Danaher Corporation

Good day. My name is Leo, and I'll be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's first quarter 2022 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 star 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

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, 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 May 5th, 2022. During the presentation, we will describe certain of the more significant factors that impacted year over year performance. Supplemental materials describe additional factors that impacted year over year performance. Unless otherwise noted, All references in these remarks and supplemental materials to company-specific financial metrics relate to the first quarter of 2022, 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 our actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements except as required by law. With that, I'd like to turn the call over to Reiner.

Well, thank you, John, and good morning, everyone. We appreciate you joining us on the call today. We're off to a good start in 2022 with the first quarter coming in ahead of our initial expectations. The team navigated a challenging operating environment to deliver strong revenue, earnings, and cash flow growth. And our performance was broad-based with high single-digit or better core revenue growth in each of our three segments. Now, during the first quarter, we continued to strengthen our competitive advantage through high-impact growth investments in innovation and bioprocessing production capacity, both of which we believe are contributing to market share gains. Now clearly our well-rounded results are really a testament to our team's commitment to continuous improvement and to the unique positioning of our portfolio. We just have an exceptional collection of businesses, all powered by the Danaher business system that serve attractive end markets with durable, secular growth drivers. And it's this combination that differentiates Danaher today and provides a strong foundation for the future. So with that, let's turn to our first quarter results. Sales were $7.7 billion in the first quarter, and we delivered 12% core revenue growth. Our base business was up 8%, with broad-based strength across the portfolio and COVID-19 testing contributing 4%. Geographically, Revenue in both the U.S. and Western Europe grew mid-teens, while high-growth markets were up low single digits. China declined low single digits, but was up high single digits, excluding the impact of a previously called-out significant bioprocessing project delivered in the prior year. The COVID-19-driven lockdowns that began in late March had a very modest impact on our first quarter results in China. However, as these lockdowns extend further into April, we're seeing more of an impact in our businesses, and we anticipate the situation will begin to ease in the coming weeks with an eventual return to normalized activity levels by the end of June. Our gross profit margin for the first quarter was 61.2%. The operating margin decline of 80 basis points to 28.3% is largely due to year-over-year changes in foreign currency exchange rates and product mix primarily within our life sciences segment. Now adjusted diluted net earnings per common share of $2.76 were up 9.5% versus last year, and we generated $1.7 billion of free cash flow in the quarter. So now let's take a look at our results across the portfolio. and give you some color on what we're seeing in our end market today. Let's start with life sciences, where reported revenue grew 9.5% and core revenue was up 7.5% with broad-based strength across the segment. In bioprocessing, we're seeing very robust activity levels. Customers are accelerating their investments in research and production across all major therapeutic modalities. Poor revenue in our bioprocessing business at Cytiva and Paul Biotech grew high single digits and was up low double digits, excluding the impact of that significant one-time project in China last year. The orders remained very healthy, and we continued to build backlog across both businesses during the quarter. Now, over the last two years, our customers prioritized the development of COVID-19 vaccines, and therapies to rapidly accelerate their time to market. Today, these programs require less investment in manufacturing capacity as they mature and become a part of our customers' core business. And as a result, our customers are starting to reallocate resources back to previously paused and new programs for other modalities. Notably, monoclonal antibody-based therapies, or MABS, cell and gene therapies, and mRNA-based technology. In bioprocessing today, monoclonal antibodies are the largest investment area for our customers as they're becoming the standard of care in the treatment of many diseases. Customers are adding manufacturing capacity to support both novel masks in clinical trials and the rapid growth of approved treatments. Biosimilar development and production are also increasing. as patents on higher volume therapies expire. This trend is making life-saving treatments more accessible and helping to accelerate adoption in underserved markets. Now, we continue to make substantial investments in manufacturing capacity to help meet our customers' accelerating demand in bioprocessing. An important focus area of our expansion has been with single-use technology. which are key enablers to scale the development and manufacturing of biologic and genomic-based medicines. In this first quarter, our newest plant, dedicated to the manufacturing of single-use technology, came online in Cardiff, Wales. Now, this plant, along with recently opened facilities in South Carolina and Beijing, are critical to support our customers' demand today. Long-term, they provide additional capacity for one of the fastest-growing product categories within bioprocessing. So turning to our life sciences instrument businesses, we're seeing strong levels of activity in all major end markets. Demand is particularly robust at our pharmaceutical, CRO, and academic research customers, where a healthy funding environment is accelerating the initiation of new projects. In the first quarter, Leica Microsystems, IDT, and SCIEX each grew over 10%. At SCIEX, the Xenotop 7600 and TripleQuad 7500 continue to perform well and are great examples of how our investments in innovation are driving market share gains and enhancing our growth trajectory. At Leica Microsystems, MICA is another example of impactful innovation for our customers. MICA integrates wide fields and confocal imaging in a single instrument, while leveraging machine learning and automation to dramatically simplify the imaging workflow for our researchers. So clearly, across