Danaher Corp

NYSE:DHR

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Crystaal and I'll be your conference operator this morning. At this time, I would like to welcome everyone to Danaher Corporation's Second Quarter 2021 Earnings Results Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

[Matthew Gugino, Vice President, Investor Relations and FP&A]

Thanks, Crystaal. Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer, and Matt McGrew, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly Earnings.

The audio portion of this call will be archived on the Investors section of our website later today under the heading Events & Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until August 5, 2021.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics refer to results from continuing operations and relate to the second quarter of 2021, and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices, which have applications submitted and pending for certain regulatory approvals or are available only in certain markets.

During the call, we will be making forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law.

As a result of the size of the Cytiva acquisition and its impact on Danaher's overall core revenue growth profile, we're presenting core revenue on a basis that includes Cytiva sales. References to core revenue growth includes Cytiva sales in the calculation of period-to-period sales growth.

With that, I'd like to turn the call over to Rainer.

[Rainer Blair, President and Chief Executive Officer]

Well, thanks, Matt. And good morning, everyone. We appreciate you joining us on the call today. We're very pleased with our strong start to the year with another terrific results in the second quarter.

We saw broad-based strength across the portfolio, which helped us deliver over 30% core revenue growth, more than 70% adjusted earnings per share growth and outstanding free cash flow generation. This well rounded performance is a testament to the positioning of our portfolio and our exceptional team who are committed to leading and executing with the Danaher Business Systems every day.

During the second quarter, we continued to strengthen our competitive advantage through significant high impact organic growth investments and enhanced our portfolio with strategic growth accelerating acquisitions.

We prioritized innovation across Danaher and increased our production capabilities, all of which we believe contributed to the market share gains in several of our businesses.

We also announced our pending acquisition about Aldevron, which will expand our presence into the fast growing and important frontier of genomic medicine.

Putting it all together, we believe the combination of our leading portfolio and DBS driven execution differentiates Danaher today and provides a strong foundation for sustainable long-term outperformance.

So, with that, let's turn to our second quarter results. Our sales were $7.2 billion and we delivered core revenue growth of 31.5%, with strong contributions from all three of our reporting segments.

Geographically, high growth markets grew nearly 35% and developed markets were up more than 25%. Revenue in each of our three largest markets, North America, Western Europe, and China, was up 30% or more in the quarter.

Our gross profit margin increased by 710 basis points to 60.9%, primarily due to higher sales volumes, the favorable impact of higher margin product mix and the impact of prior-year purchase accounting adjustments related to the Cytiva acquisition that did not repeat in 2021.

Our operating profit margin increased to 27.8%, including 775 basis points of core operating margin expansion, primarily as a result of higher gross margin and continued lower operating expense as travel and other related costs remained below pre-pandemic levels.

Adjusted diluted net earnings per common share of $2.46 were up to 71% compared to 2020. We generated $1.8 billion of free cash flow in the quarter, up over 40% year-over-year.

In June, we announced our intention to acquire Aldevron, a producer of high quality plasmid DNA, mRNA and protein, serving academic, biotechnology and pharmaceutical customers. The addition of Aldevron will expand our capabilities into the important field of genomic medicine, where we're seeing the accelerated adoption of gene and cell therapies, DNA and RNA vaccines and gene editing technology.

We anticipate Aldevron will be accretive to Danaher on multiple levels as we expect the business to generate $500 million of revenue in 2022, with more than 20% annual revenue growth and a strong margin profile. We look forward to welcoming this incredibly talented and innovative team to Danaher once the transaction closes.

In addition to announcing Aldevron acquisition, we also accelerated several organic growth investments across the portfolio. One of our core values at Danaher is innovation defines our future. And we have made a significant commitment toward our research and development efforts, increasing our research and development spend by more than 30% year-over-year to bring more impactful solutions to our customers.

At SCIEX, we launched the ZenoTOF 7600, a high resolution accurate mass spectrometry system that enables scientists to identify, characterize and quantify molecules at previously undetectable level, helping to advance the development of new biotherapeutics and precision diagnostics.

At Beckman Coulter Diagnostics, we recently introduced the DxA 5000 Fit, a compact automation solution designed for small and mid-sized laboratories that reduces up to 80% of the manual steps typically required for sample preparation.

These are just a few great examples of how we're continuing to invest for growth across Danaher to support our customers and enhancing our competitive advantage through innovation.

