NEW YORK – Danaher has begun making shifts to its business as COVID-19-related revenues decline, including reducing capacity at Cepheid and adjusting to changes in the demands of its bioprocessing business customers.
At Cepheid, which doubled its instrument installed base during the COVID-19 pandemic to about 50,000, there are plans to scale down Cepheid's capacity in Q2 and Q3 as it enters a "new phase of volumes," Danaher CFO Matt McGrew said on a conference call to discuss the firm's first quarter financial results on Tuesday. That reduction will include closing and consolidating some manufacturing plants that were put up quickly in locations that are "not ideal for the longer term," reducing headcount, and decreasing fixed overhead costs.
These changes come as declining COVID-19 test sales have shifted Danaher's revenue mix. Cepheid saw more than 30 percent core revenue growth year over year in non-respiratory testing and more than 50 percent growth in infectious disease testing, Danaher CEO Rainer Blair said on the call. It also saw nearly 30 percent growth in sexual health testing, led by demand for the recently launched vaginitis panel test. Cepheid's respiratory testing revenue was about $550 million in Q1, exceeding the firm's expectation of $450 million, Blair said.
Danaher expects to perform about 30 million respiratory tests and garner $1.2 billion in revenue for full-year 2023, he added, as Cepheid's expanded installed base "significantly improved their competitive advantage."
McGrew noted that for many customers, COVID-19 was an "anchor assay" but that those customers are moving into other infectious diseases and adopting other tests from Cepheid's menu.
On the biotechnology side, Danaher is still seeing robust supply and demand from large biopharmaceutical customers, although that segment is being impacted by customers' inventory normalization processes as they work through inventory built up during the COVID-19 pandemic, Blair said, adding that is taking longer than expected. Those larger customers are recalibrating their production plans to conserve working capital and cash, he said.
For emerging biotechnology customers, who focus largely on discovery and early-stage clinical trials, there has been softer demand globally as pressure to conserve capital increases, and more projects are delayed and canceled. Danaher has faced funding headwinds since the second half of 2022, but those headwinds "became significantly more pronounced" in Q1, Blair said.
The change in headwinds led to changes in assumption and guidance for the rest of the year, McGrew said. In January, the firm assumed larger customers, which make up about 70 percent of the segment's customers, would see growth in the high-single-digit percent range. Emerging biotechnology customers, about 25 percent of customers, were expected to see growth in the low-double-digit to low-teens percent range. Instead, large customer growth in Q1 was in the mid-single-digit percent range, while emerging biotechnology growth was down in the mid-teens range, affecting the company's expectations.
Blair noted that it will be a challenge to predict how the emerging biotechnology segment progresses as it depends on the capital markets, the banking sector, and other macroeconomic factors, but that Danaher doesn't anticipate improvement in that segment for the rest of 2023. However, those "short-term pandemic-related dislocations" haven't changed Danaher's "assessment of the tremendous opportunity ahead in the biologics market," Blair said.
These adjustments come as Danaher reported on Tuesday a 7 percent year-over-year decrease in total revenues.
For the three months ending March 31, total revenues were $7.17 billion compared to $7.69 billion in the year-ago period. Revenues beat the analysts' average estimate of $7.02 billion.
Core revenues decreased 4 percent year over year due to lower COVID-19-related revenues, while base business core revenues growth was 6 percent, the company said in a statement.
Revenues in Danaher's Life Sciences segment grew 2 percent to $1.71 billion in Q1 2023 from $1.67 billion in Q1 2022, according to the company's Form 10-Q filed with the US Securities and Exchange Commission. Core revenues for the segment were up 5 percent, Blair said. The firm saw increased demand in its flow cytometry, particle counting, and centrifugation product lines, which was partially offset by lower demand for automation and genomic products related to COVID-19.
Core instrument revenues grew in the mid-single digits, which was consistent with expectations, Blair said. The genomics consumables business, meantime, grew in the double digits, although it was partially offset by declines in next-generation sequencing and basic research revenues.
Blair said that COVID-19 revenues provided a headwind of about 10 percent.
Meanwhile, the Diagnostics business declined 10 percent to $2.38 billion from $2.64 billion. Lower sales of molecular diagnostic tests for COVID-19 contributed significantly to the decline in overall core sales for the segment, the firm said in its 10-Q form. However, core sales in the segment's clinical lab business, acute care diagnostic business, and pathology business increased from a year ago.
Blair noted that Leica Biosystems grew in the mid-single digits, led by advanced staining and digital pathology, while Beckman Coulter Diagnostics exceeded expectations and saw core revenue growth in the mid-single-digit percent range.
The Biotechnology segment, which includes subsidiaries Cytiva and Pall, fell 16 percent to $1.86 billion in Q1 2023 from $2.22 billion in the year-ago quarter. Core revenues were down 13 percent, but the bioprocessing business saw core revenue base business growth in the low-single-digit percent range, Blair said. Declining demand for COVID-19-related therapeutics and vaccines led to lower core sales in the bioprocessing business, the company noted. Blair added that Danaher anticipates both Q2 2023 and full-year 2023 base business core revenue growth will be largely consistent with Q1.
Revenues for Danaher's Environmental & Applied Solutions segment grew 5 percent to $1.22 billion from $1.16 billion. The water quality business saw core revenue growth in the low-double-digit percent range, while the product identification business grew in the low-single-digit percent range. The firm's plan to spin off the EAS segment into a separate business called Veralto is on track to be completed in Q4, Blair said.
The company posted net earnings of $1.45 billion, or $1.94 per share, in the recently completed quarter compared to net earnings of $1.73 billion, or $2.31 per share, in Q1 2022.
On a non-GAAP basis, EPS for Q1 2023 was $2.36 and beat the consensus Wall Street estimate of $2.25.
The firm finished the quarter with $7.38 billion in cash and cash equivalents.
Regarding M&A activity, Blair said that Danaher's balance sheet is "in great shape" and noted that valuations for companies in the space continue to moderate. He added that any potential acquisition has to "be the right end market, it's got to be the right target, and the model has to work. … It's when those three lights flip green that we execute."
Danaher expects non-GAAP base business core revenue growth for both the second quarter of 2023 and the full year to be in the mid-single-digit percent range, lower than its previous guidance. Total core revenue in Q2 is expected to decline in the high-single-digit percent range due to lower demand for COVID-19 products, Blair said. For the full year, total core revenue is expected to decline in the high-single-digit percent range.
In morning trading on the New York Stock Exchange on Tuesday, Danaher's shares were down 5 percent at $240.60.