My name is Wes, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Cepheid Acquisition conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin.
Thanks, Wes. Good morning, everyone, thanks for joining us on the call. With us today are Tom Joyce, our President and Chief Executive Officer, Dan Comas, our Executive Vice President and Chief Financial Officer. This call will be recorded and posted on the Danaher website, www.danaher.com, under the heading Investor Events, will remain on the website for one week. Any information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are also available on the investor section of our public website. During the call, we'll be making forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.
These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date they are made, except as required by law, we do not assume any obligation to update any forward-looking statement. With that, I'd like to turn the call over to Tom.
Thanks, Matt, good morning, everyone. We are very pleased to announce that Danaher has entered into a definitive agreement to acquire all of the outstanding shares of Cepheid at a price of $53 per share in cash, representing a total consideration of approximately $4 billion. Based in Sunnyvale, California, Cepheid produces molecular diagnostic systems and tests used primarily in clinical settings that are highly accurate, easy to use, fully integrated. Cepheid systems enable sophisticated tests that help clinicians diagnose and monitor numerous types of diseases, such as hospital-acquired infections, tuberculosis, HIV, hepatitis, certain types of cancer. Led by its GeneXpert system, Cepheid has the largest global installed base of any molecular diagnostic platform. Importantly, it also has the broadest test menu available, delivers a system for institutions of any size and sophistication.
In 2015, Cepheid generated revenues of approximately $539 million, including double-digit organic revenue growth and gross margins in excess of 50%, reflecting the value that Cepheid's high-quality, differentiated products provide to customers. The company's razor/razor blade business model, with more than 75% recurring revenues, makes the company a great fit with the types of business model that Danaher has been strategically building over the last two decades. Cepheid is an exceptional company and represents an important strategic addition, not only to our diagnostics platform, but to Danaher overall. There are a number of strategically compelling factors involved in our decision to acquire this wonderful company. First, Cepheid is a leading global player in the fast-growing, highly attractive, $6 billion molecular diagnostics market.
The molecular market has several attractive long-term growth drivers and is still in the early innings of penetration into a range of clinical arenas, from large hospitals and reference labs to smaller hospitals and physician office labs and various point-of-care settings. As care delivery networks continue to migrate closer to the patient, diagnostics platforms such as Cepheid's will be best positioned to address these evolving needs. By way of background, molecular testing pulls the DNA of a target cell or virus to identify its existence and/or to highlight a mutation. This means, for example, a healthcare professional can determine if a patient has a specific disease or whether a tumor will respond to a certain drug. It's worth noting that DNA targets are expanding and changing all the time. Diagnosing the correct strain through molecular testing allows clinicians to respond with appropriate therapies that are tailored to the clinical condition.
While there are many other molecular platforms on the market, what we find so compelling about Cepheid's platform is, one, its simplicity. Its instruments can be operated with minimal training. Two, its rapid time to result, which is typically 30 to 90 minutes. Three, the ability of the instrument to accommodate over 20 different tests without any need to adjust or work with the instrument. Four, the ability to take the core instrument and scale it to any lab's requirement. Cepheid's focus on growth through innovation has established the company as one of the leading brands in molecular diagnostic testing. Strategic investments in menu and platform extensions have contributed to one of the most comprehensive test menus on the market, and Cepheid's uniquely flexible technology makes it one of the simplest molecular diagnostic systems to operate.
Cepheid's continuous innovation process focuses on ensuring that their global installed base of more than 10,000 instruments is able to take advantage of the development of new and advanced assays over time. Their systems can easily be reconfigured as a customer's testing needs grow or change over time. All of Cepheid's platforms and tests use the same patented single-use cartridge format to accommodate a wide range of sample types. Second, Cepheid represents a strategically important addition to Danaher's existing diagnostic businesses, which include Beckman Coulter Diagnostics, Leica Biosystems, and Radiometer. As a leader in molecular testing, Cepheid brings a differentiated technology, large installed base, and comprehensive test menu to our $5 billion diagnostics portfolio and further enhances Danaher's position as one of the world's leading providers of diagnostic solutions.
