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Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2018 Fourth 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. [Operator Instructions]
I’d like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President-Investor Relations. Mr. Apicerno, you may begin the call.
Good morning and thank you for joining us. On the call with me today is Marc Casper, our President and Chief Executive Officer, and Stephen Williamson, Senior Vice President and Chief Financial Officer.
Please note this call is being webcast live and will be archived on the Investors section of our Web site, thermofisher.com under the heading Webcasts and Presentations until February 8, 2019. A copy of the press release of our fourth quarter 2018 earnings and future expectations is available in the Investors section of our Web site under the heading Financial Results.
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 September 29, 2018, under the caption Risk Factors, which is on file with the Securities and Exchange Commission and is also available in the Investors section of our Web site 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 the 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 fourth quarter 2018 earnings and future expectations and also in the Investors section of our Web site under the heading Financial Information.
So, with that, I'll now turn the call over to Marc.
Thank you, Ken. Good morning, everyone. Thank you for joining us today for our 2018 Q4 and year-end call. As you saw on our press release, we delivered a fantastic year. We had excellent growth momentum all year long and Q4 was no exception. We're pleased to report that we delivered very strong growth in both the quarter and the year.
Our team executed well to take advantage of the good conditions that continued across our end markets in 2018. Our performance speaks to the success of our growth strategy and our ability to strengthen our position and continue to gain share. Our commitment to launching great new products, building scale in high-growth in emerging markets, and enhancing our customer value proposition has created a clear competitive advantage for us.
We also continue to complement our growth with an effective capital deployment strategy. We completed two nice bolt-on acquisitions that strengthened our customer offering while returning capital to our shareholders and reducing debt.
Our outstanding performance in 2018 has further strengthened our leadership position and sets us up for long-term success. I will cover some of the highlights later in my remarks, but first I will hit the financials from the quarter and the year at a high-level.
Starting with the quarter, our revenue increased 8% in Q4 year-over-year to $6.51 billion. Adjusted operating income increased 12% to $1.61 billion and our adjusted operating margin expanded 90 basis points in Q4 to 24.8%. We delivered very strong adjusted EPS growth in the quarter with a 60% increase to $3.25 per share.
Turning to our results for the full-year. We increased revenue by 16% to $24.36 billion in 2018. Adjusted operating income increased 16% to $5.62 billion, with adjusted operating margin of 23.1%. We are especially pleased to deliver another year of strong earnings performance in 2018 with a 17% increase in our adjusted EPS to $11.12 per share.
Our excellent earnings growth is the combination of a well executed growth strategy, effective capital deployment and the power of our PPI Business System that we continuously leveraged to make our better even better. So is a fantastic year by all accounts and that sets us up well for 2018.
Now I'll turn to our performance by end market. As I mentioned, conditions remain strong across the board consistent with what we saw all year. And we effectively leveraged our customer value proposition to drive outstanding growth.
Let me provide you with some more color. So starting with Pharma and Biotech, the unique depth of capabilities we can offer these customers is clearly giving us an advantage and allowing us to continue to gain share. We delivered low teens growth in the quarter and we continued to see strength in all of our businesses serving this end market. Our leading position in Pharma and Biotech led to mid teens growth for the year.
In academic and government, it was great to see the continued strong demand across our life science solutions and analytical instruments businesses in Q4. And our research channel also performed well. We grew in the mid-single digits during the quarter and for the full-year.
Turning to diagnostics and healthcare, we had good growth in our transplant diagnostics, amino diagnostics and clinical diagnostics businesses in Q4. In this end market, we grew in the mid-single digits for both the quarter and for the full-year.
Finally, in industrial and applied, we delivered 10% growth during the quarter led by strong performance across our analytical instruments businesses. For the full-year, we grew in the high single digits. So we’re really performing at a high level and leveraging our unique scale and depth of capabilities to capitalize on the opportunities we saw across our end markets. We continue to strengthen our strategic position and that bodes very well for our future.
Now let me discuss our accomplishments in the context of our growth strategy. We're making great progress across all three pillars of our strategy, and that's really making a difference for our customers, as you can see in our results.
Starting with the first pillar of our strategy, high-impact innovation, we continued our strong momentum of new product launches across our portfolio. We're committed to innovation and we invested $1 billion in R&D in 2018. Our impressive lineup of new products during the year, and our strong revenue growth shows that we're getting a great return on that investment.
I will recap a few of the highlights. In our analytical instruments business, we continued to strengthen our Thermo Scientific brand by building on our leading platforms across chromatography, mass spectrometry and electron microscopy. In fact, of the top 15 innovations in 2018, that were recognized by the readers of Analytical Scientist Magazine, five of them came from Thermo Fisher.
The Orbitrap IDX Tribrid and the Q Exactive UHMR mass spectrometer systems that we launched at ASMS are seeing strong adoption from our customers. And the Q Exactive HF-X that we launched a year-ago made R&D magazine's list of the top 100 innovations in 2018. These examples reinforce the tremendous value we continue to create through our leading Orbitrap franchise, whether our customers are discovering new drugs or working in applied markets such as food safety.
In our electron microscopy business, the Verios G4 scanning electron microscope that we launched early in the year is gaining good traction with our Materials Science customers. And it's great to see that our Glacios Cryo-EM for life sciences which we began shipping in 2018 is ramping up nicely, and customer feedback is quite positive.
