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Agilent Expects Varian to Add $111M to Life-Sci Arm's H2 Revenue, May Be a Year for Large M&A

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This story originally ran on May 19.

By Tony Fong

Agilent Technologies expects its recently completed acquisition of Varian to add about $111 million to its Life Sciences business for the second half of fiscal 2010, company officials said this week.

As the company integrates the Varian business into its fold, Agilent CEO William Sullivan added that the company in one year "will be in a position to again look at [large M&A] opportunities."

The company made the disclosures as part of its fiscal second-quarter earnings release, which showed that total revenues grew 16 percent and that a net loss in the prior-year period swung to a profit in the current quarter.

Total receipts for the three months ended April 30 increased to $1.27 billion from $1.09 billion year over year, as Life Sciences receipts rose 12 percent to $334 million from $298 million. Receipts for the firm's Chemical Analysis arm rose 19 percent to $238 million from $200 million a year ago.

Agilent also reported a profit of $108 million, or $0.31 per diluted share, compared to a loss of $101 million, or $0.29 per share, a year ago. Last year's loss, which was recorded in all of Agilent's businesses, was the result of the economic recession, the company said (PM 05/21/09).

The earnings release came on the heels of last week's announcement by Agilent that it had completed its $1.5 billion purchase of Varian. The buy, the largest life science deal in Agilent's history, was originally announced last summer (PM 07/30/09).

While the acquisition mostly benefits Agilent's Chemical Analysis segment, company officials have said it will increase the company's footprint in the life-science market by providing it with a number of instruments it did not previously offer. These include NMR, MRI, and X-ray crystallography systems and two mass-spectrometry platforms: a Fourier transform MS and an entry-level triple-quadrupole.

"These technology platforms will open new doors for Agilent and its customers," Nick Roelofs, Agilent's senior vice president and president of the company's Life Sciences Group, said in a statement last week. "This technology will play a key role in Agilent's growth through applications such as pharmaceuticals and therapeutics."

Roelofs' statement echoes comments he made in February at Pittcon, where he emphasized Varian's anticipated role of expanding Agilent's protein research offerings.

"We're very focused on solving a question called proteins, and we're very focused on attacking a protein in every way we can," he said (PM 03/05/10).

Beyond Varian

During a conference call this week to discuss the earnings, Didier Hirsch, Agilent's acting chief financial officer, said the Varian deal is expected to add $370 million, or $0.08 per share, to Agilent's top line during the second half of 2010. About 70 percent of that contribution will go to the Chemical Analysis group and 30 percent will end up in Life Sciences.

The acquisition took 10 months to close. In order to win approval from European regulators, Varian had to sell certain businesses, including its inductively coupled plasma mass spectrometers, laboratory GC instruments, and GC triple-quadrupole mass specs, (PM 03/19/10). Bruker bought these assets.

Despite these circumstances, Sullivan said during the call that the company remains "very confident" that it will achieve $75 million in cost synergies during the next four to five years.

Teams from Agilent and Varian have been developing "detailed integration plans for the next several months," he added. "By the end of the calendar year, our plan is to integrate our legal entities, core quote-to-cash processes, services and support processes, sales and marketing processes, Web environment, and begin the conversion of the factories to our ERP system."

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Responding to an analyst's question about recent weakness in Varian's revenues, Sullivan said that the first priority is to "leverage what is now close to, if not the broadest product portfolio in the industry."

While Agilent is working to eliminate costs as part of its $75 million synergies goal, "the message that we have clearly said to the new Agilent employees is that we must recapture the momentum into the marketplace," he said.

As the Varian integration proceeds, Sullivan added, Agilent will remain on the lookout for other M&A possibilities, both large and small. "We need to make sure that Varian gets integrated successfully … and a year from now, we will be in a position to again look at [large M&A} opportunities," he said. "This is not counting small bolt-on acquisitions. We continue to target $100 [million] to $200 million a year of smaller bolt-on acquisitions."

EMG Recovery

The 16-percent rise in total revenue Agilent recorded during the fiscal second quarter contracted to 13 percent when adjusted for currency exchange rates. And while growth in the company's Life Sciences and Chemical Analysis businesses contributed to the overall revenue growth in the quarter, a turnaround in the firm's Electronics Measurement Group, Agilent's largest business by revenue, keyed the companywide improvement.

For the period ended April 30, EMG revenues climbed 18 percent to $699 million from $593 million a year ago, or 15 percent adjusting for currency effects. It was the first time the business posted a year-over-year quarterly revenue increase since Q3 2008.

Indeed, during the past year, as all of Agilent's businesses faced soft demand, EMG was hit especially hard; revenues receded by more than 20 percent year over year during some quarters.

Sullivan said this week that the bounce in the EMG sector was the company's "biggest story" for the quarter.

In Life Sciences, revenues were up 12 percent, but fell back to 8 percent on a currency-adjusted basis. Total Life Sciences orders rose 15 percent to $331 million from $298 million a year ago.

Sales in the Americas were up 9 percent from Q2 2009, and European sales grew 4 percent. Sales in Japan jumped 27 percent, while the rest of Asia Pacific rose 25 percent.

Sullivan said sales of Agilent's liquid chromatography products increased 28 percent year over year and recorded "strong worldwide demand." Sales of Agilent's 1290 UHPLC, introduced a year ago, "continued to exceed expectations," he added.

The company's LC-MS business was "strong," though Agilent did not provide figures. Sullivan said that there was increasing demand for Agilent's triple quad and Q-TOF platforms, but did not elaborate.

Companywide, revenues grew in the double digits in all geographies with the largest grower, Asia Pacific, increasing by 24 percent year over year. Asia now represents 41 percent of Agilent's total business, the largest share ever for the company in that region.

Europe was up 10 percent year over year, and the Americas grew 13 percent.

During the quarter Agilent had restructuring charges of $22 million; Varian-related acquisition costs of $10 million; and $9 million of non-cash amortization, the company said.

The company spent $150 million on R&D and reported it had slightly more than $1.5 billion in cash and cash equivalents as of April 30.

During the conference call, Hirsch said that excluding the effects of Varian, revenues for the third quarter are expected to rise between 16 percent and 19 percent over the year-ago figure, or to between $1.23 billion and $1.26 billion.

For full-year fiscal 2010, revenues are projected to increase 12 percent to more than $5 billion compared with fiscal 2009. On a per-share basis, income is projected to fall to between $1.70 and $1.75, which is $0.05 per share more than Agilent had earlier forecast.

— Adam Bonislawski contributed to this story.

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