Additionally, we're making substantial investments to expand capacity across our bioprocessing businesses and Cepheid. Near term, these investments are supporting existing customer demand, driven by both the market and meaningful share gains. But they're equally important to support the long-term growth of these businesses where we see tremendous runway ahead, given the underlying structural growth drivers in the market they serve.

We expect our total capital expenditures across Danaher to be approximately $1.5 billion in 2021 as we continue to invest in support of our customers' needs today and well into the future. We believe the strategic combination of these organic and inorganic investments across our portfolio will reinforce our competitive advantage and accelerate our growth trajectory going forward.

Now, let's go into more detail on our quarterly results across the segments. Life Sciences reported revenue increased 41.5%, with core revenue up 35%. This growth was broad based, with most of our major businesses in the platform delivering 30% or better core growth. We continue to see strong demand for our bioprocessing solutions with combined core revenue growth of more than 40% with Cytiva and Pall Biotech.

Our non-COVID related bioprocessing business was up low double digit, where we saw robust customer activity and order rates. COVID-related vaccine and therapeutic revenues were consistent with the first quarter and exceeded $1 billion over the first six months of the year.

So, I'd be remiss if I didn't take a moment to reflect on Cytiva's fantastic first year as part of Danaher. We've established a new company with a new brand name, added more than 1,500 associates and made substantial progress in the transition to Danaher, all while maintaining world class support of our customers, significantly ramping production capacity and growing revenue by more than 50%.

When we announced the acquisition, we talked about the strategic and value creation opportunities we saw, and we're excited to welcome such a talented and engaged team to Danaher. I think it's fair to say they've exceeded our expectations in every way. And that's really a testament to the Cytiva team who've embraced Danaher and the Danaher Business System and continued to execute exceptionally in support of our customers.

Moving to Diagnostics, reported revenue was up 40.5% and core revenue grew 37%, led by more than 50% core growth at Cepheid. Beckman Diagnostics and Leica Biosystems each grew more than 30% as patient volume and clinical diagnostic activity approached pre-pandemic levels around the world.

At Cepheid, growth outside of respiratory testing was led by our sexual health and hospital acquired infection assays, particularly among newly acquired Cepheid customers. In respiratory testing, we believe we continued to gain market share as expanded manufacturing capacity enabled the team to produce and ship approximately 14 million cartridges in the quarter.

As expected, COVID-only tests accounted for approximately 80% of these shipments, while our four-in-one combination test for COVID-19 Flu A, Flu B and RSV represented approximately 20%. This broad-based performance across Cepheid was driven by the team's thoughtful installed base expansion over the last 15 months and is evidence of the significant value Cepheid provides to clinicians with unique combination of fast, accurate lab quality results, and the best-in-class, easy-to-use workflow at the point of care.

Moving to our Environmental & Applied Solutions segment, reported revenue grew 15.5% and core revenue was up 13%. Revenue growth accelerated across both platforms with water quality up high single-digit and product identification up approximately 20% in the quarter.

In our water quality businesses, demand for our analytical chemistries and consumables was driven by improving activity across municipal, chemical, food and beverage end markets. Equipment order rates accelerated as customers got back up and running and began to invest in larger projects.

In product identification, Videojet was up mid-teens and our packaging and color management businesses were up more than 25% in the quarter. This acceleration reflected a broad-based recovery with growth across most major geographies and end markets.

So, with that as a backdrop for what we saw this quarter, let's spend some time going through trends geographically and across our end markets. Looking at conditions around the world, most major regions and countries have broadly returned to or are approaching normal operations. This is reflected in the strong results we've seen across the US, Europe and China.

That said, we're mindful of the emerging COVID-19 variants driving further outbreaks, and have taken action to help minimize the potential impact on our respective businesses. And at this point, we've seen no material impact from recent variants or selective lockdowns.

We saw positive momentum across our businesses with order growth trending above revenue growth. Most of our end markets have largely recovered, with growth rates at or above pre-pandemic levels as customers have adapted to the new environment.

In-person commercial activity continues to rebound, and we're seeing our teams spend more time on site with their customers, a trend we expect to continue as we move through the year.

Across Life Sciences, we're seeing healthy demand in most of our end markets, led by biopharma where the pace of customer activity remains elevated. Biotech funding levels are robust and the number of lifesaving biologic and genomic-based therapies in development and production continues to rise, and it's further augmented by the work around COVID-19 vaccines and therapeutics.

