Agilent Technologies, Inc. (A) Earnings Call Transcript & Summary

Good afternoon, everyone, and Happy New Year. I'm Matt Sykes, the life science tools and diagnostics analyst for Goldman Sachs, and I have the pleasure of welcoming Mike McMullen, CEO; and Bob McMahon, CFO of Agilent, here today. Mike and Bob, thanks so much for joining us today. We really appreciate the time. I thought I'd let you guys set the stage for us in the first few minutes and talk about the year review for Agilent. What were some of the challenges and opportunities presented by COVID? And then what parts of the business are you most excited about for 2021? And kind of how did the 2020 finish up? And what does the momentum look like as we head into the new year?

Sure, Matt. And first of all, thanks for the invitation to join today's conference, and Happy New Year to the audience, and thank you for joining us here as well. So 2020, as we all know, will go down as a year for the ages. And clearly not the year a lot of us had anticipated at this time last year. But as I look at what happened at Agilent, we had several challenges. Number one was to ensure the safety of our team. The second one was really to make sure that we could answer the call for our customers, and that included making sure that we could have our continuity of manufacturing operations, logistics, supply chain and then also creatively finding ways to support the customer. And I really couldn't be prouder of how the team responded in 2020. And you saw that reflected in the quarterly earnings that we announced in the fourth quarter, really ended the year with momentum. At the AID, our first virtual Analyst and Investor Day in early December, we talked about that momentum continuing through the month of November. And then part of the AID thing was really talking about, hey, 2020 really was a proof point for the building -- this building of a new company. We've been called a new Agilent, a company who is much more resilient. And boy, was our resilience tested in 2020. Yes, we're able to grow the top line, grow operating margin in the midst of a pandemic in 2020. So really, it was a real proof point for the company in terms of how different this company is in terms of our portfolio. And since 2015, we've had about $1.3 billion in revenue, 80% of it is coming from these new high-growth markets. To really set the stage for the second part of your question, which was -- or the warm up, which was what are we excited about in 2021. And that momentum that I talked about through November, we're just back today to the office after the holidays. So we haven't closed the books completely yet on December. But what we do know is on the order book, and that momentum that we highlighted in Q4 that we commented on for November, we saw that continue -- that momentum and trajectory continue and remain intact for the month of December on the order front. And I think it really speaks to some of the exciting opportunities that we see for 2021. And again, some of this was highlighted a bit in our AID, but I think it's worth -- at least from my perspective, worthy of repeating, but the overall theme of biopharma, we really have consciously set out to build a biopharma franchise. Really nonexisting business 5 years ago, a knock on the door on the $600 million, over 10% of the company's revenues in this fast-growing biopharma space. We think about the biopharma tools piece, the cell analysis business that we built through a series of acquisitions. And organically, how we've been building up our -- what we call our NASD business, which is the GMP-grade oligonucleotides for the whole new class of RNA-based therapeutics. I'm sure we'll get into that a little bit later on. So headline #1 would be this continued strength of the biopharma side of our house. Sustain this momentum we have in the core analytical instrumentation business. So it's been the core franchise of the company for a number of years. And you saw us deliver reported and -- core growth in that business as we exited Q4. And very clear, when you see our performance in the instrumentation side relative to peers, we're picking up market share here. And then finally, one of the big moves we made when we started out the new Agilent was the creation of the Agilent CrossLab Group. And I've been feeling the question every year, hey, Mike, when is that growth rate going to slow down? And we say, why would it? So we expect 2021 to be a continuation of the strength in that ACG business. So I'd -- that will be the 3 headlines for me, which was overall under this build and buy growth strategy we have. Biopharma, return to growth on the analytical instrumentation side and sustaining the strong momentum in ACG.

Great. Well, thanks for setting the stage. That's very helpful. I think just given that momentum, and exciting to hear that it continued through the end of December, you recently hosted the Investor Day, which you referenced. And you introduced some longer-term targets, including 5% to 7% organic growth, which I think when the market looks at sort of the comps that you're facing this year, which were relatively easier, especially relative to your peers, and some of the significant secular growth tailwinds that exist in a lot of your end markets, they wonder if that's being conservative. And could you talk about balance being prudent, which you mentioned a couple of times at the Investor Day versus sort of the...

