Thanks everybody for joining us. Welcome to Danaher's 2016 Annual Investor Day. Appreciate you all coming out on a cold day here in N.Y., we also appreciate those joining us on the webcast. Just forward-looking statements, not going to read all of these, but do need to say today's presentation may include forward-looking statements and actual results may differ materially from these statements. Please refer to the slides for more information. Just on the agenda, Tom will come up first here, give his opening remarks. After that, we're going to have 2 sections of platform presentations and Q&A sections for each. We'll take a short coffee break in the middle of those platform presentations. You'll get a chance to see some of our product displays outside in the atrium.
After the second section of platform presentations, Tom will give details on our 2017 guidance, followed by a closing Q&A session. After Tom's Q&A session, we'll host a light fare lunch outside in the atrium as well. That will run until about 1:30 P.M. Thanks again. We'll bring up Tom.
Thank you, Matt. Good morning, welcome. We really appreciate you being here today. We know this is an incredibly busy time of year for all of you, we appreciate you making our time together this morning a priority in your schedule, so thanks very much. This morning, I'll give you a preview of the presentations that will follow. I'll cover the importance and the impact of DBS, the Danaher Business System. I'll give you, I hope, a good sense of the strength and the opportunity that's represented by our portfolio. Finally, I'll give you a perspective on how we think about deploying capital, how we think about building the portfolio over time with a strategic view towards building long-term shareholder value. Let's start with the portfolio as it exists today.
For some of you, this may be the first look that you've seen of the Danaher portfolio post the separation, post the launch of Fortive, which by the way, went very successfully earlier this year. What you see here are 4 segments and 5 platforms that are united by a common business model. The 5 platforms, you'll hear from each of the 5 platforms today, share common characteristics. They share the common characteristics of strong brands and leading market positions, well-entrenched installed bases of instrumentation, importantly, significant captive recurring revenue streams. Each of them with global market access underpinned by strong secular growth drivers. I think most importantly, we hope you get a sense of this today, this portfolio has incredible opportunities for growth and margin enhancement over time. At Danaher, we are building and have built over time, a multi-industry science and technology portfolio.
Let's recap 2016 briefly. We're very pleased with how the team has executed in what is arguably a relatively low growth macro environment. We've delivered consistent core growth on a year-to-date basis, that growth has been reasonably consistent across all four of the segments. In delivering that core growth, we've also delivered significant improvement in operating margins, 90 basis points year to date. Running the Danaher playbook means that as we drive those operating margins, at the same time that we're getting that growth from gross margin improvements and holding or dropping the percent of sales in G&A, we're reinvesting in R&D and sales and marketing. You'll hear about a number of situations today where that's having tremendous benefits to the portfolio. That core growth and operating margin improvement has yielded terrific cash flow.
Our free cash flow on a year-to-date basis and on a full-year basis, we expect to be roughly $2.5 billion, we'll exceed net income for the 25th consecutive year this year. Key to the Danaher business model is the way we deploy that free cash flow strategically into acquisitions, we've long had a bias of capital deployment towards M&A. This past year has been no exception. We've done 10 deals across all five, covering each of the five platforms. Most importantly, the two of the largest deals, Cepheid and Phenomenex, tremendously strengthening our strategic positions in both diagnostics and life sciences. Of course, we completed the separation of Fortive, a year-long effort that launched very successfully a new industrial growth company. To sum it all up, all in, we expect to deliver 20% adjusted EPS growth year-on-year during the course of this year.
What will you hear today? It all starts with the Danaher Business System, with DBS. It's our culture, it's our competitive advantage. It's who we are, it's how we do what we do, how we measure what we do. Ultimately, it's the cornerstone of the processes that lead to our results. Secondly, you'll hear about the portfolio. You'll hear about the opportunities I mentioned a few minutes ago in terms of growth and margin. I think if you take one key message away from today, it would be to understand the potential that this portfolio has, still a relatively young portfolio, for organic improvement in its growth trajectory as well as in its operating margins.
Finally, you'll hear about our ability to generate free cash flow, generate it on a differentiated basis, further differentiating us, our ability to deploy that cash strategically in a disciplined way towards M&A. Putting all that together is the formula with which we believe will deliver a compounding level of long-term shareholder value creation. To understand Danaher, it really helps to appreciate what the Danaher Business System represents to our performance. Today you'll hear a number of stories from each one of our businesses that will help to illuminate what DBS really means at an operating company or a platform level. Across Danaher, DBS starts with our five core values, five core values on this slide. The best team wins. That team is challenged to listen to customers. Customers talk, we listen. The third of those core values, customers expect us to drive continuous improvement.
One of the ways they expect us to deliver that improvement is through innovation, because we believe innovation defines our future, you'll hear a number of examples and see a number of examples today where innovation is part of the essence of how we're driving growth and share gains. Finally, when we live those four core values, the best team, customers talk, we listen, Kaizen, and innovation, ultimately we know we'll deliver to shareholders because we compete for shareholders. DBS also defines how we measure our performance, we measure performance through the eyes of the customer, quality, delivery, cost, and innovation, because ultimately, DBS is a customer-centric business model. Finally, it's a continuous process. It's a perpetual cycle of bringing in outstanding talent and developing that talent, driving process execution that ultimately results in sustainable performance.
DBS exists in three primary areas or tool sets, tools around lean, tools around growth, and tools around leadership. Most of you know our history going back 30 years and the evolution of the Danaher Business System really started with lean, but it's evolved over time. It's evolved as we've seen opportunities. It's evolved by the nature of the platforms and the portfolio. Today, you'll hear specific examples. You'll see specific examples. You'll hear stories from each of the presenters about how DBS has impacted the performance of operating companies within the portfolio. From our Life Sciences businesses and our Diagnostics businesses, you'll see how new product innovation has driven growth. Arnd Kaldowski, leading our Diagnostics businesses, will share with you how we've driven growth in high growth markets.
You'll also hear how our PID platform, our Product ID platform, has driven share gains consistently over a long period of time through a combination of the use of a number of DBS tools. The lean tools, for as mature as they are over our long history, continue to drive tremendous performance. You'll get a specific presentation today about our progress at Pall. Both at Pall and in our Dental platform, lean tools are driving significant improvement in not only gross margin, but in operating margin, and in turn, we're able to reinvest and drive growth. You'll hear from Lance Reisman today, who leads our Water Quality platform.
You'll hear about a number of DBS examples, but specifically, you'll hear about leadership and how we've been able to develop leaders over time and ultimately export leaders from one platform into other businesses throughout the corporation in the interest of sustaining and growing our culture. People often ask us, "How do you measure your performance internally?" Well, the eight metrics that you see on the right-hand side of this slide, those are the eight metrics that we start every meeting with in every company, everywhere in the corporation, everywhere in the world. They're about our shareholders in terms of growth and operating margin and cash flow and returns. They're about the customer in terms of how we deliver quality and on-time delivery. They're about people, our people, and the way we develop those people for purposes of internally filling roles and retaining people over the long term.
DBS is about, oftentimes, singles and doubles. It's about day in and day out incremental improvement through the tools of lean and growth and leadership. By expanding those tools over time, as we've done over 30 years, we've been able to drive consistent execution and sustain our results. None of this would be possible without people. It's the talent, it's the leadership that make all of this happen every day, and that's been true since the very beginning. I mentioned our first core value. It's the best team wins. It all starts with our folks. We set high expectations for the team. We set the expectations for the team that they will lead through the tools of the Danaher Business System, and they will live the culture every day. The culture is passed down through the organization everywhere in the world.
We build a leadership pipeline, because in order to grow at the rates that we grow today and will grow in the future, both organically and inorganically, we need to ensure that we have a strong pipeline. If there was ever proof of our ability to build a tremendous pipeline, it would be in terms of our abilities to export talent into new businesses. Certainly, we stood up Fortive successfully with an extraordinary number of Danaher leaders, but I think there's no better example from an acquisition perspective than the Pall Corporation example. Where through the benefits of deep succession funnels, we were able to put a leader into the Pall business right at the outset. Rainer Blair stepped out of his leadership role across the life science platform and has led Pall since the acquisition.
In addition, a CFO, a head of operations and service, all came internally from Danaher. We retained a number of Pall leaders, an exceptional team, and in fact gave them additional responsibilities and promoted people into new roles. The extraordinary thing that we've seen since then is the quick adaptation of the tools of the Danaher Business System, the expansion of the culture at Pall, and now we see the talent growing up in that business to be able to export ultimately to new acquisitions. As you know, in our history, normally, a beachhead or a cornerstone acquisition leads to bolt-ons. As we do that, having talent ready from those core larger businesses is essential to our success. Of course, attracting and retaining new talent to the business, particularly in new and special domains, will always be part of the formula.
Sustaining the DBS culture through the growth of talent and leadership will be essential to our future and always has been. Let's turn for a few minutes to the portfolio. I showed you the portfolio just a few minutes ago, now in a minute, I'll put some numbers to the portfolio. Again, I think the key message here that we'll talk about is around the opportunity. The opportunity for an improvement in the growth trajectory over time and the opportunities to continue to drive margin improvement. It takes time. It's a function of the way we deploy capital. It's a function of the way we deploy DBS. It doesn't happen overnight. As you'll see, we have a long and successful track record of driving this level of improvement, particularly when you see that it's a relatively young portfolio today.
Let's start with what that portfolio looks like today. Today, we're roughly a $17 billion corporation, and we believe this is a portfolio that has the potential to be a consistent mid-single-digit growth portfolio over the cycle. Important to recognize that that would include the impact of Cepheid and Phenomenex, two wonderful acquisitions accretive to our growth rate that won't become core until later next year, late next year. Over time, we believe they'll have a meaningful impact. That growth rate will be underpinned by strong secular growth drivers, and you see those listed on this page. Remember, this portfolio, as I mentioned, is really unified around a common business model. A business model that we believe is underpinned or has as its foundation a tremendous level of largely captive recurring revenue.
When you look at the percentage of the business that's in the aftermarket, you see it in the lower left of this slide, again, this in this case, includes the impact of Cepheid and Phenomenex. You see a portfolio with roughly 65% of it in a, again, largely captive aftermarket of high-value consumables, very sticky consumables. When you build a portfolio like this, that's how you ultimately deliver, sustain, and improve gross margins in the 55% neighborhood, which have come up over time and will continue to improve. That yields mid-teens operating margins and continuing to improve those, and ultimately, in the most important metric, a continued level of extraordinary free cash flow and 100% conversion net income into free cash flow over time.
It's worthwhile to maybe step back for just a second and gain a perspective on where we've come from, because the portfolio that exists today really has been the product of an evolution, not a revolution. It's really come well over a decade. The numbers that you see here extend over a roughly 15-year period. Not only has the mix of the portfolio changed and the models evolved, but the metrics have certainly evolved significantly along the way. You see today, we're a business that's north of three times larger than we were 15 years ago. At Danaher, we're not exclusively about being better. Excuse me, we're not exclusively about being bigger. We are really about being better.
Being better is better reflected in the numbers that you see below the top line, which is a position now in higher growth markets that's north of three times greater than it was several years ago. Gross margins that were south of 40%, now well north of 50% at 55%. Percent of consumables are in the aftermarket at less than 15%, that's now in the 65% area that I talked about. A number that's not on this page that I think is important is the portfolio today, our businesses today are roughly two-thirds direct to the end customer. That's important because it reflects the type of customer intimacy that we are able to establish, and how our growth tools can have direct impact on the lives and the workflows in our customer environments.
Our strategic priorities over a long period of time have really informed the evolution of the portfolio, and you'll see this evolution continue in the years ahead. The way we have evolved the portfolio over time has involved a number of key initiatives, and probably the best way to start thinking about that is that we generally initially will build scale at the platform level. Large cornerstone acquisitions anchoring a platform like Hach, like Videojet, beachhead assets, iconic level brands that then give us an ability to expand from there inorganically and organically into adjacencies and use bolt-on acquisitions to expand our footprint. In addition to building scale at the platform level, we look very strategically at our positions and identify where there may be opportunities, there may be gaps in the portfolio, and where are there unique strategic assets that can enhance our position.
The three examples that you see here are probably three of the best. We stood back a couple of years ago and realized that our dental platform was not nearly as exposed to the high-growth areas of implantology, and hence the Nobel Biocare acquisition. The addition of Pall, a tremendous addition to the life science portfolio that dramatically enhanced our exposure to the high-growth areas of bioprocessing and biopharmaceutical manufacturing. Finally, Cepheid, our most recent acquisition. Just a few weeks ago, that deal closed. You'll hear more about Cepheid from Arnd shortly, but an extraordinary asset that really filled a very unique position in our portfolio in the area of molecular diagnostics, one of the fastest-growing segments within the broader diagnostic markets globally. Finally, of course, the spin-off of Fortive, the separation earlier this year.
That was the ultimate step in focusing the portfolio, focusing the portfolio into the four segments and the five platforms that I mentioned, that really crystallized our approach to building a multi-industry science and technology company. These strategic initiatives have really helped us optimize the portfolio, we believe, for the long term. We believe that there's real value in this business model that I've talked about that is characterized by this well-established, installed base of instrumentation that has, as a function of that well-entrenched installed base, this recurring revenue stream that ultimately reduces volatility, helps us with getting closer to our customers and greater customer intimacy, and ultimately, as I mentioned, drives higher margins over time. Those higher margins obviously allow us then to reinvest for growth in R&D and sales and marketing.
The more recent acquisitions that we've done, noted here, Pall, Phenomenex, Cepheid, each one of those have been accretive to that percent of the balance of sale in recurring revenues. This, by the way, also tends to be the area in which we're able to enhance margins over time, at times through the tools of DBS, and in other cases, through the opportunities to gain price as a function of delivering very high-value consumables to our end customers. While the acquisitions themselves have been important, I think this is where we get to probably the two parts of the most important message from today around the opportunity. The first being the opportunities around improving the growth trajectory of the portfolio.
