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

All right. Good morning, everybody. I'm Doug Schenkel from Cowen's life science and diagnostic tools team. It's my pleasure to welcome management from Agilent to the 41st Annual Cowen and Company Healthcare Conference. From the company, we have Mike McMullen, the company's Chief Executive Officer; Bob McMahon, Chief Financial Officer; Sam Raha, President of DGG; and Ankur Dhingra, the Head of Investor Relations. Gentlemen, thanks to all of you for joining us this morning and taking the time. Mike, you've been doing a terrific job positioning the company for sustained above-peer-group growth through organic and strategic acquisitions. I know it's been great to see how the company has evolved under your leadership. I know you're not doing it alone. The other folks on the screen and all of your colleagues have been rowing hard moving along. We have a bunch of questions to ask you on the business, on the end markets and, of course, on the most recent announcement on your pending acquisition of Res Bio. Before we get into that, let me hand it over to you. And if you want to make any prepared remarks, please feel free, and then we can get into the discussion.

Yes. Thank you very much, Doug. I really appreciate the invitation and joined you on their 41st Cowen conference. I know you haven't been there for all 41 of them, but it's -- what a great tradition. And we're really happy to be a part of it. I very much appreciate the feedback on what Agilent has been up to. As you mentioned, it really is a team effort, really proud of the results the Agilent team has been delivering, not only this year, but through the transformation. As you may know this, I'm coming up on my sixth year in my role, and it's hard to believe it's been 6 years, but time flies when you're having fun. And we've really been having a lot of fun at Agilent as we've -- really have rebuilt the company culture. It really starts with the team. We've built this One Agilent culture where we're all, as you described, growing together as one team, I think the real power to that. We've built significant new positions in high-growth, new markets for us. And in fact, we'll talk about our latest move in that area I'm sure today with our recently announced Res Bio acquisition. And then finally, I think we've been able to build a reputation of a company that does what it says it's going to do. We've been delivering results, delivering results for our shareholders along the lines of our shareholder value creation model. And as I mentioned earlier, we've been having a lot of fun because when you've got sustained above-peer growth coming out of the company, delivered by the team, we can -- while we're all expand those operating margins and driving double-digit EPS. It really is energizing for the team to be able to do great things for our customers, but also great things for our shareholders. So we're a much different company than we were 6 years ago, and we got a very exciting future ahead of us. More to come. In fact, I think you saw before we get into Q&A, we're off to a really excellent start for 2021. I'm really pleased what the Agilent team delivered in Q1. And if there was any message I would want to make sure I got through today, which was growth was broad-based across all of our business groups. All of our regions, geographies grew, led by China and U.S., and momentum in our business continues. And relative to -- we feel really good about the -- our ability to deliver on those longer-term commitments we shared at our December analyst call so -- and Investor Day. So that's the end of my somewhat prepared remarks. So Doug, where would you like to take us?

Well, no. And that's a great, great start to build off of. I do want to come back and talk about some of what you just referenced later in our discussion. I want to talk about some of the have building early in the fiscal year and, obviously, in the early part of the calendar year. Before we do that, maybe we can just do some current events and talk about the Res Bio acquisition. So earlier this week, you announced plans to acquire Resolution Bio for -- I think it's up to $695 million. And I think you've talked about paying $550 million upfront, the balance being milestones. So I'll do my best to just give a quick description of what Res Bio is. And Sam and the team can probably do a much better job and clean up anything I mess up. But this is an NGS-based liquid biopsy platform with products designed to be kitted, but also to be run in the CLIA lab. The company did -- I think it was about $35 million last year in revenue and had indicated it was targeting of $50 million to $55 million in calendar '21 revenue. So congrats on this. Maybe you could just tell us a little bit more about Res Bio and why you felt that the right home for this asset was within Agilent.

Yes. Let me lead off of this, Doug, then I'm going to pass it over to Sam. So you've got the characterization right. It's a real company with real customers, a growing company with a very strong biopharma services business, which we think is going to be a huge complement to our existing Companion Diagnostic business, IHC side, and Sam will go into some of the details. Also became very clear, not only did they have a great platform technology and strong customer relationship, but there's just a tremendous cultural match here. And we spent a lot of time -- Sam has known Mark and the team for a number of years. I've gotten to know them over the last 6 months really in-depthly, and their's is a great culture fit as well. We had our initial introductory call with the Res Bio team. It was one of the Zoom events, but almost 2 hours of conversation, a lot of excitement on their side. And as you'll hear from Sam, both co-founders plan to stay with us and really continue to inspire the team. And they're all super excited about really being able to take their vision of the future to really help more people faster. And they see that happening at Agilent, which fits exactly to our model of we're looking for companies where they can really leverage the scale of the capabilities of Agilent. So this is right in our sweet spot, the companies we like to look to bring into Agilent. And Sam, why don't you share some more of the details about why we really love the Res Bio and are super happy to have them as part of Agilent?

