Danaher Corporation

My name is Gretchen, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's second 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'd like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press 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.

Thank you, Gretchen. 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, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, and additional materials are all available on the investor 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 August 4th, 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 refer to results from continuing operations and relate to the second 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 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 to all of you. We really appreciate you joining us on the call today. So let me start with we had a great quarter. In fact, our strong second quarter results rounded out a terrific first half of the year. Broad-based strength across the portfolio drove better-than-expected revenue, earnings, and cash flow. And we were particularly pleased with the performance of our base business, which grew high single digits, and believe we gained market share in many of our businesses. Now, these results are a testament to our team's strong commitment to executing in a challenging operating environment. They've done an incredible job leveraging the Danaher business system to help mitigate supply chain constraints, manage inflationary pressures, and improve our competitive positioning with impactful new innovation. Our second quarter results also highlight the strength and resilience of the businesses that make up Danaher today. Our portfolio is comprised of leading franchises positioned in attractive end markets with strong secular growth drivers, all united by a common set of durable business models. In fact, nearly 75% of our revenues today are recurring. the majority of which are consumables that are specified into highly regulated manufacturing processes or specific to the equipment that we supply. On top of that, our strong balance sheet and free cash flow generation positions as well to further enhance our portfolio going forward. We believe this powerful combination of our talented team and the strength of our portfolio, all powered by the Danaher business system, differentiates Danaher and reinforces our sustainable long-term competitive advantage. So with that, let's turn to our second quarter results in a little more detail. Sales were $7.8 billion, and we delivered 9.5% core revenue growth, including 8% growth in our base business, with strong contributions from all four of our operating platforms. COVID-19 testing contributed an additional 150 basis points to core revenue growth in the quarter. Geographically, core revenue in developed markets grew low double digits with broad-based strength across North America and Western Europe. High growth markets were up mid-single digits, including impressive high single-digit growth in China. Our results in China significantly exceeded our expectations, which is particularly notable as lockdowns continued for longer than we anticipated. So now I'd like to take a moment to acknowledge our associates in China for their extraordinary efforts and commitment during such a challenging time. To the teams that managed the approvals necessary to reopen our facilities, the supply chain and logistics teams that kept parts moving, and the manufacturing associates who spent several weeks away from their families, thank you. Thank you for supporting the reopening effort, and most importantly, thank you for supporting our customers. This is such a great example of one of our core values, the best team wins in action. Now, as we move through the rest of the year, we're keeping an eye out for further outbreaks and regional lockdowns. But we're currently seeing more normalized business operations in China and expect this positive trend to continue for the balance of the year. Gross profit margin for the second quarter was 60.9%, and our operating margin of 28.4% was up 60 basis points, including 100 basis points of core operating margin expansion. Our strong margin performance was a result of disciplined cost management and the proactive measures our teams have taken to address the inflationary pressures we've seen over the last several quarters. We're also using DBS tools to execute price actions, and we achieved approximately 400 basis points of price increases in the quarter, a significant acceleration from our historical price realizations. Adjusted diluted net earnings per common share of $2.76 were up 12% versus last year. We also generated $1.7 billion of free cash flow in the quarter and $3.4 billion year-to-date. 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 markets today. In our life sciences segment, reported revenue grew 6% and core revenue was up 7%. Strength was broad-based across the segment with high single-digit or better-based business core revenue growth at each of our largest operating companies. In our bioprocessing business, we continue to see record activity levels from early stage research to later stage development and production. which drove a combined core revenue growth rate of high single digits at Cytiva and Paul Biotech. Our backlog and our order levels remain very healthy, and as always, we're working closely with customers to ensure they have the right inventory levels to support their planned activity. We are seeing our customers continue the healthy transition away from COVID-19 vaccines and therapies, and into previously paused and new programs for other modalities. As a result, we now expect COVID-19 vaccine and therapeutic revenue of approximately $1 billion in 2022, down from approximately $2 billion in 2021. Now, that said, there's no change to our high single to low double-digit core revenue growth outlook in our bioprocessing business for the year. as customers are accelerating their investments across all other major therapeutic modalities. This acceleration, paired with improving price realization, is driving more than 20% core revenue growth in our non-COVID business, up from the low double-digit growth we've seen historically. The biologics market remains very healthy, as evidenced by the increasing number of treatments in development and production. Today, there are over 1,500 monoclonal antibody-based therapies in development globally, which is up more than 50% from just five years ago. This is being driven by both novel molecules in development and the proliferation of biosimilars, which are helping to accelerate adoption in underserved markets as patents on higher-volume therapies expire. There are also over 2,000 cell and gene therapy candidates in development today, a more than tenfold increase over the last several years. Given this backdrop of such a significant and sustained increase in activity, we expect the growth rate in this market to remain very strong for many years to come. Now, as the complexity required to manufacture these life-saving treatment increases, Customers are looking to collaborate with us to help them solve their most challenging problems and assist them as they move from lab to production scale. Cytiva recently announced a collaboration with Bayer to develop the industry's first modular end-to-end manufacturing platform for