If you stand back, you realize that roughly half of the total revenue of the corporation today has been acquired or has only been part of Danaher for five years or less. We have a terrific track record of improving the growth trajectory of businesses over time. You think about the Hach business and water quality, Videojet and PID, Radiometer in diagnostics, every one of those businesses that you see here, moving their growth rates from low single digits up to mid-single digits, and in some cases, beyond. A number of businesses, again, that are newer to the portfolio, like, say, Beckman Coulter Diagnostics, or even our dental platform, which we are treating as if it was newer to the portfolio, have these opportunities to improve their growth trajectories over time.
Again, the newly acquired businesses now coming in at higher growth rates, all contributing to our confidence that we can continue to improve growth over the long term. While the acquisitions are certainly helpful and accretive to our growth, it's what we do with an acquired business or any of our businesses that have been with us for a long period of time that ultimately differentiates our performance on a sustainable basis. Part of that comes from investments in R&D. We continue to take operating improvements and the cost advantages that they yield and invest further in R&D. You see a terrific example here. You'll hear more about SCIEX today, a game-changing product in the X500R that can transform our position in routine testing and mass spectrometry as one example.
Product services and solutions are a starting point and really are the key to us living up to our core value, which is innovation defines our future. Beyond new products, we continue to invest in commercial initiatives. Market penetration through Funnel Management and Transformative Marketing, tools that were actually developed at Videojet. You'll hear Joakim Weidemanis speak to you today about the PID platform and highlight the tremendously consistent performance that we've seen through the use of DBS tools in the commercial arena to drive mid-single digit core growth consistently over the last seven years. Finally, we deploy many of those commercial initiatives, not just in developed markets, but in high growth markets. Admittedly, a number of those markets are more challenging today than they were a year ago or two years ago or three years ago, but we continue to have success in those markets.
We continue to invest for the long-term benefit. You see one example here. Amir Aghdaei is going to speak later today about our dental business. In China, that team has taken our position in our dental business from $25 million in 2011, just five years ago, to over $150 million. Tremendous opportunities in terms of the overall growth of that market, but the team executing with the commercial tools of DBS is what's really making the difference. The second part of the opportunity, I talked about the growth opportunity of the platform. I'm going to talk about the margin opportunities of the platform.
Using a similar lens, meaning the lens of time, again, realizing that a number of our businesses are newer to the portfolio, if you look back at businesses that have been with us longer, again, Water Quality, PID, Radiometer, each of those have taken, through the tools of DBS, operating margins from low teens and high teens to now north of 25%. On a comparative basis, if you look at the new businesses today against the well-tenured businesses, you'd see that the delta between the two is significant, and there's no reason why we can't take both the newly acquired businesses as well as those businesses that have been with us less than 10 years or those that maybe haven't just lived up to the expectation to this point, like the dental platform, and get them to these types of improvements.
Growth opportunities in the platform, as well as margin opportunities across the board. To be specific across those opportunities, it's the early innings still at Pall. We're just over a year in. Nobel, still with opportunities for improvement. Cepheid, Phenomenex, all with opportunities for improvement. Using the tools of Lean, focusing on direct and indirect spend, pricing opportunities are always on the table. There's a second wave of improvement coming at Beckman as well, and we think that can also be enhanced by the way we do incremental bolt-on acquisitions. You've seen us do some of those already. The acquisition of the MicroScan business as well as the Iris business. Iris, by the way, delivering double-digit return on invested capital to this point.
Our dental platform, as I mentioned, a business with a terrific leadership team in place now and being treated as if it were a newly acquired business. As we look at the portfolio, we're confident in our abilities to deliver 50 to 75 basis points of core operating margin improvement on an annual basis, and we know that that'll be driven by the tools of DBS. When you combine the opportunities that are represented by the portfolio with the impact of the tools of the Danaher Business System, you ultimately lead an ability to deliver a differentiated and superior level of free cash flow generation. How we deploy that cash strategically, thoughtfully, through a disciplined M&A process, ultimately differentiates us from the standpoint of the returns that we generate.
Simply put, free cash flow is the single most important metric at Danaher, both internally from our view, and we think it should be externally. We have a tremendous track record, and we know that free cash flow is effectively the fuel that powers the engine of the overall business model. The combination of core growth, operating margin improvement, a relatively low level of capital intensity, as well as consistent year-on-year improvement in working capital, together combine to deliver the track record that yields 25 years of consistent improvement and record levels of conversion of net income to free cash. Now, how we deploy that free cash flow is obviously important to ensure that it's well-utilized. We think about capital deployment in a three-pronged approach. We start with market, and we always look first at the attractiveness of secular and structural growth drivers. Is it a fragmented market?
Are there opportunities for consolidation where we continue to bring bolt-on and adjacencies into the platform? Once we've identified the attractiveness of market, only then do we begin to look at the companies and identify who the most attractive assets are, who has the most competitive position, where are the strengths of brands, who has consistency in terms of visibility of revenue, and where are the margins generated most, and consistently so? Only then, once the attractiveness of both the market and the company from a competitive standpoint are assessed, do we then turn our eyes to valuation. No metric is more important than the return on invested capital over time.
Getting to that return on invested capital is a function of our ability to deploy DBS, a function of the business's ability from a cultural standpoint to adapt those tools. The sustainability of the ability of those results, ultimately, the combination of the growth capabilities of the business and the operating margin capabilities to deliver long-term results. We're always careful to make sure that we approach each acquisition in a somewhat different way and tailor our approach to how we deploy DBS carefully to ensure we get the best results. We deploy that capital in a variety of different ways. In some cases, it's around large value-creating opportunities, like Videojet and Hach, certainly Pall and Beckman. In other cases, these would be acquisitions that are extensions of a cornerstone or a beachhead position, where we gain some synergies.
For example, in Trojan and ChemTreat, extending our position in water beyond analytics. Esko and X-Rite, extending our Videojet position beyond coding and marking. Technology additions to platforms are critically important and strengthen us strategically and lay the foundation for real long-term growth anchored in innovation breakthroughs. Certainly, the acquisitions of Cepheid and Phenomenex most recently are examples of that. Finally, we invest in acquisitions in high-growth markets. We've done a number of acquisitions, particularly in Latin America. Our water quality business has extended its footprint through acquisitions such as LIPESA. Even in China, where our Xitogen acquisition has yielded a new product, which is a breakthrough new product in flow cytometry that's driving the growth rate at Beckman Coulter Life Sciences.
A number of different angles in which we deploy capital to build the strength of the portfolio that we have today and to drive shareholder value in time. Finally, I mentioned return on invested capital. ROIC is the way we measure the efficiency of our capital deployment. It has been an important metric at Danaher since our beginning, and it remains the most important metric in terms of measuring the impact of our capital deployment over time in terms of acquisitions. Again, using the lens of time, looking at deals that we had done in excess of 10 years ago, you'd see businesses like Hach, Videojet, Radiometer, that started as mid-single-digit returns, that certainly brought their challenges, that today are high-teens return on invested capital and continuing to improve as a function of the tools of DBS.
Those businesses, say in the middle of their tenure, if you will, at Danaher, businesses like SCIEX and ChemTreat, X-Rite, that again started as mid-single-digit returns that today are double-digit returns. Consistently improving year-over-year. Finally, our newer acquisitions, which again begin as mid-single-digit returns and where we have confidence that the track record of thoughtfully deploying the tools of DBS, putting the right talent in place, leveraging our capabilities around growth, lean, and leadership, ultimately will yield double-digit returns that will be consistent with our past history. There's a consistent trajectory in our return on invested capital as a function of a long period of time of an upward trajectory, and we're confident in that improvement as time goes on.
To summarize, at Danaher, we're building a multi-industry science and technology company with the strength and the resilience of an exceptional portfolio, a portfolio with tremendous opportunities in terms of growth and margin expansion that we believe will capture as a function of the consistent deployment and utilization of the tools of the Danaher Business System, and we believe that that formula, which has and certainly will deliver long-term shareholder value creation. With that as a starting point, we're going to begin the presentations of each of the individual platforms. We're going to have a presentation by each of the five platforms, as well as a specific presentation on Pall Corporation. In each presentation, you'll get an overview of the businesses. You'll get a quick look at our performance in 2016 and the highlights.
In each case, each presenter will give you a sense of how DBS has had an impact, how it's had an impact in terms of either improving operating margins through lean improvements or driving growth through product innovation or commercial initiatives. First up is our Executive Vice President, Dan Daniel. Dan's going to share with you some insights on our life science platform with some specific emphasis on SCIEX and Beckman Coulter Life Sciences and some of the great work that those businesses have done in product innovation, as well as enhanced commercial execution. Dan, being careful to treat his recently injured Achilles tendon carefully through some casual and friendly sporting activities that we shared together, I might add. Here's Dan Daniel.
Tom knows that's probably the most challenging part of my day is to navigate those five steps, I'm halfway there.
You're halfway there.
For those of you in my age group who still think it's a good idea to play basketball, see me at the break. I can help you out with that.
Well, thank you all for coming again this year. We really do look forward to this as a way to share with you the many ways we're using DBS to improve our businesses across Danaher. I have the opportunity to do that here with our Life Sciences portfolio here today. I think you all know we have a number of very strong brands in our Life Sciences set of businesses. It's a portfolio that's relatively young. The last 16 months, with the acquisition of Pall and the transition that Rainer Blair will share with you, and last month, the close of Phenomenex, we've added a couple of marquee brands in the life sciences world to our business. We now have over $5 billion of revenue in this platform in a large and attractive and growing market. I like to think one of the strengths of our portfolio is balance.
Balance across some very important instruments to the future research needs of this industry, but also across geographies, both developed markets and an increasing presence in high-growth markets, but also diversity across our end markets, where we primarily serve Life Sciences research, some applied markets of environmental and food and beverage, but an increasing presence and role in biopharma. I'll share some more about that here in the future. The biggest impact here to our portfolio has been in the increase in our percentage of business, which are recurring revenues or consumables. Tom touched on Pall and Phenomenex. We now have over 60% of our revenues from this portfolio in consumables and steady, regular, recurring revenues. We have a number of important growth runway opportunities, both organically, I think you'll see continued capital deployment in this portfolio for inorganic growth over time.
We think the margin runway is particularly attractive as well, partially because of the new age of the companies in the portfolio in a relatively early stage in the DBS journey, but also because these are attractive markets that we're receiving significant investment, both in developed markets, but increasingly in high-growth markets as well. We think the portfolio has been strengthened significantly over the last 18 months. 2016 has been a year of progress in many ways. Certainly at the top of the list in our life sciences portfolio is the transition with Pall. Rainer Blair will follow me and share with you the details, but we knew 16 months ago this was an outstanding company with very strong brand and technology, but what has just thrilled us is the way the team has embraced DBS.
First and foremost, to improve service to customers and on-time delivery, improve margins so that we can invest in growth opportunities, and here more recently, really strengthening our innovation and new product development pipeline. The team has embraced DBS. Perhaps they had a bit of a taste of some of the concepts of DBS before Danaher, but they've certainly embraced it, and this is a team that's going to provide runway for Danaher for many, many years to come. 2016 has been a year of solid margin improvement. As you can see, 75% of this portfolio has been in Danaher less than seven years. We see runway. In fact, a significant portion is just under two years. Plenty of runway there.
That is margin that you'll hear a number of examples of where we're investing that margin for growth, and the innovation pipeline is full and going to be very much a growth driver here for us in the future. 2016 has been a good year. I think some of the product development that we're launching and have planned for 2017 will make 2017 even better. As we look across this portfolio in these five to six operating companies, there are a number of themes that are very consistent in what we call the playbook for growth and margin improvement. I'll talk specifically about Beckman Life Sciences and Pall, but if you step back for a minute, first and foremost, we have strong brands, but some of those, I would say, are much more than brands. They're franchises.
SCIEX with mass spectrometry and now Phenomenex and the consumable revenue stream of that, certainly the Beckman Life Sciences analytical tool portfolio, and great brands like Leica and Molecular Devices as well, and with the addition of Pall, another franchise. It's not just a brand, it's the technology, it's the installed base, and it's customer positions and relationships that are enduring. That's a very important framework here. We also like to then take some of that early margin expansion and invest in feet on the street and expanding our service footprint so we can maximize our support for customers and leverage that installed base for accelerated growth as well.
In the life science world today, the high-end, high-performance instrument that we have is an important foundation and place to start, but it's increasingly about the software, the assays, the consumables, the recurring revenue streams that go with that, and providing a complete solution for researchers as they tackle some of the most complex and challenging problems in research and healthcare today. That's the framework of what cuts across all of these businesses, and I'll share with you some specific examples. Before I do that, as you will hear from all the presenters today, examples of how DBS is improving our business. As Tom said, we talk about the three pillars of growth, lean, and leadership. Those are a set of tools that help us drive improvement in our business.
Those of you that have been around Danaher for a long time know that lean as a foundation has been 30 years of effort and progress. I would say the growth side of DBS has been more prominent for the last 15 years. If that sounds like a long time, it is, but that's what it takes to really be ingrained in the culture that really is what DBS is all about. You'll hear a number of examples from our presenters about growth tools, lots about product development and our innovation pipeline, but lean and how it still works just as well as it did 30 years ago. As we think about DBS, it takes time. The journey is long. It's about steady progress, having a solid foundation, and that's really what the growth, lean, and leadership pillars represent for DBS.
