Thermo Fisher Scientific Inc. (TMO) Earnings Call Transcript & Summary

Okay. Good afternoon. We're going to go ahead and get started. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce our next company this afternoon, Thermo Fisher Scientific. We're going to do a breakout right after in the Borgia Room, which is across the home. And with that, let me turn it over to Marc Casper.

Tycho, thank you. Nice to see everybody here in San Francisco to kick off what I know will be another special year for Thermo Fisher Scientific. The format of our presentation will be similar to years past. I'll give you an update on the company, review our progress against the goals that we highlighted at this conference at the beginning of 2019, and then I'll end with a talk to what are our goals for the future, and we'll follow that up with our financial guidance that we'll give in a few weeks' time during our earnings call. So starting with the safe harbor statement and the use of non-GAAP financial measures. You can find the reconciliation of those non-GAAP financial measures to the most appropriate GAAP measure on the Investor section of our website, thermofisher.com. So Thermo Fisher Scientific, we're the world leader in serving science; have built over a number of years the industry leader today. We're a $25 billion revenue company with 75,000 amazing colleagues working around the world. We invest $1 billion in research and development each year. Our customers know us, not only for our strong brands, Thermo Scientific, Applied Biosystems, Invitrogen, Fisher Scientific, Unity Lab Services and Patheon, but more importantly, from the benefits of our industry-leading scale and our depth of capabilities. That scale allows us to have an unparalleled commercial reach in our industry and able to work with customers across the world every day. From a depth of capabilities, we're known for innovation, for our deep applications expertise, for helping our customers drive their own productivity and then ultimately having a very comprehensive set of services offerings. All of that capabilities is underpinned by our business system, Practical Process Improvement, or PPI, which engages all of our colleagues to make the company more efficient and more effective and helps enable really very strong financial performance. When you look at our revenue profile in terms of orientation, as a $25 billion revenue, we have a really strong set of end markets. Pharmaceutical and biotech being the largest, representing about 40% of our revenue, but we also serve the health care and diagnostics market, academic and government and industrial and applied. About 75% of our revenue is recurring in nature through our services and consumables products. And from a global reach perspective, we have industry-leading scale in the emerging and high-growth regions. And I'll highlight that in a little bit more detail in a few moments. When you look at our business segments, we have 4 complementary segments that add value to one another and in and of itself are industry leaders in their own right. Analytical Instruments business is about a $5.6 billion business. We are a leader in electron microscopy, mass spectrometry, chromatography will be some of the key product ranges. In our Life Science Solutions business, about $6.7 billion business, a leader in genetic sciences, bioproduction and biosciences capabilities. A niche player in Specialty Diagnostics, where we have leadership positions in the areas that we compete. Transplant diagnostics, microbiology, clinical diagnostics, immunodiagnostics are some of the areas, well-known for our BRAHMS PCT sepsis biomarker, one of the more significant ways that we play in that field. And then Lab Products & Services, our largest segment, over $10 billion in revenue. We have leading laboratory products and equipment business, our Fisher Scientific channel and our pharma services CDMO capabilities. So that portfolio, impressive in the individual pieces, but each of those pieces adds value to one another, and I'll highlight some of that in the rest of my remarks. Financially, we've delivered very strong financial performance over a long period of time. When you look back since 2011, we've averaged 10% revenue growth. We've converted that 10% revenue growth into 14% growth on an annual basis and our adjusted earnings per share and have been able to grow our cash flows also at that rate, converting that earnings into cash generation at that mid-teens rate of growth. That industry leadership and the strategy that we pursued has allowed us to deliver very strong financial performance. And as we looked each year, we give a 3-year outlook in May, and we continue to have exciting prospects very similar to what we've delivered in the past. With those great results, it's not just about the numbers, but it's also about doing business the right way. And the company historically and continues to have a very significant focus on environmental, social and governance approaches that are responsible and continue to ensure that we have a bright future. Our mission is very much focused on enabling our customers to make the world healthier, cleaner and safer. It engages our colleagues in pursuing a socially responsible footprint. And when you think about some of the work that we do, we work in our communities that we live. We volunteer. We're focused on sustainability and all the aspects of doing business in the right way, and that's very important to all of our colleagues, our customers and our stakeholders to make sure that we have a bright future. Last year, in January, we outlined our goals for the year. Starting with revenue, our focus for 2019 was to continue our share gain momentum and to do that by leveraging the proven growth strategy that we've been executing for more than 15 years, which is have another year of great new product launches, that -- innovation that matters to our customers. Secondly, to leverage the unique customer value proposition, which I'll bring to life for our pharmaceutical and biotech customers and how we uniquely help them to achieve their goals. And third is to leverage our scale in the high-growth and emerging markets. The second aspect of our goals for last year was to take that top line growth and convert it into strong margin expansion and do that by leveraging our PPI business system, well ingrained in the company to make the company more cost-effective, more efficient. Third goal was around integrating and capitalizing on the returns and the opportunities from the acquisition of Patheon, which we completed in 2017, and have momentum off of the success that we delivered the year before. And then finally, from a capital deployment perspective, use our significant cash flow and leverage capacity to ensure we have a