Danaher Corporation (DHR) Bank of America Securities 2023 Healthcare Conference Transcript

Danaher Corporation (NYSE:DHR) Bank of America Securities 2023 Healthcare Conference May 10, 2023 1:00 PM ET

Company Participants

Mike Ryskin - Analyst, Bank of America Life Science Tools and Diagnostics Team

Rainer Blair - Chief Executive Officer, Danaher Corporation

Conference Call Participants

Mike Ryskin

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. And joining us for the next session is Danaher. We’re excited to host Rainer Blair, Chief Executive Officer. Reiner, thank you so much for coming.

Rainer Blair

Thanks for having me.

Mike Ryskin

Yeah, great. [For now] [ph] 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?

Rainer Blair

Sure. Well, good morning, everyone. Thanks for coming. I thought I would kick off with the strong start in the first quarter that we had is, Danaher, our Base Business grew 6%. Recall, the Base Business is the business without COVID impact, whether 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 and up low-single-digits in the high growth markets.

Now, 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 the quality of our businesses, but also the quality of our execution, leveraging the Danaher Business System.

Now, 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 going to talk about here in a little bit. So, in summary, good start to the year as it relates to the outlook, keeping everything the same Bioprocessing adjustment.

Question-and-Answer Session

Q - Mike Ryskin

Great. So 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? What’s going on with customer inventories and destocking? So what did you see as the quarter progress that made you sort of reassess that?

Rainer Blair

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. And then in the first quarter down 20%. And so, 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.

And 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. So, 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. And really, it’s on that basis that we said, okay, we have to adjust that down.

Now, 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.

And that’s related really to 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.

So, we see that in that segment, and then in a segment we call, emerging biotech, which is simply smaller customers that do not yet have a commercialized program in the market. So, no commercialized program, preclinical up and through Phase 3, that customer segment, in particular, continues to struggle. We saw some of that in the fourth quarter, we’ve seen more of that in the first quarter. And really, it’s a global phenomenon.

We see it in the US 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, and all that together, just didn’t give us the data bases in order to support a step up here in the second half.

Mike Ryskin

Got them. And 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 get back to what should be their ready run rate, I guess as sort of a forward indicator for when orders will reaccelerate?

Rainer Blair

No, 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. But 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 J.P. Morgan and discussed with many customers what they saw. And many were, you know, saying yes, you know, things are softening a bit here.

But ultimately, we’re holding our budgets. But then, as we progressed, we saw that, in fact, they’re having to address their own working capital challenges or additional funding constraints. So it’s pretty, you know, the visibility to this is not what it has been, you know, prior to the pandemic, due to some of these dislocations.

Mike Ryskin

And what’s your – so what’s your assumption, you know, in your latest guide for large pharma and emerging biotech for the rest of year?

Rainer Blair

So going forward for the rest of the year, we really are expecting the same type of activity level as we saw in Q1. And 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.

Mike Ryskin

Then maybe, you know, taking a step back from some of the near-term inventory components, just think about the underlying health of the industry, and specifically, the Bioprocess. You know, you’ve cited that a number of times, and that’s what gives you confidence that it will return, because you’re seeing the underlying demand there.

Rainer Blair

We are, we are. Our customers are continuing to produce these drugs, patients are receiving these drugs. So we don’t see any fundamental change in that. And 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.

And 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. Now, 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.

Mike Ryskin

That’s you took it exactly where I wanted to go, was GLP-1s and Alzheimer’s. So, 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 2, Phase 3, and some of these drugs have been around. But still just what’s hat’s the incremental opportunity as these become more commercialized? What do you need to see to gain more confidence in that?

Rainer Blair

Yeah. So, 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.

And, 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, and 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.

Then, if you think about the GLP-1 drugs, now these are different, in turn, they’re not monoclonal antibodies, there’s various molecules there. And they are not as intensive in terms of the equipment and consumable requirements that per instance a monoclonal antibody would have. But, nonetheless, they are also important to support the overall growth hypothesis we have for the market.

So 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, but they all do require the purification type of steps that, of course, we’re very well represented in with Pall and Cytiva. So, not quite as impactful as a large scale monoclonal antibody, but still an important contributor to our overall growth perspective.

Mike Ryskin

Okay. Now, do you want to move on from our process, because you’re not just about processing company. So let’s maybe touch some other parts of the portfolio. So, 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?

Rainer Blair

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. And they have done very well, including here in the first quarter. But we’ve talked about the normalization of demand in that particular segment for some time, and we’re seeing that.

And 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. But 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.

Mike Ryskin

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 they’re doing a little bit better?

Rainer Blair

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. But 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 are going down to three and four. And that’s really across the board. So that’s an indicator for us that things are returning back to normality, and what we consider to be sort of you know, a mid-single-digit market for the long-term.

Mike Ryskin

And are you seeing any cancellations, any delays yet? Or is it just again sort of just reducing the number of new orders?

Rainer Blair

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.

Mike Ryskin

Okay, all right. And then, what about Cepheid and the Diagnostics outwork. You reiterated, you know, as it relates to relates to COVID and respiratory, you reiterated the $1.2 billion guide for the year? Obviously, that’s an environment that’s also still really fluid. So what gives you confidence in that number going forward?

