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... As Waters Expects Enhancements to Acquity to Drive Stronger Sales in 2006

Waters is predicting strong sales growth for its Acquity UPLC system in 2006, driven by demand outside of its pharmaceutical base and expected enhancements to the system throughout the year.

The company finished a difficult year in which it issued two quarterly warnings that revenue would not meet previous guidance, but sales of its Acquity system surpassed expectations in the fourth quarter. The company also surprised the market by reporting a 9-percent increase in its fourth-quarter profit.

During a conference call this week, Waters executives said they expect continued strong growth in the Asian market, where the firm plans to expand this year. However, they remain cautious about pharma spending patterns — an issue that dogged the firm throughout the year and was the primary cause for revenue shortfalls in 2005.

"As we move into 2006, we're watching for signs of a recovery in big pharma spending," Douglas Berthiaume, president and CEO of Waters, said during the call. "However, without a clear indication of a pickup in sight, we will maintain a conservative outlook and manage our business in a manner that will deliver meaningful growth in earnings while assuming relatively modest top-line expansion."

"As we move into 2006, we're watching for signs of a recovery in big pharma spending. However, without a clear indication of a pickup in sight, we will maintain a conservative outlook and manage our business in a manner that will deliver meaningful growth in earnings while assuming relatively modest top-line expansion."

Berthiaume said that he believes current Acquity users will promote the use of the system among colleagues, which will stimulate demand for new placements. He also said the firm expects to offer "meaningful enhancements" to the system during the year, which should drive future growth of the high-speed LC system.

Company officials declined to give sales figures for Acquity, which was launched in August 2004. But, Berthiaume noted, "It more than doubled in the quarter in terms of underlying growth rate and order rate."

He added. "The growth rate in Acquity columns is going to be phenomenal this year. It's been building very strongly."

According to Berthiaume, Acquity sales reached a quarterly high, with sales increasing to smaller pharma and biotech firms, as well as other industrial end markets, such as food and water testing and environmental analysis. "As we moved through 2005, we began to see a broad uptake of Acquity among a wide variety of customer groups using HPLC, and it's this proliferation of the technology across many LC applications that has driven its growth in a tough year for pharma spending," Berthiaume said.

He also noted that there is still a large base of HPLC users in the market that he believes will choose to upgrade to UPLC. But Waters will not be the only company fighting for the business of customers who want high-speed and higher-resolution liquid chromatography instruments.

This week, Agilent announced the introduction of its 1200 Series LC system, a high-resolution, high-speed system to compete with the Acquity UPLC (see article in this week's issue).

Q4 Sales, Profit Rise

For the fourth quarter of 2005, Waters reported revenue of $332 million, a 3-percent increase over sales of $324 million in the fourth quarter of 2004. According to the firm, excluding foreign currency effects, total sales would have been up 7 percent for the quarter.

"We did not see a significant rebound in pharma spending," said Berthiaume during the conference call. He cited weak pipelines, mergers and acquisitions, and litigation woes among some larger pharmaceutical companies as key factors for decreased capital equipment spending.

However, he said the sluggish pharma sales were offset by broad-based strong demand for the firm's liquid chromatography products.

In addition to exceeding sales expectations for the Acquity line, he said sales of its earlier-generation Alliance HPLC grew "very nicely." Overall, sales of Waters' liquid chromatography products grew 8 percent in the fourth quarter compared to Q4 2004, with LC chemistry and service revenues up 9 percent and instrument sales up 5 percent to 6 percent for the quarter, Waters CFO John Ornell noted during the call.

Berthiaume also said that during the fourth quarter the firm began to see multiple purchases of Acquity on single orders from customers, mostly from those outside of its targeted base of large pharma. "We feel we're poised for significant growth in this market segment when the spending environment improves," he said.

According to Waters officials, the firm's mass spec business grew slightly in the quarter — 2 percent — and year, though sales were less than expected for the year.

Company officials said that sales to Asia were very strong during the quarter, with India, Japan, and South Korea leading the growth. They noted that while sales in Europe were soft at the beginning of 2005, in the fourth quarter the situation was "markedly improved."

Waters' net income increased to $78.2 million, or $0.71 per share, from $71.5 million, or $0.58 per share, in the year-ago period. The results beat the firm's and analysts' consensus forecast of $.64 per share.

Even though the quarterly revenue growth matched that of the third quarter, investors responded enthusiastically to the profit growth, sending shares in Waters up 14 percent to close at $43.08 on Tuesday.

R&D spending in the quarter increased slightly to $16.7 million from $16.5 million year over year.

For fiscal 2005, Waters reported revenue of $1.16 billion, a 5-percent increase over revenue of $1.1 billion in 2004. The firm said net income for the year declined to $204.5 million, or $1.76 per share, from a profit of $224 million, or $1.87 per share, in 2004. R&D spending for the year grew 3 percent to $66.9 million.

Waters is predicting sales growth of 4 percent for the first quarter of 2006 and earnings per share of roughly $.42. For full-year 2006, it is predicting sales growth of 7 percent, excluding currency effects, which could cause that number to drop to 6 percent. It expects earnings per share of approximately $2.20 for 2006, before any unusual charges.

Customers and investors can expect the company to be more involved in Asia this year as the firm ramps up Acquity production levels and moves some Alliance manufacturing to Singapore, the Waters executives said. They said the firm would invest more in its Asia operations, while cutting expenses elsewhere, though they would not provide details of potential cost-cutting moves.

"There will likely be one-time costs associated with these actions that are not included in our current earnings projections," said Ornell. "These activities will take place over the next few quarters and could result in a one-time charge of $5 million to $9 million later this year."

— Edward Winnick ([email protected])

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