Thermo Fisher Scientific Inc (TMO) — Q2 2024 Earnings Call Transcript

Good morning, and thank you for joining us. On the call with me today is Marc 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, Events, and Presentations until August 7, 2024. A copy of the press release of our second quarter 2024 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 and 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 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 second quarter 2024 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 Marc.

Raf, thank you. Good morning, everyone and thanks for joining us today for our second quarter call. As you saw in our press release, we had great results for the quarter. We're making excellent progress to deliver differentiated results for the year. I'm proud of our team as they executed at a very high level to enable our customers to make the world healthier, cleaner, and safer. This continued success is a result of our proven growth strategy and our PPI business system. So first, let me recap the financials. Our revenue in the quarter was $10.54 billion. Our adjusted operating income was $2.35 billion. Adjusted operating margin increased in Q2 to 22.3%. And we delivered another quarter of strong adjusted EPS performance, achieving a 4% increase year-over-year to $5.37 per share. Our performance in the second quarter is allowing us to raise our guidance once again and continue our track record of delivering differentiated results. Turning to our performance by end market, in the second quarter, underlying market conditions played out as we expected. Our team's excellent execution drove share gain in the quarter, and we delivered a sequential improvement in growth in all four of our end markets. Let me provide you with some additional context. Starting with pharma and biotech, we declined in the low-single-digits for the quarter. The vaccine and therapy revenue runoff resulted in a 4 point headwind for this customer segment. Performance in the second quarter was led by our biosciences and clinical research businesses. In academic and government and in industrial and applied, we grew in the low-single-digits during the quarter. In both these end markets, we delivered strong growth in our electron microscopy business. Finally, in diagnostics and healthcare, we declined in the low-single-digits. As a reminder, the reported growth in this end market is impacted by the runoff of COVID-19 testing-related revenue. During the quarter, the team delivered good core revenue growth highlighted by our transplant diagnostic and immunodiagnostics businesses, as well as our healthcare market channel. As I reflect on our performance during the quarter and on a year-to-date basis, I feel very good about the progress we've made at the halfway point of the year. Our end markets are playing out as we expected, and our team's execution has been excellent. I'll now turn to an update on our growth strategy. As a reminder, our strategy consists of three pillars. High impact innovation; our trusted partner status with customers; and our unparalleled commercial engine. Starting with the first pillar, it was a fantastic quarter of innovation as we launched a number of high impact new products across our businesses. I'll begin with the new technologies we launched at the American Society for Mass Spectrometry Conference, further strengthening our industry-leading position in analytical instruments. At the conference, we introduced the Thermo Scientific Stellar Mass Spectrometer, which extends our leadership in proteomics. The Thermo Scientific Stellar is used to validate biomarker candidates. It offers unprecedented analytical capabilities for targeted quantitation, enabling the insights needed by researchers to advance their work. It's a perfect complement to our groundbreaking Thermo Scientific Orbitrap Astral, used for protein discovery that we launched last year. It was incredibly exciting to hear the customer testimonials sharing the power of the Orbitrap Astral. To date, we've had more than 40 publications that incorporated the impact of this breakthrough, and we're really just getting started. Also at ASMS, we launched three new build-for-purpose editions of the Thermo Scientific Orbitrap Ascend Tribrid Mass Spectrometer tailored to specific applications for MultiOmics, Structural Biology, and BioPharma. These instruments continue to elevate our industry-leading Thermo Scientific Orbitrap portfolio by offering enhanced speed and sensitivity to detect and characterize the most difficult protein samples, including complex biologics. This quarter we also launched products to help our customers meet their own sustainability goals. In our bioproduction business, we introduced a first-of-its-kind bio-based film for our single-use technologies. These new bioprocess containers use plant-based material rather than fossil fuel materials to provide lower carbon solutions for the manufacture of biologics. And in our laboratory products business, we launched a new line of Energy Star certified Thermo Scientific TSX universal series ULT freezers that deliver industry-leading performance and energy efficiency to help labs meet their sustainability goals. Turning to the highlights of our second and third pillars of our growth strategy, during the quarter we continued to strengthen our industry-leading commercial engine and the trusted partner status we've earned with our customers. Our customers rely on us to help accelerate their