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ABI, Waters, and Thermo Report Slow MS Sales: Is Cannibalization to Blame?

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Applied Biosystems and Thermo Electron blamed what one analyst called the “cannibalization” of outdated products for across-the-board disappointing mass spec sales in the quarter ending Sept. 30, 2003 during a series of quarterly earnings calls this week, while joining Waters in touting the successes of their newest offerings.

ABI President Michael Hunkapiller, whose company experienced a slight decline in mass spec revenues compared to the year-ago period, said that the “stronger than anticipated demand” for ABI’s 4000 Q-TRAP LC/MS/MS system had caused “upselling” relative to the original API 4000 triple quad, as well as increasing a backlog in Q-TRAP orders that Hunkapiller said would not be resolved before the third quarter of the fiscal year, which for ABI began July 1. “These are normal ramp-up issues that you see with these kinds of complicated systems, exacerbated by the fact that the demand was stronger than we anticipated and the switchover from the [previous model, API] 4000 was also stronger than anticipated,” Hunkapiller said. He added that MDS Sciex, a development collaborator on the Q-TRAP, usually takes “two to three quarters to fully ramp up their manufacturing capabilities,” and that the ultimate result was that ABI had so far only been able to fill half of the orders that it received in the quarter. This trend of receiving more orders than were possible to fill was expected to continue in the next quarter, according to Tony White, CEO of ABI’s parent company, Applera.

While acknowledging this backlog problem, Hunkapiller also took the opportunity to claim that the increased demand underscores the superiority of the Q-TRAP over competitors’ instruments in the triple quad market — such as Waters’ Quattro Premier, introduced at the ASMS conference in June, which the latter company had been counting on as the key to a comeback in triple quads following its patent infringement suit with ABI and subsequent removal of the previous Waters triple quad from the market (see PM 4-1-02, 4-29-02, 3-17-03, 7-25-03). The Q-TRAP “is a higher end system in a sense that it has all the capabilities of the [API] 4000, which is the market leader in high end triple quadrupole LC/MS systems, but it also has all sorts of other functions that you don’t get on a traditional triple quad as well,” Hunkapiller said. “I think we feel pretty comfortable with the positioning of the 4000 compared to [Quattro Premier] and we’re very comfortable with the Q-TRAP 4000 positioning,” he added.

Waters CEO Douglas Berthiaume, in a conference call earlier the same day, denied that the Quattro Premier, which began shipping in the quarter, was in any direct competition with the Q-TRAP. “I would not say right now that we’re seeing that [competition] with the hybrid,” Berthiaume said. “We’re still looking principally at competition coming from the classical triple quad.” Berthiaume said that although the Quattro had not been shipped to paying customers yet, he still expected that the instrument would bring in the previously forecasted $5 million to $10 million of new revenue by the end of the second half of the year. John Nelson, Waters’ chief techno-logy officer, said also that although sensitivity in the instruments was “roughly equivalent for all players in the triple quad marketplace,” when it came to comparing samples run on different instruments in live demos “we’re doing better than holding our own.”

Waters had better hope that the Quattro helps the company pull out of its current mass spec funk: The company posted a double digit decline in year-over-year mass spec sales for the second quarter in a row. Berthiaume blamed continued weaknesses in post-litigation Q-TOF sales and a general “slowing in proteomics investments” for the poor showing, and said that Waters may have to wait until 2004 before this trend reverses itself. “What we’re seeing in the last year or two — and granted, it coincided with patent troubles — was the overall level of pull having modulated,” Berthiaume said.

Berthiaume said that while there was a wave of proteomics investments in 2000 and 2001 from which Waters benefited, big pharma has still “not waded in extensively.” Meanwhile, Berthiaume continued, scientists were in the process of rethinking their front- and back-end strategies, and were doing less buying. All of this will begin to turn around in 2004, according to Berthiaume’s hypothesis — and Waters will be poised, he said, to capitalize on the new trends. ”I don’t think that the proteomics market will all of a sudden explode come Jan. 1, but we will have very good reason why a number of these customers will be interested in examining our new capabilities,” Berthiaume said. These capabilities will include a new Q-TOF — which Berthiaume confirmed would be released at ASMS 2004 — as well as “a new set of chemistry and software that we think can significantly improve your ability to separate and analyze proteins in large scale proteomics-like studies.” Included in this set will be an “entirely new chromatography system” that Waters will roll out at Pittcon in March.

On the software side, Berthiaume said that Waters would try to capitalize on its recent acquisition of Cologne, Germany-based Creon Lab Control, a small bioinformatics company, to expand much more deeply into the realm of data management. “Already a lot of pharma companies are coming to us saying they want to hear about the acquisition. … We think we can balance this in the mix [with the mass specs] and we’re actively looking for ways to expand,” Berthiaume said.

Thermo Electron also reported a disappointing quarter for mass spec sales, recording flat growth year-over-year despite the recent release of two new mass specs: the LTQ ion trap and LTQ FT-MS. Thermo’s CEO, Marijn Dekkers, placed the blame for this result squarely on the cannibalization effect. “We think the major reason for that is our customers evaluating our two brand new products and slowing down the purchases of the old products that they are replacing,” Dekkers said. He predicted that the trend would turn around in the fourth quarter, and cited mass spec sales as one of the company’s “clear driver[s] for year-over-year growth.” Dekkers also minced no words in boasting about the response of customers to the new mass specs. “We are extremely — emphasis on extremely — pleased with customer receptivity to our new mass spectrometers,” he said.

Thermo Electron’s Life and Laboratory Sciences revenue was $301.5 million for the quarter ended Sept. 30, 2003, compared to $300 million in the year-ago period. The company’s total revenues, including its Measurement and Control and Optical Technologies business units, was $497.1 million for the third quarter of 2003, compared to $517.2 million in the third quarter of 2002. Thermo Electron reported a decrease in R&D spending year-over-year for all of its business units, to $34.9 million in the third quarter of 2003 from $37.5 million in the third quarter of 2002. The company’s net income was $48.5 million for the quarter, compared to $39 million in the same period of 2002. Thermo Electron has $207.5 million in cash and cash equivalents.

Waters reported revenues of $230.4 million for the third quarter, up from $216.0 million for the same period last year. The company had net income of $36.4 million, compared to $39.0 million for the same period last year. For the quarter, R&D expenses increased to $15.1 million, from $13.6 million in the same period last year.

As of Sept. 30, Waters had $288.1 million in cash and cash equivalents, up from $263.3 million at the end of 2002.

ABI reported net revenues of $382.7 million for its first fiscal quarter, which also ended Sept. 30, down $13.2 million compared to the same quarter of 2002. Despite the drop in revenues, ABI reported an increase in net income year over year: income rose to $33.4 million for the quarter, compared to $17.8 million for the year-ago period.

This rise in net income reflects the fact that the company recorded a loss of $16.4 million from discontinued operations the same period last year. The company recorded research and development expenses of $59.6 million, compared to $61 million for the same quarter in 2002. Mass spectrometry revenues were nearly flat at $82.4 million, compared to $84.2 million in the year-ago quarter. As of Sept. 30, ABI had $590.8 million in cash and cash equivalents.

— KAM

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