Danaher Corporation (NYSE:DHR) Evercore ISI HealthCONx Conference November 30, 2022 10:30 AM ET
Company Participants
Rainer Blair – Chief Executive Officer
Conference Call Participants
Vijay Kumar – Evercore ISI
Vijay Kumar
Okay. Thanks, everyone, for joining us this morning. A pleasure to have with us Danaher this morning. We have CEO, Rainer Blair. I think in the background, we have CFO, Matt McGrew; and from Investor Relations, John Bedford.
Before we get started, Rainer, if you had some opening remarks, just on what you’re seeing in the business year-to-date results, I think that would be a helpful starting point?
Rainer Blair
Thanks, Vijay. And listen, thank you for having us today. Really appreciate it. And I look forward to sharing our perspective here and answering all the questions that you have teed-up for the fire chat. But maybe before we get started, we should level-set here on what it’s been like.
And as we look to close out the fourth quarter here, Danaher is going to have another really strong year. And you saw that in the prints of the previous quarters and we expect that also to be the case for the full year. Our teams have leveraged the Danaher business system to execute in what’s been a really tough operating environment, protecting our customers, the supply chains, delivering market share gains also with exceptional price execution in what’s been an inflationary environment with some pretty strong foreign exchange headwinds.
So the teams have done exceptionally well here delivering these results. Now as we look forward here to sort of 2023 and beyond, our portfolio and our DBS base ability to out execute is unique. And when you couple that with our 75% recurring revenue that’s supported by attractive really low cyclical end markets, I think that speaks really well for what’s to come.
Now our decision that we announced at the Investor Day to separate the Environmental & Applied Solutions business by the end of 2023 brought together with our strong balance sheet, really further support our re-rated higher growth and earnings profile for 2024 and beyond. So we feel good about our positioning here. We feel good about the future and our ability to execute through what comes next. So with that, Vijay, happy to get started with the Q&A.
Vijay Kumar
Thanks for those comments, Rainer. And that sort of segues nicely into bioprocessing, which has been so key. It really has been transformational post-op in the [indiscernible]. When I look at the numbers, right, it’s the overall portfolio. I think the guidance is up high single-digits year-to-date. But I think in that high single-digits, which perhaps missed it, like the base is up like 25% to 30%, I think. So maybe just talk about bioprocessing here, guidance, I know was changed from low double-digit to high singles. Did anything change in the base or was this all vaccine-related interment change?
Rainer Blair
No. I mean it really was related to the vaccine and therapeutic related changes, and obviously, in the bioprocessing business, where we’ve taken down that guide for 2022 to $800 million COVID vaccine and therapeutics revenue. But if we back up for a second, and let me frame this up because there’s been so much talk about bookings and book-to-bill ratios and so forth. And frankly, in aggregate, they can be very misleading and actually don’t reflect the true underlying demand of the business. So if I’ll just take a minute here.
If we think about our bioprocessing business, it’s a $7.8 billion business for 2022, $7.8 billion. Now COVID represents $800 million of that. And so that leaves you with a $7 billion non-COVID business. Now as we look forward to 2023, the question is what’s going on in the non-COVID business?
And we’ve seen, based on changes in lead time, the constraints of the pandemic, the lumpiness of extraordinarily large projects that the bookings number in any one quarter or even in any one year actually doesn’t tell the true story. In fact, it’s the three-year CAGR that really brings back and normalizes what’s going on in the market from a true demand perspective.
So if we look at the three-year CAGR, through 2022 in bookings for that $7 billion non-COVID business, we’re talking about a mid-teens growth CAGR. Now if you do the same calculation for revenue, you end up with a mid to high-teens growth CAGR, and we believe that, that is really what the demand pattern in the marketplace, of course, with our unique positioning looks like.
Now as we think about that then looking forward, well, what does that mean for 2023? We think about it this way. Well, we’re really looking right now at a range of potential outcomes, and we’re validating where we fall within that range in the context of the exit rates of the fourth quarter, the standard discussions that we have with our customers, and those are intimate discussions about their inventory levels production schedules and so – and other needs they might have, that all happens, and it does every year in the fourth quarter.