I think I [indiscernible] the number of times I said prudent. I think it's over 12x.

So I guess balance being prudent versus actually the multiple avenues of growth you see over the next 5 years. And so how should we think about this 5% to 7% growth?

Yes, absolutely. So happy to comment on that, and I'll show Bob in on this conversation as well. So part of the story to AID also was putting out there longer-term growth and margin expansion goals, as you mentioned, Matt. And what we wanted to communicate at AID was, hey, while we're very proud of what has been accomplished in terms of creating value for our shareholders in terms of the growth, the margin expansion up almost 500 basis points, core growth up, double digit EPS, we think we can do even better and even more excited about the future. So that's why you saw us ratchet up the core growth rates. As I mentioned in the AID, we've never had a core growth rate out there with the 7 in it. And many people say, hey, when are you going to be done? Have you tapped out your ability to expand the margins? We said, no. In fact, we increased that number to 50 to 100 basis points, and then all committed to a double-digit growth in earnings per share. I would point the audience more towards the higher end of that range because in terms of our outlook for growth, we wanted to be prudent, if you will, just to recognize over multiple years that you can run in this in the scenarios like we just did, some major macro scenarios, which could bring the growth rate down. But even in that, we've demonstrated our ability to grow even in the most difficult circumstances. And then relative to '21, we really -- and when Bob and I put out the guide in the fourth quarter earnings call, the major thing we were trying to accomplish was, one, is a sense of confidence, which is the restoration of guidance. In fact, many people were surprised to see we had restored guidance. And listen, there's still some uncertainty around some aspects of the business because COVID-19 virus is still out there, as you know. But we felt confident enough that, hey, we can put a number out there. And then we also put out a few breadcrumbs in terms of where we saw upside to the guide. In particular, our #2 market in terms of size is chemical and energy market. We saw growth for the first time in several quarters in the fourth quarter. It wasn't enough for us to put that growth into our FY '21 expectations. But there's things going on in the macro environment, such as the thing we just saw we report out today, PMIs are at a 33-month high. So there are macro factors pointing to perhaps some upside in some of our markets. We want to see the orders come in, and we want to see the revenue for more than just a quarter before we make that call. Bob, what would you add to that?

Yes. I think the -- you said it well. And good afternoon, everyone. And just to build on what you're saying, that 5% to 7% is a core growth rate. And so when we think about what we've been able to do over the course of the last 5 years is also add some significant businesses from an M&A or capital deployment side as well. So think about that as an opportunity to go above that with capital deployment. And so certainly, we feel very good about the makeup of our business today, the trajectory of it, the increased exposure to those faster-growing businesses. And as Mike said, moving to the higher end of that range there's still some uncertainty given the virus out there. But make no mistake, I think if the virus has taught us one thing in addition to what Mike talked about, it says the strategy in the markets that we're in, life sciences tools with a focus on pharma being our largest end market and the most resilient is the right place to be, and we're continuing to double down there and feel good about the investments that we've made paying off, and we'll continue to make investments going into the future.

Great. Just could you talk a little bit about how COVID has accelerated digital engagement and services aspect to your business? What could this do to your OpEx leverage going forward if we assume that some, if not most of the increased digital engagement, just in terms of sales and service, actually continues? You guys have talked a lot about what you've learned during COVID and how your customers have seen increased engagement with -- on the service side digitally. What do you think can be kept? What do you think can be sustained? And what do you think that might do to the operating margins in the business in general?

