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Saying Pharma Slump Has Bottomed Out, Waters Sees Spending Recovery After Q1

SAN FRANCISCO — Although Waters officials do not believe that big pharma's spending slump will recover in the first quarter of 2006, they are optimistic about a recovery later in the year.

Speaking Monday at the JPMorgan Healthcare Conference, held here this week, Waters President and CEO Doug Berthiaume said, "We think we've seen a bottoming out of the difficulties with large pharma." However, he said he does not believe large pharma "will open up the checkbook" in the first quarter.

Waters is betting that sales of its Acquity UPLC instrument, which was launched early last year, will pick up during 2006.

"There's a huge installed base that we have the opportunity to convert from HPLC to UPLC, and whether that's Waters' installed base or competitors' installed base, it will be many years before you would see a lack of opportunity [in] moving new gear into the marketplace," Berthiaume said.

He said senior research people at large pharmaceutical accounts have told him that they will not be buying substantial numbers of HPLC instruments in the future, and "'We've just got to figure out how we make the switch over to UPLC,' … and we've seen selectively some proof of that."

While the firm is anticipating that competitors, primarily Agilent, will introduce their own UPLC instruments this year, Berthiaume thinks Waters' head start and the performance of the Acquity system will give it an edge.


"There's no reason for us to believe that we can deliver double-digit top-line growth and better than that for bottom-line growth."

"We have a very clear technological lead" over other prototype UPLC systems being developed by competitors, Berthiaume said, citing a study done by researchers in the UK, who eventually purchased Acquity instruments. In addition, Agilent "[doesn't] have enough instruments in [the market], and I think they're going to have to pay the price of multi months at a minimum to get them qualified in large pharma accounts," said Berthiaume.

The Acquity UPLC instrument costs 30 percent more than Waters' Alliance liquid chromatography instrument and the platform requires proprietary chemistry — the first such instrument sold by Waters with that requirement. Asked during a breakout session at the conference whether these two factors could have been reasons why pharma customers are delaying or are not purchasing the instruments, Berthiaume said he doesn't think either one was the primary reason why customers had not purchased the instruments at a level that was expected.

Berthiaume did acknowledge, though, that sales of Acquity could have been hurt by not having a full suite of chemistries available for the platform when it was launched. He said that wasn't a problem anymore, and even predicted that competitors may choose to tell customers to use Waters' proprietary consumables in their platforms rather than develop their own.

He added that one of the reasons Waters decided to develop proprietary chemistries for the Acquity was the company's relatively low market share, in the mid-teens, in consumables for liquid chromatographs. The firm's share in the instrument part of that market is in the mid-twenties, said Berthiaume.

The firm is hoping not to repeat sales problems encountered in 2005, a year in which it issued two warnings — one in the first quarter and one in the third quarter — that it would not achieve predicted revenues.

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 before. Berthiaume attributed the shortfall to weaker sales to large pharmaceutical customers, which was most evident in the US and Europe.

"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."

Waters expects to report 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.

Acquisitions, Diversification Not Likely

Even though Waters has struggled with its core markets of mass spectrometry and liquid chromatography, it has no plans to diversify its product portfolio and branch out into higher growth technologies, such as cell analysis.

"There's no reason for us to believe that we can deliver double-digit top-line growth and better than that for bottom-line growth," Berthiaume told BioCommerce Week. "I think we've done it for 10 years. We didn't do it this year, but … even in a bad year, our earnings are probably going to grow 7 percent, and our cash flow is going to grow probably 10 percent, too."

The firm also appears unlikely to make any significant acquisitions this year. In terms of the firm's balance sheet, Berthiaume said the company is easily capable of doing a $300 million or $400 million deal, but it just hasn't seen a combination that makes sense.

He added that the firm does not have any constraints on doing such a deal. "We continue to look at opportunities to expand the portfolio, and we might be a little bit more active now than [we were] over the last couple of years, in terms of looking at things, but I'd say we haven't tightened the screws on acquisitions," said Berthiaume. "We tend to be fairly conservative about what we think makes sense for the company."

— Edward Winnick ([email protected])

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