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Morningstar | Addition of GE's Biopharma Business Should Enhance Danaher's Narrow Moat

Danaher is a unique business with impressive historical results. Its strategy relies on the success of management's continued capital-allocation acumen and integration efforts. Management's historical deals, improvement in underlying business performance, and conservative use of financing suggest the company will remain disciplined, but its strategy has risks. Deals like Pall, Nobel, and Cepheid have brought in more innovative industry leaders with higher growth opportunities but at the expense of returns on capital, which have slid in recent years. While we mostly like the long-term outlook for the majority of Danaher’s businesses, we’d like to see more evidence that management won’t overpay for growth. Following the spin-off of Fortive in 2016 and anticipated spin-off of the dental segment in 2019, Danaher has become a major player in the life sciences and diagnostic market. We continue to appreciate the direction of management’s capital deployment. We think Danaher’s two largest segments, life sciences and diagnostics, remain attractive areas because of the aging population demographics, growth of personalized medicine, and demand for biologic manufacturing processes. Danaher’s installed equipment helps maintain a sticky customer base with recurring consumables sales. We like management's decision to spin off the dental business and acquire General Electric's biopharma business. We imagine the spin-off has stemmed from the dental segment's weak performance. Although the dental industry's exposure to mostly cash-pay services combined with a fragmented customer base remains attractive, the rise in corporate practice buying power and increasing commoditization in many product categories have weakened growth and profitability prospects.On the other hand, the biopharma business is characterized by high growth, high margins, and a large stream of consumables to a sticky customer base. From cell culture media and single-use manufacturing products to chromatography systems, GE's biopharma assets share a significant amount of strategic overlap with Danaher's existing life sciences business.