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Waters Charts a Year of Growth: A Temporary Blip or Comeback?

In the last year, Waters has proven one thing: that there is room to re-enter the high end of the mass spectrometry instrument market and chart double-digit growth.

Whether Waters' comeback can extend into 2005 is in doubt, however, after the company on Tuesday cut its Q1 revenue growth projections to a range of 3 percent to 4 percent from its previous forecast of 13-percent sales growth over the same quarter last year.

In the first 40 minutes of trading Wednesday, Waters lost one-fifth of its market capitalization — $1.2 billion — as shares fell 22 percent.

The company said the reduction is the result of a combination of "order delays at its large pharmaceutical accounts and a general weakening of its industrial-based businesses." If the company performs as projected, it could be its worst quarter since the Q4 2002, when it charted 3.1-percent year-over-year growth.

Waters was essentially kicked out of the high end of the mass spectrometry market in early 2002, when it lost a patent-infringement decision and was forced to ultimately pay some $53 million to its rivals Applied Biosystems and MDS. The development caused the company to take a financial hit in the first quarter of 2002. Revenue for Q1 '02, compared to Q1 '01, was down nearly $48 million, with a year-over-year loss of 0.34 percent.

The aftermath lasted through into 2004, when the company in the first quarter announced the lay-off of 2 percent of its workforce, amounting to as many as 80 of the company's then-3,500 employees worldwide.

But, in the remainder of 2004, the company engineered a comeback, generating $1.4 billion in sales, a 15.3-percent increase over sales of $958.21 million in 2003, and 24 percent over sales of $890 million in 2002. Year over year revenue growth was 15 percent in the first quarter, 12 percent in the second, 15 in the third, and 18 percent in the fourth (see chart).

Doug Berthiaume, Waters CEO and president ,who earned a bonus of $2 million in 2004, told analysts in a conference call following the release of the Q4 '04 earnings in January that Waters' fourth-quarter financial performance "was the strongest we've seen in several years." Total revenues for the three months ended Dec. 31, 2004, increased 18 percent to $324.15 million (see BCW 2/3/2005).

On Tuesday, in a statement he said: "Our mass spectrometry instrument business appears to be continuing to show positive momentum in North America with comparatively weak performance in Europe."

Rebuilding High-End Mass Spec Line

In March 2002 Waters was ordered to pay Applera and MDS $47.5 million in damages after a jury found that one of its business units had infringed on a patent held by MDS and licensed to Applied Biosystems and MDS in a joint venture. The patent, US Patent No. 4,963,736, is entitled "Mass spectrometer and method and improved ion transmission".

The judge in the case, tried in the Federal District Court of Wilmington, Del., added $4.1 million in pre-judgment interest and issued a permanent injunction prohibiting the sale or importation into the United States of Micromass Quattro Ultima triple-quadrupole instrument systems. Waters took the Quattro Ultima, the Q-TOF, and the Q-TOF Ultima MALDI, off the US market but appealed the ruling.

In March 2003, the decision was affirmed on appeal and Waters paid $53.7 million.

But in 2003, the company introduced two new mass spectrometry systems, the Quattro Premier tandem quadrupole and the LCT Premier electrospray-TOF instrument. Concurrent with the settlement and licensing agreements, Waters introduced its Acquity UPLC (ultra-performance liquid chromatography) HPLC platform sample-separation technology and then later in the year, its new Q-TOF configuration mass spectrometry system, the Q-TOF Premier, to replace the sidelined Q-TOF Ultima line of systems. Still, at the end of the year, mass spec sales were down 18 percent, the company said in SEC filings.

It is unclear whether the new mass specs were rushed through the company's research and development process to replace the units taken off the market. The company declined comment for this article.

Exactly one year ago, Waters agreed to pay an additional $18.1 million to the companies — over and above licensing fees to settle all suits between the companies. These included a European mass-spec patent infringement action brought by MDS and ABI, and another patent infringement suit filed by Applera and the University of Manitoba, as well as a countersuit by Waters against Applera.

By the end of 2004, Waters had re-entered all the markets that it exited during the patent dispute. In its 2004 10-K report, the company said mass spectrometry sales for the year grew 6 percent.

Berthiaume told analysts in January that mass-spec system sales for the fourth quarter of 2004 grew 40 percent, driven by the company's year-old tandem quadrupole and LCT mass spectrometry systems, and by initial sales of the Q-TOF Premier platform that started shipping in August.