One of the things that we've done with DBS in our life sciences businesses in 2016 is use customer and market segmentation as well as value stream mapping, which is historically a lean tool, to go very deep in the biologics market. I know all of you are familiar with Pall's position in the biologics market, with over $1 billion of revenue. Rainer will talk more about that. The rest of our tools businesses have a very significant and broad position as well. Across the top is just a quick summary of the workflow, our value stream map breaks that down in very great detail and looks for customer pain points and places where they are looking to change the workflow for faster, better solutions in this business.
It starts with target identification, goes through a discovery and development iterative process, ultimately goes through the regulatory processes, then finally makes its way into drug production. This is a large, rapidly growing market. We think there's going to be a long runway to it, our operating companies in the tools market have over $500 million of revenue, starting with SCIEX, with mass spectrometry and protein analysis, certainly with Molecular Devices and cellular imaging and plate reading tools. FortéBio is actually a business that came with the Pall acquisition for cellular and protein analysis as well. Then our Beckman Coulter portfolio in life sciences is flow cytometry, fluid and automation handling systems, as well as centrifugation.
It's a broad portfolio, and what that allows us to do is to talk to customers about the whole workflow, how we can provide multiple solutions to change how they get better answers faster, earlier in the development process. This is all about how you find the right solutions, and the wrong solutions you fail quickly on. This is $1.5 billion plus of revenue for us in our life sciences portfolio and a very attractive market with significant growth runway in the future. Our product development in biologics has been significant in 2016. Two significant examples for that. First, in SCIEX, with the X500B platform mass spectrometer. This is a mass spec that's designed specifically for the biologics market, not just the hardware but also the software, and helping make it easier for customers to use our products faster to develop those solutions.
It is a product that has been part of a platform. It's a faster, more sensitive device, but the complete solution is what makes it attractive for the biologics market. The second example is really an example of collaboration between Beckman Life Sciences and our Radiometer Diagnostics company. It takes the Beckman Vi-CELL cell viability instrument, puts it together with the design of the ABL90 analyzer, and creates a combined solution that allows customers to measure the metabolic properties within cell culture media. A very important step and ingredient in the biologic process. This was developed, refined, and launched all in 2016, and it is in the marketplace today. We're thrilled with the speed of that collaboration, and I think it highlights opportunities across the life science and diagnostics world that we'll continue to pursue going forward.
Continued product innovation in the biologic space, in the attractive market that it is a very high priority for us. As we look now at a couple of complete businesses, I'll just walk you through the journey and give it as an example of how DBS can improve growth and margins in the businesses. Beckman Coulter was acquired in 2011, as you all may recall, and one of the first decisions Tom and the team made was to take the life science instruments apart, create a standalone operating company that could focus directly on the life sciences in market and in customers in a very focused way, and really provide that as a platform for growth and improvement. One of the first steps is to use DBS Lean to improve the footprint, to improve margins, so that we can then invest for growth.
Part of that investment for growth has been additional feet on the street in both developed and high-growth markets. It's been around leveraging and utilizing the Videojet demand generation model for both market visibility and lead generation to drive organic growth. More recently, it's become about using the margin expansion to improve our product development pipeline. We've had a number of product development opportunities in Beckman Life Sciences that have been launched in 2016. We've got more coming in 2017, and this journey has taken a business that was flattish to low single-digit and made it a consistent mid-single-digit grower for us over the last two years. We're thrilled with that progress and that journey and plenty of opportunity ahead for the Beckman Life Sciences team. Similar story at SCIEX, and I know we've shared our progress with you about SCIEX over the years.
It started with carving out SCIEX out of a difficult joint venture or a complex joint venture, I should say, shortly after acquisition. Again, aligning the commercial teams within markets, using DBS lean to generate margin improvement in the early days, and taking that to invest in the R&D pipeline, where we substantially ramp the R&D investment at SCIEX and develop 15 new instruments. That has helped make SCIEX a very consistent share gainer over the last three years. The commercial teams are aligned within markets. The service teams are leveraging our installed base for additional growth, and it's really an opportunity to take margins, invest for growth. It is a journey. It's not overnight. As Tom said, it's singles and doubles. In football, it's blocking and tackling.
Use whatever analogy you want, it's good, steady, consistent progress with a strong foundation of lean growth and leadership across DBS. SCIEX is a business that we are thrilled with. It's a market leader in a very competitive market, and it had nice share gain over the last three years. SCIEX is a business that we have strengthened even further with the acquisition just last month of Phenomenex. Phenomenex is a, some of you called a crown jewel, and we certainly agree with that, and we're thrilled to have it as part of our portfolio. We've had a long relationship with Fasha Mahjoor and the Phenomenex team. To go back to Tom's slide around market and company, I think this is just a textbook case.
Obviously, we knew the market being in SCIEX, the company we knew quite well and had a multi-year cultivation process to where if Fasha were here today, he'd tell you he selected Danaher every bit as much as we selected Phenomenex. It is a team that knows how to win. They get up every day focused on customers and have been a continual share gainer over many, many years. It's a culture that will fit very well inside Danaher. We're just a few weeks into the transition. The SCIEX team is leading the transition, and we are thrilled to have Phenomenex as part of our portfolio and are confident that it will be a double-digit return business for us in that five-year time horizon. Phenomenex is a wonderful addition that we just closed last month. In summary, we've got a portfolio that is strong.
It's even stronger over the last 18 months. DBS has driven that improved performance, we think the runway ahead is even greater. Thank you for your time. With that, Tom, I'll flip it back to you and limp my way back down.
Thank you, Dan. A tremendous story of success in our life science portfolio of businesses. Obviously, a wonderful position in the high-growth area of bioproduction. Terrific progress in terms of innovation across the businesses at SCIEX and at Beckman Life Sciences, and I think a tremendous addition to the portfolio, a very strategic acquisition to the portfolio in the case of Phenomenex. Next up, Rainer Blair. Rainer is going to share with you the story of Pall. As I mentioned, Rainer stepped into this role after having led the life science portfolio and has really done a tremendous job in applying the tools of DBS in a very broad way. You'll see the impact of that implementation as Rainer takes you through it. Rainer, welcome.
Thank you, Tom. Good morning, everybody. It's a pleasure to be here today to talk to you a little bit about what we've been doing over the last 12 months at Pall. Before I get started, allow me to briefly introduce the company. A $2.8 billion operating company in the Danaher family, growing at mid-single digits. We operate in a $20 billion market. We have an excellent business model, 75% recurring revenue with a nice diversification geographically, perhaps with some upside in North America, as well as the high-growth markets. Very attractive end markets that bifurcate into life sciences and industry. I'll talk to you in more detail here about the biopharma market in just a minute. We also have very attractive applications on the industrial side. Our verticals are supported by really strong secular growth drivers, expanding production of biopharmaceuticals, certainly, also enhanced environmental and safety regulations.
Also the Internet of Things and the growing complexity of electronics are starting to pull more silicon wafers and really giving us a nice tailwind in that particular industry. You would know our customers, Genentech, Sanofi, Amgen, but also Intel, Airbus, Caterpillar, and Hewlett-Packard. Just really the who's who here, and we're really proud to serve them every single day. Really an outstanding, highly strategic asset for us in the portfolio with a very, very good business model. Dan had just talked about the fact that within the life science industry, the biopharmaceutical opportunity is one of the most attractive. You can see here we're talking about the inputs to the manufacturing of biopharmaceuticals. That's roughly a $4 billion-plus market growing at low double digits. Just as context, biologics, biopharmaceuticals are therapies which are typically produced by genetically modified living organisms.
In fact, 7 to 10 of the top-selling drugs these days are already biologics. The top 3 alone gross $20 billion in sales a year. There's an extraordinary incentive to innovate as well as to get product to market. This innovation manifests itself in over 2,500 biologic molecules 15% year-over-year growth already. Over half of these are monoclonal antibodies, as well as recombinant proteins, which are produced in processes just like the one that is depicted here on the screen. In fact, Pall solutions are in the middle of these processes and very sticky. You can imagine that once the FDA has approved both the drug therapy as well as the process, it's cost prohibitive to make a change there, and it would introduce additional risk, potentially, for the patients. Additionally, about 80% of today's biologics are produced in stainless steel vessels.
As the concentration of these therapies, the drugs actually increases, their batch size decreases, as well as the number of additional applications is reducing the batch size. That's making single-use technologies, where you literally discard what you're using, the production inputs every time, much more popular. As you look over to the schematic one more time, you see the little colored boxes, and that shows you how well Pall is positioned, really in every step of the process, both with traditional as well as the single-use technology solutions. In this year, the FDA cleared 12 biologic therapies, and we were specced in with nine of those. We feel very good about the way we're positioned in this very attractive market.
If we come back up and just talk more generally about how are we doing at Pall, couldn't be more pleased with how the Pall team has adopted and applied, with the help of also about 15 Danaher leaders, the Danaher Business System for real results. The way we did that is really focusing on three priorities: improve execution, both operationally and commercially, reduce costs, and then reinvest to accelerate innovation for competitive advantage. You can see some of the results here. We've improved on-time delivery by 2,000 basis points while improving working capital turns as well. We've increased our market visibility, so we're seeing more deals, and we're learning how to win more of those deals, supporting that mid-single-digit core growth. We've also done really well on reducing costs. You can see here our year one target was $60 million.
We're well over $100 million in savings already and confident that we can hit that longer-term $300 million savings objective. Additionally, we've been able to accelerate innovation, 50% increase in the number of products that we've launched. I'll talk about that in a little more detail in just a minute. At the same time, in those needle-moving breakthrough projects, we've been able to cut our cycle time by 25%, allowing us to get to market much faster. The combination of these measures really allowed us to get to not only the mid-single-digit growth, but also that leverage in gross margin and Operating Margin Expansion. You see us applying the Danaher playbook here. On the one hand, we focus on the customer, we reduce waste, and then we reinvest for innovation and competitive advantage. How did we do this?
The first thing we do is we learn from each other. The prior largest acquisition prior to Pall was Beckman, and we certainly went to our colleagues, Arnd Kaldowski and his team, to learn what worked and what didn't work, and were able to modify that playbook in alignment with the priorities that I had just mentioned, and pick from that rich toolbox that both Tom and Dan referred to of the Danaher Business System. We went to a deep pool of over 50 Danaher facilitators that allowed us then to transition the organization and DBS into Pall. None of this would've been possible without the extraordinary embrace of DBS by our Pall associates. Over 70% of them went through the training in the first 90 days, and they've worked tirelessly since the day of closing, well over 300 Kaizens to drive real results.
I think it's fair for us to say today that DBS is central to how we operate at Pall today. Coming back to this concept of improving execution, both operationally as well as commercially, here you see a couple of examples of operational improvement. We talk a lot about on-time delivery improvement. You might ask, "Well, why is that?" Well, certainly, it satisfies our customers. We want to satisfy and even exceed expectations there, and that's very, very important to us. Additionally, however, we're driving process improvement through the entire supply chain, not only to become more effective, but also to drive cost out of the system. All the metrics that you see on the page here are examples of those kind of results. You might also ask, "Why is this guy showing me an empty room?
What's this all about?" Well, with Lean, we go after all kinds of waste, and when we see an empty room where we can free up space, that's an opportunity for us. This is how we enable rooftop consolidations, making the receiving plant more productive, reducing logistics costs, and further decreasing the complexity of our supply chain so that we can improve our lead times to our customers. You see this entire domino effect from Lean implementation to improved customer service and improved cost as well. If we think of our largest plant in Ilfracombe, in the U.K., southwest coast, near the surfing capital of the U.K., on-time delivery, if you decide to visit, you need to pack a lunch. On time delivery, extraordinary improvement there as well.
This is an exciting example of one of our Kaizens, where we took underutilized and idle equipment, rebuilt a manufacturing cell for so-called low runners. Turns out, these low runners were products that our customers needed in hours and days, and we've been able to achieve that, versus the previous lead times of weeks. Those are the products that our customers spec into the process that I showed you earlier and provide years and years of recurring revenue. At the same time, where we pulled those products out, those larger lines now run more efficiently, more productivity, more working capital turns, i.e., inventory turns, and of course, shorter lead times again. Now we have customers coming to us in an unsolicited fashion, asking whether we can do more for them.
That's where we want to be, and at the same time, we're starting to gain more pricing leverage because our delivery performance has improved significantly. Now, if we come back to this concept of operational execution, improvement, and commercial, here you see the results that we've achieved through that. Meaningful gains in quality as well as delivery. There you see it, 19 line moves and four rooftop consolidations while improving on-time delivery by 2,000 basis points. That's the power of DBS. Doing all these, the power of the Danaher AND, those are central to the Danaher Business System and our culture. We talked about reducing costs. Well, how did we do that? Well, certainly the purchasing leverage that the larger Danaher Corporation brings to procurement has helped us significantly.
We've also taken the DBS tools and applied them to drive waste out of our transactional as well as our operational processes, and you see again the extraordinary results here. Lastly, if you think about commercial execution, we've been able to improve our visibility of the market by a factor of three. At the same time, we've been able to improve, by a factor of five, the number of deals that we see, and now we bring together cross-functional teams, this is a concept that we've borrowed from Videojet, in order to ensure that we win more of those deals. For you baseball fans out there, think of it this way: more at-bats on the one hand, while improving your batting average. That allows you to run up the score and take share. Now how do we accelerate product innovation for competitive advantage?
Well, first of all, Pall has an extraordinary scientific and innovation foundation. We have well over 350 scientists around the world, well over 1,300 patents and many more pending, and we're adding at a clip of 25 a year. Taking the scientific prowess and combining it with the power of the DBS system has allowed us to compress cycle times, launching 35 products, 50% more than the prior year, so that we can monetize that innovation more quickly. At the same time, we've become much more reliable in delivering those innovations to the market, giving more confidence to our commercial teams, 2,700 basis points improving there. Lastly, we've been able to combine our teams to get more leverage in the projects that move the needle.
