Thermo Fisher Scientific Inc.
Q2 2015 Earnings Call Transcript

Published: 22 Jul 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to the Thermo Fisher Scientific 2015 Second 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. I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President Investor Relations. Mr. Apicerno, you may begin the 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 Pete Wilver, Senior Vice President and Chief Financial Officer. Please note that this call is being webcast live and will be archived on the Investor section of our website, thermofisher.com, under the heading Webcast and Presentations until August 14, 2015. A copy of the press release of our 2015 second quarter earnings and future expectations is available in the investor 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 March 28, 2015 under the caption Risk Factors, which is on file with the Securities and Exchange Commission and also available in the Investor 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 second quarter 2015 earnings and future expectations and also in the Investor section of our website under the heading Financial Information. So with that, I'd now turn the call over to Marc.

[Marc N. Casper:]

Thank you, Ken, and good morning everyone. Thanks for joining us today for our Q2 call. As you saw in our press release, we had an excellent quarter. Financially we delivered strong growth on both the top and bottom line. Operationally our team executed very well and we gained share with our customers. Strategically we continue to execute our growth plans with significant new product launches, good progress in emerging markets, and many examples again this quarter that demonstrate how our unique value proposition is resonating with our customers. We also announced a nice bolt-on acquisition near quarter end, which is an example of how we're continuing to deploy capital to create shareholder value. I'll touch on all these achievements beginning with the financial summary and my end market commentary, then I'll cover some of the business highlights from the quarter and close with our updated guidance for the year. So beginning with the financials. Our revenues in Q2 were $4.27 billion. Our adjusted operating income increased 3% to $950 million. We had good expansion in our adjusted operating margin, which increased 90 basis points to 22.3% and we delivered adjusted EPS of $1.84, which is a 7% increase over Q2 of last year. We fully leveraged our top line growth while continuing to effectively manage the business to offset the FX headwind. The power of our PPI Business System continues to contribute meaningfully to our earnings growth. Let me now put our growth in the context of our end markets. First in academic and government, we saw a good improvement in Q2 as we expected after a soft Q1. Growth here returned to a low single digits. We were encouraged that the proposed increase in NIH funding continues to move forward. While it's not likely to have any near-term impact, if enacted it would certainly be a real positive down the road. In industrial and applied, we didn't see much change with growth in the low single digits in Q2. Our core industrial businesses remain soft while our businesses serving applied markets continued to do well. In particular, we had a very strong quarter in chromatography with high demand for our HPLC and GC products. Turning to diagnostics and healthcare, also not much change here. Conditions in this end market were similar to what we saw in Q1, and we grew in the low single digits. The key contributors to our growth again this quarter were our Clinical Diagnostics and ImmunoDiagnostics businesses. Last, our performance in pharma and biotech was very strong and we grew in the mid-teens in Q2. Given our significant strength here, I want to give you a bit more color on this end market. We believe our performance was driven by a combination of three factors. First, we continue to capitalize on the strong market conditions that we're seeing, especially in biotech. Second, we're effectively leveraging our customer value proposition across our businesses, and that accelerated our excellent growth momentum in this end market. And third, the actions we've taken as part of the integration have fundamentally strengthened the growth trajectory of our BioSciences and BioProduction businesses. The revenue synergies are also starting to ramp up and beginning to contribute to our growth. Let me now highlight some of our accomplishments from the quarter in the context of our growth strategy. We made great progress to set ourselves up for another successful year. As you know, our growth strategy is centered around three things

[Peter M. Wilver:]

