Agilent restructures medical division as losses and investor anxiety mount

Persistent rumors notwithstanding, Agilent has no intention of selling off its Healthcare Solutions Group—at least for now.

The Andover, MA-based firm, spun off from Hewlett-Packard earlier this year, has opted instead to reduce its HSG workforce globally by 650 employees after two consecutive quarters of lower-than-expected results. These actions are expected to save the company at least $80 million annually starting in 2001.

While Agilent's electronics and communications businesses continue to do well, healthcare has fallen off considerably. Agilent reported earnings of $155 million on revenue of $2.7 billion in the third quarter (end July 31), up from earnings of $135 million in third quarter 1999. Orders in the healthcare sector fell 13% to $318 million, after falling 9% in the second quarter. HSG's losses for the quarter were higher than expected at $40 million, compared with profits of $41 million for third quarter 1999.

The layoffs (450 full-time employees and 200 contractors) come mostly within the administrative, financial, and human resources parts of HSG, with some additional reductions in research and development. The sales and service organizations will remain largely untouched.

In addition to the cutbacks, Agilent is accelerating consolidation of its manufacturing operations, a cost-cutting measure that has been under discussion since late last year. Over the next 24 months, the bulk of HSG final assembly operations will be moved to Singapore, where the firm already has extensive facilities.

"It makes sense to ship some of the basic manufacturing resources offshore," said Deane Dray, an analyst with Goldman Sachs. "It is something they should have done a while ago."

Like many of its competitors in the healthcare sector, Agilent attributes the losses from its healthcare group to the lingering effects of Y2K fears and the continuing effects of the Balanced Budget Act of 1996, both of which have reduced customer spending.

"The biggest impact on us right now is a slowdown in business in the U.S.," said David Ataide, worldwide marketing manager for Agilent's HSG. "We've also seen a slowdown in Europe. It's true that healthcare is in a turndown right now, so we're taking action today."

However, many on Wall Street believe the move has been coming for some time. Questions about the long-term viability of the healthcare group have circulated for months, with some investors insisting that Agilent sell off what they say is a noncore business that is draining resources from the more traditional and profitable parts of the company.

"The issues were likely buried when the healthcare group was part of HP," said Robert Maire, an analyst with Bear Stearns. "But now that Agilent is independent, the problems have a larger impact on a smaller company."

Agilent's desire to accelerate its separation from HP is also affecting the bottom line this year. Those separation costs total about $250 million, according to Dray, shared equally across all businesses. Agilent is also spending $140 million on a high-profile branding campaign.

The company is working hard to maintain its position as a market leader in its core product lines such as patient monitoring and point-of-care diagnostics, Ataide said. However, because these markets are relatively mature, they leave little room for rapid revenue growth. Thus, the firm is working at breaking into healthcare product lines with more development opportunities.

Agilent's fastest growing product line is automatic external defibrillators (AEDs), with a growth rate of over 60%. However, most of the AED purchases are coming from nonhealthcare customers such as airlines—in other words, customers who have more money to spend.

Ataide expects disease management products, such as its in-home monitor for congestive heart failure patients, and consulting services to help drive HSG revenue upward. Demand for the firm's services is outpacing growth on the capital equipment side of Agilent. In the meantime, HSG is continuing its plan to expand through strategic ventures and alliances, in both its core market and new markets.

"We are positioning Agilent as a high-tech, high-growth company, and medical products are part of that," Ataide said. "HSG expects to participate in the high growth, but the markets we're in are mature. We're making infrastructure and expense/cost adjustments and are bullish on our outlook going forward due to our entry into new, higher growing market segments."

The company's stock rose slightly on news of the restructuring. After reaching a high of $162 in March, the stock had steadily declined, hitting a low of $38 just a few weeks ago, and is now hovering in the mid-$40s. But the honeymoon will continue to be rocky for this young high-tech firm, and investors are likely to remain skeptical of Agilent's continued commitment to healthcare. Agilent is walking a tightrope between investor expectations and customer needs in the healthcare sector.

"Agilent is not viewed as a healthcare company but as a technology company, and technology investors are not patient," Maire said. "The view in technology is if you don't get your product fixed in a quarter or two, you might as well hang it up. The bottom line is, they really have to make this division stand on its own."