So we’ll update then where we dial-in more precisely in 2023 in January. But as we think about looking forward, the range of outcomes looks something like this. The revenue for 2023 non-COVID could be in the mid-teens. That’s representative of what the three-year CAGR has been. It’s been mid to high-teens, so it could be mid- to high-teens.
It could also be what it’s been sort of the last year, which is well over 25%, as you suggested in your question, certainly, that could be one outcome, or perhaps it just settles back into the high single-digit, low double-digit longer-term growth rate that we’ve spoken about.
Now I think our view is that while that’s the total range, it’s probably more likely that it is between the high-single digit and mid-teen range, but there is that number out there of well over 20%. But somewhere in between that range is how we see 2023 playing out. And as I said, we’ll look at the exit rates here and then give more precise guidance on that in 2023.
Vijay Kumar
That’s extremely helpful context and perspective, Rainer. I think a couple of questions related to that. Some of your peers have spoken about stocking dynamics, and I think that’s one which is really – it’s been a new factor, at least when it comes to the larger cap names. What is stocking? And does that have any bearing here as you look at Q4 into next year?
Rainer Blair
It does, but to a limited degree. So as we’ve said pretty consistently that as you look at the broader marketplace, we really don’t see an enormous amount of stocking going on. In fact, it wasn’t in until very recently that we got out of the hand-to-mouth sort of supply situation with the constraints that occurred in the supply chain through the pandemic-related demands.
Now having said that, and I think I’ve been clear here that there are pockets where there has been some inventory build-up and they tend to be related to customers who have larger COVID-related programs, whether that’s a vaccine or whether that’s a therapeutic, they’ve either not had the kind of demand drawdown that they expected because the vaccination rate is lower or the variance made a particular therapeutic no longer relevant or because they’ve cancelled the program entirely.
So you have sort of the full gamut of potential there. But those are really just pockets with larger players who are quite well positioned to draw that down. And so how does that make us think about 2023? Well, we’ve already said, look, for 2023, we think our COVID demand goes from the $800 million I just spoke of to the $500 million, right? So you see the manifestation of what I just spoke of sort of these pockets in that change there, and that’s what we’re currently expecting for COVID in 2023.
Vijay Kumar
That’s helpful perspective. And this – maybe just diving a little bit into your bioprocessing, upstream versus downstream rate. When you look at these areas that Danaher plays in, are these products interchangeable as and if a customer build up inventory? Can they repurpose those products into other areas?
Rainer Blair
So it’s one of those dissatisfying answer is that it depends a little bit. But I would say, generally speaking, if we start at the high level and I’ll get more specific, these are products that can be interchanged between at least the same class of drugs, right?
So yes, that can happen and does happen on a pretty regular basis. Having said that, and we have a really good view to this, Vijay, because the combination of Cytiva and Pall Life Sciences, and you saw this at the Investor Day, it’s just unique in the world in terms of its breadth. We’ve got the entire gamut horizontally.
And then as you think about this in terms of its depth, the different modalities, monoclonal antibodies, mRNA, cell and gene therapy. So it goes – we have really a unique view to this. There, I would tell you that in certain upstream applications, for instance, think of cell culture media where we have gained significant share, invested significantly and are leading player in cell culture media, certain single-use technology applications such as in bioreactors and such are specific to a given modality or drug.
But generally speaking, as you continue to downstream, they tend to get less teed into any given drug. So we’re strong across the entire gamut of these products and feel like we have a unique value proposition there across the board.
Vijay Kumar
Understood. And then maybe one more bioprocessing-related question. This is on the base business, the $7 billion that you referred to, Rainer. The range of outcomes, perhaps in the high singles to mid-teens. So as you go through the planning process, right, what determines those ranges, right, between now and as we go through the guidance process? Is that more…
Rainer Blair
That’s exactly right. It’s that very intimate customer communication that we have where we literally work through what their inventory situation is, what kind of safety stocks they want to maintain, what they believe their production schedule is, so that all happens and it regularly happens in the fourth quarter as everybody starts dialing in their plans for the next year. And so we’re currently in that process. And then, of course, that will be brought together to provide our view here in January.
Vijay Kumar
Understood. Thanks for all of the details in bioprocessing. I know it’s been tough though for investors. A lot of people got confused by the book-to-bill commentary. I think this helps us level-set on how to think about the range of outcomes and the drivers here. One maybe on vaccine. And I know this year in fiscal 2022 we’ve had a series of revisions. $800 million going down to $500 million, Rainer, does it seem aggressive or do you have visibility in that order book for the $500 million?