innovation, increase their productivity, and advance their important work. I spent a lot of time connecting with customers to understand their near and long-term priorities so that we can enable their success. As a result of these unique relationships, we continue to advance our capabilities to be an even stronger partner for our customers. Let me give you a couple of examples from the second quarter. We expanded our leading clinical trial supply services with a new ultra-cold facility in Bleiswijk in the Netherlands to offer pharma and biotech customers tailored end-to-end support throughout the clinical supply chain for high-value therapies, including cell and gene therapies, biologics, antibodies, and vaccines. We also opened a state-of-the-art innovation lab at our site in Center Valley, Pennsylvania, to showcase our innovative solutions for global clinical trial supply, including new packaging solutions, real-time tracking and tracing, and enhanced clinical trial setup and planning. In addition, we advanced partnerships and collaborations with our customers during the quarter. Let me give you a couple of examples in the Asia Pacific region. To support Indonesia's growing investments in healthcare, scientific research, and renewable energy, we further expanded our presence and capabilities in the country. We are collaborating with the National Battery Research Institute to advance battery technology and energy storage, as well as with the Mandaya Hospital Group to help advance stem cell research and cell therapy development. In Singapore, we announced a collaboration with the National University Hospital in Mirxes, a local RNA technology company, to develop and clinically validate advanced next-generation sequencing genomic testing solutions specifically made to address the needs of the Southeast Asian population. So another strong quarter of executing our growth strategy. Let me now turn to our PPI business system, which enabled excellent execution during the quarter. PPI engages and empowers all of our colleagues to find a better way every day. During the quarter, I had the opportunity to see the PPI efforts to further improve manufacturing of our lab equipment products, and I came away incredibly impressed with the progress to drive operational efficiency in this business. It's also great to see how PPI has been adopted in our clinical research business, where it is driving meaningful improvements in our efficiency and customer allegiance. Ultimately, you see the positive impact of our PPI business system and our Q2 results reflected in strong profitability and cash flow that we delivered in the quarter. We also advanced our corporate social responsibility priorities during the quarter. As a mission-driven company, we helped to make the world a better place by enabling the important work of our customers. We also create a positive impact by supporting our communities and being a good steward of our planet. We continue to make progress on our environmental sustainability roadmap in Q2. As part of our commitment to safeguarding the world's natural resources, we have set targets for 2025, which include zero waste certification for 30 manufacturing and warehouse sites. During the quarter, three more of our sites attained zero waste certification, and we're on track to achieve our goals. You can learn much more about our progress in our 2023 Corporate Social Responsibility Report, which was published during the quarter. The report provides a transparent account of our journey as we fulfill our commitments to society and all of our stakeholders. Let me now give you an update on capital deployment. We continue to successfully execute our disciplined capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. Shortly after the quarter ended, we completed our acquisition of Olink, and it was great to welcome our new colleagues to the company earlier this month. As you know, Olink is a leading provider of next-generation proteomic solutions. The addition of Olink’s proven and transformative technology is highly complementary to our industry-leading mass spectrometers. Olink further advances our leadership as it is a great addition to our differentiated protein research ecosystem. Our world-class commercial engine will enable us to bring this technology to scientists around the world. By increasing the use of next-gen proteomics and providing industry-leading data quality at scale, we're in a great position to further enhance the understanding of human biology and meaningfully accelerate scientific breakthroughs. So as I reflect on the quarter, I'm proud of what our team accomplished and grateful to their contributions to our success. Let me now turn to our guidance. Given our strong performance in the second quarter, we're raising our 2024 guidance. We now expect revenue to be in the range of $42.4 billion to $43.3 billion and adjusted EPS to be in the range of $21.29 to $22.07 per share. Stephen will take you through the details in his remarks. So to summarize our key takeaways from Q2, we delivered another quarter of strong results driven by our proven growth strategy and PPI business system. We continue to enable our customer success and this reinforces our trusted partner status and industry leadership. Our strong results in Q2 allowed us to raise our guidance again for the year. We're well-positioned to deliver differentiated performance in 2024 as we continue to create value for all of our stakeholders and build an even brighter future for our company.

