Danaher Corporation (DHR) Earnings Call Transcript & Summary

Well, good afternoon, everybody, and thanks for being here. It's Steve Beuchaw from Wolfe Research. Getting toward the final quarter of the conference here, the afternoon of Day 2, Wolfe's second health care conference, first and hopefully only virtual health care conference. I'm really happy to have the Danaher team here with Matt McGrew spearheading the effort. Matt's the CFO of the company, been a little while since we caught up with Matt so I'm very excited about it. Thanks for being here, Matt.

Thanks for having us, Steve.

I wonder, Matt, if I could just give you a chance to kick it off. A lot has happened, right? It's not just that we've come through a COVID environment, but some things have changed for Danaher, right? Cepheid has become a bigger business. Cytiva has become a part of the company. It's been a little while now, but Dental is no longer a part of the company. And you got a new CEO. I wonder if I would just open the door and allow you, as you've done for us in D.C. in past years, can you just sort of talk about the proposition with Danaher. What do you think the long run financial model looks like now and we'll have some fun going through a lot of details.

Yes. So we've had some change. There's no doubt about that. I think maybe kind of starting with the portfolio over the years, I mean, I think we've, really sort of getting back to kind of when Tom took over as CEO. I think he came in and he really left his mark on a couple of things. I think he left his mark, one, on sort of DBS and how he could accelerate the growth as well as the talent pieces of that. And I think that, that's been very, very evident. But I think that's just more internally. I think that we've done a lot. I think you've seen it with our improved growth rates, for sure. But I think that's been the mark, his first notable mark. And two, obviously, is the portfolio evolution that has happened underneath Tom. Like you said, we sort of started out with the Pall acquisition, the Fortive spin, that really did get us to the bioprocessing world, which I'm sure we'll talk about here today. And then sort of further on with the IPO and eventual split of Envista here in the last 12 months and also bringing in Cepheid and Cytiva, right? So a lot has changed in that regard. And maybe kind of I'd say a word about Rainer and maybe how that might be different or not and then come back to this topic of how the portfolio changed because I think it's sort of an important one on how you think about fundamentally the growth perspective of Danaher today versus where we might be. And so maybe just a word on Rainer. Yes, so Rainer Blair, new CEO. He's been in the chair for probably, I don't know, 2, 3 months formally, have been in transition for all summer. Rainer and Tom don't have a lot of distance between them. They're very, very similar. They've worked together for 10 years. Rainer reported into Tom for the last 10 years. So I wouldn't expect a lot of change here from what our priorities would be as a corporation, capital deployment, et cetera. So maybe just as folks get a chance to meet Rainer, even if it's virtually and talk through with him, I think that's pretty much been his messaging to people on what to expect. So like I said, given that we aren't expecting a lot of change from where we are today, maybe just a quick way how we're sort of thinking about the portfolio, the changes that Tom made and sort of that Rainer is going to be off and running with. And I think the way we think about the world is sort of a pre-COVID and a post-vaccine, right? And so if you think about sort of a pre-COVID world, our base business was probably a mid-single-digit type organic growth. The portfolio had evolved to a higher sort of recurring revenue, higher growth. And in 2018, 2019, we were, call it, 5% to 6%, and that included Dental, which was very much at the -- it was actually, frankly, is well below that. It was low single-digit growth. And so that base business kind of was growing mid-single digits. And then you had, as you mentioned, Steve, you had Cepheid. That was a $1 billion business, kind of growing in the low double digits. And at the time, that represented, call it, 5% of our revenue, right? And that pre-COVID here, we didn't even own Cytiva. And so we brought that in and we thought that, that would be accretive to our core growth because it would be a 6% to 7% grower. And so you kind of wrap it up, that's who we were pre-COVID. Then you go through the Dental split and then you go through adding Cytiva in, then you go through the world we're in here with COVID. And I come out on the other side and I think that the base business continues to be mid-single-digit plus. I think the underlying improvement in the end markets is obviously going to continue to happen, and I think some of the investments that we've made in innovation will pay off there. So a little bit better in the base business. Cepheid, we think, potentially gets back to that low double-digit growth given the fundamentals that are there. But Cepheid is going to be 10% of the 2020 revenues versus 5% that it used to be. So it's going to be a bigger base, a bigger, higher growth business that's built into the base. And frankly, we're going to have Cytiva that comes into the portfolio. And obviously, we can talk about some of the positioning of the vaccines and the therapeutics over the medium to long term, but I think we thought that 6% to 7% growth is probably going to be more like high single digits going forward. And so add in a little bit of capital deployment weighted towards M&A. And while there's obviously some macro risks out there, I really think that we've sort of re-rated from that 5%, 6% growth to 100 basis points better than that based on sort of portfolio and what's happened here with everything in the last 7 to 8 months.

