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System
System
Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2021 third quarter conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call.
Rafael Tejada
Vice President, Investor Relations
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 of our website, thermofisher.com, under the heading News and Events until November 12, 2021. A copy of the press release of our third 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 and Form 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 reports on Form 10-Q, which are on file with the SEC and available in the Investors section of our website under the heading Financials, 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 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 the press release of our third 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.
Mark Casper
Chairman, President, and Chief Executive Officer
Thanks, Raph. Good morning, everyone, and thanks for joining us today for our third quarter call. We delivered another outstanding quarter, achieving exceptional financial performance while continuing to effectively execute our growth strategy to make Thermo Fisher Scientific an even stronger partner for our customers. As I reflect on the year so far, three things stand out to me. Our proven growth strategy, powered by our PPI business system, is driving outstanding financial performance. Our base business is performing very well, and we are playing a leading role in our industry's response to COVID-19. And we continue to build on our trusted partner status with innovative new products and expanded capabilities to further enhance our unique customer value proposition. All of this gives me great confidence in a very bright future as we continue to create sustainable value for all of our stakeholders. I will get into more detail on these in my remarks later, but first let me recap the financials. Our revenue in Q3 increased to $9.33 billion, growing 9% year over year. Our adjusted operating income for the third quarter was $2.78 billion, and our adjusted operating margin was 29.8% for the quarter. Finally, we increased adjusted EPS by 2% to $5.76 per share, so another outstanding quarter. Turning to our end markets, in Q3, market conditions were strong, and our team executed well to deliver another fantastic quarter. Starting with pharma and biotech, we continue to have outstanding performance in this end market with growth of just over 20% driven once again by strong market dynamics, 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 supporting COVID-19 vaccines and therapies. Our trusted partner status earned over many years with these customers continues to drive robust growth. In this end market, we saw broad-based strength, including in our bioproduction, pharma services, biosciences, chromatography and mass spectrometry businesses, as well as in the research and safety market channel. In academic and government, we grew in the mid-single digits in the quarter, with very good growth in biosciences and the research and safety market channel. Turned into industrial and applied, we grew in the mid-teens. In Q3, we had particularly strong growth in our electron microscopy business and in the research and safety market channel. Finally, in diagnostics and healthcare, we declined 11%. Performance in our base business was strong, driven by immunodiagnostics, clinical diagnostics, and transplant diagnostics. The team also executed very well to support customers' COVID-19 testing needs, delivering $1.55 billion of revenue this quarter versus $1.8 billion in Q3 last year. Before I move on to our growth strategy, let me provide a few comments on our industry-leading role in the pandemic response. In the quarter, we generated $2.05 billion in COVID-19 response-related revenues. With the surge in the Delta variant, we saw strong testing demand around the world in Q3. We also played a very meaningful role in vaccines and therapies for COVID-19, generating just over $500 million in the quarter from these activities. The underlying demand for our product and service offerings used in the production and development of vaccines is very robust, and over time, we expect this demand to transition to non-COVID revenues. Our industry-leading response to the pandemic has enabled us to accelerate our growth strategy, strengthen customer relationships, and accelerate investments, which contributed to our ability to raise our long-term core organic growth guidance to 7% to 9% as we communicated at our recent investor day. Let me now give you an update on our growth strategy, which consists of three 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. Let me provide a few examples of how we're delivering on our growth strategy. Starting with innovation, we launched a number of new products across our businesses to further strengthen our industry leadership and enabling our customers to accelerate scientific breakthroughs and make the world a better place. In our genetic sciences business, we launched the Applied Biosystems QuantStudio AbsoluteQ digital PCR system. This is the first fully integrated digital PCR system featuring simplified workflows and designed to provide highly accurate results in only 90 minutes. This system will help advance our customers' innovation efforts in areas like oncology and cell and gene therapy. In chromatography and mass spectrometry, we launched three new thermoscientific TSQ-plus triple quadrupole mass spectrometers to address the growing need for faster throughput and increased sensitivity across a range of applications in biopharma and applied settings, including clinical research for large and small molecules, toxicology, food safety, and environmental analysis. We also launched the thermoscientific Vanquish Neo UHPLC system and the thermoscientific PEPMAP Neo UHPLC columns, designed for use in proteomics, precision medicine, and translational research. Turning to the second pillar of our growth strategy, we continue to leverage our scale to create an outstanding experience for customers in high growth and emerging markets. This has contributed to the excellent performance we are delivering across Asia Pacific, where we delivered growth in the low double digits during the quarter. We continue to build on our presence and capabilities in the region. During the quarter, we opened a bioprocess design center in South Korea. This facility features laboratory and educational space and more than 100 instruments that support pharmaceutical research and manufacturing processes. This center will help our pharma and biotech customers advance their important work. Our performance