[First of two parts]
Addressing the recent virtual J.P. Morgan 40th Healthcare Conference, Agilent Technologies president and CEO Mike McMullen described his company in nine words: “A leading lab partner with unsurpassed capabilities and scale.”
With record revenue of almost $6.32 billion and record net income of $1.21 billion in FY 2021, McMullen says Agilent is better positioned than ever to live up to its self-description. Since McMullen became CEO in March 2015, Agilent’s revenue has grown 56% from $4.04 billion in FY 2015 (Agilent’s fiscal year ends October 31), when the company finished with $140 million in net income.
Agilent’s three key high-growing markets—pharmaceutical, diagnostics & clinical, and academia & government (research)—account for a combined 59% of revenues (35%, 15%, and 9%, respectively), up from 51% in FY 2015. (The other three markets are chemical & energy, food, and environmental & forensics).
Pharma has what Agilent projects to be its largest total addressable market (TAM) of $19 billion, growing at 5% to 7% annually. Within pharma, biopharma has grown to 36% of total segment revenues, up from 14% in FY 2015.
“I can remember when I first became CEO, people went, ‘Could Agilent ever have a meaningful business in biopharma?’ I think we’ve proven that out,” McMullen crowed.
Agilent’s Diagnostics & Genomics Group (DGG) has grown to a $900 million business with a TAM of $17 billion and also projecting 5% to 7% of annual growth. Last year, Agilent moved to expand DGG activity by acquiring Resolution Bioscience for up to $695 million, in a deal intended to expand the buyer’s precision medicine offerings by complementing and expanding its capabilities in next-generation sequencing (NGS)-based cancer diagnostics.
Academic & government is a roughly $600 million business with a TAM of $13 billion, expected to grow between 3% and 5% each year.
The company attributes its success in part to a “Build and Buy” approach that combines internal growth with external acquisitions–$2.9 billion in mergers and acquisitions since FY 2015—as well as capital investment, dividends and share repurchases.
For FY 2022, Agilent has issued guidance to investors projecting between $6.65 billion and $6.73 billion, with year-over-year core revenue growth of between 5.5% and 7%.
In an exclusive interview with GEN Edge, McMullen discussed Agilent’s fiscal year 2021 results, the company’s perspective on the drivers of its growth, and its strengths and challenges in the current fiscal year. (This interview has been lightly edited for length and clarity; Part II will appear separately).
GEN Edge: What drove Agilent’s strong fiscal year 2021 results?
McMullen: The strength in our largest end market, the pharmaceutical market. The pharma market represents about 35% of Agilent’s total revenues. For the full year, pharma grew 24%, which is some pretty, pretty healthy growth rate, led geographically by the United States and China. We exited 2021 with not only record performance but very strong momentum going into 2022. We’re not just a one-year wonder! We have been methodically building a bigger presence in what we see as high growth markets for the company.
In 2015, when I became the CEO, about 50% of our businesses was what we called pharma, diagnostics, and research. We purposely prioritized investments in those areas over the last several years, both internal but also through acquisitions to build new businesses here. Now, it represents almost 60% of the company’s revenues, inherently bringing up the growth rate.
GEN Edge: What’s behind Agilent’s pharma growth?
McMullen: One factor has been a big bet on the large molecule biopharma side. We made some acquisitions in a few buckets. We built up biopharma analytical tools, which has been an historic strength of Agilent, with analytical laboratory instrumentation. We built a series of workflows and additional chemistries and software solutions around our leading instrument platforms to drive our share in the R&D side of biopharma and ultimately into the QA/QC market.
We also made a big bet with our NASD (Nucleic Acid Solutions Division). Now, everybody knows all about mRNA and mRNA vaccines, right? Back in 2016, we decided to start investing several hundred million dollars in mRNA APIs [active pharmaceutical ingredients] for therapeutics. We have a number of pharma partners—companies like Alnylam and The Medicines Company, now part of Novartis. This was a big bet for us: We put out $350 million capital the first few years. We built a second production facility in Frederick, Colorado, to produce oligonucleotide APIs. Right now within that Frederick site, we’re adding another production line to double the current capacity for manufacturing therapeutic oligos.
When we first made these investments, people were wondering, would these technologies ever go beyond clinical trial programs? The initial therapeutics really targeted towards orphan drugs with smaller patient populations. What’s happened is, the number of programs has expanded very rapidly.
The question about whether there’s going to be on-market therapeutics for larger patient populations has now been answered. For example, Inclisiran (Leqvio®) from Novartis was just recently approved [December 2021] by the FDA, to address the situation where people aren’t responding to statins. Long story short, that was a significant driver for growth for us in 2021, and I think it’s one of the reasons why you’ll see us continue to drive strong growth in coming years.
GEN Edge: How much was Agilent’s pharma growth driven by biologics?
McMullen: The growth for the overall pharma market was 24%. There are small molecule drugs and the second piece being large molecule—that biopharma piece grew 38%. That segment has grown very significantly. Now we’re up almost 20 percentage points from where we were in 2015, when people were wondering: could Agilent ever build a biopharma business? Well, we answered that question.
Our mix of our businesses went up significantly in what have turned out to be attractive end markets. It’s our play in biopharma tools, both in the analytical lab but also moving out into the newer ways to create biologics, which is to change some of the bioproduction processes. We’ve been moving a lot of our technologies out of the lab into online/at-line.
I mentioned earlier our NASD business. The third thing is, we’ve built up a private cell analysis business, which has heavy research in both academia and pharma. This was built through a series of acquisitions. It’s now about a $375 million business for us, grew 25% last year, and it’s in a very attractive end market. We see a $5-billion market growing greater than 10% annually. And this is where you’re working on immuno-oncology immunotherapies. All these new types of research and new types of cancer treatments and therapeutics are really driving investments into those areas, which Agilent is poised to capture with those portfolio products.
