2023-11-29 18:04:09 ET
Danaher Corporation (DHR)
6th Annual Evercore ISI HealthCONx Conference
November 29, 2023 03:00 PM ET
Company Participants
Rainer Blair - CEO
Conference Call Participants
Vijay Kumar - Evercore ISI
Presentation
Vijay Kumar
Thanks, everyone, for joining us this afternoon. A pleasure to have with us, Danaher. We have CEO, Rainer Blair, with us. Rainer, thanks for spending the time with us this afternoon.
Rainer Blair
Pleasure to be here, Vijay. Thanks for having us.
Question-and-Answer Session
Q - Vijay Kumar
There's never been a dull moment since you took over the reins. It's been one after the other. But just when you think about the current macro environment, obviously, China has come up a lot. Any thoughts on the broader macro environment relative to what we saw in third quarter? Any change in macro sentiment?
Rainer Blair
I think that third quarter was a very good quarter for us. As you know, we beat top and bottom there and saw our Diagnostics businesses outperform our expectations. Bioprocessing met our expectations. And then in the life science tools, life science instrument area, which represents less than 10% of total sales, that was lower than expectations.
But overall, that ended up in a solid beat. And as we think about the fourth quarter and the macro, we really don't see much of a change here in the fourth quarter. Now as that relates to going forward, as we've talked about, we want to see the fourth quarter data and the full year data here before we think about what the next year might look like.
Vijay Kumar
Got you. And there are a few things which came up during the third quarter earnings season, Rainer. I think one of them was the debate around book-to-bill commentary on why is Danaher at 0.8x versus someone else being at 1x. It might be definitional, but if you could just throw some light on does book-to-bill matter and is Danaher seeing something different versus peers?
Rainer Blair
As we've mentioned before, we really don't run the business using a book-to-bill, right? We really look near term at the reality of what our customer requirements are, and that ultimately is what defines our forecasts in our guides. But something that we've talked about previously is that we wanted to use the second half of this year really to take some of the slack out of the system and try and bring as much as possible the inventory discussion behind us in 2023. And we knew we wouldn't be able to resolve everything here in 2023, and we expect some of that to still be applicable in '24.
But we've been trying very hard to drain this excess inventory by taking measures such as ensuring that we suspend cancellation fees when our customers really do not need the material that they've previously ordered. That had been a hindrance to getting a clear signal-to-noise ratio. Sales persons, incentive programs at times would require pushing in more volume when in fact, that's not what a customer requires. And then, of course, customers also have sort of rebate schemes that ultimately would incentivize them to bring in volumes that they may not need in the immediate term.
And so by working through all of that, we have tried to ensure that we take some of the slack out of the system and, of course, all of that impacts how you think and calculate your book-to-bill. As it relates to our share position, we're as confident as ever that not only are we maintaining but we have taken share during the course of the pandemic. And we view that really over the four-year continuum here and feel very good about our positioning.
Vijay Kumar
Those are some helpful comments, Rainer. When you look at that metric, for whatever reason, the Street has been focused on book-to-bill, is that booking, like when you say you're working with customers, did that booking inform the number? Was that in line with your expectations? Is this what you expect when you're working with customers to take down slack in the system?
Rainer Blair
Yes. In fact, we've targeted customers here to ensure that we improve that demand signal, something that we have learned throughout this pandemic that we really want to get clear demand signals. And the book-to-bill is just one of many tools that we use to do that.
Vijay Kumar
Got you. The related question, I think you sounded pretty confident about fiscal '23 being the bottom for bioprocessing. And again, is that because of the actions Danaher has taken in working with the customers? Is that what gives you the confidence that all the slack in the system has been pulled out?
Rainer Blair
Well, I wouldn't say that all the slack has been pulled out of the system, but we do think that we're making pretty significant progress here. And that's related to many of the measures that I've just mentioned that we control. Certainly, our customers are also keen on bringing their own inventory levels down as the cost of capital has increased. And so, we're very, very closely aligned here with our customers. And we have seen now consistently, if you will, the book-to-bill rate here over the various quarters be consistent.
And frankly, we have also anecdotal stories of customers suddenly requiring volumes there lower on their inventories. And while those are not yet data points that we would use to make any projections, in previous quarters, you didn't have these kind of anecdotes where customers would suddenly require a rush order, if you will. So we see that and we continue to watch it. We like more than a couple of data points. We like data series. And as we then finish up this quarter and get to our January earnings call, we'll talk about what all that means for 2024.
