Life Science tools and diagnostics team, and I'm very excited to be hosting Danaher. I'm joined by Rainer Blair, Chief Executive Officer. Reiner.
Good day, everyone. Thanks for having us, Mike.
Always great to have you here. Really a pleasure. We'll just do a fireside chat, but if there's any really burning questions, please throw up your hand. Maybe just to kick things off, you know, just a couple of weeks ago you reported 1Q. You know, you saw 50 basis points operational core growth, but there was a respiratory dynamic there as well. Strong earnings growth despite that. You know, you provided an update to the full year guide. Maybe just talk through real quickly how the quarter played out relative to expectations. What was maybe a little bit strong or what was maybe a little bit more challenging? You know, what surprised you?
Sure. Well, it was a solid quarter. We saw our end markets as well as the momentum across the business be actually a little bit better than we thought. If you take out respiratory, just as you mentioned, we had 300 basis points of growth. We thought that was pretty solid. The ILI, of course, anticipated that respiratory would be a little bit softer. As we think about the end markets there, we look at bioprocessing, came in at high single digits driven by consumables. I think a nice point of confirmation that the activity levels are getting better was the year-over-year orders growth in equipment, which was over 30%.
The first time in nearly two years that we saw that type of year-over-year growth. Prior to that, we'd been talking about sequential improvements. I think that's a data point that is noteworthy along with the activity level that is confirmed by the consumables. As you go to life sciences, there also we saw pockets of better activity levels. Our life science consumables business grew as you think about Abcam and Aldevron. Those would be indicators for higher activity levels in the biotech space, especially with Aldevron. Abcam is a business that's skewed a little bit more towards academic and government. They also grew, which is a nice indicator that things are starting to move there. Again, these are consumables, so it really does speak to the activity level there.
As you think about diagnostics, here where we're looking for another quarter without respiratory and volume-based procurement to be at mid-single digits. That's again what we saw. It's the eighth quarter in a row, so solid activity levels there. I think one point that's noteworthy out of China was that one, the volume-based procurement was as expected. Even with the medical services guideline changes we had anticipated and framed those correctly, and so that frame holds. We also see that the sequential improvements, so the comping out of that VBP dynamic, occurred in the first quarter.
I think somewhat surprising to us in a positive sense was that the patient volumes in China were higher, that's important as we continue to comp out a volume-based procurement during the course of the year. We do see that the patient volumes are robust and growing, of course, that's supportive here for the long term as well. That's describing the activity levels. As you think about our execution, like I said, without respiratory, 300 basis points of growth, but also delivering 30% operating margins, and nearly 10% EPS growth in the first quarter. All of that supports the guide that we've been talking about for the full year.
Okay. That's a great way to set the table. I want to double click on a bunch of those individual drivers you talked about. Maybe let's start with bioprocess. Strong consumables demand. You've seen, you know, pretty regular, pretty consistent, robust consumables growth in BP for a number of quarters now. Are we done with that? Are we done with the headwinds? Are we done with the fluctuations? Is consumables now, you know, rock steady back at normalized growth, or is there still some uncertainty, some volatility? You know, there's always some swings between high mid-single, low high single. Where are we in that trajectory?
Well, I mean, the consumables business, I would say, has normalized here now for a number of quarters. The lead times are really at the pre-pandemic levels, if we can say it that way. Customers are ordering these products when they need them. Now, sometimes, these orders, even for consumables, are very large, they can be lumpy, that explains some of that movement that you see there in high single digits. As we start to see higher activity levels with equipment orders ultimately turning into revenue, well, equipment, of course, is lumpier almost by definition. What's really important to note is that the bioprocessing market is robust. The approval of new monoclonal antibodies as a proxy modality for biologics are strong. We see biosimilars coming to market which will continue to drive volume.
Just to say that the bioprocessing hypothesis that we have been talking about for some time of high single digit growth for the long term holds.
Okay. I mean, on the equipment side, just as you were saying, you know, greater than 30% year-over-year growth. You do have a little bit of an unusual comps dynamic, so it's not just that clear cut, but it's still clearly a positive indicator. Can you talk us through, you know, where the demand is coming from? Is it more greenfield? Is it more brownfield? Replacement, you know, new capacity, big pharma, CDMO? Also, you know, would love to hear sort of orders converting to revenues.
When? How?
