Danaher Corporation (DHR) Earnings Call Transcript & Summary

All right. Good morning, everybody, and welcome back. I'm Doug Schenkel from the Cowen life science and diagnostic tools team. It's our pleasure to welcome Rainer Blair to the 41st Annual Cowen and Company Health Care Conference. For those of you who are maybe a little bit new to the Danaher story, just as way of background, Rainer took over as President and CEO of Danaher in September of last year, though he's been at Danaher for over a decade. He played an instrumental role in developing the company's highly successful Life Sciences platform, and was a key figure behind the major acquisitions of both Pall and Cytiva. Our goal for the next 30 minutes is to really try to tackle 3 things. I mean this is an ambitious agenda, but we'll start by talking about the company's response to COVID-19. And more importantly, at least in our view, as we sit here today, the outlook for that part of the business, and hopefully, a post-COVID-19 world. Secondly, to just break down and go back to breaking down 2021 guidance. And then third, to talk a little bit about capital deployment.

So with that said, let's jump into it. And again, Rainer. Thanks for being here with us this morning. You -- as I mentioned, you've been in the CEO seat for, I think it's exactly 6 months. It might be to the day, right? I think we're pretty close. Before we dig into the details that I just mentioned in terms of just providing that framework, it would be interesting just to get your take on the CEO transition process. And really more what I'm getting at is, what have you been your key takeaways in the new seat? And then building off of that, looking ahead, how do you think about strategic priorities and things -- yes, I think there's probably a lot that you don't want to change, given how great things have been going at Danaher. But I'm sure there's some things that you'd like to implement that are a little bit different. So anything you can share 6 months in would be really a thought of interest, I know to me, and I'm sure to everybody else here.

Will do, Doug. Well, thank you, first of all, for having us, and good morning to everybody. It's great to be here with you to share a little bit about what we're up to. Coming to the transition. First, we really had a great transition since May of last year when we announced with both Tom and the Board of Directors, in fact, I'd say it couldn't have gone better. And as you may know, I worked, and you talked about this, in the Product Identification platform as well as in the Life Science platform. So I spent most of my time really coming up to speed in Diagnostics and the Water Quality platforms. And I have to say, in all cases, I was deeply impressed by the depth and commitment of our talent and the thoughtful and the rigorous deployment of the Danaher Business System. So that was a big point here, and really getting to know those businesses much, much better. And then to the point, what would you do differently than Tom? Tom and I worked together for over a decade, right? And so at a high level, expect continuity and consistency and emphasis on our key priorities. And those priorities focus on making us an even better and stronger science and technology company. And what kind of things do we focus on there and will I focus on there, in particular? Well, the first is talent. We have a great team, and we're going to continue to invest in our team, including in diversity and inclusion. But I've also focused on enhancing our science and technology capabilities. For example, you may know that we have 4 Board members with scientific backgrounds. We just hired a Chief Scientific Officer. And we've also installed a very capable scientific Advisory Board. So this gives you that sense of strengthening ourselves as a science and technology company. And that, of course, has its implications for talent as well. Then execution. We're going to continue to invest in the Danaher Business System culture as much as we are in developing new tools and capabilities to drive world-class execution. From a capital deployment perspective, we are going to continue with our bias towards M&A to further enhance the growth and earnings trajectory of our portfolio. And then lastly, sustainability. We've worked on this for a long time, but we're going to continue to, and we're going to strengthen, our stakeholder engagement to be a force for good beyond the P&L and the balance sheet.

That's great. That's a -- that's some good color and gives us a good framework to work through some of these questions. And so we'll unpack some of that in a little more detail as we work through the next 25 minutes. Rainer, maybe to start, as I promised, on COVID-19. Again, just to frame this for folks, and correct me if you think I'm misstating anything. But I think I got this right. I mean it's fair to say Danaher has played a major role in the COVID-19 response with both its Diagnostics and Life Sciences platforms. Some of the key businesses involved with the COVID-19 diagnostic and vaccine therapy manufacturing solutions include Cepheid, Becton, Cytiva and Pall. We want to dig into some of the business-specific questions as it relates to this, and then tie this together in terms of how these near-term dynamics could impact Danaher's growth rate really exiting the pandemic. So if we think about 2021 guidance, it assumes that COVID-19 tailwinds approximate $2.7 billion to $2.8 billion, with $1.3 billion coming from vaccine therapeutic manufacturing and the rest coming from diagnostics. If we start on the bioprocessing piece, in talking to you at the time of the call, you guys seemed very confident in the $1.3 billion forecast for vaccine therapeutic manufacturing. I think backlog is already at $1 billion, or at least it was last time we talked about this. And then if you annualize what you did in Q4, you get to that $1.3 billion, so that seems like a really safe number. What are the key factors investors should consider as we think about the potential for upside there? I mean it certainly seems like the demand is there. But are there actually constraints that would limit you, at least in the near term, in terms of how much better you could do relative to that target?

