Equity Position Update: Danaher (DHR, Financial)
Danaher is our longest held investment and remains a top five position. Danaher has underperformed the S&P 500 this year due to a slowdown in the bioprocessing industry and more cautious spending by biopharma customers. Bioprocessing is a key end-market that drives more than a quarter of Danaher’s profits. Bioprocessing products are the main inputs that biopharma companies use to manufacture biologic drugs, which are the fastest growing category of drugs, growing low-to-mid-teens and representing a sizeable portion of the clinical pipeline.
The bioprocessing industry experienced significant growth in 2021 and 2022, driven by Covid vaccines and a strong biotech funding environment. Several participants, including Danaher, lowered their 2023 growth outlook in large part due to customer inventory de-stocking and biotech funding weakness. We anticipate that this slowdown is temporary, and the bioprocessing industry will return to normalized growth of high-single digit to mid-teens in 2024 and beyond.
Danaher has created significant value over decades through its unique operating system and superior M&A, and its low leverage balance sheet should allow it to take advantage of depressed valuations in the life science tools sector to continue to add to its portfolio. More importantly, Danaher stands to benefit from the surge in new projects and drug discovery spending occurring in the post -Covid world. Danaher’s Biotechnology and Life Sciences segments are poised to accelerate from data analytics and computational biology, which will grow meaningfully as AI and eventually quantum computing technology advance. We would not be surprised to see Danaher’s growth rate move from high single digits to the low teens over time, implying a long runway for Danaher’s business and stock price to increase sustainably while they enable the discovery and manufacturing of key life-saving drugs.
Danaher is on track to spin-off its Environmental & Applied Solutions division in Q4 of this year, which marks the last step in the company’s transformation into a pure-play life sciences tools and diagnostics company. The spin-off, to be named Veralto, has a strong ESG profile with well positioned assets in the high growth areas of water quality and product identification end markets. As a stand-alone public company, Veralto will benefit from tailored capital allocation and meaningful inorganic investments.
From Daniel Loeb (Trades, Portfolio)'s Third Point second-quarter 2023 letter.