the life sciences portfolio, we're investing in innovation to bring meaningful solutions to our customers and to strengthen our competitive position. Aldebaran continued its great start as a part of Danaher, delivering over 40% growth in the first quarter. Since joining Danaher in late August, the team has embraced the Danaher business system and is putting DBS tools to work. Recently completed Kaizen events, which focus on increasing throughput and further reducing lead time, are already generating terrific results. So we're excited about the early progress at Aldebaran and thrilled with the great work the team is doing. So now let's move to diagnostics, where reported revenue was up 21.5%, and core revenue grew 22.5%, led by over 50% growth at Cepheid. Our non-COVID clinical diagnostic businesses collectively grew mid-single digits, notably Leica Biosystems delivered their seventh consecutive quarter of double-digit order growth driven by strength in core histology, advanced staining, and digital pathology. In clinical diagnostic markets, volumes remain in healthy levels in most geographies as patients are returning for wellness checks, routine screenings, and other elective procedures. Our customers are effectively managing through periodic outbreaks by adapting their protocols and procedures, allowing them to continue providing critical healthcare services. Now, in China, we're currently seeing regional lockdowns impact patient volumes, and we expect our diagnostics business to be the most affected in the second quarter. In molecular diagnostics, respiratory testing volumes have moderated globally as the Omicron outbreak has subsided in most regions. However, demand for Cepheid's testing at the point of care remains very strong, and we believe we're taking market share. Our continued growth in share gains are a testament to the significant value of the unique combination of fast, accurate lab results and a best-in-class workflow is providing to clinicians at the point of care. As COVID-19 moves towards an endemic disease state, we're seeing increased demand for Cepheid's broader test menu. In the first quarter, non-respiratory testing revenue grew double digits, led by hospital-acquired infection, virology, and infectious disease testing. Customers, including several who initially purchased our GeneXpert system for COVID-19 testing, are expressing increased interest in expanding their menu utilization. As our customers' free capacity from respiratory testing, we believe there are significant opportunities to leverage our market-leading installed base and testing menu to drive broader utilization and demand for Cepheid's point-of-care molecular testing solutions. Now, respiratory testing revenue of $900 million in the quarter exceeded our expectations as customers showed an increased preference for Cepheid's 4-in-1 combination test during the respiratory season. Our combination test for COVID-19 flu A, flu B, and RSV represented approximately 65% of the 17 million respiratory cartridges shipped in the quarter. with COVID-only tests accounting for approximately 35%. So now let's move to our environmental and applied solutions segment, where reported revenue grew 2.5%, with core revenue up 6.5%, including high water quality and mid-single-digit growth at product identification. At water quality, Chemtreat delivered its fourth consecutive quarter of double-digit core growth. Accelerating demand for our analytical chemistries and consumables was driven by activity across municipal, chemical, food, and beverage end markets. Equipment order rates also remained strong as customers are continuing to invest in larger municipal projects. Now, product identification Our marking and coding business was up high single digits, partially offset by slight decline in our packaging and color management business. VideoJet was up high single digits with strong demand in food, beverage, and industrial end markets. So stepping back, our water quality and product identification platforms have done an exceptional job of leveraging the Danaher business system to improve their positioning, both from a cost and growth perspective. While supply chain pressures have been modestly more pronounced in EAS, our teams are using DBS tools such as daily management to work with suppliers and ensure production component availability. We're also using visual project management to help us re-engineer our products faster with a focus on moving from difficult to source electronic component to newer, more cost-effective next-generation chipsets. Now, we believe DBS enables us to deliver faster and more reliably than many of our competitors. Now, our teams are also using DBS growth tools to accelerate innovation and deliver more impactful solutions to the market. Innovations such as VideoJet CIJ1880 printer and HOX HQ Series portable meters are helping our customers solve the many challenges they face, from increasing regulatory requirements to skilled labor shortages. And we're seeing the impact in our core growth, which has averaged mid-single digits annually over the past 10 years at EAS. So we believe this combination of the rigorous application of DBS tools paired with our proactive growth investments is driving meaningful market share gains and enhancing our long-term competitive advantage. So now let's briefly look ahead to our expectations for the second quarter and the full year. In the second quarter, we expect to deliver mid-single-digit core revenue growth in our base business, which includes a headwind of approximately 200 to 300 basis points from the ongoing COVID-19-related shutdowns in China. For the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business, as we expect the shutdowns in China to normalize as we move through the remainder of the year. We continue to expect both a low single-digit core growth headwind from COVID-19 testing and overall mid-single-digit core revenue growth. So to wrap up, We had a good start to the year and look forward to building on this foundation as we move through 2022. Our first quarter results are a testament to the dedication of our outstanding team and their commitment to executing with the Danaher business system. And these results also reflect the unique positioning of our portfolio and the exceptional collection of high quality franchises that comprise Danaher today. We believe the durability of our businesses, where consumables now represent 75% of revenues, positions us exceptionally well in today's dynamic operating environment. So this powerful combination of our talented team, the strength of our portfolio, and the Danaher business system differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, I'll turn the call back over to you, John.

