These cutting-edge tools not only give operators the required level of proficiency in much less time, but also benefit customers by increasing quality and efficiency.

This is a great example of how we invest organically to differentiate ourselves from other CDMOs and our customers' own internal capabilities.

Last, I attended the grand opening of our new transplant diagnostics Center of Excellence in West Hills, California.

We brought our research, manufacturing and distribution capabilities together at this site to more effectively meet the needs of our customers and the patients they serve.

It was great to hear firsthand from transplant patients and their families about the impact we're having by providing diagnostic tools that effectively match transplant donors and recipients.

I'm now going to give you an update on our capital deployment activities.

We continued to successfully execute our disciplined strategy, which, as you know, is a combination of strategic M&A and return of capital to our shareholders.

In terms of M&A, let me start with an update on our acquisition of Brammer Bio.

This is the viral vector CDMO that we acquired in Q2.

The integration is going very well and the business is off to a good start as part of Thermo Fisher.

Our product businesses serving the gene therapy market are already benefiting from the deep expertise that Brammer Bio brings to our company.

We also completed our acquisition of the GlaxoSmithKline site in Cork, Ireland right after quarter-end.

The site produces Active Pharmaceutical Ingredients or APIs that are used to treat diseases including childhood cancers, depression and Parkinson's.

The Cork site adds capacity to our API network to support customer demand, and we're very pleased to welcome 400 new colleagues to Thermo Fisher.

We're excited about the prospects for the sites and look forward to leveraging this world-class facility to capitalize on growing demand for API development and production.

Looking forward, our M&A pipeline continues to be very active and we remain disciplined stewards of capital.

From a return of capital perspective, in addition to our dividend in Q3, we repurchased $750 million of our stock just after quarter end.

One final comment on capital deployment.

After quarter end, we refinanced $5.6 billion of debt.

Our unique scale and financial track record allowed us to complete a very attractive refinancing of our debt portfolio to further strengthen our company and create shareholder value.

With that, I'd like to review our 2019 guidance at a high level.

As you saw in our press release, we're raising both our revenue and earnings guidance for the full year.

The increase is based primarily on our strong Q3 operational performance and also the benefits of our refinancing activities.

We're raising our revenue to a new range of $25.34 billion to $25.50 billion, which would result in 4% to 5% revenue growth over 2018.

In terms of our adjusted EPS, we're raising our guidance to a new range of $12.28 to $12.34, which represents 10% to 11% growth year-over-year.

So to summarize our key takeaways from Q3.

We executed very well to continue our growth momentum and deliver excellent revenue and earnings performance.

We launched new products and expanded our capabilities to enhance our customer value proposition.

And we also continued to execute our disciplined capital deployment strategy to create value for our customers and our shareholders.

With that, I'll turn the call over to our CFO, Stephen Williamson.

Stephen?

Thanks, Marc, and good morning, everyone.

I'll begin by taking you through an overview of our third quarter results for the total company then provide color on our 4 business segments and conclude by reviewing our updated 2019 full year guidance.

Before I get into the details of our financial performance, let me provide a high-level view of how the third quarter played out versus our expectations at the time of our last earnings call in July.

You saw in the press release we delivered a very strong quarter in Q3 with 7% organic growth and 12% increase in adjusted earnings per share.

The 7% organic growth was approximately $90 million more than we'd assumed in our prior guidance.

Adjusted EPS was $0.09 higher than we'd assumed at the midpoint of our previous guidance.

This is driven by $0.06 from strong operational performance and $0.03 from a less adverse FX environment.

So another excellent quarter for the company.

Now let me provide more detail on the quarter, starting with our total company financial performance.

In Q3, we grew adjusted EPS by 12% to $2.94.

GAAP EPS in the quarter was $1.88, up 7% from Q3 last year.

On the top line, our reported revenue grew 6% year-over-year.

The components of our Q3 reported revenue increase included 7% organic growth, a 1% contribution from acquisitions, a 1% headwind from foreign exchange and a decrease of 1% due to the divestiture of our Anatomical Pathology business.

Turning to our growth by geography.

North America grew in the mid-single digits, Europe grew in the high single digits, Asia Pacific also grew in the high-single digits with China growing at 13% and rest of the world grew in the low single digits.

Looking at our operational performance.

