Danaher Corporation

Good day, everyone. My name is Emma, and I will be your operator today. At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2021 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. I would now like to turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, please go ahead.

Thank you, Emma. Good morning, everyone, and thanks for joining us on the call. With us today are Reiner Blair, our President and Chief Executive Officer, Matt McGrew, our Executive Vice President and Chief Financial Officer, and John Bedford, our Director of Investor Relations. I'd like to point out that our earnings release, the slide presentation supplementing today's call, and the reconciliations and other information required by SEC 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 Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until November 4, 2021. During the presentation, we will describe certain 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 2021. And all references to period-to-period increases or decreases in financial metrics are year-over-year. We also may describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements except as required by law. As a result of the size of the CITIVA acquisition and its impact on Danaher's overall core revenue growth profile, we are presenting core revenue on a basis that includes CITIVA sales, references to core revenue growth including CITIVA sales, and the calculation of period-to-period sales growth. With that, I'd like to turn the call over to Reiner.

Matt, thank you, and good morning, everyone. And we really appreciate you joining us on the call today. Our team delivered another outstanding result in a third quarter with over 20% core revenue growth, nearly 40% adjusted earnings per share growth, and strong free cash flow generation. This well-rounded performance is a testament to the unique positioning of our portfolio and our exceptional team who are committed to leading and executing with the Danaher business system every day. I'd like to thank all of you who joined us last month for our virtual investor day, where we had the opportunity to showcase the strong foundation we've built for generating sustainable long-term outperformance. We highlighted our fantastic portfolio of market-leading franchises and highly attractive end markets, the exceptional team we have out on the field every day, and how we differentiate with the Danaher business system. And we certainly saw this powerful combination in action during the third quarter as our results attest. Now, we also talked about our sustainability efforts. And just last week, we published our 2021 sustainability report. This year's report reflects the measurable progress we've made across the three pillars of our sustainability program, which are innovation, people, and the environment, and how we use the Danaher business system to execute on this increasingly important strategic priority. Now, I hope you all get a chance to read through the report and learn more about the important work that we're doing across Danaher to positively impact the world around us for generations to come. So with that, let's turn to our third quarter results. Our sales were $7.2 billion, and we delivered 20.5% core revenue growth with portfolio-wide strength led by diagnostics and life sciences. Geographically, high growth markets grew approximately 25%, and developed markets were up nearly 20%. In fact, revenue in each of our three largest markets, North America, Western Europe, and China, was up approximately 20% or more in the quarter. Our gross profit margin increased by 550 basis points to 60.3%, primarily due to higher sales volume, the favorable impact of higher margin product mix, and the impact of prior year purchase accounting adjustments related to the Cytiva acquisition that did not repeat in 2021. Now adjusted diluted net earnings per common share were $2.39 and were up 39% compared to 2020. And we generated $1.7 billion of free cash flow in the quarter, bringing our year to date total to 5.2 billion, which is up 46.5% year over year. We continue to accelerate organic growth investments across the entire portfolio and increased our research and development spend by approximately 30% year over year. At our investor day recently, we highlighted how we use DBS growth tools and processes to accelerate innovation and bring more impactful solutions to our customers faster. In fact, recently launched products like the Cy-X Xenotop 7600 and the Triple Quad 7500 and Beckman Life Sciences Cytoflex SRT Benchtop Cell Sorter are just a few great examples of how we're driving market share gains through proprietary innovation and enhancing our growth trajectory going forward. We're also making substantial investments to expand production capacity across our bioprocessing businesses, and at Cepheid. Near term, these investments are supporting existing customer demand and driving meaningful share gain. But they're equally important to support the long-term growth