A - Agilent Technologies Inc. (A) Presents at J.P. Morgan 42nd Annual Healthcare Conference Transcript
2024-01-09 14:27:06 ET
Agilent Technologies, Inc. (A)
J.P. Morgan 42nd Annual Healthcare Conference
January 09, 2024 00:45 PM ET
Company Participants
Mike McMullen - President & Chief Executive Officer
Bob McMahon - Chief Financial Officer
Conference Call Participants
Rachel Vatnsdal - JPMorgan
Presentation
Rachel Vatnsdal
Hi. Good morning, everyone. This is Rachel Vatnsdal with the Life Science Tools and Diagnostics team here at JPMorgan. I'm joined by the Agilent management team on stage as these sessions typically are, it's 40 minutes, 20 minutes of presentation and roughly 20 minutes of Q&A afterwards. If any of you in the room do have questions, feel free to either submit them through the App, or you can ping me directly.
And with that, I will pass it off to Mike.
Mike McMullen
Thank you, Rachel. It's a real pleasure to be here today with all of you to share the updated story on Agilent Technologies. As we know, 2023 was quite a challenging year for the industry. But as we think about it from an Agilent perspective, we think these market challenges we've experienced are transitory across the industry. And as we look forward, we think Agilent is very well positioned for continued long-term growth and shareholder value creation.
So why do I say that? The story I'm going to tell you today is Agilent's diversified business with multiple growth drivers, competing in very attractive end markets. Back up by an unstoppable Agilent team that knows how to work together, focus on customers and win together. So that's the story I have today. That's what I'm sticking to.
Let's get down and take a closer look for Agilent. But first of all, our safe harbor statement for your reading pleasure. Let's take a look just a reminder of who is Agilent. We are a company that has a track record of delivery of long-term results over a period of time over a number of years, both top line and bottom line, $6.8 billion of business in 2023. That's a four year compound annual growth rate of 7%. Profitability, highly profitable with 27.4%, we've been growing our margins at average 100 bps per year for the last four years. And by the way, we're not done yet and earnings per share 15% every year over the last four years has been the average.
I talked about the diversification of Agilent business. Let's look about the mix of instrumentation versus non-instrumentation. About 40% of our business is instrumentation, but 60% of our business is services, consumables, diagnostic test and software.
Look at the diversification of the end market we compete across six end markets. Pharma is our largest end market. We've grown pharma double digit for the last four years, roughly 36% of the total Agilent's business. But at the same point in time, we have undisputed leadership in the applied markets as well. Again, sources of diversified growth as we move forward.
I now want to move to our shareholder value creation model. This really drives the execution of the Agilent team. And this is a reminder of Agilent's shareholder value creation model, but also a reminder of our long-term goals we've committed to, and we remain committed to. This company will continue to deliver above market growth. We see that as a 4% to 7% period of growth I mean, 4% to 7% core growth over our long-term growth outlook. An innovation leader, coming to the global scale, delivering different solutions to our customers.
Operating margin expansion, 50 to 100 basis points per year is the expectation we have throughout the upcoming cycle. Again, driven by our Agilent business system, our investments in digital, and a proven track record of knowing how to execute. And we will continue to deploy capital in a balanced way. And what's the result of all this? You're going to hear me talk over and over today our ability to deliver leveraged earnings growth. As we define it, and I'm sure you define it define the same way we will drive earnings faster than revenue.
By the way, this is just some theoretical model. This is what we have been doing and what we will do in the future.
Since I came in this role in 2015, we've increased our growth rate to 7% annual core growth rate since FY 2015. Operating margins are up 900 basis points since 2015 to 27.4%, as I mentioned earlier. And again, our ability to drive leveraged earnings growth, 7% CAGR growth on the top line, 15% earnings per share growth on the bottom line. This is what we do. This is what we have been doing and this is what we will do in 2024 and beyond.
Underpinning our ability to have this balanced capital deployment approach is our operating cash flow. This is really drives what we can do in terms of leveraging the balance sheet for our shareholders. Since 2015, our operating cash flow has gone from a little over $500 million a year to $1.8 billion in FY 2023. That represents a compound annual growth rate of 17%.
