Thank you, Dan Brennan from TD Cowen Life Science Tools & Diagnostics. We're here at 44th Annual Global Healthcare Conference. Really pleased to be joined here on the stage, Rainer Blair, President and CEO of Danaher Corporation. Rainer, thank you very much for being here.
Thanks, Dan. Good to see you.
Great. Mr. Blair, you took over as CEO of Danaher back in September of 2020, in the middle of COVID, quite a volatile period. You set your steady state growth rate at high single digits back in, I think, the fall of 2022. Maybe just speak to the key drivers of that kind of growth rate, your confidence in that outlook, given the continued end-market volatility since it was offered.
Happy to. I think there's a number of dimensions here to talk about which provide us confidence in that long-range outlook. The first would be our portfolio transformation. We've worked very hard here to drive our portfolio towards the most attractive end markets. If you reflect on that, we created a couple of new public companies with Envista and Veralto, which can now pursue their own strategies but ultimately help elevate our growth rate. At the same time, we have nearly replaced that revenue with some acquisitions that provide us attractive annuities. Keep in mind, we took that sort of one-time cash benefit that the pandemic provided and converted that into really important investments in both the genomic area with Aldevron as well as the proteomic area with Abcam, where we just recently closed in December of last year.
At the same time, we were able to expand our respiratory business. Our respiratory business before the pandemic at Cepheid was about $250 million, and we believe that we're well over an incremental $1-$1.2 billion that is sustainable here for the long term. So all of that together really has positioned our portfolio into highly attractive end markets with strong secular growth drivers. Additionally, it's also improved our financial profile. We spent a lot of time talking about the alternatives of how to deploy our cash, and we chose to continue our philosophy of really investing in businesses that also generate a great deal of cash. If you look at our financial profile now, re-rated growth from mid- to high single-digit growth, again, pre- and post-pandemic.
If you look at our flow-through of 35%-40% at that high single-digit growth rate, our cash conversion over 100% for well over 30 years now, that's really what drives our earnings power and we believe creates a lot of sustainable value.
Great. Thank you for that. 2023 was a challenging year for Danaher, broadly for the industry. Maybe what way did the organization learn? And how does that influence maybe your future performance and strategy?
Well, there certainly was a great deal to learn during the course of the pandemic and the post-pandemic period. I would start with the fact that we wouldn't change a thing about our portfolio. I mean, our portfolio was incredibly relevant, powerful, and supportive of the needs of the pandemic. But it also is positioned so well with the changes that I just talked about in our portfolio transformation for the future. So I think that's incredibly important. We also said we wanted to, of course, exit the pandemic stronger than we entered it. And of course, that applies to the portfolio. But it also applies to our continued work on improving our costs as well as continuing to improve processes as well as to invest for growth.
So if we start with investing for growth, we accelerated our R&D investments quite significantly during that period of time and just recently launched some really very strong innovations. I'm thinking of the DxI 9000. That's a new class of immunoassay analyzers for Beckman Coulter Diagnostics. High-resolution immunoassay, very important to open up the TAM of that business, making other assays accessible. Or, for instance, the CellXpress.ai helps you in identifying the cells that you ultimately want to pick in cell line development and other applications, leveraging the power of AI or many more. I could go on and on. So lots of innovations here that are important. At the same time, we worked on our costs.
You can imagine, as we saw inflation pick up, there was a great deal to do, certainly in terms of driving price, which we did very well and well above our historical averages, but also to ensure that we maintained and improved on productivity. And you see some of that playing out here in 2024, where we're looking to expand margins despite guiding to a slight contraction this year. And then lastly, of course, the topic of inventory and understanding the inventories of your customers. Big deal in bioprocessing. We've spent a lot of time and energy and built process around being able to improve our visibility, helping our customers also to improve their own visibility to ensure that we're able to anticipate supply chain disruptions and the short and long-term impacts that that might have on the business. So lots of learning all around.
But I believe that the strength of our portfolio, the processes, the cost work that we've done will all play out as this. You'll see all that play out as the normalization process plays out.