Thanks, Reiner. That concludes our formal comments. Leo, we're now ready for questions.

At this time, if you would like to ask a question, please press star 1 now on your telephone keypad. To withdraw yourself from the queue, you may press the pound key. Once again, star 1 to enter the queue. We'll take our first question from Derek DeBruin of Bank of America.

Hi, Derek. Morning.

Hi, good morning. Thanks for taking my question. Just a couple of sort of like incomings from clients. I think first of all, just a little bit more on the difference between, I think you mentioned 19 million on the CEPIID guide and it came in at 17, just a little bit more color on the volume difference there. And I think also related question, just are you seeing any sort of stockpiling in terms of either vendors for either bioprocessing or on the diagnostic side, and I've got one more follow-up.

Good. Thanks, Derek. Well, let's start off with the cartridge shipments here in the first quarter. Early in the quarter, as many, we suffered from some absenteeism related to the Omicron outbreak in our manufacturing plant, and that affected the production levels on the one hand. On the other hand, the mixed shift larger than anticipated towards the 4-in-1 test, 65% versus our assumption of 50%, ended up resulting in a beat in terms of revenue. So really, a short-term contained issue that affected manufacturing volumes. Ultimately, the mix and the strength of the team's recovery ended up resulting in the 17 million cartridges of shipment. If we switch gears briefly and go to the topic of stockpiling, we are very, very sensitive to this particular topic and stay extremely close with our customers. As an example, in the first quarter, Cepheid continued to be sold out. If you think about bioprocessing, this is an area where there continue to be, in the industry, manufacturing constraints. So we are very, very close to our customers working together with them with their manufacturing schedules to ensure that we're able to not only meet their needs, but also to ensure that we don't have inventory buildups in the system. So could there be pockets of that perhaps on the margin? But generally speaking, we don't see a significant buildup in the supply chain.

Great. And just can you, on the China headwind in the quarter, that 200 million basis points, What's supply versus demand?

Well, this is entirely related to supply and accessibility of customers. So the demand in China continues to be very robust. As you may have noted, in the first quarter, without this large project in the prior year, China was up high single digits for us. very strong. So this is really related to customer accessibility in hospitals and labs and, of course, the one or the other manufacturing plant that's affected by these shutdowns. Now, as we sit here today, we're already receiving the news from our team that we're able to open up not just our plants, and so those are starting to open up here as well, fully, but surely, as well as we would expect throughout the quarter clients or, I'm sorry, well as lab accessibility to improve already in May and then get back to more normal levels here by the end of the quarter.

Great. And if I can sneak one more in. The 2Q hit, nice to see you reiterating the full year guide with that. Is that expected as you expect all that China business to come back or you think you'll see stronger growth in other regions offsetting it? Thank you. I'm done.

This is mostly about China getting back to normal activity levels and both customers as well as our plants having the makeup capacity to make up for what we think are relatively short shutdown periods. Having said that, the business is a large one and there's always pockets that will grow faster. Between the two things, we feel confident that, you know, our guide for the full year holds.

