Danaher - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered modest growth and solid execution: revenue $6.54B (+2.0% YoY), core revenue +1.0%, adjusted diluted EPS $2.14 (+2.4% YoY), and free cash flow $1.50B, with gross margin up 50 bps to 59.5% and adjusted operating margin 29.6%.
• Biotechnology led with high single-digit core growth; Life Sciences improved modestly; Diagnostics declined 2% on China VBP and a slower respiratory season, though Cepheid respiratory revenue materially beat internal expectations ($0.55B vs. ~$0.35B).
• Guidance: Q1 2025 core revenue low-single-digit decline; FY 2025 core revenue ~+3%; adjusted operating margin ~26.5% in Q1 and ~28.5% for FY 2025; management expects a 2% FX headwind for 2025.
• Stock-relevant catalysts: accelerating bioprocess order momentum (six consecutive quarters of high-single-digit sequential growth), Cepheid installed base >60,000, and $1.9B buybacks (~8M shares) into Q1 2025; headwinds include China VBP acceleration and respiratory normalization to ~$1.7B in 2025.

What Went Well and What Went Wrong

• What Went Well

  • Sustained bioprocessing recovery: “six consecutive quarters of high single-digit sequential order growth,” with Q4 revenues primarily driven by consumables for commercialized therapies.
  • Margin and cash flow strength: adjusted operating margin 29.6% (+90 bps YoY) and free cash flow $1.50B in Q4; FY free cash flow conversion ~135% per management.
  • Cepheid respiratory outperformed: ~$550M Q4 revenue vs internal ~$350M expectation, and installed base now >60,000 instruments globally.

• What Went Wrong

  • Diagnostics core revenue down 2% on China VBP and slower respiratory season; Leica/Beckman strength offset by China volume-based procurement and reimbursement cuts.
  • Life Sciences caution for 2025: management guided tools low-single-digit up, but Pall and Genomics down initially; Q1 mid-single-digit decline with improvement through the year.
  • Genomics consumables softness and Aldevron behind deal model due to slower end markets; Abcam tracking close but still early.

Transcript

Operator (participant)

My name is Madison and I will be your conference facilitator this morning. At this time I would like to welcome everyone to Danaher Corporation's fourth quarter 2024 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a live question and answer session. If you would like to ask a question during that time, simply press Star then the number one on your telephone keypad. If you would like to withdraw your question, please press Star then the number two on your telephone keypad. I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

John Bedford (VP of Investor Relations)

Good morning everyone and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer, and Matthew McGrew, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, the slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G, and a note containing details of historical and anticipated future financial performance are all available on the Investors section of our website www.danaher.com under the heading Quarterly Earnings. 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 February 12, 2025.

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. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to results from continuing operations and relate to the fourth quarter of 2024, and all references to period-to-period increases or decreases in 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 that they are made, and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Rainer.

Rainer Blair (CEO)

Thank you John and good morning everyone and we appreciate you joining us on the call today. We finished the year strong with better than anticipated core revenue in all three of our segments and we were particularly encouraged by another quarter of positive momentum in our bioprocessing business and the improving performance in our life sciences instruments businesses. Our team's disciplined execution also drove solid cash flow and operating profit margin expansion. Now, throughout 2024, our 63,000 associates demonstrated an unwavering commitment to leading and executing with the Danaher Business System which enabled us to successfully navigate a dynamic operating environment. Now their dedication not only drove meaningful process improvements across our businesses, it also delivered impactful innovations for our customers, both of which are positioning Danaher for sustainable long term success.

Now, looking to 2025 and beyond, we believe Danaher is better positioned than at any point in our 40-year history. The transformation in our portfolio since the beginning of the pandemic has shaped us into a focused life sciences and diagnostics innovator with an A-rated long-term growth, margin, and cash flow profile. Our differentiated science and technology portfolio paired with the power of DBS and our talented team positions us well to create long-term shareholder value while making a meaningful positive impact on human health. With that, let's take a closer look at our full-year 2024 financial results. Sales were $23.9 billion, and core revenue declined 1.5%. Our adjusted operating profit margin of 28.6% was essentially flat year-over-year, and adjusted diluted net earnings per common share were $7.48.

