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

Good morning, everybody. Welcome to the All Stars Conference. I'm pleased to introduce our next company this morning, Thermo Fisher. With us, we have Marc Casper. Just a reminder to folks, if they do have questions, you can submit those through the website.

Marc, maybe to kick it off. I'm wondering if we could look back a little bit on the past 1.5 years or so and how Thermo may be a different company coming out of the pandemic. You obviously stepped up R&D. You mobilize quickly around testing and vaccine production. Are there kind of corporate changes or learnings that might be permanent as a result coming out of pandemic?

So Tycho, thanks for having me this morning, and nice to see you. Yes. So as I reflect back on the last couple of years, right, lots of lessons learned from the pandemic. And I think ultimately, the fact that we had a very clear view as the pandemic unfolded, which is keep our colleagues safe, make a real difference for our customers and society in the response to the pandemic, but very importantly exit the pandemic a much stronger industry leader. Those guiding principles have really played out. And if I think about where we are today, we obviously mobilize with speed at scale and enabled testing around the world in a huge fashion and the scale-up of vaccines and therapies for COVID-19. But we also invested billions of dollars in capital to accelerate our capital plans in our strategy of pull forward several years with the work, we did big expansions in R&D. And what that allowed us to do is really become a faster-growing industry leader going forward. I think when I think about the way we work, that also will change. I'm sure we'll talk more about it, which is you're getting new ways of working beyond just face-to-face with everything. And I think you see some new efficiencies. We launched products virtually and things of that sort as well. And all of those things will get incorporated going forward.

And you touched on R&D. You took that up by 20%. You're spending $1.4 billion now. Are there areas that are kind of getting overfunded today intentionally that you could point to?

Yes. The areas that we've really invested substantially our bioscience reagents business, which is just an incredible business in terms of enabling cell therapy, cutting-edge research in terms of the core technologies. We've really increased our R&D there. We've done the same in mass spectrometry, electro microscopy, clinical sequencing all areas where we really stepped up from already high levels of R&D. And that positions those businesses really, really well for the future.

And during the Analyst Day, you guided to an impressive 7% to 9% long term. That's well above market growth, 4% to 6% I am [indiscernible] but I remember when someone used to grow 3% to 4%. So it's been a tremendous transformation of the company. How did you end up at 7% to 9%? And maybe just talk a little bit about the thought process to getting there and your confidence in the ability to kind of grow above market long term?

Yes. I mean, Tycho, you know the company well, and you know our philosophy well, which is when we give our long-term outlook, we have to feel that we're already at that rate of growth, right? So we're not the promise of what might come in the future, but rather updating our investors on where we're performing internally. And we've taken that evolution over a 20-year period of 3% to 4% and then 3% to 5%, 4% to 6%, 5% to 7% and now 7% to 9%, and it's with tangible actions. So we have a high degree of confidence in terms of the rate of growth. And one of the drivers is first starting with the market. Very strong funding and science, looks to be very important for governments around the world, one of the lessons of the pandemic, the biotech and pharmaceutical markets are strong. So you start with good fundamentals. Underneath that, though, we're gaining meaningful share, right? We're gaining share through our value proposition. We're gaining share serving pharma and biotech. We benefit from the large R&D investments. And all of those things gives us a high degree of confidence that we're able to grow 7% to 9% of our organic growth over the next several years.

And has the approach to guidance changed at all? I had somebody asked that. Like if you go back, I think in the 2013 Analyst Day, you didn't incorporate life because it hadn't closed, but now you're incorporating PPD. You're rolling COVID into core, has the methodology and the way you approach guidance changed at all?

Not really. I mean what we try to do with M&A and so forth is as you get clarity to something, sometimes we'll do it where the deal is in, sometimes it's out, but when you're talking about between now and 2025, PPD, it makes sense to put them in the numbers. Otherwise, you're going to have to recast all of the models. And if it closes a month early or it's not, it doesn't materially affect the story, and hence, we decided to put it into the numbers.

And part of the Analyst Day or a lot of the Analyst Day had focused on biopharma, now over half the revenue, 56% or so. Can you just talk a little bit about that transition? And is there any downside to being over-indexed to biopharma in the DNA age?