We'll take our next question from Vijay Kumar of Evercore ISI.

Good morning, Vijay.

Good morning, Rainer, and congrats on a solid Q1 print. Maybe one on the vaccine side, Rainer. I know it's part of the base. But I guess yesterday, J&J, they pulled out their vaccine guidance. They're not guiding to vaccine revenues anymore. Obviously, there's been a lot of questions on the vaccine side and based bioprocessing. So maybe just talk about your bioprocessing trends in the queue. What were order trends? Were orders above revenues? And are we still confident about the $2 billion vaccine outlook for fiscal 2022? Sure.

Well, thanks, Vijay. So let's just level set on the numbers briefly here. If we think about bioprocessing, Q1, and as I mentioned during my opening commentary, we extract that very large Q1 shipment last year in China. Our bioprocessing business was up low double digits here in Q1, very, very strong order activity. And I'll come back to that in a minute. Now, if you look at our first quarter last year, our sales were up over 70%. And so if you look at the two-year stack for Q1, you know, we're in the 35% to 40% growth area, which we think is very robust and more than representative of what is going on in the market and think that that compares extremely well. In fact, we still think that we're taking share there. So that's sort of one marker that I want you to have. And then the second point is the order activity continues to be very, very strong. Last year, our orders in the first quarter were up over 90%. And so we anticipated that our orders in Q1 of this year would be down. But nonetheless, we continue to build backlog here in Q1 as well. in the bioprocessing area. This is why we're so confident in our core growth guide here for the year on bioprocessing of high single-digit, low double-digit. Between the robust growth that we're seeing and the backlog that we have, that's really important. Now let's unpack that a little bit and think about what's going on and why you know, COVID is sort of one variable, but that there are other variables here that are incredibly important and explain why we talk about the bioprocessing business and its growth in aggregate. So, first of all, if you think about the activity level outside of COVID in the bioprocessing business, it's important to see what's going on in clinical trials. And I've talked about this, but you know that the project pipeline for monoclonal antibodies is 50% larger today than it was five years ago. For cell and gene therapy, it's 10x larger, driving extraordinary activity here in the clinical trials area. And what you see, and as I mentioned in the opening comment, you see customers really starting to focus on these new projects across all modalities, and not just allocating their resources to COVID, but to these new modalities. So that's really important to note that customer activity level continues to be very, very high, and that plays through in the clinical trials. Now, another point to take here is monoclonal antibodies are becoming the standard of care and the predominant class of biologic drugs. So what's going on in monoclonal antibodies is the primary growth driver in the market and also for our business. And recently launched products that are ramping to new treatments and new indications are driving an exceptional amount of volume here. And then you add to that that emerging markets and high growth markets such as China and India are starting to have access to these monoclonal antibody treatments that provides additional and significant volume leverage. At the same time, you have biosimilar growth, Vijay. So these biosimilars are leveraging the fact that some of the biologic drugs, monoclonal antibodies that are higher volume are starting to come off patents, and that's increasing the penetration of those drugs throughout the world. where the penetration has been lower, and that's providing another growth impetus. And then lastly, and I'll stop with this now, we've been talking about single-use technology and their adoption for a while, which is an additional leveraged growth vector within the bioprocessing business. So all that healthy activity that we talked about provides for volume, but SUT on top of that is substituting more traditional technologies and is growing even faster. And we have well over a billion dollars of single-use technology. And we've just announced that our third new plant coming on for single-use technologies in Cardiff, Wales. So we feel very confident on the basis of what's going on outside of COVID. And that's why we look at it together, because it's the aggregate that we look at, and that really ultimately counts. will drive that high single-digit, low double-digit growth here for 2022 and also supports our high single-digit perspective beyond that.

That's helpful, Ryan. And maybe one quick one for the group. I think incremental margins, you know, we were looking at perhaps mid-30s. Q1 came in below. Matt, was this? Will this supply chain inflation impact in Q1 or perhaps FX or maybe just talk about incrementals and have expectations change for fiscal 22?

