Thank you, operator. Good afternoon, and welcome to the PerkinElmer Second Quarter 2020 Earnings Conference Call. With me on today's call are Prahlad Singh, President and Chief Executive Officer and Jamie Mok, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investors section of our website atwww.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until August 11, 2020.
Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Statements or comments made on this call may be forward looking statements, which may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward looking statements due to a variety of factors, which are discussed in detail on our SEC filings. Any forward looking statements made today represent our views only as of today.
We disclaim any obligation to update forward looking statements in the future, even if our estimates change, so you should not rely on any of today's forward looking statements as representing our views as of any other date after today. During this call, we will be referring to certain non GAAP financial measures. A reconciliation of the non GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I am now pleased to introduce the President and Chief Executive Officer of PerkinElmer, Prahlad Singh.
Prahlad?
Thank you, Brian, and good afternoon, everyone. To start, I could not be more proud of how we at PerkinElmer have met the obstacles that have faced us the past few months. We have proven to be a resilient, responsive and agile organization. Individually and collectively, we are all being presented with new challenges, big and small, every single day. At PerkinElmer, our employees have met these challenges by rallying and responding to a call to action to help during the global pandemic.
As I mentioned on our Q1 call, improving lives is in PerkinElmer's DNA. It is what impassions our team. The energy and purpose that pervaded throughout the organization during the Q2 was palpable. I felt it daily and I recognize the same passion and the countless number of employees who went above and beyond. Whether through late night, time sensitive discussions with hospitals, healthcare systems and governments to determine the best way to quickly ramp up COVID-nineteen testing, rapidly scaling our test kit assembly to fulfill urgent customer needs or personally delivering products to testing sites.
PerkinElmer colleagues demonstrated over and over again the very passion, perseverance and purpose that underpins our culture. Our strong second quarter results were truly a team effort and further reinforced the diversity of our business from a portfolio and geographic standpoint. Jamie will speak in more detail about our 2nd quarter performance. However, overall, we delivered very strong top and bottom line results despite severe macroeconomic headwinds. Our COVID related sales contributed $196,000,000 27% growth and our non COVID or core portfolio declined 14% organically with diagnostics excluding COVID declining 20% and Discovery and Analytical Solutions declining 10% compared to the Q2 of last year.
In terms of profitability, we delivered the best quarter of profitability since the creation of the modern day Park and Elmer in 1999 with 28% adjusted operating margins. And we grew our adjusted earnings per share over 50% and our adjusted free cash flow by over 200% compared to the Q2 of 2019. PerkinElmer as an organization has dramatically transformed over the past year. Not only did we undertake the largest organizational transformation in our company's history last summer, but unbeknownst to us then, we made the changes months ahead of the largest global pandemic in over a century. At the time, the change was a conscious decision to better position PerkinElmer for the future.
We needed to become a more collaborative, responsive and nimble organization. We thought the progress would be iterative and it would take years before bearing real food. However, looking back, the timing could not have been more ideal. Our first half performance in 2020 validates that the actions taken were the right decisions. We've reduced red tape, promoted cross functional collaboration and we've struck a chord with employees that has resulted in launching breakthrough innovations at the fastest clip I've ever seen in my career.
While I could easily do so, I will refrain from spending the next hour talking through all our recent product introductions, because I know you have a lot of questions teed up for Q and A. But we have launched over a dozen new products and solutions to help combat COVID through the 1st 7 months of the year, and we have several more COVID related products and solutions in the pipeline. Additionally, we have launched 13 non COVID products year to date with one of the most significant being the Nexeon 5000, a true multi quadruple ICP MS, which delivers performance beyond high resolution ICP MS and traditional triple quad technology with phenomenal stability and unmatched matrix tolerance. We also expanded our flagship cellular imaging portfolio with the launch of the Opera Phoenix Plus, which marries our premium high content screening system with a fully automated liquid handling option and fast imaging frame rate, allowing researchers to tackle fast response assays ideal for cardiology and neurology research. If you recall from our Q1 earnings call, one of our 4 guiding principles during the pandemic was to utilize our expansive capabilities to join the fight against COVID-nineteen.
We remain committed to doing so. We see the future COVID diagnostics landscape splitting into 2 broad categories, direct viral detection and immune insights. There will be many different types of tests that will be needed. In response to that need, we are actively investigating additional solutions to help on both fronts. On the viral detection side, in addition to our full suite of PCR solutions, we are looking to add both point of care and ELISA antigen testing as well as a respiratory panel that brings together COVID and flu that we hope will be commercially available before the start of the flu season in the fall.
On immune insights, we believe that antibodies are only part of the story. There has been increasing COVID related research into innate or cell mediated immunity over the past few months, as some recent work suggests that not all infected patients appear to have a durable circulatory circulating antibody response. As a result, we have several assays in development that we hope will aid researchers and clinicians in understanding how the broader immune system may help confer protection, including a patient's T cell response, cytokine levels or cellular damage. PerkinElmer has a storied history of being at the forefront of innovation in the analytical tools industry. Our teams are passionate about developing solutions that address unmet needs or solve common customer pain points in the markets we operate.