bright future from a growth perspective for our business and continue to be shareholder-friendly in our capital deployment through a balance of M&A, buybacks and dividends. So that's what we set out to accomplish. And as I look back at 2019, it was really an outstanding year starting with revenue, some of the highlights. We invested $1 billion in R&D. Some of the areas that we focused on was in these technology areas where we saw big opportunities to make a difference for our customer base. Mass spectrometry, focusing on resolution sensitivity and specificity to continue to expand the impact of mass spectrometry, including the clinical marketplace. Chromatography, continuing to use our technology, which is very well respected in the market to expand our presence in the QA/QC applications. Electron microscopy, advancing both material science applications such as battery technologies, to life sciences applications such as structural biology, different areas of significant focus of our R&D investments and portfolio. And last year was a great year. When you look at the highlights, just a small snapshot of some of the launches we had last year in mass spectrometry, very strong offering at the mid-range with the Exploris 480 at the high end, with the Orbitrap Eclipse, a really breakthrough sequencer we launched in November, which will allow oncologists to be able to give a result to patients in 24 hours versus the normal workflow of 2 to 3 weeks so that a patient can be put on the right regimen of treatment very rapidly, and across the portfolio, a very strong year for high-impact innovation, the first of our drivers of growth. The second aspect of our growth strategy is our unique customer value proposition. And what we're focused on here primarily in serving pharmaceutical and biotech customers, is helping accelerate their innovation and improving their productivity as they look to bring new medicines to the market. We use our commercial access and our customer access around the world to be able to reach those customers effectively, and then we work on increasing the share of wallet that we have with each of those customers by bringing out relevant products, increasing the benefits of our research and safety market channel through that to them, expanding our services offering and continuing to refuel with new ideas from new capabilities that we bring into the business. That result has led to very consistent strong growth serving the pharmaceutical and biotech customer base. In fact, over that period since 2011, we've averaged 9% organic growth and well above the rate of the market. And through the first 9 months of the year where we've reported, we were growing in the double digits in terms of serving the pharmaceutical and biotech market. So why is that the case? And really, it's when you look at it from the lens of a client, how they perceive Thermo Fisher Scientific is we are a company with the leading life sciences offering, complemented with the leading CDMO or contract development and manufacturing capabilities to meet their needs. And what we do is support our customers from the discovery of a molecule all the way through to bringing it to becoming a medicine. And that value proposition, well understood from the smallest company to the largest of the pharmaceutical companies, has really allowed us to gain significant share over a very long period of time in serving our pharmaceutical biotech customers. So the second aspect of our growth strategy, another great year of success in serving pharmaceutical and biotech. The third leg in our growth strategy is around how do you leverage scale in the high-growth and emerging markets. Over time, what you see is that now 22% of our revenue comes from this customer base, with China being about half of that revenue. China, our second largest market. Many of you have heard me say in the past that the reason that we've done so well and delivered such strong growth over a long period of time in serving the China market is that it's rational for a Chinese customer to prefer to work with us relative to other alternatives in the market because our scale allows us to have applications labs that are tailored to the needs across the country, commercial offices, an exquisite supply chain and amazing talent brought out of the top universities that our scale allows us to be able to do. So that the day-to-day experience that a customer has in China with us is so superior than the alternatives out in the market. And that combination has allowed us to continue to gain share in the fastest-growing markets around the world. So a very strong year in terms of execution of our growth strategy from the revenue perspective. With that revenue, our objective is to then turn that into strong margin expansion by leveraging PPI. And you look at the PPI business system, it fundamentally engages all of our colleagues to make the company better, whether it's focus on our quality, the productivity that we deliver or the customer experience and the allegiance that our customers have with Thermo Fisher Scientific. And PPI really makes the company financially a much stronger company. I thought that I'd give you an example to bring it to life a little bit. You may recall that we acquired FEI, a leading electron microscopy company late in 2016. And we deployed our teams in the methodology to the FEI business, and it's had a fundamental impact in improving the rates of growth, the competitiveness of the business, the profitability. But because it's now 3 years later, it's working at the microlevel of just constantly making the business better. And I thought these examples will give you a sense of how widely adopted PPI is within across the company. One example is how customers accept an electron microscope in that process, where they might have invested $5 million to buy this tool. And what our teams did is look at the entire process, from order to shipment, ultimately to customer acceptance and was able to dramatically improve the process from a customer perspective, taking 30% of the time out of the process, reducing our warranty expense and getting much higher rate of customer satisfaction just by reworking a process that had been in place for decades. That same team then focused on the cost side of the equation and looked at the way we ship the products to our customers. And you could imagine very large instruments, they were able to go and look and say, "There's a better way of doing this." Took out $600,000 of cost out of the system, just focus on the shipment of electron microscopes. Very small examples, but it gives you a sense of how deeply ingrained the methodology is across the company. We had a strong year in terms of margins, and that's the second lever in terms of what we are focused on for 2019. The