What happened
Shares of Agilent Technologies (A +0.93%) dropped more than 14% last month, according to data provided by S&P Global Market Intelligence. The lab equipment and services provider reported disappointing fiscal second-quarter 2019 operating results due to a weak performance from the life sciences and applied markets group (LSAG), which saw revenue decline 1% year over year. That compares to fiscal full-year 2018 growth of 9% relative to the previous year.
The unusual weakness for the LSAG forced management to lower guidance for the current fiscal year. While that's rarely taken lightly on Wall Street, analysts were also a bit perplexed by the reduced expectations. After all, when Agilent Technologies reported fiscal first-quarter 2019 results in late February, management raised guidance from its initial targets. The most recent expectations are the lowest of the three revenue ranges issued yet.
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So what
Management provided two primary reasons behind the sluggish start for the usually reliable LSAG segment. First, small-molecule drug research is losing market share to the rise of biologic drug research, such as gene therapies and cancer immunotherapies. Agilent Technologies serves both parts of the market, but currently has a larger presence in small-molecule pharmaceuticals. The accelerating shift is likely to accelerate the company's investments in biology-based research.
Second, sales in China faced headwinds in the first three months of calendar 2019. Government-run food science labs, tasked with performing quality control measures, reduced purchases of machines from Agilent Technologies. Meanwhile, the country forced generic drug companies to cut prices, which also forced many to cut costs and reduce purchases of R&D equipment and consumables.
Now what
Agilent Technologies faces headwinds for sure, but even the low end of the most recent fiscal full-year 2019 revenue guidance range would deliver respectable year-over-year growth for the slow and steady business. It's also worth noting that the company had a solid performance in fiscal 2018, which will make it more difficult to deliver attention-grabbing growth this year. Therefore, at this point there's little reason for investors to worry, but that could change if results from the next several quarters show the company is struggling to adapt to changing market dynamics.
