Q2 2025 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2025 Second Quarter Conference Call. [Operator Instructions] I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin the call.

Good morning, and thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading News, Events and Presentations until October 21, 2025. A copy of the press release of our second quarter earnings is available in the Investors section of our website under the heading Financials. So before we begin, let me briefly cover our safe harbor statement.

Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10- K and subsequent quarterly report on Form 10-Q, which are on file with the SEC and available in the Investors section of our website under the heading Financials, SEC Filings.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our second quarter 2025 earnings and also in the Investors section of our website under the heading Financials.

So with that, I'll now turn the call over to Marc.

Thank you, Raf. Good morning, everyone, and thanks for joining us today for our second quarter call. As you saw in our press release, we delivered excellent operational performance in the quarter, reflecting active management of our company and the strength of our proven growth strategy and PPI Business System. Our trusted partner status is more relevant than ever and is resonating strongly with our customers.

This is allowing us to continue to drive market share gains and highlight our unique ability to enable their success in all market environments. So turning to the details of Q2. Let me first recap the financials. Our revenue in the quarter grew 3% to $10.85 billion. Our adjusted operating income grew 1% to $2.38 billion.

Q2 adjusted operating margin was 21.9%, and adjusted EPS was $5.36 per share. These results were ahead of our guidance. During the quarter, our team aggressively mobilized to take the actions to navigate the policy environment and minimize the impact of tariffs for 2025 and beyond. Stephen will provide some more details on our progress.

I'll now cover our performance by end market. In pharma and biotech, we delivered mid-single-digit growth this quarter, representing a nice sequential step-up. Performance in the quarter was led by our bioproduction and Pharma Services businesses as well as our research and safety market channel. It was also good to realize a sequential improvement in our clinical research business, which delivered slightly positive growth in the quarter.

Turning to academic and government. Revenue declined mid-single digits in the quarter, reflecting some customer hesitancy in a more uncertain environment resulting in muted demand for equipment and instruments. In industrial and applied, performance played out as we expected, with growth declining in the low single digits during the quarter. In Q2, we delivered good growth in our research and safety market channel.

And finally, in diagnostics and health care, revenue declined in the low single digits during the quarter as we navigated headwinds in China. A highlight in the quarter was strong growth in our transplant diagnostic business. Wrapping up on the end markets, our team managed the current environment well, helping us deliver on our financial commitments for the quarter. I'm going to keep my comments a little shorter today, so I can leave time to discuss a couple of topics that seem to be of mind -- on top of mind in the investment community.

So let me give you an update on how we executed our growth strategy in Q2, which drives value creation for our investors. As a reminder, our strategy consists of 3 pillars: high-impact innovation, our trusted partner status with customers, and our unparalleled commercial engine. As you all have heard me share before, we consistently deliver really outstanding innovation, and we have some great launches this quarter. We launched several state-of-the-art solutions at this year's ASMS conference, highlighted by 2 next-generation Thermo Scientific Orbitrap mass spectrometers, the Astral Zoom and the Excedion Pro.

As you know, we're an industry leader in the space, and these cutting-edge Analytical Instruments will enable researchers to further advance precision medicine and drive significant insights to help pioneer new therapies for complex diseases like Alzheimer's and cancer. Customer feedback has been incredibly positive, with one calling the Astral Zoom a paradigm shift for proteomic technology, and noting that the Excedion Pro provides immediate value to their biotechnology work and will serve as their next-generation platform. Also during the quarter, we launched the Thermo Scientific Krios 5 cryo-transmission electron microscope, which further enhances our leadership in electron microscopy and empowers researchers to uncover critical biological insights and to support the development of new therapeutics.

Additionally, we expanded our DynaDrive single-use bioreactor portfolio for bioproduction, with the first-of-its- kind bench scale system, helping biopharma customers increase workflow efficiencies and seamlessly scale-up manufacturing of new therapies. Our trusted partner status which we built over many years is another example of why our growth strategy is working and why we're so well positioned for the future. You can clearly see this momentum in our performance with pharma and biotech. Our Accelerator Drug Development solution is a terrific example of how we're delivering great value to our customers.

Accelerator Drug Development is the integration of our Pharma Services and clinical research capabilities with the ultimate goal of taking time and cost out of the drug development process. During the quarter, it was great to see the Tufts Center for the Study of Drug Development validate the power and benefit of our unique capabilities. And I'm pleased to state that the customer uptake is very strong, with clinical research authorizations growing strongly in the quarter. Because of the unique relationship we have with our customers, we are partnering with them to tailor how we help them navigate and thrive in the current environment.

For some customers, this means expanding U.S. capacity for drug production and supporting their reshoring efforts. For others, it's about accelerating clinical research time lines by aggressively adopting AI into our processes. And then there are customers where it's all about identifying ways to help them drive productivity. Wrapping up my comments on our growth strategy, we're uniquely positioned to win in this environment.