third objective was really about integration of the acquisitions that we've done historically with a big focus on really continuing to build on the momentum that we had with our Patheon business, which expanded our offering of contract development and manufacturing capabilities. The integration is complete, right? We have had a very successful integration. The business is performing very well, growing in the high single digits, and we took a business that was growing mid-single digits prior to acquisition. And now the outlook for the business and the performance of the business is strong, high single-digit growth organically. The pipeline of activity for new wins is very strong. And that really is driving a very, very bright outlook for this business. Feedback and engagement with our customers is excellent. And we really have differentiated ourselves in terms of the reputation that we have as a CDMO. We're on track to deliver the synergy targets that we signed up for when we announced the transaction, $120 million of total synergies by year 3, $90 million of cost, $30 million of earnings from the revenue synergies that we achieved. And when you look at the momentum that we have here, what you're seeing us we're able to do is then build on that platform to ensure that we can continue to have a very bright future. And the way that we're doing that is investing in our network. We're doing that through internal capacity expansions. You may have seen us announce expansions of our biologics facilities, of our sterile fill/finish network, all about having the capacity to meet the strong demand that we've generated from our customers. In certain areas, we've been acquiring facilities from our customers to build out the capacity as well. And the most recent example is we acquired in October a state-of-the-art API facility from GlaxoSmithKline that was underutilized from a capacity standpoint, and we're going to be able to fill it up with other customers' business. A win for both organizations because Glaxo knows that it's going to have a very cost-competitive supply and assurance of supply, and we're able to generate a strong return on that investment. The third aspect of the investments in this kind of business is that we're adding new capabilities. Very excited about Brammer Bio, which we acquired back in the second quarter of the year. And that business is off to a good start. We are the leading outsourced provider of viral vector manufacturing for -- and development for gene therapies. And the business is doing extremely well and is a business that we expect to grow in the roughly 25% range for the foreseeable future. So different aspects of how we're fully leveraging the commercial momentum that we have in the acquisition of Patheon. So another strong year from integrations of acquisitions and generating strong shareholder returns. So the final aspect is then from a capital deployment perspective, to continue to leverage our cash flows and balance sheet and be friendly about how we deploy our capital. 2019 was a great year in that regard. Very balanced from an M&A perspective. We deployed $1.8 billion in capital buying Brammer, the GSK Cork site and a mass spectrometry software business. We also returned $1.8 billion of capital, a combination of share repurchases and dividend of which we increased by 12% last year. And at the same point in time, we continued to strengthen the balance sheet as well. We refinanced $5.6 billion of our debt, debt that was due over the next 3 years. We have an average tenure -- tenor of that new debt of 15 years. And in the process, we cut the interest cost in half, saving the company about $80 million a year through that refinancing activity and freeing up substantial capacity going forward. We divested one of our businesses and also generate $1.1 billion of capital through that. And you see through the third quarter, we're able to take our leverage ratio down to a very healthy 2.6x. So substantial capacity to deploy going forward. From an M&A perspective, we continue to be very active from a pipeline perspective. We evaluated many transactions during the course of the year. And we continue to do that, and we'll look for M&A transactions that meet our strict criteria around generating strong shareholder returns as measured by returns on invested capital and making sure that transactions really are well understood by our customers and would be valued in terms of having Thermo Fisher be the provider of those capabilities. So when I look at 2019, really, another excellent year, and we look forward to reporting our financial results at the end of January, but we accomplished what we set out to accomplish for the year. As we look to 2020, I couldn't be more enthusiastic about what 2020 holds. Nothing should surprise you in the goals, right, if you go back over the last decade about what we're trying to accomplish. The consistency of strategy, the consistency of execution has really served the company incredibly well. We'll focus on leveraging our strategy to drive share gain, have another great year of high-impact product launches, continue to leverage our value proposition with our pharmaceutical and biotech customers and continue to use our scale in the high-growth regions. PPI will continue to expand our margins, and we'll deliver the benefit from the recently completed acquisitions as well. Capital deployment, leveraging our strong balance sheet and cash flow to be able to continue to propel the growth trajectory of the company and continue to be very friendly in how we return capital and deploy capital for our shareholders. And then finally, to continue to do business in the right way. From an environmental, social and governance standpoint, making sure that we execute against our ESG priorities, that we'll continue to make sure that all of our stakeholders continue to benefit from Thermo Fisher Scientific's activities. When I stand here today and I think about 2020, the end markets are very strong, right? And when I look at the NIH budget that passed late in the year, a real positive as we enter the year. When I look at the business confidence that I see around the world, relative to a year ago, about talking about less talk about recession and all of the downsides, but much more of a positive and constructive environment, those are big positives as we enter this year. And if you look at the share gain momentum that we've been delivering over the last 3 years, we're incredibly well positioned to deliver another outstanding year in 2020, and we look forward to highlighting all the details of that on our upcoming Investor call at the end of the month. So thank you for joining us here today for the presentation, and we look forward to your questions in the breakout session. Thanks, everyone.

