Danaher Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 20, 2021

There are 12 speakers on the call.

Operator

Good day, everyone. My name is Emma, and I will be your operator today. At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2021 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Speaker 1

Question. I

Operator

would now like to turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Geno, please go ahead.

Speaker 2

Thank you, Emma. Good morning, everyone, and thanks for joining us on the call. Call. With us today are Conor Blair, our President and Chief Executive Officer Matt McGrew, our Executive Vice President and Chief Financial Officer and John Bedford, our Director of Investor Relations. I'd like to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations quarter and other information required by SEC Regulation G relating to any non GAAP financial measures provided during the call are all available call on the Investors section of our website, www.danher.com, under the heading Quarterly Earnings.

Speaker 2

Call. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until November 4, 2021. During the presentation, we will describe certain quarter. The supplemental materials describe additional factors that impacted year over year performance.

Speaker 2

Call. Unless otherwise noted, all references in these remarks and supplemental materials to company specific financial metrics refer to results from continuing operations and relate to the 3rd quarter of 2021, and all references to period to period increases or decreases in financial metrics are year over year. Call. We also may describe certain products and devices, which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. Call.

Speaker 2

During the call, we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments call that we believe or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, including those set forth quarter and our SEC filings and actual results might differ materially from any forward looking statements that we make today. These forward looking statements call. Speak only as of the date they are made, and we do not assume any obligation to update any forward looking statements except as required by law. Quarter.

Speaker 2

As a result of the size of the Cytiva acquisition and its impact on Danaher's overall core revenue growth profile, quarter. We're presenting core revenue on a basis that includes Cytiva sales. References to core revenue growth, including Cytiva sales and the calculation of period to period Sales Growth. With that, I'd like to turn the call over to Rainer.

Speaker 3

Matt, quarter. Thank you, and good morning, everyone. And we really appreciate you joining us on the call today. Our team delivered another outstanding result in our 3rd quarter quarter with over 20% core revenue growth, nearly 40% adjusted earnings per share growth and strong free cash flow generation. Quarter.

Speaker 3

This well rounded performance is a testament to the unique positioning of our portfolio and our exceptional team quarter, who are committed to leading and executing with the Danaher Business System every day. I'd like to thank all of you who joined us last month for our Virtual Investor Day, where we had the opportunity to showcase the strong foundation we've built for generating sustainable long term outperformance. Quarter. We highlighted our fantastic portfolio of market leading franchises in highly attractive end markets, quarter. The exceptional team we have out on the field every day and how we differentiate with the Danaher Business System.

Speaker 3

And we certainly saw this powerful combination in action during the Q3 as our results attest. Now we also talked about our sustainability efforts. Quarter. And just last week, we published our 2021 sustainability report. This year's report reflects the measurable progress call.

Speaker 3

We've made across the 3 pillars of our sustainability program, which are innovation, people and the environment, call and how we use the Danaher Business System to execute on this increasingly important strategic priority. Call. I hope you all get a chance to read through the report and learn more about the important work that we're doing across Danaher to positively impact the world around us quarter. So with that, let's turn to our 3rd quarter results. Our sales quarter.

Speaker 3

We're $7,200,000,000 and we delivered 20.5 percent core revenue growth with portfolio wide strength quarter led by diagnostics and life sciences. Geographically, high growth markets grew approximately 25% and developed markets quarter. In fact, revenue in each of our 3 largest markets, North America, Western Europe and China quarter. Our gross profit margin increased by 550 basis quarter. 60.3%, primarily due to higher sales volume, the favorable impact of higher margin product mix quarter and the impact of prior year purchase accounting adjustments related to the Cytiva acquisition that did not repeat in 2021.

Speaker 3

Call. Now adjusted diluted net earnings per common share were $2.39 and were up 39% compared to 2020. Quarter. And we generated $1,700,000,000 of free cash flow in the quarter, bringing our year to date total to $5,200,000,000 which is up 46 0.5% year over year. We continue to accelerate organic growth investments quarter.

Speaker 3

Across the entire portfolio and increased our research and development spend by approximately 30% year over year. Call. At our Investor Day recently, we highlighted how we use DBS growth tools and processes to accelerate innovation quarter and bring more impactful solutions to our customers faster. In fact, recently launched products like the SCIEX VenoTox 7,600 quarter and the Triple Quad 7,500 and Beckman Life Sciences CytoFlex SRT bench top cell sorter are just a few great examples call. How we're driving market share gains through proprietary innovation and enhancing our growth trajectory going forward.

Speaker 3

Quarter. We're also making substantial investments to expand production capacity across our bioprocessing businesses and at Cepheid. Call. Near term, these investments are supporting existing customer demand and driving meaningful share gain, but they're equally important to support the long term growth quarter. Where we see significant runway ahead given the underlying structural growth drivers in the sectors they serve.

