Thermo Fisher Scientific Inc

Good morning ladies and gentlemen and welcome to the Thermo Fisher Scientific 2021 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star and the number one on your telephone keypad. If you would like to redraw your question press the pound key. Thank you. I would like to introduce our moderator for the call, Mr. Rafael Tejadas, Vice President Investor Relations. Mr. Tejadas, you may begin the call.

Good morning and thank you for joining us. On the call with me today is Mark Casper, our Chairman, 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 Investor section Thermo Fisher dot com under the heading News and Events until August 13, 2021. A copy of the press release of our Second Quarter 2021 earnings is available in the Investor section of our website under the heading Financials. 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 most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q, which are on file with the SEC and available in the Investor section of our website under the heading Financials, SEC guidelines. 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 will 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 press release of our second quarter 2021 earnings and also in the Investor section of our website under the heading Financials. So with that, I'll now turn the call over to Mark.

Thanks, Ralph. And good morning, everyone. Thank you for joining us today for our second quarter call. As you saw in our press release, we executed on our growth strategy to deliver another fantastic quarter of Q2 with excellent growth on both the top and bottom line. As I reflect on the first half of the year, three things stand out to me. First, our team's exceptional execution operating with speed and scale to deliver on our growth strategy and gain share. Second, we're already seeing the benefit of the accelerated investments we initiated in 2020. And third, the power of our PPI business system, which enables our performance. These three factors position us exceptionally well to deliver a fantastic 2021 and provide terrific momentum as we enter 2022. I'll cover each of these topics in more depth in my remarks, but first, let me recap the financials. Our revenue in Q2 grew 34% year over year to $9.27 billion. Our adjusted operating income for the second quarter increased 44% to $2.69 billion. And our adjusted operating margin expanded 200 basis points to 29% for the quarter. Finally, we delivered another quarter of exceptional adjusted EPS performance, achieving a 44% increase to $5.60 per share. Turning to our end markets, we continue to see excellent conditions driven by three factors. Robust fundamentals in the life sciences, strong economic activity globally, and the role our industry is playing in the pandemic response. Our unique competitive position and excellent execution by our team have allowed us to gain share and deliver another outstanding quarter. Starting with pharma and biotech, we have outstanding performance with growth of over 30% driven by strong underlying market conditions, the benefit of our unique customer value proposition, and our leading role in supporting our customers across a wide range of exciting therapeutic areas, including our significant role in COVID-19 vaccines and therapies. We saw excellent growth across all businesses serving these customers, including bioproduction, pharma services, biosciences, chromatography and mass spectrometry, and in our research and safety market channel. We're clearly benefiting from our trusted partner status that we've earned over many years with these customers. In academic and government, we grew 35% this quarter. We saw very strong growth across our businesses supporting this customer base, especially in biosciences, electron microscopy, and the research and safety market channel. Turning to industrial and applied, we grew approximately 30% during the quarter as the team continues to execute at a high level to capture opportunities. In Q2, we had particularly strong growth in our electron microscopy and chromatography and mass spectrometry business. Finally, in diagnostics and healthcare, we grew in the high teens during the quarter, and we're seeing customer demand in our base business approach pre-pandemic levels. Our immunodiagnostics and transplant diagnostics businesses delivered outstanding growth. Also in diagnostics and healthcare, demand for COVID-19 testing-related products grew to approximately $1.4 billion. Let me wrap up the end market recap with a quick comment on our role in the pandemic response. Since the beginning of the pandemic, we have played the largest role in the life science tools and diagnostics industry in supporting the societal response and delivering critical solutions for our customers and governments around the world. In the second quarter, we generated a total of $1.9 billion, bringing our first half COVID-19 response revenue to $4.7 billion. One of the benefits of our response activity is the ability it gives us to accelerate investments and position the company for a phenomenal future. You know about the additions to capacity, capabilities, and new products that we are making, and we are also continuing to invest in our colleagues. Building our investments last year, we are again providing all non-executive colleagues with a special recognition payment of two weeks additional pay to reflect the incredible contributions to our success. This is just one of the many measures we are taking to ensure we remain the employer of choice across the life sciences industry. Let me turn to the great progress we made in Q2 on our growth strategy, which is based on three pillars. Launching high-impact innovative new products, leveraging our scale in the high growth and emerging markets, and delivering a unique value proposition to our customers. Let me give you a few examples. I'll start with innovation. We launched a number of new products across our businesses to further strengthen our industry leadership and enable our customers to accelerate scientific breakthroughs. Let me highlight a few. In chromatography and mass spectrometry, we launched the new thermoscientific orbitrap IQX, Tribit Mass Spectrometer, which further extends the impact of our industry-leading orbitrap platform to accelerate small molecule analysis from metabolites and other complex compounds. In our electron microscopy business, we introduced the thermoscientific Helios 5EXL wafer dual beam scanning electron microscope, a very important tool