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Pharmas Delay Spending, but Waters Says Interest Still Strong for Flagship Tools

Despite a delay in pharmaceutical spending and other “challenging economic conditions,” Waters this week said that researchers continue to express strong interest in the company’s Acquity UPLC and Synapt High Definition mass spectrometer.
Company officials made those remarks as Waters released its first-quarter earnings, which showed that revenues rose 12 percent to $371.1 million from $330.8 million a year ago, and profits surged 22 percent to $68.5 million from $56 million last year.
During the three months ended March 29, sales of its instrument systems, which include liquid chromatographers and mass specs, grew 5 percent. Waters did not disclose dollar amounts.
CEO Douglas Berthiaume said that it was “another good Acquity quarter,” without elaborating. And while sales of Waters’ mass specs dragged, he said he expects to see a rebound in the second quarter that will continue throughout the year.
In past quarters, company officials had aggressively played up the Acquity and Synapt platforms. This week their comments were more muted as a sluggish first-quarter pharmaceutical market tamped down overall results, leading to a mixed picture for its proteomics tools business.
Of the Acquity system, Berthiaume said demand for the instrument remained strong, though he and company CFO John Ornell said that the product mix in the LC market played out differently during the quarter than had been expected due to greater demand for the company’s Alliance HPLC, particularly among pharmaceutical clients in Asia.
In the fourth quarter of 2007, the company reported a 20 percent jump in Acquity sales, but this week, during a conference call accompanying its earnings release, Berthiaume said that the shift toward the Alliance instrument seen during the first quarter should not be interpreted that the Alliance is cannibalizing Acquity sales.
“I don’t really think they’re linked,” he said, referring to the “shift” in product uptake. He added that any slowdown in Acquity sales was a consequence of weaker pharma spending during the quarter, which wasn’t as acute during the fourth quarter of 2007.
“We haven’t seen any reduced interest in Acquity” in the first quarter, Berthiaume said. “At the same time, a lot of our stronghold areas with Alliance, with the QC area in Asia in particular, have held up very well. So you see kind of a natural effect of that in the first quarter that I don’t think is something that you will see necessarily in the second, third, and fourth quarters.”
He added that he remains confident that pharma would use the Acquity for QA/QC operations.

“We’re not seeing any competitive thrust particularly against things like Acquity, particularly in things like the high-end research-grade mass spectrometers.”

On the mass-spec side of Waters’ business, the high-end market was weaker than the company had anticipated, stemming from the soft pharma environment. But Berthiaume stressed that “none of what we saw in the first quarter was a result of any substantial losses that we saw in those accounts.”
“I’d say overwhelmingly it’s delays versus lost business,” he added. “We’re not seeing any competitive thrust particularly against things like Acquity, particularly in things like the high-end, research-grade mass spectrometers.”
Responding to an analyst’s question, Berthiaume said Waters’ triple-quadrupole business did “pretty good” in a space that he called “probably the most competitive area in the mass spec world.” He did not elaborate.
The recently launched Synapt MS, upgradeable to HDMS mode and aimed at researchers who aren’t yet ready to buy the Synapt HDMS, was also drawing good response from the research community, he said, also without elaborating.
“I’d say we feel pretty good about our array of weapons as we move through 2008,” Berthiaume said.
Soft Pharma
Traditionally the first of the proteomics tools vendors to report its earnings each quarter, Waters has served as a touchstone for potential trends in the market. During this week’s conference call, analyst interest hovered around the pharma market.
While acknowledging softness there, Berthiaume sought to reassure Wall Street that Waters had already begun seeing a gradual turnaround in pharma spending, and cautiously predicted that the budget freeze will continue to thaw throughout the year.
Each year, many of Waters’ largest pharma accounts are taking longer to loosen their purse strings, and this year was no different, he said. Pharma spending in North America was flat, while in Europe sales fell short of expectations, especially for high-end research instruments.
In spite of that, Waters’ overall pharma business grew during the quarter thanks to growth in Asia, particularly in India and China, which grew at a double-digit clip. Outside of its top-15 pharma accounts, its business with generic drug manufacturers, contract research organizations, and biotechnology firms also grew during the first quarter, company officials said.  
By comparison, Waters saw sales slide 9 percent year-over year in Japan due to soft market conditions and a difficult base-quarter comparison.
“Though we expect economic conditions in Japan to remain at best uncertain, more favorable quarterly comparisons as we move through 2008 will help us offset market weakness,” Berthiaume said.
Outside of Japan, sales in Asia rose 27 percent compared to a year ago, Ornell said. In the US sales rose 9 percent, while European sales slipped 2 percent before currency effects.
Projecting its pharma business ahead, “if you look at early indicators, and then you look at some subsequent events as to [how] we started off the second quarter, I think on balance it’s a net positive,” Berthiaume said. “There continues to be high quote activity and there continues to be some late-blossoming real business out of those accounts. I’d say that throughout the first quarter, while the actual order rate was lower than what we had budgeted, the response from most of those accounts was still pretty optimistic.”
While attendance at seminars don’t necessarily translate to sales — and “we’re reading the same things that you are, about a number of [drug manufacturers] facing difficult times” — the need to keep the new-drug pipeline going should continue fueling the demand for new instruments, Berthiaume said.
“They’ve got to continue to focus on development programs,” he said.
Other financials for the first quarter include a 5.7-percent rise in R&D spending, which grew to $19.8 million.
Waters reported $758.5 million in cash, cash equivalents, and short-term investments as of March 29.
The company forecast 11 to 13 percent sales growth for the second quarter, year over year. Based on $353 million in revenues Waters reported during the second quarter of 2007, that would project to between $392 million and $399 million for the second quarter of 2008.

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