Vijay Kumar
Got you. I think earlier in the year, you guys had spoken about early-stage biotech and then that sort of bled into China and large biopharma customer cautiousness. I think some of your peers have mentioned IRA. When you look at all of those sets of issues, have you seen any change in those different buckets as early-stage biotech, has that normalized, or I guess, stabilizes as perhaps the right word?
Rainer Blair
I think on early-stage biotech, and I just want to level set our definitions because as you know, we have used some different words here. As we think about emerging biotech, that's what we've talked about in the past, that includes anybody, whether it's a biotech or a CDMO that does not yet have a commercial program. If we talk about the more traditional definition, which you just used, Vijay, that represents about 10% to 15% of our business.
And I would tell you that we see that stabilizing. We see that stabilizing. Does it have a little bit to go yet? That remains to be seen. We want to see the fourth quarter. But if you look at venture capital funding statistics in the space, while they may not quite yet be at the 2019 levels, we're starting to see that stabilize and potentially improve here as time goes on, but that remains to be confirmed. And then as you think about large pharma, large pharma is working very hard on bringing their pipelines to market. We see those investments. We continue to see large pharma burning off the inventories that we've discussed. So we're quite confident about that.
And then as you think about the larger picture here, drugs, commercialized drugs continue to grow. So, we see the number of scripts or prescriptions continue to grow. And we see those end markets, even in today's environment, growing right around 10%.
Vijay Kumar
And that, I think that ties in pretty closely with this destocking phenomena and you did give a couple of anecdotal evidence of customers running out of stock and beginning to preorder. But any sense on that how much inventory is still left in the channel or perhaps your backlog levels, right, how does that compare to pre-pandemic levels?
Rainer Blair
Sure. So it's hard to say in aggregate where the exact inventory level is, but we are confident that, that inventory level is burning off, not only with specific customers but in aggregate because we've seen the sell-out. Again, we think it's around 10% being below the sell-in based on our own numbers. And that makes us very confident that 2023 is the bottom. That's how we think about it. Now with that, we also would say that as we go into 2024, our backlog will be higher than it was pre pandemic, so 2019.
Vijay Kumar
So entering 2024, backlog will still be elevated?
Rainer Blair
Versus 2019 pre-pandemic levels.
Vijay Kumar
But shouldn't that be a function just because of revenue basis, higher the business is bigger?
Rainer Blair
Certainly, that would be a part of it, but it also dispels the notion that the fact that book-to-bill ratios were below 1x, that perhaps backlog levels have been drained entirely. And that certainly is not the case.
Vijay Kumar
Got you. The back -- sorry, I think the terms you used, sell-out versus sell-in, just to clarify what that means.
Rainer Blair
Sure, no problem. So as we think about the volumes that pharmaceutical companies are selling in as pharmaceuticals and the number of prescriptions that are out there and the volume that, that represents, that would be the sell-out. And then in terms of what we, as an industry, provision the pharmaceutical industry with in order to be able to produce those volumes, that would be the sell-in.
Vijay Kumar
That delta is almost at 20 percentage points. Scripts volumes are growing 10%, but your sell-in is 10% below?
Rainer Blair
So one is volume and the sell-in would be in dollars, so you have to offset that a bit. But that's the neighborhood that you would be thinking about in terms of burn-down.
Vijay Kumar
That is helpful. And this concept of backlog being higher entering fiscal '24, I think that ties in with some of the questions I've been getting. If book-to-bill is 0.8x, should bioprocessing revenues decline next year? I don't think that's what you're trying to say based on the backlog commentary.
Rainer Blair
What I'm saying is and we, as a company, believe that 2023 is the bottom. I think we're clear about the fact that backlog is robust and has not been depleted through this burn-down of inventory in the market more generally, and that we want to see how the fourth quarter plays out here before we start thinking about the framework for bioprocessing in 2024.
Vijay Kumar
Understood, understood. And the reason we're confident about fiscal '23 being the bottom is because the sell-out versus sell-in dynamics that you're seeing in your book of business?
Rainer Blair
That's correct, and the fact that we have stabilized here in both the first half of the year to the second half of the year.
Vijay Kumar
I think when Danaher did the Cytiva transaction, I think you'd characterized the growth outlook as high singles. Obviously, the CAGRs have been running much higher. Has your views on bioprocessing outlook changed? Is that still like high single should be like double digits once the environment normalizes?