Q3 adjusted operating income increased 9%, and adjusted operating margin was 22.7%, up 60 basis points from Q3 2018.

We delivered strong productivity and volume pull-through, offset in part by strategic investments and unfavorable business mix.

The headwind from foreign exchange in Q3 was just over 1% on revenue and adjusted operating income, but with no material impact from FX on adjusted operating margin expansion or adjusted EPS in the quarter.

As reminder, the sale of the Anatomical Pathology business was completed last quarter.

The impact of the divestiture on Q3 was a $55 million reduction in revenue, $20 million of adjusted operating income and just over 10 basis points of adjusted operating margin and $0.04 of adjusted EPS.

Moving on to the details of the P&L.

Total company adjusted gross margin in Q3 was 46.1%, down 10 basis points from the prior year.

In the quarter, strong productivity was offset by strategic investments and unfavorable business mix.

Adjusted SG&A in the quarter was 19.5% of revenue, an improvement of 60 basis points versus Q3 2018.

Total R&D expense came in at 3.9% of revenue.

R&D as a percent of our manufacturing revenue in Q3 was 6.6%.

Looking at our results below the line for the quarter.

Our net interest expense was $111 million, down approximately $10 million from Q3 last year driven primarily by debt reduction.

Adjusted other income and expense was a net income in the quarter of $26 million, which was higher than Q3 2018, primarily due to changes in nonoperating foreign exchange.

Our Q3 adjusted tax rate was 11.2%, which was 30 basis points lower than Q3 2018.

Q3 average diluted shares were 404 million, which were 2 million lower year-over-year, mainly as a result of the share buyback partially offset by option dilution.

Turning to cash flow and the balance sheet.

Cash flow from continuing operations for the first 9 months of the year was $3.1 billion and free cash flow was $2.4 billion after deducting net capital expenditures of $619 million.

We ended the quarter with $1.3 billion in cash and investments.

Early in Q4, we repurchased 750 million of our shares -- $750 million of our shares, bringing our total repurchases for 2019 to $1.5 billion.

In Q3, we returned $76 million to shareholders through dividends.

Now turning to our debt portfolio.

During Q3, our total debt reduced $2 billion to $17.1 billion driven by a strong year-to-date cash flow generation.

Our leverage ratio at the end of the quarter was 2.6x total debt to adjusted EBITDA, down from 3x at the end of last quarter.

In addition, as Marc mentioned earlier, we recently completed refinancing $5.6 billion of our debt.

The new debt has an average maturity of 15 years and an all-in average interest cost of 1.48%, which is half the current adjusted P&L cost of the debt that it replaced.

This represents an interest savings of approximately $20 million per quarter for our adjusted P&L.

And wrapping up my comments in our total company performance.

Adjusted ROIC increased to 11.6%, up 120 basis points from Q3 of last year as we continue to drive excellent returns on investments.

I'll now provide you with some color on the third quarter performance of our 4 business segments, starting with the Life Science Solutions Segment.

In Q3, both reported and organic revenue growth was 13%.

We saw very good growth across the segment led by our bioproduction and biosciences businesses.

Q3 adjusted operating income in Life Science Solutions increased 19% and adjusted operating margin was 34.5%, up 160 basis points year-over-year.

In the quarter, we drove very strong volume pull-through, which was partially offset by strategic investments.

In the Analytical Instruments Segment, reported revenue increased 2% in Q3 and organic revenue growth was 3%.

Growth in the segment was led by the chroma mass spec business.

Q3 adjusted operating income in Analytical Instruments increased 6% and adjusted operating margin was 23%, up 100 basis points year-over-year.

In the quarter, we saw a very strong productivity.

This was partially offset by unfavorable business mix and strategic investments.

Turning to Specialty Diagnostics Segment.

As reminder, this is the segment that used to include the Anatomical Pathology business that we divested last quarter.

In Q3, total revenue declined 2%.

Organic revenue growth in this segment was 7%.

We had good growth across the segment led by transplant diagnostics and immunodiagnostics.

Adjusted operating income was flat to prior year due to an 8% impact from the divestiture.

Adjusted operating margin was 25.3%, up 30 basis points year-over-year.

In the quarter, we saw a strong volume pull-through on productivity, which were partially offset by strategic investments, unfavorable business mix and a 50 basis points impact from the sale of the Anatomical Pathology business.

