Danaher Corp (DHR) 2021 Q3 法說會逐字稿

Good day, everyone. My name is Emma, and I will be your operator today. At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2021 Earnings Results Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, please go ahead.

Thank you, Emma. 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 November 4, 2021.

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 third quarter of 2021 and all references to period-to-period increases or decreases in financial metrics are year-over-year.

We also may 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.

As a result of the size of the Cytiva acquisition and its impact on Danaher's overall core revenue growth profile, we are presenting core revenue on a basis that includes Cytiva sales. References to core revenue growth including Cytiva sales in the calculation of period-to-period sales growth.

With that, I'd like to turn the call over to Rainer.

Matt, thank you, and good morning, everyone, and we really appreciate you joining us on the call today.

Our team delivered another outstanding result in the third quarter with over 20% core revenue growth, nearly 40% adjusted earnings per share growth and strong free cash flow generation. This well-rounded performance is a testament to the unique positioning of our portfolio and our exceptional team who are committed to leading and executing with the Danaher Business System every day.

I'd like to thank all of you who joined us last month for our virtual Investor Day, where we had the opportunity to showcase the strong foundation we've built for generating sustainable long-term outperformance. We highlighted our fantastic portfolio of market-leading franchises in highly attractive end markets, the exceptional team we have out on the field every day, and how we differentiate with the Danaher Business System. And we certainly saw this powerful combination in action during the third quarter as our results attest.

Now we also talked about our sustainability efforts. And just last week, we published our 2021 sustainability report. This year's report reflects the measurable progress we've made across the 3 pillars of our sustainability program, which are innovation, people and the environment, and how we use the Danaher Business System to execute on this increasingly important strategic priority.

Now I hope you all get a chance to read through the report and learn more about the important work that we're doing across Danaher to positively impact the world around us for generations to come.

So with that, let's turn to our third quarter results. Our sales were $7.2 billion, and we delivered 20.5% core revenue growth with portfolio-wide strength led by diagnostics and life sciences. Geographically, high-growth markets grew approximately 25%, and developed markets were up nearly 20%. In fact, revenue in each of our 3 largest markets, North America, Western Europe and China was up approximately 20% or more in the quarter.

Our gross profit margin increased by 550 basis points to 60.3%, primarily due to higher sales volume, the favorable impact of higher margin product mix, and the impact of prior year purchase accounting adjustments related to the Cytiva acquisition that did not repeat in 2021.

Now adjusted diluted net earnings per common share were $2.39 and were up 39% compared to 2020, and we generated $1.7 billion of free cash flow in the quarter bringing our year-to-date total to $5.2 billion, which is up 46.5% year-over-year.

We continue to accelerate organic growth investments across the entire portfolio and increased our research and development spend by approximately 30% year-over-year.

At our Investor Day recently, we highlighted how we use DBS growth tools and processes to accelerate innovation and bring more impactful solutions to our customers faster. In fact, recently launched products like the SCIEX ZenoTOF 7600 and the Triple Quad 7500 and Beckman Life Sciences CytoFLEX SRT Benchtop Cell Sorter are just a few great examples of how we're driving market share gains through proprietary innovation and enhancing our growth trajectory going forward.

We're also making substantial investments to expand production capacity across our bioprocessing businesses and Cepheid. Near term, these investments are supporting existing customer demand and driving meaningful share gains, but they're equally important to support the long-term growth of these businesses where we see significant runway ahead given the underlying structural growth drivers in the sectors they serve. And we expect our total capital expenditures across Danaher to be approximately $1.5 billion in 2021 as we continue to invest in support of our customers' needs today and well into the future.

So now let's go into more detail on our quarterly results across the segment. Life sciences reported revenue increased 24.5%, with core revenue up 20%. This growth was broad based across the segment with most major operating companies achieving high teens or better core growth. Now these strong results were led by continued demand for our bioprocessing solutions, as in Cytiva bioprocessing and Pall Biotech both grew more than 30% in the quarter, including low double-digit non-COVID-related core growth.

