Agilent Technologies, Inc. (NYSE:A) 41st Annual J.P. Morgan Healthcare Conference January 10, 2023 12:00 PM ET
Company Participants
Michael McMullen – President and CEO
Robert McMahon – SVP and CFO
Conference Call Participants
Rachel Vatnsdal – JP Morgan
Rachel Vatnsdal
Perfect. Hello, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostics team. Thank you so much for joining us today. So I’m joined with the Agilent team, Mike McMullen, CEO. Standard with the other sessions that you’ve been attending today, we’ll kick it off with a 20-minute presentation by the company, and then we will shift to Q&A.
During Q&A, if you’re joining via webcast, you can feel free to submit a question via the Q&A function. And for those of us in person, feel free to raise your hand, and we have mic runners throughout the room that can hand a microphone off to you.
So, with that, thank you so much.
Michael McMullen
Well, thank you, Rachel. I know I say, as I mentioned earlier, it’s just great to be here and must be — it’s great to be back in a phased environment here at JPMorgan. So, thanks for joining today. There’s three parts to my talk today. First of all, I’m going to talk to you an overview of Agilent, who we are, what we’ve been doing in terms of shareholder value creation. Then we’re going to move forward and talk about where we’re going to make sure that we can continue to perform at a high level in 2023 after the Agilent team delivered an excellent 2022. And then I’ll close with what you can expect from Agilent in FY ’23.
But first, for your reading pleasure, our safe harbor statement. Okay. With that, I want to move on to who is Agilent.
We’re a $6.8 billion company with unsurpassed scale, a leading partner with unsurpassed capability to scale across the world’s 265,000 laboratories. I would also say we’ve been working really hard to change the overall mix of the company’s business. You noticed we’ve highlighted here the move to — almost 59% of our revenues today come from high-growth pharma, these connected high-growth areas of pharma, clinical diagnostics and life sciences research.
If you had a chance to listen to me talk last year in our virtual format, I talked to you about we had a winning strategy, this Agilent team. The Agilent team was performing at a very high level, and we’re going to deliver, and that’s exactly what we did in 2022. So, we grew 12% core in 2022 on top of 15% of the prior year. Margins, up 160 basis points in an inflationary environment that none of us have seen for a number of decades, and then our earnings per share growth continues to accelerate. We did 20% growth this year on top of 32% of the prior year.
So, we’re not at all satisfied. We continue to push ourselves. We’re going to continue to drive shareholder value creation as we move forward. In fact, in terms of shareholder value creation, I want to remind you of what is our model here at Agilent. I stood in front of this group when I first became CEO back in the 2015, and I described our shareholder value creation model at the time, which was to drive above-market growth, which can tap a continued expansion of the operating margin and deploy capital in a balanced way.
That’s been our model that’s been intact for — since 2015. And what can you expect from that model? What we shared at our most recent Investor and Analyst Day back in, I guess, December 2020, right, Bob, above market growth, I think we’ll do 5% to 7% core as a company, continue to expand operating margins. I’m sure we’ll get into some of those details in Q&A, of 50 to 100 basis points per year, and continue to use the strong Agilent balance sheet to deploy capital in a balanced manner.
Where does that all lead to? Double-digit EPS growth. And you can see by our results for the last 2 years, we’re delivering on this commitment here. And as I show you the results for the last 5 years, you’ll see that it’s been a continuous story of delivering on this model.
In fact, these aren’t just some theoretical business model that we talk about with investors. This is what drives the Agilent team. And what I would say with you is that if you look at the growth rate of this company, pre-2015, which I call the creation of the new Agilent after the — our spin-off of our Electronic Measurement business, and we come in a full focused company on life science diagnostics, our growth rate has accelerated. So not only had our growth rate doubled, but you’ll see in the last few years, it actually has been accelerating with 15% core in ’21, 12% core last year.
I can remember being in front of a group like this 5 or 6 years ago talking about operating margin expansion. Could you ever get to 22% operating profit? Well, we’ve blown right through that. Margins are up 800 basis points since 2015. And last year, as I mentioned earlier, we delivered 160 points of improvement in an inflationary environment. Where does this all go to? Again, this idea of superior earnings growth, 17% CAGR through the last 5 years, now 32% in ’21 and 20% in the past year, going from $1.74 to $5.22 in FY ’22.
