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Improved Pharma Spending, Strong MS and LC Demand Help Waters' Q4 Sales Grow 16 Percent

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
A continuing rebound in pharmaceutical spending helped Waters post a 16 percent gain in fourth-quarter revenue year over year, the company said this week.
 
The firm, which struggled amid a decline in spending among larger pharmaceutical accounts in 2005, has now posted two consecutive quarters of double-digit sales growth. Company officials this week said that the firm benefited from an outsourcing trend among larger pharmaceutical firms as well as fast customer uptake of recently launched products, including a new mass spectrometer and liquid chromatographers.
 
After warning investors twice in 2005 that revenues would not match quarterly guidance, Waters’ results improved dramatically in the second half of 2006. Its third quarter had brought year over year revenue growth of 10 percent thanks to improved spending by pharmaceutical firms and to strong sales growth for its liquid chromatography products (see BioCommerce Week 10/25/2006).
 
This week, Waters reported fourth-quarter revenues of $387 million, a 16 percent increase over sales of $332.3 million in the fourth quarter last year. Foreign currency translation contributed 3 percent to that growth, while acquisitions contributed about 1 percent.
 
Asia was Waters’ strongest area among its geographic markets, with 28 percent revenue growth, according to CFO John Ornell. US sales grew 9 percent, while European sales were up 6 percent in the quarter, he said.
 
Fourth-quarter revenue gains were driven by “improved pharmaceutical demand, continued growth in overseas markets, and strong sales growth by our TA Instruments division,” said Doug Berthiaume, Waters chairman, president, and CEO. He also said the firm benefited from the introduction of new mass spectrometers last year, echoing statements he made a couple of weeks ago at the JP Morgan Health Care Conference in San Francisco (see BioCommerce Week 1/17/2007).
 
“The quarter was stronger than we anticipated initially due to favorable market dynamics that were accompanied by broad acceptance of our new systems offerings,” Berthiaume said during a conference call this week. “We’re seeing good double-digit, or near double-digit, growth in our HPLC and UPLC lines, our mass spectrometry products, and our TA Instruments business.”
 
He said that although pharmaceutical spending was a significant issue during 2005 and the beginning of 2006, the firm has been “cautiously optimistic that spending may be returning to a more reasonable level.”
 
“I am more confident that the worst of the weak and erratic demand that we experienced from our large pharma customers is mostly behind us,” said Berthiaume. “Certainly, some big pharmaceutical accounts are still struggling and restructuring.”
 
But this year he said that he expects “that we’ll continue to see improving demand from these customers. Perhaps not a complete return to prior lofty spending levels, but rather improvements based on penetration of our new products and continued strength of our recurring revenue base with these customers,” he said.
 
Asked during the Q&A portion of the conference call whether he expected the firm to be affected by the massive layoffs announced this week at Pfizer, Berthiaume said that sales to Pfizer represent less than 1 percent of the firm’s overall sales, “so, it’s not a big piece. Don’t look at Pfizer’s announcement as saying that they’re getting out of the separations or analytical instruments business,” he said. “We had a pretty healthy [fourth] quarter with Pfizer.”
 
Berthiaume also said that the firm is benefiting from an outsourcing trend among pharma firms, with Waters capturing the business of these partners.
 
Waters posted net income of $79.9 million, or $.79 per share, for the quarter — a 5.6 percent gain over net income of $75.6 million, or $.70 per share, for the fourth quarter last year. Its fourth-quarter results include a charge of $5.8 million for impairment of an equity investment in Caprion, which said earlier this month that it would ditch its proteomics business after merging with Ecopia Biosciences.
 
The firm’s R&D expenses rose 16.8 percent to $19.5 million from $16.7 million year over year.
 
Highlighting MS, LC Sales
 
Sales of Waters’ liquid chromatography products grew 12 percent year over year, while mass spec sales grew 14 percent, and thermal analysis products were up 17 percent, according to Ornell.
 

“I am more confident that the worst of the weak and erratic demand that we experienced from our large pharma customers is mostly behind us. Certainly, some big pharmaceutical accounts are still struggling and restructuring.”

“The strong momentum from growth associated with Acquity UPLC throughout the year was augmented by new mass spec capabilities,” Berthiaume said during the call. “Because of the timing of new system introductions, we anticipated stronger mass spec sales in the second half of 2006, [and] we have seen this ramp up in the second half.”
 
In particular, Berthiaume cited the launch of the Synapt high-definition mass spectrometer as the most important of those introductions because it offers the market a new ion separation ability — and at a price of $650,000, it targets the high end of the MS market, which he estimated at $250 million.
 
Waters introduced the Synapt at the American Society for Mass Spectrometry meeting in late May, but didn’t begin shipments until later in the year (see BioCommerce Week 6/7/2006).
 
Berthiaume said the firm installed several Synapt systems with customers in the fourth quarter. But he declined to provide a market forecast for the instrument, saying it was too early to provide such predictions.
 
He also said the firm plans to promote the use of its UPLC/MS and GCMS systems in the applied markets, such as food and environmental testing.
 
In addition, Berthiaume noted that the firm expects to increase its presence in clinical diagnostics through the use of its LC/MS systems. “To that end, we will continue to develop new systems for these applications and investigate internal and external investment opportunities to position Waters as a preferred supplier in this marketplace,” he said.
 
For full-year 2006, Waters reported revenues of $1.28 billion, up 10.3 percent from revenues of $1.16 billion in 2005. Its net income for 2006 grew 10 percent to $222.2 million, or $2.16 per share, from $202 million, or $1.77 per share.
 
The firm’s 2006 R&D spending climbed 15.5 percent to $77.3 million from $66.9 million.
 
As of the end of 2006, Waters held $514.2 million in cash and cash equivalents.
 
The firm expects organic revenue growth of 7 percent to 9 percent in 2007, with an additional two points of growth coming from acquisitions and currency translation, said Ornell.