Danaher Q4 2021 Earnings Call Transcript

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Provided by Quartr
January 27, 2022

There are 10 speakers on the call.

Operator

Hello. My name is Ashley, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's 4th 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.

Operator

I will now turn the call over to Mr. Matt Gugino, to Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Speaker 1

Thank you, Ashley. Good morning, everyone, and thanks for joining us on the call. With us today are Reiner 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 and other information required by SEC to the operator. Regulation G relating to any non GAAP financial measures provided during the call are all available on the Investors section of our website, to www.danaher.com under the heading Quarterly Earnings.

Speaker 1

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. To the call. A replay of this call will also be available until February 10, 2022. During the presentation, we will describe certain of the more significant factors that impacted year over year performance. The supplemental materials describe additional factors that impacted year over year performance.

Speaker 1

Unless otherwise noted, all references in these remarks and supplemental materials to company specific financial metrics to refer to results from continuing operations and relate to the Q4 of 2021 and all references to period to period increases or decreases and financial metrics are year over year. We may also describe certain products and devices, which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments 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 in our SEC filings, and actual results might differ materially from any forward looking statements that we make today. These forward looking statements 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.

Speaker 1

With that, I'd like to turn the call over to Rainer.

Speaker 2

Well, thanks, Matt, and good morning, everyone. We appreciate you joining us on the call today. 2021 was a tremendous year for Danaher, capped off by a very strong finish to the 4th quarter. Our well rounded performance throughout the year was highlighted by to our outstanding core revenue and earnings growth, as well as strong free cash flow generation. We're particularly pleased with the to the strength of our base business across the portfolio, which was up low double digits for the year.

Speaker 2

And we believe our accelerated innovation and to the company. Capacity expansion initiatives have helped us capture market share at a number of our businesses. Now these results are a testament to our team of to the company's 80,000 associates and their outstanding execution in what has been a challenging operating environment. Despite the uncertainty that has come to characterize life for all of us throughout the pandemic, our associates are showing up big every day, working longer shift, launching breakthrough products in record time and going above and beyond to support our customers. And they remain committed as ever to executing with the Danaher Business System.

Speaker 2

Really their dedication to serving to the global community is as humbling as it is inspiring and we're grateful for their invaluable contribution. The circumstances over the last several years have also shined a light on the high quality market leading franchises and technologies that now comprise Danaher. We're seeing the results of our purpose driven portfolio transformation in action today through higher growth and margins, stronger cash flow And a higher percentage of recurring revenue. We're exceptionally well positioned to continue this trajectory going forward and we see a very bright to the future ahead indeed. So with that, let's take a closer look at our full year 2021 financial results.

Speaker 2

We delivered 25% core revenue growth, 5.60 basis points of core operating margin expansion, to nearly 60% adjusted earnings per share growth and over $7,000,000,000 of free cash flow. We deployed $11,000,000,000 of capital towards acquisitions, closing 14 deals across all four of our platforms. To the largest acquisition, Aldevron, joined our life sciences segment in August, providing a fantastic beachhead for us in the important to the Frontier of Genomic Medicine. It's just a great example of how we're using strategic M and A to enhance our capabilities and bring greater value to our customers. Now throughout the year, we also made significant organic investments to accelerate to innovation across our businesses.

Speaker 2

Our R and D spend was up approximately 30% year over year and is now more than $1,700,000,000 annually. New products, which has the SCIEX XenoTOF 7,600 and the Triple Quad 7,500 and Leica Biosystems' Aperio GT 450 Digital Pathology Slide Scanner are driving share gains in their respective markets through proprietary innovation, while further enhancing our growth trajectory. To our Q1. Our total capital expenditures were $1,300,000,000 for the year, which reflects substantial investments to expand production capacity across our businesses, particularly at Cepheid, Pall and Cytiva. In bioprocessing, I'm really happy to report that our new single use technology plants in South Carolina and Beijing and our cell culture media expansion in Utah to the Q4.

Speaker 2

And at Cepheid, we more than doubled our production capacity for respiratory tests in 2021. For near term, we believe these investments have been critical to support customer demand and have helped us achieve meaningful market share gains. And they're equally important in the long term to support the significant growth opportunities we see ahead in these very attractive end markets. So now let's spend some time on the 4th quarter results. Our sales were $8,100,000,000 And we delivered 19.5 percent core revenue growth, with strong contributions from all three segments.

Speaker 2

We saw broad based strength across our base business, which was up approximately 10% in the quarter. Geographically, both the developed and high growth markets were up approximately 20%, led by nearly 25 to the Q1 of 2019. Gross profit margin was 60.7% and our operating profit margin of 26.4% was up 270 basis points, to the Q1 of 2019, including 2 40 basis points of core margin expansion. Adjusted diluted net earnings per share of 2 point to $0.09 were up approximately 30%. And now for the full year, we generated more than $7,000,000,000 of free cash to the Q1 of 2019.