Specifically, Cepheid will significantly accelerate our presence in molecular diagnostics, complementing our recently introduced VERIS high-volume system, creating a more comprehensive and enhanced product offering for our customers. Our existing diagnostics businesses will benefit from Cepheid's exceptional assay development capability, improved access to under-penetrated segments, like smaller and medium-sized hospitals, as well as the high-growth point-of-care and oncology testing markets. At the same time, Cepheid will benefit from Danaher's broader suite of diagnostic testing offerings and our effective disciplined go-to-market strategies in regions around the world. Our already well-established infrastructure and deep market visibility in high-growth markets, one example being Danaher's strong presence in China, will enable Cepheid and our diagnostics platform to accelerate growth. Cepheid is a highly complementary and strategic addition to our portfolio that will enable us to expand our capabilities across the platform and provide a more comprehensive suite of solutions to our customers.
With the addition of Cepheid, we will further elevate our diagnostics portfolio as one of the leading players in this highly attractive market. Finally, we see tremendous potential for the Danaher Business System to significantly improve Cepheid's operational efficiency and profitability. The Cepheid leadership team is focused on execution. With the power of DBS, we believe this combination will improve the business's growth trajectory and profitability. Cepheid recently implemented a number of manufacturing and cost efficiency initiatives. The application of DBS tools can accelerate the impact on results and drive meaningful margin expansion. In addition, DBS will help Cepheid accelerate their go-to-market initiatives. We have identified approximately $100 million of annual cost synergies and an additional $100 million of annual revenue synergies that we believe can be realized within the next five years.
We look forward to building upon Cepheid's industry-leading position and are confident that DBS can enhance the team's success in the years to come. We expect to achieve high single-digit return on invested capital in the fifth full year following close of the transaction and increasing to double digits over time. In the first full year post-acquisition, we estimate Cepheid will be moderately dilutive to GAAP diluted net earnings per share and approximately $0.05 accretive to non-GAAP adjusted diluted net earnings per share. We anticipate accretion to grow to $0.30 in the fifth full year post-acquisition on a non-GAAP basis. Before wrapping up, I'd like to take a moment to thank John Bishop, Cepheid's CEO, and the rest of the Cepheid team.
We are very excited about the opportunity to work with this strong team. We're very pleased that the Cepheid board of directors has unanimously recommended this transaction. I'll now turn the call over to Dan to give you some additional details on the financial aspects of the transaction.
Thanks, Tom. Good morning. Let me provide a little more background on the transaction and our offer. As we announced, we've agreed to acquire all the outstanding Cepheid shares for $53 per share in cash for a total purchase price of approximately $4 billion, including assumed debt and net of cash acquired. The transaction has been unanimously approved by the boards of both companies and will be subject to customary closing conditions, including the approval of Cepheid's shareholders and receipt of applicable regulatory approvals. We anticipate completing the acquisition around the end of calendar year 2016 and expect to delist Cepheid following the successful completion of the transaction. We expect to fund this transaction with a mix of our available cash on hand and debt proceeds.
Thanks, Dan. Wes, we'd now like to open up the lines for any questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you limit your questions to one question and one follow-up question. Again, press star one to ask a question. We'll take the first question from Jeffrey Sprague at Vertical Research Partners.
Good morning, everyone.
Morning, Jeff.
I guess summer's over. I got three deals on the tape this morning.
Welcome back.
Yeah, no kidding. Congratulations. Hey, just a couple kind of financial related questions, if I could. First, the synergy number, 16% of sales certainly kind of strikes as a big number. Obviously, you're expecting the sales to grow. Do you view those synergies really coming out of the Danaher side also? Maybe just give us a little more color on what the opportunities are and how to kind of frame the magnitude.
Sure, Jeff. As you point out, the $100 million is a year five number, that is likely off a much higher kind of revenue base. It is a combination of public company costs, G&A costs. I think there are costs within our existing business today, diagnostic platform, that we will not need to accelerate as much, given some of the things they're already doing on the Cepheid side. It's a combination of kind of, again, the SG&A public company, but also some areas where from a kind of combined basis, we'll have to reduce the funding versus if they were being done independently.