Speaker 3

Call. And we expect our total capital expenditures across Danaher to be approximately $1,500,000,000 in 2021, call as we continue to invest in support of our customers' needs today and well into the future. Quarter. So now let's go into more detail on our quarterly results across the segment. Life Sciences reported revenue increased quarter 24.5 percent with core revenue up 20%.

Speaker 3

This growth was broad based across the segment quarter. With most major operating companies achieving high teens or better core growth. Now these strong results were led by continued demand for our bioprocessing solution quarter. As in Saiteva Bioprocessing and Pall Biotech, both grew more than 30% in the quarter, quarter, including low double digit non COVID related core growth. COVID related vaccine and therapeutic revenue contributed quarter.

Speaker 3

Continued to be strong and now exceeds $1,500,000,000 year to date. At Cytiva, we passed an important milestone last month call when we exited the lap of our transition services agreement with GE. We successfully completed this process quarter ahead of schedule, which is a testament to the entire Cytiva and integration team and their collective commitment quarter. Cytiva also added more than 1500 new associates to the global team since joining Danaher call to help ensure that we're supporting our customers today and continue meeting their needs well into the future. Quarter.

Speaker 3

Now in August, we successfully closed our acquisition of Aldebaran and we are thrilled to officially welcome the team to Danaher. Call. Aldebron is a leading producer of high quality plasma DNA, mRNA and proteins and provides a fantastic beachhead quarter. We're seeing the rapid development of gene and cell therapies, DNA and RNA vaccines quarter. So we're really excited about the quality, the scale, the turnaround time and the reputation call that Aldevron brings to the Danaher portfolio.

Speaker 3

Now in diagnostics, reported revenue was up 29.5 quarter. And core revenue grew 28.5%, led by more than 60% growth at Cepheid. Quarter. Each of our other major diagnostic businesses, Beckman Coulter, Radiometer and Leica Biosystems grew low to mid teens quarter as clinical diagnostic activity and patient volumes around the world largely returned to pre pandemic level. In respiratory testing at Cepheid, we further expanded manufacturing capacity, which enabled the team to produce and ship approximately quarter.

Speaker 3

COVID only tests accounted for approximately 80% of those shipments quarter and our 4 in-one combination test for COVID-nineteen, flu A and B and RSV represented approximately 20%. Quarter. Non respiratory core growth at Cepheid was up double digits as well, led by demand for hospital acquired infections, sexual health and virology testing. We also saw strong growth in our installed base as system placements continue to exceed pre pandemic rate, call. And we believe the team's thoughtful placement of the Janexpert and Infinity system over the last 18 months quarter.

Speaker 3

It's setting up Cepheid very well for future growth opportunity. Let's move to our Environmental and Applied Solutions segment. Quarter. Reported revenue was up 7% with core revenue up 7.5%. Quarter.

Speaker 3

Water quality grew mid single digits and our product identification platform was up low double digit. Quarter. Across our water quality businesses, we saw good underlying market strength, particularly in food and beverage and various industrial applications quarter. As activity returned to more normal levels, municipal projects picked up given the improving funding environment call. On product identification, both Videojet quarter.

Speaker 3

And our Packaging and Color Management businesses were up low double digits in the quarter. Comparable quarter. Consumables service and installed base growth was driven by more normalized levels of customer activity and investment. We believe that our ability to meet our customers' needs, quarter, particularly on the equipment side at Videojet enabled us to gain market share and expand our industry leading installed base printers. Quarter.

Speaker 3

So with that as a backdrop for what we saw this quarter, let's spend some time going through Regional and End Market Trend. Most major regions and countries around the world are largely back to pre pandemic quarter. Customers have adapted to the current operating environment and protocols and broadly resumed in person commercial activity quarter. Now this is reflected in the strong results we've seen across the U. S, Europe and China.

Speaker 3

Quarter. And this momentum is also reflected in our strong order book growth, which is trending above revenue growth. Quarter. Now we're mindful of potential COVID-nineteen variants or outbreaks and selective lockdown, but we're not currently seeing any material negative impact quarter. And while we are seeing some global supply chain constraints, we're leveraging the Danaher Business System tools like daily management quarter.

Speaker 3

And actively working with our customers and suppliers to help mitigate any impact. Across Life Sciences, call. We're seeing robust customer activity and demand across all major end markets. Lab and other site access is largely back to pre COVID levels quarter. And we're seeing this through more normalized productivity levels, installations and project initiation driven by a strong funding environment.