They move the needle for our customers in terms of the degree of innovation on the one hand, and they move the needle for us from a financial perspective. You see two pictures here. The one is the Cadence Acoustic Separator. You may have seen that in the foyer earlier. If not, I encourage you to have a peek. Combined with our continuous chromatography skid here, the Bio-SMB. Those two innovations are the key enabler to being able to move bioprocessing from a batch to a continuous process. From a batch to a continuous process. That significantly reduces the CapEx required to bring into production those 2,500 drugs that you saw in the pipeline, as well as accelerates the time to market for these really important drugs that are also very valuable.
Here you see how this all comes together, the Danaher playbook, improve execution, reduce cost, take those resources to build competitive advantage with innovation. In summary then, we feel really good about how we're positioned in the verticals as well as the applications that we focus on within those. DBS is alive and well and growing, and our team is adopting this and applying this every single day. Lastly, it's really early days. We've been in about 15 months now, and we see plenty of runway to go. We couldn't be more pleased with where we stand today. Thank you very much.
Thanks, Rainer. Pall's clearly off to a terrific start, and thanks to Rainer, the tremendous team of Danaher associates who have joined the Pall team, and the Pall team themselves, who together have ensured the great start that they've had over the first year. Every acquisition is different. Every acquisition deploys DBS in a different, but importantly, a tailored way, but ultimately towards the same objectives: improving the growth trajectory, improving operating margins, delivering free cash flow, and positioning that business for future growth as a function of additional acquisitions that we would do to supplement that business over time. We couldn't be more pleased with the way the Pall team has performed to this point and how the business has come along. Next up, we're going to turn to water quality. Lance Reisman is going to come up in just a minute, get us started on water.
Those of you who have a good deal of history with Danaher will remember, the Hach business was acquired over 15 years ago. Is a great example of a business that has not only made tremendous progress over that long period of time in growth and margin improvement, but continues to make those improvements today through the tools of the Danaher Business System. A tremendous exporter of talent. The Water Quality business has been a supporter of many of our other platforms in terms of talent. I came out of the Water Quality platform. I'm but one of many examples of folks who started their careers in Water and were able to move on and do other things throughout the corporation. Lance, join us and give us a look at the great progress that you're making in Water, please.
By the way, after Lance wraps up, Lance is going to invite Rainer and Dan Daniel back up to the stage, we'll take some time for Q&A around the first three presentations of the morning before we go to break.
Thank you, Tom, and thank you for the opportunity to present Water Quality platform. I am proud to stand here and say we are now the oldest platform within Danaher since the Fortive spin-off. Broadly, we're all about testing water and treating water to make sure water quality is available for the population, have the right quality for the environment, also for our industrial customers. As Tom mentioned, it started off with Hach, but we also have some additional anchor brands that we've acquired in Trojan and ChemTreat. Hach was acquired in 1999. It was a few million dollars in revenue. Now it is the worldwide leader in water analytics, and the platform itself is $2.1 billion with a mid-20s operating margin. When you look at the mix, very similar to the other Danaher businesses, high level of consumables. We like our razor blades.
Razor blades in this industry is primarily chemistry and services. When you look at our geographic split, we're a little heavier in North America. This is primarily driven by Trojan and ChemTreat, which are more North America-centric. Hach is very diversified globally. It's a $15 billion market with great growth drivers, regulatory, water scarcity, and workflow. Strong fundamental growth drivers, a very large, diverse customer base, which I'll get into a little bit more detail later, is the foundation for this business. Touching on 2016 highlights. We continue to expand our global presence. We like our direct presence, and we're expanding our feet on the street, which includes service as well in high-growth markets in North America. We continue to expand our capabilities. We've been driving service for a number of years. It adds tremendous value to our brand and to our products and to our customers.
We've been growing high single digits for a number of years now in service. As one of the older platforms, we continue still with M&A with some bolt-ons. We've had seven deals in the last three years, I'll touch on a number of these in a moment. Of course, we continue to innovate. Innovation has been the foundation of these brands and this business, and that continues today. In TrojanUV, they've launched TrojanUVFlex this year. It is for the reuse market. It provides 2X the UV output in the same footprint as our peer group. There's multiple benefits for our customer, less energy use and a smaller footprint. When you're talking reuse, you're talking about existing facilities, limited space, so space is at a premium.
From a Hach perspective, we've had a number of products over the last three years that we've launched to help drive mid-single digit growth in the muni space. The latest is turbidity. Mr. Hach himself invented turbidity in the mid-1950s. We've continued, innovated over the years, once again, 2016, a breakthrough innovation with turbidity targeting regulation and workflow. We'll show you a video. This product launched in Q3 and has been one of our fastest growth new products in the 11 years I've been at Hach. The customer clearly sees the benefits. Obviously, regulatory is required, but the workflow benefits are very clear. It has a very exciting potential moving forward. How do we win in water quality? I'm going to come back and talk about our customers a little bit here. Municipal, we service the drinking water and the wastewater customer.
Industrial, there are many verticals that we serve, oil and gas, food and beverage, power. Environmental, you're looking at natural resources. See our brands. We have very strong brand equity with our customers, driven through a heritage of innovation. We continue with our product advantages and our commercial advantages to drive that brand equity. Product advantages in municipal, we've talked about reuse, regulatory, workflow. In the industrial market, it's more about the application. Each of these industrial customers have different applications, whether it's in-process water, even their wastewater. Because of their process, they have some specific needs. We design our products and our services around those specific applications. Environmental, we have differentiated products, but we also now have end-to-end monitoring capabilities with the acquisition of Lufft and Sutron, which I'll talk about more in a moment.
From a commercial advantage across the portfolio and across our customers, it is really about that direct sales and service capabilities, as well as dedicated resources by opcos. We are very close to the customer, we are very close to the applications, and we can value-sell our products, solving their challenges. This is also very productive in bringing back the needs of our customers so we can continue to innovate like we did on turbidity. Strategic initiatives, there are many. Here is a couple of commercial strategic initiatives, and we use the Danaher Discipline to Execute and Transformative Marketing and Funnel Management are two key commercial initiatives you see through a number of our opcos and platforms, and I will talk a little bit more detail on this in a moment. We continue to win with the strong brands, the products, and innovation across the segments. Talk about M&A, I mentioned Lufft.
This is an expansion into meteorology, which also gives us further runway going forward. It adds a critical part of the water cycle management to our portfolio. We have been measuring natural waterways. The way to link this is think about precipitation, think about flooding, and we can provide that information to our customers. Combined with Sutron, which provides satellite communications, world-class satellite communications, which is necessary, as you can see from these pictures, because these are very remote deployments, whether it is natural waterways or meteorology. For an expansion in Latin America, we got four acquisitions. Two are ChemTreat, AGUASIN and LIPESA, and two are Hach, in India and Reactivos. These are beachheads for further growth and expansion within Latin America. DBS, it is through all of our businesses. It is our culture. It is our core. I am going to touch on growth and lean briefly, but really focus on leadership.
We have really been building out this platform of tools over the last three years, as leadership is critical to keep supporting our organic and our inorganic growth. First, touching on lean and growth. On the lean side, 10 years plus in, DBS still works, and we still have runway. You can see the OMX improvement, the gross margin improvement, and our on-time delivery is now above 95%. We continue to reinvest. Talk about Funnel Management. This is about productivity. This is about connectivity of the sales team. As we have invested additional 70 basis points in sales and marketing as well as R&D, we see this Funnel Management really driving that productivity. One of the key metrics is our improvement in managing global key accounts at Hach, which is coordination across many regions, across many salespeople, and providing the support for these global key accounts, and we are growing at 15%.
From a Transformative Marketing, it is about visibility of customer, be able to drive digital marketing to them, drive leads, move those leads into revenue, and be able to measure that revenue, an actual ROI on marketing, which has always been a dream of us marketers. And we can see that revenue is 2x what it was in 2015 at Hach based on lead generation. So we are improving our profitability. We are also driving share gain. Coming back to leadership and building more leaders. We have our toolkit. A lot more tools in it now, and we are also matching it up with this model. This model is demonstrating the best way for leaders to learn, and this was created by the Center for Creative Leadership in North Carolina. This model holds that 70% of the knowledge of leaders is through experience, 20% through coaching, 10% through training.
I want to walk you through this with one of our key training tools, which is our General Management Development Program. This is where we take our top talent, and we put them through this program. They get specific training, classroom training, such as situational leadership, such as case studies with people from across Danaher. They get plenty of coaching. They get mentors during the training, DBS mentorship, and they also get their manager's mentorship through this. We understand their development needs, and then we execute and give them the experience to overcome those development needs. This tends to be rotations and stretch roles, and we want them to be moving every one to two years. This is not a cookie-cutter program. Everybody doesn't get the same experiences. It depends on your past experience and your development needs.
You don't rotate until you've conquered that development need and delivered some results. Very well received amongst our top talent, so much so that we now use it in a recruiting tool to make sure we're getting the very best talent at the very best universities globally. Let's talk about building leadership and how we've done it in Water Quality and the results. Again, it's every platform's responsibility and all of the leaders' responsibility to make sure we are building this leadership base and this funnel to make sure we can support that growth, the inorganic and the organic. We're doing it at Water Quality. We are a net exporter of talent. We exported 26 senior leaders over the last three years.
While that's good, what's really impressive is that our internal fill rates of filling our own jobs in the Water Quality platform is at a very high level and continues to improve. In addition, the current candidate pool that we use, and when we look at some of our processes of succession planning, chess boarding, we can look at our candidate pool and realize we have 2x candidates, then we have senior positions, which means long term, we're going to continue to be an exporter, continue to support Danaher, and be able to support our internal needs. One of the keys to be able to do that is to retain your senior leadership and your best talent. We're able to do that through these leadership training programs. Our leaders see that we're investing heavily in their abilities.
We also have the career opportunities for them as well, plenty of advancement opportunities. We limit leakage, and we continue to build leadership across Danaher. Some specifics, you look at Hach, we've exported to Beckman Coulter. Jennifer Honeycutt to a President position. As Tom mentioned, he is from Water Quality. We've also exported Melissa Aquino into the VP of DBS. She actually came out of Leica Microsystems, one of our businesses, into the DBS role, and we backfilled her internally with Steven Bell, who is a General Management Development Program graduate. You can see how that flywheel continues to work and support Danaher and Water Quality. In summary, this is a great business, great profitability, great consumables in very high attractive segments of the water market. We continue 10-plus years in to drive that DBS playbook to continuous improvement to allow more investments in organic and inorganic initiatives.
Finally, the new leadership program built up over the last three-plus years, really leveraging that across Danaher and across Water Quality to make sure we have the leaders for the future, to make sure Danaher continues to outperform in the market. Thank you very much. With that, I'll bring Dan and Rainer back up, and we'll open it for questions. I think there's a mic running around in the back somewhere. There's a couple questions there. Go ahead.
Hi, Lance. Just a question on the Water Quality I'd love to start with, which is you identify about $15 billion in market size. You guys are around just over $2 billion now. From a growth perspective, how much of that's really attractive business in which you'd have an interest with your current portfolio? How do you take a step function level approach to growth in terms of your adjacencies from there, as opposed to maybe more than incremental improvement, but at that level?
Clearly in that space, there are some unattractive areas, I would say the majority of it is attractive to us. It is a slower-moving industry, but I think we continue to drive accelerated growth through executing the DBS growth tools. The Funnel Management is accelerating growth, as is Transformative Marketing. These are world-class programs that a lot of our competition cannot execute because we still have a long tail of very small competitors. We'll continue on that path as well as innovation in penetration of the high-growth markets, is what we're going to do to drive accelerated growth.
Yes. Over here, Lance. Staying Water Quality, if we could.
Yes.
I was surprised in your description of the Water Quality platform, missing from that is the Pall business. If you go to any trade show, you'll see a big booth showcasing Pall as one of the leaders in nanofiltration. You all launched a new mobile water treatment business. I know you're investing in the business, but it didn't show up here this year, and it didn't show up last year. Is there a rebranding coming? I'm just curious why it's missing from being showcased today.
Maybe Rainer can help me with this as well. While they are water, they are definitely different customers and different applications. We definitely do partner up and share where we have maybe relationships that can be transitioned from one company to another to help growth. We do that. You've mentioned mobile. That business actually is going to move into the Water Quality. That business, we do see leverage, same customer base, similar applications, we do see leverage across Water Quality. As of January 1st, the Pall water, a small subset, will be moving to Water Quality.
Hey, guys. Good morning. Thanks. One question on Pall and another one on Phenomenex. On Pall, I'd be interested, if you look at the landscape of the big manufacturers, drug manufacturers out there, it looks like there will be a pretty good amount of new capacity coming online in the next couple of years. I was hoping you could give us a sense of how you think about what that means for your business. In other words, as those manufacturers bring capacity online, should we assume there'll be a commensurate benefit to purchasing of your equipment? Could it be more of a phased-in process where you need to see the volume in those plants sort of come through those facilities before you get a benefit?
Yeah, great question. First of all, there will be this capacity expansion that you addressed. The pipeline is requiring that. It may be slightly different how these capacity expansions occur versus previously. I talked about the stainless steel versus single-use technologies. Most of the products are coming out with smaller batches, we're going to see single-use technologies take a larger share than in the past of those capacity expansions. That's right down our Pall lane in terms of single-use technologies. Additionally, we're one of the few providers in this space that designs the systems and the skids that accompany these single-use technologies. We see this as a large opportunity here, you could expect that Pall has an entitlement in that growth for sure.
I would add to that, we talk a lot about the recurring revenue streams at Pall. One of the early applications of our DBS growth tools at Pall has been the visibility and the targeting of the initial installations in that first fit. I think the team has done a tremendous job of improving their ability to see those and are working hard to win more of those. As that capacity comes online, I think we'll get a nice share from that.
