Danaher Builds Its Life Science Business

Danaher has done it again, announcing a major acquisition in the lab products market that will reshape the market. On May 11, the company unveiled its $13.8 billion planned acquisition of Pall to be followed next year by the spin off of Danaher’s more industrial companies into a separately traded public company (see page 2).

The post-Pall Danaher will be made up of its Dental, Life Sciences & Diagnostics, Product Identification and Water Quality platforms, as well as Pall (see table, page 8). As a result, 28% of Danaher’s estimated $16.5 billion in annual sales will now come from the diagnostics market, 15% from the life science market and 12% from the water quality market. In 2014, each respectively accounted for 24%, 12% and 10% of Danaher’s $19.9 billion in revenues. “Danaher will be a more focused science and technology growth company united by common business models with attractive characteristics,” stated President and CEO Thomas P. Joyce, Jr. on a conference call discussing the transaction. These businesses are estimated to collectively generate mid-single-digit organic growth.

Pall will add separation and filtration systems and consumables for both life science and industrial end-markets to Danaher’s business mix. For the year ending July 2014, revenue for Pall Life Sciences, consisting of products for the biopharmaceutical, medical, and food and beverage end-markets, increased 11.0% to $1,454 million. Sales for Pall Industrial, consisting of products for the process technologies, aerospace and microelectronics end-markets, declined 0.2% to $1,335 million.

Danaher cited Pall’s consumables revenue as an important reason for the acquisition. More than 75% of Pall’s revenues are from the aftermarket, with the Life Sciences and Industrial divisions accounting for 60% and 40%, respectively, of consumables revenue. Following the acquisition, Danaher’s share of recurring revenues will be more than 60%. “The margin profile will remain very attractive, with gross margins over 50%, and mid-teens operating margins,” stated Mr. Joyce on the call. Describing the companies that will remain part of Danaher, Mr. Joyce commented, “They share the characteristics of being razor and razor blade–type businesses, [with] high consumables streams—that recurring revenue model—great growth trajectories, terrific margin profiles and exciting opportunities we believe for continued capital deployment.”

The purchase greatly expands Danaher’s biopharmaceutical offerings, most notably, adding products for biomanufacturing, primarily filtration and separation consumables. In this way, the acquisition also takes Danaher into the bioprocessing market, which includes capsule filters, membranes, and development and process-scale chromatography, alongside Merck Life Sciences, Sartorius and Thermo Fisher Scientific. In addition, Danaher’s biopharmaceutical business will now be extended from research through manufacturing. “Approximately two-thirds of Pall Life Sciences’ segment revenue is derived from the fast-growing biopharma market,” stated Mr. Joyce on the call. In fiscal 2014, biopharmaceutical consumables accounted for 33% of Pall sales, or $918 million, according to a recent Pall investor presentation.

Pall’s Life Sciences segment also includes routine lab consumables, such as sample preparation and filtration products. Pall’s primary distributor for lab products is VWR. Previously, for the R&D and applied lab markets, Danaher was largely focused on lab instrumentation.

The acquisition also creates increased cash flow opportunities for Danaher. Danaher estimates $300 million in cost synergies, including savings in procurement, inventory and receivables, according to the call. Mr. Joyce also commented that Pall is a foundational growth opportunity.

With the spin off, Danaher becomes another conglomerate, such as Agilent Technologies (see IBO 9/30/14) and W. R. Grace (see IBO 2/15/15), to separate its slower-growing businesses, or businesses with different business profiles and end-market characteristics. “Each company will be more focused with access to the capital necessary to pursue organic and inorganic growth opportunities,” said Mr. Joyce.

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