By Alex Philippidis
Danaher (DHR) and Thermo Fisher Scientific (TMO) are two of the largest and best-run biotech tools companies, but a falloff in business ate into their third-quarter results released this week—in turn, touching off stock selloffs by investors as well as price-target cuts and, in the case of Thermo Fisher, a downgrade by one analyst.
The slowdown in R&D spending by financially-squeezed smaller drug developers in the U.S. and China lowered the numbers for both companies—especially Danaher, which saw its third-quarter net earnings tumble 28% from a year ago, From $1.572 billion to $1.129 billion, on sales that fell 10% year-over-year, from $7.663 billion to $6.873 billion.
Q3 marks the last quarter that Danaher’s results included sales from its former Environmental & Applied Solutions segment, which the company spun out last month into Veralto, a nearly $5 billion business representing 16% of Danaher’s $31.5 billion in 2022 revenues.
Of Danaher’s three surviving business segments post spinoff, two showed the biggest declines, accounting for the lower results: Biotechnology fell 19% year-over-year, from $2.053 billion to $1.664 billion, while Diagnostics skidded 16%, from $2.679 billion to $2.254 billion. The third segment, Life Sciences, stayed all but flat, dipping 1% from $1.723 billion to $1.706 billion.
Danaher and analysts pointed to several reasons for the segment declines:
- Bioprocessing—Core sales decreased more than 20% worldwide year-over-year in Q3.
- China—Bioprocessing core sales in China plummeted approximately 45% in China year-over-year in the third quarter.
- Lower demand—Customers bought less from Danaher’s lab filtration, medical and diagnostics, and genomics product lines, partially offset by increased demand for protein research products.
- Emerging biotechs—A tightening credit environment also contributed to a reduction in year-over-year demand from emerging biotechnology companies in Q3 and Q1–Q3, as customers continued to preserve capital.
“The Company expects the impact of reduced demand and reduction of customer inventory levels to continue at least through the remainder of the year,” Danaher predicted in its Form 10-Q quarterly report.
Catherine Ramsey Schulte, senior research analyst with Baird, opined in a research note: “We think investors were disappointed by commentary that orders declined QQ [quarter-over-quarter] and that DHR expects a similar book-to-bill (~0.8x) in 4Q.” Book-to-bill is the ratio of orders received to units shipped and billed for a given period, typically a month or a quarter.
“While we expect bioprocessing, instrumentation, and China headwinds to continue into FY24, we remain constructive on the medium-term outlook and believe a muted FY24 outlook is largely baked into the stock at these levels,” Schulte added.
Despite that reassurance, Schulte lowered her firm’s 12-month price target on Danaher shares 5 from $227 to $215, though she maintained its “Outperform” rating.
Brandon Couillard, Jefferies equity analyst, noted that bioprocessing orders were slightly down in dollar terms quarter-over-quarter, contrasting that with Sartorius, whose orders returned to positive quarter-over-quarter growth in Q3 (11% not counting orders due to M&A. Year-to-date, he reported, Danaher’s bioprocessing orders are “down low-30% range” with the company expecting its book-to-bill ratio to remain at 0.8 in the fourth quarter.
“Reason to be cautious”
“We view the data points as another reason to be cautious on 2H growth expectations for other instrumentation-heavy Tools cos,” Couillard wrote.
For all of this year, Danaher still expects a 10% decrease in bioprocessing base business core revenues. But the company lowered its Life Sciences segment guidance for the year from low single digit growth to flat, marking the second consecutive quarter of reducing its guidance to investors—mostly. (The company raised its forecast for 2023 Cepheid COVID-19 testing revenues from $1.2 billion to about $1.6 billion).
“Questions on 2024 remain unanswered, and with consecutive guide cuts, it’s comes as little surprise that investors have mixed feelings with still-limited visibility into the business,” Puneet Souda, a senior research analyst at Leerink Partners covering Life Science Tools and Diagnostics, wrote Tuesday in a research note.
Souda cut his firm’s price target on Danaher shares 4%, from $230 to $220. Souda and Schulte were among nine analysts at deadline to lower their forecasts of the company’s share price, along with:
- Barclays’ Luke Sergott (down 26% from $290 to $215), maintaining “Overweight” rating.
- Goldman Sachs’ Matthew Sykes (down 14%, from $250 to $215), maintaining “Buy” rating.
- KeyBanc Capital Markets’ Paul Knight (down 13% from $300 to $260), maintaining “Overweight” rating.
- Citigroup’s Patrick Donnelly (down 10% from $265.92 to $240), maintaining “Buy” rating.
- Raymond James’ Andrew Cooper (down 4% from $250 to $240), maintaining “Outperform” rating.
- J.P. Morgan’s Rachel Vatnsdal (down 4% from $260 to $250), maintaining “Overweight” rating.
- RBC Capital’s Conor McNamara (down 3% from $246 to $239), maintaining “Outperform” rating.
