Danaher Corporation (DHR) Earnings Call Transcript & Summary

Good morning, everybody. Luke Sergott from Barclays. I cover life science tools and diagnostics here. It's with true pleasure that I have Danaher's management of Matt McGrew, and then Matt Gugino and Kelly Brame with us. So with that, if you guys want to give a little bit of quick intro, then we can get right into questions.

Sure. Yes. Maybe I'll just give a quick update on sort of where we are, what we're seeing. I think the simplest way to say is that we're kind of tracking with what we thought. We've got probably 2 ways to think about it, our base business. I think we -- kind of the modest improvements as expected as the people kind of come back to work and are learning to work in this environment, both in labs as well as elsewhere. I think we have seen -- from a patient volume and maybe a lab opening perspective, I think very consistent with where we stood a couple of weeks ago and, I would say, tracking exactly with our expectations. As far as the COVID sort of tailwinds go, popular question on the testing side. We have seen no decline in our testing demand at all. And as far as the therapeutics and the vaccines go, again, I think the demand there is very much playing out as we expected. So again, tracking to what we thought. I feel like we're in a pretty good place here in the short term from a portfolio perspective and longer term as well.

All right. That's great. You knocked out all my questions in just that, so we're good to go.

So let's just dig in on that a little bit as you're seeing those trends. So Quidel came out yesterday and said that they are seeing their demand off of fourth quarter down 30% to 40%. And I know that, that's more rapid antigen. But can you talk a little bit about across the testing portfolio and the demand from molecular through the new antigen test from Beckman, kind of demand you're seeing from new customers and new placements?

Yes. Sure. Well, I mean, I think maybe just to kind of level set everybody on who -- what our testing really is because I think it's important for -- there's a lot of testing, and there's a lot of PCR testing. And just to level set who -- what we are and what we do, we sort of think of it as a concentric circle, right? And so that concentric circle, think of it as a target, right? In the middle is the bull's-eye. And in the middle is -- the way we think about it, that is point-of-care PCR testing, right, which is if you -- that is where we are going to make a clinical -- somebody is going to be using our test to make a clinical decision that needs to be done very rapidly for -- at the point-of-care. And so that's where we are positioned. This is where we're positioned before from a respiratory perspective, and that's sort of the center of that circle. As you sort of move outside of that point-of-care PCR kind of clinically important decision point, you start to get to the other outer rings of the circle. That's where you're going to see things like antigen testing. You're going to see high-throughput PCR testing, right? So things that are going to be done in labs or state testing facilities. And so when we kind of think about testing and talk about testing, it's really about that point-of-care, at the middle PCR testing. And like I've said, we have seen no drop-off whatsoever there, again, because of the clinical utility. As you move further away, we do have some solutions. We have a high-throughput antigen solution at Beckman, like you said. We haven't seen a lot of traction there with that yet. But I think as you think about it going forward, there could be some uses of that as we return to work and think about -- go back to school and return to work. So in the broader landscape, though, we're fairly focused in what we do. I haven't really seen any impact whatsoever around some of the things that maybe others have seen, so just to give you, I guess, a sense of it. And as far as the installed base goes as well, that has been a very good story for us here over the last kind of, call it, year or so. Our installed base is up 35% year-over-year in 2020. 35% of that increase was customers that were in our funnel who were -- somebody we were targeting to convert, and we were able to do that, sort of converting from other competitors. And the other 2/3 went to existing customers, where they sort of were expanding upon their capabilities that they had. So I think maybe an IDN that had it at some of the -- that wanted to standardize across all of its hospitals and/or all of its other point-of-care locations or kind of clinics, et cetera. So we have seen a nice increase in the installed base here, again, largely focused at the point-of-care clinical setting. We really haven't gone after and haven't been a part of some of the testing that isn't very focused in that area.

All right. That's great. Great framework there. So I mean, as we think about how this year progress with testing, and it's no -- it's not -- consensus is that the testing is going to be a lot lower than back half off of one tough comps and also greater vaccine rates, et cetera. So I think that it is likely to remain elevated if variance and things play out and just the mentality gets a lot more relaxed. But with that, do you see a shift from that high-throughput testing volume into the point -- more towards the point-of-care? And so as flu comes on, we didn't have a flu season. So it's probably going to be really bad, right? As that comes on, as we think about your 60-40 shift in 4-in-1 to just pure play, do you guys plan to have that going up? Or is that just kind of baseline and upside?

Yes. Maybe -- I think there's kind of a couple of questions in there, maybe the first on just our assumptions for the full year on testing. We've talked about we're doing -- we did in Q4, we did 9 million tests in the quarter, and we thought and told people we think that, that is a good run rate on a quarterly basis for the entire year. Just -- that's sort of the -- our working assumption on that. So again, as testing maybe falls in some of those outer bands of the concentric circle, we do feel and we are seeing right now very strong demand in that center circle where, again, you are making a clinical decision at the point-of-care. So that's sort of that frame. And what was -- I'm sorry, what was the second question that you have at the very end? Oh, the 60-40, on the split?