Yes. So if you recall back a year ago in the September 2020 Analyst Day, we really focused on diagnostics and health care and gave an update on our COVID response, but also sort of put that in the context of what we do in diagnostics and health care as a segment. So we thought at this Analyst Day, we would focus on biopharma as the deep dive. And between those 2, it covers about 3/4 of the revenue or less. And academic and government, and industrial and applied, we have good growth drivers in both of those markets. From an academic and government perspective, really innovation is one of the core drivers in our ability to develop great products, great mass spectrometry and electro microscopes. Those things are what drives academic growth. The Fisher Scientific channel that we have is very, very strong and serving that end market. And industrial and applied is really we have a strong presence in all the QA/QC labs across the industrial economy and good economic conditions really bode well for those markets as well.

You've been spot on, on kind of the COVID side on testing in terms of talking about that dropping off. I know with 2Q, you had to lower the testing expectations by about 900 million. As we think about kind of the variance, how do you feel like you're positioned here in the back half of the year? Could you see an uptick on testing or because you're more levered to kind of nonautomated PCR maybe it wouldn't be the same pickup that you might have around antigen testing, for example.

Yes. So Tycho, when I think about our role in testing, we really have enabled the global response in a huge way. I mean it's in the range of over 650 million tests have been run on our technology since the beginning of the pandemic, which is an astounding number. And when we thought about the outlook, for this year when we're sitting in July, if you think about it, we know that testing is going to be relevant, and it's going to have a duration. But at some point, the pandemic will be behind us. And the amount of questions we were getting in testing revenue relative to the rest of the company started to get disproportionate. And the reason it got disproportionate is if we think about it, every other business kind of has a perpetuity value. The testing will run out, say, 2023 or 20 -- whatever it is, 2024, there's not a tail, if you will. And so we decided to derisk the testing number not that necessarily we think that testing demand is going to wane that much, but rather to say, you know what, we're able to raise our guidance, which we did and have a very small level of testing assumed in the guidance. And investors really appreciated that. And we did the same convention for 2022, which is, we assume $750 million of testing revenue. I think there are many scenarios that are meaningfully higher than what's in the guidance, and will be there, right? Our customers want our technology, we will support it. And if there's demand, we will meet it, and we gave the sort of economics for every $100 million about $0.06 of EPS. And we will drive that and whatever level of demand is there. So it was more of a clarifying for investors as opposed to having a debate about is it another $100 million or not? It became a disproportionate time sink, if you will, in terms of kind of forecast testing.

And what's your view longer term on the durability? I know it's going to kind of get rolled into core for you guys. But I mean you guided $750 million for 2022. As we think a little bit longer term, I mean, do you think there's a durable testing opportunity around COVID for Thermo?

Yes. So if you think about how we thought about all of our COVID response, right, what we said is that the vaccine and therapy revenue about $1.8 billion this year will roll into our core revenue because the capacity will literally get converted to other modalities whenever those vaccines and therapies aren't needed, which feels like they're going to be needed for a while, but at some point they will transition. We said for the testing piece that we'll assume that it isn't going to get. It will eventually go to 0. The reality is it's going to be meaningfully better than that, but it's small relative to the $4 billion or $5 billion of testing revenue that we're generating, right, which is we increased our installed base of qPCR instruments. We increased our installed base of sample preparation instruments massively, right? And a lot of them aren't going to get turned off when the pandemic demand isn't there, they're going to be repurposed for other applications in molecular diagnostics. And therefore, there's going to be a durable nature of the revenue. But relative to the billions of dollars of COVID testing, it's relatively modest, and it sort of actually makes sense because if you think about it, the molecular diagnostic business exploded across the industry because of COVID. While it's a big market, it's not that big of a market actually when you take out the COVID number, right? So you get into the hundreds of millions of dollars of sort of kind of scale of additional sample prep reagents and PCR consumables and new content, you don't get into billions of dollars. So we didn't want to get into that discussion of exactly what is the number, exactly what is the duration. We basically said for simplicity, we'll consider a temporary rate.

And then how much are you focused on building out content for the installed base of PCR systems, including the Amplitude, including Mesa. How much of a focus is that for the company right now?

Yes. So we are building our content for our PCR instruments for Amplitude, for our rapid diagnostic system, the acquisition of Mesa. The Mesa one is clear in terms of that, it's a product with 510(k) content already. We will continue to bring out additional tests over time, has got a good footprint in the pharmacies in the kind of point-of-care setting. So it's a nice technology that over time, it will build out a further menu, be on the respiratory panel that it had pre COVID and obviously has the EUH bond. On the Amplitude and the lab-based PCR instruments, right now, it's really around respiratory panels. That's the next place you focus and it's because ultimately, someone's going to present to a doctor with a respiratory issue. And you want to know is it flu, is it RSV, is it COVID? And that's likely to be -- to have some longevity to it. Even if the pandemic starts to wane because people are going to want to know what are they dealing with? So you'll see more and more content coming out on our installed base there. And then ultimately, adding other tests as well.

