Business Breakdowns
· Mark de Vos
[00:00:00] S1: Perhaps new business segment is actually a little bit harsh. It's actually an old business segment which is growing rapidly. So they have a notable business that they call NADS, Nucleic Acid Solutions Department. NADS. It produces what are called oligonucleotides, oligonucleotides we can call them. They're short strands of lab-made DNA or RNA and they're used to treat some genetic diseases and importantly in some RNA-based vaccines or drugs, including the COVID-19 vaccine. So these oligonucleotides are a key part of the production process and they're used typically to help stabilize the RNA during production. It's a chemical that's used during the production of these advanced drugs and vaccines and Agilent is the clear leader in producing these. It's interesting as it was actually initially a tiny part of Agilent. It was formed in 2006 by merging some technology Agilent already had in-house, which was around knowledge on RNA molecule synthesis, with a business they acquired called SynPro. Again, a tiny company they bought back in 2006, they merged it, kept it running and then this really took off a few years ago. They continued to develop it over 20 years. And then in 2018 they start to see a lot of orders both to the development and potentially commercialization of some of these drugs. At that point they had an interesting decision to make. They had to either invest $185 million in growing this production facility or not, and give away the business either to someone else or try and sell that asset. They decided to invest organically back their engineers and so they spent $185 million in 2018 and demand continued to grow. So actually in 2023 they broke ground on a further $725 million expansion of that facility. It's in Frederick, Colorado. So far, demand's been really strong and they're by far the leader in this sort of niche CDMO sector. It's the same customers, but it's a different product to what they've done in the past.
· Matt Reustle
[00:00:00] S0: If chromatography was not complex enough, I'm glad we've introduced something else here. It's very interesting to hear how this has evolved. Am I right to think that the legacy business is in some ways selling the picks and shovels to the gold rush here? They're developing an actual molecule. I'm just curious about the demand profile for that molecule and how it might vary versus what you look for in their legacy business or what else you would point to in terms of the differences because you tapped into it there. And I'm just curious if you could expand on that a bit more.
· Mark de Vos, Matt Reustle
[00:00:00] S1: They're not generally tied to a single pharmaceutical company. They work with all of the main manufacturers of these types of drugs. There is definitely more customization for each specific project. So they generally partner with them quite early during the development phase. Agilent probably won't be making very much money on it while they develop these custom sort of oligonucleotides to support the project. But the payback is if they make it to commercialization and some of them are now moving to commercialization, that the volume really ramps. And that stays with Agilent. There's no other company that has equal capacity or larger capacity than Agilent for producing these specialist oligonucleotides. Most things, it's probably easy to make in really small quantities. But if you want to make production-grade stuff where you can make 100,000 vaccines, then really it's only Agilent you can work with who have that facility. There are definitely differences. I think you're right. But it's similar in that it's not tied to a single all-in-one drug or nothing. [00:00:00] S0: Is it tied to the mRNA more broadly? That theme within pharma broadly. [00:00:00] S1: Correct. The step back of RNA-based drugs is unhelpful and things like changing in the funding environment and things like that. You definitely see that in some of their results where companies focus less on R&D one year and more on commercialization to respond to funding changes.
· Mark de Vos, Matt Reustle
[00:00:00] S1: Correct. The step back of RNA-based drugs is unhelpful and things like changing in the funding environment and things like that. You definitely see that in some of their results where companies focus less on R&D one year and more on commercialization to respond to funding changes. [00:00:00] S0: And you mentioned it's gone from small to it's not huge, but it's a much bigger portion of the business now. What does it represent versus what it was before? [00:00:00] S1: Their core NADS internally developed is a little over $300 million now of revenue. They've also acquired a business for about a billion dollars called Biovectra, which is in a similar space. It does slightly different things, but very similar. So altogether they're about $470 million of revenue, so about 7% of sales or so for huge. [00:00:00] S0: Impressive to come from something so small, especially when the rest of the business is growing alongside you. When you think about that as a shareholder, you mentioned a bit about the margin profile not being great in the early stages, so you're investing with this long cycle return. I'm just curious to get into your head about how that all felt. Maybe years back versus where we are today because it is a bit different with inside the business and they've gone from if we go all the way back to the HP days that being a conglomerate in many things to much more pure play. How do you frame that type of somewhat strategic adaptation to include this with some of those things in mind?
· Mark de Vos, Matt Reustle
[00:00:00] S1: Way back at the start of the conversation in Agilent's history, I went through an example where they gave away or sold for a tiny price a business that went on to be a core part of Broadcom today. Obviously it would have been nice if they kept hold of that one. Agilent engineers have clearly developed something that's unique and seeing demand from customers, it's a healthy sign that the company is willing to back them with the capital that they need. They run a pretty cautious balance sheet. They've got 1 times net debt EBITDA. If it's a choice between giving away the opportunity to someone else, who's going to spend that money backing your own engineers? We were pretty glad to see they had a culture firstly where they could reach the right people to make that kind of decision and then also where they decided to back their team and build out that facilities. We viewed it as a positive. [00:00:00] S0: When it comes to other capital allocation decisions. You have capex there reinvesting in the business and some of the opportunities you tapped into some bolt-on M&A historically and some bigger acquisitions. How core to the overall Agilent thesis is M&A and the willingness to continue to look for bolt-ons other deals that fit the general thesis of what they're doing.
· Mark de Vos
[00:00:00] S1: I think they've got a decent long track record of doing small bolt-ons. We think that's a pretty good thing. I wouldn't say it's a significant driver of growth, at least in the short term. They've generally used them for one of two purposes. One would be to fill in a small technology gap. So for example, they recently acquired a software business that specializes in lab productivity software. So now you can buy your Agilent instrument consumable service and plug it into this Agilent piece of software that will track usage and reorder consumables and call service technicians automatically. If you're a machine, break all of that kind of stuff. Seems pretty logical to acquire a small business that's doing that. So we like that. The other would be to add adjacent products where they're selling to the same customers. So that would be Biovectra recently where they've got this NADS business that was organic Biovectra had some additional capabilities, particularly around filling and packaging some of the products that benefited that NADS business, and that to us felt reasonably sensible. Of course there's always an element of risk and as the deals get larger the risk goes up. So we're keen. There's a sort of upper level on acquisition prices, but so far they seem to be being sensible. And I wouldn't say it's core to the strategy.