Danaher Corporation (NYSE:DHR) Evercore ISI Annual HealthCONx Conference Call December 1, 2021 1:00 PM ET
Company Participants
Rainer Blair - President and Chief Executive Officer
Matt McGrew - Executive Vice President and Chief Financial Officer
Conference Call Participants
Vijay Kumar - Evercore ISI
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Vijay Kumar
00:01 Okay. Good afternoon, everyone. Thanks for joining us. A real pleasure to have a management team from Danaher with us. We have Rainer Blair, CEO. We have Matt McGrew, CFO. And I think behind the scenes we have John Bedford, the new Head of Investor Relations, and I think Matt could you know, he used to have run IR, just got promoted, so Matt, congratulations to you, well deserved. So with that, it looks like Matt is following the other Matt’s footsteps so I can only expect great things with you know going forward.
00:36 With that Rainer, Matt thank you guys for spending the time with us this afternoon.
Rainer Blair
00:44 Pleasure, Vijay. Thanks for having us.
Vijay Kumar
00:48 I do want to start with some near term questions just given this news on the new variant, I think the most important or first question is that can your Cepheid test detect the new variant?
Rainer Blair
01:01 Well, great question and the answer is, absolutely. So, whether it's a COVID-only test or the four in one test or the four in one plus, all of those are able to detect the Omicron variant.
Vijay Kumar
01:15 Fantastic. That's brilliant. I think some the headlines coming out on the week, I forget that the number of mutations, I think thirty or forty mutations, they did cost an alarm. So, glad to hear gene expert is strong. Maybe a segue from that, there's been some chatter about lockdowns restrictions in Europe, Rainer, has there had any impact on the business or how you're thinking about the base business, if you will?
Rainer Blair
01:47 Yeah. I mean, we're monitoring the situation very closely, but we've not really seen any material impact at this stage, Vijay.
Vijay Kumar
01:57 Okay. And then off on similar lines up, Rainer, look at your base business, I think the guide was high single for base business with mid to high contribution from code. That was the Q4 guide. I mean year to date, your base business trends have been really, really strong, I think 3Q was off about ten percent. Does Q4, are there any moving parts in Q4 or perhaps this is the typical Danaher, you know we'll put a number out there and we'll see where we land after the Q?
Rainer Blair
02:32 Well, We are certainly, Danaher in the fourth quarter as we always are, but I will tell you that the high single digit guide on the base business is on the back of, really strong performance as you pointed out. We were double digits there in Q3. The two year stack is, six percent to seven percent at hundred basis points higher than prior to the pandemic. So, we've come out of the shoot here, doing very well, and I would tell you that in our base business, we believe because of the strength of our value propositions, our ability to execute with [DVS] [ph] with also our ability to ensure that our supply chain remains secure and robust that we're taking share. And so, we have good momentum here in Q4 and we wanted to be prudent as always in our planning assumptions given the other factors that we see around us.
Vijay Kumar
03:29 Got you. That makes sense. I think couple of other moving parts, which have come up in conversations Rainer has been COVID testing, clearly most companies, given the rising testing volume, we've seen volumes go up, is it safe to assume for Cepheid, you know volume should be going up sequentially or perhaps the capacity constraints coming into the picture for you guys when you look at Q4?
Rainer Blair
03:56 Well we continue to have more demand than we're able to supply. We think the sixteen million test number that we put out post earnings is still the right number. And we feel very confident about that. We saw a resurgence. In fact, RSV as an example in the Southern states, but also more broadly in the U.S. and Europe. And as a result of that beyond the absolute number of tests, which we feel very strongly about.
04:30 We're also seeing that mix shift. We talked about having, you know, in the flu season perhaps a shift to fifty, fifty COVID-only versus the four zero one test – four in one test, and that's manifesting itself as we speak. So, we feel good about the quarter and it's developing as expected.
Vijay Kumar
04:50 Got you. Then maybe a couple of other macro kind of questions Rainer before we get into some of the business segments. I think, we had the infrastructure bill pass. This talks about our [indiscernible] coming back into the mix here, should that matter for Danaher? I know the mix has changed, but I'm curious how you guys are thinking about it?