So again, we’ve lined up our compensation systems. This is how we focus the entire company on this model. So, it’s more than a theory. This is what we do at Agilent.
I want to dig in a little bit deeper about the comments on the balanced capital deployment. So, what do I mean by that? So, we’ve got this great balance sheet. So how are we going to use it? So, the way we’re going to use this balance sheet is to drive investments for growth as a top priority.
So, let me start to the far right. So, this includes organic investments of CapEx. Up through 2015, we’ve invested about $1.3 billion in CapEx primarily to the first phase of growth for our NASD business but also to expand production capacity across other parts of the Agilent portfolio.
Now I hope you had a chance to catch our press release that went out yesterday, where we announced another $725 million on top of this as we continue to expand our NASD business. And I’ll be going to dig deeper about that, our plans there later on in my comments this morning. And then we’ve also deployed over $3 billion in capital for M&A. And we’re really targeting great companies in fast-growing end markets, and we’re really happy with our success to date. In fact, over 8% of Agilent’s revenues today have come through acquired companies.
And you hear me talk a lot about today, this build-and-buy growth strategy that Agilent has. The build — our internal organic investments at NASD investment is one example of that. And then the buy, obviously, is what we’ve been doing with the M&A side of our activities. While returning capital to shareholders. So, during the last 5-plus years, we’ve paid out $1.6 billion in dividends. I think this is actually underappreciated aspect of Agilent’s capital deployment approach, which is a growing cash dividend that we’ve been able to do every year since 2015.
And then share repurchases, we have bought back $4.4 billion worth of shares since 2015, over $1.1 billion in ’22. And you may have seen in a recent press release where we’ve been authorized by the Board for another $2 billion realization of our share repurchase for another $2 billion. So again, what you’re hearing is consistency of execution of what we already called our balanced capital deployment.
Okay. It’s not just about the numbers at Agilent, although we’re very proud of the results we’re delivering for our shareholders. We also have a role to play in society. And I’d like to talk to you about our ESG initiatives but I’m going to focus in on sustainability, both in terms of what we’re doing relative to our own operations but also how we’re helping our customers.
So, let’s first of all talk about sustainability in our own operation at Agilent. So, we’re committed to net-zero emissions by 2050. At Agilent, though, the real plan is to get there. This is not a slogan or some kind of statement. It’s real at Agilent. So, we have multiyear plans to get us there. And in fact, since 2014, our car emissions are down 34%. But it’s not about just what we can do with our own operations, how can we help our customers?
So, you think about — when you talk to our customers, they’re really engaged in trying to meet their sustainability goals, and Agilent has a role here to play. Think about the engineering prowess we have in terms of how we design our instrumentation. It’s much smaller and we use a lot less energy, and a lot less waste is generated. So, our engineering for sustainability is really a key part of what we do in terms of our NPI activities.
We have an industry unique refurbished business unit, which is basically a certified Agilent pre-owned. So, instruments aren’t getting disposed out somewhere in some dump site or actually being recycled and resold in the marketplace for other customers. And our efforts here have been actually recognized by the migraine lab, and we have eco-product labels.
You also may know that energy consumption in a lab per square foot is right up there with what you see in hospitals and large commercial organizations. So, our customers are very concerned about the energy consumption that happens in their laboratories. And this is where our CrossLab Connect organization [indiscernible] go in, where we can go in and really offer them advice in terms of how they can reduce their energy consumption.
So as proud as we are about the financial results we’re delivering, we have a real role here to play in making the world a better place, and we’re committed to doing that, both in terms of our own internal operations but also what we do for customers. And as you might imagine, there is a little bit of a commercial story on the right-hand side as well as we help our customers with their sustainability goals.
Okay. Enough about the history in the past, let’s look forward. The point I’m going to drive home today is Agilent is a diversified and resilient business with multiple growth drivers. So, what’s behind that statement? Let me take you through that.
So, I think, first of all, it starts with the market and, specifically, where do you want to focus your company’s investments? So, a number of years ago, we decided that the priority investments we were going to invest at a higher proportion of our investment dollars into the fast-growing pharma and clinical diagnostic marketplace, while at the same point in time, taking advantage of secular growth drivers in applied markets. So, our model is we can develop core technology and applicate those across multiple end markets.