to help semiconductor customers more efficiently ramp up production of new, smaller, and more complex microprocessors and memory devices. In our bioscientific business, we launched several new products, including two instruments to advance cell analysis. The InvitroGEN Bigfoot Spectrosorter is a powerful cell sorting tool based on the technology we acquired from Propel Labs in Q1, and the InvitroGEN Atune SitePix Flow Psychometer, which offers enhanced imaging capability to enable researchers and cell therapy developers to better understand cell biology. Turning to the second pillar of our growth strategy, we continue to leverage our scale to create an outstanding experience for customers in the high-growth and emerging markets. This has contributed to excellent growth and share gain we are delivering across Asia Pacific. Let me cover a couple of the highlights. In China, we delivered strong growth of just under 30% in the quarter. The team is ramping up our new single-use technology facility in Suzhou. In India, we demonstrated speed at scale at our genetic sciences facility in Bengaluru, which shipped millions of COVID-19 PCR tests to support the country's response to the pandemic. We also contributed $10 million in urgently needed products and donations to help India bring the crisis under control. Our performance across the region demonstrates that we are creating a differentiated experience for our customers, and the significant investments that we've made in these markets are fueling growth. The third pillar of our growth strategy is our customer value proposition, and we continue to increase our capabilities and capacity to be an even better partner for our customers and help them achieve their goals. Building on our significant investments last year, in 2021, we're executing on over $2.5 billion in CapEx to further expand our capacity and capabilities. It's exciting to see the continued progress of these investments. For example, during the quarter, we brought additional capacity online around the world to support customer production of vaccines and therapies. These include sterile fill finish lines in Italy and Greenville, North Carolina, expanding our single-use technology capacity in our facility in Logan, Utah, and adding to our Lithuania site for the production of essential raw materials used in making mRNA vaccines. These investments in our value proposition demonstrate our commitment to our customers, which rely on us as an essential partner in their work. During the quarter, we announced a number of collaborations with leading academic medical centers. The combination of our innovation and our unique customer value proposition position us to move science forward. For example, we're collaborating with the Mayo Clinic to develop more precise and personalized diagnostics for blood-based cancers, allergy, autoimmunity, and therapeutic drug monitoring. This work will leverage our insight and technology in clinical next-gen sequencing, immunology, and clinical mass spectrometry. In addition, we announced that we'll build and operate a -the-art cell therapy development, manufacturing, and collaboration center at the University of California, San Francisco to advance innovation in cell and gene therapy. These partnerships will lead to new capabilities for our customers and, ultimately, better outcomes for patients. As always, our PPI business system was a major factor in our success during Q2. This discipline and our mission-driven culture helps us to find a better way every day so we can continue to bring more innovative new solutions to our customers, work more efficiently and effectively, operate with speed and scale, and create even greater value for all of our stakeholders. Turning to capital deployment, we announced the acquisition of PPD at the beginning of the quarter. This acquisition will establish Thelma Fisher as a leader in the attractive and high-growth clinical research services industry and add highly complementary services for our fastest growing end market. The integration planning is going extremely well. I've been very impressed with the world-class talent I've met during the integration planning process. We're looking forward to welcoming our PPD colleagues to Thelma Fisher upon closing of the transaction. Before turning to guidance, let me update you on our progress from our ESG initiatives. As the world leader in serving science, we know that our role goes beyond the work we do to enable our customers to the value we create for our shareholders. It extends to our responsibility to make the world a better place. To that end, we continue to advance our sustainability initiatives. Yesterday, we announced our commitment to achieve carbon neutrality by 2050. This builds on our existing goal to reduce greenhouse gas emissions across our operations by 2030. We're moving forward on this front by making our facilities more energy efficient, increasing our use of renewable energy and reducing waste in our operations, while also innovating across our portfolio to enable customers to meet their sustainability needs. This is aligned with our commitment to doing business the right way and to fulfilling our mission to enable our customers to make the world healthier, cleaner, and safer. Now, let me turn to our guidance for 2021. Driven by our very strong start to the first half of the year and our confidence in the full year outlook, we're raising both our revenue and earnings guidance for the full year. Steven will outline the assumptions behind our guidance. I'll cover the highlights. We're raising our revenue guidance by $300 million to $35.9 billion, which represents 11% reported growth over 2020. In terms of adjusted EPS, we're raising our guidance by 10 cents to $22.07, which will represent 13% growth over 2020. Before I turn the call over to Steven, let me summarize our key takeaways from Q2. Our team is doing an outstanding job of executing our proven growth strategy to strengthen our competitive position. Our PPI business system is enabling our ability to operate with speed at scale. Our business is performing extremely well and gaining share. All of this enabled us to deliver excellent first half results and position us to deliver a fantastic 2021 and provides terrific momentum as we enter 2022. Finally, I'd like to thank my 80,000 colleagues for their dedication to our company, our customers, and for once again delivering another excellent quarter. And now, I'll turn the call over to our CFO, Steven Williamson. Steven.