Yes, Matt, great question. Also a topic of a lot of dialogue and discussion inside Agilent. But for several years now, we've been investing very heavily on new digital capabilities. So we knew the trend was out there, but what's happened with COVID is accelerated it because that was the only way to engage often with customers. And what we found is that it's not only a lower cost way of engaging with customers, but you're much more responsive. Our customer satisfaction scores are at historic highs right now. And customers are engaging us -- are grading us very highly on our responsiveness. So we think a lot of this is here to stick -- is going to stick. And by the way, it's not -- it's just not just in terms of the sales and service, it's also your marketing programs. How many people want to go off and go to some big trade show, a big conference, where we've had -- we -- I think we ran a cell analysis virtual trade show. We had 2,000 participants, all through a digital platform. The analytic this year was held all in a digital platform, same thing with [indiscernible]. And so there's -- whether it be the digital marketing side, whether it be the actual sales process, the service process, we think that a lot of this is here to stay. There will be some calibration back because there'll be some level of always wanting to get out and see customers face-to-face, and certain service interactions will require face-to-face. But we don't see it snapping all the way back. In fact, that's actually a mandate that Bob and I have because a lot of the money we've been saving in travel will be actually able to move into other areas that drive growth. I'd love to tell my team and says, do we really want to invest in travel? And we want to invest in new products and more field capabilities. So -- and then one thing I'd also leave you with is lots of investment for internal operations to make ourselves more efficient. So when we talk about the -- and I'll pass this over to Bob as well. When we look at our trajectory of margin expansion in the coming years, we think a lot of it's going to come through SG&A through digitally enabling our teams in terms of the way they engage with customers, but also internally how we run our own operations.

Yes. I think just to build on that, I think it increases our confidence that we can continue to drive that operating leverage -- operating margin leverage mainly through OpEx leverage and through all the reasons that Mike just talked about. And I think the digital tools that we have, not only supporting our customers, we're able to leverage that internally as well. And you've seen that as a result of us really driving that and increasing our forecast from 50 to 70 basis points to long-term kind of more to 50 to 100 despite funding investments like NASD and some of those other areas. So we feel very good about this, and this is a big component of that. And it makes it easier to do business with us. But it also is helpful in terms of our efficiencies driving -- going forward as well.

Yes. And you -- but you just can't wake up in the midst of a pandemic and say, geez, I think I need to start investing in digital. We started this path -- we started down this path several years ago. But to your -- to the root of your -- the core of your question, Matt, is we've just seen an acceleration of the adoption of digital. And we don't think -- and I think the same question is being asked in other industries. We don't see it ever going back to what it once was, albeit, I think, there will be some moderation relative to today's level.

Right. And staying on this kind of theme that you talked a lot about the informatics opportunity, and you talked about it at the Investor Day. And it seems like this actually cuts across a number of your divisions. And I get the sense that the life science tools industry is in the early days of the informatics opportunity, certainly from a monetization standpoint. Could you talk about your overall strategy in informatics and how you see that adding to growth and profitability going forward? I mean, I think you have a unique position with ACG to be able to capitalize on this. So I would love to hear your view on informatics.

Yes. Matt, we share your assessment. So in fact, I think your initial comments about opportunities across all the business groups is spot on. That's also why it's so important to have the right environment inside your company, the right culture that supports the individual units to work together. So we call this our One Agilent Culture. So not only do we have, I think, the technology capabilities to build this integrated digital ecosystem, but we also have a way of working inside the company that is conducive to having different business units working with one another. So I think we're really set up for success relative to our people and cultural side. And that being said, I think what you may have seen in the deck we had for the Analyst and Investor Day, we talked about this, if you will, this integrated digital platform where you're bringing together all different aspects of digital, right? So whether it be having all your systems connected, but also having intelligent instruments in terms of smart alerts and other proactive indications to the lab manager about what's going on, on their instrumentation, data analytics, and this is where you get into the whole ACG side, which is, historically, vendors have focused on the scientific aspects of data in a lab. But that's not sufficient. You need to have a comprehensive view, both the scientific and the operational data, and this is why where ACG comes in because they've been building this CrossLab Connect platform, informatics platform that ties into our data system as well as competitors' data systems to give customers operational information about the lab. So we think the future is going to be digital, not to say that -- it's going to be a future driver, not to say the instruments aren't important, but whoever builds the digital infrastructure that customers want to migrate to, I think, really will be in a strong position for the next wave of growth in this industry. And you shouldn't think of it simply as how much informatics to software revenue we'll particularly come to get? It really is tied into all other aspects of the offering, the instrument platforms as well as services. And again, also, this really points to you can't capitalize on that if you're a narrow supplier. What we've tried to do over the last 6 or 7 years is be a broad-based supplier, actually goes back to the Varian acquisition in 2010, where we said we want to have -- be a broad-based supplier into the analytical labs so that whatever application you may need to have, we have a technology for you. And by the way, I'm concentrating right now on the analytical lab, but we see the same needs on the digital side are there in a regulated environment as well on the diagnostic side. So we're really excited about this. It's been a major focal point of investment, both on enabling our instruments in our hardware divisions but also building up informatics capabilities inside as well as you know, we did a few acquisitions with companies like iLab, Cartagenia and Genohm give us other new capabilities. So we think that digital is going to be a driver for this industry for years to come, both in terms of how you interact with the customers, how you run your internal operations, and the theme that we're on right now is how do you offer new capabilities to your customers as they run their labs.