Jeff, I'd just add that the team at Cepheid is off to a good start. They've got a framework that they put together, particularly around the gross margin improvements that they've been driving. We're confident that with the additional resources and capabilities that we can bring as a function of DBS, that we can take that good start that the team has and continue to move that forward very effectively.
Thanks, Tom. Actually on that point, what is the gross margin you're thinking about kind of being associated with that 20+ OM margin rate?
Well, Jeff, they're about 50% today. We would expect that would be much higher, probably north of 55% in time, and maybe even higher, particularly as the consumable business gets to be an even bigger piece of the overall pie.
Just lastly, the dollars are always fungible, right? This puts the Fortive dividend to work and a little bit of other cash that you had available. How do we think about your appetite to do other things here in the next 6 or 12 months, and what the pipeline looks like?
Look, Jeff, we think we're in a very good position. As you've heard Dan note a number of times recently, the team at Pall has done an exceptional job to this point. Dan and the team have worked the debt that we were carrying down substantially since that transaction. We believe that going forward, our bias, certainly on the back of this transaction, will be towards small and mid-size bolt-on acquisitions. There's probably still $1 billion worth of flexibility out over the next year, the bias obviously be to smaller deals. We have plenty to do, as you can imagine, from an execution standpoint. We're thrilled with the start that we've had at Pall. The team is executing in an exceptional way. We'll have plenty to do at Cepheid to continue to improve this wonderful business.
I think the focus will really be on execution, and the bias will remain towards small bolt-on acquisitions.
Great. Thank you very much. Good luck.
Thanks, Jeff.
If you find that your question has already been answered, please press star two to remove yourself from the queue. The next question comes from Ross Muken at Evercore.
Hi. Good morning, guys.
Morning, Ross.
Curious to your thoughts on some of the bigger, longer-term opportunities for Cepheid. Obviously, they were entering the oncology market. That was sort of a new endeavor for them. Curious your thoughts there. Talked about the Omni launch. That's a big new market in terms of point-of-care you have maybe a different look at, and just curious to how you're thinking about those revenue opportunities in the context of, one, the synergy, and two, just the overall top-line growth rate.
Sure. Thanks, Ross. You're absolutely right that there have been ongoing investments at Cepheid around the new platform of Omni and oncology. I'll come back to those in just a minute. I think it's important to recognize that this is a double-digit growth business today, long before we get to realize the opportunities of those longer-term investments. While we've seen the core hospital-acquired infection business be a steady grower, we see the closer end, the more near-term investments in sexual health, in virology, clearly being good growth drivers in the near to mid-term. Beyond those, I think the Omni launch, which you'll see in 2017, as Cepheid has commented, is a tremendous opportunity relative to what I mentioned earlier around the shift in the care delivery networks. As care moves closer and closer to the patient, smaller footprint, easy to use, essentially one-step analytics is really going to be critical.
The Omni investment in that new architecture is going to be key to realizing that opportunity. Oncology is more an investment around the assay development. It is a little bit further out, as Cepheid has commented, and both of those, we think, hold terrific opportunities for great returns in the out years. Those are not modeled in as significant near-term growth opportunities. I would say in the out years of the model, they will be material.
Great. Maybe, you mentioned they were already underway on some of their own manufacturing-oriented upgrades, and they had some benefits from royalty and a few other things. Talk to me about how DBS, you see it being applied here and, is this sort of a traditional Danaher deal in the context that the real margin levers for Cepheid are sort of GM and G&A and then accelerating the top line and that's what attracted you here? I think the big question for most folks is whether you can get that GM above 55.
Sure. Well, clearly you've heard, those of you who followed the commentary around the gross margin initiatives, are familiar with what they're doing relative to enzyme sourcing. That is a key element of the improvements in the near term. We reviewed those initiatives, and relative to your question about DBS, improvements around purchase price variance, the way we leverage material costs and sourcing across our businesses, manufacturing efficiencies that are clearly driven by DBS on the shop floor, all of those will certainly contribute. You've seen us do that in a number of different businesses, not unlike this business. We're confident in those gross margin improvements, both those that are in process as well as those that we can take to a new level through the application of DBS.