GEN Edge: How much did COVID-19 drug and vaccine development boost Agilent’s FY 2021 results?
McMullen: Very little. There were a few relatively small programs on the mRNA side for therapeutics that were thought to be possibilities for COVID treatment, but very little of our business actually came from COVID. Our products were used in PCR testing flows, and we have products that have been used in some of the antibody tests. Our tools are used in research. Right now, some of our fragment analyzers are used, for example, for QA/QC with Moderna and Pfizer in terms of the production of vaccines. But it has been a relatively small part of Agilent’s business.
There’s a real emotional piece to it. People are thrilled that they’re a part of it. But in terms of materiality to Agilent’s growth, it’s been relatively small. We’re pointing to about a half point of a headwind next year in terms of growth because a lot of people bought a lot of our instrumentation automation platforms to get the PCR workflows. We’ve seen that business slow down.
GEN Edge: How have biopharma services contributed to Agilent’s pharma growth?
McMullen: We have a biopharma services business, where we’re working with our pharma partners on therapy selection. You may be familiar with Merck’s Keytruda®, an IHC [immunohistochemistry]-based product. Agilent worked with Merck to develop the companion diagnostic for Keytruda, hence a push into precision medicine recently. It’s still early days. We’ve added NGS and a liquid biopsy capability as well, a non-invasive test developed by Resolution Bioscience.
We’re really focused on the therapy selection market space, as well as MRD [minimal residue disease]. These are some of the examples of what we do on the biopharma space. And then we have a very strong historic footprint and portfolio on the small molecule side. And that also is experiencing strong growth—not as high as large molecules, but still very healthy. It’s being led by China.
GEN Edge: Speaking of China, its National Drug Centralized Procurement Pilot (“4+7”) Scheme, launched in 2018, lowered generic drug prices and consolidated generic drug production in 11 major cities. You have credited 4+7 with fueling Agilent’s small molecule growth in China. How so?
McMullen: China’s 4+7 Scheme was a new tendering process which really was driven with the idea of lowering the price of pharmaceuticals, to be able to provide more healthcare to their population.
Initially the industry reaction was, that’s not a really good thing for the life science tools industry. Our position was completely different: anything that drives more production, more therapeutics being produced—there’s going to be a need for high-quality, high-performance, reliable equipment and software to ensure that the drugs that are being produced are of the highest quality, that they’re safe.
That’s exactly what’s happened in China. We are a vendor of choice there. As China has been restructuring and rebuilding its pharmaceutical industry, we’ve been able to enjoy that growth.
GEN Edge: How much of a headwind does China’s “Buy China” domestic-preference policy pose toward Agilent’s pharma growth in China?
McMullen: It would be a headwind if we weren’t effectively addressing it! The way I like to think about it is this: China, like any other country, would love to see their domestic industry be the primary source of procurement. We’d like to see that in the U.S., but at the end of the day, they have higher levels of priorities for the country.
What are those priorities? Ensuring a healthier life for their citizens. This has to do with healthcare treatments, the clean-up of their environment, ensuring the safety of their food supply. These quality-of-life priorities for China still leave Agilent in a very enviable position in terms of growth, because right now, there aren’t any local substitutes of our capabilities. For the capabilities we provide our Chinese customers, the best choice is Agilent. That requires us to continue to innovate and make sure that we stay on the leading edge of things.
GEN Edge: What about companion diagnostics growth in China?
McMullen: Keytruda is just now available in China, and our diagnostic is now available in China. The Chinese government would not want to suddenly restrict the ability for their population have access to Keytruda. There is not a local companion diagnostic of the capabilities of Agilent.
That said, we also recognize that we need to continue to invest directly in China, because I think there’s a huge customer benefit to be able to be more responsive to your customers in China. And then, it also mitigates that “Buy China” in terms of, “We have it in China for China” strategy.
Last year, we started doing our target enrichment products in China. Then on January 10, we announced a $20-million expansion of our Shanghai manufacturing center to produce more liquid chromatography (LC), spectrometer and mass spectroscopy (MS) products. There’s a huge customer benefit for that. Customers are very confident because you’re in the country, you can be more responsive, and get things done quicker. If there’s issues, they get resolved more quickly—although we’d like to say, we don’t have issues.
GEN Edge: How has “In China, for China” helped or challenged Agilent?
McMullen: “In China for China” is also not only about manufacturers in China primarily selling to China, but also making sure that our products are tailored for whatever regulations may be specific to China. It’s a very important market, a very dynamic market. It’s one that we actually know quite well. We were there from the early days in the ‘80s, with the first JV [joint venture] with Hewlett Packard. I spent six years living in Asia, and for a number of those years I was managing the China business.
I think we’ve got a really good connection in terms of the dynamics of the marketplace in China. But it’s very clear that just like other countries, China would like to see more happen with local content. You talk about Chinese companies: We’re a Chinese company from a standpoint that we have no expats in China. We run it. We’ve developed teams over the years. We have 2,000 people in China, a big team. You’ve got to continue to understand how to compete in China, and I think if you remain indispensable to their higher goals, that’s how you continue to win.
I think over the next 5–10 years, you will see an evolution of that marketplace, where more and more of the market is served by local Chinese companies. My goal is to make sure that that share loss occurs with my competitors, not me. I feel pretty good about our chances.
[In Part II of this interview, McMullen discusses the growth of the Diagnostics and Genomics Group, key factors in DGG’s growth, and potential headwinds to growth in FY 2022].