allogeneic cell therapies, which will help to improve the treatment of a broad array of diseases, including cancer. This collaboration is just amazing. Another great example of how our scientific expertise and leading positions in upstream and downstream applications are helping these cutting-edge therapies advance from the laboratory to the clinic. Our more instrument-oriented life science businesses collectively delivered high single-digit-based business core revenue growth. We're seeing a healthy funding environment and solid demand across most major end markets. SIEX core revenue was up more than 10% in the second quarter, driven by an acceleration of new projects at our biopharma, CRO, and academic research customers. We continued our cadence of innovation with the introduction of several new solutions that improve the accuracy and efficiency of genomics and proteomics research. Notably, SIEX introduced the Xenoswath VIA, an innovative software solution which doubles the number of proteins that can be discovered versus previous swath approaches, helping researchers discover more potential biomarkers and better understand the cause and treatment of diseases. Now, in our genomic businesses, customers are making significant investments in the development and production of cell and gene therapies, DNA and RNA vaccines, and gene editing. IDT had its 10th consecutive quarter of double-digit core revenue growth, led by robust activity in next-gen sequencing and gene writing and editing. Aldevron, more than 20%, while also making significant progress on the capacity expansion projects needed to support their long-term growth outlook. Now, moving to our diagnostic segment, Reported revenue was up 9.5%, and core revenue grew 12.5%, led by nearly 30% growth at Cepheid. Our other diagnostic businesses, including Beckman Coulter Diagnostics, Radiometer, and Leica Biosystems, collectively delivered mid-single-digit core revenue growth, despite headwinds from the COVID-19-related shutdowns in China. In China, our diagnostics core revenue was flat year over year. Site access and patient volumes slowly improved as the quarter progressed with a more pronounced recovery in June. Patient volumes remained slightly below normal levels, but we expect continued recovery as we progress through the remainder of the year. Now, outside of China, patient volumes across hospital and reference labs held up well during the quarter, and remain at or above pre-pandemic levels despite recent outbreaks of emerging COVID variants. Our diagnostics customers continue to face skilled labor shortages and are increasingly seeking to improve automation and productivity within their labs. This quarter, Leica Biosystems introduced its next generation, fully automated advanced staining platform, Bond Prime. to help address these needs in the pathology lab. Bond Prime facilitates a continuous pathology lab workflow and delivers the high-resolution stains needed for a definitive diagnosis with an industry-leading average turnaround time of only 90 minutes. As I mentioned earlier, core revenue growth at Cepheid was up nearly 30% in the quarter. Low teens growth across our non-respiratory test menu was led by sexual health, hospital-acquired infections, and virology. In respiratory testing, strong global demand persisted for Cepheus point-of-care assays, and we believe we continued to gain market share. Respiratory testing revenue of approximately $750 million in the quarter exceeded our expectations of approximately $400 million. The spread of highly transmissible COVID variants and greater incidence of other respiratory infections, such as RSV and flu, led to both higher testing volume and a preference for our four-in-one combination test. As a result, our four-in-one test for COVID-19, flu A, flu B, and RSV represented about 50% of the 16 million respiratory cartridges shipped in the quarter with COVID-only tests accounting for the remaining 50%. Now, as COVID-19 shifts to an endemic disease state, we're seeing more customers begin to consolidate their point-of-care PCR testing platform onto the Cessia GeneXpert. This preference for the GeneXpert, both within hospitals and across healthcare networks is evidence of the significant value the unique combination of fast, accurate, lab-quality results and an easy-to-use, best-in-class workflow provide clinicians. In addition, as our customers begin freeing capacity from respiratory testing, they are increasingly interested in discussing opportunities for broader utilization of CEFIA's leading point-of-care molecular testing menu. Moving to our environmental and applied solutions segment, reported revenue grew 6.5% and core revenue was up 10% with double-digit core growth at water quality and mid-single-digit core revenue growth at product identification. In water quality, Chemtree, Trojan, and Hawk each grew double digits during the second quarter. Robust growth in our analytical chemistries and consumables was broad-based across all major end markets. Equipment sales remained strong with healthy levels of project activity at both industrial and municipal customers. At product identification, marking and coding was up high single digits, and packaging and color management grew mid-single digits. VideoJet was up high single digits, led by North America, where food and beverage sales were particularly strong. Our EAS team are leading the charge and writing the newest chapter in the DBS playbook to counter the supply chain and inflationary pressures we're seeing every day. They've been reengineering products to reduce our reliance on hard-to-source electronic components and using daily management to work closely with suppliers to ensure production part availability. These efforts, along with our accelerated price actions, are also helping improve our margin position. We saw the impact on our results this quarter with more than 100 basis points of core operating margin expansion at EAS. Our strong performance also highlights the resiliency and the durability of the high-margin recurring revenue business models that make up our EAS portfolio. With that color on what we're seeing in our businesses and end markets, let's now briefly look ahead at expectations for the third quarter and the full year. In the third quarter, we expect to deliver high single-digit core revenue growth in our base business. We expect a mid single-digit core revenue growth headwind from COVID-19 testing, resulting in low single-digit core revenue growth overall. For the full year 2022, there is no change to our previous guidance of high single-digit core revenue growth in our base business and mid single-digit core revenue growth overall. Given our strong second quarter performance, we now expect operating fall through at the high end of our previously communicated range of 20 to 25% for the full year. So to wrap up, we're really pleased with our strong second quarter and first half performance. Our results are a testament to the team's consistent execution in a dynamic operating environment and to the durable balanced position of our portfolio today. Looking ahead, our team's commitment to executing with the Danaher business system, our differentiated portfolio of businesses serving attractive end markets, and our strong balance sheet all position Danaher to continue delivering sustainable, long-term performance.