And do you have to build out the channel at all for Mesa on the physician office side? Or do you feel like you have enough there already?

I think we have a pretty good presence. I mean in terms of supporting that between our Fisher Scientific and Fisher health care channels and the direct selling we have, I think we can feel it, we can reach that market relatively effectively.

And then on the vaccine side, 1.8 billion this year, I think you unofficially or officially blessed 2 billion or so for next year. How do you think about the ability to kind of mix and match around capacity there? I mean you talked about the ability if the vaccines wanes you could transition that capacity to other applications. How easy is that to do?

Yes. So you have a couple of things. First of all, when we think about the revenue that we will generate next year, it's really based on customer commitments and customer demand planning with us. So it's -- so we get lots of questions about what are you assuming on boosters in or out or these different things. But really, the way we do our planning as well as our customers say they want to what services they want to purchase from us, what technology they're going to buy from us. So we have a high degree of confidence in 2022. And our customers are asking us to be prepared for '23 and beyond. So it's not as if that it's '22 and done is how our customers are thinking about it. So I think for a while, you're going to have meaningful activity directly supporting the COVID-19 applications. The technologies that we make the product on and the bioproduction and biosciences reagent capacity, which are used as the technology to make mRNA is not exclusive to this application, right? Our fill/finish lines can be used really for any biologic. And the purification chemistries can be -- in the capacity there can be used for any therapy or vaccine. So our ability to transition and given the scale of our customer base, we feel a high degree of confidence in our 2023 to 2025 model, I feel that all of that capacity will get repurposed from COVID to other applications.

And you highlighted a lot of it. Just maybe stepping back and thinking about bioprocess. You highlighted a lot of the capacity expansion that's underway at the Analyst Day, including in China and the new single-use technology in Nashville. How do you think about additional investments in capacity versus asset transfers from pharma? I know you've done a couple of the latter as well.

Yes. So when I think about and I'll try to be expansive here to put you in context, right? So roughly, we have about a $20 billion revenue base serving pharma and biotech when you incorporate PPD into our numbers as well. So that's the scale of the business. And roughly half of that is in the broadly defined bioproduction aspects of what we do, right, which is the -- what most people call bioprocessing or bioproduction, which is your single-use technologies, your cell culture media, your purification resins, or enzymes or those products. That's about a $4 billion business, and then we have about a little over $5 billion pharma services business, which is where we do the activity for the innovators, right? So that's what the business is. Because the demand has been so robust, and we've had great growth for years in this business, but the demand has been so robust that we have been internally expanding our capacity and we highlighted last week at our Analyst Day, a very aggressive capacity program from 2020 to 2022, where we're expanding our all 3 -- all of our capabilities, including adding new ones. It doesn't end in 2022, right? We didn't want to have this perception is that all this is like these hugely long year programs of which you kind of sell the big numbers for big numbers sake, these are like projects in flight that we have going on right now. But then there's the cadence of additional programs thereafter where we continue to add new abilities and expand our business. I'm very excited by the collaboration we have with our customers, the demand profile that they're telling us that they want from us. And that's allowed us to really open up significant new capabilities, right? And we're opening up a large-scale single-use technology facility in Nashville to complement our complex in Utah and the U.S., and we're adding 2 Asian facilities as well. We've opened up our facility in Suzhou, China, very important to serve the local Chinese innovators as well as a large facility in Singapore to support the multinationals across Asia Pacific. So you're seeing those investments. The same is true in cell culture media, purification, chemistries. And even in the next couple of years, capacity will have doubled or tripled to support it.

And then there's obviously a lot of focus in D.C. now on supply chains and bringing more back to the U.S. I mean, how does that kind of weigh into your thought process and where you open capacity? And is the government underwriting any of this at all at this point?

