Danaher Corporation (DHR) Earnings Call Transcript & Summary

Good afternoon. Thanks, everybody, for joining us. Welcome to the Jefferies 2021 Virtual Global Healthcare Conference. I'm Brandon Couillard. I cover the life science tools and diagnostics sector here at the firm. Very pleased to have Danaher with us at the conference this year and joining us for this fireside conversation, CFO, Matt McGrew; and also have Head of IR, Matt Gugino, with us. So thank you both for being here.

Matt, wanted to start off with what, I think, is certainly top of mind for investors right now, especially coming out of Abbott's updated guidance yesterday around COVID testing. So want to start with Cepheid. You guys have been pretty upbeat about your PCR testing outlook, talking about Cepheid volumes going from 10 million in the first quarter to 13 million by the end of the year. So kind of 45 million tests for '21. And a similar number, you kind of endorsed for '22. Can you just sort of give us your latest view of the market and what you're seeing and whether that outlook is still relevant where you sit today?

Sure. So I would sort of start by saying that we have not seen a change at all sort of in our business. And I think it's probably instructive though to talk about a little bit why. I think we're -- maybe sort of uniquely positioned in testing, in particular, where we are at the point of care and where workflow speed and accuracy are super important. And so maybe I'll kind of give you a little bit of how we think about the world of testing and why we're not really seeing anything kind of different. So we talked a lot in the past about kind of the idea of a series of concentric circles with a bull's eye and in the middle of the bull's eye sort of the red dot. That red dot, we've always kind of looked at and said, okay, that, to us, represents point-of-care PCR testing, right? That is -- and if you think about what are you doing there and using that point-of-care PCR testing for, that is going to be or it traditionally has been you are making a -- you're having a physician or a clinician at the point of care with a patient who has presented with some sort of illness that we need to rather quickly make a clinical decision on. And that's always going to be done mostly in hospitals, in the hospital setting, right? So somebody has kind of come in. They presented. And historically, if you think about respiratory diseases, that would be flu, right, or RSV. And somebody would come in very, very sick. We would go ahead and do -- use one of our Cepheid gene experts to do a very rapid test to find out, do they have the flu, do they not. And that was sort of how the clinical decision was made. But remember, speed and accuracy were really important. You couldn't wait 8 hours, right? And so as you think about what happened here during the course of the pandemic, those outer bands started to come out, right, the outer circles outside of the point-of-care PCR test because we had a need for it, right? We had a need to do a lot of testing for asymptomatic cases. We had testing for back to work, back to school. And so when you think about maybe a couple of those other outer bands, you had things like antigen testing. That was one of the bands. And what was that going to be used for? Well, that's back to work, back to school, going to a concert, going to a baseball game, all kinds of things that we thought we might use that for. Not as accurate, can be done sort of at the point of care, but had its purposes. Then you had another band of that would be, say, high throughput PCR, right? So you've got -- your kids have come back from Thanksgiving break or Christmas break, and they -- in order to go back to school, they had to go and get tested in a testing center. So go through the drive-through, get the swab and take that pathogen up, send it off to a lab. Lab processes it on some of the higher throughput all at one time, and maybe 2 days later, you get an e-mail with your test results. Again, kind of the need arose to do that level of PCR testing, whether it'd be to get on a plane or like back to school, et cetera. So those were all pieces of, if you will, the market that expanded given the pandemic, the nature of the pandemic. But that core in the middle was always there and stayed there. And we sort of only stayed in that place. We didn't move out into antigen testing. We didn't move out into anything higher throughput. We really didn't -- we stayed in hospitals. And we didn't participate in any of the back to work, any of the sports leagues or anything like that. And so when we kind of think about what we've been doing for the last 18 months, we've been spending time with our customers, increasing our installed base and increasing that installed base to hospitals, right? And we really think -- we thought about it. And we've got 65% of our installed base today -- or of our -- we had a 40% increase in the installed base. Of that, 65% went to existing customers that we already had, who understood the value proposition, maybe had used us for flu, maybe had used us for something different. But they understood the workflow advantage. They understood the value proposition, and they wanted more, and they knew that they would have needs for it afterwards as well, right? And so we spent a lot of time and effort with those folks as well as going after some new customers that we have been targeting to bring over either to molecular or from a customer -- or from a competitor. So as we sort of increase that installed base and then you add on our menu advantage that we think will be kind of going forward, 20 tests in the U.S., 30 globally, a lot of ability for us to be nimble, let alone the fact that we think that COVID's going to be endemic here, right? We're going to be testing for this for a while. We're going to have a respiratory season next year. We may have flu and RSV next year as well to go with COVID. And if it's going to be around for a while, hospitals in particular are going to want to make sure that COVID doesn't get in and wreak havoc. And so that's -- again, our positioning is very different and unique. And the fact that it is hospital-based matters for a clinical decision that's got to be done quickly. And you sort of -- maybe one way to think about where we are today versus where we were and how we can go back to a different level. Today in the United States, I think we're testing 800,000 tests a day for COVID PCR tests. That's down from north of 2 million. And we did 10 million tests last quarter. So that's about 125,000 tests a day. About half of our tests are in the U.S. and the other half is in Europe, rest of world. So we've got, call it, 65,000 tests a day that we're providing into the U.S. market that is 800,000 tests a day. So our market share is single digits today. And just to give you some comparison, back in 2019, when we had a respiratory franchise, not as large as it is today, but our respiratory franchise, think flu in RSV, our share was north of 25%, 30%. So again, as everything sort of comes back to that middle, we feel like we're really well positioned, and we should be able to sort of keep taking that share back given the uniqueness of our franchise.