Today, there are over 1,500 monoclonal antibody-based therapies in development globally, which is more than 50% increase from just five years ago. We also see over 1,000 gene therapy candidates in development today, a tenfold increase over the last several years as these technologies mature and therapies gain regulatory approval. Given that many of these candidates are still in early stage research, we expect the growth rate of this market to remain strong for many years to come.

In addition to the growth in biologics and genomic-based medicines, there is significant demand related to COVID-19 vaccines and therapeutics, both on the market and in development today. Given the interest we're seeing from customers looking to address emerging variants and increased global supply, as well as evolving vaccination guidelines globally, we expect to see durable growth in this segment of the biopharma market for the foreseeable future.

At the current pace of vaccination, it's clear that vaccine demand will continue well into next year. We expect to recognize $2 billion in COVID-related vaccine and therapeutic revenue in 2021 and anticipate entering 2022 with approximately $1.5 billion in COVID-related backlog. These assumptions do not include the potential contribution from booster shots or an expansion of availability to populations under 12 year old due to the level of uncertainty around each of these scenarios.

Given the growing numbers of drugs being developed and the increasing scientific sophistication required to discover and manufacture these complex therapies, customers are looking to partner with vendors who can reliably supply them with solutions for their most challenging problems as they move from the lab to production scale.

Our comprehensive bioprocessing portfolio and scientific expertise positions us well to do just that. And we're confident our proactive investments in innovation and capacity will help us meet this growing customer demand now and far into the future.

In the clinical diagnostics market, patient volumes are at or near pre-pandemic levels in most major regions as patients are returning for wellness check, routine screening and other elective procedures.

In molecular diagnostics, while PCR respiratory testing volumes in the US have declined, we're seeing persistent demand for Cepheid testing at the point of care. Outside of the US, which makes up approximately half of Cepheid's revenue, we continue to see strong demand for our testing as vaccination rates lag and emerging variants drive outbreaks.

Now, as I mentioned earlier, we shipped approximately 14 million respiratory tests during the second quarter, up from 10 million shipped in the first quarter, and we now expect to ship approximately 50 million tests in 2021.

Looking ahead, with the assumption that COVID-19 will be an endemic disease, we believe that the point of care molecular respiratory testing market will expand significantly from where it was prior to the pandemic. And given Cepheid's leading positioning around speed, accuracy, and the ease of use workflow advantages, we believe we'll continue to gain market share.

The combination of these market share gains, the expansion of Cepheid's leading global installed base and the broadest molecular diagnostic test menu on the market creates significant opportunities ahead for broader utilization and demand for Cepheid point-of-care molecular testing solution.

Moving to the applied markets, we're seeing a continuation of the steady improvement over the first half of the year. Customer activity is accelerating in line with broader economic activity, which we see in healthy order rates for consumables and increasing investment in equipment.

Across municipal markets globally, consumable demand remains solid as customers continue to test and treat water and instrument-oriented project activity is accelerating with the improving funding environment.

Now, let's look ahead to our expectations for the third quarter and the full year. We expect to deliver third quarter core revenue growth in the mid to high-teens range. We anticipate high single-digit core revenue growth in our base business and a high single-digit core growth contribution from COVID related revenue tailwind. Additionally, we expect to generate operating profit fall-through of approximately 40% in the third quarter and for the remainder of 2021.

For the full-year 2021, we now expect to deliver approximately 20% core revenue growth. We anticipate that COVID-related revenue tailwind will be an approximately 10% contribution to the core revenue growth rate. And in our base business, we now expect that core revenue will be up 10% for the full year, an increase from our prior expectation of high single-digits.

So, to wrap up, we've had a great start to the year and we've seen meaningful opportunities across Danaher to build upon this outstanding performance. Our second quarter results reiterate the power of our portfolio and our exceptional team, a unique combination that differentiates Danaher today and provides a strong foundation for sustainable long-term outperformance.

With that, back to you, Matt.

[Matthew Gugino, Vice President, Investor Relations and FP&A]

Thanks, Rainer. That concludes our formal comments. Crystaal, we're now ready for questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of Tycho Peterson with J.P. Morgan.

[Tycho Peterson, J.P. Morgan]

Congrats on the quarter. Rainer, I think one of the debates around the stock is still around the testing outlook, in particular around 2022 for Cepheid. I know you came out in the first quarter and talked about the fact you thought trends would be sustainable heading into next year. Can you maybe just talk a little bit about what you're seeing in the field, how you're thinking about variants in the near term and what gives you confidence in the outlook for 2022? Obviously, you're more hospital with PCR, not antigen. So, we get all those dynamics. But I think there's still some debate as to whether testing could drop off more significantly next year.

