Danaher Corporation (NYSE:DHR) Q3 2023 Earnings Call Transcript

Danaher Corporation (NYSE:DHR) Q3 2023 Earnings Call Transcript October 24, 2023

Danaher Corporation beats earnings expectations. Reported EPS is $2.02, expectations were $1.84.

Operator: Good morning. My name is Todd, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Danaher Corporation’s Third Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. John Bedford, Vice President of Investor Relations. Mr. Bedford, you may begin your conference.

John Bedford: Good morning, everyone, and thanks for joining us on the call. With us today are Rainer 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 Form 10-Q for the third quarter, 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 a note containing details of historical and anticipated future financial performance 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 & Presentations, and will remain archived until our next quarterly call.

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A replay of this call will also be available until November 8, 2023. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics related to the third quarter of 2023 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. Before turning the call over to Rainer, I’d also like to point out that since Veralto was part of Danaher through the end of the third quarter, our financial highlights will include the combined Danaher and Veralto results. We will then provide detail for the businesses remaining with Danaher. Veralto will be reporting their third quarter results separately later this week, and we’d like to ask that you please save any questions about the Veralto businesses until then.

Our guidance for Danaher’s continuing operations will exclude Veralto for the fourth quarter and the full year. I’d also like to mention that historical financial results reflecting only Danaher’s continuing operations excluding Veralto are available on the Investors section of our website under the sub-heading Financial Reports. With that, I’d like to turn the call over to Rainer.

Rainer Blair: Well, thank you, John, and good morning, everyone. We appreciate you joining us on the call today. Core revenue in the third quarter came in ahead of our expectations with Biotechnology performing as anticipated, and higher testing revenues more than offsetting slightly softer-than-expected demand in Life Sciences. Our team’s consistent DBS-driven execution also enabled us to deliver better-than-expected earnings and cash flow in what remains a challenging and dynamic operating environment. This was also a transformative quarter for Danaher. On September 30, we completed the spin-off of Veralto Corporation, a global leader in water and product quality. The successful launch of Veralto is a testament to the team’s execution focus and outstanding teamwork.

We believe this separation creates exceptional opportunities for both Danaher and Veralto to better serve their customers, deliver on their respective strategic priorities and create greater long-term shareholder value in the years ahead. Now, I want to thank Jennifer Honeycutt and all the Veralto associates for their contributions to Danaher over the past two-plus decades. And we wish them the very best as they embark on their exciting endeavor to help safeguard the world’s most vital resources. Now going forward, Danaher is a more focused life sciences and diagnostic innovator, committed to accelerating the power of science and technology to improve human health. We’ve got a great line-up of leading franchises, well positioned in attractive end markets with durable, high-recurring revenue business models, and our strong free cash flow generation positions us well to further enhance our portfolio going forward.

This unique combination of our leading science and technology portfolio and financial strength all powered by the Danaher Business System, differentiates us, and reinforces our sustainable long-term competitive advantage. So with that, let’s turn to our third quarter results in more detail. Now, as John mentioned, since Veralto was part of Danaher through the end of the third quarter, our financial highlights for the third quarter include Veralto’s results. Sales were $6.9 billion in the third quarter and core revenue declined 11.5%, including a 3% decline in our base business and a COVID-19 revenue headwind of approximately 8.5%. Geographically, core revenues in developed markets declined low double digits, primarily driven by lower COVID-19 revenues.

High growth markets were down high single digits, including a mid-teens decline in China, where the economic landscape remains challenging. Our gross profit margin for the third quarter was 58.2%. Our operating margin of 20.9% was down 540 basis points, primarily due to the impact of lower volume in our Biotechnology and Diagnostics segment and costs related to the separation of Veralto. Adjusted diluted net earnings per common share were $2.02. We generated $1.3 billion of free cash flow in the quarter and $4.6 billion year-to-date, resulting in a year-to-date free cash flow to net income conversion ratio of more than 120%. Strong free cash flow generation continues to be one of the most important metrics at Danaher and enables us to actively pursue high-impact organic growth and M&A opportunities.