Thanks, Marc, and good morning, everyone. I'll provide an overview of our second quarter results for the company and discuss our four business segments, followed by our updated guidance for 2024. Before diving into the specifics of our financial performance, I'll share a high-level perspective on how the second quarter compared to our expectations from the last earnings call. As Marc stated, market conditions were in line with our expectations, and we executed excellently, allowing us to surpass the Q2 financials we had anticipated. Starting with revenue, core organic revenue growth exceeded our previous guidance by just over half a percentage point, equating to around $60 million, although this was partially offset by slightly increased foreign exchange revenue headwinds. For the bottom line, adjusted EPS was $0.25 higher than our prior guidance, with $0.08 attributed to strong operational performance, $0.06 from favorable effects and discrete tax planning benefits, and $0.11 from reduced net interest expense. I had approached the Olink transaction conservatively from a financing cost perspective. We are also on track with free cash flow generation, which is 68% higher year-to-date compared to the same period last year. This strong performance positions us well at the mid-year point. Now, regarding Q2 specifically, adjusted EPS rose 4% to $5.37, while GAAP EPS climbed 15% year-over-year to $4.04. However, reported revenue was down 1% compared to last year, consisting of a 1% decline in organic revenue, a 1% foreign exchange headwind, and a minor contribution from acquisitions. We achieved another notable sequential increase in core organic revenue growth this quarter, rounding up to flat on a year-over-year basis. Pandemic-related revenue was approximately $115 million, primarily from vaccines and therapies, presenting a 3% headwind to organic revenue growth. Geographically, organic revenue performance in Q2 showed a mid-single-digit decline in North America, low-single-digit growth in Europe, and mid-single-digit growth in Asia Pacific, including China. On the operational front, we reported $2.3 billion of adjusted operating income in the quarter, with an adjusted operating margin of 22.3%, up 10 basis points year-over-year and 30 basis points higher than Q1 2024. Our adjusted gross margin for the company was 42.1%, up 110 basis points compared to Q2 last year. We maintained strong productivity, focusing on cost management while benefiting from last year’s cost actions, allowing us to counteract the low volume impacts while investing in our industry leadership. In terms of our income statement, adjusted SG&A was 16.6% of revenue. We spent $340 million on R&D in Q2, 7.1% of our manufacturing revenue, reflecting our commitment to high-impact innovation. Below the line, net interest expense for Q2 was $59 million, significantly reduced compared to Q2 2023 due to higher cash and investment balances. Our adjusted tax rate was 10%, and our average diluted shares stood at 383 million, about 5 million lower than last year, due to share repurchases offsetting option dilution. Looking at free cash flow and our balance sheet, we generated $3.2 billion in cash flow from operations year-to-date, with free cash flow of $2.6 billion following $630 million in net capital expenditures. We ended the quarter with $8.8 billion in cash and short-term investments, alongside $35.4 billion in total debt. Our leverage ratio was 3.3 times gross debt to adjusted EBITDA and 2.5 times on a net debt basis. The suggested return on invested capital was 11.8%, showcasing the strong returns we’re generating. Turning to our four business segments, starting with life sciences solutions, Q2 reported revenue decreased 4%, and organic revenue fell 3% year-over-year. Growth was primarily driven by our biosciences business despite the pandemic’s impact. Adjusted operating income in this segment rose 6%, with an adjusted operating margin of 36.7%, up 350 basis points from last year. We achieved strong productivity but faced some unfavorable volume pull-through. In the analytical instrument segment, reported revenue increased by 2%, and organic growth was up 3%. Our electron microscopy business performed strongly. Adjusted operating income grew by 1%, with an adjusted operating margin of 24.6%, slightly declining year-over-year. We exhibited strong productivity again, though it was offset by unfavorable mix and strategic investment. For specialty diagnostics, both reported and organic revenues increased by 1% year-over-year, driven by growth in our core areas, notably transplant diagnostics and immunodiagnostic businesses, as well as in our healthcare market channel. Adjusted operating income in this segment rose 1%, with an operating margin of 26.7%, unchanged from Q2 2023. Good productivity was matched with necessary strategic investments. Lastly, in the Laboratory Products and Biopharma Services segment, reported revenue and organic growth each experienced a 1% decline year-over-year, primarily due to the drop in vaccine and therapy-related revenue. The clinical research business led the segment’s growth. Adjusted operating income fell by 10%, with an adjusted operating margin of 12.9%, down 120 basis points year-over-year. We again achieved strong productivity, but it was more than offset by volume mix issues and strategic investments. Now, regarding our updated guidance, as Marc noted, due to our strong Q2 performance, we are raising our full-year guidance for 2024. We now expect revenue in the range of $42.4 billion to $43.3 billion and adjusted EPS between $21.29 and $22.07. The increased revenue guidance does not alter our core organic revenue growth projection for the year, which remains between minus 1% to positive 1%. We still anticipate the market to decline in low-single digits this year. Our consistent growth strategy and PPI business system execution will support our continued market share gains. Our updated guidance assumes an adjusted operating income margin between 22.5% and 22.8%, slightly up from prior estimates. We expect net interest costs to fall between $380 million and $400 million for the year. The adjustment to our adjusted EPS guidance reflects a $0.15 increase at the lower end and a $0.05 increase at the higher end, leading to a $0.10 rise in the midpoint. We experienced another robust quarter of execution, allowing for an enhanced guidance outlook for the year, positioning us strongly to maintain our differentiated performance.