Rainer Blair
Our hypothesis remains unchanged. In fact, if you go back the last four years and you run a four-year CAGR, you're still in the high single digits level. And looking forward, we think the secular growth drivers remain the same. First of all, biologic drugs could be consumed and are not sufficiently accessible by enough patients around the world. And we see not only new drugs coming out of the pipeline with biosimilars improving accessibility.
And it's important to note that our business is volume-driven. And we see each time there's a biosimilar launched, that the total quantity, so the primary inventor and then subsequently, the biosimilar together are larger volumes, so that there's not a total cannibalization there. In fact, accessibility improves, volumes go up, and that benefits patients and that benefits our industry and Danaher specifically.
Vijay Kumar
And when you say the CAGR last four years has been high singles, is that for overall bioprocessing in 2023 versus 2019?
Rainer Blair
Correct.
Vijay Kumar
And if hypothetically, and this is again me hypothesizing, right, if next year, if the Street were to model like flat or up low singles, then we would be below the trend line rate on a versus 2019 CAGR basis, that would be the implication?
Rainer Blair
That would be the implication.
Vijay Kumar
Got you. I guess related to bioprocessing has been -- actually, before we move on to China, I think you mentioned share gains. You're very confident that Danaher has not lost share. What gives Danaher that confidence?
Rainer Blair
Well, we know our supply position by customers, and we understand which positions we won with new capacity being installed during the pandemic and then also our peer suppliers being unable to supply certain products. That happened to nearly every supplier, including ourselves. But we believe that net-net, we are in a stronger supply position post the pandemic and continue to see volumes moving back there. We're on the margin we were unable to supply.
Vijay Kumar
Understood. I know Alzheimer's comes up from time to time. I do think like GLP-1 has been hypothesis as being a tailwind for the group. How does Danaher participate in these categories and should that be meaningful?
Rainer Blair
So we are represented on all of the GLP-1s as well as the Alzheimer's that you would see in the drug development pipeline. GLP-1s, as you know, are produced in different ways. Some are synthetically produced upstream. Others are biologically produced using more traditional cellular production capabilities. And so the intensity of product usage for our industry and Danaher specifically is lower on synthetically-produced product. So you're more in the downstream area in purification as opposed to in the actual synthesis.
And then, of course, with the biologically-produced GLP-1s, the full gamut of product supply. Again, we are fully spec-ed in with all the manufacturers and all the products in drug development. And we expect that to be a tailwind, but it's not the same level of tailwind that you would see, for instance, for a monoclonal antibody. And you just referenced Alzheimer's. We're very excited for patients regarding what is happening in the drug development pipeline as it relates to Alzheimer's.
And we're very happy and proud of the fact that we are a primary supplier to those companies and are very hopeful that over time, these drugs are not only approved but ultimately are prescribed by doctors and, of course, also reimbursed. All of those are requirements to ultimately be able to talk about a tailwind. But we are very well represented there, and we would expect that to be significant if and when that happens.
Vijay Kumar
Fantastic. And so Alzheimer's would be a more traditional straightforward map just based on script volumes?
Rainer Blair
Correct. And in terms of the consumption intensity of what Danaher provides as solutions versus other types of modalities.
Vijay Kumar
In switching gears to China, that's been the other component of this biopharma slowdown. Just high level, what is Danaher's exposure in China? And what is your revenue mix in China between Diagnostics, Life Sciences and bioprocessing?
Rainer Blair
So our exposure to China is in the low double digits, Danaher overall. And if you think about our China business mix, their Life Sciences would be slightly above that. Diagnostics would be really at the fleet average, and the Biotechnology group, so bioprocessing and some of the other businesses there would be below that average.
Vijay Kumar
And when we look at the most recent quarter, I think down mid-40s. Was this across the board in the mid-40s or did you see more on the Biotech side versus Life Sciences and Diagnostics?
Rainer Blair
So that was skewed towards bioprocessing for sure. In Diagnostics, we really saw continued strong performance. Patient volumes are back to pre-pandemic levels for sure, and we would even expect growth in those patient volumes going forward. And as we think of Life Sciences, that was down, and that's primarily related to the termination of the subsidized loan program for research instruments, which sunset at the end of the second quarter of this year. So certainly, there was some buy forward there. And then the general life science funding environment in China has also contracted, and so we would expect that to continue not only here in the fourth quarter but into 2024 as well.