Great. So maybe on 2024, the guides, low single-digit decline for core organic. You talked about, I think, life science and biotech decline while diagnostics is going to be growing. Just kind of give us a sense of how this outlook incorporates. Does it incorporate some cushion, given the volatility? Excuse me. And which areas do you think reflect the best chances for potential upside, assuming there is some cushion in there?
So our guide really contemplates what we're seeing today. We build our guides based on data and demonstrated capability as opposed to building in a wish list of things. We really go with what the data tells us and what we've demonstrated in terms of performance. And with that, really, what we saw in the second half of 2023, we believe, continues to play out in the first half of 2024. And that's why we've spoken of the fact that we believe in the first half in bioprocessing, the inventories will play out. And if you think about life sciences, there we've seen higher comps because of some of the accelerated purchases we saw of life science instruments and other solutions in the first half of 2023. So we believe all of that tends to play out here in the first half.
And then as we get to the second half, inventories in bioprocessing should have been worked through at that point. And then the math of the comps and the fact that our end markets continue to be quite robust really plays out and leads us to believe that we'll have a small contraction, low single digits for the year. Now, in terms of up and downsides, I think the key things to look at are how does China play out versus what we've guided? And in China, we've said we don't expect an improvement in 2024. We believe it remains at the level that it is today. So yes, some stabilization, but at a low activity level.
As we think of the life science end markets here, we believe that, one, the comps will be supportive in the second half, as well as over time, the large pharma players and others will return to replacing their installed base. Then lastly, the diagnostics business is and has been stable, and we expect that to continue with patient volumes being quite strong and certainly at pre-pandemic levels. As you know, we've predicted that or guided that that will grow.
Kind of starting on bioproduction, we do get questions while there's so much focus on inventories. If you step back and zoom out, like the state of the end market, the health of it, has anything changed from pre-COVID to today? There's IRA, there's biotech volatility. Just what's your view on kind of the sell-through, the overall health of that market?
So our view, and it's based on data, is that the market is as strong as it has ever been in the last years. We think that it's been about a 10% end market growth, whether you're looking at a 2- or 3- or 4-year sort of stack at the end market. And we believe that continues. We're not guiding or our guide does not contemplate an inflection of that end user demand here in 2024. In fact, we just believe that it will continue in its strong growth as we go forward.
When we think about the down low single-digit guide for bioproduction, can you comment on where you think customers are with the inventory destocking? Are we through kind of how your active management program is kind of enabling that? And then also just how we think about what you're doing, maybe similar or different than peers.
So we've been working very hard, of course, to reduce our customers' inventories and to ensure that we remove any dysfunction or disincentives to the right behavior, which is to allow stocks to deplete or remove. And that would imply that, for cancellation fees, we've paused those for our customers. We have looked at the incentives that customers have sort of at the end of periods that would make them buy more, even though they don't actually have a demand for it. And then, of course, our salespeople and how their incentives play out needed to be looked at as well. So we've been very aggressive in that all with the intention to have a better signal-to-noise ratio, to understand what is the true level of demand and what is going to be sustainable as we go forward. And we've been making great progress with that.
It started in the second half of last year. Our customers appreciate it, are taking advantage of it. That continues, we believe, sort of with a declining trend here for the first half of this year. And so we believe that by the time we get to the middle of this year, we've largely put the inventory discussion and bioprocessing behind us. And then, of course, as we go forward in the second half, there's still that robust demand that I talked about at the end market, and that should then provide for growth that we've talked about, which is mid single digits for the second half in bioprocessing, but an exit rate of high single digits or better as we go into 2025.
And then as we kind of think about any change, kind of you just talked a little bit about where we are with that slope down, but in terms of ordering and kind of trends in 1Q, orders were up 20% sequentially in the fourth quarter. Is it reasonable to think orders continue to grow in the first quarter, given your guidance, or just how do we think about that?
It's accurate that we saw 20% sequential growth there Q4 over Q3 2023. We continue to see the green shoots, the anecdotal evidence that customers are returning to normal ordering patterns. But it is not yet broad-based. It is not yet a trend that we would be willing to call, and our guide does not contemplate that. We continue to believe, per our guide, that the first half will be soft as inventories continue to deplete. Then, as I mentioned earlier, as we get to the second half, we'll see both comps and normalized inventories result in a pickup in both the growth as well as the exit rate.
