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spk01: and I will be your conference operator today. At this time, I would like to welcome everyone to the Danaher Corporation's third quarter 2020 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 question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.
spk02: Thanks, Christelle. Good morning, everyone, and thanks for joining us on the call. With us today are Reiner Blair, our President and Chief Executive Officer, and Matt 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, our third quarter 2020 Form 10-Q, and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call 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 investor section of our website later today under the heading events and presentations and will remain archived until our next quarterly call. A replay of this call will also be available until November 5th, 2020. 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 refer to results from continuing operations and relate to the third quarter of 2020, 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 may 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 statement except as required by law. As a result of the size of the Cytiva acquisition and its impact on Danaher's overall core revenue growth profile, we are presenting core revenue on a basis that includes Cytiva sales. References to core revenue growth including Cytiva sales in the calculation of period-to-period sales growth comparing the current period Cytiva sales the historical psyche of the sales prior to the acquisition. With that, I'd like to turn the call over to Ryan.
spk06: Well, thanks, Matt, and good morning, everyone. We delivered an outstanding third quarter with results in the mid-teens, core revenue, over 60% adjusted EPS growth, and more than doubled our year-over-year free cash flows. This strong performance is a testament to our team's dedication as they stay focused on executing for our customers during the COVID-19 pandemic. Since the onset of the pandemic, we have met the challenges presented and turned them into impactful opportunities to support patients, our customers, and the global community. So before we run through our third quarter results, I'd like to update you on how we are directly contributing to the global fight against COVID-19. CECIAD continues to be a leader in the global diagnostic testing effort, and the team's commitment to tackle this global health crisis was further demonstrated by the recent launch of a rapid four-in-one combination test for COVID-19, flu A, flu B, and RSV from a single patient sample. The symptoms for each of these viruses are very similar, but the treatments differ greatly. and this test will provide clinicians with critical answers in approximately 35 minutes to help ensure the best patient outcome. Now, as we head into flu season, we believe Cepheid's easy-to-use rapid four-in-one test will be a critical tool in clinicians' testing arsenal, and we are incredibly proud of the Cepheid team's fast and innovative response to the pandemic. We further enhanced our diagnostic testing capabilities with Beckman-Coulter Diagnostics' new IgM serology and IL-6 assays. The IL-6 assay can help identify severe inflammatory response in COVID-19 patients, a crucial consideration as clinicians evaluate the risk of intubation with mechanical ventilation. The IgM serology assay can detect IgM antibodies to the virus, which typically begin to develop shortly after symptoms appear, and it's complementary to Beckman's IgG test, providing greater insight over the course of a patient's infection and immune progression. While the use of COVID-19 antibody testing is relatively limited today, In the future, it may play a critical role pre- and post-vaccination for population surveillance and clinical trial studies. We're also proud to support the scientific community's pursuit of new vaccines and therapeutics for the virus. Paul and Cytiva's products and solutions are involved in the majority of the more than 400 vaccine and therapeutic projects currently underway globally, including every Operation Warp Speed COVID-19 vaccine in the U.S. As a market leader across the bioprocessing workflow, the breadth of our offering and technical expertise are key differentiators that enable us to contribute meaningfully to the development and production of COVID-19 vaccines and treatments. So now let's take a look at our third quarter results. We generated $5.9 billion of sales with 14% core revenue growth. COVID-related revenue tailwinds contributed approximately 1,000 basis points to third quarter core revenue growth, while our underlying base business was up approximately 4%, a sequential improvement from an approximate 3% decline in the second quarter. Geographically, revenue in the developed markets was up mid-teens, led by North America and Western Europe. High-growth markets were up approximately 10%, driven by sequential improvement in China and India. Our gross profit margin was 54.8%, and our operating profit margin of 18.5% was up 80 basis points. Our core operating profit margin was up 310 basis points, with each of the three segments achieving 75 basis points or more of core margin expansion. Adjusted diluted net earnings per common share of $1.72 were up 62 percent versus last year. We generated $1.5 billion of free cash flow in the quarter and $3.5 billion year-to-date, up 110 and 59 percent respectively with 174% free cash flow to net income conversion in the quarter. This outstanding cash flow generation, combined with our strong balance sheet, positions us well to actively pursue strategic M&A opportunities. We also continued to accelerate organic growth investments across Danaher, with a particular focus on expanding production capacity at Cessid, Cytiva, and Paul Biotech to support increasing demand driven by COVID-19. So now let's take a more detailed look at our results across the portfolio. Life Sciences' core revenue was up 18.5%. led by core growth rates of 20% or more at Paul Biotech and Beckman Life Sciences, and more than 35% at Cytiva and IDT. We continued to see strong demand from customers building out their genomics and automation capabilities, and from our biopharma customers working on COVID-19 vaccines and therapeutics. In our more instrument-oriented life science businesses, declines moderated as academic and research labs continued to reopen, driving increased installations and better order trends. SCI-X benefited from this improving environment, achieving low single-digit core revenue growth, driven in part by demand for new products, such as the Echo MS and the Triple Quad 7500, the most sensitive mass spectrometer on the market. Moving over to diagnostics, reported revenue was up 18% and core revenue was up 17.5%, led by more than 100% core growth of Cepheid as a result of COVID-19 testing