Rainer Blair
That’s currently the status that we have with our customers, the $500 million. And I think our customers regularly review vaccination rates, new approvals that they get around the world in various countries. And so that’s what we think that’s our expectation for 2023.
Vijay Kumar
Understood. Understood. And I don’t know if you can give any more granularity on is that different types of modalities, mRNA versus non-mRNA on the book of business or those customer orders, which give you visibility to $500 million?
Rainer Blair
There are a number of successful vaccines. I think the ones that are most successful, everybody is familiar with, they tend to be in the mRNA space, and of course, we’re well represented on those. But having said that, we’re represented on all the vaccines in the world and to the extent they’re in use Danaher participates in that.
Vijay Kumar
Understood. And given what we started with mRNA here on the class point, I want to switch on and move to maybe Aldevron and IDT, which has been – it’s amazing. It’s a $1 billion business, growing strong double digits. Aldevron, it’s well above deal model rate. And when I think about the 30-plus percent – I mean, well above 30%, frankly, in 2022, is 30% sustainable here into 2023-2024?
Rainer Blair
Look, we’ve had, as you say, a great start here with Aldevron with a growth rate of over 30%. And we think the $500 million number that we’ve talked about for the revenue is still a good number. Our order book remains strong. We see the business growing, and we believe that it’s going to be a double-digit plus, if I can say it that way, grower here for the long-term without pegging a specific guide on that, we’ll talk more in January here.
But we couldn’t be pleased – more pleased with Aldevron. And sort of in the same vein as we talk about genomic medicines, IDT it’s been 11 straight quarters of double-digit-plus kind of growth. And they’ve really just – the team has just executed so well. So we couldn’t be more pleased with both the business, the end markets and the team’s execution.
Vijay Kumar
Understood. Understood. And maybe just one question on Aldevron and one on IDT. What is – when you think about Aldevron, what is driving the growth, the underlying fundamentals here, Rainer? Is that cell and gene therapy? Or – who is using? Is this early-stage biotech, well-established biopharma?
Rainer Blair
So Vijay, well said. I mean the primary drivers here are cell and gene therapy and mRNA, okay? And so as we think about – let we start with mRNA, Aldevron produces mRNA for manufacturers that you’re familiar with. Two, they, of course, make plasmid DNA with very high fidelity at GMP levels of volumes and they do that for the gamut of the various levels of projects, whether that should be Phase 1 all the way through Phase 3 and even for those that are thinking about going for their BLA approval here.
So they are really well represented from the plasmid perspective as well. And then I think it’s also worth calling out the protein business, which is nascent but growing at very high rates, it’s small. And here, you’re talking about enzymes that are used in genomic editing in the various types of genomic editing which, of course, are still early stage, both as therapeutics or as tools in order to build therapeutics, but that’s also a part of the business that we shouldn’t overlook.
Vijay Kumar
Understood. And sorry, just on – when you say Aldevron produce mRNA, this is not a vaccine, right? This is outside of vaccine or is this related to vaccines?
Rainer Blair
Well, yes and yes. So there’s – it’s related to vaccines and not only for COVID.
Vijay Kumar
Got you. And then on the IDT side here, Rainer, there’s been some chatter in the market about competitive dynamics and pricing in that market. Maybe talk about why IDT has grown double digits. Has IDT gained share, Rainer? How do you see the pricing environment within the oligo market?
Rainer Blair
Yes. I mean we do think that IDT has absolutely gained share. And that’s related to a number of factors. It’s hard to overstate the importance of quality and oligonucleotides. One base being incorrect or not having the binding capability that’s required for the experiment shows your entire experiment off or doesn’t allow you ultimately to build the gene that you’re looking to build. So, we have a process that is unique and is proprietary that allows us with very high fidelity to produce oligonucleotides and the other downstream products such as primers and probes and so forth that allow you to do NGS experiments.
So that’s really important. Also, the fast turnaround time. So, we are unique in the industry in terms of how quickly we’re able to turn this around, and that’s incredibly important for scientists who are trying to advance their research. So they want their experiment to work, because you have the quality. And two, they want to be able to continue on to the next design of experiments quickly because you have the turnaround time.
