This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
Waters this week reported its fourth consecutive quarter of double-digit revenue growth, which company officials attributed primarily to a continuing increase in demand for instruments from large pharma customers, with a particular emphasis on new systems.
The pharma spending rebound continues a trend from last year and has coincided with the release of newer high-end products from Waters. The Acquity UPLC, which was launched nearly three years ago, also has experienced a significant increase in demand this year, according to company officials.
After warning investors twice in 2005 that revenues would not match quarterly guidance, Waters’ results have improved dramatically over the past four quarters thanks to improved spending by its large pharma customers and to strong sales growth for its liquid chromatography products.
In a statement, Waters CEO Douglas Berthiaume said the company’s broad-based first-quarter growth sped up in the second quarter, “with continued rapid uptake of our new products and strengthening demand from life science customers, including our large pharmaceutical accounts.
“Our chromatography consumables business benefited from exceptional growth of Acquity UPLC columns, and delivered double-digit growth before factoring the positive effect of acquisitions,” he added during the firm’s conference call.
Sales of Acquity consumables are doubling annually, he said, but still represent less than 10 percent of the firm’s overall consumables sales.
Berthiaume also said that the ramp in orders for the firm’s Synapt HDMS, which was launched late last year, has been “very steep, and we expect the ramp in orders will continue to be steep over the last two quarters of this year.” He declined to provide more specific detail on orders for the new system.
Company officials consider the Synapt HDMS the most important of the firm’s newer product introductions because it offers the market a novel ion separation ability — and at a price of $650,000, it targets the high end of the MS market, which the firm estimates at $250 million.
Overall, Waters’ second-quarter revenue rose 17 percent to $353 million from $302 million year over year. Revenue from instrument systems grew 18 percent for the quarter, while services grew 8 percent, and chemistry sales grew 21 percent, company officials said during a conference call this week. Sales for its TA Instruments division were up 13 percent year over year.
Sales in Asia and Europe grew 14 percent apiece, while US sales grew 18 percent.
Waters posted second-quarter net income of $59.9 million, or $.59 per share, up 25.3 percent from $47.8 million, $.46 per share, in the second quarter last year.
The firm’s R&D spending declined 3 percent to $19.1 million from $19.7 million in the prior-year period.
Pharma Rebound Continues
“Sales to large pharmaceutical accounts continued their positive momentum and again grew double-digits,” Waters CFO John Ornell said during the call. Sales to smaller pharmas and industrial customers “remain robust,” he said.
“Historically, when our larger accounts were under pressure to reduce capital spending we saw a delay in budget releases to later months in the calendar year,” Berthiaume said. “We’ve not seen these delays this year and feel the current spending patterns suggest that 2007 may well mark a turning point for this segment of our business.”
He noted that demand was up among drug discovery, drug development, and quality control labs.
“We’re not seeing universal strength across the large pharmaceutical universe, but if you look at the top 15 to 20 pharmaceutical accounts we definitely saw very good double-digit growth … and that’s consistent but a little better than we saw in the first quarter of this year,” said Berthiaume.
“We’re seeing it most significantly in our instrument systems as opposed to the consumables and service pieces. So, it does show kind of a more aggressive investment dynamic on the part of those accounts,” he said.
Berthiaume said he believes Waters is gaining market share, particularly with its new products, such as the Acquity UPLC and Synapt HDMS.
He said demand for Acquity UPLC had grown significantly in the second quarter compared to last year, and that sales for UPLC would soon match those of the firm’s HPLC systems. “The strategic implications here are significant when you consider the positive impact this transition will have on our overall market share — not just instrumentation but also Acquity columns, specialized software, and instrument services,” said Berthiaume.
Asked during the call if the pharma market recovery was sustainable, Berthiaume replied, “Over the last two to three years, we clearly saw a downward slope in their investment in our kind of technology. We kept saying ‘if that just evens off we’ll stop feeling the downward drag.’
“We’re seeing it most significantly in our instrument systems as opposed to the consumables and service pieces. So, it does show kind of a more aggressive investment dynamic on the part of those accounts.”
“I think what we’re seeing in terms of the growth dynamic is … they’re not up to where they were three years ago,” he said. “It’s not like the performance that we’re seeing is a big bounce off that bottom, in my opinion.”
He said that bounce back has not yet occurred among some of the top pharmaceutical firms, which he said is encouraging because eventually those accounts will hit their trough and R&D spending will pick up among those unnamed customers.
“We’re reasonably hopeful that we’re going to see an improved dynamic in 2008,” said Berthiaume.
Berthiaume noted that revenues from environmental and food-testing applications were not as robust in the quarter as they were in the comparable period of 2006, when new regulations put in place in Europe and Asia drove instrument and consumables sales. But, he said the firm is “very excited” by opportunities in these markets and expects governments around the world, including the US, to institute more stringent regulations.
“Most of the systems we sell into food testing are LC-tandem mass spec,” said Berthiaume. “It’s a very strong business in Asia and Western Europe. It’s a good business in the United States,” but it’s focused in Asia and Europe.
“If the FDA acts, we’re going to see more of that likely to spur investment in the United States, and probably see a similar dynamic in exporters having to increase their analytical requirements,” he said. “In a related area, environmental, we’re seeing a great deal of interest … in the developing world.”
Trying to capitalize on opportunities outside of the traditional drug-discovery and QC markets, Waters established a business unit focused on using its analytical technologies in clinical applications.
“To date, this group has very effectively driven the growth of our business associated with newborn screening and a variety of more research-focused clinical applications,” said Berthiaume. In particular, he said, “the growth of our clinical diagnostics business is an important long-term business initiative for us, and we will continue to fund internal development programs while seeking business collaborations and selective acquisitions on this front.”
The firm recently received US Food and Drug Administration clearance for a diagnostics kit for therapeutic drug monitoring.
Waters officials predicted FY 2007 revenue growth of 14 percent, up from the 12 percent growth they predicted in April, with acquisitions and currency effects providing 4 percent of that growth.
The firm’s R&D spending is expected to grow in the mid-single digits for the full year, said Ornell, noting that R&D spending was up last year due primarily to mass spec product development.
Berthiaume said R&D growth will be “more normal” in 2008. “We had kind of an unusual base period. We don’t see 2008 as being another peak, but neither will it be a valley,” he said.
He also said more money has been pumped into marketing in 2007 versus 2006 to support new products. “But that’s clearly not something that’s going to continue as we go forward. That will normalize, too,” said Berthiaume.
As of June 30, Waters had $544.3 million in cash and cash equivalents.