Q1 2024 Earnings Summary
- Orders in the bioprocessing business grew mid-single digits sequentially despite typically seeing a seasonal decline, and the book-to-bill ratio increased to approximately 0.95, indicating stronger demand.
- Larger customers in North America and Western Europe are increasingly returning to pre-pandemic ordering patterns, and destocking is expected to be largely behind as they enter the second half of the year, signaling a positive outlook for future sales growth.
- Through the acquisition of GE Biopharma and combining it with Pall Life Sciences into Cytiva, Danaher has built a very strong and highly competitive bioprocessing franchise, which is expected to continue improving in the near future.
- Danaher is not raising its bioprocessing guidance despite better-than-expected orders in Q1, indicating continued uncertainties in market recovery. The company states that it's "still early" and more order momentum is needed before adjusting expectations.
- Margins are expected to decline in Q2 due to significantly lower respiratory revenues at Cepheid. The adjusted operating margin is projected to drop from approximately 30% in Q1 to about 26% in Q2, primarily because of a decrease in respiratory revenue from $675 million to around $200 million.
- The Abcam acquisition may impact short-term profitability. The integration involves cost reductions that "will cost some money to do," and initial margins are affected by transition costs. There's acknowledgment that "we're going to need a little time to get after some of the growth and cost opportunities".
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Bioprocessing Guidance
Q: Bioprocessing orders up; why not raise guidance?
A: Despite an encouraging start to the year, with orders growing mid-single digits sequentially and a book-to-bill ratio of approximately 0.95 , we are keeping our full-year core revenue growth guidance at down low single digits. It's still early, and we want to see continued order momentum through Q2 and stability in consumables. Equipment demand, though a smaller part of the business at 15%, is important for the long term. Emerging biotech funding is stabilizing but hasn't translated into orders yet, so we believe our current guidance is appropriate. -
China Outlook
Q: Does China stimulus change your view on China?
A: We haven't changed our full-year outlook for China, expecting it to be down high single digits. We're closely following stimulus discussions, but it's early days, and implementation details are unclear. We don't expect a significant impact in 2024. IDT has minimal exposure to China and continues to perform well, growing mid-teens since acquisition with operating margins over 30%. -
Margin Outlook
Q: How will lower Cepheid volumes affect margins?
A: Q2 adjusted operating margins are expected to be approximately 26%, down from ~30% in Q1, primarily due to lower respiratory volumes at Cepheid. Q1 respiratory revenue was $675 million; we're expecting around $200 million in Q2. This significant drop impacts margins due to operating leverage. Going forward, margins will show different seasonality, with higher volumes and margins in Q1 and Q4 due to the respiratory season, a change from pre-pandemic patterns. -
Biotech Funding
Q: When will improved biotech funding benefit you?
A: We've seen stabilization or slight improvement in biotech funding, but it will take several quarters to impact our business. It's too early to adjust our guidance based on this, as the increase hasn't materialized in orders yet. We haven't factored any significant order impact until next year. -
Abcam Integration
Q: Early positives and negatives from Abcam acquisition?
A: We closed on Abcam in December and have completed the first full quarter. A new Danaher President and CFO are integrating Abcam and implementing the Danaher Business System. It will take some time to realize growth and cost opportunities. Long term, we believe Abcam is a high single-digit grower in a fantastic market. -
M&A Environment
Q: Thoughts on M&A given your capacity and rates?
A: Our preference is for M&A, but higher interest rates raise the bar. We're not compromising on earnings expectations or return on invested capital targets. We need to work harder to meet higher hurdle rates, but we remain active and disciplined in our M&A efforts. -
BIOSECURE Act Impact
Q: Potential impact of BIOSECURE Act on bioprocessing?
A: The BIOSECURE Act's outcome is uncertain with many unknowns. Customers view it as a risk and are taking steps to de-risk by possibly shifting manufacturing and trials away from Chinese CDMOs. Our global capabilities allow us to support these changes smoothly. Timing and potential disruptions remain to be seen as companies adjust their supply chains. -
Life Sciences Trends
Q: Were instruments weaker and reagents stronger?
A: In Q1, Life Science tools, about 10% of our business, had core growth down mid-single digits, consistent with H2 2023. Pharma and biotech customers are stable at lower demand levels; academic and applied markets held up better. We're seeing improved funnel activity for later in the year, but it's not yet translating into orders. In China, tough comps and weaker macros affected the market; we expect normalization to continue in Q2 and improvement in the second half. -
Bioprocessing Mix
Q: Expectations for equipment and consumables trends?
A: We don't break down guidance between consumables and equipment. Recurring revenue (consumables) represents about 85% of bioprocessing and was the main driver of order improvement. For the full year, bioprocessing is expected to be down low single digits; we're focused on the recurring business, where destocking occurred previously. -
Competitive Dynamics
Q: Any shifts in bioprocessing competitive landscape?
A: We believe we have a strong bioprocessing franchise after acquiring GE Biopharma and integrating it with Pall Life Sciences into Cytiva. We continue to improve through our Kaizen philosophy and are confident in our competitiveness, expecting our position to strengthen throughout the year. -
Life Sciences Margins
Q: Why were Life Sciences margins down more than expected?
A: Margins in Q2 were approximately 23%, slightly above our expectations. Volume was down, and the inclusion of Abcam brought transition costs, causing some dilution. Despite this, margins were in line with our forecasts. -
Order Progression
Q: Should exit rates change given order trends?
A: We saw a better start in January that continued through the quarter. We still expect to exit the year with high single-digit growth and haven't changed our guidance. Consistent book-to-bill ratios in the 0.9s each quarter support our full-year outlook. -
China Biotech Funding
Q: Do improving funnels apply to China?
A: In China, our biotechnology segment was down nearly 40% in Q1; Life Sciences down high teens, Diagnostics down low single digits. We expect biotech funding improvements to be skewed towards developed markets; in China, any stabilization is at a much lower level compared to developed markets.