volumes and record gene expert system placements. Radiometer and Leica Biosystems, our acute care and pathology businesses, delivered mid-single-digit core revenue growth. Declines at Beckman Coulter Diagnostics moderated as elective procedures and wellness checks continued to resume throughout the quarter. Moving to our environmental and applied solution segments, reported revenue and core revenue were down 1%, with similar results at both our water quality and product identification platforms. Across our water quality businesses, municipal activity and projects continue to resume, driving growth in North America and China. And this was offset by softness in the industrial end markets globally. Demands for consumables and chemistries remain steady, supporting customers' mission-critical day-to-day water operations. And equipment declines moderated, and we were encouraged by equipment order trends in the quarter as more customer facilities got back up and running. Now, during the quarter, Hawk closed the acquisition of Aquatic Informatics, a leader in water-focused software solutions. Aquatic Informatics solutions collect, manage, and analyze large volumes of water data, and these capabilities combined with Hawk's deep applications expertise will help us bring greater operational efficiencies to customers' workflows. At our product identification platform, low single-digit core revenue growth at VideoJet was driven by strong demand in North America, particularly across the consumer packaged goods, food and beverage, and pharmaceutical end markets. Consumables and services performed well globally as VideoJet continued to help customers keep their essential businesses operating through the pandemic. Now with that as context for what we saw by segment during the quarter, let's take a look at recent trends across our end markets. Geographically, customer activity continues to increase in the U.S. and Europe as phased reopenings proceed across these regions. We're keeping an eye on areas that have recently experienced setbacks in the process of reopening, but we have not seen any material impact so far. And China is progressing well with activity in most regions approaching pre-pandemic levels. Within life sciences, bioprocessing demand continues to lead the way. COVID-19 vaccine and therapeutic activity increased meaningfully during the quarter, with development and production scale-up occurring at an accelerated pace. Viteva and Paul Biotech comprise most of our bioprocessing exposure, and collectively these businesses increased orders by more than 60% in the quarter, driven by our comprehensive offering across the bioprocessing workflow. Non-COVID-related bioprocessing activity remains healthy and in line with what we saw over the last several quarters. Now, as I mentioned earlier, academic and research labs around the world are continuing to reopen at reduced capacity as social distancing measures limit the number of people allowed in the lab at any one time. And we estimate that approximately 60 to 70 percent of academic research labs are now open in some capacity. And in China, that number is closer to pre-pandemic levels. Moving to clinical diagnostics, we continue to see strong demand for molecular testing in both hospital labs and point-of-care settings. Since launching the first rapid molecular test for COVID-19 in March, CESIID has meaningfully increased production capacity and shipped more than 7 million test cartridges in the third quarter. The team continues to ramp test production, and we now expect to ship more than 8 million tests in the fourth quarter. SETI had also delivered another record number of new systems in the third quarter, expanding their market-leading global install base by approximately 35% over the past year. Across hospital and reference labs, patient volumes increased through the quarter as elective procedures and wellness checks resumed across much of the developed markets. We estimate that global patient volumes are currently 90 to 95% of pre-pandemic levels with China slightly ahead of North America and Europe given its earlier reopening. In the applied markets, consumables remain solid as customers sustain essential business operations like testing and treating water and safely packaging food, medicine, and consumer products. Previously delayed equipment installations are starting to resume, and we're seeing our equipment order books improving as customers start to initiate new projects and capital investments. So as we look ahead, we expect to deliver low double-digit core revenue growth in the fourth quarter. Modest sequential improvement across our businesses will be offset by the impact of three fewer selling days versus last year, which represents a core growth headwind of more than 300 basis points. We anticipate COVID-19 related revenue tailwinds will be similar to what we saw in the third quarter. So to wrap up, We're really pleased with our results this quarter, and we're proud to play a pivotal role in tackling COVID-19 head-on. Our team has turned unprecedented challenges into tremendous opportunities, and our strong performance is a testament to our associates' focused execution and commitment to our customers. With the Danaher business system as our driving force and the powerful combination of our talented team, exceptional portfolio of businesses, and strong balance sheets, We believe Danaher will continue to outperform through the remainder of 2020 and well into the future. Now, before I go on to the Q&A, I just want to take a moment to share a few thoughts after my initial month as CEO. First, I always knew we had an exceptional portfolio and extraordinary team, and that conviction has only been reinforced over the last few months as I've had the opportunity to spend more time with more of our businesses and leaders. And in doing so, a couple of things really stand out. One is the considerable amount of innovation happening across the organization. Our investments in R&D and commercial initiatives are allowing us to continue building sustainable competitive advantages all across our businesses. The other standout for me is the caliber and the depth of talent we have across Danaher. Our associates are innovative and passionate about their work and committed to the Danaher business system and our culture of continuous improvement. It's clear that DBS is what drives it. It's who we are. It's how we do what we do. It's our ultimate competitive advantage, and I see it alive and well everywhere. So our future is bright, and I'm excited about what lies ahead for Danaher. I believe that the combination of our investments and innovation, outstanding team, and strong balance sheet, all powered by the Danaher business system, will enable us to keep building an even better, stronger company as we move forward. So with that, I'll turn the call back over to Matt.
