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Mizuho Upgrades Waters on Improving Pharma Picture

NEW YORK (GenomeWeb News) – Mizuho Securities today upgraded Waters' stock to Buy from Neutral, citing the firm's exposure to the pharma industry, its presence in emerging markets, and its "strong" product cycle.

Mizuho also increased the price target on Waters' stock to $92 from $84. The investment firm lowered full-year 2012 revenue estimates to $1.89 billion from $1.91 billion, while maintaining an EPS estimate of $5.10.

In a research note, analyst Peter Lawson cited Waters' reliance on the drug manufacturing sector — about 55 percent exposure — as a strong point in the face of an uncertain academic environment. Waters' exposure to government/academic funding is about 15 percent.

"We favor pharma versus academic exposure due to a lack of visibility into 2013 funding and the [National Institutes of Health] overhang," Lawson said. At issue is an unresolved 2013 budget for NIH and the possibility, though unlikely, that NIH's budget may face a 7.8 percent cut in funding if sequestration occurs.

"While pharma R&D spending is sluggish and further R&D cuts are possible, we believe we have moved past the most severe forms of large pharma's R&D cuts outside further consolidation," Lawson said.

Waters recently reported a 2 percent decline year over year for its first-quarter revenues, and missed Wall Street estimates on the top and bottom line. Lawson noted that the top-line miss was driven by weakness in large pharma due to delays in capital budget deployment, weakness in India's CRO business, as well as a strong year-ago comparison.

He added that half of the pharma weakness in Q1 resulted from slippage of orders into Q2, and Waters' management has said that the pharma business has shown improvement since the end of Q1. India will remain under pressure if the rupee shows strength against the dollar, but year-ago comparisons will be easier, as will comparisons with China, he said.

Lawson is bullish on Asia, in general, where Waters has about 33 percent exposure. In particular, spending on healthcare and R&D in the region is comprising a larger part of gross domestic product, he said.

The soft Q1 results also presented an opportunity for Waters to "reset expectations to more achievable levels," Lawson said. "For Waters, the [Q1] miss and guide down provides the company with some breathing space and the potential to raise numbers with any macro improvements."

Last, he noted Waters' strong record of new product innovation, saying the Milford, Mass.-based firm has among the best product cycles in the industry. Lawson said that while the addition of Dionex to Thermo Fisher Scientific's business will eventually pose a threat to Waters' mass spectrometry and ultra-performance liquid chromatography portfolio, that will be longer term.

Waters was up 2 percent to $82.61 in Monday morning trade on the New York Stock Exchange.

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