Well, officially welcome everybody. I am glad that you could all make the trip. Realize it is a long way to come, but hopefully, a combination of the tour this morning, and some of the things that you saw, plus the presentations we have got here today, you will walk out with a much better understanding and view on our Leica businesses. I also suppose welcome everybody on the webcast.
We will start the program here shortly. Just as a note, we are going to have Tom come up and give an open on all of Life Science Diagnostics. He is going to then introduce David and Arnd, who will give each of their presentations. David and Arnd will take questions at the end of their presentations. Then at the end, we are going to have Dan and Tom come up and take 10, 15 minutes of general questions.
We will save those questions for the end, but David and Arnd will take questions right after their presentations. With that, introduce Dan Comas.
Good afternoon, and good morning, and good afternoon to people on the webcast. Appreciate you all coming. We completed the acquisition of Leica in 2005, so it has been about six years. Happy to have many of you here for the first time. Obviously, today, the focus will be on life science diagnostic businesses, in particular, Leica Microsystems and Leica Biosystems. I hope one of the things you saw early in the tour, but get during the course of the day, is if you go back to 2005, we really pitched Leica as sort of a value deal. I think we have delivered on that. We have tripled the operating margins and both David and Arnd will talk about that.
I think more importantly, what the management team has done, both through organic and inorganic efforts, and again, we will go through that through the course of the afternoon, we have really transformed this into a growth platform. I think it is an exciting story, and I think it also has a lot more runway. So we are excited to have this as part of the portfolio. Before I bring up, introduce Tom, just a quick recap. We announced our earnings two weeks ago. Many of you know we have reported organic growth of 10%. Some of the favorable surprises here were clearly our life science and diagnostic businesses across the board, as well as the industrial businesses. We continue to see very strong performance out of the emerging markets, which were up 20%. A good performance in the U.S., up 10%, and mid-single-digit growth coming out of Western Europe.
We are investing a lot of money on the R&D side, on feet on the street. Again, you will get a taste for that this afternoon. But despite the very heavy investment in our growth initiatives, we had very solid margin expansion. All of our segments had at least 200 basis points of core margin improvement year-on-year during the first quarter. That is obviously translated into about 33% earnings per share growth year-over-year. Clearly, on the M&A side, it has been an exciting first half of the year for Danaher. We just completed the sale of our Pacific Scientific Aerospace business to Meggitt PLC, while bringing in the EskoArtwork business into our Product Identification businesses. Two businesses that have the same operating margin today, but Esko with 20 points higher on the gross margin side than the business we just divested. Then finally, Beckman Coulter. We have not closed it yet.
Hopefully, we will next month. Very excited about it. A lot of work, particularly for Tom, but I think a great opportunity for Danaher and for the life science and diagnostic businesses. With that, have Tom come up here and kick the day off. I have worked with Tom for 20 years. He has got responsibility for all the life science and diagnostic businesses, as well as our water business.
Thank you, Dan. Let me add my thanks to all of you for coming, and a warm welcome to Wetzlar, the home of Leica Microsystems, and as you hear about today, Leica Biosystems. I am going to give you a brief overview of our businesses. As you see there, as I click through our forward-looking statement as well in your deck. I am going to give you an overview of our life science and diagnostic businesses, a little bit of a recap on the first quarter, a bit of insight as to how the other businesses are performing, and also give you a bit of an introduction to what you will hear about in much more depth today from David Martyr and Arnd Kaldowski relative to Leica Microsystems and our Biosystems businesses.
The news on the first quarter is pretty well out, but you can see here if we zoom in a bit on our life science and diagnostics businesses in the first quarter, terrific performance across the board, reported revenue growth of 21%. But as you know, we focus on how we do in the core business growth. In that case, 9% core business growth across the platform, reflecting terrific operating performance really across every business in the group, and I will take you through in each one of those in a bit more detail. You see we reported operating margins doubling in the period. Obviously, a fair degree of transaction deal-related costs in 2010 reflecting that lower margin.
You look at our operating margins on a core basis, so a real reflection of operating performance in between the two periods across the platform, and you see a tremendous growth in operating margin expansion consistent with what Dan mentioned a few minutes ago that we posted across the entire corporation. I think here it is really reflective of both very good drop through on strong core growth, as well as an ability that we demonstrated to still invest in go-to-market activities, as well as innovation in the period, and still deliver a terrific lift in operating margins. So if we take a look in a little bit more detail on the Q1 2011 performance, DBS really remained the cornerstone of our execution. I think it is important to remind everyone that DBS really has three legs to what we sometimes refer to as the DBS stool.
First being the leg that is most familiar, and that is our efforts around lean. Clearly, throughout the first quarter and throughout last year, we saw the benefits of applying lean, particularly in our newer businesses, in AB SCIEX and in Molecular Devices, but continuing great performance in our legacy businesses. You clearly saw that on the tour downstairs, where you see continued efforts around continuous improvement in a business that is frankly five, now six years into the lean journey. Remember the other dimensions of DBS. Most importantly, around growth, because those initiatives around lean ultimately are designed around continuing to make sure that we invest aggressively. We saw that in each one of our businesses as they continued to take the benefits of productivity and those improvements in driving performance around innovation and go-to-market. Then finally, talent, the third aspect of DBS.
Here you see new presidents, Danaher presidents, coming into the AB SCIEX business and into Molecular Devices, where we have been able to leverage our ability to develop talent in other Danaher businesses and promote them into our newer businesses. Also in emerging markets. We are very fortunate that one of the up-and-coming Leica leaders in China, we were able to bring over to lead our China business in Molecular Devices. So I think great examples of DBS at work, lean, growth, and importantly also, talent. Leica, you will hear a lot about Leica today. High single-digit growth in the period, challenging comps against some great performance, particularly out of Japan, in the first quarter of 2010. AB SCIEX, we couldn't be more pleased with how the first year turned out.
Certainly had its challenges as we both deintegrate a business from its prior owners and then integrate it into a fully functioning operating company. We saw high single-digit growth in the first quarter, and we think that business is very well poised to continue to grow at that rate and potentially in excess of that for the balance of the year with the TripleTOF 5600 that you heard a lot about last year really leading the way. Radiometer. We have talked to you in the past about the AQT90 FLEX, our investment in a new point-of-care based immunoassay platform. We continue to see excellent traction there with double-digit growth in that platform, and now a significant read-through in the consumables portion of that business, lifting its profitability and continuing to create a very sticky relationship with customers over time.
As we look out ahead, we think the first quarter positions us very well for continued performance into the second and beyond on a similar basis to what you've seen here in the first quarter. We think high single-digit growth. Leica Biosystems that you will hear about today will clearly lead the way at a double-digit growth clip consistent with its past performance. We will expect to see continued performance in year-over-year operating margin expansion. We will probably see a slight dip in those sequentially between the first quarter and the second quarter, as we are going to make some investments in the clinical trial efforts and accelerate those clinical trials in AQT.
As you know, we are known for a bit of quiet restructuring here and there, and a couple of our businesses have some outstanding plans to make some changes in their structures in Q2 that we are going to take advantage of. Again, largely being able to accelerate some of those things because we are off to such a fine start thus far in the year. Dan mentioned it was clearly the biggest news for us in the platform in the first quarter, the announcement of the acquisition of Beckman Coulter. We are very much still between signing and closing at the moment. We are going through the regulatory process. You have seen announcements as to where we have cleared those regulatory hurdles to this point. We expect that process to continue to go smoothly and continue to expect that transaction to close here before the end of the second quarter.
We have got an outstanding relationship with the team at Beckman. They have been very supportive, and we are very much involved with them on a daily basis. As anyone who checks my flight itineraries would know that my home increasingly would look like Brea, California, as opposed to Loveland, Colorado. There are several key macro drivers across the platform that probably a bit helpful to level set everyone on as you think about our business, for those of you who may not be as familiar across the breadth of product lines that we have today. I think clearly the evolution of life science research is a key macro driver, and that applies regardless of whether we are talking about the clinical realm or the more basic or foundational life science research realm that ultimately leads to the uncovering of the secrets of disease and improvements in human health.
But we continue to see both in the developed markets and the emerging markets, investments in those arenas, and scientists continually looking to move to the outer edges of technology's performance levels. Healthcare expenditures, particularly in the emerging markets, are a key macro driver for our business. Again, that applies both on the life science side, where the fundamental research is being done, as well as in the direct clinical arena. I think regardless of how you might handicap healthcare reform in the developed markets, specifically in the U.S., I think there is no question that the end result of that will be an increased need for investment in healthcare, if nothing else, an increased demand, particularly as you see the prospects for higher levels of coverage throughout the U.S. market. Regulatory oversight is clearly a macro driver.
Typically, that is driving increased demand and increased investment in order to be compliant with regulatory drivers. In the U.S., where increasingly the FDA is something to be dealt with in terms of the investments required to be compliant, the investments required to ensure that all the regulatory hurdles are exceeded in terms of clinical trials and eventual approvals. We think the advantage goes to those with experience and those with scale. We think ultimately that benefits us in time. Finally, new solutions are required in lab environments. If you think about the experience that you just had down in the pathology lab, if you will, that we just walked through, the overview of the lab environment that is histopathology today.
You think about the technology, the skill level, I should say, of the individual technician that's required for each one of those steps, it is significant. Yet there's a shortage of that skilled technician today. As a result, new products and innovations, similar to, for example, the sample tracking system that you saw or the automation associated with the BOND-III advanced stainer. Those types of innovations are essential to dealing with the challenges of a shortage of skilled technicians in clinical environments today. We think we're uniquely positioned to take advantage of those macro drivers across each of our businesses. For those of you not quite as familiar with the breadth of the portfolio, this slide will give you a brief overview of the brands. Again, leading brands in each one of their markets, likely that you'll understand more about today.
SCIEX is clearly the leader in mass spectrometry on a worldwide basis. Radiometer, the leader in acute care diagnostics specific to blood gases and increasingly around cardiac markers and other immunoassay technologies for the point of care. Finally, Molecular Devices, a leader in plate readers, washers, and other imaging modalities for life science research and drug discovery purposes. As you can see, terrific operating margin performance and each of those businesses positioned in markets with overall good growth dynamics. One of the things that really I think is a common theme across each of the businesses in the portfolio is the way in which DBS helps each one of these businesses perform, both at the growth level and the growth dynamics, as well as in their operating margin performance.
When you think about how DBS drives growth across each one of these business, first of all, you'd think about how we use the tools around bringing the voice of the customer into our businesses and the aggressive nature in which we do that. You may have heard Maria downstairs when we were going over the new surgical microscope, talk about the 1,000 surgeons that we talked to in developing the new surgical microscope. That's an example of using not just one, but a series of DBS tools to ensure that we bring the voice of the customer into the business. Those voice of the customer tools lead to outstanding performance around accelerated product development and innovation. Then ultimately, the way we go to market and the way we apply the tools of value selling to be able to capture those opportunities.
Finally, ensure that we deploy investment by using the tools of policy deployment to ensure that we're driving that kind of growth. Those are all common themes that really exist in each one of our life science and diagnostic businesses. Now, beneath that, each of our businesses have some unique competitive advantages that they take advantage of every day. If you start with Leica Microsystems, you'll really hear a lot today from David about innovation and how we've really used innovation as a competitive differentiation. You saw some of that downstairs in the extraordinary product array that we have. What you didn't see downstairs, you didn't see our low-cost region footprint. You didn't see how some of those products are now produced in China and in Singapore.
You didn't see how the supply chains have created cost advantages that we've been able to leverage, particularly as we enter emerging markets. In Leica Biosystems, we talked a little bit about this in my group, that that platform that we had, even before the acquisition of Vision Systems Limited, with our microtomes and tissue processors, our sample preparation capabilities that allow us now with the addition of the BOND-III and the associated consumables, allows us to leverage the broadest portfolio in the marketplace. That combined with the strength of the Leica brand, extraordinary opportunities to now start to improve the workflow as we layer on the capabilities around the CEREBRO sample tracking system. Radiometer, an extraordinary brand position, a brand that has been established based on outstanding product quality and extraordinary service.
As you might imagine, in an acute care environment, an emergency room and operating theater cannot afford to have instrumentation that isn't completely reliable and always up and running. You'll hear often from our customers the extraordinary reliability, and when there is an issue, outstanding service and support. One of the things that Radiometer's done a wonderful job of in the last few years has been leveraging that strong position in emerging markets and taking a model that is a direct-to-customer market, where we provide that technical capability in a very front-and-center customer-facing way, has allowed us to go into markets, for example, like Turkey, where we've been able to double our volume in just 6 months of incremental investment in feet on the street and technical support.