Yes. And Matt, just to build on what Mike, you're saying. I mean you heard us talk about it in the Analyst and Investor Day about the customer lifetime value. And this is a core component of driving increased customer lifetime value for us. So we see this as central to the strategy of actually combining the benefits that we have on the instrumentation side, plus the ACG side, that services and software component, as well as driving that productivity for the labs. And what we found is if you have a compelling offering here that actually improves the uptime of the instrumentation or improves the outcomes of the lab and so forth, they'll want more. And so you get this virtuous cycle of a nice annuity stream here on the software or service around these analytic capabilities and so forth. And so what we're seeing is almost a pull -- still early days, but a pull from our customers about this, and we think that we're very well positioned to be able to take this, given the breadth of portfolio that we have.

Right. Bob is spot on here, Matt. So we're talking about -- you think about what's behind this whole concept, which is it's not only about having great scientific outcomes, but things such as smart alerts and others, it's all about uptime. And what's the worst thing that can happen to a lab manager? One, is they get a bad scientific result; and two, of equal importance is the lab's not up and running. So -- and we think that this approach really addresses both of those challenges for our customers.

Great. Why don't we stay on ACG for just a minute. It's obviously been a very solid grower, consistent margin expansion over time. And it seems like there's still a lot more to go for in that business. So could you talk about how your installed base gives you a competitive advantage? Because it's not like this growth and the margin expansion has gone unnoticed in the sector. And I'm sure it will continue to be a competitive space. But your installed base should give you a competitive advantage and might actually insulate you from competition as now they sort of increase their tension on the space? And then maybe how this could actually help your margin potential for the segment. It's often said, and I've heard you say within Agilent, that it was thought to be hard to generate significant margin expansion in the services-led business. Clearly, it hasn't been for ACG, but kind of what's your response to that? And can you continue the progression? Because I think there's a lot people who see that growth, see the business and still are waiting for it to either fade in growth or the margins to slow down. Talk about the future of that business.