Rainer Blair
05:13 I mean, the macro environment remains very strong for us, whether that, you know, if it's COVID-related or whether that's related to the secular growth drivers that really underpin our base business as well, right? So, we continue to see a very strong biologics development funnel that is non-COVID right, whether that's monoclonal antibodies gene and cell therapies or other modalities where funding continues to be very strong and I would say even accelerating when we look to our environmental and applied solutions segment, also here, we see that the infrastructure improvement efforts are helpful, but also there the business has recovered from the pandemic.
05:58 We feel that we're executing strongly and taking share and the food sector and packaging requirements in order to protect the food supply continue to be very strong. So, we think the base business and the macro is very strong. And as it relates to the [indiscernible] proposal there, it's a little bit early days there. Right. We don't know the specifics of that, but we would say that that, you know, directionally is also a helpful in what is already generally a pretty strong funding environment.
Vijay Kumar
06:30 That's helpful, Rainer. And maybe now diving into this point of rates. I think biopharma clearly it's [foreign center] [ph] for investors along with the vaccine and durability, but I wanted to begin on the base biopharma for a bet if you will. Because it's really interesting how the businesses evolved for you guys. I think the current, at your Analyst Day you put out a high single digit sort of number for Cytiva, clearly the order trends have been well north of those numbers year to date.
07:05 You did mention perhaps we're seeing some acceleration in the macro and the biopharma side. Maybe talk about, should biopharma be more like a double-digit growth for Danaher versus the high single outlook?
Rainer Blair
07:19 Sure. I mean, I think there's two things there. One, of course, the short-term is stronger and above this longer term outlook that we talk about as high single digits, right. We've also talked about the shorter-term, there would be low double digits plus, but I think, more importantly is if we take a step back when we originally acquired the GE Biopharma now Cytiva business, we viewed that business really as being a six percent to seven percent grower.
07:47 And what we've seen here through the pandemic through the funding increases, but also through our share gains is that that for the long term is really a high single digit growing business. And the way to think about that is today already, this business far larger than we anticipated at seven point five billion dollars of bio processing business that larger base along with this higher re-rated growth rate will continue to compound here for the long-term. So, we think we frame that appropriately for a world post pandemic. So pandemic as opposed to pandemic, you know, being sort of a high single digit growth business.
Vijay Kumar
08:29 And just maybe on the order on the biopharma side, we've been hearing some chatter in the industry about order cycles being or lead times being elongated. What kind of lead times is Danaher seeing and does that give you visibility into twenty three, are you taking book of business for twenty three at this point in time?
Rainer Blair
08:50 No, I mean, it's really too early to talk about twenty three for a couple of reasons. One, if you think about what we thought about the world two weeks ago versus what we think about it today, a lot has transpired and so to think about twenty three might be premature, but also from an order perspective, you know, we don't reflect orders that are greater than twelve months out in our order book, right?
09:12 So the two billion dollars that we've talked to you about, those are really orders that are in hand and that are for twenty twenty two delivery. And that's a strong order book. If you consider that for twenty twenty one, we've shipped and we'll ship right around two billion dollars in and of itself. So, we enter the year twenty twenty two within the order book that is the same as the shipments that we executed in twenty twenty one.
Vijay Kumar
09:41 This is – that two billion that's specific for vaccines, not for the base business, is that correct Rainer?
Rainer Blair
9:47 Well that two billion is for vaccine and therapeutics. And, you know think about it eighty five percent vaccines, fifteen percent therapeutics, that order of magnitude.
Vijay Kumar
09:57 Got you. And this was a number you guys updated on the call. And no, just given this Omicron and booster shots, I guess becoming more of the norm now, is that reflected in that order book what we have so far?
Rainer Blair
10:19 Well the latest news here around Omicron is not as, I don't think anybody is really sure what the ultimate implications are. But one thing is for sure, it does appear that a broader percentage of the population is going to be going for booster shots. But it's almost easier to talk about what's included and not included in that order book in the sense that we anticipated that in the developed markets that the broader adult population would require a booster shot. So, that's included, as well as the children in the U.S. twelve and younger wasn't included. But if you think about what's excluded, that would be a broader stroke or population requiring boosters outside of the U.S. as well as children twelve and under having the approval to get now shots as well. So that's excluded. And that represents a potential upside, sure.
Vijay Kumar
11:21 Got you. And then maybe one more or couple of questions on this biopharma just given it's been such a key part of the business for you guys. Does it make sense to think about large molecule, small molecule, and cell and gene therapy, I think some of your peers have tried to segment the market in three different buckets? Does it make sense to look at Danaher’s portfolio along those lines and what is your exposure to those different buckets?