Yeah, no, for Q1, I mean, we kind of came through about 25%. I think that was pretty much in line with what we thought, Vijay. So no real difference, I think. You know, from a year-over-year perspective, the difference between that 35 to 40 that we normally talk to and this 25, it was all FX, right? So in the quarter, I mean, you think about it, it was kind of like a 7-cent headwind here for us. So I don't think we saw anything. You know, obviously supply chain is what it is, but I think we were able to kind of work our way through that. I really think it was all FX here in the quarter and first quarter. As far as – and I think you bring up a good point then as far as the full year goes. So I would say there's no change to the full year fall through, you know, other than the FX impact that we're seeing. And just to kind of, you know, lay that out, you know, we continue to expect mid-single-digit core growth, you know, from kind of the core and acquisitions. And that will have that 35% or 40%, you know, fall through. You know, in January, we thought that FX was going to bring that 35% to 40% down to, say, 30% to 35%. But given, you know, the currency moves we've seen since January, you know, as we sit here today, I think it's going to be more like 20%, 25% fall through for the year versus, you know, the 30% to 35% that we sort of guided to the last time. So, you know, look, it still leaves us If we deliver that, that still leaves us with low single-digit EPS growth for the year, despite, you know, what I think is some pretty significant FX headwinds year over year. And maybe just to give you a color on the sizing of that headwind, I mean, right now FX is going to be a 35-cent EPS headwind year over year. And that's a pretty meaningful number for us, you know, here during the year. It's probably half of what we initially thought. So, It's a pretty big headwind here for the year, and it was a little bit here in the quarter, too.

This is helpful, Matt.

Thank you. We'll take our next question from Scott Davis of Melius Research.

Scott, good morning.

Good morning, guys. Thanks for all the detail here. The price dynamic, I mean, I know FX is FX. Can't do much about that, perhaps, but Are you still out there capturing additional price to offset the general inflation and general cost and logistics issues that are so prevalent?

Scott, we have been working price directly and indirectly, and we're seeing very good traction. Let me lay that out for you here, and let me start off with the fact that You know, there are inflationary pressures out there. We've talked about that in the past. And that's moved from sort of the classic topics of, you know, memory chips and other types of chipsets and freight and perhaps labor to seeing more broadly inflation. But nonetheless, with the Dan and her business system, our teams have been able to do a number of things here in order to contain this. of course, is related to ensuring the robustness of the supply. Many of our businesses today are gaining share because we are able to continue our supply, have shorter lead time, because we're able to access and secure the components necessary to drive our manufacturing and our business. So it's an important aspect to this entire equation of growth and share gain. Secondly, the DBS tool sets that we have been putting in place are also helping us offset costs in the sense, and as I mentioned in the introductory comments, that, look, we are able to now re-engineer more quickly to other types of, again, I'll use the example of chipsets, to next-gen chipsets more broadly, consolidate those, and not only gain supply, but then also reduce our costs. So there's an entire DBS machine, if you will, that is driving to secure supply and to offset costs. At the same time, of course, we're driving price and we see strong traction there. In fact, we're well over 200 basis points of price here in the first quarter. And that's a quarter that still had a fair amount of, if you will, 2021 backlog in it, right? So we have now worked through the majority of that backlog and expect to see continued momentum there. So thinking about price at these levels of 200 plus basis points, that's the right way to think about that. And it's just another testament to the strength of our portfolio, the degree of differentiation of our product, and the leverage that this razor, razor blade business model provides us with 75% consumables, many of which are specced in or keyed in to the equipment or instruments that they supply.

We'll move next to Dan Brennan of Cowan.

Hi, Dan. Good morning. Good morning. Good morning, Landon. Thanks for taking the questions here. Congrats on the quarter. So, if I could just go back to bio process, obviously, really nice quarter with the high single-digit growth against an extremely tough comp. You know, I appreciate COVID as part of the base, and it's great about all the, you know, robust inherent out of the ex-COVID, which is a big driver long-term. But given the interest in kind of dissecting COVID at this point from investors, it would be helpful to learn if the 2022, you know, high single, low double-digit guide continues to incorporate $2 billion from COVID. And if it does, you know, any call that you can provide there about, like, how much of that $2 billion is blocked in with firm orders.

Thanks, Dan. You know, really, the way we're thinking about that business is, again, in aggregate. And we do believe that both the underlying strength of the markets, as I just laid out, as well as the strength of our backlog, which continues to grow, supports both the high single-digit, low double-digit bioprocessing guide for the year. And as you think about COVID within that, COVID is going to do what it does, but there is a larger market that is growing rapidly, and we're going to continue to see fluctuation as it relates to COVID volumes, whether there's a decision on booster shots for different age groups, whether it becomes part of an annualized immunization regimen. All of these are open questions. And our belief is that COVID is a part of our business, but there is another part of this business, which is larger, is growing at a factor rate, and we are making investments to ensure that we capture the appropriate shares here. So, Dan, high single digits, low double digits, bioprocessing growth for 2022.

