Q3 2020 Danaher Corp Earnings Call

Ladies and gentlemen, this is the operator your conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.

[music].

Thank you for standing by my name is Crystal and I will be your conference operator today.

This time I would like to welcome everyone to the Danaher Corporation's third quarter 2020 earnings results Conference call.

All lines have been placed on to prevent any background noise.

After the speakers remarks, there will be a question and answer session. If you would like to ask a question at that time. Please press star one on your telephone keypad.

If you would like to withdraw your question press the pound key.

Well now turn the call over to Mr., Matt that Gino Vice President of Investor Relations Mr. could you know you may begin your conference.

Thanks Crystal.

Good morning, everyone and thanks for joining us on the call with US today are Reiner Blair, our president and Chief Executive Officer.

We grew our executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, the slide presentation supplementing today's call.

Third quarter, 2020 form 10-Q, 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 Dot dinner dotcom Hattie 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 5th 2020.

During the presentation, we will describe certain of the more significant factors that impacted year over year performance supply.

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 preferred to results from continuing operations and relate to the third quarter of 2020, and all references to period to period increases or decreases in financial metrics are year over year.

We may also describes certain products and devices, which have applications submitted intended for certain regulatory approvals 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 or SEC filings and actual results may differ material 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 this I T. The acquisition and its impact on Danahers overall core revenue growth profile, we're presenting core revenue on a basis that includes like yourselves references to core revenue growth, including sativa sales in the calculation of period to period sales growth comparing the current period that keep ourselves the historical psyche.

Sales prior to the acquisition.

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

Well, thanks, Matt and good morning, everyone.

We delivered an outstanding third quarter revenue.

It's in the mid teen core revenue over.

Over 60% adjusted EPS growth and more than doubled our year over year free cash flow.

The strong performance is a testament to our team's dedication and they stay focused on executing for our customers during the COVID-19 pandemic.

The onset of the pandemic, we've met the challenges presented and turn them into impactful opportunities to support patients our customers and the global community. So.

So before we run through our third quarter results I'd like to update you on how we are directly contributing to the global fight again COVID-19.

So it continues to be a leader in the global diagnostic testing effort and the team's commitment to tackle this global health crisis was further demonstrated by the recent launch of a rapid four and one combination test for cold at 19.

Hey, lubi and or it could be from a single patient sample.

Symptoms for each of these viruses are very similar.

Treatments different greatly and this test will provide clinicians with critical answers and approximately 35 minutes to help ensure best patient outcomes.

As we head into flu season, we believe that it's easy to use rapid for in one channel will be a critical tool and clinicians testing Arsenal and we are incredibly proud of the cephea teams fast and innovative response to the pandemic.

We further enhanced our diagnostic testing capabilities with Beckman Coulter diagnostics, new dermatology and I'll sit outside the <unk>.

Ill say can help identify severe inflammatory response and COVID-19 patients.

Crucial consideration as I mentioned evaluate the risk of intubation with mechanical ventilation.

The Idmc Rawlins yesterday can detect AARGM antibodies to the virus, which typically begin to develop shortly after symptoms appear and is complementary to beckman Gi tests, providing greater insight over the course of a patient's infection.

And immune progression.

While the use of COVID-19 antibody testing is relatively limited today in the future. It may play a critical role pre and post vaccination for population surveillance and clinical trial studies.

We're also proud to support the scientific community pursuit of new vaccines and therapeutics for the virus Paul.

Paul in fact, Chivas products and solutions are involved in the majority of the more than 400 vaccine and therapeutic projects currently underway globally, including every operation Warp speed COVID-19 vaccine in the U.S.

As the market leader across the Bioprocessing work flow the breadth of our offering and technical expertise are key differentiators that enable us to contribute meaningfully to the development and production of coal, but 19 vaccine entry.

And treatment.

So now let's take a look at our third quarter results.

We generated $5.9 billion of sales with 14% core revenue growth.

Hope it related revenue Tailwinds contributed approximately 1000 basis points third quarter core revenue growth, while our underlying base business was approximately <unk> was up approximately 4% a sequential improvement from an approximate 3% decline in the second quarter.

Geographically revenue in the developed markets was up mid team led by North America and Western Europe.

High growth markets were up approximately 10% driven by sequential improvements in China and India.

Our gross profit margin was 54.8% and our operating profit margin of 18.5% was up 80 basis points.

Our core operating profit margin was up 310 basis points, but each of the three segments, achieving 75 basis points or more of core margin expansion.

Adjusted diluted net earnings per common share of $1.72 cents were up 62% versus last year.

We generated $1.5 billion of free cash flow in the quarter and $3.5 billion year to date up 110, and 59%, respectively with 174% free cash flow to net income conversion in the quarter.

This outstanding cash flow generation combined with our strong balance sheet positions us well to actively pursue strategic M&A opportunities.

