Danaher Corp (DHR) 2021 Q4 法說會逐字稿

Hello. My name is Ashley, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's Fourth Quarter 2021 Earnings Results Conference Call. (Operator Instructions)

I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Thank you, Ashley. Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer; Matt McGrew, our Executive Vice President and Chief Financial Officer; and John Bedford, our Director of Investor Relations.

I'd like to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call 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 and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until February 10, 2022.

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 refer to results from continuing operations and relate to the fourth quarter of 2021, 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 they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'd like to turn the call over to Rainer.

Well, thanks, Matt, and good morning, everyone. We appreciate you joining us on the call today. 2021 was a tremendous year for Danaher, capped off by a very strong finish to the fourth quarter. Our well-rounded performance throughout the year was highlighted by outstanding core revenue and earnings growth as well as strong free cash flow generation.

We're particularly pleased with the strength of our base business across the portfolio, which was up low double digits for the year. And we believe our accelerated innovation and capacity expansion initiative has helped us capture market share at a number of our businesses.

Now these results are a testament to our team of 80,000 associates and their outstanding execution in what has been a challenging operating environment. Despite the uncertainty that has come to characterize life for all of us throughout the pandemic, our associates are showing up big every day, working longer shifts, launching breakthrough products in record time and going above and beyond to support our customers, and they remain committed as ever to executing with the Danaher Business System. Really, their dedication to serving our customers and the global community is as humbling as it is inspiring, and we're grateful for their invaluable contribution.

The circumstances of the last several years have also shined a light on the high-quality, market-leading franchises and technologies that now comprise Danaher. We're seeing the results of our purpose-driven portfolio transformation in action today through higher growth in margins, stronger cash flow and a higher percentage of recurring revenue. We're exceptionally well positioned to continue this trajectory going forward, and we see a very bright future ahead, indeed.

So with that, let's take a closer look at our full year 2021 financial results. We delivered 25% core revenue growth, 560 basis points of core operating margin expansion, nearly 60% adjusted earnings per share growth and over $7 billion of free cash flow. We deployed $11 billion of capital towards acquisitions, closing 14 deals across all 4 of our platforms.

The largest acquisition, Aldevron, joined our Life Sciences segment in August, providing a fantastic beachhead for us in the important frontier of genomic medicine. It's just a great example of how we're using strategic M&A to enhance our capability and bring greater value to our customers.

Now throughout the year, we also made significant organic investments to accelerate innovation across our businesses. Our R&D spend was up approximately 30% year-over-year and is now more than $1.7 billion annually. New products, such as the SCIEX ZenoTOF 7600 and the Triple Quad 7500 and Leica Biosystems Aperio GT 450 digital pathology slide scanner, are driving share gains in their respective markets through proprietary innovation while further enhancing our growth trajectory.

Now total capital expenditures were $1.3 billion for the year, which reflects substantial investments to expand production capacity across our businesses, particularly at Cepheid, Pall and Cytiva. In bioprocessing, I'm really happy to report that our new single-use technology plants in South Carolina and Beijing and our cell culture media expansion in Utah all came online in the fourth quarter. And at Cepheid, we more than doubled our production capacity for respiratory tests in 2021.

So near term, we believe these investments have been critical to support customer demand, and have helped us achieve meaningful market share gains. And they're equally important in the long term to support the significant growth opportunities we see ahead in these very attractive end markets.

So now let's spend some time on the fourth quarter result. Our sales were $8.1 billion, and we delivered 19.5% core revenue growth with strong contributions from all 3 segments. We saw broad-based strength across our base business, which was up approximately 10% in the quarter.

Now geographically, both the developed and high-growth markets were up approximately 20%, led by nearly 25% growth in North America and high teens growth in China. Gross profit margin was 60.7%, and our operating profit margin of 26.4% was up 270 basis points, including 240 basis points of core margin expansion. Adjusted diluted net earnings per share of $2.69 were up approximately 30%.

And now for the full year, we generated more than $7 billion of free cash flow, up 30% year-over-year. In fact, our free cash flow to net income conversion was 112% for the full year, and it marks the 30th consecutive year this figure has exceeded 100% for Danaher.