Speaker 2

Well, up 30% year over year. In fact, our free cash flow to net income conversion was 112% for the full year And it marks the 30th consecutive year this figure has exceeded 100% for Danaher. So now let's go into more detail on our quarterly results across the segment. To the conference call. Life Sciences reported revenue increased 20.5% with core revenue up 17%.

Speaker 2

These strong results were broad based with most major operating companies achieving low double digit or better core growth. In fact, Aldevron delivered over 30% revenue growth in the quarter and finished the year with approximately $400,000,000 in total revenue. That business is off to a great start as part of Danaher, and we couldn't be more pleased with the team's performance out of the gate. Our core revenue growth in our bioprocessing businesses continued to outpace segment level results with Cytiva and Pall Biotech both up more than 25%. Non COVID related bioprocessing trends remain strong with our businesses growing low double digit again this quarter.

Speaker 2

We continue to support significant customer activity across the development and production of COVID vaccines and therapeutics, which drove $2,000,000,000 of revenue in 2021. Moving to Diagnostics, reported revenue was up 29.5% And core revenue grew 29%, led by greater than 75% core growth at Cepheid. To non COVID clinical diagnostic activity across all our operating companies, including Beckman Coulter Diagnostics, Radiometer to Analica Biosystems collectively drove high single digit core growth, as patient and testing volumes largely remained at or near to pre pandemic level. And we also saw an acceleration in demand across Cepheid's non respiratory test menu, led by sexual health, to hospital acquired infections and virology testing. To the company's Q1.

Speaker 2

This dropped the total number of respiratory tests to Shipt in 2021 to approximately 60,000,000 cartridges, more than 10 times the number of tests produced and shipped in 2019 prior to the start of the pandemic. In fact, our 4 in-one combination tests for COVID-nineteen, flu A, flu B and RSV represented approximately 50% of Q4 respiratory test shipments, while our COVID only test accounted for the remainder. Now let's move on to our Environmental and Applied Solutions segment. Reported revenue was up 4% 7.5 percent core revenue growth. Our water quality and product identification platforms both delivered high single digit to our core growth for the quarter.

Speaker 2

Now across our water quality businesses, strength was broad based globally across industrial

Speaker 3

to the Q

Speaker 2

and A. Customer activity accelerated with the support of strong funding environment and many projects that were put on hold during the pandemic have now resumed. ChemTreat delivered low double digit to our core revenue growth in the quarter to close out its 53rd consecutive year of growth. This is a tremendous accomplishment and a testament to the team's best in class commercial execution and commitment to continuous improvement. It's truly a differentiating combination, which has driven to market outperformance.

Speaker 2

In product identification, our packaging and color management businesses were up mid single digits And Marking and Coating was up approximately 10%. Videojet had its 3rd consecutive quarter of double digit to our growth led by strong demand in industrial and food and beverage end market. So with that as a backdrop for what we saw in the quarter, Let me highlight the trends we're seeing both geographically and in our end market. So a return to pre pandemic levels of activity is driving healthy customer demand across most major geographies. This is reflected in the strong results we've seen throughout both the developed and high growth markets and our strong order book growth, Which continues to trend above revenue growth.

Speaker 2

While certain regions have implemented targeted lockdowns to address recent COVID-nineteen outbreaks, We're not seeing any widespread declines in our customer activity. Now given the size and scope of our business, We're certainly not immune to ongoing supply chain constraints and inflationary pressures, We're proactively addressing these challenges across Danaher, leveraging the Danaher business system and tools such as daily management and working closely with our customers and suppliers to mitigate the impact. We're also using DBS to accelerate price actions and manage to cost pressures. In fact, we've achieved nearly 150 basis points of price each of the last three quarters, which is approximately double our historical price realization. Now in life sciences, We're seeing robust demand across all major end markets.

Speaker 2

Lab and customer site access is holding at pre pandemic levels, to the call today, evidenced by more normalized customer productivity, equipment installations and project initiation supported by a strong funding environment. Biopharma continues to be our strongest performing end market within the life sciences. The structural shift and treatment for biologics as the standard of care and the accelerating focus on genomic therapies are driving significant investment in research, to the development and production capacity across the sector. And we believe we're well positioned to support this work across to our $7,500,000,000 bioprocessing franchise. Now in addition, we continue to see significant demand related to development and production of COVID-nineteen vaccines and therapeutics, and we expect this activity to persist longer term.