We also continue to accelerate organic growth investments across Ghana, with a particular focus on expanding production capacity. It said that Chiba and Paul biotech to support increasing demand driven by cold at 19.

So now let's take a more detailed look at our results across the portfolio.

Life Sciences core revenue was up 18.5% led by core growth rate of 20% or more at Pall biotech and Beckman life Sciences, and more than 35% at site Chiba and I'd tea.

Continued to see strong demand from customers building out their genomics and automation capabilities and from our Biopharma customers working on COVID-19 vaccines and therapeutics.

In our more instrument oriented life science businesses declines moderated academic and research labs continue to reopen.

Driving increased installations and better order trends.

Sykes benefited from this improving environment, achieving low single digit core revenue growth driven in part by demand for new products, such as the Echo and math and the Triple Quad 7500, the most sensitive mass spectrometer on the market.

Moving over to diagnostics reported revenue was up 18% and core revenue was up 17.5% led by more than 100% core growth accelerated as a result of COVID-19 testing volumes and record gene expert system placements.

Radiometer and like a bias system, our acute care and pathology businesses delivered mid single digit core revenue growth declines at Beckman Coulter diagnostics moderated as elective procedures and wellness cheques continue to resume throughout the quarter.

Moving to our environmental and applied solutions segment reported revenue and core revenue were down 1% with similar results that both our water quality and product identification platforms.

Across our water quality businesses.

The whole activity and projects continued to resume driving growth in North America, and China and this was offset by softness in the industrial end markets globally.

Bands far consumables and Chemistries remain steady supporting customers mission critical day to day water operation.

And equipment declines moderated and we were encouraged by equipment order trends in the quarter as more customer facilities got back up and running.

Now during the quarter hockey closed the acquisition of aquatic informatics, a leader in water focused software solutions occur.

Aquatic informatics solutions collect manage and analyze large volumes of water data and these capabilities combined with hockey deep applications expertise will help us bring greater operational efficiencies to customers' workflows.

At our product that if an identification platform low single digit core revenue growth at Videojet was driven by strong demand in North America, particularly across the consumer package, good food and beverage and pharmaceutical end markets.

Similar and services performed well globally at Videojet continued to help customers keep their essential businesses operating through the pandemic.

Now with that as context for what we saw by segment during the quarter, let's take a look at recent trends across our end markets.

Geographically customer activity continues to increase in the U.S. and Europe has phased Reopenings proceed across these regions work.

We're keeping an eye on areas that have recently experienced setbacks in the process of reopening, but we have not seen any material impact so far and China is progressing well with activity in most regions approaching pre pandemic levels.

Within life Sciences bio processing demand continues to lead the way overnight team vaccine and therapeutic activity increased meaningfully during the quarter with development and production scale up occurring at an accelerated pace that Chiba and Paul biotech comprise most of our bioprocessing exposure and.

Collectively these businesses increased orders by more than 60% in the quarter.

Given by our comprehensive offering across the Bioprocessing workflow.

Non cobrand related bio processing activity remains healthy and in line with what we saw over the last several quarters.

As I mentioned earlier academic and research labs around the world are continuing to reopen at reduced capacity at social distancing measures limit the number of people allowed in the loud at any one time and we estimate that approximately 60% to 70% of academic research labs are now open in some capacity and in China that numbers.

Closer to pre pandemic level.

Moving to a clinical diagnostics, we continue to see strong demand for molecular testing in both hospital lab and point of care setting.

Since launching the first rapid molecular tests for Cobi 19 in March tested has meaningfully increased production capacity and shipped more than 7 million test cartridges in third quarter.

The team continues to ramp test production and we now expect to ship more than 8 million tests in the fourth quarter.

That's it also delivered another record number of new systems in the third quarter expanding their market, leading global installed base by approximately 35% over the past year.

Across hospitals and reference labs patient volumes increased through the quarter as elective procedure and wellness checks resumed across much of the developed markets. We estimate that global patient volumes are currently 90% to 95% of pre pandemic leveled with China slightly ahead of North America and Europe.

Minutes earlier reopening.

And the applied markets consumables remain solid at customer sustained essential business operations like testing and treating water and safely packaging food medicine and consumer products.

Previously delayed equipment installations are starting to resume and we're seeing our equipment order books, improving as customers start to initiate new project and capital investment.

So as we look ahead, we expect to deliver low double digit core revenue growth in the fourth quarter.

Modest sequential improvement across our businesses will be offset by the impact of three fewer selling days versus last year, which represents a core growth headwind of more than 300 basis points we have.

We anticipate COVID-19 related revenue Tailwinds will be somewhat similar to what we saw in the third quarter.

So to wrap up.

We're really pleased with our results this quarter and we're proud to play a pivotal role in tackling COVID-19 had on our team has turned unprecedented challenges in the tremendous opportunities and our strong performance is a testament to our associates focused execution and commitment to our customers.