Operator, we're ready for the Q&A portion of the call.

Great. Thanks for taking the questions, guys. Congrats on the quarter. Marc, a high-level one for you to start off maybe, at our Vegas Health Care Conference in May, you made some initial comments about 2025 market expectations. And you said that you expect the tools market next year would be just below the 4 to 6 level it has historically been. Just given the way the year is playing out, how you're exiting 2024, entering 2025. It's been a couple months since then. You've got hopefully a clearer view of how 2024 is going to play out. So given where you sit now, do you have more confidence in that 2025 market assumption and maybe how Thermal can deliver differentiated performance above that?

Mike, thanks for the question. It was a pleasure to be with you earlier in the quarter. Let me start by framing a few general thoughts before discussing 2025. In Q2, the team executed exceptionally well, delivering strong financial performance that exceeded our expectations, enabling us to raise our guidance. The actual performance was clearly very strong and differentiated. It was good to see that our core has now stabilized, achieving 4% adjusted EPS growth and margin expansion. I feel very positive about our performance, and the market was in line with our expectations, which is reassuring as we see the return of visibility we've enjoyed for decades. I was pleased to observe sequential growth improvement across all four of our markets, representing a very positive development. Our PPI business system is having a significant impact, and I am optimistic about our performance. Capital deployment has been effective, with over $6 billion allocated in the first half of the year—half on returning capital and half on our exciting acquisition of Olink. We are in a strong position to deliver excellent results. Looking ahead to 2025, I plan to provide more insights in January 2025 once we have the year's results in context and are focused on delivering a strong year. I expect the market to continue to modestly improve in the second half of the year, with each quarter performing better than the last. Our own performance should also improve, giving us momentum heading into 2025. We will provide more details in a few months.

Okay, fair enough. And then for my follow-up, I want to focus on China, I think if I heard correctly, you called out that it grew mid-single-digits in the quarter. I want to make sure I heard that right. But if so, that's a bit surprising. Anything you could say in terms of what you're seeing there? Is that also ahead of your expectations and is this just a temporary bump in the quarter or something one-timey or are you seeing some real traction here and you think that can get you into your end? Thanks.

Yes, your hearing is excellent. So yes, we delivered mid-single-digit growth in the quarter. The team did a nice job, really good execution. The comparison was relatively easy in the quarter, so and I would still characterize the conditions as muted in terms of the environment, but a nice job by the team to deliver a very solid Q2 result. Thanks, Mike.

Thanks. Good morning, guys. Wanted to start by asking about LSS, so this had some nice sequential improvement in the growth rate. I heard biosciences led to growth. Can you talk about the relative improvement you're seeing there, or also genetic sciences and bioprocessing? And any updates on where you think your customers stand in terms of e-stock?

Yes, Jack, thanks for the question. I would like to highlight the key points regarding our life science solutions segment. It's great to see growth in our biosciences business, which is performing well every day in laboratories, especially with strong adoption in the pharma and biotech sectors. This is a positive development. Regarding bioproduction, which is a significant focus for our investors, the business is progressing as we anticipated and had a strong quarter. Specifically, we experienced impressive sequential revenue growth in Q2, and our orders showed significant sequential growth as well as year-over-year increases, leading to a favorable book-to-bill ratio. Overall, I feel very confident about our performance compared to others in the industry. In the life science solution segment, these are two of the main growth drivers, and we've also made recent announcements related to important companion diagnostics. Our clinical sequencing business is performing quite well. So, Jack, I appreciate your question on LSS.

Excellent okay and then one to rotate to AI, so this also came in a bit better than I was expecting. Can you talk about how the book-to-bill was in the segment in the quarter? And just update some customer spending patterns? Thanks.

