All right. Thank you for joining us for our next session. For those of you that don't know me, I'm Mike Ryskin on the Bank of America Life Science Tools and Diagnostics team with Co-Senior Analyst Derik De Bruin. Joining us for the next session is Danaher. We're excited to host Rainer Blair, Chief Executive Officer. Rainer, thank you so much for coming.
Thanks for having me.
Great. Well, it'll be a fireside chat as usual. Maybe just to kick things off, any prepared remarks or any intro you'd like to give just to get us warmed up?
Good morning, everyone. Thanks for coming. I thought I would kick off with the strong start in the first quarter that we had as Danaher. Our base business grew 6%. Recall the base business is the business without COVID impact, whether it's through testing vaccines or therapeutics. From a geographic perspective, we saw we were down mid-single digits in the developed markets. Again, this is with COVID, up low single- digits in the high-growth markets. I think it's important to call out that our cash flow for the quarter was $1.7 billion, a real hallmark for Danaher because it not only speaks to the quality of our businesses, but also the quality of our execution, leveraging the Danaher Business System.
Looking forward, we did adjust our guide, as you know, and kept essentially everything the same in the guide, with the exception of taking down the bioprocessing business expectations, which I'm sure we're gonna talk about here in a little bit. In summary, good start to the year as it relates to the outlook, keeping everything the same, processing adjustments.
Great. Yeah, I'll just follow up right on that. The bioprocess adjustment, I mean, it's something we've been talking about for a couple of quarters now, obviously in terms of what's going on in that end market and what's going on with customer inventories and destocking. What did you see as the quarter progressed that made you sort of reassess that?
We've been watching the bioprocessing business very carefully. Just a couple of data points here. We had orders down 17% in the fourth quarter. This is non-COVID bioprocessing. In the first quarter, down 20%. We were really looking to see a stabilization in the first quarter and more positive activity to be able to underwrite a step-up in the second half in the bioprocessing business. Essentially, that's not what we saw. We saw, you know, continued weakness. January was weak. February was weak. March was a little bit better. Now, we see April really fundamentally the same as the first quarter.
We just have not seen the type of activity that we would need to see at this stage in order to be able to underwrite a step-up here in the second half. Really, it's on that basis that we said, "Okay, we have to adjust that down." The factors that drove that are really twofold. First of all, you know, large pharma customers are doing well with their demand, and they're burning down inventory, not quite at the pace that we had expected. We thought that they would be growing in the high single- digits area and saw more in the first quarter, mid-single- digits growth.
That's related, really to it taking a little bit longer to burn down inventories as not only inventory of our own products and those of others, but their own finished good inventories are now being looked at more closely, let's say by their CFOs as working capital has become much more relevant with the higher interest rates. We see that in, in that segment. Then, in a segment we call Emerging Biotech, which is simply smaller customers that do not yet have a commercialized program in the market. No commercialized program, preclinical up and through phase III. That customer segment in particular continues to struggle. We saw some of that in the, in the fourth quarter. We've seen more of that in the first quarter. Really, it's a global phenomenon.
We see it in the U.S. and, as well as in China, that funding constraints there continue to hamper investment. Of course, you see CapEx being reduced here, but also OpEx. I'm sure many of you have noted the layoffs that are happening in the sector. All that together just didn't give us the data basis in order to support a step-up here in the second half.
Got it. On that, on that inventory point, especially when you talk about, you know, large pharma burning it down, is there any way for you to quantify how much is left until you sort of they're back to what should be their ready run rate, I guess, as sort of a forward indicator for when orders will re-accelerate?
You know, it's very difficult ultimately to categorize how much of that inventory is burned off by when. Of course, we stay very close with our customers. I'll tell you how this played out. We saw, you know, the orders contraction there in the fourth quarter, and of course, went to JPMorgan and discussed with many customers what they saw. Many were, you know, saying, "Yes, you know, things are softening a bit here, but ultimately we're holding our budgets." As we progressed, we saw that in fact they're having to address their own working capital challenges or additional funding constraints.
You know, the visibility to this is not what it has been, you know, prior to the pandemic, due to some of these dislocations.
What's your assumption, you know, in your latest guide?
Right.
For both large pharma and emerging biotech for the rest of the year?
Going forward for the rest of the year, we really are expecting the same type of activity level as we saw in Q1. That's why we're saying in the bioprocessing business
We continue to see that, you know, we were 1% in the first quarter, so call it flat, and that's essentially what we're saying for the remainder of the year, expecting no change in that dynamic as the market works through, you know, these various points. Maybe, you know, taking a step back from some of the near-term inventory, components, just thinking about the underlying health of the industry, and specifically, to bioprocess. You know, you've cited that a number of times, so that's what gives you confidence that it'll return because you're seeing the underlying demand there.
