Danaher (NYSE: DHR), a major provider of tools and technologies for drug development, is on the rebound amid growth in the pharmaceutical industry.
Danaher stock has jumped 23% since Sept. 25. But that still leaves it just 12% higher than five years ago. High costs and expensive acquisitions have weighed on shares during that period.
Danaher has a market capitalization of $158 billion. It has three divisions: biotechnology (30% of sales), life sciences (also 30% of sales) and diagnostics (41%).
Takeovers (and divestitures) represent a major pillar of the company’s business model. Its largest acquisition was GE Biopharma in 2020 for $21.4 billion. It also bought Aldevron, a maker of DNA, mRNA, and proteins that go in vaccines, gene and cell therapies, in 2021 for $9.6 billion.
And Danaher acquired Abcam the “Amazon of antibodies” in 2023 for $5.7 billion. Abcam is a leading supplier of protein consumables (antibodies, reagents, and other products) for medical researchers.
On the divestment side, Danaher spun off Veralto, its environmental and applied solutions group, in 2023.
A winning strategy
“Danaher aims for continuous improvement of its scientific technology portfolio by seeking attractive markets and then making acquisitions to enter or expand within those fields and also divesting assets that are no longer seen as core,” wrote Morningstar analyst Julie Utterback. That strategy has led it to top-five positions in the life sciences and diagnostic tool markets.
Biopharmaceutical manufacturing is particularly appealing for Danaher, because of its strong growth trend, high profit margins, and high switching costs in light of end users’ concern about regulatory and reproducibility issues, she notes.
“Management has started making more acquisitions in that space, such as Aldevron, and we would expect more tuck-in acquisitions in this and other end markets, given Danaher’s intense focus on acquisitions.”
As for earnings, the company’s revenue climbed 4.5% to $6.1 billion in the third quarter from a year earlier. Profit rose 11% to $908 million, and the adjusted operating profit margin gained to 27.9% from 27.5%.
Pharmaceutical research spending rebounded modestly In the third quarter, though it still trails historical levels, Danaher CEO Rainer Blair said in the company’s October earnings call. He anticipates drug companies will increase research and development spending further as tariff issues get settled.
Rising investment confidence
“We’re starting to see more confidence [from pharmaceutical companies] regarding capital investment decisions and the location of those investments going forward,” Blair said. He also expects equipment sales to rise, as drug companies build new manufacturing facilities.
A major area of strength for Danaher is its biologics business, which encompasses medicines derived from living organisms using biotechnology, including gene therapy. Danaher’s biologics business has benefited from the high amount of U.S. government drug approvals, and a rise in the development of new biologics.
Looking at the company broadly, intangible assets and switching costs provide its main competitive advantages, Utterback says. “Danaher offers differentiated technology that is protected by various intangible assets, including patents, brands, copyrights, and trademarks,” she wrote.
On the switching-costs side, “once its products are chosen due to their differentiated features for a specific application, Danaher is often able to layer on substantial switching costs for customers,” Utterback says. “Danaher’s tools enable the essential operations of its clients, and switching to a competitor’s technology could change the outcome of those operations.”
So Danaher is looking quite healthy.
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