And I think — as I walk you through our storyboard in terms of our portfolio, you can see what we’ve got this more diversified, resilient new business. So, building a more resilient business, this doesn’t happen overnight. It requires a focused set of efforts over the years. And what I wanted to talk to you today was how have we built resiliency at Agilent, how do we continue to build resiliency in terms of our revenue profile?
First of all, it starts back when we spun off at that time a very highly cyclical Electronic Measurement business. That’s when we formed the new Agilent. We then made a big bet on services and consumers, our CrossLab strategy. We entered the clinical market and diagnostics market. And as we’ll hear later, we’ve been investing very heavily in biopharma APIs. This is our strategic intent around how to build resiliency.
So how is it working out so far? So, if you go back to 2008, 2009, we were in a global recession. I think the global GDP was down 1.3%. Agilent, restated Agilent would have been down about 2%. If you look at what the pandemic caused in terms of 2020, global GDP was down 3.3%. Agilent actually grew 1%. So even in the face of a pandemic-induced global recession, Agilent has found ways to grow.
And you can see it on the right-hand side here how significantly changed our revenue mix is from back in 2008, 16% was recurring revenue. Now almost 60% of our business is recurring revenue. So, these are real significant changes in terms of the portfolio of our business, but it came through a series of focused strategies the way it had started a number of years ago.
Let’s talk about one aspect of that resilience business. So, I mentioned earlier, we made a big bet on the services business back in 2015 with the formation of our Agilent CrossLab Group. The results speak for themselves in terms of how we’ve been delivering here. The business is now at $1.5 billion of business. I’d point out that 60% of those revenues actually come from annual or multiyear service agreements.
So, a high level of predictability about the revenue recurring. We have built a best-in-class customer service organization second to none, and we also tied this very closely to our consumables business. You’ll hear us talk a lot about connect rates, which is, of the Agilent installed base how much of their consumables and services are coming from Agilent.
And we had a new milestone this last quarter, over 30%. We’ve think we’ve got a lot more headroom in front of us. But you can see how the growth rate has accelerated for the first few years from ’15 to ’20 about 8% over the last 3 years has accelerated to 11% in terms of our top-line growth.
Now I’m arguably biased, but I think high growth, high margin, high driver of customer satisfaction. There’s a lot to like here with the Agilent to our services business. I talked a little bit about the bets we make in terms of really investing in faster-growing segments of the market. So, a number of years ago, we said biopharma is a place we’re going. And now through a series of focused investments and success in the marketplace, it now represents almost 39% of Agilent’s total pharma business.
And you can see how the business has grown. We were less than $100 million in 2015. We were knocking on the door of $1 billion. I think this chart is $1 billion. I think the actual number is $999 million, but I round it up for $1 billion for this presentation.
But we’ve been driving a really straightforward strategy which is to leverage our positions across the biopharma value chain to expand our offering. So, we’ve been leading to — providing leading analytic solutions in and out of the lab, building that kind of our strong instrument heritage here. We’re a leader in biopharma services for therapy selection.
This is where our whole companion diagnostics business comes in, market leadership in RNAi-based APIs and growing CRISPR position, we’re going to dig into that a little bit deeper. And then also, we’ll talk about our cell analysis business we built here. It’s all about providing the capabilities across the whole value chain for our biopharma customers.
So, the focused investments are paying off. And I would tell you we’re not done yet. We think there’s a lot of growth still in front of us in the biopharma space. So, I’ve been hitting that this already, but we have a leadership position today in the therapeutic oligonucleotide marketplace, particularly — specifically siRNA. This is what we refer to as our NASD business. This is a large market, already $1 billion TAM, growing 20%. We become the market leader in this business. In 2022, delivered almost $300 million of revenue, high margin, growing 29%.
Why are we winning? We have high-quality oligo API materials. I think it really kind of also — the key point of the capabilities we have as a team, superior customer service. We are known in the industry as the company to work with. We have a solid and diversified client portfolio and I mentioned earlier there’s this deep technical acumen, and we’re willing to invest.
Right now, we have what we call our Train B, which is the new production line that’s targeted to come online in 2023. We’re talking about that midyear of next year. In addition — on top of that $300 million, that will add another $150 million of annual capacity of revenue. And again, we’re looking — we’re pretty confident about how things would happen for us in ’23 relative to Train B. And for the future, we’re not done yet.