Got it. Got it. So it's more like as you're down mid- to high teens in the first half, and then you have that second half acceleration, kind of orders kind of follow that suit. I guess the guide implicitly incorporates orders kind of I don't know if they're stable in the first half and then picking up in the back half, but certainly doesn't assume sequential growth in the first half. Is that right?
That's right. That's right. I mean, we basically are saying that the first half is similar to the second half of last year. It's mid- to high-teens contraction in the first half and then that mid-single-digit growth in the second half exiting at high single digits or better into 2025.
How do we think about China versus ex-China? Are there dramatically different assumptions? China has obviously been a steep decline, which you guys called out a quarter or two ago. Just can you separate bioproduction in China and ex-China and kind of what the guide incorporates?
So we would see bioprocessing in China being down mid- to high teens, which implies for the remainder of the global markets flat to, let's say, low single-digit contraction. We believe that's reasonable if you look at the overall year. Having said that, we've talked about that first half versus second half dynamic, and I would say that applies to that as well.
Okay. And in terms of your order and revenues versus some of your large peers or even some of the smaller peers, there's differences, obviously, your size and the product portfolio. But could you just give us a sense of maybe why your results could look different than some of the other peers, which I think are calling for more of an improvement right now?
Well, first of all, we often talk now in the industry about the book-to-bill . And of course, each company likely has its own processes and procedures to calculate the book-to-bill . So that's an area of difference where we believe we're very conservative. That's a net of cancellation number. And then as a matter of course, we only include orders with a 12-month runtime in our calculation. So some customers will actually come to you and give you 24 months' worth of orders, while we only count the value of the first 12 months of that in our accounting as well as the book-to-bill calculation. So there is that difference. I think more importantly is the fact that we have the broadest portfolio with all of the necessary product lines included.
Those product lines have different levels of inventories, destocking in the marketplace for all kinds of different reasons. So that leads to differences also in what our competitors might see. Additionally, it's important to note that 70% of our business is in commercialized drugs, right, in phase three. So phase three in commercialized drugs is 70% of our business. That, again, is a bit different and more skewed towards commercialized business than some of the folks that you're talking about might see. And then, of course, there's geographic differences. Some players are perhaps not as strong as that's in one region versus the other. And when you bring that all together, I think you end up where we are today, which I don't believe is dissimilar from the general view, which is the second half of 2023 was better than the first half.
The belief is that the second half of 2024 will be better than the first half. I think everybody is seeing very similar trends in that. I think everybody, including ourselves, are seeing this anecdotal evidence that customers are returning step by step, but not entirely there yet to normal order patterns.
How about GLP-1s? I think you've characterized the relative size of the molecule, just not nearly as large and consumptive, if that's a word, versus traditional monoclonals. But there is certainly some intensity, I'm sure, in your business. Just how do we think about your benefit and opportunity in GLP-1s?
So first of all, it's great to see that these drugs are available and that the society can benefit from them. As it relates to the intensity of the kind of solutions that we provide in that particular drug class, I would say it's a tailwind on the margin because it is, as you say, not as consumptive in quotation marks as some of the other biologics out there. And then it depends on which GLP-1 you're speaking on. Some are synthetically produced, and they have less intensity of our solutions. Downstream, there's more of that. And then there's others that are biologically produced, and those, of course, would require more of our solutions. So it's still early days in the uptake of these drugs, and we'll see ultimately which method and production modality is the favored one.
But we really do view this as something that would be beneficial at the margin.
Maybe just one more before we go to life science instruments. I mean, back to your Cytiva Investor Day a few years ago, it's one of the first times you basically took an acquisition and you combined it, right? You typically let them stay on the outside, and you discuss all the benefits that you would get from putting these businesses together. We're kind of two years later. What have been the benefits thus far from doing it? Have you generated revenue synergies from that? Are they still to come? Just maybe speak through the opportunity from combining those businesses.