spk02: Thanks, Ronald. That concludes our formal comments. Christelle, we're now ready for questions.
spk01: Thank you. At this time, if you would like to ask an audio question, please press star 1 on your touchtone phones. Once again, that is star one to ask an audio question. Your first question comes from the line of Tycho Peterson with J.P. Morgan.
spk07: Hey, good morning. Congrats on the quarter. Ryder, you know, 50% order growth in policy is certainly impressive and, you know, a notable acceleration from last quarter. So could you maybe just, you know, touch on the manufacturing scale-up you alluded to and, you know, how quickly can additional capacity come online and where are you making those investments?
spk06: Sure. So first of all, good morning, Tycho. And, you know, thanks for the question. You know, as I think about the larger opportunity here, particularly in the vaccines and therapeutics, it might be helpful just to back up one second and think about the scale and the breadth of our unique portfolio. We're incredibly well-positioned. through the combination, of course, of Paul and Sativa, but also upstream with many of our companies being involved in, you know, the development of the actual drugs themselves. And then, of course, the process scale-up, the upstream solutions, including cell culture media, single-use bioreactors, and then all the downstream fluid management filtration and chromatography solutions. And so I think what you saw there in that step-up here quarter over quarter was the breadth of that portfolio and the capability of those teams really moving forward and gaining traction. You know, we are on top of well over 400 vaccines and therapeutics that are in the pipeline, and we're playing in the great majority of those in one capacity or another. And so the nature of our portfolio, the focus of our teams, the trust that the customers have in us is giving us an extraordinary number at bat. And so as you think about that portfolio positioning here, going forward, we think that as the capacity needs of our customers continue to ramp, certainly as we think about 21 and beyond, we expect to play very, very well there. And just to give you a sense of that, you know, we year to date have a billion dollars, well over a billion dollars of COVID orders in the combination of Cytiva and Paul Biotech. And that's before any vaccines have been officially approved by the FDA. So, again, we really see an opportunity here for the long term to really capture an extraordinary amount of opportunity and share going forward. Great.
spk07: And then maybe I guess a similar question on Cepheid. I know you've been, you know, committed to scaling up the manufacturing there, and you talked about 8 million tests in the fourth quarter. But can you talk about where you think, you know, that needs to go from a capacity standpoint? And, you know, any headwinds we need to think about from a lighter flu season here for you guys in the fourth quarter and early next year? The flu trends, you know, early on are still kind of light. Thanks.
spk06: So just the level set on that one, Tycho. We have had extraordinary demand for our COVID tests here from Cepheid. In fact, you noted in my comments that in Q2, we had 6 million tests shipped. In Q3, 7 million tests shipped. And now in Q4, we're looking at 8 million tests shipped. And we also, at the same time, at the end of September, launched this 4-in-1 test, which really positions us uniquely and extraordinarily in order to be able to address the opportunity and the need in particular here as the flu season arises. You can imagine as patients present, particularly in hospitals and points of care, that physicians will want to know the right answer quickly and the right answer needs to distinguish between COVID and the flu season. So we're really thinking of this as, the flu season, and COVID testing, both being tailwinds as we go into Q4 and beyond.
spk04: And maybe just to put some numbers around that for you. So if you think about sort of the capacity that we talked about at CEPID, you know, sort of to begin this, in Q2 we sort of had 6 million tests that we had. That increased to about 7 million. here in Q3, and we expect that to go in Q4 to call it maybe closer to 8 million. And as we sort of ramp through 21, we are going to be adding additional capacity as well. Now, I'm not sure exactly when we expect all of that to come online, but as that happens, we will sort of, you know, kind of keep people updated. But, yeah, for sure we are going to add a little bit here in Q4 and then throughout 21 as well. Okay, thanks.
spk07: I'll hop off and let others jump in. Thanks.
spk01: Your next question comes from the line of Derek DeBruin with Bank of America.