Let me provide a few comments on capital deployment. We continue to successfully execute our proven capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. As you recall, in February, we announced that we had entered into a definitive agreement to acquire Solventum's Purification & Filtration business. Last month, we amended our agreement to remove Solventum's drinking water filtration business from the transaction, which allowed us to both accelerate the regulatory clearance process and narrow the scope of the acquisition to the business lines most synergistic with Thermo Fisher.

We have received all regulatory clearances, and we're on track to close the transaction before year-end. We're excited to welcome our new colleagues to the company and bring the benefits of Solventum's Purification & Filtration technologies to our customers. And then shortly after the quarter closed, we announced an expansion of our strategic partnership with Sanofi to enable additional U.S. drug product manufacturing. Under the agreement, we will acquire Sanofi's sterile fill-finish site in Ridgefield, New Jersey and continue to manufacture a portfolio of therapies for Sanofi.

We will also invest in expanding production at the site to meet the growing demand for U.S. manufacturing capacity from our pharma and biotech customers. This is a great example of the power of our trusted partner status and capital deployment strategy at work. As always, our PPI Business System was a key enabler of our strong execution in the quarter and drives competitive advantage for Thermo Fisher. We're leveraging PPI to adjust our supply chains in the tariff environment and to aggressively manage our cost base.

And we continue to further strengthen the PPI Business System by incorporating AI to enhance how we serve customers, streamline internal processes and reduce costs. PPI is enabling excellent execution today and will continue to do so in the future. So let me now turn to our guidance. We're increasing our guidance for the full year on the top and bottom line.

We now expect revenue in the range of $43.6 billion to $44.2 billion, and adjusted EPS in the range of $22.22 to $22.84 per share, a $0.23 increase at the midpoint. This reflects continued active management of the business. Stephen will take you through the details in his remarks. Let me now turn to a couple of questions that seem to be top of mind for investors.

The first is, what is our early thinking on the potential impacts of the U.S. policy focus and tariffs on the near-term growth outlook for Thermo Fisher? And second, in that scenario, how are we managing the company to create meaningful shareholder value? Given our strong conviction of the long-term growth drivers of our industry, we thought it would be most helpful to you if we zoomed in on the nearer term, say, the 2026, 2027 time frame to focus these questions. We believe that a reasonable assumption is that our end markets will gradually build from the lower growth environment that we're currently navigating.

This would lead to a 2026 and 2027 scenario where we will deliver 3% to 6% organic revenue growth. Today, we're currently at the low end of this range, and we believe that our growth will accelerate over the next 2 years. Given that top line scenario, here is how we're focused on driving shareholder value creation. First, we'll collaborate even more closely with our customers.

As you've heard me say before, our trusted partner status is a meaningful differentiator for us with our customers. They're relying on us to enable their success as they adapt to the environment. Second, we're actively managing the company. You see that in our results and the 2025 financial outlook.

Strong cost management was a focus at the beginning of the year, embedded in our original guidance, and we've meaningfully stepped up the action as the year has progressed, adding an additional $300 million of cost reduction since the initial guide. And we will continue that intense focus in 2026 and 2027. This will result in us delivering strong adjusted operating income growth of mid- to high single digits. And when you factor in our disciplined capital deployment strategy, we have the opportunity to further compound our returns. The final point I want to make is that the long-term drivers of the industry remain very compelling.

We expect the environment to improve over the next couple of years, and during that time, we'll deliver very strong earnings growth. When I look to the future, once this near-term scenario plays out, we expect to deliver 7% plus organic revenue growth. So to summarize our key takeaways from the quarter, we delivered excellent operational performance driven by our proven growth strategy and PPI Business System, beating our guidance and raising our outlook for 2025. Our trusted partner status and proven ability to enable our customer success is a significant competitive advantage. We're actively managing the company in this environment.

We're gaining share and driving greater productivity and cost reduction, and I remain incredibly confident in the near- and long-term outlook for the company. With that, I'll now hand the call over to our CFO, Stephen Williamson. Stephen?

Thanks, Marc, and good morning, everyone. I'll take you through an overview of our second quarter results for the total company, then provide color on our 4 business segments, and I'll conclude by providing our updated 2025 guidance. Before I get into the details of our financial performance, let me provide you with a high-level view of how the second quarter played out versus our expectations at the time of the last earnings call. In Q2, our team executed really well, and we delivered ahead of what we'd assumed in the midpoint of our prior guidance on both the top and bottom line.

This performance reflects very active management of the company both to minimize the tariff and broader policy impacts, and enable the success of our customers. On the top line, Q2 organic revenue growth was approximately $75 million ahead of what we've included in the prior guidance, driven by sales in China being less impacted by tariffs than had been assumed. In aggregate, the rest of the business performed in line with our expectations, which is an excellent outcome given the macro environment. Then on the bottom line, we delivered $0.13 of adjusted EPS, ahead of what was included in the prior guide for Q2, reflecting excellent operational execution. $0.08 of the beat was from lower impact of tariffs that have been assumed in the prior guide and $0.05 of the beat was some strong cost management enabled by the PPI Business System.