Well, our customers certainly appreciate having a one point of contact with significant depth and breadth. So breadth in terms of all the unit operations, whether you need individual ones or whether you need really a full-scale manufacturing line, including the clean rooms around it. That's one aspect. But then there's the other aspect that this team now can offer and speak in technical depth to the various manufacturing modalities as well, whether that's monoclonal antibodies, whether that is mRNA, whether that is gene and cell therapy. So we have that same breadth and depth and are able to drive that globally as a team. And we do see benefits of that as customers view us as the one player out there that can look across the entire manufacturing game plan and try to improve manufacturing yields, which offers so much more opportunity in terms of improvement for the industry.
We're seeing that benefit. It's appreciated. The reason that we did this in the first place was because our customers asked us to come together and supply them this kind of coverage.
So, maybe switching gears over to instruments, your guidance is down low single digits. We've heard from a few of the larger instrument peers yesterday and kind of what they're seeing. I think you were flat last year. So just, you were certainly up a lot more coming through COVID and out of COVID. Just kind of what's happening in the instrument business and how did you the data speaks for itself, but given these volatile trends, just trying to get a sense of kind of what you've incorporated.
So let's start with that. The life science instrument business is under 10% of our business. So I'm not sure we're the great read-through here, but happy to talk about what we've seen, which is our belief has been, and if you look at a decade worth of data, that the market is a mid single digit growth market. And individual players will outperform or underperform that gravitational force, if you will, through innovation, through launching new solutions to customers that are oftentimes, certainly in the early period after launch, a tailwind to growth. So that was one aspect that we saw. Certainly in our business, we had and have an excellent innovation cycle. Secondly, there was a lot of funding that came to life science research, venture capital, government funding, and other funding modalities during the pandemic when everybody realized the importance of life science research.
We believe that's pulled a lot of purchasing forward. We saw that certainly in China with the subsidized loan program that went through the first quarter of last year. So that just means that in this normalization period, customers are going to be using these instruments for a while before it becomes time to either replace it or bring on the next generation of any given solution. I think that's what we're seeing here. As we go through the first half of this year where the comps are very high based on this buy forward activity, certainly in China, that's what we're seeing in the first half of this year. We expect that to normalize as we get through to the end of this year. The second half should be better. Then we would expect 2025 to bring more normality to that market.
So you talked about Cepheid at the onset; it's been growing high teens ex-COVID the last two years. The molecular diagnostics market's probably high single digit growth, so it could be double. Just, can you give us a sense? You talked about the increased size of the business, and obviously you've had a tremendous amount of placements. Just give us some more flavor underneath it, exactly why the growth is so high, at Cytiva.
So we have increased the install base to well over 50,000 instruments here during the pandemic, and we continue to place instruments at a brisk pace. And that's related to the fact that this is just a fantastic solution at the point of care where doctors are making decisions, therapeutic decisions. And we have to say that the pandemic allowed so many use cases and point of care sites to test drive the power of the GeneXpert and Cepheid's menu that they're now continuing to adopt that. And so we're seeing share gains through the consolidation on desktops and countertops in the hospital setting from competitive onto the GeneXpert as one modality of growth. We're seeing more tests, more menu items being used on the install base. So think of respiratory testing, but also strep.
We have recently launched women's sexual health tests that is also starting to gain traction on what is by far the largest menu. We have well over 20 tests approved by the FDA in the U.S. and well over 30 elsewhere in the world. So this is a very large and dynamic menu. The bottom line is that the GeneXpert works. It's easy to use. It gives you certifiably the right answer in a short period of time so you can make a therapeutic decision. And that's what clinics, that's what point of care is looking for. And so our team is uniquely driving that value proposition for share gain on top of what we're seeing here in terms of the organic growth rate of the market.
Is that high teens growth? I mean, what's the right way to think about? I don't know what you think the molecular market or addressable market grows at.
You've heard us talk about the respiratory market and that we believe the endemic level of revenue is probably closer to $1.5-$1.6 billion, different than the $1.2 billion that we've talked about. And that's related to the mix shift that we've seen, that clinicians are increasingly selecting what we'll call the respiratory panel, the four-in- one, versus a COVID only or a flu only, flu A only, or flu B only test in order to ascertain what the patient is suffering from and then ultimately to make a therapeutic decision. So that's one part. And we believe that, one, that's sustainable. And two, we'll see then how the flu seasons and the respiratory seasons develop in the future. Then you have well over $1 billion non-respiratory business, which has been growing well over 20% here in the last year.