I think we're going to kick off. Maybe I'll start with one just on kind of the outlook. I know you want to talk 2020 numbers, but like just talk a little bit maybe whether you're feeling a little bit better or worse? [indiscernible] start to feel a little bit better from the [indiscernible] for next year and the chance [indiscernible]?

Yes. Sure. So the question was high-level 2020, how do we see the world relative to the past. So I think the business confidence, as I said in the other session, feel stronger kind of a sentiment. NIH funding, so U.S. academic and government should be stronger based on the budget that passed. I would say that Pharma & Biotech, which has been on a really good roll for the last several years, continues to feel very strong. Science is very good. So I would think that would continue to be a very robust market. I don't think significant changes elsewhere. When I think about industrial, a weaker year last year in terms of industrial. Comparisons get easier in the second half is the way I would think about it, even if the markets is exactly the same would be the -- my interpretation.

And finally, [ extraction ] was up 20%, 25% last quarter. I mean how do you think about kind of the sustainability. That's obviously above, like, what was given about the long-term trends of the markets?

Yes. I would say that bioproduction is a strong double-digit growth business. And we've done well in terms of growing faster than that in terms of our production as a leader in the single-use technologies and in cell culture media. So we feel good about the prospects and continuing to drive elevated growth. And it will vary quarter-to-quarter about how strong it is, but it's been very, very robust for the last few years.

And trends for the Brammer, you want to talk a little bit about kind of the funnel there and we're seeing some of your peers aggressively build up CapEx for some theme. How do you think about build of CapEx?