Thanks, Mark. Good morning, everyone. I'll begin with a high-level summary of our Q2 performance. We had another excellent quarter and grew our revenues 34%, including 28% organic growth. As Mark mentioned, our growth strategy is enabling us to take share on top of strong market conditions. As a result, in Q2, we were able to live at 27% organic growth in the base business and continue our industry-leading response to the pandemic, generating $1.9 billion of COVID-19 response revenue in the quarter. Our PPI business system enabled us to generate excellent pull-through on the very strong top-line growth and is also enabling us to execute really well on our significant growth investments. As a result, we grew our adjusted EPS in Q2 by 44% to $5.60 and delivered $1.7 billion of free cash flow. Overall, another excellent quarter. Now, let me try some more color on the Q2 performance. Gabby Piaz in the quarter was $4.61, up 59% from Q2 last year. On the top line, our Q2 reported revenue grew 34% year over year. The components of our Q2 reported revenue increase included 28% organic growth, 2% from acquisitions, and a tailwind of approximately 5% from foreign exchange. As I mentioned, the base business organic growth was 27%. Turning to our performance by geography during the quarter, North America grew 25%, Europe grew 35%, Asia, Pacific, and China both grew just under 30%, and the rest of the world grew low double digits. Turning to our operational performance, Q2 adjusted operating income increased 44% and adjusted operating margin was 29%, 200 base points higher than Q2 last year. In the quarter, our PPI business system enabled us to deliver very strong contributions from volume and productivity. We also have a favorable business mix. This is partly offset by the ongoing strategic investments across our businesses to support our near and long-term growth. Included in the investments in the quarter is over $100 million of supplementary cash bonuses for the non-executive colleagues and we recorded a similar amount in Q1. This is to recognize the extraordinary work that our colleagues continue to do for our customers, communities, and shareholders. Our ongoing investments in our colleagues and capacity and capabilities are ensuring a really bright future for the company. Moving on to the details of P&L, total company adjusted gross margin in the quarter came in at .6% flat to Q2 of the prior year. In the quarter, we delivered strong productivity and had positive business mix. This was offset by strategic investments. Adjusted SG&A in the quarter was .9% of revenue, a decrease of 200 base points versus Q2 2020, reflecting strong volume leverage. Total R&D expense was approximately $340 million, representing growth of 29% versus Q2 2020. It reflects the increased investments in high impact innovation to fuel future growth. Looking at results below the line for the quarter, our net interest expense was $111 million, $17 million lower than Q2 last year, largely due to lower net debt. Adjusted other income and expense was a net income in the quarter of $3 million, $30 million lower than Q2 2020, mainly due to changes in non-operating effects. Our adjusted tax rate in the quarter was 14%. This is 250 base points versus Q2 last year due to the increase in pre-tax profit. Average diluted shares were $396 million in Q2, about $2 million lower year over year, driven by share repurchases, net option dilution. Turning to cash flow on the balance sheet, the cash flow performance enabled by our PPI business system was very strong in the first half of the year. -to-date, cash flow from continuing operations was $4.2 billion, up 88% from the same period last year. -to-date free cash flow was $3 billion, up 76% over the same period last year, and that's after investing $1.2 billion of net capital expenditure. This reflects the strong returns we're generating in the short term and the investments we're making for the long term. We returned over $100 million to shareholders through dividends in the quarter. This reflects the 18% dividend increase we announced in February. We entered Q2 with $7 billion in cash and $18.8 billion of total debt. A leverage ratio at the end of the quarter was 1.4 times gross debt to adjusted EBITDA and 0.9 times on a net debt basis. Concluding my comments on total company performance, adjusted ROIC was .5% of 10 percentage points from Q2 last year as we continued to generate exceptional returns. Now, provide some color on the performance of our four business segments. Similar to the last few quarters, I'll start with some framing thoughts on the impact of the COVID-19 response on our segment results. From a revenue standpoint, as was the case in the last three quarters, the majority of the COVID-19 response revenue is recognized in life-sign solutions with the remainder recognized as laboratory products and services and specialty diagnostics. From a margin standpoint, the impact of COVID-19 differed across the segments based on the scale of the response revenue and the different levels of profitability on that revenue. In addition, during the quarter, we continued to make strategic investments across all of our businesses. The size of those investments does not necessarily align with the COVID-19 response revenue in each segment as that does skew some of the reported segment margins. Moving on to the segment details, starting with life-sign solutions, Q2 reported revenue in this segment increased 37% and organic growth was 29%. In the quarter, we've lived an exceptionally strong growth in our biosciences and bioproduction businesses. Q2 adjusted operating income in life-science solutions increased 39% and adjusted operating margin was 48.3%, up 90 basis points year over year. In the quarter, we drove strong volume pull-through and saw positive business mix, which were partially offset by the strategic investments. We also had a tailwind on margins from FX in this segment in Q2. In the analytical instruments segment, reported revenue increased 41% in Q2 and organic growth was 36%. During the quarter, we saw excellent growth in all businesses within the segment. Q2 adjusted operating income in analytical instruments increased 107% and adjusted operating margin was 18.9%, up 600 basis points year over year. During the quarter, we drove very strong volume pull-through and productivity, which more than offset the strategic investments that we're making across this segment. Starting with specialty diagnostics, in Q2 reported revenue in this segment increased 25% and organic growth was 21%. During Q2, we delivered exceptionally strong growth in the immunodiagnostics and transplant diagnostics businesses. Adjusted operating income increased 15% in the quarter and adjusted operating margin was 19.9%, down 170 basis points from the prior year. In Q2, the positive volumes leveraged and favorable business mix were more than up to 100%. Organic

growth was 23%.