All right. Just sticking with Pall, could you talk a little bit about the range of scenarios you see for Pall Industrial from a macro perspective and some of the indicators that could get that business growing again?
Sure. First of all, hi, Ty Coates, good to see you again. We're actually pretty pleased with the development of our industrial business here over the last year. Particularly our aerospace and our microelectronics businesses are already clipping away at about mid-single-digit growth rates, with some nice tailwinds here going into next year. In the process systems business, we haven't seen the same kind of lift yet, although there is a fair amount of optimism in the air, as you may know. We're focusing on the process side on continued improvement in our execution. We expect next year to be a flattish year for the industrial in aggregate, which would be improvement over this year. We don't expect, unless something fundamentally changes here in the macro, a significant upside.
Jeff.
Thanks. Just back, one more on Pall. When I think about these applications where you've been specified in the manufacturing processes, are those sole source specs? If they're not, can you address maybe if you're one of several that have reached the specification, kind of what your share capture is on those sorts of projects?
Sure. In the majority of cases, these are sole source specs. It depends exactly where you are in the process. The most critical areas in the process, deep in filtration, viral filtration, those are typically sole specs to not introduce variability into the process and along that, with that in the therapeutic. Around the process, where you see air filtration and other types of filtration going on for the inputs into the process there, you might see a dual spec of this sort. I would say that we are very well represented in both the specifications and the sole specifications, as well as around there. In fact, we have particular strength around the process as well.
We can go last one here, Steve.
Thanks. Good morning. If I think about your businesses relative to the broader Danaher portfolio, I'll put my own lens on it, I think about your business as it's probably more likely to see some benefit over time in the event that we do have a pretty substantial infrastructure build, infrastructure push here in the U.S. It's been a long time since we've seen that type of focus, we have seen that type of focus in other countries. I wonder, as you think about multi-year planning, how you think about the importance of a greater emphasis on infrastructure in the U.S., where you've seen that before. Any thoughts there would be really helpful. Thank you.
Sure. Specifically, these questions are for Pall? In turn Is that correct?
Pall on water.
Okay. Did you want to?
That's all right.
Okay. On the Pall side, we for sure see an opportunity in the infrastructure spend, particularly as you go into oil and gas, energy, if we're upgrading refineries and this sort of thing. Pall can play a pretty significant role there, particularly in our process business. That could be of interest. As I said just a minute ago, we're hearing about all the hype, but on average, we're from Missouri on this one and want to see for real that we see an improvement in the demand pattern.
From a water quality perspective, we're not in big infrastructure, of course, but when we do see infrastructure investment, we do see improvement in our market. Clearly, if wastewater, drinking water facilities are built specifically in high-growth markets or even domestically, we will see an uptick with that, but it's definitely a wait and see. More industrial investment, that also provides opportunities for us as well.
All right. Okay. Thank you.
Thank you very much.
Guys, thanks very much. Just before we go to break, some of you may recall last year, we
did away with an extra umbrella or a tote bag or a pen and pencil set that you could take with you as a gift. Instead, we decided to make a charitable contribution as a function of the event today. We're going to do the same thing this year. I know some of you would probably prefer with the weather coming, perhaps a wool hat and mittens, given the forecast for later on today. The charities that you see up here on the board, each of whom have some additional detail associated with them out in the lobby during break, are the charities that'll be a recipient of a gift that we'll make on all of our behalf following this conference and as a function of and a representation of the season of giving. With that, we're going to take a break.
It's just a minute or two after 11 o'clock. I'd ask that you be back in your seats at 11:15. We're going to start promptly at 11:20. Thanks very much. Well, welcome back. Next up, we're going to enter the world of diagnostics, Arnd Kaldowski is going to join us here in just a moment and share with you the many exciting things that have happened in our diagnostic platform over the last year. Not the least of which, of course, is the acquisition of Cepheid, one of the most exciting and strategically important acquisitions that we've done in the past year. Not only is the acquisition of Cepheid important, but some of the tremendous growth that's happened through the investments in new product innovation, and particularly the progress in driving growth in the high-growth market. With that, Arnd, come on up and let's get into diagnostics.
Thank you, Tom. Good morning, everybody, and welcome back after the break. It's a pleasure to share with you the progress as well as the highlights of the diagnostics platform in 2016. To orient everybody, I want to give a quick overview on the diagnostics platform and the market we're serving. We're playing or we're addressing a $35 billion part of the in vitro diagnostics market through four operating companies, Beckman Coulter, Leica Biosystems, Radiometer, and with the recently closed acquisition of Cepheid in the molecular diagnostics. You heard Tom earlier talk about how much we appreciate razor/razor blade businesses, and you can see here from our revenue share that 80% of our revenue within the diagnostics is coming from consumables. Also, high exposure in a positive sense to the high-growth markets, with more than a third of our revenue coming from the high-growth markets.
Our market has stable growth drivers, the high-growth markets continuing to invest into healthcare, a move to preventive and predictive medicine, particularly important for diagnostics in the genomics and the molecular field, helping on that type of preventive and predictive medicine. Then a continued demand of automated solutions to help our customers with the continued shortage of skilled labor, and at the same time, the cost pressures on them and their institutions. From the highlights in 2016, we were able to drive productivity and continue to fund growth as we've done in the years before. In numbers, you see an operating margin improvement of 100 basis points while we were continuing to grow our R&D capabilities and capacity, as well as our feet on the street, especially in the high-growth markets.
We were able to increase our momentum from a new platform launch perspective, particularly in Beckman Coulter Diagnostics, where we have launched new products over the last 18 months, which have revenue potential three times as high as in the period before. From a market perspective, continued share gains with Radiometer and Leica Biosystems, especially in blood gases, point of care immunoassays, and advanced staining. Seen good growth in the high-growth markets. A couple of them not as strong as they were in the years before, but in general, a good performance here, particularly in China and in India. Then on the M&A side, as you heard throughout Tom's presentation, the acquisition of Cepheid, which closed about six weeks ago, early days, but a very good start with the team there on the ground.
We're excited about that strategic investment because of the growth potential Cepheid has in that market space due to its unique value proposition, and I'll go a little deeper on that in the next pages. We're also excited because we see the potential to use DBS as well as access to the broader diagnostics platform we have to enable top-line growth, as well as significant improvements on the operating margin side for Cepheid. I want to go a little deeper on Cepheid and to get everybody a first-hand impression, I want to share a video here before I go into the slide. Can we start the video, please?
Since the introduction of the SmartCycler system in 2000, Cepheid has been at the forefront of molecular diagnostics innovation. In 2006, Cepheid introduced an even better way for any healthcare facility to leverage the power of molecular diagnostics. Since then, on-demand accuracy, speed, and ease of use have become synonymous with the platform and associated tests. Today, with nearly 11,000 systems worldwide, Cepheid innovation is rapidly expanding access to a technology once reserved for only the most sophisticated laboratories.
Cepheid is an exciting addition to our diagnostics portfolio. Molecular diagnostics is a technology which enables the clinician to analyze DNA for various sample types to help diagnose for many different disease, like infectious disease, cancer, and others. Cepheid, over the years, has created an outstanding franchise in the molecular market due to its unique value proposition, with the opportunity to take advantage of the underlying growth and the decentralization of testing, which we see on the molecular side. Cepheid is a global innovation leader with a unique value proposition to the customers, and that unique value proposition comes from two different pillars. On the one hand, a unique product architecture, which enables to bring molecular testing to decentralized positions closer to the patient, and at the same time, a high focus and a broad development and availability of menu, which they offer.
If you had a chance or have a chance later on for the product demos, you can take a look at the product. When I talk about unique product architecture, it's all centered about what we call a smart cartridge. All of the chemistry, all of the sample preparation is in that cartridge for a unique patient sample. The clinician or the technician just needs to inject the sample, and everything gets taken care of by the system from there. This is paired with a simple product on the hardware and the electronic side, far more simple than the normal diagnostics instruments we're used to because of that smart cartridge. That gives the opportunity to, on the one hand, have a low investment because it's such a simple instrument. You can scale it. You can see it here on the picture. You can see it outside.
It's available with a single module for the easiest instrument. You can scale up to 80 different modules in one installation. Really allows the customer to buy with a low capital investment into molecular at the starting point and scale up over time. At the same time, this is simple to operate and allows less trained technicians to run the test and get consistent results. Really in line with those challenges I shared earlier for our customers and the ability to decentralize the testing. From a menu breadth perspective, Cepheid has developed a menu which is three times larger than the next competitor. If you take those two things together, the scalability as well as the broad menu, you can see lots of organic runway here from a growth perspective.
Now, with Cepheid and Danaher together, we can really accelerate our initiatives, our strategic initiatives in the molecular space. If you think in terms of leverage and opportunity for Cepheid, they're now part of a group of companies which has a large infrastructure and many different touch points with customers across the different laboratories. Laboratories where molecular is on the edge of moving into. Lots of runway in developed markets, even more runway in the high growth markets, if you think about the scaled market access we have in high growth markets on the Danaher side, and Cepheid just really being at the beginning of penetrating those markets. At the same time, lots of growth runway from a penetration, deeper penetration, even in the developed markets with this unique product architecture and this ease of use.
There's just a third of the hospitals in the U.S. today, the larger ones, who actually have molecular testing in-house. Significant interest to in-source this kind of testing and a simple instrument for low volumes at the start, which you can scale up, really gives you that runway. Now, similar to what you heard about the Pall story from Rainer, as well as people who know us longer, Beckman and other acquisitions we've done, significant opportunity from a DBS perspective. Clearly on the bottom line, but also with regard to driving the top line together with the tools we have and this great product and this great positioning. Let me elevate back up to the Diagnostics Platform, talk a little bit about the positioning and how we win in the marketplace.
By now we have, through many acquisitions as well as organic initiatives, a broad range of product offerings for clinicians in the hospital, covering almost all laboratories you can think about and offering unique value there. We have a scaled global distribution and service network serving a large base, which puts us in the position to have a high customer support level as well as a fast response time on a global basis. Our customers have the need to continue to elevate their laboratory services. That means improving outcomes as well as improving efficiency, and that's key to our success to help them on that journey. We have a differentiated position in all of the outputs which we have with regards to leading automation solutions.
First in the individual instrument, which we develop with a unique understanding of the underlying workflow and optimize even from a sample preparation, sample handling perspective, but also with regard to automation we provide to link instruments, and provide the appropriate IT tools to that. We've increasingly embarking on supporting our customers with what we call a DBS service, where we have DBSLs, which actually go to the customers who are on the lean journey in their laboratory and help them improve their own efficiency and productivity. Those colleagues set up daily management with the customers. Those colleagues drive Kaizens and are really on a continuous improvement journey with the customer together. This offers us the opportunity to not just have transactional relationships, but really elevate many of our relationships to customers to a strategic level.
From a growth tool perspective, I want to focus on two, one around Speed Design Review, which helps us on the new product innovation, then the other one on Transformative Marketing in the following slides. There, a two-prong approach: continue to invest in being closer to the customer, driving the customer intimacy, and helping the customer on the ground. At the same time, deploying the appropriate DBS tools to take advantage of the investment we're doing there in the fastest possible way. By now, we are not just focused on sales coverage, which was kind of a first phase, but we're really building stronger commercial capabilities on the ground, including marketing, scientific skills, as well as application skills. You can see the numbers here.
We continue to invest in the large high-growth markets. We take more and more markets direct, but really the majority of the lift comes out of the Chinas, comes out of the Latin Americas, and the Middle East, where we continue to broaden the team. There's a third theme which we have started to embark on in our high-growth market strategies. Still somewhat early, like our Leica Biosystems has started this a couple of years ago, and that's around localizing products, particular for China. We've built a dedicated R&D team for Leica Biosystems in China. In the last 12 months, we launched the first two products developed by this team, manufactured in China for the local needs, for other high-growth markets, but also for other price-sensitive customers in developed markets. Beckman has embarked on the same journey two years ago.
We all opened an R&D center in Suzhou focused on instrument development for the lower-tier customers, as well as broadening our menu with local development. The second key initiative from a growth investment in DBS perspective is new product innovation. Similar playbook as you heard on the high-growth markets, really using the improvement on the gross profits and investing into more capacity and capability. But particular on Beckman DX, we were behind with regard to the sheer capacity we had to innovate product when we acquired the business. And you can see here the ramp-up of resources over the last three years, more than 25% across the platform, but more than 30% more R&D people in Beckman Coulter over the last three years, and really building the ability to drive more projects in parallel and getting more product out.
At the same time, DBS tools like Visual Project Management and Speed Design Review, which came to the Danaher toolbox over the last couple of years. Lots of training from the DBS Office and support here, really taking the lean principles closer to the new product development. You can see a master schedule in Beckman here, where we bring all of the information on a daily basis to the cross-functional team on how we're doing in the project, elevating bottlenecks, risks, retiring risks early on so that we really get to a high predictability of our development process. And you can see the results here, a significant improvement in predictability of the time lengths as well as from a time to market.
One metric to look at is what I would call the product launch cadence. Over the last 11 months across the platform, we've launched eight new instruments in all three operating companies, while the 18 months before we just launched two. Lots to look forward to from the impact of the instruments with regard to their top-line contribution. In summary, we've built a full-scale offering across the clinical diagnostics at Danaher. Cepheid really helps enhance our molecular diagnostics offering and across the entire platform. The DBS growth tools accelerating new product innovation and going deeper in the high-growth markets. Thank you.