I mentioned earlier the importance of investing for growth with our capital. Since 2015, we put over $4.6 billion, all geared towards driving future growth for the company. About $300 million -- $3 billion in M&A, and by the way, you may be curious what that's translated in terms of revenue. About 8% of Agilent's total revenues today come from acquired companies with that $3 billion of investment.
And then CapEx. Our investments in our NASD business have been the center pin of that business, and we have plans for future CapEx going forward. $1.6 billion deployed in capital over the last several years. And then, also direct returns of capital to shareholders. Since 2015, we have distributed $1.8 billion of a growing cash dividend, providing a source of stable and predictable returns for our shareholders.
And we would say best-in-class yield within our space in terms of dividends and over $5 billion of share repurchases. So again, you can expect us as the coin of phrase from the CFO that we used in our last earnings call, we have a fortress balance sheet, which we believe can really be leveraged to drive growth for the company as well as providing direct return to our shareholders.
Okay. Enough of the history lesson. Let's talk about the future. So again, the storyboard here is Agilent's diversified business, multiple growth drivers in attractive long-term markets. So, why do I say that? It all starts with the markets you compete in. We're in a big market, a $65 billion TAM. And when we look at the long-term growth prospects of the market, we remain convinced this is a 4% to 6% long-term growth market. We think 24% is a transitory year, so we're not calling for this type of market growth rate in 2024, but do see that in 2025 and beyond.
And why do I say these are attractive long-term growth markets? What are the drivers? There's investments being made here to fund the enable side missions that will sustain growth in these markets. Who is against the advancement of human health? Who doesn't want to clean a more sustainable world and who doesn't want a safer place to live in terms of food and water supply, just to name a few. So these are the drivers behind the markets.
But also, you've got big TAMs. The trick for come to gasum [ph] is where you choose to focus your investments? And what you're going to hear from me today is we continue to believe that pharma, particularly biopharma, remains the highest priority investment for the company along with the connected life science research markets and academia and government as well as connected clinical and diagnostics markets. We also see opportunities -- select opportunities in applied markets, which we'll get into in a little bit here in my presentation, and then services across a continue of all the markets we compete in.
Pharma and biotech, Mike, why are you playing up pharma biotech? When I look at your numbers, you grew in 2023 against all in markets with the exception of pharma. Well, pharma was a down year in 2023, but it's been a source of growth for a number of years for the industry as well as for Agilent. And I think it's been an outside source of growth for us as we've been driving market share.
But again, if you step back and look at the long-term market drivers, changing demographics and increase in health care spending, success of personalized medicines, prompting new investments in innovative new therapies.
Moving to multi-acre monitoring for these new drug production types creates new testing requirements, which we believe we are fully capable of meeting and then very close to home for us is this rapid growth in nucleic acid solution therapeutics prompting the need for both do analytical testing needs, but also specialized production capacity, which we are driving with our investments in ASD.
The applied markets, as I mentioned, this is where Agilent grew up. We are the undisputed leader in this space. This market grew 3% for us. I mean our business in this market grew 3% for us in 2023. And we're going to get into some really cool selective secular growth drivers happen around PFAS testing and Advanced Materials.
Academia and government grew 6% for us last year. This is the market historically where you're not done as well. But we are gaining market share here. We see a really strong funding environment continuing in academic and government. And again, it's very connected to what's happening in pharma and biopharma. And then the downstream clinical and diagnostic market growing here in low single digits.
Increased personal therapies are looking to have companion diagnostics, which is a big part of our pathology testing business growth and overall investments to really continue to focus on cancer testing and therapy development. And as we all know, unfortunately, the number of cancer cases continues to drive -- go up globally, which drives the need for additional testing. So again, there's other aspects of as business be on pharma, biopharma, very attractive markets for us.
This diversification story that I've been telling about goes beyond the end markets. It also goes across the geographies that we compete in. Agilent, if you look across the five major geographies we compete in across the globe, we've been growing 6% to 8% over the last four years in all those geographies. This is a result of our decades-long approach of building local teams to drive the business locally to understand specific country requirements, so we can compete there locally. We have the scale globally compete anywhere. So no matter where business is and we'll probably talk in the Q&A, we're seeing some movements of supply chain between countries. No matter where the businesses geographically, we'll get it because we built the teams there locally.