Turning to our life science solutions business, we continue to strengthen our Ion Torrent line of Next-Gen sequences with the GeneStudio S5 series of benchtop instruments launched in 2018, and our Invitrogen EVOS M5000 digital microscope for cell imaging that we highlighted in Q3, is off to a very good start.
Finally, in our specialty diagnostics business, we launched two important instruments in 2018, the B·R·A·H·M·S KRYPTOR GOLD automated immunoassay system and the Phadia 200 benchtop analyzer to help doctors diagnose allergy and autoimmune conditions. So clearly an excellent year for innovation and we look forward to continuing our momentum in 2019.
Turning to the second pillar of our growth strategy, our strong performance in high-growth emerging markets, reflects how we’re effectively leveraging our scale to create competitive advantage. These markets now represent 21% of our total revenue or about $5 billion.
In 2018 not only do we delivered excellent growth again in China, but we had broad-based growth in these geographies, including double-digit growth in India. Let me spend a couple minutes on China, which as you know is our largest market outside the U.S. Our team has consistently grown our business there faster than the market. We had another strong quarter in China in Q4 and that led to 20% growth for the year.
We're clearly benefiting from the scale that we’ve continued to build, which allows us to deliver a differentiated experience to our customers. Our commercial infrastructure, in particular, is driving strong growth and share gain. In 2017, you may recall that we opened two customer demo centers in China to showcase our capabilities in precision medicine and Cryo-EM.
In 2018, we established a new commercial office and customer training center in Beijing, and we also opened our first Bioprocess Design Center in November. This new center which is located in Shanghai, features our latest advances in bioprocessing technology. The goal is to facilitate collaboration between our biologics customers and our own application scientists to design optimal bioprocessing solutions for this high-growth market.
We continue to increase our scale and depth of capabilities in China to meet the needs of our customers, and we’re excited about the opportunities we have going into 2019. Our confidence comes from China's continued focus on national priorities supporting public health, the environment and food safety, which aligns directly with our company mission to enable our customers to make the world healthier, cleaner and safer.
The third pillar of our growth strategy is our customer value proposition. And we delivered that by leveraging our unique capabilities to help our customers meet their goals for innovation and productivity. What's important here is that we continued to enhance the value we can offer, whether it's a new product innovation or more comprehensive product and services offering. And our results show that our customers really value the unique benefits that we can provide.
Let me use our Pharma and Biotech customers as an example. We've been growing significantly faster than the market here for quite some time. And in 2018 our growth accelerated to the mid-teens. Our offering for these customers was very strong and we further strengthened our capabilities through the acquisition of Patheon in August of 2017.
Customer reactions have been incredibly positive whether they’re small emerging biotechs that don't have the in-house capabilities or large pharmaceutical customers that need to increase capital efficiency. The integration of Patheon has gone very smoothly. The business are performing well and delivering strong growth, and it's in a great position given the strong commercial momentum that we’re seeing.
We continue to increase our capabilities to serve this attractive market, including the expansions of our clinical trial supply chain facility in Rheinfelden, Germany, our Biologics Production Center in St. Louis and our sterile [indiscernible] in Italy and North Carolina.
From a synergy perspective, we’re on track to deliver on our [indiscernible] synergy targets of $120 million. Our PPI Business System is having a significant positive impact on this business. So we are excited about the opportunities we have through our leading Pharma Services offering. There's still much more to be done, but we feel very good about the outlook for this business based on our progress to date.
To wrap up our growth strategy discussion, we're committed to strengthening our position to be the best possible partner for our customers, and we're clearly seeing the results.
Turning now to capital deployment, as you know we have a great track record here in creating value for our shareholders by being good stewards of capital and we continued that in 2018. First our goal is to reduce debt to strengthen our balance sheet following the Patheon acquisition. We started the year with 4x leverage and we ended the year with just over 3x leverage after reducing debt by $2 billion.
Second, we deployed a little more than a $0.5 billion on two bolt-on acquisitions. The largest was the advanced bioprocessing business of Becton Dickinson that we closed in Q4, which added a complementary self portrait [ph] products for our Biologics production customers. We also continued to return capital to our shareholders buying back $500 million of stock during the year and increasing our dividend by 13% versus 2017.
One last comment here, you saw our announcement on Monday regarding the sale of our Anatomical Pathology business, which is incorporated into our 2019 guidance. Once we close which we expect in Q2, the transaction will give us additional capital to put work -- put to work over time to create shareholder value. Stephen will give you more details during his remarks. So it was a very productive year from a capital deployment perspective as well.
To summarize our performance, our strong Q4 really capped off a fantastic year on all fronts. Our team executed very well to deliver strong revenue and earnings growth. We strengthened our industry leadership by advancing our growth strategy and continuing to gain share. We also effectively deployed our capital to create significant value for our customers and our shareholders.
Looking ahead as you would expect, we're planning to extend a long track record of consistent and strong financial performance in 2019. Stephen will outline the assumptions that factored into our revenue and earnings guidance, but let me quickly cover the highlights.