spk10: Good morning. So just to follow up on Tycho's question, just because I'm getting some pings from investors, how are you thinking about pricing on the 4-in-1 test? And, I mean, when we've done some calls with labs, I think there's some concern about how they're going to get reimbursed for some of these multiplex tests. Can you sort of talk through pricing and, you know, sort of like what is the strategy for your customers to get paid for these?
spk06: Sure, sure. So let's start off with just to level set that we, in fact, have launched this four-in-one test here in September and are already shipping, and we're seeing great customer demand for this. So customers are really recognizing what an incredible tool this is at the point of care and in hospitals to be able to diagnose and help customers. Now, this test here, and of course, this always depends on the type of customer, but the four-in-one test will be priced right around $55 to $60 per test, and that compares to the COVID-only of about $20 to $40. Once again, depends on the type of customer and volumes and so forth, but that gives you a sense of it. Now, from a reimbursement perspective, we feel very good about this for a number of reasons. As you know, the 4-in-1 test is a multiplex test, and that is going to be so useful for clinicians to determine what type of treatment will be suitable for that particular patient. So as you think about that, today already there are multiplex tests in use for respiratory-type ailments, and they're used all the time. And so we see that our customers are very familiar with the reimbursement dynamics here and don't see any issues as it relates to the Cessia 4-in-1 multiplex test.
spk04: And, Brad, maybe just to give you a little bit of context, sorry, as well on some numbers on that. On that 4-in-1, obviously it's got a higher price point like we talked about, but just to make sure that we're kind of level set on how we think about when that will come online. So I think in Q4, thinking about maybe 60% of our test volume in Q4 is going to be COVID only. And then the other 40% will be the four and one. And I think the way to kind of think about that is that when you think about, you know, we're still going to be producing COVID only and the kind of staggered adoption because, one, you've got high-growth markets that really don't experience seasonal flu, so the demand for that is just not going to be, you know, as high, if any. And Europe is going to be more of a staggered adoption. It's going to be country by country. It's not going to be kind of uniform like it might be in the U.S. So just maybe to think about from a modeling perspective, you know, that split would be the way I'd think about that.
spk10: Great. And I guess on that one – well, actually, let me follow up on something else. And so I guess – Can you talk a little bit about the pacing in SCIEX and academic labs? I mean, and basically, you know, talk about are you seeing any signs of any increased activity in terms of like a fourth quarter budget flush? Just sort of like the end market dynamics and sort of what's going on. I mean, you talked about labs being open, but what's really the spend potential there and just sort of like what does this really customer spending environment look like? Sure. Sure.
spk06: So, Derek, we have seen lab activity around the world pick up. As we mentioned, we see China nearly at or at pre-pandemic levels. And I would say in North America and Western Europe, we see those lab capacities at about 70% to 80%, which is a sequential improvement, and we saw that. And so our teams are able to now get in to see the customers, to install the systems, provide the services, and so forth. But we still see some capacity limitations, as I mentioned earlier, related to social distancing measures and so forth. Now, having said that, in Q3, our tools business grew 10%. We're very happy about that. And that was driven certainly by IDT and Beckman Life Sciences, but also by new product launches, which were incredibly important for us and our customers. For instance, the Echo MS which is a high-throughput screening tool used in front of mass spectrometers, which has been seeing an extraordinary uptake. The launch of the triple quad 7500, I mentioned that, that's the most sensitive triple quad on the market, seeing great uptake for that. And that's driving and actually drove a positive low single-digit growth already for SCIEX and Q3. And then at Leica Microsystems, we had recently launched the Stellaris confocal microscope, which is the most versatile and powerful confocal microscope in the market. So this combination of certainly sequential improvement in the marketplace, more labs being accessible, us being able to get in and install and provide services has been helpful, but I think we've also been buffeted by this aggressive new product introduction that we've invested in here, too, for the future.
spk10: Great. Thank you very much.
spk01: Your next question comes from the line of Scott Davis with Milius Research.
spk11: Hi, Scott. Good morning. Good morning, Reiner. Welcome.
spk06: Thank you.
spk11: Reiner, anything the board wants you to do kind of differently than your predecessor? Anything to focus on differently?