Thanks, Marc. I appreciate your kind words and I'm very excited about my next chapter with Thermo Fisher. With that, let's move on to the numbers. As usual, I'll begin with an overview of our total company Q2 financial performance, then provide some color on our four segments and conclude with our updated 2015 guidance. As you can see from our results, we had a very strong second quarter and delivered a solid first half. In the second quarter we grew adjusted EPS by 7% to $1.84. This represents very strong underlying operating performance, given that we had a 12% headwind from FX in the quarter. GAAP EPS was $1.27 in Q2, up significantly from $0.69 in the year ago quarter, primarily as a result of lower non-cash acquisition-related charges. On the top line, organic revenue growth was 6% this quarter and our reported revenue was down 1% year-over-year. Q2 reported revenue included a 1% decline from divestitures net of acquisitions and a 6% headwind from foreign exchange. Backlog remained steady in the quarter with bookings slightly ahead of revenue. Looking at our growth by geography, both North America and Europe grew in the mid single digits. Asia-Pacific grew in the high single digits with China growing in the mid-teens and Rest of World grew in the low single digits. We don't normally provide color on Japan, but given our commentary last quarter, I wanted to provide you with a brief update on developments there. As we noted on last quarter's call, the budget was approved in early April. As Q2 progressed, we started to see funding begin to flow and Japan returned to low single-digit growth for the quarter. Looking at our operational performance, Q2 adjusted operating income increased 3% and adjusted operating margin was 22.3%, up 90 basis points from Q2 last year, despite a 100 basis point headwind from FX. At a high level, our adjusted operating margin expansion for the quarter was driven by continued strong contribution from our primary productivity levers

[Kenneth J. Apicerno:]

Thanks, Pete. Operator, we're ready to take questions.

[Operator:]

Your first question is from the line of Tycho Peterson from JPMorgan. Your line is open.

[Tycho W. Peterson:]

Hey, thanks, guys. And congrats, Pete, on the shortest retirement I've ever seen. Maybe just on some of the sequential improvement we saw here, particular on pharma, mid-teens growth was terrific. Can you maybe just help us think about how much of that is a function of the market conditions versus the life synergies versus I guess your value proposition as you described it? Obviously the growth there is driving a lot of the performance.

[Marc N. Casper:]

So, Tycho, in terms of the pharma biotech end markets, clearly the underlying conditions are strong, but obviously, nothing near the mid-teens type growth. So it's been a good market. As you know, biotech funding has been robust. Pharmaceutical companies are spending more money. But the majority of the very strong performance is driven by how our value proposition is resonating with our customers, and particularly how the underlying performance of our BioProduction BioSciences business is performing with that customer set. Our teams have worked very hard in putting together the two companies' capabilities, and in each of those businesses we're gaining market share and we're also seeing the benefits from our revenue synergies starting to pick up. Obviously, the revenue synergy is not a huge contributor, but it is a nice contributor to the growth in the customer side.

[Tycho W. Peterson:]

And I guess, speaking about the revenue walk through the back half of the year and guidance, I mean maybe the one thing I think that maybe stands out relative to your prior comments is on China because you're coming off two strong quarters here. Maybe just give us a sense of your thoughts on China in the back half the year?

[Marc N. Casper:]

Yeah, so the team executed very well in the quarter and executed very well in the first half of the year. Our view is that there are still some overhang in the Chinese market as they work through the anti-corruption efforts, and obviously a little bit slower GDP growth. But, clearly, the conditions in China are better than what we assumed at the beginning of the year and has been a nice contributor to our growth. In terms of the outlook for the second half specifically, hard to forecast exactly, but it should be better than our original assumptions.

[Tycho W. Peterson:]

And then, just last one. Was there a catch-up on China – I mean Japan? Pete, I know you talked about low single-digit growth. I'm just trying to think about the dynamics following the soft first quarter. How do we think about kind of the catch-up?

[Peter M. Wilver:]

Yeah, we really didn't see a catch-up. I mean, actually, the funding is still – it's flowing but it's still a little bit slow. So I would say it's kind of back to it. It was a normal quarter without any offset from the weakness in Q1.

[Tycho W. Peterson:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Ross Muken from Evercore ISI. Your line is open.

[Ross Jordan Muken:]

Good morning, and congrats. So I guess it's sort of odd – two years in a row we've had this dynamic where strong fourth quarter, weaker first quarter, recovery second quarter. I mean, I know you had given us last quarter some commentary that you had been sort of trying to understand the timing dynamic. And obviously we had a bit of a backlog build. Last quarter you had very good orders, so that sort of explains some of the sequential improvement. But as you think about the pacing and predictability in the business, anything new to share in terms of the magnitude of those sort of inflections on a quarterly basis? I mean, we always think of your business as so predictable.

