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Agilent Exec Says Success for Life Science Biz Means Shift from R&D Emphasis to Profits

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CHICAGO – Agilent Technologies plans to focus its life science strategy on generating a greater return on its previous R&D investments in the space, according to a company official.

While the firm will continue to invest in developing new technologies for the life science market, R&D spending as a percentage of revenues will shrink from a current level of around 12 percent to the single-digit range, Nick Roelofs, vice president and general manager of Agilent's Life Sciences Solutions unit, told ProteoMonitor here this week during Pittcon.

This week, the company reiterated its focus on growing its Bio-Analytical Measurements unit, and especially its life-science segment within BAM. But at the same time, Roelofs said that after several years of building up its presence in the life-science space with new technology development, the firm now needs to create "a long-term sustainable model."

That means bringing all of its life-science businesses in line with the company's broader operating model of healthy and consistent profits while at the same time pushing out new technology to keep its product portfolio fresh.

While Roelofs said that that has always been the plan for the business, he noted that a recent "change in competency" is driving the transition from an R&D mode to a profit-driving focus.

For the past several years, Agilent has elbowed its way into the life-science market amid a shift from the semiconductor business. That strategy originally meant building up its strengths in four areas: proteomics, DNA microarrays, informatics, and diagnostics.

With that has come relatively high R&D spending in order to create the necessary products to bring to market. According to Roelofs, 12 percent of Agilent's top line in its life-science business has been reinvested back into R&D while its competitors' R&D spending as a percentage of revenues has been typically in the single digits.

"In order to fund that kind of investment we have to have the rest of the corporation much more profitable to fund the high level of investment in a single sector," Roelofs said. And to take on such an investment strategy, "we have to have a light at the end of the tunnel where we say, 'OK, we will move the life science business toward the industry average.'"

Double-Digit Growth by 2012

Roelofs emphasized that the company is not backing off new product development, but will grow R&D spending at a slower pace compared to revenue growth — eventually bringing it into the high single digits as a percentage of revenues.

"Agilent believes that if we have a business that has a decent operating profit … that in principle can self-fund the business' growth, then we will have a much longer play in that space," he said. "And while we don't require every business in Agilent to have perfect profitability, what we want to do is have every business to move toward the model."

The company's life-science business is only now able to move in that direction because only now has that business achieved the level of "competency" to do so, he said.

Getting to that point involved honing its market focus as well as ramping up its technology. Life sciences is such a "broad and diffuse field of interest" that it's tempting for a large firm to chase all applications at once, he said. Citing Agilent's microarray business, Roelofs said that for a decade, the firm was "very enamored" with the technology's "broad range of interesting applications," to the point that was chasing after its competitors, especially Affymetrix, in supporting new applications for the technology.

But in doing so, that part of Agilent's business spread itself too thin. Today, the company is more focused on which applications are best suited for its microarrays — such as array-CGH, ChIP-chip, and microRNA analysis — "and that's burst that business into profitability because the ratio at what we're looking at to what the top line can afford has gotten much, much better," Roelofs said.

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Indeed, Agilent cited microarrays as one of its strongest growth areas in its most recent financial statements. For its first fiscal quarter of 2009, the company reported double-digit growth in its array business, and for the fourth fiscal quarter of 2008, it posted 40 percent growth in arrays.

Beyond arrays, Roelofs said that all of Agilent's life science businesses have seen a turnaround during the past two years. In 2007, the company had five businesses in life sciences. Of that, only one, liquid chromatography, turned a profit. Today, Agilent has seven businesses in the segment, including the purchases of Stratagene and Velocity 11, and all are profitable, Roelofs said.

Between 2007 and 2009, the goal was to move all the businesses "out of the red ink," he said. Moving forward, by 2012, the goal will be to grow all the businesses within life sciences by double digits.

In mass spectrometry, that is already being achieved. During its most recently completed quarter, sales of the instruments grew 18 percent year-over-year while its total life-science revenues receded 1 percent and company-wide revenues dropped 16 percent [See PM 02/19/09].

Fueling the growth in mass specs, Roelofs said, has been use of Agilent's instruments for what he called "protein-omics" adoptions, which includes proteomics, metabolomics, and epigenetics.

While initial interest in the company's suite of mass specs was for chemical analysis, "in the past year, our strength in 'protein-omics' has really come on," Roelofs said, attributing that to the launches of the 6460 triple-quadrupole and 6530 Q-TOF mass-spec systems last year that took Agilent from "a decent instrument to a parity play" with the industry's technology-development leaders. "That's been really opening doors in the protein space," for Agilent, he said.

Last quarter, the first quarter of Agilent's fiscal 2009, the firm's sales in high-end liquid chromatograpy-mass spec system were about evenly split between life sciences and chemical analysis, he said, where not long ago it was 70-30 tilted toward chemical analysis.

In proteomics, there remain two unmet needs for mass specs, Roelofs said – sensitivity and protein fragmentation.

Agilent tried to address the first issue in its 6530 instrument with jet stream technology that improves system sensitivity to high femtogram levels of detection, but is continuing work on "make sure we can get more of the protein in the instrument," he said.

On protein fragmentation, Agilent is working "on both ends of the ionization spectrum to try to improve getting larger molecules into the instrument."

Not So Academic

Roelofs also reiterated the company's goal of expanding its presence in the academic and government markets. That has, so far, entailed retraining and redeploying sales staff to specifically address the needs of researchers in those markets. Unlike industrial customers who are more "routine driven," academic/government scientists need platforms that will help them answer more pure research questions.

For example, on its LC-MS systems, Agilent's industrial customers are interested in issues such as compliance with US Food and Drug Administration guidelines, whether the instrument can run 24/7 with minimum maintenance, whether the data is reproducible, and how easy the instrument is it to use.

But an academic/government researcher is more interested in the instrument's sensitivity, whether it can be tuned to maximum flexibility, and adaptability in terms of the kinds of samples that it can run.

"Our current sales reps can speak to FDA compliance issues at the drop of a hat. … They will struggle with 18 different applications on a given day," Roelofs said. "This customer wants to separate proteins, this customer wants to separate large chemical molecules with silicon attached: We need to retrain people and hire people who have the more horizontal diversity of application as opposed to the vertical depth in specific application."

Despite the company's announcement last month that it will lay off 600 staffers, these positions are mostly in the semiconductor and electronic board business as well as infrastructure such as IT and human resources. Agilent is actually hiring life science sales staff, Roelofs said.

The work that the company has done in expanding its presence in academia/government has so far resulted in a growth rate about three times the growth rate of its industrial businesses, Roelofs said.

Still, he acknowledged, Agilent still has a ways to go before it catches up with its competitors. The firm estimates that academic/government sales make up about 45 percent of the life-science sales of other vendors in the market, but that segment currently comprises only about 15 percent of Agilent's life science business, or 5 percent of the company's total sales.

Roelofs said the company plans to increase its sales to academia and government customers to reach that 45-percent figure in three years.

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