COVID-related vaccine and therapeutic revenue contributed -- continued to be strong and now exceeds $1.5 billion year-to-date.

At Cytiva, we passed an important milestone last month when we exited the last of our transition services agreement with GE. We successfully completed this process ahead of schedule, which is a testament to the entire Cytiva and integration team and their collective commitment to the Danaher Business System. Cytiva also added more than 1,500 new associates to the global team since joining Danaher to help ensure that we're supporting our customers today and continue meeting their needs well into the future.

Now in August, we successfully closed our acquisition of Aldevron, and we are thrilled to officially welcome the team to Danaher. Aldevron is a leading producer of high-quality plasma DNA, mRNA and protein, and provides a fantastic beachhead for us in our genomic medicine enterprise. We're seeing the rapid development of gene and cell therapies, DNA and RNA vaccines, and gene editing technology. And Aldevron expands our capabilities in these areas to ultimately help our customers bring more life-saving therapies and vaccines to market faster. So we're really excited about the quality, the scale, the turnaround time and the reputation that Aldevron brings to the Danaher portfolio.

In diagnostics, reported revenue was up 29.5% and core revenue grew 28.5% led by more than 60% growth at Cepheid. Each of our other major diagnostic businesses, Beckman Coulter, Radiometer and Leica Biosystems grew low to mid-teens in the quarter as clinical diagnostic activity and patient volumes around the world largely returned to prepandemic levels.

In respiratory testing at Cepheid, we further expanded manufacturing capacity, which enabled the team to produce and ship approximately 16 million cartridges during the quarter. COVID-only tests accounted for approximately 80% of those shipments, and our 4-in-1 combination test for COVID-19 to A and B and RSV represented approximately 20%.

Nonrespiratory core growth at Cepheid was up double digits as well, led by demand for hospital-acquired infections, sexual health and urology testing. We also saw strong growth in our installed base as system placements continue to exceed pre-pandemic rates. And we believe the team's thoughtful placement of the GeneXpert and Infinity Systems over the last 18 months is setting up Cepheid very well for future growth opportunities.

Let's move to our Environmental & Applied Solutions segment. Reported revenue was up 7%, with core revenue up 7.5%. Water quality grew mid-single digits, and our Product Identification platform was up low double digits.

Across our water quality businesses, we saw good underlying market strength, particularly in food and beverage and various industrial applications as activity returned to more normal levels. Municipal projects picked up given the improving funding environment and as more customers returned to in-person work.

On Product Identification, both Videojet and our packaging and color management businesses were up low double digits in the quarter. Comparable strength across consumables, service and installed base growth was driven by more normalized levels of customer activity and investment. We believe that our ability to meet our customers' needs, particularly on the equipment side at Videojet, enabled us to gain market share and expand our industry-leading installed base of printers.

So with that as a backdrop for what we saw this quarter, let's spend some time going through regional and end market trends. Most major regions and countries around the world are largely back to pre-pandemic activity levels. Customers have adapted to the current operating environment and protocols, and broadly resumed in-person commercial activities and site access. This is reflected in the strong results we've seen across the U.S., Europe and China. And this momentum is also reflected in our strong order book growth, which is trending above revenue growth.

Now we're mindful of potential COVID-19 variants or outbreaks and selective lockdowns, but we're not currently seeing any material negative impact from these scenarios. And while we are seeing some global supply chain constraints, we're leveraging the Danaher Business System tools like daily management, and actively working with our customers and suppliers to help mitigate any impact.

Across life sciences, we're seeing robust customer activity and demand across all major end markets. Lab and other site access is largely back to pre-COVID levels, and we're seeing this through more normalized productivity levels, installations and project initiations driven by a strong funding environment.

Now biopharma continues to lead the way as the number of life-saving biologic and genomic-based therapies in development and production continues to rise and is augmented by the ongoing work around COVID-19 vaccines and therapeutics. And at our recent Investor Day, we spent time covering how well positioned we are to support this complex, life-changing work that our customers are pursuing.