So Doug, let's start with the latter part of the question, around capacity. We don't see any material capacity constraints. We've been investing in Cytiva capacity since the signing. So even prior to the closing on the GE Biopharma deal and -- we have really accelerated our investment from there. And frankly, the same holds for the Pall Biotech business as well. So you've seen some announcement and press releases out there. We've been continuing to invest. And GE has been a great partner throughout this transition here, so that's gone very well. And then you think about that $1.3 billion guide you just mentioned. That was all about vaccines and therapeutics that are already approved and on the market, as well as those that are in the late stage, let's call it, Phase III of the clinical trial process. So we tried to be pretty clear about how concrete that funnel is and how good we feel about that $1.3 billion guide. But it's also important to talk about what it doesn't include, which is we mentioned we're on 400-plus projects in the therapeutics and vaccines space. And many, many of those are, of course, in the discovery or even early-stage clinical trial process. And so those are not included in that $1.3 billion guide, nor is the topic of booster shots. That's a topic that is developing on a daily basis, literally. And as you think back 6 weeks or so, the topic of booster shots was nebulous, and it's still not actually all that clear. But it does seem as though booster shots will be a part of the future going forward. So when you think about that, could there be upside? Sure. But at the same time, some customers will put their pencils down. We've seen that also as clinical trial results aren't meeting their expectations or certainly that which is already on the market. And those are not going to be orders that repeat going forward, right? Those clinical trials would be shut down. But I think, within our portfolio and our coverage, and once again, we're on all of these 400 programs on all of the Warp Speed projects, I think we're really well positioned.

Yes. It's interesting. I hate, as an analyst, kind of ask the question. So is your guidance conservative? Because no one likes to say that. But I mean, the way you outlined it in terms of what's in or what isn't, I mean, it certainly deals like while you don't have a perfect crystal ball, nobody does, but the error bars skew maybe to the upside relative to that target just given what's in there and what isn't. I would say, conversely, it wasn't that you were aggressive on the Diagnostic side, but I would say over the last month or so -- and I think this is encouraging at a higher level, but we've all seen Diagnostic volumes for COVID plateau, and actually moved down a little bit on a weekly basis. So that was one area where I thought, "Okay, maybe there's not as much upside for Danaher. At least in terms of what's in guidance." But as I've thought about it a little bit more, and we had a panel discussion with a couple of lab directors this morning, talking about what's going to be durable and what isn't as it relates to COVID-19 molecular testing. I mean it was made pretty clear that -- I think as we all know, unfortunately, this isn't going to go completely away. And as you think about next respiratory season, hopefully, there's less COVID, but there's probably going to be more flu. There's probably going to be more RSV. And if anything, there's going to be more need for panel testing. So with that in mind, as we think about your diagnostic assumptions, I mean, specifically to -- for Cepheid, I think you're assuming you're going to sell 9 million COVID test per quarter, which is about what you were doing, I think, in Q4. I think you're still ramping capacity, and you're always improving efficiency. What we heard on our panel discussion this morning is right. There also could be some potential for upside, especially as we think about the need for panel test and 4-in-1 test next fall.

I think that's well characterized. And let me just confirm one thing here, speaking about what does it look like today. What's the current perspective on Cepheid testing line? So to start with, we're not seeing a softening in our testing demand here in Q1. So I can't speak to others, but I can speak to us, and we're not seeing that. That as well as that our assumption around the 4-in-1 test, which, as you suggested, tests for flu AB as well as RSV and COVID, or the COVID-only test. That 40-60 ratio that we saw in the fourth quarter continues to be appropriately accurate here for Q1 as well. And so how do we need to think about that going forward? We believe that we're uniquely positioned at the point-of-care with a differentiated value proposition. Workflow ease is critical, speed, and it's got to be right. So accuracy, that exquisite accuracy is just so important, and being located at that point-of-care where that care provider needs to make a decision based on a diagnosis. So that's just a critical intersection that our value proposition with a gene expert and Cepheid's capabilities, it's highly durable. So...

