Agilent's razor and razor blade model means about two-thirds of revenue comes from consumables, service and software, which Mark de Vos says makes it a predictable business.
Mark de Vos says Agilent holds about two-thirds of the global gas chromatography market and calls that applied niche a poster child market.
Agilent's NADS oligonucleotide unit, with revenue of a little over $300m, gives it a leadership position in a niche manufacturing sector that Mark de Vos expects to grow.
Agilent sells lab instruments and earns its money on what follows
Agilent is a toolmaker for laboratories whose real business is the recurring stream after the instrument is sold. Regulated customers rarely switch suppliers, so consumables and service earn higher margins and steady cash. The main risk is cyclical pharma spending, while oligonucleotide manufacturing and PFAS testing add growth at a reasonable valuation.
Takeaways
Razor-blade model drives Agilent's economics. Instruments, about $100,000 each and lasting six to 10 years, are a third of revenue. Consumables, service and software make up two-thirds, and consumables and service earn about 34% operating margins versus about 20% for life sciences instruments.
Regulation and service create strong customer lock-in. Quality control is written into FDA approval, so switching is costly. Labs pick one primary supplier for service and spare parts. Agilent is one of two firms able to service rivals' equipment, with 4,000 technicians.
Agilent leads gas chromatography and competes in liquid. It holds about two-thirds of gas chromatography, roughly a third of liquid chromatography and 40 to 50 percent of spectroscopy. Main rivals are Waters, about $3bn of revenue, and Thermo Fisher, about $43bn, built through acquisitions.
Pharma spending cycles and China are the main risks. Agilent struggles when big pharma customers cut spending, as after pandemic lab buying. China, about 18% of sales, has been through a down cycle that Mark de Vos says is improving. Academia and NIH exposure is small.
The portfolio is now steadier and cash generative. After spinning off Keysight in 2014, Agilent has grown sales about 5% organically since 2015 and earnings per share about 13% a year. Free cash flow is around $1.4bn, about 90% of adjusted net income.
Oligonucleotide manufacturing is the new growth leg. NADS makes oligonucleotides for RNA-based drugs and vaccines, with revenue above $300m. After the roughly $1bn Biovectra deal the combined figure is about $470m, around 7% of sales, with a $725m expansion underway.
Valuation looks reasonable with further upside. Agilent trades above a 4% free cash flow yield and below 20 times earnings, with high single-digit earnings growth expected. PFAS testing, about $400m growing 20% a year, adds upside. Bolt-on deals are not a major driver.
How Agilent got here
Hewlett-Packard starts in a garage, and its first product is a test instrument used on audio equipment for Fantasia.
HP buys F and M Scientific in 1965, bringing gas chromatography expertise.
HP spins out its testing and measurement business as Agilent in 1999.
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On this episode 2
Show 1
Agilent sells its medical business to Philips in 2001 and its semiconductor business to KKR and Silver Lake in 2005.
In 2014 it spins off Keysight, its electronic measurement business, which was about 40% of sales, leaving a focus on life sciences, diagnostics and chemicals.