of these businesses, where we see significant runway ahead, given the underlying structural growth drivers in the sectors they serve. And we expect our total capital expenditures across Danaher to be approximately $1.5 billion in 2021, as we continue to invest in support of our customers' needs today and well into the future. So now let's go into more detail on our quarterly results across the segment. Life Sciences reported revenue increased 24.5%, with core revenue up 20%. This growth was broad-based across the segment, with most major operating companies achieving high teens or better core growth. Now, these strong results were led by continued demand for bioprocessing solutions, as in Cytiva Bioprocessing and Paul Biotech both grew more than 30% in the quarter, including low double-digit non-COVID-related core growth. COVID-related vaccine and therapeutic revenue continued to be strong and now exceeds $1.5 billion year-to-date. At Cytiva, we passed an important milestone last month when we exited the last of our transition services agreements with GE. We successfully completed this process ahead of schedule, which is a testament to the entire Cytiva and integration team and their collective commitment to the Danaher business system. Cytiva also added more than 1,500 new associates to the global team since joining Danaher, to help ensure that we're supporting our customers today and continue meeting their needs well into the future. Now, in August, we successfully closed our acquisition of Aldebaran, and we are thrilled to officially welcome the team to Danaher. Aldebaran is a leading producer of high-quality plasma DNA, mRNA, and proteins, and provides a fantastic beachhead for us in our genomic medicine enterprise. We're seeing the rapid development of gene and cell therapies, DNA and RNA vaccines, and gene editing technologies. And Aldebaran expands our capabilities in these areas to ultimately help our customers bring more life-saving therapies and vaccines to market faster. So we're really excited about the quality, the scale, the turnaround time, and the reputation that Aldebaran brings to the Danaher portfolio. Now, in diagnostics, reported revenue was up 29.5%, and core revenue grew 28.5%, led by more than 60% growth at Cepheid. Each of our other major diagnostic businesses, Beckman Coulter, Radiometer, and Leica Biosystems grew low to mid-teens in the quarter as clinical diagnostic activity and patient volumes around the world largely returned to pre-pandemic levels. In respiratory testing at Cepheid, we further expanded manufacturing capacity, which enabled the team to produce and ship approximately 16 million cartridges during the quarter. COVID-only tests accounted for approximately 80% of those shipments, and our 4-in-1 combination tests for COVID-19, flu A and B, and RSV represented approximately 20%. And non-respiratory core growth at Cepheid was up double digits as well, led by demand for hospital-acquired infections, sexual health, and virology testing. We also saw strong growth in our installed base as system placements continued to exceed pre-pandemic rates. And we believe the team's thoughtful placement of the GeneXpert and Infinity system over the last 18 months is setting up Cepheid very well for future growth opportunities. So let's move to our environmental and applied solutions segment. Reported revenue was up 7%, with core revenue up 7.5%. Water quality grew mid-single digits, and our product identification platform was up low double digits. Across our water quality businesses, we saw good underlying market strength, particularly in food and beverage and various industrial applications, as activity returned to more normal levels. Municipal projects picked up given the improving funding environment and as more customers returned to in-person work. On product identification, both VideoJet and our packaging and color management businesses were up low double digits in the quarter. Comparable strengths across consumables, service, and installed-based growth was driven by more normalized levels of customer activity and investment. We believe that our ability to meet our customers' needs, particularly on the equipment side at VideoJet, enable us to gain market share and expand our industry-leading installed-based printers. So with that as a backdrop for what we saw this quarter, let's spend some time going through regional and end-market trends. Most major regions and countries around the world are largely back to pre-pandemic activity levels. Customers have adapted to the current operating environment and protocols and broadly resumed in-person commercial activities and site access. Now, this is reflected in the strong results we've seen across the US, Europe, and China. And this momentum is also reflected in our strong order book growth, which is trending above revenue growth. Now, we're mindful of potential COVID-19 variants or outbreaks and selective lockdowns. but we're not currently seeing any material negative impact from these