So with that, I'll turn the call back over to John. Thanks, Reiner. That concludes our formal comments.

Gretchen, we're now ready for questions.

At this time, if you'd like to ask a question, please press the star and one 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 one to ask a question. We'll take our first question from Derek DeBruin from Bank of America.

Good morning, Derek. Hey, thanks for taking the question. This is Mike Riskin on for Derek. A couple of quick questions. One on the COVID versus non-COVID bioprocess you talked about. Really appreciate the clarity on the, you know, the reduction in COVID, but then fully offsetting that with non-COVID strength. I want to ask on the non-COVID bioprocessing, you know, your higher expectations for that, how durable do you think that is into future years? Is that growth rate in those businesses sustainable for 2023 and beyond? Or are we seeing a little bit of a catch up in 2022? just due to, you know, some of those projects being put on hold the last couple of years.

Thanks, Mike. Look, I mean, I think the way we see it is the following way. Let's level set on 22 here, where in the COVID business, we see revenues going from 2021, 2 billion to 2022, 1 billion. The non-COVID business, as you suggested, has accelerated here as customers are moving to non-COVID modalities and all sorts of them, very broad-based. And, of course, on the margin, price ends up helping that as well. So we would expect, you know, certainly for 23 to continue to see elevated levels of non-COVID activity, probably above the low double digits that we have seen historically in Too early to say if it stays up over 20%, but certainly elevated in 23% versus what it's been historically.

Great. Are you seeing any stocking or any change in purchasing patterns by any of your customers, in particular CDMOs? And that's related to the buy process, but then just overall anywhere across your portfolio?

So we have very, very close relationships as a result of, you know, what we've just all passed through here in the last 18 months. With all of our customers, we conduct regular surveys. And, you know, while there is the one or the other customer that has canceled a large project, which, by the way, is not that unusual, right, in this business, you know, projects sometimes fail even in late-stage clinical trials. I would say, generally speaking, we see healthy inventories across the sector and don't see any major pockets of buildup.

Thanks. And then one last one, if I could squeeze it in. The feeling better about the operating margin fall through for the rest of the year, just to clarify, is that the effect of the beat in 2Q, or is there anything else going into that in terms of pricing, supply chain, COVID contribution, sort of like what's changed there?