Rainer Blair
11:48 Yeah. I mean, we can talk about it in that context just to be clear, small molecules are really a very small part of our business. If we just look at the life science segment as an example here, with fifteen billion dollars of, you know, total revenues, and you look at about seven point five billion of that, the bio-processing and then extract from that, you know COVID revenues just for the sake of argument, you end up with about call it thirteen billion in total revenue without COVID, right?
12:25 About half of that would be then the bio processing business, which is, you know, largely the great majority of that is large molecules, right? Then you have the genomics business, broadly speaking about one billion dollars and then the remainder splits evenly between five clinical and research. And so, when you look at that segmentation there, less than five percent of the fifteen billion is small molecule. So, really not a large factor.
12:58 And if you look at the performance of the portfolio, the base business, without COVID, so that thirteen billion, you know that's been growing nine ten percent year for the last three, four quarters.
Vijay Kumar
13:15 That's amazing. It really is, because I mean, I go back to the last cycle 2008, 2009, not many of us thought that these business would turn around, and we'll be talking about high single growth. That's been a remarkable journey for you guys. I think along those lines with Aldevron coming into the family, it really, I think that that transaction surprised people for a couple of things.
13:40 One, the multiple paid with this is not the same Danaher, which bought back when back in the day. This is a different – this is a confident Danaher, which is hunting for premium assets in the marketplace, if you will. Maybe talk about why this transaction and what does it bring to Danaher?
Rainer Blair
13:59 Sure. Absolutely. Well, as you pointed out, Aldevron is a premium asset no question for a number of reasons. And from our perspective, keep in mind the way we execute M and A is, we get comfortable with the market and the long term drivers of the secular growth drivers of that market. We understand, the players in that market and what the long term competitive advantage really implies here and then, of course, we look at the financial model that's associated with that.
14:30 When those three elements, if you will flip green, that's when we'll confidently execute. And as it relates to Aldevron, Aldevron really for us brings in new capability and represents a sort of cornerstone of our genomic medicine strategy because they are so well placed here with competitive advantage in plasmids and in other products as well.
14:56 And frankly, we couldn't be more pleased with how they’ve joined us and the performance that they are delivering beyond expectations as you saw in our earnings call. We are very pleased with the adoption, I have to say the pool of DBS in order to continue to accelerate not only capacity expansions, but also growth. And that's just really encouraging.
15:20 So, as you think about Aldevron that really brings new capability to Danaher on the one hand. On the other hand, we're able to bring a great deal of health and capability to expand Aldevron going forward as well.
Vijay Kumar
15:36 And just maybe one more question on this Aldevron topic, Rainer. I think the general view is that cell and gene therapy market, I mean, this is triple, I guess over the next few years based on some of your peer commentary, any, I mean, my understanding is that Aldevron is the number one player in that space for those specific products right? Any reason why Aldevron’s growth should be any different from the end market growth rates?
Rainer Blair
16:04 Well, I'll tell you, I mean, we look at the facts on the ground. We have seen thirty percent plus growth here in Q3 that was sort of the first quarter that we’ve had Aldevron on board. We've talked about a twenty percent plus growth rate here going forward. We think that’s still a good way to think about it, but you can imagine that we work every day to ensure that, you know, that continues to accelerate.
Vijay Kumar
16:33 Fantastic. And that segues me back into perhaps the other question for both Matt, when you think about fiscal twenty twenty two, so far, comments from [LSD peers] [ph] have been comps don’t matter and twenty twenty one was a strong year, but right now in the midst of a very strong CapEx cycle, how should we think about Danaher’s base business? Let's leave out testing and vaccine for a second, should base business should be in line with your LRP commentary or perhaps above LRP or should comps matter?
Rainer Blair
17:11 You know, I'll tell you, we'll get into twenty two with a guide here in January. But, you know, I think I can help with China frame it this way. If you look at our base business, already in twenty twenty one, we're seeing on a two year stack six to seven percent growth, which is one hundred basis points higher than it was prior to the pandemic. So, we feel like we have good momentum building there. And as we look to twenty two and think about the secular growth drivers that support those base businesses, we think those are in great shape.