So the question is around our acquisition of Brammer Bio? And how is that doing? And sort of what's the future hold? It's been about 9 months since we acquired the business. Really off to a nice start, right? The customer feedback has been excellent. And the value-add in terms of bringing the regulatory experience to that business, which is super important because it's a young field, where the science knowledge is incredible in our viral vector space, but actually going through the regulatory process is something that the rest of our pharma services businesses has great capabilities. That's going to really help our clients. We expect that to be a roughly 25% type growth business, off to a good start. In December, I was part of the opening of our third facility, this one in Lexington, Massachusetts. And as we had talked about at the time of the acquisition, we'll be breaking ground on our fourth facility in the very near future as well. So we feel very good about sort of what the pipeline is and the expansion of that business. And the first 4 facilities that we have should allow us to be able to achieve our growth for the next, I'd say, 4 or 5 years.

And are you getting upfront fees for capacity reservation if you think about it these next few years?

Yes, we have continued to have an attractive economic model from our perspective.

Capital deployment? You obviously hit on it on the slide, both for the 2019 and the 2020 out. I guess I'm not sure if you're allowed to talk about [indiscernible] out there. I'm not sure if you can talk on that a lot, but just talk a little bit about the funnel, how you think the M&A for you.

Yes. So in terms of M&A and capital deployment, we had a busy year in terms of things that we looked at. I like the 3 transactions that we did. And we continue to be busy in terms of what we're looking at and what we're working through. So pipeline is good. Roughly, as a reminder, we look at roughly 10 businesses for every 1 that we buy. And our track record on the performance of the businesses that we acquire has really been exquisite, right? And that's a combination of the right selection criteria. We are buying businesses that you understand well you can add value to and then a methodology from an integration perspective that really brings that value to life. And because of that, we've been able to exceed the financial return hurdles that we've articulated externally. So that our deals, the vast majority of which have been well ahead of what we signed up for. And when I look at going forward, we have a very strong balance sheet. We have good cash generation. So we have plenty of capacity. And we're in a very fragmented market, $170-plus billion of served market. As the industry leader with $25 billion in revenue, it's still incredibly fragmented. So we think there'll be plenty of opportunities, and we'll be thoughtful about which ones we should ultimately close on.

Has the regulatory bar become more problematic, meaning you seldom get involved at the time obviously and break that up? How much of a hurdle was that as you look at deals?

Yes. I -- actually, the regulatory environment has been pretty similar over a long period of time, right? And if you look at the larger transactions, they clear, right? They clear the process because you can have remedies that you can meet whatever the regulators' requirements are and still be able to do deals that are value creating. When you have very narrow transactions, there are no remedies. It's a binary event, either the regulators approve it or not because there's nothing you can do that is going to say, if the regulator raises a concern on how you're going to solve the problem. So if I use the Illumina-PacBio example, the most recent example, once the regulators flagged the concern, there's not really a practical remedy that you can do anything about versus the larger transaction that you see going on right now in this space. And there's some divestitures, but that transaction looks like it's going to get through the process.

Did you look at any of the assets that are sold as part of the GE deal that is of interest to you?

Yes, we don't comment on the specifics, but we typically look at most things, not everything out there, but we look at most things out there.

How much of the M&A focus on the CDMO side is asset transfer versus all company acquisition versus maybe a specific niche technology you can drive back on that?

Yes. So in terms of our CDMO strategy, from how do we grow the business from a capacity standpoint capability, most of it is organic investment, right? Leveraging our network, building out our network. There are opportunities -- there's always facilities available from the industry, but you only want to add capabilities of really outstanding capabilities that commercially other clients are going to want to use. So you'll see us periodically pick up sites from other companies. And when you see us do that, it means that those sites are really amazing in terms of what it brings. And you're usually buying them for pennies on the dollar versus what it would cost you to build it, right? And then in terms of capabilities, you may see us do the occasional thing like Brammer, but we have a very deep set of capabilities. So probably less of those types of transactions where you're adding a new service line. Maybe some but probably less so in that vein.

Anything on budget flush? I know that was a little bit of a debate coming out of 3Q, what we're going to see you're in post dynamics.

