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IP RESEARCH: Danaher Cytiva: History, Moat, and Bundling Pall Filters

GE does not manufacture chromatography filters, and [Lonza] currently has a choice between Danaher and Sartorius as the two viable suppliers of these specific filters. Therefore, such a bundling and tying strategy would foreclose Sartorius and leave with no choice in chromatography filters. [Lonza] is also concerned about such bundling and tying and the consequent foreclosure effect more broadly, for example, for other filters and related consumables”. These concerns arise “from the must-have nature of GE’s Protein A” - Lonza Complaint against DHR / GE merger, Note 484, European Commission

This complaint by Lonza highlights the core hurdle Danaher had to overcome to complete its $21bn acquisition of GE Healthcare in 2019. At the time, GE had ~90% market share in Protein A resins and Danaher's Pall was the market leader in downstream filtration.

Cytiva's ÄKTA chromatography system and resin has maintained ~80%+ market share for nearly three decades. Chromatography is the critical and complex process of purifying the cells created upstream. The instability and complexity of large molecules makes the purification process the most technologically complex and critical for manufacturers. The ÄKTA franchise generates the majority of Danaher’s Biotechnology EBITA today.

Supplying resin to biopharma manufacturers is the most attractive part of the business. The consumable is specified into the manufacturing process at the development stage and stipulated on the FDA approval document. It would take years to switch out. Resin also accounts for ~50% of the biologic manufacturing cost and is arguably the most important driver of overall yield.

A litre of MabSelect Protein A resin is ~$20,000 and customers use hundreds of litres per year per biologic. Over the last decade, Cytiva's ~80%+ resin gross margin has enticed many new entrants. All have failed.

During the GE acquisition, Lonza and multiple other customers were worried that Danaher would bundle Pall’s filters with this MabSelect resin to shut out competitors and increase its pricing power. The regulator disagreed for multiple reasons. Five years later, we may now discover how Danaher plans to bundle products from the two companies. In Q1 24, Cytiva, the combined entity of GE and Pall downstream assets, began merging its sales teams.

This research explores the history of Cytiva, the depth of its downstream moat, and the opportunity to bundle chromatography and filtration products. We curate our learnings from multiple hours of interviews including:

Next week, we plan to publish a Danaher Downstream Bioprocessing Learning Journey and begin our work on IDT, Aldevron, and DHR Life Sciences division.

Vitrolife & the EmbryoScope System

In 2014, Vitrolife, a leading supplier of consumables & equipment to IVF clinics, bought Unisense Fertilitech and its innovative EmbryoScope time lapse incubator. The EmbryoScope now has an installed base of more than 1,650 units, which accounts for ~70% of its Technologies Division revenue. A Former Senior Vitrolife executive explains why the size of the installed base is such an advantage in developing embryo selection algorithms:

This also gives Vitrolife a major advantage because no one else has this amount of data. With AI and big data, it's growing every day. They are collecting data every day from these EmbryoScopes installed globally. So no matter how people would come now and start doing something similar, there's a huge leap where Vitrolife is in front. - Former Director at Vitrolife

The EmbryoScope improves pregnancy rates by over 20% by keeping the embryos in a stable environment and facilitating embryo selection with its iDAscore algorithm. However, the quantity and quality of data might not be as high as it looks.

It really depends on the country and its legislation. In some countries, you're not allowed to give that feedback. For example, in the US, you are not allowed to send data like that out of the country. - Former Director at Vitrolife

This raises questions about potential commoditization of the hardware as competitors release competing time lapse incubators. We will address this in the next interview with an executive from a clinic network that has developed their own algorithms

First Watch Restaurant Group: Culture, Positioning, & Operational Excellence

This interview with an operations veteran of restaurant chains and Former Director at First Watch explores how the company culture and operating model provides a unique positioning in the market:

If you're a server making night money during the day and you're only there until 2:30, you're going to do whatever you can to keep it clean, do the five steps of service, the Ten Commandments, etc. Because the leadership team, including myself, were looking for it and we would call you out on it. We did not accept subpar performance. You're not having to deal with being there at night, which opens up your day. You're able to plan your nights with your family. Your husband or wife can get a night job if you only have a day job. The time is 2:30 with the goal to be out the door by 3:30. "No mas Tomas" at 3:30 was our motto. - Former Director at First Watch Restaurant Group

Builders FirstSource: BMC Integration, Product-Market Fit & Distributor Relationships

In this interview, a former Category Manager at Builders FirstSource sheds light on the challenges of the BMC integration and the importance of adapting its product mix to cater to local markets.