So now let's go into more detail on our quarterly results across the segments. Life Sciences reported revenue increased 20.5% with core revenue up 17%. Now these strong results were broad-based with most major operating companies achieving low double-digit or better core growth. In fact, Aldevron delivered over 30% revenue growth in the quarter and finished the year with approximately $400 million in total revenue. That business is off to a great start as part of Danaher, and we couldn't be more pleased with the team's performance out of the gate.

Now core revenue growth in our bioprocessing businesses continued to outpace segment-level results, with Cytiva and Pall Biotech both up more than 25%. Non-COVID-related bioprocessing trends remained strong with our businesses growing low double digits again this quarter. We continue to support significant customer activity across the development and production of COVID vaccines and therapeutics, which drove $2 billion of revenue in 2021.

Moving to Diagnostics. Reported revenue was up 29.5% and core revenue grew 29%, led by greater than 75% core growth at Cepheid. Non-COVID clinical diagnostic activity across all our operating companies, including Beckman Coulter Diagnostics, Radiometer and Leica Biosystems, collectively drove high single-digit core growth as patient and testing volumes largely remained at or near pre-pandemic levels. And we also saw an acceleration in demand across Cepheid's nonrespiratory test menu, led by sexual health, hospital-acquired infections and virology testing.

Cepheid produced and shipped approximately $19 million (sic - 19 million) of respiratory test cartridges during the quarter. This dropped the total number of respiratory tests shipped in 2021 to approximately 60 million cartridges, more than 10x the number of tests produced and shipped in 2019 prior to the start of the pandemic. In fact, our 4-in-1 combination test for COVID-19, Flu A, Flu B and RSV represented approximately 50% of Q4 respiratory test shipments while our COVID-only test accounted for the remainder.

Now let's move on to our Environmental & Applied Solutions segment. Reported revenue was up 4% with 7.5% core revenue growth. Our water quality and product identification platforms both delivered high single-digit core growth for the quarter.

Now across our Water Quality businesses, strength was broad-based globally across industrial and municipal end markets. Customer activity accelerated with the support of a strong funding environment, and many projects that were put on hold during the pandemic have now resumed.

ChemTreat delivered low double-digit core revenue growth in the quarter to close out its 53rd consecutive year of growth. This is a tremendous accomplishment and a testament to the team's best-in-class commercial execution and commitment to continuous improvement. It's truly a differentiating combination which has driven consistent market outperformance.

In Product Identification, our packaging and color management businesses were up mid-single digits and marking and coding was up approximately 10%. Videojet had its third consecutive quarter of double-digit core growth, led by strong demand in industrial and food and beverage end markets.

So with that as a backdrop for what we saw in the quarter, let me highlight the trends we're seeing, both geographically and in our end markets. So a return to pre-pandemic levels of activity is driving healthy customer demand across most major geographies. This is reflected in the strong results we've seen throughout both the developed and high-growth markets and our strong order book growth, which continues to trend above revenue growth. While certain regions have implemented targeted lockdowns to address recent COVID-19 outbreaks, we're not seeing any widespread declines in our customer activity.

Now given the size and scope of our business, we're certainly not immune to ongoing supply chain constraints and inflationary pressures, but we're proactively addressing these challenges across Danaher, leveraging the Danaher Business System and tools, such as daily management, and working closely with our customers and suppliers to mitigate the impact. We're also using DBS to accelerate price actions and manage cost pressures. In fact, we've achieved nearly 150 basis points of price each of the last 3 quarters, which is approximately double our historical price realization.

Now in Life Sciences we're seeing robust demand across all major end markets. Lab and customer site access is holding at pre-pandemic levels, evidenced by more normalized customer productivity, equipment installations and project initiation, supported by a strong funding environment.

Biopharma continues to be our strongest-performing end market within the Life Sciences. The shifts in treatment towards biologics as the standard of care and the accelerating focus on genomic therapies are driving significant investments in research, development and production capacity across the sector. And we believe we're well positioned to support this work across our $7.5 billion bioprocessing franchise.

Now in addition, we continue see significant demand related to development and production of COVID-19 vaccines and therapeutics. And we expect this activity to persist longer term. Our customers are planning for ongoing production with the assumption that there will be an enduring need for effective treatment and prevention as the world transitions to approaching COVID-19 as an endemic virus. And more broadly, our customers increasingly view the potential applications of new mRNA modalities, including vaccines and other therapeutics, as an important area for future investment.