17:45 Whether it's the biologics funnel that we talk about if you think about [Matts] [ph], fifteen hundred [indiscernible] project in the development funnel, which is fifty percent higher than just five years ago or in the cell and gene therapy development funnel, you know, you're looking at a thousand plus project in that funnel.
18:06 Once again, ten x what it was, just five years ago. And of course, many other modalities that are associated with that. So, as you think about that, as you think about infrastructure investments, certainly in the United States, but also around the world to protect the water supply as we think about protecting the food supply, and not to mention the diagnostic requirements of that rollout and the opportunity that we see in molecular testing, we feel that we're very, very well positioned here in the base business in twenty twenty two and beyond.
Vijay Kumar
18:40 Absolutely. I do want to come back to this twenty twenty two [LRP] [ph] question, but type before maybe Matt for you, I know your favorite has been on the incremental rate, you guys have done a phenomenal job year to date, I mean, how should we think about incrementals for twenty two, right? You don't have some travel expenses coming back. I think, Gugino made it a point to note that his travel bills have gone up in Q4, so, I'm curious how you think about twenty two margins?
Matt McGrew
19:14 Well, I mean, I think the way that we kind of thought, forget about twenty two, I think we've kind of talked about the re-rating of the growth profile. And I think there's a re-rating of the margin profile as well, right. So, I think, you know, pre-pandemic we would probably call it, you know, a thirty, thirty five percent DCA business.
19:32 I think as we have been, like you mentioned, kind of forty five percent here recently, on the back of a lot of things like you said, travel not being there and kind of, you know a lot of Zoom meetings, everything else that have – and not being in person has kind of given that a bit of a lift, but I think when you get to the other side and we think about margins as a DCM, I think when we get to that close pandemic, whatever that looks like or whatever that is, I think we've got a margin – structural margin increase, as well as core growth, right?
20:09 And so, I think instead of thirty to thirty five, I think going forward, we're going to be more, call it thirty five percent to forty percent, a little bit below maybe where we've been for the last four or five quarters, but still, you know, a margin above where we were before, and that's due a couple things.
20:26 One, I think if you think about the businesses that we have brought in, the Cytiva’s and the Aldevron’s, just those are marginally structured higher businesses. I think then when you also think about what we've been able to do at Cepheid over time, remember that business came in, and it was essentially a flat OP business, didn’t make any OP.
20:48 I mean, that has obviously taken a turn up here and then let alone, what we've been able to do, sort of with the rest of the base business that we have, the margin improvements there. So, you can, kind combine those three, and I think that's how you get to, call it that, you know, thirty five percent to forty percent to go with that better topline growth [indiscernible].
Vijay Kumar
21:10 That's helpful perspective Matt. Rainer back to you on, I think some of your peers have spoken about, given the current inflationary environment, pricing perhaps for twenty two should be about historical trends, as you think about the planning cycle, what should pricing contribution be for Danaher in twenty twenty two and should be about historical trends?
Rainer Blair
21:34 Yeah. I mean, one once again, I mean, we'll talk about the specifics of twenty two in January, Vijay, but, you know maybe the following can be helpful here. First off all, I would tell you the Danaher business system is a real differentiator in this environment, right. For daily management as we call it is the key, you know we have live teams on the ground in the plants, cross functionally problem solving every day, to not only drive supply security to ensure that we have supply, but also to ensure that we're driving cost in the right direction or containing it where possible.
22:09 Now having said that, of course, we implement additional measures, whether that be, freight surcharges or fuel surcharges, and, of course, price increase and we do those, you know, not only at a greater magnitude, but also at a higher frequency. So, to give you a sense of this and this is not a top down, sort of mandate that we do. We drive this bottom up through our operating leaders.
22:33 You know today, we are realizing prices increases of about one hundred and fifty basis points, which is about fifty to seventy five basis points versus higher than our historical price achievement and that gives you a sense of the, kind of momentum that we build and are building as we go into twenty twenty two as well.
Vijay Kumar
22:57 That's helpful Rainer. I think off of that I think another topic that's come up is, this concept of diagnostics emerging a stronger post pandemic, right. I think the Cepheid installed base, it's something that's been spoken about, maybe the one at least for me is the diagnostic, probably base diagnostic, that’s a constant rate. So, there have to be winners and losers. Everyone has their installed base going up. Why should Cepheid be different and what gives Danaher the confidence that there is going to be leverage off this higher installed base, emerging from the pandemic?