Thank you, Arndt. Tremendous progress, across the diagnostic platform. Operating margin improvements, you saw the 100 basis points, I think when you get to the back end of Arndt's presentation and you see the investments that were made consistent or in concert with those operating margin improvements. R&D investments, Beckman Coulter Diagnostics up 30%. Great examples of how DBS has an impact on improving the cost structure of businesses, at the same time taking some of those improvements and continue to invest in the interest of innovation. Clearly, some breakthroughs in terms of time to market and some tremendous progress in terms of feet on the street and commercial execution in the high-growth markets, which has been a key source of growth for the diagnostic platform for some time.
We expect that it will continue to be as those high-growth markets continue to mature in their investments in healthcare. Now we're going to turn to the Product ID platform. Joakim Weidemanis is going to come up and share with you the wonderfully consistent performance that we've seen in terms of core growth in the platform. Joakim has led some of the development of some of the most important growth tools that are new to the Danaher toolbox. By applying those tools at Videojet and throughout the Product ID platform, we've seen continuous improvement in growth rates all along funded by great improvements through the tools of lean as well. Joakim. Oh, did you bring me a treat?
Not yet.
Thank you, Tom. With a name like that, I'm obviously incapable of talking about baseball or football. I'm from Sweden. I do know a little something about what this is, and hopefully even those of you in the back, although you can't read this, you'll know what this is. This is a typical customer of the Product Identification platform. Great platform where we help brands like this succeed in the marketplace. We help them with software solutions that design this packaging, that help them collaborate cross-functionally and work with their suppliers. That's the Esko business. We have the X-Rite and the Pantone business, who help them define what colors to use in their consumer goods. Color is a key criteria in how we, as consumers, choose products.
More importantly, also be able to manufacture this blue, whether it's in China, in Sweden, Mississippi, or here close to New York City. Finally, of course, Videojet, that you've heard about already today. On the back of the package or on the juice package, you read what we print every day. You probably did this morning, where you read by when it's safe to consume this product. That's more or less what we do in a Product Identification platform. You're welcome to have some of these cookies after the presentation here. It's a great platform. I love this platform. We've been able to drive consistent mid-single-digit growth here for quite some time, and on the same time, add solid margin expansion every year.
There are some favorable market drivers, for sure, but I'm very proud of the team and how we've been able to pick up the growth a little bit with some of the DBS-oriented tools that Tom mentioned. More recently, we've picked up the pace a little bit on the innovation side as well. We've got a healthy mix of consumables or, let's say, post the initial sales mix here, and it's growing, driven by what we're able to do on the services side of our business and the software side of our business. In terms of drivers, as you can imagine, the manufacturer or the owner of the brand that I just showed you there thinks of that brand, the Appearance of that product, as one of their most important assets.
To be able to manufacture that exactly the way they had intended it, the way they designed it, to do that all over the world and to preserve brand consistency is incredibly important for them. Helps our business. The consumer concerns around safety of products, of course, helps drive and fuel some of the growth that we see in terms of giving products unique identities. Then lastly, you might not think about it, but a package like I just showed you is an increasingly important part of our customers' marketing campaigns, how they drive demand. Some of you might remember that Coca-Cola, for example, started selling products with individuals' names on them. You'll see the Super Bowl version of the beer can and so on. They're tying the packaging to driving demand.
As they do that, there's a greater need for the kinds of tools that we offer. Couple highlights from this year. We're very pleased with the progress here in terms of growth. Like I said, we've been able to pick up the pace a little bit on the innovation side of things. Esko, our software business, launched their Suite 17 here most recently. Really nice pickup, where we keep on adding capabilities that allow the large consumer goods brands to do more through our software system, and thereby be able to more efficiently collaborate within their organization as well as with their suppliers. The big news from X-Rite this year is what you'll see outside here over lunch, which is really moving beyond just measuring color. We're now able to digitally scan and render close-to-reality Appearance.
Appearance is how we perceive different products, which is more than color. It's texture, it's gloss, and so on, and I'll come back to that a little bit. On the Videojet side of things, we've been able to accelerate our service business very nicely, and I'll talk a little bit more about that here a little later today. In addition to that, we're actually in the middle of a 12-month period, which is the most intense period in Videojet's history in terms of new product launches. We have a number of very interesting things that are on their way here to the market in a few years. Sorry, in a few months. Coupled with that, we continue with our solid DBS execution, and we're driving more than 100 basis points of margin improvement this year. I'll show you a few examples on that here later.
The two bolt-on acquisitions that we made about a year ago are helping us win more deals with a little larger scope. The MediaBeacon digital asset management bolt-on to Esko allowed us to win a major deal with one of the world's largest food companies here more recently. The latest acquisition in track and trace has allowed us to accelerate our growth in the pharmaceutical business. Some very nice progress here for 2016. Let me paint a broader picture for how we're building this platform and how we think about how we differentiate and win. This is a depiction of what happens in the packaging value chain. If you start on the left, it's really the large brands, consumer goods brands, who define concepts for new product strategies.
They move on to designing packaging, preparing the designs for being manufactured, which is here called packaging printing, which are typically suppliers of theirs. Then those packaging materials come back into their plants, where the cookies, in this case, are put in the packages. That's, of course, where they get their unique identities, and then they hit the retail shelf after that. We entered this world more than 10 years ago with the acquisition of Videojet. Great company, great market position. Over the last 10 years, we've added about 12 bolt-on acquisitions to add technologies as well as channel access and built even more differentiation. On the same time, of course, we did a number of organic things as well to drive the differentiation there. More recently, we bought this track and trace company, Laetus, that's mainly focusing on pharma.
It really helps us. In a very simple way, I could say it helps us as individual consumers be able to pick up a package, a pharmaceutical package at the pharmacy, and by scanning a barcode, tell if that's an authentic product and it got there in the right way. Four or five years ago, we started to extend our capabilities on the left-hand side of this value chain with the acquisition of Esko. That acquisition then led to that we added X-Rite and Pantone with the color capability. Over the last few years, we've integrated those solutions so that when the big brands design their packaging in the Esko workflow solution, they're immediately picking up and getting access to the X-Rite and the Pantone color management tools. The same thing is true for the manufacturers of the packaging materials.
Seamless integration of the two leading solution providers when it comes to packaging design as well as manufacturing. More recently, we added the MediaBeacon digital asset management solution, which is really about as you design thousands and thousands of packages, you tie those to marketing campaigns. There are a lot of digital assets to keep track of. This is sort of the library and the distribution machine for these digital assets that are created. We have a unique position. There's no other player in the world that has a portfolio and as differentiated as we have in this space here. If I simplify, what we're trying to do is we're really trying to help the players who play, the customers who play in this value chain.
We are trying to help them collaborate in an easier way with some value-added tools to simplify what they do in each step, but also simplify how they can collaborate. In that way, simply put, just get to market a lot quicker than they were in the past without the tools that we have, and obviously, in that way, reduce cost and maintain quality. You heard earlier today how many of my colleagues in their businesses have applied DBS tools. I will give you a few examples as well. Maybe the one add I will make here is that DBS is really a set of tools and ecosystem that continuously evolves. As Tom mentioned, some of these tools have been developed in Videojet, and I will give you a short view into what that looks like.
Before I do that, I said we have been able to accelerate the growth a little bit. One way that we were able to do that is just to make room for growth investments. We are more than 10 years into the application of the lean tools in Videojet, but we continue to eke out margin improvements and room for investment by applying these tools. You have a few examples here. More than 60 Kaizens in the last year. These are cross-functional, very focused, couple of days improvement events with people from different parts of our company. We have a mantra around driving productivity and material cost improvement sort of in the 5% range. We continue to do that year in and year out with the help of the DBS approaches that we have.
Those approaches we have extended into other commercial areas in the company, and one of them is marketing, that we launched into about four years ago. Simply put, what this is about is making sure that we are able to find all the potential customers out there. There are 1.5 million plants in the world that we could sell to. We need to know on average three people in each plant. There is no database you can go buy anywhere. You need to figure out how to do that at scale economically yourself. You need to find a way to communicate with these people, and they need to listen to you, so you need to earn the right. At the end of the day, what this is all about is really driving revenue to new customers, people we did not know before or who we could not do business with before.
You can see here our trajectory of new customer revenue that is helping fuel growth here. All in all, the marketing initiatives adding more than a point to our growth in that Videojet. You see some statistics here around how we have been able to grow, how many people we know, as well as how many, and that is the organic comment here, how many people actually start reaching out to us independently, not us reaching out to them because of other marketing activity we have done. Obviously for the sales force, serving up qualified leads makes them more productive, so we get more out of the investment we have in an already very capable sales force. We have expanded our service business. This has helped us add another point to our growth.
We started a few years ago by simply doing a better job on commercializing the service offering, selling it better, marketing it better than we used to. We then evolved to having a much better understanding of what the needs of the different kinds of customers that we have are. You need to keep in mind here that most of our customers use our products for eight to 10 years. Some are high-volume manufacturers, some are low-volume manufacturers. So by a deeper understanding, higher customer intimacy, we were able to construct a much more intelligent and compelling product portfolio for them. Of course, we saw that we could augment this business, drive even faster growth if we were to harness the promise of the Internet of Things, remote service, remote connectivity, analytics. A solution set that we launched about two years ago, first mover in our industry.
As you can see from the charts here, we are rapidly ramping up the amount of printers out in our install base that are connected to our service offering. I think we're building a very interesting competitive advantage here, and we're so early in this game. It's exciting what's to come. The last example I'll give here of how we apply DBS and PID is around a breakthrough innovation in X-Rite that I alluded to before. We have the demo up here. Let me give you a little bit of background here. Color, as you saw from this package I showed to you, is a major factor in how we, as consumers, decide what to buy. Color is sort of an approximation of what things really look like. Appearance, texture, gloss, things like that are other attributes of what things look like.
If you imagine, maybe some of you have bought some sports shoes here more recently. Please buy more. Don't listen too much to Dan's basketball stories. If you have, you will notice that the choice you have, different materials, different colors, has grown exponentially over the last few years. It's basically because these companies compete on what their products look like. The challenge a company like a sports shoe manufacturer has is that somehow they need to offer all this choice, but they can't make 1,000 variants in their factories, right? So they have to get to a point where, in the design phase, they open things up, and they look at all sorts of materials and combinations and colors. But at the end of the day, they have to make a choice.
These are the 50 variants, not the 300, but these are the 50 variants that we're going to tell the factories to make. The challenge they have is that they have to mock up those 300-ish variants in the real physical world. They can't do it with high-definition photography because it's just not close enough to reality. What we're launching, already launched, is a way to digitally scan various kinds of materials that you would use, for example, in manufacturing these shoes. Then we're able to, in a very near reality way, render that digitally. You'll see it out there, and it's in a three-dimensional way. In that, what we call the virtual booth, you can spin the product and see what it looks like in different light conditions, and you can hold up a physical something else product and compare to it.
Now these people, who in the past were making 300 or so physical examples, and all the material and logistics involved in all that, they can do this digitally, and they can make their choice to say, "Hey, these are the 50 variants we're going for digitally." It reduces their time to market by close to 60%. Of course, you can imagine there are a lot of cost savings involved in this as well. Very exciting product. We just launched it, and very pleased. We got to market earlier than we had expected by applying some of the DBS tools that we have around new product development. We're very excited about this product. Hopefully you were able to see today how we've been able to extend our capability throughout the packaging value chain in a very differentiated way.
By leveraging DBS, we've been able to accelerate our growth as well as continue to drive the margin improvement. Thereby, we've been able to outgrow our market. As a last point, I'd say that even though we continue to do bolt-on acquisitions, there are still many more opportunities for us out there. Thank you.
Thanks, Joakim. You can leave those cookies if you don't-- I mean see you at break. Obviously, a fantastic track record, not just at Videojet, but throughout the product ID platform. Terrific growth and operating margin improvement in 2016 is no exception to that continuing track record. Now we're going to turn to dental. Amir is going to join us in just a moment and share with you the progress that we're making across a platform that, as you heard us mention a couple of times today, we're really thinking about just as if it were a newly acquired platform. The reason is we wanted a new headset.
We wanted to have a recognition that we had done a number of acquisitions in this platform and that we hadn't yet made the kinds of progress that we knew we could make if we took a more aggressive approach to driving the operating margins and improving the trajectory of growth in the business. We've made some management changes over the last 12 to 18 months, I think we're starting to see the beginnings of those improvements. We've seen them on a year-to-date basis. Amir is here to tell you a little bit more about what's behind our improvements in dental and the exciting things to come.
Thank you.
Welcome.
Let me start by introducing dental back to you and what this industry is. 1.5 million dentists. They are in 4 different aspects, 4 categories. They either have private practices or they are in a specialist, orthodontist, people who are doing very specific type of work. Group practices are coming in here and making a huge difference by expanding the market as a whole, opening new offices. Then you have the traditional institution, schools, universities, and many other places in army and hospitals. The macro driver around this industry are extremely positive. You have aging population, high growth market growing, giving access to new generation of people that having access to dental care for the first time. IT and digitization is coming to this space, and this is something that is rapidly changing the industry as a whole.
Last but not least, pain management is the first reason people are going to a dentist office. The quality of life improvement as well as self-esteem. Cosmetic becoming an important factor in this industry. About a $20 billion market. We have about $2.8 billion business in here, and about mid-teen operating margin. 70% of our business is consumable, 30% equipment, and we are expanding rapidly, diversifying this business from a geographical point of view. Still, North America plays an important role, and by adding resources and expanding our capability, we can, a term that we tend to use, democratizing dental healthcare, giving it to as many people as we can. Tom talked about approaching this as a new acquisition. I want to touch on 3 specific thing, what we have done in the last 12 months alone. Improving the performance trajectory.