There's a lot of different drivers here on the equipment side. I think the first one that I want to talk about is the fact that the industry has underinvested in capacity for the last 2.5 years. Despite the fact that the activity levels, so the prescription of these drugs, the manufacture of these drugs, has continued to be robust. That is manifested, and the proof point for that is in the consumables. That is the activity level. There is a need to invest in more capacity for drugs that are already on market and coming into new indications, and so we see some of that, and we see that around the world.
I think secondly, we're starting to see other companies making investments here as the in what we believe are the early phases of a multi-year CapEx tailwind related to, one, capacity expansion, but two, the reshoring here in the U.S. That's manifested itself with the acquisition of underutilized pharmaceutical plants by CDMOs. Many of those are public. If you think about Lonza, Samsung, you think about Celltrion and others, some are investing, of course then to refurbish those or to make them more flexible for the greater variety of drugs that a CDMO would produce. We're seeing those kinds of orders as well. What we're not yet seeing are the greenfield investments that you would associate with reshoring. Those are on the drawing boards.
We're starting to give quotations, to the companies that ultimately construct those facilities. That's early days, and that will continue to provide that tailwind for several years to come.
In terms of the lag of orders converting to revenues, remind us sort of, like, of your lead times here and where did you see the 30% growth? Where did you see the strongest growth in 1Q orders?
We continue to see the majority of those orders in the brownfield area. Those can range between 6 to 18 months in terms of their execution. Some of them are larger, some of them are smaller. Keep in mind that timeline is not always determined by our lead time to manufacture these solutions. It's often the customer's site readiness that determines when you ultimately supply that. There's some variability and lumpiness in that over time.
You haven't updated or changed many of your assumptions on equipment revenue growth for 2026?
That's right. I mean, we continue to think there's going to be a year-over-year improvement. Last year, our sales for equipment were down double digits. In the context of our guide, we've assumed that equipment sales would be flat this year, so certainly a year-over-year improvement. We'll have to see how the next quarters play out here in terms of customer readiness before we would make any changes to that guide.
Okay. All told on BP, you know, you had a couple comments of you still think the bioprocess market is very robust, the long-term drivers are there. Once we get past some of these more near-term issues and you know, the orders do flow into revenues, take it all together, you know, is your view on bioprocess market still, you know, still the same, still high single digits longer term?
Absolutely.
Okay. Easy. All right, let's pivot to life sciences and talk about that a little bit. You know, you mentioned Aldevron and Abcam grew in the first quarter. That was a little bit of a positive surprise. Anything in terms of what drove that? Was that a little bit of a timing benefit, or are you know, starting to turn a corner in those markets?
No. I mean, this was for us, a pleasant surprise. In the context of our guide, we had anticipated that those businesses would start growing in the second half, primarily driven by some tougher comps there. You'll recall we had a lot of changes in life sciences sort of in the first half of last year, with various policy changes, the administration change of course, and tariffs and MFN. All of that sort of happened in the first half and played its way through there. That being said, here we saw more momentum, saw more life in biotech and really you see that with Aldevron returning to growth here.
That was nice to see because that is a market that is more characterized by biotech demand and some of those really advanced therapeutics, very nice to see. Abcam tends to be skewed more towards the academic market. There we also saw pockets of growth in Abcam returning to growth here. We've had 5 months in a row now of consecutive year-over-year growth, just underwriting our acquisition hypothesis that this is an outstanding asset now executing at the level that we expect of a Danaher operating company and driving real progress in science. It's very good to see that.
While those businesses can also from a quarter to a quarter, be a little bit lumpy, we expect that to play through here for the year in a positive way and expect life sciences to be a little better for us.
Okay. That was on the consumable side. Maybe we can talk about LS, instruments or equipment, you know, between SCIEX, Leica, Beckman, you know, overall LS instruments declined low single digits.
You called out a couple different moving pieces there. Maybe you could run through what you saw across the various opcos.
Just to level set here, as we think about our life science instrument business, that's about $4 billion of the $25 billion, just to get a sense. From a North American academic is low single digits of total Danaher sales. Just to range find a little bit as to the size of that business. It's really the academic market that is still softer for life science instruments, although it has stabilized. While we didn't see the level of sales, because you'll recall my comment, the prior year was still Fairly normal prior to some of these policy changes. We did see our order book move quite nicely here in the first quarter for life science instruments.