Rainer Blair
23:37 I mean, I think there's myriad data points to, sort of underwrite that hypothesis. And let me start by level setting, we've nearly, almost not quite doubled our installed base since twenty nineteen. We're over thirty five thousand installed instruments at this point. And that's by far the largest molecular diagnostic installed base around the world. And at the same time, we also have the largest menu. So, beyond the COVID testing, which I'll come back to in a minute, we have the largest menu approved over twenty assays in the U.S. And over thirty assay outside of U.S. And so the entire hypothesis has been absolutely, we need to help in this pandemic and position these instruments in order to drive COVID testing and we've done that.
24:29 And at the same time, we want to make sure that those instruments have application after a pandemic, you know post-pandemic world. Today, we've actually modified our hypothesis to say, we believe a post pandemic world has COVID being endemic. In other words, COVID does not go away, but that does not go away, but it continues on. So, these instruments will find use certainly as for COVID testing, but we also know that when we place those instruments that these were care settings that would be able to take full advantage of the menu.
25:05 Of such hospital acquired infections, sexually transmitted diseases and many others. Those are all a part of that and we're starting to see there where, the care settings actually have capacity to do something other than COVID testing. We're starting to see that menu adoption occurring. So, that's I think one set of important data points, but there were others.
25:25 As we look back the past year, which seems much longer than a year, quite frankly, as we look at that, you recall that we had periods of time when testing volumes were dropping. But that was not the case Cepheid. In fact, we continued one quarter after another to shift more tests as we expanded capacity. And we continue to be sold out. So, for us, demand continues to exceed available capacity, we feel very good about the sixteen million units that we talked about shipping in Q4 and we do see that mix shift towards four and one versus COVID-only occurring as we thought to fifty fifty, but that's just an indication for you of how strong that value proposition is at the point of care, right?
26:14 People, clinicians, in particular want the right answer, they want it quickly, and they want it to be easy enough for a lab tech to take care of it in that care setting so that they can make a diagnostic decision. Excuse me, a therapeutic decision such as prescribing an antibody cocktail or a small molecule antiviral or some combination thereof.
26:36 So, we think that's a unique value proposition and as the market contracted between the surges that we had we continued to see that value proposition gain traction with continued growth.
Vijay Kumar
26:49 And then that segue is leading nicely into this next question Rainer, some of the data coming out to Pfizer under [indiscernible] pretty remarkable right, ninety percent reduction, I think one of the hypothesis investors have been having as well if someone gets diagnosed next year, your point of care testing and then you give the [indiscernible]. That seems like – sounds like Cepheid to me, so I’m curious as you're – if there's any [indiscernible] that hypothesis and if it does get – if it should be given credit, and does that forty five million testing outlook you guys gave, does that perhaps sound conservative?
Rainer Blair
27:28 Well, twenty twenty two will come to in January. So, we're just thinking about it, but I can frame it this way. Look, first of all, what's fantastic news, right, that there is this antiviral that could be that effective and we'll see it, and hope that it's approved here in the U.S. as well in short orders. So, we'll see how that works. But look the way we think about it is, first of all, as I mentioned to you, we don't have very large small molecule exposure.
27:57 Right. So, in terms of that generating business directly, that's less of a factor for us. On the other hand, you know, we believe that vaccines and the associated boosters are still the primary and the best prophylactic and that this small molecule or this antiviral that's being pursued, Merck and Pfizer, but these are really what you do for folks that have chosen for whatever reason not to get vaccinated, perhaps they don't access to vaccines yet or folks that have gotten a breakthrough infection, right? That for some reason, perhaps get in trouble and are in immunocompromised or something like that. So, we see that as a very powerful thing.
28:45 One, we don't see it affecting materially vaccination rates. On the other hand, as you suggest, before you can prescribe it, you must have an accurate diagnosis, which would be supportive of just the kind of solution that Cepheid provides at the point of care. So, we see this really as a double thumbs up from nearly any perspective.
Vijay Kumar
29:06 Understood. Understood. Now, I want to get back to, sort of the LRP question. I think it’s; I wouldn't call it tale of two cities, but certainly the amount of inbound questions has increased post your guidance philosophy on the LRP. I can't tell you the amount of debate the plus has caused. The MSD, mid-single-digit plus [indiscernible] versus your peer putting out a seven to nine, is it as simple as look, you guys were just conservative and you're not assuming some of these trends to sustain for three to five years, but near term there should be no change in your business versus your peers. Is that a fair comment or help us contextualize the seven to nine versus plus?
