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Strong Pharma Appetite for Proteomic Instruments Helped Waters Post 10-Percent Rise in Q3 Revenue

Waters this week said that sales of instruments with proteomic applications to drug makers was a major contributor to a 10-percent increase in third-quarter sales, and company officials said they expect strong demand to continue through the remainder of 2006 and into 2007.
Total sales for the three months ended Oct. 1 increased to $301 million from $273 million a year ago. Net income jumped 96 percent to $50.4 million from $25.7 million year over year.
Speaking during a conference call accompanying the release of the company’s results, Douglas Berthiaume, chairman, president and CEO, said that while freer spending by drug makers was the prime driver for the company’s strong financial performance, growth in its proteomic-related business also boosted overall sales.
In particular, company officials continued to highlight the Acquity Ultra Performance Liquid Chromatography system. John Ornell, Water’s CFO, said that sales of the system grew 13 percent during the quarter compared to a year ago.
According to Berthiaume, the Acquity system “has been especially valuable to researchers, and Acquity-based systems continue to drive our overall LC and LC/MS systems growth.” These statements echoed earlier remarks that he expects Thermo’s UPLC system revenue to double this year over 2005 [See PM 07/27/06].
Since Waters launched the Acquity product in 2004, competitors such as Agilent and Thermo Electron have introduced rival high-throughput liquid chromatography systems. But responding to an analyst’s question during the conference call, Berthiaume brushed off any suggestion that the competition was pressing down on Waters.
“I don’t think that competitive introductions have had a material impact on the sales performance of our UPLC,” he said. “We’ve had hundreds of customers come through here, just in the last month-and-a-half, two months, and unsolicited, we continue to get from those customers that nothing touches the UPLC performance.”
During the year, in a series of maneuvers to capture market share, Waters crafted collaborations with Thermo, Bruker, and most recently Applied Biosystems to integrate those firms’ mass specs with the Acquity system [See PM 09/07/2006]. It is still too early to tell the effect of that strategy.

Berthiaume also said that sales of its Alliance high performance liquid chromatography systems were strong, though company officials did not cite any specific figures. Last month at an analyst conference, Ornell said Waters has about 20 percent of the liquid chromatography market [See PM 09/28/06].
In its mass spec business, Ornell said shipments during the quarter rose 3 percent year-over-year but did not disclose any sales figures. At last month’s conference, Ornell said that after several years of lying low, Waters is once again reasserting its presence in the space. With several new instruments introduced this year, the company expects to see double-digit growth in mass specs for full-year 2006. 
In the third quarter, the only new mass spec to be shipped was its single-quadrupole instrument. During the fourth quarter, two additional new instruments, the tandem quadrupole and Synapt high definition mass spectrometry system, will begin shipping. As a result, company officials said they expect its mass spec business to accelerate in the fourth quarter and into 2007.
“We’re still being a little bit cautious as we look at the fourth quarter in terms of how much we take to the bank, but it’s fair to say we clearly expect our mass spec business to perform better in the fourth quarter,” Berthiaume said.  
Looking further ahead, he said that he expects both the liquid chromatography and mass spec businesses “to be significantly stronger on average in ‘07 than they have been in ’06,” with the liquid chromatography business posting higher revenue figures, but the mass spec business having a higher growth rate.

“We’re still being a little bit cautious as we look at the fourth quarter in terms of how much we take to the bank, but it’s fair to say we clearly expect our mass spec business to perform better in the fourth quarter.”

Overall, Berthiaume said, Waters’ third-quarter results were boosted by higher pharmaceutical spending. For several quarters, drug companies have cut back their budgets contributing to flat sales at Waters even as other sectors ramped up their spending.
“But that changed in the third quarter as we saw the improvement we had hoped for but [were] somewhat hesitant to forecast,” Berthiaume said. “Our larger pharmaceutical accounts began to release capital budgets and started to buy instrumentation at a faster pace in the United States,” including more liquid chromatography and mass spec systems, he added.
The result was 9-percent growth in US sales, which company officials said was essential to Waters’ overall third-quarter performance. Meanwhile, sales in Asia rose 16 percent spurred by continued robust business in India and China. Sales grew 8 percent in Europe with the emergence of Eastern Europe as a growth market, Ornell said.
Waters spent $17 million on R&D, down 2 percent from the year-ago period and down from the first half of 2006 “as the significant costs of introducing multiple mass spec instruments were largely behind us,” said Ornell.
The company had $512 million in cash and cash equivalents as of Sept. 30.

For the remainder of 2006, the company forecast sales to grow 8 percent. For full-year 2006, the overall business is also expected to grow 8 percent, Ornell said.

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