The Danaher business system, as our driving force and the powerful combination of our talented team exceptional portfolio of businesses and strong balance sheet.

We believe Danaher will continue to outperform through the remainder of 2020 and well into the future.

Now before I go onto that today I just want to take a moment to share a few thoughts after my initial months as CEO.

First.

Always knew we had an exceptional portfolio and extraordinary team and that conviction has only been reinforced over the last few months as I've had the opportunity to spend more time with more of our businesses and leaders.

And in doing so a couple of things really stand out.

One is the considerable amount of innovation happening across the organization our investments in R&D and commercial initiatives are allowing us to continue building sustainable competitive advantages all across our businesses.

Yeah. The other stand out for me is the caliber and the depth of talent, we have across banner. Our associates are innovative and passionate about their work and committed to the danaher business system and our culture of continuous improvement.

It's clear that DBS is what drives it it's who we are it's how we do what we do it's our ultimate competitive advantage and I see it alive and well everywhere.

So our future is bright and I'm excited about what lies ahead for Danaher I believe that the combination of our investments in innovation outstanding team and strong balance sheet. All powered by the Danaher business system will enable us to keep building, an even better stronger company as we move forward.

So with that I'll turn the call back over to Matt.

Thanks, Robert that concludes our formal comments, Chris Delaware, we're now ready for questions.

Thank you at this time, if you would like to ask and O'neil question. Please press star one on your Touchtone phone once again that is star one to ask an audio question.

Your first question comes from the line of Tyco Peterson with JP Morgan.

Hey, good morning, congrats on the quarter, right or 50% order growth in policy that keep us certainly impressive and notable acceleration from last quarter. So could you maybe just touch on the manufacturing scale up you alluded to and how.

How quickly can additional capacity come online and where are you, making those investments.

Sure. So first of all good morning Tyco.

And thanks for the question as I think about the larger opportunity here, particularly in the vaccines and therapeutics. It might be helpful. Just to just to back up one second and think about the scale and the breadth of our unique portfolio.

We're incredibly well positioned through the combination of course, Oh, Paul Insightuba, but also upstream with many of our companies being involved in the development of the actual drugs themselves and then of course the process scale up the upstream solution include.

In cell culture media single use bio reactors and then all the downstream fluid management filtration chromatography solution.

And so I think what you saw there in that step up here.

Quarter over quarter was the breadth of that portfolio and the capability of those teams really.

Moving forward and gaining traction you know we are on top of well over 400 vaccines and therapeutics that are in the pipeline and we're playing and the great majority of those and one capacity or another and so the nature of our portfolio. The focus of our teams the trust that the customers have that you know it.

Giving us an extraordinary number of at bats, and so as you think about that portfolio positioning here going forward, we think that as the capacity needs of our customers continue to ramp up.

Certainly as we think about a 21 and beyond now we expect to play very very well there and just to give you a sense of that you know we year to date had a billion dollars.

Well over a billion dollars of cobot orders and.

In the combination of sites, Eva and Paul biotech and that's.

And that's before any vaccines have been officially approved by the FDA. So again, we really see an opera.

An opportunity here for the long term to really capture an extraordinary amount of opportunity in share going forward.

Great and then maybe I guess, a similar question on separate I know you've been committed to scaling up the manufacturing there and you talked about 8 million tests in the fourth quarter, but can you talk about where you think that needs to go from a capacity standpoint, and you know.

Any headwinds we need to think about from a lighter flu season here for you guys and the fourth quarter and early next year. The flu trends you know early on are still still kind of like I can.

So this the level set on that when Tyco, we have had a extraordinary demand for are coded tests here from Seth did in fact.

You noted in my comments that 10-Q, two we had 6 million chats ship in Q3 7 million tests [noise] shift and now in Q4, we're looking at 8 million tests.

Shifting and we also at the same time at the end of September launch this foreign one test, which really positions us uniquely an extraordinarily.

In order to be able to address the opportunity and the need in particular here as the flu season arrives as you can imagine as patient presents particularly in hospitals and points of care that physicians will want to know the right answer quickly and the right answer needs to distinguish between Kobe.

Ed and the flu season, so we're really thinking of this as the flu.

The flu season, and Kobin testing, both being tailwind as we go into Q4 and beyond.

And maybe just to put some maybe just to put some numbers around that for you. So.

So if you think about sort of the capacity that we talked about accepted sort of to begin. This in Q2, we weren't sort of had 6 million tests that would that we had that increase to about 7 million.

Here in Q3, and we expect that to go in Q4 to call. It may be closer to 8 million and as we sort of ramp through 21, we are going to be adding additional capacity as well and I'm not sure exactly when.

When we expect all of that to come online, but but as that happens. We will we will sort of Ah you know kind of kind of keep people updated but but yeah for sure. We are we're going to add a little bit here in Q4, and then throughout 21 as well.