100 basis points of a margin improvement over the last 12 months. Low single digit. We have had Nobel Biocare as part of our portfolio in the last two years. Over 500 basis points of a margin expansion. That has given us opportunity to invest in R&D, to extend our sales and marketing capabilities. Since acquisition, introduced 20 new products in Nobel Biocare portfolio, and we're just getting started in that area. Our wires and bracket, our equipment business, Ormco and the traditional KaVo business, beginning to show momentum and growth, not only on the top line, but we are beginning to get margin expansion in these businesses. Plenty of room for expansion. We are investing back in the business. We spent over 10% in our R&D in the last 12 months, an additional 5% in our commercial activities. Second aspect of this is about high-growth market.
We now have over 500 people facing customers in these geographies. Over a 6-year time period, we have increased our business in China by 10-fold. We have an opportunity to continue to extend that and step and repeat that model in various high-growth markets. Last piece is about scale. We're beginning to integrate many pieces of this beautiful business to make it better, make it stronger, coming together. We're consolidating our back offices. We are looking at manufacturing, bringing DBS to this platform. We start consolidating some of our go-to-market and channel activities, specifically around equipment and consumables. This is a journey that we have gone through and the beginning of the next phase of this platform. Over four and a half-fold increase in our top line, 900 basis points of improvement in our margin.
Our operating margin is in mid-teens, but we have opportunity and runway to continue to extend that over time. Our high-growth market now is over 20% of our business. Our R&D is spent 6-fold in the last 10-11 years. We are able to do that through rationalization of our brands, through our consolidation of our capabilities, investing in R&D and growth, and continue to improve the cadence of new product innovation. Bringing the product to the market that dentists want and consolidating our equipment, consumables, and specialty businesses to give the best possible choices to those that they're trying to expand their business over time. How do we win in this business is through the capabilities that we have today. We have brands that have been out there for 125 years, well-known in the industry.
We're going to continue to leverage those brands and build around them, try to integrate the pieces that work together to make life easier, to bring efficiency and effectiveness at dentist offices, in universities. We're going to try to provide all clinical needs. As dentists expand their businesses, we want to give them the capability that they can expand their office and tool sets. We have over 3,000 customer-facing resources today. Over 50% of our business is sold direct. We have a fantastic relationship with our partners, and we're going to continue to build on it to reach as many customers as we can. Training plays an important role in here. Over 2,000 courses per year. We teach, coach, hand-hold, and continue to help our customers to become better, more efficient in what they do. We continue to be present in over 99% of dentist offices.
We're doing that through leveraging DBS in this space, through growth. By applying DBS, we are creating room so we can invest in R&D. We can invest in high-growth markets through resources that allow us to expand our capabilities. We are applying lean to this platform. We're looking at the manufacturing, procurement, and many back offices to make it more efficient, to create margin opportunities that we can invest. Talent, an important part of this equation. Talent from other parts of Danaher, as well as bringing new capabilities inside this platform and develop them for the long run. I want to show you a picture of what we have today and what we want to build over the years to come. We have some of the best brands in the industry. Point solutions on equipment, consumables, and software.
When you look at the workflow in here, you start by going to a dentist and getting diagnosed. What challenges you have, what problem to be solved. You start using that as an opportunity to develop a treatment plan. Connect that to be able to execute. Provide tools in here that makes that job as efficient and effective as possible. To bring the people so they can do complex procedures through digitization as easy as possible. We have the capabilities today, and through the acquisition of Nobel, we are able to leverage that to connect various pieces to create this digital workflow in order to be able to do various specialties.
That's the broad vision of what we intend to do. We're beginning to build the pieces of this puzzle by creating the capabilities inside the organization organically. Start building it and introducing it one piece at a time. We mentioned about introducing this platform as a new integration and acquisition opportunity. The step 1 through this process is building a DBS culture. We have started that through the lean integration and migration. We're looking at our manufacturing capabilities, our procurement, quality, and delivery. I want to give you the outcome of that and a specific example. This is a result of the last 12 months, 75 basis point of a growth margin improvement. Over 50 basis point of a G&A reduction. We have been able to invest in R&D and improving our operating margin.
This gives us the confidence and the runway to get to a 20% margin over the next four to five years. To be very specific, applying this to very specific part of our business, in our own core business, over the last 12 to 18 months, we have brought DBS to life by doing a series of very specific tangible activities. Using tools that makes assembly and production easier, bringing inventory to the production line through the Kanban system. Looking at the flow of how we build things and taking waste out of the system. The outcome of that has been we have shrunk the footprint by 15%, we have increased the inventory turn by twofold, we have reduced the cycle time of how we build product by 35%, and we have 50% higher throughput.
What that does for a customer is you're able to get the product 20% higher on time delivery than you had before. It gives us an opportunity to reduce our past due shipment by over 75%. When we make a commitment, we are able to deliver on it now. Improve productivity, improve yield. Do that traditional standard DBS model in here. Use that in order to invest. Invest in R&D as we have done 10%, build a margin that is required for this business to be a business for the long run. Continue to grow the business through expansion of commercial activities. This model now can be applied across Dental. We're beginning to get the momentum that is required to make that an example of a platform that has plenty of runway inside Danaher.
In the last 18-24 months, we have gone through a transformation that has just gotten started. We created a framework that has 3 key pillars. Pillar number 1 is around building a foundation that is sustainable, that is repeatable. You saw many example of it today. We want to be able to create that for years to come. We want to create an opportunity that we can rejuvenate innovation and growth, and we want to create a model that create this seamless workflow integration. Activities that we are taking, actions that we are taking, lines up with this specific pillar approach. We went for more than 10 operating companies. Every one of them have their own CFOs and president, back offices, very specific approach, limited overlap, limited opportunity for collaboration. Significant amount of G&A. We have brought them together. We have reduced our manufacturing footprint by 30%.
We have created a scale around application software knowledge. We are ramping up our R&D and we are unifying our go-to market, the specific geographies, duplicating the model that we talked about in China. We are consolidating our brand. We have had multiple brands through acquisition, that we are bringing it together, platforming it, giving people opportunity to invest and grow with us in the long run. We are positioned well. We have the product portfolio that is needed in all aspects of the dentistry. The cost-saving opportunities through integration of DBS has just gotten started, and plenty of more opportunity for us to apply that into our commercial activities, as you saw example of it, as well as on our Talent. We see a runway to 20% margin over the next 4-5 years.
This is a business that it is well-positioned inside Danaher, is understood by the customers that we serve, and has a great opportunity to help the people, the communities that we serve. With that, let me ask Arnd and Joakim back on the stage to answer any question that you have for us.
Thanks. Maybe to start with dental. This reposition that you've done clearly has delivered some nice results after, I think, some frustrating years, so it's encouraging. In terms of having line of sight to that 20%, why hasn't a lot of the, I guess, benefit already been achieved in this initial reposition? What gives you the confidence that this is going to be a multi-year steady pace?
Yeah. We have multi brands in various spaces and capabilities distributed worldwide. We need to be thoughtful about this transition. We need to be thoughtful to bring our customers and our associates with us. We have wonderful relationship with our partners. We want to make sure that they are all part of this journey. Step by step, make sure that it's repeatable, we can depend on it, we can build on it moving forward. Innovation plays an important role in here as well. Revamping the innovation requires time, and we want to make sure that we are not doing single product. We want to make sure that we build the pieces of puzzles that allows us to bring all of that together. That's the intention of having a 3-5-year horizon, and every step of the way, making those milestone along the way.
Hi. On Cepheid, just curious about how you're looking at potential for revenue synergies between those. We know that there's about 1/3 of labs that are molecular. I guess when you look at labs where Beckman Coulter is already positioned, do you see opportunities for selling into those markets? I guess the question I'm getting is, where's Beckman Coulter pushed into labs that don't have a molecular business already and sort of what your opportunities are. Once again, the other question, one that overhangs on Cepheid was always on the operating margin and the gross margin, trying to get that. Can you sort of talk us what you've seen initially for looking at business improving the margin on Cepheid?
From a revenue synergy perspective, I think it's given the many different points where molecular can land in a hospital, it's really a multi-tier answer. I think with regard to the high growth markets, I talked about that. Lots of runway with regard to just giving access through the distribution channels and now with people on the ground. If you get more into a developed market environment, I think there's a couple of different laboratories which can benefit from molecular and where Cepheid hasn't built that channel. One of them is in the anatomical pathology, where the efforts to get into oncology will build a nice entry point through the Leica Biosystems market access. Hospital point of care Radiometer with a more and more decentralized testing towards the emergency departments in the OR.
Between the Cepheid and the Beckman side, I think the first one to see is we do have two different product architectures. We have the Cepheid more low volume, high mix type of instrument, and we have, with the Veris, the entry into the high volume, lower mix. I think they end in very different locations now. With regard to Cepheid, continue to drive their market access there. Beckman continue to drive more towards the core lab with what we are bringing out on the Veris side. If it comes to integrated delivery networks, really getting together and joining in the discussion with somebody who thinks about the whole hospital.
From a gross profit perspective, I think Cepheid is on a good path with regard to the things they have shared over the year, with regard to the initiatives they have themselves put in place and which we help to de-risk and drive with DBS, which are about insourcing enzymes, which are about significant positive benefit from royalties which are rolling off. A significant lift into 2017, and then continue taking advantage out of a DBS approach with regard to efficiencies, PPV wave, and the ability to continue to drive the cost position there.
I just wanted to ask you specifically on, in diagnostics, HDRs, you've put up that chart, 10% or more growth for the last five years, when it comes down to it. You talked about continuing to work on localization and DBS strategy. At some point, the numbers get pretty large, right? You have to worry about it slowing down a bit, then you have the sort of political environment that's around us now. Cepheid is a good runway to continue the growth. If I look at ex-Cepheid, does it still feel like you have a ways to go in sort of localization that we can look at next few years as still close to that 10% growth?
I think from a go-to-market perspective and reaching more customers, there's a lot of runway there. I think there's not a significant change in the need for diagnostics, particular in markets which continue to bring that into the tier 2 and tier 3 cities and elevating the capability for more manual testing into more automated testing.
I think it's also fair to say that despite the investments we've done in Feet on the Street, there is a set of markets where we are still having opportunity to get to the same size of the Feet on the Street, given particular in Beckman, the limited investment outside of China and high growth markets when we acquired the business. I would believe there's a lot of organic runway there.
Thank you. Thank you, Cliff Francen. A question for Cepheid. If it's too early, you can pass it to one of your colleagues. I'm always intrigued how lean thinking, broadly defined, and DBS specifically, is used to change how you do your business. My question would be, have you thought about when you look at the priority for whatever your next assays, your next diseases that you're going to use in Cepheid, has lean thinking affected that versus the way they did it previously?
We've recently started what we call the 100-day strat plan. I don't have an outcome of that because the acquisition is so early. The Cepheid team is intrigued by thinking about their product portfolio, on the one hand, on how do we identify what has the biggest bang for the buck, how do we get the choices right? At the same time, thinking about how do we get the right amount of resources to the right projects and getting a high predictability when we're in the new product development phase. Clearly, they see the opportunity. We haven't taken any significant changes and decisions with regard to product portfolio, but I think they can see the opportunity in that decision-making process, as well as the clear focus on setting yourself up for success the way you're running the projects.
Last question. This actually
A couple questions for you, Joakim, as you stand up there. First of all-
I knew you would have one for me. Yeah.
The bolt-on acquisitions that are available to you-
Yeah
do they favor the upstream side of Videojet or the downstream side? Second question is, has the attachment rate on the service side of your business gotten to such a number that we're now kind of moving more towards a subscription-based kind of-
let me just say, remote diagnostics type of offering? Is that kind of where you were headed here?
Okay. Let me answer. The bolt-on we did on Videojet is this track and trace company called Laetus, which is half a software company. Although their solution is sold into the factories of the pharmaceutical companies, which is where Videojet plays, because of the software nature of that solution and how we integrate into the pharmaceutical companies, SAPs, Oracles, et cetera, it elevates who we talk to in the pharmaceutical world. It actually helps us reposition Videojet a little bit together with Laetus in the pharmaceutical industry, which is very beneficial for us. On the service side, we're still in the early innings of building that service business. It's about a fifth of the Videojet business today, but the contract attachment rate on the install base is still less than 20% globally. We have a lot of runway there.
To start talking about it like a subscription base and that the business model would change radically, I think is far too early. Of course, the whole objective here is to build a much larger recurring revenue stream for Videojet.
Guys, thanks very much. We head towards the finish line. Hopefully, you've gotten a sense today that it's been an exciting year for us and the team and the platforms, our businesses, have performed quite well. Solid core margin growth of our top line, operating margin expansion, terrific free cash flow, 25th consecutive year of cash flow in excess of our net income, and a continued track record of deploying free cash flow successfully, and most importantly, strategically to strengthen each one of our platforms during the course of the year. We also hope you've gotten a sense of the strength and the opportunity we have in the portfolio today, that there are terrific opportunities in terms of enhancing our growth trajectory, but also to expanding our margins through the tools that you've heard about in lean, in growth, and in leadership in DBS.
Finally, I'll end where we started, and that's with the Danaher Business System. It is our culture. It's who we are, and it's how we do what we do. It continues to be the foundation of our operating practices, and it continues to be the primary driver of our performance improvement year in and year out. As we look ahead now to 2017, we put the guidance out this morning. I'm sure all of you have that by now. Implied in that guidance is a core revenue growth rate of 3%-4%, and that implies also that Cepheid and Phenomenex won't come into the core and help to be accretive to that core until late next year, annualizing over the date at which we acquired the businesses this year.
The operating margin expansion is linked to a 35%-40% fall-through, which is a bit higher than what we talked about last year, largely as a function of the continued ramp of the operating margins at Pall. Not to mention the fact that we'll see the incremental benefits of the more newly acquired businesses. The incremental contribution from an EPS standpoint from Cepheid, Phenomenex, and the 2016 acquisitions is $0.08. Currencies obviously are a factor today, and as the dollar has strengthened against not just the EUR, but the JPY, the GBP, and the CNY, we're now looking at roughly $375 million of headwind on the revenue line and roughly $0.08 at the EPS line. We've linked to the EUR in the $ 5, $6 range.