Now let’s take a closer look at our results across the portfolio and give you some color on what we’re seeing in our end markets today. Reported revenue in our Biotechnology segment declined 19% and core revenue was down 21%. Bioprocessing core revenue declined over 20%, as anticipated, while discovery and medical was down mid-single digits as a result of lower demand from our earlier-stage research and lab filtration customers. In bioprocessing, base business core revenue declined mid-teens and market conditions were consistent with our expectations coming into the third quarter. Our customers are still working through inventory built up during the pandemic, while also continuing to conserve capital as a result of funding pressures. China was down approximately 45% in the quarter, driven by a weak funding environment and lower underlying activity levels.

Based on what we’re seeing today, we’re maintaining our full year outlook of approximately 10% base business decline in bioprocessing, which assumes that market conditions in the fourth quarter are consistent with what we saw in the third quarter. Although these market dislocations are impacting our recent performance, global demand for biologic medicines continues to increase. Since 2018, underlying demand for biologics has grown at an average annual rate of approximately 10%, and is continuing to grow in 2023. In addition to more patients using biologic medicine, this year is on pace to be a record year for FDA approvals of biologics, including approvals for meaningful indications, such as Alzheimer’s disease and several cancer immunotherapies.

These positive trends reinforce our conviction in the tremendous opportunity ahead in the biologics market and the high single-digit long-term growth outlook for our leading bioprocessing franchise. Now, the pace of innovation and advancement in biologic medicine is accelerating, and Cytiva is uniquely positioned to support customers as they pursue life-changing breakthroughs. Cytiva’s recently launched NanoAssemblr, the industry’s first end-to-end lipid nanoparticle formulation system, is a great example of how our investments in innovation are supporting customers’ needs around quality, yields, and cost. The NanoAssemblr automates and streamlines the lipid nanoparticle manufacturing workflow, helping improve reproducibility and scalability in the nucleic acid therapy manufacturing process.

Turning to our Life Sciences segment. Reported revenue declined 1% and core revenue was down 2.5%, including a low single-digit decline in our base business. Our Life Sciences instrument businesses collectively declined mid-single digits, in part driven by China, where an already challenging funding environment further deteriorated as the quarter progressed. Outside of China, we continued to see softness at pharma and biopharma customers, while demand remained stable in life science research and applied markets. Our genomics consumables based business declined low single digits in the quarter. Double-digit growth across plasmids, proteins, and gene writing and editing solutions, which are primarily used in projects that are in later stages of the drug development pipeline or have been commercialized, was more than offset by declines in next-generation sequencing and basic research.

Our Life Sciences businesses continue to deliver innovative solutions that are helping accelerate the discovery and development of biologic medicine. Molecular Devices recently released the CellXpress.ai, an artificial intelligence driven cell culture system that automates traditionally manual cultivation processes. The CellXpress.ai is engineered to improve workflows and reproducibility in growing and scaling human-relevant cell lines, which can reduce reliance on animal models and fast-track potential therapeutics to preclinical trials. We’re also actively leveraging strategic M&A to enhance our capabilities and bring greater value to our customers. In August, we announced our intention to acquire Abcam, a leading producer of protein consumables that are critical for advancing drug discovery, life science research, and diagnostics.

Abcam has a long track record of innovation, outstanding product quality, and breadth of antibody portfolio, which positions them as a key partner for the scientific community. The addition of Abcam will give Danaher entry into this highly attractive market, furthering our strategy to help map complex diseases and accelerate the drug discovery process. We expect Abcam will be accretive on multiple levels, including core growth, earnings, and talent, and look forward to welcoming this incredibly innovative team to Danaher once the transaction closes. Now moving to our Diagnostic segment. Reported revenue declined 16% and core revenue declined 15.5%, with mid-single digit growth in our base business more than offset by lower COVID-related respiratory testing volumes at Cepheid.

Our clinical diagnostics businesses collectively delivered mid-single digit core revenue growth. Radiometer led the way with high-single digit core growth and solid results across both blood gas and point-of-care immunoassay product lines. Beckman Coulter Diagnostics was up mid-single digits with double-digit growth in instrumentation and notable strength across clinical chemistry and immunoassay. Beckman’s recent strong performance is a direct result of leveraging the Danaher Business System to improve commercial execution. We’re seeing better win and retention rates globally, particularly in North America, which grew high-single digits in the third quarter. The team has also been accelerating new product innovation, and there’s encouraging early traction in Europe for the DxI 9000, Beckman’s next-generation immunoassay analyzer.