Sales down, yes, but our order book was a little bit stronger than anticipated, and we think that plays through positively here, in life sciences, driven primarily by pharma and clinical and applied market applications, but also starting to see pockets of the academic and government market showing a little bit of life. Activity levels, and the momentum in that end mark and those end markets a little better.
Okay. As you said, I mean, especially in U.S. ANG, some of the headlines last year hit in February, you didn't really see the revenue impact until March or even April 'cause there was a lag, you know, tough 1Q comp, maybe a little bit of an easier 2Q comp from U.S. ANG perspective, right?
Correct. Correct.
Okay. All right. Let's talk about, you know, there's other parts of LS that maybe are a little bit underappreciated or forgotten just because they don't come up on every call. You know, we had some questions on Pall Industrial, that's still in the, in the LS business. Remind us of some of the exposures there, you know, maybe the size of that business and how that's done recently.
Pall is about 25% of life science segment sales. This is a great business. The largest business there is microelectronics, where we're a leader in providing filtration solutions to the manufacturer of memory chips and semiconductors and so forth. Very nice end market exposure there. The growth that we're seeing for Pall in its entirety, but of course, for that particular end market is accretive to life sciences. We have invested and are validating new capacities that we've built in Asia. That's very exciting. We have an aerospace business also exposed to the expansion not only of commercial but also military solutions, which are becoming more popular these days. We're seeing that business expand nicely as well.
Our energy business is 1 that is primarily associated not only with the manufacture of fossil fuels and very specialized petrochemicals. Those are becoming more and more important and are also relevant to repairing gas and oil manufacturing sites, that's an area of strength. We have a food and beverage business, which is a GDP grower, smaller part of that business. In its entirety, Pall is an attractive business. It's exposed to attractive end markets. Technologically, it provides synergies with some of our other businesses in life sciences and is accretive both from a growth as well as a margin perspective.
Okay. I'm trying to remember from our Danaher initiation report from 2016, I think Pall Industrial, at the time you bought it, was maybe like $1.3 billion in revs, something in that ballpark. What's, you know, given some of the, some of the exposures to the advanced market electronics where, you know, there's a lot of investment opportunities now, what could that business grow over the sort of the medium long term? I know you don't guide by opcos, but just directionally how do you think about that?
We don't guide by opcos. I would tell you that it in its current setup would be accretive to the life science segment.
Okay. I'll take that. Maybe while we're on the topic of LS, let me just make a quick side pivot. Let's talk about AI a little bit. Comes up on and off, I would think that would be where you'd be probably the most exposed would be within life sciences, within pharma, biotech, in terms of leveraging AI for R&D. Just what have you seen from your customers over the last three to six months as it's really kind of become mainstream? How broadly are they leveraging it, and how does Danaher fit into that, you know, hopefully as beneficiaries?
When we think about our customers, in AI, I think the place to start thinking about that, as you suggested, is in life science, life science research, and in the pharma segment. There our customers are very excited about what this means, and we believe rightly so, and we see that the application of AI for pharma will result in a multiyear, secular growth acceleration because it ultimately increases the speed and the effectiveness of the pharma flywheel. What does that mean? As we think about the pharma drug development pipelines, we know that the yields of those pipelines are fairly low and the investment intensity is fairly high, and that's very difficult to sustain over time.
Now with AI, we have, as an industry, the opportunity with our customers in order to improve the yield of the development pipeline from 10%-12% to something much higher over time. That doesn't happen overnight, but over time. Of course, that will fundamentally accelerate the development of those therapeutics. That will be a real shot in the arm in terms of the profitability of pharma companies on the one hand, on the other hand, the reinvestment profile. Imagine if you have a much higher yield in your drug development pipeline, what would you do then if you can bring markets better products to market more quickly?
Of course, you're going to reinvest a good amount of that back into the front of the flywheel. That's so important for the life science tools industry, and of course for Danaher. What role do we play there? We are a automation provider. These models that are being built, one has to keep in mind that large language models really don't solve for the drug discovery and development topic, certainly not entirely. Biologic models are required. Those have to be built. That will take some time, and it takes a great deal of testing, and that testing increasingly will come through autonomous labs. Some people call it lab in a loop, and we provide those kind of solutions. You've heard about our collaboration with Automata.
That's a company that helps provide an intermediate layer there to allow the connectivity between the various instruments, and of course, those would be our instruments. It's our automation. These are our reagents and information systems, and that's a value proposition that we're proud to share and work with our pharma customers.