Speaker 2

To our customers are planning for ongoing production with the assumption that there will be an enduring need for effective treatment and prevention as the world transitions to approaching COVID-nineteen as an endemic virus. And more broadly, to our customers increasingly view the potential applications of new mRNA modalities, including vaccines and other therapeutics as an important area for future investment. In the clinical diagnostics market, Patient volumes remain at or near pre pandemic levels. Our customers have largely adapted their protocols and procedures to manage through recurring outbreaks, allowing them to continue wellness checks, routine screenings and other diagnostic procedures. To the operator.

Speaker 2

While selective lockdowns are causing modest disruptions in certain regions, like pockets of China and Europe, We're not experiencing any material widespread negative impact from these measures. In molecular diagnostics, global demand persists for Cepheid's point of care PCR respiratory tests, further heightened as a result of the recent global surge of the Omicron variant. Additionally, we're seeing a more to the active respiratory season in the Northern Hemisphere, driving customers' preference for our 4 in-one combination test. And we expect both of these trends to continue into the Q1. Now in light of these dynamics and conversations we're having with our customers about their expectations for the upcoming year, we anticipate shipping the same number of respiratory tests in the first quarter as we did in the Q4 and approximately 50,000,000 tests for all of 2022.

Speaker 2

In 2021, CECI had placed a record 10,000 new GeneXpert systems, to bringing the total installed base to more than 40,000 systems worldwide. The team's thoughtful approach to placing systems throughout the pandemic focused on both the near and long term value this technology can bring to our customers. More recently, we've seen several existing healthcare to the next slide. We will now begin the call to our operator for the Q and A session. To the Q1 of 2019.

Speaker 2

The scalability and unique architecture of the GeneXpert, where the same test cartridges are used on higher and lower throughput instruments with the broadest test menu in the market to provide our customers with the confidence that they will achieve consistent reference lab quality results, whether they're testing in an urgent care clinic to Ora Central Hospital Lab. So now looking ahead, with the assumption that COVID-nineteen will be an endemic disease, We believe that the point of care molecular respiratory testing market will expand significantly from where it was prior to the pandemic. Given Cepheid's leading test menu and installed base, combined with an advantage positioning around speed, accuracy and workflow, We believe Cepheid will continue to gain share in an endemic environment. So moving on to the applied markets, customer activity is largely back to pre pandemic levels, which we see in robust order rates for both consumables and equipment. In fact, project oriented activity is accelerating with an improving funding environment And more normalized site access has prompted the resumption of many projects and installations that were put on hold in the throes of the pandemic.

Speaker 2

So now let's look ahead to our expectations for the Q1 full year. Beginning with the Q1 of 2022, we will now include the impact of COVID vaccine and therapeutic to the Q1 of 2019. This change is driven by our greater confidence and the durability of our COVID related vaccine and therapeutic revenue as the virus turns endemic. So now for the Q1 and full year 2022, we expect our base business to our core revenue growth to be in the high single digit percent range. Additionally, we expect to generate operating profit fall through to the Q1 of 35% to 40% in the Q1 and for the full year 2022, up from historical and pre pandemic rates between 30% 35%.

Speaker 2

So now to wrap up. 2021 was another terrific year for Danaher. Our team to the execution of our challenging environment to deliver outstanding financial performance, all while supporting our customers and directly contributing to the global fight against COVID-nineteen. We're seeing the results of our purpose driven portfolio transformation in action to to growth, expanded margin, stronger cash flow and higher recurring revenue. We're a better, stronger company today And there's tremendous runway ahead for us to continue building upon this foundation.

Speaker 2

With the Danaher Business System as our driving force, to our talented team and resilient portfolio of businesses. We believe Danaher will continue generating sustainable long term shareholder value for years to come. And with that, I'll turn the call back over to Matt. Thank you.

Speaker 1

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

Operator

And we'll take our first question from Tycho Peterson with JPMorgan. Please go ahead.

Speaker 4

Hey, good morning. Ryan, are you guided for the base business to grow high single digit? Can you maybe just give us latest thoughts on vaccine and

Speaker 5

to the Q2. I know you previously talked about this $2,000,000,000 backlog heading

Speaker 4

into the year. So have any of the assumptions around vaccines and therapies changed?

Speaker 2

So just to confirm, that's right. For 2022, we're guiding the base business to high single digits. And no, our assumptions as it relates to the Vaccine and Therapeutics business have not changed. We saw continued strength in our orders. In fact, orders exceeded our sales here in Q4 and we continued to build backlog.

Speaker 2

At the same time, we have to say that from a roughly 70% comp, we were down about mid teens in terms of the orders growth. Nonetheless, orders still outpace sales, we built backlog and we're looking forward to roughly flat sales in the bioprocessing business to our Q1 results for Vaccine and Therapeutic Revenues in 2022. Now the core business, so in other words, to the non vaccine and therapeutic related business for COVID. We expect that to continue to grow, of

Speaker 4

And have any of the Aldebaran assumptions I know you previously talked about $500,000,000 this year growing greater than 20%.