across the region demonstrates that we're creating a differentiated experience for our customers and the significant investments 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 faster and more efficiently. As I mentioned last quarter, we're executing on over $2.5 billion in CapEx this year. Let me give you a brief update on our progress. Building on our pharma services capabilities in Q3, we brought additional capacity online to support vaccine and therapy production. And as part of the previously announced strategic partnership with CSL Limited, we assumed operating responsibility for a new state-of-the-art biologic site in Langnau, Switzerland. The site will feature highly flexible bioproduction technologies, including single-use and stainless steel, to provide a pathway from development to large-scale production as customers' needs evolve. To support growing demand in the biopharmaceutical industry, we announced plans to open a new bioproduction facility in Nashville, Tennessee to manufacture single-use technologies. The facility will be one of our largest SUT sites in the world. In addition to support disease research and diagnostic testing, we announced our commitment to co-invest with the U.S. government in building a state-of-the-art facility to manufacture pipette tips. The new facility will be located in North Carolina and designed in line with Thermo Fisher Scientific's carbon neutrality goals. These investments in our value proposition demonstrate our commitment to our customers who rely on us as an essential partner in their work. Now let me give you a brief update on capital deployment. We continue to successfully execute our discipline strategy for capital deployment, which is a combination of strategic M&A and returning capital to our shareholders. In terms of M&A, we are super excited for our acquisition of PPD. The business is performing well. The regulatory process is on track and we expect to close by year end. As a reminder, PPD will establish Thermo Fisher as a leader in the attractive and high growth clinical research services industry and add highly complimentary services for our fastest growing end market. Integration planning is going very well, financing is largely complete, and we're looking forward to welcoming our PPD colleagues to Thermal Fisher later this year. Before turning to our guidance, let me update you on our progress we're making on our ESG initiatives. As the world leader in serving science, we know we have a responsibility to use our industry leadership position to make the world a better place. And to that end, we continue to advance our sustainability and social impact initiatives. During the quarter, we committed to expand our use of ACT product labeling to include our entire cold storage portfolio by the end of the year. ACT labeling clearly details the environmental impact of the product, empowering our customers to make sustainable choices, and ultimately helping them achieve their own goals for environmental stewardship. Our 90,000 colleagues are also passionate about the difference they can make. And our local site-based community action councils support a number of charitable and STEM education activities throughout the year. We have amplified our support of these efforts by investing an additional $15 million in our Foundation for Science. And we continue to support the historically black colleges and universities to deliver accurate COVID-19 testing to students and staff, helping to ensure campus safety and the ability to confidently deliver in-person learning. With that, I'd like to review our guidance at a high level, and then Stephen will take you through the details. As you saw in our press release, we are raising both our revenue and earnings guidance for the full year. This increase is a result of our strong Q3 operational performance in our base business and the continued strength of our COVID-19 response revenues. we're raising our revenue guidance by $1.2 billion to $37.1 billion, which would result in 15% revenue growth over 2020. In terms of adjusted EPS, we're raising our guidance by $1.30 to $23.37 per share, which represents 20% growth year-over-year. The 2022 guidance raise reflects the increased outlook for the core business and adds to the very strong outlook that we share with you at our investor day. We're raising our 2022 full year revenue guidance by $200 million to $40.5 billion and increasing our 2022 adjusted EPS guidance by 20 cents to $21.36. So to summarize our key takeaways from Q3, We executed it very well to continue our growth momentum and deliver excellent revenue and earnings performance. Our business is performing very well, and we continue to play a leading role in the pandemic response. We continue to expand our trusted partner status with innovative new products and expand the capabilities to further enhance our customer value proposition. And our exceptional performance through the third quarter enabled us to raise our outlook for the year and sets us up for an even brighter future. With that, I'll now hand the call over to our CFO, Steven Williamson. Steven?
Stephen Williamson
Senior Vice President and Chief Financial Officer
Thanks, Mark, and good morning, everyone. Before we get into the details of the quarter, I'd like to begin with a quick reminder about the definition of core business. This is a term we introduced at our recent Investor Day. Core includes our base business and the vaccines and therapies response revenue. And post-close, it will also include the PPD acquisition. So moving on to the details of Q3, it was another excellent quarter. Let me provide a high-level view of how the quarter played out versus our expectations at the time of our last earnings call in July. We had a broad-based beat versus the prior guide. Revenue was $1.2 billion higher, driven by $900 million higher testing response revenue, $250 million higher core business revenue, and $50 million more favorable core FX. On our last earnings call, our guidance de-risked testing response revenue, and we said that if there were any additional opportunities to support customers' testing needs, we'd be ready to do so and float the benefits throughout P&L. And that's exactly what we did in Q3. In total, delivering $1.55 billion of testing response revenue in the quarter. Yours had a great strength in the core business. In Q3, the base business organic growth was 10%, which is 3%, or $190 million higher than included in that prior guide. Also in the core, vaccines and therapies response revenue was $60 million higher than in that prior guide, and was $510 million for the quarter. So excellent momentum on the top line. Our PPI business