[Marc N. Casper:]

Yeah. So, Ross, the business is quite predictable. If you think about it, we were not concerned after Q1 in our ability to do the 4% organic growth of the full year. And we're not doing victory laps after a strong Q2. We're right where we expected to be at the halfway point of the year. There were a lot of nuances to the calendar. You had less days in Q1 versus the prior year, you had clearly some customers flush some money at the end of the last year that bought some products that they knew they would use and that led to a little bit of a softer start. But we saw that the improvements happening as that first quarter went on and the team delivered a great Q2. And we sit at about 4% organic growth at the halfway point, which is where we want it to be, and we feel confident in our ability to deliver 4% growth for the full year.

[Ross Jordan Muken:]

Maybe turning to sort of obligatory section on M&A. You guys have been more active on the tuck-in side. It's actually kind of contradictory to what we're seeing in the market. I was listening to our company's call before and there's been a lot of large transactions versus small, which is not unusual, given where we are in the cycle. I mean, I guess is your thinking about the pipeline and the components of value you're seeing in different sub-segments, how would you sort of characterize for life sciences and diagnostics and the various areas you touch activity levels and more so on the mid-size because it seems like that's where you've been more active. How the sourcing and sort of pacing of deals is trending.

[Peter M. Wilver:]

So, Ross, in terms of the industry, it's a $100 billion industry. We're the market leader, but we obviously have less than 20% share in aggregate. So still very fragmented, even when you take the largest few players, it's still a very fragmented industry. We have a good pipeline of bolt-on transactions. We've done two that we feel good about it and we evaluate others. And we always have an interesting pipeline on that front. The way I think about it, is we follow our criteria. Is it going to strengthen the company strategically, is it going to be well received and help the customers and clearly is it going to create shareholder value as measured by the rates of returns on those investments. And we were able to do two transactions and we'll continue to look at that pipeline over time and I think we're in a good position from the ability to deploy capital to create shareholder value.

[Ross Jordan Muken:]

Great. And lastly, so I guess, Pete, congrats on staying. Is it possible we'll get you to do cameos down the road and maybe pop in on earnings call? I was just coming to grips with you leaving and so now that you're back, I'm excited about maybe you participating a little bit more. So, is it too big of a request to ask you to come back maybe once a year and pop in?

[Peter M. Wilver:]

So the only cameo you might see, Pete, is certainly not in the finance or the earnings calls, but maybe you'll see him occasionally with a tennis racquet or golf after hours. But you'll have to reach out that way. One of the things is that for clarity, I think it was after the period where Pete reflected on the transition to CFO and was able to take a deep breath and feel totally confident in Stephen that he and I started to talk about the next chapter of his life. I think he can add enormous value by not spending time on the finance function but rather helping us build our capabilities and strengthen the company in some other areas. So no more cameos for Pete here, but you can always reach him on non-financial related topics.

[Peter M. Wilver:]

Yes, Ross, I'm very happy to be doing my last earnings call.

[Ross Jordan Muken:]

Thanks, guys.

[Operator:]

Your next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch. Your line is open.

[Derik De Bruin:]

Hi. Good afternoon or good morning. Hey, Marc, can I just clarify your China comments? You talked about feeling a little bit better about the second half. Is that optimism driven by your backlog and the orders you have in hand? And so this leads to the question of how much visibility you have so is this certain China macro instability something we need to worry about in 2016?

[Marc N. Casper:]

So, it's a good question. In terms of visibility in China, it's less than what it used to be, say a couple of years ago, but it's not perfect. My comment really is saying we were expecting the company average for the year, when we gave the original guidance, and we've been growing. We grew high single digits in Q1, mid-teens in Q2 and we're likely to grow certainly better than the low single digit type growth, mid single digit growth for the full year. So that's really the reflection on the comment. Visibility, I think it's going to take some time before you get back to very clear visibility in China because they're still working through a lot of changes in the government.

[Derik De Bruin:]

Great. And I guess I have to ask the obligatory NIH question and is that – how are you thinking about what's going on there? And I believe when we had you on the road recently you were still thinking that maybe the budgets could give you somewhere between 25 bps and 50 bps of incremental organic revenue growth if they go through with things. Is that still sort of your thinking on it?