Finally, in the Laboratory Products and Services Segment, both reported and organic revenue growth was 6%.

We saw strong growth this quarter across the segment led by our pharma services business.

Adjusted operating income in the segment increased 1% and adjusted operating margin was 11.6%, which is 50 basis points lower than prior year.

In the quarter, we saw strong productivity and volume leverage, which is offset by strategic investments and unfavorable business mix.

Now I'd like to move on to our updated full year 2019 guidance.

As you saw in our press release and as Marc mentioned earlier, we're raising both our revenue and adjusted EPS guidance.

Let me walk you through the details.

I'll begin with revenue.

We're raising the midpoint of our revenue guidance by $20 million and tightening the range by $40 million.

The $20 million increase in the midpoint consists of 3 elements.

First, a $90 million increase in our organic growth outlook for the year, which reflects the strong Q3 performance and no change in our assumptions for Q4.

This increases our organic growth outlook for the full year to 6%.

The second element is $90 million of more adverse FX versus our previous guidance.

And the third element is an addition of $20 million of revenue to reflect the acquisition of the Cork, Ireland API facility.

Turning to adjusted earnings per share.

We're increasing the midpoint of our adjusted EPS guidance by $0.10 and tightening the range by $0.04.

The $0.10 increase to the midpoint consists of 4 elements: a $0.06 increase from the strong Q3 operational performance, $0.04 increase to reflect lower interest expense as a result of our recent debt refinancing, a $0.02 increase to reflect the benefit of the share repurchases we undertook in early Q4 and a $0.02 reduction to account for more adverse FX environment versus our previous guidance.

Let me give you a bit more detail on this change.

The $0.02 reduction is comprised of $0.03 benefit in Q3, a $0.05 reduction in Q4 relative to our prior guidance for foreign exchange.

To sum this up, our 2019 revenue guidance is now a range of $25.34 billion to $25.50 billion, which should represent 4% to 5% reported growth versus 2018 and 6% organic growth.

And our adjusted EPS guidance for 2019 is now a range of $12.28 to $12.34, which should represent growth of 10% to 11% versus 2018.

Our adjusted operating margin is now expected to be about 23.5%, which should result in margin expansion of 40 to 50 basis points.

A few other details behind the revised 2019 guidance.

Starting with FX, the mix of FX rate changes since our last guidance had an adverse $90 million net impact on full year revenue and $30 million adverse impact from adjusted operating income and a $20 million positive impact below the line.

So for the full year, we now assume that FX will have a negative impact of approximately $500 million in revenue or about 2%, 10 basis points of margin and $0.25 or 2.2% on our adjusted EPS.

Next, we continue to expect the year-over-year gross tariff impact to be approximately $30 million, which is just over 10 basis points of margin impact and approximately $0.07 of adjusted EPS, no change from our previous guidance.

Moving below the line.

We're now assuming year-end debt will be approximately $17.5 billion.

Our net interest expense will be about $450 million, down $20 million from the prior guidance reflecting the benefit of our recent debt refinancing.

And we're assuming other net income will be about $60 million, which is approximately $20 million higher than our July guidance, reflecting the additional benefit of nonoperating FX realized in Q3.

We continue to expect the 2019 adjusted tax rate to be 11%, unchanged from our previous guidance.

We're continuing to assume net capital expenditures will be between $925 million and $975 million for the year.

Free cash flow is expected to be approximately $4.1 billion, no change from previous guidance.

We assume we'll return about $300 million of capital to shareholders this year through dividends, no change from our previous guidance.

And we now estimate our full year average diluted shares to be approximately 403 million, approximately 1 million lower than our previous guidance reflecting the recently completed share buybacks.

And our guidance does not assume any additional share buybacks this year and does not include any future acquisitions or divestitures.

In summary, we continued the strong performance we delivered in the first half of the year and achieved excellent third quarter.

We're very well positioned to achieve our goal for the year.

With that, I'll turn the call back over to Ken.

Thanks, Stephen.

Operator, we're ready to open it up for Q&A.

(Operator Instructions) And our first question comes from the line of Tycho Peterson with JPMorgan.

Congrats on the quarter.

I want to start with the fourth quarter guide, the comp is slightly easier sequentially.