And then lastly, I think it’s also important to mention IDT’s innovation. So they continue to launch new gene editing products, which are high fidelity products that are incredibly sought after. And we’ve also made some small acquisitions that have helped us build out, Swift Bio being an example, helped us build out our NGS library prep portfolio, and that’s also helped us.
Now as it relates to pricing, these are, of course, competitive markets, but people recognize that having the high quality and the fast turnaround is worth of premium, and that’s what we see with IDT. IDT has recognized for the position that it has. And while you might find somebody who is less expensive, it may not be something that you always appreciate for the long-term.
Vijay Kumar
Gotcha. And so as far as Danaher and IDT is concerned, pricing, really, the environment hasn’t changed for Danaher?
Rainer Blair
It is not.
Vijay Kumar
Fantastic. I did have one question on instruments before we move to diagnostics. How large is instrument portfolio for Danaher? I think that segment has been growing double digits. And I think there’s been some questions in the market about is, I wouldn’t call it stocking, but perhaps maybe supply chain-driven fears and maybe customers pre-bought systems. Is that possible? And what’s driving this instrument strength?
Rainer Blair
So I’ll start with that. I think it’s unlikely that you buy these, and I’m sure you’re speaking of life science research instruments here, not diagnostic.
Vijay Kumar
Yes.
Rainer Blair
Okay. So life science research, I just don’t think you buy those on stock, if I can say it that way. These are high fidelity valuable instruments that researchers are looking to deploy and to use. So I don’t see the topic of an inventory buildup as being relevant here. I think what we have seen with the very strong growth of this business, which if we look at the entirety of that business is over a $5 billion business for us, round numbers.
Is that – we are in an exceptionally strong funding environment. Life science research has attracted so much capital and cash in order to further what’s possible in health care generally, but also specifically to the biologics marketplace. And so there’s a huge demand, broad-based, that I think the industry is benefiting from.
On top of that, I think you see that Danaher is coming out of the pandemic or at least the heights of the pandemic stronger than it entered, because we’ve upped our research and development investment and are now launching new products, one after another, really pushing the limits of science forward. And so we have on top of the strong funding environment, a new product introduction cycle, which is also providing us with tailwinds.
Vijay Kumar
The – when you think about that capital environment, obviously, macros [ph] and some headlines, do you expect any customer behavior pattern to change here on the capital front as you look at 2023?
Rainer Blair
So once again, if we’re talking about research instruments, in particular, here, which, of course, is a capital expenditure, I do think that we were likely to come off the heights of this life science renaissance and investment that we’ve seen. But it’s not to say that we will necessarily go back to historical rates. I think it’s useful to think about three-year CAGRs here as well in order to take out some of the anomalies, right? And so I think you’re looking at a market that is probably going to end up growing mid to very low double-digits, and then you see different players playing in that market, probably closer to the mid- to high-singles and then individual players depending on their innovation cycle growing either below or above that.
Vijay Kumar
That’s helpful perspective, Rainer. And then switching over to COVID diagnostics here. I think –just on your fourth quarter guidance here, it seems a little light. Third quarter did over $850 million of revenues, fourth quarter just given some of the spikes we’re seeing $400 million seems light. Maybe talk about what you’re seeing from a flu combo testing perspective?
Rainer Blair
Yes. I mean we definitely saw the respiratory season start in the Southern Hemisphere and the medical community watches these things very closely in order to be able to anticipate what kind of respiratory season will we have in the Northern Hemisphere and of course, specifically in the U.S. and Western Europe. And so what we saw in the third quarter, and you recall, we increased – preannounced and then subsequently increased again with the print on our sales of tests. And what we saw there is really a stocking behavior to try and get ahead of what was expected to be a strong respiratory season. And I think we see the indications of that occurring here.
Now our fourth quarter guide there is related to the fact that we have seen strong starts to respiratory seasons, which ultimately dropped off quite precipitously. And – so with the stock that was built there, I think we’re being prudent in understanding, does that ultimately play out here in the fourth quarter? What we’re seeing so far is that, in fact, the respiratory season is strong. Will it be prolonged? That remains to be seen. And of course, we’ll have another shot at that by analyzing the fourth quarter data here and then updating in January.