spk06: You know, that's a great question. And right now I'd also like to take this opportunity to start out with thanking Tom and the board and all the associates for the fantastic transition that they have provided me here over the last month and getting me off to what is a great start here for Danaher and Q3. So, you know, I have worked for Tom a decade, and with that, of course, also with our board. And what you can expect there is a great deal of consistency and continuity, for sure. And my plan, of course, is to is to build on the fantastic foundation that Tom and the board have laid in making us a stronger science and technology company. And you'll see that I'm very passionate about the topic of innovation. You heard me comment on that today already, as well as talent. And so you'll see us continue investing here quite significantly in innovation and in our talent and our scientific capabilities, whether those be internal or external investments. as we continue to chart our course here forward as a leading science and technology company. Now, having said that, with all the similarities, you can also expect to see no change as it relates to our capital allocation bias, which will continue to focus on M&A and particularly on making us a stronger innovation and growth company as we continue to move forward. And, you know, when I started this role just after we had closed the Cytiva deal, you know, I thought that perhaps I would be sitting here with, you know, the ability to make some smaller deals. But certainly, you know, initially with a balance sheet that needed some rebuilding. And we find ourselves here in a great situation in that, one, you know, our free cash flow is stronger now. Sativa's performance is even better than expected, and we couldn't be more pleased with how the team is transitioning and being a part of Danaher. And then you add the equity raise to that, and that's really put us into a situation where we just have more degrees of freedom. And so that, from an M&A perspective, also puts us in the position of being able to do certainly small and medium-sized strategic deals And then as we go forward, get back into a stronger position pretty quickly.
spk12: That's helpful, Reiner. Is aquatic the type of deal that we should expect going forward? I'm not sure you guys sized that. Maybe you could help us understand if that's material or not.
spk04: Yeah, Scott, I can give you a little color on at least the size of it. I mean, you know, this is a deal that's in – in water for the informatics, and Ryan can talk a little bit about it. But it's a pretty small deal. I mean, it's a sub $20 million in revenue and, you know, probably I'll call it $80 to $100 million type deal and kind of deal price. So it's not huge.
spk06: But it is exemplary of, you know, the deals that we continue to like. It's nothing new. You've seen us do technology deals here that strengthen and round out our portfolio, and we like aquatic informatics positioning and capability. So certainly you'll see more of those types of deals, and we consider that a smaller one. Perfect. Well, good luck to you, Ryan, or we wish you well. Thanks, Scott.
spk01: Your next question comes from the line of Doug Schenkel with Cowan. Hi, Doug. Welcome.
spk03: Good morning, guys. Thanks for taking the questions. I want to go back to Tycho's first question on capacity buildup. How do you balance the desire to fulfill acute needs? and vaccine development demands related to the pandemic with the outlook for post-pandemic demand. I mean, I guess to be more to the point, do you believe the capacity you're building today will continue to be used even post-pandemic and thus to review the elevated revenue levels associated with your build-out as being durable even after the surge in pandemic-related demand subsides? Yes. And I guess while I'm on this topic, along those same lines, you're placing a lot of gene experts today. They're going to be used for the foreseeable future as much as people can get those, at least in our opinion, just given what's going on. But post-pandemic, how do you think about the durability of these placements and the associated revenue potential?
spk06: Hmm. Thanks, Doug. You know, what I'd like to do is take your question and even broaden it a bit to let you hear how we think about the long term here. And the way we frame that is what does the world look like post-vaccine versus what the world for Danaher looked like pre-COVID, call it. And let me start with our base business. through the portfolio moves that we had made and the investments, had already been transitioning to a higher growth and earnings profile with a higher degree of recurring revenues. And so we feel very good about, you know, the growth profile that we had pre-COVID where we were already a 5% to 6% grower. And to your point, including in that, with Cepheid growing at low double digits at the time, representing about 5% of our portfolio. And at that point, we didn't even own Cytiva yet, although we were thinking, as we were diligencing and going to close, that, you know, this would be about a 6% to 7% grower. So as we think now about a post-vaccine world, you know, we actually really believe that our core growth is going to improve. And why is that? Well, First of all, our base business will continue to improve as activity picks up and markets recover and our innovation investments, some of which I talked about earlier, start paying off even more. But then also to your point, Steffi, it might be back to low double digit, but it will represent 10% of our portfolio in 2020 with what we think are some of the most durable testing revenues in the marketplace. Because we are at the point of care, because our workflow is so easy, because of the menu breadth we have with both multiplex or COVID, we really see this point of care positioning as unique. And then you add on top of that, and you mentioned this, our increase in the install base, 35% increase over prior year, just in 2020. We really see this as a long-term improvement. Then you add to that Cytiva, which we're seeing now with the leading positions in cell culture media, single-use technologies, including bioreactors, filtration, process chromatography, and many more things, that we're getting so many at-bats with these over 400 vaccines and therapeutics in the pipeline that we see an extraordinary potential there for the traction and the capacity increases that are needed for the future, independent of the type of vaccine that will ultimately receive approval. And so we think that that 6% to 7% growth assumption that we had here prior to the pandemic was likely conservative and that for the long term we really can think high single digits there as well. And then lastly, you see our capital allocation strategy, which is biased towards M&A. You add that on top of here, and we really do believe that our growth profile as a result of the pandemic and the durability of our positioning in the aftermath of all of that is going to result in a higher growth profile. Now, there's lots of things here to consider in terms of macro risks. Think of government spending, taxes. You know, there are a number of variables here. So, you know, it's a little bit early here to be conclusive, but what we see here is a fundamentally stronger and more durable growth profile going forward.