[Marc N. Casper:]

Yeah. So, the way I think about it, I don't expect the budgeting process and things like the 21st Century Cures to have any impact in this calendar year, but could set us up for a very attractive growth environment for the NIH and US academic and government going forward, should those things become law. So those are really good, important pieces of legislation, and if we can get those enacted, that clearly is going to be a big improvement in the NIH funding. I think it's almost $9 billion of funding over the upcoming year's period. So it could be super exciting if it goes through the process.

[Derik De Bruin:]

Great. Thanks.

[Marc N. Casper:]

You're welcome.

[Operator:]

You next question comes from the line of Jon Groberg from UBS. Your line is open.

[Jonathan Groberg:]

Great. I'll offer my congratulations to you, Pete, and good luck with the new role in the future. And we look forward to seeing you on the tennis court, as Marc said.

[Peter M. Wilver:]

Thanks, Jon.

[Jonathan Groberg:]

So, Marc, I want to follow-up on kind of your comments. You mentioned and I was kind of just – this morning doing the same thing, 2% first quarter, 6% this quarter, so first half you're sitting right at 4%, which is what you expect for the year. If you look at this quarter, I think what will really stand out to people is obviously that biopharma, and in particular, I think that Life Sciences Solutions growth of 7%. Many people thought that business might actually grow below the organic rate of the company. So can you maybe dive in a little bit and give a more specific example? I think you mentioned that the third action point of kind of growth in BioSciences and BioProduction really helped out biopharma and I'm assuming that's somewhat tied to what's happening in Life Science Solutions. So can you maybe provide a little bit more detail or specific details about the actions that you took? And then secondly about, kind of for the second half of the year, do you expect biopharma to keep growing at this mid-teens rate or high single digit rate, let's call it, and the rest of the businesses to stay low single digit? Or is there something you see that makes you think that maybe diagnostic and healthcare, industrial or something there could get a little bit better in the second half? Thanks.

[Marc N. Casper:]

So, good questions in a bunch, too. Let me start with the broader end markets and then I'll hit the specifics within the Life Science Solutions and what's going on there. If I think about the second half, we wouldn't expect pharma and biotech to be at that same torrid pace of Q2, but certainly will be a strong end market for us in the second half of the year. And our expectation is that fairly similar conditions in the academic government and diagnostics and healthcare and industrial and applied in the second half than it was in the first half. Probably slight improvements from where they are, but not particularly material and when you kind of walk through the math, that sort of gets you to the 4% growth. Within the Life Science Solutions segment, the team has done a great job in leveraging the combined capabilities of the company. And that is, obviously there was a lot of redundant cost and there has been an interesting – driving of great earnings growth, but also reinvestment in certain parts of the business, as well. While we have been raising synergy targets, we've also been able to strengthen the fundamentals of the business. You're seeing nice impact innovation in the BioSciences business. That is clearly helping accelerate the growth there. And commercially, both BioProduction and BioSciences is really leveraging the strength of the excellent commercial footprint that Thermo Fisher Scientific has in serving that customer set; leveraging our channel but also leveraging the corporate accounts and the strong relationships and the combination of good innovation and good commercial execution has put that business on a nice growth path and that's helped us, both in the biopharma customer set, but also helped us strengthen our Life Science Solutions business. When you go back to our Analyst Meeting in May, we expressed our confidence in changing the long-term outlook from 3% to 4% organic growth for that business, and we feel good about that. And I think a quarter like this shows you some of the early progress that we're making in strengthening the growth outlook for the business.

[Jonathan Groberg:]

That's helpful. And then if I could just quickly, as you look at your end markets again, I mean, if you go back to the lives (44

[Marc N. Casper:]

When you think about the business that we have, we serve four end markets. They're slightly off-cycle from one another, which actually allows us to deliver very consistent growth. Because it's unlikely that all four are going to be in a trough, and it's unlikely that all four are going to be at a robust period. So you get this nice effect of getting steady, organic growth over long periods of time. In terms of the longer-term outlook, we've had, obviously, choppy academic and government end markets for a while, and things like the 21st Century Cures which pulls through, things like a recovery longer-term in China from – can be things of help that end market. Will that be a robustly growing market? No. But could it be better than where it is today? Sure. Over time I think that's probably the one that you'd see opportunities. Within Thermo Fisher, we're very bullish on the long-term prospects for our healthcare and diagnostics business and see that over time being one of our faster growing markets, particularly because we're driving the penetration of Life Science Tools into that market. So things like mass spectrometry, NextGen sequencing will be longer-term growth drivers for that end market, and we think that we're well positioned to get very good growth there over time.