Yeah, I mean, I think Certainly Q2 is helpful, right? I mean, if you think about sort of where we ended up in the beat, that gave us a lot of latitude to offset some of the FX headwinds. But, you know, I think if you think about what we're seeing in the businesses, pricing is holding in very well, kind of a couple hundred basis points better than we did here in Q1. You look at the supply chain, I think we've done a really good job of managing that, plus driving the pricing. So if you think about where we're at from a price-cost perspective, We like where we're at. I mean, each of our segments was positive on the margin side here during the quarter. So I do think that as we sort of go forward, you know, that we've got our arms around the price-cost and feel pretty good.

Great. Thanks so much.

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

Morning, BJ.

Morning, Rainer. Congrats on that terrific print here. Maybe one in a simplistic question on the guidance here, Rainer. 2Q of revenues beat by 650 basis points. It looks like bioprocessing, your orders are strong, instruments are strong, execution coming in about, but the annual guidance is reiterated. Anything going on in second half, or is this...

over to some given given the macro I think we feel continue to be you know really comfortable with our full year guide here we've talked about the base business being high single-digit here for some time and you know we saw that play out here throughout the quarters and we don't see any reason whether that is you know demand and you know the orders development or the backlog position that would give us pause as it relates to the high single-digit base business guide that we have. Now, as we talk about COVID testing, I think you as many and all of us, you know, continue to do our best in terms of forecasting what might be happening and testing at any given moment. But as we go forward with testing, I think our perspective that, you know, Q3 in particular, is sort of the slowest respiratory testing quarter of the year, you know, is important to note. And then, of course, as you go into Q4, respiratory season picks up again, and so we would expect to see that as well. And as I talked about there in my prepared remarks, you know, we took up that COVID testing number to about $2.5 billion here from around 2.2. We would also say it's important to think about China here. China recovered very well for us here in the second quarter after an unexpectedly long shutdown. And we continue even today to see these sort of more limited spot shutdowns throughout the country. So we continue to watch that, but fundamentally expect the second half in China to be more constructive than it was here in the second quarter.

That's helpful, Commissioner Viner. Maybe one for McGrew here. Given increments were north of 40% in 2Q, I think the guide implies back half getting back to 25. Any incremental inflation or FX impacts here in the back half, that's dragging second half incrementals back to 25%. And I think in the past, Mike, you said LRP incremental should be 35% to 40%. Is that 35% to 40% applicable for Fiscal 23 or any sensitivity to Fiscal 23?

I'm sorry, was that Fiscal 23, you said?

Yes. It was a two-part question, one back and one back.

Yeah, so, I mean, maybe just, let me just be clear. Let me reiterate kind of what we said for the full year. I can give you a little bit of color on Q3. Hopefully that sort of gets you where you need to be because I think, so let me recap what we said in the prepared remarks. Like Reiner just said, we reaffirmed high single-digit core growth in the base business and overall kind of mid-single-digit core growth, inclusive of testing. Like we talked about a little bit earlier, Q2, you know, outperformance is gave us the ability to fully offset all of the second half FX headwinds. So you'll see that in sort of the margins. $400 million of incremental FX here since April, talking about $1.3 billion, almost 5% for the full year from a revenue perspective. So no doubt that the second half will have – that FX will have an impact worse than it even did in the first half. But despite that additional FX headwind, we expect to be at the high end of the range that we talked about earlier of 20% to 25% from a fall-through perspective. So let me just kind of give you that color of where we think we'll be here in the second half, inclusive of FX headwinds. And then for Q3, revenue is going to be down $200 million year over year, and that is all due to FX headwinds. So if you think about it, we're going to have, call it $400 million of FX headwinds. couple hundred million dollars of core growth and acquisitions, but net-net, we're going to be negative here in the year. And from a, you know, I realize from a modeling perspective, it's sort of fall through in a negative environment isn't all that meaningful. So I think maybe the easier way to think about where we're thinking about for Q3 is we're expecting our EBITDA margins to be about 30% in the quarter. And so hopefully with that, And then the full year frame, right, on 20% to 25%, you can kind of, you know, it frames a little bit of what we're thinking about for sort of the back half from a margin perspective. Hopefully that's helpful.

That's helpful, Matt. And sorry, on 23, is 35% to 40% still the right number to look at?

Yeah, I think, you know, barring any additional FX headwinds or something – Who knows what could happen out there these days. But, you know, barring anything else, barring FX or some sort of other macro event, yeah, I think that's right. 35 to 40 on our base business is a good way to think about margins as we head into 23. We've talked about in the past how, you know, our margin profile has re-rated from 30 to 35 percent to 35 to 40, and there's no change to that.