Yes, yes. Thank you, Mike. And Doug, I'll offer up maybe 3 important things to detail further. One thing is that they have a technology, which, as you said, is applicable NGS-based for liquid biopsy. But it's also what we can cover with their particular technology. It's all the major types, which we call the single nucleotide variation, insertions, deletions, fusions, all the things that are important across a broad class of cancers. So this is about lung. This is about breast. It's about prostate, and you could think about the broader cancers. Now this is very important to us because we consider ourselves to be a diagnostic provider across cancer. And our model is about, first and foremost, working with biopharma customers to work on specific indications of cancers that are tied to specific drugs that are in development or on market and to really have a companion diagnostic that's on the label of those drugs. So what Resolution is doing is very much tied to what we have, and what also excites us is what we are able to do together. Doug, as you probably know, we have built up over the years a relatively differentiated capability, not only to do that companion diagnostic development and registration, for example, in over 85 countries today, for PD-L1 as an example. But beyond that, the ability to then actually manufacture, to kit, to distribute, to have the market access into thousands of clinical diagnostic labs. We believe that the Resolution Bio capability, which is the next-generation sequencing complement to IHC, is something we can plug-and-play into the Agilent engine of those other capabilities. So those are some of the reasons we're very excited about this fit.

Let's unpack that a smidge more, Sam. So when you talk about Res Bio's ability to -- in a kit if that's what folks want or in the central lab to do SNFs, to do fusions, to do [ CMBs ]. And I guess, really what I'm describing there is to, call it, genetic variation variance but also find structural variance. Was that what attracted you to that? I mean I think everybody wants to do that. But basically through your diligence, did you conclude that the approach that Res Bio is taking is differentiated relative to some of the alternatives that are either already out there on the market or available to you as a target?

Yes. I'd say 2 things to that, Doug. First of all, yes, confirming that their technology that they built -- and when I say technology, it's a combination of their chemistry, their informatics and decision support system, which has been tuned by thousands of clinical samples, right? All of that being their technology really is proven to work across these broader sorts of cancers. And as you also described back to me, those common mutations, which are very important in having a companion diagnostic. And I think the best evidence of does it work or how relevant is it is the fact that they have dozens of programs that they're working on with more than 10 pharma companies already. So we saw the same thing. And you said another thing, which I do want to highlight. I think what makes their technology at this moment relatively unique and very attractive to us is our vision is to have -- we believe in cancer -- I'm taking a step back for a second, turnaround time on results matter. Days to understanding...

And just everywhere.

If -- what treatment to put a patient on or not put on makes a huge difference. And with a centralized testing model, we've improved as a science and medical community, and we're maybe 7 to 10 days. But being able to reduce that to 2 to 3 days is going to make a difference. And cancer doesn't happen just around these central labs, right? Cancer happens everywhere in the world. And so we see the ability to have these kitted NGS-based tests to be a real opportunity for the market.

And this is a real opportunity for you. And I -- again, I apologize, Sam, because I'm kind of saying the same thing you did a different way. But I think part of the attraction here is you have a leading IHC franchise.

Yes.

You have a commercial reach [ instantly ] to get after the hospitals. In the U.S., we haven't seen a lot of success -- I mean we've seen some success, which is early, but it's still a centralized model. History tells you eventually things get decentralized. Essentially, I'm guessing, part of the logic here is buy a good asset that you guys feel comfortable with, that's been validated by biopharma, plug it into your regulatory infrastructure, but maybe just as importantly, your best-in-class commercial infrastructure and have this tool ready to go as a means of decentralizing in the way that we've seen tissue going over the last several decades.

I couldn't have said it better, Doug.

You got it. You've got it.

I've got to tape that, and I got to use that one exactly.

It was pretty good. Sam or Bob, what do you think?

Yes.

Doug, as you know Bob joined Agilent from the diagnostics world. And I think you've seen this model play out as well, Bob, right?

Yes. And Doug, as you said, I mean, this is truly, for us, we view this as a global opportunity. When you think about where our diagnostics business is today, actually, we have a greater presence in Europe than we do here in the U.S. and so forth. And that model isn't the same in Europe, as you know. And so being able to take this technology and the ability to kit this and actually leverage our channel, as you said, we see this as not only a near-term play but a long-term play.