I'm just wondering with the 5% guidance, is there any kind of macro deterioration that you're factoring in there?

Or is it just maybe some prudent conservatism?

Tycho, thanks for the question.

When you look at the assumption for the fourth quarter, it remains identical to what we started with the original part of the year back in January and to all the subsequent guidance, which is assuming the normal year-end pattern of budget spending.

So as a reminder, the last couple of years, '17 and '18, we had above average or strong year-end spend and you don't get visibility to that until very late in the quarter.

So our convention has been normal year-end is what we assume in our guidance.

And that positions us if that's the way the year plays out, that we'll have delivered a fantastic year.

If you get another very strong finish from budgets flushed, then it will be an even better year in terms of performance.

So that's our thinking about it and we're not seeing anything in the macro environment that's giving us a change to Q4 from like a negative or conservative viewpoint.

Okay.

And then for the follow-up on biomanufacturing.

Obviously, you're putting up great numbers there.

We did hear from one of your peers yesterday about some potential concerns over capacity, in particular around biosimilars.

So I'm curious if you could comment on your thoughts there on capacity for the industry right now.

And then as we think about cell and gene therapy separately, obviously there have been some mixed data points around the Sarepta denial and the Roche-Spark delay.

I'm just curious if the pipeline there is still very robust around Brammer, if you could comment on that?

Yes.

So Tycho, thanks for the questions.

So our bioproduction business is doing great, right, and it really is performing at a very high level.

Our customers appreciate the strong positions we have in cell culture media and single-use technologies where we're the industry leader.

We had a great quarter, so that's continuing.

But in terms of how we see the market, we, of all the companies, probably have the best insight because we have our bioproduction business, which gives you one lens.

We obviously have a biologics CDMO, which gives you another lens.

And then we have these very deep relationships across the biotech and pharmaceutical industry.

And what we're seeing is a very robust pipeline of activities.

So we feel good about what the future holds.

In terms of cell and gene therapy, these are young industry and you're going to see individual company volatility.

But the promise around cell therapy and gene therapy continues to be very strong and we're very excited about our competitive position, both in our pharma services business as well as our product businesses serving that market.

So we feel good about the outlook there.

Your next question comes from the line of Jack Meehan with Barclays.

I wanted to start with the China region.

So 13% growth was right around what we're looking for.

But obviously, there's been a little bit more noise, which has come out.

So I was just wondering as you looked across the businesses, are there any areas where you have any concerns?

Or what are some areas that are doing better?

Are there any areas that are during weaker, if you'd just walk us through it, it would will be a great.

Thanks for the question.

In terms of China.

Another excellent quarter, right?

When I look at how we have been performing, very strong.

Our customers value the capabilities that we bring to the Chinese market.

And our industry continues to be so incredibly well aligned with the government priorities around their Five-Year Plan, right, which is we enable environmental protection, the expansion of the health care system, building an innovative biopharma industry, those are all things that our technologies across our industry benefit from.

Thermo Fisher as the industry leader in a very unique competitive position that we have in China positions us even better in terms of our performance.

And you see that in our results.

In terms of the details of what's going on in China, really conditions continue to be very, very similar to what we've seen the last couple of years.

And as a reminder, the comparisons in our industrial business also played through in China meaning that we had very, very strong year-end finish in the second half last year in the industrial businesses globally.

So we have a difficult comparison there and you see that in the results across industrial end markets, but you see that in China a little bit as well.

So the 13% very strong growth, we're on track to deliver the mid-teens growth for the year is the way we would see it.

Great.

And then just as a follow-up on the Analytical Instruments Pathology business, the underlying growth, even if you adjust for some of the timing dynamics, seemed to moderate a little bit.

Could you walk us through what are we seeing in terms of the market, in terms of the macro versus share gain, in terms of certain products.

And then finally, I didn't hear electron microscopy get called out.

Just how are you threading the needle between semi versus cryo there would be helpful.

Yes.

So it's a good question, Jack.

In terms of Analytical Instruments, that is the segment where we have our most industrial exposure of our -- in terms of our business, most industrial exposure.

And we had a very strong second half last year in electron microscopy and chemical analysis.

So we expected and we've been articulating since the beginning of the year that we expected the second half in our industrial businesses to have more muted growth because of the challenging performance -- the challenging comps against the amazing performance we had last year.