Speaker 3

Call. Now biopharma continues to lead the way as the number of life saving biologic and genomic based therapies in quarter. Development and production continues to rise and is augmented by the ongoing work around COVID-nineteen vaccines and therapeutics. Quarter. And at our recent Investor Day, we spent time covering how well positioned we are to support this complex life changing work that our customers are pursuing.

Speaker 3

Quarter. Our combined bioprocessing portfolio across Cytiva and Pall Biotech is the broadest offering quarter in the industry with leading positions in upstream and downstream applications. And we further support our customers with best in class quarter. Our next question comes from the line of David. Hi, And our global reach enables us to reliably and consistently meet our customers' needs.

Speaker 3

Call. Now in addition to the industry wide opportunities in biologics and genomic based medicine, we continue to see significant demand quarter. Our customers are working to address emerging variants quarter. And given that only about a third of the global population has been vaccinated, we believe we'll see durable growth in this biopharma segment for the foreseeable future. We continue to expect about $2,000,000,000 of COVID related vaccine and therapeutic revenue quarter.

Speaker 3

And since we spoke at our Investor Day, we now expect to enter 2022 with approximately $2,000,000,000 quarter. And COVID related backlog versus our previous expectation of $1,500,000,000 of backlog. Call. This increase is driven by the recent enhanced visibility for booster shots and the likelihood of vaccine availability for quarter. Quarter.

Speaker 3

Volumes are essentially back to pre pandemic levels in most major regions as patients are returning for wellness checks, routine screening quarter and other elective procedures. In molecular diagnostics, strong global demand persists for Cepheid point of care PCR respiratory testing as a result of the Delta variant and outbreaks, along with lower vaccination rates in many regions. As I mentioned earlier, we shipped approximately 16,000,000 respiratory tests during the Q3 quarter. And we now expect to ship approximately 55,000,000 tests in 2021 versus our prior expectation of 50,000,000. Quarter.

Speaker 3

Now as we head into the traditional respiratory virus season, we're hearing from customers that they expect this to be a much more active season than last year's. In preparation, their preference is for our 4 in-one combination test. So we're seeing an uptick in demand for those cartridges, particularly given the recent grades of RSV across the U. S. Cepheid's 4 in-one test was also recently approved with a third gene target for quarter SARS CoV-two detection, ensuring it can continue to accurately detect future COVID-nineteen viral mutations quarter.

Speaker 3

And reinforcing Cethiud's competitive advantage in the respiratory testing market. Now moving to the applied market, quarter. Customer activity has largely rebounded to pre pandemic levels, which we see in robust order rates across both consumables and equipment. Quarter. In the global municipal market, consumables demand remains solid and the pace of instrument oriented project activity continues to pick up quarter.

Speaker 3

Quarter. So now let's look ahead to our expectations for the Q4 and the full year. Quarter. We expect to deliver 4th quarter core revenue growth in the low to mid teens range with high single digit core revenue growth in our base business and a mid to high single digit core growth contribution from COVID related revenue tailwind. Additionally, we expect to generate operating profit quarter.

Speaker 3

Fall through of approximately 40% in the 4th quarter, a similar level to what we achieved in the 3rd quarter. Quarter. Now for the full year 2021, we now expect to deliver more than 20% core tailwinds and our base business will each contribute more than 10% to our 2021 core revenue growth rate. Quarter. So to wrap up, we're proud to deliver another terrific result here in the 3rd quarter.

Speaker 3

Quarter. Our performance is a testament to the power of our unique portfolio, the strength of our end markets and our team's commitment to leading and quarter. And this unique combination differentiates Danaher today and it reinforces our opportunities quarter ahead for sustainable long term outperformance. So with that, back over to you, Matt.

Speaker 2

Quarter. Thanks, Reiner. That concludes our formal comments. Emma, we're now ready to take questions.

Operator

3rd. We will take our first question from Tycho Peterson with JPMorgan.

Speaker 1

Call. Hey, good morning.

Speaker 3

It's Michael.

Speaker 1

Hey, Reiner, I'm wondering if you could talk a little bit more on China. There seems quarter. Growing noise on pressure, local competition, it seems to particularly be impacting some of the diagnostic tenders with that process getting pushed out to the provinces. Call. Are you seeing anything there for Bechtin or Cepheid?

Speaker 1

I know China was up 20% overall, but I'm just curious if there's any pressure on the diagnostic business based on what you're seeing.

Speaker 3

Quarter. Sure. So let me start with, we are not seeing any material impact related to quarter. Some of the tenders or some of the other things that we hear out of China. In fact, quarter.

Speaker 3

The Hanwei province tender is really an exception in diagnostics and actually more Common in Other Industries. And we'll see this kind of thing from time to time, but it's quarter. Neither unexpected nor do we see it as material. But what we're seeing generally in China is really very consistent with quarter. What we've seen over the past several years, China has been very forthcoming with its Made in China 2025 initiative as well as several others, all of which we see quite aligned with our strategy, starting with our portfolio, which is call.