Likewise, investors responded with a selloff that sent Danaher shares falling nearly 6% over two days, starting with a 3.5% decline on Tuesday, from $204.05 to $196.84, followed by a 2% drop on Wednesday, to $192.65. But by Thursday, enough investors rallied behind the stock to stabilize its price; shares inched up 0.5% to $193.68.
“Ultimately, we believe that DHR’s outlook is much stronger in the long run (2-3 years) despite near medium-term concerns,” Souda added. One factor in Danaher’s favor: It has some $20 billion of “dry powder” capital it can draw upon to fund merger and acquisition (M&A) deals like its planned $5.7 billion acquisition of Abcam, dubbed the “Amazon of antibodies” because of its selection of over 110,000 products for research scientists.
Upon completion of the deal, Abcam would operate as a standalone company and brand within Danaher’s Life Sciences segment, which makes and markets instruments and consumables for studying DNA and RNA, nucleic acid, proteins, metabolites and cells, with applications in the discovery, testing, and manufacture of new drugs, vaccines, and gene editing technologies.
Last year, Danaher carved out of Life Sciences a Biotechnology segment that includes its bioprocessing and discovery and medical businesses and offers tools, consumables and services primarily used by customers to advance and accelerate R&D, manufacture and delivery of biologics.
TMO: No “normalization” of orders
Thermo Fisher shares sank 5.5% on Wednesday, from $458.26 to $433.18, after the tools giant reported its own quarterly revenue decline, citing factors similar to those that have served to lower Danaher’s results.
Marc N. Casper, Thermo Fisher’s chairman, president and CEO, cited a lack of growth in bioproduction orders, increased reluctance by customers to spend on drug and vaccine development, and shrinking revenue in China due to slowing economic activity there. Thermo’s Life Sciences Solutions segment, which includes bioprocessing, showed the only decline among of company operating segments, and a sizeable one at -18% year-over-year, from $2.962 billion to $2.433 billion.
Thermo Fisher shrunk its revenue forecast for the year by 1.6% and 3%, to $42.7 billion from a range of $43.4 billion-$44 billion—the second time this year that the company has retreated from its initial guidance to investors on 2023 revenues. Thermo Fisher now expects core organic revenue to grow by only 1%, and its adjusted EPS to reach only $21.50, down from a range of 2–4% and a range of $22.28–$22.72.
“One of the things that we assumed in our previous guidance was that in our bioprocessing business, that orders would stabilize—start to normalize in the third quarter. We did not see that,” Casper told analysts on the company’s quarterly earnings call. “We didn’t see that normalization of orders. In general, that business operates on a roughly a 13-week lead time. So, if you don’t see the orders in Q3, you’re not going to see the revenue step up in Q4.”
Revenue in China declined in the high single digits, compared with low single digit declines in the rest of Asia-Pacific and North America, and a low single digit gain in Europe, added Stephen Williamson, Thermo Fisher Senior Vice President and Chief Financial Officer.
Williamson said unfavorable foreign exchange rates accounted for $200 million of the $850 million drop in projected 2023 revenues, $45 million reflected the acquisition of clinical data intelligence company CorEvitas for $912.5 million cash, in a deal completed in August.
CorEvitas is one of two companies Thermo Fisher acquired since July. The other is Olink Holding, which Thermo Fisher agreed to purchase for approximately $3.1 billion earlier this month, in a deal intended to expand the buyer’s presence in proteomics.
Thermo Fisher finished the third quarter with a 15% year-over-year rise in net income attributable to the company, from $1.495 billion to $1.715 billion. But the company’s revenues slid 1%, from $10.677 billion to $10.574 billion.
One downgrade, 12 price target cuts
The revenue dip wasn’t as much as Danaher’s, but it rattled at least one analyst—KeyBanc’s Knight—enough to be the first analyst to downgrade the company’s rating on its shares since April 2022. Knight downgraded Thermo Fisher from “Overweight” to “Sector Weight,” meaning the stock is not likely in his view to perform better than the stock of other biotech tools companies.
Knight was one of 13 analysts revising their view of Thermo Fisher stock. The other 11 analysts lowered their price targets, with Jefferies’ Couillard cutting his firm’s stock price projection 13%, from $500 to $435, reflecting 20 times his 2024 earnings per share (EPS) projection.
We think the key debates from here center around degree of conservatism embedded in TMO’s market growth assumptions for ’24 & whether TMO’s +7-9% core growth LRP [long-range plan] is still relevant/credible over next few yrs,” Couillard observed. “At a minimum, don’t expect much of a recovery at least until mid-2024. While this probably de-risks 2024 EPS for now, we find it hard to argue for much more than ~20x multiple (in line w/ 10yr avg) until demand picks up.”
Morgan Stanley’s Tejas Savant dropped his firm’s price target twice this week, for a combined 15% reduction. After lowering the price target a day before the earnings report release (Tuesday) from $640 to $600, he cut the target an additional 12.5%, to $545. Savant maintained Morgan Stanley’s “Overweight” rating.
