Thermo Fisher Scientific Inc.
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2017 third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President, Investor Relations. Mr. Apicerno, you may begin you call.

[Kenneth J. Apicerno:]

Good morning and thank you for joining us. On the call with me today is Marc Casper, our 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 Investors section of our website, thermofisher.com, under the heading Webcasts & Presentations, until November 3, 2017. A copy of the press release of our third quarter 2017 earnings and future expectations is available in the Investors section of our website under the heading Financial Results. So before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's quarterly report on Form 10-Q for the quarter ended July 1, 2017 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investors section of our website under the heading 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'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our third quarter 2017 earnings and future expectations and also in the Investors section of our website under the heading Financial Information. So with that, I'll now turn the call over to Marc.

[Marc N. Casper:]

Thank you, Ken. Good morning, everyone. Thanks for joining us today for our Q3 call. I am pleased to report that Q3 was another excellent quarter for Thermo Fisher Scientific. We achieved strong growth on both the top and bottom line thanks to sharp execution by our team. We had a number of developments in the quarter that strengthened our leadership and innovation and in emerging markets. And we significantly enhanced our customer value proposition by adding new capabilities through the acquisition of Patheon, which we were able to complete earlier than expected. With an excellent nine months behind us, we're well positioned to achieve our growth goals for the year. So let me start with a quick overview of our Q3 financial highlights. First, we delivered another quarter of strong adjusted EPS performance, achieving a 14% increase to $2.31 per share. Our revenue in Q3 also grew 14% year over year. Our adjusted operating income increased 13%. Before I turn to our end markets, I wanted to acknowledge the tremendous effort of our teams. The natural disasters during the past couple of months have been unprecedented, and our teams have managed through very effectively. I've been inspired by how our colleagues across the company have stepped in to offer their support in many different ways from both a humanitarian and an operational perspective. For us, the most significant impact was in Puerto Rico. About 700 colleagues and their families are located on the island, and we were relieved to learn that they were all safe. Even with tough challenges at home, it was humbling to see colleagues return to work focused on doing everything they could to meet customer requirements. It reinforced our culture of intensity and involvement, which is the foundation for how we work every day, but really stands out in times like these. Our legacy Patheon site in Manati, Puerto Rico is the only one still experiencing disruption, but we're making steady progress in getting the facility back to full operation. Now let me provide you some color on our Q3 performance relative to our key end markets. Starting with pharma and biotech, we grew in the mid-single digits in Q3. Our chromatography and mass spectrometry and biosciences businesses performed well. We also had strong growth in our research and safety market channel. Our value proposition for these customers remain a key competitive advantage for us, and we continue to build on our leading position. Diagnostics and healthcare grew in the low single digits, in line with what we've been seeing all year, with good growth in our transplant and immunodiagnostic businesses. In academic and government, we were pleased to report mid-single-digit growth, driven by strong performance in Europe and China. Last, in industrial and applied, we continued to benefit from increasing global demand and grew here in the mid-single digits. We saw particular strength across our analytical instrument businesses in Asia-Pacific. We also continue to make excellent progress in setting Thermo Fisher up for an even stronger future. As you know, the three elements of our growth strategy are

[Stephen Williamson:]

Thanks, Marc, and good morning, everyone. I'll take you through an overview of our third quarter results for the total company, and then I'll provide some color on our four business segments and wrap up with an updated 2017 guidance. Before I get into the details, let me remind you that our results now reflect the addition of the Patheon acquisition, which we closed on August 29. Patheon's results are now part of the Laboratory Products and Services segment. So with that, let me start with a high-level view of how the third quarter performed versus our expectations at the time of the last earnings call. As you saw in our press release, we delivered a very strong quarter with 5% organic growth in Q3, which was above the midpoint of our previous guidance range and was driven by strong operational execution. We were also able to deliver $0.11 more adjusted earnings per share in Q3 than we had assumed in the midpoint of our previous guidance. This was driven by four factors of roughly equal magnitude

[Kenneth J. Apicerno:]

Thank you, Stephen. Operator, we're ready to open it up for Q&A.

[Operator:]

Your first question comes from the line of Derik de Bruin, Bank of America. Your line is open.

[Derik de Bruin:]

Hi, good morning.

[Marc N. Casper:]

Good morning, Derik.

[Derik de Bruin:]

So a couple of questions. So the 11% organic number in Analytical Instruments, what was the FEI contribution to that?