That's helpful perspective. Thanks again, gentlemen.

Yep. Thanks, PJ.

Our next question comes from Scott Davis from Milius Research.

Good morning, Scott. Hey, good morning, guys. Now that we're on the topic of FX, Matt, is FX more of a concern on, I mean, is it more of a translation issue for you guys, or is there a certain level where the competitive dynamics get wonky and product around from dollar-based regions to not dollar-based regions?

No, I think it's more of the former. I mean, it's really what we're seeing now, Scott, is just it's not just the euro, right? I mean, I think that's kind of the key. Yeah, that's the one that gets a lot of the headlines with sort of going to parity. But we really are seeing a breadth of FX headwinds globally that is sort of impacting things as we think about Latin America, we think about Southeast Asia, we think about even China. It's starting to hit us in places where we just You know, we don't have a cost base, but we've got some revenues. And that's a little bit different than maybe in the past where it was a little bit more Eurocentric for us. It's just really the breadth of the FX headwinds that I think have been sort of quite, you know, it's quite surprising, frankly, but that's what we've been seeing here in the first half.

Guys, help us understand the logistics of pricing in some of your business. I know it's different now. business like Beckman, do you have to wait until contracts kind of renew to get the price? I mean, the big step up in price you had quarter to quarter, is that just a function of time and diagnostics?

I would tell you it really does vary around the businesses. Absolutely. We have contracts out there that, you know, have notification periods. Those notification periods and the way we manage contracts with nearly 100% visibility to when we can proactively move those prices is a big part of our pricing standard work. And in all businesses, including diagnostics, we have been able to move pricing in the right direction. We talked about the 400 basis points here in Q3, and as we think about sort of the second half, the first half between first quarter and second quarter was about 300 basis points, let's call it, and that's a good placeholder here, I think, for the second half as well. Now, as you come to some businesses where contract terms are longer, let's say, As a result of freights and other types of inflationary pressures, we are able to talk about other types of fees and upcharges that are not directly related to price. And that ends up providing us with the requisite uplift as well.

Good luck, Colin. Pass it on. Thank you, guys.

Thank you, Scott.

Our next question comes from Dan Brennan from Cowan.

Good morning, Dan. Good morning. Thanks for taking the questions. I guess I wanted to discuss a little bit about the last downturn and what we're beginning to see happen now. Obviously, the company is dramatically different. No Ford of no dental, and you've got all these great structural growth businesses that you've kind of taken on and are growing, particularly across all the biopharma areas. You know, in the last downturn, you were down 12% in 09, but again, such a different business. So maybe while we don't know what the magnitude and duration and the moving pieces of what the slowdown and the recession, if we enter one will entail, clearly you're preparing for a bunch of different scenarios. So I'm hoping you can just maybe help us think about a framework for Danaher. You know, the street right now has you growing, call it like 7% or so on the base for next year. Like, can you give us a sense of how we should consider the different businesses faring? as the economy slows here across LSDX and EAS and, you know, it's mid single digit, a reasonable downside case to think about or low single, just anything you can help us frame. And again, we don't know what the downturn will look like, but you're in a better position than we are to give us a sense of how your businesses will do.