scenarios. And while we are seeing some global supply chain constraints, we're leveraging the Danaher Business System tools, like daily management, and actively working with our customers and suppliers to help mitigate any impact. Across life sciences, we're seeing robust customer activity and demand across all major end markets. lab, and other site access is largely back to pre-COVID levels, and we're seeing this through more normalized productivity levels, installations, and project initiations driven by a strong funding environment. Now, biopharma continues to lead the way. As the number of life-saving biologic and genomic-based therapies in development and production continues to rise and is augmented by the ongoing work around COVID-19 vaccines and therapeutics, And at our recent investor day, we spent time covering how well positioned we are to support this complex, life-changing work that our customers are pursuing. Our combined bioprocessing portfolio across Cytiva and Paul Biotech is the broadest offering in the industry with leading positions in upstream and downstream applications. And we further support our customers with best-in-class scientific services, partnering to solve their most challenging problems as they move from the lab to production scale. And our global reach enables us to reliably and consistently meet our customers' needs. Now, in addition to the industry-wide opportunities in biologics and genomic-based medicine, we continue to see significant demand related to the development and production of COVID-19 vaccines and therapeutics. Our customers are working to address emerging variants and increase global supply And given that only about a third of the global population has been vaccinated, we believe we'll see durable growth in this biopharma segment for the foreseeable future. We continue to expect about $2 billion of COVID related vaccine and therapeutic revenue in 2021. And since we spoke at our yesterday, we now expect to enter 2022 with approximately $2 billion in COVID related backlog versus our previous expectation, of $1.5 billion of backlog. This increase is driven by the recent enhanced visibility for booster shots and the likelihood of vaccine availability for children under 12 years old in the US. And moving to the clinical diagnostic market, non-COVID testing volumes are essentially back to pre-pandemic levels in most major regions, as patients are returning for wellness checks, routine screening, and other elective procedures. In molecular diagnostics, strong global demand persists for Cepheid's point of care PCR respiratory testing as a result of the Delta variant and outbreaks, along with lower vaccination rates in many regions. As I mentioned earlier, we shipped approximately 16 million respiratory tests during the third and we now expect to ship approximately 55 million tests in 2021 versus our prior expectation of 50 million. Now, as we head into the traditional respiratory virus season, we're hearing from customers that they expect this to be a much more active season than last year's. In preparation, their preference is for our four-in-one combination test, so we're seeing an uptick in demand for those cartridges, particularly given the recent outbreaks of RSV across the U.S. Cepheid's 4-in-1 test was also recently approved with a third gene target for SARS-CoV-2 detection, ensuring it can continue to accurately detect future COVID-19 viral mutations and reinforcing Cepheid's competitive advantage in the respiratory testing market. Now moving to the applied market. Customer activity has largely rebounded to pre-pandemic levels, which we see in robust order rates across both consumables and equipment. In the global municipal market, consumables demand remains solid and the pace of instrument-oriented project activity continues to pick up with the improving funding environment and broad return to work. So now let's look ahead to our expectations for the fourth quarter and the full year. We expect to deliver fourth quarter core revenue growth in the low to mid-teens range with high single-digit core revenue growth in our base business and a mid to high single-digit core growth contribution from COVID-related revenue tailwinds. Additionally, we expect to generate operating profit fall through of approximately 40% in the fourth quarter, a similar level to what we achieved in the third quarter. Now, for the full year 2021, we now expect to deliver more than 20% core tailwinds, and our base business will each contribute more than 10% to our 2021 core revenue growth rate. So to wrap up, we're proud to deliver another terrific result here in the third quarter. Our performance is a testament to the power of our unique portfolio, the strength of our end markets, and our team's commitment to leading and executing with the Danaher business system. And this unique combination differentiates Danaher today, and it reinforces our opportunities ahead for sustainable, long-term outperformance. So with that, back over to you, Matt.