In the quarter, we saw excellent growth in all our businesses in this segment. Adjusted operating income in the segment increased 59% and adjusted operating margin was 12.4%, which is 230 basis points higher than the prior year. In the quarter, we delivered positive volume leverage and favorable business mix, and this was partly offset by strategic investments. With that, now let me turn to our updated 2021 guidance. As Mark mentioned, we're raising both our revenue and adjusted EBS guidance, reflecting the strength of our Q2 performance along with a stronger outlook for the base business in the second half of the year. In terms of revenue, we're raising our full year guidance by $300 million to $35.9 billion and increasing our full year organic growth to 9%. The increase in revenue guidance is driven by three factors. An increase in the base business organic growth outlook for the full year from 8% to 12%. An updated assumption of $6.7 billion of COVID-19 response revenue for 2021. And a slightly more favorable FX tailwind than previously assumed. Let me give you additional detail on each of these factors. Starting with the base business, here we're increasing the outlook by $850 million, reflecting our great Q2 performance and a stronger outlook for growth in the second half of the year. This increases that 2021 full year organic growth outlook for the base business by 400 basis points to 12%. Our end markets are very strong and we're executing very well on our growth strategy and increased strategic investments to try excellent performance. Moving on to COVID-19 response revenue. Our role in supporting COVID-19 vaccines and therapies continues to increase and we now expect $1.8 billion of related revenue in 2021, up $300 million from the prior guide. Approximately half that $1.8 billion was recognized in the first half of the year. Given the strength of both the base business growth and our vaccine and therapy response, we've taken the opportunity in this revised guidance to significantly de-risk the outlook for testing. We've lowered the full year testing related response revenue by $900 million from the prior guidance. We're now assuming it will be $4.9 billion for 2021, of which $3.8 billion was delivered in the first half of the year, leaving just over a billion dollars to go in the second half. There continues to be a wide range of outcomes for testing in the second half of the year. There are scenarios where the pandemic could increase in intensity driving a higher need for testing. Should that be the case, we'd be well positioned to support customer needs and those benefits are bad through our P&L. But for now, we thought it was prudent to take the opportunity to de-risk the outlook. A third and final element of the revenue guidance raise is FX. Rates continue to fluctuate. They were favorable to those from our prior guidance for most of Q2, and then moderated significantly. The net of this results in an increase in our FX revenue tailwinds for the year is now assumed to be $525 million, up to $50 million versus the prior guidance. Taking account of the different margin profiles of the revenue changes I've just outlined, we're increasing our annual adjusted EPS guidance by 10 cents to $22.07, which will result in 13% growth over 2020. With the revenue mix assumed in the guide, we now estimate that the adjusted operating margin for the full year would be approximately .7% in line with 2020. The other elements of our guidance remain the same as the prior guide. Let me remind you of some of those assumptions. We've not included any operational benefits in 2021 from the acquisition of DPD. When we get more clarity on the actual close date, we'll provide an estimate of any potential impact in 2021. We expect net interest expense in 2021 to be approximately $510 million. As a reminder, included within that number is $40 million or 10 cents of adjusted EPS as a placeholder for pre-financing for the DPD transaction. We expect the adjusted income tax rate to be 14% in 2021, resuming net capital expenditures of approximately $2.5 to $2.7 billion, and free cash flow of approximately $7 billion in 2021. Our guidance still includes $3.8 billion for capital employment, which is $2 billion of share buybacks which were completed in Q1, $1.4 billion for completed M&A, and $400 million for capital return to shareholders through dividends. We estimate the full year average diluted share count will be 397 million shares. Finally, I wanted to touch on phasing of revenue dollars and adjusted EPS for the remainder of the year. When I think about the split of the second half P&L Q3 and Q4, we're assuming that the results will be slightly weighted to Q4. As you think about that split, remember the placeholder for P&P financing is all in Q4. To conclude, we delivered another excellent quarter and we're in a great position to achieve our 2021 goals as we move into the second half of the year. With that, I'll turn the call back over to Rex. Thank you, Stephen.

Operator, we're ready to take questions.

In order to allow everyone in the queue an opportunity to address the Thermo Fisher Management Team, please limit your time on the call to one question and only one follow-up. If you have additional questions, please return to the queue. If you have a question at this time, please press star one on your touchtone phone. Your first question comes from the line of VJ Kamar with Evacor.

Hey guys, congrats on that. I'm a solid friend this morning. Mark, one on the guidance here. So overall revenues were increased by 300 million for the year. But your call-response revenues were lowered by 600. In the implied math on basis, it's up 850 million XFX contribution. That's a big number and that's all coming here. Most of it seems to be in the back half. I'm curious, what is, I guess, what changed versus the prior assumptions? Which segments are coming in better? Clearly we saw analytical tech coming better. I'm curious if it has any implications for RAS fiscal 22.