In the clinical diagnostics market, patient volumes remain at or near pre-pandemic levels. Our customers have largely adapted their protocols and procedures to manage through recurring outbreaks, allowing them to continue wellness checks, routine screenings and other diagnostic procedures. While selective lockdowns are causing modest disruptions in certain regions, like pockets of China and Europe, we're not experiencing any material widespread negative impact from these measures.

In molecular diagnostics, global demand persists for Cepheid's point-of-care PCR respiratory test, further heightened as a result of the recent global surge of the Omicron variant. Additionally, we're seeing a more active respiratory season in the Northern Hemisphere, driving customers' preference for our 4-in-1 combination test. And we expect both of these trends to continue into the first quarter.

Now in light of these dynamics and conversations we're having with our customers about their expectations for the upcoming year, we anticipate shipping the same number of respiratory tests in the first quarter as we did in the fourth quarter and approximately 50 million tests for all of 2022.

In 2021, Cepheid placed a record 10,000 new GeneXpert systems, bringing the total install base to more than 40,000 systems worldwide. The team's thoughtful approach to placing systems throughout the pandemic is focused on both the near and long-term value this technology can bring to our customers. More recently, we've seen several existing health care system and integrated delivery network customers adding new instruments at sites further out in their networks and closer to their patients, facilitating faster diagnostic and treatment decisions.

The scalability and unique architecture of the GeneXpert, where the same test cartridges are used on higher- and lower-throughput instruments with the broadest test menu in the market, provides our customers with the confidence that they will achieve consistent reference lab quality results, whether they're testing in an urgent care clinic or a central hospital lab.

So now looking ahead, with the assumption that COVID-19 will be an endemic disease, we believe that the point-of-care molecular respiratory testing market will expand significantly from where it was prior to the pandemic. Given Cepheid's leading test menu and installed base, combined with an advantaged positioning around speed, accuracy and workflow, we believe Cepheid will continue to gain share in an endemic environment.

So moving on to the Applied markets. Customer activity is largely back to pre-pandemic levels, which we see in robust order rates for both consumables and equipment. In fact, project-oriented activity is accelerating with an improving funding environment, and more normalized site access has prompted the resumption of many projects and installations that were put on hold in the throes of the pandemic.

So now let's look ahead to our expectations for the first quarter and full year. Beginning with the first quarter of 2022, we will now include the impact of COVID vaccine and therapeutic-related revenue as part of our base business core revenue growth. This change is driven by our greater confidence in the durability of our COVID-related vaccine and therapeutic revenue as the virus turns endemic.

So now for the first quarter and full year 2022, we expect our base business core revenue growth to be in the high single-digit percent range. Additionally, we expect to generate operating profit fall-through of 35% to 40% in the first quarter and for the full year 2022, up from historical and pre-pandemic rates between 30% and 35%.

So now to wrap up, 2021 was another terrific year for Danaher. Our team successfully executed through a challenging environment to deliver outstanding financial performance, all while supporting our customers and directly contributing to the global fight against COVID-19. We're seeing the results of our purpose-driven portfolio transformation in action through faster growth, expanded margins, stronger cash flow and higher recurring revenue.

We're a better, stronger company today, and there is tremendous runway ahead for us to continue building upon this foundation. With the Danaher Business System as our driving force, our talented team and resilient portfolio of businesses, we believe Danaher will continue generating sustainable long-term shareholder value for years to come. And with that, I'll turn the call back over to Matt. Thank you.

Thanks, Rainer. That concludes our formal comments. Ashley, we're now ready to take questions.

(Operator Instructions) And we'll take our first question from Tycho Peterson with JPMorgan.

Rainer, you guided for the base business to grow high single digit. Can you maybe just give us latest thoughts on vaccine and therapies? I know you previously talked about this $2 billion backlog heading into the year. So have any of the assumptions around vaccines and therapies changed?

So just to confirm, that's right. For 2022, we're guiding the base business to high single digits. And no, our assumptions as it relates to the vaccine and therapeutics business have not changed. We saw continued strength in our orders. In fact, orders exceeded our sales here in Q4, and we continued to build backlog.