We also generated $5.3 billion of free cash flow resulting in a free cash flow to net income conversion ratio of approximately 135%. Strong free cash flow generation is one of the most important metrics at Danaher, and 2024 marks the 33rd consecutive year of free cash flow to net income conversion which exceeded 100% and speaks to the differentiated quality of our earnings and business models. Now, through 2024 and into the start of 2025, we deployed approximately $7 billion of capital towards the repurchase of 28 million shares of Danaher common stock. This includes approximately 20 million shares purchased in the second and third quarters and approximately 8 million shares purchased in the fourth quarter and into January 2025. We also remained active on the M&A front completing several strategic acquisitions during the year.

Now these acquisitions bring innovative technologies and solutions that further strengthen our competitive advantages and position us for sustained long-term success. Now we also continue to make substantial investments in innovation throughout the year, enabling the launch of several groundbreaking technologies that are advancing our customers' critical work in biotechnology. Cytiva introduced the Sefia Cell Therapy Manufacturing platform which is helping address critical cost and capacity constraints associated with CAR T cell therapy manufacturing. The efficiencies customers gain through the Sefia platform have the potential to increase patient access to these life-saving therapies. In life sciences, Beckman Coulter Life Sciences introduced the Cydem VT Automated Cell Culture System which simplifies and accelerates the cell line development process, enabling pharmaceutical researchers to bring therapies to market faster.

And in diagnostics, Beckman Coulter Diagnostics made significant strides in expanding the cardiac and blood virus menus on the DxI 9000, our next generation high resolution immunoassay analyzer. With sensitivity 100 times greater than traditional immunoassay systems, the DxI 9000 is enabling faster and more accurate patient diagnoses and ultimately paving the way for precision diagnostics. These are just a few examples of how our innovation engine is driving long term growth and helping customers solve some of the most important health challenges impacting patients around the world. So now let's turn to our fourth quarter 2024 results in more detail. Sales were $6.5 billion in the fourth quarter and we delivered 1% core revenue growth. Geographically, core revenues in developed markets were essentially flat with a low single digit decline in North America and a low single digit increase in Western Europe.

High growth markets were up low single digits with solid performance outside of China, more than offsetting a mid single digit decline in China. Our gross profit margin for the fourth quarter increased 50 basis points year over year to 59.5%. Our adjusted operating profit margin of 29.6% was up 90 basis points, driven primarily by the positive impact of cost savings initiatives. Adjusted diluted net earnings per common share of $2.14 were up 2.4% year over year and we generated $1.5 billion of free cash flow in the quarter. So now let's take a closer look at our results across the portfolio and give you some color on what we're seeing in our end markets today. Core revenue in our Biotechnology segment increased high single digits year over year, with our bioprocessing business up high single digits and our discovery and medical businesses up low double digits.

In bioprocessing, the gradual recovery we saw through the year continued into the fourth quarter. We were particularly encouraged by the sustained positive momentum in our order book which grew high single digits sequentially and this represents the sixth consecutive quarter of high single digit sequential order growth. Revenue growth in the quarter was primarily driven by consumables supported by robust demand for commercialized therapies. Equipment demand, while improved, remained subdued as customers continue to be cautious with their capital spending now. In China, underlying activity levels were relatively stable but weak as customers faced ongoing challenges in a difficult funding environment. But the continued progress we're making in our business coupled with healthy underlying market trends reinforces our confidence in the long term outlook for Cytiva's bioprocessing franchise.

Monoclonal antibodies, which comprise more than 75% of our bioprocessing revenues, remain the largest investment area for our customers, and 2024 was a near record year of FDA approvals for new monoclonal antibodies. At the same time, biosimilar development and production are increasing as patents on high volume therapies expire, making life saving treatments more accessible and driving broader adoption. With our comprehensive portfolio and an innovation engine focused on increasing yields and enhancing manufacturing efficiencies, we believe we're very well positioned to support our customers today and for the long term. Now turning to our Life Sciences segment, core revenue increased by 1%. Core revenue in our life sciences instrument business was up, slightly exceeding our expectations. In the U.S. and Europe, we saw modest demand improvements at our pharma and applied customers.

In China, while we did see a modest benefit from the ongoing stimulus program, market conditions continue to be challenging as customers remain cautious with their investments. In October, Leica Microsystems expanded its STELLARIS confocal microscopy platform with the introduction of Spectraplex, a cutting edge solution for 3D imaging in spatial biology. Spectraplex enables researchers to gain deeper insights into cellular organization interactions and spatial phenotyping, advancing the understanding of disease progression and aiding in the identification of potential therapeutic targets. Now, core revenue in our genomics consumables business declined in the quarter. Growth across next generation sequencing products and basic research was more than offset by declines in proteins, plasmids and gene writing and editing solutions. Moving to our Diagnostics segment, core revenue decreased 2%.

