Since September 2016 to the start of 2020, Danaher's (DHR 0.97%) stock price has doubled, going from below $80 a share to now sitting at $160 a share. In 2019 alone, the stock increased over 45% in value.
This past year, the company announced a deal to buy General Electric's (GE 2.23%) biopharma unit for roughly $21 billion. This deal has largely been seen as a very good move by Danaher that will position the company for expanding growth. Will Danaher continue to see massive growth on par with the last three-plus years?
What has fueled Danaher's success?
Danaher is a conglomerate based in Washington D.C. The company operates three core divisions: environmental and applied solutions, life sciences, and diagnostics.
The company's strategy has been to acquire businesses in growth sectors and then apply its operating model, the Danaher Business System, to those businesses. The success of this model is proven by the enormous growth the company has seen.
Two recent acquisitions of Danaher underscore the success of this model. In August 2015, Danaher acquired the Pall Corporation, a company operating in the life sciences and industrial sectors. Since the acquisition, Pall has seen revenue growth, an increase in gross margins of 5% to 55%, and increased operating margins over 10% to 25%. Cepheid, a molecular diagnostics company, was acquired by Danaher near the end of 2016. Since the acquisition, the company has grown by double digits each year to almost $1 billion in revenue and seen its gross margins increased 10%, while the company's operating profit margins went from zero to 20%.
GE's biopharma business makes Danaher a major bioprocessing player
Against this backdrop of success of increasing the performance of new acquisitions, Danaher announced last year that it would acquire GE's biopharma unit. GE's biopharma segment is a manufacturer of products and equipment that allow pharmaceutical companies to test and produce cellular therapies and drugs.
Much has been written about how good of a valuation Danaher got for GE's biopharma business and how it is the growth leader of GE's healthcare segment. One aspect of the deal, however, has not gotten quite as much coverage-the fact that the deal will make Danaher the key player in the bioprocessing field. This field is forecast to see a compound annual growth rate of 17.5% over the next four years.
Bioprocessing involves cultivating and developing cells into a biomass which is then purified and distilled into a final product. The end result is a therapeutic product with quality controls that are equivalent to pharmaceutical drugs.
The bioprocessing industry is made up of products in five general areas: filtration, fluid management, fermentation, purification, and cell culture media. Without GE's biopharma company, Danaher was a key player in filtration and had a presence in fluid management, fermentation, and purification. The acquisition of the biopharma business fills in the gaps Danaher has in the bioprocessing field and instantly makes Danaher the major player in bioprocessing.
Danaher will now have the Xcellerex line of mixers which elevates its presence in fluid management. The acquisition will give Danaher the Wave product line of bioreactors and makes it a leader in fermentation. Akta chromatography systems and Hyclone cell culture media products instantly make Danaher the leaders in purification and cell culture media processing.
Becoming a complete end-end supplier of bioprocessing tools and equipment to users will allow Danaher to better compete with Sartorius, the current leader in the field. In 2018, Sartorius saw revenue growth over 13% in its bioprocess solutions division and offers guidance of 8% to 12% growth in the current year. Gaining market share will now be easier given that Danaher is now able to supply customers with all the products necessary to cultivate and develop cells as well as to distill and purify the end product.
Good news for Danaher investors
This is all very good news for Danaher investors. Given Danaher's track record, there is little doubt the company will capitalize on the GE biopharma deal which will position itself as the leader in the growing bioprocessing market. I see Danaher as growing 10% or more in the coming year and is still a good health stock to buy for investors who want a solid company with proven results.