We are. Our customers are continuing to produce these drugs. Patients are receiving these drugs. We don't see any fundamental change in that. As we look at the number of projects in the pipeline, again, we're talking about thousands of projects in the pipeline, we are as bullish as we have been on the long-term prospects of the industry. You know, there are many things to look at here that are positives and just reinforce our perspective of the long-term growth rate in this industry. You all are reading about Alzheimer's drugs or GLP-1s.
These are all exciting things that, when they play out, meaning, you know, they do need to be approved, they do need to be reimbursed, and ultimately prescribed and taken by the patients, but these are all positive indicators on the health of the industry and support our long-term growth view.
You took it exactly where I wanted to go, was GLP-1s and Alzheimer's.
Yeah.
Obviously, a lot of discussion in the market in the last couple of years on some of these new drug classes, or even new modalities. Can you help us characterize that? I mean, first of all, some of that is already in the numbers because you're involved in them when they're in phase two, phase three, and some of these drugs have been around. Still, just what's the incremental opportunity as these become more commercialized? What do you need to see to gain more confidence in that?
First of all, I'd bifurcate when you're looking at Alzheimer's today, at least Alzheimer's therapeutics appear to be heading into the monoclonal antibody area, and that, of course, is impactful as it relates to the bioprocessing industry. We know monoclonal antibodies well in terms of their requirements. We're well-represented on all of those drugs as Danaher. Of course, we now need to see data. As I mentioned, we need approvals. We need reimbursement. We've had that before with other approved Alzheimer's drugs that did not result in an uptake. That means we also need to see physicians prescribing the therapeutics despite them being approved, and then ultimately patients taking them.
Having said that, these are drugs that if they were to, you know, meet their potential, they would have a meaningful impact both for the industry overall as well as for us, as we're very well represented there. If you think about the GLP-1 drugs, now these are different. They're not monoclonal antibodies. There's various molecules there. They are not as intensive in terms of the equipment and consumable requirements that, for instance, a monoclonal antibody would have. Nonetheless, they are also important to support the overall growth hypothesis we have for the market.
To be more specific, some of these are produced synthetically and don't require, you know, cell lines and cell culture media, and all the things that you might have on the upstream side of these. They all do require the purification type of steps that, of course, we're very well re-represented in with Pall and Cytiva. Not quite as impactful as a large-scale monoclonal antibody, but still an important contributor to our overall growth perspective.
Okay. Now I do wanna move on from bioprocess 'cause you're not just a bioprocessing company. Let's maybe touch some other parts of the portfolio. Maybe we'll start with analytical instruments. You guys have had really robust growth there in the last couple of years, moderated a little bit in 1Q as well. Again, sort of what are you seeing in that market? What are your assumptions as you go through the rest of the year?
We've seen over the past years, you know, double-digit plus kind of growth here in our what we call the Life Science Instrument Group. They have done very well, including here in the first quarter. We've talked about the normalization of demand in that particular segment for some time, and we're seeing that. We would expect that demand to be, you know, in the mid-single- digits here this year, which we still consider, you know, very strong growth in view of some of the comps that are out there. Nonetheless, a recognition of the fact that we're returning to normality here in terms of the funding levels and also in terms of, you know, what has already been acquired here over the last two, three years.
Are you seeing any separation in terms of different technologies, you know, SCIEX versus some of the more, you know, traditional instruments in Beckman Coulter? Are there any parts of the market that are doing a little bit better?
It's not significant. It would be at the margin. You know, today, we still see the higher-end analytical instruments perhaps incrementally stronger, and then some of those that are, you know, lower price points, perhaps a little softer. I think in general, what we're seeing is, you know, an extension of the funnel velocity, so the amount of time it takes to close a deal. We've continued to see that. We see that customers, rather than ordering, you know, six of one type of instrument or going down to three and four, and that's really across the board. That's an indicator for us that things are returning back to normality in what we consider to be sort of a, you know, a mid-single- digit market for the long- term.
Are you seeing any cancellations, any delays yet? Or is it just, again, sort of just reducing the number of new orders?
It's rare to see cancellations here because the lead times are relatively short. But what we are seeing is, you know, the hesitancy to place, you know, larger orders, perhaps, start with a lower number first and then confirm later on.
Okay. All right. What about Cepheid and the diagnostics outlook? You reiterated, you know, as it relates to COVID and respiratory, you reiterated the $1.2 billion-
Right.
... guide for the year. Obviously, that's an environment that's also still really fluid. Sort of what gives you confidence in that number going forward?