[Marc N. Casper:]

So, Derik, in terms of Analytical Instruments, we had very strong performance from our chromatography and mass spectrometry business. It's good to see chemical analysis also return to growth. FEI had strong double-digit growth in the quarter. Obviously, it was a partial quarter impact just given the anniversary, but obviously, electron microscopy also contributed to the strong growth.

[Derik de Bruin:]

And so staying on the Analytical Instruments side, and this is a question for both your industrial and your pharma customers, as we talk about increasing interest in tax reform in the U.S. and there's talking about immediate expensing of capital, are you seeing any potential hesitation in terms of people looking to spend in Q4? The question on the budget flushing, thinking about if people think tax reform is coming, would they push instrumentation spending off into next year?

[Marc N. Casper:]

If I think about what's happened in industrial and applied end markets, we saw real strength in Asia-Pacific. The U.S. has been pretty consistent. Customers really haven't talked much about sitting on the sidelines because of potential tax regulations. So I think the U.S. has not been strong with industrial. It's been slowly recovering. So I don't think we're expecting a big factor one way or the other from U.S. tax policy on demand.

[Derik de Bruin:]

Great, and I'll get back in the queue.

[Marc N. Casper:]

Thank you, Derik.

[Kenneth J. Apicerno:]

Thanks, Derik.

[Operator:]

Your next question comes from Tycho Peterson of JPMorgan. Your line is open.

[Tycho W. Peterson:]

Hey, thanks, great quarter. Marc, I want to maybe follow up on that questioning on FEI. I'm curious how much of the growth is coming on the semi side versus Cryo-EM uptake. And then with the new systems, is this reflecting some strong early interest on the pharma side? It seems like the new platforms are geared toward drug development.

[Marc N. Casper:]

So, Tycho, thanks for the question. When I think about how the FEI business has performed, given that it's just past the one-year anniversary, it's a good time to reflect on what's happened. I think at the highest level, the business has benefited tremendously from our integration approach, right? Our PPI Business System has helped them expand capacity. And our business management system, part of PPI, ruthless prioritization on the most important things has allowed both the materials sciences businesses and the life sciences businesses to really significantly accelerate growth over anything the business has delivered over the last number of years, and the team has done a fabulous job of executing. When I think about the two end markets, materials sciences is in a strong part of the cycle. That's both industrial and semiconductor customers. Semiconductor has been very strong, but we've also seen a nice acceleration in our life sciences customers as well as strong bookings growth as well. So the businesses are performing well across all fronts. The new products are geared towards both the nano material research on the materials science side. And on the life sciences side, we are getting some level of interest from biotech and pharma customers, although it's still a bit early, but the feedback has been positive. When you summarize the whole story on FEI, I think the way I would characterize it, performance has been so strong that relative to the underwriting case that we talked about when we announced the deal on the call a little over a year ago, we're going to meet our ROIC hurdle a full year earlier than what we articulated back then. So it's been a great acquisition, off to a great start, and we're going to fully capitalize on the opportunities ahead.

[Tycho W. Peterson:]

Thanks. And then a follow-up, I'm just curious on your comments on bioprocess. There's a fair amount of noise in that market now with biosimilars and some of the drug companies working down inventory at both the supplier and the manufacturer. You see both sides of it. I was just curious – your comments on the outlook for that market, I know it slowed a little bit last quarter. That was more timing on the supplier side, but I was curious how you see the outlook there.

[Marc N. Casper:]

So, Tycho, in terms of bioproduction, we had moderate growth, very similar to what we saw in Q2. We continue to see very strong early indicators that really showed up in the biosciences business for cell culture media and sera as well as in the smaller biotech demand for our clinical trials activity. So the early indicators, leading indicators are very strong, and conditions were similar to what we saw in Q2 with moderate growth.

[Tycho W. Peterson:]

Okay, thank you.

[Marc N. Casper:]

Thanks, Tycho.

[Operator:]

Your next question is from Steve Beuchaw of Morgan Stanley. Your line is open.

[Steve C. Beuchaw:]

Good morning and thanks for the time here, everyone. First question is actually on the fourth quarter, the implied fourth quarter expectations. It would be really helpful if you could try to frame up for us, quantify for us what you think the bottom line impact in the fourth quarter would be from Patheon specifically and from any lingering impacts from the situation in Puerto Rico or the natural disasters, more specifically top/bottom line. Whatever you have on hand would be very, very helpful. Thank you.

