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Waters' Q3 Sales, Profit Jump as US Pharma Spending Recovers; Targets LC, MS Growth

Waters this week posted 10-percent revenue growth and said its profit nearly doubled for the third quarter as spending by large pharmaceutical customers improved, reversing a negative trend from the past several quarters.
Waters twice last year warned that revenues would not match quarterly guidance, so a reinvigorated pharma spending market, particularly in the US, is a welcome change. Company officials believe that the firm will now be able to capitalize on recent and upcoming market launches of its liquid chromatography and mass spectrometry instruments to drive growth in the fourth quarter and into 2007.
Waters posted third-quarter sales of $301.2 million, a 10-percent increase over last year’s third-quarter sales of $273 million. Its net income almost doubled to $50.4 million, or $.49 per share, from $25.7 million, or $.22 per share, in the third quarter a year ago.
“Even more significant than these good results are the encouraging underlying dynamics that supported our growth,” said Douglas Berthiaume, chairman, president, and CEO of Waters, during the firm’s third-quarter conference call this week.
“You may … recall that for several quarters weakness in our large pharmaceutical accounts has restrained sales growth in the United States, and as a result and despite strengths in other market segments outside of big pharma, the overall US business has hovered around a flat growth rate,” said Berthiaume.
“Well, that changed in the third quarter as we saw the improvement we had hoped for but were somewhat hesitant to forecast. Our larger pharmaceutical accounts began to release capital budgets and started to buy instrumentation at a faster pace in the United States,” he said.
He also cited rising sales to contract research organizations as part of the reason for the third-quarter revenue growth. “We're clearly seeing large pharma outsource more of their research in later-stage development activity to other organizations,” said Berthiaume during the Q&A portion of the call. “So we're seeing a lot of that new activity take place,” he said, referring to sales to new CRO customers.
CFO John Ornell said sales grew 9 percent in the US during the quarter, reversing a 2-percent decline in the second quarter. Sales to Asia were up 15 percent for the quarter, and sales to Europe rose 8 percent, according to Ornell.
Referring to Asia, Berthiaume said, “We don’t see a sign of any let-up in these areas.”
Banking on LC, MS Sales Growth
Sales of the firm’s liquid chromatography products grew 13 percent, while mass spec sales were up 3 percent for the quarter. “Acquity UPLC continued to do well, and we feel we’re poised to build on this success in the fourth quarter of this year and into next year as we broaden our systems offerings with new mass spectrometry instrumentation,” said Berthiaume.
“More recently, we’ve seen greater uptake of Acquity technology by customers in productivity-focused labs, such as those working in CROs and generic drug manufacturing,” he said.
After having the first-mover advantage in the high-speed, high-end LC market for nearly two years, Waters’ Acquity UPLC now faces competition from Agilent, which launched its 1200 Series LC system earlier this year (see BioCommerce Week 1/25/2006). Thermo Electron also recently introduced an HPLC system that is intended to compete with both Waters’ and Agilent’s top-of-the-line LC offerings. Despite the new competition, Berthiaume said he doesn’t see these firms taking market share from Waters.
“I guess I can only say that I don't think that the competitive introductions have had a material impact on the sales performance of our UPLC,” he said. “No question that others are out there touting their own instrument's benefits, but we don't think when they're run side by side and when customers really are determining what they're going to bank on that anything matches UPLC at this point.”
Waters officials also said they expect the firm’s mass spec sales growth to accelerate in the fourth quarter as the firm begins shipping its new tandem quadrupole mass spec and Synapt HDMS system, which the firm introduced at the American Society for Mass Spectrometry conference in Seattle in June (see BioCommerce Week 6/7/2006)
But in forecasting growth for the mass spec and LC businesses, Berthiaume said, “It's getting harder and harder to differentiate an LC business and a mass spec business. We're clearly involved in selling systems, and while not all of our HPLC systems go with a mass spec, almost all of our mass specs go with an LC, particularly more and more an Acquity HPLC.

“Our larger pharmaceutical accounts began to release capital budgets and started to buy instrumentation at a faster pace in the United States.”

“But both of them are going to, I think, be significantly stronger on average in '07 than they have been in '06,” he said.
Waters’ R&D spending for the third quarter rose 12 percent to $19.1 million from $17 million. Company officials said during the call that they expect R&D spending to grow at a similar rate in the fourth quarter.
The firm’s cash and short-term investments totaled $512 million at the end of the quarter. “With our strong balance sheet and liquidity, we believe we have adequate flexibility to fund future working capital needs and acquisition opportunities,” said Ornell.
Asked about potential acquisitions, Berthiaume said the firm may look at industrial applications outside of life science research. “A lot of our expertise carries over into that sphere,” he said.
“We're always interested in the consumable space, particularly the proprietary consumable space, and services and support activities, and we're, I'd say, actively looking at opportunities in all of those areas,” said Berthiaume.
He said the firm tends to look for opportunities that help differentiate its product line. “We tend not to be interested in significant horizontal expansion of our technology.”
The firm forecasted fourth-quarter earnings per share of $.78, and EPS of $2.14 for fiscal 2006.

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