In terms of our revenue guidance, we expect to deliver between $24.88 billion and $25.28 billion in 2019, which would result in a reported revenue growth of 2% to 4%. We're initiating adjusted EPS guidance for 2019 in the range of $12 to $12.20 per share. This will lead to 8% to 10% growth year-over-year. Our outstanding results in 2018 really sets us up for another successful year ahead.
With that, I will now hand the call over to our CFO, Stephen Williamson. Stephen?
Great. Thanks, Marc, and good morning, everyone. I will begin with an overview of our fourth quarter and full-year results for the total company. Then I will provide some color on our four segments and conclude with a detailed review of our 2019 guidance.
Before I get into the details of our financial performance, I thought it would be helpful to provide a high level view of how the fourth quarter played out versus our expectations at the time of the last earnings call.
As you saw in the press release, we had a strong finish to 2018, delivering 8% organic growth in Q4 and for the full-year. This is driven by continued strong market conditions, great operational execution and continued share gains. From an earnings standpoint, we delivered adjusted EPS that was $0.09 higher than the midpoint of our previous guidance. This is driven primarily by pull through on our strong organic growth and to a lesser degree by less adverse FX environment.
For full-year 2018 we delivered 8% organic growth, 16% growth in adjusted operating income, and 17% growth in adjusted earnings per share. Overall, excellent financial results in 2018.
Now let me give you more color on our performance. Starting with our earnings results, as you saw in our press release, we grew adjusted EPS in Q4 by 16% to $3.25. For the full-year, adjusted EPS was $11.12, up 17% versus 2017, GAAP EPS in the quarter was $2.22, up 71% from Q4 2017; and for the full-year, GAAP EPS was $7.24, up 30% versus the prior year.
On the top line, our Q4 reported revenue grew 8% year-over-year. The components of our Q4 reported revenue increase included 8% organic growth, approximately 1% growth from acquisitions, and a foreign exchange headwind of approximately 2%. For the full-year 2018, reported revenue increased 16% year-over-year. This include an 8% contribution from organic growth, 7% positive impact from acquisitions, and a 1% benefit from foreign exchange.
Looking at growth by geography, our markets were strong across the globe in Q4. North America and Europe both grew in the high single digits, Asia-Pacific grew in the low teens, including another quarter of very strong growth in China and rest of the world grew in the mid-single digits. For the full-year, North America grew in the mid-single digits, Europe and the rest of the world grew in the high single digits, and Asia-Pacific grew in the mid-teens.
Turning to our operational performance, Q4 adjusted operating income increased 12% and adjusted operating margin was 24.8%, up 90 basis points from Q4 of last year. We feel strong productivity from our PPI Business System and good volume contributions partially offset by strategic investments and unfavorable business mix.
For the full-year, adjusted operating income increased 16%. And adjusted operating margin was 23.1%, which is 10 basis points lower than 2017. We feel strong productivities from our PPI Business System and good volume contributions. However, this was more than offset by the impact of acquisitions, strategic investments and unfavorable business mix.
Moving onto the details of the P&L. Total company adjusted gross margin in the quarter came in at 46.9%, down 10 basis points from Q4 prior year. In the quarter, strong productivity on volume pull through was more than offset by unfavorable business mix and strategic investments. For the full-year, adjusted gross margin was 46.7%, down a 150 basis points from 2017, strong productivity of volume pull through was more than offset by the impact of acquisitions, unfavorable business mix, and strategic investments.
Adjusted SG&A in the quarter was 18.3% of revenue, which is down 90 basis points versus Q4 2017, driven by a strong top line growth. And total R&D expense came in at 3.9% of revenue, flat compared to Q4 last year as we continue to reinvest in our businesses. R&D as a percent of our manufacturing revenue in Q4 was 6.2% and for the full-year was 6.5%.
Looking at results below the line for the quarter, our net interest expense was $127 million, down $19 million from Q4 last year, driven primarily by lower level of debt and improved interest income. Net interest expense for the full-year was $530 million, an increase of $19 million from 2017.
Adjusted other income and expense was a net income in the quarter of $12 million higher than Q4 2017, primarily due to changes in nonoperating foreign exchange. In 2018 as a whole, we saw a $27 million of nonoperating income benefit from FX. At this point we do not expect majority of this to repeat in 2019.
Our adjusted tax rate in the quarter were 12.2%, down 110 basis points versus Q4 last year and in line with our previous guidance. Our full-year adjusted tax rate was 11.9%, which is a 110 basis points lower than full-year 2017, primarily reflecting the beneficial impact of U.S tax reform. Q4 average diluted shares were 405 million, 0.5 million shares higher year-over-year. For the full-year, average diluted shares of 406 million, up 8 million from 2017.
Turning to cash flow and the balance sheet. For the full-year, cash flow from continuing operations was $4.54 billion and free cash flow was $3.83 billion after deducting net capital expenditures of approximately $700 million.
Our primary focus for use of our cash flow in 2018 was to reduce debt post the acquisition of Patheon. Our total debt at the end of Q4 was $19 billion, down $2 billion from the prior year. Our leverage ratio at the end of the quarter was 3.1x total debt to adjusted EBITDA, down from 4x at this point last year and down from 4.4x immediately post the Patheon acquisition. This demonstrates the significant strength of our cash flow and our commitment to maintain a solid investment-grade debt rating.