[Marc N. Casper:]

So I'll do a little bit of it and then Stephen will give maybe a more comprehensive view. In terms of the fourth quarter, other than bringing our Manati, Puerto Rico site back online, we're not expecting really any impact from weather. So what you would see from that in the fourth quarter is embedded in our guidance of about a $0.05 headwind, probably a little bit we got at the end of the third quarter, but a $0.05 headwind in Manati based on just getting the operation back online. And, Stephen, you might want to discuss some puts and takes.

[Stephen Williamson:]

Yes, so just some additional color. So the $675 million of revenue for Patheon that we've added to guidance, $190 million of that was recognized in Q3. And then in terms of Q4 for the net accretion, including the impact of the Puerto Rico issue for that site, it's still $0.02 additional accretion in that $0.12 change that I gave you at the midpoint.

[Steve C. Beuchaw:]

Okay, got it. I really appreciate that. And then, Marc, it's always really helpful to hear how you're thinking about a couple of things going forward. I think one is it's very helpful to hear how you think what the critical factors outside the company's control are with regard to where the trajectory of the business is within the 4-to-6 framework. And then maybe a subcategory of that framework is always the NIH, not necessarily budgets but more disbursements, and then I'll get back in queue. Thanks so much.

[Marc N. Casper:]

Thanks for the question. So the company is performing extremely well. When I think about the quarter, 5% organic growth. When I think about the end markets, we saw improved performance and really strong execution, both academic and government and industrial, applied, very, very positive. When I think about the outlook for Q4, basically we've raised our outlook for organic growth based on the Q3 performance. We've maintained for the fourth quarter the same level of organic growth that we assumed back in July. And the reason we did that is there's always a range of outcomes on what year-end spend is, and we're obviously going to drive to the highest possible number. So I think in the fourth quarter, the things we look at is where does FX rates finally settling at, and ultimately what's the level of year-end spend. And as you look back over many years past, we'll do a good job of capitalizing on all the market opportunities out there and creating some new ones as well.

[Steve C. Beuchaw:]

Thanks so much.

[Marc N. Casper:]

You're welcome.

[Kenneth J. Apicerno:]

Thanks, Steve.

[Operator:]

Your next question is from Doug Schenkel of Cowen. Your line is open.

[Doug Schenkel:]

Hey, good morning.

[Marc N. Casper:]

Good morning, Doug.

[Doug Schenkel:]

You increased full-year organic growth revenue expectations by $25 million. This is about the magnitude of the Q3 beat. It seems like you have stronger than expected FEI momentum. AI grew I think around 6% the last six months with no signs of slowing momentum. And Specialty Diagnostics growth is actually improving to levels that we haven't seen in a little while, just to name a few observations. Your guidance doesn't seem to reflect a continuation of improving momentum. Could you just speak to why that might be? And then I guess relatedly, is some of this weather, and would you be willing to quantify specifically what you believe the impact of weather was in the third quarter?

[Marc N. Casper:]

So, Doug, in terms of the fourth quarter, a couple points, the first of which is we were very comfortable banking everything we delivered versus our expectations organically in Q3 and then subsequently raising the guidance. We chose to keep the Q4 number the same as it is because, as you know, it's the one with the widest level of variation based on year-end spend, and we've assumed year-end spend to be exactly the same level as last year. So we believe that the range of outcomes has the possibility for better performance. So I think that's one way to think about it. I think the other way is, just when you go through the numbers, we have a more challenging comparison in our electron microscopy business in the fourth quarter. So it will be above the company average and we're very confident of that, but the contribution might be a little bit smaller in Q4 than what we saw in Q3.

[Doug Schenkel:]

And the...

[Marc N. Casper:]

Are you talking about weather?

[Doug Schenkel:]

The weather impact.

[Marc N. Casper:]

Weather here just in terms of customer demand in Q3 was probably about 0.5 point of impact.

[Doug Schenkel:]

Okay. And the expectation is some of that lingers into Q4.

[Marc N. Casper:]

Not a material amount.

[Doug Schenkel:]

Okay, and just one more follow-up. I know Tycho asked the earlier question on bioproduction. I apologize if I missed it in his answer, but when do you expect that to pick up a little bit more with the bioproduction revenue trend? And specifically on destocking, which is what we've heard from a few of your peers, have you seen any impact from destocking in that part of your business?

