Ladies and gentlemen, thank you for standing by and welcome to the Avantor Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there we will a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us on today's call. We made the decision to accelerate the timing of our earnings release and conference call to coincide with our debt offering. We appreciate the flexibility in joining us this morning. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Tom Szlosek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our investor website at ir.avantorsciences.com. A replay of this webcast will be made available on our website after the call. Following our prepared remarks, we will open the line for questions. I would like to note that we will be making forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those that are set forth in our SEC filing. Actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update these forward-looking statements, whether a result of new information, future events and developments or otherwise. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the appendix to the presentation. With that, I'd like to turn the call over to Michael. Michael?

Thanks, Tommy. I'm starting on Slide three with a brief review of Avantor's revenue profile. Avantor is uniquely positioned to offer complete solutions for many scientific workflows. We are among the most recognized and trusted global providers of products and services to the life science and advanced technology industries, and our portfolio is used in virtually every stage of the research, development and production activities our global customers conduct. Our business model is very resilient due to our consumables-driven portfolio and highly recurring revenue base. Approximately half of our revenue comes from proprietary branded products and services, and no single customer represents more than 3% of our revenue. Approximately 2/3 of our revenue is in attractive life science end markets, including significant exposure to the bioproduction space. We are well positioned for continued growth in Europe and the Americas, and we are investing to expand our capabilities in emerging markets throughout Asia, the Middle East and Africa. Moving to Slide four. Here are the third quarter business highlights. The team continues to execute extremely well in a challenging environment. We grew our top line more than 5% organically, expanded margins more than 100 basis points, increased earnings per share by more than 60% and generated $266 million in free cash flow. I will cover these results in more detail on the next slide. Serving our customers and supporting them in their mission-critical work remains a top priority for us and one of our core values. Fortunately, all of our distribution, research and manufacturing sites have remained fully operational, and we've been able to leverage our global scale and footprint to maintain supply to our customers throughout the pandemic. Bringing innovation and developing new workflow solutions is another important element of our customer-centric business model. During the third quarter, we launched…

Thank you, Michael, and good morning, everyone. Let's start on Slide six. Organic revenues increased 5.4% in the quarter, which, as Michael mentioned, includes approximately 300 to 400 basis points of tailwinds from COVID-19 related items. Similar to the second quarter, diagnostic testing solutions drove approximately half of this benefit with the balance equally represented by sales of personal protective equipment and biopharma production materials, including those to support vaccine and therapy development. Recall in our Q2 earnings release, we indicated an expectation for growth in July of flat to low single digit. We achieved low single digits and momentum built over the quarter. Looking at growth from a regional perspective. Americas, which represents approximately 60% of global sales, reported 4% organic revenue growth, a big improvement from the Q2 decline of nearly 7%. We experienced market improvements across all end markets, highlighted by high-single-digit growth in biopharma, including double-digit growth in biopharma production and greater than 20% growth in health care, driven by hospitals and clinical reference lab customers and despite continued year-over-year declines in elective procedures. The declines in education moderated significantly, although lab and school closures continue to drive overall negative growth. The government business was strong with mid-teens growth and advanced technology and applied materials improved to roughly flat year-over-year. Europe, which represents approximately 35% of global sales, reported 7.2% organic revenue growth, also a big improvement from the 3% growth in the second quarter. Similar to the second quarter, biopharma grew close to 20%, which included over 40% growth in biopharma production. Health care improved from flattish in the second quarter to high single digit in the third quarter. Education was flat, but this actually marked a strong sequential improvement of over 1,000 basis points from the second quarter. Government grew double digits. Advanced technologies…

Thanks, Tom. I'm on Slide 10. We executed well in a challenging environment, and our top line performance, strong EBITDA and adjusted earnings per share and outstanding cash generation reflect the resiliency of our business model, the value of our highly recurring revenue base, broad mission-critical product portfolio and exposure to attractive end markets like biopharma. While the uncertainty associated with the current pandemic continues, our business remains strong, and we're committed to our role in combating COVID-19 by supporting our customers' ongoing initiatives in testing vaccine and therapy development and, ultimately, the production of approved treatments. Reflecting our relevance in this critical endeavor, our bioproduction order book has more than doubled, and we are actively investing to capture this opportunity. The potential to achieve life sciences breakthroughs has never been greater. We remain steadfast in our focus on executing our long-term growth strategy and are optimistic about our future. I want to thank you for your interest and investment in Avantor and for your ongoing support. I will now turn it over to the operator to begin the question-and-answer portion of our call.