Yes, yes. It was definitely a [ Doug ] question with like 4 parts in 1 [indiscernible] that.

Yes. So no, what we've seen so far is kind of 40% of our customers are choosing to use the 4-in-1 and the 60% are COVID-only. That's on a customer-by-customer basis. They do have a choice to use what -- whichever one they want, and different customers will choose that for different reasons. Some customers were -- are in locations where they're outside the U.S. where flu, seasonal flu is not that prevalent, and they're choosing COVID-only, right? Whereas in the U.S., even though it's been a light flu season, we still have seen -- again, you're presenting -- you've got symptoms, you're in a hospital. There's a clinical decision to be made, and they really do want to know the answer. And so that 4-in-1 does provide clinical value, whether it's RSV, Flu A-B or COVID, very different treatment options for each of those. So we are seeing about 40% of our customers sort of go with 4-in-1. And I think it's probably a good frame for the year as well at this point.

Just maintaining that 40-60. Okay. And then as you think about the ASP, I mean, the EUA has been extended, I think, 5 times now.

Yes.

So I mean, what's your base assumption there on just the pure-play test? I don't think we have a reimbursement rate on the panels yet.

We are assuming no change. We're not seeing anything from a pricing perspective.

Okay. All right. And then so when you think about that 9 million per quarter, that really -- taking just a generic ASP of 40, that really accounts for your -- the assumed implied testing COVID tailwind for the year, right? And so you guys don't have any antigen or anything like that baked into guidance?

No, we don't. Like I said, Beckman's got the capability. We have the test, but that is not in our -- we haven't included anything for antigen testing. The only thing in our testing is the stuff that's the point-of-care PCR.

All right. And then how quickly can you guys ramp that capacity if it needs -- if you need to, right? I mean, 9 million per Q?

Yes.

No? Is that weeks? Is that months?

Yes. No, look, I mean, we're -- we've done some expansion already. As you probably remember, I mean, we started out 2 million and quickly took it to 6 million a quarter, 7 million and then kind of -- or 6 million, 8 million and ended up at 9 million in Q4. If I think about -- we're going to continue to work to ramp as we go kind of sequentially through the year here. I think the likelihood, though, is that you're probably more in the months than weeks, Luke, that's probably the reality of how that's going to play itself out.

All right. So when I'm thinking about upside and spikes, you guys have really got to start planning for that a couple of months ahead of time. And so there's not a huge inflection that we could see in a huge beat from that perspective when we're...

I don't think so. Yes, I think you're on the right path.

All right. And then so when you've talked about the 40% incremental margin drop-through, can you kind of unpack that where -- from an instrument perspective, from a test perspective? And then I think you also assume that rate for the bioprocessing side, too. So just give us a little more detail around that.

Yes. So we talked about on the call kind of our 40% incremental margins here for the year as a way to think about sort of the fall-through. And that was a Q1 dynamic as well as a full year, just level set for folks. That's down a little bit from what we have been seeing, which has been kind of more like 45% or so in the last couple of quarters. But I think we want to maintain and be pretty aggressive here on accelerating some of the growth investments that we've been putting in because we're seeing good payoff on that, obviously. And so I think Rainer and my bias is to be pretty aggressive with some of those things, which will have a bit of an impact versus what we have seen in the last couple of quarters. And I also mentioned and talked about a little bit of -- there's some inflationary pressures out there today as well. We're seeing it on the freight side. We're seeing it on the commodity side. I think resins, metals, seeing a little bit on the electronics side as well, I mean, I think largely supply-driven, but manageable at this point, but we are seeing some modest pressures here. And so kind of those 2 things, combined with the fact that when you think about China, which has been sort of back to work for -- they're sort of fully back, right, traveling and -- at least intra-country and we saw what that looks like, a little bit lower fall-through when you're traveling again and getting back in the office. So all 3 of those things sort of combined is how we're thinking about that 40%. And that would -- that'd be pretty much across the entire portfolio, I think, the way to think about it.

Okay. And then you're talking about the inflationary pressures that you're starting to see already pop up. Walk us through some of the leverage that you guys have available to you to -- from a DBS tools perspective?

Yes. Well, there's a lot of things that you can do, whether it be reverse auctions and the like. I think one of the things that we're trying to be thoughtful about too is just -- it's managing your supply chain, individual supplier by supplier, just to make sure you understand if there is going to be an issue beforehand, right? And I think we've done a pretty good job of that over time of being able to identify and get out in front of the fact that we start -- we might start to see some pressure, for example, in the electronics. Well, how can we go and make sure that we're being a little bit more thoughtful around maybe our inventory? Maybe I need to hold more, right, or I need to make sure that I can procure more than I might think because there is some pressure. And so I think individually, opco by opco is where we've really been able to sort of manage it. It's -- unfortunately, I don't think that there's anything that is super secret other than hard work on the supply chain guys.