So excellent operational performance in Q2. Let me now provide you with some additional details on the quarter. Starting with earnings per share. In the quarter, adjusted EPS was $5.36. GAAP EPS in the quarter was $4.28, up 6% from Q2 last year. On the top line, Q2 reported revenue grew 3% year-over- year.

The components of our reported revenue growth included 2% organic revenue growth, a slight contribution from acquisitions and a 1% tailwind from foreign exchange. Within our revenue growth for the quarter, we had a 1% headwind from the runoff of the pandemic-related revenue. Turning to our organic revenue performance by geography. In Q2, North America and Europe both grew low single digits and Asia Pacific declined low single digits, with China declining high single digits.

With respect to our operational performance, we delivered $2.38 billion of adjusted operating income in the quarter, an increase of 1% year-over-year, and adjusted operating margin was 21.9%, 40 basis points lower than Q2 last year and flat sequentially to Q1 2025. In Q2, the year-over-year impact of tariffs and related FX was a 5% headwind to adjusted operating income dollars and a headwind to reported margins in the quarter of 140 basis points. This was partially offset by the rest of the business, which drove 100 basis points of margin improvement in the quarter, demonstrating our ability to drive strong earnings growth in a more muted top line environment.

We delivered very strong productivity, which enable us to fund strategic investments to further advance our industry leadership and offset the impact of unfavorable mix. Total company adjusted gross margin in the quarter was 41.3%, which is 80 basis points lower than Q2 last year. Tariffs and related FX reduced adjusted gross margins by approximately 150 basis points. This was partially offset by 70 basis points of improvement across the rest of the business.

Moving on to the details of the P&L. Adjusted SG&A in the quarter was 16.2% of revenue. R&D expense was $352 million in Q2, reflecting our ongoing investments in high-impact innovation. And R&D as a percent of our manufacturing revenue was 7.4% in the quarter.

Looking at our results below the line. Our Q2 net interest expense was $107 million. As expected, the adjusted tax rate in Q2 was 10%. And average diluted shares were 378 million, 5 million lower year-over-year, driven by share repurchases net of option dilution.

Turning to free cash flow and the balance sheet. Year-to-date cash flow from operations was $2.1 billion, and free cash flow was $1.5 billion after investing $645 million of net capital expenditures. During the quarter, we repaid approximately $700 million of senior notes and returned $160 million of capital through dividends. We ended the quarter with $6.4 billion in cash and short-term investments, and $35.2 billion of total debt.

Our leverage ratio at the end of the quarter was 3.2x gross debt to adjusted EBITDA and 2.7x on a net debt basis. And concluding my comments on our total company performance, adjusted ROIC was 11.3%, reflecting the strong returns on investment that we're generating across the company. Now I'll provide some color on the performance of our 4 business segments. In Life Sciences Solutions, Q2 reported revenue in this segment increased 6% versus the prior year quarter and organic revenue growth was 4%.

Growth in this segment was led by our bioproduction business, which had another quarter of excellent growth. Q2 adjusted operating income for Life Sciences Solutions increased 6% and adjusted operating margin was 36.8%, up 10 basis points versus the prior year quarter. During Q2, we delivered very strong productivity, which was partially offset by the expected impact of the Olink acquisition, unfavorable mix and strategic investments. In the Analytical Instruments segment, reported revenue declined 3% and organic growth was 4% lower versus the year ago quarter.

This was driven by the impact of tariffs and the policy focus of the U.S. administration, which is leading to a more muted demand for equipment and instrumentation. In this segment, Q2 adjusted operating income decreased 26% and adjusted operating margin was 18.8%, down 580 basis points versus the year-ago quarter. The majority of the margin change was driven by the impact of tariffs and related FX. Outside of that impact, strong productivity was more than offset by lower volumes and strategic investments.

Turning to Specialty Diagnostics. In Q2, reported revenue grew 2% year-over-year and organic revenue was flat compared to the year ago quarter. In Q2, growth in this segment was led by our transplant diagnostics business. Q2 adjusted operating income for Specialty Diagnostics increased 3% and adjusted operating margin was 27%, 30 basis points higher than Q2 2024. During the quarter, we delivered good productivity, which was partially offset by unfavorable mix and strategic investments.

Finally, in Laboratory Products and Biopharma Services segment. Reported revenue increased 4% and organic revenue grew 3% versus the prior year quarter. In Q2, growth in this segment was led by our Pharma Services business and our research and safety market channel. The runoff of pandemic-related revenue had over a 1% impact on the revenue growth in this segment in Q2. Q2 adjusted operating income in the segment increased 11% and adjusted operating margin was 13.8%, 90 basis points higher than Q2 2024. In the quarter, we delivered very strong productivity, which was partially offset by unfavorable mix and strategic investments.

So turning to guidance. As Marc outlined, we're increasing our 2025 full year guide to reflect the Q2 beat and our continued active management to the company. Let me provide you with the details. We're raising our revenue guidance to an expected range of $43.6 billion to $44.2 billion.