Speaker 3

Clearly aligned with the Healthy China 2,030 agenda, where you see the need for both quarter. Improved diagnostic solutions as well as life science, research and bioprocessing, as well as the desire to call. Protect the environment where water quality really plays big, as well as the desire to improve and protect the food supply quarter. Where we see PID playing large as well. So we think we're really ideally positioned here to meet the needs of where China is going.

Speaker 3

Quarter. Now at the same time, for years, we have been investing in China as our business gains scale to ultimately localize our production. And that's been the case quarter for some time, positioning us very well in China, and that will continue to be the case quarter. Going forward as our businesses continue to gain scale there.

Speaker 1

Okay, that's helpful. Quarter. Supply chain, you flagged some constraints. Obviously, you guys are generally very good at kind of mitigating an impact here. But I'm curious as you kind of look out over the next couple of quarters,

Speaker 3

Are there areas where maybe you're more

Speaker 1

or less concerned around supply chain that you might flag?

Speaker 3

So we haven't quarter. Really seen a material impact on our ability to meet our customers' demand, but we are seeing some modest quarter. Inflationary and supply chain pressures in certain areas, just to name a couple, of course, electronic components, freight and logistics and some labor shortages. But really, this is where the Danaher business system is a differentiator for us in this environment. In fact, despite quarter.

Speaker 3

The additional work that ensues, we see this really as an opportunity for ourselves to differentiate with our DBS toolset, For instance, with daily management, which brings our cross functional teams together on a daily basis, drive disciplined execution and accountability as well as the sense of urgency and real time problem solving. And at the same time, of quarter. So this is how we make sure that Danaher continues to not only meet its customer quarter expectation, but also has opportunity to gain share. Now at the same time, of course, we see some inflationary pressures quarter. And we're offsetting those, of course, with more active cadence of price increases and those will also be incrementally larger quarter than in the past, as well as freight and fuel surcharges.

Speaker 3

So on the one hand, we're driving as always call. To reduce our cost of goods sold, at the same time, we take additional offsets with moving on some of these surcharges and price increases quarter I mentioned. I think also importantly to note here that this is not a top down process. The Danaher operating companies have this process muscle and are able to execute effectively, whether that's ensuring the security of the supply chain or whether that's ensuring that we can offset quarter. Cost increases via price and other methods.

Speaker 3

And ultimately, we think that differentiates us quarter. And we think we're gaining share as a result of that in PID, water quality, Cytiva and Pall, radiometer and elsewhere.

Speaker 1

Quarter. Okay, that's great. And then before I hop off, just one on Septia, you're exceeding your targets here in the near term. Should we assume your estimates for 2022 are Still intact? I think you talked about 45,000,000 tests before or have you kind of revisited those as well?

Speaker 3

No, that's correct, Tycho. We're really pleased that quarter. The team was able to ship more again here in the Q3 with the capacity increases and quarter. Demand still exceeds our ability to supply, but for today's view, 45,000,000 cartridges for 2022

Operator

quarter. We'll go next to Vijay Kumar with Evercore ISI.

Speaker 4

Good morning, Vijay. Good morning, Bijan. Congrats on another impressive print here. Call. Just one on testing here.

Speaker 4

I think I heard the number $55,000,000 test for 2021. Quarter. The implied Q4 number, I think, is about $15,000,000 That's a sequential step down from 3Q. I'm curious, just given the testing trends, quarter. Whether that step down makes sense and any change to your I think your prior expectation was 45,000,000 tests for fiscal 2022.

Speaker 4

Is that still relevant given the current run rate?

Speaker 3

Sure. Thanks, Jay. Quarter. So the way to think about the Q4 here in terms of testing is we would expect also 16,000,000 cartridges in the Q4, similar to what we saw in Q3. While we're always working to increase capacity, quarter.

Speaker 3

We think the 16,000,000 cartridges is the right way to think about it. And of course, if you add up the quarters, let's call it about 55,000,000 call. I wouldn't want you thinking about a step down here in Q4 for Steph did. That's not the case. Now as you look forward to 2022, call.

Speaker 3

We still think that 45,000,000 cartridges where we sit today is the right way to think about it. Call. And as we come to our Q4 earnings call in January, we'll revisit the topic then.

Speaker 4

Quarter. Understood. And my second question, Biren, this is maybe a bigger picture question. I think at your Analyst Day, call. You updated Cytiva outlook as high singles.

Speaker 4

Now when you look at your peers in the biopharma space, most of them are in the double digit range. Call. Is there anything different about your Cytiva business mix versus your peers? And correct me if I'm wrong, but isn't Cytiva gaining share versus peers?