Yes. That's true. I mean the DBS, the gemba walks, I mean, yes, there's nothing secret but nobody -- it's hard to implement. So let's get into the non-COVID business, right? And so you've had various puts and takes across the 3 large segments. And so when I think about that, I mean, Beckman was modest declines last year. The Radiometer and Leica were really well in the diagnostics side. Kind of break us through what you've been seeing on a recovery perspective on the non-COVID business. And how sustainable, like the Radiometer and the Leica business, high -- mid-to-high singles is throughout '21?

Yes. So yes, so Radiometer and Leica Biosystems, if we're kind of sticking in the diagnostics outside of Cepheid. Radiometer is our blood gas analyzing business and Leica Biosystems is our anatomical pathology business. And I think those are going to be high single digits here in '21. Radiometer had a pretty good year last year. Again, some benefit from COVID there a little bit. When folks go into the ICU, you will be -- you will have your blood gas monitored. So a little bit of benefit there, particularly in Europe, but they had a real nice year. Smaller scale, but a very nice year, again, on instrument placement/installed base, not unlike Cepheid, kind of being able to drive some incremental installed base there. And Leica Biosystems, I think, again, pathology, you're talking about cancer testing and the like. As we sort of saw the higher patient volumes come back, we did see their demand step up. And that has, like I said in my opening statement, sort of maintained where we have thought it would be. And on top of what we have also seen is some pretty strong demand for digital pathology offerings. We've got a new product out there that came out last year that allows folks to sort of digitally scan and review slides sort of anywhere. And so that -- in this environment, that's been good. So I expect those businesses, again, to be kind of high single-digit plus here in '21. As far as Beckman goes, I think that's much more of a patient volume kind of game, if you will. Beckman was down sort of high single digits, maybe 10% here in '20. But I suspect that would be reversed, up high single digits this year as we sort of see hospitals get back to those elective procedures and we're not seeing these kind of closings and shutdowns like we saw last year. So I think, again, what we've seen here so far, very much kind of in line with what we thought we would.

Okay. And then lastly, the last 5 minutes here, the M&A story, you -- one of the conversations that we've had really stuck out, and you said the only process within Danaher that is not efficient is the M&A side, right? And so as you think about your balance sheet, you got the amount of cash that you guys have, you have significantly more capacity than I think that anybody was expecting for this year. And so you've talked about maybe taking -- being able to take a bigger bite at the apple. Just dig in a little bit on that and kind of where you could see it. And if -- as standing up Cytiva, we're not even a year into it, so is that something that prevents you from doing more acquisitions around that particular business? Or if -- because of your structure, you're able to just kind of let that go and then focus on other things?

Yes. No, I mean, your comment on M&A being inefficient, it's true, right? And part of the reason it's inefficient is just because of the nature of it. I mean we -- you do a lot of cultivation. You do that cultivation over several years. And it's not always a quick process, but it is what it is, but one that we have found that pays dividends. As far as balance sheet goes, yes, like you said, I mean, we're sitting here at the end of '20, call it, 2.5x leverage. We had 6.5 -- a little over 6, I guess, of EBITDA last year. So we're in pretty good shape, along with the equity raise that we did earlier in the year. Rainer will tell you, if you ask him on M&A, he'll say he sort of -- when he took the role, not sure that he thought he'd be able to do anything for a while given the fact that we had just done Cytiva. So yes, given the better core growth and some of the cash flow we saw last year, we were able to sort of get into a position where our balance sheet is in pretty good shape. I think we'll be certainly focusing on kind of the smaller midsized deals as we sort of move forward. Cytiva will still take some time. You're right. I think the team that is working on that and going through that is sort of a little bit busy, sort of preoccupied here for a little bit. But that doesn't mean that we couldn't do a deal and have different folks sort of help out on it. So I don't think we're constrained in any way with regards to that. So yes, I think we're going to be -- we'll be -- continue to be active on the M&A front and yes, working to continue the long-term competitive advantages, both organically and inorganically.

Yes. I describe it as 7-Eleven. You might not always be doing business, but you're always open. So you guys just -- and so if I could sum it up, like the Swift Biosciences addition to IDT, just adding technologies, kind of what we could expect probably. Maybe a little -- obviously, a little bit bigger than that, but not something more transformative.

Yes. I mean I think that would be on the smaller end for sure. No doubt about that. But I mean I think what you're seeing with that, and you saw it with water earlier as well. We did a sort of a deal, Aquatic Informatics for water. These are -- while not -- sometimes not big, they can become really important. They can become -- as you're starting to try and address and solve customer issues and workflow problems. And I just think you -- you'll continue to see a host of things of multitudes of sizes from us because that's what we've always sort of done. We don't really target any amount of M&A in any year. It's -- we always say M&A is episodic. But yes, we'll continue to be active.

Okay. All right. Well, that's all the time, gentlemen, and Kelly. Thank you. I really appreciate it. Look forward to connecting and staying in touch with you guys and hopefully, in person in Miami next year. What do you say about that?

Yes. Like it.

All right. Take care.

All right. Thanks, Luke.