We have and will always lead with science. Specific to COVID, this has been no different. From our R and D team in Taichung to our manufacturing groups in Turku and Texas to our scientists in Lubeck, we ran full speed ahead with the confidence we have always had in our capabilities and technologies and never looked back. Each of our COVID offerings, spanning RP PCR, high throughput RNA extraction, automation, ELISA and lateral flow based serology testing have proved vital for specialty and reference diagnostics labs, clinics, hospitals, pharmaceuticals and biopharmaceutical labs, academia and governmental and research institutes in combating the pandemic. Underlying our science is our customer first approach that has earned us the trust of so many.
Our commitment to producing and delivering high quality COVID tests, especially in light of shortages and bottlenecks in pockets around the world, has proven to be and will continue to be a differentiator. In fact, we are now live streaming our turnaround time for the delivery of COVID tests to increase transparency and allow testing centers to maintain maximum capacity and enable labs to rapidly respond to evolving public health needs. Having our own network of clinical labs has also been a competitive advantage for PerkinElmer during this crisis. The PerkinElmer Genomics team has been instrumental in helping PerkinElmer be at the forefront during the pandemic. We have been able to respond more quickly to market needs because we are one of the only life sciences and diagnostics company with a CLIA and CAP certified internal commercial testing lab.
Our lab in Pittsburgh allows us to rigorously test our full suite of solutions to better optimize them for our customers. It also allows us to actively demo full workflow solutions in a real time clinical setting for labs across the globe looking to scale. And it affords us the ability to develop and validate testing in house. Combating COVID has energized our organization and enhanced our ability to deliver what our customers need in the most agile way with science they can trust. Moreover, the brand equity we have built up from new partnerships in the wake of COVID has opened doors to larger, even more impactful opportunities to make a difference.
For example, governments around the world have chosen to partner with PerkinElmer on milestone collaborations, such as our partnership with Public Health Wales. We are honored to work with them and we are filled with gratitude for the feedback they provided in their recent press release on the collaboration. We have engaged in similar collaborations across the world, setting up labs, providing around the clock support and swiftly delivering instruments and reagents to various top hospitals, National Ministries of Health, networks of labs and testing companies, as well as state health organization. For example, we recently announced collaborations with Semaphore as well as with Sonora Quest Labs through its partnership with the State of Arizona. We also teamed up with the Texas Department of State Health Services and the Georgia Esoteric and Molecular Laboratory.
At our EUROIMMUN site in Lubeck, Germany, we received a visit from the Prime Minister of the region to learn more about our test systems, automation solutions and software. From drive through testing in Brazil to labs in New Zealand, PerkinElmer's global footprint helped us make a global impact. Again, much has changed at PerkinElmer over the past year. While there is a lot of uncertainty in the world, our focus and determination to help is resolute. I'm humbled by and proud of our entire organization.
Our 13,000 employees have and continue to go above and beyond. To them, I say thank you. As I close my prepared remarks, I want to take a moment and make some general comments. Setting COVID aside, we are all living in a challenging and ever changing world, whether it is due to climate change, important social justice issues or increasing constraints on global resources. At PerkinElmer, we need to do more to be a part of the solution.
We need to take a more proactive role to be better, to do better. Ask any PerkinElmer employee and they will tell you the same thing. We do what we do because we are passionate about helping people. It's personal. But it also extends beyond the individual.
It includes helping our communities and our planet. It was very timely that during the Q2, we debuted our latest corporate social responsibility report, which put a stake in the ground for PerkinElmer as we enter an era where our voice as a company needs to ring even louder. I invite you to read this report and share your feedback with us, since we are all truly in this together to make the world a better place. With that, I will turn it over to Jamie to discuss our financial results in more detail. Jamie?
Thanks, Prahlad, and good evening, everyone. To start, I hope you are all safe and doing well. I would like to echo Prahlad's comments by thanking the global team at PerkinElmer. We've all been through a lot of change over the past 18 months and our team's passion and dedication has been amazing. So a big thank you to everyone.
Over the past 3 months, I spent a disproportionate amount of my time working with our segment leaders, especially within our applied and food businesses to understand our go to market strategy, competitive advantages and future opportunities. We evaluated the product pipeline, strategy and profitability of these businesses, and we identified significant opportunities that have me even more excited about the future potential of PerkinElmer. We will be sure to democratize some of those learnings in future discussions with the external community, but I wanted to take the time to reinforce that we have also been making a lot of progress on our non COVID portfolio, which will position us well for the future. On a related point, given our inability to get together in person due to the current environment, we will postpone our Analyst Day originally planned in September to a date to be determined in 2021. That said, we recognize there has been a significant amount of time since our last Analyst Day our portfolio has dramatically changed.
Given this, our hope is to host virtual webinars to walk through our end markets and product portfolios over the coming quarters. Before I begin, I want to remind people that our Q2 earnings call presentation has been posted on the Investors section of our website under Financial Information. As always, I will begin my prepared remarks by highlighting the Q2, then I'll provide some additional color on our served end markets and financial metrics, and I will end with Q3 guidance as well as some updated full year details that will hopefully assist you in your own modeling. At a high level, we are extremely pleased with our 2nd quarter and first half results. The team executed well despite COVID related customer shutdowns severely impacting business activity in April May.
There were some signs of improving momentum in June, but business activity across the globe has yet to fully normalize. Revenue grew 12% to $812,000,000 and included a 2% foreign exchange headwind and a 1% net acquisition tailwind. Organic revenue increased 13% year over year, which is 1% better than what we had previously communicated. As Prahlad mentioned earlier, overall COVID related products contributed $196,000,000 in the quarter, propelled primarily by our PCR tests, RNA extraction solutions and serology kits. Demand was strong across all three of these product lines with each contributing in excess of $50,000,000 during the Q2.