Yeah, so VJ, thanks for the question. As I look at the base business outlook, really incredibly strong Q2. The performance, the 27% base business organic growth. You know, the business is really firing all cylinders. And orders were very strong. The informal dialogue you have with customers is very bullish about market conditions and also more importantly our role in supporting them. And that gave us confidence that 12% organic growth for our base business activities is an appropriate guidance for the full year. So we feel really good about that. And you're seeing the benefits of the acceleration in our growth strategy investments that we started in the second half of last year. You're seeing those things start to come into the new products that we launched, the collaborations, new capabilities. It's really a super exciting time and we're excited about it in terms of what the final outlook is for the base business.

Understood. And one for us, Stephen, Stephen, on the margins here, I think you called out one time or maybe two weeks with extra pay. What was the impact and is that expected to continue in the second half? And I think you mentioned a billion dollars of testing in the back half. And I think the commentary used was it's the rest. So I'm curious, do you have any tenders or orders that are going to be going into those numbers?

Yeah, Stephen, why don't you do the margin and then I'll talk

about the testing.

Yeah,

so when you think about the mix of change in our guidance, it brought down the margin profile for the full year down to the 29.7%. It was down about 15 basis points from what I'd assumed in my prior guide. That kind of takes into consideration the different mix of contribution margins and the revenue changes.

Yeah, and in terms of the response revenue and on the testing side of the equation, we took the strategy around de-risking the outlook. We had a strong order actually at $1.4 billion of testing. We felt reasonably good about that. And we actually have a number of orders for the second half and felt that given how much dialogue there is around testing just generally and so much noise, we just felt that taking that off the table felt like the right thing to do. And we're well positioned as you know given our relationships and capacity. If things like the Delta variant continue to drive more demand for testing, then obviously we're going to be higher than the number we assumed in the guidance.

Your next question comes from the line of discussion. Go with Cowan.

Hi, Doug. Oh, hey guys. Can you hear me?

Perfect, yes.

Okay, sorry about that. Had some technical difficulties. Actually, I guess the question as we think about 2022 and I know you're not going to guide on this call and I'm going to apologize for... No, no, no. ...in advance of this. But I mean at some level to maybe just cut to the chase, is it reasonable to take the three-year revenue from the PPS targets from your 2019 Analyst Day at the mid to high ends, layer in some lingering COVID-19 relief revenue at the top and bottom line and then add in whatever we're going to model for PPAD and basically take those three components and add them up and use that as kind of a construct for thinking about 2022. Is there any reason to just not boil it down to that construct at this point?

So, Doug, I'm going to give you terrific news. Which is we're going to hold an Analyst Day on September 17th and we're going to give our some early thoughts about 2022 to help with some of the ways to think about modeling and not what I would call official guidance for the year, but at least some scenarios to help that and then give the three-year outlook going forward. So we thought an Analyst Day would be the best way because we think it's a great question. You know, what I would say is you think about between now and for 2022. The performance of the base business is super cool, right? You know, 12% organic growth. We're going to be entering the year with very strong order book with very strong momentum and more and more of those investments that we've made and are making positions us for great momentum in 2022. We're going to play a meaningful role in what customers need on the response, right? There's a 2022 strategy that seems like a long way off, but I'd say obviously vaccines and therapies are going to continue to be super relevant and, you know, they'll be testing. The question is at what level and we'll try to do some scenarios to help with that, but nobody knows what the demand is going to be for testing next year and so there'll be a range of outcomes showing that. But I'm excited. We're, you know, we're obviously you'd add whatever, you know, assumptions for next year to the numbers from a capital deployment perspective. So 2022 is going to be another great year for the company.

Okay. All right. Thanks for that, Mark. And then I guess as my follow-up, maybe I'll just throw the two quick ones out there. The first is, you know, as you know as well as anybody, there's a ton of labs globally that built out new infrastructure for COVID-19 testing using thermo products. What are you seeing at these sites now? So testing volumes, they're flowing, but still robust. What I'm curious about is as we move into the, towards the fall, are you seeing these labs move more into -in-one testing? And then, you know, I guess beyond that, is there any move towards broader infectious disease testing at these sites? Because I think that would help us as we think about the durability of what's occurred in that category. And then the other one I just want to sneak in for Steven. COVID-19 revenue, you know, has really been a boon to operating margin. That said, underlying margin seems to be tracking quite nicely. Maybe I should be able to do this math real quick, but I haven't. I'm just wondering if you take COVID-19 revenue contributions out of your 2021 targets, where do you believe 2021 operating margin would come out? Thank you.