Our clinical diagnostics businesses collectively delivered low single digit core revenue growth. Leica Biosystems led the way, with nearly 10% growth driven by strength across core histology, advanced staining and digital pathology. Notably, Leica placed a record number of its GT450 digital pathology slide scanners this quarter as clinicians are increasingly looking to leverage its predictive algorithms and productivity gains to deliver more accurate and timely patient diagnoses. To further enhance the digital pathology capabilities, Leica recently established a strategic partnership with Indica Labs, a global leader in AI-powered digital pathology software. This partnership aims to accelerate the development of next-generation cancer diagnostics by combining Leica Biosystems' expertise in instrumentation and extensive global footprint with Indica Labs' leadership in enterprise software and artificial intelligence.

Core revenue at Beckman Coulter Diagnostics was essentially flat with mid single digit core revenue growth outside of China offset by the impact of Volume-Based Procurement in China. Earlier this month, Beckman introduced several cutting edge research use only assays for neurodegenerative disease research on the DxI 9000. Now these assays allow researchers to detect and quantify emerging neurodegenerative biomarkers with exceptional sensitivity and specificity, providing valuable insights into conditions such as Alzheimer's disease. In addition, the U.S. Food and Drug Administration granted Breakthrough device designation to Beckman's p-Tau217 / β-Amyloid 1-42 assay designed to aid clinicians in identifying patients with Alzheimer's. This designation reflects the potential of Beckman's test to transform how clinicians diagnose and manage Alzheimer's, ultimately leading to improved outcomes for patients and families affected by this devastating disease.

In molecular diagnostics, increasing menu adoption and system utilization contributed to another quarter of mid teens core revenue growth and Cepheid's core non respiratory reagent portfolio. All of these product lines delivered double digit growth in the quarter, led by over 20% growth in sexual health as customers are increasingly adopting our multiplex Vaginitis panel or MVP. The rapid growth of the MVP panel since its introduction highlights the value rapid turnaround diagnostics brings to women's health clinicians at the point of care. Cepheid's Multiplex panel enables physicians to quickly and accurately diagnose infections and prescribe targeted treatments, reducing the need for multiple office visits. Now, beyond enabling improved clinical outcomes, MVP underscores the significant growth opportunities ahead as we continue to expand our women's health business and is also a great example of how Cepheid is unlocking long term growth opportunities in outpatient settings.

Cepheid's respiratory revenue of approximately $550 million in the quarter exceeded our expectation of $350 million as we saw both higher volumes and a favorable mix of our 4-in-1 test for COVID-19, flu A, flu B and RSV. In 2024, Cepheid's installed base grew by high single digits and is now more than 60,000 instruments globally. In recent quarters we've seen healthcare systems and Integrated Delivery Network customers accelerating the placement of new instruments at alternate care sites such as clinics and urgent care centers. This expansion beyond the hospital helps customers improve clinical outcomes and reduce costs by standardizing care across their networks. With the continued expansion of our leading global installed base, the largest test menu on the market, and a robust innovation pipeline, Cepheid is well positioned for sustained long-term growth.

Now let's briefly look ahead at expectations for the first quarter and the full year 2025. For the full year 2025, we anticipate core revenue growth of approximately 3%. In addition, we expect an approximately 2% revenue headwind due to recent strengthening of the U.S. dollar. We also expect a full year adjusted operating profit margin of approximately 28.5%. In the first quarter, we expect core revenue to decline in the low single digit percentage range. Additionally, we expect a first quarter adjusted operating profit margin of approximately 26.5%. So to wrap up, we are pleased with our fourth quarter performance and look forward to building on this momentum as we move into 2025. Our team successfully executed through a dynamic environment to deliver strong financial results while continuing to invest for the future.

Looking ahead, the transformation in our portfolio paired with our organic growth investments has created a lineup of outstanding franchises that are very well positioned in highly attractive end markets, and we're a better, stronger company today positioned for higher long-term growth, expanded margins, and stronger cash flow with tremendous opportunities to continue building upon this foundation. With the powerful combination of our leading portfolio, talented team, and strong balance sheet, all powered by the Danaher Business System, we feel well positioned to deliver long-term shareholder value for years to come. So with that, I'll turn the call back over to John.

John Bedford (VP of Investor Relations)

Thanks, Rainer. That concludes our formal comments. Operator, we're now ready for questions.

