Life sciences and medical diagnostics company Danaher (DHR) delivered a first-quarter earnings beat Tuesday, however its lowered outlook sent shares of our holding tumbling. The revised guidance forces us to trim the position at a loss and put our fundametal thesis of Danaher stock under review.

• Revenue for the period ended March 31 declined nearly 7% year-over-year, to $7.17 billion, but outpaced analysts’ estimates of $7.03 billion, according to Refinitiv. When excluding the impact of Covid testing sales and sales of products that support COVID-19 related vaccines and therapeutics, Danaher realized base-business core sales growth of 6%.

• Adjusted earnings-per-share (EPS) decreased 14.5% annually, to $2.36, ahead of the consensus estimate of $2.25 per share, Refinitiv data showed.

Shares of Danaher plummeted more than 7% Tuesday at the time of this article, to around $238 apiece.

Summary

This was not the quarter we were looking for from Danaher. Its strong headline results were more than offset by downward revisions to the firm’s guidance for the remainder of the year.

The revised outlook was impacted by the ongoing destocking of bioprocessing inventories. Danaher management noted Tuesday that they are seeing a greater-than-anticipated drag from larger customer inventory destocking. These customers account for about 70% of the company’s bioprocessing sales. As a result, management now sees growth in this cohort coming in around 6%, down from the 7% to 8% management was previously expecting for 2023.

Moreover, the remaining bioprocessing customers, which include emerging biotechnology companies and others working on early-stage projects, are seeing a liquidity crunch, with operating and capital expenditure budgets declining as a result. The company now sees negative mid-teens percentage growth for that cohort of customers, compared with the low-teens percentage growth previously anticipated.

Given this protracted bioprocessing headwind, we are cutting half of our position in Danaher. We have to reassess our investment thesis in order to decide whether to keep the other half. Our investment thesis in Danaher has been a stable, resilient, recession-resistant lifescience growth. That's why we have been willing to pay an above-market multiple. However, clearly, the company cannot grow as well, as a result, we cannot bear such a large position in the stock. We are also assessing the longer-term implications of tighter liquidity levels for emerging biotechnology customers following the collapse of Silicon Valley Bank, which had been a key funding source for biotech startups. 

Guidance

• Management expects overall core-revenue growth to be down by a high-single-digit percentage for the second quarter. That’s a steeper decline than the 4.4% predicted by Wall Street. After adjusting for an expected low-double-digit percentage impact related to Covid-19 testing, vaccine production and therapeutics sales, Danaher management is forecasting base business core-revenue growth to be in the mid-single-digit percent range for the second quarter. The adjusted operating profit margin is expected to be roughly 26% — much lower than the roughly 31% we were expecting.

• For the full year 2023, management expects a similar dynamic, with overall core revenue growth to be down by a high-single-digit percentage, compared with analysts’ expectations for a 3.75% decline. Base business core-revenue should grow by a mid-single-digit percentage after adjusting for an expected low-double-digit percentage impact related to Covid-19 testing, vaccine production and therapeutics sales. That represents a downward revision from the mid-single-digit percentage decline previously expected on a core basis and the high-single-digit percentage growth previously expected for the base business.

• Management on Tuesday said that during the first quarter, the company saw softer global demand from many emerging biotechnology customers, “as more pronounced pressures on liquidity and funding accelerated their efforts to conserve capital, leading to project delays and cancelations.” As a result, the team expects inventories to continue to normalize in the second half of this year, rather than the first half as originally expected.

• A cut to guidance had been expected after German peer Sartorius (SARTF) issued disappointing first-quarter results last week — but this appears to be a bigger downward revision than many on Wall Street were anticipating.

• The adjusted operating profit margin for the full year is expected to be roughly 30%, down from the previously forecast 31% level, due to a decline in expected revenues in bioprocessing and capacity reduction costs at the biotechnology and diagnostics units.

• Management’s Covid-related vaccine and therapeutics revenue forecast for the full year was unchanged, at $150 million. Testing at the high-growth molecular diagnostics unit, known as Cepheid, is expected to be $175 million in the second quarter and $1.2 billion for the full year.

• Across business areas, Danaher saw largely flat sales at its biotechnology division, a high-single-digit percentage annual increase at its life sciences unit, a low-double-digit percentage increase at its diagnostics business and a 6.5% advance at the environmental & applied solutions division.

• Management also noted a biotechnology funding headwind in China, but noted that overall business ins the country was better than expected, due to higher patient volumes and strength in diagnostics.