[Rainer Blair, President and Chief Executive Officer]

As we think about the remainder of 2021 and how that sets us up for 2022, just a couple of things to sort of set the baseline here. First of all, we now expect to ship 15 million tests in 2021 for COVID, either COVID only or four-in-one. And we've taken that up from the 45 million test guide before. And the confidence that we gain here is really through what we've seen. As we've ramped up our capacity here and shipped 14 million cartridges in Q2, you'll recall we originally expected to ship 11 million in Q2. 50% of that outside of the US, 50% of that inside the US. That really has given us the confidence that there's still plenty of demand for our solution at the point of care.

And here's why? We're really not perceiving a slowdown currently in our testing demand, and we're shipping everything that we're producing. So, while it's true that we see core lab tests trending downwards, we continue to see strength in the demand for our testing solution.

The other thing that we are considering here is we're a bit concerned about some of the RSV breakouts that we're seeing in the US, but also elsewhere in the world, which makes us think that we'll start seeing testing skew more towards the four-in-one solution which, of course, tests for RSV in addition of Flu A, B And COVID-19.

So, as we think about where we sit today, we feel comfortable that we'll see 50 million tests this year, and we don't have anything that would indicate that our previous guide for 45 million tests in 2022 would be materially different. We continue to see plenty of opportunity. Keep in mind, we've increased our installed base by 40% since the beginning of the pandemic, and of course, have the largest testing menu with 30 plus tests outside the US and 20 plus tests in the US. So, we feel we feel strongly that that demand should be available to us once again because of that unique value proposition at the point of care.

[Tycho Peterson, J.P. Morgan]

A follow-up on Aldevron. I think you mentioned when we spoke on the deal that you've been looking at this asset for about five years. Can you just talk a little bit about how you're thinking about synergies? I know there's capacity expansion that's coming online next year. So, if you could talk to that. And then, I think to get to half a point of growth, the implied growth rate is closer to 35%. Definitely greater than 20%. But I'm just curious how you're thinking about growth outlook and synergies with Pall and Cytiva, in particular.

[Rainer Blair, President and Chief Executive Officer]

As we look at Aldevron, we really see it as our entry into the genomic medicine market, and are seeing it really as a standalone in that regard, specifically with plasmid DNA, protein and mRNA, and are really not looking initially here at synergies related to Cytiva or Pall. There's plenty of opportunity inside that scope to invest, expand capacity in the existing product lineup, as well as to globalize that. The great majority of Aldevron's revenues are actually in the US. So, we see great opportunities to globalize that.

And from a growth perspective, like we said, this is in 2022 going to be $0.5 billion business growing at 20%, adding about 50 basis points to Danaher's overall growth profile, as well as adding $0.20 of EPS in year one and $0.30 EPS in year two.

[Matt McGrew]

Tycho, they have a little bit better growth historically than kind of that 20%. But I think, again, just sort of from our perspective, to be prudent from a planning perspective, that's sort of what we've laid out. I think we've had a lot of success with that type of setting up, if you will, for acquisitions in the past. That's sort of why we've kind of come to there versus where they have been a little bit more historically higher.

[Tycho Peterson, J.P. Morgan]

Matt, can you just comment on the bioprocessing order book? I think you said bioprocessing up 40%. I assume that was revenues. What was the order book up?

[Matt McGrew]

It was north of 60%.

[Operator]

Your next question comes from the line of Derik De Bruin with Bank of America.

[Michael Ryskin, Bank of America Merrill Lynch]

Hey, this is Mike Ryskin on for Derik. A couple quick ones. Just to clarify, on the COVID contribution for the fiscal year, it sounds like you're saying 10%, which is roughly unchanged from prior, but you're seeing a lot more cartridges coming out. The four-in-one solution should have some better pricing if you're going with that versus the COVID-only. And the COVID vax is doing better and the order book is strong. So, are there some other moving pieces there? Or is this just some uncertainty back half of the year? Just want to reconcile that.

[Matt McGrew]

I think the way to think about the COVID tailwind is we sort of took up the number for the full year, Mike. And I think what I would kind of think about that is that most of that is the $200 million better cartridge performance that we saw here in Q2 sort of rolling through for the full year. So, if you think about the COVID contributions, I think we're up $200 million versus where we thought we would be. All of that is just going to be sort of rolling that Q2 beat through to the full year for the COVID. side.