We ended the quarter with approximately $2.1 billion in cash. During 2018, we also continued returning capital to shareholders with $500 million of share buybacks and $275 million in dividend. In addition, as Marc mentioned, we successfully deployed capital to strengthen our customer value proposition through strategic acquisitions, including our recent acquisition of Advanced Bioprocessing.
To wrapping up my comments and our total company performance, adjusted ROIC was 10.9%, up 50 basis points from last quarter and up 90 basis points from Q4 last year as we continue to generate very strong returns.
Now I will provide you with some color on the performance of our four business segments for the quarter, starting with Life Science Solutions. In Q4, reported revenue in the segment increased 8% and organic revenue growth was also 8%. In the quarter, we continued to see strong growth in this segment led by the bioproduction, biosciences, and clinical next-gen sequencing businesses.
Q4 adjusted operating income in life science solutions increased 11% and adjusted operating margin was 36.8%, up a 130 basis points year-over-year. In the quarter, we drove very strong productivity and volume pull-through, which is partially offset by unfavorable business mix, the impact of acquisitions and strategic investments.
In the Analytical Instruments segment, reported revenue increased 11% in Q4 and organic revenue growth was 12%. In the quarter, we continued to see very good growth across all of our businesses in the segment. Q4 adjusted operating income in Analytical Instruments grew 20% and adjusted operating margin was 26.6%, up 210 basis points year-over-year. In the quarter, we saw a very strong volume leverage, good productivity, and benefited from positive business mix. This was partially offset by strategic investments.
Turning to Specialty Diagnostics segment, in Q4, total revenue grew 4% and organic revenue growth was 5%. Growth in this segment was led by our transplant diagnostics, neuro diagnostics, and clinical diagnostics businesses. Adjusted operating income decreased 4% in Q4 and adjusted operating margin was 24.5%, down 190 basis points from the prior year. In the quarter we saw good volume leverage. However, this was more than offset by strategic investments and unfavorable business mix.
Finally in the Laboratory Products and Services segment, Q4 reported revenue increased 8%. Organic revenue growth was 9%. In the quarter, we saw strong growth across all our businesses in the segment led by the Pharma Services business. Adjusted operating income in the segment increased 14% and adjusted operating margin was 13.1%, which was higher than the prior year by 60 basis points. In the quarter, we saw good productivity and volume leverage. This was partially offset by strategic investments and business mix.
With that, I would like to review the details of our 2019 guidance. We're initiating a 2019 adjusted EPS guidance range of $12 to $12.20, which is 8% to 10% growth over 2018. This includes $0.10 of net dilution from the sale of the Anatomical Pathology business that we announced earlier this week. In terms of revenue, our guidance range is $24.88 billion to $25.28 billion, which is growth of 2% to 4% over 2018.
Let me now cover the key assumptions that we factored into our full-year 2019 guidance. We are expecting to deliver 5% organic revenue growth in 2019. With regards to FX, in 2019 we are assuming that [indiscernible] year-over-year headwind of approximately $400 million of revenue or 1.6% and $0.21 of adjusted EPS or 1.9%. The majority of this headwind is expected in the first half of the year.
As I mentioned, our guidance reflects the divestiture of the Anatomical Pathology business, which I referred to you as the AP business. In 2018, this business had revenue of approximately $315 million, of which approximately $100 million was sold through our channel businesses. We will continue to sell AP products through our channels after the divestiture.
To write-off the estimated $0.10 dilution impact of 2019, we are assuming the transaction closes in Q2. This would create a year-over-year headwind of approximately $170 million of revenue and $60 million headwind of adjusted operating income. Both of these are net of the retained channel business.
In the calculation of the adjusted EPS impact, we're assuming that the net sale proceeds are placed on deposits and earn interest income for the remainder of the year. The cash taxes and transaction fees related to the sale are expected to be approximately $125 million. These will be reflected in our free cash flow in 2019.
We expect the acquisition to be completed in 2018 will contribute approximately $85 million to our reported revenue growth in 2019. This is principally from the acquisition of Advanced Bioprocessing. We are assuming that there is no change in the trade tariff environment in 2019. This means that our guidance includes the year-over-year headwind from tariffs of approximately $30 million or $0.07 of adjusted EPS to reflect the full annualized gross impact of the tariffs that are currently in place.
Turning to the adjusted operating margin, we are assuming that we offset a 20 basis point headwind from tariffs on the sale of the AP business and deliver 60 basis points of expansion year-over-year. Moving below the line, we are assuming $1.25 billion of debt repayments in 2019, and we expect net interest expense to be about $480 million. This is approximately $50 million lower than 2018 and is driven by lower average debt level and higher cash balances, partially offset by assumed higher interest rates.
We are assuming that other net income will be about $20 million, which is $18 million lower than 2018 due to assumed lower below the line FX benefits in 2019. We expect that 2019 adjusted income tax rate to be 11%. The improvement from our 11.9% rate in 2018 primarily reflects the finalization of our tax planning initiatives tied to U.S tax reform.
We are assuming net capital expenditures to be between $800 million to $850 million for the year. This represents an increased investment of approximately $100 million over 2018, driven by capacity and capability expansions in our Pharma Services and bioproduction businesses.