Our combined bioprocessing portfolio across Cytiva and Pall Biotech is the broadest offering in the industry with leading positions in upstream and downstream applications. And we further support our customers with best-in-class scientific services, partnering to solve their most challenging problems as they move from the lab to production scale. And our global reach enables us to reliably and consistently meet our customers' needs.

Now in addition to the industry-wide opportunities in biologics and genomic-based medicines, we continue to see significant demand related to the development and production of COVID-19 vaccines and therapeutics. Our customers are working to address emerging variants and increased global supply. And given that only about 1/3 of the global population has been vaccinated, we believe we'll see durable growth in this biopharma segment for the foreseeable future.

We continue to expect about $2 billion of COVID-related vaccine and therapeutic revenue in 2021. And since we spoke at our Investor Day, we now expect to enter 2022 with approximately $2 billion in COVID-related backlog versus our previous expectation of $1.5 billion of backlog. This increase is driven by the recent enhanced visibility for booster shots and the likelihood of vaccine availability for children under 12 years old in the U.S.

Now moving to the clinical diagnostic market. Non-COVID testing volumes are essentially back to pre-pandemic levels in most major regions as patients are returning for wellness checks, routine screening and other elective procedures.

In molecular diagnostics, strong global demand persists for Cepheid's point-of-care PCR respiratory testing as a result of the Delta variant and outbreaks, along with lower vaccination rates in many regions. And as I mentioned earlier, we shipped approximately 16 million respiratory tests during the third quarter and we now expect to ship approximately 55 million tests in 2021 versus our prior expectation of 50 million.

Now as we head into the traditional respiratory virus season, we're hearing from customers that they expect this to be a much more active season than last year's. In preparation, their preference is for our 4-in-1 combination test. So we're seeing an uptick in demand for those cartridges, particularly given the recent outbreak of RSV across the U.S.

Cepheid's 4-in-1 test was also recently approved with a third gene target for SARS CoV-2 detection, ensuring it can continue to accurately detect future COVID-19 viral mutation and reinforcing Cepheid's competitive advantage in the respiratory testing market.

Now moving to the applied market. Customer activity has largely rebounded to prepandemic levels, which we see in robust order rates across both consumables and equipment. In the global municipal market, consumables demand remains solid and the pace of instrument-oriented project activity continues to pick up with the improving funding environment and broad return to work.

So now let's look ahead to our expectations for the fourth quarter and the full year. We expect to deliver fourth quarter core revenue growth in the low to mid-teens range, with high single-digit core revenue growth in our base business and a mid- to high single-digit core growth contribution from COVID-related revenue tailwind. Additionally, we expect to generate operating profit fall through of approximately 40% in the fourth quarter, a similar level to what we achieved in the third quarter.

Now for the full year 2021, we now expect to deliver more than 20% core tailwind, and our base business will each contribute more than 10% to our 2021 core revenue growth rate.

So to wrap up, we're proud to deliver another terrific result here in the third quarter. Our performance is a testament to the power of our unique portfolio, the strength of our end markets and our team's commitment to leading and executing with the Danaher Business System. And this unique combination differentiates Danaher today, and it reinforces our opportunities ahead for sustainable, long-term outperformance.

So with that, back over to you, Matt.

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

(Operator Instructions) We will take our first question from Tycho Peterson with JPMorgan.

Rainer, I'm wondering if you could talk a little bit more on China. There seems to be growing noise on pressure on local competition. It seems to particularly be impacted some of the diagnostic tenders with that process getting pushed out in the provinces. Are you seeing anything there for Beckman or Cepheid? I know China was up 20% overall, but I'm just curious if there's any pressure on the diagnostic business based on what you're seeing.

Sure. So let me start with, we are not seeing any material impact related to some of the tenders or some of the other things that we hear out of China. In fact, the (inaudible) Province tender is really an exception in diagnostics and actually more common in other industries. And we'll see this kind of thing from time to time, but it's neither unexpected nor do we see it as material.