Yes. So when you look at the -- one of the lessons of the pandemic is that governments, in particular, want to play a more active role in ensuring that they have secure supply chains, right? And so what you've seen us do is largely us doing it because we want to be well positioned for serving our customer needs, right? So we've expanded capacity in the U.S., expanded capacity meaningfully in Europe to support our customers with that supply chain assuredness. And we standardize how we make the product in those facilities so that a customer ultimately can be prequalified to say, you know what, I'm getting it from a facility in Logan, Utah, but I can also get the same product with the same specifications out of Cramlington in the U.K., right? So that customers really get not only the local effect, but they also have the network effect as well so that the products we made elsewhere. Where governments -- where we've seen government support right, is the facility in Singapore as we've gotten really great collaboration because they wanted to have regional supply assuredness. So that would be an example. The same thing, very good corporate support in China for our expansions there. In the U.S., really the big program where we're working with the U.S. government really is actually in our lab products business, not so much in this part of the business, but we just signed a contract to build a new pipette tech facility in North Carolina and the U.S. government is funding most of that facility, about $190 to $200 million project, and we're going to put in a meaningful amount of money as well. And that's really around supply chain and shortness for lab testing in the U.S., primarily government-driven initiative, which we will build a facility, we own it and then we'll sell the capacity commercially.

That's great. I mean we do hear a lot about the pipette dip shortage from labs. I guess as we think about your overall footprint in bioprocess, your capacity expansion plans, you touched on. Is M&A part of the thought process there, too, in terms of would you look at another CDMO? Or do you have what you kind of need with Patheon at this point and it's more about building around it?

Yes. I mean we've been active organically, and we've been active also inorganically, right? So when we acquired Patheon in 2017 to complement our own CDMO capabilities in clinical trials, we felt that, that gave us the combined backbone to be world class. And what we've been doing subsequent to that is adding capabilities, right? So we bought Brammer Bio. We bought the European viral vector business, Henogen. So 2 areas there. And then at the same point in time, we've also taken over facilities from some of our customers, a partnership with CSL, an acquisition from GSK. So you're seeing us do stuff through M&A, but really building on the backbone that Patheon really expanded the business. So I think that's how you'd see it play out, complemented with a lot of investment to expand and bring new capabilities on organically.

And then how much of the bioprocess strength at this point is being driven by cell and gene since you mentioned Brammer? And how would you characterize, I guess, the completeness of your offering around cell and gene therapy today?

Yes. So we have been supporting our cell therapy customers and our gene therapy customers from the very early days of their research before there was ever a product to market and that ecosystem that we have, which is we enable that cutting-edge research and the journey from the academic labs to the biotech or pharmaceutical company and supporting the early research through the process development that goes on and ultimately scaling up manufacturing and all the technologies. We really have a very unique ecosystem in supporting it. If you think about cell therapy first and gene therapy. In addition to our bioscience reagents, one of the challenges on the cell therapy side is how do you actually manufacture the product in an effective way? And what we have brought out is a workflow for our customers to be able to manufacture the therapies that way. And ultimately, signed a collaboration with UCSF where we're going to scale up a facility that we'll run for them in collaboration with them to actually for their patients as well as for biotech companies in the Bay Area to basically leverage those capabilities. So really, it gives you the evolution from the earliest days of research all the way through to developing of a service line, we have that. And we keep adding capabilities, right? There's -- I don't know one company has every single thing used in the process and what we continue to do is see where the needs are based on those relationships and insights, expand the offering. Gene therapy, again, our technologies in our bioproduction business are used there very significantly. And ultimately, we acquired Brammer Bio. They have a service offering. We then put together teams from our pharma services business with our products business to continue to optimize the workflow so that we can reduce the cost of bringing gene therapies to the market. And I think that's a huge opportunity to get expansion as the cost curve comes down.

And there's been such a shortage of capacity in cell and gene therapy, we hear from others in the industry about getting capacity reservation fees, right? The economics are a little bit better. Do you see that changing in the near term as more capacity is added? Or are we still going to have a bit of a bottleneck for the next couple of years?

No. I would say that on the cell and gene therapy side, there's been so much demand that capacity is coming online, but demand is still outstripping supply is the way I would think about it.

Got it. Maybe we'll shift over to a couple of other businesses. Genetic sciences, obviously you touched on some of the R&D efforts and you've got your kind of end-to-end workflow with Genexus. Can you just talk a little bit about your overall strategy around genetic sciences between sequencing and the array business with Affymetrix. How has that business performed? Where are you placing incremental investments?