You'll have to wait for the earnings call for the budget flush discussion.

Well, just -- what was the uncertainty? Which is that in the macro, you may not see as much move as it was? Did that had a...

No, it does not -- I mean it was -- it was very straightforward. We plan every year for a normal level of year-end spend, right? And that's our planning assumption. For the previous 2 years, the actual spend was very strong year-end spend. The year before that, it was actually below average year-end spend. So it varies. And our convention is we're assuming a normal level of year-end spend. So there's no uncertainty. You just don't know what customers are going to do the last couple of weeks of the year. And so that was the convention. With that assumption, we were able to raise our organic growth guidance going into the final quarter of the year. So it wasn't holding our back or our ability to deliver really exceptional performance in terms of what our expectation was.

All right. Pricing, I mean you talked about the ability to kind of pursue a little more in kind of discovery. So if you think about the deals being sign out, obviously how do you think about kind of price dynamics for this year?

Yes. So this is a great industry from a pricing perspective. And on an average year, you get 0.5 to 0.75 of a point of price with each year. That's a great contributor to the profit growth for the industry and for the company. When I look at where we expect last year to finish, probably about 1 point, so above the trend line. And really, that was the ability to pass-through incremental pricing because of tariffs. When we look at what we think is going to be in the deal that's supposed to be signed this week, it doesn't have a big effect on the actual cost that we have. So our categories aren't materially reduced. But I think it takes some risk out of new things being added. I think it kind of blunts the sort of downside of more tariffs, which is good. And then over time, if some of these roll back, that would be great.

Can you talk about the share gains that you've cited over the course of the year, like outside of the typical instrument stacks? Are there anything -- any other factors that you think might drive in adding your order community or commercial organization? I guess as you think about going forward, how do you sustain those and kind of stay 1 step ahead for you to drive this?

Yes. So the question's really around give a little more flavor for the share gain that we delivered most recently and sustainability of that share gain. What's exciting is that the share gain that we experienced was broad-based, right? Whether it was our bioscience reagents, whether it was our strength in bioproduction, our channel business, our pharma services business, our chroma mass spec business. Through the first 9 months of the year, we grew meaningfully faster than the peers in those businesses. And that has really been driven by a couple of things. One, the strength we have in pharmaceutical and biotech has allowed us to drive share of wallet, right? Customers are choosing to do more business with us, and they see the benefits of working holistically with us. So it's been 1 driver. Our strength in the high-growth regions of the world also has been one of the key drivers. And we had a great year in terms of innovation in the higher technology portions of our product line. So that was a really strong year. And that certainly served well and chromatography, mass spectrometry would be examples of where new product introduction made a real difference.

Can talked a little more on just $1 billion in R&D, a $1 billion plus, how that's broken up? How is software? How much is kind of instrument development? Are there any kind of areas you're stepping it up significantly in nature?

Yes. So in terms of our investment in research and development, by the major product categories, our instruments business, electron microscopy, chromatography and mass spectrometry and our clinical sequencing business would be the largest consumers of this one cut, sort of the largest areas. In terms of big programs, clinical mass spectrometry, which is a unique set of capabilities that we're developing, is an area that is a big investment as well. In terms of how we think about it, we think about it less about software versus hardware, but think about what's the purpose of the product? Is it a breakthrough innovation? Is it more of an incremental change? Or is it sustaining sort of health? And what you've seen over time is that a larger and larger percentage of our revenue or our dollar spend is on breakthrough innovation that we're bringing out higher impact products and moving less about the basic sustaining of product lines and more about making sure you have the most relevant products for your customers.

You're in flat clinical mass spec, but you actually just launched a clinical sequencer as well. So how much of the R&D -- or how is the R&D budget for the kind of genetic analysis portfolio today versus maybe a couple of years ago?

Yes. So we increased last year our investment in the genetic analysis portfolio and we continue to invest at a high rate. We're very excited, and as are our customers, about what we launched in the Genexus platform. Today, the workflow for an oncologist is often that they get a result on a sequence that's after the first set of decisions they make on treatment regimen, right? That it takes a couple of weeks. And they're not going to wait for the patient for a couple of weeks to say what you do. The workflow that we've developed with Genexus allows for you to get a result in 24 hours. So that literally you can use that information to actually guide where you're going to put a patient and what's the best way to address this. So I think it's profound. And the feedback, the early feedback, amazingly positive about what that technology is. So we continue to invest, support it, and we're excited about what the future holds there. Yes?