Speaker 2

They're right on the mark. Dollars 500,000,000 is a good number. That's a kind of growth and slightly better than we expected here, closing the year off right around 400,000,000 Well, Aldevron is right where we think we should be and performing at our expectations.

Speaker 4

Okay. Maybe last one from Agru. Environmental and Applied operating margins were down quite a bit, I think 4 10 basis points. Can you maybe just touch on what drove that decline?

Speaker 5

Yes, sure. Like you said, it was down 4.10% here in the quarter. It's probably three things. I would say, first, that's probably the area that we accelerated the investment spend the most in the Q4, given obviously a pretty across the entire portfolio. I think we took an opportunity in the Q4 to kind of Overcharge a little bit of the investment there at EAS.

Speaker 5

So I think that's probably the first thing. I think the second thing is the supply chain. The challenges I would say there are probably modestly more pronounced at EAS than they are elsewhere, Tycho. There's a kind of a high number of legacy products here, that probably, I would say, have more specialized components and really what's happening is kind of those specialty components are a little bit harder to procure, especially in this environment So largely offsetting that with daily management and doing some spot buys and some other product redesigns, etcetera. But I think a little bit more kind of to supply chain issues there.

Speaker 5

And then lastly, I think if you think about there was a bit of mix issue here too with Trojan, which is a bit lower margin business being up. I think it was even north of 20% in the quarter. So And so I think despite that though, the good news is, like I said, I think the team is doing a pretty good job using DBS to drive it. From What we think and what we've seen here, it looks like even because of all that, I think we took some share here in Q4 and definitely in to Q1 and that's really a result of being able to get through those challenges and still meet customer demand.

Speaker 4

Great. Very helpful. I'll leave

Speaker 2

it at that.

Operator

And we'll now take our to the next question from Derik De Bruin with Bank

Speaker 2

of America. Please go ahead. Thanks.

Speaker 3

Thanks for taking the question. This is Mike on for Derik. Hey, thanks. First of all, I'll focus on Cepheid both in 2022 and post pandemic. Given you're saying 19,000,000 tests again in 1Q, it seems like you're seeing a pretty strong drop off in 2Q and 3Q.

Speaker 3

And you do sound a pretty confident duration, COVID being endemic to the POC market expanding successfully going forward, you need to take market share. So could you give us Could you give us some more color on continued market share gains, the 10,000 boxes you placed this year, sort of what are your expectations going forward? And just is that $50,000,000 testing, is that sort of assumed that that's going to be the run rate beyond that? Or do you expect continued sort of Deterioration in COVID revenues is offset by other MDX.

Speaker 2

I'll start with, as you know, the situation around COVID is incredibly dynamic, right? It started with the assumptions that we made around Delta and then Delta spiked and we thought that might become the dominant variant and then omicron came 60 days ago So the environment is incredibly dynamic. But in the discussions that we have, both with public health to the public officials, but also with our customers. I think there's a couple of takeaways. The first one is that, we do think that COVID is going to turn endemic and a lot of public health officials will talk about the end of 2023, Perhaps the beginning of 2024 being that timeframe when we call it endemic with greater confidence.

Speaker 2

As we look at our customer feedback and what they see happening here, That's what we're triangulating for 2022 into the $50,000,000 test area. And as we've talked about, we see to our base business in 2022 growing at high single digits and essentially having as a result of the step down from to 60 to 15, 2022 at 200 to 300 basis point headwind there. Now as we think about that going forward beyond 2022, to We think there's and once again in the discussions with our customers that there's still a likelihood that there will be to a large respiratory testing business, much larger than pre pandemic in 'twenty three and beyond. And once again, in the early days, and this could change, it's so dynamic. But we're thinking that that probably steps down again in 2023 and our working number there for now is right around to 30,000,000 tests.

Speaker 2

So as we think about the year 2023 and COVID testing, we see that going from $50,000,000 in 2022 to perhaps $20,200,000 but that's a number that of course, There's a lot of dynamic. There's a lot to happen between now and then, but that's sort of the planning number that we're working with. At the same time, as you think about 2023, we see our base business, of course, the primary aspect of our total business continuing to grow up the strength of our portfolio. We've rerated our growth rate and discussed that at several occasions. So we feel really good about how we're moving forward and like to set up.

Speaker 3

Okay. Really appreciate the color there. And maybe one for Matt. You had some color on the pricing power going forward. I think you called out 150 basis points price in the 4th quarter throughout the second half or the last three quarters.

Speaker 3

Could you comment on how much further runway do you see in 2022 if we continue to be in an inflationary environment to pass on price to your customers, any pushback you're seeing again in any of the end markets. And just in general, the comments on the higher fall through in the business, Labor pressure, logistics obviously in the news a lot, but how are you navigating that this year and implications for margins for the year?