But what we're seeing generally in China is really very consistent with what we've seen over the past several years. China has been very forthcoming with its Made in China 2025 initiative as well as several others, all of which we see quite aligned with our strategy, starting with our portfolio, which is clearly aligned with the Healthy China 2030 agenda where you see the need for both improved diagnostic solutions as well as life science, research and bioprocessing, as well as the desire to protect the environment where water quality really plays big as well as the desire to improve and protect the food supply, where we see PID playing large as well. So we think we're really ideally positioned here to meet the needs of where China is going.

Now at the same time, for years, we have been investing in China as our business gains scale to ultimately localize our production. And that's been the case here for some time, positioning us very well in China. And that will continue to be the case going forward as our businesses continue to gain scale there.

Okay. That's helpful. Supply chain, you flagged some constraints. Obviously, you guys are generally very good at kind of mitigating an impact here. But I'm curious as you kind of look out over the next couple of quarters, are there areas where maybe you're more or less concerned around supply chain that you might flag?

So we haven't really seen a material impact on our ability to meet our customers' demand, but we are seeing some modest inflationary and supply chain pressures in certain areas. Just to name a couple, of course, electronic components, freight and logistics and some labor shortages. But really, this is where the Danaher Business System is a differentiator for us in this environment.

In fact, despite the additional work that ensues, we see this really as an opportunity for ourselves to differentiate with our DBS tool set, for instance, with daily management, which brings our cross-functional teams together on a daily basis, drive disciplined execution and accountability, as well as the sense of urgency and real-time problem solving. And at the same time, of course, we're qualifying additional suppliers and building safety stocks. So this is how we make sure that Danaher continues to not only meet its customer expectations but also has opportunity to gain share.

Now at the same time, of course, we see some inflationary pressures, and we're offsetting those of course, with a more active cadence of price increases, and those will also be incrementally larger than in the past as well as freight and fuel surcharges. So on the one hand, we're driving, as always, to reduce our cost of goods sold. At the same time, we take additional offsets with moving on some of these surcharges and price increases I mentioned.

I think also importantly to note here is that this is not a top-down process. The Danaher operating companies have this process muscle and are able to execute effectively, whether that's ensuring the security of the supply chain or whether that's ensuring that we can offset cost increases via price and other methods. And ultimately, we think that differentiates us, and we think we're gaining share as a result of that in PID, Water Quality, Cytiva and Pall, Radiometer and elsewhere.

Okay. That's great. And then before I hop off, just one on Cepheid. You're exceeding your targets here in the near term. Should we assume your estimates for 2022 are still intact? I think you talked about 45 million tests before. Or have you kind of revisited those as well?

Now that's correct, Tycho. We're really pleased that the team was able to ship more again here in the third quarter with the capacity increases, and demand still exceeds our ability to supply. But for today's view, 45 million cartridges for 2022 is our point of view.

We'll go next to Vijay Kumar with Evercore ISI.

Congrats on another impressive print here. Just one on testing here. I think I heard the number, 55 million tests for '21. The implied Q4 number, I think, is about 15 million. That's a sequential step down from 3Q. I'm curious, just given the testing trends, whether that step down makes sense. And any change to your -- I think your prior expectation was 45 million tests for fiscal '22. Is that still relevant given the current run rate?

Sure. Thanks, Vijay. So the way to think about the fourth quarter here in terms of testing is we would expect also 16 million cartridges in the fourth quarter, similar to what we saw in Q3. While we're always working to increase capacity, we think 16 million cartridges is the right way to think about it. And of course, if you add up the quarters, let's call it, about 55 million, I wouldn't want you thinking about a step down here in for Q4 for Cepheid. That's not the case.

Now as you look forward to 2022, we still think that 45 million cartridges, where we sit today, is the right way to think about it. And as we come to our fourth quarter earnings call in January, we'll revisit the topic then.