As far as the four-in-one goes, as we think about the contribution kind of going forward, we still think Q3 is probably going to be pretty close to what we saw here in Q2, which was – 80% of that was COVID only, 20% was the four-in-one.

Given what Rainer said and what we saw last year as well, but what Rainer said around the RSV sort of outbreak here that we're seeing in the south, we think we might have a little bit of a different or more of a respiratory season than we did last year. So, sort of as we move forward, we're sort of thinking, Q4, that split moves more to kind of a 50/50, 60/40. We'll see where it comes out, but something more like that in the fourth quarter.

[Michael Ryskin, Bank of America Merrill Lynch]

Could you comment a little bit on instrument trends in some of the analytical markets? I didn't get a clean SCIEX number. Can you just talk a little bit about what you're seeing in LCMS markets as far as base business recovery?

[Rainer Blair, President and Chief Executive Officer]

If we start with the topic of customer activity in these analytical markets, they're really at or very near pre-pandemic levels with the underlying recovery well underway. And we're seeing the customers adapting readily to new work environments that we're in there where it's still necessary or are fully back to normal where the infection rates are really low. So, that manifests itself in better order rates, our funnels are stronger, we see higher instrument and service sales. Keep in mind, SCIEX over 30% core growth here in Q2, just as a marker. But really, all of our major life science operating companies were at or over 30% core growth for the quarter. So, we're seeing some very nice momentum there.

And if you look at the two-year growth stack there, we're really at or very near to pre-pandemic growth rate. While this is driven by more customer activity, but we also have to say, in our instrument areas is a place where we have been accelerating R&D investment and we've seen great traction for some of our new product introductions. I mentioned the SCIEX ZenoTOF, but we've also introduced the 7500. And at Beckman Life Sciences, we introduced the CytoFLEX cell sorter. So, those are all things that contribute to what we think is outperformance here in the instrumentation market.

[Matt McGrew]

Mike, just to give you a sense, outside of life sciences, just overall, equipment was up north of 20% and consumables were north of 30%. So, just to give you a sense of – that's not all that different from what we saw elsewhere as well.

[Michael Ryskin, Bank of America Merrill Lynch]

One last quick one if I can squeeze it in. I think you called out CapEx of $1.5 billion for the year. That's a pretty nice step up even with Cytiva in the numbers. Just wondering how much of that is specific to more cartridges for Cepheid, for COVID or more on the bioprocessing side? And is this a fair jumping off point for 2022 and beyond?

[Rainer Blair, President and Chief Executive Officer]

I think, Mike, normally even inclusive of Cepheid or Cytiva, we'd probably be more like $850 million in CapEx. So, I think you can kind of size the delta on that $1.5 billion with that. I would say that the preponderance of the increase that you're seeing there is going to be at Cepheid and Cytiva as at Pall on the bioprocessing side. So, those would be the three big ones that will be sort of driving that increase.

I suspect – you'll see that, obviously, this year. I suspect we might be at something in between those two numbers. Maybe we're at the higher end of that number, the $850 million and the $1.5 billion as we head into next year. But I think, over time, that probably does start to come down a touch. As we've talked about, we've been pulling forward a lot of the capacity increases that we were already planning for all of those businesses, just given the demand now, plus the longer-term secular growth drivers.

This is sort of more of a pull forward is the way I think about it, and I think you'll have a little bit of a bolus [ph] here for a couple years and then probably come back down to a lower landing level.

[Operator]

Your next question comes from the line of Vijay Kumar with Evercore ISI.

[Vijay Kumar, Evercore ISI]

Congratulations on a solid print this morning. Maybe one on vaccines and bioprocessing, Rainer. The commentary around backlog, exit backlogs stepping up for the year in light of 2Q, it feels like maybe the order conversion, maybe that's stepping down in back half. And is that the right way? This is just more of a timing thing that we're thinking about on the vaccine side when you think about the revenue cadence? And then, ex vaccines, when you think about pace, bioprocessing, we just had a major Alzheimer's drug approval. I'm curious what it does to either industry growth or perhaps at your business.