Joining Savant and Couillard in lowering their price targets on Thermo Fisher, listed by size of the reduction:
- UBS’ John Sourbeer, down 25% from $680 to $510, maintaining “Buy” rating.
- Stifel‘s Dan Arias, down 20% from $660 to $530, maintaining “Buy” rating.
- Barclays’ Sergott, down 19% from $585 to $475, maintaining “Overweight”” rating.
- TD Cowen’s Dan Brennan, down 17% from $640 to $530, maintaining “Outperform” rating.
- Citigroup’s Donnelly, down 15% from $625 to $530, maintaining “Buy” rating.
- RBC Capital’s McNamara, down 12% from $657 to $579, maintaining “Outperform” rating.
- Raymond James’ Cooper, down 11% from $580 to $515, maintaining “Outperform” rating.
- Baird’s Schulte, down 11% from $589 to $524, maintaining “Outperform” rating.
- Deutsche Bank’s Justin Bowers, down 8% from $590 to $545, maintaining “Buy” rating.
- J.P. Morgan’s Vatnsdal, down 5% from $630 to $600, maintaining “Overweight” rating.
“While we expect bioprocessing, instrumentation, and China headwinds to continue into FY24, we remain constructive on the medium-term outlook and believe a muted FY24 outlook is largely baked into the stock at these levels,” Schulte wrote in a research note.
Leaders & Laggards
- 2seventybio (TSVT) shares sank 28% on Thursday, from $3.54 to $2.55, after Bristol-Myers Squibb (BMS) reported of a 13% third-quarter sales decline year-over-year, from $107 million to $93 million, for Abecma® (idecabtagene vicleucel), a chimeric antigen receptor T-cell (CAR-T) therapy co-marketed by 2seventy and BMS as a fifth-line treatment for relapsed or refractory multiple myeloma. Market watchers have blamed growing competition from rivals such as Johnson & Johnson/Legend Biotech’s Carvykti® (ciltacabtagene autoleucel), J&J’s Talvey™ (talquetamab-tgvs), and Pfizer’s Elrexfio™ (elranatamab-bcmm). “The Company also believes that the competitive dynamics impacting Abecma will continue into the fourth quarter of 2023,” 2seventy stated in a regulatory filing confirming $69 million in Q3 U.S. sales for Abecma. 2seventy is set to report Q3 results on or before November 14.
- Cassava Sciences (SAVA) shares jumped 26% on Wednesday, from $14.77 to $18.58, after the company announced positive interim magnetic resonance imaging (MRI) brain data from Alzheimer’s patients who are enrolled in its Phase III trial (NCT05026177) of simufilam. The data “suggest simufilam is not associated with treatment-emergent amyloid-related imaging abnormalities, or ARIA,” Cassava stated. The company added that the safety finding was based on an independent, interim neuroradiological evaluation of brain MRIs taken at week 40 in a blinded sub-study of 180 Alzheimer’s patients enrolled in the trial. Final MRI data is expected to be released at the conclusion of the Phase III study.
- CEL-SCI (CVM) shares soared 41%, from $1.07 to $1.51, on Monday after reporting positive data from a 928-patient Phase III trial. The data showed a five-year survival rate of 73% alive in the target population of locally advanced primary head and neck cancer patients treated with its immunotherapy drug Multikine (Leukocyte Interleukin, Injection), compared with 45% alive in a control group. The five-year risk of death was cut in half for Multikine-treated subjects in the target population vs. control. CEL-SCI presented the data for the first time at the European Society for Medical Oncology (ESMO) Congress in Spain on October 22.
- LianBio (LIAN) shares more than doubled, zooming 117% on Tuesday, from $1.39 to $3.02, after the company announced that Bristol Myers Squibb (BMY) had obtained LianBio’s exclusive rights to develop and commercialize mavacamten in China, Hong Kong, Macau, Taiwan, Singapore and Thailand. LianBio previously licensed those rights exclusively to MyoKardia, which Bristol Myers Squibb acquired in 2020 for $13.1 billion. Mavacamten is approved as a treatment for adults with symptomatic New York Heart Association (NYHA) class II-III obstructive hypertrophic cardiomyopathy (HCM) in the U.S. under the name Camzyos®.
- Revolution Medicines (RVMD) nosedived 33% on Monday, from $27.37 to $18.35, days after the company on October 22 announced anti-tumor and safety data for its RASMULTI(ON) inhibitor RMC-6236 that appeared to disappoint investors in patients with previously treated non-small cell lung cancer (NSCLC) and pancreatic ductal adenocarcinoma (PDAC) across several dose levels and KRASG12X genotypes, including common KRAS-mutant genotypes G12D and G12V. Among 40 efficacy evaluable NSCLC patients, the objective response rate was 37.5%, with one patient achieving a complete response (CR) as a best response and 14 patients achieving a partial response (PR), including three unconfirmed PRs. Among the 46 efficacy evaluable PDAC patients, the objective response rate was 19.6%, with nine patients achieving a PR (including four unconfirmed PRs) as a best response.
Alex Philippidis is Senior Business Editor of GEN.