Finally, AB SCIEX, one of our newer businesses in the platform, is really a business that's built, again, similar to Leica, very much on innovation. Very much ensuring that we're at the forefront of capabilities around sensitivity and selectivity, again, ensuring that we are also applying investments equally to our go-to-market activities and taking that innovation more broadly into markets like China, and increasingly into Latin America and beyond. This slide will give you a bit of an insight on the business mix from a product and a geographic perspective. As you can see, a business that is, in large part, an instrumentation business with a very strong consumable stream across the platform. The largest portions of those consumables businesses come from Radiometer as well as from our Leica Biosystems businesses. High-margin pull-through consumables that are a function of that strong instrument placement.
Service, while only 5% of the overall platform, is a key strategic advantage for us and a segment of the business that we look to expand over time. We believe, again, it creates a tremendous level of a strong customer relationship, the stronger your service capability becomes. Our geographic mix, relatively well-balanced across the North American and European markets, with the fastest-growing segment of the platform being in the emerging markets. You will hear more about that today as you hear about how Leica Microsystems in particular has grown to become one of our largest businesses across all of Danaher in China. The customer mix that we have in the platform is a customer mix that I think you can think of as being on a continuum.
A continuum where technology and innovation typically begins in the life science arena, and then over time migrates into the clinical or the diagnostic arena. You see this probably one of the better examples of this is if you look at where mass spectrometry is today. You see how it primarily exists today as a life science tool, but increasingly is migrating out of government and academics and the front end of pharma into reference labs and increasingly into the clinical environment. We think as we look at the platform, that it is important to have positions across the spectrum, across the continuum, as we typically then are able to leverage technology and over time leverage go-to-market capabilities that creates, again, real competitive advantage. You saw quite a few examples of innovation today on the tour.
Beyond some of what you saw at Leica Microsystems and Biosystems, and you will learn more about those, there is also terrific innovation engines at work at AB SCIEX, at Radiometer, and at Molecular Devices. Again, last year, you saw the investment that we made, for example, in the TripleTOF 5600. You also saw us make a very quick acquisition following the acquisition of AB SCIEX into a strong niche position in liquid chromatography with Eksigent, which we are increasingly leveraging the capabilities of Eksigent along with the 5600 for penetration into the key areas of genomics in particular. Radiometer that you will not hear much more about today, but we would love to have you come up and visit us in Copenhagen sometime. You would see how they have done a wonderful job of investing into that transition that is happening in the hospital environment from the central lab to the point of care.
The key underlying dynamics there are really around turnaround time and making sure that clinicians have the advantage of rapid results, again, in an easy-to-use small footprint as near to the patient as practically possible. Radiometer's investments have been very much along those lines, and you see the benefit of that now in their core growth at roughly 2X the market rate. For the balance of the day, you are going to hear the Leica story. Dan gave you a few of the headlines of that Leica story just a few minutes ago. It has really been a story of continued investment in innovation and in emerging markets, while at the same time leading to terrific drop-through and improvements in operating margin.
Investments in virtual microscopy that you saw downstairs, the Vitality Index that David will touch on in more detail and what underpins that, and a tremendous double-digit growth rate in China, now making Leica one of our four north of $100 million businesses in China across Danaher. Secondly, it is about expanding our served market. You will learn more today about the roadmap that we followed in expanding our position in histopathology and strengthening our position both with organic investments as well as inorganic investments on the road to the digitization, digital microscopy, a realm of today and the future. Then finally, there has been a real transformation at Leica from a structural perspective. When Danaher acquired Leica, it was very much a structure which was very much product-oriented.
We had product business teams as opposed to today's structure, which has been transformed into very much a customer-facing or a vertical market-oriented structure. That has gotten us closer to that voice of the customer. It has allowed us to bring that voice of the customer in in a more streamlined and simple way, and allowed us to enhance that vitality index that was very good to begin with into even higher levels. It has allowed us to drive growth rates at 3x the rate of growth prior to the acquisition, and as you can see, tremendous improvement in operating margins as well. Again, as you think about other businesses, SCIEX being another good example where, at times, some structural changes in a business can also have meaningful shifts in capability to be able to take advantage of the opportunities that are out there.
I think Leica is a great example of where a structural change made a real difference in performance as well. Prior to acquisition, Leica always had a very good vitality rate. We measure product vitality as a function of the revenues that we do today and what percent of those revenues are represented by products that we have introduced in the last three years. Leica, prior to acquisition, was very good. They were in the 30%-40% kind of range. But with the added investments that have been made and the reallocation from areas that were not yielding great results into the greatest opportunities from a growth standpoint, we have been able to drive that vitality index now north of 50%, and we believe that is sustainable over time.
As you think about that journey, that roadmap I mentioned of how we have expanded our footprint, our served market, this is another way to think about that. Think about our entry point into a business that served roughly a $2.5 billion-$3 billion market. That market has grown obviously over time, but fundamentally, that was and remains a low single-digit kind of market. But as we have entered virtual microscopy, we have entered the realm of what is more likely a low double-digit kind of market. Again, there has been both organic and inorganic investments in leading to that expansion of our ability to take on a market. Histology consumables, the acquisition of Surgipath and Coretech that you heard about earlier, opened up a mid-single digit to potentially high single-digit growth rate and supplemented an already strong position in instrumentation in biosystems.
Finally, our entry through the Vision acquisition and investments beyond that in immunohistochemistry, otherwise known as advanced staining, a low single-digit grower, a real battlefield where we are taking share in that market. Now leading this year to a served market of $5 billion to $5.5 billion with stronger underlying growth dynamics. Frankly, a far stronger competitive position in that market than perhaps we could have even imagined. So that is the part of the growth story. The margin story, equally impressive as we look at how that sales volume has dropped through.
Driving that sales volume has certainly not just been about innovation and acquisition, it has been also about how we use, to use the acronym SFI, our sales force initiatives, how we have worked to ensure that we are managing and executing our sales force initiatives in a way that really differentiates us, and service is very much part of that equation. Value selling is extraordinarily important in this marketplace because we have challenging competition, where price is not easily won, and we are selling on value and the features and benefits of a Leica product versus the competition is ever so important. So we drop that volume through.
Obviously, we do that with the benefit of the DBS tools helping us to ensure that we are reaping the full value of those margins, but ensuring also that we are taking advantage of improvements in our supply chain and our manufacturing footprint along the way. So what you see is a business that has moved from the mid-40s to the mid-50s on the gross margin line, operating margins now in the mid-teens, and that is just the beginning. We think there is upside to that, clearly. Continued investments in R&D, so we have been able to reinvest some of that drop through to continue to make sure we take vitality up to even higher levels. So the full picture looks something like this. 2005, about a $500 million business with op margins around 5%. The acquisitions Vision.
We have not talked much about FinTech, an outstanding acquisition of our distribution channel in Japan, which has created a tremendous competitive advantage for us in that market. Smaller acquisitions leading to advances in our consumable streams as well as in software capabilities. About a $650 million investment, and $225 million in revenue. Fast-forward to today, we are a business roughly twice the size, nearly over six times the level of operating income, and a higher percentage of that being invested in innovation as well as go-to-market, again, particularly in the emerging markets. So an outstanding level of return, a return on invested capital that we are proud of. I think one that suggests our capabilities to continue to replicate that model as we look at businesses more recently acquired than Leica. So in summary, Leica, a terrific story. You will hear about it in depth today.
A tremendous credit to David and Arnd and the teams in driving investment, accelerating DBS, and ensuring that they are deploying capital smartly. Sometimes on small bets, sometimes on big bets, but ultimately to the strategic advantage of the overall business. A great model, I think, within Danaher, a model that today is alive and well and in process with AB SCIEX and Molecular Devices, and obviously more to come as we build out the life science and diagnostic platform over the years to come. With that, I am going to now turn the mic over to Dr. David Martyr. David has been involved and been in a senior position with Leica for over a decade. Since 2002, he has been the President of Leica Microsystems.
He is also a group executive with Danaher and clearly the credit of the story that you have just heard and the one you will hear in the next hour or so goes to David and then to Arnd. David?
Tom, thanks very much. Well, ladies and gentlemen, welcome to Leica and welcome to Wetzlar. It is a great pleasure to have you here, also to have those on the webcast, and we very much appreciate you investing the time and effort to travel here. Leica has a number of quite significant facilities around the world. It is particularly pleasing to me that you are here in Wetzlar, which was actually the place where Leica was founded just over 160 years ago. The business operated under the name Leitz for many years. It was a family business, the Leitz family. Like many businesses, they merged together, and in 1990, a number of leading microscope companies all came together, Leitz, Reichert, Wild, Jung, American Optical, Spencer. To be honest, I guess they were searching for a name to unify the company. At that stage, the company was branded Leica.
Leica had been a name for a product for quite some time. In fact, I have one here. This is the Leica camera that Leitz essentially innovated, the 35 millimeter still camera nearly 100 years ago in 1914. This is actually from the first production series in the 1920s. Essentially, it created a new market. But we decided to use that name to unify the company as it all came together in 1990. The Leica Camera Company actually got floated off in 1996, listed on the stock market. There is no remaining link between our business today other than a long history and pride in those products. But the Leica brand is fully owned by Leica Microsystems. The remaining company was split into two parts, Leica Microsystems and Leica Geosystems in 1997, and the two parts were then actually traded to private equity firms.
So again, those two parts became completely independent in 1998. In 1998, Leica Microsystems moved forward, and in 2005, we were acquired by Danaher. By that time, we had the microscopy business, and we also had our sample preparation business. As there have been several references already on the tour about the Vision acquisition, essentially with the Vision acquisition in 2007, it was clear that this provided a tremendous runway in pathology diagnostics to build up that whole specimen preparation business into a true Biosystems business. With the growth of that business in 2008, we took the opportunity to elevate that to a full opco status under the name of Leica Biosystems, which is a brand which we are now planting into the marketplace. Arnd came on board in 2008, initially leading our global sales, and then took the challenge to lead the Leica Biosystems business.
He is going to go into a lot more detail on that side of the business, and I am going to focus my comments on the microscopy side of the business, which we now refer to as Leica Microsystems. As you can see, Leica Microsystems sale on the microscopy area at $750 million sales just over in 2010. Key customers, as you have seen from the tour down below, mainly on research areas, labs, universities, both in life science and also in material science and materials development. Big role in hospitals, both in the operating room with the surgical microscopes that you have seen, but also in clinical diagnosis in the pathology labs and the cytology labs. Essentially all of the screening and diagnosis that needs to be done currently through microscopy, in the future, through digital pathology.
An important footprint also in industrial markets, principally in terms of looking at quality assurance and inspection on materials, micro assembly. Many products these days actually have to be assembled under microscopes because of the way in which geometries are shrinking. From a geographic mix point of view, you can see we have quite a balanced footprint. About 80% of our sales volume goes through our own direct sales force, which we have subsidiaries in 19 countries. Around just over 20% of the sales volume is in the Asia-Pacific region, as was already mentioned, particularly strong in China and in Japan. We also have a good geographic footprint from our production capability point of view, and it was mentioned earlier by Tom that we have over 400 people in our Singapore factory. We have over 500 people in our Shanghai factory complementing the long-established factories that we have here in Europe.
If we look at some of the macro drivers in our business, there are many applications for microscopy and imaging systems. But there are a few high-level macro drivers that I would like to just pause on. First area is around life science. Life science and research is about nearly half of the overall sales of the microscopy business. If we look at what is going on in that area, then essentially, scientists are always pushing the boundaries. By definition, they are working at the leading edge. They are always wanting a better tool, something that helps them to see further. 150, 160 years ago, when this business was founded on microscopy, it was quite a revelation to see even a cell or a blood cell, or something into the tissue of plant or biology.
Now scientists want to go deeper and deeper into the cells and the structures. They want to get down beyond chromosomes. They want to get down into the DNA strands. They want to actually get down and check the gene sequences to see what's correlating with what they might see on sequences. So they're ever testing the limits of what you can see. And light microscopy is a perfect tool to get down into that detail. So it's been driving our growth over the past few years, particularly live cell imaging, developmental biology, using confocal laser scanning microscopes to actually look in three dimensions inside those cells. And now we believe there's an equally important driver, which is super-resolution, which is going beyond the bounds that people said was possible with normal light microscopy. If we look in digitization, you saw digital pathology earlier.
I'd really like to highlight two, what I would say is macro trends. There's the whole slide scanning, which is going to be very important in the clinical environment and also in the drug discovery environment. There's also quantification in general. People don't just want to see what's going on in the structure. They want to measure, they want to count, they want to check areas, they want to check ratios, and therefore, our equipment increasingly has enabled them to quantify the experiments and support their hypothesis. And that's driving the need for new equipment and more advanced equipment and increasingly clever software tools and integration. Like many businesses, the emerging markets are very important. Very much true for Leica Microsystems and Leica Biosystems. Particularly here, though, emerging economies invest heavily in hospitals, and we're seeing that in many regions around the world. They're putting in surgical microscopes.