So those are, those are, those would be good like two or three hour long conversations, but I'll take a shot at it and certainly feel free to add. When I think about the COVID testing demand and what are we seeing, but what I would say is we obviously have built, we've had and have built during the pandemic a huge install base around the world. Right? It's for us, the activities we do across all of the countries is the huge driver of our activity. And, you know, so a lot of what we read about is what's going on in the U.S. and in the U.S., you know, testing demand is, is definitely less at this moment, although obviously cases are starting to increase, but there's quite a bit of demand around the world and certain customers are preparing for a respiratory panel for the winter season and obviously we'll have that and, you know, we're going to support our customers whatever level of demand that they need. In terms of margins, I'll make it sort of what's the philosophy and then Stephen if you want to add, feel free, which is we're not thinking about it based business versus COVID, we're thinking about how do we manage the company appropriately in terms of the profitability of the company and the investment rate for, you know, the going forward. I think one of the things that, you know, if you kind of do very simple math and I'll do it from an EPS perspective, right, we raised our, you know, based on the very strong outlook for the year and the very strong first half, we raised our EPS by 10 cents in the guidance. We chose to invest another 25 cents in our colleagues, right, the $100 million in the Q2 additional payment is a investment in the future, right, so we made a conscious decision, obviously margins are very strong and we'll manage that appropriately. It really highlights

the power of our PPI business system. Yeah, we'll raise the focus on that and maximize the top line opportunity and then we invest appropriately for the future to pay so we're getting great returns so we get the right returns of that investment and then the flow through then comes so it's less that we're trying to manage to a margin expansion number and appropriately manage the P&L and invest appropriately for the future. Thanks, Doug.

The next question comes from the line of Jack Meehan with Nefron Research.

Good morning, Jared. Good morning. Good morning. Mark was hoping you'd give us your latest thinking on capital allocation, you know, within the, you know, if I go back to the 2019 Analyst Day, you talked about 29 billion in deployment through 2022, though I think there's a view in the market that it could be a lot higher than that because of the COVID response sales, so my question is, what's your latest view on ability to close deals as the multiples seem to be moving higher and if not, why not do more buyback? Three and a half billion since the beginning of 2020.

Yeah, so, Jared, thanks for the question. You know, in terms of capital deployment, we're first of all, it's been an active year, right, between, I'm not giving an update on PPD in a minute, but it's been an active year. We obviously announced PPD, we've done a number of smaller bolt-on transactions, so we've been active. Our pipeline is quite busy, right? We're looking at things, you know, we're disciplined and because our industry is so large and fragmented, we're seeing opportunities to continue to build on our M&A strategy and execute against that and so from that perspective, you know, things are good. From a return of capital perspective, we felt the $2 billion that we did in terms of buybacks and the increase in the dividend felt like the right return given the M&A commitments we've made to PPD and we certainly revisit our return of capital mix with our board periodically and we'll continue to do so, but right now we continue to have M&A as the primary focus. PPD, I'll spend a moment there because it's, you know, it's a large commitment of capital. I've been super impressed with the team. You know, I've gotten to get to meet a number of the team because of the integration planning, it's going very smoothly. The colleagues are very excited to become part of the company. As you see from some of the other companies in the serial field that are reporting, the end markets are super good. The industry is doing well as PPD as a leader is very well positioned. So, you know, it's going to be a really good growth, you know, asset. From the pathway to closure of the transaction, we've gotten most of the direct investment, the foreign investment approvals done so we've got a little bit left to do there, but that's pretty much done. We're working our way through the various Amitrust filings around the world. We're collaborating with the FPC on the second request and we're looking forward to closing the transaction by the end of the year. So that's a quick recap on capital deployment. Yeah, and

then, Jack, just one thing to add, one thing back to 2019, the outlook and I think that use of cash and ROI has been significantly higher investments in capex. We've identified some great opportunities to invest organically and we're putting cash to work and getting great returns in a really short period of time as well. So that's another element. If I think about how the companies have evolved over that period of time.

Yeah, definitely hear you on that. Just as a follow-up, either for Mark or for Steven, there's been a lot of discussion around inflation across the market. So I was curious to get your view, you know, just ability to toggle pricing as a lever in the channel, just how that is going and then any thoughts around the supply chain? Have you had any issues?

Yeah, I think when you look at the world, it's unwinding from the recessionary impacts of the pandemic and as a result, you've got Kingston supply chain and clearly inflationary pressures in multiple different places. And how large that impact is and how long it lasts for is still to be proven out and we're operating on the basis that it'll be with us for some time. Our PPI business system enables us to effectively navigate events like this and run our operations efficiently, use our scale to partner with suppliers and then maximize opportunities, as you mentioned, around pricing for certain products to help protect our margins. It's not just in the channel, it's really across the portfolio and it's a scale benefit of using our pricing discipline across the company and we've navigated through this dynamic really well over the first half of the year and I can expect it to continue to do so going forward.

Your next question comes from Linah Tyko, Peterson at JP Morgan.

Hey, good morning. Mark, I'm wondering if you could talk a little bit more about the recovery and analytical instruments. I know you said it was widespread but you did call out electronic class a couple of times so can you maybe just talk to that dynamic? How much of that do you think is pent up demand? How much of that is kind of in the semi-cycle? Just curious for some more calling in.