Yes. So Tycho, as you know, we have a very large presence in genetic sciences, and our strategy has been clear which is have the tools that our customers need for the task at hand, right? So when you look at our offering, it is the leading position in qPCR instrumentation, the Sanger sequencing technologies, microarrays and our clinical sequencing technologies. And we actually just launched a new digital PCR instrument that we announced last week. So we continue to have a very broad footprint in a very scaled business. When I look at the applications, obviously, the qPCR franchise has played a huge role in the COVID response. And actually, the next-gen sequencing franchise in terms of all the variant analysis has also played a very large role in that. So being just so present across the labs around the world has put us in an enviable position to grow very strongly. When I look to the future it is an area that we're investing significantly and if you take the clinical sequencing example, Genexus, which is a sample-to-answer next-gen sequencer, very well received in the market. We continue to launch new tests for oncology on that instrument installed base. You probably have seen a number of regulatory approvals from companion -- effectively companion diagnostics, particularly in Japan for a number of different medicines that are approved on it. And so we've had really good performance there, and you'll continue to see us invest significantly and bring our products that our customers really want.

And that's a market I think that's obviously evolving very quickly, both in terms of new markets opening up like liquid biopsy, but also just the technology changing. How do you think about the evolution of sequencing? Are you looking at kind of third-gen technologies to complement Ion Torrent? How do you think about kind of the road map there?

Yes. We continually look at what's next and what's disruptive and we scout all the time. And if we see something that we think is appropriate and it's got the right economics for our shareholders and strengthening the company, then you'll see us play there. Right now, the demand has been very strong for our technologies. And we focused that business on very important niches, if you will, within the clinical sequencing area around oncology and therapy guidance. And it's doing extremely well, right? So we picked our spots, and that's how we play.

Maybe shifting over to Analytical Instruments. Just if you could talk to the recovery you've seen in that segment, how you're thinking about kind of the back half of the year, but flex dynamics for the broader AI segment?

Yes. So if you think about areas that were disrupted by the pandemic from an industry perspective, the instrument businesses were disrupted because if labs were at smaller stabs and restricted hard to install instruments and those things. So that business had an effect in 2020 because of the scale of the company and the strong performance, we kept investing significantly in our products and R&D. And so we have a really strong suite of products that we've been launching and the business is doing very well. So it sprang back quickly. We're growing sharply. We expect the second half to grow very strong in that business. And the stack comparisons of the 2-year CAGRs are good, meaning that it's growing off of the 2019 numbers nicely to -- and so we have more the easy comparison, if you will, from last year. And you're seeing the most strength in electron microscopy and chromo mass spec, and you're seeing a recovery in chemical analysis but not as strong yet as the other 2. So that will come over time, but still growing nicely. Within electron microscopy, very strong broad-based demand. Material science is driven by semiconductor and battery technologies, life sciences through structural biology, very, very robust end markets for electro microscopy, probably mass spectrometry doing very well also.

And obviously, the semiconductor shortage has been well documented. I mean how do you think about that in the context of FEI? I mean that business should be kind of tethered to kind of new fab construction, right? So to the extent you have capacity coming online on the semi side, that's generally a good thing for FEI.

Yes. The strength of our semiconductor end markets is very strong, demand is strong. So we've enjoyed really good growth this year and even stronger growth in backlog. So that bodes well. So I think that strength that one anticipates in semiconductor for the next couple of years in terms of the end market, new fab construction, even supply chain and shortness in that end market bodes well for strong electro microscopy demand.

Great. I've got one question that came in on e-mail, which was as you add assets across the value chain, you touch customers across their R&D and drug development processes. Can you just talk about how you coordinate these touch points to give the ability to cross-sell and outgrow the underlying end markets? Is there a software strategy that gives you data on what customers are doing to improve kind of the ability to cross-sell?

Yes. So when you think about our track record here, right, at a philosophy level, what we're trying to do is make it rational for our customers to want to do more business with us and we have really unique access to the decision-makers in the pharma and biotech customer base, right? And whether it's the C-suite, the heads of R&D or the best bench scientists in the world, we cover the whole spectrum of the decision-making. And when we do a good job, which we do every day, we get the opportunity to present new ideas and capabilities. And our teams are rewarded for doing a good job and enabling customer success. And so that cycle has allowed us to do that well. We also take insights, right? We do think about what are we hearing from our customers and forming our trends, right? So when you think about the acquisition of Patheon, you think about the acquisition of Brammer. They were based on discussions we had over many years with our customers about what were their biggest unmet needs, right? So it informs us. So it's only about cross-selling. It's also about insight that informs our strategy.

