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Waters Says US Pharma Market Still Weak As Strong Asian Sales Lift Q2 Revenue 6 Percent

An unremitting trend of lower spending by large pharmaceutical customers in North America hurt Waters’ sales in the second quarter, but strong sales in Asia pushed the firm’s overall revenues up 6 percent year over year to $302 million, the company said this week.
 
A depressed pharmaceutical spending market has been a common refrain from Waters officials over the past five quarters, but while they believe the decline has bottomed out they are maintaining a conservative outlook.
 
Company officials also said during a second-quarter conference call this week that they expect sales of the Acquity UPLC system to roughly double this year.
 
Waters this week reported that its second-quarter revenues rose to $302 million from $285 million in the second quarter last year, led by a 36-percent jump in sales to Asia, excluding Japan, Waters officials said during the call. Sales to Europe grew 2 percent year over year while sales in Japan were up 6 percent. Sales to customers in the US declined 2 percent in the quarter.
 
Sales of the firm’s liquid chromatography products grew 6 percent, while sales of its mass spectrometry products grew 4 percent, and its thermal analysis business grew 7 percent.
 
“The most important trends that we’re seeing through the first half of ’06 include a rapid expansion of our business in the developing world, especially China and India, a continuation of strong spending from industrial and food safety labs, and sustained strong uptake of Acquity UPLC across a wide array of applications and customer groups,” said Douglas Berthiaume, chairman, president, and CEO of Waters, during the conference call. “These positive trends were somewhat offset by continued softness in North American spending by large pharmaceutical accounts.”
 
He noted, however, that the top 15 pharmaceutical firms represent only roughly 15 percent of Waters’ business.
 
“In our view, the issues facing these companies were not likely to dissipate quickly,” said Berthiaume. “However, we felt that the lower spending levels we had experienced for the past few quarters had pretty much bottomed out and that sales to this customer set were likely to either stabilize or see a moderate recovery. Though our business to big pharma did sequentially grow from the first quarter of ’06 to the second quarter on a year to year basis, this segment was a depressant to our overall sales growth rate in the second quarter with a double-digit decline.”
 
He said that feedback from customers in pharma labs “suggests that spending will improve later this year. However, our recent history suggests that we should maintain a pretty conservative outlook.”
 
Twice last year, Waters was forced to issue a warning that revenues would not match quarterly guidance. Both times, the firm blamed a weak pharma spending market as the culprit.
 
Berthiaume said that despite the continued difficulties selling to larger pharmaceutical firms, the “more broadly defined pharmaceutical market, including biotechs, generic firms, and CROs, performed quite well, and allowed us to achieve positive sales growth for our overall pharmaceutical business in the quarter.”
 
Water’s chromatography business grew at a double-digit pace, according to Berthiaume, though it “cooled a bit from the 16-percent pace we saw in the first quarter, due to a tougher base of comparison in the second quarter and the softness in pharmaceutical spending.”
 
He said that the firm’s Acquity UPLC momentum continued to grow and the firm’s second-quarter sales volume for the instrument grew sequentially from the first quarter of 2006. “At this point, we appear to be on track to roughly double our UPLC system revenue this year,” said Berthiaume.

“The most important trends that we’re seeing through the first half of ’06 include a rapid expansion of our business in the developing world, especially China and India, a continuation of strong spending from industrial and food safety labs, and sustained strong uptake of Acquity UPLC across a wide array of applications and customer groups.”

Waters enjoyed a first-mover advantage when it introduced the Acquity UPLC and has been trying to convince customers to switch from the firm’s older Alliance HPLC system, as well as competing platforms. But that nearly year-and-a-half-long selling advantage ended in January when Agilent launched its 1200 Series LC system, a high-resolution, high-speed system to compete with Waters' Acquity UPLC (see BioCommerce Week 1/25/2006).
 
In citing the growing sales of the Acquity UPLC, Berthiaume discounted the competitive threat from Agilent’s new platform — though he didn’t mention Agilent’s name. “I think most of the dynamic on the HPLC front is market driven and not evaluation of competitive products,” he said. Berthiaume also said the firm has not felt any pricing pressures due to Agilent’s new instrument, saying “pricing on Acquity has held up nicely” in response to competition.
 
Stock Options, Restructuring Charges Hurt Profit
 
Though its revenues were up 6 percent, Waters’ net income fell 12 percent to $47.8 million from $54.1 million. The firm’s earnings per share were even with last year’s second quarter at $.46.
 
Waters’ profit was affected by a restructuring charge of $2.5 million and stock-option expenses of $5.1 million. Currency was neutral, company officials said.
 
In March, Waters said it would cut 70 employees from its staff as part of a restructuring and resource reallocation plan that would help support the firm's growth in Asia (see BioCommerce Week 3/8/2006). According to a 10-K filing at the time, the company expected to take a one-time restructuring charge of $5 million to $7 million related to the plan in 2006.
 
Company officials said that they expect to take charges of $1 million or less related to the restructuring in the second half.
 
They also said sales are expected to grow 8 percent in 2006, while earnings are expected to finish up 18 percent for the year. They also predicted earnings per share of $2.09, including continuing option expenses and restructuring charges.
 
For the third quarter, Waters expects sales growth of 9 percent and EPS of $.51, including option expenses, which will reduce EPS by $.05.