Organic revenue growth is still expected to be in the range of 1% to 3%. We're increasing our outlook for adjusted operating margin in 2025 to a new range of 22.5% to 22.7%. And we're raising our adjusted EPS guidance to a new range of $22.22 to $22.84. The increase at the midpoint of the guidance range reflects $120 million higher revenue than the prior guide, 30 basis points of improved adjusted operating margin and $0.23 of higher adjusted EPS. This incorporates the Q2 beat as well as an additional $0.10 of adjusted EPS in the second half of the year to reflect additional cost actions we're taking to continue to actively manage our cost base.

It is important to note that our organic outlook for the second half of the year remains on track to the prior guidance. The U.S.-China tariff situation has improved significantly versus our prior guidance assumptions. We reflected the Q2 benefit of that in our revised guidance. Given the fluidity of the tariff and trade policy environment, we thought it was appropriate to keep the tariff impact outlook for the second half unchanged at this point.

Should global tariffs to remain as they are today, we'll likely have upside to the new guidance. We're actively managing the company to appropriately navigate the macro environment. Our growth strategy is enabling customer success and driving share gain, and we're using the PPI Business System to effectively address tariffs and aggressively manage our cost base. Our initial guide for the year includes a very strong earnings growth enabled by aggressive cost management, and since then, we've added an additional $300 million of cost actions for 2025. Through PPI, we're constantly finding ways to be more productive and to leverage the scale of the company.

This includes increasing the utilization of our shared services and our functional centers of excellence. PPI drives strong earnings growth and also creates room in the P&L to continue to invest for the future. I'll now move on to an update of some of the modeling elements for the full year. FX rates continue to fluctuate in the quarter driven by changes in tariffs and trade policy.

In Q2, the year-over-year FX impact on revenue improved [ $60 million ] versus our prior guide, but the adjusted EPS impact worsened by $0.08, largely due to onetime transactional FX caused by intra-quarter volatility in rates, which, if FX rates stay as they are today, will not reoccur in 2026. So for the full year, we now expect FX to be a year-over- year tailwind to revenue of $10 million and a headwind to adjusted operating income and adjusted EPS of $80 million and $0.27, respectively. Below the line, we now expect net interest expense to be between $360 million and $370 million in 2025, and we continue to expect an adjusted tax rate of 10.5% for the full year.

We continue to expect between $1.4 billion and $1.7 billion of net capital expenditures in 2025, and free cash flow in the range of $7 billion to $7.4 billion for the year. In terms of capital deployment, we're assuming $2 billion of share buybacks, which were already completed in January. We continue to estimate the full year average diluted share count will be between 378 million and 379 million shares. And we'll return approximately $600 million of capital to shareholders this year through dividends.

Our guidance does not include any future acquisitions or divestitures. So it does not include any impact from the pending acquisitions of Solventum's Purification & Filtration business and the sterile fill-finish site from Sanofi. In terms of phasing for Q3, we expect organic growth in Q3 to be about 1 point higher than Q2 and adjusted EPS to be approximately $0.10 to $0.15 higher than Q2. Then finally, I wanted to touch on the financial scenario for the next couple of years that Marc outlined earlier. We're managing the company under the assumption that we'll deliver between 3% and 6% organic revenue growth in that period.

That includes a continuation of the strong share gains that we've been delivering. In that top line environment using the proven levers of the PPI Business System, we expect to generate approximately 50 to 70 basis points of adjusted operating margin expansion and mid- to high single-digit adjusted operating income growth. We have a number of exciting opportunities to supplement this organic performance with effective capital deployment. We're very well positioned to continue to drive very strong earnings performance under this level of assumed top line growth.

And there are scenarios where we can be above this assumed level of growth. And should this occur, we'll be in a great position to drive even better performance. So to conclude, we continue to actively manage the company and are effectively navigating the macro environment. Our customers are working on incredibly relevant science to address huge unmet needs in the world, and we're uniquely positioned to enable their success.

With that, I'll turn the call back over to Marc.

Thanks, Stephen. Before we open the call for questions, I'd like to take a moment to share an update about our leadership team that involves great news for 2 people whom I hold in very high regard and work very closely with. First, Stephen Williamson, our Chief Financial Officer, has decided to retire next year at the end of March. This was thoughtfully planned on his part, and I know that he and his wife, Jane, are very excited for his upcoming retirement.

Stephen has had an extraordinary impact on Thermo Fisher Scientific. Since taking on the CFO role in 2015, he has been instrumental in driving our company's financial performance and strategic growth, and he has built deep relationships with our investors and colleagues. I've had the privilege of working closely with Stephen for nearly 25 years. He's been a true partner, insightful, thoughtful and always focused on the long-term success of our company.

I deeply appreciate his guidance, his unwavering commitment, his steady leadership and the impact that he has had on our success. While I'll certainly miss him, the entire company is incredibly grateful for his contributions, and we wish him the very best in his well-deserved upcoming retirement. Next, I'm very pleased to share that as part of a long-planned transition, Jim Meyer, currently our Vice President of Financial Operations and member of the company leadership team, will become our Chief Financial Officer effective March 1, 2026. Jim is an accomplished finance leader with deep company knowledge and a strong track record across our organization.