Operator (participant)

Thank you. And at this time, if you would like to ask a question, please press the Star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two once again, that is Star and one to ask a question and we will take our first question from Jack Meehan with Nephron Research. Please go ahead.

Jack Meehan (Analyst)

Thank you. Good morning. Jack wanted to start by digging more into the guidance for Life Sciences in 2025.

That's where I'm getting most of the question, notably the pacing. So, starting down mid singles, getting the low single digits up for the year. As you look at the operating businesses there, can you just call out? Is there anything that stands out as one.

Off or notable in terms of the ramp? And just when in the year will you return to growth? Is 2Q reasonable or is it more back half weighted?

Rainer Blair (CEO)

So Jack, good morning and thanks for the question. For 2025 and life sciences, you know, it's the one segment where we see a little bit of noise right now with the external environment. But given that we're trying to take a reasonably prudent approach to the guide for 2025 and we're assuming life science tools up low single digits and Pall and genomics will be down, so we'll possibly do better. But where we sit today, this is probably a good starting point. And as we think about the phasing, we would expect each quarter to get a little better.

Matthew McGrew (EVP and CFO)

Okay, Jack, just. Q1 like you said, it's kind of down mid single digits. I think we probably are kind of flattish as we head into Q2 and then kind of ramp up from there. And really Q1, the big kind of comp issue is a lot of it really is Pall, and in particular some of the things in the industrial business both year over year with some big projects that we saw there. And then also sequentially kind of the step down, if you will, from Q4 in Life Sciences. They were a double digit grower here in Q4. I think they're going to be negative here in Q1. And given the size of that business, it's almost, you know, $2 billion. It does kind of move the needle.

But you know, the core tools we think is still in pretty good shape and kind of at the high end of low single digits.

Jack Meehan (Analyst)

Great. Okay. And then, Rainer, you alluded to this a little bit. Obviously had the change in administration and U.S. academic government funding has been a hot topic. A lot of headlines. Was curious if you could give us a state of the state, what you're seeing in the market today and how did that influence the way that you set the guide?

Rainer Blair (CEO)

It's only been a couple weeks here of the new administration, Jack, but in general we'd expect the environment to be more business friendly. And certainly the election has not changed our view of our portfolio, which we know is positioned towards the most attractive secular growth trends in Life Sciences and diagnostics and sure, and we plan for this and as you said, we talked about that here in the Life Sciences guide for 2025. There's likely going to be some puts and takes but you know, we're confident we can leverage our portfolio and the Danaher Business System to continue to outperform.

But Jack, I do think it's fair to call out that this is the one segment in Life Sciences, you know, where the noise around, like Rainer said, the noise around it is higher because I think that's where we've seen most of the noise has been around that segment. So I think, you know, we're trying to take some of that noise into account. I think mostly it's going to be in Life Sciences is where you see that. And I think it probably, you know, it's probably fair to say that we took a fairly prudent approach to how we thought about starting the year here, given some of the, given some of the recent news.

Jack Meehan (Analyst)

That all makes sense. Thank you guys. Thanks, Jack.

Operator (participant)

Thank you. And we will take our next question from Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin (Managing Director)

Yeah, thanks. Thanks for taking the question, guys. First, I want to touch on what you called out for the diagnostics. I think there's whatever the shortfall there versus expectations in the guide you called out specifically Cepheid, the respiratory, you're looking for $1.7 billion versus I think $1.95 billion in fiscal year 2024. And then for volume-based procurement in Germany and China, you talked about $150 million for the year versus previously you were expecting sort of a steady cadence of $50 million per year. So can you just talk through those both pretty quickly? One is what changed in the VBP. Sounded like it changed a little bit.

In the fourth quarter as well.

And just how you think the VBP headwinds come through in 2025 and 2026. And then for Cepheid Respiratory. Why is 1.7 the right number? I mean we've talked about this for a while. It's sort of like at what point do you say, okay, this is the new endemic. So you know, you did 1.95 in 2024. Why isn't that just the new normal going forward where, you know, we're four years post-COVID? It feels like respiratory sort of like settled down a little bit. So what are you seeing in January?

Matthew McGrew (EVP and CFO)

Yeah, Mike, let me see if I can capture all that. So first VBP 150 versus the 50 that we thought before. That is correct. I think we think now and we saw 50 here in 2020 in Q4. So probably 200 all up, but 200 in two years instead of the three that we thought. So I think that's right. As far as why did that and how it accelerated in Q4. I mean we just saw increase in Q4 a lot more aggressive stance in China, particularly from the central government to sort of really get after VBP and do some other things outside of just straight VBP also going and doing some reimbursement cuts. And so I think the combination of the tenders that we saw come through the reimbursement cuts really accelerated here late in the quarter.