Well, I think that's a great maybe segue into PPD, which I assume also came from some customer discussions. I guess can you talk to how that process evolves because PPD was already pretty well run, the CRO industry is well established. So what are you hearing from customers about why PPD would be a good fit for you?

Yes. So we're excited about the upcoming acquisition of PPD, a terrific team. The business is performing extremely well. Customers are very impressed with the capabilities that PPD has and they see the strategic logic of the combination as well, right? So -- and the ability to have the pharma services capability and the clinical research services capability allows you over time to take out time out of the process to bring a scientific idea ultimately to an approved medicine. And will that happen right away? No, of course, not, right, developing a medicine is a very challenging process. But we will have a unique set of insights to be able to make it more effective for customers to be able to bring medicines to market. And when we do that, we'll continue to gain market share, right? So we'll take a high-performing business add the capabilities to Thermo Fisher and accelerate its growth even further.

I think about what made PPD different. I mean, there are a couple of things. I mean it was obviously exceptionally well run. They had a site ownership strategy and then about 20% of the business or so is lab services. Can you maybe just talk to those 2 dynamics? Site ownership, is that something you can leverage for other parts of your business? And same thing with lab services, I mean that's almost like a mini reference lab doing biomarker discovery, vaccine development work. Is that something you can also scale up and leverage as well?

Yes. So the -- those capabilities are core to the offering that PPD has, right? So when I think about the fact that they have a site network, the fact that they have the lab services, and all the clinical research services, that's one really great integrated offering that customers can choose what's relevant to them, and we'll do a good job of bringing those capabilities together within the company. So I view it as the whole package as to what we're bringing together.

Is this an area where you envision you could do more from an M&A perspective on kind of the late-stage CRO side? Or how do you think about scaling it up organically versus potentially doing bolt-ons around PPD over time?

Yes. Obviously, we're focused on closing this transaction, right? And that's the -- I think the playbook here is going to be about investing in the business to grow it, right? I think it's primarily organically. Could there be a technology or something that you pulled on to it to round out an offering? Sure, that's possible. But I think it's going to be an organic investment play to really drive great customer experience and growth and build on the strong momentum that PPD has today.

The margin profile there is a little bit different than your core business. How do you expect kind of PPD margins to trend over time? Could they eventually kind of reach the corporate average?

Yes. The way I would think about it is we're assuming that the transaction closes on 12/31 of this year for simplicity and it will come in at mid-teens operating margins next year. And kind of the next milestone is with the synergies that we get with the noncash accounting for revenue recognition for sure, that unwinds over a couple of years. You get the high teens operating margins in a few years, basically, and that's the next step, if you will, for PPD. And then the margins still expand over time, right, as that business grows. You do get some moderate level of expansion. And so I think that business will really be a nice driver of our margin expansion going forward once you get into sort of the weighted average math of the year gone.

And I know for kind of the longer-term outlook, you've guided 40 to 50 bps. Half of that is coming from PPD synergies, the other half from volume and pricing leverage. Can you just talk about that 40 to 50 bps is there room for expansion beyond that? Does PPI still have legs to run? How do you think about kind of the longer-term margin trajectory?

Yes. So Tycho, when I think about the margin progression, I think about it from 2 different lenses, right? One is we don't see -- when you get to 2025 kind of the next longer-term model, there's the next 3-year period of time, of which we will have margin expansion goals that are meaningful. And we have an incredible track record of continually making our business more effective and efficient. So I see the opportunity to significantly expand margins beyond the 26% that we would get to in 2025. But when I think about in the shorter term, what we wanted to give in our Investor Day was a sense of at 7% to 9% growth what is the -- and with PPD, what's the likely margin assumptions? I think there are potential upsides to that depending on what the pricing environment is? And what's the growth environment versus the productivity environment? If you're erring more on the side of even stronger growth, you're probably a little less focused on that last incremental unit of time on productivity, right? But if the markets are a little bit tighter and you're in the kind of in the middle of that range, you're going to focus more on productivity and you balance it out. But ultimately, what we're looking at is the earnings growth that we drive, right? And we optimize the top and the middle of the P&L based on the end markets.

I have one follow-up on e-mail that came in. To your comment on making it rational for customers to do more business with Thermo. Why do customers prefer to do business with the company that Thermo has acquired? What's the advantage to the customers? Is it better pricing, better quality, more integrated offering?

