Danaher Corporation (DHR) Earnings Call Transcript & Summary

Terrific. Well, welcome. Day 2 of the TD Cowen Global Healthcare Conference. I'm Dan Brennan, I follow tools and diagnostics. Really pleased to be joined here with me on stage, Danaher management. We have President and CEO, Rainer Blair. So Rainer, once again, thank you very much for being here.

Dan, it's good to be here. Thanks for having us.

Awesome. So yes, I thought we'd kick it off, obviously shoot high level. The quarter wasn't too long ago. Yes, I'm just wondering, you guys got to set the guide framework with 3% to 6% this year. And maybe just speak to a little bit of kind of how you're thinking about the year and how you're thinking about the guidance, and then we can dig into some of the details.

Sounds great. Well, first of all, we were encouraged by our finish to the quarter, which was really a broad-based beat and showed some nice momentum here as we came into 2026. And it's really on that basis that we set the guide. And if you think about that, that guide is really led by our bioprocessing franchise, where we see high single-digit growth for the year, great activity levels there all around. Even there, we're assuming flat equipment growth, maybe we'll talk about that a little bit later. In Life Sciences, we see end markets improving to some extent, also stabilizing. If you think about pharma, we saw several quarters of growth out of the pharma end markets there. Clinical was solid. And then academic and government, while that was down for obvious reasons, we saw that solidify. And then Biotech also is showing some improvement there as the funding flows improve. And then as you think about Diagnostics, here outside of China and respiratory, we're already in our -- that was 8 quarters of mid-single-digit growth. And so we're really encouraged by that. And if you take those now abating headwinds, China in particular, we see nice growth there for Diagnostics in the low single-digit area. So that's how we started off the year. We like the set up.

Terrific. Yes. So maybe just as a follow-up to that, Rainer. So that's the guide. And I think myself and I think others are kind of anchored to that 3% right now. So if we think about starting at 3% and pushing into that midpoint or even the high end, what would need to happen? How realistic is that? Maybe just -- maybe a little more color on some of the drivers there?

Well, I mean, as we look at the first quarter here in particular, we do see that as the low watermark and see continued improvement here for the course of the year. And what would have to improve in our view is Life Science end markets. For example, we want to see continued improvement in the growth there, stability with some of the things, the noise that we had in the last year. And we do see that. In Biotech, similarly, we want to see those funding -- improved funding flows now come through in order patterning and pattern, and we're encouraged by what we see there as well. So just to say we want to see Life Sciences continue to improve here through the course of the year. And then Biotechnology, bioprocessing in particular, that would be an area that if we see continued improvement even in the strength of consumables or equipment kick in a little bit stronger, those would be other opportunities for acceleration.

And maybe just kind of staying at the high level, but maybe thinking about -- your high incremental margins at Danaher has that 35% -- 35% to 40% drop-through. How do we think about that this year with that 3% to 6% in terms of the incrementals? Would you be able to achieve that across the whole range? Do you need to be in the midpoint of the range? I mean, you've done a nice job on earnings. But as we see this growth progress this year, just wondering how you might contemplate that?

Well, even at 3%, and it really shows you the power of the portfolio here. We -- with those -- with the fall through you talked about, 35%, 40%, we can deliver high single-digit earnings growth, 100 basis points operating margin expansion. So I think that's notable. And should the growth come in higher here beyond the 3% to 4% range, we see opportunity there for further EPS expansion.

Okay. We'll dig in to some of the segments in a minute, but just going to kind of keep high level here. I mean, the Masimo deal was just recently announced a few weeks ago. I think it was a deal that people -- not necessarily that deal, but certainly a deal, Danaher's balance sheet is in great shape. So -- and you guys are -- been really [ shoot the criers ] over time. It did raise more questions maybe that's typical for Danaher. I think because the headline was it's a MedTech company. So that was the first thing that maybe stuck out, probably less well known to folks like myself. Kind of what led you to the deal? What do you think the key selling points of the deal are?