In molecular diagnostics, increased menu utilization by customers paired with recent new product innovation helped drive over 20% core revenue growth in non-respiratory testing at Cepheid, including more than 25% core revenue growth in Group A strep and sexual health. In respiratory testing, Cepheid’s revenue of approximately $350 million in the quarter exceeded our expectation of $100 million. A higher prevalence of COVID-19 drove both higher volumes and a preference for our 4-in-1 test for COVID-19, flu A, flu B, and RSV. As we move into the fourth quarter and our customers begin planning for the respiratory season, we now expect approximately $1.6 billion of respiratory testing revenue for the full year versus our previous expectation of $1.2 billion.

The broad-based strength across Cepheid’s testing menu is a result of the team’s thoughtful approach to placing systems over the last few years. Customers who realized the benefit of accurate, easy-to-use molecular testing during the pandemic are increasingly consolidating their point-of-care testing platforms onto the GeneXpert and adding additional assays from our leading test menu. Their preference for the GeneXpert within their labs and across their healthcare networks has led to a more than 2.5 times increase in both our installed base and revenue since 2019. And we believe Cepheid is well positioned to continue gaining share and expanding our installed base in today’s endemic environment. Now let’s briefly look ahead at the expectations for the fourth quarter and the full year.

As a reminder, both our fourth quarter and full year guidance include only Danaher’s continuing operations and exclude Veralto. In the fourth quarter, we expect core revenue in our base business to be down mid-single digits year-over-year. We also expect total core revenue to decline in the high-teens percent range, primarily as a result of lower demand for COVID-19 testing, vaccines, and therapeutics. Additionally, we expect the fourth quarter adjusted operating profit margin of approximately 28%, which includes additional anticipated productivity initiatives to further adjust our cost structure. Turning to the full year 2023, we anticipate core revenues in our base business will be down slightly. And we also expect total core revenue to decline low double digits for the year as a result of lower demand for COVID-19 testing, vaccine, and therapeutics.

Additionally, we expect a full year adjusted operating profit margin of approximately 29%. So, to wrap up, we’re pleased with our third quarter results and believe the combination of our team’s DBS-driven execution and differentiated portfolio enabled Danaher to outperform on a relative basis. With the successful spinoff of Veralto, we are now a more focused company committed to deploying leading-edge science and technology to improve human health. Danaher is purpose built to help customers solve some of the most important health challenges impacting patients around the world. Our proven ability to innovate is enabling faster, more accurate diagnoses and helping customers reduce the time and cost needed to sustainably develop and deliver life-changing therapies.

So, as we look ahead, the unique combination of our talented team, differentiated science and technology portfolio, and balance sheet optionality, all powered by the Danaher Business System, positions us well to maximize value for our customers, our associates, and our shareholders. So, with that, I’ll turn the call back over to John.

John Bedford: Thanks, Rainer. That concludes our formal comments. Operator, we’re now ready for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Dan Brennan with TD Cowen. Please go ahead.

Rainer Blair: Good morning, Dan.

Dan Brennan: Hey, guys. Hey, good morning, Rainer. How are you? Thanks for the questions here. Congrats on the quarter. Maybe just starting off with bioprocess, if you don’t mind, since there’s remains, obviously, as you know, a tremendous amount of focus here. I know with Q2, you guys talked about order trends being down modestly in the second half of the year. Sounds like what you’re seeing is consistent with that, but I was hoping maybe you can unpack a little bit of color on kind of what’s going on in the order side for bioprocess and kind of what you’re seeing in the field and kind of what this might portend as we think about looking out to 2024.

Rainer Blair: Sure, Dan. Let’s start off with Q3 one more time here. So, Q3 results were consistent with what we expected. But also I have to be clear that we have not seen an inflection in orders. And I would say that we’re sort of at the bottom here, bouncing along. And to give you a sense of this quantitatively, from — our book-to-bill was at around 0.8, which is consistent with what we’ve been seeing here for the last few quarters. And for Q4, we think that looks a lot like Q3 with likely similar book-to-bill. But we do continue to expect our base business through the full year for bioprocessing to be down 10%, so as expected.

Matt McGrew: Hey, Dan, maybe just a little bit of other color, too, just to give some sense of what we saw. Orders in dollar terms were actually down a little Q3 versus Q2. And like Rainer said, the book-to-bill here has been at 0.8. It’s been like that for six quarters. I think we anticipate that it will be like that in Q4 as well. And I think kind of another triangulation that I look at is kind of on a two-year stack here. Orders have been kind of, call it, down 32%, 33%, 34% here for the last three quarters. So, like Rainer said, I think we’re looking at Q4, it looks a lot like Q3, but no real change here.