Speaker 5

Yes, sure. No, I mean, I think as far as price goes, like you said, we saw kind of 150 basis points here in Q4. And I think that we've seen that for the last couple of quarters. I think that's a pretty good placeholder to put in for 2022. Teams are obviously over the last 6 months we've been working harder to get that price and I think you're seeing it show up.

Speaker 5

I mean, it's basically 2x the price we used to get, call it, 5, 6 quarters ago. So I guess a good place to start for 2022. As far as margins go, just kind of maybe overall, I know we sort of put out a guide for 2022, Call it 35% to 40% fall through and that's down a little bit from where we've been kind of more in that 40% to to 45%. But I think that 35% to 40% kind of incorporates a little bit of what you're talking about. I think it's kind of in line with what we thought, frankly, our longer term outlook was going to be.

Speaker 5

But if I think about year over year from 2021 to 2022, I think You're right. I think a component of sort of the step down is going to be a little bit of the return to work and maybe some of the inflationary pressures that we see offset by price. The other piece really is going to be largely on the volume step down that we see and that's mostly going to be at kind of A mix type issue. So throw in some FX headwinds and share count and that's how I sort of I'm thinking about The 40% to 45% in 2021 going down to 35% to 40%. But I think the good news is that's pretty much in our long term framework right where we thought.

Speaker 5

And I think it's also probably important to think about it that even though we're seeing headwinds on the testing front this year, call it 200 to 300 basis points, No, our COVID testing revenue is pretty much at the fleet average, right, which is why it's not a big step down for us. It's pretty much fleet average from a margin perspective. So I think it's, that helps kind of on as we navigate the headwinds here.

Speaker 3

Great. Thanks so much. Appreciate it.

Operator

To the operator. And we'll take our next question from Vijay Kumar with Evercore. Please go ahead. Your line is open.

Speaker 2

Hi Vijay.

Speaker 6

Hey guys. Hi, Brener. Congrats on a solid print here. I guess one on Just the guidance here, fiscal 2022, some clarification. So your definition of core now includes vaccines.

Speaker 6

And I think that's comparable to how your largest peer looks at core organic. But vaccines, if I just understood you correctly, it's flattish year on year, which means your base to Danherb Ex WACC, that's really growing at the very high end of high singles. Is that the right way to think about this guidance here on the base business? And what's driving this SaaS trend? It looks like it's assuming perhaps bioprocessing growing double digits, that's well above your LRP.

Speaker 6

So I'm sure there's some comments on bioprocessing.

Speaker 2

Sure. So once again, just to level set, the base business includes bioprocessing for COVID vaccines and therapeutics. Important to note that. And in fact, we see the entire base business growing both for the quarter and the full year at high single digits. And that's driven by a number of factors.

Speaker 2

1, As you just suggested, of course, the non COVID bioprocessing business is still growing at the low double digits to the processing business. So as you think about our diagnostic businesses, as you think about our life science instruments and so forth. We see them growing very strongly, on the back of the investments that we've made around innovation, additional feet on the street and really driving the growth here. Keep in mind, that portfolio transformation that we've talked about to the company as rerated our base business growth and we continue to see that. We saw that here in the 2 year stack in 2021 And you're seeing that here in the guide for 2022.

Speaker 6

Understood. So I guess now we have clarity on what the mid single digit plus, what the plus Yes. That's helpful, Rainer. Maybe one for Matt. The 35% to 40% incremental margins here, Matt, Is that sustainable going forward?

Speaker 6

Should we I guess my question is most of your peers who have benefited from COVID tailwinds, There is a cliff here or perhaps a transition year. It seems like Danford does not have a cliff here. Maybe talk about to the sustainability of incrementals and why perhaps the drop down in co tailwind shouldn't be a headwind for Dan Hur?

Speaker 5

Yes. I mean, I think that's right, Vijay. I think like I just kind of said, I mean, our COVID kind of revenue, both vaccine, therapeutic and the testing. It's more or less at fleet average, Right. And so what I think you're seeing here, part of the reason we talked about the rerating of the portfolio from a growth perspective, as we just mentioned, plus We've also talked about the fact that the portfolio is rerated from a margin perspective too, right?

Speaker 5

We used to be more 30%, 35%, now we're 35%, 40%. And I think what you see here is that as we go forward and think about kind of what a margin profile looks like, I think I feel very comfortable with the 35 To 40% and the fact that, yes, like you said, we'll have some revenue headwinds. We're going to have some volume headwinds, testing like we sort of laid out. We can talk about 23, maybe if you're interested. But I think as we get to those headwinds, it won't be above the fleet Headwind, if you will, from a decremental perspective.