They already had some success on the clinical side from -- on the kit side in Europe. I would assume that you're going to have success. That's where one of these companies would have early success versus the U.S. just because things in the U.S. are more centralized right now.

Doug, if you're asking, I mean, there are no kits on the market today. All the programs are in development with pharma, and this is the modeling and the Agilent model. The kits that will come to market will be tied specifically to on-market drugs as a companion, right? So that's our primary model, so nothing yet.

Okay. No, that makes sense. And then -- but then kind of along the same lines, when those kits are developed, presumably the lower the market in Europe versus the U.S. But [indiscernible]

Yes, you're spot on, Doug. You're spot on.

Maybe last one along these lines. One of the things I've come to appreciate over the last several years is -- there's maybe a better way of putting this, so clean up for me if I'm messing this up. I mean there are kind of politics within the hospital, right? And there's the oncologists, there's the geneticists and then there's the, yes, pathology lab. And they overlap, but there are different departments, and they have different motivations. And sometimes, they all want to get to the same place, but sometimes they want to get there in different ways. Your strength -- yes, you have strengths in some different areas, but I would say, amongst those constituents, where you're strongest is with the path lab. You're now going to try to sell an NGS-based approach, I think, through that channel. How do you kind of address this conflict or the politics, whatever the right way to kind of describe what I'm trying to describe? Is that something you think is real? Like is that real? And if so, how do you address it?

Yes. Maybe I'll start and then -- and Mike and Bob, you can add in, too. I think, as you said, it's a sometimes complex symbiotic relationship between those constituencies. But what we know is when you start with a companion diagnostic that's on the label of a drug, that's a differentiated solution because that makes it much simpler. It's not about let me choose from the plethora of what's out there. We're usually in a relatively unique position. So our relationship with biopharma is our -- where we start with our position of strength. And we pull that thread, if you will, all the way through. And the other thing I will tell you is these pathologists. And if you have -- if -- when there is clarity of what test to use, then I found personally that the interactions between those various key clinical constituents is much more straightforward. It's more about the multi-modality and how they come together on cancer panels and -- so tumor boards and so forth. I'd offer that. And then by the way, Doug, though our -- I'll tell you 2 other things. One, that though we clearly have a very strong presence in anatomical molecular pathology labs, because of our NGS products, our SureSelect and genomics products are already the backbone a lot of diagnostic, NGS-based diagnostic testing that's being done today. So we're in those labs, too. So it's not exclusive to molecular or anatomical pathology labs that we have it. I think that gives us a place. And I will tell you, I have personally been to dozens of pathology labs over the last 3 years around the world. And at least in 50% of them, they ask directly, "When are you going to have an NGS solution that we can consider?" So even the hard-core anatomic pathology labs are going to pull this. We're not just going to have to push them.

That's great. I was -- I think we have 10, 15 minutes left. I mean I was -- I'll check to see if any other folks who are listening in have questions on Res Bio. But I was thinking with the balance of our time, we could talk a little bit more about the balance of the business and the momentum you have coming into this year. So maybe just to frame this, starting on COVID-19. You are a bit less exposed to the COVID-19 tailwinds. Or at least, we were last year relative to some of your diversified tools peers. The flip side to that or kind of the silver lining or however you want to put it is, you don't have the same headwinds this year or next year that some of these companies may face. That being said, Mike, would you -- Mike or Bob, would you be willing to just help me frame this a little bit better in terms of what were the headwinds and what were the tailwinds over the last few quarters specific to COVID? And how we should be thinking about those as we think about the year ahead?

Let me make a few opening comments, and I'll pass it to Bob. So you're right on, Doug, which is we have been a part -- the company has been a part of this COVID-19 fight, and it's a really kind of a feel good for the Agilent team to know that they're are out there playing a part. But in terms of overall materiality to the company, the strength of the company has really been in the non-COVID-based business. I think we've had about 2.5 points of reported growth has been coming from the tailwinds. And I think, Bob, we're kind of expecting kind of a similar level sort of...

That's right.

But it's a -- I don't want to diminish the energized impact it's had from the company to know that our company is involved in this fight. But in terms of materiality, it's really a base business story. But Bob?

Yes. And I think, Doug, to your point, I mean, we'll start lapping that in the second half of this year as that ramped up. But our view is that, that's not going to materially diminish. There will be some puts and takes. But as we think about it, vaccine production is ramping up. We've got some products in there that really have started to ramp really on the front end of QA/QC and some of that. And we think vaccines are going to be around for a while here. And so that will help kind of help the glide path here. And so to your point, we haven't had a -- as some of our -- others that play heavily into COVID testing, we haven't had as much. But that $30 million to $35 million or 2% and 2.5% kind of quarterly, we think that, that's going to be here for the next several years.

