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Positive Trends Continue for Waters in Q3; Acquity, Mass Spec Drive Revenue Growth

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
For the second quarter in a row, Waters reported year over year revenue growth of 17 percent, which company officials attributed to increased sales for its Acquity UPLC systems and columns and the continuation of a few positive trends.
With a continuing rebound in spending by pharmaceutical customers, the firm believes it is well-positioned for growth thanks to a handful of new high-end products and upcoming launches, particularly in the mass spectrometry market.
Waters reported third-quarter revenue of $353 million, a 17 percent increase over sales of $301 million in the third quarter a year ago.
“The third quarter results largely indicate a continuation of positive trends that we saw through the first half of 2007,” Douglas Berthiaume, chairman, president, and CEO of Waters, said during the firm’s conference call this week. “Among these trends are improved spending from our global accounts, expansion of our businesses in Asia, and generally healthy industrial demand.”
Those positive trends have helped Waters rebound from a difficult 2005 and first half of 2006, and this latest quarter marks the fifth consecutive quarter of double-digit revenue growth for the firm. Spending by pharmaceutical customers was the primary culprit in Waters’ previous struggles, and company officials have been asked on several occasions over the past few months whether the rebound is sustainable.
“Our overall pharmaceutical demand was strong in the quarter, driven again by generic, CRO, and specialty pharmaceutical customers,” said Berthiaume. However, “uncertainties in a couple of large firms weighed down on the group as a whole this quarter.”
The firm expects a sales pick-up among these customers in the fourth quarter, he said.
Of the 17 percent revenue growth, 3 percent was due to currency benefits and 2 percent was attributed to acquisitions.
Geographically, sales in Europe were up 12 percent, sales in the US were up 18 percent, and sales were up 12 percent in Asia, led by China and India, according to company officials. The sales growth in the US matched the increase in the second quarter, and Berthiaume said that strength “is sustainable over the next 12 months.”
Regarding China, India, Eastern Europe, and parts of the Middle East, “we don’t see any real near-term likelihood that this business stops growing at the rate we’re experiencing,” he said during the call.
In India, the emphasis is on pharmaceutical and generic drug applications. In China, it is much more heavily weighted to environmental, food safety, and governmental labs, said Berthiaume.
In the Waters division, which contains the firm’s core life and analytical science products, instrument systems revenue grew 12 percent, service revenues were up 7 percent, and chemistry sales increased 19 percent.
“We think we’re gaining share, specifically in a couple of areas,” said Berthiaume. “It seems little doubt that the result of our Acquity UPLC strategy and technology introduction has gained overall market share. It’s still to the point where we don’t think there’s really good, meaningful competition for that product, and that’s what our customers continue to tell us.”
The Acquity was launched three years ago, and after an initially slow start, sales for the platform have picked up considerably, according to company officials, though they declined to provide figures. They also noted during the call that despite Acquity’s uptake, sales for the firm’s earlier-generation Alliance HPLC continue to grow.
‘Feeling Good’ About Mass Spec
“If you look at another big segment of our marketplace, which is the mass spectrometry product line, I don’t think that there’s any doubt that Synapt and our overall high-end mass spectrometry is gaining market share today,” said Berthiaume. “I don’t think the market is growing as fast as we are.”
Waters introduced the Synapt HDMS late last year, and company officials consider it 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.

“Frankly, we think this business can continue to grow at good double-digit rates and produce shareholder returns that are among the best in the industry.”

“It’s still early in the curve, but the growth rates are very high [for Synapt],” said Berthiaume. Sales are still heavily weighted to the protein research market, particularly the high-end academic customers, he said.
Berthiaume also said the firm intends to roll out new mass spec-related products next year.
“We are really feeling good about what’s on our plate in the mass spectrometry area,” he said. The Synapt “clearly takes advantage of the Acquity UPLC as the front part of that system, and we’re driving that through our R&D programs right now.”
In addition to the core life science applications, Waters is one of several capital equipment vendors selling products into the applied markets of food, water, and product safety testing.
Berthiaume said there is an “interesting mix of applications that we’re seeing across the world in food safety. A lot of our current business in Asia is regulatory-driven, and that’s largely driven by European regs, as those producers in Asia have to meet the rigorous European requirements for food imports.
“We’re also seeing a fair amount of food and beverage business that’s probably not so much safety-related as it is [quality control] and competitive information-related … and that’s quite sustainable and unrelated to any food safety concerns,” he said.
“I wouldn’t say we’ve seen the big bolus of actual investment in that area,” Berthiaume added. But “that’s probably the biggest area of opportunity in the next couple of years, because that will focus probably on increased regulation on the requirements for imported food.”
Waters posted third-quarter net income of $53.3 million, or $.52 per share, compared with net earnings of $50.4 million, or $.49 per share, for the comparable period a year ago. The firm took a $12.2 million charge, or $.08 per share, during the quarter related to converting from a defined benefit pension plan to a 401K plan.
Its R&D spending increased to $22 million for the quarter from $19.1 million in the third quarter last year.
Berthiaume noted that the firm continues to buy back shares on the open market, even though Waters’ stock is up 51 percent for the year. Company officials noted that the firm bought back $24 million worth of shares during the third quarter.
Waters finished the quarter with $626.5 million in cash, cash equivalents, and short-term investments.
Given the company’s cash position, Berthiaume was asked if the firm may spend some of that money on acquisitions instead of buying back stock.
He replied, “Our fundamental strategy is to continue to add to our portfolio with things that are digestible and that add to our overall strategic portfolio. We’re not looking for a major defining acquisition. Frankly, we think this business can continue to grow at good double-digit rates and produce shareholder returns that are among the best in the industry.”

And in a thinly veiled reference to rival Thermo Fisher Scientific, Berthiaume added, “At a time when some companies strive for breadth of product offerings and benefits from economies of scale, I think we’ve demonstrated the advantages of continuously working to be the best at delivering advanced system-based solutions,” said Berthiaume.

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