Understood. And my second question, Rainer, this is maybe a bigger picture question. I think at your Analyst Day, you updated Cytiva outlook as high singles. Now when you look at your peers in the biopharma space, most of them are in the double-digit range. Is there anything different about your Cytiva business mix versus your peers? And correct me if I'm wrong, but isn't Cytiva gaining share versus peers?

So to start with, the Cytiva and the Pall Biotech businesses together are, by far, the most complete portfolio in the marketplace. And we continue to see pockets where we're taking share because we've been able to invest not only in capacity, but our customers really appreciate the scientific capability and the help that they get from Cytiva and Pall in solving the challenges that are associated with making biologics of high quality with high yields at the targeted cost. So we really see ourselves in an advantaged position here and believe that we continue to take share, whether that's on a quarterly or on an annual basis. That's, for sure, the case.

Now as we think about the long-term growth, and perhaps our time lines need to be aligned here as we think of long-term growth, we -- you might recall when we acquired Cytiva, we thought this was more of a 6% type of growth business. And what we've seen here is that certainly, the growth of this business has rerated higher and certainly in the pandemic, is quite a bit higher.

So once again, as we think about the long term, we think it's prudent to think about a business at that scale in the high single digits. And we think that will compare very favorably with any other business out there in the short, medium and long term.

That's helpful, Rainer. And just to summarize that, there's no reason to think Cytiva growth should be below market. Is that a fair summary?

We continue to believe that we will take share now and in the future.

We'll go next to Derik De Bruin of Bank of America.

So I have a couple of ones. Can we talk a little bit about operating leverage as we go into '22 and '23. I mean, you guys are investing really heavily in R&D. You're doing a lot to sort of like drive innovation in the business. So how can we think about op leverage as we go in there and just to get a sense of sort of like where the margins are going to come on?

Sure. So Derik, as you know, we have been, and as you just mentioned, investing very significantly in the business. This is not only the case in capital expenditures where we're investing in our manufacturing network throughout the world, but we've also been investing significantly in research and development, in feet on the street to drive proprietary innovation in the short and long term, as well as to ensure that we can continue to drive share gains with our direct business model.

And as we think about the operating leverage, you know that our fall-through here has been in the 40% range. And we think that's a good way to think about the quarter here as well.

In the long term, historically, our fall-through has been more than 35% range. And we think that's probably the better way to think about fall-through for the long term just because we want to find that balance of reinvesting in the business as well as driving profitability expansion.

And we think that flywheel works for us, right? Mid-single-digit plus growth on the one hand. On the other hand, 50 to 75 basis points of operating margin expansion, free cash flow conversion, over -- net income over 100%, all of that then to drive double-digit plus EPS growth. And when you couple that with our current balance sheet positioning, with our bias to deploy capital towards M&A, we think that sets us up very nicely here, both from an operating leverage perspective as well as driving our growth franchise forward.

Great. So can we talk a little bit about the analytical instrumentation sales? I'm sort of curious just on how SCIEX is comparing to 2019 and so as some of the other instrumentation -- as well as some of the other instrumentation. And specifically, I'd like to know developed world versus China, and sort of like what is sort of that is? I'm just trying to gauge overall, are we seeing accelerating analytics demand from 2019 versus where we are today?

Well, let me start with that we are seeing accelerated analytical demand versus prior year today. That's the case in all of our more instrument businesses, and that is certainly the case for SCIEX as well. So we do see that the funding environment, labs opening up are helpful here and have accelerated instrument demand going forward. And SCIEX has done very nicely here with over mid-teen core growth in the quarter, and that also reads through to China as well.

So SCIEX, in particular, as you know, has been on a great streak of, and continuous streak, of innovation, launching the ZenoTOF 7600 as well as the 7500 Triple Quad and Echo MS. And is not only benefiting from the tailwinds of an attractive funding environment, which we see here this year and certainly in the second half of 2021, but they're also benefiting through this innovation that is really allowing our scientist to answer new questions, and that's resulting in share gain.

