Danaher Corp. (NYSE: DHR) reported strong results in 3Q20 as it delivered COVID-19 testing products and solutions for developers of coronavirus vaccines and treatments. The recently acquired Cytiva and Cepheid businesses are key drivers of revenue growth. We see Danaher as very well positioned to help biopharma companies develop new medicines, including treatments for COVID-19.
On October 22, Danaher reported that 3Q20 adjusted EPS grew 62.0% to $1.72.
On October 22, Danaher reported that 3Q20 adjusted EPS grew 62.0% to $1.72, topping the consensus estimate by $0.36. GAAP net income was $883.5 million or $1.16 per share, up from $630.7 million or $0.84 per share a year earlier.
Sales related to COVID-19 accounted for about 1,000 basis points of growth in 3Q20. Even excluding the COVID-19 revenue tailwinds, however, Danaher’s underlying base business performed better in 3Q20 (+4%) than in 2Q20 (-3%).
By business segment, Life Sciences core revenue grew 18.5%. Both Pall Biotech and Beckman Life Sciences posted more than 20% growth, and Cytiva and IDT posted more than 35% growth. These businesses are seeing strong demand from customers who are building out genomics and automation capabilities, as well as from those developing COVID-19 vaccines and treatments. SCIEX, also benefiting from this environment, saw low single-digit revenue growth. This was driven by demand for new products such as the Echo MS and the Triple Quad 7500, which Danaher claims is the most sensitive mass spectrometer on the market.
In the Diagnostics segment, core revenue grew 17.5%. This was led by Cepheid, which posted more than 100% growth due to high COVID-19 testing volumes and increased placements of the GeneXpert System, a molecular diagnostics platform. The revenue declines at Beckman Coulter Diagnostics moderated from the second quarter as elective procedures and wellness visits resumed in 3Q.
In the Environmental and Applied Solutions segment, core revenue was down 1%, largely due to softness in industrial end markets. Revenue declined for consumables and equipment, though these declines moderated from the second quarter as customer facilities resumed operations.
By measures of profitability, the 3Q gross margin was 54.8%, up 80 basis points. The core operating margin improved by 310 basis points.
During the quarter, Cepheid launched a rapid 4-in-1 combination test for detecting COVID-19, Flu A, Flu B and RSV from a single patient sample. RSV is a common, and very contagious, virus that typically infects the respiratory tract of children before their second birthday. The combination should be especially useful in the current flu season as many symptoms of the four viruses are similar, while treatments differ greatly. The test will provide results in 35 minutes.
In addition to Cepheid’s testing solutions, Beckman Coulter Diagnostics recently launched its Immunoglobulin M (IgM) and IL-6 assays. The IgM test detects the IgM antibody, which is usually the first antibody produced by the immune system when a virus attacks. A positive IgM test indicates that the person may have been infected and that the immune system has started to respond to the virus. In such a state, a person may still be infected or may have recently recovered from an infection. The IgM test complements Beckman’s IgG test, which indicates whether a person recently had the virus and has developed antibodies that may protect from future infection. The IL-6 assay can help identify severe inflammatory response in COVID-19 patients, a crucial consideration as clinicians evaluate the risk of intubation.
EARNINGS & GROWTH ANALYSIS
While Danaher has not reinstated its 2020 guidance, it did provide a revenue growth forecast for 4Q20. It currently expects non-GAAP core revenue growth, including Cytiva, in the low double digits in the fourth quarter.
Based on Danaher’s solid 3Q results; new pipeline products; and strong execution in the Cytiva, Beckman and Cepheid segments, we are raising our adjusted EPS estimates to $5.50 from $5.30 for 2020 and to $6.60 from $6.30 for 2021.
FINANCIAL STRENGTH & DIVIDEND
The company has ample resources for M&A and internal investments.
The debt/equity ratio was 57.5%.
There are risks to owning DHR shares, including the uncertain impact of the coronavirus. Multiple factors could cause earnings to fall short of consensus expectations. The company is launching new products in the midst of the global pandemic, raising supply-chain and distribution risks.
Danaher is a diversified Life Sciences and diagnostics company with global operations. In March 2020, it acquired the GE Biopharma business and renamed it Cytiva.
DHR trades at 35.2-times our 2021. The company added another growth driver in early 2020 with the timely acquisition of Cytiva. Newly launched products from Cepheid and Beckman Coulter have also expanded Danaher’s testing capabilities for COVID-19 and other infectious diseases.