[Rainer Blair, President and Chief Executive Officer]

Let's start with bioprocess and how to think about that. So, just to level-set, we expect to do for vaccines and therapeutics this year $2 billion in revenue, and that second half is going to be consistent with what you saw in the first half. And so, the activity level remains elevated. And any decel that you're thinking about is purely related to comps. And now more broadly speaking, speaking really for total Danaher, the Q2, Q3 prior year step up is over 1,000 basis points. Right? So, if you keep that in mind, I think that characterizes the activity level appropriately. We continue to see strength in vaccine and therapeutic. Orders, Matt has talked about it with Tycho, 40% plus on the revenue side in Q2, 60% plus on the order side. So, the activity level remains very high. And we expect that this will continue, which is why we're confident in talking about $1.5 billion of backlog for 2022, which sitting here on July 20 looking forward is a good place for us to be. And it gives us, as you think about 2022, a number of quarters to continue to strengthen that. So, there's a great deal going on in the vaccine and therapeutic space. Keep in mind, the rollout that we've seen has been primarily a developed market story. We're starting now to see some of the emerging market vaccine manufacturers kicking in and ramping up. There's three in China to say an example. Another one in Russia, of course, and several more. And they're just starting to kick in. So, we expect that all to provide really some sustained strength for some period of time.

[Matt McGrew]

Vijay, maybe just a 100,000 foot view, just to kind of think about – in each of the last five quarters in biotech, the bookings have been higher than revenue. And that was also true in Q2, just to kind of – there's all kinds of numbers and comps and everything else, just take a step back and just kind of keep that in mind as we head into the second half here.

[Rainer Blair, President and Chief Executive Officer]

Now coming back to your Alzheimer drug question with Aduhelm, first of all, we can't comment specifically on any particular drug. But we're absolutely delighted to see that science and the pharmaceutical industry is making progress on this disease. Alzheimer's, as you know, afflicts so many around the world and there's a real need for a solution. At this point, it's early days. As you know, there's quite a bit of discussion around the efficacy of the drug, the size of the target population, reimbursement, and a number of other questions.

But I might say that this is one drug. There are several others that are in late stage qualification and approval processes. And so, we do see here this indication of Alzheimer's disease becoming more and more relevant for monoclonal antibodies.

Awfully early to say what impact it has, but we can say that with the breadth of our portfolio, the capability of our team and the penetration that we have in the market, it's fair to say that we're represented on all of those projects and are confident that we can supply those, should there be an elevated need.

[Vijay Kumar, Evercore ISI]

Matt, one quick one for you. Appreciate you're trying to simplify the numbers. A lot of numbers flying around. With orders above revenue for five quarters, I think that's straightforward. Assuming mix is – ignoring the mix impact for 2022, any comments on margins or incremental margin for fiscal 2022 as expenses come back?

[Matt McGrew]

Vijay, I'd love to have the crystal ball for 2022 for you, but I'm just still hoping to get some insight into the second half, frankly. Like you said, besides the mix, we are starting to – as we got into the quarter and we had pretty good fall through here in the quarter again, but we are starting to see activity resume a little bit, especially late in the quarter. A little bit more travel activity, a little bit more kind of people doing in-person things. And so, I think, in my mind, there's two things. It's when do the costs come back because I do believe we will have some costs come back, and how fast that happens. So, it's just really kind of balancing those two. And I think there's still enough uncertainty out there that it's difficult to pin that down. I'm hoping that as we get into the fall here that we get a bit more color on that, and hopefully be able to provide a little bit more when we talk about 2022 later in the year. But unfortunately, I think it's a little early for us to think about it. But that's where we are today.

[Operator]

Your next question comes from the line of Scott Davis with Melius Research.

[Scott Davis, Melius Research]

I was really surprised. I thought you might mention labor and logistics costs and some challenges there, particularly in E&AS. Is there a meaningful impact on margins, more broad based in E&AS, if so? I'd just leave it there.

[Matt McGrew]

It's a fair point. We have definitely seen it. I think, again, similar to the travel sort of as we've moved through the quarter, I think we are definitely seeing inflationary pressures here and supply chain pressures. I would say that, right now, for us, it is modest. And we're able to manage through it, some of that with better price on our side and some of it just being able to on the daily work, if you will, from a DBS perspective, but we are definitely seeing that. We are seeing it in resins, in plastics, in metals. Again, not a huge part for us, but we do see it where that happens. I think the two biggest pieces for us, Scott, our freight is definitely an issue. Fewer cargo flights obviously means it's a little bit more expensive to move things by air. And then, I think as everybody has read and saw, electronics, particularly the supply chain around the chips globally, has been a challenge for us as well.