Steady state, kind of.

Yes. The composition will look a little different in terms of the products, but we feel pretty good about that right now.

No, that's really helpful. Because I think there is this question about the durability of COVID revenue, I mean, if you can get to that level and sustain it. And again, the mix, like you said, is going to change a little bit from where you were playing a bigger role on the vaccine and the therapeutic side. Unfortunately, those needs are probably not going away anytime soon. But I think it is important folks -- for folks to note, and Bob, again, just clean this up if I'm messing it up. But the 2.5 points of growth you had in fiscal Q1, I mean, that was 2.5 points in a -- I think it was a 14% growth quarter, right? So this is -- you guys are doing a good job with COVID, but this isn't a COVID story. I mean this is a story of growth driven by other areas.

Absolutely.

Absolutely. That's absolutely correct.

So in terms of other drivers, and again, I know that the Venn diagram isn't completely clean here. But as we think about China, you are over-indexed or more indexed to China than some of your peers. Last time we hosted Agilent at this conference, which was a year ago, we were talking about the decline in China due to COVID-19. Now we're happy to be talking about what is recovering robustly, especially in China. You grew 25% in the first quarter. That was led by food and pharma. Just to start on food, you've mentioned that there is increased investment at the national level. Is this going to be a robust grower -- growth area? I mean there's -- I imagine some of this is the comp. But when you think about the 3- to 5-year plan, this is another area where China food, I would think, could be a durable driver to growth.

Yes. So a couple of comments here, then Bob and I would tag team on this. First of all, I appreciate your recognition of the strength of our business in China. At Agilent, we play a long game. And I think I've been pretty public about my position here, which is having a strong business and team in China is a good thing. And sometimes it falls in and out of favor. But if you look at the long-term growth prospects of that marketplace, you want to have a strong team. You want to have a strong business there because there's some fundamental drivers in that marketplace which really play to the capabilities of Agilent. For example, their continued investment in pharma, biopharma, the continued investment in quality-of-life improvements, specifically what you're talking about relative to the food market. And if anything, it's been even further visible to the population with COVID how important food safety is. So we've been in the midst of a transition in that marketplace. As you -- been fairly well-publicized, the government changed its role and pushed a lot of the routine testing to the contract labs supporting the end-market customers. And we have done really well in that all through the last several years. Where the business has really been constrained is the portion of investments at the national level, which has oversight responsibility for the overall market. And this -- we've had a very, very strong position in those accounts. So we were really -- we really struggled when they weren't investing. And you saw us -- that business went from, what, a $200 million-ish, Bob, to almost back to $160 million, almost a 20% drop. We're seeing a continued growth in the contract side but also reinvestment now occurring on the national level. I don't think it's going to go back to those high double-digit growth rates, but there's no reason why this can't be a -- somewhat contribute to growth in -- at least in the high singles long term. Probably this year, we'll do better than that. But Bob, I know you've taken a close look at that.

No, you're spot on. I mean I think when we think about it, if you looked at the way that the testing happens in China relative to, let's say, the U.S. and index it in terms of the way that FDA works and so forth, then they actually started modeling more similar to the way FDA does, decentralize the testing. There's still a lot of growth opportunities there. And I think, as Mike talked about, this halo effect of COVID in terms of just sensitivity around ensuring that food is safe and so forth, that certainly is in play in China. Quite honestly, it's a play around the world. And we're seeing growth in food, and we're very strongly positioned, are well positioned in the food market. But I would say in China, our biggest opportunity continues to remain, I think, the pharma market and our investment there, not only in the instrumentation, but the continued development in our services and consumables business that has continued to be growing at advance of the company, double digits and so forth. And this productivity push there will only, I think, continue and I think will benefit. Sam's business probably has the most gaudy growth numbers off a small base, but there's also opportunity there going forward, too. And so -- but if you think about where the key pieces are, I would say pharma and food has come in a nice recovery as well.

And this durability growth we get with the ACG business, playing to our strength of having the largest installed base of instrumentation already out there. So there's a lot to be excited about relative to the future in China. And Sam will have those gaudy growth rates on a growing base of business.

That's right.