If you ever have heard me talk before about this business, I’ve said, hey, there’s more letters in the alphabet than A and B. In fact, we just announced yesterday in a press release that we’re going to further expand that business, we’re on the road to a $1 billion revenue business here as we invest $725 million in what we refer to internally as Train C and D, which is going to give us additional capacity at siRNA, but it also allows us antisense and more CRISPR guide RNAi material.
So, we’re very excited about this. This will actually double the revenues of NASD. And back to the sustainability story, our new design also incorporates a lot of sustainability capabilities to really limit the impact on water usage and waste production.
So very exciting time for us, a great business for us and highly connected also to our genomics research business as well. So very excited about our ability to be on the road to $1 billion in revenue. We crossed over $300 million in ’22, and we have more capacity coming on ’23, and this will start coming online around ’26 for us. So again, pointing to the future of strong growth in biopharma.
The cell analysis side of our business, the title here is the buy side is working. Just as a reminder, what’s driving this marketplace is things like, immunology, immuno-oncology, immunotherapy investments, cell and gene therapy, a really nice end markets through a series of acquisitions. We’ve built up a $400 million revenue business, growing 15% since FY ’20 on an annual basis.
This will be an area of continued priority of investment for us as we move forward. And again, I think it really shows the power of Agilent’s business model, which is, we can both build internal investments, as I just shared with you, on NASD but also buy and build some really nice new businesses for our shareholders and customers.
Remember, as I said, it’s all about the market. And so, we’ve been really focusing on the higher-growth pharma markets and diagnostics markets. But I also talked to you about the secular trends that are going on in this space. There’s 2 that I really like to highlight here, which is what’s happening in advanced materials. This is a big market, $1.5 billion. We are the undisputed leader in this space of advanced materials. 2 secular trends I’d focus on here. I picked up a few headlines from the newspapers here. But as you know, there’s a lot of onshoring going on relative to semiconductors.
And as COVID-19 kind of highlights the world — how concentrated the supply of chips was in particular parts of the world. You see massive investments, government-supported investments happening right now to build new fabs in the United States, Europe and other parts of the world. So, we’re going to benefit by that secular driver that’s happening right now.
And I think we all know there’s a revolution going on in the electronic vehicle side, electric vehicle side of the automobile industry. The demand for batteries is exploding right now. And this is where Agilent plays in the space already from the actual mining of the raw materials that actually goes into the production of batteries but also all through the value chain in terms of development, production and QA/QC.
So again, this is a great example of our leveraging core technologies in markets that are growing rapidly. So, we will get the outsized level of growth here relative to our peers. We are the undisputed leader in this space. And then another secular driver I point to in the applied markets relates to the environmental testing area. You may be familiar with an emerging public health challenge, which is the so-called forever chemicals, which are everywhere, and they are forever.
And I think there’s a growing recognition that this has health consequences. You’ve seen a number of companies announce their discontinuance of production of forever chemicals. And why is that important for this conversation today? There is increasing levels of research and regulation happening in the space to monitor water test for water and other types of contaminants, if you will, out there.
And this is where Agilent comes as leader in this space with our configured systems to allow our customers to work on PFAS. This initiative has really started initially in the United States. It’s growing in Europe, and we expect China and Japan also to follow suit with more regulation, creating new opportunities for the company.
So, going to just highlight the last three months just to show you about the secular drivers that happen in our applied markets business. So, in my opening comments, I said what can you expect from Agilent in 2023? Just a reminder of the guidance that we shared in our last earnings call, for the full year, we’re expecting revenues of $6.9 billion to $7 billion.
That would be core revenue growth of 5% to 6.5%, EPS of $5.61 to $5.69. And then for Q1, you actually see our core revenue growth is guided at a higher rate, $1.68 billion to $1.7 billion in terms of dollars for Q1 with core revenue of 6.8% to 8% and the EPS at $1.29 to $1.31.
So, I went through the numbers pretty quickly. I want to get to Q&A, but I’m assuming you’ve got these already in your notes, but I just want to remind you what our guidance was in our last call.