So, again, haven't seen material impact. I do believe that as we move forward into the second half that that probably does not abate, if anything might step up a little bit and clearly a challenge here for us. But so far, we've been able to work through it with some hard work and a little bit of price and some PPV.

[Scott Davis, Melius Research]

Just to follow-up on that, Matt. Does times like this really make looking at things like on-time delivery kind of wonky and hard to even think? Can you still use that metric with any real sense of confidence since orders are so high?

[Rainer Blair, President and Chief Executive Officer]

We don't compromise on that. The core value, customers talk, we listen. And our focus on quality, delivery, and cost remains our Northstar. And we drive our processes. And with that, anybody who's associated with that, starting with what we can control internally, but also our supply partners who have been stepping up to the plate supporting us here and making the necessary investments. But we're not going to compromise on on-time delivery and meeting or exceeding our customer's expectation.

[Scott Davis, Melius Research]

Well, congrats, guys. And congrats on a great start, Rainer, in your CEO tenure.

[Operator]

Your next question comes from the line of Doug Schenkel with Cowen.

[Doug Schenkel, Cowen and Company]

I want to go back and try to kind of take a different angle on some of the questions regarding durability of growth when it comes to all things post-COVID. So, on Cepheid, there was an earlier question on the outlook for testing volume in 2022. You've noted before, your GeneXpert install base increased by about 40% since the beginning of the pandemic. You've also previously talked about your efforts to be as smart as you can about where you place boxes. Essentially, the goal has been to as much as possible pull forward placements, especially in areas of the world where you may have been under indexed in an effort to make sure that these instruments are used durably over the long term. I was wondering if you could share some specific data on how you're having success with newer accounts driving utilization of these boxes for non-COVID-19 purposes? And additionally, is it possible that there are some new assays coming over the coming quarters that might move you into additional testing categories that also boost your confidence in the outlook for durability? I ask because right before the pandemic got going, we had picked up on some signs that there were some notable advancements being made on assay development initiatives, including some of those talked about in the past by old Cepheid management, which would greatly increase the TAM for the company. I think a lot of lingering concerns about this category would be further assuaged by combining what we saw in Q2, which was really strong with the outlook for assay menu expansion and some positive signs in terms of what's going on with newer accounts.

[Rainer Blair, President and Chief Executive Officer]

I think you're on to a strong point here, which is – and we saw this in Q2, but just to level-set for everybody here on the phone. Once again, we've increased our installed base here since the beginning of the pandemic by 40% plus, and that's with thousands of instruments in places where they haven't been before. And we've tried to do that very strategically, always, of course, wanting to help with the COVID pandemic and the near-term requirements and needs, but also looking beyond that to see whether those care settings would be able to use the menu that we have available today and the one that, of course, we develop every day in order to launch new assays. And we have seen that starting to play out in places where perhaps the COVID need is not as strong and particularly at new customers. And that's manifested, for instance, in our sexual health or hospital acquired infections assays, which are up 30% plus, here in the second quarter, and provide us with an additional pillar of strength. And so, we're very pleased with that. And we expect that to continue here as we not only made progress in the US, but in the rest of the world. So, very important point. The menu is gaining traction, and we're starting to see that play out here in the second quarter and expect that to continue to be the case going forward.

Now, as it relates to new assays, please know that we are working on new assays every day. And you can expect that, over time, to continue to broaden that lead in menu breadth, as well as depth over time. So, that's absolutely a part of our daily activity here.

[Doug Schenkel, Cowen and Company]

Hopping over to really the Pall and the Cytiva side of the equation, as we've talked about it a few times, the expected backlog heading into 2022 is $1.5 billion. The potential for upside, I think, seems pretty clear specific to COVID. That said, there is still some investor uncertainty with regards to what happens if demand were to slow in this category. A basic but important question is if demand were to slow for COVID related products and services in this category, is it fair to say that you're comfortable that there was enough demand more broadly across biopharma to essentially compensate for that? Our thinking has been, this has been an area where there just hasn't been enough good supply of products and services, and that's presented you with a fantastic opportunity to basically solve that problem. Even if the COVID demand were to slow, presumably, you're still going to be able to essentially reallocate these products and services for other purposes. Is that a fair way of thinking about things?