They're putting in pathology equipment. They're putting in microscopy. It's going into the universities. And we're also in certain countries, like in China, particularly, I think they're investing in life science research as a strategic advantage. So we're finding very often our most sophisticated high-end systems, the early adopters are Chinese institutes and Chinese universities, who are very well funded to move forward in those areas. In medical technology, the advances of microsurgery are increasingly pushing the limits and creating demand for what people want to do with these tools. You're seeing that we particularly focus on neurosurgery. We do a lot of eye procedures. People are living longer. More people will need cataract surgery. Increasingly, there are advances in retinal surgery. And all of these procedures have to be done under microscopes. In the neurosurgery, it's not just brain surgery.
A lot of spinal surgery is fairly routine, but again, you need to have the microscope. Plastic surgery treatments. And again, we're seeing now with our move into dental, people are paying a lot to have their dental care, and they want to be sure it's done perfectly. And the microscope is the ideal way to see that. And in precision manufacturing, I think it's easy to say it's a nano world. Everything's getting smaller. Everything needs to be inspected more. New materials need to be developed, and alignment of precision components, and this is where our microscopes get incorporated. If we just reflect for a moment on 2010, it was a strong year for Leica Microsystems.
We had solid mid-single digit growth bouncing back from what was only a shallow dip for us in 2009, so we ended up in a much higher position in 2010 after the challenging economy. We continued to invest strongly in innovation. Three particular products are mentioned here. Our vitality index actually reached 55% in 2010. We had super-resolution microscopes. We launched our second generation of confocal microscopes. We launched our digital pathology systems. You saw the scanner downstairs. Of course, we made the acquisition early in 2010 of Genetix, which brought with it the market leading SlidePath digital pathology software. The combination of that was extremely well received in the marketplace. We also launched the dental microscope, which we are distributing with KaVo. We had strong investment in R&D and sales and marketing feet on the street.
On the Microsystems side of the business, we actually added 90 head count during 2010 into those two functions. Reinvesting some of the DRA, the opco cost that we had done in 2009 to support and sustain the growth. We saw good growth in many regions on many product lines. Particularly in China, we broke through the $100 million sales barrier. We also broke through the $100 million sales barrier for the first time in Japan, which was a very important milestone for us. We gained market share in high-end surgical systems, particularly on the neurosurgical and the spine area. We gained share in confocal. We gained share in stereomicroscopes. We also gained share in nanotechnology equipment. Just on the Genetix acquisition, this was an important business for us to acquire, but it was actually essentially three businesses in one.
A very small part of that business, but a very strategically important part of their business was the SlidePath software. In fact, that had been acquired by Genetix only six months beforehand, and that was a very nice bolt in to fill out our digital pathology offering. It also brought with us a system called CytoVision. This is essentially image analysis of human chromosomes for diagnosing genetic diseases. This software was essentially the gold standard used by all the labs and hospitals globally as the market leading product. Again, that added to our portfolio. All of these systems work with microscopes. Again, it was a very nice fit. Cell biology is used particularly in drug development, particularly looking at biologics, and this is essentially technology to enable people to select high producing antibodies.
Looking at the beginning of this year, in Q1, solid start to the year, mid-single digit growth again. Q1 was actually a challenge for us because we had a very good year in Q1 in 2010. During that time, we were experiencing a lot of Japanese stimulus funding. We were winning a lot of sales of equipment into the universities with that money. We also had a huge forensic order at the beginning of 2010. So that gave us a tough comparable, but we delivered a strong performance. We also saw a very solid performance in emerging markets during the first quarter of this year, with over 30% growth. China, very strong. Brazil, extremely strong. India, solid growth as well. If you look at our product overview, perhaps you got a feeling for it on the brief tour, that we have a very broad product palette.
I have to say that it was really the tip of the iceberg that you saw. We have a huge number of products, so essentially, we can tailor products to almost anything anybody wants to do under a microscope. Virtually all of these products actually need configuration to the customer's requirements. I think that's something Leica's particularly good at matching that equipment, that technology, and the application support to work with the customer to find their solution. As Tom highlighted, a part of what we've done since acquisition is actually go one step further than that. We're not just matching up the products, but matching up our organization to the way in which our customers operate. We now operate in Microsystems across three divisions, a life science division, a medical division, an industrial division. In fact, within those divisions, there are further subdivisions.
In life science, there is actually a clinical group, there's a research group, there's a nanotechnology group, and it means that the specialists there are carrying the voice of customer information back. We're able to innovate the products, and we're able to deliver those products back through to the customers with everybody speaking the same language about the environment of those customers. We think that's been a significant contributor to our above-market growth. Certainly, the increase in our growth rate since acquisition. I think the products are pretty much listed. You saw most of these products on the tour. I think what I'd like to highlight is that in most of the major categories here, we're either in the market leading or number 2 market share position across all of these positions. It's part of our brand proposition.
We don't want to be an also-ran or in fifth place. We're a leading edge. We're pioneering, we're innovating, and therefore, we try and position ourselves to have a leading market share. Certainly, in confocal microscopy, in stereo microscopy, in nanotechnology preparation equipment, we're number 1 positions, and we're solid number 2 positions in surgical microscopy and many of those other categories across that chart there. I'd like to dip a little bit further into three of the headings that I mentioned as particular wins in 2010, just to give you some insight as to strategically where we're going in these particular technologies as well. The first one to pause on is digital pathology.
I think the demonstration probably says more in a couple of minutes of the demonstration than I could articulate in words, but essentially, you can see it's the whole slide digitization, which is the key breakthrough here. Being able to actually move all that tremendous amount of information freed from the microscope and tortuously finding that particular region of interest up into the computer. The ability to apply image analysis algorithms to quantify the data, the ability to share that information over the Internet. Some very clever technology. Sean, during the demonstration, spoke about the SlidePath software, which enables us to use a variety of image capture devices, our own high-speed, high-resolution scanner. The fastest scanner, the highest resolution scanner on the market that we launched at the end of 2009.
The architecture is actually open to scanners from other vendors, which is a very powerful proposition when you're building in essentially the workflow image software to that hospital or laboratory. All of the servers then to handle that. The ability to do the image analysis. For example, if you're going into breast cancer scoring with HER2 scoring, you actually get quantified information from that. Then the ability to share these huge files in real time through the Internet, even onto iPads and iPhones to get second opinions. Very much more effective than FedExing glass slides around, which was essentially the current technology. So strong performance for us in 2010. We brought together the software and the hardware. Very well received by the market. This is a new niche, as Tom showed in the chart of where the market expansion is occurring.
The market, we believe, is about $100 million at the moment. We're targeting to double our sales in 2011 and to get $15 million of that market during this year. A particular advantage for us is that we're leveraging our sales force into that environment already. About half of these digital pathology systems are going into hospitals, and about half are going to research operations or organizations. So we have sales forces visiting both of those environments. We're the trusted partner for histopathology. We're a trusted partner for the quality of the vision. Very often what people are saying to us, that it's an easy sell for them because they see the brand promise, which is so much more compelling than perhaps buying from a start-up company offering this sort of technology. Second area that I'd like to just touch on briefly is on confocal microscopy.
Confocal microscopy essentially is, well, firstly, what is confocal microscopy? In very simple terms, you'll be familiar, I'm sure, of having looked through a magnifying glass or a microscope, and you perhaps are frustrated that you can focus on a certain thing, there's a lot of stuff that's out of focus. Essentially, a confocal microscope uses a special technique where what is in the focal plane is visible, and everything that's not in the focal plane essentially just disappears. So it doesn't get in the way and give you all of this out-of-focus information that confuses the image. Then you can imagine, if you focus that plane at several intervals through the material that you're looking at, the slice of tissue or the cell structure you're looking at, you can then reconstruct them in the computer and get a full three-dimensional view. So essentially, you're optically sectioning the material.
You're not having to physically cut it. Somebody likened it earlier to a tomography scan. It's exactly like that, but you're using light to make that scan, and you create the model. By using different lasers, you get different interactions with different parts of the cells, and then you can actually color those according to the colors of the lasers, and you get these spectacular, totally crisp, focused, three-dimensional models of cell structures. As I mentioned earlier, this is exactly what life scientists are trying to do. They're trying to get in there and see what's going on because they'll have a theory as to what's going on, a theory that a certain gene is expressing or something is localizing, but they've got to get in there and look and see if that's really the case. These are the tools that enable them to do that.
Increasingly, what they want to do is what we call live cell imaging. They match it over a period of time and actually take time-lapse sequences. This is a very successful business for us. We doubled the business in the last 5 years, $150 million last year. Quite high-value systems, $100K to over $1 million each. Particularly, our strategy there has been innovation leader and strongly protecting significant breakthroughs, one of which is super-resolution. If we look at surgical. Core business has been mid to high-end surgical systems in ophthalmology and neurosurgery. Our strategy there is rapidly bringing new features into the products and cascading that to keep a market-leading position. Image-guided surgery, fluorescent imaging, high definition, all of these new illumination techniques rapidly into the new products. As Maria highlighted, some of these now coming down to the mid end.
Also what we've done during 2010 and 2009, we've entered a couple of significant new markets. Firstly, bringing ophthalmology for cataract surgery to emerging markets with a whole new product, designed and built in a very short time, in 12 months. Fully manufactured in our Singapore facility, 100% LCR material at launch. Getting into a price bracket previously we thought was not possible, but with excellent gross margins. Then leveraging that basic platform and learning to actually then go after the dental market. Again, a very nicely produced instrument. Short development time. Great gross margins because of the Singapore facility, and leveraging new sales channels through the KaVo partnership. If we take a look back at what's happened in Leica. Tom gave a large part of the story of the overview of Microsystems and Biosystems. This chart looks at the microscopy part.
To be honest, the microscopy part was the least profitable part at the time that we were acquired. Certainly, the specimen preparation had some very nice margins. Microscopy was low single-digit margins. But we've been able to bring that business up significantly. We've had a lot of growth as well. The business has grown significantly from over $400 million up to $750 million last year. As you can see, we've had a couple of acquisitions along the way. Genetix was one of them. Also, Invetech was another. But the largest part of the growth has been core growth. Part of that has been leveraging this higher innovation rate. If we look at our core growth for the 5 years before acquisition, it was less than 2%.
If you look at the core growth over the last 5 years, including that funny year in 2009, it still averages out over 6%. The innovation and all of the other diligence there, and the focus and the realignment of the organization into application areas, all of these things have paid off in terms of driving growth, as well as expanding into new areas, as well as expanding into emerging markets. We've doubled our sales force in China during the last three and-a-half years. We've also tripled our sales during that time. If we look at OP margin expansion. An even more compelling story than on the sales growth side. We've gone from that low single digit up now to the low teens. We've moved the gross margins up.
PPV on our material has been an extremely important contributor there, moving more and more of the material to low-cost region sourcing. In 2005 or 2006, we were at 25% LCR material. We are now at just over 40%. In fact, we have 60% of our production headcount in LCR regions. I think you may have seen on the tour that several of our plants have won Most Improved Danaher Plant awards. The Asian factories have each won awards. This factory has won awards, and also the Mannheim plant has also won awards for Most Improved Plant, as we have introduced the lean conversion. Working capital. Essentially, we have grown the business significantly on the microscopy side. We actually have less working capital in the business now, even though the business is almost twice as large.
I particularly like the fact that we collect the cash from our customers faster than we pay it out to our suppliers. That was the other way around in 2005, even though we were working very hard on that. We have improved the inventory turns a lot, but as you can see, even though we have got lean conversion in all the cells, you will have seen on the Kanban materials cards, it is a key focus area for us as we continue to drive our inventory from the shop floor and free up more space for production expansion. This is one of the lean converted cells you saw downstairs. To be honest, you would see exactly the same cells if you visit any of our plants around the world.
I would not want you to get the impression that with those few examples and the equipment you saw in the showroom, that is all we have done. As you are probably getting the picture, Leica is quite complex in terms of the number of products we have. Therefore, to achieve such a high vitality rate, we have to innovate a lot of products in parallel. I think we are quite efficient at doing that. This is even just a little scattering of some of the main products. In fact, there are around 40 products we have launched in the last 24 months on the microscopy side. These are some of the more significant ones. You can see we are innovating in each of the divisional areas. For the sake of time, I am not going to go through those, but each of those are very important.
Some of them are stretching the boundaries of what products can do in certain areas. Some of them are opening completely new markets for us. This was a move into digital video microscopy, a completely new format of microscopy that we worked with an open innovation partner on. Surface metrology, again, a completely new sub-niche market that we have gone after, as well as, of course, the more established market areas. Just briefly on to emerging markets. Obviously, a lot of focus on emerging markets now and going forward, quite rightly. We are having a lot of success there. The picture shows Larry in China in January when he was on a whirlwind tour of quite a few places, congratulating the four Danaher businesses that broke through the $100 million barrier in 2010. Very pleased that we were one of those businesses to get there.