Frankly, this was kind of a November almost in December phenomenon. So that kind of came through and informed our guide as we think about going forward from a respiratory perspective. You're right, we're here 1.7 We've always thought that that was about the normal range for a normal respiratory season in an epidemic state. The last two years we did about $2 billion. I think what we saw the last couple years was we sort of had a bit of a double dip, if you will. We had a big spike in September, October as people sort of return to school and then, you know, return to work, return to school. Then we saw another one here, usually a typical respiratory season in January and February. We didn't really see that this year.

And so that was, you know, we're kind of assuming that we're going to go back to that normal respiratory pattern where we see a bit of a spike up in the ILI like we are seeing now. We did not see it as much here in Q3 like we normally do. And so I feel pretty comfortable that 1.7 is the endemic rate. We did a little bit better the last couple years, but that's no real different than what it was like prior to COVID. We had respiratory season. Some are better than others, not better. But from a testing perspective, more testing versus not. So I feel pretty comfortable with the 1.7 still versus 2 being some sort of new number.

I just.

Maybe we're proven wrong, but given what we've seen in the data, I think 1.7 is probably going to be a pretty normal respiratory season.

Michael Ryskin (Managing Director)

Okay.

If I could squeeze in a follow-up on bioprocess and biotechnology, talk about 6%-7% for the year in biotechnology. Same thing for the first quarter. It seems like sort of pretty steady throughout the year. I think we talked about bioprocess being maybe more of a high single digit business thinking more of like an 8%, maybe 7% -8%. Is the delta there really just the instrumentation part of it sort of? If it wasn't for that, would you be at that 8% rate for the year? And if so, if it is instrumentation, just any signs of that, any hope of that coming back as you go through the year? Just sort of like what's holding that back? Why is that still so subdued? If the consumables are really back and the demand continues to be there?

Rainer Blair (CEO)

I'll tell you we're very encouraged by what we're seeing in the bioprocessing business and the orders growth. Six consecutive quarters now of high single digit orders growth. We don't normally talk about the year over year numbers, but even in the fourth quarter, well over 30% orders growth there and probably one of the biggest quarters that we've had in two years in terms of orders growth. So we think the bioprocessing sets up very nicely. Now to your point, look, we expect 6%-7% core growth in 2025. That's essentially similar to what we saw in the fourth quarter, and what we're seeing is consumables are essentially also back to normal here with large customers driving that, and we do see some improvements there with smaller customers as well, but they're still not back to normal.

So to your question, and then as it relates to equipment, it's also better, but not quite back to normal. So we continue to be really encouraged by what we're seeing and the recovery is clearly underway.

Michael Ryskin (Managing Director)

All right, thank you.

Operator (participant)

Thank you. And we will take our next question from Scott Davis with Melius Research. Please go ahead.

Scott Davis (Chairman & CEO)

Hey, good morning guys.

Rainer Blair (CEO)

Morning.

Scott Davis (Chairman & CEO)

So I'm going to go into a completely different direction and because guidance we can kind of fixate on for the rest of the call, I'm sure lots of people will. It was maybe a little disappointing, but I wanted to get a sense from you guys just in talking about seeing some of the build out of test capabilities in Cepheid. What does AI do for you guys in? It could be broader than just Cepheid. But when you think about ability to kind of lever that computing power into something that maybe materially or meaningfully increases your ability to broaden out those test kits and really make them more ubiquitous. How do you guys think about that?

Rainer Blair (CEO)

Well, thanks for the question, Scott. We're well into the application of artificial intelligence throughout the corporation here.

To your question, also in research and development, and essentially how we're applying it is to accelerate the development time not only of our assays. Certainly the technical and research aspect of R&D, but also in terms of how we get the integrated evidence plan that you need to get that assay to market much more quickly and broadly on top of the decision support systems that we're building. Another example is Leica Biosystems, where you just saw us do a deal with Indica Labs, where clearly the journey takes us to digital diagnostics in pathology that is supported by artificial intelligence, helping those pathologists to make not only faster diagnoses, but to see things that they might not normally see.

We are definitely down the path here and investing significantly in accelerating cycle times throughout the corporation, but certainly in R and D as well.