Okay. Great. Let's pivot to diagnostics now. You know, maybe we'll start on the Cepheid respiratory side of things. You know, you started the year guiding for $1.8 billion, which was prudent given what we saw over the last couple years. You know, you revised it on 1Q to $1.6 billion-$1.7 billion, so $150 million. I believe it's 50/50/50 lower 1Q, 2Q, 3Q. Is that, you know, is that sufficiently conservative, you feel, for 2Q, 3Q? How much visibility do you have into how that could play out the rest of the year? Just talk about sort of confidence in that new number.
I mean, we think that we understand based on the infection rates here in the first quarter, discussing with epidemiologists, as well as with our customers, how they view the first 3 quarters of the year, as you just suggested. We've adjusted that. The rest of the portfolio makes up for that adjustment. That's not the concern. For the fourth quarter, we're assuming a normal respiratory season as well. That's a reasonable assumption because hospital systems in particular try to get ahead of what might happen in a flu season. As you know, it straddles the fourth quarter of 1 year and the first quarter of the next.
There's a stocking phenomenon there in the first quarter to ensure that during the peak of those seasons, they are appropriately stocked to meet the needs of their patients. We feel comfortable with that assumption and continue to see a share gain for Cepheid even in respiratory as people just see the solution, the ease of use and the turnaround time of these solutions to be critical for their patients.
On the, on the non-respiratory side, I think you saw mid-teens growth in Cepheid non-respiratory for our call. It's done really well for a number of quarters. You kind of talked about even going back to your Analyst Day, you know, the non-respiratory getting bigger and bigger and bigger until it sort of starts to really show up in numbers. What's been driving that growth? You know, menu expansion, install base, execution?
The non-respiratory business is about as large now as the respiratory business, so it's grown nicely, as you mentioned, mid-teens growth here for 2026, and we believe in the long term. What's been driving that is the thoughtfulness of the Cepheid strategy, where during the pandemic, we really focused on placing our instruments in care settings that ultimately would be able to take advantage of our expanded menu. What turned out, started as a COVID test and then a 4-in-1 respiratory panel has been expanding, and we have over 40 now approved, regulatory approved tests, by far the largest menu, and now have taken the next step technologically by opening up the mid-plex segment. What that means is that we can test for more analytes.
The 4-in-1 test in respiratory was the first example of that, the MVP test. Now the gastrointestinal panel is the next test, and you can expect many more of those to come for the next 12-18. That's exciting for us because really there's the high-plex segment and sort of the lower-plex segment, but the sweet spot for clinicians is the mid-plex segment. They really don't like stacking all these codes in the high-plex because it tends to be more expensive, and it's an overkill in terms of the type of data it provides. We've opened up our addressable market significantly by now being able to handle these mid-plex tests. We're super excited about that, and that's gonna continue to drive mid-teens plus growth in the non-respiratory segment.
Okay. Okay. All right. Maybe kind of taking a step back and rolling it all together, when we think about the outlook for the, for the rest of the year, for fiscal year 2026, you've talked consistently about how you're not anticipating any end market improvement and that the, you know, the ramp as you go through the year, you know, was 0.5% organic in the first quarter. You're down 2% in the second quarter, sort of that, you know, mid-single digits in the second half. A lot of that or all of that comes from headwinds fading as you go through the year, taking that risk out of the, out of the model, and that, you know, that seems prudent and appropriate. I think at the same time, we've had questions that, you know, headwinds are unanticipated, right?
I mean, if we go back two years, the headwind with Aldevron, that was unanticipated. The headwind with VBP was unanticipated, and this year the headwind with respiratory is unanticipated. While you're retiring risk and headwinds fade, is there, you know, how would you answer the question of what if there's new headwinds pop up, whether it's from Middle East conflict, you know, anything in pharma end market specifically? Do you have a cushion or a buffer in the guide to absorb those if there are new headwinds? Maybe, you know, what levers could you pull to sort of offset some of that?
We provided this guide with the assumption, as you just suggested, that we're retiring some of these headwinds here in the second half, and that's real. That's over 300 basis points of headwind that we will have retired here in the first half to the second half, and that's what takes you from the Q1 to Q2 acceleration, takes you to that mid-single digit exit rate as we head into 2027. The question arises, okay, if there's anything else that happens, where do we sit with that? When we build a guide, there's 2 things that we do.
