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Waters, Thermo Post Strong Q1 Revenue Growth; Cautiously Optimistic on Large Pharma Spending

Officials from Thermo Electron and Waters expressed cautious optimism about big pharma's future spending on big-ticket research instruments as both firms reported strong revenue growth for the first quarter of 2006.

As the first-quarter results start rolling in from BCW Index companies, customers and investors alike will be keeping an eye on whether spending by large pharmaceutical firms has rebounded after a fairly weak 2005. Capital equipment manufacturers such as Waters, Thermo Electron, and PerkinElmer are exposed to cyclical pharma spending patterns more than their counterparts in the Index that sell consumables — and that exposure hit Waters particularly hard last year, forcing the company to issue two quarterly revenue warnings.

"We remain optimistic that [large pharma] budgets will be released as we move through this year," Waters' Chairman, President, and CEO Douglas Berthiaume said during a conference call this morning, sounding a similar refrain to comments he has made in quarterly calls over the last year. "However, the results we've observed so far from this important market segment continue to affect our expectations for top-line growth in the upcoming quarters."

A "weak" pharma market also caused Waters' mass spec sales to remain flat in the first quarter, according to company officials.

Last year's dip in pharma spending did not hit Thermo as hard as Waters — 5 percent of Thermo's total sales are to the top 10 pharmaceutical firms — and Marijn Dekkers, the firm's president and CEO, acknowledged during his firm's first-quarter conference call this morning that a rebound, albeit slight, appears to be underway.

"Large pharma was pretty depressed in Q1 of last year, and that clearly has come back a little. We're not bringing out the celebration cakes here, but it's clearly better than a year ago."

"In the first quarter of last year, we were all sitting here and complaining about large pharma, not about the rest of the life sciences customer base," said Dekkers. "But large pharma was pretty depressed in Q1 of last year, and that clearly has come back a little. We're not bringing out the celebration cakes here, but it's clearly better than a year ago."

While the firms are hoping for improved spending among the top pharmaceutical companies, both reported robust revenue growth for the first quarter of 2006.

LC Sales Drive Waters' Q1 Growth

Waters reported that first-quarter sales rose 8.2 percent to $290.2 million from $268.3 million in the year-ago period.

"When we last spoke in January, I reported that our business improved in the fourth quarter of 2005 with strong demand worldwide from industrial labs along with overall robust sales growth in Asia as the key factors in driving our growth," said Berthiaume. "These trends continued into the first quarter of '06 and enabled us to grow sales organically by 12 percent."

Sales of Waters' liquid chromatography products grew 16 percent year over year, with instrument sales up 19 percent, services up 10 percent, and consumables up 16 percent within that product line, CFO John Ornell said during the conference call. He said that sales of mass spectrometers were flat in the quarter, while the firm's thermal analysis products grew 10 percent in the quarter.

Berthiaume blamed the soft mass spec sales on "weakness in the US big pharma market, with some customers delaying orders due to our new product launches and to heavy ordering for larger systems that occurred late in the quarter — too late for us to deliver to customers' labs in the first quarter of '06."

Despite the weak mass spec sales, Ornell said that first-quarter results exceeded the firm's expectations.

Geographically, sales in Asia, excluding Japan, grew 39 percent in the quarter, according to Ornell. Waters' sales in Europe were up 26 percent for the quarter, while sales in the US and Japan were flat with last year.

Berrthiaume cited "a favorable convergence of market factors" for the firm's first-quarter growth, "including rapid uptake of our proprietary Acquity UPLC chromatography technology, robust business growth in India and China and the continued strength of our global industrial accounts."

He said that the firm expects sales to large pharma accounts to be stronger in 2006 than in 2005. In the first quarter, "we did observe a pickup in European large pharmaceutical accounts, [while] most of our US-based large pharmaceutical customers are continuing to hold back their spending," he said.

"Then there is the whole trend of outsourcing services at pharma, where we are quite well-positioned with some of the services beyond typical industry services like equipment maintenance."

Waters is in the process of introducing a series of high-performance mass spectrometers, said Berthiaume. Among them is the Acquity SQD, which the firm launched last month at Pittcon 2006 in Orlando, Fla. (see BioCommerce Week 3/15/2006). He said the firm will launch more mass spec instruments at the ASMS conference next month in Seattle.

Waters' R&D spending in the quarter jumped to $19 million from $16.7 million year over year.

The firm's profits for the quarter declined to $44.2 million from $46.6 million year over year though per-share income grew to $.42 from $.39.

Waters said it had around $481.2 million in cash and equivalents as of April 1.

Company officials predicted 2006 sales growth of 9 percent to roughly $1.26 billion, before currency effects. For the year, the firm expects liquid chromatography sales to grow 10 percent, mass spec sales to grow in the low- to mid-single digits, and sales of thermal analysis product to grow 7 percent to 8 percent.

Thermo Posts 22-Percent Growth in Q1

Thermo reported first-quarter revenue growth of 22 percent to $684 million compared with $559 million in the first quarter of 2005. The firm said the growth was driven by a 30-percent rise in revenue for its life and laboratory sciences segment and a 16-percent contribution from acquired businesses.

According to Dekkers, the firm's growing portfolio of integrated laboratory technologies has led to accelerated growth in the life and laboratory sciences segment, which reported sales of $512 million for the quarter compared with $393 million in the first quarter last year. Dekkers said that revenue growth in this segment was roughly even between sales to life sciences and industrial customers.

"We think that pharma is feeling better than Q1 [last year], but I also think there is an element there of us taking share in certain areas — mass spectrometry, for sure," Dekkers said during the conference call. "We have focused a lot on corporate accounts over the last few years, and as a result probably have been gaining share at the larger accounts.

"Then there is the whole trend of outsourcing services at pharma, where we are quite well-positioned with some of the services beyond typical industry services like equipment maintenance," said Dekkers. "That has probably helped us grow faster with large pharma."

Sales for the firm's measurement and control segment increased 4 percent to $172 million from $166 million.

Thermo's first-quarter net profit dropped 4 percent to $46.9 million, or $.28 per share, from $48.9 million, or $.30 per share, in the first quarter last year. The firm's earnings were hit by $25.6 million, or $.07 per share, in amortization expenses.

Thermo's R&D spending increased 6.6 percent in the quarter to $38.7 million from $36.3 million in the comparable period last year.

The firm finished the first quarter with $230.8 million in cash and cash equivalents.

Thermo officials predicted 2006 revenue of $2.81 billion to $2.86 billion, an increase of 7 percent to 9 percent over 2005 revenue of $2.63 billion, with organic growth of 5 percent to 6 percent for the year.

— Edward Winnick ([email protected])

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