Vijay Kumar
And just when you put all those elements together, is China -- should it get back to growth or should it be flat next year? Or what's the right way to think about China?
Rainer Blair
This is how we're thinking about China. First of all, we believe China continues to be a very attractive growth market. We have to see that in China, the middle class is the largest in the world. And that middle class and those that are not in the middle class are striving to improve the quality of their life. And the Chinese government is very keen to help improve the quality of life in a number of dimensions but particularly as it relates to delivery of health care.
And so the Healthy China 2030 strategy and initiative continues to be a priority for the government. And we expect, in the long term, China to grow above the fleet average for Danaher. Having said that, in the shorter term, we believe China still has to digest a number of these challenges that they're currently perceiving and we believe that to play out certainly throughout 2024.
Vijay Kumar
Understood. And just within that China exposure, like how -- I think you gave some numbers about bioprocessing. You took it down by $500 million to $800 million. How does that number compare to pre-pandemic levels?
Rainer Blair
So just to level set, you're correct, $800 million for the bioprocessing business here in '23 and that compares to about $600 million prior to the pandemic.
Vijay Kumar
And has the mix instrumentation versus consumable, has that changed at all where we are now?
Rainer Blair
It has. As you can imagine, during the pandemic and immediately following it, China was really trying to scale capacities, gain more supply chain security by building more capability in country. And so we were skewed more to equipment sales in China than we might otherwise be in other regions in similar circumstances.
Vijay Kumar
Understood, understood. Maybe switching gears to Diagnostics. Given that we're on China, maybe we'll start with China. You did bring up China BVP. I think it's impacting 20% of your book of business in China but the impact has spread over a few years. Just remind us on what those numbers are. And is there a reason why it can spread from 20% to 40% or 50% of the book of business?
Rainer Blair
Well, I think it's pretty clear in terms of which assays are relevant here from a volume perspective and where the provinces and the central government are looking to improve access to diagnostics. And as you well know, diagnostics is not the only class of health care products that are being targeted here. And as we've talked about, if you do the math, ultimately, you come out to an impact, a headwind of about $50 million a year. And we would say that, that is likely to continue over a three-year period. And we believe that, that's the right way to think about this. It takes three years just to implement these changes and it happens sort of one province at a time. There are many provinces and that's why this takes a period of time.
Vijay Kumar
Understood. And those assays, are they -- is there -- are there some reasons why it's limited to those assays and can be rolled out to other assays?
Rainer Blair
It's just a materiality aspect. So clearly, the Chinese government and the provinces are looking, once again, to improve health care access here. They've benchmarked the cost, if you will, in other countries and are looking to again improve that access, especially for the higher volume tests that apply to a broader set of their population.
Vijay Kumar
Understood. Within Diagnostics, I think Cepheid has been a gem. In the past, I think the 1.2 billion of COVID testing has been perceived as an endemic number. Is that still valid at 1.2 billion being an endemic number?
Rainer Blair
So we are looking at that number again. And as we've said, I think in other places, we think for 2023, the right number is $1.6 billion for respiratory testing. And we are in conversation right now with our customers, epidemiologists and so forth to try and triangulate if what we're seeing here in 2023 is representative of an endemic level or many of you know that COVID is circulating again, if this is another spike or a different kind of spike. So this is quite difficult to forecast, but we will do that and present our framework around that here in January during our earnings call.
Vijay Kumar
Understood. And these are -- just to clarify, these are all tests being used in the hospital setting for symptomatic cases?
Rainer Blair
They're used at the point-of-care when patients present with flu-like symptoms.
Vijay Kumar
What is your current installed base of Cepheid instruments? And what percent -- some of these systems which were installed during the pandemic years, are they being used for non-COVID tests?
Rainer Blair
So, we have more than doubled our installed base to over 50,000 in the U.S. and around the world here since the beginning of the pandemic. And you may know that we have the largest approved menu with well over 22 tests in the U.S. and 30-plus outside of the U.S. So, we have a very strong menu in order to help drive what you're suggesting here, Vijay. And we used COVID testing in the place, and this time period really has an opportunity to strategically place this installed base with customers who would have a use case post the pandemic and would use our instruments and our broader menu going forward.
And that's playing out. We're starting to see that. Now COVID is still with us and many of these instruments, if not the great majority, are still being used, where opportune, to test for COVID. But we're also seeing that other tests are being used here if you think of Strep A as an example or some of the other parts of our very broad menu.