Okay. Thanks, I'll hop off let us just got that thanks.

Your next question comes from the line of Derik de Bruin with Bank of America.

Hey, good morning, So just a follow up on hi, just to follow up on Tyco's question, just get them getting some things from investors. How are you thinking about pricing on the four to one a foreign one test and I mean, we've done some calls with labs I think there's some concern about how they're going to get reimbursed for some of these multi.

Flex test can you sort of talk through pricing and sort of like what's what is the strategy for your customers to get right to get paid for these.

Sure sure so let's.

Let's let's start off with just to level set that we in fact have a launch this foreign one.

Test here in September and are already shipping and we're seeing a great customer demand for that so customers are really recognizing what an incredible tool. This is at the point of care in hospital to be able to diagnose and help help customers.

Now this this test here and of course, there's always depends on the type of customer, but the foreign one test will be priced right around 55 to $60 per test and that compares to the cobot only have about 20 to $40. Once again depends on the type of customer and volumes and so forth but that.

Do you have a sense of it now from a reimbursement perspective, we feel very good about this for a number of reasons as as you know the foreign one tested the multiplex tests.

And that is going to be so useful for conditions to determine what type of treatment will be suitable for that particular patient and then too. So as you think about that today already there our multiplex tests and use for respiratory type ailment and their use all the time and so we see.

The that our customers are very familiar with the reimbursement dynamics here and don't see any issues as it relates to the CST had foreign one multiplex test.

Great maybe just just to give you a little bit of context, sorry, it's well on on some numbers on that on that for in one obviously, it's got a higher price point like we talked about but just to make sure that what kind of level set on how.

How we think about when that will come online. So I think in Q4 thinking about maybe 60% of our test test volume in Q4 is going to be kobin.

And then the other 40% will be the four and one and I think that the way to kind of think about that is that.

When you think about.

We're still gonna be producing cobot, only and the kind of staggered adoption because one you got high growth markets that really don't experience seasonal flu. So the demand for that is just not going to be you know as high if any <unk> and in Europe is going to be more of a staggered adoption, it's going to be country by country, it's not going to be kind of uniform like it might be a U.S. So just maybe.

To think about from a modeling perspective that split would be wed think about them.

Great and.

And the.

I guess on that one.

Well actually the let me follow up on somebody else and so I guess can what's can you talk a little about the pacing and side effects and academic labs, I mean and basically the.

Talk about are you seeing any signs of any increased activity in terms of like a fourth quarter fourth quarter budget flush.

Just sort of like the end market dynamics and sort of what's going on you talked about labs being opened but whats the really the spend potential there and and just sort of like what is this really a customer spending environment look like.

Sure sure.

So derik, we we have seen a lot of activity around the world pick up as we as we mentioned, we see China nearly at or at a pre pandemic level and I would say in North America and Western Europe, we see those.

Lab capacity that about 70% to 80%, which is a sequential improvement and we saw that and so our teams are able to now get into see the customers to install the systems.

Provide the services and so forth, but we still see some capacity limitations as I mentioned earlier related to social this thing thing measures and so forth now having said that in Q3, our tools business grew 10%, we're very happy about that and that was driven certainly by I'd tea and Beckman life Sciences.

But also by new product launches, which were incredibly important for us and our customers for instance, the echo amas, which is the high throughput screening tool.

Used in in front of mass spectrometer, which has been seeing an extraordinary uptake the launch of the Triple Quad 7500 mentioned that that's the most sensitive triple quad on the market team great uptake for that and that's driving that actually drove a positive low single digit growth already force kayaks and Q3.

And then like a Microsystems, we had recently launched the Dolores confocal microscope, which is the most versatile and powerful confocal microscopy in the market. So this combination certainly sequential improvement in the marketplace more labs be accessible us being able to get in.

And and install and provide services has been helpful. But I think we've also been buffeted by this aggressive new product introduction now that we've invested in here too for the future.

Great. Thank you very much.

Your next question comes from the line of Scott Davis with Lilly.

Lilly's research.

Hi, Scott good morning.

Right right are welcome. Thank you.

Thank you and he.

Oh, right or anything the board wants you to do kind of differently than your predecessor.

The thing to focus on differently.

You know.

That's a great question and right now I'd also like to take this opportunity to start out and with thanking Tom and the board and all the associates for the fantastic transition.

That they have.

Provided me here over the last month and getting me off to what degree.

What is the great start here for for Danaher in Q3. So you know I have worked a four Tom.

A decade.

And with that of course also with our with our board and.

And what you can expect there is a great deal of consistency and continuity for sure and my plan of course is to is to build on the fence Fantastic Foundation that Tom and the board have laid and making us a stronger a science and technology company and you'll see that I'm I'm very passionate passionate about this.

