Unless everyone will, I'll kick things off for our next session. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics teams, and I'm thrilled to host Danaher. And I'm joined by Rainer Blair, CEO. Rainer, thanks so much for coming.
Mike, thanks for having us.
We'll do a fireside chat as usual, but just to kick things off, you know, you reported 1Q a couple weeks ago, you know, first name out of the gate, set the tone for tools. You know, pretty impressive quarter, good start to the year. Anything you wanna call out, any, you know, any opening remarks you wanna make?
Well, we did have a good start to the year, and it started, really with our, our top-line performance. We contracted only 4% versus our guide of, of high single digits and delivered, you know, very strong operating margins of 30%, which also exceeded our guide. All of that, of course, drove, a, a very strong cash flow of, of $1.4 billion for the quarter. So, we're, gratified and encouraged by the start to the year, and look forward to, the rest of the year as it develops.
So, first question, obligatory, has to be about bioprocessing. A lot of debate there, a lot of focus there. You know, decline was high teens but slightly better than expected. You know, you had a nice sequential improvement in book-to-bill, order growth. So, you know, could you give us a little bit more color on what's going on in the bioprocess end markets, inventory destocking, and just sort of visibility over the last couple quarters?
We did have a moderate beat here versus our expectations in bioprocessing. And what we found particularly encouraging was the sequential orders growth of mid-single digits. Typically, when we go from Q4 to Q1 of any year, we see a decline in orders, but we thought it was noteworthy and encouraging that we saw mid-single digit growth here in the sequential orders development. I think another point which was encouraging in the quarter for bioprocessing is that our book-to-bill moved from the prior quarter's book-to-bill, which was around 0.8, 0.85, to, in the first quarter of this year, 0.95. So that's encouraging. That's a significant step up there. But in addition to that, we also saw a reduction in cancellation requests. In fact, they weren't significant at all.
And you'll recall, in prior quarters, we have been trying to ensure that we improve the quality of the signal-to-noise ratio, in other words, the visibility to our customers' ordering patterns, by allowing for these cancellations. And it's a signal to the positive that those cancellations are no longer significant. Now, as it relates to the inventory destocking, for us, we believe that we'll largely have the destocking behind us here, at the end of the second quarter. And what's driving that really are, in North America and in Europe, the large pharma and CDMO customers who are increasingly returning to their normal ordering patterns. And that's encouraging because we're starting to get that regular order traffic, and those customers are clearly with that signaling that they have come into an inventory equilibrium, and that supports our hypothesis there.
Now, as we think about the biotech segment, which represents about 20, 10%-15% of our business in bioprocessing, we have seen the improvement of the funding levels, and they're just above, I would say, the 2019 levels now after the, the peak, after, between the two years here. And, that's also an encouraging signal, but it's a little too early to see that have an effect right now. In order rates, it typically takes 2-3 quarters before we start seeing that improved funding level play out in actual orders. And then lastly, I would say China. China remains, as we have forecast, at a low activity level, and is not really contributing from a tail or headwind. It is as we have projected and guided, with a relatively low level of activity.
Okay. That's all really helpful context. I think one of the things we've noticed in the last couple quarters, last year, is that, you know, between yourselves and Sartorius and Merck KGaA and Avantor and Repligen and Thermo, you know, everyone's got slightly different book-to-bills. Everyone's got slightly different order trends, seasonality, pacing. You know, how would you characterize high level, where your portfolio stacks up versus the others? And what should we keep in mind when we're making those read-throughs from company to company?
So there's a couple things to consider when comparing companies. First of all, everybody has slight differences in how they calculate a book-to-bill, so that's sort of one point. The second point would be that there are differences in the portfolios. For instance, at Danaher, we have the broadest and deepest portfolio in bioprocessing. And as you think about our product mix, that will be different than any given other player. And then the geographic and customer mix is also different. So that will lead to different patterns in the recovery. But I would say the large picture, if we take a step back, is actually fairly consistent.
It appears that the industry is seeing a slow and gradual recovery here through the first half of the year with an expectation that things get better here in the second half, certainly off of the basis of easier comps, but also because we have largely put the destocking issue behind us.