Vijay Kumar
Understood. And then on fiscal 2023, I think Danaher said 30 million tests, in COVID-related test, is a reasonable number for fiscal 2023. And what gives Danaher the confidence, Rainer? Is this hospital testing for symptomatic respiratory cases? And have hospitals indicated any change in their – how they go about testing these patients?
Rainer Blair
So there’s a couple of factors there, Vijay. First of all, I think it has to be said that the value proposition that Cepheid delivers to the hospitals at the point-of-care, it’s differentiated and it’s unique. And what we’re observing is a consolidation of the bench top, if you will, as the degree of COVID testing starts to wane, customers are looking to consolidate and simplify their workflows and we would say that Cepheid is gaining share on that basis, not only because of our respiratory testing menu, but because we have the broadest menu, we have invested significantly in capacity and are able to supply our customers’ needs. So now they feel less of a need to diversify what they do on the bench top, because they’re comfortable that they’re going to get what they need. So, I think that’s an important point here.
Secondly, we have seen, in different hospital systems, decisions that are to ensure that patients who end up in the hospital or in an ICU are COVID-free or prior to going into the operating theater are COVID free. And that’s done soon just before the procedure or before going into ICU. You can imagine those poor patients do not need to be grappling with a surgery and then at the same time with pretty virulent respiratory infection nor spreading it to others in the ICU. So we do see that kind of testing. And with that, we think the 30 million tests that we’ve talked about roughly $1.2 billion of revenue there for COVID is a reasonable way to think about 2023.
Vijay Kumar
Is that – so that ASP is I think it’s around $40 just given you a current mix of combo or sustained loan. It seems like, do you expect any change in that combo or sustained loan for fiscal 2023?
Rainer Blair
I mean, that’s what the history shows. Once again, it depends on how severe the flu season is estimated to be. Generally speaking as we get into flu seasons, we see hospital systems and physicians wanting to understand, am I looking at a patient who’s presenting with flu symptoms or is it COVID? And so it’s natural that we see a bit of a skew here during the flu seasons towards the 4-in-1 versus the COVID only. But we try to take all of those machinations out of it. I think 30 million tests at $1.2 billion kind of sets the frame for how we’re thinking about that.
Vijay Kumar
Understood. Is that an endemic level for Danaher, Rainer, or should we expect a step down from the 30 million tests for true endemic state?
Rainer Blair
So, based on our customers conversations that epidemiologists and so forth, we think this is a good base level to be thinking about 30 million tests a year.
Vijay Kumar
And another point that you mentioned was customers looking to consolidate testing on Cepheid platform, right? What proof points or maybe not proof points, what data points can you share? What kind of tests are customers using these systems for other kinds of testing beyond COVID?
Rainer Blair
Sure. We see hospital acquired infections being a big aspect at the point of care. Virology is a big point of care. Strep is another test that’s becoming more relevant. And then we have of course, sexually acquired diseases as another test. Now, this is – these are sort of the larger groupings that we’re seeing in application first. Any one hospital system will use all of them in different locations. So – but we’re certainly seeing the early days of that broader menu coming into testing as people leverage that anchor assay of COVID and flu testing to now bring in other services in their hospital.
Vijay Kumar
Understood. And just that related to that, the – when I look at pre pandemic, I think Cepheid was about $1 billion business, and that install base doubled up. Should I think about that $1 billion as doubling up because they’re now using all these other tests or perhaps utilization is lower, and maybe I should be looking at a different number?
Rainer Blair
Well, as we think of the non-COVID testing it’s – the way to think about that is in 2021 that was as you suggested $1 billion dollar business round numbers. And that continues to grow at an attractive double digit rate. And that’s how I would think about that going forward. And the reason is simply you don’t just start ordering in a hospital a couple new tests, right? You have to – there’s an entire system and workflow associated with that starting with ordering it and the physicians knowing it’s available to the billing procedures associated with it, and getting them that data into the electronic health records. So when you bring in the new test, that’s a little bit more than just ordering it from Danaher takes a little bit.
Vijay Kumar
Understood. And the – when I look at on the Beckman side, do you feel like Beckman clinical has been growing in line with the market? I know some of your competitors talk about new system launches and share gains how’s that market trending?