At the same time, we have to say that, from a roughly 75% -- 70% comp, we were down about mid-teens in terms of the orders growth. Nonetheless, orders still outpaced sales, we built backlog, and we're looking forward to roughly flat sales for -- in the bioprocessing business for vaccine and therapeutic revenues in 2022.

Now the core business, so in other words, the non-vaccine and therapeutic-related business for COVID, we expect that to continue to grow, of course, in the low double-digit area as has been the case here for many quarters.

And have any of the Aldevron assumptions changed? I know you previously talked about $500 million this year, growing greater than 20%.

They're right on the mark. $500 million is a good number. That's the kind of growth and slightly better than we expected here, closing the year off right around $400 million. So Aldevron is right where we think we should be and performing at our expectations.

Okay. Maybe last one for McGrew. Environmental & Applied operating margins were down quite a bit, I think 410 basis points. Can you maybe just touch on what drove that decline?

Yes, sure. Like you said, it was down 410 here in the quarter. It's probably 3 things. I would say, first, that's probably the area that we accelerated the investment spend the most in the fourth quarter. Given obviously a pretty strong print here across the entire portfolio, I think we took an opportunity in the fourth quarter to kind of overcharge a little bit of the investment there at EAS. So I think that's probably the first thing.

I think the second thing is the supply chain. The challenges I would say there are probably modestly more pronounced at EAS than they are elsewhere, Tycho. There's a -- kind of a high number of legacy products here that probably, I would say, have more specialized components.

And really what's happening is kind of those specialty components are a little bit harder to procure, especially in this environment that we're seeing. So largely offsetting that with daily management and doing some spot buys and some other product redesigns, et cetera, but I think a little bit more kind of supply chain issues there.

And then lastly, I think if you think about -- there was a bit of mix issue here, too, with Trojan, which is a bit lower-margin business, being up, I think it was even north of 20% in the quarter.

So -- and so I think despite that though, the good news is, like I said, I think the team's doing a pretty good job using DBS to drive it. From what we think and what we've seen here, it looks like, even because of all that, I think we took some share here in Q4 and definitely in Q1. And that's really a result of being able to get through those challenges and still meet customer demand.

And we'll take our next question from Derik De Bruin with Bank of America.

This is Mike on for Derik. First of all, a focus on Cepheid, both in '22 and post-pandemic. Given you're saying 19 million tests again in 1Q, it seems like you're assuming a pretty sharp drop-off in 2Q, 3Q. And you sounded pretty confident in duration, COVID being endemic now, the POC market expanding significantly going forward beginning to take market share. So could you give us some more color on continued market share gains? The 10,000 boxes you placed this year, sort of what are your expectations going forward?

And just is that 50 million testing, does that sort of assume that that's going to be the run rate beyond that? Or do you expect continued sort of deterioration in COVID revenues, offset by other [in the exit]?

Well, I'll start with, as you know, the situation around COVID is incredibly dynamic, right? It started with the assumptions that we made around Delta, and then Delta spiked, and we thought that might become the dominant variant and then Omicron came 60 days ago and spiked. So the environment is incredibly dynamic. But in the discussions that we have both with public health officials, but also with our customers, I think there's a couple of takeaways.

The first one is that we do think that COVID is going to turn endemic, and a lot of public health officials will talk about the end of 2023, perhaps the beginning of '24, being that time frame when we call it endemic with greater confidence.

As we look at our customer feedback and what they see happening here, that's where we're triangulating for 2022 into the 50 million test area. And as we've talked about, we see our base business in 2022 growing at high single digits and essentially having, as a result of the step-down from to 60 million to 50 million in 2022, a 200 to 300 basis point headwind there.

Now if you think about that going forward, beyond 2022, we think there's -- and once again, in the discussions with our customers, that there's still a likelihood that there will be a large respiratory testing business, much larger than pre-pandemic in '23 and beyond. And once again, in the early days, and this could change, it's so dynamic.

But we're thinking that that probably steps down again in 2023. And our working number there for now is right around 30 million tests. So as we think about the year 2023 and COVID testing, we see that going from 50 million in 2022 to perhaps 2023, 30 million. But that's a number that, of course, there's a lot of dynamic. There's a lot to happen between now and then. But that's sort of the planning number that we're working with.