Free cash flow is expected to be approximately $4.1 million in 2019. The increase over 2018 is primarily driven by expected strong earnings growth. In terms of capital deployment, we are assuming that we will return approximately $300 million of capital to shareholders this year through dividends and that guidance also assumes a total of $750 million of share buybacks in 2019, which were completed earlier this month.
We estimated full-year average diluted share to be approximately 403 million, and our guidance does not assume any future acquisitions and with the exception of the sale of the AP business, our guidance does not assume any future divestitures.
Finally I want to touch on quarterly phasing for the year. In terms of organic revenue growth, we are expecting that Q4 is lower than the yearly average, but the other three quarters are about the same level of growth. In terms of adjusted EPS, we are expecting the same phasing of 2018 when you look at each quarter as a percentage of the total year.
So at a high level, in 2019, we expect to deliver 5% organic revenue growth and 8% to 10% adjusted EPS growth. Embedded in the adjusted EPS growth is the headwind of approximately 3% from the -- from FX and the sale of the AP business. The underlying adjusted EPS growth is 11% to 13%.In summary, our 2019 guidance reflects the continuation of very strong financial performance.
And with that, I will turn the call back over to Ken.
Thanks, Stephen. Operator, we're ready to take questions.
[Operator Instructions] Your first question comes from Tycho Peterson with JPMorgan. Your line is open.
Hey, thanks. Congrats on the quarter. Marc, I want to start maybe just in terms of what’s embedded in guidance for Pharma. Obviously, that’s been such a meaningful growth driver for you. It could be up double-digits again this year and how are you feeling about customer M&A? And then any update there on kind of pay down revenue synergies and the St. Louis expansion on [indiscernible]?
Sure. Tycho, thanks and good morning. We're assuming in terms of the year with 5% organic growth for the full-year. We are assuming high single-digit growth in Pharma and Biotech is embedded in the guidance based on the strength of the end market and how well our value proposition is resonating with these customers. We expect the year of continued share gain. In terms of the industry consolidation, as you know, we typically benefit from that consolidation because those customers are looking for synergies and given the unique capabilities that we have, we are very much part of delivering the synergies to those customers. And we’ve already had meetings with some of the companies that are thinking about getting bigger and that creates good opportunities going forward. In terms of the receptivity to our Patheon acquisition, which we call Pharma Services, the customers are extremely excited that Thermo Fisher has expanded our capabilities there beyond our historical clinical trials business, and we have a very strong set of wins commercially and that bodes well for the future. And timeline for our St. Louis expansion, it should be completed towards the end of the year, so revenue really is a 2020 event from that expansion.
Okay. And then for a follow-up, can you just comment on the decision to sell Anatomical Pathology? Was it really just a function of being a slower growing business in noncore? And are you looking at other divestitures? I know there's nothing embedded in guidance for additional [indiscernible]?
Yes, so Tycho, the Anatomical Pathology business as you know, our job as a management team is really to create shareholder value. And we think that the transaction is both good for Thermo Fisher and good for the Future of the AP business. And we don't have any other divestitures that we're contemplating at this point of time.
Okay. Thank you.
Thanks, Tycho.
Next question comes from Ross Muken with Evercore ISI. Your line is open.
Good morning, guys, and congrats. So maybe, Marc, just picking up China, obviously lot of headlines, but it continues to be a huge sort of [indiscernible] of strength for you. I guess, how are you thinking about sort of progression of that business this year and have you seen anything in the phasing of orders, whether in the end of 4Q from a month-on-month perspective or into early this year that gives you any pause in any parts of the business?
Yes, Ross, thanks for the question. In terms of China, very strong year, continuing really a trend of many very strong years. And as a reminder, the 5-year plan within China is very focused on expansion of healthcare and improving environmental protection and food safety. It's really creating an improved quality of life for China. So there is strong demand underlying within the market and because of our unique competitive position, we’ve continued to outpace the market growth. Orders were strong throughout the year. The phasing in Q4 was very good. We did spend time in person with our China leadership team in the first week of January and they’re quite bullish about the prospects for 2019 in terms of both what's going on in the market in terms of -- and also terms of how our customers are perceiving our capabilities and the pipeline of momentum. So 20% organic growth for the year, a very strong fourth quarter as well, good orders. And I’m looking forward to going to China at the end of this quarter to spend time with our team and customers.
Excellent. And maybe just one clarification on the guide and then sort of a follow-up on it. I'm guessing as with prior practice, Gatan is sort of not contemplated or the accretion from that in the guide given your commentary on sort of revenue expectations for the year in terms of M&A. And then secondarily, post Anatomical Pathology assuming that closed in the second quarter, you have a pretty substantial warchest now. How are you just thinking about what we should think from Thermo this year in capital deployment wise? I mean, I know we got the buyback, but more M&A focused just given it seems like you’ve got is bigger sort of [indiscernible] and balance sheet capabilities you’ve had in some time?
So, Ross, in terms of Gatan, we don't have that in our results. So we will do that as soon as that closes and our expectation is that it will close in the back half of this year. In terms of the capital deployment, as you know in our long-term 3-year model, primarily we spend and deployed capital on M&A. And we do that over time and we strengthened the balance sheet substantially and Anatomical Pathology will give us even more firepower to deploy over time. And as you know we're incredibly disciplined, so we don’t know the timing of M&A, and we’re not particularly focused on the awareness doing the right deals for our shareholders to create value and over time you will see us continue to deploy capital. From return to capital perspective, as Stephen said, we've done our buybacks and we're assuming in the model for the year.