We've used that kind of spot rate and implied that if that didn't change going forward, that would be the rate that we'd have throughout the course of next year. Obviously, time will tell. From a tax perspective, I know there's a lot of things moving around in the tax world today in terms of the future, but the tax rate we're using is 21%, which would be consistent roughly with 2016. Then finally, just for purposes of your own modeling, we've given you some guidance there in terms of the seasonality of EPS during the course of the year. You put all that together, and you get at our adjusted EPS guidance that we put out today of $3.85-$3.95. To represent that graphically and walk that forward, we start with the midpoint of the 2016 EPS guidance at $3.59.
We take that $0.08 of headwind that I talked about from a currency perspective. We get the benefits of productivity improvement, some lower interest expense, a bit of an offset in terms of inflation, share count, and the growth investments that we make every year. That gives us the $0.06 improvement. $0.08, as I just mentioned, coming from the acquisitions that we talked about, predominantly Cepheid and Phenomenex, but a few of the smaller deals. Then finally, that 3%-4% core growth dropping through at the range I talked about a minute ago adds the $0.20-$0.30, and that's how we come out with the $3.85-$3.95 for 2017, obviously implying an EPS growth rate from 7%-10% over the course of the year. With that, it brings us to a final session of Q&A.
We've got a few minutes, and we'll go ahead and take any questions that you may not have covered in the earlier sessions. Scott?
Thanks. Thanks, Tom.
Sure.
How do you think about portfolio balance? Meaning you've got a mix of industrial guys here, healthcare guys. Maybe that's good, maybe that's bad, who knows. Us industrial guys are a little dumber, so we're-
We love you all.
When you-
Yeah
look at forward deals
Yeah
does balance within the portfolio play into it? I guess where I'm getting at is that you have headline risk. If you're too much healthcare and there's a repeal of Obamacare, you have headline risk, and that impacts your valuation certainly. If you have too much industrial, you have too much cyclical risk. Does that matter to you guys at all, or not?
It's interesting to me personally as I've been with Danaher, as all of you I think know, for coming up on 28 years. I've seen the evolution of the portfolio over a long period of time. To your question about balance, you would almost think that we work on balance, that somehow that's a priority and that we've always tried to keep things in balance, because somehow, across the evolution of the portfolio, that's always happened. Yet, the reality of it is, as strange as this may seem, is that's never been a particularly driving force in terms of balance across the portfolio.
Maybe with the exception of, if you really step back, the broad evolution of the portfolio from being more industrially oriented and more cyclical into more science and technology oriented, which we've accomplished really over a decade, certainly under Larry's leadership, I think we've extended it in the last couple of years. We very much value, back to the point about industrial versus healthcare, even though we've made this shift to more science and technology, more resilient business models, better recurring revenue, we value being a multi-industry company. We value that level of balance that you talked about, where we're not purely a diagnostic company or a life science company or a dental company, but we have some balance because it's always served us well. It helps us offset certain cycles in certain businesses.
It helps us as acquisition opportunities come up. We value the balance, but it's not a primary driver in terms of the way we allocate capital.
Okay. That's fair. Really, as a follow-up, I think you only have about $1 billion of capital left to deploy, if we just think about it in terms of pure cash. We're walking into a bit of a potentially M&A sweet spot. There's a lot of assets out there for sale. We've talked to sponsors that have things that they'd like to get rid of that maybe aren't core, and GE's Water business is available, as I'm sure you guys are well aware.
Yep.
How do you think about stretching beyond that $1 billion? Whether the $1 billion is just literally a barrier that you can't really get past in the next six months or so?
Yeah, we've talked to a half a billion to $1 billion over the next nine to 12 months, we put that out as a rough framework, as an envelope. We've never treated those kind of numbers as hard numbers, as lines we won't cross. We've stretched in the past. For the right acquisitions, we'll stretch in the future. For the ones that make a real strategic difference, the ones that we covet, the ones that we've got to have because we know we're going to drive those returns over time, we'll stretch the capital envelope to get there. We value the investment-grade rating we have, we've always been able to stretch and then get back in fighting shape, we would do that again for the right deals.
Go to Ty Coates in the back.
Okay. Sorry for the lights. Ty Coates?
First question on distribution. In particular within Dental, where there've been some changes in the market, but for your broader portfolio overall, can you talk a little bit about how you think about working through distributors?
Sure. From the perspective of the overall corporation, we are somewhere probably between 65% and 70% or so direct. Within the Dental platform, we're about 50/50 direct and distribution. We view distribution as having an important role to play in a number of our businesses, particularly when you're talking about products that are probably lower price, faster turn, high utilization, low levels of customer support, technical support, and where reach really, really matters, where same-day delivery at times or next-day delivery is critical. Those aspects really make distribution a valuable partner. It's not valuable in a number of our businesses where technical support, capital equipment that requires a good deal of installation and ongoing support, and where the margins support a good deal of direct selling. Those are obviously attractive businesses to be more direct with your customers. I think we've got a balanced perspective.
Yes, there's some shifting sands around the dental market today, but, in general, we see distribution as playing an important role, but one that we think about carefully and strategically.
Just one follow-up on service. You talked a lot about DBS. I think you're starting to push that more to customers, going in with Beckman and kind of helping them optimize their labs. Seems like there was a bigger opportunity around Pall as well. Can you maybe just help us think about how you size the service opportunity?
Service is playing an increasingly important role in a number of our businesses. We deliver high-value service across a number of our businesses. They're increasingly becoming revenue generators, and they're accretive to our operating margins in a number of cases. We've also looked at the service opportunities in terms of the strategic value that it represents, in terms of the stickiness that we can create with customers. As we've gone through strategic plans over the last couple of years with our businesses, increasingly, investments in service and service-related technologies, such as what Joakim was just talking about with Rick, are increasingly important to building competitive advantage. Steve.
Tom. A couple questions. First, given all the changes that are being discussed in Washington and the scenarios that you guys are running, can you give us some sense for, if they were to go through, what the benefit might be from a tax rate perspective? How does Danaher stand to benefit in some of those situations?
Obviously, there's a lot being talked about within the context of a new administration coming in. Certainly, some things going on around in the tax world, certainly around trade, certainly around regulations, I think in a number of those cases, there could be terrific opportunities for the U.S. economy. I think any of those changes that are good for the U.S. economy and for corporations like us headquartered in the U.S., we would obviously think of as something that we'd like to see happen and happen rather quickly. From the specific question that you asked about tax, as you saw in my last slide, our effective tax rate at 21% is obviously pretty good and has been pretty consistent. If U.S. rates went to 20, there'd be maybe a modest impact on us relative to what revenue we have in the U.S.
If they went to 15, maybe a little better than that. In general, I think the impact's probably modest.
Export/import too, that would be the case, right?
Yeah, we're more of an exporter than we are an importer. If you look at finished goods, we skew towards exports. Our imports are more skewed towards the lower-cost raw material component inputs. I think in general, that balance will probably serve us well.
Okay. Strategically, you've made some enormous moves over the recent years, Beckman, Nobel, Pall, that you started off with talking about these things. Do you think that Product ID and Water give you enough, since given your comments to Scott on the fact that balance may not matter, but you like being multi-industry-
Yeah
Are those big enough adjacencies? Are the adjacencies to those large enough to give you scale opportunities-
Yeah
As you can see within your investable horizon?
Yeah. We think the adjacencies are quite large, and we do think it gives us an opportunity to continue to expand our footprint. I think the challenges are different, Steve, between the two. Lance mentioned, a lot of the space around us in Water is quite fragmented, and so it's likely to be a series of smaller deals, which by the way, deliver some of the highest returns. We love those small deals and we work to do them. We've tended to shy away from maybe some of the larger spaces that are more capital intensive, a little bit more lumpy, a little bit more cyclical, and inherently lower margin. We like the high value components and the higher margin of the more analytically oriented businesses. I think in PID, it's a little bit different.
I think a wonderful thing that Joakim and the team have done is they've been incredibly creative and thoughtful about the opportunities extending out of coding and marking. To work back in the workflow towards brand owners with Esko and X-Rite, now with Appearance, with Laetus and Track and Trace, with the opportunities they have in high growth markets, I think the mix is very different there, and I think you've seen the benefit of that with some more meaningful deals.
Over to Derek.
Derek.
Thanks. Two questions. One quick one just to clarify. Your tax rate for 21%, that includes some of the changes in stock option accounting and everything that's well done with it already?
I think that's right, unless Dan has a different view on that.
Yeah.
Dan is mic'd in back.
Our expectation based on 2015 and 2016, it will be a slight benefit. If we are 21%, 22%, because of the change of the accounting for stock option treatment, probably about 100 basis point impact, which might put us more in the 21% or a little bit south of 21%.
Great. Thank you. Just sticking with the M&A theme. Certainly in the Life Sciences and Diagnostics, you have stuck with a very technology concentrated, technology focused sort of strategy. Is there any need to go broader in those markets? Do a broader selection of analytical instruments as sort of offer to sort of augment what is going on with SCIEX? It is a question about are there gaps in your portfolio on the Life Science Diagnostics space?
Sure. We have been very comfortable, I think we continue to be very comfortable with the scale we have. We like the meaningful positions that we have been able to carve out in mass spectrometry, in flow cytometry, in microscopy, both in the Life Science side as well as some of the applied markets. I think in general, we are very happy with those positions. One of the things I think that we are most excited about in terms of an addition would be the Phenomenex acquisition in terms of the way it expands our consumables position. Because if you look at that Life Science portfolio, pre-Phenomenex, you could say, "Well, gee, you are a little skewed on the instrumentation side. You are probably lower on the consumable side." We think there are opportunities there, but we are also careful and selective about what represents a high value consumable, a sticky consumable, something meaningful to a workflow.
There's some places you could go on a commodity basis that are probably less attractive, lower margin, and frankly, undifferentiated. That's kind of the way we would think about it.
Hey, Tom.
Hey, Jeff.
Hey, how you doing?
Great, thanks.
Just back to, I guess, related to M&A, but more kind of the ROIC-
Yeah
approach and story from here. Obviously, if we think about what you did historically, a lot lower starting point on the entry multiples-
driving into those returns.
As we look at what you're expecting, you did put double digit on the chart, Should we expect there's kind of a lower terminal ROIC for some of these deals than maybe those earlier ones?
Secondly, kind of regardless of what you see ROIC trending to, how much different is the playbook to get there versus
if I think back to Fluke, which obviously is in Fortive now, but
big gross margin, low operating margin, family business
It's kind of obvious how you got there.
With these more kind of technology oriented businesses, it's a little less clear really.
Sure.
Thank you.
Thanks, Jeff. Clearly, as we've evolved the portfolio towards more science and technology oriented businesses, albeit still multi-industry, the premium to be paid to access some of those extraordinarily attractive assets has been a meaningful one. That said, I would not say at all that there's a lower terminal value, to use your term, on what we can do from a return standpoint. In fact, if there were, that could be a knockout blow to a deal. As we've said many times, if we ever thought that a deal capped out at, say, 10% ROIC, it would become unattractive to us because our track record over time is built on going beyond that number, and we've done it over successive number of years. That's a very important component of our calculus.
While the timeframe might stretch out a little bit as a function of that starting point, we absolutely would expect those returns to accrue into double digits over time. Relative to your question about the playbook, I would say the playbook in many respects is the same. To the extent that we're talking about newly acquired businesses that require the tools of DBS, starting with the fundamentals of lean, getting after whether it's the low-hanging fruit of public company costs or just getting after inefficiencies in G&A, driving gross margins through better procurement and better factory efficiency, and then applying some of that cost takeout to hire R&D and greater sales and marketing. That playbook, I think, is pretty consistent in almost every acquisition. However, we tailor the approach, because every one of them is different. We tailor the approach to each acquisition.
For example, in the Pall acquisition, where our focus has really been getting after a lot of the complexity that was inherent in that supply chain and some of what we're doing in procurement, that's less of an issue say at Cepheid, where some of the components that we're working on in terms of a new approach to the enzyme component that aren't talked about, be a slightly different approach. We tailor the tools we use to the opportunity, but ultimately, it's really all about getting the cost efficiency to fund R&D and sales and marketing and drive growth.
Last one.
Last one? Sure. Shannon?
Yeah. Tom, just one more question in terms of reinvesting in the business.
Yeah.
As you've gotten into some of these double-digit growth areas, does your calculus around plowing back some of the DBS savings change at all? Is every business still sort of funding its own plowback via its own DBS, or is there a cash cow
Yeah
growth stars element to this?
Yeah. No. Thanks for that question. It's not exclusively about one business having to fund its own way all the time. In other words, we approach the allocation of resources within the corporation on a full portfolio basis. Absolutely, we would see opportunities where businesses that might need more funding for, say, R&D or a growth breakthrough commercially in a high-growth market might get the benefit of some incremental funding that we would be managing at the corporate level because some other businesses were, in fact, creating that opportunity. In fact, at Product Identification, Joakim would've told you the story relative to that question of some investment that we made in developing the commercial growth tools at Videojet around Transformative Marketing that they couldn't have funded on their own. That was because other businesses were doing so well, and we shifted some resource allocation.
We absolutely make those portfolio decisions. Dan and I and our finance teams sit with the operating leaders every single month. We see the financials of every business. We know who's running ahead or behind. We know what the growth opportunities are, and we're able to move funds rather fungibly across the portfolio to where the best impacts are. I think we're out of time. Thanks so much for your time today. We really appreciate it. On behalf of the entire Danaher team, we wish you all a very safe and joyous holiday season. Thanks for being here.