system enabled us to generate excellent pull-through on the very strong top-line performance, And at the same time, execute really well and add significant growth investments. And as a result, suggested EPS in Q3 was $1.30 higher than included in that prior guide. And the components of this overachievement are $1 from testing response revenue, $0.20 from the core business, and $0.10 from FX on the base business. Overall, another excellent quarter. Let me now provide some color on the Q3 performance. Beginning with our Q3 earnings results, as you saw in our press release, we grew adjusted EPS by 2% to $5.76. Gap EPS in the quarter was $4.79, down 1% from Q3 last year. On the top line, our Q3 reported revenue grew 9% year over year. The components of our Q3 reported revenue increase included 7% organic growth, a tailwind of 1% from foreign exchange, and 1% contribution from acquisitions. As I mentioned, the base business organic growth in the quarter was 10%. Turning to our performance by geography during the quarter, North America was flat. Europe grew over 20%. Asia Pacific grew low double digits. China grew in the low single digits. And rest of the world declined in the high single digits. The organic growth rates by GEO are skewed by the response revenue in the current and prior quarters, as well as the scale of the impact of the pandemic on the base business in the prior year. In terms of our operational performance, Q3 adjusted operating income decreased 1% and adjusted operating margin was 29.8%, 310 basis points lower than Q3 last year. In the quarter, our PPI business system enabled us to deliver strong productivity, which is more than offset by unfavorable business mix and the ongoing strategic investments across our businesses, including investments in our colleagues. All of these are being made to support our near and long-term growth. Moving on to the details of P&L, total company adjusted gross margin in the quarter came in at 51.4%, 90 basis points lower than Q3 last year. The decrease in gross margin had similar drivers to those I just mentioned for adjusted operating margin in the quarter. Adjusted SG&A in the quarter was 17.9% of revenue, an increase of 190 basis points versus Q3 2020. Total R&D expense was approximately $350 million, representing growth of 19% versus Q3 2020, and reflects our ongoing investments in high-impact innovation to fuel future growth. Looking at results below the lines for the quarter, our net interest expense was $119 million, $17 million lower than Q3 last year, largely due to lower average interest rates on our debt. Adjusted other income and expense was net income in the quarter of $9 million, $7 million higher than Q3 2020, mainly due to changes in non-operating FX. Adjusted tax rate in the quarter was 14.2%, down 150 basis points versus Q3 last year due to the benefits of our tax planning initiative. Average diluted shares were 397 million in Q3, 2 million lower year over year, driven by the share repurchases, net of option dilution. Turn to cash flow in the balance sheet. The cash flow performance enabled by our PPI business system continued to be very strong. Year-to-date cash flow from continuing operations was $6.9 billion, up 38% from the same period last year. Year-to-date free cash flow was $5.2 billion, up 27% from the same period last year, and that's after investing $1.7 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 an 18% dividend increase we announced in February. And during the quarter, we issued $3.1 billion in new debt as part of the pre-financing for the PPD acquisition. We ended Q3 with $12 billion in cash and $21.7 billion of total debt. Our leverage ratio at the end of the quarter was 1.6 times gross debt to adjusted EBITDA and 0.7 times on a net debt basis. Including my comments on our total company performance, suggested ROIC was 22.3%, up 740 basis points from Q3 last year, as we continue to generate exceptional returns. Now I'll provide some color on the performance of our four business segments. Similar to last quarter's, I'll start with some frame thoughts on the impact of COVID-19 response in our segments. From a revenue standpoint, as was the case in the past quarters, the majority of our COVID-19 response revenue was recognized in life sciences solutions, with the remainder recognized in 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. That does skew some of the reported segment margins. Moving on to the segment details, starting with life sciences solutions, Q3 reported revenue in this segment increased 9% and organic growth was 4%. In the quarter, we delivered very strong growth in our bioproduction and biosciences businesses. Q3 adjusted operating income and life science solutions decreased 3%, and adjusted operating margin was 48.9%, down 600 basis points year over year. In the quarter, we saw positive volume leverage, which is more than offset by strategic investments and unfavorable business mix. In the analytical instrument segment, reported revenue increased 11% in Q3, and organic growth was 9%. Growth in the segment this quarter was driven by the electron microscopy and chromatography and mass spectrometry businesses. Q3 adjusted operating income and analytical instruments increased 54%, and adjusted margin was 17.8%, up 500 basis points year over year. During the quarter, we delivered very strong volume pull-through and productivity, which is partially offset by the strategic investments we're making across this segment. Telling us especially diagnostics, In Q3, reported revenue decreased by 5%, and the segment declined organically by 5%. In the quarter, we saw a strong growth in our immunodiagnostics, clinical diagnostics, and transplant diagnostic businesses, which is offset by lower COVID-19 testing revenue versus the year-ago quarter. Adjusted operating income decreased 22% in the quarter, and adjusted operating margin was 22.7%, down 520 basis points from the prior year. In Q3, we drove positive productivity, enabled by our PPI business system. This is more than offset by unfavorable volume mix and strategic investments in the quarter. Finally, in the barter products and services segments, Q3 reported revenue increased 12%, organic growth was 10%. In the quarter, we saw very strong growth in all of our businesses in this segment. Adjusted operating income in the segment increased 8%, and adjusted operating margin was 11%, which is 40 basis points lower than the prior year. In the quarter, we drove a good volume pull-through and productivity by our PPI business system, which is more than offset by strategic investments. With that, let me now turn to our updated guidance. And as Mark mentioned, we're increasing