Yes. Oh, go ahead, sorry.

Go ahead, Doug. Yes, and it's coming back to the other point that you were mentioning here. From a testing durability perspective, we still think our concentric circle analogy applies in what we see in Cepheid's positioning as the strongest, occupying the center of that circle and then decreasing testing durability for other test modalities and different treatment settings or more general screening environment. So what does that mean? So if you recall that concentric circle, where the point-of-care, molecular diagnostic testing, short turnaround has to be right, diagnostic decision will be made, that's where we feel, that's the most durable area. So whatever is happening with the total volume of COVID tests, that is the area that will likely be most durable. And then as we go to the outer layers of that concentric circle, we come to less durable testing modalities. So the type of technology, but also settings. If you think about sports venues or school testing or that sort of thing, you're going to find different technologies there, but it's also not clear how durable those will be. We think that ours will be very durable for the reasons stated, but also for what you mentioned and that this is going to be endemic. And nobody -- no matter what, if somebody presents with symptoms that are flu-like, you're going to have to make a call as to whether that's COVID or not, perhaps a new strain, right? You have to know in order to move forward. So we think the roughly 9 million tests per quarter are a good way to think about it. We're increasing capacity. We do that for all kinds of reasons. Certainly, there are short-term reasons to do that. But also as you think about our positioning for the long term, with that very broad net menu and that largest installed base, which grew over 35% in 2020 alone, we have the need to feed and help our customers drive their testing needs.

Yes. It's interesting, I was just going to mention that 35% growth and the fact that the installed base is over 30,000. And you've done well in the U.S., but you've probably also pulled forward the pace of thousands of placements outside the U.S. in markets where you're really underindexed. So as long as you're -- I mean we've consistently heard, you, Danaher, has been very good at making sure those boxes end up in the right place. And by that, it means balancing the need right now for COVID testing, but also making sure they're being placed in labs where there's going to be long-term demand for the instruments. I mean, really, it's up to you to keep advancing the menu globally in a way where those customers, if you've done your job and you found the right customers, that those customers are positioned to keep using the boxes in a post-COVID world.

That's well said, Doug. We call that intersection between the immediate COVID need, but also the care setting is one that will be appropriate to provide the other tests going forward.

And it's sort of the same thing. I know I'm going back and forth. But on bioprocessing, you've noted that you're accelerating Cytiva and Pall capacity, as we talked about before, not just for COVID, but anticipation of long-term growth. The non-COVID-19 bioprocessing business grew double digits in 2020. And I would think early mRNA vaccine success bodes well for other modalities in infectious disease. So do you believe that there's enough momentum in this category, including or maybe especially beyond COVID-19 to sustain bioprocessing revenue at kind of high single-digit, low double-digit growth for the foreseeable future?

So let me start with the yes, and then I'll follow up with the why. Let's just level set. For 2021, we see bioprocessing COVID tailwinds at $1.3 billion. We've talked about that. And that's about twice what we shipped in 2020, and gives you that total opportunity we talked about early on at $2 billion, right, between 2020 and 2021. But as you think about 2022, it becomes a little more difficult for all the reasons we just talked about because there's still a lot of unknowns. But if we back up just a second and talk about what are some of the drivers here, I think that the yes, to your question about the sustainability of high single-digit type of growth rate, becomes clearer. First, we still see the potential need for a booster shot. Today, we would tell you we're more skewed to thinking that than we might have been 6 weeks ago even though the durability of any given COVID vaccination, whether it's a 2-shot or a 1-shot regime is not fully known. Will that last a year? 18 months? 24 months? That's just an unknown. But already, it's clear that even if that was to be more durable, there's likely the need to update booster shots for different variants, right? So that's a topic that will, as it relates to COVID, yield a stronger durability. The continued strong growth in the drug development pipeline is not to be underestimated, right? So as you look at the IMD registrations and you see those continue to grow at double-digit rates, and all the funding that is now being provided by the most diverse set of sources, including venture capital, you see that the innovation engine of the industry has been really revealed to the world. And the world is now essentially investing here in order to drive more innovation and value creation through this biologic drug development pipeline. So that's a big deal, and we see that playing out in our non-COVID, call it, base business bioprocess growth as well. So as you think about that and the low penetration of biologics in the global population, there's just -- we're still in the single digits penetration in terms of the availability of these incredibly important and effective drugs to the world population. The secular growth drivers are just really immense. And we think that we're really well positioned. We think the long-term outlook for both the market as well as our business looks positive.

