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New Products, US Pharma Spending Uptick Spark Q1 Double-Digit Growth for Waters

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Riding a recovery in pharmaceutical spending, particularly in the US, Waters this week reported its third consecutive quarter of double-digit sales growth.
 
Company officials have been cautiously optimistic over the past nine months in their expectations of sales to large pharma accounts, but now believe improved demand will continue through the year. In addition, they cited strong uptake of new products, sustained strength in the industrial markets, and for the second quarter in a row, “healthy growth” in US sales as the primary drivers of Waters’ 14 percent increase in first-quarter revenue.
 
After warning investors twice in 2005 that revenues would not match quarterly guidance, Waters’ results improved dramatically in the second half of 2006 thanks to improved spending by pharmaceutical firms and to strong sales growth for its liquid chromatography products. Its 2006 third quarter had brought year over year revenue growth of 10 percent (see BioCommerce Week 10/25/2006), and that was followed by fourth-quarter sales growth of 16 percent (see BioCommerce Week 1/24/2007).
 
This week, Waters reported first-quarter revenue of $331 million, a 14 percent increase over sales of $290 million in the first quarter last year. The firm also posted a profit of $55.9 million, or $.54 per share, compared with net income of $44.2 million, or $.42 per share, in the comparable period a year ago.
 
“We started off the year on a very positive note,” Doug Berthiaume, chairman, president, and CEO of Waters, said during the firm’s first-quarter conference call. “The strength and demand that we saw building through most of 2006 continued through the first quarter of 2007.”
 
Berthiaume noted that sales to pharmaceutical customers grew in the double digits for the first quarter. “Feedback from our customers and our field sales force suggests that this positive trend in pharma demand is continuing, and that 2007 is likely to be a markedly stronger year in this segment of our business,” he said.
 
The firm’s sales in Asia were up 11 percent, while sales in Europe grew 7 percent, and sales in the US were up 21 percent. Company officials said during the call that sales of its liquid chromatography products and services were up 9 percent year over year, while mass spec shipments were up 12 percent, and thermal analysis sales increased 33 percent.
 
Sales of UPLC systems increased “very significantly” over last year’s first quarter, said Berthiaume, adding that Acquity column demand is “ramping at an impressive rate.”
 
CFO John Ornell, speaking last month at the Lehman Brothers Global Healthcare Conference in Miami, said the Acquity instrument is the fastest growing technology Waters has ever had (see BioCommerce Week 3/21/2007). Waters launched the Acquity UPLC nearly three years ago, but market uptake was initially slow due to a constrained pharma spending market.
 
Company officials now say they expect its rapid growth to continue as more HPLC users replace their instruments with UPLC and the Acquity gets pushed into clinical applications.
 
Exactly how fast Acquity is growing is not being disclosed by the company. When asked during the conference call this week to put a number on the growth rate of Acquity instruments and columns, Berthiaume coyly answered, “It’s greater than 20 percent growth, less than 100 percent growth.”
 
In addition to Acquity, Waters officials pointed to strong sales of its newer mass spec products as a key driver of revenue growth. In particular, Berthiaume touted Waters’ Synapt HDMS system, which was introduced at the American Society for Mass Spectrometry meeting in late May 2006, but didn’t begin shipping until later in the year.
 
Company officials consider it the most important of the firm’s newer product introductions because it offers the market a novel ion separation ability — and at a price of $650,000, it targets the high end of the MS market, which the firm estimates at $250 million.
 
“The initial reaction to Synapt has been phenomenal,” said Berthiaume this week. “We are getting publications on specific applications. Those publications in those early applications have tended to be in the proteomics and … metabonomics marketplace.
 
“We’re seeing Synapt demand from large pharma, but we’re also seeing Synapt demand importantly from other research institutions,” said Berthiaume.
 
The Synapt was one of three new mass spec offerings launched last year by Waters that are key to the firm’s re-emergence in the market and that have company officials predicting double-digit revenue growth for its mass spec products in 2007. The other two recently introduced instruments are the low-end Acquity SQD and the mid-level Acquity TQD.
 
Like many of its competitors in the mass spec space, Waters also is seeing increased use of its instruments in diagnostic applications.
 

“Feedback from our customers and our field sales force suggests that this positive trend in pharma demand is continuing, and that 2007 is likely to be a markedly stronger year in this segment of our business.”

“We continue to see good opportunities in the neonatal screening [market],” said Berthiaume. “We’re continuing on the development side to look at ways to expand our reach in the clinical diagnostics business, and we think we’ll be developing more applications and opportunities there.” He did not elaborate.
 
Acquisition Strategy Unchanged
 
Over the past year some of Waters’ closest rivals have been very active in the mergers and acquisition market — particularly PerkinElmer, with its recent focus on acquiring cell analysis technology companies, and Thermo Fisher Scientific. But Waters has stuck with smaller deals that have increased its presence in the thermal analysis market and other industrial fields.
 
“What you’ve seen in the past couple of years is pretty much what you should expect to see” in the firm’s M&A activity this year, said Berthiaume. “We work on a number of projects that tend to be on the small side, companies with sales in the $10 million to $50 million annual size, as opposed to bigger opportunities.
 
“We like those,” he said. “We think, while not risk-free, they’re on the very low side of the risk equation. They fit nicely with our existing management strength, and they’re almost all rapidly accretive.”
 
He added, “This year, it may be that none of them come to fruition.” But, “we certainly would like to do more of the kind of deals we’re doing. We’ve devoted marginally more resources to doing that.”
 
Waters officials said during the call that they expect to report full-year earnings per share of $2.72, up from the firm’s January guidance of $2.62, due partially to higher sales expectations. The guidance is also higher than the consensus estimate of $2.64 predicted by analysts who cover the firm.
 
Company officials also predicted second-quarter sales growth of 14 percent, comprised of 10 percent organic growth, 2 percent M&A impact, and a 2 percent currency benefit. They expect second quarter EPS of $.57.

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