Speaker 5

So while it will be a headwind, and I think you can obviously, you see that a little bit here in 2022. From a margin perspective, it's not going to be overly burdensome.

Speaker 6

That's fantastic. Helpful, Matt. Thank you, guys.

Operator

To the next question from Scott Davis with Melius Research. Please go ahead. Your line is open.

Speaker 7

Hey, good morning, everybody. Congrats on a great year overall. But anyways, Ronner, I was hoping you could talk a little bit about M and A, given that growth assets seemingly are out of favor In public markets, fairly meaningfully, has that kind of gone down into private markets at all and helped you out on the valuation side much? If you could talk about that and the pipeline, please.

Speaker 2

Sure. Well, I mean, first of all, to the environment that we see out there, This is an environment that over our history, we have thrived in, whether you want to call this Anxiety or uncertainty or even in times of dislocation, we've always viewed this as an time of opportunity for ourselves. And there's examples of that. If you think back to the financial crisis now going back some years, We acquired SCIEX at that period of time, and that turned out to be a fantastic asset. The team has done a wonderful job.

Speaker 2

Also, if you think about some of the anxiety around Cepheid or Nepal deals there, that has We couldn't be more proud of how the teams have performed there and turned those businesses into really real powerhouses. And so we sit here in this environment with a rock solid portfolio, an outstanding team, and a strong balance sheet and a great deal of optionality, and And we like that setup. And so as we think about our funnels and to your questions, they continue to be as active as ever. To the call. They covered the gamut, whether that's public or private, and we'll continue driving our M and A strategy and our bias towards to allocating capital towards M and A as we have in the past.

Speaker 2

And that will happen when that attractive end market, that to our first class asset with competitive advantage meets our financial hurdles here as has always been the case. So we like what we said and we like the setup.

Speaker 7

That's helpful, Reiner. And Reiner, you talked about new product launches like Leica and Beckman. Okay. How has COVID impacted those launches? Is there a were these things perhaps that were Pushed back a little bit because of COVID, were they on schedule, with customer response and ability to get out and see the customer with that product, has that all been Altered or changed and just a little bit of color there would be helpful and then I'll pass it on.

Speaker 7

Thanks.

Speaker 2

Sure. In our case, COVID has actually accelerated innovation Of course, in the obvious sense and that we were able to pull forward the GeneXpert COVID only test subsequently and very quickly thereafter the 4 in-one. Those are sort of the obvious examples, but at the same time, to the operator. You've noted that we increased our R and D expenditures by 30% up to $1,700,000,000 which has manifested in us Going forward innovation, accelerating it and getting those into the market. And examples were mentioned, the triple to Quad 7,500 most sensitive triple quad in the market, the XenoTalk Outstanding.

Speaker 2

And then of course, the GT450 pathology slide imaging, to fantastic launches here, all of which was accelerated by the pandemic and we were able to turn That into real opportunity for us.

Speaker 7

Great. Okay. Good luck in 2022 guys. Thank you.

Speaker 2

Thank you.

Operator

And we'll take our next question from Dan Brennan with Cowen. Please go ahead. Your line is open.

Speaker 2

Hi, Dan.

Speaker 8

Great. Thank you. Thanks. Hey, good morning and congrats on the corner. I guess the first question just on the vaccine therapeutics outlook Now that you're including it in the base, we were assuming in our model a pretty steep drop off in 'twenty three and 'twenty four just as we go from initial to 2 dose regimens down to boosters and while booster uptake looks good, it's probably not going to be nearly as good as the initial vaccines.

Speaker 8

So I guess First question, I mean, is that reasonable to think there's going to be a healthy step down, number 1? And then number 2, the fact that you're including it in the base, Just wondering, I know previously you've discussed Cytiva kind of high single digits. Is that still fair to think about the high single digits now that you've got

Speaker 2

to. Sure. Well, let's start off with the why is vaccine and therapeutics in the base. And that just comes from our belief of 2 things. 1, that COVID-nineteen will be endemic and that there will be a continuous requirement for vaccination.

Speaker 2

And that is going to be a global requirement. We also think that new age groups, will receive vaccination more broadly in the world, kids in particular. And as such, there is a strong recurring demand there. And that was discussed in some of the previous questions. But if we back up a minute here and we think about this longer term and talk about our 2022 guide here with high single digit growth in our base business.

Speaker 2

And we talked about the to 300 basis points of headwind coming from testing. As you think forward now, how does all that play out, let's say, in 2023? And once again, it's important to start with the base, which is at the center of your question, which is, okay, well, we have this rock solid portfolio that's transformed over the years that's going to be mid single digit plus growth and is going to have a different earnings profile as well as Matt just talked about. And then inside of that, of course, you do have vaccine and therapeutic revenues from COVID, and that will continue. There are new therapeutics being developed and there are also a lot of additional vaccines that are still in the pipe.