And at the same time, as you think about 2023, we see our base business, of course the primary aspect of our total business, continuing to grow off the strength of our portfolio. We've re-rated our growth rate and discussed that at several occasions, so we feel really good about how we're moving forward and like the setup.

Okay. Really appreciate the color there. And maybe one for Matt. You had some color on the pricing power going forward. I think you called out 150 basis points price in the fourth quarter and throughout the second half or the last 3 quarters. Could you comment on how much further runway do you see in '22, if we continue to be in an inflationary environment, to pass on price to your customers? Any pushback you're seeing yet in any of the end markets?

And just in general, the comments on the higher fall-through in the business, labor pressure, logistics, obviously in the news a lot. So how are you navigating that this year, and implications for margins for the year?

Yes. Sure. No, I mean, I think as far as price goes, like you said, we saw kind of 150 basis points here in Q4. And I think that we've seen that for the last couple of quarters. I think that's a pretty good placeholder to put in for '22. Teams are obviously, over the last 6 months, we've been working harder to get that price, and I think you're seeing it show up. I mean, it's basically 2x the price we used to get, kind of call it, 5, 6 quarters ago. So I guess it's a good place to start for '22.

As far as margins go, just kind of maybe overall, I know we sort of put out a guide for '22 at, call it, 35% to 40% fall through. And that's down a little bit from where we've been, kind of more in that 40% to 45%. But I think that 35% to 40% kind of incorporates a little bit of what you're talking about.

I think it's kind of in line with what we thought, frankly, our longer-term outlook was going to be. But if I think about year-over-year from '21 to '22, I think you're right, I think a component of sort of the step down is going to be a little bit of the return to work and maybe some of the inflationary pressures that we see, offset by price.

The other piece really is going to be largely on the volume step-down that we see. And that's mostly going to be at kind of a mix type issue. So throw in some FX headwinds and share count, that's how I sort am thinking about the 40% to 45% in '21 going down to 35% to 40%. But I think the good news is that's pretty much in our long-term framework, right where we thought.

And I think it's also probably important to think about it, that even though we're seeing headwinds on the testing front this year, call it, 200 to 300 basis points, our COVID testing revenue is pretty much at the fleet average, right, which is why it's not a big step down for us. It's pretty much fleet average from a margin perspective. So I think that helps kind of on -- as we navigate the headwinds here.

And we'll take our next question from Vijay Kumar with Evercore.

Congrats on a solid print here. I guess one on just the guidance here, fiscal '22, some clarification. So your definition of core now includes vaccines, and I think that's comparable to how your largest peer looks at core organic.

But vaccines, if I just understood you correctly, it's flattish year-on-year, which means your base Danaher ex vaccine, that's really growing at the very high end of high single. Is that the right way to think about the guidance here on the base business?

And what's driving this strength? It looks like it's assuming perhaps bioprocessing growing double digits, that's well above your LRP. So I'm curious, some comments on bioprocessing.

Sure. So once again, just to level-set, the base business includes bioprocessing for COVID vaccines and therapeutics. It's important to note that. And in fact, we see the entire base business growing both for the quarter and the full year at high single digits. And that's driven by a number of factors.

One, as you just suggested, of course, the non-COVID bioprocessing business is still growing at the low double digits that we have seen here, and that continues to be strong. We also see our non-bioprocessing business, so as you think about our diagnostic businesses, as you think about our life science instruments and so forth, we see them growing very strongly on the back of the investments that we've made around innovation, additional feet on the street and really driving the growth here.

Keep in mind, that portfolio transformation that we've talked about has re-rated our base business growth, and we continue to see that. We saw that here in the 2-year stack in 2021, and you're seeing that here in the guide for 2022.

Understood. So I guess now we have clarity on what -- the mid-single digit plus what the plus means. So that's helpful, Rainer. Maybe one for Matt. The 35% to 40% incremental margins here, Matt, is that sustainable going forward?

Should we -- I guess my question is most of your peers who have benefited from COVID tailwinds, there is a cliff year or perhaps a transition year. It seems like Danaher does not have a cliff year. Maybe talk about the sustainability of incrementals and why perhaps the drop down in COVID tailwinds shouldn't be a headwind for Danaher.