Topic of innovation, you heard me comment on that today already as well as talent and so you'll see us to continue investing here quite significantly in innovation and in our talent and our scientific capabilities, whether those be internal or external as we continue to chart. Our course here forward as a leading.

Science and technology company now.

Now having said that.

With all the similarities you can also expect to see no change as it were.

As it relates to our capital.

Capital allocation bias, which will continue to focus on M&A.

And particularly I'm, making that the stronger innovation.

And growth company as we continue to move forward and you know.

And you know when I started the this role just after we had closed the sites even deal you know I I thought that perhaps that would be sitting here with you know the ability to make some some smaller deals.

But certainly you know initially with with the balance sheet that need some rebuilding and and we find ourselves here and a great situation and that one you know.

Our our free cash flow is stronger.

It's actually the performance is even better than expected and we couldn't be more pleased with how the team is is.

It's transitioning and being a part of Danaher and then you add the equity raise to that and that's really put it.

Into a situation, where we just have more degrees of freedom.

And so that from an M&A perspective also puts us in a position.

Being able to do certainly small and medium sized strategic deal.

And then as we go forward I get back into a stronger position pretty quickly.

That's helpful runner. It aquatic the type of deal that we should expect going forward I'm not sure you guys size that can maybe you could help us understand that's material or not.

So Scott.

Got to give you a little color on at least the size that I mean, it's a you know this is a deal that didnt.

In water for the the informatics and Myron talk little bit about it but it's a pretty small deal I mean, it's a sub $20 million in revenue would probably I'll call. It 80 to 100 million dollar type deal and.

Kind of deal for us so it's not huge.

But but it is exemplary ads or you know the deals that we continue to like a it's nothing new you've seen us do a technology deals here that strengthen and round out our portfolio and we like aquatic in for Matt Maddox positioning and capabilities. So I certainly think more of those types of deal and we consider that a smaller one.

[music].

Perfect well good luck to your writer, we wish you well thanks Scott.

Your next question comes from the line of Doug Schenkel with Cowen.

Hi, Doug welcome.

Good morning, guys. Thanks for taking the questions Oh I want to go back to pica.

Hi, guys first question.

Our capacity build out or how do you balance the desire or.

Phil acute or.

Rx in vaccine development the bonds are related to the plans about what is it with the outlook for post Panamax and what I mean, like I guess to be more to the point.

We'll leave the capacities of Golden today will be Steve oppose could have done that.

I'm not sure.

Should we view the elevated revenue levels associated with your build out as deep durable you're going after the surge in Poland dynamic related demand subsides.

And I guess, while I'm on this topic along those same lines are placing a lot of cheap experts today, they're going to be used for the foreseeable future as much as people can get those at least an article that just given what's going on but close calls dynamic how do you think about the durability of up these placements and the associated revenue potential.

Mm.

Thanks, Doug you know what I'd like to do is take your question and even broaden into.

Bit too to lets you to hear how we think about the long term here.

Here and the way we frame that is what is what is the world looks like post vaccine versus what the world for Danaher looked like free.

Pre back or pre cobot call it.

And let me start with our base business through the portfolio moves that we made and the investments have already been transitioning to a higher growth and earnings profile with a higher degree of recurring revenue.

We feel very good about the growth profile that we had pre cole goodwill we were already a 5% to 6% grower.

And to your point you, including in that with Seth did growing at low double digits at the time, representing about 5% of our portfolio.

And at that point, we didnt, even own a site.

Chiva, yet, although we were thinking.

As we were Deluging diligencing and going to close that you know this would be about a 6% to 7% grower.

So as we think now about a post vaccine world.

No we actually really believed that our core growth is going to improve and why is that well.

First of all our base business, well continue to improve as activity picks up and markets recover and our innovation investments some of which I talked about earlier start paying off even more.

But then also to your point that did you know it might be back to low double digit and it will represent 10.

10% of our portfolio in 2020.

With what we think are some of the most durable testing revenues in the marketplace. Because we are at the point of care because our work flow is so easy because of the menu breadth, we have with both multiplex or coded.

We really see that's the point of care positioning as unique and then you add on top of that and you mentioned this our increase in the installed base, 35% increase over prior year. Just in 2020, we really see the as as a long term improvement then you add to that site.

Uh huh.

Which we're seeing now with the leading positions and cell culture media single use technologies, including bio reactors filtration process chromatography.

And many more things that were getting so many at bats, with these over 400 vaccines and therapeutics in the pipeline that we.

We see an extraordinary potential there for the traction and the capacity increases that are needed for the future independent of the type of vaccine that will ultimately receive approval and so we think that that 6% to 7% growth assumption that we had here prior to the.

The pandemic.

<unk> was likely conservative and that for the long term I really can't think high single digits, there as well.

Then lastly, you see our capital allocation strategy, which is biased towards M&A you add that on top of here and we really do believe that our growth profile as a result of the.