Vijay Kumar
Sorry, are all of these systems being used for non-COVID?
Rainer Blair
I would say the majority of these systems are being used for non-COVID as well.
Vijay Kumar
Fantastic. And I think moving away from Cepheid, when you look at your pathology business Leica, I think some of your peers within that space that are talking about digital pathology and AI and maybe some new product offerings, what is Danaher in those areas? Is there anything which is automated, AI-based solution for pathology?
Rainer Blair
So the anatomical pathology business for us is Leica Biosystems, and that business has been growing gangbusters in the high single digits for quite some time. And we couldn't be more pleased with the performance. And it's based not only on outstanding commercial execution but also on innovation and the placement of digital imaging capabilities.
So to give you some examples, we have significantly increased our digital imaging installed base. It's really the go-to instrument to do that. And as you can imagine, we are developing, together with our customers, the image analysis capabilities, which of course, includes AI capability as well.
At the same time, we've just launched the BOND-PRIME instrument, which is in the fast-growing advanced staining segment. We launched that late last year and that is also gaining swift adoption here. Once again, this advanced staining is an important part of the mix in that business to be able to more accurately and more quickly diagnose cancers.
Vijay Kumar
Fantastic. So no change in comparative environment for Leica?
Rainer Blair
On the contrary, we feel as strong as ever.
Vijay Kumar
And the last two pieces within Diagnostics, when you look at Radiometer and Beckman, I think Radiometer has done high singles. What's the outlook for that business? Should it continue to be high singles?
Rainer Blair
We are confident in Radiometer's capabilities. As you know, they're the market leader in blood gas and also are making real inroads in immunoassays in critical care settings and very confident Radiometer continues on what has been its historical growth rate here as well. And as it relates to Beckman Diagnostics, you know we have been working for years on repositioning Beckman Diagnostics' growth, and we're here to say that we couldn't be more pleased with the progress that we're making.
Certainly, we had a lot of work to do in commercial execution, and we see that just as a data point in North America, which had been traditionally a bit of a soft spot for us at Beckman Diagnostics. We grew high single digits in the third quarter, just underwriting the improvement in execution that we see there. But also from an innovation standpoint, the team has done wonders.
We are starting to close the menu gaps, BNP, a cardiac marker that we have now gained direct control of, as well as we think of blood virus, which we will then be able to offer in concert with the launch of the DxI 9000, which is the next-generation high-throughput, high-resolution immunoassay analyzer that is exceeding our expectations, that already has the CE Mark in Europe, and we're seeing a very strong demand for them.
And keep in mind, this is the next generation of immunoassay analyzer. And we are starting to engage and develop in interesting assays that would be relevant for Alzheimer's diagnosis, for instance, from a blood draw. And many of you know that today, diagnosing Alzheimer's is done via spinal fluid taps, which is somewhat risky and difficult, or MRIs and CT scans where you often diagnose the disease when it is well progressed.
So, we're quite excited. If you think about the future where Alzheimer's might be druggable, we have a unique platform that allows us to potentially and this is in the future, these are not marketed assays yet, to diagnose Alzheimer's. Exciting stuff.
Vijay Kumar
Is that a fiscal '24 kind of...
Rainer Blair
No, I think that's going to take some time to work its way through approvals, but it gives you a sense of where the direction is and the newfound innovation drive and momentum that we see at Beckman Diagnostics.
Vijay Kumar
Understood. And then genomics has been, I think those end markets again, they've been challenged. Instruments were down, not a surprise, just given the macro. But I think your genomics, you do have IDT, you do have...
Rainer Blair
Aldevron.
Vijay Kumar
Aldevron. Can you just parse out between those two groups on what they've done in the recent past few quarters?
Rainer Blair
I mean, if we look at them as a group here, you're looking at mid-single-digit growth as they digest what were COVID-related volumes and comps on the one hand. And on the other hand, specifically at IDT, we see them in gene reading. So an NGS analysis that, that's an area that is slower than it has been in the past as many of those segments work through their difficulties. But having said that, if you look at the group in aggregate, we're very pleased with their performance, and we really view that as a double-digit growth capability that we have in an incredibly exciting market segment of genomic medicines.
Vijay Kumar
And I think on IDT, there's been some market chatter perhaps, IDT has lost some share. I'm curious on how you think about competitive positioning within that part?