Okay. And, you know, most of those comments, I think, really touch on the short term, but can we think about bioprocessing longer term? You know, I think as you exited this year, you talked about mid-single digit, high-single digit growth. Or better, you know, that sets you up well for 2025. So when we think about the long-term bioprocess algorithm, you know, what's your latest view on underlying market demand and just so sort of, you know, how sustainable is that growth?
That's right, Michael. So we are saying that in the second half in bioprocessing, we'll see mid- to high-single digits with an exit rate of high-single digits or better. And that supports our long-term thesis that the bioprocessing market really is growing at high-single digits. And that's our expectation here for the long term. 2025 is, is, ways away for us yet. We wanna make sure that we deliver what we have to do in 2024. But our long-term hypothesis remains intact. And that's really based on a number of supporting factors. If we, if we think about the lower penetration, relatively speaking, of biologic drugs around the world, and the opportunity to reach more patients with different approaches such as biosimilars.
If we think about the size and the speed of development in the development funnel with the various types of modalities, certainly monoclonal antibodies, but also different proteins such as ADCs, bispecifics, and then, of course, nucleic acids as they make their way into the therapeutic arsenal for clinicians. So all of that we view as very positive and supportive of our long-term hypothesis.
You don't think, just to be clear, you don't think there's been any change in competitive dynamics over the last year in terms of market share, market gains and losses. You don't think there's really any new entrants that have popped up in the space. It's, you know, when we go into 2025, it'll still be relatively similar market to what it was, you know, pre-inventory growth?
By and large, there have been small share shifts. We believe that we're a beneficiary of those. Of course, there are always new entrants with new ideas and innovations at the margin. But if we view the large picture here, essentially the industry structure and hypothesis remains intact, and we view ourselves as a determinant player in that industry.
Okay. That's helpful. And then maybe shifting away from bioprocess specifically, let's talk about the biopharma end market. You touched briefly on biotech funding and emerging biotech and sort of, you know, early funding levels in 1Q and how that'll play out. Let's talk about large pharma. I think broadly, the comments were that, you know, 1Q was a little bit slow out of the gate. So just could you, could you expand on that a little bit, you know, in terms of budget releases and how have things trended in terms of conversations through March and April?
So large pharma for us, actually was not slow out of the gate here, in the first quarter. In fact, as we look at prescription rates, here from 2018 forward, we continue to see in biologics a growth rate of 9%-10%. And that has sustained here. And we actually believe, net of any inventory correction, that we're starting to see that demand signal, more of it certainly in the first quarter. And we would expect to see more of it, as we go through the year. So, there are a number of things that are going on in, in big pharma, but one, one has to see as the key takeaway is that the pace of innovation in large pharma has never been faster. The investments, and the bets that are being made are, have never been larger or more exciting.
All of that speaks well not only to what clinicians will have to treat patients around the world but for the industry's health as a whole. So we're very bullish on the long-term future here and how large pharma plays out in the long term.
What about factors like IRA, the Inflation Reduction Act? I mean, that's been a hotly debated topic for the past year. Are you seeing any changes tied to that? No, it's still years away?
Well, it's a little early for there to be an impact. But as we tease apart the different elements that are applicable to us, I think the first thing to note is that biologic drugs versus small molecule drugs are treated differently in the IRA. Biologic drugs receive protection, relatively speaking, for 12 years and small molecules for 5 years. And so as you think that through, while that's perhaps shorter than it has been, it actually advantages the development of biologic drugs going forward as they would have longer protection. Secondly, should the pricing of these drugs be lower through Medicare or other programs, the expectation would be that the volume of the prescription and the consumption of those drugs to patients who need them would increase. And of course, our business is volume-driven.
So as the production of these drugs increases in volume, whether as a result of the IRA or whether because a biosimilar has been launched, that's a net positive for the tools industry and, of course, as we're the largest player in bioprocessing, certainly for us as well.
Okay. That's helpful. And then, sort of sticking on pharma but maybe expanding things a little bit, let's talk about instrumentation. It's a small part of your business. It's not, you know, it's not the biggest needle mover, but still, instrumentation was a little bit challenged in the quarter. Again, you saw relatively similar commentary from some of your peers. You know, how should we think about instruments recovering, or progressing as you go through the year?