Well, we've been looking at Masimo for 10 years, maybe more. We've admired the company for a long time as we encountered them in these acute care settings, particularly because of Radiometer. In fact, Radiometer was our first diagnostic acquisition back in the day, and we've learned a lot there and seen the value of these kinds of solutions and these high acuity settings, and Masimo is really a gold standard there. So we view this as a specialty diagnostic company because doctors take that information and make absolutely critical therapeutic and clinical decisions right there in these very, very important applications. So we really like and understand that particular application and when the opportunity arose. And you know the model that we always use is we like to -- we want to see the end market and the secular growth drivers that support that. And we see that here as pulse oximetry and some of the other advanced applications are absolutely critical and will only be more critical here going forward with an aging population, with the change in how anesthesiology works here, gaseous versus intravenous. Those are really important factors in supporting the growth here for the long term and are very, very positive. Then as we think about the asset or the actual company, look, this is the gold standard in pulse oximetry and in some other advanced applications with an enormous intellectual property moat, a clinical data that is out there for over a decade that really differentiates the solution. So we like that aspect as well. Now on the other hand, we also see a lot of value reserves. We like to see those because we can bring the Danaher Business System and our capability to the asset in order to make what is a good, very good company into a great company. And so that's really the opportunity here. And then lastly, we like the financial model discussion. And here, we see a company that is accretive from a growth perspective, a gross margin perspective and operating margin perspective. And that will provide, with the synergies that we've talked about, a high single-digit return on invested capital by year 5, if not sooner. So this is really, from a Danaher perspective, a traditional, very normal kind of acquisition.

Okay. Yes, I was going to ask a question on synergies. Maybe I'll just kind of put a bow on the Masimo kind of conversation. So I think you've laid out $50 million of 5-year revenue synergies, $125 million of cost side. Yes, just kind of Danaher typically is conservative on these. I guess some questions we've gotten is on the cost side. There might have been a lot of margin that was already squeezed out of the business. I guess, what's supported those? Or how do you feel about those?

As you can imagine, through the years that we have known Masimo, we've seen a lot of opportunities there as well as through diligence, which was, of course, very extensive. So we see of the $125 million of cost synergies, $50 million in the cost of goods sold. So on the gross margin line, we see another $50 million in the operating expense line. And then there's $25 million of public company costs that won't be necessary in the future. So that's how you get to the $125 million, and we feel very comfortable about that. Then the $50 million sales synergies, while we've talked about the same call point there between Radiometer and Masimo. Radiometer is a little stronger in Europe. Masimo, a little stronger in the U.S. They're about the same size, so we see a real opportunity to level each other up there. And of course, the Danaher Diagnostics platform. That franchise is a $10 billion before Masimo franchise. And increasingly, C-suites at IDN and other large players in the space want to talk to us about a much broader play. And we -- that's gaining traction, and this fits right in there.

Okay. Terrific. Thanks. So we move over to the businesses, starting with Life Sciences. It's been increased focus for investors trying to parse out kind of what's happening given the lack of recovery, not just Danaher, broadly in the space, right? Life Sciences, pharma spending, academic spending has been tough the last couple of years. So here, I think you guys declined a couple of points last year. Consensus has you about flat this year. So a bit of improvement, but still probably well below what you would consider normal. Maybe just give some flavor on kind of what underpins even though it's -- flat might not be where you want to be, it's still an improvement. What underpins that improvement? How confident are you in that?

Well, first, we're very confident in that. We do see the pharma end market improving. You recall last year, after getting through some other types of headwinds, we had the MFN discussion, and pharma held back a little bit in terms of their investments. And as one deal after another was cut there between the administration and the pharma companies, we saw that investment confidence return. Certainly in Life Science research, for instance, in instruments as we saw there in the fourth quarter as well as in Biotechnologies. We'll come back to Biotechnologies. That said, we also see improvement beyond pharma. Like I said, Biotech is showing more life with the improved funding flows. And we see that not just in the U.S., but also in China. And then we see other end markets maintaining sort of the level that they were at. Clinical, for example, which was pretty solid. So all in, we see the Life Science end markets modestly improving here. And at the same time, we're going to start as a company to comp out of specific situations, whether in genomic consumables as an example, where 2 large customers in particular, it affected us. That's, as we move through the year, going to return to growth.

Well you mentioned the Biotech side -- and we'll get into bioprocess too, but just broadly in like Biopharma, we've heard a lot about even just on research spending. I mean, it's probably not that big a part of your business. But I mean, is that part of the calculus too, maybe a bit of improvement there with some of the funding that's occurred? Or just anything...

As we think about research funding, it certainly has stabilized. If you think about academic and government, U.S. academic and government is actually low single-digit percentage of our business, so it's fairly small. But that said, it has stabilized. These worst-case scenarios that were discussed last years have not come to pass. In fact, we've seen stability there in NIH funding, but also beyond, we're starting to see university funding come through at better levels than they had here in the middle of last year. So we're encouraged by what we see there. But I would say from today's perspective, it's stable.