Speaker 2

And And then as you think about COVID testing, as I talked about, we see that stepping down to what We'll call it a more endemic look from 50,000,000 tests in 2022 to 30,000,000 tests in 2023. Now when you wrap all of that up, and of course, there's a lot of things that are still up in the air in terms of the number of fights you might have in between. 2023 really looks a lot like 2022 in terms of how we think of the base growth going forward as well as our fall through.

Speaker 8

Excellent. And maybe as a follow-up, just one more on bioproduction, if you don't mind. Certainly, the low double digits is impressive growth, particularly on the size of your business. To some of the CapEx that we've seen in the industry that was really accelerating. Landa talked about, I think, in their guidance 40% plus type of CapEx growth In 'twenty two on top of 40% in 'twenty one.

Speaker 8

So I'm just wondering, could you give a little color on maybe the order book there, like on the base business, kind of what you're seeing and I'll be in like a period of like hyper investment where maybe that low double digit could have some upside here over the next couple of years? Thank you.

Speaker 2

Sure. So we do continue to talk about the low double digit growth rate for the non COVID to the Bioprocessing business. That's what we've seen for many quarters. But we also talked about the fact that our backlog continues to build there. And these announcements that you're seeing here out in the market, those are important indications of the strength of the industry and the market, in and of itself.

Speaker 2

And of course, you can imagine with the breadth of our portfolio, our global reach, that we play, if not on all, on the great majority of those kind of investments. And so could there be upside? Sure, there could be. But of course, we're looking at the order book, and that's in hand and thinking about how that developed, and we'll continue to update. But for now, low double digits in the non COVID bioprocessing business is a good planning number.

Speaker 8

Great. Thanks, Ryan, and thanks, Matt.

Operator

And we'll take our next question from Jack Meehan with Nephron Research. Please go ahead.

Speaker 9

Hi, Jack. Good morning. Hello. So one of the big questions we've been getting is the Fed is looking to start raising rates. Just would be Great to get your thoughts around durability of demand from biopharma customers.

Speaker 9

And how much of a factor do you think higher rates could have on demand? And then finally, maybe any color on mix between development and commercial and interplay on those two sides of the market?

Speaker 2

Could you I'm sorry, could you repeat the second question, please? It came through a little garbled.

Speaker 9

Sure. Sorry. Just thoughts on how higher rates might influence demand from customers on the development side versus those with

Speaker 2

to Commercial Products. Understood. Well, let's start with the rates. It's early days, of course, and we'll see where those go. As we look at the markets that we play in more broadly, the impact of those rates could be different.

Speaker 2

But generally speaking, We see our end market to be able to perform and drive growth Even in a market where we see incrementally higher fed rates. And examples of that would be, if you look at biotech and aggregate, You see that the cash positions in these companies is extraordinarily high. We continue to see investments going in there strongly. And so we don't anticipate any near term impact due to Fed rates in that particular area. And I would, of course, overlap with the development part of your question.

Speaker 2

And as it relates to those that are already in commercial production, They are out there driving growth and ensuring the penetration of these incredibly efficacious biologic drugs, not just in the developed markets, but increasingly also in some of the higher growth markets. So we see really the demand drivers here going beyond to any one country's monetary policy and continue to see that in a very positive light. So, Fed policy is one thing. To the specific markets that we play in, we would see less impacted by any of the incremental rate increases that are being discussed.

Speaker 9

Great. And then Dan just asked about CapEx going in on the CDMO side. Wanted to ask a similar question, but focused on all the CapEx going in from the bioprocessing players. Back at the Analyst Day, you talked about $1,500,000,000 of your own CapEx. Some Some of your peers are talking about a lot of more investment going in the single use and just bioprocessing broadly speaking.

Speaker 9

So as you look across Everything going on, just talk about supply versus demand and how you feel, whether that just your views on that broadly speaking.

Speaker 2

Sure. Well, let me characterize that a little bit. So the large CDMO investments that you see there Are really a derivative of what we talked about in your question before, which is the strength of the biotech market. These are typically smaller companies that don't want to invest their precious cash in the manufacturing facilities and will outsource that to CDMOs. And as we talked about, if you think about the fact that just in monoclonal antibodies over the last 5 years, we've seen A huge increase in the number of projects in the funnel.

Speaker 2

If you think about nucleic acid therapies, there we've seen a 10x increase in the development funnel. And now you're seeing those work their way through the clinical trial process and that requires capacity. So that's what to the CDMO investments are about. And of course, the customer our customers are also CDMOs and we're helping them build those capacities so that they can take care of those developments going forward. And then we also continue to see drugs going commercial.

