Waters this week reaffirmed earlier statements that lackluster mass-spectrometry sales to a stingy pharmaceutical market led to disappointing third-quarter results, but it was a disappointment not shared by close competitors PerkinElmer and Thermo Electron.
Two weeks ago, Waters had cautioned that it would report lower-than-projected quarterly sales and earnings per diluted share due to "slower than expected" sales growth (see BioCommerce Week 10/20/2005). The company cited a decline in third-quarter sales in the United States, where instrument sales to large pharmaceutical accounts were "less than expected" due to delays associated with both the evaluation of new products and the release of capital budgets.
While many believed the capital-equipment spending environment had improved after a shaky start this year, Waters' warning brought fresh concern that tight pharma budgets could have a sector-wide effect. But judging by the quarterly results and comments of two of Waters' chief competitors, PerkinElmer and Thermo Electron, it appears the issue had a greater effect on Waters.
PerkinElmer, which this week reported a 6-percent increase in third-quarter revenue, said that biopharma spending has slowly improved throughout the year and called it a "slowly strengthening marketplace." Thermo, which posted a 25-percent gain in third-quarter receipts, said "big pharma [are] recovering from weak first-quarter levels," adding that it "is certainly not a problem area for us, and it's not holding back our overall growth."
In July, Waters "thought that the situation was improving, and that our larger customers were showing signs towards a return to more customary spending trends. However, this optimism was obviously premature, and capital spending again tightened during the third quarter."
For good measure, Thermo President and CEO Marijn Dekkers said, "Reading what's being said about mass spectrometry by some of our competitors we can't help but thinking we are gaining significant share in this area."
'Frustration' and 'Premature Optimism'
As expected, Waters reported sales growth of just 3 percent for the third quarter instead of the 8 percent that had been projected by the company a few months ago. The shortfall was due to weaker sales to large pharmaceutical customers, which was most evident in the US and Europe, according to President and CEO Doug Berthiaume.
"We have seen this type of spending behavior before, most recently in the first quarter of this year," Berthiaume said during the firm's conference call following the release of the results. "When we last spoke in July, we thought that the situation was improving, and that our larger customers were showing signs towards a return to more customary spending trends. However, this optimism was obviously premature, and capital spending again tightened during the third quarter."
Total sales for the period ended Oct. 1 increased 3 percent to $273 million from $264.8 million year over year, with foreign currency translation having a "negligible effect" on results.
CFO John Ornell said during the call that US sales had declined 9 percent year over year, while sales growth in Europe was 1 percent, and sales growth in Asia was a robust 20 percent. Sales of liquid chromatography instruments increased 4 percent year over year, but mass spectrometer placements declined 4 percent, due primarily to poor sales of the firm's single and tandem quadrupole instruments.
Waters' net income declined 50.5 percent to $25.7 million, or $.23 per basic share, from $51.9 million, or $.43 per basic share, year over year. A $24-million tax provision related to a dividend distribution was recorded during the quarter, which cut the firm's EPS to $.22.
Berthiaume said that he was "frustrated by the pace of decision-making" by pharma companies, adding, "I know it probably sounds defensive and excuse-making, [but] we clearly thought that the pace for some of these major decisions for investment would pick up."
He also said that he was surprised by the shortfall in university and government spending in Europe. "That has tended to be a more constant source of demand, normally strong double digits, but it's pretty constant," Berthiaume said. "That's why we think the third quarter is a bit of an anomaly."
However, Berthiaume cautioned about Waters' prospects for the remainder of the year. "It's difficult to predict what the longer-term ramifications of the third quarter results are," he said.
He said Waters had been polling customers over the past few weeks, and the constant message is that spending will remain "pretty tight for the rest of this year." Sounding a note of optimism, Berthiaume said, "We feel we're well-positioned to take advantage of the growth opportunities when this market improves."
Waters is predicting sales growth of 4 percent for the fourth quarter, but factoring in currency effects the total sales growth is expected to be 1 percent. The firm is predicting fourth-quarter EPS of $.54 and full year EPS of $1.91.