Okay. I am a fan of high expectations. I appreciate you're laying it out there. I want to try to unpack a number of the things that you've touched on, and I appreciate you covering so much in your opening comment. But before I go into the business, though, I just have to ask, given you relative to really anybody in the industry have a very uniquely broad view on the world, over the last 30 or 60 days, a lot of questions out there about the resurgence of the virus. We've asked this question to a lot of folks at the conference. I mean, do you think it's having an impact on the way your customers behave? And if you see anything, can you give us any insight into what that might be?

Yes. Like we talked about on sort of the Q3 call, no doubt that, that was only 3 weeks ago. And even since then, it's probably even a bit worse given the recent hotspots, particularly in the EU. Like we talked about, we've been watching that for sure. I would say that we haven't seen anything meaningful from a change in the customer behavior at this point. Certainly, I think you remember, we sort of talked about our assumptions for kind of a continuation of a ramp, if you will, in patient volumes and other sort of lab openings, et cetera. And we sort of in Q3 said, well, we're sort of assuming the same level that we saw in Q3, no improvement. And part of the reason that we didn't think we would see any improvement was because we were kind of mindful from a planning perspective on what might be here in some of these hotspot locations. And so I don't think we've had any. There's no change here from what we saw a couple of weeks ago. But yes, certainly keeping our eyes open but haven't seen anything yet.

Got it. Appreciate that. So I think for the next few things I want to touch on, it really is unpacking some of the points that you made as you framed up the growth profile for the company. I like the term post-vaccine. I'm going to steal that. So I wonder maybe if we think about, first, the testing segment of the business. Cepheid is pretty unique, right? Enormously user-friendly, you've already got approval for something of a mini respiratory panel where you can test for flu A/B, RSV, COVID on Cepheid. You also have an antigen offering, which is still kind of early days. Given that you have this kind of visibility and this breadth of presence, how do you try to frame up for folks in a post-vaccine environment what the testing business looks like as compared to where it's been maybe in the last few months or if you'd prefer to use 2019 as a baseline, either would certainly be fair.

Yes. Yes. No. So I think the way that we've been thinking about this sort of is, is think about it as a concentric circle, right? So maybe a bull's eye. And in the middle of that concentric circle, the red part right in the middle is point-of-care PCR testing, right, which is going to be where we participate today at Cepheid. And the reason that's there is because you're talking about being in a hospital situation where if you've got to get it right, you can't turn your non-COVID ward into your COVID ward. You are going to, first, you need quick turnaround time, time to answer, and you need to be darn sure it's right. Now that is going to be sort of where you're going to use kind of a Cepheid, and that's where our customer, our core customer base is today. So then as you think about testing as it sort of expanded over time over the last couple of months and through 2020, you're starting to add circles, concentric circles around that bull's eye in the middle, right? And so maybe the next circle on the outside is more of the testing that's happening in labs, right, people going through the drive-thru testing coming through, the higher volumes that are kind of coming through tests today. That's not at the point of care, has a little bit longer turnaround time, but certainly, right now, has a high degree of value and need, right? So that's sort of outside of the core concentric circle in the middle. And then as we sort of move out even further from those, you start to get to other modalities, right? You talked about antigen testing. Well, that's probably even further on the way out that's got some value clearly in what you would use it for, but you probably wouldn't use it for anything. If you really needed it in those inner circles, antigen testing is probably not what you're going to use if you really need that answer and specificity, right? And so as you move further out the testing world, it gets a little bit further away from what we think is the point-of-care center of it. So over time, what we think is going to happen is that, that concentric circle is going to shrink. It's going to shrink back in to the point where we get back to that point-of-care testing again, right? Where in a post-vaccine world where we're not using antigen testing for schools and back to work, and we don't have the volumes that we might have today from a need perspective because enough people started to at least get herd immunity and/or have gotten vaccinated, we think stuff comes back towards where it was in 2019, which is having the point-of-care solution with a quick turnaround time. And coupled, for us, we then think about Cepheid and say, okay, what's that mean for Cepheid? Well, it means a couple of things. We think this is going to be endemic, right, for a while. And if it is going to be endemic, as we move back into the point-of-care, there's going to be a need for testing for COVID. And we're going to have therapeutics that are going to be available for folks who get this. And you're not going to want to give a therapeutic for COVID to somebody who actually just has the flu, right, be a very different dynamic. And so we think that things sort of kind of come back towards the middle. And how can Cepheid then sort of, how do we think about Cepheid's positioning? I think we're really well placed there today. Where we have had our 35% increase in installed base has been focused there, not at some of the outer bands or some of the folks that we don't want to have as customers going forward. We're very focused on kind of expanding the customers we know or who are already on our sort of list. And so we sort of think of it in that world is that, early on, there's a lot more circles. And eventually, we're going to come back to the one that was there in 2019, but we'll have better opportunities when we get there, we think.