I think key beyond the gross margin, though, is taking out the public company costs, the back office costs, and looking for the sales and marketing and G&A efficiencies that we normally do in situations like this. I think a combination of those gross margin improvements, helped by DBS, as well as the additional operating efficiencies, is going to get us to those operating margin targets confidently.
Great. Thanks.
Maybe just one quick reference point, Ross, on that, just by way of a bit of history. You probably remember this, others will, but a number of years ago, we did an acquisition of a similar company, albeit a smaller size, in Vision Biosystems. That was a business that we paid five times revenue for that was break even at the time. Lots of gross margin opportunities there. Had tough return metrics at the outset. Today, that business is an $800 million business doing 20% operating margins and a leader in its market. There's a clear analogy here to another diagnostic business where we've achieved the same types of improvements, albeit a smaller business, but the same type of opportunity.
Excellent.
Thanks, Ross.
The next question comes from Tycho Peterson at J.P. Morgan.
Hey, thanks. Morning. Tom, given your own molecular efforts with VERIS, I'm wondering if you could talk a little bit about how you see that playing out going forward vis-a-vis Infinity, Cepheid's own high-throughput product. How quickly do you think you can port menu over to the VERIS platform from some of Cepheid's menu?
Sure. What Tycho references, just for others on the call who may not be as familiar, is there's been an ongoing organic investment at Beckman Coulter Diagnostics that has now culminated in the launch of a high-volume molecular platform in Europe called VERIS. We've been very pleased with the launch of VERIS. We're seeing good traction and great opportunities for continued growth, albeit just in the European market at the moment. We see the Cepheid architecture as being very complementary to VERIS. VERIS was designed specifically for the very large high-volume environments that are more typical of the Beckman Coulter customer base. We're talking about environments where test volumes are 20,000, 30,000 or even as much as 40,000 tests a year.
In the case of the Cepheid architecture, Tycho's specific question referencing the Infinity platform, what makes Cepheid really unique is that it has a modular architecture that allows a facility to scale up from a very small number of tests per day, per week, or per month, up to a very large number of tests. At the highest end, that would be the Infinity-80 architecture. Tycho, we still see that as highly complementary because that would probably still sit at levels underneath VERIS. I think largely those architectures would be targeting different customer sets. Customers that would be moving up in volume would be more likely to be a Cepheid customer. Customers who are already in large volume environments, more likely to be the VERIS customer.
Relative to menu portability, clearly there is an opportunity at Beckman Coulter to leverage some of the exceptional assay development capability that exists at Cepheid. We plan to do that. We'll have to be selective about which of those we port over. Obviously, with different architecture, it's not necessarily a simple and straightforward thing to port menu over. That assay development capability and the core assay element is clearly going to be beneficial to Beckman, and we expect will accelerate the ability for us to expand menu on VERIS over time.
If I could just ask a follow-up to the question Ross asked earlier on the pipeline. Are you still committing to the timelines they'd laid out around some of the oncology milestones, or should we think about you guys going in and reevaluating a lot of that spend and maybe pushing off some of those launches?
We'll be taking a hard look at that, Tycho. Obviously, we want to make sure that the nearer term roadmap is well-staffed, well-resourced. The assays around sexual health and around virology obviously have terrific opportunities. We'll be taking a hard look at the roadmap and looking at those milestones. I think Cepheid has a pretty disciplined process for establishing those priorities. Those milestones may very well be the appropriate ones, we'll certainly take our time in making sure that we've got the resources aligned appropriately with those timelines.
Okay, just one last one. Can you comment on emerging markets? They had an initiative there. It's had some decent traction, and you've obviously got a big footprint with Beckman in places like China. Can you maybe just talk about how you see that opportunity?