[Operator Instructions] Our first question comes from the line of Tycho Peterson with JPMorgan.

Hey, good morning. Michael, I'm just wondering if you could comment on why the COVID tailwinds moderated this quarter relative to last quarter. Is that just the timing of some of the vaccine campaigns? And should we assume that three quarters of it was testing in PPE, like it was last quarter? Or was there any mix shift there?

Yes, good morning Tycho. Thanks for joining the call today. As we mentioned in Tom's remarks, roughly half of the tailwinds are linked to testing. And I think as we've said earlier in the quarter, we saw somewhat of a moderation in testing in the early part of the summer, particularly in July and August, and we saw an acceleration back in September. But on a full quarter basis, testing tailwinds for us were somewhat moderated relative to what we saw in the second quarter. Similar dynamic for PPE, where the tailwind wasn't quite as strong. A piece of that is the continued supply constraints that certain elements of that portfolio continue to endure. And for us, the acceleration on the vaccine piece really won't come in a meaningful way until there is an approved treatment. We've been supporting the process developments and the clinical trials, but you're talking tens of thousands of doses at that scale. And as we move look forward to an eventual approval, you're obviously then moving into the millions and presumably billions of doses. So the tailwinds will shift as we move into a phase of an approved treatment.

And then on the end markets, on biopharma, obviously, great strength there. You talked a lot about bioprocess. Can you talk on the R&D side, the pharma R&D piece that's still there to your revenues? And any thoughts on 4Q budgets? The last we've heard, some of your peers kind of talked that down. And I know overall equipment was down mid-single digits. So is there any hope equipment could recover in the fourth quarter?

We don't have a lot of visibility. We were encouraged as we saw equipment kind of accelerate maybe 15% in the third quarter relative to the second quarter but still off meaningfully. And we don't have a long window into the order book for that equipment. You're correct to point out, at the end of the year, you would typically see some potential budget flush. I'll remind you, last year, we didn't really experience much in the way of a budget flush the last couple of weeks of the year. And the visibilities further hampered this go around just given the pandemic. But what I can say about the R&D environment, we've seen that steadily improved throughout the third quarter. And even as we move into October here, as Tom indicated, the business is up overall, mid- to high-single digits in the month of October. And certainly, part of that acceleration that we do see is coming from the R&D space in biopharma. It does appear to be improving sequentially.

Okay. And then last one before I hop off on health care. You had a huge sequential swing there. How much of that was recapture of any delays kind of the second quarter? And any additional thoughts into the fourth quarter?

Yes. A lot of momentum in the health care space. As you pointed out, we were well into the double digits from a growth standpoint. Strong recovery in both the reference labs that we service and a return of, obviously, not just the COVID testing, but many of those labs that we support don't have a lot of exposure to COVID. And you're seeing a return of kind of a more normalized procedure environment and the associated diagnostics that come with that. We were also successful in the quarter, leveraging our supply chain to pick up business that we hadn't enjoyed before. And customers really are benefiting from the security that our supply chain provides to keep them supplied in a pretty critical time. So certainly, a piece of that is a reflection of new business wins that we had throughout the quarter.

And then all that, Tycho -- and all of that delivered with still a fairly tempered environment on elective procedures. So we're looking forward to the eventual improvement of that as well.

Right, excellent Thomas.

Thanks Tycho.

Your next question comes from the line of Vijay Kumar with Evercore ISI.

Hey guys, thanks for taking the question and congrats on a good print here. Michael, maybe on the comment on bioproduction order book has doubled. Was that -- what was the base? Is that a year-on-year doubling up or sequential doubling up? And what does it mean for, I guess, from a top line perspective or perhaps contribution to top line when you think about 2021?