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

At this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and 1 to ask a question. We will take our first question from Tycho Peterson with J.P. Morgan.

Hey, good morning, Tycho. Hey. Ryan, I'm wondering if you could talk a little bit more on China. There seems to be, you know, growing noise on pressure, you know, local competition. It seems to particularly be impacting some of the diagnostic tenders with, you know, that process getting pushed out to the provinces. Are you seeing anything there for Beckman or Cepheid? I know China was up 20% overall, but I'm just curious if there's any pressure on the diagnostic business based on what you're seeing.

Sure. So let me start with we are not seeing any material impact related to some of the tenders or some of the other things that we hear out of China. In fact, the Hanwei province tender is really an exception in diagnostics and actually more common in other industries. And we'll see this kind of thing from time to time, but it's neither, you know, unexpected, nor do we see it as material. But what we're seeing generally in China is really very consistent with what we've seen over the past several years. China has been very forthcoming with its Made in China 2025 initiative as well as several others, all of which we see quite aligned with our strategy, starting with our portfolio, which is clearly aligned with the Healthy China 2030 agenda, where you see the need for both improved diagnostic solutions as well as life science, research, and bioprocessing, as well as the desire to protect the environment where water quality really plays big as well as the desire to improve and protect the food supply where we see PID playing large as well. So we think we're really ideally positioned here to meet the needs of where China is going. Now, at the same time, for years, we have been investing in China as our business gains scale to ultimately localize our production. And that's been the case here for some time, positioning us very well in China. And that will continue to be the case going forward as our businesses continue to gain scale there.

Okay, that's helpful. You know, supply chain, you flagged some constraints. Obviously, you know, you guys are generally very good at kind of mitigating an impact here. But I'm curious as you kind of look out over the next couple quarters, are there areas where maybe you're more or less concerned around supply chain that you might flag?

So we haven't. really seen a material impact on our ability to meet our customers' demand. But we are seeing some modest inflationary and supply chain pressures in certain areas. Just to name a couple, of course, electronic components, freight and logistics, and some labor shortages. But really, this is where the Danaher business system is a differentiator for us in this environment. In fact, Despite the additional work that ensues, we see this really as an opportunity for ourselves to differentiate with our DBS tool set, for instance, with daily management, which brings our cross-functional teams together on a daily basis, drives disciplined execution and accountability, as well as, you know, the sense of urgency and real-time problem solving. And at the same time, of course, we're qualifying additional suppliers and building safety stocks. So this is how we make sure that Danaher continues to not only meet its customers' expectations, but also has opportunity to gain share. Now, at the same time, of course, we see some inflationary pressures, and we're offsetting those, of course, with a more active cadence of price increases, and those will also be incrementally larger than in the past, as well as freight and fuel surcharges. So on the one hand, we're driving, as always, to reduce our cost of goods sold. At the same time, we take additional offsets with moving on some of these surcharges and price increases I mentioned. I think also importantly to note here that this is not a top-down process. The Danaher operating companies have this process muscle and are able to execute effectively effectively. whether that's ensuring the security of the supply chain or whether that's ensuring that we can offset cost increases via price and other methods. And ultimately, we think that differentiates us, and we think we're gaining share as a result of that in PID, water quality, Cytiva and Paul, radiometer and elsewhere.

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

That's correct, Tycho. We're really pleased that the team was able to ship more again here in the third quarter with the capacity increases and, you know, demand still exceeds our ability to supply. But for today's view, 45 million cartridges for 2022 is our point of view. Perfect. Thank you. Thanks, Tycho.

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

Good morning, Vijay. Good morning, Viner. Congrats on another impressive print here. Just got one on testing here. I think I heard the number 55 million tests for 21. The implied Q4 number, I think, is about 15 million. That's a sequential step down from 3Q. I'm curious, just given the testing trends, whether that step down makes sense. And any change to your, I think, your prior expectation was 45 million tests for fiscal 22. Is that still relevant given the current runway?

Sure. Thanks, DJ. So the way to think about the fourth quarter here in terms of testing is we would expect also 16 million cartridges in the fourth quarter, similar to what we saw in Q3. While we're always working to increase capacity, we think 16 million cartridges is the right way to think about it. And, of course, if you add up the quarters, let's call it about 55 million cartridges I wouldn't want you thinking about a step down here in Q4 for Cephid. That's not the case. Now, as you look forward to 2022, you know, we still think that 45 million cartridges where we sit today is the right way to think about it. And as we come to our fourth quarter earnings call in January, we'll revisit the topic then.