The pandemic and the durability of our positioning in the aftermath of all of that is going to result in a higher growth profile no.

No theres lots of things here to consider in terms of macro risks think of government spending taxes. You know there are a number.

There are a number of variables here. So it's a little bit early here to to be conclusive, but what we see here is a fundamentally stronger and more durable growth profile going forward.

Super Helpful. And then just one more quick follow up on I think I would want to Erics questions art.

Just keeping in mind you know how strong your business has done this year it seems pretty clear that youre going to be in a position to get your debt to EBITDA ratio down in the neighborhood of three times funding under the senior you referenced M&A.

Great My last question.

How ready the organization parameter given everything that's going on but the balance sheets clean book or Hanukkah man on your infrastructure Clunker I'm just wondering how you would characterize your M&A right.

Thank you.

It's a great question you don't first of all speaking to the balance sheet. You know I think I think you're in the right neighborhood. There that those are numbers that we could confirm based on the free cash flow and EBITDA that we see in our current debt profile on that.

Our balance sheet it isn't a very good position I would also say we couldn't be more pleased with.

The progress that we're making in the transition of the GE Biopharma business now insightuba a into the.

Into danaher and they are firing on all cylinders and we continue to extricate ourselves. There from you know the transition services that GE provides us.

And standing up this organization and see just extraordinary not only efforts, but but real results. There. So we always at Danaher maintain leadership and management capacity to ensure that the opportunities that we generate and that the market provides us we can take advantage of.

And so while while we are transitioning sativa into danaher and nearly complete with that that doesn't keep us from being ambidextrous here and keeping our eye on being able to take advantages take advantage of the opportunities that the market provides.

Okay, great. Thanks again.

Your next question comes from the line of Vijay Kumar with Evercore ISI.

Hey, guys. Congrats on a really strong quarter here, Rob Reiner of maybe a question on I'd say to you, but no surprise, but if I look at how the Q played out societies or was up 500 basis points, if a contribution into Q and I'm looking at the order trends, which is accelerating.

Maybe talk about the Q4 guidance here you know.

You know, which which implies a modest step down here for safety, but is that a timing element or perhaps a flesh out why contribution perhaps steps down in the context of accelerated in the quarter.

Thanks, BJ and good to hear you.

So Q4 touchy boat.

Yes, that's helpful. The backup and come back to what Matt was talking about earlier, it's really.

It's really important to see that we can.

That we can continue to expect a similar growth tailwind from from coated in Q4.

As we did in Q3, and we expect our base business to perform similarly, or incrementally better but it is important to keep in mind that we have three working days less and particularly for the consumer oriented businesses.

That's you know that's pretty impactful in the calculation and having said that if you think about the bioprocess industry. Today already these companies are producing a vaccine. So if you think about operation works feed them or BARDA is involved not only are the.

Bio pharmaceutical companies producing clinical trials quantity, there already ramping up capacity for those vaccines that they see axes and therapeutics that they see very near to approval and are hopeful for and of course. This is finance Austin.

Austin times through the federal government and so there's a great deal of aggressiveness, there and so that's already happening here at the back end of Q3 and you'll see that also in Q4 and then.

And then as approvals start coming in and we're hopeful that that happens at the end of the fourth quarter or in the first quarter, then I would expect to see an additional ramp there as well.

BJ, maybe just as a kind of some some context around I mean, we've talked about.

Sort of year to date, we've got you know north of a billion dollars of covert orders between Tivo, Paul Paul biotech.

No the way to think about that is that you know those are orders that we've already gotten that.

The better booked probably 50% of those orders are going to ship here in 2020, but the rest are gonna move to 2021.

Just to give you some idea of sort of how the order book is played out and it's going to move its way through the piano like Brian was just talking about.

That's helpful I'm, Matt no.

Right.

One more follow up on that you spoke about the order book.

Yes, as vaccine manufacturing ramps up you need to make incremental investments and I'm just thinking about incremental margins here. It's been really strong the last two quarters mid fortys well above the historical trends how should we think.

Actually it took me thinking about the spend levels in incremental margins because of lithium and travel.

So as the economy it reopens.

Thank you.

Yeah, Yeah, so BJ.

I'll start here and I'll pass it onto Matt. So first of all we we absolutely are and continue to invest in capacity expansions. In fact, we were in a capacity expansion program at side Ti Vo.

As we brought the company into the Danaher fold and are of course accelerating that and you can expect additional investments here in Q4 that are.

That our capacity related certainly, but also related to standing up the organization and then as we continue to go into a 2021, you'll see continued investment.

And of course that has.

And that plays out in our margin assumptions as well and I think that you were just about to jump in on that.

Yeah, I think for Q4, I think you're right. We have seen sort of Q2 Q3, we've had really good fall through and on on on the growth I think is.

