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As Pharma Releases Grip on Purse Strings, Waters LC-MS System Sales Rise 18 Percent

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A rebound in spending by large pharmaceutical accounts combined with ongoing demand for instruments helped Waters this week post a 17-percent increase in second-quarter sales.
 
Overall revenue for the three months ended June 30 rose to $353 million from $302 million year over year, aided by an 18-percent jump in sales of instruments with proteomic uses. Profits rose to $59.9 million, up 25 percent from $47.8 million a year ago.
 
In a conference call accompanying the release of its financial results, Waters officials attributed a turnaround in pharmaceutical spending to the sales uptick. Last quarter, the company reported that after several years of a tight-fisted hold on their purse strings, pharmaceutical clients had begun loosening their grips [See PM 04/26/07].
 
This week, company officials said the freeze on pharma spending was continuing to thaw. In particular, its largest pharma clients were opening up their budgets, even though spending has not yet bounced back to the levels of three years ago.
 
Sales to large pharma grew at a double-digit pace year over year, said Waters CFO John Ornell, while sales to smaller pharma and industrial customers remained “robust.” That prompted CEO Douglas Berthiaume to say that “the current spending pattern suggests that 2007 may well mark a turning point for this segment of our business.”
 
Pharma’s warmer outlook has translated into improved sales of Waters’ instruments business. During the second quarter, instrument system sales — which include liquid chromatographers, mass spectrometers, and software — grew by 18 percent year over year. For full-year 2007, Waters is projecting 12-percent growth in sales of instrument systems.
 
The company no longer breaks down sales by instrument categories because it is migrating to a sales strategy that is based on whole instrument systems, Ornell said. As such the growth in instrument system sales “is supported by the pick-up from pharmaceutical spending and indicates renewed interest in acquiring advanced technology for drug discovery and development activities,” Berthiaume said in the conference call.
 
“We’re seeing [the growth in pharma spending] most significantly in our instrument systems as opposed to the consumables and the service piece, so it does show a kind of a more aggressive investment dynamic on the part of those accounts,” he said.
 
Demand was high for all instruments, he said, adding that in the US, sales of its newest mass spectrometers to pharma, as well as universities, was a significant growth driver, he said.
 
During the second quarter, Waters introduced two new mass-spectrometry based systems with proteomic applications, the IdentityE high-definition proteomics system for protein identification, and the MALDI Synapt HDMS system [See PM 06/07/07].
 
Commenting on the latter, Berthiaume said that in the long term, demand for the MALDI Synapt will be slightly lower than for the traditional Synapt system, which utilizes atmospheric pressure ionization capability.
 
But “in proteomic applications, I think the MALDI will be successful,” he said, adding that the number of orders the company has taken for the instrument has been “very encouraging.”
 
He attributed that to high demand for the Synapt platform in general from the proteomics and metabolomics research market. While declining to provide sales figures for the system, Berthiaume characterized the ramp in orders as “very steep,” a trend that the company expects to continue through the remainder of the year.
 
The Acquity UPLC and UPLC-MS instruments also performed strongly, company officials said. The Acquity system had “a very strong quarter with sales increasingly significantly over last year’s results,” Berthiaume said, though he did not break out sales numbers.
 
“We feel that Acquity UPLC now dominates the top-performance segment of the liquid chromatography market,” he said.
 

“We’re seeing [the growth in pharma spending] most significantly in our instrument systems as opposed to the consumables and the service piece, so it does show a kind of a more aggressive investment dynamic on the part of those accounts.”

Introduced in 2004, the Acquity system has been hawked by Waters as leading edge technology. In February, Waters said that the number of installed Acquity systems is only about 1 percent of the number of installed HPLC systems. Berthiaume said this week, however, that the company expects the demand for Acquity to approach that of HPLC systems “in the near future.”
 
As that happens, he said, all UPLC-related business, including consumables, software, and instrument service will be significantly affected. Currently, Acquity consumables are growing at a double-digit clip annually, but still represent less than 10 percent of Waters’ total consumables volume.
 
With competition in both the liquid chromatography and mass-spec space growing increasingly fierce, one analyst questioned how Waters will compete with other firms that have been more aggressive in marketing their tools based on price. Berthiaume responded that the company’s average end-market prices had not declined during the past year.
 
“That’s true for the lower end single-quadrupole technology as well as the higher end high-resolution mass spectrometer,” he said. “There’s no question that we’ll probably see a few more competitors with a few more products, and some of them have a tradition of using price more as a competitive weapon, but we continue to believe that these customers are driven by factors other than price primarily.”
 
Among its divisions other than instrument systems, services sales rose 8 percent during the second quarter, while chemistry sales spiked 21 percent, aided in large part by acquisitions made during the past year. Factoring out the effect of the acquisitions, sales in the division rose 10 percent.
 
Sales in Waters’ TA instruments unit grew 13 percent year-over-year.
 
By region, US sales grew 18 percent, while sales in Asia and Europe rose 14 percent.
 
R&D spending for the quarter slid to $19.1 million from $19.7 million, due to “large project spending on prototype materials incurred last year for new product development,” Ornell said.
 
As of June 30, Waters had $544.3 million in cash and cash equivalents.
 
The company is projecting sales growth of 14 percent for the third quarter, with 10 percent of that organic. Waters is projecting 14 percent sales growth for full-year 2007, 10 percent of that organic.

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