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Waters Blames Delays in Pharma Spending for Second Quarterly Earnings Warning This Year

For the second time this year, Waters has warned that it will report lower-than-projected quarterly sales and earnings per diluted share due to "slower than expected" sales growth.

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. It has been an up and down year for firms selling capital equipment to the life science market, but it remains to be seen whether Waters' chief competitors, including Applied Biosystems, PerkinElmer, and Thermo Electron, report the same difficulties.

Waters said last week that it expects third-quarter sales growth to be around 3 percent year over year. The announcement surprised investors and industry observers, since during its second-quarter conference call on July 26, Waters said it anticipated sales to grow 8 percent in the third quarter year over year.

Sales of liquid chromatography products grew moderately in the third quarter of 2005 compared with the prior year, while mass spectrometry sales declined slightly, according to the company. However, Waters noted that thermal analysis instrument sales grew in the quarter at a rate that was higher than the company's overall growth rate.


"I think the weakness we saw in the large pharmaceutical companies really is the primary cause for the volume shortfall."

Global sales to life-science companies were roughly flat in the quarter, while a "relatively strong" performance of Waters' industrial business was largely offset by a decline in sales to governmental and academic institutions, the company said.

"The market dynamic story is a more compelling story than a product line-specific story," said Gene Cassis, vice president of investor relations for Waters. "I think the weakness we saw in the large pharmaceutical companies really is the primary cause for the volume shortfall. To the extent that mass spectrometry is weighted toward life science, it's somewhat natural you'd seen an impact on the mass spectrometry line," he told BioCommerce Week.

He added, "In fact, if you look at our performance by product line, the liquid chromatography business showed middle-single-digit growth rates, and that was offset by an equal, but negative, performance in the mass spectrometry side." Organic sales growth in the quarter was also 3 percent as foreign currency translation had little incremental effect on third-quarter revenue, according to Waters.

Going forward, the company said it anticipates a continuation of the challenging business conditions it experienced in the third quarter, with comparable sales growth before currency impacts. The firm also said it is evaluating opportunities to control operating expenses, but did not elaborate on what those measures might include.

The firm generated $264.8 million in revenues during the third quarter of 2004. Based on its renewed projections, third-quarter 2005 revenues are now expected to be around $272.7 million.

Third-quarter earnings per share, which Waters originally said would be $.47, are now projected at approximately $.43 — excluding a $24-million tax provision to be recorded in the third quarter related to a dividend distribution that will cut the firm's EPS by roughly $.21.

Some mass spec competitors, most notably ABI, have said that increased competition from new products launched at the American Society for Mass Spectrometry conference in June is one of the reasons for decreased sales of mass spec instruments (see BioCommerce Week 10/6/2005). But Cassis said that, if anything, Waters believes ASMS helped the firm.

"One of the products we highlighted at this year's ASMS was this integration of Acuity with our QTOF, and we had double-digit growth in that product line," he said. "Some of the mass spectrometry products that are associated with routine testing, specifically the quadrupole, seemed to be showing a little bit more softness in the quarter."

ABI officials couldn't discuss whether they are experiencing the same negative trend as Waters because they are too close to their first-quarter earnings announcement. The company reported a 1-percent decline in mass spec sales in its fourth quarter ended June 30. During the firm's fourth-quarter conference call in July, ABI officials said, "A challenging pharmaceutical capital spending environment, coupled with time required by customers to evaluate our recently introduced products prior to purchase, slowed mass spec systems sales during the fourth quarter."

Waters noted that strong sales growth in Asia was "largely in line" with expectations. Company officials have said several times this year that the firm expects strong growth over the next several years in Asia, primarily in the emerging China and India markets.

In an August interview with BioCommerce Week, Cassis said, "We think that the growth is likely to be slowest in Western Europe, and we think that the growth will be right in the middle for North America. Our feeling is [that] our business in Asia can sustain a double-digit growth pattern, as it has over the past couple or three years." (see BioCommerce Week 8/4/2005)

But the slow third-quarter growth in the US was a bit of a surprise for Waters. "In the first quarter this year we had an issue with Europe, but looking at the results for this recently completed quarter the European business performed to expectations, which was a low-single-digit growth rate," Cassis said. "It was the business in the United States that showed moderately negative performance compared to the prior year."

Earlier this year, Waters cut its Q1 revenue-growth projections to between 3 percent and 4 percent, from its previous projection of 13-percent year-over-year growth. Although the firm posted 5 percent sales growth for that quarter, results were aided 2 percent by currency-exchange benefits (see BioCommerce Week 4/28/2005).

The warning triggered analyst downgrades, and a slide in shares among all the mass-spec based tools companies tracked in the BCW Index. Waters lost some 21 percent in market capitalization, around $1.2 billion, after lowering its projections (see BioCommerce Week 4/7/2005).

Investors punished Waters again, sending its shares down 11.6 percent, to close at $36.58 on Friday, the first day of trading after the warning was issued. Waters' shares remained depressed, closing at $36.00 on Tuesday.

However, the firm's warning did not cause the same market-wide ripple that it caused earlier in the year. Even ABI, whose shares were downgraded by JP Morgan from "neutral" to "underweight" on Thursday barely budged over the past trading week (see BCW Index).

Waters will release its full third-quarter earnings on Oct. 25.

— Edward Winnick ([email protected])

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