He joined Thermo Fisher in 2009 and has held senior finance roles across several of our major businesses. And in his current role, he leads the finance support for all of our operating businesses. Over the past few years, I've had the opportunity to work closely with Jim. He's exceptionally qualified to take on this role and will continue to drive Thermo Fisher's long-term growth and outstanding financial performance.

Stephen and Jim will work together closely over the coming months to ensure a seamless handoff. And I look forward to continuing to partner with them during this transition. With that, I will turn the call over to Raf for questions.

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

[Operator Instructions] Our first question today comes from Michael Ryskin with Bank of America.

Great. Congrats, Stephen, on the retirement, and you guys certainly gave us plenty to talk about in this call. Marc, maybe I'll start with a high-level one, what you talked about in terms of the new outlook. I think the 7% plus in the long term, it sounds like that's the new long-term outlook, the LRP.

In the past, you've sort of talked about here's what the market is going to grow, here's Thermo taking share above that due to PPI and trusted partner status. Could you sort of break that 7% plus down a little bit, give us a little more clarity on that? And then sort of part of that, you talked about the strong conviction in the long-term drivers of the industry, and sort of how do you arrive at that number? Given everything that's happened in the first half of '25, the uncertainty we still see in the market, what gives you the conviction that 7% plus is the right number going forward for the long term?

Yes, Mike, thanks for the question. So when I think about trying to create a financial framing scenario, there's been many questions over the last coming months, very appropriate about what's the growth outlook for the industry? What's the growth outlook for us? What are all the policy impacts, et cetera, right?

So that's all in the background. And what we wanted to make sure that all of our investors understood is that we're not waiting for anything to happen, right? We're going to actively manage the business and deliver very strong earnings growth. We've been doing that since the second half of 2024, certainly was embedded in our guidance.

And as we've highlighted in our remarks, we've been stepping that up to be able to deliver a strong view on the bottom line. When I think about the scenario that we're in, what we're really assuming in the 3% to 6% is that today, we're at the 3% level already. And that as you get the absence of some of the negatives, meaning that academic is not going to keep declining year-over-year-over- year, but it will stabilize, even if it returns to 0, you actually get higher and higher in that range. So it's just working through.

And the same thing is true in clinical research. When I look at authorizations momentum, this year, it's a flattish year in aggregate. That starts to pick up. So without major changes, you're in that range over the next couple of years, right?

And so that's the first aspect of it. I'm sure there'll be other analysts have questions about that. But then we take to the longer term and you think about the fundamental drivers of the industry, there's a huge need for improved health care around the world. The scientific breakthroughs are incredible.

When I talk to our biotech and pharmaceutical customer executives, they're incredibly excited about what's in their pipelines and the huge unmet needs that they're going after. And to be able to say in the longer term that we're going to be 7% plus feels very reasonable to us. And we believe in our conviction around our share gain of that 2 to 3 points, right? And so you can kind of back into, I would say we're getting to the 4% type market growth feels very reasonable in the longer term.

But I'm really focused on the short term right now and delivering just great experience for our customer share gain and great operating income. So hopefully, that's growth. So I hope that's helpful.

Okay. Great. And then, Stephen, one for you then. Talking about the margin expansion in the next couple of years.

I think you said 50 to 70 bps of OEM per year. That's pretty impressive given the subdued environment. You've already delivered or you're planning to deliver a good amount of margin expansion this year, again, in an uncertain market. Can you talk about the levers you have there?

How much of it is PPI versus some of the synergies from the business you brought on or any particular segment where you're pulling the lever more? Could you just talk about the drivers of that margin gains?

Yes. So Mike, actually, just one clarification on Marc's comment that we're talking about clinical research, and he said that business is flat this year and expected to increase going forward. That wasn't authorizations. That's organic revenue growth and authorizations were very strong in the quarter and as they were last quarter, the business is in very good shape.

So when I think about the 50 to 70 basis points of margin expansion, it's about using the same tools in the toolbox from PPI Business System, and we keep improving the tools in there, and we've added AI capabilities in and as we think about how we manage the company. So it's really about how do we -- where do we spend the organization energy to use the right levers and we're not having to invent new things and take this out. This is all about the same levers that we have. And our team is executing on that this year.

And I think about what we delivered in Q2. We've got obviously a significant reported margin headwind from the impact of tariffs and FX. And then underlying, the business is delivering 100 basis points of margin expansion. That's demonstrating how strong that growth is in earnings. And I think about that organic viewpoint on earnings growth in the quarter, that was about 6%.

So very strong performance in a more muted top line environment. So we know the right levers, and we're confident in the ability to deliver on that over that 2-year period.

Our next question comes from Dan Arias of Stifel.

Marc, maybe on biopharma. It seems like there's a range of things that are going on right now when it comes to just the investment approaches for these companies. You kind of touched on it. But can you just maybe expand on the extent to which it feels like the spending decisions are being influenced by the macro factors at play?