Yeah, absolutely. Thanks for the question, because that is a terrific opportunity, and really one of the terrific situations that we have in terms of leveraging what today is a billion-and-a-half dollar position that we have in our diagnostics businesses in high-growth markets, leveraging that infrastructure in the interest of bringing Cepheid's go-to-market capabilities up to a much higher level. Cepheid today has less than 10% of its revenue in those high-growth markets. With the opportunity we have of using the infrastructure of our current diagnostics platform in places like China, in Brazil, in India, in other high-growth markets, I think we have a terrific opportunity to take the Cepheid go-to-market position up to a very different place in a short period of time.
Okay. Thank you.
Thanks, Tycho.
We'll go next to Isaac Ro at Goldman Sachs.
Good morning, guys. Thank you.
Morning, Isaac.
Just interested in getting a better sense of how you guys break down the revenue synergies of that $100 million in year five. Can you talk a little bit about where you mentioned in the press release some of the channels where your existing diagnostics franchise has perhaps greater reach than Cepheid did. Is there maybe one or two that stand out as the biggest near-term focus?
Sure. Let me highlight a few of those. Thanks for the question, Isaac. If you think about our diagnostic platform today, let's start with the largest position we have, which is our core lab revenue, which is largely the Beckman revenue. We do about $2.5 billion in core labs today. Those are obviously skewed towards larger healthcare facilities. There's a tremendous installed base we have there today and a field sales force of over 3,000 folks globally, sales reps, application people, service engineers, all of which who present the opportunities to create some leverage for Cepheid's growth in that market. If you turn to our position in microbiology, largely on the back of the acquisition we did of the MicroScan business from Siemens.
We do about $200 million to the microbiology lab today, and many of Cepheid's infectious disease assays are converting, as you know well, from culture to molecular. We have an installed base of over 6,000 instruments in that market and a field sales force of over 250 folks. Finally, if you think about our critical care position with Radiometer, of over $500 million in revenue into the critical care market and with an orientation to the point-of-care and the emergency room at about $125 million, you see a number of Cepheid's assays moving to rapid diagnostics in urgent clinical situations. I think those are three examples where you look at our core business as creating leverage for Cepheid.
I'd go back then and just obviously add to that the point I just made, relative to Tycho's question, that position that we have in high growth markets with our $1.5 billion position in those high growth markets is really a significant opportunity to leverage. I think we feel very good about those commercial synergies. One last point, maybe to go in the other direction. If you think about where Cepheid plays today, they're largely oriented towards the small and mid-size hospitals and are beginning that initiative towards the point-of-care. That's obviously a unique opportunity that Cepheid brings to our diagnostic platform to create a higher level of market visibility in those smaller environments, and we intend to leverage that. That's a real benefit that Cepheid brings to our business today.
Great. That's helpful. Just to follow up, I think Cepheid in recent quarters had had some good success actually placing their instruments in large national reference labs, which is not their traditional wheelhouse. As you pointed out, they've been pretty good in the point-of-care, but they've been making some headway in terms of the central lab facilities. I'm curious, as you compare the trajectory they have there in that market versus where you are with VERIS, how do you balance your investment and focus in molecular? It seems like you have maybe a little bit of a nearer turn-up opportunity to penetrate central labs if you're successful with the Cepheid platform. Would that maybe come as a priority over where you'd want to go with VERIS, since it's going to be a couple of years till you have that in the U.S. market?
Well, that's a great point. The last point you made really is the key there. Today, we're only cleared under a CE mark with the VERIS platform in Europe, with the work still to be done around the clinical work, as well as the FDA clearance in the U.S. for VERIS to enter those high-volume environments. There's a tremendous complementarity that we have at the moment in terms of being able to address those high-volume environments, with one platform in the case of Cepheid in the U.S., with the VERIS platform in Europe. Cepheid, interestingly enough, on the other side of the coin, is fairly under-penetrated in Europe today. As a result of that, I think we have two levers to pull, depending on whether a lab is looking to scale up over time, or whether or not they already have the volume that would support VERIS initially.
Got it. Thanks so much, guys.
Thanks, Adit.
The next question comes from Doug Schenkel at Cowen and Company.
Good morning, and thanks for taking my questions.
Hey, Doug.
Good day.