Excellent. Thanks, Marc.
Next question comes from Derik De Bruin, Bank of America Merrill Lynch. Your line is open.
Hi. Good morning. Two questions. The first one would be talking about Patheon, I think one of the concerns when you did the transaction was the fact that the margins in the business were quite a bit lower than Thermos. Can you talk about where the gross margin operating margin is on the Patheon business now and sort of what improvements you’ve done on that one? And then I’ve a follow-up.
Yes, so from the Patheon business, our -- as you know, when we acquired the business, it was kind of a mid single-digit type growth business. And where we have really focused in year one is in two different things. The first of which is to accelerate the momentum of that business and we grew just about 10% for the year in that business. It was really nice to see that step up in momentum. So that was the first. The second was to apply PPI widely across the network and that is having a huge impact on margin. So we are in the mid-teens margins now. We will expect that to be increase slightly this year. And the reason for that is we have a couple large expansions that we're doing in St. Louis and in our [indiscernible] finish network, and when you do that you actually higher the quality and production people in advance so that they’re trained in advance of when the capacity comes online, so you can get the benefit. So you expect that margins will be similar this year, and then in the future you would see very nice expansion going forward. So that's how I would think about where we are with the Pharma Services business.
Great. And then just a follow-up on the academic and government market. I mean, we’ve obviously had some -- the shutdown in the U.S., we've got Brexit and some other government shenanigans going on. I guess, what do you think about the academic and government market and should we model that a little bit more conservatively in Q1, given all the moving parts?
Yes. So what I would say is for embedded in our guidance for the year is low single to mid single-digit growth in academic and government. We had mid single-digit growth in 2018 in the market. And obviously what we are just paying attention to is a little bit more on Europe. We've seen good strength in China. As you know, 70% of the U.S government was funded or is funded through September 30. So the most important thing was NIH and so that's been fine and looks good for the year. And we’re just paying attention to Europe, so we are giving ourselves a little bit wider range of outcomes for this year. But we feel that between low and mid should be a reasonable outcome for the year.
Thanks.
Next question comes from Doug Schenkel with Cowen. Your line is open.
Hey, good morning guys and thank you for taking my questions. My first one is regarding your long-term organic revenue growth target of 4% to 6%. You clearly grew well above that in 2018, market was helpful. You walked through how the three pillars of your growth strategy are playing out successfully. That being said, I was wondering if you would be willing to maybe breakout how much of the strength in 2018 was better than normal end markets versus your portfolio evolution versus your strong execution? If it's possible to answer that, I think it would help us. We try to assess the sustainability of you generating growth in the higher end of the long-term growth range and the possibility that you might increase the range at some point in the future?
Yes. So, Doug thanks for the questions and good morning. As you know in our long-term model, what we’ve assumed is 3% to 5% market growth and to grow at least a point faster than the market. That’s sort of the high-level assumption. When I look at 2018 performance, the market was clearly strong. And we accelerated our share gain meaningfully during the course of the year, right? So that was a fantastic execution by the team. When I think about the actions we’ve taken and one of the things we said at the May Analyst Meeting is as we've invested more and more in the business as we have taken life technologies from a low single-digit growth business to a mid to high as we really driven the synergies on the revenue for FTI, as you see the things we're doing within the Patheon acquisition, a year and half after the close, you get a sense that we're driving to the higher portion of our long-term guidance, because we’ve changed the mix of the company through adding a ton of value to the businesses we’ve acquired and strengthening the businesses that we’ve owned historically. So the 5% starting point for the year is actually the start -- the strongest starting point that Stephen and I could remember in our many years of the company. So we're very bullish about the outlook and we will think about the longer-term model back in May when we look forward to seeing everybody in New York and we'll figure out what the right posture is at that point.
Okay. That's helpful and those last couple remarks are a good segue to my second topic, which is really just making sure or clear on guidance logic and guidance philosophy. Again, Europe against an impressive, but still very difficult 8% core revenue growth comparison heading into 2019. That said, you are up against the tough comp in the last couple of quarters including 7.8% in Q4 17, you grew 9% in the third quarter of this year, another 8% I think plus in the fourth quarter. And if I look at the 2-year stacked average growth rates over the past year and then look at what is implied in your guidance for 2019, one would have to assume that the stack [ph] growth rate actually moderates in '19 to get down to around 5% core growth in '19. You certainly haven't said anything that suggests that things are slowing in any geography or end market. I just want to make sure it's fair to conclude that the biases to the upside if underlying end markets and geographic trends continue, and that you continue to execute the way you have over the last several years. Again, everything sounds great. I just want to make sure we’re not missing anything and that guidance is really just the function of the comp and the fact that it's still January?
Yes. So very thoughtful. As I think about the year, what is assumed in our initial guidance is that GDP growth will be a bit slower in 2019 versus 2018, because you have uncertainties associated with things like Brexit and trade wars, right? So that's underlying the assumption to start. When you look at the fundamentals of our business, we are not seeing a slowdown in the momentum, right? So the guidance contemplates that the world could get more challenging, but you actually look at what's within our actual order book and sort of customer pipeline, it's very strong. So that's how we’re thinking about the year and as Stephen has said a couple of times during the course of last year, if the market conditions stay as we have enjoyed over the last year and a half, this will be -- if last year was fantastic, this will be spectacularly fantastic, I don’t know. But it'll be just an outstanding year and this guidance allows us to deal with a bit slower GDP growth if that happens.