So what we've seen in the instrument business and recall our instrument business is about 10% of our total business. So, as you suggested, it's not our largest segment. But nonetheless, what we have seen here, and we've called it out some time ago, is really a normalization process of an industry which is typically a mid-single digit growing industry. And what we've seen in the past through subsidies, whether they be in China or by other countries in various different forms, is the pull forward of demand. And what we're seeing now is really the overhang of that pull forward as this industry normalizes.
We would say this is still in the earlier stages of that normalization process but expect to start seeing improvements here in the second half, not only because of better or easier comps but also because we would expect the activity level to return here, as pharma companies and other researchers and applied markets start replacing their installed base and getting back to a normal rhythm.
Are you seeing any difference across your portfolio? You know, you've got exposure there from Leica Microsystems, from Beckman Coulter, from SCIEX. Any parts of the business doing a little bit better than others? Sort of, what differentiates that?
I would say what we see, and this is to be seen as a nuance as opposed to a large trend, is that the larger scientific instruments that are really about pushing scientific inquiry forward at the leading edge of science are doing better than those that are more the traditional lab workhorses, where there's still, I would say some opportunity for improved growth going forward, but we're not there yet.
Okay. All right. That's helpful. Next, I wanna run through a couple, a couple specific business segments. Let's start with Cepheid. Business did really well in 1Q, but then again, it's done very, very well for a number of quarters in a row. It's been a number of years since you closed that deal. If you could just sort of take a step back and, you know, evaluate where Cepheid was when you brought it in versus what it is now, you know, what really has driven that outperformance?
This is an acquisition. Certainly for the history books, we're working every day, of course, to put others in there. And there's a couple other examples. But Cepheid truly is an extraordinary example of that. And really, the acquisition was about acquiring an outstanding team, first and foremost, that had developed a differentiated technology that is defensible and that delivers first and foremost real clinical value. The secret sauce of Cepheid's success is tied directly to the value it offers to clinicians to help their patients. And so, of course, as Cepheid entered Danaher, we helped Cepheid to become more profitable and with that profitability to be able to reinvest more in the business.
with that, we're then able to fully take advantage of the pandemic with our installed base now post-pandemic being more than 2.5 times the size it was prior to the pandemic. We've invested significantly in R&D and the assay development flywheel that we drive there and that has us now with 30+ approved assays in the U.S. with 40+ approved assays outside of the U.S. And those are delivering differentiated value in various care settings at the point of care where doctors are making calls about therapeutics. I was asked just the other day about the 4-in-1 test and why it is such a popular respiratory test solution. And you'll recall the 4-in-1 is for flu A, flu B, RSV, and COVID.
The reason is that when a patient presents with flu-like symptoms, it's really a crapshoot as to what this patient has. And ultimately, with the 4-in-1 test, the doctor is not only able to identify what it is not, it specifically identifies what the ailment is and allows a therapeutic decision. And this is done with ease of use. This is done at a short turnaround time. And it's high performance, meaning it's the right answer. And that combination has really been attractive to hospital systems and clinicians throughout the world and really defines how Cepheid continues to move forward and take share.
So with all that being said, you know, where does Cepheid go next? You know, you talked about the massive growth in the installed base. You talked about the menu expansion. You know, margins have really taken a huge leap forward. So sort of what's your view of Cepheid over the next couple of years?
We're gonna continue to take share. There's plenty of opportunity for share gain, not just in respiratory testing. On the contrary, we have many more tests available. So we continue with ensuring that the utilization of more menu assays per instrument as well as introducing additional assays. And then, of course, we still have the opportunity of geographic expansion. So, we're gonna continue to invest in the right clinical decision-making for the hospital systems and doctors out there by providing them this outstanding solution.
So net, net, you know, above company growth, margin accretive at this point, right? Coming up.
So, we think the long-term growth rate of the non-respiratory business is in the low double digits. That is above the fleet's growth rate, which we believe to be high single digits. And, this is a very profitable business at scale, and will contribute and be accretive to the fleet average.
Okay. A couple other assets I wanna touch on real quick. Aldevron, you acquired that asset a couple of years ago. You know, when you acquired it, I think, I believe, $400 million in revenue, you know, growing healthy, healthy double digits, very strong margins, you know, really positioned you for, you know, nucleic acids, cell and gene therapy, some of the new modalities, some, some, you know, affiliated with bioprocessing. Could you give us an update on that deal and, you know, how that's fared since the since the acquisition post?