spk03: Super helpful. And then just one more quick follow-up on I think it was one of Derek's questions. just keeping in mind, you know, how, how strong your business has been this year. Um, it, it seems pretty clear that you're going to be in a position to get your, your debt to EBITDA ratio down in the neighborhood of three times by the end of this year. Um, You referenced M&A in answering my last question. How ready is the organization for M&A, given everything that's going on, but the balance sheet's clean, but there's just a ton of demand on your infrastructure? So I'm just wondering how you would characterize your M&A readiness right now. Thank you.
spk06: That's a great question. You know, First of all, speaking to the balance sheet, I think you're in the right neighborhood there. Those are numbers that we could confirm based on the free cash flow and the EBITDA that we see in our current debt profile that our balance sheet is in a very good position. I would also say we couldn't be more pleased with the progress that we're making in the transition of the GE Biopharma business, now Cyteva, into Danaher, and they are firing on all cylinders, and we continue to extricate ourselves there from, you know, the transition services that GE provides us and standing up this organization and seeing just extraordinary, not only efforts, but real results there. We always at Danaher maintain leadership and management capacity to ensure that the opportunities that we generate and that the market provides us, we can take advantage of. And so whilst we are transitioning Cytiva into Danaher, and nearly complete with that, that doesn't keep us from being ambidextrous here and keeping our eye and being able to take advantage of the opportunity that the market provides. Okay, great. Thanks again.
spk01: Your next question comes from the line of Vijay Kumar with Evercore ISI.
spk05: Hey, guys. Congrats on a really strong quarter here. Ryan, maybe a question on Cytiva. No surprise, but if I look at how the queue played out, so Cytiva was 500 basis points of contribution in 3Q, and I'm looking at the order trends, which is accelerating. Maybe talk about the Q4 guidance here, which implies a modest step down here for Cytiva. Is that a timing element, or perhaps a flesh out what Y contribution perhaps steps down in the context of accelerating orders.
spk06: Thanks, Vijay, and good to hear you. So Q4, Satebo, perhaps it's helpful to back up and come back to what Matt was talking about earlier. It's really important to see that we continue to expect a similar growth rate tailwind from COVID in Q4 as we did in Q3, and we expect our base business to perform similarly or incrementally better. But it is important to keep in mind that we have three working days left, and particularly for these consumer-oriented businesses, that's pretty impactful in the calculation. Now, having said that, if you think about the bioprocess industry today, already these companies are producing vaccines. So if you think about Operation Warp Speed and where BARDA is involved, not only are the pharmaceutical companies producing clinical trials quantities, they're already ramping up capacities for those vaccines that they see, vaccines and therapeutics that they see very near to approval and are hopeful for. And of course, this is financed oftentimes through the federal government. And so there's a great deal of aggressiveness there. And so that's already happening here at the back end of Q3, and you'll see that also in Q4. And then as approvals start coming in, and we're hopeful that that happens at the end of the fourth quarter or in the first quarter, then I would expect to see an additional ramp there as well.
spk04: And BJ, maybe just as a kind of some context around, I mean, we've talked about Sort of year to date, we've got, you know, north of a billion dollars of COVID orders between Cytiva and Paul Biotech. The way to think about that is that, you know, those are orders that we've already gotten that are booked. Probably 50% of those orders are going to ship here in 2020, but the rest are going to move to 2021. Just to give you some idea of sort of how that order book is played out and is going to move its way through the P&L like Brian was just talking about.
spk05: That's helpful, Matt. Now, Reiner, one more follow-up on that. You know, you spoke about the order book. As vaccine manufacturing ramps up, do you need to make incremental investments? And I'm just thinking about incremental margins here. It's been really strong the last two quarters, mid-'40s, well above, you know, historical trends. How should we be thinking about, you know, spend levels and incremental margins? Because I'm assuming travel, you know, steps up as the economy reopens. Thank you.
spk06: Yeah. So, Vijay, I'll start here and I'll pass it on to Matt. So, first of all, we absolutely are and continue to invest in capacity expansions. In fact, we were in a capacity expansion program at Cytiva as we brought the company into the Danaher fold and are, of course, accelerating that. You can expect additional funding. investments here in Q4 that are capacity-related, certainly, but also related to standing up the organization. And then as we continue to go into 2021, you'll see continued investment. And, of course, that plays out in our margin assumptions as well. And I think, Matt, you were just about to jump in on that.