Do you think your current menu on Genexus is enough to drive the initial wave of adoption? Or do you think you need much more significant menu development in order to gain traction in that product? And then for menu development, what's the strategy in terms of in-house versus outsourcing?

Yes. So in terms of Genexus menu and is it sufficient to be adopted, the answer is yes. We have a strong menu today with our existing platform, and that's all compatible with the Genexus products, and we will continue to expand it. And we have a number of companion diagnostic programs with the major pharmaceutical companies, which will continue to add to that menu as well. So we feel good from liquid biopsy to solid tumor set of capabilities, very strong offering, and we're doing that primarily in-house.

In one area where you said there's some softness in the industrial side, I think it was kind of in the cryo-EM on the Thermo Krios science side. Do you think things are kind of bottoming out there? Returning? Or...

Yes. Our expectation is that in the second half of the year of 2020, that you would see a step-up just based on the growth rate of the business. That's what we're assuming. And so that slower growth in the earlier part of the year and then step up from that.

Where are we in the kind of the pharma adoption cycle for the cryo-EM?

Yes. So one of the things that when we decided to acquire FEI that we were excited about was the use of electron microscopy for life science applications, particularly in the drug discovery and development process. And when we acquired the business, really, from Life Sciences perspective, Tycho, you saw EM really in the Tier 1 academic centers, and that was it. And the NIH put out $130 million grant to increase the training of scientists to be users. So it was hugely helpful. And today, you've seen widespread adoption of sort of a program around cryo-EM at the major pharmaceutical companies. Not across everything they do, but pretty much most of the companies are using cryo-EM now, getting accustomed to it with a sample prep, building our capability, and the feedback has been very positive. So we think that we've gotten to the next wave of adoption, and we think that will continue to accelerate. And then ultimately, we need to make a sample prep easier and we need to bring the price point down in terms of the feature, some of the instrumentation, so that we can have widespread adoption across Tier 2 academic centers. And at the same point in time, the broader Pharma & Biotech community.

While we're at this, probably I'd ask about China. You're up 13% last quarter. I mean how do you think about kind of the sustainability of that, that sort of growth?

Yes. So from a China perspective, I always like to start with a long view, historically and looking forward. But if you go back over the last decade or so incredibly strong growth, not every quarter, but very strong growth year in and year out because the societal priorities of the government are very aligned to the technologies that our industry provides, from helping control pollution, improving food safety, expanding health care access through the highly effective technologies. Our industry is well positioned there. And we, in particular, have done better than the industry because, as I said in the presentation, we really do create a wonderful experience for our customers by leveraging our scale. When I look forward, the same macro drivers are there, right? From a government perspective, with the adder that the building of a biotech innovative industry in China for the Chinese market has been also an exciting development to consume many of our products, and that bodes well for the future. I think as you look last year, through the first 9 months, it was a choppier year for the industry in China, with good growth, but not as strong as you saw in the previous year, really driven by slowing GDP growth and trade tensions between the U.S. and China, right? So I feel great about the long-term prospects. The market continues to grow well, but there's some headwinds that mutes it a little bit.

On the CDMO side, I mean obviously, you've done -- I think the access planning has been there. When can we start to see some volume leverage benefit from all the clients? Or do you expect margin on the LPS side to remain stable as you add more products?

Yes, it's a good question. So on the Lab Products and Services segment, what's the margin outlook, especially given that we've been investing in our CDMO capabilities in that segment. So when I look to the way the capacity comes online, what's -- one of the nuances of our pharma services business is you hire the people in advance of when you actually bring the commercial product to market because you've got to train, make sure everybody's following the quality system. So growth actually dampens margins. But as you look at the math, you should start to see really -- you'll see some margin expansion this year in that segment. But you'll see a real step-up in 2021 and beyond as capacity comes online and you're generating revenue from those trained employees. Good. Tycho, thank you so much. Thank you, everyone.