Sure. Dan, first of all, I think you hit it on the head. We are a very different company today than we were in 2009. And some of that you already saw in 2020 where even as the country and the world shut down, we only had one negative quarter and ended up being obviously very positive for the year, even in 2020. But let's talk about the why here first. I mean, the portfolio transformation that was purpose-driven has made Danaher far more resilient today than ever before. And let's tease out why that is. I mean, first of all, You know, over 40% of our portfolio, well over 40%, is in biopharma, genomics, molecular diagnostics, and all of these are supported by very, very strong secular growth drivers. And you heard me talk about those in the prepared remarks with a number of, you know, therapeutic projects that are in the pipeline that drive so much value creation and activity in our industry. You know, we also see, you know, population increases, access to medical care increasing. So when we think about patient volumes around the world, we see those continuing to increase. So also, you know, from a diagnostic perspective, we're very well positioned. You think about EAS, you know, the positioning there is water is becoming scarcer, unfortunately more polluted and requires more testing. The food supply is under pressure. And so PID is very much involved in these kind of macro drivers as well. So we feel that from a portfolio perspective, it's nearly purpose-built for the world that we're in and the pressures that we live under. Now, you add to that 70% of our revenues, or I should say over 75% of our revenues are recurring. And most of those are captive, meaning they're specced in or they're specific to our equipment and instruments. along with these super durable business models, razor blade, and high service levels. So that's a very different kind of business that, once again, I'd say it's purpose-built for these type of things. Now, you add to that our scale and our DBS-led execution, where even in tough and choppy times, we're able to focus on what matters, which is our customers, and execute in that environment. On top of the strength of our balance sheet, we actually see these challenging macro environments as opportunities. So rather than battening down hatches here and having our head down, we're focused on executing, continuously improving, and taking advantage of the opportunities that the crisis can offer us. And so as you think about our balance sheet position today, less than 2x net debt to EBITDA. We're well positioned there for sure. And so looking ahead, should a recession be there or should the times get choppier, we're looking to get to the other side of that even stronger than we would enter that. Now, as we think about our 2023 guide, which I think is what Part of your question was trying to tease out. We feel good about our mid-single digit plus positioning there for the long term, which we have talked about in a number of occasions. When you unpack that a little bit, we see bioprocessing to be a high single digit, and that's consistent with what we've spoken of. As you look at bioprocessing, There we continue to think that the non-COVID business is going to be growing very strong. You saw what we're doing here in the second half of the year with growth rates well over 20% in non-COVID. And then we've also de-risked the discussion here relating COVID-related therapeutics and vaccines. We see $1 billion of revenue in 2022, and that's down from $2 billion in 2021. And we'd probably say $500 million for 2023. So 2021, $2 billion. 2022, $1 billion. And 2023, $500 million for COVID-related vaccines. And having said all that, we still see our biotechnology business growing at high single digits. And that leaves you then with COVID testing, and we've talked about that at length We speak to our customers about that. They still think that COVID goes endemic at the end of 23, beginning of 24. And we still think our framework of about $1.2 billion of COVID testing revenue in 23, which is roughly around 30 million tests, is the right way to think about it. So when you put all that together, And we feel very good about the way we're positioned here from a core growth perspective. Think mid-single digit plus on the base business. And then, you know, from a COVID headwind perspective, think, you know, low single, mid-single headwind, overall giving you, you know, a solid low single digit 2023. Great.

Thanks, Reiner. Maybe just one quick follow-up then, just as it pertains to China. Could you just flesh out a little bit? Obviously, the quarter progressed better than expected. You gave some color about the DX drag continuing. But kind of how do we think about implicit in your full year guide, like what is China expected to do? And are you expecting or baking in a completely normal China, you know, absent diagnostics for the back half?

For a normal year, we would see China, you know, in the low double digits, low teens kind of growth. We'd say for the full year this year, in view of what we've seen in the first half, high single digits is the way to think about China, which we consider to be strong growth in view of some of the macro challenges that China is facing today.

Great. Thank you. Thanks, Dan.

Our next question comes from Jack Meehan from Nefron.

Good morning, Jack.

Good morning. First question I had is on bioprocessing. So just to follow up, the $1 billion updated COVID guide for the year, can you just provide how much was in the first half? And then the assumption for the second half, could you just talk about what you're assuming related to boosters or government contracts, just how you build up to the billion dollars?

So just to repeat here, Jack, for everybody, 2021, $2 billion of revenue. 2022, $1 billion of COVID-related vaccine and therapeutic revenue. I think it's fair to say that that trails off here towards the second half of the year, getting you to, you know, for that 2023 run rate that I talked about, about, you know, 500 million for the year. So some of this stuff is lumpy, so it can go back and forth in a quarter, but that's the general downdraft.

Yeah, maybe just to put some numbers to it, I'd say it's call it a little over 500 in the first half, and then, you know, a little around 400 or so, a little under in the second half. You can see that that's sort of the magnitude of the drop.

Got it. Yeah, that makes sense.

In terms of boosters and annual shots, look, as you know, the public health official discussion there continues. Our belief is that, you know, it is likely that there's going to be a regular vaccination schedule. It remains to be seen what the uptake of that vaccination will be. But if it is, you know, on the order of what flu vaccination is in the country, you know, the kind of numbers that we talked about for 23, perhaps a little bit less, you know, much longer term, is probably the order of magnitude in an endemic vaccination regime.