I mentioned earlier, this 60% of Agilent's business being non-instrument related. A big part of that story is a business we're very proud of the Agilent CrossLab services business, $1.6 billion of business for us, having grown over the last four years, 10% on an annual compound annual growth rate. We've got the best-in-class services business. We're driving customer satisfaction, loyalty, we have unsurpassed scale. This business is both high growth and high margin, and we have this track record of market-leading growth with multiple drivers.
So one thing I'd point out here is we look to the right hand of my slide here, contracts. Lot of questions about durability of growth these days, think about this, we have a $1.6 billion business, 64% of that roughly $1 billion of Agilent's revenues today are an annual or multiyear service contracts, so a dependable, durable source of growth. So we are driving competitive differentiation, durable growth and profitability with the Agilent CrossLabs story here.
I talked earlier about the storyboard around Biopharma. Agilent's desire to aggressively invest in biopharma is not a new story. We've been doing this for a number of years. You see this, for example, from FY 2019 to FY 2023, our Pharma business has grown from $1.6 billion to $2.4 billion, but look at the mix of business. Our biopharma business has almost doubled and over is 40% of total pharma business.
So the question is, is how are you actually going to win going forward. So we've been winning in this space. You can see the numbers. How are we going to do it going forward? Well, we are a company that has leading technology platforms from chromatography, spectroscopy, flow cytometry, mass spectrometry to name a few.
What we're doing is we're applicating those with workflows across the overall biopharma continuum from drug research, drug development, drug manufacturing, we augment our instrument platforms and workflows with enterprise services and data management, compliance services, lab operations.
So the story I'm trying to communicate here is a broad set of portfolios across the entire biopharma continuum in some very attractive spaces. This has been the strategy that has been working for us, and we will continue to focus on driving this forward. Just as a reminder, even though biopharma our real pharma business was down in 2023, biopharma actually grew for us in 2023.
Our storyboard goes beyond providing leading analytical workflow solutions. As I mentioned earlier, this -- what's happening in the oligo therapeutics marketplace is really grain ports to Agilent, but also most importantly to human health. And we've been investing very heavily in what we call our NASD business, been putting up really strong growth, 19% in 2023, out a $350 million revenue business. It's been growing over 30% per year on average the last four years.
But look at what we believe is going to happen to the market. What's happening here is the market is expected to expand from a little over $1 billion addressable market in 23 billion to over $3 billion by 2030. What's behind that? We see this in our programs. Increasingly, the therapeutic programs that our pharma partners are engaged and are targeting much larger population sizes. For example, you can see some of the cardiovascular disease here on this slide, potential patients over $500 million.
What does it mean for us? Larger commercial demand and expanding market. And as you may -- if you've been following Agilent know that we increased our capacity this year with our Train B capacity expansion and now we're able to take on more programs. We have the largest number of programs we've ever had as a company, 50-plus clinical programs in various stages of development. And you can see as they advance through the various phases, we'll get more on commercial market demand.
So again, the message here is a growing business with a lot of headroom in terms of growth in the coming years because of these macro dynamics that have happened in terms of the therapeutic developments that are underway.
The story doesn't stop here. The cell analysis business is we increasingly push that portfolio into the biopharma space, and we're investing here to support R&D efforts in immunology -- immunocology -- immunotherapy, cell and gene therapy. This business has been growing 10% on average the last four years. It's roughly a $400 million business inclusive of services. And if you are following what's been going on, we just recently moved this business into our Diagnostic and Genomics Group to really further align our workflows with what's happening in genomics.
So we see this as a very promising market, $5 billion TAM, expected to grow 5% to 7%. You can expect this to be an area of increased investment for Agilent both in terms of organically and potentially inorganically in terms of how we expand our offerings in this space.
I mentioned earlier, it's more to the story on this Agilent story about multiple growth drivers one that I'd like to highlight for you today is our investments in the PFAS testing. You may be familiar with us already forever chemicals. Agilent is the undisputed leader in environmental testing. This is a growing marketplace globally. About a $250 million market, 15%, 20% expected growth rates.