By business diagnostics representing 52% of total sales increased 48% organically as strength in our immunodiagnostics and applied genomics businesses more than offset a modest decline in our reproductive health franchise. Discovery and analytical solutions representing 48 percent of total sales declined 10% organically as better than expected performance in our Life Sciences business was more than offset by softness in Food and Applied Markets. On a geographic basis, Americas grew low double digits, Europe grew strong double digits and Asia Pacific was flat. China improved sequentially. However, growth remained negative as non COVID diagnostic demand was anemic due to ongoing clinical caution, leading to lost prenatal and infectious disease testing and deferments in autoimmune and allergy testing.
Operationally, we are extremely pleased with our performance. Adjusted operating margins expanded 7.90 basis points in the 2nd quarter to 28.1%, led by business mix, productivity and operating expense leverage. Adjusted earnings per share of 1 point quarter increased 57% year over year. Looking further into the key drivers within our segments, let's start with our Diagnostics business. As mentioned in my earlier remarks, organic revenue increased 48% as robust growth in Europe and the Americas drove the momentum with both regions generating greater than 50% organic growth.
Our Applied Genomics business led the way posting over 150 percent organic growth on broad based momentum across all geographies and led by our nucleic acid extraction and liquid handling product lines. Combined, these product lines grew more than 6 times year over year as they have proven to be vital upstream solutions in automated, high throughput COVID RT PCR detection workflows. Meanwhile, immunodiagnostics increased 60% organically with EUROIMMUN increasing over 30%. Demand for our RT PCR and serology assays was particularly strong across the globe. The quality of our COVID solutions and breadth of capabilities led to strong interest in PerkinElmer assays throughout the quarter, including several prominent customer wins.
Reproductive health declined mid single digits organically driven by lower newborn and prenatal testing across the globe. Performance was consistent across all three major geographic regions. If you recall, we experienced some stocking of reproductive health products at the end of the Q1 as certain customers in the U. S. And Europe built additional inventory as COVID-nineteen started moving west.
Normalizing for the impact of stocking at the end of the Q1, our reproductive health business would have been flat in the U. S. And Europe in the second quarter. Turning to Discovery and Analytical Solutions, organic revenue declined 10% in the second quarter. By end market, we experienced a low single digit organic revenue decline in Life Sciences.
Pharma Biotech was up low single digits driven by strength in informatics. Academic and government declined high teens. Our OneSource enterprise service was nearly flat as strong professional services demand was offset by billable business declines due to COVID related pharma lab shutdowns. Applied markets declined approximately 20% with all 3 major geographic regions experiencing double digit declines as customers dealt with ongoing shutdowns and funding delays. Food declined over 20% due to muted demand in the Americas and Europe.
Asia Pacific food rebounded sequentially to flat, led by our growth within our grain and milling and dairy franchises in China. Meanwhile, Industrial and Environmental Safety declined high teens. Trends were generally consistent throughout the Q2, which has us a bit more cautious on the velocity of a rebound near term. Order pacing in Asia Pacific in the Q2 was encouraging, though it is still too early to say whether this momentum is here to stay. Shifting to below the line items, net interest and other expense for the Q1 was approximately $11,000,000 and our adjusted tax rate was 19%.
Turning to the balance sheet, we finished the quarter with approximately $2,000,000,000 of debt and $219,000,000 of cash. Free cash flow was $122,000,000 in the quarter and adjusted free cash flow was $127,000,000 We achieved an adjusted free cash flow conversion of 72%. Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 2.3x, down 0.5 turn since the beginning of the year. Closing the books on the first half of twenty twenty, we are extremely pleased with our performance, including 6% organic growth, 33% adjusted earnings per share growth and over 400% adjusted free cash flow growth. Adjusted free cash flow conversion was 67%, up from 17% in the first half of twenty nineteen.
We are encouraged by our accounts receivable progress to start the year. The reduction in our DSO year to date has been a function of process improvements as well as due to more favorable terms associated with the COVID related demand. Additionally, we consciously invested capital in inventory to start 2020. We expect that the increased inventory levels should support our higher COVID and non COVID backlog as we transition to the back half of the year. As I mentioned on our Q1 call, we remain steadfastly committed to returning our adjusted free cash flow conversion to the 85% to 90% range over the next 2 to 3 years.
For many reasons, the first half of twenty twenty will no doubt be one to remember. And again, I could not be prouder of how the PerkinElmer team has together has come together and executed during these difficult times. As we transition to the back half of the year, I want to provide an updated view on modeling items that are less dependent on COVID impact scenarios. We now anticipate 1% foreign exchange headwind for 2020. For below the line items, we anticipate $44,000,000 to $46,000,000 in adjusted interest and other expenses, a tax rate of approximately 18% and our share count to average $112,000,000 for the year.
We are assuming a tax rate at the higher end of our previous guidance as we now expect a greater mix of profits will come from areas with higher jurisdictional tax rates. Turning to the Q3 of 2020, we are forecasting reported revenue of $760,000,000 to $860,000,000 representing 7% to 21% organic revenue growth, including a negligible impact from foreign exchange. Embedded in this guidance is $150,000,000 to $200,000,000 of COVID related revenue, representing approximately 21% to 28% organic growth, partially offsetting an organic demand drop of 7% to 14% for our non COVID product lines. In terms of adjusted earnings per share guidance for the quarter, we are forecasting a range of $1.18 to 1.53 dollars All of this is detailed in the second to last page of our Q2 earnings presentation. In closing, I am extremely proud to be part of the PerkinElmer family.