Speaker 3

Quarter. So to start with, the Cytiva and the Pall Biotech businesses together are By far, the most complete portfolio in the marketplace, and we continue to see quarter. The capability and the help that they get from Cytiva and Paul in solving the challenges that are With making biologics of high quality with high yield at the targeted cost. So we really see quarter. Ourselves in an advantaged position here and believe that we continue to take share, whether that's on a quarterly or on an annual basis.

Speaker 3

That's for sure the case. Now as we think about the long term growth and perhaps our timelines need to be aligned here quarter. As we think of long term growth, we you might recall when we acquired Cytiva, we thought this was more of a 6 percent type of growth business. And what we've seen here is that certainly, the growth of this business has rerated higher quarter. And certainly in the pandemic, it's quite a bit higher.

Speaker 3

But once again, as we think about the long term, we think it's prudent call to think about a business at that scale in the high single digit. And we think that will compare very favorably with any other business out there in the short, medium and long term.

Speaker 4

That's helpful, Renner. And just to quarter. Summarize that. There's no reason to think SITEVA growth should be below market. Is that a fair summary?

Speaker 3

Quarter. We continue to believe that we'll take share now and in the future.

Speaker 4

Thank you, guys.

Speaker 3

Thanks, Vijay.

Speaker 1

Quarter.

Operator

We'll go next to Derik De Bruinig with Bank of America.

Speaker 5

Derik, good morning. Call. Hey, good morning. Thanks for taking the question. So I have a couple of ones.

Speaker 5

Can we talk a little bit about operating leverage as we go into 202223. I mean, you guys are investing really heavily in R and D. You're doing a lot to sort of like drive innovation in the business. Call. So how can we think about op leverage as we go in there and just to get a sense of sort of like where the margins are going to come on?

Speaker 3

Call. Sure. So, Derek, as you know, we have been, and as you just mentioned, investing very significantly in the business. This is not call. Only the case in capital expenditures where we're investing in our manufacturing network throughout the world, but we've also been investing significantly call in research and development, in feet on the street to drive proprietary innovation in the short and long term as well as call to ensure that we can continue to drive share gains with our direct business model.

Speaker 3

Now as we think about the operating leverage, you know that quarter. Our fall through here has been in the 40% range, and we think that's a good way to think about quarter here as well. In the long term, historically, our fall through has been More than the 35% range. And we think that's probably the better way to think about fall through quarter. For the long term, just because we want to find that balance of reinvesting in the business as well as driving profitability expansion.

Speaker 3

Quarter. And we think that flywheel works for us, right? Mid single digit plus growth on the one hand, on the other hand, 50 to 75 basis quarter. Point of operating margin expansion, free cash flow conversion over net income over 100%, call. All of that then to drive double digit plus EPS growth.

Speaker 3

And when you couple that with our current balance sheet positioning with our bias to deploy capital towards M and A. We think that sets us up very nicely here, quarter. Both from an operating leverage perspective as well as driving our growth franchise forward. Great.

Speaker 5

Call. So can we talk a little bit about the analytical instrumentation sales? I'm sort of curious just on call. How SCIEX is comparing to 2019, and so some of the other instrumentation as well as some of the other instrumentation. And specifically, I'd like to know Developed world versus China, sort of like what is sort of that is.

Speaker 5

I'm just trying to gauge overall, are we seeing accelerating

Speaker 3

quarter. Well, let me start with that. We are seeing accelerated analytical Demand versus prior year today. That's the case in all of our more instrument, bias businesses quarter. And that is certainly the case for SCIEX as well.

Speaker 3

So we do see that the funding environment labs opening up are quarter. Helpful here and have accelerated instrument demand going forward. And SCIEX has done very nicely here with over mid teen core growth in the quarter, and that also reads through to China as well. So call. Cyence, in particular, as you know, has been on a great streak of and continuous streak of innovation launching quarter.

Speaker 3

The Zenotov 7,600 as well as the 7,500 Triple Quad and Echo MS, and is quarter. Not only benefiting from the tailwinds of an attractive funding environment, which we see here in this year and certainly in the second quarter of 2021. But they're also benefiting through this innovation that is really allowing our scientists To answer new question and that's resulting in share gain. Derek, maybe just This is Matt.

Speaker 6

Just to put some numbers to what Reiner said. I mean, if you look at SCIEX in particular on a 2 year stack, quarter. You're talking about high single digits here in 2020 2021, which is that's actually better than where they were in 2018 2019 On a 2 year stack. So I think like Reiner said, we're seeing some pretty nice acceleration, really new product driven as well. But It's been a really good story here for the last couple of years.