Agilent has got the leadership position here, and you probably are quite familiar already what's happened in this space, but increased regulation in terms of regulating PFAS chemicals. Just a handful right now of the hundreds and thousands that are out there, hundreds or thousands of different chemicals out there. Also growing interest in from the consumers, because they're wondering if this is in the food, and then the FDA and others start to wonder if this has human health consequences beyond what's already been identified.
So you can expect us to continue to talk about our growth in PFAS. And with our long-term relationships with environmental customers, they trust us, they know us very well. We have the expertise to provide them the workflow, and we have the most robust equipment out there. So they know that when they run this analysis over and over with Agilent equipment, it will continue to deliver for them.
Semiconductors, Advanced Materials. This whole area of advanced materials is another secular driver for us, both in terms of onshoring of semiconductors, the digitals of everything. So we expect semiconductor to be a long-term growth market for Agilent along with -- you're all quite familiar with what's happened in electronic vehicles, energy storage, next-generation batteries, all these present opportunities for Agilent given our leadership position in these markets, roughly a $500 million mark, when we look at the two segments growing 8% to 10%.
If you heard me talk before, and this gets back to some of the storyboard around our margin expansion, I've talked about how we've been digitizing our business both in terms of customers and operations. And that really has been part of our story in terms of growing recurring revenue growth as well as margin expansion.
We're now putting more money into the AI side, whether it be the acquisition of Virtual Controls, which really provides AI-enabled interpretation of data for our customers. We're using AI inside the company to lower our inspection costs on our production lines. And then we're increasingly using AI to generative AI to aid software development activity to get more product to market more quickly.
I want to use this JPMorgan format to also talk about ESG. And it's part of our story tied to advancing the quality of life, and Agilent gets really high marks in this area on the environmental side. Recently, our net zero targets are validated by SBT, we've reduced COT, for example, by 33% in 2014 despite the fact that the company has grown.
We're certified as a great place to work in all 27 countries and territories that we operate. That has all occurred in the last six months in the midst of a major market challenge really speaks to how Agilent employees feel about working for Agilent. And then we get -- we continue to be recognized externally in terms of our sustainability efforts.
So it's not only are tied to our advancement of the call to life, but back to focus today growth. We also have a very broad set of products that we offer on sustainability solution. We have the broadest set of solutions across the marketplace, including a very unique business, which is our refurbished product business, business where we can basically bring in product, refurbish and resell it elsewhere in the marketplace. We were an early pioneer in Act.
We have -- our products have been certified in some environmental friendly and that continues to grow. And then our engineering paralysis is tied to what we do with our instrumentation development driving lower solving use, lower electric consumption and often, the elimination of uses of dangerous gas.
And so again, this is part of who we are is tied to our mission as helping the world improve the world's quality of life. At the same point in time, it does also represent a commercial opportunity for Agilent as we move forward.
If you heard me talk before, I think that culture is often underappreciated reason why companies win. I believe you need to have the right strategy, the right team and right culture. And we do believe there's something special about the Agilent culture. We're intentional about the culture as we are about strategy innovation. We have a culture, one Agilent culture where we expect and people work together as one team on behalf of the customers for total company success. Business unit success or a functional success, it's not were after. And you're probably saying, well, isn't that what everybody does, well, no. What you often find is people suboptimize the company by focusing on the particular business unit or a function and we really have something special we think here at the Agilent culture. It's been recognized externally, but also in terms of how our team feels about it. I think that's part of our sustainability to continue to drive competitive differentiation and win in the market because of how we show up in front of the customers, we've earned our trust, and this is why we continue to do better than our competition in terms of growth.
I want to conclude my remarks with just a reminder of the guidance and commitment we made to all of you at our Q4 '23 call. Let's take a look at the full year. Net revenue is going to be $6.71 billion to $6.81 billion, core revenue growth, 1% at the high end, about 0.3% -- 0.25% in the midpoint, EPS of $5.44 to $5.55. And then looking at Q1 '24, $1.555 billion to $1.605 billion in terms of revenues and EPS expected to be $120 million to $123 million, not expecting to remember all those numbers that I share with you. What I would ask you to think about is the conclusion comment here. We are committed to delivering leverage earnings growth. So we will continue to drive earnings faster than revenue. We've done it in the past. We did it an unexpectedly challenging 2023, and we'll do it in '24 and beyond.
