The image that usually springs to mind when considering products made by the biopharmaceutical industry is one of small pills that are consumed orally. And this makes sense, given that roughly 90% of treatments on the market today come in pill form, commonly known as “small molecule” drugs. Small molecule drugs are synthesized by chemical reactions between different compounds. They can be manufactured at great scale and low cost, have a long shelf life, and are easy to store and handle. However, discovering a small molecule drug can be incredibly difficult and expensive (as highlighted in our piece last week), and for patients the drawbacks can include side-effects and a tendency to interact with other drugs, potentially reducing their effectiveness.

In contrast, biologic or “large molecule” drugs are made from living cells, and are injected into the body. They can be much more expensive to produce, given they are manufactured in small batches and are highly sensitive to external conditions. However, they may also provide greater efficacy than small molecule drugs and have lower toxicity (which benefits patients), leading them to also command significantly higher prices (which benefits drug companies); it is estimated that the average price of a biologic drug is 22 times higher than a small molecule drug.

The first commercially available biologic drug was human insulin, which arrived in 1982, and despite being less than 10% of all available drugs on the market, biologics have accounted for around 25% of new drug launches in the last decade. Given their higher prices, it is no surprise that seven out of the best-selling drugs in 2018 were biologics. It is expected that biologics will reach over 30% market share in the next five years, growing at an estimated CAGR of over 10%.

This significant growth is driving demand for equipment and expertise in the manufacture of biologics, known as bioprocessing. Bioprocessing includes several critical steps, including filtration, fluid management, fermentation, purification, and cell culture media, and one of the leading companies in the space is Danaher.

Danaher is a diverse conglomerate, with 21 individual operating companies serving a broad range of end-markets, with a growing focus on health care. Up until last year, the company was a key player in filtration, and had a smaller presence in fluid management, fermentation, and purification. Following the acquisition of GE Biopharma (now known as Cytiva), a deal that was completed in 2020, Danaher has added extensively to its bioprocessing portfolio and is now considered the leader in the field.

Cytiva is expected to generate significant growth for Danaher over time, more than justifying the $21bn price tag for the acquisition. Early results have been encouraging, with Danaher announcing yesterday that underlying demand for bio-processing activity “remains very healthy, contributing to demand for filtration, chromatography, single-use and cell and gene therapy products”. However, a recent tailwind for the company has been the demand uplift due to the search for a COVID-19 vaccine. Currently, Pall (another of Danaher’s bioprocessing businesses) and Cytiva’s products and solutions “are involved in the majority of the more than 200 vaccine and therapeutic projects currently underway around the world, including participation on every COVID-19 vaccine that is in human clinical trials today”. As such, revenue growth at Cytiva for the quarter was over 20%.

We believe the opportunity in biologics and bioprocessing can drive significant growth for Danaher, and when combined with the other high-performing businesses operating under the renowned Danaher Business System framework, we see ongoing value creation for shareholders.

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