[Marc N. Casper:]

Probably from our company perspective, it's better to give the pharma and biotech as an end market. And when I look at that, obviously, solid mid-single-digit growth in the quarter, real strength in the research applications. Bioproduction had moderate growth. It was a little bit slower, but still a good contributor. We saw some of our customers managing their inventory. Really with the advent of biosimilars becoming more important, I think customers are just managing inventory in a more prudent fashion. But the pipeline of new molecules is quite promising, and it will take some time to ramp up. So we're very, very bullish on the long-term prospects of bioproduction. We're very bullish on our competitive position across pharma and biotech, and it continues to be a great end market for us.

[Doug Schenkel:]

Okay, thank you for all that. Have a good day.

[Marc N. Casper:]

Thanks, Doug.

[Operator:]

Your next question is from Dan Arias of Citigroup. Your line is open.

[Daniel Arias:]

Hi, good morning, guys. Thanks, maybe just two on FEI. Stephen, on the top line, I'm just curious how much of the organic growth that you're seeing is actually falling through versus being reinvested. And then along those lines, we're coming into year-one accretion that's more like $0.40 than $0.30. And so is that right? I'm just wondering maybe if you have a view on year-two accretion or synergies given where the performance is.

[Stephen Williamson:]

Sorry, can you just clarify the first question? I didn't get it, sorry.

[Daniel Arias:]

I'm just trying to understand how much within that business you're actually letting through to the bottom line. And then on accretion, for the year-one target that you had of $0.30, we're looking at more like $0.40. I'm just looking to see if that was right.

[Stephen Williamson:]

Yes, so we're appropriately investing in that business for the long term. And you see that, the results of that in the new products that have being introduced this quarter. But we're also printing very good EPS from the high growth that we're seeing this year. As you look at the first 12 months of this acquisition, as you said, we outlined $0.30 back at the beginning of the deal, and I think the actual number was $0.43, so very strong contribution from the acquisitions. And a significant amount of that was basically the base business revenue being higher. The synergies are running a little bit ahead. Probably $0.01 – about $0.02 of that beat was synergy-related. The rest was really from the base revenue.

[Daniel Arias:]

Okay. And then Marc had highlighted the new products that you've launched there recently. So I guess as we think about the gross margins for the AI business, I'm just curious whether you think that segment can benefit from an improving profile there. Prior to the deal, those guys had emphasized better gross margins on the newer instruments that were being launched. So I'm just curious if you think that's something that's meaningful at all going forward.

[Marc N. Casper:]

Yes, I think you'll continue to see gross margins expand, and certainly in the electron microscopy business just given the mix over time. The life sciences business a number of years ago was a lower-margin business for legacy FEI. And through our PPI Business System as well as our commitment to innovation, those products are increasing their margins. The materials science applications are, of course, still higher margins. They're a more fully established set of products. So mix matters within the business, but in the underlying pieces, margins are expanding in both.

[Stephen Williamson:]

And just one other factor, the life sciences side of the businesses, the service stream for that is really ramping up. And that's slightly – that delays from the ramp-up in the instrument placements. So that will also help gross margins as we go out the next couple of years.

[Daniel Arias:]

Super. Okay, thank you.

[Operator:]

Your next question comes from Jack Meehan of Barclays. Your line is open.

[Jack Meehan:]

Hi, thanks. Good morning.

[Marc N. Casper:]

Good morning, Jack.

[Jack Meehan:]

I have two biopharma questions. So I wanted to start with Patheon. So now that you've owned the acquisition for about two months, just talk about conviction in the revenue synergy's long-term trajectory there. And near term, if I think about the implied fourth quarter from Stephen's guidance, I think it's down a little bit year over year, maybe just how you think that turns going into 2018.

[Marc N. Casper:]

In terms of the fourth quarter guidance, we're actually quite bullish on what the outlook is for the business. The end markets actually look good. So it is obviously – roughly around the 4% range would be what's implied based on the July guidance. And as we've talked, there's obviously a range of outcomes, with a good year-end finish could drive that higher. So that's the way to think about it.

[Stephen Williamson:]

But one additional factor is, Jack, is that we have deferred revenue accounting adjustments at the beginning of the transaction, and it's fairly sizable for this deal. It's about $20 million of impact on revenue and profitability in Q4 for the Patheon transaction.

[Marc N. Casper:]

So we feel good about Q4. From that perspective, everything looks strong and solid. So I don't think there's much there. In terms of going into 2018, looking at the end markets, we'll obviously give the more holistic view for the year when we get on to the January call. But based on what's going on in Washington, we're expecting a budget to get into place with NIH growth towards the end of this year, which would set up as a positive for next year. Obviously, in industrial and applied, at the beginning of this year we're talking about a recovery, and obviously we're seeing good growth there. And pharma and biotech has been solid throughout the year. So at least as we see the world right now, we're entering 2018 with a lot of really good things going on. So I feel good about how the team is executing.