Rainer Blair
For us, Beckman has performed very well. We saw in the third quarter here, great mid-single digit growth. And that’s despite these lockdowns in China, which to some degree affect patient volumes. Now certainly the market has been helpful here because we have seen that patient volumes outside of China are really at or above the pre pandemic levels. So that’s sort of one thing the market is quite strong.
Secondly, we look at innovation here as being a key point as well. We’ve launched the DxH 900, which is a hematology testing device, or the DxA Fit, which is automation for smaller and mid-sized labs, as well as some novel assays such as early sepsis detection, which you can imagine is a very important test. And then lastly, we have significantly improved over the years in execution, and we see that in improved win rates. So we like the way Beckman has continued to accelerate here and looking ahead, we really see them as a solid mid-single digit grower at scale.
Vijay Kumar
Understood. And as you – when I sum up all of these, right, when I look at the clinical piece, Cepheid in a bioprocessing, rolling all of these together, there is a range of outcome on bioprocessing [indiscernible] but the macro seems fairly in a stable for next year. Would that be a fair comment or given China, Europe, or there are some factors that we need to be sensitive to?
Rainer Blair
Yeah, I mean, I’ll like to piece that apart a little bit if I could. So I’m having trouble saying that the macro is going to be stable when I think about it more generally. Of course, our end markets tend to be quite a bit less cyclical and in some cases not cyclical at all. And of course that differentiates us. But I do think as you think about 2023, we’re thinking about that base business being the mid-single digit plus kind of growth. We’ve talked about how we think about COVID testing here with the 30 million tests. And I think the other point to think about is foreign exchange, it doesn’t affect our core growth rate, of course, right? But FX just in 2022 was a $1.4 billion revenue headwind. And different to other times when we’ve experienced this, this is really a global currency phenomenon against the dollar with maybe one or two exceptions around the world.
So literally everywhere we sell with the exception of course of the U.S., the currency has devalued. And so the fall through on that, we usually say 35% to 40%, and I think that holds, but probably skewed a little bit more towards the higher end of that range. So if you apply that thinking now to 2023, and if exchange rates remain as they are today, then we’re looking at $800 million of currency headwind on the top line. And once again, I’d say that 35% to 40% holds because we just don’t have costs in all these countries, nor do we want to. So skewed a little bit more towards the higher end of the 35, 40 in terms of the fall through. So those are the factors I think to think about here looking at 2023.
Vijay Kumar
Yeah, that’s extremely helpful. And just maybe near term, since you brought up China, think on the diagnostic side, Rainer, as some of your peers have spoken about maybe China localizations as an issue, and it’s not been consistent and some companies haven’t seen it, others are speaking about it. And there’s been some headlines about China lockdowns or unrest if you will, maybe talk about China and what you’re seeing in China?
Rainer Blair
Sure. So let’s start, I mean, there’s a lot to unpack there. First of all, let’s start with China as a market, which we continue to see as a very attractive market. This is a population, an economy, and a society that wants to invest in the future to grow, increase its standard of living and have set as a priority for its economic development, precisely the areas that we in our portfolio applied to.
So if you think about healthcare and building your own pharmaceutical industry, developing your own drugs, if you think about diagnostics and having a higher standard of care with more hospitals that are able to deliver the highest technology assays or if you think of water quality and food testing, all of these things have fly nicely. So we believe in China for the long-term, and that’s how we’ve positioned ourselves here for years, and it’s how we continue to invest in China, and we expect China to be an above fleet average, if you will, grower for the long-term.
Now as we think about competition in the near term here, we continue on a steady course of localization. And we do that for a number of reasons. One, we want to ensure that we shorten our supply chains so that we are as nimble as we can be for our customers. Secondly, we are localizing in local R&D, product management and manufacturing to ensure that we’re able to meet the needs of our customers in China, which at times differ and sometimes significantly from the needs that you would find in other markets around the world. So that’s very important to us.
And then lastly, we are bringing in a great deal more autonomy for our colleagues in China to maintain their degree of nimbleness versus local competition, which has always existed and which, as in every region, sometimes becomes stronger, sometimes less so. So we continue to invest in that.