Terrific. So Aldebaran, really strong quarter out of the gate. Maybe can you give us a little color on how the integration is going? And in light of the really strong first quarter, how do we think about Aldebaran for the full year in 2022 and beyond?

I mean, we couldn't be more pleased with the team. You know, I've been up there several times working with the team, seeing how they're growing, bringing on capacity. We continue to invest in expansions there. And that 40% growth exceeded our expectations and gives you a sense of how quickly the Danaher business system has gained traction. And that's a combination of a couple things. The first thing is the leadership and the team at Aldebaran that is pulling and open to applying the Danaher business system as fast as possible to fortify their competitive advantage in lead time, in quality, and to ensure that we drive this business to the growth of its potential. And, you know, we think for 2022, we continue to think that the $500 million revenue number is a good number, 40% in Q1. We certainly expect to be, you know, in the first half here, well over our expectation of 20% plus revenue. that we previously talked about. So $500 million for the year is a good number, and that team is firing in all cylinders.

And if I could speak one more, just on China, obviously good news that you guys are managing through this and the four-year diet is maintained. Maybe could you just give us an update, like in Q2, like what you're actually expecting for China? You know, maybe you said the number. I missed it. And kind of how do you think about China, you know, for the four years since you are expecting a nice rebound exiting Q2? Thank you.

Just to revisit, we've talked about China here. In the first quarter, it was really the end of March where we started to see the impact of some of these larger-scale shutdowns, and we continue to see those here in the first week of April, although we've just spoken to the team here yesterday, and they've received approval to start opening up plants and we also see more activity at our customers. And so we do expect to work through the shutdowns here in the second quarter. Again, that was the 200 to 300 basis point headwind that we included in our Q2 guide of mid-single digits. So as we think about the quarter here, and for China, remember we had a very strong activity level in Q1 of high single-digit growth minus that large transaction last year. And we expect that in China we'll probably be down in Q2, you know, mid to high single-digit percentages for the quarter. Now, once again, we expect that to unwind in Q2. and then continue to catch back up here through the year where we continue to see China as a high single-digit market.

Great. Thank you. We'll take our next question from Jack Meehan of Nefron Research.

Good morning, Jack. How are you?

Thank you. Good. Good morning. So on life sciences, I wanted to turn to some of the capital-heavy businesses, SCIEX, Leica Micro, Paul Industrial. Can you just talk about the durability of the growth you're seeing there? How are order trends and any change to the growth expectations for the year?

So in life sciences, if we now pivot from bioprocessing and more to the life science analytical businesses, as you suggest, Jack, we're seeing very strong underlying activity in the various sectors of the business. If you think about the pharmaceutical segment, CROs, academic research customers, our funnels are strong and continue to outpace quarter over quarter what we've seen in 2021. I think that's buttressed for us particularly because of the strong innovation track record and the recent launches that we've had. I've talked to those at SCIEX, the Xenotop, the AccurateMath instrument, as well as the 7500 triple quad. Those are class-leading innovations that are growing exceptionally well and driving market share gains. Beckman Life Sciences, with their CytoFlex benchtop cell sorter, the most recent And then, of course, we talked about MICA, which is that combination of wide field and confocal leveraging machine learning. So we're firing on all cylinders here in a strong investment environment. And we think that that's sustainable here for the foreseeable future as we continue to see investments from both the biotech sector, but also academic sectors, as well as institutions that are very, very bullish on the innovations and the science that they want to drive forward.

Right. And then just a broader question on M&A. You know, it's been obviously a very choppy macro environment. Look at the cash flow statement. It was a light quarter for you on M&A. Just curious how you're seeing assets in the market. Do you feel like expectations have changed at all from sellers and just your own willingness to do M&A kind of in a choppy environment? Thanks.

Well, Zach, I'll tell you, we've excelled in these kind of environments historically from an M&A perspective. You know, these environments of dislocation inevitably show up opportunity and we feel very good about how we're positioned with our funnel. Now, having said that, you know, the volatility that we're seeing today is, while it might not feel that way, relatively recent, and it's probably a little too early to see the full impact of that volatility. Having said that, you know, we're sitting here at, you know, with two X turns, very strong free cash flow of over $7 billion. and over $10 billion of EBITDA, so we feel like we're in a very good position both in terms of the strength of our balance sheet as well as the opportunities that lie ahead.