Rainer Blair
29:50 Look, I think there are many factors, including the ones that you mentioned, right? But I will say this. Look, we look at the long term as the long term, right, including, you know the next several years. And so, we like to talk about the pre-pandemic world and the post pandemic world. And today, and that would be different, we think of the post pandemic world as having COVID the endemic, so that there is, you know, a tale there that is relatively long and the magnitude of which remains to be defined.
30:26 However, you know, when you look at the really purpose driven portfolio evolution that we've had. We just look at the data and the fact that, you know, before [Dental] [ph] left the portfolio, before we acquired Cytiva, Cepheid was only five percent of the portfolio instead of ten. When we add these factors and we look then at sort of the post pandemic where all along we've said we intend to exit the pandemic stronger than we entered it with thirty percent increase in R and D investment, ten acquisitions and plus in twenty twenty one.
31:02 You know, we really believe that as Matt pointed out, this not only re-rates our growth rate to something higher than what it was previously. That's what the plus means, okay. But also the gross margin and operating margins, re-rate higher due to structural and mixed reasons, and that we are as well positioned as anyone in this environment, with our portfolio, which is underpinned in every segment by very, very strong secular growth drivers.
Vijay Kumar
31:36 Got you. That's helpful comments. The one maybe on water and environment. I don't know if it's a fair question, but there certainly seems to be an ESG premium for certain stocks, does Danaher get that credit with water environment being part of the Danaher family?
Rainer Blair
32:01 Well, I would tell you that, I think we've made a lot of progress here on EESG and, you've heard us talk about our three primary ESG pillars, right, innovation, people and the environment. In innovation, we invest very significantly in these life-saving technologies that ultimately result in a development manufacturer of life saving technologies and diagnostics.
32:26 Yes, in detecting contaminants such as PFE and the water or even COVID in the water and protecting the food supply in our PID platform. So, from an innovation perspective, the core of our business is ESG related. From a people perspective, you know, we've gone to some very powerful declarations of where we want be, which is forty percent women representation by twenty twenty five, thirty eight percent in the U.S. People of color representation, which we upped from thirty five percent because we're making such great progress there.
33:08 And then when you think about the environment, here we've been very clear as we tend to be about the metrics that we want to achieve around energy consumption, greenhouse gas emissions in landfilled waste, each of which we want to reduce by fifteen percent in that case by twenty twenty five and we're applying our DBS toolkit there and really driving it down. And in our last sustainability report, which we just published, we actually published the progress we are making against these metrics and even going as far as to publish race as well as ethnic demographic data for our U.S. Associates.
33:45 So, we see that the topic of ESG, is an integral part of who we are in the businesses that we drive forward. And so, yes, I believe we're getting credit for what we do in EAS. But EAS is one part of the story. Yes. And then the rest – the other two segments, of course contribute to that as well, and very powerfully so.
Vijay Kumar
34:10 You brought up a number of points. But one, you said the DBS tools allows Danaher to track some of these metrics, right? Is that an annual target as management comp tied to some of these D&I ESG metrics?
Rainer Blair
34:26 Absolutely. So, as you would expect, we have metrics. We have tool sets develop that drive for example, you know, energy consumption reduction. And, you know, as another example for instance, our leadership, our people leaders have a diversity and inclusion objectives in their variable compensation.
Vijay Kumar
34:53 In back to the water environmental segment question Rainer, perhaps, I did not phrase my question properly. Now, look at someone like a [indiscernible] gets a lot of credit for being getting the ESG tag right. Would water and environmental testing get a higher [mouthful] [ph] if it was – because it goes right into the ESG angle, or does get the same credit, as it deserves being part of Danaher was the question?
Rainer Blair
35:24 Well, it's a great question. And I think our water business has the multiple of the entire Danaher Corporation, which I think compares well with others that that you mentioned there. So, I do think that we get credit for water and water gets credit for Danaher and then from an ESG perspective, we're telling our story. This is something that’s relatively new for us to do, but I think we have charged down this path with clarity, with commitment around real metrics and objectives.
35:57 We're measuring our progress and we're publishing it on an annual basis in our sustainability report. Management incentives are aligned. So, we feel like we're making great progress here.