We're seeing a very strong Q1 with further growth. It's not peaked up. It is really on a sustainable growth curve. Part of that sustainability is that we've actually been feeding a lot of feet on the street, a lot of application specialists and service people, to ensure that the brand promise that we're offering to our customers can be sustained in the future. We're building our infrastructure. We're going to be adding two more regional offices in China during the course of this year to again ensure we have that proximity to the customer. We're also investing in India and Brazil, Middle East, and Turkey especially, and we sell in over 100 additional countries. But these countries especially, we're investing in feet on the street to work alongside distribution partners as we prepare to move direct in some of those larger territories.
The final area I'd like to just touch on, a little bit of a smorgasbord of things, but essentially is to look into digital marketing. Obviously, reaching our customers is extremely important, as we have an extremely diverse customer base. We have 65,000 active customers that bought product from Leica in the last two years. We need to use all those channels to go out and keep them up to date with what's going on. Obviously, we've had the World Wide Web presence, internet site like everybody else. There's a lot of content on there. I'd just like to highlight 2 particular initiatives.
One is that we've had e-commerce for a number of years where our distribution partners can actually place their orders online, configure the product online, make sure they're not configuring something that can't be built, making sure they can track their delivery information, and get the right pricing. What we've now done in March, we've opened up Leica Direct, which enables initially consumables to be ordered online. We're focusing on consumables and in North America, and we intend to broaden this over a much wider range of products in the coming months and years. We're live now since the past few weeks. In this particular case, focus on Biosystems, but it's a common architecture across both Leica opcos. The second area I'd just like to mention is that we've been looking at how do we leverage the social networking. Obviously, we're getting into Facebook and Twitter.
A lot of the age group of our customers use that a lot. The question is, how you make that interaction? How do you drive customers and interest to your websites? What we're going to launch later in this quarter is a second internet site called the Leica Science Lab, and this is going to be a much richer area for interactivity. So people can actually share their applications developments. They can download information. They can upload papers. They can even download grant writing application forms and aids to help them. We'll be streaming video casts from our Leica Scientific Forums, some of our Nobel Prize speakers, et cetera. So sharing that information out, and again, providing a much richer context. Already, without that going live, we've been working on search engine optimization and doing a little bit of pay per click.
The month before last, in March, the last data I had on here was 225,000 people visited the Leica site during the month of March, and that was up 25% over the previous year. As again, we work hard to make sure when somebody's putting in digital pathology, we want to come out top on the list and all these other terms. A lot going on in digital marketing. That's essentially a fairly rapid run through Leica Microsystems, the microscopy part. Obviously, Arnd is going to follow through on Biosystems. I think a compelling story, and I think we have a lot more to come in terms of growth and runway. I see the hands already going up in the room.
We're going to ask you to use the microphone so that we can make sure we get good sound on the webcast. Thank you.
Yeah. It's Rob Cornell. In the $100 million in China, I was wondering if you're really selling your A price point product there, or are you starting to put local product for local manufacture? You have the low-cost dental product that is under development. Was that a product that was d esigned for the emerging markets, or was it one that was developed broadly, but maybe address the whole A and the
It's a bit of both. It's more the former at the moment that actually, to be honest, they're buying the research tools. When they're buying research tools, they actually try and buy the most expensive research tools. You're right that there is the market for products specifically for grade 2, grade 2A hospitals, et cetera, to get a deeper penetration. The grade 3 hospitals and the top institutes, they can afford the best. There's only 1,000 grade 3 hospitals, and there's 100,000 or whatever of the less well-equipped hospitals. We've been looking at how to move to those. The M220 ophthalmic microscope for emerging markets was specifically designed for China and India. India is actually the largest country in the world for cataract procedures. We're getting all the product registrations for that product in all these emerging markets.
That's specifically designed for those regions and built in Singapore, in that particular case, using low-cost materials. The dental product actually is not so much for emerging markets, it's actually more for developed countries, but it uses the same platform technology. We think there's a long way we can go with developing further products for the emerging markets. Specifically, Arnd and Leica Biosystems actually already have some products which we design and produce completely in China for histology, for microtomes, for slicing and for embedding, used domestically. Exactly fitting those needs. I see lots of hands. I'm going to defer to whoever wants to pick for me.
Hi, thank you. Keith Dickwith, Generation. Just a question. You had a slide with acquisitions after Leica that were added to the platform with some $650 million invested and $225 million of sales, I guess, at the time of acquisition, and $30 million OP. I was hoping you could relate that back to your ROIC targets and acquisitions generally and how that one gets there.
Yeah. The chart you're referring to was from Tom's deck, which was looking at the whole Leica platform, Leica Microsystems and Leica Biosystems. That additional $650 million was primarily the Vision Systems Limited acquisition, also a couple of other quite sizable acquisitions we made to the Biosystems. Those acquisitions actually came a couple of years after the initial Microsystems investments.
We had the same on the Vision acquisition as well. This was, I think, about three and a half years ago. The same minimum standard of 10% after-tax return within five years.
Okay.
I think your hand went up marginally first.
Over here.
Oh, sorry. Actually, you were up before.
Hi, it's Deane Dray from Citi.
Hello.
David, I was struck by the almost 55% vitality index, and it raises the question as to how much innovation is too much. How do you manage it?
Are you short-circuiting any potential cash cows by introducing a new product too soon and cannibalizing? What is the optimal number?
Yeah.
Just a follow-up question for Tom. I was struck as you clicked through Beckman, and we've seen the targeted customer base of Leica. Just talk about the overlap of the customers that you are already addressing that you will be coming in now with Beckman Coulter.
Okay. I think the role of vitality is quite different between, let us say, we say the microscopy part of our business, or the Microsystems side and the Biosystems. I think diagnostics companies, generally, you will see a lower vitality because actually you want to have the longevity of the reagents, the consistency of the process. In fact, it is actually quite difficult, because of regulatory reasons, to change your instruments. On the other hand, if you look at the research side, which is primarily where Leica Microsystems is playing, is actually innovation and new features, new technology, new advances, which are giving you that competitive edge. So I would probably argue you can never have too much innovation. Obviously, portioning it up into slices so you can, a bit like Intel, keep coming back with a faster processor and people have to upgrade.
I think there is a right pace for it. I think we think the right pace is to keep the Microsystems side of the business cruising a little bit above 50%. That is a really nice level. As Tom indicated, we have built that up from, it used to be around 30. We have been able to deploy some of the savings from DRA back into a higher R&D spend to keep that vitality index. I think that is a nice number for us going forward, and we are confident that we can maintain it. Now and then, one division gets a little bit ahead, launches a whole raft of new platforms. But on average, it is about that level, and I think it is about right.
Thank you.
Deane, to your question on Beckman. I think it's important to probably think about Beckman as two businesses. It is one, but it has really two distinct market positions. One is the largest portion of the business, obviously, is the diagnostic business, clinical chemistry, immunoassay in the central laboratory of major hospitals and reference labs. The second business, or the other business, which is a key part of the overall portfolio, is the life science side of the business. There, you're talking about a business that probably represents, depending on how you slice a few of the product lines, $600 million, $700 million, $800 million of that overall portfolio is really a life science portfolio. There you're talking about the centrifuge business, a tremendous brand in centrifuges, capillary electrophoresis, liquid automation, just to name the core.
As we think about that relative to our portfolio, if you take the diagnostic side, you're really talking about a business in Beckman that focuses on the central lab. In some respects, that is synergistic with Radiometer, you might say, because you would find Radiometer blood gas instrumentation in the central lab, and to some extent, the same buying influences and folks in the central lab making those decisions. But as we talked about Radiometer increasingly being a business pointed at the point of care, and that's a different call point in the hospital. Leica Biosystems, a very different call point, admittedly in the hospital, but very much in histopathology. Some overlaps at the more senior levels in the C-suite or the chief of pathology, but a lot of different buying influences.
On life sciences, probably the closest call point or intersection would be with our Molecular Devices business, where you've got some synergies between the types of environments where you'd find a plate reader and a washer, as well as a centrifuge, as an example. With mass spectrometry, probably in the same labs, may or may not be purchased by the same folks. Those would be some of the dynamics. All that is maybe good for reference, but not in any way to suggest that we have a vision that we're going to somehow integrate these businesses from a go-to-market standpoint. We'll look for those opportunities selectively with key accounts. But again, we think there's a lot of benefits from focus that come from having these businesses with their own go-to-market structures.
Thanks. Jim Lucas from Janney. I was wondering on the market share positions, where you are number two. Generally, are you seeing the same number one player, and are there opportunities for you to move into a number one position across the portfolio?
It sort of varies by product category. If you recall, the slide I had on the screen showed the whole different product categories there. In certain positions, we are number one. In stereomicroscopy, we have 35% global share according to the microscopy annual surveys, et cetera. We are number one in confocal microscopy. We are number two in surgical microscopy because Zeiss is simply quite a bit bigger than us on surgical microscopy. They started that business a long time before. If you get into the core compound microscopy area, Olympus in Japan is still the largest compound microscopy business. But then as you sort of segment it down, in pure dollar terms, they are still a little bit bigger. Although they seem to be declining a bit on their published numbers compared to us growing. But if you look in certain areas, we are very strong at the research end.
They are stronger at the routine and educational end of the line. So it depends a little bit how you break it up. I think if you say number two overall, it is just adding up all the dollars in the markets we play and averaging it out. But I think in most of the categories, we are in that one or two position. There is a couple where we are in three, but nothing beyond that.
Thanks. Terry Darling with Goldman Sachs. Just wonder if you could fill in some more of the blanks on China. First, from a very high level, the $100 million of revenues. What is that growth rate been in the last three years or so? Where do you see that growth rate migrating? Then all the way back down into the weeds, you talked about adding two facilities.
Yeah.
Where are you adding that? Talk a little bit about the sales force
Sure.
Evolution as well.
Okay.
How is productivity fair and
That's fine.
Yeah, no, about where you want it. The $100 million is domestic sales. These are products that we sell into Chinese users. It is not related to our factory in China, just to clarify there. The $100 million also is obviously the sum of Leica Microsystems and Biosystems together. It's about 80% on the Microsystems, 20% on the Biosystems. We see a lot of growth runway on the Biosystems side. The average CAGR we've seen in China over the last five years has been north of 25%. So, in some years expanding a little bit more, I guess. I don't think there's been a single year less than 25% over the last five years. We have offices at the moment in Beijing, Shanghai, Guangzhou, Chengdu, and also in Hong Kong. We're adding this year in Xi'an and Shenyang. Don't ask me to spell it.
Can you just. Last call would just be on the margin evolution.
Yeah.
Margins about average, or are you just in that high investment mode?
The gross margins are, in some cases, a little lower, but the cost of doing business in China, in terms of the cost of your salespeople, your service people, is also a lot lower. Actually, the operating margins are quite nice in China. Yeah.
Yeah. In terms of, I guess, what differentiates in microscopy, your stuff versus other people's. Is it fair that customization is the main element in terms of sustaining, I guess, the brand? Or are there other points that you would highlight?
Yeah. I am not sure if I would really define it as customization. I think customization or configuration, I think is more how we think of it. Pretty much all of the high-end microscopy players have to do that if you want to compete. It is more demanding at the high end, and of course, we are stronger at the high end, so maybe in a way, we are better at that configuration and offering those solutions. But I think it is actually fundamental to the feature or the capabilities of the product. A researcher that is trying to look at a really small structure, if he sees it, maybe I am exaggerating to say blurry through one optic or even more clear through another, he is always going to go for the clearer one, even if that is more expensive. And that is essentially our brand proposition.
We position ourselves to be the market leader in innovation, best quality, high-end performance. We demand a higher price. Leica microscopes are more expensive than Olympus or Nikon, and in most cases, Zeiss microscopes. But we deliver better value because you can do more with that microscope. It will last longer. It will deliver superior results. Time to publication, time to discovery, is what the researchers are measured on. I say customization is an important part, but I wouldn't define that really as the differentiation.
Just on your market shares. Your installed market share, I guess, is around 25% or something on your current business. You obviously expanded the addressable market a lot in the last five or six years. How do you think your market share is on
The areas where you've expanded the adjustable market. Confocal microscopy, I think you said it's 30%?
It's a bit higher than your average. What are the other areas where you've added new lines or gone into new areas?
Things where we've added new lines, particularly digital pathology. We've moved into surface metrology, so measuring the roughness of things, an important area. We've moved into defining new product categories like digital video microscopy, which is essentially taking high-resolution microscopy portable. Still a $50,000 microscope, but you can take it to the sample, which is very important in certain situations. So we've added a lot of tools around nanotechnology. We're the market leader. We have a 70% plus market share, so the way to grow that market is to innovate and create demand. And I think we've been quite successful at doing that. Some of the fastest-growing areas we see going forward for Microsystems will still be around the confocal, high-end, high-resolution technologies, live cell imaging, and digital pathology.