Yes -- good morning Vijay, good to hear from you. The order book has doubled since the beginning of the year, and we've really seen an acceleration of that book as we've moved through the second quarter and into the third quarter, and it's even continued to build here as we've gone through the early days of the fourth quarter. And it reflects a couple of things. Firstly, the base business that we support, absent the vaccine effect, is extremely robust. We've been investing heavily over the last several years in new product capabilities and innovation capabilities, and we've had tremendous success in moving our technologies through the pipeline. And you see that reflected in the base business. But encouragingly, the majority of this order book build is actually in our base business. As I mentioned in the last quarter, we are starting to see COVID-driven vaccine orders coming into the book, and that will certainly satisfy some of that in the fourth quarter as any of these vaccines move from clinical trial into an approval phase and into commercial production. But I would anticipate more of that coming next year, just given where we're at here in the quarter and the fact that there isn't an approved vaccine. But ultimately, the visibility in terms of what it could mean for us next year is still pretty volume, Vijay. I think a couple of things I would point out. One, we're going to be relevant across all the major modalities that are being developed, whether that be mRNA or recombinant proteins, viral vectors. So that's the first point. The second point, there's a lot of variables that will ultimately dictate what this means for us specifically. We've tried to articulate what we think this does from an addressable market standpoint by technology. But it was obviously influenced by things like the number of doses that are ultimately produced, the mix of technologies that are openly approved here. And then I think an important variable here is what's going to be the adoption rate of any of the vaccines that are on the market. I think the data on that is somewhat mixed at the moment. So it makes it difficult for us to give you a real specific range on what level of revenue we would build into a forward plan. There's obviously lots of different scenarios as they play out. I think the key takeaway for us is we do see considerable opportunity here. We have mobilized to meet that demand through investments in capacity to ensure that we can fulfill the orders as they come. I think we're obviously very encouraged about the trends here.

And Vijay, on the open orders, a couple of things I would add is that the mix between -- and Michael mentioned that the COVID piece is fairly small. But the mix between our single-use and our high-purity chemicals is roughly split equal. And the other thing is that most of this is customized. So this is offerings that are noncancelable. We have commitment from the customers, and we've done engineering and formulations work with them. So it's pretty firm. And like what Michael said, it continues to track upward in the fourth quarter.

That's helpful, guys. And one on the free cash flows here, I mean if I recollect the start of the year, we started, I think, sub-600. I mean this is -- I'm just curious about $700 million for the year, that's really strong. Was there any timing impact? And how should we think about these free cash flows? Should free cash flows be growing off of this new base? And what's the primary use if it's determined by -- I did see the refi announcement this morning. Perhaps any color on what that could mean for interest expense going forward.

Yes. Sure. So just on the free cash flow itself, Vijay, just to remind everybody, we started the year with an expectation of $450 million to $500 million in free cash flow. We are already at $582 million through the third quarter. The only unusual thing that's in there, apart from the benefit from the refinancing that we've done -- and that's basically a forward benefit. Not a ton that's come through yet because we actually had to accelerate some interest payments into the third quarter that normally would be paid in the fourth quarter to the tune of about $60 million that we were able to overcome and still deliver that $582 million. But the only unusual item really in there is as part of the CARES Act, we were able to defer some tax payments and some employer tax liabilities, but that's less than $50 million. So, I mean the real benefit is in working capital. We've been able to contain working capital to just about flat through three quarters despite the growth that we've delivered. In fact, in the third quarter, we actually reduced working capital by close to $20 million. And yet, we grew sales, as you saw, 5.5% or so. So that's, I think, mostly reflective of operational. I think going forward, I think the refinancings that we've done will be helpful. As you're aware -- and just to give everybody an update on the refinancing process, because I'm sure we'll get questions on it. We have about $5 billion of debt outstanding. We refinanced $2 billion of that $5 billion in July. As you know, we reduced the rate on those borrowings from 9% to about 4.5%, and that's going to be close to $9 million of annual pretax savings. As I said, that…

It's helpful detail. Thank you.

Your next question comes from the line of Patrick Donnelly with Citi.

Great, thanks guys. Maybe just to follow up on one of Vijay's there. On the bioproduction book doubling, are you able to talk about the magnitude there in terms of hard numbers? We had a couple of your peers give hard numbers there and talk about what percent is going to burn in 2019 versus -- sorry, 2020 versus '21. So wondering, again, just the raw size there if you're able to talk about it. And then Michael, maybe just a little more color in terms of how you see it trending once these vaccines slip commercial, is that -- does the revenue really take off there from the book?