[Jonathan Groberg:]

Thanks, Marc. Helpful.

[Operator:]

Your next question comes from the line of Brandon Couillard from Jefferies. Your line is open.

[S. Brandon Couillard:]

Thanks. Good morning.

[Marc N. Casper:]

Morning.

[S. Brandon Couillard:]

Marc, I guess, sticking with the theme, if we look at the LPS business and the volatility in that segment's core revenue growth, I mean, there are one or two things that you attribute to the volatility we've seen more recently in the growth rates, which is above what this business used to – how it used to perform, and, I mean, given the high mix of consumables in the channel business, would expect, I guess, a little more consistency. Does that normalize at some point in your view?

[Marc N. Casper:]

Yeah. I think that the Laboratory Products and Services business performed really well, and if you look back over the last few years, I mean, it really has been one of the nice growth drivers for the company. In the quarter, all three of the businesses that make up the segment, our Lab Products, our Customer Channels, and our BioPharma Services business, had a really good quarter, and so I feel good about it. In terms of why softer Q1 and then a stronger Q2 really reflects what's going on at the company level, it's not particularly segment thing. You get the same days of calendar effects in that business as you would elsewhere in the same days of the budget flush in Q4 starting out with a weaker start. So, it's a good grower for the company and one that is the heart of our customer value proposition. So, I think it's a nice growth driver going forward, as it has been historically.

[S. Brandon Couillard:]

And then one more for Pete. Would be curious if you could break out the effect of currency and mix, just the components in the gross margin in the second quarter.

[Peter M. Wilver:]

Sure. So the year-over-year bridge between 49% last year and 48% this year in gross margin, we had about 75 basis points of headwind as a result of FX and about 80 basis points of unfavorable mix, that's both segment and within segment mix. And then obviously very good productivity, over 100 basis points.

[S. Brandon Couillard:]

Super. Thank you.

[Operator:]

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

[Steve C. Beuchaw:]

Hi. Good morning. Thanks for taking the questions, everyone. The progress in China is nice to see. It's very much in line with – maybe a little bit ahead of what you had anticipated, but I take your comments to mean that you don't anticipate – and this is, of course, pretty normal for Thermo – anything along the lines of let's say a budget flush in China in the latter stages of the year. As we talk to industrials companies and tools companies, it seems like opinions on the likelihood of some sort of budget flush are really all over the map. It'd be interesting to hear your thoughts on that. Why is it you think there are divergent opinions and what are you watching to get a sense for whether any acceleration in China is a function of that in the latter stages of the year is reasonably possible?

[Marc N. Casper:]

So, in terms of the – whether you would have outsize growth at the end of the year, it really is hard to forecast that. And if I think back in my 15 years with the company, it's really something that we don't actually spend a ton of time on in terms of what's going to happen in December in that particular market. Generally the macro trends are pretty favorable in China because GDP growth there is faster there than anywhere else in the world roughly, and the needs for our products; environmental protection, food safety, healthcare expansion are right there in the sweet spot. So, we always think that long term that we're well positioned to have outsize growth in China and get a little less focused on what's going to happen quarter to quarter. I will be there again next month and look forward to working with the team and visiting a bunch of customers, and maybe in the Q3 call I'll have a little more color on how we see the very end of the year playing out.

[Steve C. Beuchaw:]

Got it. And then incremental to your comments around the $1.4 billion of capital deployment this year, it's always helpful just to hear how you're thinking about the gating factors for any incremental share repurchase. Are we waiting to see what comes through from the M&A funnel? Are there other gates we ought to consider? And, again, I will thank you guys for all the help this morning.

[Marc N. Casper:]

Sure. So, right now with the $1.4 billion that we have deployed and expect to deploy, that would put us at the three times leverage ratio approximately at the end of the year, which really sets us up for a great position going into 2016. We do evaluate share buybacks from time to time, and we do have an authorization. But at least at this point we're not expecting anything in the super short term. And then we plan to get back to a more normal capital deployment as we get into 2016. But we're always flexible depending on what's going on in the end markets and what's going on with the stock price at a particular point in time.