Yeah. It's John Inch. You've done really well in China. I think it's about a half, roughly, of your emerging markets exposure. How do you think of emerging markets over the next few years in terms of the opportunity? What I mean by that is it still going to be as much emphasis on China, with China perhaps becoming more? I mean, the other markets, obviously, they're very important.
Yeah
And fast-growing, but they are smaller. Do you have to make a bigger footprint emphasis to
It is an interesting question, is not it?
Get more penetration
Yeah, it is an interesting question. We see a lot more runway still in China. Of course, it is a bigger number growing at a good rate, so that generates a lot more dollars of growth. But some of these next markets are also getting to quite an interesting size. Our business in India is in the tens of millions of USD. We see Brazil, Middle East, and Turkey as very important areas. I think I mentioned at the beginning that we have 19 sales subsidiaries at the moment, and for sure, we will be adding the 20th and the 21st, in fact, I hope this year, in two of those emerging markets. Because we see the BRIC countries especially as the key focus.
Now, if you actually translate that back into are we going to generate more dollars out of the next three or four countries after China compared with the growth of China, I would probably have to go away and do the math a little bit to come to a conclusion as to which is which, because they are both going to be significant.
It is not really obvious. Can I ask you then, just as a follow-up, what are the biggest competitive risks or just challenges or issues? I mean, is it IP in China?
Yeah.
What do you think it is?
High tech businesses, IP is always, should we say, a landscape of potential risk and a potential advantage. Our approach is to innovate strongly and protect very strongly. We have around 1,800 patents in Leica across Microsystems and Biosystems, and we continue to defend solidly in those areas. I think we are paying a lot more attention to proactively protecting areas where we see the growth opportunity going forward. There is always a risk that somebody else is going to start patenting, too. But we have some pretty clever people, and usually we have been able to come up with improvements and ways to move forward. IP is probably more of a tactical risk than a strategic risk, and we are certainly laying down some foundation in that area. In terms of overall competitive risks, I would not say that there are any really significant strategic risks.
You'd have to say that Leica is very well-positioned, given that we're the only major player which actually has a footprint both in histology and in microscopy. The others play in one or the other. We hear very often that people see that as a big advantage for us because we understand the workflow all the way through from end to end of the samples. I hope it doesn't sound in any way arrogant, because it wasn't the intention, but I wouldn't say that there's any major risks in that extent.
John, if I would add something. I'd say, given the propensity for that high-end researcher to move with what is new, to move with the latest and greatest technology, I think the innovation game that we play successfully is one you have to continue to play.
I think you have to be well-capitalized because at times you have to go inorganic and take advantage of an up-and-coming technology or a niche. Sometimes you make a risky bet that may or may not pay off. But I think you have to be on the forefront of technology or you could potentially get lapped.
Affordability comes back again. Is that a thing with-
Right. I think you have to hold on to a position. I think you have to be placing those markers down in the emerging markets. I think you have to be cognizant of those lower price points and how those grow and leveraging the footprint that I think David and the team have built over time. Obviously, that becomes a challenge in terms of your allocation of resources because you're really playing at both ends of the spectrum.
We'll just take a last call from Nigel Coe with Deutsche Bank.
I just wanted to pick up similar sort of question from the weight and image marks going back to U.S. and the rest of the world. What truly drives the customers upgrade of an existing machine? For example, I've got a microscope that's okay. What drives me to go to the next level? Are the technology leaps that you're seeing come through now as you raise your vitality so great that it forces an upgrade? How important is government's given me some money, therefore, I go and spend that money on a new system.
Therefore, as NIH funding is frozen
Sure
how much of a headwind is that?
Sure.
I guess I could start the answer by saying, would you like to have the cell phone you had five years ago or the digital camera you had five years ago?
Yeah, it is sort of both.
But I think in terms of the features that we get used to from those sorts of technology, it is the same sort of thing in our microscopy, obviously, at a very different scale. If you are a researcher and you are trying to push the boundaries, the structures that people were looking at five years ago is nowhere near where people are trying to get to now with light microscopy. It genuinely is driving that demand. I think you were saying, well, are people spending money that is being, in a way, forced on them with stimulus funds or whatever? I do not think so. I think it really actually is required to upgrade equipment because we are pushing the boundaries. We spoke about super-resolution before. This is not sort of going a little bit better. This is a factor of 10 better in what you can see.
It busts through the limits. The reason that is important is that many of these structures, if you are looking at viruses, you are looking at molecules, they are right in that size range where at old technology, you cannot really work out what it is. New technology is, "Oh, aha, I get it now. There is three of those things there when I just thought it was one bright spot," and all this sort of thing. So it really is driving demand. You mentioned NIH. Now, obviously NIH, the budget has been probably one of the most widely debated topics over the last couple of years. But to be honest, we have seen NIH funding relatively flat or even in modest decline over the last five years. I mean, the days of the late 1990s and early 2000s, when it was double-digit increases at NIH, are a long way back.
But if you actually look at how we have been able to succeed and grow our business, even in what seems to be lean years at NIH or other funding authorities, is actually trying to target our innovation to particular fields. So if you look within the NIH budget, they have got about 60 or 70 disciplines that they are funding, and you will find that some disciplines, cancer research, stem cell investigations, developmental biology, they are right up there with double or triple-digit growth levels in terms of the funding they are receiving, even though the overall $30 billion NIH budget may be up 1% or down 2%. Historically, we have been quite good at lining up our innovations with those areas, both in NIH, and of course, a lot of the money then flows out to other institutions sourced through NIH, and other, MRC in the U.K., Max Planck Institutes, et cetera.
It is all the same thing. So targeting really the growth areas and getting on top of those in a leading position. So say, obviously, if NIH got an increase next year, it is probably better than a decrease. On the other hand, it does not particularly worry me, because I think that we are targeting the areas where they will actually be focusing more funds. Okay. Thank you very much. I would like now to introduce Arnd Kaldowski, President of Leica Biosystems, and he will take you through the histopathology business. Arnd.
Thank you, David. Good afternoon, ladies and gentlemen. It is my pleasure to dive a little deeper into what I think is a quite exciting growth story from an organic as well as an inorganic perspective here. I want to start off with giving you an overview with regard to the market as well as our position within that market. From the market size and the market I am looking at from an applications perspective, I would define as the market of histopathology, which is the preparation and the diagnosis of the microscopic examination of tissue. It is a market in the range of $2.5 billion worldwide, in which we are playing and with a market growth rate in the range of 7%-9%. Dan did point out to me earlier today that that is at the very high range of the markets Danaher is actually playing in.
Also, compared to other in vitro diagnostics markets, 7%-9% is also at the more higher range compared to the central lab, which is somewhat lower than that. Within that market, and you have seen that in the product tour earlier on, I think it is fair to split the workflow into two distinct segments. The one we call core histology or sample preparation and primary staining. The second one, the advanced staining. The advanced staining part is a significant size of the market and is the faster-growing element of it, and is growing in the low double digits as a market.
With our USD 400 million revenue, with an equal split between 50% in instruments and 50% in consumables and services together, we are one of the top three players in this market, and we are the one with the most comprehensive product offering across the whole workflow from the accessioning to the delivery of the stained slides to the microscopy side. From a geographic mix perspective, well-balanced if you compare to the underlying markets, 40% for North America, 30% for Europe, 30% of rest of world. North America tends to be a little overweight in the diagnostics market, especially in the cancer diagnostics. So we are really having a good, let us say, mimic here of the underlying marketplace. And with it, and David has shared some of that for Leica overall, a pretty good sales coverage and market access in the developing countries.
Turning towards the key customers we are serving, there is three main kinds of institutions we do serve: histopathology labs within the hospital. Secondly, the reference labs, which are really outsourced services to the hospitals, providing laboratory services. Some of the hospitals do use that for all of their testing. Some of the hospitals do use that more for the more complex testing, which they do not want to do in-house. And then the third part being the research labs and the universities. If you split the revenue we have and the market has between clinical and research, it is about an 80% of the market is in the clinical side of the house, but also 20% of the histopathology is in the research side of the world. Moving on to the macro drivers. Four ones I want to highlight here. Underlying all of the increasing test volume is the growing incidence rate.
It is obviously based on demographics, aging population, as well as a growing population on a global basis. The second one, we do see an increase in screening as well as monitoring of disease, so earlier diagnostics and earlier diagnosis in order to be able to treat earlier, drive mortality rates down, and at the same time, drive the cost for the healthcare system down on the screening side. Well-established programs in North America, especially about breast cancer, prostate cancer, cervical cancer. Some established programs in Europe. More and more countries are picking up on that, and that even China is starting to move towards some screening tests. Interesting element here for us from a business perspective and the ultimately number of tests done. With more screening and more monitoring, we see more and more tests done per individual patient who has cancer.
So on one hand, because the monitoring comes additive, also with earlier diagnosis, you see more and more samples coming in from patients who ultimately don't have cancer, but still get a microscopic examination of their tests. So really, a multiplication of incidence rate and more tests per patient. Two innovation-driven growth trends I want to highlight here. On the one hand, really the advancement in the diagnostics tool from a menu expansion perspective. Two key corners. The one, immunohistochemistry, which is today the majority of the testing in advanced staining protein-based detection, still growing by seeing more and more tests being innovated as well as validated towards specific disease states. So good underlying growth on the immunohistochemistry.
In addition to that, an emergence, what people call personalized medicine, sometimes get called theranostics, and that is really trying to find the right diagnosis to predict what of the potential treatments is relevant for that specific cancer and that specific patient. I think here, sharing a little bit of deeper insight on cancer diagnostics and cancer treatment, it's relatively well known that the positive response rates to cancer treatment is in the range of 25%-30% on drug-based treatments. So for every patient who gets a drug treatment today, if there's no personalized medicine, which really helps to rule in and rule out who are the people who would be having a positive response, 70% of those do not show a positive response. And with that, the significant cost on healthcare. Take a ballpark figure, you're in the $30,000, $50,000, $60,000 for any kind of chemotherapy.
You also have a significant negative impact on the patient because there's hardly any treatment which doesn't have a negative side effect. So really, that personalized medicine for cancer with, amongst all the different disease, the lowest positive response rate to date, is really something which will come over time. It's not an easy one to pick the right ones, but really an underlying for a growth trend here on the menu expansion. The fourth point, continued laboratory automation. There's more and more patients which need treatment, more and more patients coming to the hospital. At the same time, there's more and more cost pressure on containing the healthcare cost. Also, Tom has shared earlier that it's harder and harder to find skilled staff for the laboratory.
So everything which helps the hospital to automate further, drive to faster turnaround, lower the cost, lower the burden on the staff side, is really enabling the hospital to make a positive calculation on return on invested capital into more higher end equipment which drives that automation. Those who are specific here, obviously emerging markets as well as the digitalization David was talking about, both equally relevant for the histopathology space. Some highlights from us in 2010 and Q1 2011 I want to share. We've been in the double-digit core growth in 2010 as well as in Q1 2011. I want to highlight two product launches which had a major contribution into that. We launched the BOND-III as our newest release of an automated advanced stainer. Came out at the end of 2009.
We were able to get to more than 30% higher total installed base year-over-year with the BOND-III in 2010. The important part about the advanced staining of the BOND-III, this is a razor/razor blade model. You get the instrument, and then it does pull reagents over a five to six year time period. So growing your installed base is really layering in that reagent revenue for the next five years. The second one, rapid tissue processing. Peloris, a leading product in the market with regards to rapid tissue processing, had already a good momentum. On top of that, we launched a second version of it in the last year, and it did allow us to grow year-over-year in the number of instruments we sold by 70%. So that really contributed to our revenue growth already last year.
Another important one I want to share, and that was in Q1 2011, we did launch HER2 FISH as a next step into our product portfolio on personalized medicine. HER2 FISH and HER2 IHC do go hand in hand. They need both tests to come to an ultimate decision with regard to the treatment of a breast cancer patient with a drug called Herceptin. As I shared before, these are these areas in cancer diagnosis where if you are able to predict the patient responds positively, you really can improve outcomes on the cost side. In this specific case, HER2 is the most widely distributed personalized medicine diagnostic available in the market. It accounts for about $70 million to $80 million revenue just as a test in our market.
It does show you if the HER2 gene is amplified and if the HER2 gene is amplified in that cancerous cell, and that's a clear indicator that the patient will respond positively to the Herceptin drug. Last point I want to mention with regard to highlights. Last year, we used us focusing on cost reductions outside of our growth initiatives by taking specific measures on G&A cost as well as on the manufacturing side, to be able to fund more feet on the streets and more R&D personnel relative, from a growth perspective, than what we had at the top-line growth. So we expanded by more than 20% our frontline salespeople as well as our R&D staff. Overall, that was more than 90 additional people, which we were able to bring into the organization to help drive our growth going forward.