Yes. Thanks for the question. Good to hear from you. I mean, look, there's a lot of momentum here in the order book, obviously, with the numbers that we've talked about. Typically, in this order book, we would see a couple of months ahead. And one of the elements of this is we're starting to see, at least in this part of the business, an order book that's now lengthened well into next year. And as we sit here today, we probably have an order book that would back roughly half of a full year's demand or revenue in that part of the business. So, it is obviously very, very meaningful. Relative to what it looks like on the back end of a vaccine, I would take you back to the various factors here that will dictate that, which mix of technologies ultimately get approved. As you know, the raw material requirements are greatly different depending on which of the four modalities ultimately prevail here or which mix of modalities, I think is our view will probably be more than one approval coming through here. And then how quickly our customers can ramp production is going to be a major driver of how quickly that they start pulling on our materials. And then lastly, again, that you will point out, it's one thing to have the capacity and approval, but is the society going to adopt these vaccines and how quickly will they adopt them ultimately are going to dictate that. But we're investing as if there'll be a pretty rapid ramp once there are approvals. And as Tom mentioned, at some level, we're already starting to see and fulfill orders that are obviously moving from clinical trial to kind of production at risk here. And given the lead time on these materials and the customized nature of these materials, the orders that we're getting at this point for delivery later this year or into the first quarter would be full at this point, given the commitments that we have to make on those. So we'll continue to follow it closely. And obviously, as approvals on the new vaccines get issued, we'll respond accordingly.

That's helpful, Michael, thanks. And maybe, Tom, just on the margin expansion side, obviously been pretty compelling here year-to-date, great quarter here. As you look ahead to some of those tailwinds we just talked about in the bioproduction book, how should we think about the margin profile of that revenue? Again, it feels like if that inflects higher, it should carry higher-margin profile than the core business. But just wondering if we're thinking about that right, if you could just talk about the margin profile...

Yes, absolutely. From a longer-term perspective, Patrick, I mean we've -- as you know, we've endeavored to grow our EBITDA margin at a rate of 1.5 to 2 times the sales growth rate. So sales is growing 5%. We expect at least to be growing 7.5 on the EBITDA side, if not 10. The big variable between the two would be mix. And you're right, the biopharma production business does have more attractive margin profile than some of the other parts of the portfolio. So, our gross margin is roughly 31%, 32%. I'm not saying this is double, but it is meaningfully accretive to that 31% to 32%. And we'll be planning 2021 with that -- those open orders in mind. I do want to remind everybody, from a shorter-term perspective, we had a really outsized margin growth in the fourth quarter of last year, 130 basis points, as I said. So as some of these better mix products start to come through, we'll see that longer term impact. And hopefully, as we start to see it in the fourth quarter, maybe we can offset some of these headwinds we're facing. But overall, I think we'll finish very, very strong and attractive margin profiles are going out for first quarter and beyond.

That sounds good, thanks Tom.

Your next question comes from the line of Doug Schenkel with Cowen.

Hi this is Ryan on for Doug. Thanks for taking my questions.

All right, good morning.

Good morning, maybe starting on Europe. Can you talk about customer activity levels across the core business in Europe early in Q4? Have you seen any pause in the face of improvement recently due to COVID flare-ups? Or do you expect continued improvement in activity moving forward?

Europe has been a bright spot for us all year, and you saw that again in our third quarter numbers with more than 7% growth. The team has done an amazing job out there meeting really strong demand, obviously, and supplementing the portfolio with new products and solutions. We've launched more than 90,000 products this year, many of those to supplement a lot of these COVID workflows that we're addressing. And you see that being reflected in what the team in Europe has been able to deliver this year. As we moved into -- or through the third quarter, probably one of the bigger changes that we saw was a return of the academic sector. I think in Tom's remarks, he referenced maybe 1,000-point improvement in the performance of that part of the business and it kind of returned to somewhat flattish, if you will. Momentum continues into the fourth quarter here. Europe is off to another very strong start here in the first month of the quarter. But we are aware, obviously, as we're in whatever wave of the pandemic, we want to refer to this as there's obviously a lot of concern across continental Europe regarding the spread of the pandemic, and we're aware that certain countries have instituted more lockdown-type measures. I was on the phone with the team this morning just to understand where things are at, at the moment. And I think this is a general trend we see playing out in U.S. as well, where there seems to be limited appetite to go back to the extreme lockdown measures that were put in place back in March and April. I think they're doing prudent things around masks and limiting crowd size at restaurants and bars and gyms and such. But universities continue to remain open. And I think from where we see at the moment, we're not anticipating, as we sit here today, a rollback of the performance that we've experienced in the third quarter.