Dan Brennan: Got it. Thanks, guys. And then maybe just one just kind of zooming out a little bit, if you could. Just any way — any helpful way to think about — obviously, we have Q4 ahead of us, and you talked about the dynamic environment, which we all — which we can all see, which we have better visibility, but we can all see it. But as we — if you thinking about flipping the calendar to 2024, any early way to think about like a framework for revenue growth and earnings and margins as we get into the new year?

Rainer Blair: Dan, I think as you look towards 2024, it’s really important to understand the context here of the second half, so let me lay that out for you briefly. Once again, our Q3 exceeded expectations. Diagnostics was better than we expected, driven by strength at Beckman Diagnostics and respiratory testing at Cepheid. And bioprocessing was as expected, and we don’t believe that changes here either. So, we do believe that we’re at the bottom here in 2023 in bioprocessing. That’s partially offset by weaker life science instruments. And as a reminder, life science instruments for us is less than 10% of our total business. So, Q3, all in, a solid outperformance in the quarter with what we think are some important markers around diagnostics, bioprocessing and life science instruments.

And as you think about Q4, in there, bioprocessing and diagnostics, there’s really no change to our prior expectations. We expect those to continue to perform similarly as we’ve talked about in the past in Q3. Now, as it relates to life science instruments, there we’ve seen some incremental weakness in Q3 and we would expect that to continue or step down slightly here in Q4. So, with that as a context, for the second half, there’s really no change to revenue as Q3 offsets Q4. So, we’re holding the full year here. And there’s also no change to our bioprocessing expectations for the year, and we continue to believe that 2023 represents the bottom. Now, as it relates to 2024 and given where markets are today and the broader macro, we want to see how Q4 plays out before we provide a guide on our Q4 earnings call in January as we always do.

We want to see the next couple of months here play out and then build the guide, as always, for our January earnings call.

Dan Brennan: Got it. Thanks, Rainer. Thanks, Matt.

Rainer Blair: Thanks, Dan.

Operator: Thank you. Our next question will come from Vijay Kumar with Evercore ISI.

Vijay Kumar: Hey, guys. Thanks for taking my question. Good morning, Rainer.

Rainer Blair: Hi, Vijay.

Vijay Kumar: One, I just wanted to go back to this bioprocessing. So, with book-to-bill of 0.8x, I guess, is bioprocessing going to grow next year if orders are below revenues in that ’23? I don’t know if there’s a restocking phenomenon. Like, how should we generally broad strokes on bioprocessing, the plus and minuses as we look at the outlook, right? Should China inflect, or any levers that you have that could move bioprocess?

Rainer Blair: So, I think I come back to the actual data, Vijay, that we see, which is Q3 really was very similar to Q2. The book-to-bill was the same. We saw the market develop as we had anticipated. You know from our prior call that we’ve been working with customers here to take some of the tension out of the system and try and ensure that as much inventory is burned off as possible here in the year. And that’s why we’re confident that this is the bottom. But as it relates to 2024, there’s a lot of moving pieces here and it’s quite hard to draw generalizations. And that’s why it’s so important for us also to see the data here for another quarter in Q4 before we talk about what it looks like in 2024. Now having said that, we do expect that this inventory dynamic and what’s going on in China is going to also go into, if you will, impact into 2024 as well.

This doesn’t stop at midnight on the 31st of 2023. But we have seen a stabilization here with the last two quarters, and we want to see how Q4 develops before calling 2024 in January.

Vijay Kumar: Understood. Matt, one for you. Thanks for giving the stand-alone numbers. I think it looks like the stand-alone margins here, ex-EAS for Danaher for fiscal ’23 is about 28.5% sort of rough numbers, and that includes, I believe, perhaps $400 million of cost actions. What’s the right way to think about cost actions, Matt? Is that — should that all come out next year, so the right jump-off point for us ex cost actions is 30% and that’s how we should be thinking about margins for next year?

Matt McGrew: Yeah. I mean, I think we’ll kind of give a complete update when we come out because the core growth is going to be a big driver of margins. But just on the cost action part, yeah, I think you’re right. I think the way I’d probably characterize it is $350 million of one-time cost actions. We talked about $200 million in Q2 and Q3. So that would be, again, the kind of one-time cost actions. Another $150 million here in Q4, and like you said, that will roll forward and help next year. But that is sort of a net number, right, if you will. We will have other pieces, some of them pretty meaningful here that will impact margins. So think of, like I said, first core growth will have an impact. FX, as we sit here right now, is going to have an impact, and there will be some other cost headwinds.