So, thank you very much for allowing me to speak with you this morning. And just a few takeaway points, before we jump into the Q&A with Rachel and Bob. I'll leave you a few points here. Agilent participates in attractive markets with fundamental long-term growth potential. We're a diversified business with multiple growth drivers. We have a team that's focused on customers, and we have a proven track out of success. There's something about this team that allows us to have unmatched execution capabilities. And you can count us to continue to invest for growth, continue to expand our base of recurring revenue and outgrow the market and, of course, deliver leverage journey.
So again, thank you for your time today, and back to you, Rachel.
Question-and-Answer Session
Q - Rachel Vatnsdal
Perfect. Thank you, so much. So Mike and Bob, one of the first questions I wanted to ask on was just the overall health of the market. Obviously, this has been a really volatile year. You guys have seen these sectors through multiple cycles. So can you just spend a minute talking about the help of the market? What are you guys seeing? Do you think anything is structurally broken at this plane? Or is this just another cycle?
Mike McMullen
I'm not sure it's just another cycle, but these markets aren't broken. And maybe kind of pull up here. I think the -- Bob and our tag team on this, but I think the message here is very much what you heard at our Q4 earnings call. We've seen encouraging signs of stabilization in the marketplace because there is a lot of volatility in terms of really sharp demand a couple of years ago and the sharp drop in demand in terms of instruments, but we've seen that stabilization occur. And as you heard in my presentation, we believe the long-term growth driver is still there. The markets aren't broken, but there has been a level of slowness in certain aspects of the end market, particularly QA/QC.
Rachel Vatnsdal
Perfect. And then one of the questions that we've frequently been getting from investors is just around this concept of long-term guidance. A lot of your peers really lifted their LRPs during the peak of the cycle in 2021 and 2022. Agilent was one of the few that actually didn't lift their long-term guidance. Your last long-term guidance was 5% to 7% from the 2020 Analyst Day. So, can you just talk about -- given that your LRP was set prior to the cycle is 5% to 7% core, still really intact given some of the recent weakness we've seen? And then, if so, kind of what gives you confidence in that trajectory?
Mike McMullen
Yes. So we believe the 5% to 7% long-term growth rate remains intact. So I wanted to use this opportunity today in this forum to reaffirm that with the audience. And if you look at the CAGRs, we've actually been over the four years, despite the ups and down the volatility of the market, we've been at the upper end of that number for 7%.
We didn't get caught up in the exuberance around what we saw was some higher-than-normal long – demand. We saw a lot of elevated level of investment, reinvestment, if you will, in the QA/QC market, for example. And we knew that eventually would normalize to the mean overtime, which we call as more of a mid-single-digit market. And that's why we resisted the temptation to when everybody else is raising numbers to kind of stay with the guidance. And what gives us confidence is we look at the long-term growth that we've made, for example, I just highlighted our services business or any SD business. When you do the math on – on the opportunities here, we feel quite comfortable, Bob, I think, with those 5% to 7% numbers.
Robert McMahon
Yes. And I think, if we think about some of the key markets that we compete in, things like pharma, our belief is that the investment in the human condition is going to continue. You hear about all the exciting things that are continuing to go. There's actually multiple platforms that are being invested in from pharma today versus just five years ago. And when you think about some of these applied markets, where we are the leader, things like PFAS. Five years ago, no one was talking about PFAS. And now what we're actually seeing is it not only starting in water, but actually a potentially going beyond just the environmental markets into places like food safety and then potentially even in other markets as well. And so you see some secular drivers that weren't there that will help continue to drive this growth going forward.
Rachel Vatnsdal
Great. That's helpful. And then I want to touch on your 2024 guidance for fiscal 2024. So you guided to core revenue growth in the range of 0.5% of declines to 1% of growth. So that came in better than buy-side expectations. So I was wondering, can you just lay out their assumptions for the year again on how that really underpins the outlook maybe by end market and region as well?