So that's kind of the context.

When I think about more detail below that, the chroma mass spec business continues to perform at a good level.

Obviously, others have not reported in our industry yet, we're first of the major companies.

So it's hard to know exactly what our results are versus others.

But based on the customer feedback we have, we feel very good that Q3 was another excellent quarter of share gain there.

So that will get validated in the next week or so.

In terms of electron microscopy, the long-term outlook for that business is outstanding.

We have great interest both in our material science applications ranging from battery development, semiconductor, advanced materials through the life sciences application.

So when I think about where that business is, long-term prospects are -- continues to be mid to high single-digit growth business over the long term.

So we feel good about our position in Analytical Instruments and how we're performing.

Your next question comes from the line of Vijay Kumar from Evercore ISI.

Congrats on a really nice spring here.

Marc, maybe going back to that Life Science question.

Biopharma, bioproduction, really strong.

But we're seeing both the stack -- double stack accelerating here in a Q-on-Q accelerating.

Maybe can you parse out what is -- is this an end market growth versus how much of this is Thermo just because of your scale maybe outperforming the markets?

And I think you also mentioned in LPS, your services business is up strong, but what about the nonservices business?

Maybe just commentary on those end markets, I think, would be a helpful starting point.

Sure.

So Vijay, thanks for the question.

First of all, Pharma & Biotech, if we step back from how we're doing, another quarter of double-digit growth consistent with what we've seen now for a number of quarters.

The markets are good, but our competitive position is truly unique, right?

And we're clearly growing faster than the industry and gaining market share.

And that's because our customers understand that we really do have unique value proposition that helps them accelerate their innovation and at the same point help them drive their productivity.

And all our businesses did well serving our customers set.

So we feel good about that, and as I highlighted earlier, bioproduction continues to perform at a very, very high level also.

So Pharma & Biotech continues to be very good.

When I think about some of the other segments like products and services and when I think about that, across all of the businesses there, which includes our bioproduct businesses, our pharma services business and our channel business, they all had very solid quarters with good growth.

So nothing particularly differentiated between those businesses.

They all had strong quarters on the top line.

And maybe one big picture question.

You guys have been phenomenal when it comes to cap deployment over the years.

Just given where the environment is, when you look at valuations across the sector, maybe talk about how the funnel is looking and appetite for M&A?

Yes.

So thanks.

In terms of capital deployment, we have a very active funnel, right?

It continues to be very active.

And the way we think about it is we have a very disciplined process and where we have been really successful is doing the right transactions that is very much valued by our customers, strengthens the company's long-term strategic position and ultimately increase meaningful shareholders value.

And when I look at the pipeline, I feel very good about what the prospects are there.

And the key for us is that we've always been disciplined and we always will be disciplined, right?

So we'll do the right things.

And when I think about this year, what a great year in terms of strengthening the balance sheet for the long term, right, with getting an average duration of 15 years on our new debt and doing that at half the interest cost, that positions us well.

It gives us tremendous financial flexibly.

And at the same point, we've done one mid-sized bolt-on in Brammer.

We've done the Cork acquisition, a few small deals as well and cleaned up one aspect of our portfolio, which was selling off the Anatomical Pathology business.

So very solid year there.

We've returned capital as well.

And I feel great about what the M&A pipeline looks like.

Your next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch.

So Stephen, I have a question for you.

So ever since you guys bought Patheon, The Street seems to be mismodeling your gross margin number.

I mean every quarter, I get a call that, oh, your Thermo DPS and then I have to have a conversation about now the gross margin numbers came in lower and like that.

I think there seems to be this mismodeling that goes on with it.

Can you just sort of walk people through the dynamics on the gross margin line and sort of how the mix impacts everything like this.

And it's ultimately the question on how should we think about on any one quarter sort of like year-over-year gross margin expansion or how to look at it like that because as I said there's consistently this debate we have every quarter on what the right margin number is and sort of like how to model it?

Derik, thanks for the question.

So I'm going to take a long look-back.

So yes, Patheon, that is a scale business with significantly lower gross margins than the average for the company.

So took a year to anniversary that into our numbers.

So you saw that for 12 months, over 4 quarters, there was some pressure on reported gross margins, but still good business performance underlying that from the pharma services business.