The revenue growth of 2004, capped by the fourth-quarter results, also marked a comeback for Waters' sales team, which has 1,990 field reps in 89 sales offices globally.

Waters entered the high end of the mass spectrometry manufacturing business when it acquired Micromass of Manchester, UK, in 1997 for $178 million in cash. Waters' mass-spec products are manufactured in the UK in Manchester, Cheshire, and Wexford. To some users, the instruments are still best known through the Micromass brand for high-end mass spec systems that sell for $500,000 to $600,000 as opposed to the legacy Waters LC instruments, which sell in the $40,000 range.

And, even though the two companies have been merged since 1997, Waters' management is still working on the integration of LC and mass spec and selling it as a system

"The Waters sales force was used to selling $40,000 systems," Berthiaume told analysts in the Q4'04 conference call. "The mass spec side was selling, you know, up to $500,000 and $600,000 systems. We were worried about how did the customers really look at the various suppliers. We acquired Micromass in September of 1997, so I'd say since then we've been trying to drive this vision both in the way we organize, the way we approach a customer, that we are solving a customer's problem, and we're focused on applications."

The Competition

Thermo Electron claims it is picking up mass spec market share. "We don't give the specific numbers for competitive reasons, but we, of course, do read our competitors' press releases, and we deduct from that that we must have been gaining share in 2004 — and it is really driven by all of our mass spec platforms," Marijn Dekkers, Thermo's CEO, told analysts in the company's fourth-quarter conference call. "Across the board in our technology platforms of mass spectrometry, we feel we have done very well."

Thermo's Life and Laboratory Sciences segment, which supports the company's mass-spec product lines, reported a 21-percent revenue increase in the fourth quarter to $455 million from $377 million in 2003.

In its last conference call, Applied Biosystems executives told analysts that the company noticed no slowdown in sales of its Q-TOF mass spectrometer after the introduction of the Waters Q-TOF platform, but said its mass spec sales cycles for proteomic applications have changed.

"The way we're looking at that market [proteomics] is that there is a lot of competition right now with platforms," ABI president Cathy Burzik told analysts. "That's creating some slowdown on an overall sell cycle. And in general, as we look at proteomics based on the last quarter or, so we see a slight deceleration of growth in the proteomics category. And that is not growing as fast as our overall business."

Applied Biosystems reported $114 million in revenues from mass spectrometry sales in the fourth quarter, and that segment — combined with real-time PCR, and applied genomics — accounted for 54 percent of the company's fourth-quarter revenues of $463 million, the only bright spots in a product portfolio where expectations are for declining 2005 revenues for DNA sequencing, PCR, and DNA synthesis are expected, the company told analysts.

In the areas where we see growth, Burzik said, "I think it's fair to assume we're going continue to refresh those particular product lines."

Bruker BioSciences

A total of 37 percent, or $31.8 million of Bruker's record $86 million in fourth quarter revenues, up 16 percent compared to the year-ago quarter, came from the sale of mass spectrometry systems, the company said (see BCW 3/10/2005).

While the company has strategic partnerships in mass spectrometry with Agilent Technologies and with Sequenom, it is increasingly looking to its sales force to drive revenue growth. In the fourth quarter, the company said revenue from its strategic partners fell 9 percent, but revenues from its direct sales force increased 15 percent.

Bruker Daltonics, the operating unit that houses the company's life-sciences-based mass spectrometry technology, reported revenue growth of 7 percent, to $44.8 million for the quarter, compared to $42.0 million for the same period in 2003 and essentially flat when excluding foreign-exchange benefits.

— Mo Krochmal ([email protected])

 

 

Waters Revenue Growth in Percentage
Change by Quarter, 2001-2004
 
Revenue
QoQ Change
2001
Q1
201.03
11.29
Q2
206.80
5.90
Q3
202.69
4.44
Q4
278.68
10.28

2002

Q1
200.34
-0.34
Q2
217.19
5.02
Q3
216.05
6.59
Q4
256.39
3.10
2003
Q1
221.00
10.31
Q2
231.75
6.70
Q3
230.38
6.64
Q4
275.07
7.29
2004
Q1
255.09
15.42
Q2
260.49
12.40
Q3
264.81
14.94
Q4
324.15
17.84
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