full-year guidance for both 2021 and 2022. For 2021, we're banking the Q3 beat and maintaining our prior guidance assumptions for Q4. Then for 2022, we're carrying over the base business and vaccines and therapies beat from Q3 21 into the 2022 full-year numbers. This is enabling a strong beaten race for both years, reflecting the continued excellent strength of the business. Let me now provide you with some more detail, starting with 2021. In terms of revenue, we're raising our full-year 21 guidance by $1.2 billion to $37.1 billion, and increasing our full-year organic growth outlook from 9% to 12%. That includes an increase in the base business organic growth outlook for the full year from 12% to 13%, and an increase in the COVID-19 response revenue for the year from $6.7 billion to $7.7 billion, which represents $5.8 billion of testing response revenue and $1.9 billion of vaccines and therapies response revenue. As I mentioned previously, there are no changes in the revenue assumptions for Q4 in our revised 2021 guidance. We're continuing the same de-risked approach to guidance for COVID-19 testing response revenue and continue to assume $450 million of testing-related revenue in Q4. There continues to be a range of outcomes for testing in the fourth quarter and for 2022. There are scenarios where testing demand could be higher than that included in our guidance. Should that be the case, we'll be well-positioned to support customer needs, and as we did in Q3, we will flow the benefits of that through our P&L. But for now, we thought it was prudent to continue to take a de-risked approach to the outlook. And as a reminder, there are four fewer selling days in Q4 21 versus the same period last year. Incorporating our very strong Q3 performance into the revised 21 guidance, we now expect that adjusted operating margins for the full year will be approximately 30.4%, 70 basis points higher than both our prior guide and 2020. Then in terms of adjusted EPS, by banking the Q3 beat, we're raising our full year 21 adjusted EPS guidance by $1.30 to $23.37, which would result in 20% growth over 2020. The revised guidance assumes an adjusted income tax rate of 14.3% in 2021, slightly higher than the prior guide to reflect the marginal tax rate on our increased profitability. The rest of the assumptions underlying the 2021 guidance remain the same. And to call out a few of those, we've not included any operational benefit in 2021 for the acquisition of PPD, which is assumed to close at the end of the year. We expect full year net interest costs to be approximately $510 million. We're assuming 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 of capital deployment, which is $2 billion of share buybacks, $1.4 billion of completed M&A, and $400 million of capital returned to shareholders through dividends. And we estimate the full year average diluted share count will be 397 million shares. Now, moving on to the 2022 guidance raise. As I mentioned, we're carrying over the base business and vaccines and therapies beat from Q3 21 into the 2022 full year numbers. In terms of revenue, we're raising our full year 2022 guidance by $200 million to $40.5 billion. That reflects a $250 million increase in core revenue, offset partially by $50 million less FX tailwind for the year. The guidance for 2022 continues to assume core organic growth of 8% and $750 million of testing response revenue for the year. In terms of adjusted EPS, we're raising our full year 2022 guidance by 20 cents to $21.36. As Mark mentioned, the 2022 guidance increase reflects the increased strength of our core business, adding to the already very strong outlook for 2022 that I shared with you at the recent investor day. So to conclude, we're delivering another excellent quarter and we're in great position to achieve both our 21 and 2022 goals. With that, I'll turn the call back over to Rhett.
Rafael Tejada
Vice President, Investor Relations
Thank you, Stephen. Operator, we're ready to take questions.
System
System
As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. In order to allow everyone in queue an opportunity to address the Thermo Fisher management team, please limit your time on the call to one question and one follow up. If you have additional questions, please return to the queue. Our first question comes from the line of Patrick Donnelly of Citi.
Patrick Donnelly
Citi
Great. Thanks for taking the questions, guys. Mark, maybe one for you just on the guidance. You know, obviously encouraging to see you raise the 22 guidance going to flow through the beat, you know, so soon after providing it at the analyst day. Can you just talk about, you know, not bumping the 4Q number? Obviously, again, the core seemed a bit stronger in 3Q. The end market recovery seems well on its way. I certainly understand, you know, keeping the testing conservative. But maybe just on the core business, you know, what kept you guys from flowing through a bit of that strength into 4Q?
Mark Casper
Chairman, President, and Chief Executive Officer
Patrick, thanks for the question. Good morning. So, you know, obviously a really outstanding Q3. When I think about the momentum in the core business in the fourth quarter, we obviously enter the fourth quarter with very strong performance. As I look at the outlook for Q4, first of all, we felt it was prudent to keep it at the same that we did last quarter. There's nothing particularly deep about that. We have four less selling days, so when you look at the base business results, It's very similar. It implies about 9% growth, about 5% reported, and you had about four points for the day. So you had about 9% growth, so very similar to what you saw in Q3. And when you look at the other part of CORE, which is the vaccine and therapy numbers, similar levels of revenue to what you saw in Q3. So we felt that was a prudent view. On the testing response, we kept the de-risk number. We're obviously going to shift whatever our customers need. And, you know, if you think about how short the true visibility is for testing response, right, you know, which is we de-risked at the end of July. And, you know, by the time we got into August, the Delta variant had created, you know, We feel like the 450 number is one that we have an incredibly high likelihood of achieving and will obviously shift meaningfully more than that if customers need it. So that's how we thought about it. And as we thought about 2022, we carried forward the core revenue beat into the year. And as we sit here at the end of January when we give our full year final guidance for the year, we'll look at what is the right level of assumptions and make adjustments as appropriately.