And then if you sort of remove the small biotech segment from the equation, where I understand it's kind of just about how much money you have left in the bank, I'm curious whether there are factors or characteristics that are emerging that sort of divide those that are pulling back in response to the macro versus those that are pushing forward and in some cases, investing more? Is it pipelines, geographies? Is it something else?

Yes. Thanks for the question. So when I think about pharma and biotech, our mid-single-digit growth, we saw broad strength actually across all aspects of the business. And that was a nice sequential step-up and actually the best we've seen in 9 quarters.

So I feel very good about that. Bioproduction was excellent. Team did a really good job, strong growth, continuing the trends we saw in Q1. Great bookings growth. Pharma Services, very strong growth.

Makes sense. We've talked about the importance of our sterile fill-finish capabilities, the work we do for the clinical trial supply and those things on Pharma Services. Excellent demand there. Research and safety market channel continues to do well.

That's a reflection of sort of what's going on in the research labs at biotech and pharma. And that was a strong performer. And as Stephen and I both have said, we turned to positive growth, while only slightly in the quarter for clinical research, it's actually performing as we expected. Authorization growth is very, very strong.

So those things bode really well. And when I think about the conversations with our customers, and it may actually be quite surprising to our investors, and whether this is small biotech, I saw a lot of them at the Bioconference that was here in Boston in June, large pharma, some of those companies that are growing super well, are those companies that might be managing a challenge, the tone is incredibly positive. And so why is that the case? I think that they have plans on how to navigate the environment.

I think that as they talk about their pipelines, they feel very good about what's going on in their own pipelines, the understanding of science and sort of what that bodes for the future. And there's -- for the larger companies, there's a real confidence that they can work with governments in this environment and navigate it effectively. So we actually see it as a lean-in environment for pharma and biotech and they're leaning on us to make that a reality. So we're excited about it, and it continues to be a real driver of our outlook and our current performance.

Okay. That's helpful, and good to hear. Stephen, congrats on my end as well. Looking forward to hearing where that handicap goes from here.

How should we be thinking about the Analytical Instruments business in the back half? Obviously, it's tough out there from a CapEx decision standpoint, down 4% this quarter. You have a similar comp next quarter. But then you come up against a really strong 4Q from last year.

So I know you don't try to get too specific at the segment level, but just given the moving parts on the hardware side, it would be helpful to know how you see growth there in the back half. Do you think you can finish 2025 with Analytical Instrumentation being up?

Yes. Dan, thanks for the comment. So when I think about Analytical Instruments, we've got decent bookings performance as well when I think about a positive book-to-bill. It is most impacted by the more muted conditions in academic and government and the economy in China.

So there's kind of some factors there to wrap into that. And the team is focused on executing and making sure that we're gaining share and getting the most impact from the great innovation that we've been doing across this segment from a number of years. And the new product launches that Marc talked about, a continuation of that. So it seems well positioned, and it will navigate the situation.

And as I said in my guidance, I continue the assumptions that I had for tariff impact in the second half of the year, and that was a largely pessimistic view on demand in China. And should that not be the case, that would be helpful in terms of the demand in the second half of the year. We'll see how that plays out.

Our next question comes from Jack Meehan with Nephron Research.

Stephen, congratulations and Jim, looking forward to working together. For Marc, I wanted to get your -- test the pulse on reshoring. How do you think this is going to play out over the medium term? It seems like you're planting some good seeds here with the Sanofi deal to bring business home.

Conversely, I'm just curious, like in 2Q, did you see any evidence customers could have been pausing purchasing at all? Just the idea being like if you're going to buy equipment, you got to know where to send it? I wanted to test out that theory on you.

Yes. So Jack, thanks. There's a heightened level of interest in expanding U.S. manufacturing capacity. You see that in the large pharma announcements.

You even see it in our announcement last quarter about expanding our domestic production. Because leveraging our CDMO capabilities is a very economically effective way as a pharmaceutical customer to reshore capacity, and that really is a lot around the Sanofi transaction. When I think about, does that cause any pause? Not really.

Actually, bioproduction is doing really well. And it takes multiple years to bring these facilities online. So it's a onetime added tailwind at some point in the future as facilities are opened or expanded. And then it normalizes, right, because you don't need to -- you don't keep buying more and more equipment, you just expand your capacity at your new sites.

So I think there's a tailwind that comes up over the next couple of years, is the way I would think about it. But I'm not seeing any customers pausing at all in bioproduction. So it's been very positive.

Awesome. Okay. And then I wanted to flip over to Analytical Instruments, just the organic growth decline this quarter. When you talk about some of the policy pressure, was this all academic or did you see any of that bleed into pharma biotech or elsewhere? Could you just talk about that a little bit more?

Yes. So Jack, when I think about the Analytical Instruments business, obviously, the business performed in line with what we were expecting given the academic and government environment and the tariff environment. We actually, I think, actually gained share once again, even in this environment. And why is that the case?