I think they're still working on that, to be honest. In terms of how they interact with other regions, there was really no interaction with San Diego. They were working separately, using different systems and different management. They were not working cohesively. From what I understand now, and I'm not there anymore, but I know some people there, they are slowly coming together, even if it's just a localized strategy, like a California strategy. But like any merger, it's painful and takes time. I've been through this before when I worked at British Telecom in the UK. It takes time for everything to come together. People lose their jobs, positions change, different cultures and strategies need to merge. So, bringing it all together into a cohesive way of operating is going to take some time - Former Category Manager at Builders FirstSource

Ecolab: Nalco & the Water Treatment Industry

Ecolab acquired Nalco Water in 2011 for $5.4B. A 25-year water treatment industry veteran describes how Ecolab's cleaning & sanitation business opened doors for Nalco Water after the acquisition.

What was different was the water treatment spend inside a big global company. It is dwarfed by the spend on cleaning and sanitizing, especially in the food and beverage industry. The revenue from cleaning and sanitizing might be five or six times that of water treatment. Both are important, but due to the larger spend size, Ecolab often had access to higher-level individuals in the corporate organizations of our customers - Former Senior Executive at Ecolab

Alta Equipment: End Market Cyclicality, OEM Relationship & Fleet Utilization

In this interview, a former Director of Rental at Alta Equipment sheds light on the cost of ownership, utilization and recovery rates in the US heavy equipment rental market.

"When I left Alta, they were somewhere in the low thirties. If you're at 33.3% financial utilization annualized, you're generating enough cash in three years to cover the cost of that asset. The financial utilization metric is extremely important and varies by category. If you're in the low to mid-thirties, you're in a good spot. If you get into the forties, that's the sweet spot for knowing you're “paying off” that inventory very quickly. The rest, as they say, is gravy. - Former Director of Rental at Alta Equipment

Light & Wonder: History of Casino Software

Scientific Games renamed itself after the lottery business was divested to Light & Wonder. In this interview with a former Scientific Games executive, the history of the casino software stack & sales process are discussed.

The most successful conversions, and I've seen dozens of them, involve dealing with top management. When you sell these systems, you're dealing with the top executives who run the casino company. The most successful conversions are those where top management says, "This is what we're doing. This is not negotiable. We are going in this direction" - Former Scientific Games Executive

Daily Journal: US Market Fragmentation, Court Component Model & AI Impact

In this interview, a former State Judicial Educator at the Michigan Supreme Court explains the reasons behind the US court market fragmentation, the evolution of court management software models, and the potential impact AI might have on the ecosystem in the future.

In a nutshell, many courts have moved away from two things. First, they are getting away from trying to code their own software and create their own case management systems. It has become too complicated for the available resources that most courts have in-house. So, one major direction is moving to either off-the-shelf solutions or customized solutions through an individual. That's one major trend. - Former State Judicial Educator at the Michigan Supreme Court

Macfarlane Group: Online Competition, Pricing Dynamics & Incentives

In this interview, a former Local Customer Strategy Lead at Macfarlane Group shares his views on the drivers leading to the company losing market share to competitors.

"Yes, it's mainly price-driven, but the whole delivery aspect is crucial. Next day, we will deliver your boxes and tape simultaneously, consolidating your deliveries. This means less time for them to unload and manage various deliveries. So, we are essentially selling that convenience to them. We can deliver every day if we're in the area, saving them from receiving three different deliveries from suppliers. We can deliver once a week, once a month, whatever they require. This approach is also sustainable. I know Macfarlane is big on sustainability, so we consolidate deliveries, which ticks a box for many customers. However, a lot of it does come down to price and the online ordering platform. Many people in small companies just want to go online and order something. So, we set it up, tailoring their pricing on the portal. Kite is very competitive online. If you find out where they are getting their supplies from, you can tailor their pricing to suit that. - Former Local Customer Strategy Lead at Macfarlane Group

CFM56 and Business Jet Maintenance: Fleet Owner Perspective

This interview with a Former Lufthansa Technik Executive explores how it approaches maintenance and explores how business jet maintenance and airworthiness is different to commercial aviation:

If there's an issue on a business jet, I usually call the owner and explain the issue. At the end of the day, the owner has to understand it needs to be fixed. When you have an airline like Lufthansa with hundreds of thousands of passengers waiting to board, the pressure is obviously bigger. You try to release it not only on the target date but even before. Apart from that, applying as a postholder for an airline is exactly the same. You need to have the experience. Overall, the pressure is of a higher degree when it comes to airlines like Lufthansa. - Former Maintenance Manager at Lufthansa Technik