Patrick Donnelly
Citi
Okay, that's helpful. Makes sense. And then maybe just a quick follow-up on China. You know, low single-digit growth for you guys. There are a lot of noise in the region, you know, between the tender process, general macro headlines. Can you just expand a bit on what you guys are seeing there? Again, it's always hard to remove a little bit of the comp noise and COVID noise. So we'd love just your thoughts on China and what you're expecting on the go forward.
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, I think even the way you framed the second part of that question sort of for us explains what's going on, right, which is we have low single-digit growth. In the year-ago period, we had incredibly strong COVID response revenue in China. So, you know, that drives that. When I look at bookings, which gives you a sense of kind of new orders, that grew about 10% of the quarter. So that activity was good. We have a strong backlog there. And in reviewing what's going on with our local team, you know, conditions actually continue to be good. And, you know, the government's focused on, you know, some of the initiatives that would drive you know, strong long-term growth, you know, the focus on biotech industry and food safety, those kinds of things. So I think China ultimately continues to be a nice, strong growth market for the company going forward.
Patrick Donnelly
Citi
Great. Thank you, Mark.
System
System
Your next question comes from the line of Tycho Peterson of J.P. Morgan.
Tycho Peterson
J.P. Morgan
Hey, good morning. Mark, first question, you know, on supply chain. I don't think anybody, you know, it's a huge risk for you guys. You obviously can handle these things well, but can you maybe just give us some color on what's going on on the ground? Like, are you able to pass on higher resin costs? Are there, you know, component shortages? And do you have to kind of work down inventory? I'm just kind of curious on, you know, some of the gives and takes around supply chain for you guys right now.
Mark Casper
Chairman, President, and Chief Executive Officer
Thank you. Good morning. Thanks for the question. Yeah, so supply chain, you know, as you step back on a level above thermal fissure and then get to thermal fissure, right, you know, the world is clearly experiencing supply chain disruptions, right? And, you know, it really is the pandemic is unwinding. You know, we're all seeing that. And the duration and the impact of that still to be determined, right? And As I think about our company, it's really the scale advantages we have and the incredibly strong execution capabilities we have because of our PPI business system, it's a real competitive advantage, right? And we're well positioned to navigate these environments better than the smaller, less capable companies. So that's how I think about it. As I think about Q3, there was no material impact in our results based on supply chain challenges. The areas that you see them that are being managed, things like freight and logistics, delivery times are a little bit slower, so you have things like that that you have to manage through, and electronic components, things of that sort. And we're managing through those things effectively, and I have high confidence in our team's ability to navigate it in a very strong way. And I think we'll be talking about this in some fashion across the world, not across Pacific with exercise tools and diagnosis, probably into 2022. Okay, that's helpful.
Tycho Peterson
J.P. Morgan
And then follow up on PPD. Last quarter, you talked about the second request from the FTC. Since then, you've had the recent CMA developments. I know you reiterated the timelines to close by year end, but can you maybe just update us on how that process is going and was the CMA development expected in your view?
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah. So, Tycho, in terms of PPD, it's going well and on track. So we're largely complete with the U.S. FTC process, and there's no surprises on the remaining couple of filings, including working with the U.K. government. So those are all more anticipated when we to announce the transaction. So that's all progressing well, and we feel confident in our ability to have the opportunity to welcome our new colleagues during the fourth quarter to fellow Fisher Scientific. Okay. Thank you. You're welcome.
System
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Your next question comes from the line of Jack Meehan of Nefron Research.
Jack Meehan
Nefron Research
Thank you. Good morning. Mark, can you give us an update on the durability of the investments that you've been making in testing? I know you want to stay conservative around the outlook for COVID, but just how are you feeling about the durability on the PCR side? Any updates you can provide around uptake at MESA? And just a clarification, the M&A in the quarter, was that the contingent payment for MESA?
Stephen Williamson
Senior Vice President and Chief Financial Officer
So when we have an end of quarter, that's just continued revenue from Mesa. So that business is performing well.
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, so in terms of the durability, you know, embedded in our outlook from a de-risk perspective for next year is $750 million of COVID testing-related revenue. And we'll obviously refine that when we start the year and see what the world looks like. You know, there's obviously certain aspects of our response on the testing side that will have some level of durability, but it's a relatively modest number compared to the billions of dollars of COVID-19 qPCR tests and sample prep that we provided. The areas that you would expect to have longevity is going to be the increased installed base of qPCR instruments and sample prep instruments, which will get repurposed for other testing. We've obviously developed respiratory panels as well. So likely for the future, you'll see some level of people presenting with an upper respiratory infection and doctors will want to know whether it's COVID or flu or RSV. So you'll have some of that duration. And customer feedback on the... Mesa Biotech technology, super positive. I was talking to a large customer a couple days ago, and, you know, they did a head-to-head versus some other technologies and basically said, you know, the users just love it and are excited about working on developing a broader menu over time as well. So those are some of the things that will, you know, increase our, you know, share of business post-COVID or endemic COVID phase. And that's business that we really didn't have pre-pandemic. So I think that's pretty cool. But relative to the billions of dollars of revenue, it'll be a more modest number.