Well, I mean, we have to start with, it's hard to believe, but the fourth quarter, we shipped 20 million tests, still at Cepheid. We do think we're gonna be, you know, in that $1.2 billion range here in 2023, which is the approximate equivalent of about 30 million tests. We saw in the first quarter, you know, 10, 11 million tests skewed more towards the four-in-one. The higher- priced tests here for obvious reasons. We had RSV all over the place, along with COVID. It also shows you that we're starting to step down now to that endemic phase that we've been talking about for some time, right? Fourth quarter, 20 million.
First quarter here, 11 million. We would expect that step-down to continue here as we head out of the respiratory season, and, you know, be along the lines of, you know, 5 million tests per quarter here at Q2, Q3, and then to see again a pickup in the fourth quarter with the respiratory season picking up again. That, you know, we stick there with the ±30 million tests.
Same thing, 2Q, 3Q, more likely to be a little bit more COVID only, and then 4Q back to four-in-one.
I think that's right. You know, not to be dismissed, we continue to see our non-respiratory menu make, you know, significant progress. In the first quarter, our non-respiratory menu grew over 30%, on the basis of, you know, some newer... You know, the expanded menu that we have, of course, vaginitis, as a newer test, but also, you know, Group A Strep, an important test or hospital-acquired infections. Our hypothesis that our larger installed base, which is 2.5x larger now than it was before we went into the pandemic, so over 50,000 instruments installed, that hypothesis continues to play out as more menu is being taken advantage of here at the point of care.
We see customers consolidating other platforms onto the GeneXpert platform, because of its ease of use and, you know, its turnaround time on the right answer.
That 30%, I mean, I'm glad you touched on that. I mean, that's not the new run rate for Cepheid non-respiratory, right? How much of that is timing benefit, maybe like you said, some of the new products coming in? I guess what's the new profile, just given all the changes in the last couple of years?
You know, I think we see sort of the longer term growth rate, in the low double- digit, type of, range. Having said that, you know, we do see the adoption here in the early days, to be quite strong.
Low double digits non-respiratory.
Correct.
Just for that, for the rest of the other part of the business. Okay, great. Any questions from the audience? All right. I wanna touch on margins a little bit. That was the other factor that you updated for the guide. You know, a lot of that obviously is gonna be tied to the volume-
Right
... fall through from the bioprocess, but still, can you deconvolute that a little bit in terms of like where the costs are, where the decrementals are?
Sure. We have a fall- through from the volume takedown. In addition to that, we've said, "Look, we're gonna be aligning our capacities here," now that we do see the step-down. We of course, always knew that we would at some point have to align Cepheid's capacities when we went to the endemic phase. It just, that seemed to be postponed one variant at a time. It kept extending. Now that we've seen that step-down, we're taking care of that business here, primarily in Q2 and Q3, a little bit in Q4. You know, to think about it this way, that you're probably looking at, you know, about $200 million of costs associated with aligning capacities.
What we're doing there is, you know, not just aligning capacity, we've seen a great opportunity to improve our supply security for the industry. During the pandemic, we didn't have much of a choice because we couldn't move and had to expand our capacities, not only through manual labor versus the robotics that we typically would use, because the lead times were just not compatible with the pandemic. Also we couldn't move around, so we had to do things more in the Sunnyvale, California area, and it turned out that, you know, two of our plants are on the San Andreas Fault.
We're taking now the necessary steps in this capacity alignment to really relocate that capacity to Sweden, where we already have a plant for Europe, and then also for Lodi in California, not on the San Andreas Fault. That's a great opportunity there. We're taking, you know, another $100 million or so to align our capacities in the biotechnology group as well to adjust for, you know, the vaccine and therapeutics.
All that you said is primarily 2Q, 3Q.
The, the-
As you're kinda exiting this year should be.
That's right. The boluses in Q2 and Q3, there might be a little tail in Q4, but, you know, I think it's fair to assume that, you know, a good share of that, you know, call it, $200 million, is sort of a one-time that you wouldn't see in a subsequent year. You'd also see a margin pickup in the fourth quarter as well.
That's a reasonable jumping-off point for next year as far as margins go?
I mean, I think that's a reasonable place to start. Yeah.
Okay. Great. Maybe just taking a step back and thinking about the broader worldview in terms of macro. I mean, I think it's a question that actually I don't think it was even asked on your earnings call was, you know, recession risk, macro, what's going on in the broader environment. Obviously, it's something that changes every day, and, you know, none of us sitting here are economists or strategists. What's your latest thinking there? You know, how big of an area of upside or downside risk do you see from macro?