I’m going to close with a few key takeaways that I really hope came through in my conversation with you this morning. Agilent has a diversified and resilient business. We’ve got multiple growth drivers in fast-growing markets. And it’s being driven by this Agilent team, which is focused on our customers. And I think you saw in the numbers, we have a proven track record of success and I would argue unmatched execution capabilities.
What you’re going to expect for us in the future is we will continue to prioritize investments for growth, expand our base of recurring revenue and anticipate and react quickly to changing conditions to deliver at a high level. So again, thank you for joining us today. And Rachel, I think we’re going into Q&A. I think Bob is going to join us as well.
Question-and-Answer Session
Q – Rachel Vatnsdal
So yes, we’re shifting to the Q&A portion. As a reminder, if you do have a question, please raise your hand, and we’ll have a mic runner hand you the microphone. So, thank you, guys, again for joining us. I figure just to kick it off, cyclical concerns, you highlighted some of the more nascent markets today like battery testing, PFAS, also some of the more semiconductor testing as well. But can you talk about how the portfolio has really shifted since 2008? And what is the resiliency of your portfolio today? So how much would you view as your portfolio tied to those true more cyclical end markets like energy?
Michael McMullen
Yes, Rachel. It’s great to have that first question because you hadn’t seen my deck before you prepared those questions. But hopefully, what came through on a couple of key points I tried to make earlier, which is, first of all, the big mix of recurring revenue. So, we’ve gone from 16% to 58% of our business is now recurring revenue. We now have a very large services business. We have a diagnostics business. We have an API business, and these tend to be fairly insulated relative to global GDP pressures and then the big bet on pharma for us as well.
Robert McMahon
Yes. And I think when you look at pharma, that business is now almost 40% of the total revenue back — that’s up from 10% to 15% probably back in 2015. So, you’ve got much more strong growth in more resilient end markets. And then coupled with that, even within the CAM and Advanced Materials area, that energy that you just talked about at one point in time, back in 2015, that was about 30% of that business, it’s less than — it’s about 10% now and with the secular drivers that we talked about.
Michael McMullen
And Bob, I think probably the energy segment is less than 2% of Agilent’s total revenues. And that’s why we actually changed the name of the segment to be Chemicals and Advanced Materials, more reflective of what’s really going on there.
Rachel Vatnsdal
Yes, perfect. Maybe as digging deeper into some of those more new markets like the batteries and semiconductors, can you just talk about what gives you confidence that these are going to be more resilient heading into a recession? We haven’t really seen those markets be tested yet. So, what’s your visibility into the growth there, longer term?
Michael McMullen
Yes. So, you can imagine something like bringing on a fab is a multiyear investment, but the big difference is there’s government funding and public support for these initiatives. So, it’s now viewed as a matter of security and national security in terms of where we want to have chips manufactured.
We haven’t seen this level of government support in the private sector in the United States or Europe since I’ve been in this role. So, I think these — I think you’ve got a level of funding that’s coming from not only the private space but also the public sector space.
And then on the electric vehicles, and Bob and I were talking about this, this morning, I mean all the major automobile manufacturers have major initiatives in this area. They’re directly funding a lot of the research. We’re also seeing money coming in from, again, government sources. So, I think it’s this — part of this play here is not just the private sector supporting these investments, but you’re also with the government support.
Rachel Vatnsdal
Helpful. So, shifting over to instruments, I have to ask a few on instruments here.
Michael McMullen
We haven’t talked about this one.
Rachel Vatnsdal
So, can you just talk about how much do you think is either an underlying market acceleration and instrument growth versus Agilent share gains? And then also, how are you thinking about this instrument replacement cycle and some of the growth being sustainable going forward? Do you think that we’re going to have a reset given the tough comps? Or how are you thinking about instruments heading into ’23?
Michael McMullen
Yes, sure, Rachel. I think Bob and I will tag team on this. First of all, we’re just delighted with the performance over the last 2 years of our LSAG business, which houses our analytic instrumentation business. And if you heard me talk before, I’ve quoted my Danish colleagues to say our market share results have been green, green is a Danish far. So, we’ve been actually picking up share across our core platforms. But I think part of the big story here is there’s been a lot of demand.