Speaker 5

Great. And if I can sneak in one more, the COVID vaccine backlog for 2022. Is there even some additional upside there? Is that already committed orders or is that more tied to your

Speaker 3

So we are close to those $2,000,000,000 quarter. Backlog for the Bioprocess business for 2022 today, call. And certainly expect to be there by the end of the year. We think that sets us up pretty well. We will clogged by $500,000,000 here going into 2022.

Speaker 3

We think it's a good sign for things to come. Quarter.

Speaker 6

Great. Danaher, definitely those are committed orders. That is not a

Speaker 5

Great, Jack. Thank you. That's where we're going to work. Thanks. Quarter.

Operator

Yes. We'll go next to Scott Davis with Melius Research.

Speaker 7

Good morning, Reiner and Matt and John, thanks for taking my question. I'm just kind of curious, I mean, logistics quarter. Prices and labor cost inflation are challenges and all this stuff doesn't seem to really have impacted you guys much, maybe a little bit at E and AS. Call. And you've made a comment, Ryan, on kind of capturing price, but it looks like price was sequentially flat.

Speaker 7

Is that something that call. You would expect price to be a little bit more dynamic going forward or is it just kind of a mix impact to some Products where price just doesn't need to go up.

Speaker 3

We're about 150 basis points up year over year and we continue to Move price increases through the system. So I think you're going to continue to see that filtering through here quarter going forward, Scott. So mix plays a role as you suggest, timing is another one, But all of these actions are in the works and they take some time to get through the system. Call.

Speaker 7

Okay. That's helpful. And the R and D, the spend up 30%, is that is it headcount up 30% too or call. People are costing you more. How do you think about that and how do you think about kind of getting productivity on that spend as making sure Projects are focused and there's some sort of return on that investment.

Speaker 3

Scott, it's a great question. And the 30% increase is call. Primarily related to a number of points. 1, of course, you have more people working on more projects. Call.

Speaker 3

But in terms of the productivity, the way to think about that is any project that we do has its business case and we ensure that that productivity through the

Speaker 1

delivery of that business

Speaker 3

case makes sense for us. So, 3rd. So we view this, of course, as an investment in the future call that ultimately drives defensible proprietary share gain through research quarter. And the increase comes in terms of people, it comes in terms of additional equipment, testing equipment that's required, it comes quarter. In terms of additional alpha and beta systems that are out in the field with our customers, so myriad ways that we invest that in order to drive innovation.

Speaker 7

Good luck, Reiner. Thank you and congrats on a great year so far, guys. Quarter. Thanks. That's it.

Speaker 3

Thanks, Scott.

Operator

We'll go next to Dan Brannen with Cowen. Call.

Speaker 8

Good morning, Dana. Thanks for taking the questions here. Wanted to ask a follow-up to the first question on this bioprocess. Call. So, you maintained the outlook for vaccine therapeutic contribution this year.

Speaker 8

Just wondering, is there capacity for you to exceed that quarter. In terms of is there demand for that or are you capacity constrained for 2021? And then related to that, as we think about 2022, you've already discussed The $2,000,000,000 firm order book, but how do we think about the contribution within that from boosters and from kids? Because I forget if previously you had boosters included in call. Maybe that's the first question.

Speaker 8

Thank you.

Speaker 3

Very good. Well, let's start with the topic of The contribution that's in the $2,000,000,000 So in fact, we did not include the kids 12 and below call in to our $1,500,000,000 original backlog estimate for 2022. Call. That and, of course, now the approval of boosters for various groups of the population call is really what is driving that increase from $1,500,000,000 to $2,000,000,000 of backlog for 2022. What it doesn't include is the approval of these vaccines for kids 12 and younger, for example, quarter.

Speaker 3

That's something that is still in the future and there's not sufficient clarity quarter for us to start thinking about that in quantitative terms, but that's something that would be excluded in that. Quarter. Now coming back to your capacity question, as you likely are aware and as we talked about also in our Analyst Day, call. We have been investing in capacity expansions in the Biotech business now for some time. In fact, we ensured that the investment Continued even prior to the closing of the acquisition from GE, and we have continued with those investments that have come online here quarter.

Speaker 3

Nearly in a continuous fashion through the second half of twenty twenty and twenty twenty one, and we expect those capacities quarter to continue to increase here going into 2022. So we feel very comfortable that we're able to call. Meet our customers' requirements here now and going forward. And we think that differentiates us in the marketplace And why, among other reasons, we are confident that we are taking share.

Speaker 8

Quarter. Great. Thanks, Reiner. And then as a follow-up, I know Matt discussed previously kind of a stack growth call on I believe it was on Cytiva. I just want to understand a little bit in terms of stack for your overall business.