Rainer Blair
So, we don't believe that IDT is losing share in aggregate. I know there's some larger numbers out there by some competitors that are operating at a different scale and I think that needs to be taken into account. But if you look at IDT and its core business, which is the gene reading business, the core oligo business, and then very interestingly now, the gene editing business, we continue to expand the portfolio, make inroads and are quite confident here that we're looking at double-digit growth plus going forward here, not just for the group, but for IDT in the long term, sort of that long-term range plan.
Vijay Kumar
Understood. Sorry, the double-digit growth, was it a long-range comment or was that a fiscal '24 comment?
Rainer Blair
I mean, we'll see about fiscal '24 in January. We'll take a look at that. We want to see the last bits of data coming in here. But as you think about the LRP, as you refer to it, Vijay, we really see that as a double-digit growth end market.
Vijay Kumar
And should Aldevron grow above IDT?
Rainer Blair
We see the possibility of that. There are very strong growers here. Aldevron participates also. And could it vacillate between double digits and something higher, plus or minus possibly. But if we think about their growth in aggregate, I think the double digit is the best way to think about it.
Vijay Kumar
And that's an end market where Aldevron plays and where early-stage biotech funding clearly has had an impact. But yet, Aldevron, I think it still continues to grow. Where is the demand coming from for Aldevron?
Rainer Blair
Well, one thing that's important to note with Aldevron is that surely, many small biotechs are using their solutions, whether it's plasmids or linear mRNA or other things of that nature. But those are -- while those are many customers, those are not very large volumes. At the same time, Aldevron is really the standard for clinical programs, where volumes start to be larger than in preclinical research. And then ultimately, as you get to GMP manufacturing, in Phase 2, 3 and then ultimately commercialize drugs, that's where the real volume comes together. And that's why you see Aldevron continuing to lead. They are on those commercialized programs throughout the world.
Vijay Kumar
And when you think about the portfolio and additions within that space, I think in the Abcam recent announcement, it was an interesting deal for a variety of reasons. But just walk us through the thought process and what attracted you to this asset? And what can Danaher do with it?
Rainer Blair
Well, we like Abcam for many reasons. First of all, they're the leader in the antibody research market. We think that's an incredibly important market as we think of the possibilities of proteomics in the future. You're aware that as we try to understand pathobiology, so disease biology, we have to understand more than the genomic sequences and their implications. We have to see what's actually going on in the engine of biology, the protein.
And I view Abcam similar to IDT, a bit as the Swiss knife, if you will, of protein analysis. And they are truly the leader in not only quality but support of their customers and have the leading brand. So we couldn't be more pleased with the fact that we'll ultimately close on this acquisition. The end market is attractive. The team is fantastic. The portfolio is high fidelity and pointed at the right end markets.
Vijay Kumar
And how is the macro impacted that the markets where Abcam plays in?
Rainer Blair
Well, we don't own Abcam yet so we don't have total insight as to that yet. But we have to anticipate that all these markets, to some extent, have an impact. But having said that, protein analysis and proteomics is currently an end market which is perceiving above-average interest here, and so, we would expect that to be a positive growth journey for us for some time.
Vijay Kumar
Should this be Abcam deal fit Danaher's in a typical deal model? I think, and in the past, we've looked at high-singles ROI. On the three- to five-year, certain assets have certainly been beyond the time horizon. But what's the time frame to evaluate it?
Rainer Blair
Well, I mean, we do look at the five-year horizon and don't necessarily compromise on our perspectives there. If you look at Abcam, we see the potential of this asset to be very, very strong. Our ability to help Abcam and the leadership there is asking for that help. We feel the pull already but it's just a little bit too early to offer it. And so we're quite keen to see how we can get together here and deliver and exceed our own expectations, including the ones we've talked about publicly.
Vijay Kumar
Post Abcam that was a visibly-sized deal close to $10 billion-ish. Does that limit Danaher in terms of looking at further assets in the space? How are you thinking about M&A?
Rainer Blair
So I'm sorry, I didn't hear you on which asset.
Vijay Kumar
Post Abcam, yes.
Rainer Blair
Post Abcam, yes. So look, we -- our balance sheet is in great shape. And post Abcam, we'll be -- continue to be in a very strong position to deploy capital. Our M&A funnels are active and we're very happy with our positioning here. Has to be said that the interest rate environment raises the bar in terms of the kind of returns that we want to deliver here for our shareholders, and that will have to come out of the deal model. You know how we work, end market asset and ultimately the deal model and all those will have to flash green.