[Steve C. Beuchaw:]

All right. Thanks so much.

[Operator:]

Your next question comes from the line of Doug Schenkel from Cowen & Co. Your line is open.

[Doug A. Schenkel:]

Hey, good morning, guys. How would you describe the pricing environment? Really what I'm getting at is how does it compare to recent periods and given that the value proposition is clearly working more and more? Is the outlook improving for pricing in the coming quarters?

[Marc N. Casper:]

Yeah. So, in terms of the pricing environment, actually Q2 was a strong pricing environment for us. One of the things that we mentioned at the beginning of the year with the foreign exchange headwinds where we were going to take some incremental actions on pricing and we saw some of the benefits of that. So at the halfway point of the year, Doug, we're a little bit above 50 basis points on price, which is good. It's a little better than what we've been experiencing over the last couple years. So, that's going in the right direction and generally a pretty stable price environment.

[Doug A. Schenkel:]

Okay, And a clarifying question on guidance or I guess just that's framed by guidance. As you noted and provided a lot of detail, so thanks for that, Pete. You increased revenue growth guidance largely due to FX, but you actually indicated that FX is an incremental drag on EPS. Is any of that reflective of changes in what you're expecting by geography? Essentially have your growth assumptions by geography that are imbedded into overall guidance, have they changed?

[Peter M. Wilver:]

No. It's really being driven by just the respective changes in foreign currency exchange rates. So, for instance, compared to our previous guidance, the yen, which pulls through at about 60% is up 2.5% – or declined by about 2.5%, while the pound, which is pull through less than 5% actually went up by 3.5%. You can see just those two currencies, which are two of our significant currencies, you end up with positive revenue and negative pull-through. So it's just the relative changes in the currencies.

[Doug A. Schenkel:]

Okay. And one last one. You guys had a really strong Analytical Instruments margin performance in the quarter. I think you were up 130 basis points sequentially, 160 basis points year-over-year. I think it's fair to say that was better than many expected in a quarter where I think the organic growth was solid but about as expected and FX remained a tough headwind. Is there any additional dynamic to kind of walk through here just to kind of explain that solid performance and the sustainability moving forward? Thank you.

[Peter M. Wilver:]

Yeah, in terms of year-over-year improvement 150 basis points, really solid improvement there. We had great productivity. Probably 50 basis points or so above what our normal run rate would be. We had really good pull-through on the incremental revenue. And that, obviously, was a little bit offset by foreign exchange, which was a pretty significant headwind. I would say this is an outsized level of expansion. So I wouldn't expect that every quarter going forward. But really good performance this quarter.

[Doug A. Schenkel:]

Okay. Thanks, again.

[Peter M. Wilver:]

Yeah.

[Operator:]

Your next question comes from the line of Isaac Ro from Goldman Sachs. Your line is open.

[Isaac Ro:]

Hi, good morning, guys. Thank you. A question first on diagnostics. I used to think of that business as being maybe a mid to high single-digit growth area. And last year, I appreciated a little bit of a tougher comp in 2Q versus 1Q. But just wondering kind of how you're looking at the growth rate there and wondering if it was – whether it was transplant diagnostics or maybe another area? If there was something that's been sort of weighing on the growth rate that could either abate or turn for the better.

[Marc N. Casper:]

Yeah, so Isaac, good morning. In terms of the diagnostics and healthcare, no – really if I think about the first half of low single-digit growth, first quarter you had the calendar. And in the first half a little bit weaker seasonal on both flu and allergy relative to the prior year. So those are really the factors there. The way I think about is I agree with you. I think on the mid-term and beyond is actually one of our faster growing businesses. Transplant did fine, so no issues there. So I think it's more just as you see some of the new products get launched in future periods, you'll see that growth pick up over time.

[Isaac Ro:]

Okay. That's helpful. And then just another question on bioprocess. I think you touched a little bit qualitatively on how that's going. But wondering if put some rough numbers? It seems like that market was off to a hard start for everyone in the first quarter, and I'm assuming that was the case. But just wondering if you can put some numbers around bioprocess this quarter as well as your expectations for the balance of the year? Thanks.