Robert McMahon
Yes. Yes, I'll take it. I think if we think about it first half, second half, our expectation is the first half of this year is going to look very similar to the second half of 2023, and with kind of the trough being Q1 and then progressively better going forward and then exiting the year in a period of growth.
And if I think about it from a regional basis, we are still assuming China has been a topic to Azure. We're assuming that, that would be down mid-single digits, very consistent with what we're seeing here, but we are expecting recovery in some of the other markets, particularly here in the Americas, where it was about 2% growth, I think, in 2023 and it will grow slightly more than that.
And then from an end market perspective, we are expecting pharma to return to growth. That's our largest market. Modest growth as the business will slowly recover throughout the course of the year. We are taking some, I'd say, more prudent approaches on places like chemical and Advanced Materials, where it grew 3% in 2023, and we're expecting low-single digits. And so we think we've had a series of -- and an appropriate kind of geography, as well as end market growth rate here as we look at where things are today.
Rachel Vatnsdal
Great. That's helpful. And then I want to follow up there just on that pacing dynamic, specifically on fiscal 1Q. That guidance came in a little lighter than the Street. It implies that obviously more back-end loaded fiscal year guide versus your historical precedent. So can you parse out some of the factors that drove that lower than usual fiscal 1Q? How much of this is really just due to conservatism, given how dynamic the market has been versus that lack of budget flush assumptions and then some of the comp dynamics as well?
Robert McMahon
Yes. I think, we obviously, want to get off to the right start. And I think, we used the word prudent at the beginning of the year, to look at our Q1 -- to be very clear, we have assumed no budget flush, in our numbers. And quite honestly, we haven't seen anything. So it's hitting our expectation to date. Obviously, you start to go through January, but everything that we're seeing right now is kind of aligned with where we have expected.
Q – Rachel Vatnsdal
Got it. That's helpful. And then I just wanted to touch on this recent reporting change that you guys noted where you're moving the cell analysis division into diagnostics and genomics. So can you talk about and shed some light on the rationale for really moving that in the reporting change -- and then does that really indicate anything in terms of your segment growth expectations for fiscal 2024 given the movement?
Mike McMullen
Yes. So, Bob. I’ll take lead on you can handle the second one
Robert McMahon
Sure
Mike McMullen
Just had some revised math on the outlook. But -- the headline here is all about growth. And I think it's really indicative of the fact that we've built this cell analysis business through a series of acquisitions, now got really significant scale. And then what we're increasingly seeing, though, is in the same customer base our molecular-based solutions and cell analysis solution being done in the same laboratory. So we think there's really value to bringing those two businesses closer together for a couple of reasons.
One is, you can better align and integrate your field teams in front of the customers. But more importantly, we think there's opportunities to better connect the workflows between cell analysis and Molecular Biologic Solutions. So that's really what this is all about. Is really to -- we think it could even further enable the growth we have in this space. And it's something we couldn't do before, because we really didn't have the size of the portfolio and cell analysis do that. We're feeling really good about where that business is right now. We think they're very complementary -- what I can tell you is our own internalization thought is a no-brainer. And they said, oh, finally, the executive team. So there's very well-received change, and we think it's going to lay the ground bar for more growth down the road.
Robert McMahon
Yeah. And I think from the standpoint of just kind of the forecast going forward of the guidance going forward, it really doesn't have a material change on the LSAG overall guidance. It does slightly lower the DGG as you as you know, it is a more instrument-based business. I think the long-term growth there is very positive, but we're expecting kind of lower-than-normal growth so where we had low to mid-single-digit guide for full year in DGG, it's low single digits for the full year. And then I would say, roughly mid- to high single-digit decline in Q1. But again, it's just a segment change between LSAG and DGG, our guidance remains intact for the total company.
Mike McMullen
And Bob and I were talking about this earlier today. And Rachel, I think this is also as a byproduct of how we think about our organizational structure, we think we need to continue to evolve to make sure we're capturing the growth opportunities there in front of us. So we don't want to be always say, listen, how the company is set up, we're never going to change. We're going to continue to evolve it to want to make sure it's well positioned as possible to get the growth and drive profitability.