Yes, I mean, I think that's right, Vijay. I think, like I just kind of said, I mean, our COVID kind of revenues, both vaccine, therapeutic and the testing, it's more or less at fleet average, right? And so what I think you're seeing here, part of the reason we talked about the re-rating of the portfolio from a growth perspective, as just mentioned [in the plot], we've also talked about the fact that the portfolio is re-rated from a margin perspective, too, right? We used to be more 30%, 35%; now we're 35%, 40%.

And I think what you see here is that as we go forward and think about kind of what a margin profile looks like, I think I feel very comfortable with the 35% to 40%. And the fact that, yes, like you said, we'll have some revenue headwinds. We're going to have some volume headwinds, testing like we sort of laid out. And we can talk about '23, maybe if you're interested.

But I think as we get to those headwinds, it won't be above the fleet average headwind, if you will, from a decremental perspective. So while it will be a headwind, and I think you can -- obviously you see that a little bit here in '22, from a margin perspective, it's not going to be overly burdensome.

We'll take the next question from Scott Davis with Melius Research.

Congrats on a great year overall. But anyways, Rainer, I was hoping we could talk a little bit about M&A, given that growth assets seemingly are out of favor in public markets fairly meaningfully. Has that kind of gone down into private markets at all and helped you out on the valuation side much? If you could talk about that and the pipeline, please.

Sure. Well, I mean, first [of all], to the environment that we see out there, this is an environment that, over our history, we have thrived in. Whether you want to call that anxiety or uncertainty or even in times of dislocation. We've always viewed this as a time of opportunity for ourselves.

And there's examples of that. If you think back to the financial crisis now going back some years. We acquired SCIEX at that period of time. That turned out to be a fantastic asset. The team has done a wonderful job. Also, if you think about some of the anxiety around Cepheid or the Pall deals there, that has been -- we couldn't be more proud of how the teams have performed there and turned those businesses into really -- real powerhouses.

And so we sit here in this environment with a rock-solid portfolio, an outstanding team and a strong balance sheet and a great deal of optionality. And we like that setup. And so as we think about our funnels, and to your question, they continue to be adaptive as ever. They cover the gamut, whether that's public or private, and we'll continue driving our M&A strategy and our bias towards allocating capital towards M&A as we have in the past.

And that will happen when that attractive end market, that first-class asset with competitive advantage meets our financial hurdles here, as has always been the case. So we like where we sit, and we like the setup.

That's helpful, Rainer. And Rainer, you talked about new product launches like Beckman. But how has COVID impacted those launches? Is there a -- were these things perhaps that were pushed back a little bit because of COVID? Were they on schedule with the customer response and ability to get out and see the customer with that product? Has that all been altered or changed? And just a little bit of color there would be helpful, and then I'll pass it on.

Sure. In our case, COVID has actually accelerated innovation for us. Of course, in the obvious sense in that we were able to pull forward the GeneXpert COVID-only test subsequently, and very quickly thereafter the 4-in-1, those are sort of the obvious examples. But at the same time, you've noted that we increased our R&D expenditures by 30% up to $1.7 billion, which has manifested in us pulling forward innovation, accelerating it and getting those into the market.

And examples were mentioned, the Triple Quad 7500, most sensitive Triple Quad in the market; the ZenoTOF, outstanding; and then of course the GT 450 pathology slide imaging, fantastic launches here. All of which was accelerated by the pandemic, and we were able to turn that into real opportunity for us.

We'll take our next question from Dan Brennan with Cowen.

Congrats on the quarter. I guess the first question, just on the vaccine therapeutics outlook now that you're including it in the base. We were assuming in our model a pretty steep drop-off in '23 and '24 just as we go from initial 2-dose regimens down to boosters, and while booster uptake looks good, it's probably not going to be nearly as good as the initial vaccine.

So I guess first question, I mean, is that reasonable to think there's going to be a healthy step-down? Number one.

And then number two, the fact that you're including it in the base, just wondering, I know previously you've discussed Cytiva kind of high single digits. Is that still fair, to think about the high single digits, now that you've got vaccine and therapeutics in the base?