Scott Davis (Chairman & CEO)

Okay, that's helpful. And guys, just as a completely different follow up. But where does Abcam and Aldevron or however you pronounce it, where do they sit versus the Danaher model? When you guys close those deals, are we still ahead of the Danaher model on those? It sounds like we may have taken a little bit of a step backwards, but maybe I misheard that.

Matthew McGrew (EVP and CFO)

No, I think on Abcam we're still pretty close. That's still pretty new, Scott. That's only about a year old. So I think we're pretty much tracking close there. Aldevron, we're behind. I don't think there's any way to say it other than that. And largely it has to do with the end markets of genomics are proving to take a little bit longer to round themselves out. But you know, ultimately while behind on the deal model, it's disappointing. Working hard to make sure that we try and close that gap. But you know that it's still a business that we are going to want to own. We need to be in genomics, we're going to be in genomics. If you're in life sciences, you have to have that presence.

We feel as though that business is a fantastic business with really well-positioned to take advantage of the genomics market when it does sort of ramp beyond the current levels, and I think it will, so for the long term, I think it's the right business to own for sure, but you know, we're working hard to kind of catch back up on the deal model, but I would say that we are behind.

Yeah.

Scott Davis (Chairman & CEO)

Okay. Thank you for the integrity of that answer. I'll pass it on. Thank you guys.

Operator (participant)

Thank you. And we will take our next question from Dan Brennan with TD Cowen. Please go ahead.

Dan Brennan (Senior Equity Research Analyst - Managing Director)

Great, thank you. Thanks for the questions. Maybe just starting on bioprocessing for a moment. Just back to Mike's question. You talked about really strong order growth in the fourth quarter. I think you had the same thing really in the third quarter. So call it probably maybe north of 30 or north of 20. Can you just remind us, Rainer, of the linkage between orders and the forward growth for your bioprocessing business? Is our thinking that such strong second half order growth shouldn't portend for potentially much stronger growth in 2025 for revenues?

Rainer Blair (CEO)

Well, I mean it certainly sets us up well. Some of our customers get their orders in very early, and it has implications for the second half of 2025, and others do that with the shorter lead times that we're able to deliver on for the first half.

So again, as we think about our orders development, of course, that is what is in our guide and supports our guide for the year. We really like where we're positioned here, both competitively, but also we are seeing the recovery here clearly underway, essentially in all segments.

Dan Brennan (Senior Equity Research Analyst - Managing Director)

Got it. Okay. Then maybe just kind of a big picture question, you know, the next five years, I know pharma patent expirations are set to grow versus the prior five. I think 2028 is a particularly big year. In your prepared remarks, you talked about the benefit of biosimilars to your bioproduction business. Just how do we think about the impact of Danaher's kind of your overall growth on these patent expirations?

Are these going to be more of a tailwind or a headwind? If you want to think about maybe separating between bioprocessing your more R&D related areas. Thank you.

Rainer Blair (CEO)

As we think about bioprocessing, that business is driven by volume. And it's really critical to understand that the more volume there is, the more we benefit and drive growth both top and bottom. And we're so well positioned there. We've talked about the number of monoclonal antibodies being approved, and you can expect that we are participating in all of those. And that momentum of monoclonal antibodies going forward, which represents 75% of the business, is really what drives the train. So as you think about these biosimilars starting to penetrate other patient groups that heretofore have not been able to candidly afford to buy these kind of therapies, or even payers have been unable to pay for those kinds of therapies.

That's a tailwind for us. And so biosimilars is an important category to understand. What's interesting about biosimilars, once again, in biologics, the end product cannot be perfectly characterized, so the regulators tend to lock down the process to ensure consistency there. And so even biosimilar manufacturers will try to use the inputs that have been previously approved by those regulators to ensure speed to market and a minimum of delay to getting to patients. So biosimilars are higher volumes tailwind for Danaher.

Dan Brennan (Senior Equity Research Analyst - Managing Director)

Great. Thank you.

Operator (participant)

Thank you. And we will take our next question from Doug Schenkel with Wolfe Research. Please go ahead.

Doug Schenkel (Managing Director, Head of Life Science Tools & Diagnostics)

Hey, good morning, guys. Thank you for taking my questions. So I want to start on diagnostics and then kind of pivot over to a philosophical question. So first, first on diagnostics, if I'm doing the math right, on the respiratory headwind and the VBP incremental headwinds, I think this implies kind of what's embedded into your guidance is an implied 5% core and normalized diagnostic growth rate. Is that right? And if not, why isn't this a little bit higher? And then when would we see evidence of you getting back to that high single digit growth rate that I believe you're still targeting? That's the diagnostic topic. The second one, which I'll just get out of the way is the guidance philosophy question.