Q – Rachel Vatnsdal
Great. That's helpful. And then, I want to shift over to some of the questions around instrumentation. So specifically on instrumentation, your fiscal 4Q number on LSAG instruments book-to-bill was over one in all regions, including China. So I was just wondering, can you kind of walk us through what you've seen in the weeks since you reported that fiscal 4Q number how have orders trended? How is book-to-bill kind of shaping up for fiscal 1Q? And is that falling in line with your expectations?
Mike McMullen
Yes. I think that will be the concluding comment, which is falling in line with our expectations. So November, December have come in the way we had expected. As Bob mentioned earlier, we weren't expecting any kind of significant year in budget flush. So that was not a surprise to us. And both globally but also in China, the business has continued to develop as expected.
Q – Rachel Vatnsdal
Perfect. That's helpful. And then I just want to ask about, how you're viewing the recovery time line for instrumentation you pointed some positive order book commentary like you just mentioned, falling in line with your expectations. And you've noted historically that these cycles can last anywhere from 12 to 24 months. So, what inning are we in, in this cycle? And then when do you anticipate a return to normal instrumentation growth?
Mike McMullen
Sure Rachel. So, maybe it's important for me just to clarify what segment of the market I'm talking about. Because when you think about instrument demand, there is an R&D segment that drives instrument demand as well as I mentioned, I showed you some of the secular growth drivers, then PFAS testing, advanced materials, et cetera.
They are not in a big cycle. They're actually continuing to grow what I'm referring to specifically about the cycle is really QUESTION-AND-ANSWER SESSION/QC, primarily liquid chromatography pharmaceutical market.
So, if you kind of think about that, which was there are two different dynamics where you've got a QA/QC mark, which is a primary replacement market, big market for primary replacement. And you've got an expanding R&D segment in testing in some of these secular growth areas I mentioned earlier.
Relative to innings, Mark, I was trying to come up with an analogy relative to football, but we'll stick with baseball, one of our colleagues' team won the National Championship last night. So, he's very happy here in the front row. Go Blue.
But we think that our history -- I mean these aren't laws of physics, but our history has shown that these are typically about 24-month kind of cycles before you've had a level of elevated demand. Things go down for a period of time and it starts to recover back to what we believe to be a mid-single-digit growth market. The bottom-line is we think are about halfway through that cycle right now. So, middle innings. But closer to the end than we were last year.
Rachel Vatnsdal
Perfect.
Bob McMahon
Yes. And Rachel, I think it's important to kind of look at because there has been a lot of volatility. But if you look at the four-year compounded annual growth rate for our instrument business, excluding the consumables business, it's through FY 2023, it's 5%.
And so that's kind of that long-term cadence that we expect our Instrumentation business to grow with the consumables and services growing faster than that with the attach rate and then obviously, the Diagnostics and Genomics business.
Mike McMullen
And that was back to your other question about the long-term growth rate. So, we've seen our Instrumentation business be right at where we thought long-term growth rate. So, that's why that gives us confidence going forward in terms of our outlook.
Rachel Vatnsdal
Perfect. That's helpful. Then shifting over to China a few questions in China surprise.
Mike McMullen
We're going to make a couple on your list there.
Rachel Vatnsdal
Yes, it might come up. So, I wanted to spend a minute, you're really one of the first players to call it stability in the region. China declined 31% in fiscal 4Q that was in line with your expectations and again, it's a difficult comp. But you saw that month-on-month improvement in the business throughout 4Q.
So, can you just talk about what have you seen in recent weeks in the region? Is there anything to call out any corruption as an area that's come up in previous presentations this week as well?
Mike McMullen
Yes. No. As we mentioned in our last earnings call, we were encouraged to see some, what we saw early signs of stabilization. And what do we mean by that? And I didn't say early signs of strong growth, I said early signs of stabilization because we've now seen our business come in about the same level every month or several months.
We've seen that continue throughout the early parts of FY 2024 for us. So, we think the market in China is developing as we had indicated back in November, we are calling for a year-on-year decline overall in China, primarily on the backs of difficult comps. But we do think that, that market will start to return to growth or more likely a 2025 scenario.