And then the mix of our revenues being such that the lower gross margin businesses in the company, but lower cost to serve below that, they're still decent profit margin businesses have been growing the fastest, so bioproduction and then the channel business and the pharma services is also growing very well as well.

So that's a continued pressure on reported margin but still very good in terms of generation of adjusted operating income dollars.

So seeing that dynamic play out.

And recently, we're investing fairly significantly into our pharma services business for future revenue growth.

So that's one other element.

And then this quarter, you'll see it over the next couple is with selling the Anatomical Pathology business had also put a little bit of pressure on the company's gross margin on a reported basis.

So when you think about modeling going forward, I expect the company to get some benefit in terms of margin expansion coming out of gross margin, but not significant.

And then it's really SG&A leverage with a strong revenue growth from the top line that's really going to be driving the overall operating margin expansion for the company and the long-term outlook for the next 3 years.

Great.

And you mentioned the Anatomical Pathology sale.

Can you remind us a little bit of hit on the margin, what was sort of like the drag on the gross margin -- I'm sorry, drag on organic revenue growth on that business?

And where I'm getting at, 7% growth in diagnostics in the quarter, very strong.

How much of that was Anatomical coming out plus how much of that was like gains from some of those delays you had in the second quarter just on incremental volume?

So Derik, in terms of the strong performance in health care and diagnostics and the strong performance in our Specialty Diagnostics business, we had really broad-based momentum, right, in terms of really excellent growth in transplant, in immunodiagnostics and very strong performance in our health care market channel.

So the divestiture of Anatomical Pathology, which was a slower-growing business, actually had a minimal impact on the organic growth performance.

And offset the tailwind from Q2 in terms of the revenue that was delayed in terms of shipments there.

Not a significant impact overall if you look on a net basis.

Great.

And if I can continue since you mentioned transplant diagnostics, which we haven't really talked about it for a while.

As I think back, there was a time a couple of years ago when people were worried when Lamda was going whacked from next-gen sequencing coming to the market, and obviously, you're now with the new facilities.

Can you talk about how sort of that has expanded?

I'm just really curious to see that because I remembered that was a debate we had several years ago with people.

Yes, so in terms of transplant diagnostics, incredibly important capabilities that we serve the health care community globally, which is we help match recipients with donors and we help clinicians monitor transplant health, right, in terms of organ acceptance or rejection, right?

So critical part of the medical decision process there.

That business has performed well, it's highly profitable, it's been good growth and truly an inspirational opportunity.

I love what I do, but the opportunity to talk to patients that recognize the role we play, the doctors that make those decisions, the laboratorians that do the work to match the recipients with the donors.

I had that opportunity in August when we opened up our new facility in West Hills, which is an amazing set of capabilities.

We had hundreds of people attended.

It was really an awesome experience and highlights the competitive advantage we have, right?

There wasn't a customer that didn't leave there saying, okay, this is the industry leader investing for a bright future.

We have our next-gen sequencing workflows, by the way, in transplant diagnostics, so we've made that transition as well and we continue to be a very strong performer there.

And then just one follow-up since I'll -- to take advantage of being on the call here.

One of your competitors has been making a big push into the third-party services market.

Can you sort of talk about your Unity Lab Services business and sort of like the dynamics of the industry and what's going on with it.

It's one of those areas where just we recently have a lot of visibility and so I'm just sort of trying to reconcile that with some of the trends and commentary from some of the other competitors?

Performing well, right?

It's growing -- probably grew around the company average, probably a little higher, somewhere in that range.

So performing at a good level.

Very valued by our customers, right?

We wind up with a large number of our colleagues working on the customer site to ensure effectiveness of how they operate their laboratories and making sure they're getting great experiences with our products.

And it's a good business in terms of building customer allegiance and continues to perform at a good level.

Your next question comes from the line of Doug Schenkel with Cowen and Company.

I want to talk about Europe, run through a few Q3 cleanups and then just talk through a couple of year-end into 2020 dynamics.

So starting on Europe.

In the quarter where you had strengthened a lot of different areas, I'd argue one of the most surprising things was your robust revenue growth performance in Europe.

Based on what we've read and heard from others, high single-digit growth is pretty impressive and surprising, especially given your high single-digit comp.

Can you provide a bit more detail on Europe performance by segment?

And also share if there's anything interesting in terms of monthly cadence?