The energy and purpose that pervades throughout our organization propels us all to do better. While we are operating from a strong foundation, we are improving every day. I have no doubt that the upcoming years will be even more fruitful for all our stakeholders. Operator, at this time, we would like to open the call to questions.
Thank you.
Our first question comes from Vijay Kumar with Evercore. You may proceed with your question.
Thanks guys for taking my question. Wow, best quarter since 1999 and that came in the midst of a pandemic. Congrats on a terrific execution here. Maybe I had two questions. 1 on the 3Q guide, Jamie.
The non COVID revenue base, I think the range is minus 7% to minus 14%. The base business was down 14% in 2Q. And I think commentary from your peers would suggest the base business is improving. So I'm just curious on the assumptions around that minus 17% to 14%, particularly at the high end. COVID revenues $150,000,000 to $200,000,000 It seems it's sustainable into 3Q.
Curious about thoughts into 4Q on especially on COVID diagnostics?
Great. Thanks, Vijay, for the question. First off, obviously, it's a very volatile environment. So the pandemic could swing both our COVID and non COVID revenues, but we've put a lot of time into looking at this and looked at the trends over the last 3 months, including the 1st 3 weeks of July, looked at our backlog and feel pretty comfortable with both ranges. So I'll address the non COVID piece.
So the minus 14% is similar to last quarter, the second quarter. And while we saw some positive trends, particularly on the recurring side where we see services and consumables upticking through the quarter, instruments were a bit more lumpy, but backlog did grow in DAS. But we just think it's prudent that in this scenario in this time frame, there could be a scenario where something happens and there's a setback. So while we did see improving trends through the quarter and continue to do so, I think the low end of our range, we think, is no worse than the Q2. And if the trends continue, we would get to the minus 7%.
On the COVID side, the $150,000,000 to $200,000,000 inside the $150,000,000 basically, that's just adjusted for serology. So serology was, as I mentioned in my prepared remarks, a little over $50,000,000 and we're planning for that to be under $10,000,000 in the 3rd quarter. And so the difference between $196,000,000 $150,000,000 is solely serology. And we feel confident as we look at our shipments to date and our backlog that RNA extraction and PCR test will continue. And then if you get to the high end, we're in the midst of a lot of commercial discussions and those commitments could be coming, but the ramp of those and the timing of when they would happen is still in flux.
But we do see the opportunity to get to the high end of $200,000,000 And so that's how we derive the range around COVID revenue.
That's helpful, Jamie. And then one for Prahlad. Thinking about sustainability of trends, a couple of comments you made, Prahlad, in your prepared remarks. I think you mentioned something along the lines of opening new doors in terms of relationships, just given the amount of placements you guys have done on nucleic acid extraction, liquid handling. I'm just curious whether that has any implications for tender wins going forward.
And I think you also mentioned a COVID plus flu combo test. Perhaps could you address the pricing or how to think about opportunity for this combo test? Thanks.
Thanks, Vijay. I think the way I would address the first question around the extraction kits that I think what has been really good is that the number of installed base has obviously increased significantly this year and that bodes well for the other assays that are coming through the pipeline, both COVID and also non COVID related to infectious diseases and others. So I think longer term, as customers get to using our RNA extraction kits and see the benefits that the magnetic beast based solutions provide versus what others provide. Especially in high throughput labs, we are seeing a lot of traction and that will I think be quite beneficial for us and competitively in the long run. In regards to your question around the pipeline and the flu test, etcetera, the way I would look at it, Vijay, is I would sort of demark it in 2 parts.
1 is workflow solutions around direct testing, and that could be either a flu pack test or a viral detection pooling or a direct antigen test. And the second one is around immune insights, the ways that we can look at what immune responses come out from the human system and how do we measure that in regards to COVID. So I think while it's too early to opine on the pricing, our focus is that to sort of put as many ways that we can in terms of detecting the disease directly and also indirectly. And then that's where our focus has
been. Been.
Our next question comes from Steve Willoughby with Cleveland Research. May proceed with your question.
Hi, thanks. A couple of questions for you. First on PCR test demand. Prahlad or Jamie, I know things are shifting quickly. When we look back 90 days ago on your 1Q call, it seems like you maybe downplayed the opportunity within PCR.
Obviously, it came in much better than expected. Could you maybe just provide a little bit more color on sort of what changed as it relates to the demand for your PCR test? And then secondly on PCR, Prahlad, when we look out, how are you guys thinking about the sustainability in PCR test demand, maybe even beyond the Q3? And then I have one quick follow-up.
Sure, Steve. I think when we look back 90 days, the science on the virus was still very evolutionary. And I think we along with others were still trying to figure out, hey, do we want to focus on the direct testing or was serology more important? And that's when serology came about, there was a large spike in it. And the thought was that maybe this will tell us very quickly what the immune response is and people would get back to work.
And I think that sort of played a role. But the long and short of it is, Steve, that we expect direct testing, the direct vital testing to be vital and expect sustained demand for it, not just in 3Q, but at least till the year end that we look at it. So I don't think direct testing is going to go away anytime soon.
