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How Cepheid Fits Strategically into DHR’s Portfolio

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Strategic fit of Cepheid in Danaher’s portfolio

The acquisition of Cepheid (CPHD) in the strategic sense is a gateway for Danaher (DHR) to breathe life into its limited molecular testing capabilities. Molecular testing is a process by which the DNA of a target cell is pulled to check for mutations or a specific disease, or to see if a tumor responds to a particular drug.

As an important player in the $6 billion global molecular diagnostics market, Cepheid’s growth characteristics are attractive since it’s in its early stages of penetration in most clinical arenas. Cepheid has an installed base of more than 10,000 instruments. More than 75% of its revenues are recurring in nature. This is comparable to 80% of recurring revenues in Danaher’s diagnostics segment.

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Potential in high-growth markets

Danaher’s diagnostics segment generates ~$1.5 billion in revenues from high-growth markets such as China, India, and Brazil. Cepheid earns less than 10% of its revenues from these destinations. So the acquisition provides an excellent opportunity for Danaher to expand the reach of Cepheid’s diagnostic capabilities on the back of its existing infrastructure in high-growth regions.

Future acquisitions

Danaher says it has a leeway for another $1 billion in acquisitions. However, it expects to integrate smaller bolt-on acquisitions going forward. In the near term, the company’s focus is expected to gravitate more toward integrating newly acquired companies and moving them toward the operating characteristics for which Danaher is known.

For insights on excess returns and a business analysis of Danaher, you can refer to Should Danaher Corporation Be a Part of Your Portfolio? and Danaher’s Pall Corp. Buy Still Breathing Life into Its Business.

Key ETFs

Investors interested in trading in the healthcare space can look into the Vanguard Health Care ETF (VHT) and the Health Care Select Sector SPDR ETF (XLV).

Major holdings in XLV include Johnson & Johnson (JNJ) with a weight of 11.8% and Pfizer (PFE) with a weight of 7.6%.

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