I think as we sort of look at Q4, though I think probably a 30% to 35% fall through as a better number to use.

Like you said you know we kind of.

As we look at where that's come from in Q2, and Q3 and we've had some really really good mix, where the growth is coming from Paul biotech think about citing you got incepted.

And now that some of the other businesses are contributing more I think we're going to have a bit of a mix impact and then as you mentioned you know the lower Opex, a little less travel and Tradeshow is certainly a part of it things are sort of getting going again as you saw with the growth rates.

And then you know running.

Roger talked about the accelerating growth spend we're going to do that in Q4, we've got some projects already that we've got underway I think that'll have an impact on it and and probably lastly, frankly, you know were given where we have seen some of the growth and we've got some pretty outstanding growth in for example, psyche, but for example, Cephea you know there is going to be some some sort of you.

Year end accruals, if you will on around bonuses and things like that so it will be a bit of a headwind year over year for us. So I think it's probably moderates a little bit here as we go.

As we get into Q4 from where we've been but still feel you know.

Even with that you know I still think we're going to be able to put up some some pretty good EPS growth.

That's helpful context, thanks, guys.

Your next question comes from the line of Dan Brennan with you yes.

Great. Thanks.

Hi, good morning, Thanks for thanks for taking the questions.

So I know you just kind of outline of the 500 million bucks or so for the vaccine opportunity where therapeutics.

Three biologics because I'm just wondering if you can talk to kind of raise the scope a little bit higher and just help us think through ultimately like the addressable opportunity for Teva and Paul given the magnitude of Ah you know therapeutic in vaccine development. That's ongoing so it's nice that you've got the orders in hand, but kind of how you know how how big is that market you feel that you're addressing.

As we look out for both vaccines and therapeutics related to Covance.

So Dan that's a that's a great question and you know let me, let me frame, just a little bit and give a little bit of background on this topic. So.

So important to remember that there are very different types of vaccines. In fact, there are a number of unknowns here that they'll make you know very solid and define projections a pretty challenging you know there there's a lot of questions around which kinds of vaccines and therapeutics ultimately get.

Approved and we've seen more recently with Lilly and JNJ that you know these approvals are not given these are rigorous processes that these companies go through with the FDA and.

And there are a number of wild cards, including adverse reactions and so forth that at any given time can de rail efforts that that we think are very close to the finish line. So it's really important to understand that prior to approval picking what are the future in quotes winners.

It's very difficult. The other thing. That's also hard is that you know these vaccines are produced.

Produced in very different ways, while there are a number of similarity.

Now they are produced and is very very important in terms of the amount of doses that you get per per batch as an example, which can materially in by orders of magnitude change the kinds of inputs that are required for any production.

We also have a lot of questions around the number of doses isn't isn't going to be a a one time shot with a booster for for life or is it going to be a much like we see for influenza or an annual type injection that everybody needs. These are these are big big questions that of course affect any kind of estimate.

That you that you make and then lastly, there's there's a great deal of discussion about to what degree will the population actually.

Except vaccines and use them and get vaccinated in order to to get to that ultimate goal of herd immunity. So we see that we see that it's very very challenging to come to a a good number there, but having said that.

As we get closer here in the next month, and perhaps quarter or so we'll start seeing approvals, we're very hopeful.

And this picture will become a much more clear as we get the data out of the clinical trial no about doses, whether booster shots are required and that sort of thing and then I come back to what Matt said, if you look at you know the $1 billion that we have year to date and orders.

We see that prior to FTC approval. So we certainly feel very positive about what the future holds here in the next year or so but.

But again coming down to you know hardcore and highly defined numbers and that's tough.

Well and remember too Dan that you know that that billion is orders that we've got today.

As of the end of the third quarter, so well Ryan are sort of talking about because you're talking about what's the opportunity as we go forward sort of longer term or anything that we have here in the short term in Q4 from an order perspective, we'll just keep adding to it. So so sort of the near term I think we still have some upside here as we get you know kind of into Q4, and then as the vaccines get approved and then.

As we start to learn some of these unknown variables that we can start to give you guys a bit better a kind of a view of that but so far I think it gives you a frame of what we've got we've got the Q4, how that plays out and then as we know more I think as you get into early next year, we'll probably have a better a better frame for you hopefully to get some clarity on that.

Great. Thank you. Thanks for that and then maybe just one more on separate I know you've kind of addressed it a couple of times, but I think I think there's a you know a minimally a moving target to figure out how testing evolves.

Typically related to covert as we get into 2020 more in where the vaccine and as you can see there's a lot more testing done to point of care and you know the kind of the rapid antigens and you know much cheaper faster alternatives. So any way to give us just an early I mean, you know kind of framework to think about.

We should be contemplating cephea. If you look at the 21 under the sum of those scenarios because I think you are an interesting position, where you're not the you know the kind of batch base slower CRC kind of sitting between two different two different areas. So any any color on that would be great.