Sure. So first, when we acquired it, it was more like $250 million in revenues. But nonetheless, it has continued to grow at very attractive growth rates here and is meeting our expectations. As you would expect, there's a bit of a tail post-COVID here for Aldevron as they were involved in the manufacture of various solutions here used during the pandemic. But nonetheless, they are the gold standard as it relates to supplying plasmids and other types of proteins to the gene editing market. And that, of course, is a very interesting market, not just today but for the very long term. And, you know, that was the principal reason for us making that acquisition to ensure that we not only had a beachhead but a gold standard for the development of gene editing solutions going forward.
And then, you know, your most recent acquisition was Abcam, just closed in December. So, you know, you've had it for a total of maybe five months now, but you've already taken some early steps in terms of integrating that and sort of taking it down the road of becoming a, you know, a Danaher Opco. So give us an update on how that deal's going.
So, early days. We closed in December, as you mentioned, and we just also closed on our first quarter with ownership there. We've installed a Danaher president and CFO, so that they start playing out the playbook that we put together here during diligence, which is specifically tailored to Abcam, and the opportunities there to both accelerate growth and improve the cost position. So it's early days, but we believe certainly that this really another gold standard company that is really the standard in proteomic research reagents is going to meet its high single-digit long-term growth rate.
Okay. All right. And where I'm going with these questions is, you know, Cepheid, Aldevron, Abcam, you know, we kinda talked about Cytiva when we talked about bioprocessing. You take all these together, and Danaher exiting COVID, exiting 2024, is gonna look like a very, very different company than it looked like in, you know, 2016, 2017, 2018. The last couple of years between COVID and inventory stocking, it's really obscured the underlying performance of the company. So, you know, taking all of that together, how would you characterize, you know, what are we gonna be looking at in the next couple of years going forward in terms of the new, new Danaher?
You're right. The fog of the pandemic has obscured the true power and the rerating of both our growth and earnings trajectory post-pandemic. Just to give you a sense of the power of this transformation, if we just sort of take 2018 as a base year, prior to the pandemic, and we look to the end of 2023, you know, we were a $20 billion company that was a mid-single digit grower with low-20s operating margins. Since then, we have spun off, in different forms, over $7 billion of our revenue and nearly replaced it through other acquisitions. What we spun off, Envista as well as Veralto, which was just in last October, had dilutive growth and earnings profiles, and what we acquired had accretive growth and earnings profiles.
And of course, our acquisitions were the GE Biopharma business, which we've since combined with the Pall Life Sciences business to form Cytiva. And you all know that as being the premier franchise in bioprocessing in the world. We acquired Aldevron and Abcam, both once again accretive to both growth and earnings, and those each gave us a beachhead in genomic medicines as well as proteomic research. And then lastly, if you think about how the respiratory testing market has developed, back in 2018, roughly, we were a $250 million respiratory testing business. And if you think about where we are today in an endemic state, we're well over $1 billion. We've talked about $1.6 billion here in the guide for 2024. And we believe that to be a sustainable level of respiratory testing.
So when you put all that together, you're looking at a $24 billion business that is dialed into the most attractive segments in the life science industry with high single-digit long-term growth rate, margin profile, so VCM of 35%-40%. You all are familiar with our operating system, the Danaher business system. That allows us to drive cash flow, net cash flow above our net income. And all of that, of course, then allows us to execute on M&A and capital allocation in general. And that's what ultimately drives that earnings accretion of double-digit EPS growth. So when you see all of this, you can see that our objective to exit the pandemic stronger than entering it, we believe that's been achieved.
As the fog continues to rise here in the pandemic, gets further and further into the rearview mirror, you're gonna start seeing that portfolio play itself out.
Okay. You just touched on it there in terms of the, the earnings accretion and the, the operating leverage, but I wanna touch on that a little bit more. You know, given the business shift, given where you're seeing the fastest growth opportunities in Cepheid and bioprocess, those are really creative incremental margins. You know, you've got really high volume leverage. So as the business recovers exiting this year, and as you look forward to 2025, how should we think about that incremental flow through, to the bottom line?