Jack Meehan
Nefron Research
Great. And then my second question is on analytical instruments. I hate to nitpick small numbers. The compounded growth by my math stepped down from like 4.5% to maybe 3% in the quarter. You know, just curious how the order book there is shaping up. And can you give any color on what the guidance implies for the fourth quarter for that segment?
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah. So, Jack, you can nip anything you want. It's good to focus on the areas that aren't clear. So, actually, when I step back and look at analytical instruments, actually, a very solid quarter. Very strong performance in electron microscopy. Chromium aspected very well. We're super excited about ASMS performance. which is just upon us, and exciting product launches. I highlighted a few of them on the call with the TSQ quadrupole mass spectrometers where we updated all three, our new UHPLC system. So when you actually look and say you look at the details of the numbers, We saw softness in parts of chemical analysis. That's really what's in there. And you haven't seen a full recovery in some of the industrial end markets. You see great strength in things that are semiconductor material science related that shows through across our businesses. But in some of the, what I call, historically core industrial, you haven't seen a full recovery over the last couple of years. So that's what is kind of embedded in the numbers.
Jack Meehan
Nefron Research
Got it. Steven, any color on 4Q for the segment?
Stephen Williamson
Senior Vice President and Chief Financial Officer
No, it's continued good performance in that business, and bookings were strong in the quarter, and outlook for Q4 and 22 looks very positive. Thank you.
Jack Meehan
Nefron Research
Thanks, Shane.
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Your next question comes from the line of Derek DeBrown of Bank of America.
Derek DeBrown
Bank of America
Hi, Derek. Hey. Hi. Good morning. A couple of questions. So just to take it a little bit, follow up on Jack's question there. And any sort of issues in shipping analytical instruments in the quarter and getting things installed? I mean, just getting into labs or logistics and moving around. Just wondering if, you know, I mean, 3Q is always a little bit of a squirrely quarter anyway, given seasonality. I just was wondering if... you know, there was also something compounded just in terms of not being able to ship some products or get some things out the door, get some revenues recognized because of the current situation?
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, you know, nothing that jumped out at me as being significant, Derek. When I think about bookings were stronger and, you know, Maybe shipping took a day or two longer, so there could be some math in that, but none of our teams talked about lab not ready, shipping delays. Nobody used this as a discussion topic in our deep reviews with the business, so is it possible? Yeah, but nothing that jumped out as being material from that perspective. Bookings were strong, so I think that's encouraging for the upcoming few quarters.
Derek DeBrown
Bank of America
Okay. And, Mark, how are you thinking about wage inflation and retention. And particularly, this relates to, as you think about PPD, I mean, obviously, there's a big war for talent in the clinical research associate population, you know, transitions between, you know, acquisitions of CROs tend to, you know, create some volatility in terms of headcount. And I'm just sort of thinking about, you know, on your biopharma services segment, you know, how you're sort of dealing with potential disruptions or trying to, you know, stem off some of the, you know, headwinds you could see there?
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, so when I think about our team, let's start with the Thermo Fisher scientific team, and I'll make a brief comment about PPD. We have a terrific team, right? They have delivered these spectacular results for year in, year out, quarter in, quarter out, including in very trying times of the pandemic. And they make a difference. And we have done a really, we've been really focused on ensuring that this is the best place to work. We talked last quarter about some of the additional compensation actions we've taken. We continue to do that to recognize the strong performance. We've invested in our facilities, training. We are recognized for world-class development training. These are things that we continue to focus on, and that really has allowed us to have very, very strong retention of our teams. PPD is a very well-run business with a great leadership team that's navigating the environment while the business is performing. It's lifting it as it is and running it as it is going forward. And over time, we're going to come up with some great new solutions that will make a difference for customers. But this is a growth-oriented, customer-oriented, patient's benefit acquisition. So, you know, the feedback that the PPD team that's getting on their colleagues is super positive and super excited, and we're looking forward to the transition to our company in the fourth quarter.
Derek DeBrown
Bank of America
And if I can squeeze one more in on China, how much your portfolio is manufactured in China that would not be subjected to, you know, the buy or would be sort of would be part of the buy local sort of like push there? Just sort of some idea on your manufacturing footprint there and what we consider as being outside versus inside China.
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, I mean, we have very scale manufacturing facilities in China for China. And we also import, you know, a number of products into the market. And the way you can almost think about it is if there is no local alternative for the products, you often see them imported into the country. If there is local alternatives, they often come from either our Chinese operations or other low-cost regions around the world. That's the way to think about it. It's not 100% accurate, because I'm sure there's some things that have local competition that could shift into the country, but that's the strategy at a high level, and that's served us well. We're well-positioned to support our Chinese customers, and in areas where the Chinese customers really want, you know, high degree of supply chain assuredness, things like single-use technologies, we build a very scaled facility in Suzhou to be able to meet those needs.
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Thank you.
Mark Casper
Chairman, President, and Chief Executive Officer
You're welcome.
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Next question comes from the line of Dan Arreyes of Stifel.