[Rainer Blair, President and Chief Executive Officer]

I think so. And before we move on to the non-COVID strength out there, let's reiterate in relation to that backlog number that we talked about what assumptions are in that and which assumptions are not in that number. So, in that $1.5 billion backlog, that's in addition to the $2 billion that we're shipping this year, that includes all the approved vaccines, whether those are approved in the US and Europe or elsewhere, as well as those in late stage trials, which you can imagine we're very close to. So, that's absolutely a part of how we're thinking about that. And it includes these emerging market vaccines that I was talking about. But what it doesn't include is the booster shot. And we know from Israel, we know from the UK, we know from China that those countries are now moving to booster shots, but we have not assumed that to be a part of our numbers here, nor have we included the younger kids, 12 and under, in a vaccination schedule, which you can imagine on a worldwide basis is a pretty big number. So, we've kept that out. And we think that that's an appropriate assumption.

Now as we look to the non-COVID demand, which has consistently been in the low double digits here, with one or the other quarter perhaps even above, we feel very confident that the number of projects in the pipeline, we talked about it, over 1,500 monoclonal antibodies in the development pipeline, over 50% more than just five years ago. And then you add, related to that, the gene and cell therapies and genomic medicines where you have over 1,000 projects in the pipeline, which is an order of magnitude more than just five years ago, we feel quite strongly that the capacity utilization will remain very robust here for the mid and long term.

[Operator]

And your last question will come from the line of Daniel Leonard with Wells Fargo.

[Daniel Leonard, Wells Fargo]

Two, if I may. The first one on bioprocessing. We're still hearing about supply shortages in the market for filters and such. When do you think we're going to see more of an equilibrium, when supply catches up with demand? Is there any change in your thinking on customer inventory dynamics around stocking and such?

[Rainer Blair, President and Chief Executive Officer]

Let me start with this. I think that, in general, there is a strong supply of filters, as you mentioned, perhaps single use products and such in the market and that there might be pockets where there's some shortages, but I think I would prescribe those to individual type product shortages as opposed to a broad-based shortage as the industry and, particularly, Danaher has continued to ramp capacities with some of the investments that we made. So, I think that what the industry has been able to do is accompany the growth here and continue to support that.

Now, as it relates to your inventory question, here we have been very, very rigorous in our interactions with our customers who we've asked and encouraged to give us their orders as early as possible to give us the visibility that we need to ensure that they get what they need. And as such, we don't believe that there's pockets of inventory that are sitting here in the industry. You can never ignore that there might be one or two places that perhaps that might be the case, but it's really not material in the overall size of the industry. So, we think that the industry is tight on supply. Everybody is working through it with each other, we with our customers with a great deal of visibility, but of course also with our suppliers who we mentioned earlier, who have also had to ramp up to support us and the value chain.

[Daniel Leonard, Wells Fargo]

My follow-up question is similar to Vijay's earlier on the margin side. Could you perhaps maybe bridge the expense base today when you have these COVID sales tailwinds to a world where those tailwinds might abate? Are there any expenses that that go away? Or just maybe the rate of expense increase starts to moderate?

[Matt McGrew]

I think maybe the way to answer that is, today, we've been sort of seeing in the last, I guess, five quarters, our VCM has been kind of 50%. And as I look forward and think about the expenses coming back, and it's not just COVID, I would say it's kind of broadly speaking across the business, we think it's going to start to ramp here in the second half and be in the sort of 40% fall through. Dan, if you think about where we've been more historically, it's probably been more like 35%. And so, I think what we'll see is that the expenses – and here again, the uncertainty in the timing is what I'm still not sure on, but I think what we'll see is that that expense base will come back a little bit more closer to that normal, longer-term 35%. And part of that is not only are we – we're sort of seeing the benefits, I think, of the investments that we continue to make and we have been making in innovation and kind of go-to-market.

And I think with that, if you think about today, our base business on a two-year stack for this year is going to be 6% to 7% core growth, which is 100 basis points plus where we were in 2019. And so, I think the investments that we're making are paying off on the growth side. And I think both Rainer and myself are inclined to want to kind of keep making those investments, while recognizing that we're going to have some costs that come back as we get back to the office and we start to travel again.

So, maybe, Dan, the way to bridge it would be 50% today, I think, probably is a little bit more like 40% in the second half, and over time, I think it probably is something more like 35% if I had to guess.

[Operator]

We have reached the allotted time for questions. I would like to turn the call back over to Mr. Gugino for closing remarks.

[Matthew Gugino, Vice President, Investor Relations and FP&A]

Thanks, Crystaal. Thanks, everybody, for joining us this morning. And we're around all day for questions. Take care.

[Operator]

This concludes today's conference call. You may now disconnect.