[Jack Meehan:]

Great, that makes sense. And then I just wanted to nitpick the trends in Lab Products and Services a little bit, sequentially 3% growth, but a little bit softer. I think your overlapped the clinical trial logistics in the fourth quarter, but maybe just talk about the trends there and what we should think about comp-wise in 4Q.

[Stephen Williamson:]

So sequentially, really the impact is weather. It was fairly concentrated in that segment, so it was about a percentage of growth for the segment. That's really the sequential change. And then the clinical trial, we will sunset that by the end of Q4. There's still some run-over revenue that were lapping in Q4. We'd probably be done with that by the end of the year.

[Jack Meehan:]

Thanks, Stephen.

[Stephen Williamson:]

Thanks.

[Operator:]

Your next question is from Patrick Donnelly of Goldman Sachs. Your line is open.

[Patrick Donnelly:]

Thanks, maybe one for Marc. Just on Patheon, I know it's early, but how are things compared to your expectations when it comes to utilization levels at the facilities? It feels like cost synergies are going to be driven more by improved efficiency there rather than facility consolidation. So I just wanted to hear your general thoughts now that you've had a chance to see them from the inside.

[Marc N. Casper:]

Patrick, great question. So I've had a chance to visit a number of the sites and meet with all the general managers of each of the sites and all the quality leaders. It's a really strong team. There's plenty of capacity to be leveraged, right? So what's exciting about the Patheon business is that it really is about driving operational efficiency and then leveraging our commercial reach to further fill up the plants. So incremental volumes really does flow through at an attractive rate. So driving the top line here is going to be a key driver, and our PPI Business System is going to help drive further benefits within the plants. Some of the cost synergies, obviously, is duplicative corporate costs and things of that sort. So you get those right away, and that flows quickly. And as we continue to drive volume growth, you'll see it flow through at an attractive rate. So it's early days but very, very encouraging, and we're looking forward to really leveraging our commercial infrastructure because the customer feedback has been great about the combination. So we're very bullish. It's early, but very bullish at this point.

[Patrick Donnelly:]

Okay. And then on industrial, I know in past quarters you talked about core industrial orders trending up a little bit in the U.S. and showing signs of life, and the hope was revenue would follow suit in the back half. Could you just talk about an update on the market there and how you feel?

[Marc N. Casper:]

Yes, so mid-single-digit growth in industrial, another quarter of growth in our chemical analysis business, really strong Analytical Instruments performance across chrome, mass spec, electron microscopy, environmental instruments, so good demand there. Asia-Pacific was very strong. The U.S. is growing but it's growing moderately. So that obviously still hasn't fully benefited from the recovery, but we're definitely seeing real strength in Asia. So pretty encouraging in terms of where industrial and applied is. And the applied markets continue to be very, very positive. And certainly, we saw that in our environmental instruments, and we just launched a new air monitor and that makes a difference for that marketplace as well. So really a much better part of the cycle than we've been reporting over the last couple of years.

[Patrick Donnelly:]

Thank you.

[Marc N. Casper:]

You're welcome.

[Operator:]

Your next question comes from Paul Knight of Janney Montgomery. Your line is open.

[Paul Richard Knight:]

Hi, Marc. Can you talk about NIH, what you're seeing there? And then the second question I have is Europe has been better. Why do you think Europe is better?

[Marc N. Casper:]

So, Paul, thanks for the question. So in terms of academic and government, it was really good to see mid-single-digit growth globally. That's a very strong quarter. North America was consistent with the last few quarters with modest growth, and we're expecting an NIH budget to show an increase of $1 billion to $2 billion ultimately, and that should continue momentum into 2018 as well. So generally, conditions here in the U.S. are stable and growing modestly. Europe was very good, right? So we saw that across a variety of our instrument offerings. In particular, Germany was releasing funds, which was good, but we saw broad-based demand from a number of countries. So I think getting back to a more stable, growing European economy, you're seeing governments invest in academic and research, and that was a real positive in the quarter. And it was great to translate it into our whole business, which grew mid-single digits in Europe. So it's very encouraging.

[Paul Richard Knight:]

And then lastly, FEI, obviously a good quarter. How do you view that business in terms of predictability? It still has semiconductor exposure. Is there backlog, is there orders? What's your visibility on FEI going forward?