Well, I mean, there's no doubt about the fact that the waters have gotten choppier here in the last year or so. You know, our portfolio and our business system, the Danaher Business System, has allowed us to navigate what have been, you know, some pretty significant impacts if you think of the supply chain disruptions that we've had, the inflationary surge that we've overcome. Now we're seeing, you know, venture capital funding, and I know you'll have a talk on that here at the conference as well, but more generally, liquidity tightening up. Nonetheless, we're still talking here about our base business growing, you know, in the mid-single- digits for the year.
I think it's a testimony to the strength of our portfolio, the Danaher Business System, of course, but also the fact that, you know, we've got, you know, 75% recurring revenue, a portfolio that performs very well in that kind of environment. As we think about the wild cards that are out there, of course, everybody's watching geopolitical issues out there. For us, China is an attractive market that we believe in. In the long term, China is looking to improve the level of healthcare in its country, its society. We can help with that. As we think of the U.S. here, the U.S. continues to be a hotbed of innovation in biotechnologies, and we expect that to continue.
While the geopolitics are, you know, of course, always a concern and we watch them very closely, we feel that on the basis of how we've positioned our portfolio, with the Danaher Business System and the specific needs of the countries involved in these discussions, that we're quite well-positioned.
Have to ask sort of the obligatory capital deployment question.
Sure.
You know, very healthy balance sheet. You've been sort of poised to deploy some capital for a number of years now, and you've done some deals, but still, balance sheet's in a really good place. How are you thinking about some of the opportunities out there?
For starters, M&A continues to be our bias in terms of capital deployment. As we think about our balance sheet, I think you all know that we are in excellent shape here. We believe the environment that we're in and continue to head into is one of opportunity for Danaher with the optionality on our balance sheet. As always, our funnels are very, very active. It's important to note, and I like to say it as often as possible, we stay with our discipline of attractive end markets, assets within those end markets for which we can either acquire or create a competitive advantage for the long term with that asset. Of course, the financial model has to work for us.
That continues to be our discipline. As you think about the market environment that we've been in, it's been more constructive. The conversations that we've had have been more constructive than, let's say, 12 months ago. I do think there is still more to be done here in terms of aligning, you know, board expectations with what the, what the reality is from a valuation perspective.
What about services business specifically? I mean, I think that's something that's come up a number of times. different financial profile, you know, but there are both pro and con considerations from a, from a strategy or a synergy overlap. How do you weigh all those factors?
We've often said that if our customers ask us to help them with services, that's something that, you know, we would do. I like to point to an example I spoke about this particular example during the earnings call as well with Aldevron, where, you know, our customers are buying today, call it raw mRNA for lack of a better word, and they have to ship that mRNA to a number of other companies until it becomes a drug product for them. That's an enormous headache in the sense that, you know, you, all these companies have different quality assurance systems, and you have to revalidate. They just came to us and said, "Look, you have this capability within Danaher.
Could you help us make this drug product?" So we've embarked on that. In fact, we announced that service capability just recently, and there you see us, in fact, you know, making now not just this sort of raw mRNA but going all the way through the fill-finish process to a drug product. That's an example of a pragmatic way for us to help our customers in an area that they're specifically requesting for. There are other examples with all of these new Modalities, if you think of bispecifics or ADCs, the antibody-drug conjugates, or, you know, other types of drugs.
Our customers need help in understanding how to use, you know, equipment and consumables and so forth in order to scale up and build an efficient manufacturing system. You know, what we do also, see is that our customers are not asking us for doing, you know, work at scale. They're not asking us to, you know, make acquisitions in order to mix up their supplier base. They're asking us to solve very, very specific problems.
Got it. Thanks. Any questions from the audience you want us to ask? All right. I'll go to our standard concluding question. What do you think is underappreciated about Danaher? What's misunderstood?
I think that the strength of our portfolio and how we have re-rated both the growth and earnings profile here really for the long- term, is underappreciated, where our journey and our portfolio transformation continues. We are on track, for instance, to separate Veralto, the Environmental and Applied Solutions business here, in the fourth quarter. That positions us very well, in, you know, we talk about the macro dynamic with, you know, higher growth profile as well as a higher earnings profile, in what are, you know, some of the most attractive end markets in industry.
Actually, let me throw in one more to that. The EAS spin, you know, still proceeding on plan, still fourth quarter.
We're a go. We have a very tight process as it relates to this. All the work streams are on schedule. We should be ready to go here in the fourth quarter for a successful separation.
Great. All right. With that, we're gonna call it. Rainer, thanks so much for joining us.
Thanks, Mike.
Thanks, everyone.
Thanks, all.
The ballots are not open yet. I'm contractually obligated to remind you that if you found our research helpful, we appreciate your support. If you didn't find it helpful, we'll still take the vote. Thank you.
Very good. Thanks.