I would just add 2 things, Steve. At the time of our last call, remember, we had not made any shipments yet of PCR at that time. So we were having some import issues at the time. So having the confidence to be able to ship that amount was still in question, I would say. And then the second thing is, I think our workflow is terrific.
So when you combine RNA extraction capabilities with our PCR technology and liquid handling, I think that's resonated very well in the marketplace.
So Jamie with that then, if you were only shipping the PCR test for, let's say, 2 months out of the quarter and you did, let's call it, close to $100,000,000 in revenue, It seems like the guidance for 3Q as it relates to COVID tailwinds, are we now assuming the PCR test makes up $150,000,000
or so
of that $150,000,000 to $200,000,000
Yes, that's right. I mean, as so what I tried to mention in DJ's question is that serology, which was a little over $50,000,000 obviously the time and place for serology is going to be in the future, we believe, we'll see. So therefore that demand we have taken down to less than $10,000,000 and therefore the PCR and RNA extraction technology, which as you said was, let's say, dollars 100,000,000 is much more a bigger portion of the total $150,000,000 to 200,000,000
Got you. The other quick follow-up I had is just what are your what's your outlook or how are you thinking about demand overall in China and if there's any nuance between different end markets in China in the back half of the year? Thank you, guys.
Yes. So China improved sequentially for us. So it's down over 30% in the first quarter and down about 14 percent in the Q2. And we had hoped actually that it would get to flat at one point in the quarter here. DAS did get to flat and in fact built a little backlog as well.
So we feel good about that. Diagnostics though went from down 40% to roughly down 20% in the quarter. I think whether that's the second outbreak in June in Beijing that happened, but we're still not at the utilization levels of having people comfortable going to the hospitals and clinics, etcetera, it's still not at that 100% level and hasn't returned to normal. So as we look forward here, we're hoping again that it will get to flat as soon as possible and perhaps in the Q3. But what we're planning on in the Q3 is down high single digits to low double digits as a whole for overall China.
So again, if it gets back to the flat, that will be upside to our current range. But right now, the way we see it is diagnostics is still a bit challenged. It's probably going to uptick a little bit, but that's what we're currently planning on.
Okay. Thanks very much.
Thanks, Steve.
Thank you. Our next question comes from Derik De Bruin with Bank of America. You may proceed with your question.
So Steve just took my China question. So now I got to think got to go to the second one here. So the free cash flow guidance going back to 80% to 90% and also I just wanted to sort of talk about your conference in the opening about having accelerated some programs and seeing things picked up. And I think one of the questions we're all asking is sort of what does things look like for these businesses that are getting these big COVID tailwinds when things go back to normal, can you opine a little bit on how you sort of see margins, the overall impact to margins post this crisis and what you need to do to sort of get back to the free what you need to do to get to the free cash flow levels you were talking about?
Sure. So you want to talk both margins and free cash flow. So margins, obviously, it's an unprecedented quarter. We had strong volume growth. We had great product mix.
We had all the productivity programs that we had already been working on, largely in services and DAS and EUROIMMUN. And on top of that, we had great OpEx leverage. And so even though our OpEx was up, it was still good leverage. So I think in terms of the sustainability of that, I think it supports the overall thesis for PerkinElmer long term that when those things happen, we do have the ability to get to a mid-20s to high-20s operating margin business. But certainly, this was an unprecedented quarter of margin expansion in the short term.
But some of this will remain. I mean, I think we're becoming more efficient. I think productivity programs are being put in place. I think our volume and mix is changing over time. So it's difficult to say what it would completely snap back to in the very short term.
But I think the long term, this is proving what the business can be. As it pertains to free cash flow, we had one of our best quarters again, and certainly our best first half in a long time. And that is there's a couple of things in there. Our receivables, we've been as you know and we've been talking about, we're making a lot of process improvements on, but we also did have a small benefit with regards to COVID terms. But I think receivables progress will continue to happen here over time, even in a normalized environment.
You can see that we invested a significant amount in inventory. And I think most half of that's about our COVID inventory. And we think that having the product ready, which Prahlad mentioned in his prepared remarks that we are tracking our turnaround time, is enabling us to be ready for customers and win customers that need the product immediately. And then the other half, we always have a first half build. It's probably a little bit more than normal due to the demand levels, but our non COVID backlog has increased.
So I do think that the second half will our inventory levels should come substantially down. And so we're still I think what we were saying, Derek, is that 80% to 90% we're tracking. There's a lot of good underlying progress here on receivables, on our ability to manage our SIOP. It just so happens right now that our inventory is required to be high and to meet our customers' demand. But we're focused on it, and I think we feel confident that we can get to that 85% to 90% range in a couple of years.
And if it happens before that, that's great.
Great. And just one follow-up. You mentioned some of the point of care ELISA antigen test. Are you looking at those as sort of going in with an EUA authorization or and then following up with those eventually going to a more FDA approved route. I'm just sort of curious because you haven't historically done things in the infectious disease market in the U.
S. From an FDA standpoint, it's been more focused in China. I'm just sort of curious on your longer term strategy if this is sort of like some shift.
Yes. I think COVID specific, Derek, we continue to actively investigate that as a detection method. I think the key for us is very important that the quality of our tests should meet our threshold. And I mean, we would not release a test that are in the low 80s or somewhere around that. So if we have a test which has got the right relative sensitivity that we would expect it to be, then we would release it specific to COVID.
I think longer term, will we have a point of care test strategy in the U. S. That is TBD.
Great. Thank you.