Yes. Matt, happy to do so. And as you know, that this was a major move we made when we launched the new Agilent back in 2015. And I tried to maintain a low profile as long as I could, but I guess the word's out. But I can remember at the time, people saying, "Hey, Mike, nobody is talking to you about -- nobody else in your space really talking about the importance of services." And I said, "Well, that's good. That's fine. Let's go do our thing." And even in Agilent, there was a sort of this urban legend that you can't make money in services, that basic services are here to support ability to sell more instruments, and we completely turned that on its head. And as you build up a large scalable platform, and then we've talked earlier about the digital capabilities in terms of servicing the customers, selling to the customer, it all points to the ability to have a scalable platform for margin expansion. And the fact that we have the leading installed base of instruments in the analytical lab, for example, we think, north of 500,000, you already have a credibility starting point, which is you're already in the lab. They know you, they trust you and they've already made an investment in your instrumentation. And now we're saying, listen, we can come in and help you run your lab more efficiently. We can handle all the service of all your instruments, not just the Agilent installed base. Hey, some of those activities that your scientists are engage in, let us do that. Let us do the asset management, the asset tracking, we'll take that on. And oh, by the way, would you be interested in some of these newer informatics capabilities we have relative to how your lab is running with CrossLab Connect. So I think there's also been evolution of service portfolio capabilities. And then as you build larger presence in account becomes more efficient to actually service that account. And then there's a lot of really interconnected aspects to build this up because you mentioned the installed base, which is -- gives you a really somewhat a defensible moat, if you will, because they know us, they've invested in us. And then what your -- as this market is more mature on the services side at the enterprise level, what our customers are pointing to is, hey, before it was a lot of -- it was based on a price game, who could come in. And now, it's about -- it's a value game. Because if you can deliver true value, you become so integral to their operations, they don't want to move you out. I had the call a few weeks ago with one of our big European pharmaceutical customers. And the whole discussion that occurred wasn't about pricing, it's about how quickly can we roll out the capabilities to other parts of their enterprise, both in Europe, U.S. and Asia. And then the other piece, which we don't often talk enough about, is the consumables and chemistry piece of ACG. And this is where, again, when you're in the lab and you're now in a position with your digital platforms and your workflow solutions to get -- and really have your team focused on what we call connect rate, both services and consumables, you start to get this lift on the consumable side as well. And this really gets to your point about the margin expansion. The consumables portfolio is the most profitable portfolio we have inside the company. So we don't think we've reached our limit in terms of what we can do on the services side, particularly as it's enabled by digital, but we also see as we move more and more of our business through the ACG ACSD side, which is our chemistries and consumables business, there's going to be a natural margin lift that comes with that as well. So you get both the efficiency piece on service delivery and SG&A piece across all businesses from digital, but then you're going to get a natural margin lift from the portfolio growth that's going to be occurring on the chemistries and the consumables side.

Great. Just shifting over to NASD business. It's been an area of focus, investor focus, for sure, for you guys, and you've talked about the capacity expansions that you've made. And when you think about the business and the type of demand you're already seeing, and we haven't really come close to commercial stage production for a lot of these therapies, vaccines that are going to need the materials and services that you guys are providing. What do you think the long-term potential is for an NASD? And do you think, in 3 to 5 years' time, that actually scale is going to be the key differentiator in this market as a lot of these therapies have actually start moving from preclinical through later and later stage and that Agilent is actually set to gain share. And because you've put the investment in place to be able to build the capacity and be a scale competitor?

Yes. Thanks for that question, Matt, and I will tag team on this with Bob, but just kind of the history of how we got here. And then I'll answer specifically your question. So we had a business, about a $60 million-ish kind of business centered in Boulder, Colorado, 1 site, when I came on as CEO. And to your point about scale, customers are coming to us, listen, Mike, we're not sure we want to stay with you on any future programs because do you have the ability to take on additional volume. And we are pretty much maxed out at our Boulder, Colorado site. So we made a decision several years ago to invest in a brand-new state-of-the-art facility. We call it our Frederick site. That came online at the end of 2019, started producing revenue in '20 and we scaled up. So we saw the scale needs early on. And then we continue to see that as a differentiator. You saw us just announce another $150 million expansion in 2020. And then we drop a little breadcrumbs to say, hey, there might be more to come in terms of beyond that. So by the way, I think it's -- but it does take more than just a physical plant to win in this marketplace. Now again, this is a very sophisticated manufacturing process. And maybe at some point in time, Matt, we'll do a virtual tour or something there that kind of show you what it looks like inside. It's very complicated. So it's not easily replicated, but that's only part of the story, which is also is the expertise in the organization to work with your pharma partners. And I really think this is where Agilent shines, which is we're working with our pharma partners in the early phases of their own development programs and really have -- bring to those partners a high level of technical expertise and trust. I think it's that combination of both scale but expertise around that capability. And I think, Bob, we -- if you guessed about 150-ish for the year in terms of revenues in '20, we exited -- we have a full book of business and we actually exited the year at a higher run rate than that. So we're pretty bullish on the outlook for 2021 in terms of growth. Questions we were getting last year about this time were, can you fill the factory up? Do you have customers? And we have over 20 pharma partners, over 68 programs. We can talk about 2 of them publicly. And then we believe there's a lot of long-term potential here because we're continuing to invest in scale. So Bob, I know this is an area that you've taken a sharp pencil too as well. And anything you want to add to that?

