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Despite 10 Percent Decline in Q1 Revenues, Waters CEO Sees Rays of Light for Second Half of 2009

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This story originally ran on April 28.

In the midst of reporting a 10 percent drop in revenues for the first quarter, Waters officials sounded a guarded note that the second half of 2009 could hold reasons for hope.

This week, Waters said that revenues for the three months ended April 4 fell to $333 million from $372 million during Q1 2008. Currency translation contributed 5 percentage points of the total drop in revenues.

Instrument sales were down by 16 percent in the quarter, while consumables and services rose 9 percent.

Net income for the quarter climbed 7 percent to $73.3 million from $68.5 million in the year-ago period.

In a conference call accompanying the earnings release, Douglas Berthiaume, president and CEO of the company, said that while the quarter presented a myriad of challenges, the company is "weathering the storm." He added that with the stimulus packages from the US and elsewhere expected to trickle down to the vendor level later in the year, and sustained market interest in Waters' new products, the latter part of 2009 may turn out better than had been previously feared.

Company officials said that the difficult economic conditions faced by Waters in the first quarter are expected to persist throughout the year, and that Q2 revenues could drop by about 8 percent, but going forward, "I am cautiously optimistic — emphasis [on] cautious — about the second half of the year," Berthiaume said.

"Someday we may look [back] and determine that the past two quarters were the most difficult for us in this recessionary period. …I am, however, encouraged by the potential for our new products in combination with higher research spending associated with various stimulus plans around the world," he said.

During the past year, the company launched the Xevo TQ and Q-TOF mass specs and the Trizaic UPLC. Meanwhile, customer interest remains strong for the Acquity UPLC, Berthiaume said. And earlier this month, the company announced a collaboration with the University of Warwick to develop new applications for its Synapt HDMS system [see PM 04/23/09].

For full-year 2009, the company is forecasting revenue decline of between 3 percent and 8 percent, translating to between $1.53 billion and $1.45 billion, compared to full-year 2008 revenues of $1.58 billion, Waters Chief Financial Officer John Ornell said. Consumables and services are expected to grow in the mid-single digits during the year, while instruments are projected to shrink mid-single to low-double digits.

NIH, Rx, and Prior-year Comparisons

Coming off last week's pessimistic earnings call from Thermo Fisher Scientific, during which CEO Marijn Dekkers called the economy "difficult at best and we don't see many signs of improvement for the rest of the year," some analysts questioned Waters' more positive outlook for the remainder of 2009 [see PM 04/23/09].

Berthiaume pointed to several developments that may fluff up the revenue stream going forward, including the effect of economic stimulus packages from the US, China, and other countries.

Already, he said, Waters has seen "significant pickup" activity in price quotes associated with the American Recovery and Reinvestment Act, with most of the interest in the firm's high-end mass spectrometers and the Acquity platform. The company "hasn't banked a lot of stimulus money into our outlook … [but] I think the stimulus spending will provide some hedge factor at what we're looking at," he said, adding that the "great preponderance" of inquiries is coming from National Institutes of Health-supported laboratories, medical centers, and government laboratories.

At the upcoming annual conference of the American Society for Mass Spectrometry next month, the company will make "significant new product introductions that we feel will help attract additional stimulus spending in our direction," Berthiaume added.

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Ornell said that for Waters at least, Washington's stimulus funding will benefit its life-science business as the quote activity is "heavily weighted" toward life sciences rather than industrial applications.

Additionally, in the firm's instruments business, Berthiaume said that customers are extending their instrument replacement cycles for QA/QC work, but the company is seeing no similar delays in instrument replacements for "strategic R&D programs where they're looking to significantly increase or change their processes [and] improve their productivity."

Drug maker AstraZeneca has standardized on the Acquity, and while no other large customer has taken the same step, he said that Waters has seen "a high level of interest in almost all of big pharma. … I think we're going to be in position to announce" deals similar to the one with AstraZeneca. While cuts in instrument prices have been the talk of the industry, he added that Waters has maintained its prices.

Much of Waters' fortunes have risen and fallen on the back of pharma, and this week one analyst questioned the company's optimism for the second half of the year given the instability within that industry. Along with mergers — such as the pending Pfizer/Wyeth union and the anticipated Merck/Schering-Plough combination — drug manufacturers are re-evaluating their portfolios, reducing R&D spending, and laying off workers by the tens of thousands.

Berthiaume said, however, that during the past two quarters, the company's big pharma accounts have grown, though he did not provide figures.

Within its top-20 pharma accounts, there are signs that customers are done with the bulk of their cuts to discretionary spending and "those accounts have been really focusing on productivity and how to really drive their important processes faster," he said, "and we've actually seen a lot of success in our new capabilities in all facets — Acquity, mass spectrometry, and data" processing.

Another part of the pharma equation, contract research organizations, are under pressure, he acknowledged, but said he believes that those customers will continue to spend on instruments that improve productivity and throughput "where we think we have very competitive systems."

"All in [all], the question of whether the combination of CROs and pharmaceutical is going to go dramatically down from where they are now, I think if we're not at the bottom, we don't think there's a whole lot of room to drive that capital spend down much further," he said.

A final reason for a more hopeful second half to the year, Berthiaume said, is that the company will have less difficult prior-year comparisons: it was in the last half of 2008 that the economy cratered.

Worldwide Slump

For the quarter, Waters reported revenues were down across all geographies. Excluding the effects of currency, sales were down 6 percent in the US; 3 percent in Europe; and 7 percent in Japan. Even in Asia outside of Japan, where growth had been cruising at a double-digit clip for Waters and its competitors for several years, sales were down 6 percent, Ornell said.

R&D spending shrunk by 7 percent to $18.3 million from $19.8 million in Q1 2008, while total SG&A spending contracted to $99.2 million, down 6 percent from $105.8 million a year ago.

The company reported $431.3 million in cash, cash equivalents, and short-term investments as of April 4.

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