Yes, Doug, [indiscernible] phasing of organic growth kind of expectation for the year as I described in my prepared remarks.
That’s great. Very helpful, guys. Thank you.
Next question comes from Jack Meehan with Barclays. Your line is open.
Good morning. I was hoping you can elaborate on the outlook per FTI this year across the various customer classes and what your outlook assumes for overall growth in that business?
Yes. So, Jack, thanks for the question. So our electron microscopy business had another outstanding year. And when you look at how we've added value to that business, as a reminder, those are low single-digit growth business prior to the acquisition. And we have really accelerated the growth of material sciences, because of the strength of the combination of the portfolio. Our PPI Business System has made their factories more competitive, has improved the lead times and actually has spurred additional demand. And the adoption of Cryo-Electron Microscopy in the life sciences application has been very strong and in fact the Glacios product that we launched started shipping in 2018 also has contributed to the growth. When you look to the outlook for the business, our assumption is that our industrial and applied end market will have a bit of a slower growth because of difficult comparisons, particularly in the second half of the year. We’ve good visibility of about six months in our electron microscopy business and it looks good. But we know we have a difficult comparison in the second half of the year, given the strength of that business and we're assuming that the growth will moderate because of that and obviously as the quarters unfold we will know whether that assumption was spot on or not.
Thanks. Then as a follow-up, I was hoping you could weigh in on the Specialty Diagnostics margin and the implications for growth. I think it's been a few quarters you’ve talked about the strategic investments and mix there or so, as we turn to 2019 do you think we can start to see margins moderate and expand and maybe talk about Cascadion and where some of those other strategic investments, how those are expected to ramp in terms of contribution?
Yes, I will talk about growth and then Stephen to talk about -- a little about the margin side of the equation. Nice to see the mid single-digit growth. Steve has done a nice job of capitalizing on opportunities. We are -- we launched our Cascadion product in Europe on a very limited release, so we could get hands-on customer feedback. And the R&D teams are working on menu expansion. Our assumption is that a minor revenue contributor in 2019, but ramping over time and we're excited about the longer-term there. So, Stephen, you want to talk about margin?
Yes, in terms of margin share, we’re investing -- so clearly investing ahead of the Cascadion launch, another commercialization, making investments in regulatory infrastructure across the globe and also making some good health care economics investments to make sure that we can -- all these are tied to continuing the growth profile for this segment. So I think about this investments going forward, we will continue to invest appropriately, but this will be one of the businesses with lower margin expectation -- expansion expectations versus the other three.
Understood. Thank you, guys.
Thanks, Jack.
Next question comes from Steve Beuchaw with Morgan Stanley. Your line is open.
Hi. Good morning, everyone, and thanks for the time here. Just a couple of things that have been touched on in the Q&A already that I would like to press on in a little bit more detailed way. When I think about the relative performance of Thermo -- and I’m sorry to bring up a point -- brought up a number of times before, but what really sticks on of course is that the trajectory of market share gains is less about the end markets I think. So my question is, as you look at the portfolio and you think about '19 relative to '18 and '17, is there any reason why the trajectory of share gains maybe most acutely informative -- certainly feel free to correct me on that, is basically stable or maybe even better. Just be helpful to hear how you think about the incremental growth embedded in the plan from share gains?
Yes, Steve, thanks for the question. So when I think about share gain, it's very broad-based across the company, right? And I could think about it from a few different lenses, right? If you think about it geographically, China has been a real area of our share gain relative to the market growth. If you look at it by end market, as you said Pharma and Biotech, clearly we are growing much faster than the competition. And when you look at it by product line, it's a very broad-based, but you see it clearly in our biosciences business, our mass spectrometry business or chromatography business or bio production business, or electron microscopy business, all grew meaningfully faster than the others. I’m sorry forgot a few others, but it gives you a sense that we have very strong share gain. As I think about what's embedded in our outlook, the minimum goal that we have is at least 1% growth faster than the market, and we obviously did meaningfully better than that in 2018 and our teams are very excited about the prospects for 2019 and they’re going to go out and execute the best they possibly can and drive a very good year for us.
Okay. Thank you for that. And then just one -- sorry, it's a little bit of a fine point, but I wonder if you could peel back the layer of the onion a little bit more on the traction that you're seeing with some of the new Phadia launches. It seem like that’s been one of the most important drivers of the top line acceleration [indiscernible] in the second half of '18. Can you give us a sense for the sustainability of the incremental growth there? Do you think that is share gain or is it more likely that that’s a refresh cycle with existing Phadia customers? How do you think about that? And then I will jump back in queue. Thanks again.
Thanks, Steve. So our allergy business and autoimmunity business had a nice share, good growth. And really, we are a very large percentage of the market. So it's really as we expand our menu and as we help, do the health care economics about the importance of allergy testing, particularly around asthma and all of the effects of asthma that's really what drives the -- drives the growth of that business, expands the market. In the U.S., we’ve -- we enjoyed good growth and that really is migrating from skin protesting to blood based testing, and so we when we think about the business really is all about market expansion and the benefits the patients get from having allergy test. So that’s how we thought about it and the business is doing well and the outlook is very positive for that business as well.