Yes.

So Doug, thanks for the question.

It's been interesting, right?

If you read the sort of popular press about Europe, you have this, for quite some time, this very bleak view, right, of sort of everything is slow and so forth.

If you then look at our performance over the last number of years, our performance in Europe has been very strong, right?

So -- and that's because our value proposition resonates, right?

There's a big pharmaceutical industry presence there that we're very well positioned to serve.

We have strong presence serving the diagnostics market.

Our high- end instrumentation is valued by customers and the business is performing well.

The high single-digit growth reflects very good performance of the team.

And we've been delivering strong growth in Europe.

So when we did our reviews with our European leadership, and myself and members of our company leadership team spent time with the commercial team at the end of the quarter in Europe and market conditions where we serve continued to be good and our share gain momentum is excellent.

So nothing really jumped out to me as being particularly surprising.

I was just pleased with the job well done by the team.

Okay, that's great.

Now for the cleanups.

On the data storage outage, I just want to confirm, was the impact of recapturing revenue lost in the second quarter about $50 million?

And if so, would you break that down by segment and comment on whether or not there's anything more to recapture related to that between now and year-end?

Yes, Doug.

Thanks.

So as we outlined on the last call, approximately $50 million of revenue shifted from Q2 to Q3.

These are orders that were ready to ship to customers right at the end of the quarter and were delayed by the system outage and they were shipped in early Q3.

So that's basically across the line.

Okay.

And then the other cleanup was on bioprocessing.

Just wondering if you'd comment on whether or not our math is right, which leads us to conclude that you might have grown 20% to 25% in the quarter.

Are we in the right neighborhood?

Yes, you're in the right neighborhood.

Okay.

And then just to close on -- okay, it's a good neighborhood.

All right.

And then just a couple looking-ahead questions.

There's been -- I guess the first one is there's been lots of focus on the outlook for year-end budget flush.

How important has a budget flush been to you the last few years?

And how important is it in the context of this year's guidance?

So that's the first one on budget flush.

The second is in terms of your visibility heading into 2020, do you think your customers are likely to compete -- I'm sorry, complete 2020 planning and budgeting later than usual given the macro backdrop and just all the uncertainty out there?

And if so, how does that impact your planning?

And then the third is kind of a higher-level question for you, Marc.

10 to 15 years ago, if we were heading into an election year where there were heightened concerns about the environment for biotech and pharmaceutical companies, regardless of size, and also by extension, concerns about the availability of capital to relatively smaller but higher-growth emerging companies, I think it's fair to say a decade, a decade and a half ago, that we'd be concerned about the possibility of a moderation in spending for that end market.

We may be facing some of those dynamics looking ahead to 2020.

Is it fair to say that the complexion of your biopharma and market exposure or really just the overall nature of that end market has changed enough over the last decade where you can say if these dynamics materialize, that they'd be less problematic today for Thermo than they were 10 to 15 years ago?

Sure, Doug.

Great question.

Let me take a shot at that.

And the first one is, will customers do planning later, macro environment, something I thought a lot about actually in preparation for this earnings call.

And when I think back over the last 2 decades here, it actually doesn't feel like there's any more uncertainty or challenges than really the normal level of noise, right?

And I remember discussing terrorism risk and discussing dramatic changes in FX and sequestration, all of these things, and when I sit in there and say, yes, there's a lot of -- we have an administration that is very publicity oriented.

But when I think about the big-picture issues, science is great, the economy is pretty good around the world and our industry is doing very well.

So when I think about planning, I think it's going to be pretty normal in terms of the process across the industry.

In terms of biotech and funding and all of those things, the end market continues to be strong.

Science is excellent.

If you have a view that might change or so forth, our company mix has changed, right?

If you think about a decade ago, our exposure in biotech and pharma would have been more purely on the research side of the equation.

And today, you have more of a balance with clinical trials capabilities, development and production.

So the mix is different and that latter stage is typically stickier in terms of the movement.

And then in terms of budget spending and so forth, it's something that is hard to have a scientific view of it.

Our best view of the difference between a normal year and a strong year in terms of organic growth in the quarter, probably 2 points.

Meaning that if you go from normal to strong, about 2 points of growth additional and that represents roughly 0.5 point of growth for the full year.