Bob McMahon
Yes and for any additional commentary on that for things like the corruption, we actually think that is a long-term benefit for a company like us that does business the right way. And so there was a pause in the market. I think when people were trying to understand what does it mean it's primarily focused at the hospitals, but -- and where we have a smaller-sized business within our pathology business, but it did impact also pharma companies.
But we actually think that over time, this will be a benefit to Agilent and allow us to have an even playing field, which is the intent of the regulations and so forth. And we actually think that it's behind us when we talk to our sales team in China, they said that impact is behind us now.
Rachel Vatnsdal
Got it. And then just a quick follow-up on the pace of recovery for China. So you mentioned it's going to be pressured throughout the year and return to growth in 2025. Could we see a quarter of growth in fiscal 2024 for China? How do you expect that to kind of trend this year?
Bob McMahon
Yeah. So if we think about the growth rate, I mentioned it's down mid-single digits for the full year, which is very similar to this year. We exited at minus 30. We're going to be down in the 20s in Q1, still, if you think about kind of the cadence of revenue though, the revenue actual dollars is going to be pretty consistent. I don't know if it's going to get to positive growth as we exit it, but it could be flattish. And so -- and it could surprise to the upside, but that's certainly not baked into our guidance.
Mike McMullen
Not on the realm of possibility, but not baked into our plans. And as I mentioned to you earlier, we visited China back a few months ago. And you're just kind of reminded of the series size of the market and where the customers want to go with their investments. They want to invest with in leading-edge technologies to really advance their work, and we think we're well-positioned to do that. But at the same point in time, we also recognize the changing market dynamics to really make sure you have ability to be made in China. So we think we've got a really strong position there because of our long heritage, but we've -- we're also taking a realistic view of near-term growth.
Bob McMahon
But I think it's important to also say, we do think that China is a growth market long-term. And if you think about the investments that are being made, our market -- our products are central to what the Chinese government is trying to do to improve access to health care, improve the environment, improve the safety of food. Our products are essential to being able to do that.
Rachel Vatnsdal
Perfect. And then a quick question here just around pharma and biotech budgets and some of the decisions and reprioritization we've seen there. What is conversations with your customers trended lately? How are you seeing, if any, an impact from IRA? And then how much longer until we're through this dynamic of pressured budgeting?
Mike McMullen
I'd say, Bob, the conversation of the RA have been really heavy in 2023 and we've communicated this a bit already relative to ASD business. What we've seen our customers doing is starting to rethink the cadence of the clinical trials and when they might come to market, sometimes opting to delay the introduction from smaller patient populations to have a go after more indications right off the bat. But I think the internalization of what this means for their go-forward plan, I think, is pretty complete.
Bob McMahon
Yeah. Our view is that the IRA impact is transitory, not something that's structurally changed. If we think about the R&D investments based on our conversations with our customers, they're continuing to increase their R&D investments. We talk about the number of platforms that are being invested in. All of those require tools like Agilent, tools to be able to do.
And so I think the first half of this year will be important. Last year, there was a lot of uncertainty. I think the entire industry underestimated the impact inclusive of the pharma industry, the first list got identified and then are going to be here negotiated, I think, from the standpoint of what's happening here in the first, I think, first quarter. So we think a lot of that has played out already.
Rachel Vatnsdal
Great. That's helpful. Then with about a minute left here, I just want to ask on M&A here in capital deployment. Deal flow has picked up in recent months. So how should we think about Agilent's deal appetite in terms of size and capabilities?
Mike McMullen
Yes, absolutely. So we've been executive call build-to-buy growth strategy. So the buy side is something that remains high interest stores. We're very active in the market. And we think that given the growth of the company, the capitalization of the company, this fortress balance sheet that we talked about earlier, we can do multiples of our large deal biotech probably as much as $4 billion to $5 billion.
Bob McMahon
Yep.
Rachel Vatnsdal
Perfect. And with that, we are out of time.
Bob McMahon
Thank you, everyone.
Mike McMullen
Thank you. We made it on time.
Rachel Vatnsdal
Thank you. Yes.
Mike McMullen
Thank you, Rachel. Thank you.
Rachel Vatnsdal
Perfect. Thank you.
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Agilent Technologies, Inc. (A) Presents at J.P. Morgan 42nd Annual Healthcare Conference Transcript