You're seeing <unk>, sorry go ahead Ryan.

Yeah, I, just I was just going to say that.

Yeah. Dan. This is a really critical question right law and people talk about the antigen test and most of those are used in different care settings are the separated.

Solution gene expert.

That is used at the point of care.

In critical care environments and in the hospital wind speed perks flow and accurately really count.

So those commission on the basis of that tests are going to make a call as to what therapy. They prescribe. So it has to be right. It just has to be right and so that's why the gene expert said.

Testing approach as the gold standard and that's why we see that really had a very very durable testing modality that is that the right place at the right time with the right answer at the right cost forensic.

And we expect independent of the number of infections that we see other types of modalities really breathing either higher or lower depending on the infection rate, but as you think about the point of care hospitals in particular.

And the other point of care setting, that's where we see the gold standard along with its multiplex foreign one test to have an extraordinary amount of durability and we see that right and you see us continuing to ramp up from six to seven in the fourth quarter 8 million and you can expect more tests per quarter.

As we go through 2021, so I feel very strongly about Uh huh.

Unique and durable positioning of our our accepted gene expert approach and add on top of that the fact that we've increased the installed base by 35% this year that really.

That really puts us in a very strong position and that installed base continues to grow.

Great. Thank you.

Your next question comes from the line of Steve Byrne Chow with Wolfe Research.

Hi, Steve.

Hi, good morning.

I am not going to ask about Kobin.

Cobot testing or.

Or by a process just just to be clear.

I was going to ask one on China and one on on Dec. The X. I'll just ask both here and then jump back in Q1 is I wonder if we could put more granularity on the growth in China have progressed through the quarter and any areas of of comparative strength or weakness packaging of course that it's all recovering right here.

Sure. It would be helpful. Just to get that regional perspective and to the extent you're comfortable talking about where that might sit in fourq you and then I'm going to ask my second question, which is actually on that Dx, which would you haven't really touched on here in the queue.

In the Q, an a. I Wonder if you could talk about you know the capital side, what your expectations are given Dx say is now available in some regions I believe how you think about capital impact Dx prospectively.

Prospectively and then to the extent that you have a window on it you know given that you have that that business and the broader diagnostics platform. How are you planning for for the fourth quarter and next year is it really.

As it relates to some of the specialty testing categories that are so important in hospital settings, both for for this business.

In in for just getting folks back into the hospital to get to to get the kind of care they need it whether it's in related to cardiovascular or other specialty settings, and I'll apologize for the very long winded or two questions and get back in queue. Thank you know were no worries, thanks, Steve well, let's start with China, China has been.

An extraordinary story as as you all know in turn.

In terms of the speed of the recovery and what we see as unique with China is the breadth of that recovery. So not only do we see of course extraordinary returns.

Return to lab capacity, which are nearly or at a pre pandemic level.

We also see a good return of patient volumes.

Add to some degree a approaching normality and what's your.

And whats unique about China is that we also see this in our more industrial businesses. So the recovery in China in contrast to North America and Western Europe.

It is broader base and so as you think about our yes portfolio or some of the business. Since we have a industrial businesses, we have with Paul we're seeing a very nice recovery there.

Like we said in China, we saw Isnt.

It's actually 10% growth here in Q3, and we expect to see acceleration of that here in Q4 as well as that as that economy continues to build momentum and that and that's really across the portfolio.

Now, let me think about Beckman diagnostics and our business there I'm really pleased by the performance and the return of patient volumes here in the developed markets. It was it really exceeded our expectations.

And the team has done very very well and continuing to grow that business innovate in that business you heard about the aisle six you heard about I GM on top of I GG and so we have a great deal of momentum here and our innovation cycle times have has been shortened and accelerated racing.

Secondly, and as we.

And as we think of capital you know, we're starting to see our funnels pick up in the discussion also around capital equipment placement no doubt they are not yet at the level of what we saw prior to the pandemic, but they certainly are better than what we saw in Q2 and earlier Q3, and so those comps.

Stations are starting to happen.

Also differently to what we saw in Q2.

And this will be something to monitor as we see cold and hot spots that continue to pop around it popped up around the world is that for now we haven't seen anything but on the margin.

Impacted in the patient volume returns, meaning that we see wellness testing and elective type procedures continuing to ramp.

And not be significantly impacted yet by some of these hot spots. So cautiously optimistic here that the progression that we've seen for beckman diagnostics and more generally with patient volumes.

10 years to move forward positively.

Thanks for all the perspective, there and welcome to the call here right.

Thanks, Steve appreciate it.

We have reached the end of the allotted time for questions I will now turn the call back to our presenters for closing remarks.

Thanks, Chris and thanks, everyone for joining us today, we're around all day for questions.

Thanks, everybody thinks they stay safe and healthy.

This concludes today's conference call you may now disconnect.

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