That's very helpful context. As we look out to next year, 2-part question, what do you expect pricing to do? And number two, how do you see the mix evolving between stand-alone test and the 4-in-1 combo? I mean is it your expectation that next flu season, vast majority of that testing just uses the combo test with flu and RSV on it as well?

Yes. So I'll tell you what we saw so far and then kind of the early conversations with customers. But just to give a sense on pricing, just to level set people, our COVID-only test is, call it, $30 a test, and our combo test is $55, $60 a test. And the combo, just so people understand, test for COVID, flu A, flu B and RSV all at one time. And so as we think about pricing or as we think about the split mix, if you will, for heading forward, we saw sort of in Q1 this year that we were probably 50-50, 60-40-ish range on -- with a higher demand for COVID only. So call it 40% or 50% of the folks were looking for the combo test. As we move out of the respiratory season here, our kind of thought talking with folks is that they're going to move a little bit more towards -- in the summer months, I think you're going to see more COVID only. So call it 80% COVID only, 20% kind of the 4-in-1. And then as we go back, I think our customers are sort of anticipating that maybe that Q1 level is a bit more -- that 50-50 or 60-40 split is probably a little bit more likely given, I think, most of our customers think that there will be a respiratory season that also includes flu this year in all likelihood given the fact that we're not going to be masked, kids will be back in school, travels sort of resuming more generally. So that's sort of our high-level framework as we move into the year.

Last question on Cepheid. What's the next big thing in Cepheid's pipeline? And is cancer tissue testing still sort of in the works? What's coming next as far as menu expansion?

Yes. Good question. So I would put it into kind of 2 buckets. And the first bucket I would characterize more as think about what a near-term asset expansion is going to look like. And I would put into that category, I think you're going to see women's health, I think some rapid [ C, D and G ] Group B strep, et cetera, women's sexual health. In that category, that will come out, that will be kind of first wave. There will be additional HAI, hospital-acquired, that will be menu expansions coming here. And then I think you're also going to probably see an updated version of the COVID test as well. So that's sort of the nearer term. I think if you start to think a little bit more midterm, you're going to start to see things around calling it maybe emerging infectious disease stuff, HBDC. And then I think you're going to get to the cancers as well. So I think it will likely be a little bit further out. Those are beyond a 12-month period. But that will be something that, over time, I think we'll start to see from us.

Maybe shifting gears over to another part of the Diagnostics business. I want to focus on Beckman Dx, about 15% of the revenue base. Is Beckman holding serve in the market? I mean when I look at the relative growth rate of Beckman versus some of your closest central lab peers, it's kind of hard to tell. And secondarily, can you comment on any impact that COVID antigen or antibody testing has had? Has that been immaterial to date?

Okay. Let me take the second one first because it's the easiest answer. The antigen/antibody testing for us has been literally totally immaterial, no impact. I would just put it at that, no impact at all, at least to date. And our view going forward is wait and see what happens. As far as Beckman sort of holding serve, it's hard to tell, like you said, given the ups and downs of what we've seen over the last 18 months. But if you sort of go back and you look at our numbers on a 2-year stack and kind of where -- I think for the most part, the patient volumes are 95% back. So accepting that we're not over -- back to 100% just quite yet. I think we're essentially back on sort of an aggregated basis, taking out some of the noise, to that kind of low mid-single digits that we were at when we went into the pandemic in '19. So I think we're in pretty much the same place that we were. And that's driven by probably 3 main things that we didn't talk much about last year but obviously spent some time talking about it on the journey of Beckman from, frankly, a flat business when we bought it to a mid-single-digit business today. One, we continue to sort of move the mix higher from immunoassay becoming a bigger piece of the puzzle. Historically, as you know, brain and clinical chemistry is a much larger piece. And in 2019, for the first time, we actually split that. So immunoassays are a bigger piece and obviously a faster-growing piece. So that helps. Hematology has been a really good story for us here in the near term. I think we've talked in the past about some of the struggles we had there, and I think we've got a much better story here recently from a new product perspective. And the hematology business has been really, really impacted by those new product launches over the last several years. So that's been a good story. And then finally, automation, I think, would be the other one that I would highlight. That has been a strong suit for us, and in particular, kind of coming out with the DxA 5000 right around now when you're talking about the importance of workflow and automating in the lab with labor shortages, et cetera, that continues to be good, too. So yes, I feel like we're holding serve. That said, we are not done here at that level. The team as well as myself and Rainer have aspirations for better growth even than that. The team and I think we're on our way here.

In terms of your guidance for the year, I think you talked about base business, so excluding kind of the COVID tailwinds, base business organic growth in the high single digits for '21. You did 10% in the first quarter, kind of guiding base business, low double digits in 2Q, which would suggest that back half is only kind of growing low single digits. Is that the right way to think about it? And why wouldn't the second half outlook necessarily be better? What are some puts and takes there?

Yes. So I think maybe just a slight tweak to that, Brandon. So on the call, in Q1 call, we sort of took the full year base from what was mid-single to high single to that high single-digit plus that I think you talked about for the full year. And so if you think about the, let's call it, 10% in Q1 and Q2 that we're going to do, the math kind of gets you to more mid-single digit in the second half versus low single to get to the high single-digit plus. So I think it's a slight tweak. I would probably characterize it as the second half is mid-single digit. And given we had a really good start here, Q1, Q2, but then in the second half of last year, I think we grew 3.5% to 4% in Q3 and Q4, so there's a 400 basis point meaningfully tougher comp sequentially as we head to that second half. So actually feel like that mid-single digit is pretty good on the comps that we had given the fact that our base business grew last year.