NEW YORK – A complicated macroenvironment in China and fluctuations in the life sciences market impacted Danaher's third quarter financial results and are expected to have a lasting effect through the rest of the year, company executives said on Tuesday.
The firm saw core revenues decline in the mid-teens for the business overall in China in the third quarter, with a particularly pronounced impact on bioprocessing, which saw a 45 percent decline in the country due to a weak funding environment and lower underlying activity levels, Danaher CEO Rainer Blair said on a conference call to discuss the company's financial results Tuesday morning.
A larger-than-expected decrease in life sciences revenues also impacted the company's results, particularly as the challenging funding environment in China further deteriorated throughout the quarter, Blair said. The base life sciences business decreased in the low-single-digit percent range, with the life sciences instrument business down by mid-single digits, while the pharmaceutical and biopharmaceutical markets were soft, offset by stability in life science research and applied markets, said Blair, adding higher-end instrumentation also held up better than less-specialized solutions.
He noted that the life science instruments business makes up less than 10 percent of Danaher's total business.
The genomics consumables base business was also down in the low-single digits. Although the company saw double-digit growth in its plasmids, proteins, gene writing, and gene editing segments, that growth was more than offset by a decline in its next-generation sequencing and basic research businesses, Blair said. He noted that the pharmaceutical and biotechnology markets for the life sciences business "took a modest step down," particularly in the US and China, as large pharmaceutical customers are "tightening their belts as it relates to capital expenditures."
Life sciences revenues overall were worse than expected in China. Blair said that some of the country's anti-corruption initiatives had slowed down equipment tenders and installations. There were weeks where equipment tenders were postponed or delayed and installation of larger capital equipment slowed, but Danaher has seen that trend wane in the last few weeks, he said. The anti-corruption initiatives won't be a short- or mid-term growth headwind and are ultimately positive as they level the playing field for multinational corporations in China.
The company didn't see a change in bioprocessing market demand in China, but Blair noted that the business has been impacted for several quarters by the weaker funding environment and excess capacity.
In contrast to bioprocessing and life sciences, the diagnostics business was consistent in China as patient volumes have largely returned to normal post-pandemic levels. However, the volume-based procurement program in China for diagnostics will largely impact Beckman Coulter Diagnostics. Danaher CFO Matt McGrew said that the company believes there will be a $50 million yearly headwind over the next few years related to the VBP as prices will be reduced by about 50 percent. That headwind is "pretty modest and manageable for us over the period," he said.
Despite the weakness in China across much of Danaher's business, Blair said that he believes the country is currently going through a reset after the pandemic and that it is "just at the tip of the iceberg" of demand for biologic drugs. The large and increasing middle class is "demanding access to the most advanced medications in the world," so Danaher continues "to see China as an opportunity here in the mid- and long-term because the fundamentals are in the right place."
For the overall business, Danaher reported an 11 percent year-over-year decrease in third quarter revenues.
For the three months ended Sept. 30, revenues reached $6.87 billion, down from $7.66 billion a year ago, but beating the consensus Wall Street estimate of $6.26 billion. Core revenues declined nearly 12 percent year over year on a non-GAAP basis, including a 3 percent decline in its base business.
Life sciences revenues fell 1 percent to $1.71 billion from $1.72 billion in Q3 2022, according to the firm's form 10-Q for Q3 2023 filed with the US Securities and Exchange Commission, while life sciences instruments declined in the mid-single-digit percent range. Core revenues fell nearly 3 percent for the segment.
Blair also addressed Danaher's proposed $5.7 billion acquisition of Abcam, saying that the addition will give Danaher entry into the "highly attractive protein consumables market," estimated to be over $8 billion, and is expected to be accretive on multiple levels, including core growth and earnings. The acquisition is expected to close by mid-2024, he said. Cambridge, UK-based Abcam currently offers antibodies, reagents, biomarkers, and assays for drug discovery, life sciences research, and diagnostics.
In diagnostics, revenues decreased 16 percent to $2.25 billion from $2.68 billion a year ago. Core revenues also fell 16 percent, although base business core revenues grew in the mid-single-digit percent range. The clinical diagnostics business saw mid-single-digit core revenue growth, as non-respiratory testing at Cepheid grew more than 20 percent, while Radiometer revenues saw high-single-digit core growth and Beckman Coulter Diagnostics saw mid-single-digit growth. Cepheid also saw 25 percent growth in group A Streptococcus and sexual health testing, Blair noted.
Beckman Coulter saw double-digit growth in instrumentation and strength in clinical chemistry and immunoassays, Blair said.
Cepheid's respiratory testing revenues totaled about $350 million, exceeding expectations of approximately $100 million. Blair said that the higher prevalence of COVID-19 drove higher respiratory volumes and demand for Cepheid's four-in-one test for COVID-19, influenza A/B, and respiratory syncytial virus. He also noted that Cepheid's installed base and revenues have more than doubled since 2019, with the company "well positioned to continue gaining share and expanding our installed base in today's endemic environment."
Revenues for the biotechnology business fell 19 percent to $1.66 billion from $2.05 billion in Q3 2022, while core revenue declined 21 percent year over year. The bioprocessing business has been impacted by customers continuing to burn off inventory acquired during the COVID-19 pandemic, but Blair said he is confident that this is the bottom and that the company has seen stabilization in the bioprocessing business in the past two quarters.
The company completed the spinoff of its environmental and applied solutions business Veralto at the end of the third quarter.
The firm posted a net profit of $1.13 billion, or $1.51 per share, in Q3 2023 compared to a net profit of $1.57 billion, or $2.10 per share, in Q3 2022. Adjusted EPS was $2.02, coming in above analysts' average estimate of $1.76.
The company had $12.28 billion in cash and cash equivalents at the end of Q3.
For the fourth quarter, Danaher expects base business core revenues will decline in the mid-single-digit percent range. For the full year, it expects base business core revenue growth to be down slightly year over year. Financial results for the third quarter included contributions from Veralto, but guidance for Q4 and full-year 2023 exclude Veralto, the Washington, D.C.-based conglomerate said.
Danaher expects biotechnology core revenues to decline in the high-teens percent range and life sciences core revenues to remain flat for full-year 2023. Diagnostics revenues are expected to decline in the mid-teens for 2023, although the company raised Cepheid testing revenue expectations to $1.6 billion from the prior expectation of $1.2 billion.
In afternoon trading on the New York Stock Exchange on Tuesday, Danaher shares dropped 2 percent to $199.68.