Dan Arreyes
Stifel
Morning, guys. Thanks for the questions. Mark, two questions for you, one on biopharma and one on the NIH, if I can. On biopharma, I'm just curious what your expectations are for flush spending at the end of the year here. Obviously playing nuances in that segment, so do you feel like it's more or less likely to be just sort of similar to what we've seen in non-pandemic years?
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, so Dan, good morning. In terms of You know, Farm and Biotech, this is performing really well, right, in terms of the growth that we are delivering with the 20%, better than 20% growth in the quarter. We're assuming, which is the convention we use every year, we're assuming an average year-end spend across our customer base. And we really don't get visibility until right after the Thanksgiving holidays. So we use that convention. And, you know, that served us well. I think most years it's been average or above average. It was one year that it was below average from recollection over the last number. So that's how we think about it.
Dan Arreyes
Stifel
Okay. And then maybe on the NIH funding dynamic, which you've usually got a pretty decent line of sight into, as we head into next year, I'm just curious if you have a view on the budget and the way that it looks like it might be allocated, just given that you have that core budget and that ARPA-H component. Are you hearing anything about the ARPA-H funding and whether it will sort of just be accessible to basic researchers? I mean, I don't want to come out of left field with that one, if that's what it sounds like, but it seems like that is sort of a question in the academic world, and there really aren't too many good people to ask about that, so I figured I'd throw it out there.
Mark Casper
Chairman, President, and Chief Executive Officer
So Dan, it's not clear yet. And I think that ARPHA-H concept is a really important concept for the US. The way to think about it is you have defense spending. Defense spending prepares for all of the what could happen, and you invest in different technologies to defend the country. ARPA-H is the healthcare equivalent. It's investments in things to anticipate future challenges, as opposed to typically our research is solving clearly known challenges that you have now. So I think that the fact that we're going to have longer-term funding that would prepare for the next pandemic or other future challenges. I think it's fantastic and will spur great research. How that exactly is going to be allocated, I haven't seen it. It may come out, but I haven't seen the details of how that's going to be done. And I know that the U.S. is not the only country that's talking about using vehicles like this. So I think this is one of the reasons that we're so excited about what the scientific funding is going to be like going forward in our industry, and we're incredibly well-positioned to serve that.
Dan Arreyes
Stifel
Okay. Appreciate that. Thanks, Mark. Sure.
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Your next question comes from the line of Vijay Kumar of Evercore.
Vijay Kumar
Evercore
Hey, guys. Congrats on a nice sprint, and thanks for taking my question. Mark, maybe one on the fiscal 22 guidance raised here by a couple of hundred million. It looks like the base came up by 250. I'm curious where the strength is coming from. Would you say that's coming from biopharma across the board or, you know, what is driving that base improvement?
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, so, Vijay, good morning. Thanks for the question. As I thought about the, you know, 2022, you know, we obviously saw strength across our company in Q3 and in the core, and we flowed that entirely into the next year. And, you know, obviously very strong performance in pharma and biotech, so that's very encouraging and is obviously, you know, a large driver of that. But we saw good performance actually across the different parts of our business. So I don't want to say it reflects the portfolio of activities that we have. It's the way we think about the strength of the core.
Vijay Kumar
Evercore
And just, I think, to clarify that more, I think the base now includes, you know, vaccine contribution. But this is, I guess what you're saying is this is across the board. This is not just, you know, vaccine outlook improving, correct?
Stephen Williamson
Senior Vice President and Chief Financial Officer
Yes, Avita, just to clarify, so we've got core and base. So within the guidance rate for next year, it's basically up $250 million, which includes $190 million from the base plus $60 million more vaccine and therapies. The combination of all of that is $250 million for the core and then slightly decreased because of FX, less tailwind. So it's kind of strengthened the base business and the vaccine and therapies that's being carried forward into 2022.
Vijay Kumar
Evercore
That's helpful, Stephen. And just one quick one on the tax side. How should we think about any potential tax reform changes in impact to thermal?
Stephen Williamson
Senior Vice President and Chief Financial Officer
The guidance we've given here doesn't assume any significant U.S. tax reform or other tax reform across the world, and we continue to monitor the changing dynamics closely in D.C. and advocate for if change needs to happen, that the right change happens without unintended consequences so that we actually understand revenue raised is being paid for, but let's make sure that that's being done in a logical way. The company has a competitive advantage in that tax position versus other well-run companies, and we expect that competitive advantage to be continued forward through whatever changes potentially can happen. So that's the best way to think about tax for the company.
Vijay Kumar
Evercore
Thank you, guys.
Stephen Williamson
Senior Vice President and Chief Financial Officer
Thanks, Vijay.
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Your next question comes from the line of Dan Brennan of Cal.
Dan Brennan
Cal
Great. Thanks for taking the question, Mark. It's hard to find anything positive to shout out for the Jets at this point. So the first question is on bioproduction. So maybe I missed it in the prepared remarks. Can you just discuss what the base growth did this quarter, so X, the COVID contribution, and kind of what's implied in 4Q and 22 and any color on trends there?