You all have seen the workflow in histopathology and some of the products we have, so I don't want to dive too deep here into the respective products we have. I shared that we have the most comprehensive product portfolio covering the consumables, the instruments on the sample preparation, as well as on the staining side. Now, if you look at this comprehensive product portfolio, it didn't come together by accident. That was really by design. That is really the main backbone for the acquisition strategy deployed here by Leica and Danaher in the histopathology space. When Leica was acquired, we were just playing in core histology systems sample preparation, as well as the primary staining. We have been in a strong market share position, very good sales coverage on a global basis.
I would say, it is fair to say we touch about 80% of all of the labs in the world if I look on our market share. That was in play already 2005. Now, taking that as a platform to add bolt-ons is ideal because you have that huge sales reach as well as the access to the customers. Then defining the market broad and not just as a specimen preparation, but saying, look, we are playing in histopathology, and there is this significantly growing advanced staining business. We can identify a target with Vision Systems Limited, which was at a good point for an acquisition because they had great technology on the instrumentation side. They had very good reagents. But they obviously did not have that sales coverage and go-to-market opportunity. So that acquisition, bringing that together and entering into that faster-growing market, also entering to having access to the pathologist.
The sample preparation test normally gets discussed on the lab director level, but the advanced staining really gets you to the pathologist and to some degree, to the oncologist. So that was the strategic rationale behind that acquisition, brought that on board in 2007. Then 2008 and 2009, with the acquisitions of Coretech and Surgipath, we completed our product offering with the consumables on the core histology side. Again, leveraging, and both of those that were smaller U.S.-based companies, but together with a pretty comprehensive consumable product portfolio. Bringing those together, especially with the histology systems, again, allows us to leverage the sales and market access.
On the other hand, there are specific applications in that process steps where over time, the consumables and the instruments do grow together to close the instruments with the intent to get to better outcomes for the customer, as well as help him drive productivity again. On our end, obviously, closing them together creates also on the core histology side, that razor blades model. So altogether, most comprehensive product portfolio, very clear game plan to get to that, and now a unique positioning within the marketplace.
Yeah. Sorry, can you just go through it with a bit more detail?
Yeah.
Just the top of my head showing people. What are the major kind of categories of instruments that you have?
The core histology systems, that was what was with Leica at point of acquisition of Leica. You have seen the workflow, everything from the tissue processing, where you dehydrate the tissue, make it ready for cutting as well, durability, the embedding, the microtomes, where you were doing the cutting, cryostats, another product for cutting, but at a frozen section, and the primary staining, and the cover slipping. So everything until that
Nigel, the way to think of that box is sample preparation. Everything that happens before you essentially stain it, get the colors to emerge, and eventually image it.
Plus the primary staining, which is the chemistry-based staining. So that was with Leica. This box here came through the acquisition of Vision Systems Limited, which is the automated advanced staining instrument, the detection kits required, the Novocastra reagents, and now through the launch of HER2 IHC and FISH, the first move into personalized medicine. Then the third category was the acquisitions of Quatech and Surgipath, which is all of the consumables you need in the sample preparation process step, which now paired together with the instrumentation we had from the Leica site on the sample preparation.
All right. Maybe just 30 seconds on FISH. Lest anyone think we're in the realm of the aquatic.
Yeah. FISH stands for fluorescent-
In situ hybridization.
In situ hybridization, and is a molecular test which you can run on the BOND-III, gets paired together with a fluorescent microscope when you analyze, and it does highlight molecular activity on the cellular level. The HER2 IHC is the first step the physician takes, and for a certain group of patients who have a specific, let's say, result in the IHC, you need to do the FISH, and then you can take a decision with regard to the treatment path. I want to share a couple of more insights on cancer diagnostics as a market. I was talking about the macro trends. I want to dive a little deeper here.
Cancer is a severe disease, but also a very significant disease amongst the different diseases with regard to mortality as well as cost, the second after cardiovascular disease in the healthcare world, amounting for an estimated $125 billion healthcare cost in the U.S. in 2010. If you look on the mortality rate, 40% is a lot better than the 70% in Asia, but still very high. You really have patients for whom the treatment and the diagnosis is critical. That's one corner. Nobody will save a lot of money on making the diagnosis cheaper if it helps. The second one, interestingly here, if you look at the difference between 40% for North America and 70% for Asia, one of the key drivers for that difference is simply the availability of diagnosis and treatment. We've come a long way in North America. It's great.
Even more to be done. More importantly, probably on that difference here, if there's more funds available in the developing countries for healthcare and the hospitals invest more in the healthcare infrastructure, this is going to be an area where you will see a lot of investment. Because people do understand they can get to a far better outcome, and in a lot of cases, to survival rather than the mortality side here. Critical, accurate, and fast diagnosis for our customers, again, tying it back to the role of diagnosis versus treatment. The earlier we can diagnose and the more specific we are diagnosing, it's not just an outcome-related discussion, but in almost every case in healthcare also helps to reduce the total healthcare cost.
The last point, if you think about screening and definitive diagnosis, most of the screening today is done at imaging and blood testing. But as soon as the physician finds a case where he does believe it could be cancerous, he's going to go back to the examination of the microscopic slide, because that's the place where they do the definitive diagnosis. That's the gold standard. Whenever it comes to that point, we're in the play here. You see Ralph guiding you through the process here downstairs. Just to summarize it again, tissue arrives at the accessioning of the lab, could come out of a small biopsy or a more bulky material out of a surgical intervention. Sample gets logged. In few cases today in the sample tracking, the predominant mode is writing it down somewhere, even handwriting on the cassette, not using barcodes.
As much as for us on the outside, sample tracking sounds like something everybody should be having, hardly anybody who has it today. So great opportunity to help them and also get our product into play. The tissue section gets selected and right-sized. Pretty much the manual step here, we provide a lot of the consumables. Tissue processing, where they dehydrate the tissue infiltrated with paraffin to make it durable and cuttable. So you've seen the tissue processing coming. The sample gets oriented and embedded in a paraffin block on the embedding system to go to the sectioning, and here, that's where we cut that thin slices, two to three micrometers, in order to get the tissue slice on the class and then put it into the primary staining and the advanced staining. Primary staining is done on 100% of the samples.
This is not a substitution with advanced staining. This is done on all of them. The pathologist takes a look on the morphology. He can't look into the individual subcellular detail, but he looks on the morphology here and then decides what of those cases he understands on that basis, what of those cases go to advanced staining. 20 years ago, there was no advanced staining, and everything was done in primary staining, and the physician had to live with how far he could get diagnostically. Today, we're seeing about 20% of all patients getting additional advanced staining.
Why does the advanced staining
The advanced staining allows you to use antibodies which can detect specifics on the protein level of the cellular level to get a more specific diagnosis.
Yeah. Because the dark shade isn't that clear what is that basically the reason? That's all.
Yeah. Essentially. Some things you can look and say, "That's definitely this.
Yeah.
Some things are just borderline, and it gives them a much clearer and also it helps them to quantify. That is why this is the trend, because as treatments are becoming more, we could go this way or this way, you want to be more specific about what it is. But if there wasn't a treatment, well, you got cancer and that is it. Whereas it is like, well, this cancer at this stage, but therefore the treatment will go this way. You need to do much more quantified macro, which is what is driving advanced staining.
John, it is a little bit analogous to black and white versus color photography.
Yeah.
Black and white, basic staining, you can see the shape, but you may not know all the details and the nuances of the color. Go to advanced staining, the color is going to reveal a lot more at the protein level as to what type of cancer we are really talking about.
Sometimes I understand it doesn't always reveal, right?
Not always. There is room for uncertainty about exactly what cancer it is, even at the advanced staining level.
There's still some skill of the pathologist to choose the antibodies to see what they're looking for, and then still to interpret the results.
They often use a panel of different antibodies, which they deploy one after the other because they have certain logic trees. If I see this, I don't see this, but I see this, outcome could be this. Even you may see them pair other modalities which are not advanced staining into the decision-making.
This is also back to the issue in digital pathology where people go for second opinion. The reason for second opinions is because, quite frankly, they need somebody to corroborate. "Well, I think it's this. What do you think? Have you seen anything like this?" Pathologists keep collections of these images of interesting cases or difficult cases, and they go back and compare to help to diagnose.
I think what's critical here from an economical perspective, to go back 20 years ago, there was no advanced staining. Today, 20% of the patients do get advanced staining as a test on average. Keep in mind that the primary staining from a reimbursement perspective comes at a factor 10 lower than advanced staining. It's about the same in the cost per test a hospital needs to plan. It's not just 20%, but it's 20% at 10 times the cost, as well as 10 times the reimbursement. This is really that growth here is really a significant drive in the market growth. The slide moves over to the imaging side. For the customers to seeing us having that breadth of portfolio, I think gives us two significant advantages.
On the one hand, if you think with regard to the discussion, the relationship with them, and an increasing level also helping them to consult them in optimizing their workflow. We do value stream map with customers on an increasing basis. That really gives you a lot of credibility if you're playing in all of the different fields. Important with regard to the sample tracking launch now. At the same time, I think for us understanding the whole workflow, we're in the prime position to making those improvements with regard to automation over time and bringing the workflow to better solutions. Moving from the market and the trend drivers to the Leica Biosystems strategy, I think pretty much well lined up with the macro trends I was sharing before.
The first one is really about helping them getting more efficient due to or through improved workflow solutions we provide on the instrumentation side and paired with the consumables. There are three different levels to that. The first one is really continue to improve the individual instrument. With every new release, help them to reduce the number of button pushes, improve the ease of use, improve the turnaround time. The second one is, especially with the sample tracking now, to really help them to manage the different instruments and the whole workflow of the sample across the whole laboratory. The third one is there's particular areas in the workflow where combining the instrument and the consumable and standardizing protocol as a manufacturer leads to better outcomes than at the areas where they're fixing and mashing the different consumables and the different instruments.
All of those three drive to reduced errors, improved productivity of the lab staff, and improved turnaround times. That is really critical for the people who are running the lab. The second one of our strategic pillars here is provide pathologists and oncologists with better tools to better diagnose. The one I talked a lot about, menu expansion, still in the realm of diagnostics, but increasingly moving into the prognostic and predictive side. The second one, as David has shared, our move as Leica towards digital pathology allows us to move forward on image analysis and risk stratification, which at the end of the day, in that decision tree of what do I get as different information and what is the sum of the outcome, is really critical for them to get to a result and not just to images. The third one, expanding go to market.
As I have shared for 2010, we do intend to continue to invest significantly into the advanced staining and the emerging market field on the street. How did bringing those companies together, driving the strategies, at least until today, result in the growth story we have together? Let me first park on the results of the last four years with regard to the growth we have been able to create in the histopathology space. In 2006, when Danaher acquired Leica, we had a sample preparation business in the range of $125 million. In 2010, we had a histopathology business across the different steps of around $400 million. That is more than tripling the business. If you look just on the organic growth rate, which I have marked here below, at average, we were in the low double-digit growth rates organically on top of the acquisitions we have done, despite the economically challenging 2009.
The key four elements of that growth, obviously, were the different acquisitions. Spoke about Vision, Coretech, and Surgipath. We also acquired our distributor in Japan in order to be direct and build an advanced staining business in Japan. Japan is the second-largest advanced staining market of the world, where historically, Vision Biosystems was indirect, but a rather not very successful distribution channel. The second one is really focusing on the DBS growth tools, which early on we deployed value selling and smart pricing, to all of the salespeople we have on a global basis. In 2008, we added more focus on sales force initiative, helping to make new sales reps productive while we are moving in an accelerated pace of adding more feet on the street. On the product development perspective, accelerated product development process, as a DBS tool.
In 2006 and 2007, when Leica and Vision Biosystems got together, we really needed to instill more focus on new product development that comes with improving processes as well as increasing the capacity. We got on, I think, a better funnel and a better momentum with regard to new products developed and brought to the market, as you can see from the number of stars here on the chart, which do mark the major new product launches we have done over the period here. The last point, as I shared at the beginning, BOND-III being a razor blade model, having driven, on average, a growth of the installed base in every year by 25%. You can just imagine how that reagent stream is coming over time on the advanced staining side. I want to share two of the innovations in a little bit more detail.
The BOND-III advanced stainer, launched at the end of 2009, really deploying breakthrough ideation, shorter turnaround time with cutting the turnaround time of the instrument from 3 hours 45 to 2 and a half hours, which is significant in the lab process. That was done through an intelligent way of using multiple robots on the instrument. Instrument has 30 slides, and you need to pipette a lot of liquids on the slides, and to really, in order to paralyze all the processes, we needed to go to a multi-robot system. Deploying value selling and SFI, especially for BOND-III while we were rolling it out. Being very focused on quantifying the benefits, providing the reps with the right information, driving the increase of the sales force while we're heading the BOND-III as a new product in hand.
