Shares in healthcare-focused industrial company Danaher (DHR 1.33%) rose 15.2% in July according to data provided by S&P Global Market Intelligence. The move comes as a combination of a 5.5% rise in the S&P 500 index in July and a strong set of results from the company on July 23.
The second-quarter earnings report was notable for two reasons:
- Strong underlying growth trends at the company's existing life sciences and diagnostics businesses
- The acquisition of General Electric's (GE -1.61%) biopharma business, now called Cytiva, which has made a better-than-anticipated start to life under Danaher
The Cytiva acquisition always looked like a great deal for Danaher, but few investors could have expected such an excellent start. Management outlined that Cytiva grew its core revenue by more than 20% and helped the life sciences segment grow core revenue by 8% in the second quarter. It's a startlingly strong performance considering that instrumentation sales in the segment are being negatively impacted by ongoing closures of non-COVID-19 related research labs. In addition, Cytiva -- a highly cash-generative business which produced $1.3 billion in free cash flow for GE in 2019 -- helped Danaher improve its free cash flow in the second quarter to $1.3 billion from $900 million in the same period last year.
Meanwhile, Danaher's diagnostics segment's core revenue grew 5% in the quarter, driven by triple-digit demand growth at its Cepheid diagnostics business, which produces a COVID-19 test. The pandemic has created a potential growth opportunity for Danaher as medical bodies buying Danaher's diagnostics instrumentation in order to run COVID-19 tests can also be sold Danaher's other tests as well.
The addition of Cytiva is exciting for investors because it fills a gap in the company's bioprocessing portfolio and allows it to cross-sell solutions to existing customers.
In addition, the pandemic is likely to encourage future research into diseases -- good news for Danaher's life sciences sales. Meanwhile, the importance of diagnostics testing in battling viral outbreaks is only going to be emphasized as a consequence of the coronavirus pandemic.
Investors will be hoping the company can continue its three-year run of mid-single-digit revenue growth every quarter. Look out for management's commentary on life sciences growth, both from Cytiva and from the potential for an increase in instrumentation sales as research labs open up again.
In addition, the diagnostics segment has a growth opportunity from growing consumables sales within its newly installed customer base. And finally, management expects the environmental and applied solutions segment (water quality treatment and product ID solutions) to start the road to recovery by reporting third-quarter sales similar to that of last year's third quarter.