Okay. Maybe just a question on AI and kind of the impact to your Life Science business. There's been debates on -- it's very early, obviously, clearly. But like, does AI make pharma more efficient and do they have more money to spend on the successful molecules? Do they actually do less wet lab work? So just very early on, but like how are you guys thinking about AI from like the Life Science part of your business? And what's the opportunity? What's the risk?

Well, we're very bullish about AI and the impact that it will have in Life Sciences and for the pharma industry more generally. In fact, we think it's a real growth accelerator here, not only short term, but definitely for the long term because it ultimately accelerates the pharma development and commercialization flywheel. As we all know, it takes billions of dollars and many years, up to 10 or 12 years, to successfully bring a new therapeutic to market. And we see that accelerating. And so what that means for us, if we step back for a second. Over 25% of Danaher's revenue is in the production, so bioprocessing of therapeutics. Less than 5% is in the discovery and development of that. And I'll come back to that in a second. So if you look -- if you think about that in the future, we will have more drugs coming to market more quickly. That's a really significant opportunity for Danaher. That is, by quite a significant margin, the largest and broadest supplier to the bioproduction space. So we see that as very positive. And we also see, of course, the larger question of AI as a real shot in the arm for the profitability and the return on invested capital for pharma companies, which have been under pressure pretty significantly there. So if we go upstream then to the discovery preclinical work, if you will, we see over time -- not overnight, but over time, that there'll be more in silico work there that is going to improve the number of successful candidates going into the clinic. Meaning the yield of the drug development pipeline will increase, which is another very significant positive and will improve the economics of the pharma flywheel quite significantly. And we know not only through discussions, but through the few examples that exist, that, that benefit is reinvested in more discovery and more development. So ultimately, we believe that this is going to elevate all boats, if you will, as the water line increases.

Okay. Maybe we'll maybe jump over to Biotech and bioprocess. You mentioned a few times here, the high single-digit bioprocess guide reflects an improvement in instruments flat versus down double last year and kind of consumables growth, I think, at the high end of high single digits. Maybe just -- you mentioned a few times, kind of -- but like this is such a critical business for Danaher, high margin, a lot of investor focus. Like maybe give a little color on how you frame the guide and how you're thinking about the puts and takes as we go through the year?

Well, first of all, consumables continue to lead the way. So commercialized drugs and drugs that are in Phase III and about to be commercialized are real. The prescriptions there are growing. Biosimilars coming to market are a clear benefit to patients, as well as therapeutic volumes, which is what our business depends on. And so this continues to be a strength that is unabated and will carry the consumables aspect. At the same time, we do see equipment -- which is a smaller part of the business, I think around 15% of the business -- we do see that improving. We're encouraged by the fact that we've seen 3 quarters of sequential order growth. In the fourth quarter, we saw actual sales growth in equipment. And we're encouraged by that, and we want to see that trend continue. Our funnels are active. And so we're very focused on that aspect of the business as well, and we do see that improving.

Just maybe one more on kind of on the equipment side there. What do you think -- from your meetings with companies and maybe the salespeople's meeting with companies, so flat is a heck of a lot better than down double digits. But what do you think would get that to like up 5%, up 10%? I mean, there was a view a year or 2 ago, we all live in Excel and we could see how much things were down. Like, oh, there's going to be a recovery, it's going to go like this. And obviously, it's starting to recover now. But what do you think it would take to get that into decently positive territory?

Well, I mean I think that there's two factors here. The first one is that the lack of investment in new capacity over the last 24 months has resulted in improved utilization rates in the industry. And that's important because you really do need to get ahead in terms of investment in order to ensure that you can provide the therapeutics. So we know from the prescription data and from the volumes that are being consumed by patients that the drug demand has grown unabated whilst there has been little capacity expansion. So it makes sense to us that the utilization rates are higher. And as a result of that, we are seeing our funnels improve. That's we believe why we're seeing the sequential improvement in our order book, as well as that growth. And so that trend to be sustained. And then later on, I'm sure we'll talk about reshoring. Those are all factors that can contribute to an even better result here.

Yes. That was the next question, was reshoring. So yes, it's -- obviously, it's a topic we're going to host tomorrow. We have a senior executive from a leading engineering and construction company to speak about what he's seeing in the field from facility build-out. So that will be interesting on kind of drug companies and biotech companies. But yes. So maybe speak to a little bit about -- does reshoring help drive new incremental equipment demand? From what extent is it just a substitution, you're moving stuff from one area to the other? Just maybe give us a high-level view of reshoring, and then I can follow up with another question.