Understood. And my second question, Brian, this is maybe a bigger picture question. I think at your analyst day, you updated Cytiva Outlook as high signals. Now, when you look at your peers in the biopharma space, most of them are in the double-digit range. Is there anything different about your Cytiva business mix versus your peers? And correct me if I'm wrong, but isn't Cytiva gaining share versus peers?

So to start with the Cytiva and the Paul Biotech businesses together are by far the most complete portfolio in the marketplace and we continue to see pockets where we're taking share because we've been able to invest not only capacity but our customers really appreciate the scientific capability and the help that they get from Cytiva and Paul and solving the challenges that are associated with making biologics of high quality with high yield at the targeted cost. So we really see ourselves in an advantaged position here and believe that we continue to take share, whether that's on a quarterly or on an annual basis. That's for sure the case. Now, as we think about the long-term growth, and perhaps our timelines need to be aligned here, as we think of long-term growth, You might recall when we acquired Cytiva, we thought this was more of a 6% type of growth business. And what we've seen here is that certainly the growth of this business has re-rated higher. And certainly in the pandemic, it's quite a bit higher. But once again, as we think about the long term, we think it's prudent to think about a business at that scale and a high single digits. And we think that will compare very favorably with any other business out there in the short, medium, and long term.

That's helpful, Ryan. And just to summarize that, there's no reason to think sitekeeper growth should be below market. Is that a fair summary?

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

Thank you, guys.

Thanks, Vijay.

We'll go next to Derek DeBernet with Bank of America.

Derek, good morning. Hey, good morning. Thanks for taking the question. So I have a couple of ones. Can we talk a little bit about operating leverage as we go into 22 and 23? I mean, you guys are investing really heavily in R&D. You know, you're doing a lot to sort of like drive innovation in the business. So how can we think about, you know, op leverage as we go in there and just to get a sense of sort of like where the margins are going to come on?

Sure. So, Derek, as you know, we have been, and as you just mentioned, investing very significantly in the business. This is not only the case in capital expenditures where we're investing in our manufacturing network throughout the world, but we've also been investing significantly in research and development in feet on the street to drive proprietary innovation in the short and long term, as well as to ensure that we can continue to drive share gains with our direct business model. Now as we think about the operating leverage, you know that our fall through here has been in the 40% range, and we think that's a good way to think about the quarter here as well. In the long term, you know, historically our fall through has been more in the 35% range, and we think that's probably the better way to think about fall through for the long term, just because we want to find that balance of reinvesting in the business as well as driving profitability expansion. And we think that flywheel works for us, right, mid-single digit plus growth, On the one hand, on the other hand, 50 to 75 basis points of operating margin expansion, free cash flow conversion over net income over 100%, all of that then to drive double digit plus EPS growth. And when you couple that with our current balance sheet positioning with our bias to deploy capital towards M&A, We think that sets us up very nicely here, both from an operating leverage perspective, as well as driving our growth franchise forward.

Great. Can we talk a little bit about the analytical instrumentation sales? I'm sort of curious just on how SCI-X is comparing to 2019 and some of the other instrumentation, as well as some of the other instrumentation. And specifically, I'd like to know, developed world versus China? What is that? I'm just trying to gauge overall, are we seeing accelerating analytical demand from 2019 versus where we are today?

Well, let me start with that we are seeing accelerated analytical demand versus prior year today. That's the case in all of our more instrument biased businesses, and that is certainly the case for SCIEX as well. So we do see that the funding environment labs opening up are helpful here and have accelerated instrument demand going forward. And SCIEX has done very nicely here with, you know, over mid-teens core growth in the quarter, and that also reads through to China as well. SAIS in particular, as you know, has been on a great streak and continuous streak of innovation, launching the Zenitof 7600 as well as the 7500 triple quad and Echo MS, and is not only benefiting from the tailwinds of an attractive funding environment, which we see here this year and certainly in the second half of 2020, 2021, but they're also benefiting through this innovation that is really allowing our scientists to answer new questions, and that's resulting in share gain.