Tyko, good morning. Thanks for the questions. Our analytical instruments business performed extremely well. Grew over 35% in the quarter and all three businesses really performed very well. Chemical analysis, chromium aspect and materials and structural analysis were our per-electron microscopy business sets. When I think about the dynamics here or new products, they're very exciting. I mentioned a few of them this quarter as I did last so the investments we were making in R&D there are really paying off and the end markets are good and you see that in electron microscopy both in the adoption of the tools for life sciences applications so the cryo-electron microscopy but you also see that across the material science applications including semiconductor and obviously from everything you read around what's going on in chip supply and investments there that bodes well for the electron microscopy business for sure.

Okay, thanks. And then for the follow-up I've actually got two quick ones. On COVID I think you made a prudent move to take testing down and I'm just curious your latest thoughts on the durability on the vaccine and therapy side what you're hearing from customers and then on margins I know a lot of people are focused on 2022 operating margins he did take up R&D by 20% last year so maybe another way to ask the question is how much of the OPEX do you think will carry through or do you think you'll reset R&D a little bit to drive low leverage?

Thanks. Tango, I'll cover the margin question I think that the elevated investments are getting great returns so we're going to manage the company appropriately and help fuel really strong base business organic growth going forward and should those returns not be the right places we're going to appropriately manage spend and then as the pandemic response unwinds we're going to appropriately deal with the variable cost that goes with that and manage the P&L appropriately and look forward to giving more details when we're in a better position to do that around 2022.

So Tango in terms of the role that we're playing in supporting the vaccines and therapies for COVID it's quite significant and it cuts across both our pharma services capabilities for the active ingredients the drug substance as well as in the sterile finish activities for the vaccines and we play obviously a very substantial role as the technology provider in our biosciences business with things like enzymes, nucleotides as well as in our single use technologies cell culture media so a very large role we expect that to be about a billion eight this year and demand is very robust right so for the industry it's mostly about capacity coming online to support the demand and so we look at our you know momentum going into 2022 we would expect that the vaccine and therapy demand to be very strong given the likely demand for the response to the pandemic and as our capacity comes more and more online it positions us very well to meet the strong backlog of orders that we've been able to generate because we have the right solutions for our customers.

Your next question comes online at Dan Arias' default.

Morning guys, thanks for the question. Mark on the new Plasmid production site out in Carlsbad. I think you just opened up there so when do you expect to be fully scaled up and going? Is there anything you can say about the extent to which capacity has kind of already been booked there just given that it sounds like that's a pretty supply constrained area and then I think you're supporting mRNA vaccine work out there and I'm just curious whether you're starting to talk to customers about projects maybe down the road with them on mRNA vaccines that are not related to COVID? Just sort of thinking of one of the open questions here is where are we headed with mRNA now that we have some proof of concept?

So Dan, great question. So two different things that are going on. Let's see the mRNA more broadly first. Right, so you know, there's been a huge increase in investments in the biotech and pharmaceutical industry given the success that mRNA has had on the market and on the COVID vaccine. So that investment is both in next generation vaccines, combination vaccines, as well as just in the class for other diseases altogether. And yes, we're in numerous dialogues in supporting those activities across our capabilities. So that's a wonderful tailwind for our largest segment of pharma and biotech in terms of customers. So that looks very strong. One of the things that we have seen is that in plasma DNA, there has been a shortage of capacity for some period of time. And we've been addressing that by making significant organic investments. And we have been able to secure meaningful orders for our new facility in Carlsbad. I had the opportunity to visit the facility in June. It's awesome and super excited. It's open and we just did the ribbon cutting in early July and we'll be producing product in the not-distant future there and building momentum on that. And that's great. The customer base wanted choice and we're giving them choice and we're excited about that.

Okay, appreciate that. And Stephen, just thinking about some of the other parts of bioproduction. On NoviCept, I think the outlook last time was for $150 million in contributions from NoviCept. Is that still the current outlook because I felt like that was conservative last quarter just given that you had done almost half that or if not a little bit more than half that in one queue alone. We

secured some additional orders on the COVID response and it's slightly higher. So it's a $30 to $40 million higher for the year that's included in that increasing guide for the response revenue.

Your next question comes from the line of Derek DeBrown with Bank of America.

Hi, good morning. Good morning. So a couple of questions. I guess on the first one, can you talk a little bit about the China market? Obviously it wasn't going to be as strong in the second quarter as it was in the first quarter. The growth just given that China started recovering in the second quarter but it was a little bit lower than I would have thought. Can you sort of talk about the dynamics in the Chinese market?

Yeah, China's performing very well. When I think about the growth in the quarter of just under 30 percent, we've had 40 percent growth in the first half, spent time with the team, activities have returned to pretty much normal. The 14-5 year plan is being implemented. And that has tailwinds for our industry and thermal fisheries who are all positioned to capitalize on stuff. So I feel good about China in terms of our outlook and it's off to a good start for the first half of the year.