Thank you. Our next question comes from Tycho Peterson with JPMorgan. You may proceed with your question.
Hey, Jamie, just a clarification on the gross margin comment. Can you quantify how much of the step up was the COVID testing accretion versus the cost cutting measures for 2Q? I didn't hear you quantify that in response to Derek's question.
Yes. So overall mix, Tycho, so we grew gross margins about 600 basis points, and I would say mix made up 85% to 90% of that. So even ex the mix impact, we expanded gross margin by 50 to 80 basis points, and that was on our productivity programs. But mix certainly, and in total, not just COVID related, but in total probably made up 85% to 90% of that increase.
And then on the 3Q outlook for the non COVID based business, can you just give a little more color on what you're thinking there? Are you baking in an academic recovery, for example? And are you baking in a sequential improvement as far as just a little bit more color by end market might be helpful?
Yes, sure.
So I think in total,
in the 7% to 14% range, at a high level, we have diagnostics, which was down 20% in the second quarter ex COVID in a minus 10% to 20% range, and I'll talk about some of the end markets. And then DAS, which was down 10%, obviously, in a minus 5% to 10% range. So let me just hit some of the end markets underneath there. So reproductive health, I think, continues to tick up a little bit. I think we mentioned that it was down mid single digits.
We're kind of planning on down low single digits. China utilization, particularly on prenatal is not yet at 100% normalization, so that's reproductive health. Immunodiagnostics and applied genomics down kind of high double digits. I think it will remain down double digits and that's just a function of when do people feel comfortable coming back to see physicians in hospitals and whatnot. We expect a little bit of uptick there.
Flipping to the DAP side, life sciences, which was down low single digits, we think probably rose low single digits. In the Q2, we were buoyed by strong informatics business. Enterprise was flattish and discovery was down. I only anticipate informatics to be as strong, but I think Discovery will pick up and we're seeing that in some of the consumables business and our backlog and our tenders as well as the enterprise business as more labs return. So we expect looking at Life Sciences to kind of move from down low single digits to up low single digits.
Again, this is on the high end of our range that is. Applied Markets and Food, again, was down, I think, 20% and on the low end of our range. Obviously, that remains at that level and but we are expecting it to start picking back up. We had a bit of backlog growth, but that we would expect pick up, but it would still be down double digits even in the high end of our range, which is down 7%. But I think simplest way is down 5% to 10% for DAS and down 10% to 20 percent for DDS, excluding COVID.
Okay. That's helpful. And then just one for Pahlad on the antigen test you mentioned. I assume that uses some of the technology. But can you just talk about the thought process there?
We've seen a lot of lower quality antigen tests come into the market. So I'm just curious why you're entering and how you think about the role of antigen testing versus PCR longer term? Thanks.
Yes, Tycho, thanks. I'm not saying that we are going to. I'm saying that we are evaluating it. And you're absolutely right. The while we actively investigate it, the focus for us is that we would only launch it if the quality metathreshold.
And Tulip is one aspect from where we would develop it, just like on the rest of our product portfolio, where we've been able to leverage our capabilities from across different sites and companies. We've got competencies and capabilities on this in China and Europe too. So we would be leveraging. So in the event we would come out, it would only be if we get the sensitivity and specificity levels at the high end.
Okay. Thank you.
Thank you. Our next question comes from Dan Arias with Stifel. You may proceed with your question.
Maybe just on the reproductive health side, obviously, it's a tough selling environment for your Vanadis franchise right now. But can you just sort of level set us on expectations and then what's going on in Europe? And then just thinking ahead there, where does all of this have the value study with women and infants shaking out? Is that data that can still show up at the end of the year? Or is it best to sort of think of that as a 2021 thing?
Yes. So thanks, Dan. The Vanadis as a program itself, it continues to progress very well. The funnel continues to be stronger. Obviously, COVID has resulted in installation delays.
The funnel for us is stronger and the installations generally are being held up right now. In terms of the tests, they continue to run smoothly and the demand is high. The challenge for us, both in terms of publishing the study and getting the installations are in place, is that the market shifts in terms of COVID, I would say, freeze or travel restrictions, etcetera. But I think as it starts to loosen and open up, the installations will pick up. I will say that I don't think we expect the installations to be anywhere up to 55 in 2020 as we had projected.
But we are very hopeful that as regions open up in Q3 and Q4 that we will be able to fill the pipeline that we have seen.
Okay. And just maybe going back to COVID on serology. Prahlad, does the data that you're generating suggest that your ELISA assay can be used to provide information on neutralizing antibodies? And then just thinking about with the PCR test, since it's obviously in pretty high demand with the PCR test since it's obviously in pretty high demand. It sounds like some of your larger diagnostics competitors, at least on the European side, have the adopted debt strategy.
So just curious whether that's something you're able to use to drive volume there?
Yes. To your first question, Dan, I think the in the case of serology, our understanding of the science, as I said earlier, is evolving every day. I think if I were to look at a crystal ball, I would say that we expect the epidemiology studies around serology to continue and for it to provide a better understanding of the immune response. And as vaccines come into play, it will drive broader immune insights testing and that's where serology will play a larger role. In terms of us being able to put it together, I mean, there are examples as you saw with Sonora Quest where we've done both serology and PCR testing.
So I would say that it is larger in larger customer bases, we are seeing traction around our total solutions, whether it's around collection devices, extraction kits, PCR or serology. I think the challenge as of now is that serology is to some extent taken a backseat and most of the focus continues to be on direct virus detection.