In our existing model, when we go out five years, we had Cepheid growing sales 10% or so, with operating margin just above 20%. I think we're in line to maybe a bit below consensus. The point is, if anything, we're on the conservative side relative to the Street. You talked about $100 million in revenue synergies and another $100 million in cost synergies, I believe, in your prepared remarks. If we take our forecast and layer in those synergies, we get a lot more than $0.30 in accretion. I guess the questions are really just getting at trying to understand what is the disconnect between our model, I guess, and Street models and these synergy targets. More specifically, could you just talk a little bit about what revenue growth rate you've assumed in there?
On a gross margin line, you mentioned getting gross margin above 55% over time from around 50% today in response to the first question. That seems impressive on the surface, but it's worth noting that Cepheid was targeting 56%-58% for 2017. Again, I'm just trying to get at what's the difference between what we were modeling and why we're not getting more accretion when we layer in the synergies that you talked about in year five.
This is Dan. Well, maybe go back to try to build up. I think our assumption around the core growth in the business before any synergies would probably be pretty close to your model, which would be slightly below probably where the Street numbers are, which is call it 10%. Add in $100 million of revenue synergies, maybe that gets you to compound, kind of low teen numbers. If you layer in, you consider 30%, 40% fall through on the revenue synergies, add $100 million of costs, you put it into your model, you probably get to a higher number. I think in part, if we get to those sort of numbers, part of that benefit, as we've done with most of our other acquisitions, would be put some of those additional savings back into the business. One of the disconnects could be.
Yep.
Your numbers could be, actually, your model with our synergies kind of probably pretty close to the way we've looked at this overall, but we have some of that going back into additional funding in places in R&D, into high-growth markets, go-to-market as well.
Okay. That's helpful. I guess a different question, a follow-up, but unrelated. You mentioned in one of your earlier releases this morning that Cepheid will operate independently within diagnostics. Over the course of this call, you've talked about the opportunity for commercial efficiencies, potential menu portability, and an opportunity for complementary positioning of Beckman and Cepheid products in the field. The products are arguably pretty different, and Beckman and Cepheid had pretty different touch points, as I think you guys have acknowledged over the course of this call, Beckman being a lot more high volume and centralized, while Cepheid has been relatively lower volume and decentralized. Maybe you could just provide a little bit more detail on the observations I'm making, and at least on the surface, they're a little bit contradictory.
I guess we're just trying to understand how you're going to integrate to take advantage of these opportunities you've talked about and at the same time, have Cepheid operate independently. With the overlap in products over time, assuming there's no change in Beckman development plans, how you manage risk of any molecular dyssynergies. Thank you.
Thanks very much, Doug. Doug, I think what we're talking about here is very consistent with the way we've operated not only our diagnostic platform over the last number of years, but really each of the five platforms that are part of Danaher today. The Danaher operating model has always been operating company centric. When we talk about setting up a business like Cepheid with a great deal of autonomy
That's very consistent with the way we've set up each one of our businesses in each platform. At the same time, however, because we're organized in a platform structure, we've facilitated opportunities and built a culture where businesses work together and help one another, starting with things like market visibility, going to lead sharing, and in certain and appropriate situations, bringing combinations of products together for the highest level of value proposition to customers. I think it's unique in the Danaher culture relative to other businesses, where we are able to have the customer focus and the market focus that's associated with autonomous business structures and facilitate the kinds of commercial collaboration that's necessary to get the best out of our businesses for the benefit of customers.
Again, I think what you've heard from us today is very consistent with the way we've operated the platform in the past. We're confident that will continue in the structures that I discussed today between Cepheid and a number of our other DX businesses.
Okay. Actually, sorry, one real last quick one. Just going back to my first question. I mentioned the Cepheid financial target for 2017 of 56%-58% for 2017 gross margin. There was an earlier question about how we should think about Cepheid's previously articulated timelines for their pipeline. I guess, a similar question on Cepheid financial targets. Should a 2017 56%-58% gross margin target, as an example, no longer be viewed as relevant? Should we assume that you are taking a look at everything and reevaluating all of these? To the extent that there are changes that you want to share, you will share them over time?