We were able to get above the 50% win ratio in side-by-side situations in the U.S. market with our advanced staining instrument. We're staying at that level, which, given the competitive nature of the business and the competitors we're facing, I think is quite an achievement. Here's some numbers on the recurring revenue model. If you think about the BOND being around $100K as a capital cost, the reagents pooled over five years are in the range of $300- $400, and 75% of that is closed reagents. They can't be replaced with anybody's, others' reagents. That's really pretty secure business to come. Sample tracking, I think you've seen it downstairs. I spoke already about it. New product we're releasing, really allowing us to move to the next level with regard to lab automation.
Coming in as the player who really covers all of the process steps helps us in the credibility and in the rollout and having those discussions with a customer. On the other side, we chose to take an open system architecture. Other people who have products in the market want to just connect them to their own instruments, which I think long term is not a wise strategy if you want to be a software player and provide that product on a broader scale to the customer. Really a market at its almost infancy. Low percentage of customers have the sample tracking today, but we know more than 100 customers who do have money set aside and budgeted, especially because of the risk of mixing up samples and getting to misdiagnosis.
This is not just a productivity tool, but also comes very high on the risk management sheet of the hospital CFO. Briefly on the OP margin expansion, I'm comparing 2007 with 2010 because that's when we had Vision Systems Limited integrated. Talked about the top line. We're able to drive the gross margins from around 50% to mid-50s. DBS with regard to labor productivity in the factories, focus on PPV and vase to improve the cost of goods sold. Then as you can see at the lower box here, the increasing share of reagents in our business. The advanced staining reagents do come at a gross margin, which is more than 2,000 basis points higher than an instrument. So you can see that lift into the gross margin as the reagent revenue stream increases.
From an R&D spend perspective, around the same percentage, which obviously gives us a lot more money to invest into specific projects. Pretty similar to the sales and marketing story, keeping that investment and increasing that investment in absolute terms on driving innovation. We came from low teens in 2007 to high teens in 2010. Working capital and cash flow. Between 2008 and 2010, we stayed at the same level of working capital while we were growing the business. I think good numbers here from a DSO and DPO perspective to start off with. Good improvement on the inventory turns fine. No metric here, really deploying DBS tools in the factories as well as in the selling units.
With that, coming to a close, really continuing to develop solutions to improve diagnostic outcomes and workflow efficiency, focusing on the three elements of sample preparation, workflow, primary and advanced staining, and the sample tracking and the lab automation. Continue to invest aggressively into feet on the street in advanced staining in the emerging markets and really leveraging DBS with regard to driving the growth, the margin expansion, and the working capital. I think, from an expectation perspective, we have been outgrowing the market. I was saying we were low double digit in our growth rate. I said at the beginning of the market, a 7%-9%, especially on the advanced staining side. Last year, we gained 2 percentage points market share, in one year. So really setting ourselves up for continued outperforming of the market here. Thank you.
Sample identification sounds an awful lot like Product Identification. Is there a play to bring in some of the technologies from Videojet to this market and maybe, find a way to leverage that?
We are collaborating with Videojet on more the printer side of the house. Because on the printer side, really, the printers we have today, we do work together on trying to find ways to even get to more durable print and printing. It is a rather complex environment because of all of the solvents we have in the lab, but that is the corner we work together. From the sample tracking, I personally would not see such a closeness to the Videojet. It is not so much the having to program and having the bar coding. Really, 80% of the work is to understand the underlying workflow specific to the histopathology lab. Yeah.
Yeah, just to follow up on that point, I wasn't sure I followed. Is your system a plug-and-play into existing LIMS systems, laboratory information management systems, and is that an advantage to you? Then all of the sample workflow, is that part of the laboratory information systems, or is it run in parallel?
The system connects to existing lab information systems.
Plug and play?
We have certain connectors which we have already in place. Others, we need to develop. Normally, in the LIS world, you do that when you get to the situation of having a specific setup. We are the first certified partner with Cerner, which has been published a couple of weeks ago. We're on that way of building that connectivity. But in some of the cases, you don't do that preemptively. You wait until you have a specific customer situation. It's not that difficult. There are certain LIS vendors who are moving into the sample tracking space. Yeah.
Probably, it is fair to say that depending on the customer expectation and need, going with the one you have from your LIS vendor, which tends to be not as specific and as well-fitting to the underlying histopathology workflow, if that is good enough for the customer, you are probably going to see him using the one from his established LIS vendor. If they really want to put that very specifically into their process, drive a dedicated process improvement for histopathology, you will probably see them retract to specialists coming out of histopathology.
I wonder if we could talk about how you see the shape of the growth curve going forward, low double digit, obviously very good number. It feels like you got a lot of investments here. We are curious why maybe it has not bounced back to that 20% level you saw before the downturn, and whether you are thinking there is greater potential for it to moderate down into the upper singles versus to move back to some higher rate.
I think the two years before the downturn have seen, in general, a quite significant investment level on the customer side. I think the market overall was very strong in investing. I think it is more of a question of, what is the expectations for the North American and European market with regard to their willingness to invest into a lot more healthcare and into capital. At the moment, they are more moderate than they were prior to 2009. I wouldn't say-
Maybe add two couple things, Terry. If you think about really what the core growth driver is around double digits, really the advanced staining. On the advanced staining side, you really look at penetration levels. We think there is still a fair amount of opportunity from a penetration level perspective, both in the developed markets, but really importantly in the emerging markets. So that is one dynamic. Probably the bigger wild card is the extent to which the digitization of the lab at the back end, the extent to which that takes hold. That is a future inflection point, frankly, that is going to come, but there is a pretty big transition there from the more veteran pathologist who is not going to make that shift from the optics to the screen that quickly. It is a safe bet it is going to happen.
The rate at which and where that inflection point sits is still a little bit of a wild card.
Tom, could you just follow up on that?
On the inorganic side, do you have the portfolio kind of exactly the way you want it, or do you see more opportunities to build on that?
I think we're pretty close to having what we need there, Terry. There are always some opportunities to fill in a gap here and there. I think what we've done, what you saw downstairs, we leveraged the capabilities we had on the instrumentation side, optics particularly, and the slide handling from organic Leica perspective. We went outside with the Genetix acquisition to buy the software nucleus that we needed to advance that. So I think we're in pretty good shape, but that isn't to say that there are probably some added capabilities, probably particularly on the software side, that we wouldn't take advantage of over time.
David.
Yeah, I think a number of small technology deals as well. I think exactly as Thomas said, we've got all of the main building blocks for the Biosystems platform. Technology's moving forward, more exquisite tests, some leading-edge technology there, and I think you'll see us want to capture that technology from time to time, and then move that through the innovation cycle and bring it out onto the platforms. But no glaring gaps anymore.
Yeah, maybe to follow up on that point. You talked about Leica Micro and Bio separately, and yet you talked about the integrated cell and having all seven steps as opposed to two. What's the potential to sell the solution, if not maybe in the industrialized countries, but maybe in emerging markets? Is that an evolving focus here?
You mean to sell all of the histopathology lines?
Yeah.
to emerging markets?
The whole lab, yeah.
Yeah. Histology labs exist in the emerging markets. The emerging markets are not big on advanced staining at the moment, but basic histology, you will find that in pretty much every lab. With fairly rudimentary technology, a lot of Leica histology equipment there, the microtomes, the slicing, the embedding, basic tissue processors. We have a range of tissue processors, particularly targeted for those emerging markets. It certainly is one of the advantages that we have, that a lot of the hospital deals there are done through tenders, and because we can actually fill out most of the positions on that tender, because we can offer the microscopy, we can offer the histology. As they are moving towards advanced staining, sometimes they are even looking for deals on the consumables to equip them for a period of time. Then certainly that is an advantage that we have.
We have described the business today as Leica Microsystems, Leica Biosystems. That is internally how we keep the focus on the business. For a lot of customers, of course, they see the Leica logo on the box, and therefore, they see that as a seamless offering between the two sides. So it is clearly an advantage, and the emerging markets are going to take more and more of the steps over time to come, particularly at the advanced staining end. But in say core histology, they are already there and quite a lot of our business in emerging markets is with that basic equipment and basic microscopy.
Probably not. On the tender side, you can see it very structured in the way it is set up. A lot of labs where you go in, probably more so in the emerging market than on the developed markets, where every instrument you find is a Leica. The customers tend to lean that direction, at least on the sample preparation. If you look to the developed countries, especially in the U.S., there are certain institutions which really try to bundle everything, and then you come to solution sell. You normally then go higher up in the hospital administration. There are tendencies, not in a large share. It is not 10% of the total business, but there are specific customers who really say, "Look, you have a good offering. How can we get to a complete solution here?" But that normally then moves up more to the C-suite.
It is a little bit more driven by the procurement than by the physician.
You talked before about how the advanced staining to the patient or the system is basically 10x, the cost of running that test. I am presuming your profitability is not 10x for those sort of product service offerings. Where exactly does that incremental cost, where does it go in the channel? Is there an opportunity for you guys to somehow capture more of that benefit? Maybe just also help explain why is there that imbalance? I am presuming it is a bit of a supply-demand type of equation, and so the market is able to accept higher pricing, and so presumably that pricing also comes down. Maybe just your thoughts around that.
Two or three issues there.
Sure. I think first part, if you look on the instrumentation side as well as on the antibody side, you are doing two are higher cost. If you compare primary staining instrument versus a BOND, if you look on the throughputs on a primary staining, the number of slides it can handle versus what a BOND can handle. Also, due to the fact that the BOND takes a lot longer from the processing time, so you have an underlying higher cost per test. Same antibody is a lot more expensive to develop, as well as to produce than you have on the chemistry side. That still leaves you with a significant margin advantage. As I said, the
The gross margin on the reagent side of the house is more than 2,000 basis points higher than you see on the instruments.
Yeah.
That ultimately allows you to invest more. There is a higher regulatory cost. There is more R&D going into it. To some degree on the sales side, it is a more complex sale. There is a lot more touchpoints at the customer.
What is the gross margin differential that is the advanced and standard?
If you take the advanced staining systems, you lock the consumables and the hardware together because there is obviously different modes in which the customer acquires the platform between reagent rental and capital acquisition, then you are more in the high 50s for the advanced staining systems. We are actually in a pretty good shape on our core histology systems. We are actually around 50% or low 50s on that because of the brand and the positioning of the leading-edge technology. There is a differential, and clearly the advanced staining with those consumables pull through as a part of that are more lucrative than the core histology. But it may be not as big a differential as you think because we have got a very solid position on the core histology side.
But that would still suggest the customer pays two or three times more expensive, not in times. I mean, there is some obvious place where all that money to a cost incurred for making the test go, we are clearly not going to use it where it does not go. Does that make sense?
Well, one dimension of it is, of course, the cost of the reagent.
Yeah.
The cost of the reagent, if you are talking H&E, you are talking about a basic chemical. We are pouring chemicals together. If you are talking about what it takes to make an advanced staining reagent, we are literally talking about cell lines that are harvested from mice, that are creating those cell lines that we then have to develop in quite an extensive process in our Novocastra business in the U.K. So the underlying cost structure of the reagents in an antibody-based reagent is very different than in the H&E basic stain.
Is there a way to bring those costs down because that is a tremendous big market?
Probably. I am not sure I can speak to the drama of that, but. Okay. So that concludes the formal remarks that David and Arnd were going to make on Leica as well as the tour. Thank you to both of you. Thank you to all of you for coming. What we do now is open it up to general Q&A. If you have questions for Dan or me, or any other follow-ups that you might have on the Leica business for David and Arnd, we will be happy to open it up for the next few minutes.
How about just general questions?
Sure. I will let Dan set the general question guidelines. I shouldn't speak so soon.
It's not going to happen.
Well, I was just wondering how much of a work in process AB SCIEX turned out to be, and you said you're very happy with the way it has gone, or I think you said that maybe, Tom. Maybe just give us more color on that.
Sure. I think it was every bit the work that we anticipated it was going to be in 2010, Bob. What did that involve? Well, obviously, a very significant, ongoing relationship with particularly the Life Technologies side as we were continuing to run on their IT infrastructure background, backbone, leveraging a lot of their back office, sharing office space. So we had literally a multi-million dollar, ongoing transition services agreement that we figured was going to run for the full 12 months. It, in fact, ran almost to the day, that 12 months. We exited that almost to the day of the anniversary of the closing of the deal. The teams around the world did an outstanding job. We exited over 10 facilities around the world. We set up a new distribution footprint.