Derek, maybe just to put some numbers to what Reiner said. I mean, if you look at SCI-X in particular on a two-year stack, you know, you're talking about high single digits here in 20 and 21, and which is, you know, that's actually better than where they were, you know, in 18 and 19 on a two-year stack. So I think, you know, I think like Reiner said, we're seeing some pretty nice acceleration, really new product driven as well, but it's, it's been a really good story here for the last couple of years.

Great. And if I can sneak in one more, the COVID vaccine backlog for 22 is, Is there even some additional upside there? Is that already committed orders or is that more tied to your expectations on boosters and etc.?

So we are close to those $2 billion of backlog for the bioprocess business for 2022 today. and certainly expect to be there by the end of the year. We think that sets us up pretty well. We will see what 2022 brings, and we'll talk more about that in January. But the fact that we've upped that backlog by $500 million here going into 2022, we think is a good sign for things to come. Great.

Thank you. Those are committed orders. That is not a great check.

Thank you. That's what I'm getting for. Thanks.

Yeah.

We'll go next to Scott Davis with Milius Research.

Good morning, Scott. Good morning, Reiner and Matt and Matt and John. Thanks for taking my question. I'm kind of curious, I mean, logistics prices and labor costs, inflation or challenges and all this stuff doesn't seem to really have impacted you guys much, maybe a little bit at ENAS. And you made a comment, Reiner, on kind of capturing price, but it looks like price was sequentially flat. Is that something that you would expect price to be a little bit more dynamic going forward, or is it just kind of a mixed impact to some products where price just doesn't need to go up?

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

Okay. That's helpful. And the R&D, the spend up 30%, does that – Is the headcount up 30% too, or people are costing you more? How do you think about that, and how do you think about kind of getting productivity on that spend as, you know, making sure projects are focused and there's some sort of return on that investment?

Scott, that's a great question, and the 30% increase is, you know, primarily related to a number of points. One, of course, you have more people working on more projects But in terms of the productivity, the way to think about that is any project that we do has its business case, and we ensure that that productivity through the delivery of that business case makes sense for us. So we view this, of course, as an investment in the future that ultimately drives defensible proprietary share gain through research and development. And, you know, the increase comes in terms of people. It comes in terms of additional resources. equipment, testing equipment that's required. It comes in terms of additional, you know, alpha and beta systems that are out in the field with our customers. So myriad ways that we invest that in order to drive innovation.

Good luck, Reiner. Thank you, and congrats on a great year so far, guys. Thanks. Pass it on. Thanks, Scott.

We'll go next to Dan Brannon with Cohen.

Thanks for taking the time. Good morning. Good morning. Thank you for taking the questions here. I wanted to ask a follow-up to the first question on this file process. So you maintain the outlook for vaccine therapeutic contribution this year. Just wondering, is there capacity for you to exceed that in terms of is there demand for that, or are you capacity constrained for 2021? And then related to that, as we think about 2022, you've already discussed the $2 billion firm order book, but How do we think about the contribution within that from boosters and from kids? Because I forget who previously you had boosters included in that. So maybe that's the first question. Thank you.

Very good. Well, let's start with the topic of the contribution that's in the $2 billion. So, in fact, we did not include the kids 12 and below into our $1.5 billion original backlog estimate for 2022. That and, of course, now the approval of boosters for various groups of the population is really what is driving that increase from $1.5 to $2 billion of backlog for 2022. What it doesn't include is the approval of these vaccines for kids 12 and younger, for example, outside of the U.S. That's something that is you know, still in the future, and there's not sufficient clarity for us to start thinking about that in quantitative terms. But that's something that would be excluded in that. Now, coming back to your capacity question, as you likely are aware, and as we talked about also in our analyst day, we have been investing in capacity expansions in the biotech business now for some time. In fact, we ensured that the investments continued even prior to the closing of the acquisition from GE. And we have continued with those investments that have come online here nearly in a continuous fashion through the second half of 2020 and 2021. And we expect those capacities to continue to increase here going into 2022. So we feel very comfortable that we're able to meet our customers' requirements here now and going forward. And we think that differentiates us in the marketplace and why, among other reasons, we are confident that we are taking share.