Okay. Got it. That's very comprehensive. And any thoughts on the Beckman initiatives in antigen testing? I know it's still early days. Have you seen that start to catch on?

I would say it's very early days. Antigen testing certainly has a role. But as I talked about, I think it's going to be in one of the outer rings of that circle. It's not going to be anywhere near sort of where we core play with Cepheid, but it's pretty early days in where we are with that journey with Beckman.

Got you.

We haven't, just so you know, it's in development, but we're not out with it yet.

Got you. Let's talk about vaccines then. Having the Pall and Cytiva franchises makes Danaher one of the important parts of that broader supply chain. You've talked about $1 billion of COVID-related orders so far this year. I believe that's across Pall, Cytiva, across vaccines and therapeutics. So it seems like that's largely for some combination of development efforts and volumes for very, very early deployment, is that right?

Yes. So we talked about the $1 billion. Like you said, it's kind of across Pall and largely Cytiva and Pall Biotech, and it's 50-50 vaccines and therapeutics.

Got you. So how long does it take until we get more of a sense for what that business looks like, the tailwind to these businesses looks like as vaccines deploy? When does that become clearer for us all?

So I think the key there is when vaccines actually deploy. So I think we'll have a lot better visibility into our opportunity, particularly. I mean, I think you sort of need to think about it as going through almost vaccine by vaccine because everybody is going to have slightly different positioning, if you will, on each of the vaccines for a variety of reasons. And so I think as we start to see the vaccines become approved and/or therapeutics become approved, we're going to be able to tell from where we are on it whether it's going to matter. It'll be different if you're on cell culture media or SUT or resins, et cetera, filtration and which it is. That will all have different opportunities for us. And so I think as we know more, as we start to learn what's actually getting approved, we're going to then understand from our customer first, good, we're on that or we're on in what level and what our customer expectations would be as we move forward '21 and beyond. I think we'll have a lot more visibility coming here, let's say, in the course of probably, I suspect, in the first quarter. I mean given what we've seen from Moderna and BioNTech, some encouraging news. I think this morning out of Oxford as well with regards to older patients. So we're starting to get there, but I think we'll know more once we actually get stuff approved.

Okay. So it is a meaningful swing factor, let's say, if a couple of these producers end up becoming the big producers or maybe if it's mRNA versus some of the more traditional approaches, those are material swing factors?

Well, I think, yes, all of the above, right? I mean, I think there's going to be swing factors there that are going to be, maybe the biggest being, what's the uptake, right? We just don't know. Are we going to get 85% of the people willing to take it? Are we going to get 40% or are we going to get 30%? Is it going to be a certain one factor versus another from an age perspective, i.e., could be one that's great for people who are over 50 and doesn't work nearly as well for younger people. So I just think there's a lot of swing factors here that will come into play before we can really sort of figure it out.

Got you.

But I mean, that said, keep in mind, we're on all of the Warp Speed, in some way, shape or form, right? And so not to mention the other 400 that are in the pipeline that we're working with. I think we're just kind of waiting to see what happens here, but I think we're really well positioned.