Yes. It's interesting. I mean a year ago, I mentioned the COVID concerns specific to China, which were already relevant in early March. But I mean if we think about the quarters before, there were concerns about when's food going to come back? Can Agilent compete in a more decentralized testing approach for food? For biopharma, there were concerns about what's going on with small molecule and going to the limited suppliers and initiatives like that. A year later, we're turning the corner on COVID in China, your food business is back. So I think you addressed those concerns about what happens to Agilent in a different type of marketplace of our market model. And I think it's the same thing in biopharma, right, where marketing growth along the lines of what you described. And it's -- I think we've noticed it on the LSAG side and the ACG side. But -- that there are really good growth rates in DGG, where I think the company is a little under-indexed in China, right, relative to the other groups.

Yes. Exactly right, Doug, and we're really pleased with how the small molecule business has developed for us in China. It's one thing -- we had a thesis, which we articulated very early when the 4+7 was going down, which was we actually think this is going to be a good thing for our business long term because pill count's going to go up. It's going to drive increased test needs. We think we're really well indexed and going to be very competitive in winning deals because we think our customers are going to be the ones that are going to win the tenders. That was our thesis, and I think it's playing out as we had hoped.

Hey, Mike, just a couple -- I'm going to try to get in 3 or 4 minutes more.

Sure, sure. I'll try to be brief. I'll try to be brief.

No, no. This is all me. So let me see if I can do a lightning round. So the last -- your last answer is a good segue to kind of a higher-level global question. And if I frame it this way by pointing to LSAG's strength, so I think as most folks on the line appreciate, LSAG is your group that provides instruments and software to analytical lab customers, and it represents about 45% of total sales for the company. In the first quarter, LSAG grew 11%, and you described the growth as broad-based. I think we've all been focused on what's going on in large molecules and the demand growth, the demand, which is driving pretty consistent double-digit growth. For you guys, you're participating there. But in small molecule, you indicated that you grew mid-teens in the first quarter. Some of that is China, but it's got to be more than that, right? Are you seeing strength in small molecule globally?

Yes. We -- and I know every CEO that probably speaks to -- at your conference would tell you they're gaining market share. But we know from our industry stats that, in fact, is the case in our core liquid chromatography and LCMS platforms. And it's both in small molecule and large molecule. And I also think it plays to our growing strength in the informatics side of that business as well. So it's really a holistic approach we have to laboratory, which is -- we often want to talk about individual technology areas, but it's a holistic approach of leading instrumentation technology, informatics as well as our services capability. So I think that's all culminating in our ability to pick up sustained movements in market share. So that's been part of our story, and it's a fairly global story as well. Obviously, the growth rates in China are pretty gaudy, but we're seeing strength in other parts of the world as well. And then by the way, I'd also just point out as a cleanup, which is part of the LSAG strength is also our cell analysis business, which was a -- we really have transformed what is LSAG. So -- and that business was -- has been putting up some pretty, pretty strong numbers as well.

Yes. That -- you actually captured a couple of things I wanted to get at, which you...

I was reading -- I think I was reading your notes there.

No, that's perfect. No, that's perfect, right? I mean, I think if we think of what's going on globally, there's continued growth in large molecule. Small molecule is probably coming back a little bit in and you're gaining share. And then on top of it, you've built a pretty impressive cell analysis business that is going to keep growing at a pretty good clip and is already what, at around $300 million [indiscernible].

Yes.

That is -- that can move the needle.

Yes, absolutely. So we're really proud of that. That's why I went -- in my opening comments, I talked about having built some significant new positions in new markets, the high-growth markets for us. And one of the stories there is the cell analysis business, which we think this has a lot of runway still ahead of us.

So I know cell analysis was built organically and inorganically. We spent a bit of time talking about Res Bio. There are now an increasing number of examples of Agilent successfully incorporating new assets into the portfolio. Even after Res Bio, the balance sheet is going to be pristine. Should we expect more?

Yes. We're -- our story here is a build-and-buy strategy. And historically, Agilent was build only, and we now want to complement our great innovation capabilities inside the company in willingness to invest in our -- direct our business through M&A that makes sense for us. And that model is growth-accretive M&A, where we think that there's a great -- that the target company has a differentiated capability, differentiated team. Can't -- don't underestimate the importance of culture. Can we integrate those cultures? And then most importantly, is there something about what Agilent can do to make that business even better so it's a good use of our shareholders' money? So we plan to continue to be aggressive on this build-and-buy strategy.

All right, guys. Unfortunately, we're out of time. We covered a lot. That was great. Mike, Bob, Sam, Ankur, we appreciate the time, and look forward to catching up again soon.

Thanks, Doug. Pleasure to be here.

Same here.

Thanks, Doug. See you.

Right. Bye-bye.