Yes. So when I think about Analytical Instruments, it was nice to see the 3% growth in the quarter and very positive. Yes, I would say the market conditions also are playing out pretty much as we expected and not at the normal levels yet, and we certainly see the impact of the muted conditions in China. We have really excellent momentum in those differentiated products that we have where innovation matters, on orders as well as on revenue. When you look at electron microscopy, you look at the Orbitrap Astral, just the cutting-edge work, you've seen incredibly strong momentum there. So that's where the highlights are, and I would say in the more routine-ish aspects of the portfolio, you see more muted conditions. Thanks, Jack.

Perfect. Hi, good morning, you guys. Thanks so much for taking the questions. Wanted to follow-up on some of the China comments. You mentioned that China grew mid-single-digits, partly due to the comp there. Can you just walk us through what are you seeing from China stimulus? We heard that this first tranche of funding was released earlier this quarter. So have you seen any orders related to China stimulus? Do you think that you'll benefit from this first tranche? And then also, have you seen any customers holding back spending related to the stimulus program? Kind of getting at this like air pocket that we've heard some of your peers talk about. Any comments there would be helpful.

Rachel, thanks for the question. It's an important question. So let me start at the sort of high level and then get down to the stimulus and then try to as much transparency as I possibly can. First of all, I think the world was surprised at how weak China was economically as this year unfolded. The stimulus programs announced early in the year was a sign that the government wanted to get the economy going, which is a good thing, right, in terms of sort of what is the macro backdrop in terms of a tough economic environment. When I think about stimulus in our industry and what we're seeing, tremendous amount of activity with our customers actually to help them with figuring out what to apply for. And so we know there's quite a bit of interest in our products from a stimulus perspective, and we're helping our customers in that process. When I think about how do I expect it to play out, my expectation is that it's largely going to show up in revenue in 2025 and likely to have some small effect in the fourth quarter of 2024 as well. I did ask the question about air pocket to the team, and I'm actually heading off to China in a couple of weeks' time, so I'm looking forward to that. Our team didn't highlight any air pocket or anything like that. So it's kind of muted conditions, and customers are working on looking at the investments associated with the additional government funding. So we didn't see any pauses in the activity, and I'm proud of the team's mid-single-digit growth in the quarter.

Great. And then just as my follow-up here. On the CRO, you called out clinical research was an outperformer this quarter that drove some of the growth. So we've seen a few volatile prints from your peers. So can you walk us through what have you seen from an RFP standpoint and book-to-bill in the quarter for PPD? And then have we turned the corner on emerging biotech funding and kind of how is that flowing through the model as well?

Yes. So Rachel, the team has done a really nice job executing very well in our clinical research business. And when I think about our performance, we delivered positive organic revenue growth despite a really substantial headwind from the runoff of vaccines and therapies in that activity. So the team is doing a nice job. Commercial execution was very strong in the quarter, right? And customers value our capabilities. And when I sort of went under the details of the commercial performance and looked at some of the underlying trends, it was very clear that in Q2, we really did see some of the biotech funding activity that we talked about is a green shoot in Q1 that would give us confidence that the year in aggregate across our business would be improving from a market perspective. We saw that in Q2 actually translate into an acceleration of authorizations in our biotech customer base. And that really does bode well for that. And as you know well this business, that really translates more into revenue in ‘25 and ‘26 in terms of how long it takes to get the clinical trials up and going, but the authorization momentum is very encouraging in the quarter. Thank you, Rachel.

Okay, thank you and good morning everybody. Marc, when we look at two-year stacks and calculate CAGRs going back pre-pandemic, it seems like most business lines within Thermo continue to trend positively. I think your commentary is consistent with that on the call this morning. With that in mind, I think one of the key questions is, what's going to be the pace of improvement from here? So with that in mind, two questions. First, where is the recovery occurring more quickly than you may have expected? Where are things lagging? And I'm kind of thinking about this both in terms of how you guided for the year, but also just based on what you've seen through previous cycles. So that's one question. And then the second would be just keeping in mind your assumption that this market grows 4% to 6% on a normalized basis, is it fair to assume that recognizing you're making progress here, but just seeing what the pacing is, is it fair to assume that the move back into that range is going to be gradual versus a snapback? And essentially that this move into the 4% to 6% range, it's going to take several quarters?