So that flow through, of course, as we've been contracting, was very high on the negative side. But you can expect that; we've done a lot of work on the cost side during the pandemic. We have not sat idly by here, and we've taken full advantage of this time to continue to drive our fixed cost base down to be able to benefit from the volume leverage, which we expect over time. So that's gonna be a very attractive incremental flow through as volumes recover going forward.
Okay. Just a couple minutes left. So I wanna make sure we touch on capital deployment at M&A. As you said, you just did Abcam last year, but given your free cash flow, given your balance sheet, you could probably do an Abcam-sized deal every year if not more. So, you know, your balance sheet remains really robust. Free cash flow is strong. You know, there's a lot of opportunities out there. Sort of how would you characterize your appetite for M&A now or for other capital deployment?
Well, we are skewed in our thinking. We have a bias, if you will, towards M&A with our cash flow, and that remains unchanged. But we do have to say that the current environment, with high interest rates and high valuations, is such that it makes it, of course, more difficult. The one thing that we're not gonna compromise is our discipline around return expectations on acquisitions. And what that likely means in the shorter term is that we're more likely to do smaller bolt-ons and medium-sized deals, which for a company of our size, $25 billion, roughly, revenue, continues and will continue to move the needle. So to give you a sense, you used Abcam as an example. That adds 2% to our growth in one year.
Of course, if we hadn't done the spins of the past and we were much larger, say, nearly double, of course, that would be only half that growth rate, and it becomes much harder to move the needle. So lastly, to the topic of other forms of capital allocation, we always look at all types of capital allocation, and we do that, of course, in relation to the alternatives that we have and on the basis of return on invested capital. So we have a bias towards M&A, but of course, we always see what other alternatives we might have in capital allocation.
Okay. Talking about the M&A angle, you know, could you talk us through your framework in terms of how you consider targets, sort of, you know, what's the roadmap you take when you're evaluating something?
So this is the way we operate. First of all, we get out of bed in the morning and are canvassing markets essentially 24/7 with our teams to understand markets and to understand companies. And it's on the basis of our strategy, which is to apply science and technology to improve human health, that we set a frame and then look for those markets that have the most attractive long-term secular growth drivers. We're not talking about three years. We're not talking about five years. We're talking about 10+ years of strong secular growth that supports an investment hypothesis. Then within that, we of course look for the most attractive targets.
And in that case, we try to develop a proprietary perspective on any given asset to see whether it has a competitive advantage, value, reserves that we might mine, or that we can expand, leveraging our experience in the Danaher Business System, in order to improve that asset. And then, of course, in parallel to that, the financial model has to work. We will not compromise on our earnings metrics and return on invested capital and our cash flow expectations.
Great. And I think if you if you frame it that way and you think back between Cytiva, Cepheid, Abcam, Aldevron, they all check the box in terms of long-term secular growth, company-specific advantage, valuation. So it's, it's a clear way of thinking about it. We got about a minute left. So just sort of our, our last concluding question is the standard, you know, Danaher's pretty well understood and, and pretty well followed, but, is there anything that you think is still underappreciated? Is there anything that, people misunderstand or misinterpret? Sort of, you know, what are the questions you're getting that, you wanna clarify?
Well, I would just say, it comes back to this fog lifting. We have done, I believe, a tremendous amount of work, to transform our portfolio and position this company with a competitive advantage, not just in terms of the kinds of companies that we have and the technologies that we use to innovate within any given segment, but also with the Danaher Business System and our teams. We just believe that this is a really unique company, the combination of those markets that we operate in, the lighthouse leading assets that we own in those markets, the tried-and-true Danaher Business System, which allows us to execute at scale for nearly 40 years now. This, that's unique. It's our culture along with the toolset on how we operate and drive improved performance.
And then lastly, I believe we bring a discipline to the market with how we operate that is truly differentiated. And it shows in our cash flow. If you compare our cash flow to other companies in the sector or elsewhere, it truly does identify where the real power and multiplier is of the Danaher Business System and our portfolio.
Great. Thanks so much. With that, we're out on time.
Thanks, Mike.
Rainer, appreciate it.
Really appreciate it. Thanks for coming.
Thank you.
Thank you, everyone.
Thank you, everybody.