And it could be off a little bit, but it gives you at least a magnitude of the difference between normal and strong.

Yes.

And Doug, just to add 2 more comments about kind of the planning and indeed this environment, it's about being flexible and it's about intuitive planning and making sure that you're up-to-date in terms of how you're thinking about operating through an environment with things that change pretty rapidly.

So I think companies are becoming more and more used to that environment and operate accordingly.

And your next question comes from the line of Steve Beuchaw with Wolfe Research.

I have one actually for Stephen and then I'll follow up with a broader question for Marc.

Stephen, for obviously good reasons, you guys have stepped up investments in CapEx for CDMO capacity and then broadly capital deployment for CDMO capacity.

How should we think about modeling that over the next few years?

Are we stable at this new level?

Or do we see growth over time in those investments?

So Steve, great questions.

So when I think about the pharma services business, we've got great opportunities to capture long, long-term organic growth with the customer set that we have, large Pharma & Biotech and more biotech customers.

So we recognize that and we're adding the right capacity and capabilities to help continue to fuel that growth for the long term.

So that gets us, we think about that business being kind of mid- to high single-digit business and putting investments to maintain it at the high end of that level of growth.

And if there are future opportunities that afford themselves to be able to get great returns, then we'll add appropriately in terms of CapEx.

You'll see this year and next year slightly heightened level of CapEx in that business that links to these great customer prospects and we'll see how that pans out from there going forward, but it's really to maintain a great organic growth from that business.

Yes, and the only thing I would add, just kind of at one level up, which is, we did refinancing and really huge savings in earnings, right?

And we took the $20 million of Q4 benefit to the bottom line.

As I think about next year, we're going to have another $60 million benefit from the lower interest costs.

We will likely reinvest a little more than half of that to continue to accelerate our growth momentum not per se, just in pharma services, but we have amazing prospects given our share gain momentum.

So I think you'll see us likely reinvest some of those savings into fueling a continued amazing future for the company.

Got it.

Very, very helpful.

And then, Marc, I wonder if you could talk about proteomics for a minute.

I know there's, again, for good reason, a lot of optimism about the growth trajectory there.

But over the last, let's say, 9 months or so, there's been more competitive noise in this space.

And historically, you've been not just a good grower, but a share gainer in proteomics.

Can you talk about the trend in how, if at all, your view on those trends evolve downstream over 2019 where some others have entered the space?

Yes.

The business -- our Orbitrap franchise is performing very well.

And when I look at the product launches we had at ASMS, American Society for Mass Spectrometry in Q2, very strong customer interest.

We've had good order shipments, performing very well.

And there's always competition, but we're very well positioned to continue to drive growth.

Funding in proteomics is very good, right?

It is -- if you think about the genomics revolution, proteomics is really where a huge level of funding is right now and looks to continue to have.

And we are the industry leader and well positioned to drive good growth in that part of our business.

And your last question comes from the line of Brandon Couillard with Jefferies.

Marc, just curious if you could speak to Patheon's core growth in the third quarter and perhaps share an update on where you stand in terms of the revenue synergy pull-through from that asset?

Yes.

So the integration is complete.

The business is performing at an excellent level.

We exceeded the cost synergies, really driven by excellent impact from our PPI Business System.

Revenue synergies, right on track.

And interestingly enough, the funnel of wins, which is future revenue, you can see it in the number of expansions that we're announcing across our network, that really is driven by revenue synergies, right, that we basically have sold out our API network and we acquired the Cork facility.

You saw us announced expansion of sterile fill/finish and biologics and networks and that really is just a reflection of how strong customer interest is because of Thermo Fisher's reputation and the excellent performance from pharma services.

The business grew about the company average in terms of our performance in the quarter.

And last one for Stephen.

Can you share net pricing in the quarter and what you've baked in for the full year?

Yes.

Net pricing continued to be good.

So just under 1.5% across the company and that's in line with how we view performance for this year.

So expect that to continue the whole year.

We're doing a good job of offsetting some of the tariff impact with pricing and being disciplined elsewhere.

So let me wrap up here.

With a strong 9 months behind us, we're really in a great position to achieve another excellent year.

As always, thank you for your support of Thermo Fisher Scientific.

We look forward to updating you early in 2020.

Thanks, everyone.

This concludes today's conference.

We do thank you for your participation.

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