That makes sense. And I also had a follow-up on China. So you grew high single digits. The guide was for down mid to high single digits. And that was despite the fact the lockdowns were longer than expected. I guess my question is simple. How did you pull it off? Can you just talk about, you know, instruments versus consumables? Just, you know, what kind of the shape of the quarter look like?

Well, first and foremost, this is about a team stepping up to the plate and executing. Our associates were ahead of the game, proactively working with the various levels of government, you know, municipal, province, and then sometimes even national to ensure that we got the necessary approvals very, very quickly and in order to be able to open up our facilities again. At the same time, our supply chain associates were prepared and ahead of the game understanding what it would take to make a quarter, the raw materials that needed to be available, the shift size that needed to be available, and the number of shipment hours that they had in order to work through it. And then we have to say, our manufacturing associates literally lived in the plant. literally lived in the plants. We built showers. They had cots. We had food and clothing brought in, as well as, you know, the necessary services to what needed to come back out in order to facilitate what is nothing but extraordinary execution with the highest level of commitment. And as you think about that, you know, whether it's instruments or whether it is consumables, it was across the board. Those things that were manufactured locally, I just talked about those people in the plants, but also those things that were imported and had the risk of being stuck in the ports as you sort of unwound the congestion associated with the shutdown. Our people were at the front of the line making sure that our goods got in first and got to the customers, were installed, were signed off, and are in use today.

Very nice. Thank you, Reiner. Thanks, Jack.

Our next question comes from Rachel Vatzendahl from JP Morgan.

Hi, Rachel.

Thanks.

Good morning, guys. Yeah, congrats on the nice quarter. So first off on COVID testing, so those obviously came in higher than expected, but I'd like to really dig into the mix of fluid versus standalone. So you were anticipating 10% of the 4-in-1 test this quarter and 90% standalone, but that sounds like it came in about 50-50. So that mix has increasingly been skewed towards the 4-in-1 product in recent quarters. So how are you thinking about that mix shift moving forward in the back half of the year? And then what's the mix that's anticipated in that 30 million test for next year?

Yeah, so as we think about, it was, this quarter was, you're right, was closer to 50-50. As we sort of think about Q3, from what we are sort of hearing, we think that it's going to look a little bit more like the mix we saw Q3 of last year, which was 80% COVID only, 20% 4-in-1. So on that, on our 325 million, call it 8 million tests or so that we think, We do think it'll be kind of skewed a little bit more like it was last year. So like Reiner said, too, just to give you some context, I mean, Q3 has historically been the slowest respiratory quarter of the year. And as we sort of talk to our customers, I think that's their expectation as well. That, you know, as we get into the summer here, it does typically become sort of the slowest time and then picks back up in the winter. As we get into Q4, I would say that that next assumption will be more like the 50-50 that we saw here and that we saw last winter as well. So I think if you think about Q4, we're talking about $525 million of revenue, maybe 11 million tests or something along those lines in a split of 50-50.

Great, thank you. And then on biotech funding concerns, so obviously there's been a number of concerns about the potential slowdown in biotech funding leading to, you know, a smaller funnel at earlier stage biotech companies as they try to rationalize candidates to conserve cash. So you flagged a number of stats on the positive pipeline for monoclonal antibodies, cell gene therapy, et cetera, and the prepared remarks. So can you just walk us through, have you seen any impact or shift in demand from that, you know, SMID biotech customer segment as a result of these funding concerns? And then how should we think about, you know, let's say that we face a prolonged, constrained funding environment for these SMID biotechs. At what point do you think that could really start to impact that phase two, phase three part of the pipeline where, you know, it starts to become more meaningful from a volume perspective, which is obviously the main driver of that bioprocessing, doesn't it? Thank you.

Thanks, Rachel. You know, Rachel, as you just suggested, the majority of these biotechs are either preclinical or in the very early stages of of clinical. And it's really important to note that our business is driven by what's happening in phase three and ultimately commercialized drugs. Over 75% of our business is in that later stage. And so then as you go upstream from that, you know, that has less of an impact. And now getting specifically to your point, we really haven't seen much of an impact of you know, the biotech funding crunch here affecting the customer activity levels that we have. And, you know, frankly, we do look at these biotechs and the proposals that they are pursuing, whether there's proof of concept in data. And our sense is that the good projects and where the data is solid and convincing and proof of concept is given, they are continuing to attract funding. We think that today's cash positions in the biotechs, the quality of the projects that they are pursuing, as well as the funding environment, still providing funding to those that are able to provide data, continues to be quite positive and is not impacting our business. Now, of course, to your longer-term question, we just have to see that the biotech area is a cauldron of innovation. That's where the risks are taken. That's where the out-of-the-box thinking oftentimes occurs. And, you know, that's where, you know, the Genentechs and the Amgens and others started, and many more that are huge public companies today. So we, of course, longer term will want to see that, you know, the funding continues to support that kind of innovation environment. But today are not concerned about about what we see here for the next, you know, call it 18, 24 months.