I think that's a fair way to look at it. We're quite comfortable we'll see a nice step-up in gross margin next year, but we'll be talking over a multi-year period.
Okay. Thanks again, guys.
Thanks, Doug.
The next question comes from Derik De Bruin of Bank of America Merrill Lynch.
Hi, good morning.
Hi, Derik.
Having covered Cepheid for a long time, one of the controversies that's sort of been on the stock was the question about the changes in competitive landscape and that when they first introduced the GeneXpert back in 2006, it was novel from sort of a sample to answer standpoint, and there's been a lot of new product development amongst the competitive world lately since then, that are sort of emulating what Cepheid's done. Could you sort of talk about how you see the competitive landscape at the moment, and your confidence in that the Cepheid platform is something that you're going to be able to continue to scale and sort of to deliver on it?
This sort of goes with Doug's question on being able to lower the cartridge cost enough to make it competitive as some of these newer platforms and some of the competition comes out.
Thanks, Derik. I think you'd have to start with the first-mover advantage that Cepheid has clearly established. I would add to that the unique nature of the GeneXpert system in terms of its architecture, both from the standpoint of its ease of use associated with a single cartridge type for each assay, but in particular then, its scalability. The ability for it to scale module by module, up from a small volume of tests onto a large volume of tests onto the Infinity. I think that first-mover advantage, both in terms of architecture for scalability, ease of use, and then the extensive nature of the menu, really puts them in a position of having an installed base that we can build upon.
With the extension of the menu around, as I mentioned, sexual health and virology and ultimately onto oncology, combined with the opportunity to shift with the care delivery networks with Omni into more near-patient environments, gives us the confidence that despite the fact that there's a lot going on in this market, that there's a lot of investment going on, admittedly amongst much smaller companies in most cases, that this is a very sustainable and highly differentiated position in the market. Clearly, the work they've done on the cartridge cost at this point, and that which will continue over the next couple of years, will improve the cost positioning. Obviously, that's going to continue to be important as molecular diagnostics continues to become a more highly used analytical modality.
I think you combine all those things, Derik, and we feel very good about the sustainability of this position despite all that's going on in the market.
Just one final follow-up question. One of the things they were working on with Honeycomb, which is their multiplex cartridge, where does that stand, and do you have any sort of thoughts on when that could probably be introduced to market?
Sure. We are very familiar with the Honeycomb investment. We're still looking at the details around the roadmap and the timing of that, so I can't be specific until we get a little bit closer to some of the development milestones. I think that investment, in terms of multiplexing, is going to be but one more important differentiator as we look at how the overall architecture of Cepheid can
Can scale, and I would add, compete with some of the other smaller players whose focus, in large part, is on multiplexing. I think that's going to be an important investment over time.
Great. Thank you.
Thanks, Derik.
We'll go next to Brandon Couillard at Jefferies.
Hey, Brandon.
Hey, good morning. Thanks for taking the question. Just in general, can you give us a sense of what you've embedded in as far as the pricing assumption goes over the next, let's call it three to five years? Any value, or what value, if any, you can maintain from the NOL base?
In terms of pricing, we've modeled in, given the high unit growth, a modest annual price decline, call that circa 1%. We do think this is obviously a very innovative company that hasn't spent a lot of time thinking about price. That may be an opportunity over time, but that's not something we're factoring in right now. Regarding the NOLs, they're relatively modest on NOL. It'll help a little bit on their free cash flow over the next couple of years, but it's pretty modest.
Thanks. Just to be clear, is the [simmons.com] base, which accounted for about 7% or seven points of margin, to what extent is that included in the $100 million of cost synergies?
That we would not.
Is that $40 million this year?
We wouldn't consider that a real cost synergy.
Gotcha.
Obviously, they would have a higher, different Black-Scholes value because of volatility. It might be a somewhat different number under Danaher, but we would not call that out as a synergy.
Super, thanks.
That concludes today's question and answer session. Mr. Gugino, at this time, I would like to turn the conference back to you for any closing remarks.
Thanks, everyone for joining us. We're around all day for questions.
That concludes today's conference. Thank you for your participation. You may now disconnect.