I think you hit it well. I mean, I think it's not just scale, but it's the capabilities. And I think that, that's what sets us apart, getting part of that clinical development program and working in a consultative approach with our partners. And the beauty is as you move through the clinical program, you're with the dossiers that go to the health authorities and so forth. And so once you get that product approved, it's not impossible, but it's difficult for somebody to actually just switch us out. And I think that, that importance of being early on is resident in the results that we've been seeing, and we will continue to make investments in advance of that to drive that scale. But it starts with that relationship with the customer, which I think we have a very good understanding of how to do that effectively.

Great. Why don't we pivot to China. I've got a couple of questions on China. And it's obviously had a very nice recovery in Agilent, in particular, it's always been a focus for you. And so could you talk about kind of where you see the opportunities for Agilent specifically in China next year and beyond? And you mentioned at the Investor Day that ACG and DGG were both kind of underpenetrated in China. So maybe that's 2 areas to discuss. And then kind of wrapping within that, we've got a question from the audience that kind of was talking about with the lockdowns we're seeing in the U.S. and Europe, is China going to be a relative bright spot next year if we don't see the similar level of lockdowns that we're seeing sort of in the west. So wrapping that all together, we'd love to get your thoughts on China here.

Yes. Happy to do so. So Matt, as you know, we've been very positive on the overall China market for a number of years. And we've always felt that, that was a market that had a lot of underpinnings to have overall market growth rate above the global average. And as you know, as 2020, it was a major driver of growth as we exited the year. Now we have to remember that China was first in, in terms of having the impact on COVID on the marketplace. In fact, we saw the first inklings of that as we closed off our Q1 last year, where we can see then our last week our book of business in China. So -- but it has been a real area of strength for us as China work throed the pandemic. And what we're seeing is a fair amount of investment, both in terms of stimulus that's coming from the Chinese government, but also just very consistent overall with their theme of improving the quality of life. And probably get into later on, we saw really strong growth in pharma, but also in the food segment. So a lot of the macro drivers that we've been pointing to for years, China really continue to be there in FY '20 and beyond. So now the nature of the competition is changing in China. So you really have to make sure that you can compete not only with, if you will, foreign companies coming into the country, but also with the growing cadre of local Chinese companies as well. And our strategy is really not sort of blur the distinction and really make sure that we're viewed as a local player in the country. Now specifically, I made comments about the opportunities by business group because, as you know, about 20% of our revenues are in China today. But if you look at the breakout by business group, it actually is quite different. About 28% of LSAG's business is in the China marketplace. And we expect that they'll continue to be able to grow and gain market share there. So we're not expecting a deterioration of any kind of any sort at all in China relative to our instrument business. But you look at ACG, only 18% of the revenues are in China and 6% of DDG. So all things considered, if you got to the -- if you can get up to the company average, you could see some really significant growth opportunities there. I think that's a byproduct of historic focus. And I think we're well on our way on ACG. We've been back to the whole digital theme. We were early investor in capabilities around the WeChat platform. And Bob, I think that ACG has been a consistent double-digit grower for us in China, with the exception of when labs are shut down during COVID. And then...

Just on DDG, is there any obstacle that you mentioned that probably historical focus was one of the reasons why the DDG penetration shines, although is there any obstacle about the market that would prevent you from increasing that business for DDG specifically?

Yes. The short answer is no, Matt. I mean, I think there are some additional regulatory requirements that have to -- that we've been investing in. And twofold, one is we've created an opportunity to go direct in some of the markets there to actually get more scale and coverage and profitability, quite honestly, in our pathology business. And then obviously, we've been working to get those products approved. We've got Omnis approved there and now building out the menu on our pathology business. So it takes a little longer, and just given the timing there. But there's nothing structurally that would prevent us to be able to garner the same level of penetration in China that we have in Europe and in the U.S., which is actually a very good and -- we're not where we want to be, but there's no reason we can't get to where we are expecting to be.