Vijay Kumar
How is the M&A funnel looking for Danaher? I think historically, these kinds of environment, Danaher certainly tends to be active.
Rainer Blair
We feel very good about our positioning, the activity levels of our deal models. There's a great deal of interest from our part, as always is the case, and we see that there's plenty of people that are interested in speaking with us. Once again, we have a very fine filter before we engage. And like I said, all three aspects of our deal model, whether that is end market, company or ultimately the return, they have to be flashing green before we move.
Vijay Kumar
Understood. On margins, I think Matt made some comments on the call about cost takeouts this year, which should help next year. But it looks like the net number could be something smaller. Should we expect Danaher to expand operating margins in fiscal '24?
Rainer Blair
Well, the way to think about what we've talked about here is we've taken about $350 million of onetime costs in 2023. And much of that was productivity investments where we're taking out costs, certainly. But as we think about 2024, we can't take that gross number and simply apply it to 2024. There's going to be offsets that we need to think about. Clearly, there are some inflationary aspects. There are growth investments that we will want to protect. But nonetheless, as we bring all this together, we need to think about FX. As we bring all this together, we'll put the model in front of you during our January earnings call for 2024.
Vijay Kumar
But it should be a good guy in general, the cost takeouts?
Rainer Blair
Well, we are doing these productivity investments to have a benefit, and the degree of which we'll see that benefit, we'll talk about in January.
Vijay Kumar
And Rainer, when you think about operating leverage, is there a typical volume level about which Danaher delivers on those operating leverage on volume-related leverage? And what is it -- does it have to be 3%, 5%?
Rainer Blair
I mean, I think our model and the one to focus on is we like to talk about our LRP, which is the high single-digit growth rates. And that's where we expect to see a fall-through of 35% to 40%, and that's re-rated from the 30% to 35% that we had prior to the pandemic. We said we wanted to be stronger exiting the pandemic than we entered, and we believe this manifests itself in a re-rated growth rate, high single digits also a higher fall-through, the range moving up 500 basis points.
You all know that for 30 years-plus, our cash conversion so our free cash flow has been over 100%. And then, we'll deploy that capital with a bias towards M&A. And that's what drives then the double-digit earnings. And so, we have to get into that level of growth in order to sort of deliver that kind of earnings model.
Vijay Kumar
Should pricing be positive for fiscal '24?
Rainer Blair
We expect pricing to be positive next year. We also expect it to moderate from the 200 to 300 basis points that we have had this year but certainly over the 75 to 100 basis points historical level that we've had in the past.
Vijay Kumar
Understood. And FX at current rates, is that neutral? Is that a headwind?
Rainer Blair
This is constantly changing as I'm certain you're noting, but I would -- today, if we think about it today, we view it as a moderate headwind.
Vijay Kumar
Moderate headwind. And on free cash flow, I think that you're, just given all the moving parts, it's a little, I think, below your longer-term trends. Should next year, should we be looking back at 100% conversion levels?
Rainer Blair
Well, we're quite jazzed by our cash generation. And certainly, as we think about Danaher and cash generation versus others in the industry, we feel that we're differentiated in that regard. We have, as you suggest, had higher-than-average capital expenditures here as we continue to expand capacities and invest for the future. And while that will be behind us for a large part here in '22 and '23, we'll still have a tail of some of those investments in 2024 as well.
Vijay Kumar
Fantastic. Maybe in the last few seconds, quick seconds here, your peers have sort of looked at first half as being cautious back half. Perhaps a more normalized environment on easy comps, is that like a rough framework to use for Danaher?
Rainer Blair
That we tend to be pretty skeptical about triangulating on the basis of comps, and we try to look really for demand signals that are real. And that's why we're also wanting to see what happens in the fourth quarter for next year. So what we would tell you is that typically, in our businesses, in the six- to nine-month framework, you should start seeing whether, in fact, you are going to have a second half inflection point.
So we would have to see that in the first quarter next year to be talking about it. That's really not yet a topic and wouldn't yet be relevant in terms of the deal cycle timing that we typically have. So we'll see more as we speak in the first quarter.
Vijay Kumar
Fantastic. With that, we're out of time, Rainer. Thanks for your time this afternoon.
Rainer Blair
Vijay, thank you, and thanks to all of you. Thank you.
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Danaher Corporation (DHR) Presents at 6th Annual Evercore ISI HealthCONx Conference (Transcript)