Our view here clearly is that we are in the early days of a years long CapEx cycle. And that, that is already underway. We see that -- as I mentioned in our order book, we see that primarily in brownfield investments, so investments in existing facilities. But we also see that with our CDMO customers who not only have increased demand for our solutions, but are acquiring, if you will, underutilized pharma manufacturing capacity to be able to put that to use in this reshoring effort. And again, there's at least two things going on that support demand. One is the continued growth of the use of these therapeutics and their penetration in the market. These therapeutics work. And as they become more accessible to biosimilars and other reasons, that growth will continue. The lack of capacity investment that I talked about a minute ago requires that there will be more investment capacity. When you look at Phase III drugs, there are many viable drugs there that are going to require further capacity increases. And now on top of that, you add the reshoring effort that is underway for also national security reasons. So this is not just an economic question in the United States. It is a national security question in the United States. These investments are coming, and it's just a matter of time as they catch up. And so the brownfield investments that are starting to occur now will continue, and they will continue to accelerate. And then we will see these reshoring investments coming to us in the 18, 24 and 36 months, depending on how much of it is greenfield and otherwise. So a years long investment cycle ahead of us.

And you guys haven't framed at all, provided any color. Would you do that at some point in '26 in terms of -- as orders start to come through? [ You tote ] $400 billion of announcement from the big pharma companies, but it's not just all CapEx. It's -- there's a lot of things in those numbers, right?

That's right. And we want to provide that clarity, and that clarity will be based on the order book and actual data as opposed to -- and understandably, it's very difficult to parse through these investment announcements. The timing differs. And of course, the plans sometimes change, but it is coming nonetheless. And as we have greater visibility to that with more specificity, we'll provide that transparency.

And maybe just want to follow-up there. Obviously, the Supreme Court shot down Trump's tariffs, and he's going to work around that and try to figure out ways. I know our pharma analyst caught up with a couple of his companies, and there's no change in the reshoring, no change. Because if the tariffs go away -- I don't know, is there any early color your team has heard from any customers? Is that the message? Or is there no message?

In my discussions with pharma CEOs -- and they've been very frequent and very recent as -- last week included -- there's no change to these investment plans. These plans are driven as much by the tariff aspects that are maybe a bit in flux, but ultimately result in similar types of levels, as they are with the fact that there is an agreement with the U.S. government to do this in relation to most favored nation pricing and so forth. So there are deals in place here that will be respected.

Okay. Great. Maybe just on consumables for Danaher. You guys are the leading player in the market, certainly by size and across a lot of the continuum. How do you think -- as the biggest player gives you a lot of scale and benefit, but also subjects to you to maybe some share loss because there's a lot of smaller players coming up, how do you think you stack up on your bioprocessing consumables portfolio versus the market? Hold share, gain share, lose share?

Well, first of all, these share gains and losses, these would be things that take a lot of time. This is not an incredibly fluid market in terms of share changes. That's just not the case. When we look at our share position, we think that it's improved. Not by enormous magnitudes, but in some areas, quite significantly. Cell culture media or single-use technologies come to mind. Just as a data point, cell culture media grew over 20% here in the fourth quarter. So these are areas where we believe that we're gaining share. In other places, we're probably holding share. An area that we view really as a great opportunity is the filtration area. So Pall, now part of Cytiva, is a powerhouse in material science and is now launching its next-generation filtration solutions. And we actually have a relatively small share in filtration. And so we really see this as a big opportunity to level up with our share position in other places in the bioprocess workflow, and we're looking forward to that.

Terrific. Maybe just one on China. Historically was a contributor to bioproduction growth, but given all the back and forth, what's happened there, it's hard to catch a trend, and there was certainly a contraction. But now with the research and biotech sector wondering what China is contributing to bioprocess these days.

So we're seeing growth in bioprocessing in China, and we expect that to continue to accelerate here in '26 off of what was previously contraction. And that's really driven by increased biotech activity there, where China has found new means of monetizing these drug developments primarily through licensing, but also increasingly through going public there in the Hong Kong Stock Exchange. And that really has added a significant amount of fuel to the China drug development flywheel. And we also see that in the number of clinical trials that are ongoing in China, quite significant increase here over the last years. So we're the largest player in China. We increasingly manufacture our solutions there locally. We are highly competitive, not just with multinationals, but also with local players there. And our customers really enjoy working together with us to help them develop these molecules and ultimately bring them to market not just for China, but also to have that capability and the credibility to market those drugs outside of China.