If you go back and look at how 2025 EPS expectations have progressed over time, if you go back to the beginning of 2023, the street was at $11.20. At the beginning of last year the street was at $8.80. Yesterday, estimates were at $8.09. And if I'm doing the math right, I think you essentially got it to around $7.60. So it's hard for a stock to work when the estimates keep moving in the wrong direction. I'm just wondering how much does these things factor into your guidance philosophy this year? Especially as it seems like your end markets are continuing to improve. And related to that, what are the biggest risks to guidance from an earnings and EBITDA standpoint and what are the biggest sources of potential upside? Thank you.

Matthew McGrew (EVP and CFO)

Yeah, sure. Let me see if I captured all that. As far as diagnostics goes, I think you're right, Doug. I mean, I think if you sort of think about diagnostics, maybe just outside of China, we are kind of mid to high single digits here for the guide, so I think you're right. I think we're pretty much in the zone of where we thought we would be. I mean, I think China is the big piece with VBP and the respiratory headwinds, so I think those are the two pieces, so I think we're pretty close to where we thought we would be or where we aspire to be, which is high single digits. So I feel pretty good about where we are from a diagnostics perspective outside of what we're seeing in China really and in respiratory.

I guess as far as guidance philosophy goes. I mean, I kind of don't necessarily look backwards when we think about guidance and philosophy. I think we always try and do a bottoms up what our businesses are telling us, what we are seeing, and we try and incorporate that into the guidance. We do probably include some external factors like I talked about. I think in particular Life Sciences. Currently there's been just kind of a lot of news and maybe noise around that segment here, and I think we try to incorporate some of that news and noise into it to be prudent, especially from a planning perspective early in the year.

I want to make sure that not only for your purposes, but for my purposes internally, that we're setting the cost structure right and we're setting expectations at a level that we can overdrive, if you will. So, you know, that's sort of our overall philosophy. I understand stock doesn't work when earnings are going down, but I would posit that there were some external things that we had to work through in bioprocessing as well as stimulus in China and some other things. I think we worked through them. I think we've done a pretty good job of managing the cost structure. I think from a margin perspective, despite the fact that we've been down two years in a row, I really like where our margin profile is. Look, we try and build it from the bottom up.

We try and tell you what we're seeing in the moment and give you that information. That's how we've always thought about it and continue to do that.

Doug Schenkel (Managing Director, Head of Life Science Tools & Diagnostics)

Okay, thank you very much.

Operator (participant)

Thank you. And we will take our next question from Vijay Kumar with Evercore.

Vijay Kumar (Senior Managing Director, Equity Research)

Hey guys, thanks for taking my question.

Maybe my first one. Rainer, I think good morning to you. I think you mentioned something around Life Sciences Q1. Was there anything one-off in Q1?

Maybe which is different versus the rest of the year.

I think you mentioned Pall, maybe if you could elaborate on what the Q1 headwind is, we'll start there.

Rainer Blair (CEO)

Look. And Pall, in the prior year, so Q1 2024, we had a very, very large tens of millions energy project and that's giving us a one-off effect here in the first quarter along with some of the other things we talked about more specifically. And again looking at the first quarter guide here, in general, the trends really remain the same as they were in the fourth quarter with the exception of diagnostics. Matt just talked about that. So bioprocessing, 6%-7% core growth. That's consistent with the Q4 exit rate. Life sciences, they're expected to be consistent here in the tools sector, and here we go. Pall and the rest of the segment is getting off to a slower start in the first quarter.

Talked about the comp here just a minute ago. But we really saw two meaningful changes in diagnostics in the fourth quarter and Matt described some of those. One was the acceleration of Volume-Based Procurement in China and the second is a slower start to the respiratory season. You bring that together between Volume-Based Procurement and respiratory, that's about a 350 basis point headwind versus Q1 2024. But the underlying market, as we just talked about in diagnostics everywhere, are growing mid to high single digits, with the exception of China. So we view this as an isolated topic and we see that in the first quarter and certainly expect every quarter thereafter to be better.

Vijay Kumar (Senior Managing Director, Equity Research)

Understood.

Maybe my one follow up is on capital deployment. Looks like Q1 is assuming a big share repurchase. How much of that is being contemplated in Q1 and rest of the year?