And I would submit that, in certain segments, there’s been an accelerated replacement cycle going on. In particular, I’ve been on record talking about the small molecule segment of pharma, which really, in our — from our assessment, delayed investments in 2018 and 2019 but sort of in a catch-up mode.
So, we expect that to move towards the mean as we go into ’23, and that’s how we set up our guide. But we also think other parts of the instrumentation portfolio are driven by secular demand.
Robert McMahon
Yes. Some of the ones that we just talked about, certainly in the Chemicals and Advanced Materials, we think, are secular drivers. And then I think within that pharma business, we still do believe that biopharma is a faster-growing end market than it was going into the company. And so, we still see expansionary opportunities there in the instrumentation. They are driven by the science.
And we’re seeing that with our customers. That’s about 39% of the overall pharma business, as Mike just talked about, a combination of both instrumentation and services. And I think what’s important here is it’s really a workflow play. It’s not just instrumentation. It’s also the services and the applications. And that’s one of the biggest areas of investment that we’ve been making in R&D, and we’re seeing it in the results.
Michael McMullen
Yes. And Rachel, I’d maybe drive — draw connection here back to our ACG services business. So actually, we’re going to get delayed gratification because we’ve placed so many instrumentation — instruments over the last 2 years, and many of them start to come off warranty as we go into ’23. So that will be another driver for us in terms of growth in services.
And as Bob just mentioned here, back to this resiliency question. I forgot to mention this, but we’ve had this workflow strategy. So, as you sell a workflow around the instrumentation, you’re often into a situation where, for the next 7 to 10 years, you have a recurring revenue stream, the consumables and services relative to that workflow.
Robert McMahon
Helpful. And so then maybe just looking at your guidance for the fiscal year ’23, you’ve mentioned how you have really strong visibility into the first half of the year. You guided to 5% to 6.5% core growth off of a stellar fiscal ’22. So, can you talk about the implied guidance more towards the back half of the year?
Is that more — are you seeing some type of slowdown that could suggest that in the back half? Or is it really just out of an abundance of caution and conservatism given this point? And then what level of visibility would you need to see to be comfortable with lifting that guide throughout the year?
Michael McMullen
Yes. So first of all, thanks for the characterization of 2022 a stellar. So, I’ll take that on behalf of the Agilent team. The way we said at the guide was we have really good visibility in the next 3 to 6 months. So, we know what’s in our order backlog and we know what’s in our funnel. So — and because I think that’s really — if you think — look at Agilent’s businesses, keep in mind that we’re really talking about the CapEx instrument piece — portion of the business. And we have really good visibility in the next 3 to 6 months of how that’s going to shape out.
As we said, the guide for second half — for the full year, we said we really don’t know what’s going to happen. It’s not a prediction. It’s just a measure of, if you will, can I use the word prudent, in terms of our guide setup, which is we really don’t know how the back half of the year is going to look like. What I can tell you is through calendar 2022, as we finished off our order book, orders came in as expected for the full calendar year. So, Bob…
Robert McMahon
Yes, you characterized it well, Mike. I think as we look through Q1 and Q2, we’ll have more visibility, obviously, into the funnel. And obviously, we’re also going up against tougher comps in the back half of the year. So that does play into it. But I think it is kind of a wait and see. We’re not seeing anything in the market that would suggest a slowdown in the back half, but we’re a few weeks in into the calendar year here, a few months into our fiscal year, and we’ll know a lot more in a couple of quarters.
Rachel Vatnsdal
Yes, helpful. Then shifting over to China. So obviously, we’ve had some concerning headlines coming out of China with the recent outbreaks there. So, can you talk about what you guys are seeing in the conversations that you’re having with your customers in that region? Also, Lunar New Year coming up. And then, finally, you flagged some potential stimulus in China. So, net-net, kind of walk us through what you’re seeing in that market. And is there any upside or downside risk to that high single digits you’ve laid out in China for ’23?
Michael McMullen
Yes. So maybe just remind the audience how things worked out in the ’22 for Agilent. So, there’s a lot of variation by quarters as we were experiencing government mandate they had to shut down to certain parts of the country. But for the year, we actually delivered 18% growth for China. So, our business in China was very strong, and we have a great team there. I think we guided high singles for the year.