It's all about having a real plan [ prior ] investments and really going after it. So I think from a DDG perspective, since I've been CEO, this is the best plan we've ever had, and we're pretty confident we're able to sustain those growth rates and have a different story in a few years about the percentage breakouts of revenues.

And I think you had mentioned, but the momentum you saw towards the end of December, a lot -- a bunch of that was China, too. So China, you're seeing good growth there right now. There's no -- okay.

Yes. Yes. Yes. I think -- go ahead, Mike.

No, no, go ahead, Bob. Go ahead.

I was going to say, I think China certainly was a bright spot for us last year and actually grew 7% on a core basis, and for the full year, actually exited at 13%. And as the business recovered, and we haven't seen any changes. As we thought about 2021, our expectation and thinking is that China is going to lead the way here for us in terms of growth consistent with kind of the recovery that we've seen. And certainly, through November and December, that assumption remains intact, for sure.

And Bob, one that I was going to make is this momentum that we've been talking about being intact, really, is broad-based. And while China clearly has been leading the way to one of the questions you received during our call, customers have found a way to work in the COVID-19 world. It doesn't mean we're completely immune to having aspect of the business, if you will, if you have a major, major flare up. But customers, we talked a bit about this earlier, have implemented safety protocols, have found ways to sustain their operations. Albeit other parts of your business, maybe your diagnostics business, could be suspect to a retrenchment if there'd be something of significance. But we think some of these trends was a shock to everyone to see -- to have a pandemic amongst us, and many people are reeling. So what I'm suggesting is, while China is clearly leading the growth trajectory from a geographic perspective, I think we can reasonably assume there'll be some growth coming out of the U.S. and in Europe as well for lots of the business.

Great. And last question on China. Food had been a difficult business, challenging business for you guys for a little while. We've seen it recover. So kind of what was the genesis of that recovery? And do you think that's sustainable? And how are you seeing that business in terms of food in China specifically as we head into 2021?

Yes, sure, Matt. In fact, we talked earlier, I said I was -- I'd be happy to get this call because it's finally green as opposed to a blinking red light, which has been that case for the past few years. And just for the audience, just a quick refresher here. I think we started talking about this almost 3 years ago, where the Chinese government was in the midst of a major reorganization of oversight of the food market. And what that -- what they ended up doing was it pushed a lot of the routine testing to the private sector, and we picked up that business on the contract testing lab side. So that's continued to grow over the last several years. But where we saw a significant slowdown was investment at the national level and in the national laboratories. In fact, for Agilent, we had a $200 million food business in China that went to $160 million, right? So down 20%. Now we knew at some point in time, there would be a need for the Chinese government to start investing at the national level particularly, and they have to stay on top of the latest technologies because there's always people trying to game the systems and find creative ways around some of the regs. And that's exactly what we've seen over the last few quarters. And in fact, we had strong double-digit growth in China in the fourth quarter, driven by a continuation of just the routine testing demand that goes on the contract testing laboratories, but also reinvestment at the national level. There's probably an element of it tied to increased worry by Chinese citizens about, hey, is COVID somehow affecting my -- the safety of my food supply. So it's back in the public eye in terms of area of real concern. We think the food market in China is back to being a contributor to growth, albeit we don't see that those same -- even as much as we love the Q4 number, I wouldn't pencil in those kind of high double-digit numbers for '21 and beyond. But I think if you put something in the high single digits, that would be a reasonable number. And then we think there will be faster-growing markets in China, like, for example, the biopharma space. But food is -- the food market, we think, has got still potential for sustained growth in China now that we've been through this major structural change in the marketplace.

Great. And maybe I'll lead with you, Bob on this one. Just in terms of capital deployment. On M&A, you both said a number of times that you have the balance sheet and the appetite for the right deals but at the right prices. And do you think that the fragmented nature of some of the faster-growing areas, maybe adjacencies to the NASD business, could be an opportunity? Or would it look more like a higher volume of smaller deals, a larger deal? How are you guys thinking about capital deployment as we head into 2021, given that it might likely be a competitive environment for M&A and therefore, valuations could shift materially?