Vijay Kumar
36:11 Understood. And then maybe one on M and A. I just – it's remarkable, you guys did a transformational deal, which includes not too long ago and the balance sheet is now at a place where it's, you guys could be out in the market if it be right. So, how does that pipeline that funnel look, and are there enough interesting assets out there for, I don’t know if whale hunting is the right term perhaps [indiscernible], I guess. However you want to call it?
Rainer Blair
36:48 Okay. So, well, I mean, first the level that, I think you're right. We're really pleased to be in the position that we're in so quickly after as you say, the transformational Cytiva deal and in fact, we expect even after the Aldevron acquisition this year and the nine, ten others that we have made in addition to Aldevron this year to be, you know at two turns net debt EBITDA here by the end of the year. So, we feel as though from a capacity perspective, we have the powder, if you will to do you know, meaningful deals.
37:23 Now having said that and coming back to your question around deals, our funnel is very active. And as you would imagine with us that that funnel consists of a real mix of assets. Large, medium, and small, and we run our process rigorously in a disciplined fashion. And we always think there are assets out there that we like. And so, it's a matter of the three things that we focus on market, right, which is so important; the quality of the assets and sustained competitive advantage that we see in it and the value that we can bring to it; and then, of course, the financial model, which has to be in the right space for us. And so, when those three things together flip green or meet our requirements, that's when we'll be ready to execute.
Vijay Kumar
38:13 Understood. Then maybe. Last question, perhaps this is for, Matt kind of question, free cash flow has been something that differentiates Danaher from other companies. I'm curious does free cash conversion as a metric, does it get enough attention from investors in your mind and when you think about that metric going forward, should it be at one hundred percent, hundred and ten percent or sub hundred?
Rainer Blair
38:39 Yes. I think we talked about it quite a bit wit folks. I think people understand the, you know, that it has been pretty good for a while now. Yeah. I would say, I think this year, obviously a heavier CapEx year for us at a one point five billion dollars a lot of investments than we've been making. So, kind of right around that one hundred percent is about where we've been every quarter. And I suspect next year we kind of have roughly similar types levels of investment maybe not quite exactly the same, but something like we saw this year.
39:10 So, I think for at least the near term, a hundred percent is still, sort of where we are, and I think in the longer term, especially after we get through some of maybe the pulled forward investment that we talked about at Cepheid and Cytiva and Paul to meet not only in the pandemic, but the demand that we think is coming, you know, I definitely would feel comfortable with a hundred percent conversion ratio, but I think people get the cash flow matters and the conversion has been pretty good for us over time. And we certainly try and talk about that as much as we can with folks.
Vijay Kumar
39:43 Understood. And Rainer, sorry, Matt's point on that CapEx investments it brought another question to my mind. Given the amount of investments in the biopharma space, do you worry about excess capacity in the industry when we're in twenty three or twenty four or I'm curious how you look at CapEx investments?
Rainer Blair
40:01 I don't. I don't worry about it. And here's why. First of all, keep in mind, pandemic goes to endemic, not the Zero. So, there is a baseline there. We all can negotiate on how high that baseline will be, and I don't think anybody really knows, but we know it's not zero. So there is a long tail there. Second of all, we talked about this, the amount of funding that the life science research area is attracting is extraordinary, and it's historic.
40:30 And so the increase that we see in the development funnel and in the number of projects, even just at the standard success rate, never mind technologies that are increasing the success rate through the pipeline with a standard historical success rate implies extraordinary growth. New modalities coming online, keep in mind, right. We talk about monoclonal antibodies, that's a relatively sizable market already, yet the penetration of these often life-saving therapeutics around the world is relatively low.
41:02 The volume requirements that are out there as we continue to become more efficient at producing and delivering these kind of therapeutics is extraordinary. Then if you add the explosion cell and gene therapy, never mind, other things such as MR&A vaccines beyond COVID and others, there's just an extraordinary amount of demand out there. And we think that the capacity that we're building is not only needed, but required.
Vijay Kumar
41:31 Fantastic. I think with that we're at the end of our allotted time. Rainer, Matt, thank you so much for spending the time with us this afternoon.
Rainer Blair
41:40 Vijay, thank you and thank you to the team. It's been a great conference.
Vijay Kumar
41:45 Okay. Bye
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