We think that the recent change in the China government policy is a net positive for our business there because we will have — in situations where our workforce may be effective with COVID and maybe it won’t be able to work for a period of time. But we’re not dealing with government-mandated restrictions, and so we think it’s overall net positive.
It’s going to take a little while to kind of work through some initial disruptions as the well-publicized waves have been gone through different parts of China. We’re experiencing that right now. And we find — we’ve gotten pretty good about navigating our workforce and being able to work from home and avoid situations where people can’t work all the time.
The one variation, obviously, would be whether or not if customer’s labs have to be shut down for a period of time. Lunar New Year, I would just say, we’re — I was talking earlier this morning with one of our investors that said I’d love to not talk about Lunar New Year but it’s always seem to be the case. So, for Agilent. This year, we actually lead to a condensed revenue cycle in China. So, we’ll be fine for the first in Q1.
So, don’t be spooked by Q1 numbers is all assumed in our guide that will have less week or so less of revenue.
Robert McMahon
Yes. I would say, Rachel, we’re positive on China. And we think that, that business is going to be the fastest-growing region coming in to this year as of fast-growing last year. The stimulus that you talked about, I think we’ll find its way much faster than stimulus finds its way in Europe, in the U.S. into key strategic industries which we support, whether that be semiconductor, bioprocessing and even the energy areas.
I think that those are critical strategic areas that are part of their 5-year plan. Removing the uncertainty of the overhang around shutdowns and so forth and being able to manage that internally, I think, is a — there will be disruption, I think, short term, perhaps, but it’s much more manageable than, all of a sudden government-mandated shutdown that we can’t go to the factory.
Michael McMullen
And our capabilities are smack dab in terms of the priorities that the Chinese government has set for the country. So as Bob mentioned, we’re very positive on China.
Rachel Vatnsdal
Perfect. Shifting over to NASD then. So, Train C and D, great to hear about that announcement this week. So, you said that costs will be estimated $725 million set to open in 2026 and 2027. So, for starters, really, how should we think about the pacing of that investment over that time frame? And then on the demand side, can you talk through some of the levers there that gives you confidence that you’re going to be able to warrant enough demand to really double the capacity there?
Michael McMullen
Bob, do you want to take the first piece?
Robert McMahon
Yes. As you can imagine, we’ve done a lot of work trying to quantify that and looking with our existing customers and looking at the clinical trial demand of not only our existing customers but also other opportunities and feel very confident. And one of the reasons that we feel confident is if you look at the therapeutic areas that are being targeted for oligonucleotide therapeutics or siRNA, they’re a broader and broader patient population. So, more and more patients, and we’re just seeing that with some of the products that we have on market in partnership with our partners.
And so, we’re looking at that. We feel very confident about that. We already have Train B, already orders in hand. And when we look into the future, not only looking at our existing customers, but the number of new therapeutic areas that are being focused on, we feel very confident that there will be enough demand out there to satisfy the capacity that we have.
Michael McMullen
Yes. I wanted Bob to speak to it because it’s not just me that shares excitement around this business. And Bob, maybe you can talk a little bit about the pacing of how the CapEx will be deployed.
Robert McMahon
If you think about this pacing, we’re — as a reminder to what Mike just talked about, we’re scheduled to have Train B, which is $150 million of revenue opportunity coming online mid this year. We expect that to be actually fully ramped up by the end of our fiscal year on an ongoing basis. So that will be a nice ’23. We’re expecting double-digit growth for that business and then going into ’24 as well.
And then from a CapEx perspective, that hasn’t been built into the $300 million that we had built in. It’s roughly $100 million to $150 million in addition this year and then more in ’24. And then as we build the factory, because this will be a new shell in Frederick, then we’ll start bringing that online in ’26.
Michael McMullen
And as I mentioned in my presentation, we have a large and diversified customer base. So, we have good line of sight to demand even out to ’26 and ’27. So, it’s not like we’re trying to build something and go look for the business. So, we know the business is going to be there.
Rachel Vatnsdal
Perfect. Helpful. Then during your comments earlier, you mentioned some of the small molecule and the robust growth there. It grew 21% in fiscal 4Q, really strong numbers for small molecule. We haven’t seen that in a long time. So, can you walk through what’s really driving some of that acceleration in small molecule? You mentioned some of the replacement cycle. But just dig deeper into that. How resilient is this growth? And at what point do we kind of see a reset here?
