Danaher Corporation (DHR) Earnings Call Transcript & Summary

All right. 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, Derrick De Brown. And joining us for the next session is Danaher. We're excited to host Rainer Blair, Chief Executive Officer. Rainer, thank you so much for coming.

Thanks for having me.

Yes. Great. Going to be a fireside chat as usual. Maybe just to kick things off, any prepared remarks or any intro you would like to give just to get us warmed up.

Good morning, everyone. Thanks for coming. I thought I would kick off with the strong start in the first quarter that we had as Danaher. Our base business grew 6%. Recall, the base business is the business without COVID impact, whether it's 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. And 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 to 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, a good start to the year. As it relates to the outlook, keeping everything the same, bioprocessing adjustment.

Great. So 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 progressed that made you sort of reassess that?

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 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, 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 it 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 the segment we call emerging biotech, which is simply smaller customers, customers that do not yet have a commercialized program in the market. So no commercialized program, preclinical up and through Phase III. 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 U.S. 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 databases in order to support a step up here in the second half.

Got it. And on that inventory point, especially when you talk about large pharma burning it down, is there any way for you to quantify how much is left until you sort of look back to what should be their ready run rate, I guess, as sort of a forward indicator for when orders will reaccelerate?

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 the orders contraction there in the fourth quarter. And of course, went to JPMorgan and discussed with many customers what they saw. And many were saying, yes, 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 -- the visibility to this is not what it has been prior to the pandemic due to some of these dislocations.

And so what's your assumption in your latest guide for both, the large pharma and emerging biotech for the rest of the year?

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. 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 these various points.

Maybe taking a step back from some of the near-term inventory components, just thinking about the underlying health of the industry and specifically to bioprocess, you've cited that a number of times. So that's what gives you confidence that it will return, because you're seeing the underlying demand there.

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 there are many things to look at here that are positives and just reinforce our perspective on the long-term growth rate in this industry. You all are reading about Alzheimer's drugs or GLP-1s. These are all exciting things that when they play out, meaning 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.

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 and then when they're in Phase II, Phase III and some of these drugs have been around. But still, just what's the incremental opportunity as these become more commercialized, what do you need to see to gain more confidence in that?

Yes. 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 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. 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, for 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 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.

Okay. Now I do want to move on from a process, because you're not just a bioprocessing company. So let's maybe touch some other parts of the portfolio. So maybe we'll start with analytical instruments. You guys 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?

We've seen over the past years, 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 in the mid-single digits here this year, which we still consider 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 what has already been acquired here over the last 2, 3 years.

Are you seeing any separation in terms of different technologies, SCIEX versus some of the more traditional instruments in Beckman Coulter. Are there any parts of the market that are doing a little bit better?

No, it's not significant. It would be at the margin. Today, we still see the higher end analytical instruments, perhaps incrementally stronger and then some of those that are lower price points, perhaps a little softer. But I think in general, what we're seeing is 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 6 of 1 type of instrument or going down to 3 and 4. 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 a mid-single-digit market for the long term.

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

It's rare to see cancellations here, because the lead times are relatively short. But what we are seeing is the hesitancy to place larger orders, perhaps start with a lower number first and then confirm later on.

Okay. All right. And then what about Cepheid and the Diagnostics outlook? You reiterated as it relates to COVID and respiratory, you related the $1.2 billion guide for the year. Obviously, that's an environment that's also still really fluid. Sort of, what gives you confidence in that number going forward?

Well, I mean, we have to start with -- it's hard to believe, but in the fourth quarter, we shipped 20 million tests still at Cepheid. And we do think we're going to be 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 10 million, 11 million tests skewed more towards the 4 in 1. 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 at $11 million. And we would expect that step-down to continue here as we head out of the respiratory season and be along the lines of 5 million tests per quarter here in Q2, Q3 and then to see again, a pickup in the fourth quarter with the respiratory season, picking up again. So we stick there with a plus or minus on the 30 million tests.

And same thing, 2Q, 3Q more like it to be a little bit more COVID-only and then 4Q back to 4 in 1?

I think that's right. And then not to be dismissed, we continue to see our nonrespiratory menu make significant progress. In the first quarter, our nonrespiratory menu grew over 30% on the basis of some newer -- the expanded menu that we have, of course, Vaginitis as a newer test, but also Group A Strep, an important test or hospital-acquired infections. So our hypothesis that are a 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 taking 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 its turnaround time on the right answer.