Business Breakdowns
· Matt Reustle
[00:00:00] S0: For something like the COVID shock where you had this major investment. When you think about the useful life of that equipment and at some point towards the end of the decade you'll come up on that six to eight years, is the expectation that there would be renewals? Do pharmaceuticals tend to take capacity offline? If it's related to something which has a shorter life cycle, how does that work, just in terms of the visibility that you might have on the six to eight years and the replacement cycles coming through and showing up in revenue?
· Mark de Vos
[00:00:00] S1: I think just talking about pharmaceuticals, there should be growth really in pharmaceutical R&D spend over the long term. We expect to see growth there driven by increasing demand for healthcare. Whether that's aging populations. I know the World Health Organization has population over 60, nearly doubling to 2050. Things like that are just going to drive healthcare spend, in our opinion, in one direction. And that's a tailwind for Agilent. The reality in the short term is that if an instrument is six years old, they could of course run it until it's eight years. There's nothing. It doesn't stop working. The parts are still available. They definitely could. What the drives are for that upgrade tend to be these instruments are operating at high temperature with sometimes nasty chemicals inside them. All components in them will eventually wear out. You've got the consumables which are designed to be replaced, but you can think of all the valves, the heaters, everything else will just start to break more after a long period of time. And lab downtime is problematic for these pharmaceutical companies. They'll want to be getting rid of these instruments before they start to see a fair amount of downtime, which will naturally happen as they become older instruments. They'll just be looking to upgrade. The other thing is there are typically reasonably significant upgrades to the platform every three years or so. After six years, you're probably two years, maybe eight years. Three upgrade cycles in and there should be a meaningful upgrade in terms of either resolution or throughput, which should help justify the upgrade spend effectively.
· Matt Reustle, Mark de Vos
[00:00:00] S0: With the competition, you mentioned that service is a major driver of the decision making there when it comes to innovation. Has there been a historical trend line for Agilent or maybe a competitor where innovation has really driven market share gains or someone moving up the chain in terms of what they've captured of the market? [00:00:00] S1: I don't think so. We talk to the companies a fair bit and they talk about reasonably stable market shares overall. I think if you do a really good product launch after a couple of years, you might gain a percentage point of market share. These are very entrenched, stable market shares. Waters actually had a chart in one of their investor days which showed sales of a specific type of column over time. We're talking over decades. And it was basically a flat line. And this was because of that point around it being tied into drug certifications. And once it's tied in, people just use the instruments again and again and again. If it works and they're getting good service, they generally don't change it. So that's why that service component is so key. [00:00:00] S0: You mentioned there's stable market shares. Do those tend to be stable with the same existing customer base? Is there a lack of switching? That tends to happen.
· Matt Reustle, Mark de Vos
[00:00:00] S0: You mentioned there's stable market shares. Do those tend to be stable with the same existing customer base? Is there a lack of switching? That tends to happen. [00:00:00] S1: It's pretty rare that a customer will build out a whole new lab. They'll generally be upgrading one section of a lab. There's that incumbency bias. We have seen companies talk about some opportunities where you're getting pharmaceutical companies thinking about maybe reshoring labs. That's one of the few examples where you're getting whole new labs being set up and that's an opportunity where you can kit out a lab. Increasingly, that service part is being folded into the discussion on instruments as well. And this is benefiting those large incumbents. Agilent has 4,000 service technicians that they employ directly. Pretty hard to compete with that. 75% of their technicians hold a degree in chemistry or biochemistry, 25% have a master's or PhD. So these are really skilled, bright people that are out doing two and a half thousand on-site service calls a day. They're trying to fold that into the discussion around instrument sales more I'd say. [00:00:00] S0: The point on the risk associated with switching providers might be the most meaningful thing. I'm curious, do you have any data points or measurement for what the cost of this equipment represents to the end customer? Just in terms of is it a large percentage of the overall cost of production or anything else that represents a large or relatively small piece of that?
· Matt Reustle, Mark de Vos
[00:00:00] S0: The point on the risk associated with switching providers might be the most meaningful thing. I'm curious, do you have any data points or measurement for what the cost of this equipment represents to the end customer? Just in terms of is it a large percentage of the overall cost of production or anything else that represents a large or relatively small piece of that? [00:00:00] S1: We think about a production facility that maybe has five or so of these sorts of instruments, maybe slightly different types over those five instruments. Let's say over an eight-year period they're spending a million dollars on the instruments and servicing and consumables. It's sort of a rounding error in the scale of a pharmaceutical production facility over eight years, both from a revenue generated, profit generated, or the other costs in that business. This is one where obviously the cost of a product failure. So if you're failing to spot a contaminant or a problem or something like that, that cost is almost unquantifiable. The damage alone to the brand would be huge.
· Mark de Vos, Matt Reustle
[00:00:00] S1: We think about a production facility that maybe has five or so of these sorts of instruments, maybe slightly different types over those five instruments. Let's say over an eight-year period they're spending a million dollars on the instruments and servicing and consumables. It's sort of a rounding error in the scale of a pharmaceutical production facility over eight years, both from a revenue generated, profit generated, or the other costs in that business. This is one where obviously the cost of a product failure. So if you're failing to spot a contaminant or a problem or something like that, that cost is almost unquantifiable. The damage alone to the brand would be huge. [00:00:00] S0: One of the main things you will hear in these niche markets that represent a very small percentage of the overall product, but are mission critical is it's a very good spot to be in if you've captured market share in those industries. I'm curious how that impacts the revenue model broadly. We can break it down if possible. You gave us some sense just in terms of volume trends over time. How do they decide on price? And it might be different obviously for new equipment versus service and everything else, but is there a general framework for how you think about pricing as it revolves around the business?