Michael McMullen
Yes. We’re assuming it’s going to reset in ’23. And we’re just delighted with the growth that we’ve seen over the last several quarters in small molecule. For the most part, this is a more mature market in U.S. and Europe. And our thesis is that there was a delayed reinvestment in this area in 2018, 2019. You may recall from our earnings calls, we’re actually talking about that.
China has always been in expansionary mode. So, we expect that to continue. But we think over time, you’ll start to see a tapering down of the replacement cycle in liquid chromatography. But again, keep in mind, it’s still an attractive market, even when it — they’re still advanced, but probably like 5% or 6% growth rate as opposed to 20-plus.
Rachel Vatnsdal
Helpful. So also, in terms of announcement, you announced a partnership with Akoya last week. So, I was just wondering if you could dig into that. Why was Akoya the right partner to partner with from a technology perspective? And then more generally, why do you view Spatial as an attractive market? And is it safe to say that it actually could do more in that area going forward?
Michael McMullen
Yes. So, we’re delighted with the partnership we announced earlier this week. And we know Akoya quite well. In a — for a period of time, we actually were directly invested in the company. So, we’re a big believer in their technology, their capabilities and where things can go on the Spatial front.
And we saw this as a natural extension of — if you say, a real recognition of the strength of our Omnis sustaining platform. So, we thought this is a great way for us to participate in the space with Akoya, it’s nonexclusive. And we think there’s more that can happen in the space for Agilent.
Rachel Vatnsdal
Helpful. PFAS testing. That’s an area that you and some of your peers have started to talk about much more meaningfully recently. So, can you talk about — you highlighted some of the regulation here today. But what should we look for going forward? Are there any other regulations coming down the pipe on PFAS? And how meaningful of a market can that be?
Michael McMullen
Yes. I think you’re going to expect to see more regulations. And a lot of it is being driven in the United States at the state level. I think you’ll start to see things happen at the national level. We expect the same thing to happen in Europe as well as China and Japan. So, this is a $200 million market. We think it’s growing greater than 10%. We expect that growth rate to continue for a number of years.
Rachel Vatnsdal
Helpful. And then shifting over to M&A. You guys have noted that you’re willing to do maybe a larger deal here. You also spoke recently and said maybe looking at a public company. So, can you just dive a little bit deeper into that? What areas of the portfolio do you think could be best? There’s obviously been a lot of beat-up names in our sector as well. So what areas are you really looking at for M&A?
Michael McMullen
Yes. By the way, our recent comments aren’t anything new. It’s just a restatement of what we’ve always said, which is we have the ability to do larger deals relative to — our till date was the BioTek acquisition, but we have really strict parameters in terms of how we think about M&A, both in terms of maintaining investment grade.
It’s got to be accretive. It’s got to be the right kind of deal that we can make it work for our customers. I mean, excuse me, our shareholders as well as customers. What I would say is — I realize that this is an interesting microphone. Okay. Sorry about that. I think the areas that we have been investing in, you’ve seen us do deals, cell analysis, genomics and diagnostics, they still remain the priority areas for the company.
Robert McMahon
Yes. I think one of the things that we’re looking at is making sure that we’re in markets that we know, and the beauty of the end markets that we play in are large already. And so, I think there’s a lot of opportunities and targets out there. And I think with our strong balance sheet and cash flow, we’re — our funnel is quite healthy.
Michael McMullen
Yes. And again, I keep coming back to our comments about Bs, we talk about our build-and-buy growth strategy. The buy is all optionality for the company. We don’t have to do deals to make our model work. But if we can find great companies, we will move on them.
Rachel Vatnsdal
Helpful. And then last question, just on leverage. Just given this market and what we’re in today, what are you willing to go to from a leverage standpoint for looking at some of these deals?
Robert McMahon
Yes. We’ve been on record in saying that our goal is to make sure that we maintain investment grade. And it’s even more important in today’s environment than in the past when money was, I would say, almost free. But where we are today, we still have plenty of leverage to get there. And I think we’d be comfortable with several turns but, again, being focused on maintaining that investment grade.
Rachel Vatnsdal
Perfect. And with that, we are out of time today. So, thank you so much for joining us today.
Michael McMullen
Our pleasure. Thanks.
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