Mark Casper
Chairman, President, and Chief Executive Officer
Yeah, so Dan, thanks for the question. And in terms of the jets, yes, painful for sure. In terms of bioproduction, exactly the opposite of that, which is things that are extremely robust and doing very well. So when I think about the, I'll give it at the sort of the biotech and pharmaceutical level, right? With a little bit over 20% growth in the quarter, you know, you had the $510 million of vaccine and therapy revenues. So you saw very strong growth, you know, excluding the contribution from vaccines and therapies as well. When you look to the outlook, while we don't guide, obviously, by segment, we would expect that biotech continues to be very strong, and, you know, we're expecting a meaningful level of growth, you know, coming from it. that in 2022 as well. The end market looks very robust. Scientific discoveries are very strong. Customer demand is good. We're seeing strong interest in our clinical trials, packaging, logistics capabilities, so that bodes well. So I say the cycle is very good, and we're well positioned to capitalize on it. You know, I think one of the things that... maybe investors don't have a 100% understanding of. If you think about what the company looks like upon close of TPD, we have about $20 billion of revenue serving pharmaceutical and biotech. About half of that is actually serving production. And when you think about that, that is the largest position serving the production market by far. And then we obviously have very attractive positions in serving both clinical trials and the research activities as well. So we're well positioned to deliver great growth into the future.
Dan Brennan
Cal
Great. Thank you for that. And then maybe just a high-level follow-up. You know, at the end, I'll say, obviously, the 79% growth outlook was stronger than expected. And I know at the time you discussed execution, healthy end markets to support that outlook. You know, we certainly feel the questions from investors regarding, you you know, Thermo typically has, you know, set a reasonably conservative bar and executed well against that. So just maybe just wondering the 7% to 9%, should we think about that similarly having any conservative bias? If so, can you just help us think through any of the, you know, the drivers or details, you know, of that guidance? Thanks, Mark.
Mark Casper
Chairman, President, and Chief Executive Officer
So you made me smile, which is good. You know, we haven't even gotten into the period yet, which we'll on 2021 right now but when I think about the philosophy around the seven to nine it's the exact same philosophy that we had when we had you know you know the continued increase in growth over time at the company which is you sign up for targets when you're able to do when you demonstrated you're delivering it right and you have confidence in your ability to do that and we have great confidence in our ability to deliver the seven to nine percent growth We're not going to cap ourselves at the 7 to 9, right? So we're going to focus on delivering as much as we can, right, and deliver great performance. And we'll look at the strength of our end markets and what's our share gains look like and set the appropriate annual targets. But we felt, you know, that 7 to 9 was an appropriate number, one that we have a high degree of confidence in the ability to deliver and with the goal to work to the biggest possible number we can over time.
Dan Brennan
Cal
Thank you.
Mark Casper
Chairman, President, and Chief Executive Officer
You're welcome, Tim.
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Your next question comes from the line of Puneet Sudha of Lear Inc.
Puneet Sudha
Lear Inc
Yeah, thanks, Mark. Thanks for taking the question. First one, just a clarification. I know five to 11 year olds vaccinations were, you know, voted positively by the panel yesterday. So just wondering if that's already contemplated into this guidance. I know that was a little bit later in the day, so likely not, but I just wanted to confirm and also on the boosters wanted to confirm if that is also contemplated in the fourth quarter and increase for vaccines in 2022.
Mark Casper
Chairman, President, and Chief Executive Officer
So, Puneet, when I think about how we've done our outlook on vaccine and therapy, it really is based on dialogue with our customers and orders that they have given us. So, you know, it's not 100% on the orders, because some of them say, hey, we're going to give you the orders, we're working on the paperwork, and some of it is, you know, So it's less about children or boosters or those things than actually what our customers are saying, the activity that they want. But obviously, things like vaccine mandates and booster shots and You know, children, you know, adds to the durability of the demand for vaccines and therapies. You know, we're largely operating, you know, with our capacity, so you don't get short-term swings in the volumes based on new pronouncements, right? You get them over time. So that's how we thought about it.
Puneet Sudha
Lear Inc
Great, thanks. And the last question for me is just on capacity expansion. Could you provide a view into, you know, the need for further capacity expansion in bioproduction at this point? You opened the Sizzlent site for biologics production, larger vessels, pipette tip production as well that's coming on board, key facility expansions that have happened. So overall, just wondering what you're hearing from the biotherapeutics customers overall and from the C-suites there in terms of the demand and your need to further expand the capacity at this point in the cycle of, you know, sort of post-COVID?
Mark Casper
Chairman, President, and Chief Executive Officer
In general, Puneet, we have in flight the activities that we need to meet the anticipated demand. Obviously, we're going to complete a lot of these projects during the course of 2022. A little bit goes into 2023. But it's largely what we have started already. If there are specific opportunities that are part of our longer-term roadmap that makes a difference, you may see us evaluate them, but there's not a long list of those. We've been very aggressive to position ourselves to meet our customers' future needs and the commitments we've gotten, and that puts us in a great spot. So that's how we've thought about it. So let me wrap it up here. I want to thank everybody for participating. And, you know, with a strong nine months behind us, we're in a great position to achieve another excellent year. As always, thank you for your support of Thermo Fisher Scientific, and we look forward to updating you early in 2022. Thanks, everyone.
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This concludes today's conference call. You may now disconnect.
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