Can you just remind us on your M&A criteria? I think there's been some chatter about.

Deal activity picking up in the tool space. How's the pipeline looking for you guys?

Matthew McGrew (EVP and CFO)

Yeah, BJ, so in Q4 and in Q1 collectively, so we started in Q4 and kind of spilled over into Q1, if you will. We did buy back about eight million shares for about $1.9 billion or so, so that is complete.

Rainer Blair (CEO)

And on the deal front, you know, we see more activity out there, no doubt, and we see that in our funnels as well. So we're very active across all three segments cultivating assets. And as it relates to the environment, not everywhere, but we're starting to see some pockets where valuations are getting a little bit better. So we feel very well positioned here, Vijay, with the way our balance sheet sets up. And we're going to remain disciplined, as we always do, around our deal philosophy, where we have to be in the right end market with those secular growth drivers. I've got to like the asset or the company. And then of course, the valuation framework, the model has to work as well. So we feel good about the world. We're positioned, markets are a little more active. Balance sheet looks good. We're going to remain disciplined.

Vijay Kumar (Senior Managing Director, Equity Research)

Understood.Thank you, guys.

Rainer Blair (CEO)

Thanks, Vijay.

Operator (participant)

Thank you. And we will take our last question from Rachel Vatnsdal with J.P. Morgan. Please. Go ahead.

Rachel Vatnsdal (VP of Investor Relations)

Perfect. Good morning. Thanks so much for squeezing me in. So I wanted to ask on some of the export control headlines that we got earlier this month surrounding flow cytometry and mass spec. Can you walk us through? Are you expecting Danaher to be impacted by this at all? And then more conceptually, life sciences were usually viewed as a sector that was more insulated from some of these export controls. So how are you thinking about the risk here going forward? And do you expect that we could see other instruments potentially added to the list as well?

Rainer Blair (CEO)

Good morning Rachel. Thanks for the question. The current export controls that have recently been published are really not meaningful for us. Our portfolio is positioned differently. More generally speaking, this category has required export licenses for many years. It's really not that new for life sciences. What they've done is expanded the category a little bit to include some other technologies. As we go forward, I think during the normal course of any administration these kind of export controls are regularly reviewed and adjusted. We don't expect anything particularly different than the standard process here and at least to date have not seen a meaningful impact to what we do.

Rachel Vatnsdal (VP of Investor Relations)

Got it. And then my follow-up, I just have a multi-part question here on bioprocessing. So you mentioned that the recovery is underway. So how should we think about the pace of recovery throughout the year in bioprocessing and really what can we be exiting this year at for growth in that portion and then other areas? Just how are you thinking about some of the comps embedded especially in the first part of the year? You have some easy one-year comps, but also appreciate some of multi-year stacks. And then lastly, what are you guys assuming at this point for standard seasonality by quarter on bioprocessing? Now that's a lot in there. Thanks so much you guys.

Rainer Blair (CEO)

Thanks Rachel. Let me start off with one more time that the recovery in bioprocessing is well underway and we're really seeing it in nearly every category of the bioprocessing portfolio. So we see a positive development here throughout the year. That said, the way we've set up the guide is 6%-7% core growth essentially on a quarterly basis. That's how we're starting our perspective on the year here and then we'll see how that plays out. If you look at the multi-year stacks and that makes sense to do, you'll see that the math shows that this is right in line with sort of a high single-digit growth rate, which is what we've talked about this market as its long-term growth rate. So we think that this is the right perspective and we sure like the fact that the momentum is building here.

Matthew McGrew (EVP and CFO)

As far as seasonality goes, Rachel, we sort of, Q1 in that business is usually kind of the lightest. We see a bit of a step up in Q2, and we do have a phenomenon there where Q3 is lower than Q2. That's always sort of been in that business, and some of the pandemic that didn't happen. But that is a normal trajectory where we see a step down, Q2 to Q3, and then obviously a step up in Q4, so sort of Q1 is your low point, a little bit up in Q2, down in Q3, and then a big step up in Q4.

Rachel Vatnsdal (VP of Investor Relations)

Great. Thank you, guys.

Rainer Blair (CEO)

Thanks, Rachel.

Operator (participant)

Thank you. And it appears that we have reached our allotted time for questions. I will now turn the program back to our presenters for any additional or closing remarks.

John Bedford (VP of Investor Relations)

Thanks, everybody. We're around all day for questions.