Rainer, if I take the building blocks, if I just kind of simplify this, I mean, at heart, I guess, I'm kind of an Excel guy still. And it's pretty remarkable to kind of think about the type of growth that Danaher is capable of as a company with a $160 billion market cap. But I mean, before you bought Cytiva, before the pandemic, you were growing 5% to 6% as a company. And yes, this was quite a bit higher than 3 years before that. And that 5% to 6% still included Dental, which was actually a lower growth rate business. So if we think of Danaher pre pandemic without Dental being something better than 5% to 6%, and then you layer on Cytiva, Pall keeps doing its thing, now Cepheid is a much bigger part of the business that is higher growth. I mean, mathematically, you can think about Danaher potentially being a sustainable 8% to 9% grower at the top line. I know I'm saying that you're not, but that's a pretty impressive number, keeping in mind just the size of the business. I mean am I ridiculous? Or is that logic at least sound whether you kind of bless that as a long-term target or not?

Well, let's pressure test it. So obviously, we have a lot of affinity for the story of our portfolio evolution, right? But let's pressure test it. So we like to think of the question slightly differently, right? We characterize it in the post-COVID world, and then the post vaccine with herd immunity world, right? Because you have this sort of hill in the middle of all of these that's hard to characterize. So we try to stay on both sides of that. Prior to COVID, we saw ourselves, as you suggested, as a mid-single-digit player. We owned Dental. Cepheid was growing double digits already, but it was 5% of total sales. And we had started investing pretty significantly in accelerating our innovation engine as well. But to your point, we didn't own Cytiva yet. And as we were looking at Cytiva, we were thinking of Cytiva more as a 6%, 7% type of grower, right? So now we fast forward, hopefully, we actually get to a post-vaccine and herd immunity world, Cepheid is going to represent more like 10% of our total sales. And it's going to continue to grow at double digits on the back of this installed base that we just talked about, the continuously expanding menu. And then Cytiva is more likely a high single-digit grower, as we just talked about the secular growth drivers, the positioning of that business, the durability of the vaccine and therapeutics for the long term here, those all give us quite a bit of confidence here. Then if you add our bias to deploy capital to M&A, I would expect our growth rate really to be in the mid-single-digits-plus range for sure. So whether pre COVID or even during the pandemic, or post vaccine and with herd immunity, so if you look at those 3 sort of stages, right? We think our portfolio resilience and our operating model and the durability of our physicians really positions us well for the long term.

And it probably shouldn't be lost on folks. I mean correct me if I'm wrong, but these are also, where you're getting the growth, a lot of these are higher-margin businesses. So we all know that Danaher is going to keep investing opportunistically in growth in a prudent way. But even recognizing that, I mean, it's not ridiculous to think if you're growing along the lines of what we just talked about, that you should be able to get 50 to 75 bps of operating leverage per year, all other things being equal?

I think that's the way we see it as well, Doug. We talk about the Danaher playbook, and there's no change to that. We were looking for 50 to 75 basis points of -- for OMX annually in a normal environment. Currently, we see different kinds of numbers. And the playbook remains, we're going to improve our gross margins. So that was, to your point, what kind of margins this business have. Sure, there's a mix component to that, but we drive leverage into the cost of goods sold. We drive all the programs we have there. Of course, we know how to price our products properly. So that's driving gross margin. And then we reduce that G&A that's not customer-facing, and reinvest into R&D and sales and marketing to keep that flywheel going. And that's what drives that OMX. And the balance of that falls through then for operating margins or reinvest in itself. So that's something to keep in mind. Now in terms of reinvestment, we've been taking full advantage of this unique opportunity right now to reinvest in our business, right now, to gain long-term sustainable competitive advantage. And we think that gives us a bit of an advantage in the sense that we're not just investing in the businesses that are rocket ships in the middle of a pandemic. We're also very deliberately investing in other businesses, call it, the base business to ensure that we exit the pandemic with competitive advantage in a different growth profile. But we think that's a differentiator.