Yes, Doug, that's a comprehensive question. I'll start by discussing the market and our performance, which is crucial for our investors. Before 2023, excluding the extraordinary market dynamics during the pandemic, we had a predictable, stable market with minimal volatility and solid underlying growth. There were no disputes about market growth during that time. Unfortunately, 2023 has been challenging for the industry due to various pandemic-related factors. Looking at the past three quarters, the visibility in the industry has been good, and things are unfolding as we anticipated. While there are always minor fluctuations, overall, I’m optimistic about the direction. Our guidance suggests that for the full year, growth will continue to improve in Q3 and Q4. Back in January, we anticipated the market would decline slightly, but it now appears stable or slightly positive in Q4. While we don't have absolute certainty, that’s the current outlook. I believe that by January, I’ll have a clearer understanding of quarterly progress. What’s crucial to me is my confidence in the long-term growth of 4% to 6%. I’m excited about Investor Day and fully believe in that growth target over a three to five-year period. The scientific advancements in our industry and the strength of our customer base are impressive, so I have no concerns there. Additionally, it's vital for us and our 125,000 colleagues that our customers prefer us over competitors. I’m confident in our ability to grow 2% faster than the market, and so far this quarter, we’ve met that objective. I hope that conveys my enthusiasm, and we’ll keep providing insights as the year concludes to clarify our expectations for next year. I believe our forecast accuracy is strong.

Okay. Marc, I have one more high-level follow-up question. Over the years, working with you and following Thermo, I've noticed that during tougher market periods, you and the company have taken an offensive approach while others have been more defensive. I acknowledge that each cycle presents its own challenges, and the last 1.5 years have been particularly difficult for Thermo. As conditions start to improve gradually, do you feel you're in a position to become even more proactive in capital deployment, business evolution, and other initiatives like you have in past cycles? Are you feeling more comfortable and confident in making those moves again? Thank you.

Doug, thanks for the question. When I think about the company's strategy and the trusted partner status that we've earned with our customers over many, many years, we're able to take a long-term perspective, while holding ourselves accountable for delivering excellent long-term results. And I love periods where not everybody is performing at the same level. It creates opportunities. I loved during the fact that the pandemic, we were able to accelerate our investments in innovation. Well, I mean I talked probably for five of my 15 minutes today on innovation. I had to truncate it because the list was so long. It is super cool. And our job is to differentiate our competitive position to deliver superior organic growth to the others and translate into great results. And I'm very excited about our ability to continue to do that and further differentiate our industry leadership going forward. So thanks for the question, Doug.

Thanks. Hey, Marc, a question on operating margins or maybe for Stephen. Lab products and services, obviously, you felt the headwinds from the vaccine and therapy roll off, but it was effectively at a two-year low. So just curious about how you think about margin for lab products going forward? And then as we think about 2025, if TPD and Patheon can grow above the corporate average, do you still have the ability to drive 40 to 50 bps of margin expansion or potentially could be higher or lower? Thanks.

Thank you for the question, Tycho. It's great to hear from you again. Regarding the margin profile for the quarter, we are mainly experiencing the effects of transitioning our vaccine-related capacity in sterile fill finish to other areas, which is probably the most significant factor. I'm optimistic about our ability to achieve strong margin expansion as revenue growth returns in certain segments of the business where we have effectively reduced our cost base and faced lower volumes. As those volumes recover, we anticipate beneficial pull-through effects. I look forward to providing more details in January regarding 2025. Overall, I feel confident about our capacity to enhance our margins considering the business mix.

Okay. And then one follow-up on CDMO capacity. You doubled fill finish over the last couple of years. Just curious, Marc, how you think about additional capacity expansion, how you think about capacity utilization in the industry and how actively you may look at some of the capacity that could get freed up from some of the recent M&A or potentially around BioSecure in the U.S?

Yes. So Tycho, when I think about our pharma services business and our capacity, where we play, I feel very good about our position. We've had very strong demand for our sterile fill-finish abilities, which is our largest activity, and we're doing well there. We've been expanding the number of lines we have at our sites, and demand has been strong for that. So I feel good about that outlook. In the clinical trials supplies, which is the other really large portion of our business and where we really have an unparalleled position, I highlighted a couple of examples of capabilities we're expanding. Effectively, we make sure that our capacity lines up with our forecasted demand. So it's not really an overcapacity viewpoint. And then on the other parts of the business, I feel okay about our position and nothing of note there. So that's pretty positive. And what we're going through right now, as a reminder, is we're transitioning a lot of the COVID-related activities to the normal therapies. And the team is doing a good job. It certainly impacts our growth in terms of headwind in 2024, but it becomes better in '25 and '26 as the new therapies and the tech transfers are complete and new lines come in place. So pretty good times ahead.