Derik, maybe just -- this is Matt. Just to put some numbers to what Rainer said. I mean, if you look at SCIEX, in particular, on a 2-year stack, you're talking about high single digits here in '20 and '21, which is -- that's actually better than where they were in '18 and '19 on a 2-year stack. So I think, like Rainer said, we're seeing some pretty nice acceleration, really new product-driven as well, but it's been a really good story here for the last couple of years.

Great. And if I can sneak in one more. The COVID vaccine backlog for '22. Is there even some additional upside there? Is that already committed orders? Or is that more tied to your expectations on boosters, et cetera?

So we are close to those $2 billion of backlog for the bioprocess business for 2022 today, and certainly expect to be there by the end of the year. We think that sets us up pretty well. We will see what 2022 brings, and we'll talk more about that in January. But the fact that we've upped that backlog by $500 million here going into 2022, we think is a good sign for things to come.

Definitely, those are committed orders. That is not a (inaudible)

We'll go next to Scott Davis with Melius Research.

I'm just kind of curious -- I mean, logistics prices and labor cost inflation or challenges and all this stuff doesn't seem to really have impacted you guys much. Maybe a little bit at E&AS. And you've made a comment, Rainer, on kind of capturing price, but it looks like price was sequentially flat. Is that something that you would expect price to be a little bit more dynamic going forward? Or is it just kind of a mix impact to some products or price just doesn't need to go up?

We're about 150 basis points up year-over-year, and we continue to move price increases through the system. So I think you're going to continue to see that filtering through here going forward, Scott. So mix plays a role, as you suggest. Timing is another one. But all of these actions are in the works, and they take some time to get through the system.

Okay. That's helpful. And the R&D, the spend up 30%, is that -- is it headcount up 30%, too? Or people are costing you more? How do you think about that? And how do you think about kind of getting productivity on that spend as making sure projects are focused and there's some sort of return on that investment?

Scott, it's a great question. And the 30% increase is primarily related to a number of points. One, of course, you have more people working on more projects. But in terms of the productivity, the way to think about that is, any project that we do has its business case, and we ensure that, that productivity through the delivery of that business case makes sense for us.

So we view this, of course, as an investment in the future that ultimately drive defensible proprietary share gain through research and development. And the increase comes in terms of people, it comes in terms of additional equipment -- testing equipment that's required, it comes in terms of additional alpha and beta systems that are out in the field with our customers. So myriad ways that we invest that in order to drive innovation.

And congrats on a great year so far, guys.

Thanks, Scott.

We'll go next to Dan Brennan with Cowen.

I wanted to ask a follow-up on the first question on this file process. So you maintained the outlook for vaccine therapeutic contribution this year. Just wondering, is there capacity for you to exceed that in terms of is there demand for that? Or are you capacity constrained for 2021?

And then related to that, as you think about 2022, you've already discussed the $2 billion firm order book. But how do we think about the contribution within that from boosters and from kids because I forget, previously, you had boosters included in that. So maybe that's the first question.

Very good. Well, let's start with the topic of the contribution that's in the $2 billion. So in fact, we did not include the kids, 12 and below, into our $1.5 billion original backlog estimate for 2022. That, and of course, now the approval of boosters for various groups of the population is really what is driving that increase from $1.5 billion to $2 billion of backlog for 2022. What it doesn't include is the approval of the vaccine for kids 12 and younger, for example, outside of the U.S. So that's something that is still in the future, and there's not sufficient clarity for us to start thinking about that in quantitative terms, but that's something that would be excluded in that.

Now coming back to your capacity question. As you likely are aware, and as we talked about also in our Analyst Day, we have been investing in capacity expansions in the biotech business now for some time. In fact, we ensured that the investment continued even prior to the closing of the acquisition from GE. And we have continued with those investments that have come online here nearly in a continuous fashion through the second half of 2020 and 2021. And we expect those capacities to continue to increase here going into 2022.