PerkinElmer Sees Slowly Improving Pharma Market
PerkinElmer officials had a different take on the pharma spending environment, saying during their third-quarter conference call that biopharma spending has slowly improved throughout the year.
Greg Summe, chairman and CEO of PerkinElmer, said, "Within pharmaceutical, we see a mix issue. We see some pharmaceutical companies have gone through a bit of a restructuring themselves, others are more aggressive on the spending. We see the biotech market continuing to get stronger, [and] we see the academic market continuing to strengthen for us, principally because there has been more of a shift into drug discovery.
"We see it as a slowly strengthening marketplace for us and our strategy here is to continue to drive this through new products," he added. "So, we see that as a good market, a very valuable market, and underlying demand has not gone away. For us, there hasn't been any change in that marketplace throughout the year."
PerkinElmer reported revenue growth of 6 percent to $259.1 million for its Life and Analytical Sciences business segment, which it said was driven primarily by its genetic screening, service, and environmental businesses. Within that segment, service revenue rose 11 percent year over year, while instrument sales were up 7 percent, and reagents and consumables gained 2 percent.
Summe noted during the call that the LAS unit had very strong growth in high-throughput screening instruments.
Total sales to the biopharmaceutical market declined 1 percent in the third quarter, according to PerkinElmer spokesman Dan Sutherby. He said biopharma sales — which includes products for core drug discovery, life science research, pharma quality assurance and control, liquid handling, proteomics, and biomarker discovery — account for approximately $500 million of LAS' annual sales of $1.1 billion.
"We continue to maintain a zero to 3 percent growth rate for just the biopharma business," said Sutherby, "and we've really had that position since we gave '05 guidance in December '04. We've been very consistent since that time. Some others in the space had some wild aspirations for pharmaceutical growth. We just weren't seeing it."
Overall, PerkinElmer's revenue of $361.9 million for the quarter year over year. The firm reported net income of $31.8 million, or $.20 per share, a 32.5 percent increase over a profit of $24 million, or $.14 per share, in the third quarter of 2004.
PerkinElmer is in the process of divesting its aerospace business and semiconductor and fluid testing businesses, from which it expects to realize proceeds of around $400 million (see BioCommerce Week 10/13/2005). While repaying debt is the firm's priority, company executives said that the funds would enable PerkinElmer to pursue licensing deals and acquisitions that would expand its offerings in the health sciences field.
"Some others in the space had some wild aspirations for pharmaceutical growth. We just weren't seeing it."
Pharma Market Recovering, Says Thermo Electron
Echoing Summe's comments, Thermo Electron's Dekkers said during his firm's third-quarter conference call this week that the life sciences market "continues to be good, with big pharma recovering from weak first-quarter levels. Performance is still a little bit mixed there with some companies doing very well in big pharma and some not so well. Big pharma is certainly not a problem area for us, and it's not holding back our overall growth."
Dekkers said that bigger pharmaceutical firms are still spending a lot of money on instrumentation and attributed his firm's robust sales partially to the introduction of new products, such as its LC Orbitrap. He said that pharmaceutical companies' continual move toward outsourcing certain services has been a benefit to Thermo, as has many firms' decision to consolidate their supplier base.
Thermo reported third-quarter revenue of $679 million, a 25-percent increase over revenue of $542 million in last year's third quarter. Its Life and Laboratory Sciences segment reported a 35-percent revenue increase year over year to $516 million.
Although the firm does not break out specific numbers for product lines, Dekkers said mass spec instruments "did very well for us in the quarter."
Thermo reported third-quarter net income of $57.7 million, or $.35 per share, compared with net earnings of $106.5 million, or $.65 per share, for the comparable quarter a year ago. Last year's results, though, include a $64.9 million gain from discontinued operations, while this year's Q3 results include a $17.1 million gain from discontinued operations.
The other major mass spec manufacturer, Applied Biosystems, is scheduled to report its fiscal first quarter results later this week.
— Edward Winnick ([email protected])