Sure. Well, let's start off with the why is vaccine and therapeutics in the base? And that just comes from our belief of 2 things. One, that COVID-19 will be endemic in that there will be a continuing, a continuous requirement for vaccination, and that is going to be a global requirement.

We also think that new age groups will receive vaccination more broadly in the world, kids in particular. And as such, there is a strong recurring demand there. And that was discussed in some of the previous questions.

But if we back up a minute here and we think about this longer term and talk about our '22 guide here with high single-digit growth in our base business, and we talked about the 200 to 300 basis points of headwind coming from testing. As you think forward now, how does all that play out, let's say, in 2023?

And once again, it's important to start with the base, which is at the center of your question, which is, okay, well, we have this rock-solid portfolio that's transformed over the years that's going to be mid-single-digit plus growth and is going to have a different earnings profile as well, as Matt just talked about.

And then inside of that, of course, you do have vaccine and therapeutic revenues from COVID, and that will continue. There are new therapeutics being developed and there are also a lot of additional vaccines that are still in the pipe. And then as you think about COVID testing, as I talked about, we see that stepping down to what is, we'll call it, a more endemic look, from 50 million tests in 2022 to 30 million tests in 2023.

Now when you wrap all of that up, and of course, there's a lot of things that are still up in the air in terms of the number of spikes you might have in between, 2023 really looks a lot like 2022 in terms of how we think of the base growth going forward as well as our fall through.

Excellent. And then maybe as a follow up, just one more on bioproduction, if you don't mind. Certainly, the low double digits is impressive growth, particularly on the size of your business. Some of the CapEx that we've seen in the industry is really accelerating. [Lonza] talked about, I think, in their guidance, 40% plus type of CapEx growth in '22 on top of 40% in '21.

So I'm just wondering, could you give a little color on maybe the order book there? Like on the base business, kind of what you're seeing? And are we in like a period of like hyper-investment, where maybe that low double digit could have some upside here over the next couple of years?

Sure. So we do continue to talk about the low double-digit growth rate for the non-COVID bioprocessing business. That's what we've seen for many quarters. But we also talked about the fact that our backlog continues to build there.

And these announcements that you're seeing here out in the market, those are important indications of the strength of the industry and the market in and of itself. And of course, you can imagine, with the breadth of our portfolio, our global reach, that we play, if not on all, on the great majority of those kind of investments.

And so could there be upside? Sure, there could be. But of course, we're looking at the order book and -- that's in hand and thinking about how that develops. And we'll continue to update. But for now, low double digits in the non-COVID bioprocessing business is a good planning number.

And we'll take our next question from Jack Meehan with Nephron Research.

So one of the big questions we've been getting is the Fed is looking to start raising rates. Just would be great to get your thoughts around durability of demand from biopharma customers. And how much of a factor do you think higher rates could have on demand?

And then finally, maybe any color on mix between development and commercial, and interplay on those 2 sides of the market.

Could you -- I'm sorry, could you repeat the second question, please? It came through a little garbled.

Sure. Sorry. Just thoughts on how higher rates might influence demand from customers on the development side versus those with commercial products.

Understood. Well, let's start with the rates. Well, it's early days, of course, and we'll see where those go. As we look at the markets that we play in more broadly, the impact of those rates could be different. But generally speaking, we see our end market to be able to perform and drive growth even in a market where we see incrementally higher Fed rates.

And examples of that would be, if you look at biotech in aggregate, you see that the cash positions in these companies is extraordinarily high. We continue to see investments going in there strongly. And so we don't anticipate any near-term impact due to Fed rates in that particular area. And that would, of course, overlap with the development part of your question.

And as it relates to those that are already in commercial production, they are out there driving growth and ensuring the penetration of the incredibly efficacious biologic drugs, not just in the developed markets, but increasingly also in some of the higher-growth markets.

So we see really the demand drivers here going beyond any one country's monetary policy and continue to see that in a very positive light. So Fed policy is 1 thing. The specific markets that we play in, we would see less impacted by any of the incremental rate increases that are being discussed.