Speaker 2

And as these drugs go commercial, that's a 10x and a 100x increase in production capacity requirement. And all of this then, if you aggregate that, is what's pulling on our demand and is why we are so confident in the investments that we've made. And I mentioned this not just for the short term, which of course is important to ensure that there are no supply bottlenecks as we work our way through the pandemic here, And also for the long term, so that we continue to be that partner of choice that has the broadest portfolio, can integrate that portfolio horizontally and can deliver it to the point of impact around the globe with the necessary experts to help our customers get their drugs in the market more quickly and at a lower cost.

Speaker 9

Thank you, Einar.

Speaker 2

Thank you.

Operator

To the next question from Patrick Donnelly with Citi. Please go ahead. Hi, Patrick.

Speaker 5

Hey, Rainer. Thanks for taking the questions. I just wanted to follow-up on the bioprocessing piece. I know you touched a little bit about what the cadence Could look like going forward, but that's certainly the question I think we get the most from investors. I just wanted to circle back on it.

Speaker 5

I mean, it sounds like you feel really good about that underlying base business Growing in the low double digits. And then the vaccine piece, maybe a little bit more of a variable. But can you just talk, I guess, about the trajectory? It sounded like 22 is a decent proxy where maybe COVID comes down and you shake out somewhere in the mid high single digits as

Speaker 2

a whole for that kind of $7,500,000,000 business.

Speaker 5

But I was just hoping you could talk a little bit about the puts and takes as we go through kind of the next few years. And again, that vaccine piece comes down, but the base business Seems like it's good enough to offset that and then some, but just wanted to get a better handle there.

Speaker 2

No, I think that's right. As we look at 2022, I mentioned The COVID related vaccine and therapeutic bioprocessing business will probably be roughly flat here in 2022. Again, the assumption being that we're starting to see the pandemic going endemic on the one hand. On the other hand, what you start seeing to happen is, if you will, We're going from 1.0 compound to 2.0. So some vaccines and therapeutics are viewed as less to the next question.

Speaker 2

I'm very pleased with the current variance and so those become less of a factor. On the other hand, you have new to monoclonal antibodies, as therapeutics starting to be proposed that show much higher efficacy here with the variance that you have. And then for those that are already in market and quite effective, we're starting to see the recurring revenue, as those companies are starting to recognize the recurring need for booster shots, not just here, but around the globe. So we think that that's a good baseline to move forward with and how to think about And we continue to view, as we've said in our long term guide around the bioprocessing business, that that's a high single digit grower. And I think that's The way to think about it in 2022 and as we said, we think 2023 will look a lot like 2022 as well.

Speaker 5

Okay, great. No, that's helpful. And I know the order book typically you're taking orders for within a year. Is any of that building into 23 yet or should We think about that as mostly a 12 month order book, and then maybe conversations beyond that.

Speaker 2

It's a 12 month order book, and conversations beyond that.

Speaker 5

Okay. And last one, just same topic for Matt. Margin profile COVID versus not for the bioprocessing, it's pretty similar, right?

Speaker 3

I just want to double check on that.

Speaker 5

Yes. In bioprocessing margin difference between COVID and not, is that what you're asking? Yes, exactly. Yes. No real difference.

Speaker 5

I mean, we're I would say that it's all again, just depending on mix of what goes in there product wise, but no margin profile wise.

Speaker 4

Great. Thanks, guys.

Operator

And this will conclude today's Q and A portion for for the call. I will turn the call back over to Matt Gugino with any additional remarks.

Speaker 1

Thanks, Ashley, and thanks, everyone, for joining us on the call today. We're around all day for questions.

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Key Takeaways

  • In 2021, Danaher delivered 25% core revenue growth, expanded core operating margins by 560 basis points, grew adjusted EPS by nearly 60%, and generated over $7 billion in free cash flow.
  • Fourth‐quarter sales reached $8.1 billion with 19.5% core revenue growth, a 10% increase in the base business, 270 basis points of operating margin expansion to 26.4%, and ~30% EPS growth.
  • Life Sciences core revenue rose 17% (led by Cytiva and Pall Biotech up >25%), Aldevron added ~$400 million in its first year, Diagnostics core was up 29% (Cepheid +75% with ~60 million respiratory cartridges shipped), and Environmental & Applied Solutions grew core revenues by 7.5% with ChemTreat’s 53rd year of growth.
  • Danaher increased R&D spend by ~30% to $1.7 billion and invested $1.3 billion in CapEx in 2021, including doubled Cepheid respiratory test capacity and new single-use bioprocessing plants in South Carolina and Beijing.
  • For fiscal 2022, management expects the base business to grow at high-single-digit core revenue rates, operating profit fall-through of 35–40%, and plans to ship ~50 million point-of-care respiratory tests as COVID-19 turns endemic.
AI Generated. May Contain Errors.
Earnings Conference Call
Danaher Q4 2021
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