So, when we get to the guide here in January, we’ll sort of take that net 150 basis points, if you will, of margin tailwind probably and see what those offsets are to end up where we are for ’24. But that’s $350 million is probably the right number to think about as one-timers that go away here for next year.

Vijay Kumar: Understood. Thanks, guys.

Operator: Thank you. Our next question will come from Scott Davis with Melius Research.

Rainer Blair: Good morning, Scott.

Scott Davis: Hey, good morning, guys. Good morning, everybody. Rainer, you mentioned in your prepared remarks, China, kind of down 45% on the biopharma side, I think you said. But could you walk us through, first of all, what is the materiality of China now that Veralto has gone, percent of sales? I don’t think we have that number. And second, just kind of walk us through the different markets in China, and maybe any color or outlook or something on how that is bottoming out or hopefully bottoming out?

Rainer Blair: Sure, Scott, and thanks for the question. So just to the materiality of China here post Veralto, I think 12% is a good number to think about as a total revenue. And now to your point, let me take you through what we saw across the portfolio here in the third quarter. So, let’s start with bioprocessing. There, we did not see a change in market demand, which has been here now for several quarters impacted by a weaker funding environment and excess capacity, and that was down 45%, as mentioned previously. Life Sciences was worse than expected on a weaker macro as well as at the margin, not to overread this, but at the margin, some of the anti-corruption initiatives in the country, which slowed down some equipment tenders, some installation of equipment at the margin.

And in Diagnostics, we’re seeing consistent patient volumes, and it’s largely back to normal. So, we expect — we don’t expect this to change here going forward in Q4, and also expect that this is going to continue into 2024. So, we haven’t seen a change in bioprocessing, Life Sciences, the worse at the margin here in Diagnostics as expected and largely back to normal.

Scott Davis: Okay. Very helpful. And just to switch gears, there’s talk about M&A multiples. In this type of rate environment, you would expect at least some moderation. I didn’t feel like Abcam was necessarily cheap despite some of the drama that is out there. It certainly seems fully priced even at higher rates. But as you look at the rest of your pipeline, is there some relief in multiples that kind of reflect the reality of the higher rate environment?

Rainer Blair: Scott, I would tell you that we take it, as we always do, based on the end market, the asset and the financial model individually. And as we look at our funnel, which is very active, there’s no doubt that some valuations still do not reflect what is a higher and likely for some time, sustained interest rate environment. When it comes down to the individual deal, we bring all aspects together and ensure that the deal model meets our expectations as well. And then, we — as I’ve always said, we’ll pull the trigger if all those lights flip green on end market, the actual target company, as well as the financial market — financial model, excuse me. And then, lastly, to reiterate, we do think valuations still have some ways to go here on average in order to reflect the interest rate environment.

Scott Davis: Helpful, Rainer. Best of luck. See you guys. See you, Matt and John. Thanks.

Rainer Blair: Thank you, Scott.

Operator: Thank you. Our next question comes from Michael Ryskin with Bank of America.

Rainer Blair: Good morning, Michael.

Michael Ryskin: Good morning, Rainer, Matt, thanks for taking the questions. Let me follow up a little bit on the Life Science weakness. It sounds like you guys are pretty clear that in 3Q, that was the biggest step down sequentially versus 2Q and versus your expectations. We have it in our notes that LS instruments grew mid-single digit 2Q and now declined mid-single digit 3Q. So, could you parse that out a little bit SCIEX versus Beckman by geographies, by customer? Where you’re seeing the slowdown? Do you think it’s tied to some of the broader weakness you’re seeing in pharma biotech? And just any thoughts on — you already provided some commentary on 4Q, but any thoughts longer term on when that could return to growth? Just because you think that LS instruments would have a slightly longer order books, you get — you have a little bit more visibility there. So, some forward commentary would be helpful. Thanks.