So we feel very comfortable that we're able to meet our customers' requirements here now and going forward. And we think that differentiates us in the marketplace and why, among other reasons, we are confident that we are taking share.

Great. And then as a follow-up, I know Matt discussed previously kind of a stack growth on, I believe it was on Cytiva. I just wanted to understand a little bit in terms of stack for your overall business. I know the commentary throughout the conversation reflected business largely back to normal, which is great. But when we look at like the base growth ex-COVID, and we consider like a stack, and this is clearly very imprecise, but in Q3, that base growth on a 2-year average basis was around 4, maybe a little bit below that.

And I believe in Q4, the high single-digit base guidance implies like a 2-year stack that might be closer to 3. And this is compared against what we consider Danaher's underlying growth rate, probably somewhere in the 6% to 8% range when things get back to normal. So I'm just trying to reconcile some of the underlying stack. And is it just conservatism right now? Are things back to normal? Or maybe is it too imprecise to do this analysis with COVID?

Yes. Dan, let me just give you the numbers because I think maybe a disconnect here. So I think the simple frame for Q4 is like we sort of talked about, we kind of increased our expectations from low double digits to low -- to mid-teens. And like you said, we were up in the base business. We think the base business is going to kind of be high single digits in Q4 which, as you said, was probably a little closer to 10% here in Q3.

And I would look at that delta between kind of high single digits in 10% and say that, that's really just more a function of kind of planning given the current operating environment and some of the things we've talked about, in particular, when you think about the Q4 and logistic challenges, et cetera, that might be there. So I think we're just trying to give a little bit of -- from a planning perspective, high single digits from about the 10% we've seen, but really not much of a change here in the environment.

We'll go next to Jack Meehan with Nephron.

Just wanted a little bit more color, I guess, on the funding environment. Was curious, as you look into the fourth quarter, what customers might be telling you around the potential for a budget flush? And what is the guidance assume kind of versus historical patterns?

So Jack, first of all, we see the funding environment across the board improving. So if we start with EAS, we do see customer activity increasing. We do see more work occurring at the workplace and with that, more projects being tackled both in the capital as well as operating investment categories. And we would expect that to continue to improve here going forward as the economy continues to pick up speed and return to normality.

As we think about life sciences, research funding is up, whether that's government funding, whether that's venture capital funding, or whether that is biopharma funding from the pharmaceutical company. We've see -- seen a step up here in an effort to take advantage of the opportunities that new breakthroughs and technologies that you're all aware of as a result of COVID, all creating a great deal more awareness of the possibilities here in therapeutics.

So we see, generally speaking, a great environment in the life science area, bioprocess, we talked about with continued capacity increases to meet the need of the very fast-growing therapeutic pipeline. We talked about the fact that monoclonal antibody pipeline is up 50% in terms of the number of projects over the last 5 years. Genomic gene cell therapy pipeline is up in order of magnitude, so 10x versus 5 years ago. So that's creating very healthy drive here, whether that's in the research side of life sciences or in the bioprocessing.

And then when you come back to diagnostics, patient volumes are nearly at full rate -- pre-pandemic rate, if you will, in nearly every geography. And we continue to, of course, see COVID driving additional diagnostic demand. And so across the board, a very positive funding environment. And we would expect that the one or the other budget is going to be taking advantage of here in the fourth quarter. We'll see. There are a number of different perspectives there, but the environment is generally very positive.

That's great. And then as a follow-up, just curious on Aldevron, how the early integration feedback is going? And as I look at the fourth quarter, you've given us the core guidance. Would you have M&A contributing 2.5 points or so to that turn rate?

Yes, that would be probably -- sorry, go ahead, Rainer.

No, go ahead. Go ahead, Matt, please.

Yes. No, the M&A contribution is probably going to be about -- it was $40 million here in Q3. So I think you're probably pretty close with what you've got, $40 million.