Yes. It's a great question. And what I would say is, I think we have opportunities across multiple -- all 3 of our groups to be able to continue to drive into faster growth areas. We don't necessarily have a crystal ball to say whether it's going to be a number of smaller ones versus fewer larger ones. I do think that we don't feel like we need a fourth leg of the stool, so to speak. So it would be bolt-ons or adjacencies. Certainly, opportunities to build out areas like adjacencies to NASD are on the list of interest as well as other areas in genomics and diagnostics and in places like where we have been historically focused on in cell analysis. So what I would say is, you're right, the valuations are pretty rich right now. And probably, our strength is looking in and being able to compete in the private sector, which, by definition, are probably smaller deals in general than some of the larger public deals. And that's where the benefit of our people, our culture come into play as well as the checkbook. And what we're thinking about is continuing that track record that we have of a number of bolt-on type of activities to continue to strengthen our portfolio, but it's really across all of these areas.

Yes. And I mentioned to Bob about this earlier, I had an exchange with Briar Alpert, who was the CEO and some of the co-founder for BioTek, and he and I were e-mailing over the holiday break because it's been a little over a year since we closed the BioTek acquisition. And we were both commenting, it was a note he dropped me about what he was hearing from his former colleagues at BioTek. And the integration of Agilent is going extremely well. The cultural alignment, the consistency and commitment to the same set of core values really do matter. And as Bob mentioned, the checkbook is important, but it wasn't the only driver, for example, in the decision for the biotech for the Alpert family to sell to Agilent. And this is why we're going to continue to focus in the private sector, where often aren't in public bidding wars for assets, and there's many -- there are other dimensions to the buying decision beyond just a pure price play.

Understood. And just shifting to the buy versus build question. You guys have done some building, particularly in ASD and other areas. How are you thinking about in terms of R&D and spending your dollars organically this year? Any focus areas? Or how is that buy versus build equation going to shift as we head into this year?

I think that the way we look at the buy piece is it's opportunistic, which is if we say something that we could add to Agilent that fits our model of being in higher growth end markets, where they have differentiated technology team where we can make that business better, the right strategy, we'll move on those. But the core of this company is build. And we -- our focus will continue to be to fund the overall R&D level in the range that it is right now. And I think this is where your question was going, Matt, which is what's most important within an envelope is where are you investing? And what we continue to -- as I mentioned earlier, the whole evolution of our biopharma business and how that's really come to be a source of growth for us, that was a result of decisions we made several years ago to start investing differently in our mass spec or LC and our chemistry platforms. And as we move forward, areas of prioritization for us are obviously cell analysis, but also the informatics is a key part for us, building out this digital lab that we talked about. Genomics. So the areas that have the highest prospects from an end market perspective, where we're pointing our investment dollars. So I think you're going to see us remain a company that's heavily focused on the build aspect of our business. But as you've seen, we've also -- with the opportunities there, we feel like we have, not only the balance sheet, but the capability now to pursue acquisitions that really are value-creating for our shareholders. So Bob, anything you'd add to that?

Yes. The only thing just to build on that second part of your question, Matt. I would expect dollars, absolute dollars to grow. Now the percentage may change a little because if you look at our mix, as ACG -- ACG lives off the investments of the R&D, largely on the instrumentation side, but as that becomes a bigger part of our business, you get a mix shift there. Doesn't -- so you may see a slight decline in R&D spending as a percent but dollars we expect to continue to grow. And actually, some of those digital investments that we talked about earlier actually have been aimed at R&D and actually getting more out of the dollars that we're spending. And so we're expecting productivity in R&D, just like we're expecting productivity in other areas of our business and so forth. So I think you're not going to see a sea change shift. What we've -- the investments that we've been making, we feel like, are working. And those faster-growing areas are going to get a disproportionate share of our R&D going forward.

Great. Well, we're out of time. Mike, Bob, thank you so much for joining us. We really appreciate it. Happy New Year, and we will talk to you soon.

Great. All right, Matt. Thanks for having us. Bye-bye.

Great. Thank you.

Thank you. Take Care.