We'll take our next question from Patrick Donnelly of Citi.

Good morning, Patrick. Hey, morning, Ryan. Thanks for taking the questions. Maybe once let's kind of jump away from China on the geographic spot. Over in Europe, you know, obviously a lot going on there on the geopolitical side. Can you just talk about if you've seen any change in customer behavior, any change in funding over there, what your guys' perspective is on that region as you work through this?

So Western Europe has continued to perform very well for us, as I mentioned in our opening comments here. We had strong growth in the mid-teens in Western Europe here in the first quarter. While we think that moderates a little bit here in Q2, just because of some of the prior year performances, the activity levels remain very strong. Certainly in Western Europe, that's the case. You know, as you think about in your reference to the geopolitical side, you know, Eastern Europe just has not been that large of a factor in the life science research and bioprocessing area as an example. And from a diagnostics perspective, we continue to see very high, let's say close to normal activity levels as well. So Western Europe for us continues to perform as expected.

Okay, that's helpful. And then maybe on the diagnostics business, just looking at the core performance there, ex-COVID looks pretty strong. Can you just talk about that? And then maybe Matt can talk about the diagnostics margins, also really strong, just the sustainability there.

Sure. As we think about the business momentum, really in all regions, with the exception of China, which I talked about, we're seeing patient levels, activity levels, really at or very close to pre-pandemic levels. And so from a macro perspective and patient volume, it's a positive environment for us. And then if you put on the back of that the recent product launches that we've had, the DXH-900 hematology, as well as the DXA-FIT, an automation for small and medium-sized labs, we're also continuing to benefit from that NPI pace that we have invested in here over the past year. So for us, diagnostics continues to be a strong forward momentum. Matt, did you want to take this?

Yeah, I mean, on the margin front, I mean, I think, you know, you think about that is going to be a big part of that will be CEPI and the volume that we're seeing there. So as long as we've got that volume and we expect to have, you know, a touch less here into next quarter, but I think those margins are pretty sustainable at that level. You know, we've talked about, and importantly, I think, you know, the margin profile of the Cepheid respiratory is no different than the margin profile of other Cepheid tests, right? It's actually very similar to the flu. So, you know, I think it's a sustainable number here as we look forward. Thanks, guys.

We'll take our final question from Luke Surgat of Barclays.

Morning, Luke.

Morning. Thanks again for the question here. So I guess I just wanted to kind of dig in on the long-term growth target, the biopharma high single digits, and really trying to figure out, you know, where the offsets are coming from. You talk about the MABS. I know you're adding new capacity, but as COVID kind of is completely up in the air and that rolls off, give us a sense of, you know, how much that could roll off and you guys continue to maintain that long-term growth target.

Happy to. So, Luke, the way we're thinking about that is the strength of our underlying business, which I've laid out here in some detail, from clinical trials, MADs, biosimilar volumes. Keep in mind, it's the commercialized drugs that really drive volume here in this business. and then, of course, that additional growth accelerator, the single-use technology adoption, those are really the foundations that are driving the growth of this business. And the COVID business will do what it does, but that variation is within the realm of what we have been casting as the overall growth rate of the business. And so you take the backlog, which continues to grow quarter over quarter, and you take the growth drivers that I've laid out, you know, that is what supports the high single-digit, low double-digit growth for 2022 and the high single-digit longer-term growth guide that we've talked about.

Great. Thanks. That's helpful. And so back to Aldebaran here, I know they're continuing to add capacity. Is that still – Is that coming in faster than you guys expected, or should we still expect that to pace out through 23 and 24?

That's going to continue to pace out as we add line after line after line. But I would say that these are programs that are coming on or better than schedule as the team continues to gain speed here, not only with their subject matter expertise, which is differentiated, so unique in the marketplace, but also with their adoption of the data or business system. So we look for that $500 million here in 2022.

Okay, great. That's all for me.

Thank you. And this does conclude our question and answer session. I'd be happy to return the call to our hosts for any concluding remarks.

Thanks, everyone. We'll be around the rest of the week for questions.

This does conclude today's call. You may now disconnect your lines. And everyone, have a great day.