Thanks, I appreciate the color.

Thank you, Marc and Stephen, for taking my question. Marc, from your discussions with C-suite leaders and therapeutics teams, what insights do you have regarding the perspectives of larger biopharma clients compared to mid-cap and smaller, early-stage customers? How significant is the difference you observe between these groups, and when do you anticipate this gap might narrow?

Thank you for the question, Puneet. When I reflect on the key observations, I'm excited about our upcoming customer engagements. With our larger clients, which typically have numerous commercial products and those in development, there are several trends. First, they are increasingly focused on the resilience of their supply chains. Previously, they might have relied on single-site manufacturing, but now we see a shift toward utilizing multiple sites and leveraging our capabilities. This is essential for meeting their demand for medicines. Additionally, there's a growing interest in how we can assist them in being more innovative and productive. By prioritizing their most critical projects, we can help them maximize the results from their pipeline. For our smaller customers, 2023 brought about funding challenges, leading to conversations centered on how to navigate that period. However, after the first half of this year, there is greater confidence. Funding is starting to flow again, and there’s a strong belief that it will continue to be available, marking a significant shift. This renewed confidence is already evident through the early signs, such as new clinical trial authorizations and activity. I expect this momentum to carry through the rest of our work as the year progresses and into 2025, which I see as a very positive development.

Okay. Great. I have a follow-up for Stephen. Regarding the EPS beat, it was about $0.25 at the midpoint, but you only raised the guidance by $0.10. I'm curious about how much of that reflects the end market versus what you can control in terms of cost management. Is there anything specific you would point out?

Yes. The $0.06 increase in Q2 is mainly due to timing. Considering the foreign exchange rates and the outlook for the remainder of the year, $0.03 of that could be balanced out in the second half. From a tax perspective, we are not anticipating a change in the overall rate for the year, so that timing aspect remains. While the $0.06 is a positive outcome for Q2, it balances out for the entire year. Additionally, we've increased the low end by $0.15 and the high end by $0.05. I believe that's a significant adjustment at this stage and is appropriate, placing us in a better position for the latter half of the year. I wouldn't interpret anything beyond that; I think this adjustment is fitting at this time.

Operator we have time for one more question.

Good morning, guys. Marc, where do you think the academic markets are headed here? Some mixed data points there, and AH budget isn't particularly robust this year. So curious what expectations we should have for the second half and then into the next cycle.

I was encouraged by what I observed in the academic and government sectors in Q2. We experienced low single-digit growth, which was quite a challenging comparison. The team performed well. In the high-end differentiated products segment, customers are receiving funding. Consumers tend to invest in great innovations, and given our history of innovation, we are witnessing strong demand for the Orbitrap Astral. There is also significant excitement surrounding the Thermo Scientific Stellar mass spectrometer and the eclipse series. These developments are very positive. Looking at the long-term, the global academic and government market has typically shown low single-digit growth, occasionally slightly better, and our performance aligns with that trend at the moment.

Okay. As a follow-up on your comments about the China stimulus and the flow of spending, do you view this mainly as a matter of time, where customers need time to receive the funds? Or are there specific triggers and events that must occur for demand to reach you? Thanks.

I mean the process is they have to apply, and there's a central government funding and matched by their other funding sources, usually provincial or it could be local depending on the institution. So they're going through that process. As it gets approved, they then have the ability to go out and place the order, so that's the view. I think because these institutions are funded by the government in all times, whether it's stimulus or not, I think they have a mechanism to understand what's likely to happen. So this is not giant mystery to them. I think they're working through it and it's kind of normal from that perspective. And what we're doing is reminding them of the importance of the important instrumentation that we've launched and the relevance of it. So that they prioritize their funding request to support our instrumentation. Dan, thanks for the question, and I'll turn to just wrapping up. So thanks, everyone, for joining us on the call today. Pleased to deliver another strong quarter, well positioned to deliver differentiated performance as we continue to create value for all of our stakeholders, and we'll build an even brighter future for our company. We're looking forward to talking about that bright future at our upcoming Investor Day on September 19 in New York and updating you on our third quarter performance in October. As always, thank you for your support of Thermo Fisher Scientific.