Great. Thanks, Reiner. And then as a follow-up, I know Matt discussed previously kind of a stack growth on, I believe it was on Sativa. I just want to understand a little bit in terms of stacks for your overall business. I know the commentary throughout the conversation reflected business largely back to normal, um, which is great. Um, but when we look at like the base growth X COVID and we consider like a stack, and this is clearly very imprecise, but in Q3 that base growth on a two year average basis was, you know, around four, maybe a little bit below that. Um, and I believe, um, in Q4, the highest single digit base guidance implies like a two year stack that might be closer to three. And this is compared against what we consider, Dan, our underlying growth rate, probably somewhere in the 6% to 8% range when things get back to normal. So just trying to reconcile this underlying stack. And is it just conservatism right now? Are things back to normal? Or maybe it's just too imprecise to do this analysis with COVID. Thank you.

Yeah, Dan, let me just give you the numbers because I think we may have a disconnect here. So I think the simple frame for Q4 is like we sort of talked about. We kind of increased our expectations from low double digits to low to mid-teens. And like you said, we were up in the base business. You know, we think the base business is going to kind of be high single digits in Q4, which, as you said, was probably a little closer to 10% here in Q3. And I would look at that delta between kind of high single digits and 10 and say that that's really just more a function of kind of prudent planning and given, you know, the current operating environment and some of the things we've talked about. You know, in particular, you think about Q4 and logistic challenges, et cetera, that might be there. So I think we're just trying to give a little bit of, from a planning perspective, high single digits from about the 10% we've seen, but really not much of a change here in the environment.

Got it. Okay, great. Thanks, guys.

We'll go next to Jack Meehan with Nefron. Good morning, Jack.

Thank you. Good morning. Good morning. Just wanted a little bit more color, I guess, on the funding environment. Was curious, as you look into the fourth quarter, what customers might be telling you around the potential for a budget flush and what does the guidance assume kind of versus historical patterns?

So, Jack, first of all, we see the funding environment across the board improving. So if we start with EAS, we do see customer activity increasing. We do see more work occurring at the workplace. And with that, more projects being tackled both in the capital as well as operating investment categories. And we would expect that to continue to improve here. going forward as the economy continues to pick up speed and return to normality. As we think about life sciences, research funding is up, whether that's government funding, whether that's venture capital funding, or whether that is biopharma funding from the pharmaceutical companies. We've seen a step up here in an effort to take advantage of the opportunities that new breakthroughs in technologies that you're all aware of, as a result of COVID, all creating a great deal more awareness of the possibilities here in therapeutics. So we see, generally speaking, a great environment in the life science area, bioprocess we talked about with continued capacity increases to meet the needs of the very fast-growing therapeutic pipeline. We talked about the fact that monoclonal antibody pipeline is up 50% in terms of the number of projects over the last five years. Genomic gene and cell therapy pipeline is up an order of magnitude, so 10x versus five years ago. So that's creating very healthy drive here, whether that's in the research side of life sciences or in the bioprocessing. And then when you come back to diagnostics, patient volumes are nearly at full rates pre-pandemic rates, if you will, in nearly every geography. And we continue to, of course, see COVID driving additional diagnostic demand. And so across the board, a very positive funding environment. And we would expect that the one or the other budget is going to be taken advantage of here in the fourth quarter. We'll see. There are a number of different perspectives there, but the environment is it's generally very positive.

That's great. And then as a follow-up, just curious on Aldebaran, how the early integration feedback's going. And as I look at the fourth quarter, you've given us the core guidance. What do you have M&A contributing, two and a half points or so? Does that sound right?

Yeah, it's going to be probably... Oh, sorry. Go ahead, Myrna.

No, go ahead. Go ahead, Matt, please.

Yeah, no, the M&A contribution is probably going to be about, you know... It was 40 here in Q3, so I think you're probably pretty close with what you've got, 40 million.