Yes. So if I think about the performance, right, when you think about how we have dealt with synergies, right? We have gotten leverage on administrative costs, infrastructure costs. Fundamentally, we have reinvested a portion of those savings in the things that customers value. If it's a product business R&D, quality, commercial capabilities, right? So you're taking some of the cost to run a business, you're saving money, if you sell it to the bottom line, some of it you actually reinvest in the business so that the products are better, the commercial infrastructure is better, the digital capabilities are better. If you think about use the electron microscopy business as an example, is performing well in 2016 when we acquired it, we increased R&D meaningfully, right, and generated more profitability and fundamentally changed the growth rate of the business. And so business was well run before, but we were able to do different things to make it really exciting for customers who want to do more business with us, and that would be a wonderful example.

One follow-up on PPD. You don't have a preclinical business. Is that something that is of interest or not? And what are your thoughts on that side of the market?

No. I think PPD has put together a very nice comprehensive offering for the clinical research service offering. I think it's the appropriate offering for us. So I think that's where we would be focused.

Marc, I'd be remiss if I didn't ask you about China. You had good numbers there in the second quarter, up 30%. I assume you don't have a lot of exposure to the Chinese housing market. But what are you kind of hearing from the ground there? It's just around 10% of revenues. How do you feel about what's kind of going on in the backdrop?

Yes. So I think China -- it's more delving into a few different aspects of it, right? If you take away all of the noise of the moment, some of which might be with us for a long time. It's a market that fundamentally is going to be a good growth market, right, which is the government's focus on science and technology, a cleaner environment even being a bit more independent from the rest of the world and more decoupled creates a booming biotech industry, right, to support the population. All of those things have good market growth, and we have a very strong position and provide outstanding support for our Chinese customers, right? So the market should be one of our faster-growing markets. On a relative basis, right, if you think back in the past, China was a big driver of our growth, but the end markets and our competitive position, particularly in pharma biotech, it's much more of a U.S. European business, we're going to get more of our growth out of U.S. and Europe on a relative basis than we might have historically, but China is still going to be a nice contributor to growth. And then when I think about the markets are strong, the team right now, the team says that we are in constant video communication with the team basically end market's good, right? And our business is performing well. And there's clearly tensions and trade challenges and all these different things. But the Chinese government is not focused on these areas as areas were challenging. So hopefully, that we'll continue to be that, and we'll enjoy long-term growth, but with short-term performance as well.

Maybe in the closing minutes, we can hit on capital deployment. You talked about deploying $4 billion over the next couple of years or about 2/3 of that going to M&A. Can you talk a little bit about why that's the right ratio? And then how do you think about kind of regulatory FTC risk as you've gotten bigger and bigger, there's -- I think there's some view that you have to look further and further afield to kind of keep the regulators at bay?

Yes. So Tycho, when I think about the financial model that Stephen, our CFO, presented last week, we said we were going to deploy from '23 to '25. So this is not including PPD, which happens at the end of this year, we assumed $48 billion of capital deployment over that period of time, of which about $30 billion was M&A and the rest is return on capital, right? On the M&A front, we serve a super fragmented industry, right? I mean, obviously, we have a very strong position as is the couple of the other large players, but the majority of the company -- of the industry is still with small -- hundreds of small companies. So I think there are ample opportunities that you can navigate from adding and not have undue antitrust for us. So when we think about our selection criteria, we always think about risk reward and what the antitrust environment is part of that calculus, if you will. And we have a good track record of well advised in navigating these processes and feel like we have ample opportunity to continue to deploy meaningful capital going forward and creating really strong returns for our shareholders. Our track record is phenomenal and we're excited. And then finally, our pipeline is busy, right? We're seeing a lot of things, and we're actively engaged in that process.

Great. Maybe one last one in closing, ESG. Obviously, more and more of a focus. You pledged a 30% reduction in greenhouse emissions through 2030 and net 0 carbon by 2050. How difficult a task is that? Is that a reasonable goal? Is it an aggressive goal? How should we think about the achievability of that?

Yes, it's an aggressive goal, and we're going to achieve it and try to exceed both the 30% reduction and try to do it fast than 2050. We have to -- we got a lot of work to do to make it happen, but we've got smart people fully engaged on it. Tycho, thank you. Thanks for having me.

Thank you. It's a great overview. Appreciate it. Good to see you.