Thanks again.
You’re welcome.
Next question comes from Patrick Donnelly, Goldman Sachs. Your line is open.
Thanks. Good morning. Marc, maybe just can you talk through the outlook in Europe. Obviously, the macro data there is signaling lower growth. You have that layered on with potential shocks of the system like Brexit, given typically political instability tends to disrupt areas like government spending as you’ve touched on. So it would be helpful just to hear your prospective outlook there for the different segments?
Yes. So, Patrick, thanks for the question. So embedded in our guidance is for Europe for the year is low single-digit to mid single-digit growth. It is what we're assuming within 5% organic growth for the year. When you look at the -- by the segments, we're assuming that academic and government will be a little bit weaker embedded in the guidance versus 2018. At the same point, Horizon 2020 funding looks good and I had the opportunity last week to meet with a couple of the ministers in the U.K government and their commitment to preserving the important life sciences heritage that exists in that country is very strong. So, I think the actions of the governments are taking actually reinforce a reasonable outlook for academic and government, but just given the potential for economic growth to mute -- be a little bit more muted. We are assuming that there's a little bit more pressure there, so we will see how that plays out.
Okay. Makes sense. And maybe just one on the bioprocessing market, given healthy results from you guys, competitors earlier this week, that market clearly seems like it's still pointing up. Can you just talk through the durability of the growth there, drivers that give you confidence in the continued strong growth driving that biopharma segment and then is that were the most upside the guidance is?
So in terms of bioprocessing, we had a very strong year and as you’ve seen more and more of the molecules have gone from small molecule to large molecule and that really bodes well for the bioprocessing business. And as a reminder, of the four main segments of the activity that exist in bioprocessing, we are the market leader in two, which is [indiscernible] and in single use technologies. And as you know we don’t play in a very large way in purification or filtration. So we are enjoying strong growth because of our strength of the position and good market conditions. When I think about the outlook, I would say we feel good about the assumptions of high single-digit growth for Pharma and Biotech in aggregate. And we will work hard to continue to drive to the highest possible growth in that end market.
Okay. Thank you.
Next question comes from Dan Arias with Citigroup. Your line is open.
Good morning, guys. Thank you. Stephen, maybe just extending the thought on the margin commentary, last quarter you called out the EPS impact from the strategic investments for 2018. Is there a number associated with those types of things for 2019, if we were just sort of trying to track how much of the top line step up that you're seeing is coming back into the business?
I guess, when I think about Q3 and Q4 step up investments we did, that was approximately just over $30 million of more investments. I think about the whole year next year where its 60 basis points of expansion and that includes the right level of strategic investments across all of the businesses. So it's hard to study separately. There's 30 -- about $30 million step up was [indiscernible] kind of the end of the year additional spending in investment level. Now are kind of more of a -- more normal run rate tied to the [indiscernible] organic growth. So I don’t give specific numbers on the strategic investments in each of the businesses or in total, but it's going to be an appropriate level of spending given the top line growth that we’re expecting for the year.
Okay. Thank you. And then maybe, Marc, on the tariffs in the manufacturing option that you have is offset just in terms of shifting production around. I’m just curious have you had to do that in a meaningful way at this point or is that just sort of part of the contingency plans if things escalate further? Thanks.
So in terms of the tariffs, we've taken some incremental pricing actions, we've taken some incremental sourcing actions, and we have the plans in place to address supply chain if the tariffs really remain permanent. So we know what we would do, but we haven't done a lot of that at this point because it takes a bunch of activity, which we easily can do. But I don't want to do it and then have them move it back or its kind of the way. So we're kind of weighing and seeing a little bit to figure out what the landscape will be on those particular actions. Operator, we have time for just one more.
And your last question comes from Daniel Brennan with UBS. Your line is open.
Thank you. Thanks for the question. Congrats on the quarter. So, Marc, I was hoping on China, can you just let us know what did actually grow in the quarter? What assumed in for '19 and maybe specifically for your biopharma business there. As we understand it, the countries are [indiscernible] transition from a generic orientation towards the therapeutic focus. So how is your biopharma business doing today in the outlook?
Yes. So we had a very strong quarter. It was -- I think it was something on 19% -- 19%, 19.5% something like that for the quarter, 20% for the year. We're assuming mid-teens growth. This was embedded in the 5% guidance. Feel like that’s a reasonable assumption at the starting point. If I think back over history, we've had different levels. I think mid-teens will be one of the more bullish starting points that we had in the year. Remember, we had double-digit in the past and others, but we feel good about the outlook for the share.
And in terms of your biopharma business there, Marc?
[Multiple speakers] really good. If you go five years ago, there was very little other than Chinese traditional medicine. And it's been extremely robust given the emergence of innovative drugs and medicines coming out of the country. So we’ve had really good growth there and that also adds sustainability to that market. So let me wrap up the call. It's been a fantastic year. But I’ve to say we are more excited about the opportunities ahead. We look forward to updating you over the course of 2019. And as always thank you for your ongoing support of Thermo Fisher Scientific. Thanks everyone.
This concludes today’s conference call. You may now disconnect.