Got it. And I'm going to squeeze two in. I guess the first one is can you talk a little bit about academic and government and what you've seen in that market? Is that 35 percent growth? Is that any of that that you think is being done? Is it tied to new funding that's coming up and sort of pick up or is that just catch up spending? And then another one, a question I keep getting from people is I still think there's some concern over the impact of PPD on the margin given it's more of a people business than a razor and blade business. Just sort of your general thoughts on the margin opportunity in PPD. Thanks.

Yeah, so, Derek, academic and government have very good growth. 35 percent growth. That's exciting. And obviously it was one of those segments of the four end markets we serve that was very effective last year, right, in 2020 because of the pandemic and then in the second quarter. That's really the place you saw it the most. So what you're seeing now is that largely activity has returned back to normal around the world. I mean, it might be different, but actually the activity level is pretty normal. And what I'm encouraged about is two things. One is widespread in terms of the performance of business, you know, biosciences, research and safety market channel. That talks about activity is very high and electron microscopy, really excellent funding. So it talks about sort of the big capital funding there also is strong. And then when you look going forward that really does look good because there's so much positive talk around the world about the funding. So,

no, PPD, Derek, the margin profile of that whole industry is significantly lower than the company average. And knowing that, I'd white out from going into this. And the investment thesis in this asset is that margin expansion, yes, we'll get some margin expansion from cost energies, but it will be lower than the company average expansion year over year, but it will be higher than average growth business. And when you think about the growth and operating income dollars, it will be very, very equivalent to the rest of the company. So it's a slightly different P&L profile we're bringing into the company. We've effected that energy as you're thinking about modeling the company going forward as the scale business coming in at lower than the average margins. But that doesn't change the margin profile or the margin opportunity for the rest of the company and doesn't change the great outlook that we think PPD has and we're excited about bringing it into the company.

Your next question comes from a line of Patrick Donnelly with Citi.

Great. Mark, maybe one on the specialty diagnostics business, you know, that came in a bit lower than we expected, obviously, a big chunk of that is the COVID testing piece, but can you just talk about the core business trends there or what the recovery path looks like in the back half?

Yeah, so Patrick, thanks for the question. So when I look at the specialty diagnostics business, you know, actually underlying what's going on in the business actually is quite encouraging. Activity level is pretty much back to the previous business and you see it in the pre-pandemic levels, you see it in really strong growth in our immunodiagnostic business or what we call allergy and autoimmunity, you see it in our transplant diagnostic business and those businesses were highly disrupted a year ago when medical procedures were put on hold. But you also saw good growth in microbiology, you saw it, you know, as well as in our healthcare market channel. So it's encouraging. You know, in terms of, you know, you do see a lot of the positive side and you see some of the COVID response revenue, you know, there as well and, you know, that will have a more challenging comparison in the second half. But I feel good about the underlying outlook within specialty diagnostics.

Operator,

we have time for one more question. Patrick, just, I think you had to follow that through Patrick.

Yeah, sorry, just a quick one on PPD. I know, Mark, you mentioned the second response from the FTC. Just a quick update there in terms of the overall response and any surprises from what the discussion has been and the confidence level there and getting that done. Thank you.

No, no surprises there. We're just working through the process and we'll work super collaboratively and I look forward to bringing it to a close at the end of the year. So, operator, we'll take one more question.

Okay, last question. I'll come from the line of PNUTSUDA as Stevie Lerink.

Yeah, hi, Mark. Thanks for taking the question. Actually, for a speed, on the COVID-related number of points have been covered, but just in terms of the MESA acquisition, I know you had highlighted a contribution there maybe closer to 200 million or so. Does that still remain there or was that removed and part of the de-risking that you mentioned? And then just, Mark, broadly speaking, you mentioned number of times Orbitrap platform continues to grow. This has been a decade-plus growth opportunity for the FTC. I know you've been working with the company. Could you maybe just on a very high level just give us a view of where that stands today and where do you expect that to grow over the next few years and if you could just give in the areas of high growth areas of biopharma and proteomics where it's levered to. So I appreciate some thoughts there. Thanks so much.

Thanks, Puneet. In terms of MESA, we're scaling up the manufacturing capacity. We're working on the top of the menu. It's a really exquisite technology so we're very excited about it. And the revenue assumptions remain the same as where they were last quarter. So from that perspective, very positive. And when I look at the Orbitrap, what a phenomenal technology continues to drive very good growth for analytical instruments business. Super relevant for our customers and we're able to continually push the technology forward to bring that to the table and we're working on more and more relevant solutions. The most recent launch really is focused on complex small molecule analysis which is also part of the technology being used in the multi attribute method for biologics in terms of QAQC which is a very large market opportunity and we're well positioned there. So I feel great about the performance of our chrome aspect business and even more excited about what the future holds there as well. So I just want to say thank you for the questions and I'll turn to just wrapping it up here. We really had an excellent first half of the year. We're on track to deliver another outstanding year and we're going to enter 2022 with great momentum that sets us up for a very bright future and we're looking forward to sharing more about our future during our virtual analyst day on September 17th and of course then updating you in October on our Q3 call. I'm official scientific. Thanks everyone.