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With New CEO, Agilent to Evaluate Biz Units; Are Investors Ignoring LSCA?

Agilent Technologies' former CEO Ned Barnholt recently told BioCommerce Week that his firm simply "measures things," Now, following Barnholt's departure at the end of February, the company will be redirecting those measurement skills toward its own operations.

The Palo Alto, Calif.-based company, which was spun out from Hewlett-Packard in 1999, is organized around four business units: test and measurement; automated test; semiconductor products; and life sciences and chemical analysis. The first three units sell into the relatively mature communications and electronics markets, while the LSCA unit sells to the emerging life sciences research market as well as the established chemical, food, and petrochemical industrial markets.

Two of Agilent's business units — tests and measurement and LSCA — are creating a track record of growth, while the other two are struggling. So now, new CEO William Sullivan — who took over from Barnholt at the beginning of the month — and his executive staff is preparing to do some measuring of their own, Chris van Ingen, the head of LSCA, told BioCommerce Week.

(Young Sohn, senior vice president at Agilent and president of the semiconductor products group, will leave the company on April 1, Agilent said as Biocommerce Week was going to press Wednesday afternoon. Sohn joined Agilent in October 2003. Dick Chang, senior vice president of new business development, and former head of the SPG group, will replace him on an interim basis, Agilent said.)

For starters, there's the LSCA business. When asked if Wall Street was considering the growth of Agilent's LSCA unit, van Ingen said no.

"Ideally, in a diversified technology company, you would like all of your businesses to be best in class; then, you would get a premium for your business," van Ingen said. "That is certainly not happening today."

In the company's most recent conference call with investors, a dozen analysts were recognized for questions. Only one sought information on an LSCA business, the lab-on-a-chip products. The remainder of the questions either dealt with general financial issues or with technologies such as light-emitting diodes, fiber optics, flash memory, test and measurements, and cell phones.

Van Ingen said that is an investor-relations challenge for Agilent.

"We need to get more people in the life sciences, and even the chemical-analysis business, to follow us as a company," he said. "That is an investor-relationship type of focus we really need to have in the company."

Sullivan's move to the CEO position may mark crossroads in Agilent's history. Barnholt led the company since it spun off from Hewlett-Packard in 1999. Sullivan comes from the company's electronic products and solutions segment where he was vice president and chief operating officer since March 2002, and before that served as senior vice president for the semiconductor products division. He will earn $850,000 in his new position; previously he made $650,000.

Van Ingen said Sullivan would be examining the company's portfolio of businesses.

In the conference call, an analyst questioned Sullivan about possible divestitures of any of the businesses in the portfolio.

"We are absolutely committed to reach our long-term model of an operating margin of 15 percent, a return on invested capital of 21 percent, and we will continue to make our business portfolio reviews and decisions accordingly, to be able to hit that model," he said.

Today, Agilent's stock is trading in the mid-20s, giving the company a market capitalization of some $12 billion. But Agilent shares are drastically down from the $150 they traded at in Jan. 2000 at the height of the high-tech bubble, and not that far from the $10 share-price bottom they hit in October 2002.

While clearly not yet best-in-class, LSCA is establishing a financial track record. The unit has recorded double-digit revenue growth over the last six quarters. Van Ingen said that the company also plans to break out more information on sales within its LSCA unit in its next quarterly report. Previously, the company did not report with granularity its microarray sales, or other details of its LSCA product lines.

In its most recent quarterly report, for the quarter ending Jan. 31, LSCA led all of the company's units with 13-percent year-over-year revenue growth as it reported revenue of $354 million for the period, representing some 21 percent of the company's top line. The unit has grown from accounting for 11 percent of Agilent's revenues in 2000, and operating at break-even levels, to providing an expected 20 percent of total revenues in FY '05, which ends in October.

The unit's growth came against a year-over-year backdrop of 10-percent revenue growth in the period for test and measurement; a 5-percent drop for semiconductor products; and a 29-percent drop in revenues for the automated-test business.

In the molecular biology tools sector, Agilent's microarray business is regarded as the No. 2 player, behind Affymetrix; and the company is also on the second tier in the mass-spectrometry field.

And, with the January acquisition of Cambridge, Mass.-based Computational Biology and the acquisition of Silicon Genetics in August, the LSCA unit is clearly making an informatics play, which some might see as a risky endeavor given the commercial track record of informatics pure-plays.

"I don't believe, in general, that there are any companies who are profitable in the bioinformatics business, nor in a lot of the enterprise software area," van Ingen said. "We are really focusing in on a different type of business model. To me, informatics is really the backbone, where you tie things together. Bioinformatics [has] become part of the applications. If you only want to do genomics, we have the bioinformatics backbone in the applications. For any additional applications, we will charge like Microsoft would. That seems to be the prevailing way to go — instead of creating an infrastructure for bioinformatics. Nobody is willing to pay for that."

— Mo Krochmal ([email protected])

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