Our next question, or last question, comes from Patrick Donnelly from Citi.

Hi, Patrick. Good morning. Great. Hey, Reiner. How are you? Thanks for taking the question. Maybe another one, just cleaning up on 23, you know, really appreciate all the color you gave. You know, it sounds like with all the moving pieces in terms of COVID headwinds, we'll probably shake out maybe in a little more low single than the mid single for 23. And I'm just trying to figure out, I guess, with all the mixed changes, again, being a little less COVID, more heavy on the core, what the right way to think about the incrementals is. I mean, it sounds like Matt earlier was talking about kind of getting back to that 35, 40%, but just wanted to circle up in terms of the moving pieces. Again, given the mixed shift, I assume FX will still be a bit of a headwind in the first half. I mean, it's still a bit away, but we'll see what the dollar does. But can you just talk through, I guess, that margin structure as we work our way into 23, you know, given, again, the growth is looking a little more low single with the COVID headwinds that you laid out?

Yeah, sure. I mean, I think maybe just kind of, like you said, get everybody grounded. That low single is overall the base business we think would be mid-single digit plus, and the COVID headwinds, which are all testing at this point, would be sort of down low to mid-single to get to a low single overall. So, yeah. As I think about my 23 margin profile, like I said before, it's difficult right now, given how dynamic things are, especially with the FX and inflation and supply chains. But I think where we are from an execution perspective here in the quarter, where we think we'll be, if we don't have any, we might have some FX headwinds, but let's see where that ends up. But if we don't have any extra... new headwinds that show up, I just think the normal VCM of 35 to 40% is the place to be. I mean, the COVID testing, like you've seen, I mean, it's more or less at the fleet average. We've talked about how we sort of intentionally did that. We price it exactly the same as we price flu. So it's not as if it has a huge, you know, outsized necessarily impact. So I still think the right place to be from a margin perspective is that fall through of 35, 40%. on low single digits. But, you know, I think, you know, given that we're going to grow that base business mid-single digit plus, and with that sort of fall through, I still think you'd see, even in that low single digit environment, I still think we drive EPS growth.

Okay. That's helpful, man. I appreciate that. And then, Reiner, you touched a little bit on the M&A landscape. You know, obviously, I don't think there's any doubt you guys have the capacity, the balance sheet is healthy. I think the questions are more around are the sellers ready or are valuations still kind of resetting in boardrooms? What are the conversations like for you guys? Again, it seems like your appetite is certainly high. To your point, macro uncertainty tends to favor you guys. You do tend to see a little bit of panic out there sometimes, and sellers kind of hit the bid. So can you just talk about conversations? Are people starting to warm up a little bit, or is it still – You know, a lot of kind of pointing back six months and, you know, maybe we bounce back, maybe we don't. What are the conversations like on that front?

Well, the 52-week high is not moved out of the window entirely. But I do think it's fair to say that people are understanding that we are, you know, we're entering into a new environment here, that there's a change of the cycle here. We see COVID tailwinds dissipating. Many were riding. that wave, you know, higher interest rates are real for everyone. And then, of course, the foreign exchange rate issues that Matt was talking about and inflation are real, too. So I think that the changed macro and the reality of valuations is starting to seep in, you know, to the boardroom discussions. But it's still early days. And we continue to watch that. We're, of course, engaged. Our funnels are very healthy. And as always, we are looking for those opportunities that align with our strategy and end market focus, as well as then, of course, premier assets in that particular area, along with the right valuation. So you noted our balance sheet. We're primed here. And look at the market with opportunity.

Great. Thank you, guys. Thank you.

And that is all the time we have for today. I will turn the program back over to our speakers.

Thanks, Gretchen, and thanks, everyone, for joining us today. We'll be around all day for follow-ups. Bye.

this does conclude today's program thank you for your participation you may now disconnect have a great day