Rainer Blair: Thanks, Mike. So, let’s level set on the numbers here. Our instrument portion of our Life Science tools is less than 10% of Danaher revenue, just to put that in context properly. And as we mentioned, our Q3 performance was modestly below our expectations, with higher-end instrumentation holding up better than the less specialized solutions. Now, if you think about this by end market, academic and life science research have held up well along with the service business that’s associated with these instruments. Applied markets were also resilient, led by food and environmental. And within environmental, you are aware of the PFAS testing volumes out there. But pharma and biotech took a modest step down, and that was particularly the case in the U.S. In China, we see large pharma customers also tightening their belts as it relates to capital expenditures.

We were just talking about the interest rate environment, and that’s playing out here as well. And in China, what we’re seeing there is just the sunsetting of the subsidized loan program of the first half of the year and very high comps, as well as the lower funding that’s available in the marketplace today in China. So, just to wrap in geographically, our developed markets were down largely due to the softness in pharma and biotech. And China, as we just talked about, was really related to the weaker macro, and, like I said earlier, on the margin only some anti-corruption initiatives there. So, as we wrap up there, I think we remain cautious on LS tools and expect Q4 to be down in the high singles versus — but still at the low singles for the full year.

Now, as it relates to ’24, like I said, I think Q4 is a very important quarter here for all kinds of reasons. As you know, in the Life Science business, a lot happens in Q4, and it’s also going to tell us a lot as we dialogue with our customers about how to view 2024, which as I mentioned, we’ll talk about in January. But I do think it’s fair to say that we expect a weaker pharma and biopharma end market here going into 2024.

Michael Ryskin: Great, thanks. That’s really helpful. And then maybe as a quick follow up, I just want to touch on China a little bit. I’m not going to ask about ’24 outlook, because I think you made it clear you’re not going to address that. But just longer term, structurally, China has been a major part of the growth for tools as an industry and for Danaher over the last five, 10 years. Given everything that’s happened over the last year, what’s your view on China going forward on a multi-year basis? Will it still be accretive to total company, meaning above total company growth? Or do you think China, sort of, is really taking a step back here and it’s going to be a multi-year process for it to return to that level? Thanks.

Rainer Blair: We think China long-term continues to accrete to the fleet average from a growth perspective, Mike. The demand in China, we’re just at the tip of the iceberg of the demand in China for biologic drugs. And there’s no question that we’re currently going through a reset that’s based on many of the things that occurred during the pandemic, if you think about the funds that were spent in the Zero COVID effort over several years, if you look at how the pharmaceutical industry is playing out in China. But all those things over time moderate, and you come back to an end market which has an enormous demand of a population which has already a large and increasing middle class and is really demanding access to the most advanced medications in the world.

So, we continue to see China as a opportunity here in the mid and long term, because the fundamentals are in the right place, although we are going through, if you will, a reset here with different funding sources and so forth in the short term.

Operator: Thank you. We’ll take our next question from Puneet Souda with Leerink Partners.

Rainer Blair: Hi, Puneet Souda.

Puneet Souda: Hey, Rainer, thanks for taking the questions. Quite a bit of coverage here, so maybe let me ask about something that is being discussed in healthcare markets and even now food and consumer markets, and that’s the GLP-1s and the diabetes weight loss drugs whose indications are expanding here. So, I’m wondering if you can provide some context on if you see contributions from these drugs in sort of 2024, anything there that can potentially help you offset some of the headwinds? And maybe within that context, if you could also just talk about how should we weigh the GLP-1’s opportunities versus Alzheimer’s, which is also a very large market, I believe, for the mAbs?

Rainer Blair: Thanks, Puneet. Let’s start with the GLP-1, which are real and they are growing, and Danaher is represented into some extent, stacked into all of them, and we expect over time for those to contribute to our growth. Having said that, GLP-1s are a class of drugs where the intensity of the use of, if you will, the standard inputs of biologic processes, for instance, such as mAbs, and I’ll come back to that part of your question in a second, is not as intense. So, you have synthetic processes for GLP-1s, you have biologic processes, and depending on how that mix develops, that also impacts the degree to which this contributes to our business. This will contribute to our business, and we think that, that provides a modest tailwind here over time.

Now, as it relates to your question around Alzheimer’s drugs, those are typically monoclonal antibodies, and the use of our industry’s products there is far greater than, for instance, in GLP-1 processes. And as those continue to make their way through the development pipeline, through the regulators, and ultimately get reimbursed and then adopted by patients, we expect that to be a more significant tailwind certainly than GLP-1.