One, we ensure that not everything has to be perfect for us to be able to deliver on that. We take the necessary measures in our guide to ensure that if unforeseen things occur, that we can handle those. That's the first point. The second point is that this is the Danaher leadership team that I'm very proud of, and we have the levers and we demonstrate that we can take care of these issues should they arise because our focus is on outcomes and results as opposed to activity. That's part of our brand, and that's what our leadership team commits to.
Okay. The guide for the year is still as you reiterate 3% to 6% organic. We've been anchored to the low end. We do get questions of sort of what gets you to 4%, what gets you to 5%, what gets you higher as you go through the year. I think it was on the earnings call in the Q&A, you identified a couple points in terms of end market improvements, whether it is biotech, pharma, China, et cetera. Are there a couple that you would say you could potentially be seeing green shoots already, or were you a little bit more optimistic about those could come through?
You know, we always see some as, you know, more likely to happen versus some being a little bit more aspirational or, you know, out of your control. Where do you see things being a little bit better already?
At the top of our chat here, I talked about activity levels being better and the momentum being better across the portfolio. That said, if I had to pick two where I say, "Okay, this is probably the area to look for," I would say that the bioprocessing equipment area, as well as in life sciences, is the area that I would focus on.
Okay. Okay. Maybe just a couple minutes left. Let's talk about capital deployment, another area where we've had a lot of interest. You know, traditionally, your preference is towards M&A for capital deployment. There's not often that we see buybacks from Danaher, but you have done a couple times in prior years. You did a sizable buyback, 2 years ago. I believe it was at around $260. You did some more last year. I think, I don't know, the stock was around $200. You know, sitting where we are today, the stock is in the, you know, $160s, $170s. Does that factor into your, you know, appetite to maybe move away from M&A a little bit and deploy capital?
Sort of what's the thinking on that, and what would it take for you to do that?
We don't think about it in terms of moving away from M&A to do something else. We think of all of our capital deployment in the context of the return on invested capital that it will generate and the compounding effect that it can have over the long term. That is why our bias tends to be towards M&A, and that continues to be the case. As values pull in here across the industry, that is the kinda time that we have made some of our best deals historically. That said, anything we do, whether that's a buyback, whether that's M&A, whether that's CapEx, we're going to look at that return on invested capital and the compounding effect that it delivers for our shareholders.
That's where we sit today in terms of capital allocation. As you suggested, we've done share buybacks in the past, somewhat of a departure of the more distant past. We maintain that flexibility, but the driving factor is what is that return on invested capital.
Okay. Maybe, well, just last couple minutes just on the topic of M&A, and balance sheet. You know, recently announced Masimo. It's been a couple months. You know, deal's still not even closed yet. But balance sheet will still be in a good place beyond that. Any other particular areas where you think, you know, where you think you complement the portfolio? What's the market look out there? Just specifically on Masimo, any early feedback from customers?
Well, let's start with Masimo. You know, we're anxious to get the team on board here. We saw the shareholder vote, which of course went very, very well. We're hopeful that we can close here in the second half of the year. We're really excited to bring this really important strengthening of our acute care portfolio on board. You know how much we like that company. We've been following it for a long time. This is really a company that is in mission-critical applications, really with proprietary SET technology, and it is accretive at all levels for us. That together with the synergy that we see, cost synergy is important, but put those aside for a minute.
The synergies that we see in the acute care settings are exciting, they're important, and we're looking forward to having them on board. Just to share an anecdote, we recently were with an IDN, a large IDN, our EVP of Diagnostics, Julie Sawyer Montgomery, was speaking with them about our Danaher Solutions, and they indicated that they only buy half of their pulse oximetry solutions from Masimo.
They said, "Well, look, would you be interested in having the entire business?" That's kind of a nice situation to be in, to have somebody recognize that the leverage of the Danaher portfolio and our ability then to bring those kind of solutions to that IDN is actually proactive in the conversation rather than a push. We're excited about that. As it relates to capital deployment for the rest of the portfolio, we have three segments that are very attractive. We're excited about their end markets, and they compete for capital. All three of them compete, and we're happy to invest in any one of them, always if they meet our three-dimensional model, end market, company with value reserves, and the financial model's gotta make sense.
Even with Masimo, I think net debt to EBITDA, 2.5 times.
Two and a half times is full speed here.
Sounds healthy for you.
That's right.
Okay. Great. With that, Rainer, thank you very much. Really appreciate it. Thanks everyone for listening.
Thanks, Mike.
Great.