But we believe and have been saying for some time that that's a sustainable, low double-digit growth rate, again, faster than the market because of the advantages of the technology for clinicians.
Great. You talked at the onset about the drop through rate. Could you just kind of walk through the margins in 2024 up 50 basis points despite the kind of tepid top line? Obviously, you took some cost actions last year. Just kind of what's the right way to think about as we kind of cycle through 2024, what the right drop through rate is for Danaher?
So just to level set, Dan, we closed out the year right around 28.5% operating margins. We talked about 50 basis points of margin expansion here for 2024, as you suggested, despite a slight decline in revenue. So that shows you that we are working very hard on productivity and that some of those productivity investments that we made are dropping through to the bottom line, again, based on a lower level of growth. As you go forward and you think about our long-term growth assumption of high single digits, I think it's perfectly fine to assume the 35%-40% fall through that we've talked about. And that's 500 basis points higher than what we had pre-pandemic, which was 30%-35%. So now we're talking about 35%-40% fall through. And that drives through then to an operating margin level in the low 30s.
I think that's the best way to think about it, this fall through. And then, of course, we'll drive that to low 30s operating margins while still having the room to really reinvest in the business.
So maybe on China, we touched upon it at the beginning. How do you think about this BIOSECURE Act and kind of how that might play out over the next few years for China? And our DC folks think that the government really means business here, and they think this will probably go through. And then eventually that could lead to further restrictions on maybe some exports of key technologies. We did a call recently, and one of the experts cited mass spectrometry as a key technology in the U.S. that the government may want to prevent kind of shipping out. So anyway, just maybe talk to your view on China over the next 2, 3, 4, 5 years and kind of how some of the political ramifications might play into that.
So as it relates to political ramifications, I'm going to tell you that I don't know and we don't know how this plays out in Congress. We might have said in prior years that that's unlikely to pass, but in the current environment, we're unsure how that might play out. But independent of that, our view on China continues to be a positive one for the following factors. This is an enormous population that wants better healthcare, and the government there wants to provide better healthcare coverage. That is one of the very few priorities domestically that the government there has called out and will continue to invest in. We believe that our portfolio is perfectly positioned in order to support those efforts, and we plan to support those efforts if we're allowed to by either side. But we do believe that long term, China represents an attractive market.
I'm more comfortable speaking macroeconomically. Our belief is that the growth rates that we've benefited from over the last 10-15 years are unlikely to sustain for the next 10 years, but still offer us opportunity to grow in China above what we would call our fleet average. Historically, we've grown, if you will, double-digit, maybe mid-teens in the one or the other years. Looking forward, we're probably thinking about low double digits, high single digits as a more sustainable growth rate given China's economic future here and the realities that the population and the government there have to deal with. We continue to invest in China appropriately to support our customers there, and we'll do that unless somebody decides that that's no longer appropriate.
So M&A, you did the Abcam deal, interest rates coming down a bit. There's still likely some very attractive assets out there, just given actually there's been some run-up in the stock prices, but there's also some that haven't recovered. So it's maybe a high-level way of saying M&A is part of your fabric. So how do you think about the environment today? What can we expect in 2024, 2025 from Danaher?
Well, I mean, as you suggested, we're as active as ever with our M&A funnels. It's part of what we do. But I also want to say that for us, the bar is higher given the interest rates where they are. The financial models need to show a return that is appropriate and accretive given the time periods that we've talked about. And in that context, we stick with our formula, which is we look at the right end market, we identify the right target, and then we look at the financial model, which has to deliver the kind of returns that we've talked about throughout the last years that remains unchanged. And when those three analyses go to green, as we say, or are positive, that's when we'll acquire an asset. And that's a discipline that we are going to maintain.
Great. Well, I think we're at a time. Rainer, thank you very much for being here. Thanks, everyone in the audience for being here.
Thanks, everybody.