Got it. Okay. Thanks very much. Yes.
Thank you. Our next question comes from Catherine Schulte with Baird. You may proceed with your question.
Great. Thanks so much for the question. Yes, first, can you just walk us through where you are from a manufacturing capacity standpoint on the serology, PCR and extraction kits today? And what are your plans in terms of expanding capacity further as we move through the rest of the year?
Yes. So, I mean, in all cases, we are highly scalable and are manufacturing multiples of what we have previously disseminated in terms of our capacity. I think this is where the benefit of the breadth of our capabilities and having a broad geographic footprint in all three parts of the world, whether it's in Asia, supply redundancies in place. So we are not sort of strong supply redundancies in place. So we are not sort of dependent on any sole suppliers, etcetera, or any particular country or a region.
I mean, at this point, we do not feel supply to be a constraint. In fact, as you probably as you probably as we've talked about earlier, we put turnaround times on our website and you can live track it's live streaming in terms of our capability to provide turnaround time to our customers.
Okay, great. And then as we think about you're getting pretty incredible incremental margins on this COVID testing business. What's your thought process in terms of letting that drop through versus using that to maybe accelerate some strategic investments?
So, yes, I mean, Catherine, I think we are biased to invest. And so actually some of the spending levels in the first half and second quarter are not at the levels by choice. It's the levels because you can't travel or you can't get a 3rd party service etcetera. So I think if we look into the second half of the year, we are going to step up our investment in areas like R and D, digital investments as well. So information technology, there's some pockets of the organization where we want to invest with some additional people.
So I think we will continue to spend and probably invest a little bit more than we have been. Of course, we'll always monitor the outlook, but think one of our guiding principles has been to emerge from this as a stronger company. And I think we're fortunate enough to be able to reinvest back in the business and we plan on doing so.
And especially around R and D, Catherine. I think some of the investments that we did want to make in the first half of the year, we couldn't just because of whether it was travel restrictions or availability of scientists to come to the bench. So I think that definitely and given the pipeline and the NPI pipeline that we are talking about, that's where you will be able to continue to invest incrementally.
Okay. And maybe just last one for me going back to Jamie's comment on emerging as a stronger company after this. If we step back and think about how part of the strategic rationale around the European acquisition was really the opportunity to grow its U. S. Presence, it seems like once we emerge from COVID and those tailwinds subside, you should be in a much stronger position from a U.
S. Adoption perspective than you would have been if COVID had never happened. So is there any way you can help us think about just how much of an accelerator COVID has been in terms of the U. S. Adoption of that portfolio longer term?
So there are 3 ways to look at it, right? 1, Catherine, the way I would look at it in terms of relationships or the emerging relationships that we are establishing with those customers. That has become significantly stronger, whether it's at institutions such as Mayo or with the large reference labs. I think the second aspect is the familiarization with the science aspects of EUROIMMUN and with the workflow that the team has been doing in Lebbeck. That has significantly improved.
And it has also allowed us to leverage the relationships to provide a peek into our current pipeline of products that are commercially available and also what's coming into the future. As we've talked about earlier, right, we're getting our random access platform, Exentis, that would be out from EUROIMMUN, hopefully, by the end of the year or early 2021, given some COVID restraints. The adoption of that is the barrier for adoption of that is going to be much lower, given what we have done around COVID with our customers. So that's one way sort of to quantify to some extent as to what the benefit of COVID provides longer term to the company as a whole.
Great. Thank you.
Thank you. Our next question comes from Steve Beuchaw with Wolfe Research. You may proceed with your question.
Hi, good afternoon and thanks for
the time here. I'll ask one for Prahlad, one for Jamie and then just jump back in queue. The one for Prahlad is, if we reflect a little bit on the experience that we've had with serology and some of the learnings for the clinical trial data that we've seen out of some of the vaccine studies, it seems like T cells have gained more and more attention, at least in the clinical community. But it's not clear to me necessarily how much demand there is for broader, so outside of vaccine clinical trials, T cell reactivity assessments. You speak to that and the extent to which outside of clinical trials those types of assays might be in demand?
And then for Jamie, there's been some focus on margins on the call, but can we just jump out like, I'm sorry to ask it this far, but 3 4 years and say, what does the margin trajectory of this company look like relative to what you thought 7 or 8 months ago? I would imagine there's been some discovery of structural cost savings. And you flagged on the call or in Q and A earlier that there's a path to mid-20s or maybe even higher margins, which makes a lot of sense on some amount of time. But can you speak to whether you think that's within the next 4, 5 years? Or is that a longer term view?
Really appreciate all the help here. Thank you.
Yes. Let me start with the easier one and then Jamie can take. I think, Steve, the aspect around T cell the T cell response, I think it's a little too early to tell in my opinion. I think one would have to look at the total response, whether it's humoral or innate response and how to look at it. But the more germane way to think of it is that immune insights are going to be important and that's where sort of we are trying to focus on as to what aspects and what avenues do we need to look at.
So I think it's something TBD or yet to come.
Yes. As for the margin, Steve, I mean, it's difficult to give an exact target here in 3 to 4 years, and we said we'd come out with our Analyst Day and that's when we were hoping to launch. What our outlook is for margin in the next 3 years? Obviously, we as you mentioned, we have had a lot of learnings. So I would what I would say without giving an exact number is, I'd say we're even more confident in our margin expansion opportunity.