spk04: Yeah, I think for Q4, I think you're right, BJ. We have seen sort of Q2, Q3, we've had really good, you know, fall through on the growth. I think as we sort of look at Q4, though, I think probably a 30% to 35% fall through is a better number to use. Like you said, you know, we kind of, as we look at where that's come from in Q2 and Q3, I mean, we've had some really, really good mix on where the growth's come from. Paul Biotech, think about Cytiva and Sapiod. And now that some of the other businesses are contributing more, I think we're going to have a bit of a mixed impact. And then, as you mentioned, you know, the lower OPEX on less travel and trade shows, certainly a part of it. Things are sort of, you know, getting going again, as you saw with the growth rates. And then, you know, Reiner talked about the accelerated growth spend. We're going to do that in Q4. We've got some projects already that we've got underway. I think that will have an impact on it. And probably lastly, frankly, you know, given where we have seen some of the growth, and we've got some pretty outstanding growth in, for example, Cytiva, for example, Cepheid, you know, there is going to be some, some sort of year-end, you know, accruals, if you will, around bonuses and things like that. It'll be a bit of a headwind year over year for us. So I think it probably moderates a little bit here as we get into Q4 from where we've been, but still feel, you know, even with that, you know, I still think we're going to be able to put up some pretty good EPS growth here.
spk05: That's helpful context. Thanks, guys.
spk01: Your next question comes from the line of Dan Brennan with UBS.
spk08: Hi, Dan. Good morning. Thanks for taking the questions. So I know you just kind of outlined the 500 million plus or so for the vaccine opportunity or therapeutics for your biologics business. I'm just wondering if you can kind of raise the scope up a little bit higher and just help us think through ultimately the addressable opportunity for Saitiva and Paul, just given the magnitude of, you know, therapeutic and vaccine development that's ongoing. So it's nice that you've got the orders in hand, but kind of, you know, how big is the market you feel that you're addressing as we look out for both vaccines and therapeutics related to COVID?
spk06: So, Dan, that's a great question. And, you know, let me reframe just a little bit and give a little bit of background on this topic. So important to remember that there are very different types of vaccines. In fact, there are a number of unknowns here that still make, you know, very solid and defined projections pretty challenging. You know, there's a lot of questions around which kinds of vaccines and therapeutics ultimately get approved. And we've seen more recently with Lilly and J&J that these approvals are not given. These are rigorous processes that these companies go through with the FDA, and there are a number of wild cards, including adverse reactions and so forth, that at any given time can derail efforts that we think are very close to the finish line. So it's really important to understand that prior to approval, picking what are the future, in quotes, winners is very difficult. The other thing that's also hard is that these vaccines are produced in very different ways. While there are a number of similarities, how they're produced is very, very important in terms of the amount of doses that you get per batch, as an example, which can materially and by orders of magnitude change the kinds of inputs that are required for any production. We also have a lot of questions around the number of doses. Is it going to be... a one-time shot with a booster for life, or is it going to be much like we've seen for influenza, an annual-type injection that everybody needs? These are big questions that, of course, affect any kind of estimates that you make. And then lastly, there's a great deal of discussion about to what degree will the population actually accept vaccines and use them and get vaccinated. in order to get to that ultimate goal of herd immunity. So we see that it's very, very challenging to come to a good number there. But having said that, as we get closer here in the next month and perhaps quarter or so, we'll start seeing approvals. We're very hopeful. And this picture will become much more clear as we get the data out of the clinical trials know about doses, whether booster shots are required, and that sort of thing. And then I come back to what Matt said. If you look at, you know, the $1 billion that we have year to date in orders, we see that prior to FDA approval. So we certainly feel very positive about what the future holds here in the next year or so. But again, coming down to, you know, hardcore and highly defined numbers is tough.
spk04: Well, and remember too, Dan, that, you know, that billion is orders that we've got today as of the end of the third quarter. So while Ryan are sort of talking about, you guys are talking about what's the opportunity as we go forward to sort of longer term, you know, anything that we have here in the short term in Q4 from an order perspective, we'll just keep adding to it. So sort of the near term, I think we still have some upside here as we get, you know, kind of into Q4. And then as the vaccines get approved, and then as we start to learn some of these unknown variables that we can start to give you guys a better kind of a view of it. But, you know, so far, I think it gives you a frame of what we've got. We've got the Q4, how that plays out. And then as we know more, I think as we get into early next year, we'll probably have a better understanding a better frame for you, hopefully, to get some clarity around that.
spk08: Great. Thank you. Thanks for that. And then maybe just one more on Cepheid. I know you've kind of addressed it a couple times, but I think there's a, you know, a similarly moving target to figure out how testing evolves, particularly related to COVID as we get into 2021 with a vaccine and as potentially there's a lot more testing done on point of care. and, you know, kind of the rapid antigens and, you know, much cheaper fast-roll tournaments. So any way to give us just an early sneak, you know, kind of framework to think about how we should be contemplating Cepheid as we look at the 21 under some of those scenarios? Because I think you are in an interesting position where you're not the, you know, the kind of, you know, batch-based, slower ACR, so you kind of fit in between two different areas. So any color on that would be great.