Lastly, if you look at the current environment, look the shutdowns continue. They have been going on for some time. The severity of those shutdowns has increased here as the variants have become more virulent. We don’t know how this plays out in the short-term, but do have the belief that in the long-term, ultimately, the population in China will have to increase its antibody titer in order to be able to live more freely, of course, and pursue economic and social interest. So we think this is a matter of time, but no doubt in the short-term, there are some challenges to be overcome.
Vijay Kumar
Got you. That’s helpful. And then back to your comment on the business being mid-single-digit-plus, what does that assume for pricing? I know this year pricing year-to-date has been strong, north of 3%. Is that sustainable for next year or perhaps something in the low single-digit range?
Rainer Blair
Yes. I mean we believe that the inflationary environment will continue perhaps not to the same degree that we have seen it here. Perhaps it has peaked. We’ll see. But we do believe that it continues into 2023. And the way we run our businesses is we always look at the price cost equation to ensure that whatever is occurring there, we’re ahead of it, and that’s how we drive each and every one of our businesses from the bottoms up. And so we believe that we’re going to continue to take price in 2023.
And I think 300 basis points is a good working number to go with. We’ve had 400 basis points here in 2022, and so we think 300 basis points is probably a good number to work with.
Vijay Kumar
Yes, that’s extremely helpful, Rainer. I know in the margins, you gave a lot of color on the FX drop-down. Anything on the COVID side between vaccine and diagnostics? I know in the past, you’ve said the fall-through should be in line with corporate with any other variables we should be thinking about on the margin front?
Rainer Blair
I don’t think so. I mean just to reiterate, our products that were destined towards COVID, whether that’s vaccines or therapeutics or testing are essentially at the same margin level for all kinds of reasons that then, let’s call it, that fleet average.
So I don’t really think that’s it. I’ve talked about the variables that I think are – that need to be considered for 2023 as we finalize our own thinking here in Q4. And I would just add to the summary that you made that FX, I called that out, and that’s something that we have to consider, of course.
Vijay Kumar
Understood. And I know at the Analyst Day, Rainer, there was some chatter about M&A. You made some interesting comments or at least the Street perceived it as interesting which given the current environment and the interest rate environment how should we think about deals and deal sizes? And we know we do have [indiscernible] been coming up. And usually, Danaher is pretty good at marrying the divestitures with welcoming new members to the family, so talk about M&A environment?
Rainer Blair
Well, this timing between separation of an entity and then acquiring one is not one that we design with any specific time in mind. So – but that has been the case, as you suggest here. Historically, I would say the interest rate environment, of course, is relevant in a number of ways. First of all, we’ve seen how the interest rates have affected equity valuations, as point one.
Second point is I’ve talked about regularly that we always look at the end market in relation to our strategy, then we look at the company and then we look at the valuation and the business model, right to ensure that all of that makes sense. And when all of those three things are green is when we execute.
And I would tell you that, one our capital allocation bias remains towards M&A; two, we are looking at alternatives from large to small at all times, and that is unchanged. And when those three lights are green, that’s when we execute. And the environment that we’re in with the strong balance sheet that we have, 1.5 turns here, is an environment in which we’ve historically done quite well. And we view this environment as one of opportunity. And of course, for us opportunity requires not just strategic or tactical success, but also a financial win as well.
Vijay Kumar
Absolutely. And then maybe one last question here in the last minute. Free cash conversion, that’s the only thing. Year-to-date, it’s been below trend. I know there’s been some strategic investments in the inventory – balance sheet inventory, working cap metrics, can that get back to north of 100% in fiscal 2023?
Rainer Blair
So we’ve had, I’ll call it, incrementally lower free cash flow because we’ve invested in the growth of the business, right, whether that is through capacity expansion in order to take advantage of the moment and ensure that we take – come out of the pandemic stronger than we entered or whether it’s positioning inventory to ensure that we protect – as I said in my opening comments, protect our customers, gain share right, and then of course, ensure our supply chain remain robust. So I would see that in the context of investing for growth. And we expect for 2022, our free cash flow to net – GAAP net income to be greater than 100% as it’s been for a very, very long time as well.
Vijay Kumar
Fantastic. I think with that, we’re at the end of time. Rainer, Matt and John, thank you so much for spending the time with us this morning, and it was a helpful conversation.
Rainer Blair
Thanks again, Vijay. Thank you to you.
Vijay Kumar
Bye.
Question-and-Answer Session
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