Terrific. So we have about 5 minutes. We'll jump over to maybe Diagnostics. So you guys have sounded very confident on that China drag which you baked into your guide kind of being pretty visible. And you feel good about that eventually lapsing this year, $75 million to $100 million. Maybe just speak to a little bit, the visibility there? Because we've heard rumblings in the December time frame, there could be another round of VBP. So just -- what are you hearing on the Street there? And should this be hopefully, the $750 million will be the right number?

We're not hearing about another round of volume-based procurement or DRG changes. But what we do see is that very methodically, the provinces and the federal government are sort of cycling through the various diagnostic tests, just like they did when they started in pharma, then MedTech and then diagnostic tests. The great majority of our tests have already been part of that regimen, and we have the great majority of that behind us, and that's what gives us the confidence to limit the further impact to the $75 million to $100 million that you mentioned. Now what kind of things are they working on now? Well, dry reagents, as an example. People talk about those. We do not have dry reagents in China, as an example. Or specific oncology tests, esoteric tests, we're really not involved and exposed to those. So there might be players out there that are still in that part of the regimen, cycling through the various tests, but that's not the case for us. And so we're really looking forward to getting through the end of this year. We'll already see in the second half, the comps starting to improve. We already saw in the fourth quarter, that type of thing playing out with the comps. So we're quite confident that we have this dialed in properly. And we're seeing the patient volumes to be -- continue to be very strong. So there's a need for these diagnostics, and we're looking forward to continued progress here.

Great. Cepheid has been a tremendous deal for Danaher, right, taking it from where it was, the profitability improvement. And then the growth that you've had, not just COVID, but on the base business. Kind of sitting here today, kind of what excites you about Cepheid going forward? What type of growth do you think we can expect there?

Well, Cepheid, I would tell you, early days. We're just getting going. You saw the launches of our syndromic panels. We didn't really talk about it as much when we launched the foreign one because it was so much part of the pandemic discussion. Then we have the MVP syndromic panel, which is really moving in the market very well, introducing us to new care settings in women's health. And now we have the GI panel, another syndromic panel. And so this is really exciting because now we're moving into the different plex market, and that's opening up a much larger addressable market for us. And this is an amazing part of the Cepheid strategy that we've executed. You know we're well over 60,000 installed base now. We -- already fully half of that installed base has the higher plex capability so that we can seamlessly implement these syndromic panels in the market. And the other half, we've been able to develop the system such that we just literally pull the module out, put in a new module. You don't have to make any other changes, and you have now enabled your installed base to take on this entire syndromic panel play. And we're really in the sweet spot there. It turns out that as you speak with clinicians about high plex, so 50, 70, 100 different plex, that they're actually not so keen on moving forward with that. It's actually a little bit too much for what they need from a clinical value perspective. And so we've dialed into the sweet spot here with this plex of about 10, 12, and we expect a lot of growth to come out of that. So continued innovation at Cepheid. This nonrespiratory side of the portfolio is growing at double digits, and we expect that to continue in a really strong way.

How much could this new higher plex market add to the growth rate, assuming the base business keeps doing what it does?

Well, it's early days here. So let us get through more launches, but expect to see more and more launches from us. But there's no doubt that this fortifies our position, makes us more and more attractive on the clinician's benchtop. And that we will consolidate not just share, but really open up new applications for us.

Terrific. Maybe we'll try to sneak in one on the balance sheet. So you did the Masi deal, you're going to -- you're working through that. Is it fair to think you wouldn't undertake another deal while this one is in the midst of closing? I mean, you have the capacity, I think, to do another $20 billion plus, but how do we think about that?

Well, we're always in the market looking at the next transaction that fits our strategy and our 3-dimensional framework that I often speak to. With this Masimo transaction, we'll sneak over just 2 turns in terms of our EBITDA debt ratio. And we feel very comfortable that we would still be in a place where we can execute another deal.

Maybe I'll let you wrap it up then with a few seconds up here. Rainer, it's been a great discussion. What do you think -- what's the message you want to leave investors with today?

Well, I would tell you that Danaher is transformed in its portfolio. Our businesses are highly attractive. We're really in the most attractive end markets here in the health care sector. And you can see that by the kind of margins that we generate. That 35% to 40% fall-through is so incredibly important. And even at growth rates of 3%, so the low end of the guide, the power of that portfolio and our earnings capability and our cost discipline allows us to deliver high single-digit EPS growth and operating margin expansion of 100 basis points. So you combine that with our ability to acquire assets, Masimo just being the latest example. We really do see the LRP as well as double-digit earnings growth as a part of our future.

Terrific. Well, thank you very much for being here, and have a great rest of the conference.

Thank you. Thanks.