Got it, and then maybe just a follow-up on bioproduction more explicitly. So revenue up 40% in the quarter or is up greater than 100%. Given you haven't had any meaningful contributions in vaccine yet and given the significant scale up expected in vaccine production over the next 12 months, do you expect bioproduction revenue growth to at least be sustained at the current 40% level in 2021? Or could it accelerate even faster in 2021?

That platform for us has been growing. Well, biopharma as an end market for us has been growing high single digits for the better part of the last couple of years, and that's strong growth in the R&D portion of that business. And then the other part of that platform is our production offering, which has been growing double digits over the last several years. And we certainly see that momentum continuing, absent even any impact from the vaccine. The vaccine will obviously only work to accelerate that growth to the extent that we do see approvals and adoption and ultimately, a ramp-up here. Hard to say what the ceiling on that is going to be, given the variables that I've already described here. But we're confident, absent vaccine, we can continue double-digit growth in that bioproduction platform and it certainly will be favorably impacted by any approvals that come through.

Okay, and if I could sneak one more in. Can you talk a bit about your exposure to rapid antigen testing within those COVID diagnostic tailwinds and how meaningful that could be for Avantor over the next few quarters as manufacturing of those antigens to meaningfully scale? Have you seen any benefit from rapid antigen test to date? Or is that largely incremental to your COVID diagnostic tailwinds over the next couple of quarters? Thank you.

Yes, that's a great question. In the third quarter results, very limited impact from the antigen-based testing. But we are starting to see some upside from that in the early days of the fourth quarter here. Just maybe take a step back and remind the group here on our exposure to testing broadly. I think we've all become experts on the three types of tests that are out there. You have the two versions of kind of antigen-based testing, the molecular PCR testing, which continues to be the gold standard. For us, to date, it has probably been the platform that has driven the most tailwinds. We're very well positioned to support the sample prep workflow that precedes the actual test itself. And that has been strong, and we see that continuing. The other test that you're referring to is these more rapid antigen-based tests. We will play that platform really as a supply chain solution. We've got access to certain approved tests that we will source from our third-party partners, and we will distribute those into the marketplace. And we have quite a meaningful order book that's developing here for the fourth quarter on that piece of the testing workflow. And then the last element of the testing and the capabilities is in the serological tests, where we have both content that we provide to OEM manufacturers as well as access to tests themselves. I think the upside was expected to be stronger than it has been today. And I think that tracks the relatively muted adoption that we've seen around the world for those tests. So as we look forward, I think I'd summarize it by saying continued momentum in tailwinds associated with PCR testing. And at least in the early days of the fourth quarter here, we are encouraged by the uptake of some of these antigen-based tests.

Your next question comes from the line of Michael Ryskin with Bank of America.

Hey, thanks. This is Mike on for Derik. I want to go back to some of the underlying 3Q performance, sort of looking at the landscape ex COVID. I think we were just expecting a little bit stronger performance in the quarter given the easy comps you had year-over-year. I think 3Q '19 was one of the easiest comps you've seen all year. So I'm just wondering if you could go in deeper into the sequential improvement in the base business, if you sort of look at it on an adjusted basis and how that frames your thinking as you go forward into 4Q because, again, you get a little bit of a tougher comp 3Q to 4Q ex COVID.

Yes, thanks for the question. If you look at the performance in the second quarter maybe as a starting point, we saw roughly 700 to 800 basis point decline in our base business. And then we were aided by roughly 500 to 600 basis points of COVID tailwinds. So as kind of an anchoring point for you, the base business from second quarter to third quarter improved sequentially by nearly 1,000 basis points. So when I read through all the numbers here, obviously, we're excited about the overall growth and margin expansion and cash flow. But one of the things that's most encouraging to me is to see the base business growing low single digits in the quarter unaided by, obviously, these tailwinds as you described. And if you look at it from an end market perspective, biopharma 50% of the revenue, very, very strong performance in the quarter. And I would say we saw a sequential improvement in the capacity utilization in the R&D space, and we've seen that carry into the fourth quarter. In the education and government part of our business, the government piece has been strong, second quarter and third quarter, driven by a lot of the COVID programs that we've been supporting. But the education piece has probably been one of the pieces of our portfolio that's been hit the most. That business was down 50% in the early days of the second quarter and have recovered substantially in the third quarter. It was roughly flat in Europe. We were down mid- to high-single digits on that platform in the Americas. And so, there's still a bit of recovery to come there, and that's ultimately going to take a full reopening of all the campuses as well as a reopening of the K-12 schools across…