We made dramatic improvements in the Singapore manufacturing operation, improved the supply lines, fully integrated our own sales and marketing organization, separated that from the life backbone. Today, I think we can say that business is completely autonomous from its prior parent, and running very effectively on their own, delivering the growth rates that we anticipated and getting the cost takeouts. Dan.
Gotcha.
We on the webcast?
I think we're still on the webcast, are we? We need it. I'm sorry.
Just a quick question. I mean, the overall geographic sales is about 30% U.S., but I guess the healthcare generally the U.S. is about 50% of the global market. I guess, is there something on the competitive dynamics in the U.S. that make you more keen to be overweight non-U.S. healthcare markets from the domestic market? I mean, partly it's a function of the deals that you've done, at least until Beckman, a few of the larger ones have been non-U.S. Beckman will correct that because it is 50% U.S. But in terms of, I guess, the rest of the business, is there any reason why it's kind of underweight U.S.?
No, we wouldn't suggest that we want to be underweight the U.S. market in any way. I think we've been very fortunate in having acquired and built the platform on very global businesses. Radiometer and Leica, two of our earliest businesses, clearly came into the portfolio with very strong global footprints. I think that's made a significant advantage to that. But no, there isn't a conscious underweighting of either the life science or the diagnostic segment of the global market.
But Julian, as you say, it was somewhat of a function of acquiring two global, but European-headquartered businesses that were
Underway compared to some of their competitors. I'd say some of our outperformance in terms of organic growth, both at Radiometer and SCIEX, has actually been in the U.S. where we've actually put in a lot of organic effort, as compared to, say, Western Europe, where we've invested, but not as much. So our percentage of business in North America compared to Western Europe is starting to balance out because of the organic investment, both at Leica and at Radiometer.
Thanks, Tom. This is a follow-up question from back in December, when I asked about AB SCIEX, and no other life science instrument company that has mass spec just has mass spec. It all has front-end separation technologies, either LC or GC.
And at the time, that's the growth opportunity. Maybe you could just flesh out how you see the way you would want to do bolt-ons on this. My guess is you don't want to add just generic separation and instruments and become another Thermo or Agilent, but there's probably a more application-specific type of ways you'd like to grow. If you just flesh out
Sure.
what you think the growth opportunity is.
Sure. Well, the rhetorical part of your question, I think is, I would certainly agree with, in the sense of not wanting to play a me-too game at the front end from a separation standpoint. I think probably part of the answer here is, it is important to recognize that the history of what built that large, almost $500 million business and a leading share position globally has been its ability to develop workflows that are customized to the customer need based on using separation technology, typically liquid chromatography, that is the best suited to that particular customer's application. And we know, because we hear it from customers, that they respect having that flexibility to do that. Now, let's take, for example, the Eksigent acquisition made that somehow compelling to us.
Well, we felt that there was something very unique about the nano regime or the nano-level flows as well as the micro-level flows, that smaller sample size, that when combined with the right kind of front end in a mass spec application, brought a truly unique capability, particularly to some of the more academic-related investigations around genomics, as an example. So we felt that was a very unique opportunity to, again, provide customized solutions, to which frankly, there weren't a lot of other options out there for competitors today, and where integration really created value.
Now, I think there are still opportunities out there in terms of sample preparation that we would contemplate, again, ones that wouldn't necessarily be me too, but I think there are potentially, again, unique applications where niche or bolt-on acquisitions could play, some of which perhaps we could develop organically, some of which you might see us do inorganically. So I wouldn't necessarily in any way suggest that we won't do things to advance that front-end position, but I don't think we sit around pining for an identical position to another mass spec player. John.
Could you, Tom, talk about, ever since Danaher first got into these healthcare businesses and has built its portfolio, what sorts of things have evolved or changed in the way you thought things were going to play out or perhaps differently, and what has been better or worse? Then the follow-up would be, what sort of lessons have been learned operationally or strategically from your dental experience and how we should perhaps feel a little bit better as you make fairly large bets on Beckman and obviously future deals? Just what-
Sure.
sort of helps to minimize, I suppose, the risks associated with doing some of these large ventures?
Sure. Well, both sides of that question, the answers to both those questions kind of come together a bit, and maybe I will ask Dan to fill in a little bit of the blanks on the dental side because he has seen that a little bit closer than I have, given that that part does not report to me. So coming back to the first part of your question. If you remember, our first foray into life science and diagnostics was Radiometer. So we put our first foot in the water on the diagnostic side. And we leArndd a lot about how to win on the diagnostic side from a customer perspective. We leArndd a lot about the regulatory environment we were playing in and what the rules were around winning.
We obviously learned a lot about the power of that consumable stream that Radiometer represented and the sticky nature of customer relationships as it relates to service, as an example. So I think Radiometer was a tremendous learning experience, a very successful one. I will say that initially under Larry's leadership and hopefully under mine and Peter Kerstein's, that we have had a tremendous track of growth and profitability there. So I think a lot of learnings. If you then look at our next step, which was really into Leica Microsystems, it really was not another step in diagnostics. It really was a step into the life sciences. As we then came to a better understanding of the different dynamics between the life science market and the diagnostics markets, we started to build this sense of the continuum that existed.
That, in fact, there is a market that we now broadly describe as life sciences and diagnostics, but that is really one that extends from one end of the other, from the academic and research-oriented customer all the way to the clinical customer, where you are dealing from a really high-mix, low-volume environment, if you will, again, broadly characterized, to more of a high volume, lower mix environment at the other end of the spectrum in a clinical realm, and how technology moves along that spectrum, and how technology investments at one end of the spectrum can pay off in the other. I think all of those things combine to create now a broader strategic view that we have, John, about how to play along a spectrum, and how to build out from those rather humble beginnings.
Relative to your dental comment, I think clearly our regulatory learnings from that business, as well as Radiometer, have been helpful. Dan, maybe you could help fill in some of the blanks about some of the other things that I may not have been as close to on.
Well, I would just say, generally, I think our experiences in the med tech world is the applicability of DBS on the margin side. You have seen it at Radiometer. You have seen it at Leica. I think a year in at SCIEX, we are really pleased where we are from a margin perspective. Clearly, on the dental equipment side, it has taken us longer. We think we have traction today. I think we are still confident there, but albeit it has taken us longer. One of the aspects I do not think we had fully baked into our models five years ago was the emerging markets. Given how big Leica has become in the emerging market, Radiometer is becoming, and seeing the growth at SCIEX, and even people like Beckman have had in the emerging markets as well, I think has been an upside surprise during the last five years.
That sort of both growth in the emerging markets, our investments and feet on the street, as well as our investment in innovation here in Radiometer, has given us some confidence that we not only can impact the margin side, but the core growth. I mean, again, people who were at Radiometer a couple of years ago remember that Radiometer, like Leica, when it was acquired, it was growing low single digits. As you know today, both Leica and Radiometer are kind of mid to high single digits. Both through innovation, investment, particularly in the emerging markets, we have been able to, you just sort of expect us to improve the margins, but I think we have also really improved the growth trajectory in those businesses as well.
John, maybe one last point, and then I will turn it maybe to Bob or to Nigel. Although you look at Danaher today and you say last five or six years in the life science and diagnostic realm, speaking as somebody who really is starting about mid-career at Danaher 10 years ago, came into the Hach business, and over time, we have built out the environmental platform. I really look at that environmental business, particularly at Hach in environmental analytics, and I see a lot of similarities to what we have done, frankly, in life sciences and diagnostics. An innovation-based platform, brands matter, service matters, consumable streams can be extraordinarily accretive over time, and lots of opportunities for bolt-on acquisitions where DBS gets applied and the value gets created.
As much as I feel like we are new to this business, I really look at that background in our environmental businesses and say, "Hey, that was where the foundation was really laid to what we do today.
I have got the mic. A lot of questions come in about whether Danaher has really sort of a life sciences company or evolved into a life sciences company. I think Larry is being pretty clear he wants to get the life sciences dental portion back down to below 40%. But how important is that range, that 35%-40%? How quickly do you envisage getting it down to that range post-Beckman?
I do not know if there is a specific timetable, Nigel, but I think one thing we have learned over time is M&A goes in cycles. As much as there is a premium on industrial deals and seem to be more attractive deals on the healthcare side, that will change at some point in the future. There will be a period when water deals get priced way out of market the way they did seven or eight years ago. I think one thing we like about the multi-industry approach is it lets us be more effective from an M&A point of view, where we can build out a platform when perhaps it is a little bit out of favor in the near term.
I think Larry's very committed, both organically and inorganically, to keep that multi-industry model, and I suspect you'll see more dollars over the next 24 months in T&M, in environmental, in Product Identification, as opposed to some of the healthcare businesses, in part because obviously we've got a lot of work to do with Beckman.
Rob?
Yeah. Actually, following up on John's question a minute ago. As you said, dental doesn't report to you, but on the other hand, you've got a new product that's being marketed through the KaVo sales force, and maybe you just sort of broadly discuss the opportunity to cross-sell NI products like that, but maybe other products in the total Danaher portfolio, in the med tech space. That, I'm sure isn't going to be unique, but maybe you could just give an idea on the potential there.
Mm-hmm. I probably wouldn't start with something between the LSD businesses and dental, probably. Because that's probably where we're furthest apart, certainly from an end user standpoint, from an application standpoint. I think probably our best opportunities sit within the life science and diagnostic realm, and probably sit uniquely in either, a couple of life science opportunities or in a couple of diagnostic opportunities. I might go back to the comments I made to Deane earlier, where I said, if you looked at, say, an academic research lab, a basic research lab, whether that's in a pharma environment or an academic environment, doesn't really matter. You'd clearly see mass spectrometry, you'd see microscopy, you would see plate readers and washers. There is probably some opportunity there.
But again, Bob, I think we'd be very careful not to convince ourselves that there's some sort of real synergy there that ultimately the customer doesn't value because we compromise the focus and the skill set of that individual bringing that bag to the market. We have to be very careful about how we think about those opportunities. I would say the very same thing about the diagnostic side. As much as I walk into a central clinical lab in a hospital, as you can as well, and you'll see a Beckman Coulter clinical chemistry analyzer. Right behind you will see an ABL800 from Radiometer.
Again, we have to be careful and be very selective about where we play that card and ensure that there is real value created for the customer, and we do not compromise that really important skill set, because nothing frustrates a clinician worse more than that generalist who comes in that can't really talk specifically about the application. The clinician feels like their time is really being wasted. We just have to be careful. There are probably opportunities maybe from an economic standpoint where, in a buying group situation, perhaps we can create some better economics. But at that face of the customer, we have to be very careful.
A couple of these. First, very helpful commentary on the competitive landscape on the Microsystems side. Can you take us down the path there on the bio side? Secondly, you are showing the improvement in working capital turns over time, very strong. Do you think you are running up against any practical limits there? And then thirdly, can you talk about Japan, both the near-term risks and long-term?
Sure.
Opportunities?
Biosystems, we compete primarily with the Ventana division of Roche, with Thermo, with Dako, to name the three primary players. Again, each of them with strengths in different portions of that workflow that you saw. Those would be the primaries. You get Sakura Finetek in Japan also a player in that market. That generally would suggest the majors there. Relative to working capital and improvements there, if you asked any of our operating leaders year to year, Terry, they would be saying, "Oh, we have so wrung the juice out of the orange here." And yet year-over-year, David Arnd and the guys continue to step up, make improvements. And clearly, we get leverage from the acquisitions, no question there. But if you really peel that apart, you would see year-on-year, we are getting inventory improvements, DPO, DSO improvements out of the core operating businesses.
And at the same time, I think the teams are very prudent in terms of the way they approach capital expenditures. Increasingly, as we leverage DBS effectively, we are seeing these businesses are tremendous cash generators and relatively low consumers of capital. So I am continuing to be bullish that David and the guys will continue to make that happen. Now, I guess, approaching 20, 21 years in a row on taking cash flow above net income. On Japan, I mentioned this to our group on the tour earlier. We have been very aggressive in peeling down through, first and foremost, the supply chain, not just the top tier of the bill of materials that we source, but the second tier and the third tier, the component suppliers to the component suppliers to the component suppliers to make sure we understand where those risks are. We are not finished with that.
We think it's prudent to be paranoid about underlying weaknesses there in the channel. That inventories can only cover for those underlying problems for so long. But so far, so good. We believe we are in reasonably good shape across the supply chains, but we are absolutely and prudently paranoid about making sure we stay on that. Relative to the top-line exposure, again, still sorting a few things out there in terms of what the underlying damage may be. Clearly, there is instrumentation, whether it is a mass spec instrument or a pathology lab where our service technicians have literally come to the rescue. And I think we are still sorting out whether there is, in fact, a bit of a soft spot coming or in fact, maybe just the opposite, maybe for some businesses, a quick uptake as those investments get put back in place.
Again, so far, I don't think we would call it one way or the other.