Our innovation is unbelievable. If I think about -- and I've said this many times for many years, which is if you bring out super relevant products, it doesn't matter what the funding environment is, customers find money. If I think about the order book on Astral Zoom that we launched in June, it's phenomenal, right, in terms of customer interest. I mean it's super cool, right?

And none of them are talking about the funding environment. They're like, wow, this is going to be breakthrough in terms of my research, right? So when I think about the environment, until there's more visibility, if you will, to how the budgets play out, I would expect that demand will continue to be muted from academic and government to this customer base. That's what's embedded in our guidance.

It's very much in line with what we said before in terms of nothing's changed and the China headwinds are favorable to what we had said back in April. So it will take a bit of time until you get more stability in this end market, but we're well positioned to gain share and do a good job serving our customers.

Our next question comes from Rachel Vatnsdal with JPMorgan.

Stephen, congrats on the long career. Jim, looking forward to working with you as well. So I wanted to follow up on Mike's question regarding those midterm targets in 2026 and 2027. It seems like investors are really most concerned about 3 key end markets for Thermo. The pharma end market given MSN and some of the tariff concerns; academic and government given the funding dynamic under the new administration; and then China.

So can you walk us through how are you thinking about those 3 end markets as we look to this 3% to 6% framework over the next few years? And could you rank-order for us which ones of those do you think are most realistic in terms of being pressured or being fully resolved as we come out of this 2026, 2027 time frame?

So Rachel, when I think about the framing, right, there's nothing super scientific about it being exactly 2 years. What we wanted to say is that it's a relatively short-term period. It's the environment that we're in now. And what are we seeing and how do we believe it to progress.

And when you go through effectively our assumption, is that in this period of time over the next couple of years, that academic and government goes from a headwind to growth, right? Normally, I think about academic and government is a couple of percent, 2%, 3% type growth end market, right? It declined mid-single digits in the quarter. At some -- and that's what we're assuming.

We are assuming headwind for a while. But what happens is the budgets get set, they don't keep declining. So that eventually in this period will normalize if you're not expecting a big funding environment to flatten out, right? So is the absence of that headwind effectively happens in this period.

And pharma and biotech actually, just based on the momentum and the authorizations of clinical research, is going to improve, certainly, that's been all along, we said '26 is a year of improving growth relative to '25, and most of the industry has said that. And if I look at another large industry participants, they saw very similar trends that we did, which is authorizations activity was good, you're seeing some level of growth. And so that's the second driver. When I think about China, it's a headwind right now.

We expect that the economy continues to be challenged. It continues to have some headwinds because of the tariff environment. Our expectation is that over this period, it will flatten out. It doesn't mean it won't be better at some point.

But right now, in the quarter for us, it was high single-digit decline. It will take some quarters to work through that. But getting back to sort of a stable, at a minimum, gets you into that environment. So as Stephen said, there are clearly scenarios that are better than that.

And I'm not smart enough to call exactly how each of these things play out. But I think from our experience, to say that we're operating in this 3% to 6% environment now doesn't take much of a change in sort of what we're seeing to make that a reality. And then whenever that exact quarter is that you're exiting that period, the growth drivers here are very strong, and that's why we said the 7% plus seems to make sense for us.

That's helpful. Then I just wanted to dig into the academic and government funding a little bit more and follow up on your answer to Jack's question. So you noted that customers are still finding budgets for your products, which is good to hear. But can you spend a minute talking about what are you hearing from customers and your consultants in D.C. regarding the funding outlook for NIH this year?

Yes. So when I think about what's going on in academic and government, a couple of things. One is, personally, I have been quite active, right, in terms of with our government and in the dialogue, certainly in Congress as well, there remains a high level of bipartisan support for academic and government funding in the life sciences. And there's a very clear understanding of the importance of the life sciences for the health of the U.S. economy and the U.S. standing in the world.

So my belief that you will get to an environment that is meaningfully better than what people are assuming right now seems quite reasonable. And it's hard to know exactly what that is, but I don't think something in the flattish type, flat funding environment, wouldn't be out of the question. It might be down a little bit. But I don't think it's going to be that significant ultimately.

But we'll see. Customers are cautious, right? And they have the dynamic that they have to spend some of the budgets that they have and they're also planning for what the next year is. So you're going to have some heightened caution until the budget environment is sorted out for 2026. And we reflected that in our guidance, right?

We're expecting that U.S. academic and government will be soft in the second half of the year. Nothing has changed in our view of that or in terms of the impact. And we'll see how that plays out.

Our next question comes from Tycho Peterson with Jefferies.

I want to maybe just probe back into Pharma Services for a minute. And I appreciate the color on strong bookings and PPD on track to get back to flat for this year. I guess, Marc, as we think ahead to next year, is there any reason that the CRO business isn't back to more normalized, call it, high single-digit growth? And I guess, has anything changed about the longer-term outlook on that side?

Yes. I think what we've assumed is a couple of things, and we're not guiding to what next year's numbers are or certainly next year by business line, and the next question for the geography. But more that we are expecting after just periods of incredible growth in clinical research, that this was a year of tough comparison, which was well earned, that tough comparison. And that authorization momentum that we saw starting to pick up in the second half of last year would drive the business back to growth.