Speaker 8

I know the commentary throughout the conversation quarter. Reflected business largely back to normal, which is great. But when we look at like the base growth ex COVID and we consider like a stack and this is clearly very imprecise. But in Q3, that base growth on a 2 year average quarter. This was around 4%, maybe a little bit below that.

Speaker 8

And I believe in Q4, the high single digit base guidance like a 2 year stack that might be closer to 3%. And this is compared against what we consider Danaher's underlying growth rate probably somewhere in the 6% quarter. Percent range when things get back to normal. So just trying to reconcile some of this underlying stack and is it just conservatism right now? Are things back to normal or maybe it's just too imprecise to do this analysis with COVID?

Speaker 8

Thank you.

Speaker 6

Yes, Dan, let me just give you the numbers because I think May we disconnect here. So I think the simple frame for Q4 is like we sort of talked about, we kind of increased our expectations call. And like you said, we were up in the base business. We think the base business is quarter. High single digits in Q4, which as you said, was probably a little closer to 10% here in Q3.

Speaker 6

Call. And I would look at that delta between kind of high single digits and 10, and say that that's really just more a function of kind of prudent planning, quarter. Given the current operating environment and some of the things we've talked about, in particular, think about quarter. Q4 and logistic challenges, etcetera, that might be there. So I think we're just trying to give a little bit of, from a planning perspective, high single digits from about the 10% quarter.

Speaker 6

But really not much of a change here in the environment.

Speaker 8

Got it. Okay, great. Thanks guys.

Operator

Quarter. We'll go next to Jack Meehan with Nephron.

Speaker 3

Good morning, Jack. Thank

Speaker 9

you. Good morning. Call. Just wanted a little bit more color, I guess, on the funding environment. Was curious as you look into the Q4, what customers might be telling you around quarter.

Speaker 9

The potential for a budget flush and what is the guidance assume kind of versus historical patterns?

Speaker 3

Call. So Jack, first of all, we see the funding environment across the board improving. So if we start with EAS, we do see customer quarter. Increasing. We do see more work occurring at the workplace.

Speaker 3

And with that, more projects call. Being tackled both in the capital as well as operating investment categories, call. And we would expect that to continue to improve here going forward as the economy continues to pick up quarter. As we think about life sciences, research funding is up, whether that's government funding, whether that's venture capital funding quarter. Or whether that is biopharma funding from the pharmaceutical companies, we've seen a step up here in an effort call.

Speaker 3

To take advantage of the opportunities that new breakthroughs in technologies that you're all aware of, as a result of COVID, call creating a great deal more awareness of the possibilities here in therapeutics. So we see, generally speaking, quarter. A great environment in the life science area, bioprocess we talked about with continued capacity increases to meet the needs of call. The very fast growing therapeutic pipeline. We talked about the fact that monoclonal antibody pipeline is up quarter.

Speaker 3

50% in terms of the number of projects over the last 5 years. Genomic, gene and cell therapy pipeline. It's up an order of magnitude, so 10x versus 5 years ago. So that's creating very healthy drive quarter. Whether that's in the research side of life sciences or in the bioprocessing.

Speaker 3

And then when you come back to diagnostics, quarter. Patient volumes are nearly at full rate, pre pandemic rates, if you will, quarter. In nearly every geography. And we continue to, of course, see COVID driving additional diagnostic demand. Quarter.

Speaker 3

And so across the board, a very positive funding environment. And we would expect that quarter. The one or the other budget is going to be taken advantage of here in the Q4. We'll see. There are a number of different perspectives there, but the environment quarter.

Speaker 3

Generally very positive.

Speaker 10

That's great.

Speaker 9

And then as a follow-up, just curious on Aldevron, how the quarter. Early integration feedback is going. And as I look at the Q4, you've given us the core guidance. What do you have M and A contributing 2.5 points

Speaker 6

quarter. Yes, so it would be probably sorry, go ahead, Ringer.

Speaker 3

No, go ahead, Matt, please.

Speaker 6

Quarter. Yes. No, the M and A contribution is probably going to be about it was $40,000,000 here in Q3. So I think you're probably pretty close with what you've got,

Speaker 1

quarter. $40,000,000

Speaker 3

So we actually coming back to the front end of your question there, I mean, we couldn't quarter. With both Aldebaran as an entity, but even more importantly, the team in Aldebaran that have quarter. Embraced joining the Danaher family, are embracing and pulling hard on the Danaher business system, and are really focused call on driving and growing their business. There is plenty of opportunity, as you likely know, quarter. In the core businesses of Aldebaran, and we see that.

Speaker 3

We see that in the order book. We see that in revenues, quarter. And we will see that also in their earnings contributions, all of which is running as we expected quarter. When we updated during the acquisition. So we expect to see $400,000,000 of revenue this year, growth rate in 20% plus range, and we expect to see $0.20 of EPS in year 1, growing to quarter.