Great. And then Dan just asked about CapEx going in on the CDMO side. I wanted to ask a similar question, but focused on all the CapEx going in from the bioprocessing players. Back at the Analyst Day, you talked about $1.5 billion of your own CapEx. Some of your peers were talking about a lot of more investment going in the single-use and just bioprocessing, broadly speaking. So as you look across everything going on, just talk about supply versus demand and how you feel whether that -- just your views on that, broadly speaking.

Sure. Well, let me characterize that a little bit. So the large CDMO investments that you see there are really a derivative of what we talked about in your question before, which is the strength of the biotech market. These are typically smaller companies that don't want to invest their precious cash into manufacturing facilities and will outsource that to CDMOs.

And as we talked about, if you think about the fact that, just in monoclonal antibodies over the last 5 years, we've seen a huge increase in the number of projects in the funnel. If you think about nucleic acid therapies, there, we've seen a 10x increase in the development funnel. And now you're seeing those work their way through the clinical trial process, and that requires capacity. So that's what the CDMO investments are about. And of course, the customer -- our customers are also CDMOs, and we're helping them build those capacities so that they can take care of those developments going forward.

And then we also continue to see drugs going commercial. And as these drugs go commercial, that's a 10 and 100x increase in production capacity requirement. And all of this then, if you aggregate that, is what's pulling on our demand and is why we are so confident in the investments that we've made.

And I mentioned this not just for the short term, which, of course, is important to ensure that there are no supply bottlenecks as we work our way through the pandemic here, but also for the long term so that we continue to be that partner of choice that has the broadest portfolio, can integrate that portfolio horizontally and can deliver it to the point of impact around the globe with the necessary experts to help our customers get their drugs in the market more quickly and at a lower cost.

We'll take the next question from Patrick Donnelly with Citi.

I just wanted to follow up on the bioprocessing piece. I know you touched a little bit about what the cadence could look like going forward. But that's certainly the question, I think, we get the most from investors, so I just wanted to circle back on it.

I mean, it sounds like you feel really good about that underlying base business growing in the low double digits, and then the vaccine piece may be a little bit more of a variable. But can you just talk, I guess, about the trajectory? It sounded like '22 is a decent proxy where maybe COVID comes down and you shake out somewhere in the mid-high single digits as a whole for that kind of $7.5 billion business.

But I was just hoping you could talk a little bit about the puts and takes as we go through kind of the next few years. And again, that vaccine piece comes down, but the base business seems like it's good enough to offset that and then some. But just wanted to get a better handle there.

No, I think that's right. As we look at 2022, I mentioned the COVID-related vaccine and therapeutic bioprocessing business, they'll probably be roughly flat here in 2022. Again, the assumption being that we're starting to see the pandemic going endemic on the one hand.

On the other hand, what you start seeing to happen is, if you will, we're going from 1.0 compounds to 2.0. So some vaccines and therapeutics are viewed as less efficacious in the current environment with the current variant, and so those become less of a factor. On the other hand, you have new monoclonal antibodies as therapeutics starting to be proposed that show much higher efficacy here with the variant that you have.

And then for those that are already in market and quite effective, we're starting to see the recurring revenue as those companies are starting to recognize the recurring need for booster shots, not just here but around the globe.

So we think that that's a good baseline to move forward with and how to think about it. And we've continued to view, as we've said in our long-term guide around the bioprocessing business, that that's a high single-digit grower. And I think that's the way to think about it in '22. And as we said, we think '23 will look a lot like '22 as well.

Okay. Great. No, that's helpful. And I know the order book, typically you're taking orders for within a year. Is any of that building into '23 yet? Or should we think about that as mostly a 12-month order book? And then maybe conversations beyond that.

It's a 12-month order book, and conversations beyond that.

Okay. And last one, just the same topic for Matt. Margin profile, COVID versus not for the bioprocessing, it's pretty similar, right? I just want to double-check on that.

Yes. In bioprocessing margin, difference between COVID and not? Is that what you're asking?

Yes, exactly.

Yes. No. No real difference. I mean, we're -- I would say that it's all -- again, just depending on mix of what goes in there product-wise. But no, margin profile-wise, it's [basically the same].

And this will conclude today's Q&A portion for the call. I'll turn the call back over to Matt Gugino with any additional remarks.

Thanks, Ashley, and thanks, everyone, for joining us on the call today. We're around all day for questions.

Thank you, everybody. Good day.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.