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Agilent s Short-Term Plan to Grow Life Sciences Arm May Not Include Big Buy

In the midst of selling off its semiconductor business to private equity firms Kohlberg Kravis Roberts and Silver Lake Partners for $2.66 billion (see BioCommerce Week 8/18/2005), Agilent officials suggested this week that the firm is unlikely to pursue a large acquisition to bolster its life sciences business.

Following the divestiture and realignment of the company, Agilent will focus more on growing its Life Sciences and Chemical Analysis group, which will be renamed the Bio-Analytical Measurement business. While acquisitions may play a role in building that segment's revenue growth over the next half year, it is more likely such acquisitions would be smaller tuck-ins and technology buys, company officials said during the firm's third-quarter conference call this week.

"Right now, where we are, to ensure that we complete the divestitures … our focus is on getting our existing commitments done," said Bill Sullivan, Agilent's president and CEO. "We are very cautious of a very large acquisition and the probability of failure, [and] we have very strict guidelines to ensure that any acquisition we make is accretive as soon as possible."

The Bio-Analytical business has been one of the firm's more predictable and profitable businesses, and Agilent hopes to grow it 10 percent or greater annually. The unit had enjoyed double-digit revenue growth for six consecutive quarters, ending with the second quarter this year, when it posted 3-percent growth followed by 2 percent in the third quarter.


"We are very cautious of a very large acquisition and the probability of failure, [and] we have very strict guidelines to ensure that any acquisition we make is accretive as soon as possible."

"We would expect that a year from now the Bio-Analytical [business] will be a larger portion [of organic growth] than it is today," said CFO Adrian Dillon during the call. "The organic growth rate is a little higher there than it is in the electronic measurement system [business], and we have some good growth plans … whether it's organic alone or supplemented a little bit by acquisitions, we do expect it to be a higher proportion," he said.

Sullivan said the firm has been "very pleased" with the progress of its Bio-Analytical business, both in genomics and proteomics, and expects to invest in developing further instrument platforms.

Divestitures on Track

In August, Agilent announced a major divestiture and realignment plan, which in addition to the sale of the semiconductor business, includes the sale of its 47-percent stake in lighting company Lumileds to Royal Philips Electronics for $950 million and the repayment of $50 million in debt.

"The divestitures we announced in August are on track," Sullivan said, with sales of both businesses expected to be completed by Dec. 1.

The plan also includes a spin off of its system-on-a-chip and memory test businesses in an initial public offering, which Sullivan said is expected to take place in the middle of the next fiscal year. Agilent also will cut 1,300 jobs — or roughly 34 percent of its workforce after the divestitures — through lay-offs, attrition, and transfers to the divested businesses.

Agilent expects the moves will reduce its global infrastructure costs by $450 million. Although it also expects to incur $200 million in restructuring costs, company officials said those costs would be offset by proceeds from asset sales including the elimination of 11 sites.

Q4 Revenue Rises 5 Percent

Also this week, Agilent reported fiscal fourth-quarter revenue of $1.41 billion, a 5-percent gain over revenue of $1.3 billion in the fourth quarter last year. However, total orders of $1.5 billion for the quarter were 26 percent higher than the comparable period a year ago.

The Bio-Analytical Measurement business pulled in revenue of $382 million, 8.5-percent growth over revenue of $352 million in Q4 2004. The segment also reported improvement in its gross margin, 52 percent versus 50 percent, and return on invested capital, which grew to 36 percent from 24 percent. Orders for life science products, which account for 42 percent of the segment's total, were up 11 percent year over year, Dillon noted during the call.


"We would expect that a year from now the Bio-Analytical [business] will be a larger portion [of organic growth] than it is today. The organic growth rate is a little higher there than it is in the electronic measurement system [business], and we have some good growth plans … whether it's organic alone or supplemented a little bit by acquisitions, we do expect it to be a higher proportion," he said.

"In the Americas, large pharma spending was softer, while spending picked up at biotech firms," Dillon said. Sales in Europe improved as budgets were released and Asia remained strong, according to Dillon.

"We've seen sustained growth from mid-sized pharmaceutical companies and good growth from generic pharmaceutical companies on a worldwide basis. In proteomics, we are gaining traction across our product portfolio including LC and LC-MS products," Dillon said.

Revenue for the Electronic Measurement segment — the other business Agilent is keeping — was $903 million for the quarter, a gain of 17.9 percent year over year. The Semiconductor Products business reported revenue growth of 25 percent to $490 million year over year, and the Semiconductor Test Solutions business had 40-percent revenue growth to $199 million.

Agilent's fourth-quarter net income fell to $26 million, or $.05 per share, from $74 million, or $.15 per share, year over year. If restructuring charges and other items are excluded, Agilent's net income would have increased to $193 million, or $.38 per share, versus $153 million, or $.30 per share, for the comparable period in 2004.

For its fiscal year ended Oct. 31, Agilent reported revenue of $5.1 billion, nearly flat with results from fiscal 2004. Its net income declined 6 percent to $328 million, or $.66 per share, from $349 million, or $.72 per share.

The firm finished fiscal year 2005 with $2.25 billion in cash and equivalents.

In addition to announcing its Q4 and full-year financial results, Agilent said that its board of directors had authorized the repurchase of up to $2.7 billion of the firm's stock in a modified Dutch Auction, under which the company intends to buy back 73 million common shares at prices between $32 and $37 per share. As of Oct. 31, Agilent had roughly 500 million shares outstanding.

Agilent's shares closed Tuesday at $34.50 on the New York Stock Exchange.

— Edward Winnick ([email protected])