I mentioned in my prepared remarks how much time we spent in the analytical and food business in all segments for that matter, but I think the margin expansion value creation opportunity there is substantial. I think it is a 3 to 5 year play, some short term actions, but certainly over the course of our NPI cadence, what we're doing with procurement, what we're doing with SKU rationalization, I think it will be rather substantial. So I did mention mid-20s and maybe that's in 3 to 4 years, but I don't think we want to sign up for anything at this point. And again, we're still learning here, but I would say we are even more confident in that approach.
Thank you. Our next question comes from Doug Schenkel with Cowen. You may proceed with your question.
Hey, guys. Good afternoon. Thanks for taking my questions. Just a couple of quick ones. The first is just as a guidance cleanup question.
It appears your Q3 guidance implies that you expect operating margin to decline about 300 to 400 basis points sequentially despite similar sequential revenue numbers. Could you provide a bit more detail on what drives this? I'm guessing it's a combination of change in mix and a reflection of some of the opportunistic investment and long term growth initiatives that you talked about?
You nailed it. It's about half that. And so I think I would expect the gross margin line to come down about 200 basis points sequentially versus the prior quarter and that is mostly mix, both non COVID and COVID. So the non COVID book coming back up a little and the COVID book coming down a little bit at the midpoint to your point, as well as some sub business mix with a little less informatics in the Q3 versus the Q2. So a little half of this probably comes down through the gross margin line.
And then you're right, the other half comes in through incremental investments and everything I mentioned to Catherine's question in terms of R and D, digital, people continuing to invest and emerge stronger here.
Okay. Super helpful. The second one is, and I think this is a Prahlad question. I'm just be willing to provide a bit more detail on your PCR revenue assumptions moving forward. Specifically, what I'm thinking about here is, one of your peers who also produces non automated PCR kits, produces, well, they're driving to produce 10,000,000 tests per week.
The automated diagnostic system vendors are expected to ramp manufacturing meaningfully by the next flu season. So just with those two examples in mind, I'm just wondering if you could just share a little bit more on how you would expect your revenue to evolve over time? Are you expecting to maintain share? Do you expect to gain share? Or is this really just as simple as you're going to sell as many as you can produce for the foreseeable future?
Yes. I think let me put it this way Doug. As of now, our capacity is greater than the demand. And we feel very good about where we are because what we are realizing that customers are coming back to us from some of our competitors because they realize that we provide a full workflow solutions with collection media, extraction kits, extraction units, PCR and fully validated workflows. And I think that's the benefit that we are seeing from our customers and I think that's where we feel that as we progress and we see sustained demand, we are very well placed with the solution that we bring to direct antigen testing.
Great. Thank you.
Yes.
Thank you. Our next question comes from Dan Brennan with UBS. You may proceed with your question.
Great. Thanks for taking the questions and congrats on the quarter. Just wondering if you could share a little insight on the liquid handling kind of the robotic market. We haven't dove in too much there, but obviously you're a leader there and it's hard to do diligence because there's not as much information. So if
you could just give a
little color on maybe size of that market, any color on kind of instrument placements in the quarter and kind of how we think about the opportunity going forward for COVID?
I mean, it has been particularly strong and especially our Janus product line has seen a lot of demand in the Q2 and the ongoing demand continues to be strong. I don't know if we have break it down specifically to product lines around automation.
No. The only thing we said, Dan, was that it was up 6.6% year over year here in liquid handling.
More color on that Jamie like 6x, I mean how much of the 190 or so million in the quarter, I know you gave some color on P. C. On extraction, but how much was liquid handling of that and kind of how do we think about that and implicit in kind of the Q2?
I think Dan we're trying not to get into exact numbers here to walk through and be able to be off of and whatnot. So I think we'd like to keep everybody focused that the overall franchise is doing well and that the diagnostics opportunity across all of our product lines is doing well, so selling together.
Got it. Okay. And then maybe just a couple of the related ones, just on us, just kind of sticking with COVID, if you don't mind. Could you share any insight at all on pricing since it's hard for us to back into kind of share of market. And as Doug mentioned, there's just a lot of capacity out there, but the revenue contribution really matters.
Obviously, the branded players are in the 20s, maybe the less automated players are in the teens. Any help you can give us on PCR pricing? And then any color also about OUS, U. S. Mix in terms of your PCR and extraction businesses?
Thank you.
I'm happy to tell you that we feel that our RT PCR and extraction pricing remains consistent. And I think that's the level of detail we want to share. There has been some decline in serology, modest, but it's not for us. I think the whole serology market has seen a decline, but I think we want to stay away from getting into specific pricing.
And in terms of U. S, OUS, is it just follow along your geographic split or are you kind of having more success in one market or the other?
I think we are seeing success in both markets, both in the U. S, Europe and the OUS also in Asia. So we are seeing broad penetration across countries in all continents.
Great. Okay. All right. Thank you very much.
Yes. Thanks, Dan.
Thank you. I would now like to turn the call back over to Prahlad Singh for any closing remarks.
Thank you for your questions. Again, I'm proud of our entire organization and how everyone has rallied together. Our breadth of capabilities puts us in a unique position to help combat this pandemic. We are focused on leading with science and that is clearly resonating. I have no doubt we emerged from this crisis as an even stronger company.
Thank you for supporting PerkinElmer and I look forward to providing further updates on our Q3 earnings call. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.