Speaker 3

$0.30 of EPS in year 2. So Aldebron, incredibly pleased with quarter. The motivation and the engagement of the team and the important work that they're doing, I'm proud to have them as a part of the Danaher family.

Operator

Quarter. We'll go next to Matt Sykes with Goldman Sachs.

Speaker 10

Call. Good morning. Hey, good morning. Thanks for taking my question. Maybe just a follow-up on Jack's question on Devaron.

Speaker 10

Call. You guys had mentioned when you made the acquisition that they were relatively underexposed to international. And I know you've got a lot of things going on with the integration. But as you think about expanding Aldevron's footprint internationally, how are you thinking about that? And are there any kind of timelines that you have for that?

Speaker 3

Call. So very much a part of the investment hypothesis is to expand activities, as you say, internationally. And we, of course, are focusing 1st and foremost now on the transition into Danaher call. And are helping the team with their number one priorities, which are to take care of the expansions quarter that they are finalizing as we speak, and we're already in the process of the next set of those expansions. And so quarter.

Speaker 3

In terms of timeline, we'll talk about that when that becomes something that's call. On the top of the agenda, but currently it's all about ensuring an effective transition, taking care of our customers, Transitioning the team on to DBS and they're incredibly excited about that. And of course, subsequent expansions as we go forward.

Speaker 10

Quarter. Great. Thanks. And maybe just one follow-up. You're obviously generating an impressive amount of free cash flow and you've been very active in M and A.

Speaker 10

But what are your thoughts in terms of quarter. Inorganic investments as you move forward, looking at where you are in terms of leverage and what you want to accomplish.

Speaker 3

Call. We really like the way we're positioned, both in terms of the franchises quarter. And the platforms that we have as well as how we're thinking about our earnings flywheel. I talked about that earlier in the call, quarter. Driving that mid single digit plus growth, the double digit EPS expansion, and of course, then having a very strong balance sheet position quarter.

Speaker 3

In order to continue to prioritize capital allocation towards M and A. And as we think about quarter. Our balance sheet position, this year after the Aldebron deal, by the end of the year, we should probably be back to about quarter. 2 times net debt, 2 turns of EBITDA over net debt. And we think that puts quarter.

Speaker 3

And our funnels are active, and we continue to work as we always have at Danaher to ensure that call. We have the next deal ahead of us and take advantage of the balance sheet that we have. So we're very well positioned there. We feel good about where we sit.

Speaker 10

Quarter. Great. Thanks very much.

Speaker 3

Thank you.

Operator

We will take our final question from Luke Securray with Barclays.

Speaker 3

Call. Hey, thanks for squeezing

Speaker 11

me in. So just quickly on the backlog and you think you quarter. Raising your guidance there or your expectations of what you're expecting in 2020 to exit the year. Can you give us a sense of the mix between the vaccine and

Speaker 1

the therapeutic revenue,

Speaker 11

or how that order book is shaping

Speaker 3

quarter. Sure. So rough numbers here, Luke. Think about 85% vaccine, 15% therapeutics.

Speaker 8

That's roughly

Speaker 3

the those are the rough numbers there.

Speaker 11

Call. Okay. That's helpful. And then we were expecting a little more balance between the 4 in 1 and the just pure COVID test. So, can you give us a sense of the order there, quarter.

Speaker 11

How the orders are starting to shape up ahead of the flu season, it makes sense that we haven't had flu season yet, but, and then really how Trying to figure out how to think about the first half of twenty twenty one through that winter season.

Speaker 3

So in terms of the mix quarter. In Q3, we saw 80% COVID only, 20% 4 in-one test. Quarter. And as you think about Q4 here, we see that heading towards the fifty-fifty. So a good way to think about it is 50% quarter.

Speaker 3

The COVID only test in Q4 and 50% of the 4 in 1. Quarter. As we think about the first half of next year, I think the best way to think about it right now is quarter. The 45,000,000 tests that we've been talking about, and generally speaking, the same kind of quarter mix ratios that we have within flu seasons and outside of flu season. So within flu season, Probably around fifty-fifty is the best way to think about it, 4 in 1 and COVID only.

Speaker 3

And then if we're outside of the flu season, probably closer to eighty-twenty.

Speaker 11

Quarter. Got you. That's really helpful. Thank you.

Speaker 3

Got it. Thank you.

Speaker 1

Quarter. I

Operator

will now turn the program back over to Matt Cajunno.

Speaker 2

Thanks, Emma. Thank you, everyone, for joining us today, and we're around all day

Operator

this does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Danaher Q3 2021
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