[Marc N. Casper:]

Yeah. It's a strong business for us. It was a meaningful contributor to our growth within the Life Science Solutions segment, and certainly of a meaningful scale business, our fastest growing business. So really a good performer. On the specific numbers it's well above the company average.

[Isaac Ro:]

Got it. Thanks a bunch.

[Operator:]

Your next question comes from the line of Jeff Elliott from Robert W. Baird. Your line is open.

[Jeff T. Elliott:]

Good morning. Marc, could you provide some additional color on the biopharma end market? I guess specifically what I'm looking for is what do you see in large pharma, kind of spec pharm, biotech, and what are the growth rates there?

[Marc N. Casper:]

So biotech by far the fastest-growing subset. You may recall a few quarters ago I talked about and certainly we reinforced, Alan Malus reinforced at the Analyst Meeting. Our push from how we approach our customers, we had great momentum with large pharma to really expand our efforts with biotech. And that clearly is paying off, right? So the biotech funding environment as you know is very strong and that's translating into spending at the Life Science Tools level, and we're well-positioned to capitalize on it. But our Big Pharma customers are doing well, right? Their pipelines look better and more drugs are getting approved and we're very well-positioned because of our value propositions. So we're seeing good growth there with our larger customers as well. So biotech is strongest, but not really any particular points of weakness within that customer set.

[Jeff T. Elliott:]

That's great. And a follow-up on the chromatography strength. I guess how would you position this? Is this mainly a factor of the new products and execution on your side, or are you seeing any disruption in the competitive environment that you're taking advantage of?

[Marc N. Casper:]

No disruption on the competitive front. We have good competitors in the field. In terms of – we had really good strength. Our team did a nice job. Ion Chromatography did well, the liquid chromatography did well and gas chromatography did well in the quarter. So really good strength between the instruments and consumables, so just really solid execution. New products help, but that wasn't a material driver of the very strong performance.

[Jeff T. Elliott:]

Thanks a lot. thanks, guys.

[Kenneth J. Apicerno:]

And, Operator, we have time for just one more.

[Operator:]

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

[Jack Meehan:]

Hi, thanks. And thanks for squeezing me in. I just wanted to ask one more or the policy side with the NIH funding. And just as you're talking with customers today, I know think you're thinking about this maybe as being more of a 2016 helper. But just if you're seeing anybody preparing ahead of the bill, and then whether you think you could actually bleed over from academic into any other customer segments?

[Marc N. Casper:]

We have a lot of dialogue with our academic and government customers, and I would say that it is – no one's spending in advance of it. I think that a lot of folks are trying to push to get these things over the goal line because it would be good for the U.S. and certainly good for their own environment. So you have a lot of folks rallying to get it through, but I don't think anyone is spending yet. I don't think that in the short term it will bleed into other segments, but I do think strong NIH funding actually positions biotech pharma and the diagnostics segments better, because there is clearly a spillover. So pumping more money into that from a government perspective is a huge positive for the eco system down the road. So, as you know, I'm a big believer in the NIH.

[Jack Meehan:]

Yeah, got it. And then, just the last one on the LPS strength. I was just curious on the clinical side of the market, whether you've seen any sort of changes in the volume dynamic in the U.S. that you thought was helping there and driving some of the robust growth the past couple of years?

[Marc N. Casper:]

No, nothing particular. The clinical exposure in that segment is a little bit less than the company average. So not really a big driver there. So thank you for the question.

[Peter M. Wilver:]

So before Marc makes his closing comments, I just wanted to say how much I've enjoyed being CFO for the past 11 years. And I'm really going to miss interacting with our investors and sell side analysts. As you know, Stephen and I have worked together for 15 years. He knows the company as well as I do and I'm very confident that he'll do a great job as CFO and continue to work with Marc and the rest of the team to take Thermo Fisher to the next level.

[Stephen Williamson:]

Thanks, Pete. I'm really excited about the new role. I hope to meet many of you during the course of the year. I look forward to updating everyone on our Q3 call in October.

[Marc N. Casper:]

So with that to wrap up we had an excellent Q2. We're in a great position to deliver another strong year and we look forward to updating you on our progress in the next quarter. Thank you, everyone.

[Operator:]

This does conclude today's conference call. You may now disconnect.