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Waters Buffeted by Receding Sales As High-End Tool Sector Takes a Hit

Prompted by a poor outlook in the European drug sector, Baird analyst Larry Neibor last week downgraded Waters' stock after the company cut its first-quarter revenue and earnings projections — and then promptly downgraded his entire analytical instruments sector, which includes BioCommerce Week Index members Applied Biosystems, Bruker BioSciences, Molecular Devices, PerkinElmer, Thermo Electron, and Waters

Last week, Waters cut its Q1 revenue growth projections between 3 percent and 4 percent from its previous forecast of 13-percent sales growth over the same quarter last year (see BCW 3/31/2005). The company also said first-quarter earnings would decrease from $.44 per share, which it projected in January, to between $.34 per share to $.37 per share.

Analysts at Stanford Research, Merrill Lynch, and Lehman Brothers also lowered their evaluations of Waters' stock while JP Morgan upgraded Waters to "overweight" from "neutral."

For the week, these companies and the others tracked in the BioCommerce Week Index finished down 3 percent (see article). Waters was down 23 percent for the five-day period ending Tuesday — a $1.2 billion loss in market capitalization — while PerkinElmer fell 4 percent, and Thermo was off 1 percent.

"The broad line correction for all the instrument-oriented players was clearly an overreaction by the street," said Panna Sharma, managing partner and CEO of TSG Partners of Boston. "Many of the companies that fell in the shadows of the Water's announcement have strong go-forward portfolios and have spent the past six to eight quarters 're-tooling' themselves for higher and more sustainable growth."

In a research note, Neibor concentrated on the European pharmaceutical market and its impact on Waters. Neibor said that the factors that drove positive performance by the sector from mid-2003 "are beginning to abate," and that cash-flow gains by the pharma sector expected to overcome slowing pharma capital spending "may not be occurring."

Besides Waters, Neibor downgraded PerkinElmer and Thermo. "The factors that influence Waters play at least as strongly with the other downgraded stocks as their exposure to the European economy is larger than Waters," he wrote. "It is possible that organic sales growth comparisons peaked for these companies at some point in 2004 and all face more difficult comparisons in 2005."

However, Adam Chazan, an analyst with Pacific Growth Equities, told BioCommerce Week that, "at first glance," he regarded Waters' changed outlook for the first quarter as an isolated incident.

He said the strategy his firm recommends for investors is to own stocks "in consumables players that are participating in downstream opportunities as close to [commercialized] drugs as possible," he said. "Our view is unchanged."

"Consumables are more consistent and less volatile," said Chazan.

Waters receives some 25 percent of its revenues from Europe while the other companies' in the Neibor's analytical instrument sector exposure to Europe ranges from 34 percent to 38 percent of sales.

Waters spokesman Gene Cassis told BioCommerce Week that the company "wrongly assumed that the momentum it had in the fourth quarter would carry forward."

"Orders in both HPLC and mass spectrometry, at best, have been pushed off to a later date," Cassis said. "It seems to be a European phenomenon, and something we didn't see in North America."

"We can't do the autopsy yet, as the patient is not dead," he said, referring to the end of the quarter. "Until we have a thorough analysis, we can't determine the affect on the second quarter, or the overall year."

As a group, these companies and others in the BCW Index are coming off a quarter where cumulatively they earned $5.9 billion, a 16-percent year-over-year improvement largely driven by acquisitions (see BCW 03/24/2005).

Cassis said that Waters is not yet convinced that market conditions require a change in strategy.

"We can't see any strategic changes based on short-term results, not until it becomes clear that there is a shift in the marketplace, and I don't think we are there yet," he said.

He said for Waters, 2005 appears to be starting off like 2004. "I wouldn't discount us having another good year," he said. "There are no holes in our product lines."

The company expects to see revenue benefit from the rollout of its Protein Expression Profiling system in the second quarter.

Sharma of TSG Partners said that pharma appears on a steady course for spending on tools, but he said the market is changing in terms of new technologies entering the competitive realm, and this will cut into the profitability of tool sales from the big companies.

"The more mature technologies are most likely to see margin erosion and increased demand for bundling with software, services and consumables — while the more emerging technologies are demanding higher margins and getting it," Sharma said. "Many of the more emerging technologies are perceived to be more integrated, better bundled, more feature-rich, and require less maintenance."

— Mo Krochmal ([email protected])

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