[Marc N. Casper:]

So orders grew strongly in the quarter. We have a very strong backlog and good visibility for the business. The life sciences business, you can think of it as a rapidly growing business, and therefore it's not really subject to the economic cycles as much. The materials science business does have a cyclical nature to it. It's in a really very positive part of the cycle. And as we read, certainly for the next quarter, that's very strong. The next year's comparison will be more challenging just given how strong the growth was this year, but we're very positive on the outlook for the electron microscopy business.

[Paul Richard Knight:]

Thank you.

[Marc N. Casper:]

You're welcome.

[Operator:]

Your next question is from Steve Willoughby of Cleveland Research. Your line is open.

[Marc N. Casper:]

Good morning, Steve.

[Stephen Willoughby:]

Good morning. Thanks for taking my question. Most of them have been asked already. Just one question for you, Marc, on your AI business on LC and mass spec. I'm just wondering if you could provide a little bit more color on what you see going on there as it relates to the strength you're seeing. Is it your new products? Is it underlying market growth? Is it potential share gains in some of those markets? Just any more color there would be helpful.

[Marc N. Casper:]

When I look at the chrome and mass spec growth that we've delivered for a number of quarters relative to what we can see from the external market, we've been gaining share, meaning we're growing faster than the others that are reporting the numbers. And as you recall, when you look at the growth, up until the last quarter or two, the chemical analysis business, which is not a mass spec business, had been declining. So when you looked at the segment, it looked like moderate growth, but underlying that was strong mass spectrometry growth. The reasons for that I think are twofold. One of the things is, as you advance technologies, it opens up new desire for the leading researchers to buy the products. So we continue to innovate, and therefore the funding cycle actually follows that innovation. So as long as the industry is bringing out relevant new products, these best researchers get the money. So the funding environment has been good. And ASMS was a great conference for us this year back in June, and it's rare that I highlight the quarter after product launches how well received they are, but our two triple-quads and our new Q Exactive really are off to a fantastic start. So it's a good market and really solid execution for share gain has been what's driving that.

[Stephen Willoughby:]

Okay, thanks very much.

[Marc N. Casper:]

Thanks, Steve.

[Operator:]

Your next question comes from Catherine Schulte of Baird. Your line is open.

[Catherine Ramsey Schulte:]

Hi, guys. Thanks for the questions.

[Marc N. Casper:]

Good morning.

[Catherine Ramsey Schulte:]

I was just thinking into the Analytical Instruments growth a little bit more. I'm wondering if you could walk it through by either end market or geography. I'm just trying to get a better sense of what was unique in this quarter to get to that 11% number.

[Marc N. Casper:]

I think probably it's more the macro of chemical analysis growing versus being a headwind because they had been shirking for several years. It's been a couple quarters of growth. So that really makes a big difference. Even though it's moderate growth, it really does matter because chrome and mass spec has done well. And then we got some benefit from electron microscopy, which had a very strong quarter. So that combination really was the big driver. In terms of geography, the one area I would call out as being just very strong was Asia-Pacific. It was very good across all segments for our Analytical Instruments markets.

[Stephen Williamson:]

And just as a reminder, the electron microscopy is currently showing up in industrial and applied and academic and government, where the concentration of revenue is.

[Catherine Ramsey Schulte:]

Okay, great. That's helpful. And then just quickly on companion diagnostics, you have a number of FDA approvals under your belt and now starting to get some reimbursement. How big of a business do you think that could be in 2018?

[Marc N. Casper:]

When I think about the programs in companion diagnostics, we are getting our lab partners up and running on our Oncomine Target DX companion diagnostic. LabCorp was up and running; more will get online. So that business will build throughout the fourth quarter and into 2018. As you know, the entire next-gen sequencing business is less than 2% of our total revenue. So it's not a huge business, but certainly the oncology portion is encouraging in terms of the actions going there.

[Catherine Ramsey Schulte:]

Great, thank you.

[Marc N. Casper:]

Thanks.

[Kenneth J. Apicerno:]

Operator, we're going to take just one more.

[Operator:]

Your final question comes from Derik de Bruin of Bank of America. Your line is open.

[Derik de Bruin:]

Thanks, my questions have been answered.

[Marc N. Casper:]

Great, Derik, thanks. So let me wrap it up. First of all, when I think about where we are at this point in the year, we're really in a great position to finish the year strongly, and I look forward to reporting a successful 2017 in January. Of course, thank you for your support of Thermo Fisher Scientific. Thanks, everyone. Have a good day.

[Operator:]

This concludes today's conference call. You may now disconnect.