Rainer Blair

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. And we do think we’re going to 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 million, 11 million tests skewed more towards the foreign one.

So, the higher priced tests here for obvious reasons, we had RSV all over the place along with COVID. But 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.

And 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, Q2, Q3 and then, to see again a pickup in the fourth quarter with the respiratory season picking up again. So that you know, we stick there with a plus or minus on the 30 million tests.

Mike Ryskin

And same thing to 2Q, 3Q more likely to be a little more normally and then 4Q back to foreign one?

Rainer Blair

I think that’s right. And then 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 a hospital-acquired infections.

So 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. And, 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.

Mike Ryskin

And 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. So how much of that is timing benefit? And 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 hospital?

Rainer Blair

You know, I think we see sort of the longer-term growth rate in the low-double-digit type of range. But having said that, you know, we do see the adoption here in the early days, to be quite strong.

Mike Ryskin

What, double-digits, non-respiratory?

Rainer Blair

Correct.

Mike Ryskin

Just for that for the rest of other [technical difficulty]. Okay, great. Any questions from the audience? All right. I want to 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 going to be tied to the volume fall through from the Bioprocess, but still you de-convolute that a little bit in terms of like, where the costs are? Where the detrimentals are?

Rainer Blair

Sure. So we have a fall through from the volume takedown. And then, in addition to that, we’ve said, look, we’re going to 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. But 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.

And, 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. And 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. But 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. And 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. So that’s a great opportunity there. And then, 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.

Mike Ryskin

And all that you said is primarily to 3Q as it kind of exiting this year should be?

Rainer Blair

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, a $200 million is sort of a one-time that you wouldn’t see in subsequent year, but you’d also see a margin pickup in the fourth quarter as well.

Mike Ryskin

And that’s a reasonable jumping off point for next year as far as margins go?

Rainer Blair

I mean, I think that’s a reasonable place to start. Yeah.

Mike Ryskin

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 the earnings call, was, you know, recession, risk, macro, what’s going on in the broader environment? Obviously, some of that changes every day. And, you know, none of us in here are economists or strategists, but what’s your latest thinking there? You know, how big of an area of upside or downside risks do you see from macro?

Rainer Blair

Well, I mean, there’s no doubt about the fact that the waters have gotten choppier here in the last year or so. And, 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 impact if you think of the supply chain disruptions that we’ve had, the inflationary surge that we’ve overcome. And 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. And, nonetheless, we’re still talking here about our Base Business growing you know in the mid-single-digits for the year. And 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, 70%, 75% recurring revenue, so a portfolio that performs very well in that kind of environment.

So, as we think about the wildcards that 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 US here, the US continues to be a hotbed of innovation in biotechnologies. And we expect that to continue.

So, 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.

Mike Ryskin

I have to ask sort of the obligatory capital deployment questions.

Rainer Blair

Sure.

Mike Ryskin

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 is in a really good place. How are you thinking about some of the opportunities out there?

Rainer Blair

So, 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. And 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. And, as always, our funnels are very, very active.

But it’s important to note, and I’d 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. And then, of course, the financial model has to work for us. And that continues to be our discipline.

And as you think about the market environment that we’ve been in, it’s been more constructive, the conversations that we’ve had, had been more constructive than let’s say, 12 months ago. But I do think there’s still more to be done here in terms of aligning, you know, Board expectations with what the reality is from a valuation perspective.

Mike Ryskin

And what about services business specifically? I mean, that’s and 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 synergy overlap. So how do you weigh all those factors?

Rainer Blair

We’ve often said that, if our customers ask us to help them with services that that’s something that, you know, we would do, and I’d 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, you know, 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.

And that’s an enormous headache in the sense that, you know, all these companies have different quality assurance systems, and you have to revalidate. And they just came to us and said, “Look, you have this capability within Danaher, could you help us make this drug product”. And 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 full finished process to a drug product.

And that’s an example of a pragmatic way for us to help our customers in an area that they’re specifically requesting for. And 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 and understanding how to use you know, equipment and consumables and so forth in order to scale up and build an efficient manufacturing system.

And, 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.

Mike Ryskin

Got it, thanks. Any questions from the audience wants to ask? All right, I’ll go to our standard concluding question. What do you think is underappreciated that Danaher was misunderstood?

Rainer Blair

I think that the strength of our portfolio and how we have rerated 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, we’re also the Environmental and Applied Solutions Business here in the fourth quarter. And that positions us very well and you know, we talk about the macro dynamic with, you know, higher growth profile, as well as a higher earnings profile in what are some of the most attractive end markets in industry?

Mike Ryskin

Actually, let me throw in one more to that. The EAS spin you know, is still proceeding on plans for fourth quarter?

Rainer Blair

Were ago. We have a very tight process as it relates to this, all the work streams are unscheduled. We should be ready to go here in the fourth quarter for a successful separation.

Mike Ryskin

Great, all right. And with that, we’re going to call it, Rainer. Thanks so much for joining us.

Rainer Blair

Thanks, Mike.

Mike Ryskin

Thanks, everyone.

Rainer Blair

Thanks, all.

Mike Ryskin

Our eye ballots are not open yet. But I’m contractually obligated to remind you that, if you found our research helpful, we appreciate your support. And if you didn’t find it helpful, we’ll still take the vote. So, thank you.

Rainer Blair

Very good.