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Macquarie Begins Coverage of Danaher

NEW YORK (GenomeWeb News) – Noting the recent acquisition of Beckman Coulter and a strong operational model, investment firm Macquarie initiated coverage of Danaher with an Outperform rating and a $55 price target on its stock.

Analyst Jon Groberg gave revenue estimates for 2011 of $16.5 billion and adjusted EPS of $2.84.

Coverage of the firm begins less than two months after Danaher acquired Beckman for $6.8 billion, the largest purchase ever by Danaher, according to Groberg, and one which significantly expanded the Washington-based conglomerate's life science business.

In a report, Groberg said that despite recent troubles, Beckman provides "a unique platform" to Danaher "to demonstrate its operational acumen," and called Beckman a market leader in the clinical diagnostics space.

In particular, he cited its position in the three largest fields within clinical diagnostics: clinical chemistry where Beckman has a 25 percent share of the US market, and 17 percent share worldwide; immunoassay (13 percent US, 7 percent worldwide); and hematology (48 percent US, 28 percent worldwide).

Outside of a DNA sequencing service, though, Beckman has "no material traction in molecular" diagnostics, he said.

Groberg also noted positive trends that could favorably impact Beckman, including emerging markets that will probably continue to invest in healthcare, the continued running of tests by hospitals for local offices, and an aging population.

However, the business also has challenges. In 2005, Beckman, like most testing suppliers, shifted to a reagent rental model rather than an instrument-purchase model, and while this provided the company with a steady revenue stream, it also limited its ability to raise prices given long-term contracts it had with customers.

When it looked to the international markets to grown its markets, Groberg added, it found that its margins were "structurally lower outside the US" because much of its sales internationally were done through dealers and purchasing outside the US tended to be done by "much-larger" purchasing groups.

Other headwinds affecting Beckman include the global financial crisis which has resulted in higher unemployment, which, in turn, led to lower test volumes as people without jobs were loath to see doctors.

And lastly, Beckman experienced trouble with its AccuTnl troponin test kits run on its UniCel Dxl system and eventually recalled the test. It also ran into trouble with the US Food and Drug Administration, which believed Beckman had marketed the troponin test on its Access and Dx1 instruments without proper agency approval.

Groberg added that frustration also ran high among customers over problems Beckman's glucose and sodium tests and a "stream of product corrective actions [that] had been getting to be too much."

During Danaher's recent second-quarter earnings conference call, its CEO Larry Culp said that progress had been made in its discussions with FDA on the test but also acknowledged that there "is plenty of work ahead of us."

As Danaher now integrates the Beckman business into the fold, tackling a broader quality problem within Beckman's operation is the top priority, Culp said, and the Beckman business has now been split into three operating groups, a Life Science business, a Diagnostics business, and a Molecular Diagnostics business.

In his report, Groberg said that despite its troubles, being part of Danaher and being forced to comply with the Danaher Business System, or DBS, with its "relentless focus on operations and execution is exactly what Beckman's business needs." DBS is a business process and philosophy that focuses on cutting waste and improving productivity, and Groberg said that while DBS is simple in its broad outline "it constantly measures and it demands focus."

He added, "We believe Beckman was an extremely complex bureaucracy with a matrix organization and little to no accountability. We think DBS is perfectly suited for Beckman's new reality."

While integrating a company such as Beckman will not be easy and has its risks, Danaher "has a history of delivering consistent core results while simultaneously successfully integrating and realizing synergies with new acquisitions," Groberg said. "Importantly, Danaher has been able to roll up businesses without significantly increasing its [debt load] or diluting its [return on invested capital."

The acquisition is expected to generate about $250 million in cost synergies and a 10 percent return on invested capital to Danaher by 2014.

Beckman will be housed with Danaher's Life Science and Diagnostics segment, which comprises 28 percent of the conglomerate's total sales, Groberg said. Within the segment is also mass spectrometry firm AB Sciex, which Danaher bought in early 2010.

While he had no specific figures for AB Sciex, within the mass spec market, Groberg forecast growth of between 5 and 7 percent "over the long term" as hospital look to bring Vitamin D testing in house and new opportunities such as pain medication monitoring emerge.

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