spk00: Sure.
spk08: Sorry. Go ahead, Ryan.
spk06: Yeah, I was just going to say that, you know, Dan, this is a really critical question, right? A lot of people talk about the antigen test, and, you know, most of those are used in different care settings. The Cepheid solution, GeneXpert, that is used at the point of care in critical care environments and in the hospital when speed, workflow, and accuracy really count. So those clinicians, on the basis of that test, are going to make a call as to what therapy they prescribe. So it has to be right. It just has to be right. And so that's why the gene expert and the Cepheid testing approach is the gold standard. And that's why we see that really as a very, very durable technique. testing modality that is at the right place at the right time with the right answer at the right cost for the system. And we expect, independent of the number of infections that we see, other types of modalities really breathing either higher or lower depending on the infection rate. But as you think about the point-of-care hospitals in particular and other point-of-care settings, That's where we see this gold standard, along with this multiplex four-in-one test to have an extraordinary amount of durability. And we see that, right? And you see us continuing to ramp up from six to seven. In the fourth quarter, eight million. And you can expect more tests per quarter as we go through 2021. So I feel very strongly about the unique and durable positioning of of our Cepheid gene expert approach. And add on top of that the fact that we've increased the installed base by 35% this year. That really puts us in a very strong position, and that installed base continues to grow. Great. Thank you.
spk01: Your next question comes from the line of Steve Burchaw with Wolf Research.
spk09: Hi, Steve. Hi, good morning. I am not going to ask about COVID testing or bioprocess, just to be clear. I was going to ask one on China and one on Beck DX. I'll just ask both here and then jump back in queue. One is, I wonder if you could put more granularity on the growth in China and how it progressed through the quarter, and any areas of comparative strength and weakness, acknowledging, of course, that it's all recovering right here. It would be helpful just to get that regional perspective and to the extent you're comfortable talking about where that might sit in 4Q. And then I'll go ahead and ask my second question. which is actually on BEC-DX, which we haven't really touched on here in the Q&A. I wonder if you could talk about the capital side, what your expectations are, given DXA is now available in some regions, I believe, how you think about capital and BEC-DX prospectively, and then to the extent that you have a window on it, given that you have that business and the broader diagnostics platform, how are you planning for the fourth quarter and next year as it relates to some of the specialty testing categories that are so important in hospital settings. both for this business and for just getting folks back into the hospital to get the kind of care they need, whether it's related to cardiovascular or other specialty settings. And I'll apologize now for the very long-winded two questions and get back in queue. Thank you.
spk06: No worries. Thanks, Steve. Well, let's start with China. China has been an extraordinary story, as you all know, in terms of the speed of the recovery process. And what we see as unique with China is the breadth of that recovery. So not only do we see, of course, extraordinary return to lab capacities, which are nearly or at pre-pandemic levels, we also see the return of patient volumes. to some degree approaching normality. And what's unique about China is that we also see this in our more industrial businesses. So the recovery in China, in contrast to North America and Western Europe, is broader-based. And so as you think about our EAS portfolio or some of the businesses we have, industrial businesses we have with Paul, we're seeing very nice recoveries there. And like we said, in China we saw essentially 10% growth here in Q3, and we expect to see acceleration of that here in Q4 as well as that economy continues to build momentum. And that's really across the portfolio. Now, as we think about Beckman Diagnostics and our business there, we're really pleased by the performance and the return of patient volumes here in the developed markets. those have really exceeded our expectations. And the team has done very, very well in continuing to grow that business, innovate in that business. You heard about the IL-6. You heard about IGM on top of IGG. And so we have a great deal of momentum here, and our innovation cycle times have been shortened and accelerated very significantly. And as we think of capital, you know, we're starting to see our funnel pick up in the discussion also around capital equipment placement. No doubt they are not yet at the level of what we saw prior to the pandemic, but they certainly are better than what we saw in Q2 and earlier in Q3. And so those conversations are starting to happen. Also differently to what we saw in Q2, and this will be something to monitor as we see COVID hotspots continue to pop up around the world, is that for now we haven't seen anything but on the margin impacted in the patient volume returning, meaning that we see wellness testing and elective-type procedures continuing to ramp and not being significantly impacted yet by some of these hot spots. So cautiously optimistic here that the progression that we've seen for Beckman Diagnostics and more generally with patient volumes continues to move forward positively.
spk09: Thanks for all the perspective there, and welcome to the call here, Ryan. Thanks, Steve. Appreciate it.
spk01: We have reached the end of the allotted time for questions. I will now turn the call back. to our presenters for closing remarks.
spk02: Thanks, Christelle, and thanks, everyone, for joining us today. We're around all day for questions.
spk06: Thanks, everybody. Stay safe and healthy.
spk01: This concludes today's conference call. You may now disconnect.
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