So we actually, you know, coming back to the front end of your question there, I mean, we couldn't be happier with both Aldebaran as an entity, but even more importantly, the team in Aldebaran that have embraced joining the Danaher family, are embracing and pulling hard on the Danaher business system. and are really focused on driving and growing their business. There's plenty of opportunity, as you likely know, in the core businesses of Aldebaran, and we see that. We see that in the order book. We see that in revenues, and we will see that also in their earnings contributions, all of which is running as we expected when we updated during the acquisition. So we expect to see You know, $400 million of revenue this year, growth rate, you know, in 20% plus range, and we expect to see 20 cents of EPS in year one growing to 30 cents of EPS in year two. So Aldebaran, incredibly pleased with the motivation and the engagement of the team and the important work that they're doing and proud to have them as a part of the Danner family.

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

Good morning. Hey, good morning. Thanks for taking my question. Maybe just to follow up on Jack's question on Devron, you guys had mentioned when you made the acquisition that they were relatively underexposed to international, and I know you've got a lot of things going on with the integration, but as you think about expanding out Devron's footprint internationally, how are you thinking about that, and are there any kind of timelines that you have for that?

So very much a part of the investment hypothesis is to expand Aldebaran's activities, as you say, internationally. And we, of course, are focusing first and foremost now on the transition into Danaher and are helping the team with their number one priorities, which are to take care of the expansions that they are finalizing as we speak. And we're already in the process of the next set of those expansions. And so in terms of timelines, you know, we'll talk about that when that becomes something that's on the top of the, on the top of the agenda, but currently it's all about ensuring an effective transition, taking care of our customers, transitioning the team onto DBS. And they're incredibly excited about that. And of course, subsequent expansions as we go forward.

Great, thanks. Maybe just one follow-up. You're obviously generating an impressive amount of free cash flow, and you've been very active in M&A, but what are your thoughts in terms of inorganic investments as you move forward, looking at where you are in terms of leverage and what you want to accomplish?

We really like the way we're positioned, both in terms of the franchises and the platforms that we have, as well as how we're thinking about our earnings flywheel. I talked about that earlier in the call, driving that mid-single-digit plus growth, the double-digit EPS expansion, and, of course, then having a very strong balance sheet position in order to continue to prioritize capital allocation towards M&A. And as we think about our balance sheet position, this year, after the Aldebaran deal, By the end of the year, we should probably be back to about two times net debt, two turns of EBITDA over net debt. And we think that puts us in great position, and our funnels are active, and we continue to work, as we always have at Danaher, to ensure that we have the next deal ahead of us and take advantage of the balance sheet that we have. So we're very well positioned there. We feel good about where we sit.

Great. Thanks very much.

Thank you.

We will take our final question from Luke Sergat with Barclays. Hey, thanks for squeezing me in.

Good morning, Luke. Good morning. How are you? Thanks for squeezing me in. So just quickly on the backlog and you think you're raising your guidance there or your expectations of what you're expecting in 2020 to exit the year. Can you give us a sense of the mix between the vaccine and the therapeutic revenue? or how that order book is shaping up?

Sure. So rough numbers here, Luke. Think about 85% vaccine, 15% therapeutics. Those are the rough numbers there.

Okay, that's helpful. And then we were expecting a little more balance between the 4-in-1 and the just pure COVID test. So can you give us a sense of the order there, how the orders are starting to shape up ahead of the flu season. It makes sense that we haven't had flu season yet. And then really trying to figure out how to think about the first half of 21 through that winter season.

So in terms of the mix here, in Q3 we saw 80% COVID only, 20% 4-in-1 tests. And as you think about Q4 here, we see that heading towards the 50-50. So a good way to think about it is 50% of the COVID-only tests in Q4 at 50% of the four-in-one. Now, as we think about the first half of next year, I think the best way to think about it right now is, you know, the 45 million tests that we've been talking about, and generally speaking, the same kind of mix ratios that we have within flu seasons and outside of flu seasons. So within flu seasons, probably around 50-50 is the best way to think about it, 4-1 and COVID only. And then if we're outside of the flu season, probably closer to 80-20. Got you.

That's really helpful. Thank you.

You got it. Thank you.

I will now hand the program back over to Matt Cugino.

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

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