And we're not assuming that right now that there's immediately the high single digit, but it returns to growth and then build from there. Long term, when I think about this business, this is a high single-digit growth business because more work is actually happening in biotech and pharma ultimately in terms of where innovation is, and biotech is 100% dependent on partners to do that work. And so the tailwinds here are very strong. And we are incredibly well positioned with that customer base.

And so long term, I feel very good about the growth drivers of clinical research, and nice to return to positive growth this quarter, nice to get great organizations growth and setting up for the continued momentum that we would expect in the second half of the year.

Okay. And then just a follow-up, maybe sticking with the services theme. On the CDMO side, the Sanofi deal was an interesting one. I think you've always said asset transfers from pharma or some of the better deals you do.

Can you maybe talk about the opportunity set there, how you feel about current capacity in fill-finish today? And then maybe just touch on traction with Accelerator, how many customers do you have today and how is that going?

Yes. So Tycho, in terms of Accelerator Drug Development, incredibly being adopted incredibly across the industry. And you see that in the Pharma Services growth. You see that in the authorizations momentum.

And the Tufts study is a nice study to get a third party's view on it. But what's more important is what are our customers actually buying. And they're super excited about it, because they partner with us, and now we're really in how are they operating and how do we make their drug development process more time effective and more cost effective so that they can get their important work to the market. And so that's driving really excellent momentum.

In terms of the sterile fill-finish and the work there, it's adding a third site to our U.S. footprint. And we really like acquiring capacity versus a greenfield because it's a much more cost-effective way of doing it. You have trained operators, you have equipment that's not 100% utilized, and that we're going to expand on their footprint. So it's great news for the team in New Jersey because they'll be working on even more exciting molecules and we'll be able to meet the demand, which is very strong, with the increased capacity that we have in New Jersey.

So it's a really nice acquisition, and we look forward to getting that one closed before the year-end as well.

Operator, we have time for one more question.

Our final question today comes from the line of Dan Brennan with TD Cowen.

Stephen, I'll echo the congratulations, and Jim, look forward to working with you. Maybe just one, Marc, to start, just on the 7% plus long-term growth. I think you said the 4% underpinning of market growth feels good to you. I would certainly agree, very doable, but the last 3 years have been so tough.

So maybe a 2-parter, just with pharma as your biggest customer, just wondering what type of maybe pharma R&D growth or other kind of factors you would kind of be using in order to support that 4% growth if R&D is a good factor. And I know you talked about the 2 to 3 points of share gains. Where do you feel best across your business for those gains?

Yes. So when I think about a very long-term perspective of serving pharma and biotech, and I think about the unique capabilities that we bring, we're very well positioned to continue to drive very strong share serving that customer base. And we are involved in all of what drives that industry, right? We supply their research labs.

We supply their quality control labs. We design their clinical trials. We run their clinical trials. We package and distribute their experimental medicines.

We scale out medicines from a concept all the way up through commercial production in small and large molecule. And we benefit from all of those drivers and the trusted partner status that positions us very well. I get lots of questions over the year about what's the aggregate R&D budget or these different things. It's interesting, it's not actually something that is a major driver, but rather it's that holistic support in the industry that we have.

So I feel very good about our ability to get very strong growth coming out of our largest end market. And that will drive our long-term growth going forward.

And then maybe just one follow-up just on the year. I know you had baked in, or Stephen and Marc, had baked in the $400 million headwind for China. And I think there was a $200 million vaccine headwind. And Stephen, you talked about how that China reversal, I think, helped the organic growth upside in the quarter.

So just -- can you just walk through a little bit how much of China of that $400 million came back in Q2? What's still left? And any benefit from the vaccine headwind? Or is that still contemplated as a drag?

Yes, Dan. So when I think about the tariff dynamic in China, we'd assumed that would be a significant cessation of trade. So we saw that early on in Q2, and there was an impact. And roughly half of the impact didn't happen in Q2. So things eased up, and that's -- so the $75 million kind of beat on the top line, that was -- you can think about that as kind of the scale of the benefit in Q2. And yes, so we have an assumption that things basically stay the same as they were in Q2, things will get -- will improve from the guide we've given you.

At the end of the day, it's probably about a 25%, a quarter cushion that we have against potential other tariff things that could come up. So I think it's appropriate at this time not to change the guidance for that, and we'll see how the tariff environment changes over the next several quarters.

Thanks, Dan. And so let me wrap up here. Thanks, everyone, for joining us on the call today. We're in a strong position as we enter the second half of the year.

We're actively managing the company, continue to deliver differentiated performance, create shareholder value, build an even brighter future for our company. I very much will cherish the upcoming 9 months with Stephen, and I look forward to working with Jim on the transition as well. And we all look forward to updating you on our third quarter results in October. And as always, thank you for your support of Thermo Fisher Scientific.

Thanks, everyone.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.