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Earnings Reports Season Kicks off Tomorrow with Waters

NEW YORK (GenomeWeb News) – Waters will be the first among the publicly traded life science tool firms to report its fourth-quarter and full-year 2008 financial results when it reports its earnings tomorrow morning.

While some firms in the sector, including Waters, have already warned of revenues coming in lower than previously expected for the fourth quarter, investors are eagerly awaiting vendors' forecasts for 2009. Some were undoubtedly spooked by a report from investment bank Leerink Swann last month, which downgraded several life science tool firms, citing a survey that said university-based researchers are seeing reductions in their budgets.

But, if comments made at the recent JPMorgan Healthcare Conference are any guide, investors are not likely to get a consensus opinion on the prospects for the industry during the economic downturn.

Waters already warned earlier in the month that its fourth-quarter revenues would be between $410 million and $420 million, about 4 percent below the year-ago period during which the company had sales of $437 million. Waters said the results were due to "anticipated sales volume resulting from weaker global economic conditions, constrained capital spending, and unfavorable foreign currency translation impacts."

Waters Chairman, President, and CEO Doug Berthiaume said at the JPMorgan conference that he expects those fourth-quarter dynamics to continue in the first half of 2009.

The company is one of several life science tool firms that sells high-priced instruments that are frequently the first to be cut in academic research budgets when spending needs to be reined in. However, many of these firms are awaiting a potential boost in funding for the National Institutes of Health that could come from a stimulus package currently making its way through Congress.

In addition, many vendors and industry observers expect NIH to receive an increase in funding that "would offset the pain," as Thermo Fisher Scientific President and CEO Marijn Dekkers said at the conference. He said that he has heard that NIH's budget could go up by as much as 4 percent to 6 percent. Although Thermo Fisher sells capital equipment that competes with Waters, the firm derives around two-thirds of its revenues from recurring sources, such as consumable products, making it less exposed to the current downturn.

Most of the tool vendors that also serve markets outside of the life sciences agreed that sales to the industrial markets are suffering much more than sales to pharmaceutical and biotech customers. But PerkinElmer President and CEO Robert Friel said that he believes the life science research market will be "fairly insulated" from the larger economic problems.

One other area that may provide a difficult selling market is hospitals, which "tend to be worriers," said Beckman Coulter Chairman, President, and CEO Scott Garrett at the JPMorgan conference. Beckman and several other tool firms that sell equipment used for clinical and research diagnostics could be affected by hospital cutbacks in purchasing new instruments.

For example, Cepheid, which sells the GeneXpert molecular diagnostics system and a variety of assays for hospital-acquired infections, said a couple of weeks ago that it expects to report fourth-quarter revenues of around $38 million for the fourth quarter of 2008, a decline of around 6 percent from the $40.4 million it posted a year ago.

The firm also projected that sales for the coming year will be flat, saying that growth in the company's core businesses will be offset by declines of roughly $25 million in the company's non-core clinical and biothreat business.

In a research note published last week, Thomas Weisel Partners analyst Peter Lawson said that the fourth-quarter miss "was driven solely by the falloff in hospital capital expenditures." He noted that Cepheid is taking measures to counteract that particular market dynamic, such as shifting its sales focus to generating more consumables sales rather than selling instruments.

Despite fears among certain equipment makers and investors that customer end markets will be challenging throughout 2009, some executives seemed less concerned. Millipore Chairman, President, and CEO Martin Madaus said that he believes the academic and government markets "should be good" this year. Millipore is one of those firms that does not sell much capital equipment and derives most of its sales from recurring and disposable products that are not expensive and are needed for a lot of routine lab procedures and drug discovery efforts.

Madaus' view was echoed by Life Technologies Chairman and CEO Greg Lucier, who said that he had "not seen any demonstrable slowdown" in spending from academic and government customers. Life Technologies, which is the recently merged business of Applied Biosystems with Invitrogen, derives about 73 percent of its revenues from consumables and services, Lucier noted at the conference.

He also said that the next-generation sequencing technologies, such as his firm's SOLiD system, are "somewhat removed" from the current economic conditions. However, the mass spectrometry business is probably most affected among all of the firm's products, said Lucier.

Many executives at the conference were wary of providing guidance for full-year 2009, citing a lack of visibility in customer spending patterns. As PerkinElmer's Friel noted, customers are not providing their spending outlook for the whole year, instead offering an outlook for only a couple of months.

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