Rainer, in the 5-or-so minutes we have left, I just want to touch on a couple of things that are front of mind when it comes to 2021 guidance, and then just close with another M&A question. We've touched on that a little bit in our discussion already. Just in the context of thinking about 2021 guidance, you talked about the fact that on the diagnostic testing demand that that's kind of holding serve, that right now, you're not seeing a drop off, even though there's been a couple of other companies talking about peak diagnostic demand, that's not what you're seeing. I think, and again, correct me if I'm wrong, but one of the key assumptions embedded in 2021 guidance, at a high level, was that things keep getting better economically, but it's not a full recovery. As best as you can answer it, as we sit here in early March, is that -- does that still feel like a good assumption, that things are getting better, but we're -- it would be premature to assume that things are really going to swing to the upside here?

I think so, Doug. I mean this is how we're thinking about the business. I think you framed it well. For the full year, we're looking at that low double-digit growth rate, right? We see the base business improving sequentially from the 2, 3-ish core of the last year to the mid- to high single digits. That implies a continuous improvement in the base business. That means patient volumes continue to increase, labs continue to open and improve their capacity utilization. It also means that the other businesses continue to ramp up, and capital becomes a little bit more available. And we think that's a reasonable assumption. And then as it relates to sort of our COVID tailwinds, we think the $1.3 billion, which is twice what we had in 2020, is an appropriate assumption as well as those 9 million tests per quarter with that sort of 40%, 60% 4-in-1 and COVID-only sort of mix assumption. When you bring that all together, and that's really what takes us to that low double-digit full year top line, 500 basis points of that coming from COVID tailwinds, and mid- to high singles from the base business.

And the risk would be probably more if the world slows, if there's another spike, then that base business assumption could take a hit. And conversely, if things keep getting better, that's where it's more of the core business upside that could drive material outperformance relative to your initial targets.

That's right. We think about potential hotspot outbreaks on variance. We're assuming that those get contained pretty quickly. It's notable that even in this third spike in the U.S., we did not see a material negative impact to patient volumes, lab openings nor sort of in the general economy.

So things have been a little more resilient than they were in other -- in past outbreaks or past spikes.

Right.

Maybe just to close on M&A. I mean Danaher is in a much better position from a balance sheet standpoint relative to where we thought you were going to be, going back to the beginning of 2020. You had just completed Cytiva, the leverage ratio was a bit higher, but you ended 2020 with a net debt-to-EBITDA ratio of about 2.5x. That said, I think on your last earnings call, you indicated that M&A remains -- kind of the type of M&A you're thinking about is more small to midsized deals. If I have that right, keeping in mind your history and where the balance sheet is now and the fact that Danaher is still a cash flow machine so that ratio continues to trend down. Why not think bigger? And what would it take for you to kind of not do just something small to midsized, but to actually do something a little bit bigger?

Doug, I'm thrilled you're asking me these kind of questions 6 months in because I have to say, when I took on the job, I thought I would be sitting on the sidelines for quite a while after the closing of the recent Cytiva deal, right? So -- but I have to tell you, the team did an extraordinary job. First of all, the financing costs were much lower than we anticipated. The Cytiva performance is better than we anticipated that transition is going so well. The team is really doing a nice job. In typical Danaher fashion, not only did we continue to, but we further improved our cash management execution, right? And you saw that great cash flow that we delivered there as well in the fourth quarter. So that just gives us more degrees of freedom here, much earlier than we thought. And to be clear, our focus is going to continue to deploy capital and M&A. And our near-term focus is going to be on small to medium-sized deals, with the ability to ramp quickly, should that be attractive. Now coming to another point, as I've heard this floating in the air waves a little bit, I want to make sure I address it. Cytiva, in every way, that transition has exceeded our expectations in all regards. And we've even already executed a small acquisition with Cytiva with the Vanrx acquisition. So we really don't see management bandwidth as a determinant constraint. We will do what we always do: strategy, market, asset and then the economics around that. And that's how we focus and that's how we'll continue to drive our value creation flywheel going forward.

All right. That's fantastic. And unfortunately, we're out of time. But at least on my side, went really quickly and was really informative. So thanks, Rainer. I appreciate you. And Matt, taking the time this morning, and we look forward to catching up again soon.

Likewise, thanks, Doug. Great job on the conference.