Great, thanks. And a quick follow-up from me on the free cash flow and the debt refinance. If you look at the debt you did earlier this year, what you've got going on now and the strong free cash flow year-to-date, the debt burden is certainly a lot lighter than you would have thought maybe six months or a year ago. I recognize you still got the long-term targets of two to 4 times leverage. But more in the near term, does this give you a little bit more flexibility to go out and do something? Or is that still getting a little bit ahead of ourselves? Do you want to get it down further before you start getting active again?

Yes, great question, Michael. This is Tom. Yes, I think you're right on point there. I mean our -- what we said all along since the IPO was that we wanted to be comfortably operating within two to 4 times leverage. We started out 2019 north of 7. And so, we've worked that down to the 4.2 that we have today. And we do expect to be at or beneath four by the end of the year, given the strength in the business performance. That's not a magical point for us, though, from an M&A perspective. I mean we've actually started our program up at the beginning of this year. We even brought in a leader. Mark centrally has been working with each of our global business units to not only develop the pipeline but understand the strategy and help them with their strategy and link that with what are the opportunities that are out there. So we've actually participated in a couple of rather small processes, but we're anxious to get going. I would expect that in the near term, probably next six months or so, I think you wouldn't see us do anything but sort of tuck-ins, maybe for the next year, tuck-in-type acquisitions, which would be maybe 1% to 2% of revenue, looking to round out some of the workflow positions in places like our biopharma production or in our lab offerings. And then going forward, who knows, I mean we -- we'll look at -- I mean we're looking at a broad funnel of things that might not even be available today. But we're really trying to focus on our core businesses. And so you would kind of expect us to be doing deals that are more of a tuck-in or a little bit larger variety than, let's say a massive transformational idea. That's what we're looking at.

That's really helpful. Thanks so much guys.

Your next question comes from the line of Brandon Couillard with Jefferies.

Hey, thanks. Good morning.

Morning.

Just a two part question for you, Tom. Looking through the Q, it looks like there was about a 70 basis point inventory charge in gross margin line in the third quarter. Is that a onetime dynamic? And any goalpost you can kind of share with us as far as kind of your gross margin outlook for the fourth quarter? And then nice progress on the tax rate. Just curious to what extent you might see more room to bring that down even further into the low 20s near to mid-term.

Yes, great questions, Brandon. Let me take the first one. We have a number of initiatives that are driving gross margin improvement. We've got really good management of the price versus cost inflation dynamic. We've had a favorable mix, as we've talked about, with proprietary growth driving better margin rates, and then the productivity and cost containment initiatives that we've got, including in this COVID environment. I mean obviously, discretionary spend has been a pretty important area of focus. Our year-to-date gross margins are up 70 basis points. We went from 31.9% to 32.6%. However, as you point out, the third quarter gross margin rate was a little bit less than that. The drivers that I mentioned, so the price, the mix, the productivity, all were in place, but we did have a couple of nonrecurring noncash adjustments in the quarter. One was LIFO-related. We follow LIFO accounting for our inventory in the Americas. And we had to make some adjustments to reflect the inflation we're experiencing in certain inventory areas. In personal protective equipment, in particular, there's been unprecedented demand that is basically overwhelming the supply, which is leading to abnormally high inflation in purchased materials, things like gloves and apparel and so forth. And so that was just following our accounting policy to reflect the cost of goods sold at the current prices and leave in inventory the older prices. That's just a dynamic of LIFO in an inflationary accounting environment. The second point, we had some cleanup in some distribution inventories that we've gotten behind us. For both of these things, I don't expect them to have any impact going forward in the fourth quarter, certainly not into 2021.

Your next question comes from the line of Dan Brennan with UBS.