So we actually -- coming back to the front end of your question there, I mean, we couldn't be happier with both Aldevron as an entity, but even more importantly, the team in Aldevron that have embraced joining the Danaher family, are embracing and pulling hard on the Danaher Business System, and are really focused on driving and growing their business. There's plenty of opportunity, as you likely know, in the core businesses of Aldevron, and we see that. We see that in the order book, we see that in revenues, and we will see that also in their earnings contributions, all of which is running as we expected when we updated during the acquisition.

So we expect to see $400 million of revenue. This year, growth rate in 20%-plus range, and we expect to see $0.20 of EPS in year 1, growing to $0.30 of EPS in year 2. So Aldevron, incredibly pleased with the motivation and the engagement of the team and the important work that they're doing, and proud to have him as a part of the Danaher family.

We'll go next to Matt Sykes with Goldman Sachs.

Maybe just to follow up on Jack's question on Aldevron. You guys had mentioned when you made the acquisition that they were relatively underexposed to international. And I know you've got a lot of things going on with the integration. But as you think about expanding Aldevron footprint internationally, how are you thinking about that? And are there any kind of time lines that you have for that?

So very much a part of the investment hypothesis is to expand Aldevron's activities, as you say, internationally. And we, of course, are focusing first and foremost now on the transition into Danaher and are helping the team with their #1 priorities, which are to take care of the expansion that they are finalizing as we speak, and we're already in the process of the next set of those expansions.

And so in terms of time line, we'll talk about that when that becomes something that's on the top of the agenda. But currently, it's all about ensuring an effective transition, taking care of our customers, transitioning the team on to DBS, and they're incredibly excited about that, and of course, subsequent expansions as we go forward.

Great. And maybe just one follow-up. You're obviously generating an impressive amount of free cash flow, and you've been very active in M&A. But what are your thoughts in terms of inorganic investments as you move forward, looking at where you are in terms of leverage and what you want to accomplish?

We really like the way we're positioned, both in terms of the franchises and the platforms that we have as well as how we're thinking about our earnings flywheel. I talked about that earlier in the call, driving that mid-single-digit plus growth, double-digit EPS expansion and of course, then having a very strong balance sheet position in order to continue to prioritize capital allocation towards M&A.

As we think about our balance sheet position this year after the Aldevron deal, by the end of the year, we should probably be back to about 2x net debt -- 2 turns of EBITDA over net debt. And we think that puts us in great position. And our funnels are active, and we continue to work as we always have at Danaher to ensure that we have the next deal ahead of us and take advantage of the balance sheet that we have. So we're very well positioned there. We feel good about where we sit.

We will take our final question from Luke Sergott with Barclays.

So just quickly on the backlog and you think -- you're raising your guidance there or your expectations of what you're expecting in '20 to exit the year. Can you give us a sense of the mix between the vaccine and the therapeutic revenue, or how that order book is shaping up?

Sure. Sure. So rough numbers here, Luke. Think about 85% vaccine, 15% therapeutics. That's roughly the -- those are the rough numbers there.

Okay. That's helpful. And then we were expecting a little more balance between the 4-in-1 and the just pure COVID test. So can you give us a sense of the order there, how the orders are starting to shape up ahead of the flu season? It makes sense that we haven't had flu season yet. But -- and then really how -- trying to figure out how to think about the first half of '21 through that winter season.

So in terms of the mix here, in Q3, we saw 80% COVID-only, 20% 4-in-1 test. And as you think about Q4 here, we see that heading towards the 50-50. So a good way to think about it is 50% of the COVID-only test in Q4 and 50% of the 4-in-1. And as we think about the first half of next year, I think the best way to think about it right now is the 45 million tests that we've been talking about and generally speaking, the same kind of mix ratios that we have within flu seasons and outside of flu season. So within flu season, probably around 50-50 is the best way to think about it, 4-in-1 and COVID only. And then if we're outside of the flu season, probably closer to 80-20.

I will now hand the program back over to Matt Gugino.

Thanks, Emma. Thank you, everyone, for joining us today. And we're around all day to take your questions.

Thank you everybody.

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