Puneet Souda: Got it. Super. And then if I could follow up on Abcam, could you talk about where you see the biggest opportunities for cost reduction here in the antibodies business and the protein reagents business? And maybe where DBS can have the most impact? And wondering if — what do you have in your algorithm longer term for the op margins for this business eventually? Thank you.

Rainer Blair: So, Puneet, we have yet to close on this transaction, so we won’t be able to talk about the model and its contents in any detail here. But I do want to take a second to reiterate that this acquisition, if that’s an entry into a really highly attractive protein consumables market, we estimate that market to be over $8 billion and growing high single digits. And very importantly, because of new detection technologies and other approaches, protein detection is now moving from research to biopharma, and we believe over time to the clinic. And so, you can see how that fits our strategy of helping to map complex diseases, accelerate drug discovery, and hopefully someday even help identify these diseases earlier in their progression.

Now, this is a differentiated company with a really terrific brand and a great long-term sustainable business model. We’ve talked about this, but this is accretive to us in growth, in earnings and also in talent. And we’re looking forward to welcoming the team here. We’re still focused right now, Puneet, on closing this transaction by mid-2024.

Puneet Souda: I appreciate it. Thanks, Rainer.

Operator: Thank you. Our next question comes from Rachel Vatnsdal with JPMorgan.

Rainer Blair: Hi, Rachel. Good morning.

Rachel Vatnsdal: Yeah, good morning. Thanks for taking the questions. So, I want to follow up with a few more nuanced questions on China. So, first you mentioned that anti-corruption had some impacts to the Life Sciences segment. So, could you quantify the impact there? And then, can you walk us through, are you just seeing that impact in the healthcare and diagnostic hospital settings, or has that started to bleed into pharma and biotech as well? And then, shifting over to more the Diagnostic side for China, another dynamic that we started hearing about in recent weeks is just China volume-based procurement. So, can you walk us through what you’re hearing on that front and what your potential exposure to that would be?

Rainer Blair: Sure, Rachel. Starting with anti-corruption, we really do see this as a transitory effect. There were some weeks, if I can say it that way, where we saw particularly equipment tenders being postponed, delayed, as well as the installation of hardware, so larger capital equipment. But frankly, we’ve seen that wane here, so come back to normal, if you will, in the last couple of weeks. And that applies both to what we saw there in Life Sciences, really, at the margin, as well as what we see in Diagnostics. So, I would not view the anti-corruption initiative as a shorter or even mid-term growth headwind. Frankly, in the long term, we think this is a positive as it levels the playing field for multinationals in China.

Matt McGrew: As far as the value-based procurement, Rachel, I think the best way to kind of think about it is I think we think it’s going to be about a $50 million kind of annual headwind here for us over the next couple of years. Most of that is at Beckman Diagnostics. So I mean maybe kind of a simple math is $800 million of Beckman revenues and maybe 40% of that is sort of subject to the VBP kind of assume a 50% type price reduction there and you get to $150 million. We think that’s kind of two, three year kind of run rate here. So, pretty modest and manageable for us over the period.

Rachel Vatnsdal: Great. And then, my follow up is just around Diagnostics. So, you guys listed that respiratory expectations for the year to $1.6 billion versus prior assumptions around $1.2 billion. So, how should we think about that endemic number for respiratory? Is $1.2 billion still on average the really way to think about this respiratory market? And then just heading into 2024, giving you guys listed expectations for this year by $400 million, should we expect a softer year next year for respiratory as well? Thank you.

Rainer Blair: Yeah, I mean, I think it’s a good question on the $1.2 billion. I think that’s probably where my baseline would be, Rachel. And I think we did a little bit better this year because we had another respiratory season that started earlier than normal, right? Just like last year, similarly, we saw sort of September and October, the ILI kind of spiked up. That is usually something in the past that we have seen more in the January-February timeframe. So if I think about the last couple years and think about that, I think $1.2 billion would be sort of where I would base it as a planning kind of purpose going forward. But we sort of typically, as we look forward from planning perspective, do that. We look at the last couple years of ILI and try and mirror that. So that’s kind of where I think I’d be.

Operator: Thank you. And that was our last question today. I will now turn the call back over to John Bedford for closing remarks.

John Bedford: Thank you everybody for joining. We’ll be around the rest of the day for questions.

Rainer Blair: Thanks, everyone.

Operator: And this does conclude today’s call. We thank you for your participation. You may disconnect at any time.