Hey, Dan. Dan, before I get to your question, I didn't get to point two on Brandon's question on the tax rate. I apologize for that. Yes. So if you go back in time, at the start of pre-IPO, we were at around 30 -- north of 30% adjusted tax rate. And we had articulated a plan to work that to the mid-20s through the removal of some inefficiencies in the way we've financed some of our businesses internationally. We're largely through those efforts. And as you've seen, our tax rate is down to -- for the full year, we're now expecting roughly a 24% tax rate, which is better than the lower end of the guidance that we had provided at the beginning of the year. So good progress there. Yes, there is more opportunity, in particular, in the way we operate our businesses in places like Central Europe or in the whole European continent. And so we've got some longer lead time initiatives that are in a way that we think can continue to drive that rate down. I'd like to be approaching 20 with the implementation of initiatives. They're probably going to take a year or two to get into place, so I would factor them into the short-term modeling. But the traction has been pretty good as it has been, the work on the tax rate -- or sorry, the cash tax part itself. So overall, thinking like you are -- that we've got to continue with this. The one wildcard is the election and how that impacts the tax planning and tax rates for all of us.

Great, thanks -- Sure, maybe just one question on the Q4 comments in mid-single, high single, could you give a sense -- or the October comment, did you break that down between what would be implied for COVID versus the base on that?

No, we did not.

And I would expect -- that, as Michael said, I mean the mix of the COVID tailwinds can have some variability to it. The second quarter was really strong for a lot of the diagnostic testing, as we said. And Michael was referencing the different testing types. We had some benefit from the serological testing in the second quarter that contributed to the 500 to 600 basis points. As you look at the third quarter, I mean the serological piece of it fell off a bit just because of the mix in what the market is using. But by the same token, overall testing volumes have increased as we head into the fourth quarter. We saw some good order activity in the tail end of the third quarter. So, we expect that mix to kind of move back to a little bit more on the diagnostics side. The biopharma production piece of it has been really strong. So, it's hard to say what the exact precise tailwinds would be. But I would expect somewhere in the Q2 to Q3 kind of range somewhere in those dynamics.

Great, thank you for that. -- And then I know there's been a series of questions on, obviously, your competitive positioning in the vaccine and therapeutic opportunity. But I was hoping one more follow-up there since you guys did provide a pretty extensive analysis on sizing the opportunity across the different modalities. So it sounds like that part of your business maybe -- was maybe 50 bps or so in Q3, just doing some quick math. I mean is it -- granted there's a range of outcomes, a wide range of outcomes in 2021, but certainly with the order book that you see, I would think there's a way to maybe frame what could be kind of a range of outlook for '21, based upon the different modalities. So anyway, one more shot, just given the extensive analysis that you've done and the importance of it to your business, I was just wondering if there's another way to -- for us to think through maybe what a range of outcomes could look like going forward.

Yes, thanks for the question. Certainly can empathize with your interest in trying to understand what this could mean for the business. And believe us, we're spending a tremendous amount of time trying to model that and really reflect that in the investments we're making to ensure that we can maximize the opportunity here. I think the best way that we found so far to kind of describe the potential impact to the business is take it back to the impact on addressable market. So, I remind you, we participate in our bioproduction business in a market that's roughly $10 million based on the technologies that we have in our portfolio. And depending on -- or based on the vaccine candidates that are in the pipeline and the projected doses based on publicly available information on what can be produced from each of those candidates, and then looking at the raw material requirements for those -- and single-use requirements for those technologies, we think that this could increase our addressable market anywhere from, call it $4 million to $5 million on the low end, up to $8 million or $9 million on the high end. So you can see it's a pretty good range of outcomes. But on a -- at least on a minimum, it will -- we anticipate it having a pretty marked impact on the addressable market for our business.

Ladies and gentlemen, we've reached the allotted time for questions. I would now like to turn the conference over to Michael Stubblefield for any additional or closing remarks.

Yes. Thank you, operator, and thank you all again for participating on our call today and for being flexible with the late shift in the timing of the call. As we close, I just wanted to express my continued gratitude and admiration for all of our global associates, who are actively living our values every day and working tirelessly to support all of our global customers during this unprecedented time. Truly, it's an inspiration. Their passion and dedication to our mission of setting science in motion to create a better world has never mattered more. I'm truly excited about what lies ahead for Avantor and looking forward to updating you at the end of the fourth quarter. And until then, take care and be well, everyone. Thank you.

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