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Waters’ Instruments Sales Slide 5 Percent in Q4 as Sales Slip 4 Percent

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Waters this week reported a 5 percent decline in instrument sales in the final quarter of 2008 and forecast a deeper slide in that part of its business for the new year.

In particular, Waters officials this week said that its high-end mass specs, including the Synapt felt the sting of the tougher spending environment, though market adoption of the Acquity UPLC continued.

For the three months ended Dec. 31, 2008, the company reported revenue declined 4 percent to of $418.3 million from $437 million during the fourth quarter of 2007. Receipts also fell 8 percent from an earlier forecast of $454 million the company made last fall before the full extent of the worldwide financial downturn had been realized.

Figures for the quarter include a $6.5 million provision for ongoing patent litigation with Agilent Technologies.

The news was did not surprise Wall Street as the company had revised its forecast in the weeks leading up this week’s earnings release. At the same time, analyst firm Leerink Swann recently reported the spending environment was and would continue to be particularly rough for instrument manufacturers, and companies largely built on its instrument sales, such as Waters, would suffer the most in 2009. [See PM 01/08/09].

That outlook was borne out this week as Waters reported a slowdown in sales growth for its high-resolution mass spectrometers, including its Synapt, which was “impacted by a tougher spending environment for large-ticket instruments,” Waters CEO Douglas Berthiaume said during a conference call accompanying the earnings release without elaborating on specific figures.

Looking ahead to full-year 2009, total instrument sales is expected to shrink in the mid- to high-single digits, though CFO John Ornell said that the company expects the life science sector to show greater resiliency throughout the year than the industrial chemical side of the business.

Likewise for the remainder of the year, the company forecast that sales in 2009 would decline between 3 percent and 8 percent to between $1.53 billion and $1.45 billion.

To deal with the decline, Waters has taken cost-control steps including limiting discretionary travel and freezing hiring and salaries, Berthiaume said.

”We think right now, we’re on the prudent side of the spending,” Berthiaume said.

Tip of the Iceberg

As the first of the large vendors with a significant stake in tools and instruments directed at proteomics to release its fourth-quarter earnings, Waters’ results could provide a preview of themes and trends that may play out during the coming weeks as more companies report their finances for the last three months of 2008, which coincided with a major nosedive by the broader US and European capital markets.

Knowing their company is not immune from that turmoil, Waters officials repeated during their conference call that they expect 2009 to present a myriad of challenges as the timing of any economic turnaround remains unclear.

Past economic downturns have been marked by recovery periods that suggested “an underlying fairly continuous demand for the instrument systems technologies that we offer,” Berthiaume said. However, he added that comparisons to the current environment may not be possible.

“We think that the fourth-quarter dynamics pretty much show what you’re going to see [this coming] year,” he said.

While the company was short on details about sales of its mass-spec business during the fourth quarter, an analyst note from Leerink Swann this week said that Waters’ mass specs could be in for a particular hit during the coming year with a projected 8 percent drop in organic sales. Meanwhile, Isaac Ro, the author of the Leerink Swann note, estimated that the liquid-chromatography business will shrink by 2 percent in 2009.

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For their part, Waters officials last week called the Acquity UPLC one of the bright spots during the fourth quarter as orders and shipments of the Acquity UPLC rose. Company officials declined to provide sales figures for the instrument, which debuted in the summer of 2004 but said that the instrument continues to elbow its way into the LC space as companies are delaying replacing their legacy HPLC systems and at least considering doing so with a UPLC platform.

Berthiaume acknowledged it will still be some time before UPLCs completely usurp HPLCs in the market — he characterized that process to be in the second inning — but offered as an example of what is happening more frequently, one unnamed “major” pharma that told Waters it will be standardizing on the Acquity platform and phasing out the HPLC instruments in the coming years.

“We see very good underlying evidence of the market swinging to the Acquity,” he said. “In some people’s views, HPLC is becoming an obsolete technology.”

Sales of Acquity columns also helped another bright spot for the company during the quarter, driving recurring revenues up 7 percent. The “very strong” sales of the columns, Berthiaume said, suggest “nearly total capture of the column business for Acquity UPLC instruments,” and the growth in recurring revenues “largely offset the declines we saw for instrumentation.”

Despite the weak outlook for its instruments business, company officials said Waters will continue to develop new technologies “in order to ensure that we will be well-positioned to enjoy the rewards of stronger end-markets when they materialize.” However, research and development spending during the fourth quarter shrunk 6 percent to $19.6 million while full-year 2008 R&D spending increased 1 percent to $81.6.

Two weeks ago, Waters re-upped the ante in the quadrupole time-of-flight mass spec space with the launch of the Xevo QTof mass spectrometer [See PM 01/15/09].

Down in the US

For the quarter, Waters reported a profit of $99.3 million, almost flat compared to a profit of $98.9 million a year ago. Sales and administrative expenses declined less than 1 percent to $101.5 million. The company said it had $428.5 million in cash, cash equivalents and short-term investments as of Dec. 31.

In addition to the weaker instrument sales, a drop-off in Waters’ industrial chemical business and adverse currency exchange effects weighed down overall revenue results. The decrease in industrial chemical sales was seen especially in its TA Instruments division. Meanwhile, the strengthening US dollar tamped sales figures from both Europe, where the value of the Euro shrunk, and in developing nations where business is done in US dollars.

“In these markets, including India, Korea, and some smaller Latin American and Asian countries, budgets that were improved in local currencies became insufficient to purchase capital goods, and consequently we saw lower demand for our products,” Berthiaume said.

Geographically, Waters’ US business fell 10 percent compared to a year ago, while European business rose 5 percent. Revenue from Asian businesses, excluding Japan, climbed 17 percent with “strong performance” in China fueling the growth. Sales in Japan expanded 2 percent.

Pharmaceutical sales, which make up more than half of Waters’ total sales, were down “slightly” in the fourth quarter compared to year-ago figures, Berthiaume said, as softness in India and the US suppressed growth. Large pharma was flat while demand from contract research organizations, smaller biotechs, and generic pharma was weaker than “in earlier quarters,” he said.

He also said that the planned $64 billion merger of Pfizer and Wyeth, announced this week, would only marginally affect Waters’ top line. Combined, the two drugmakers represent about 2 percent of the firms’ total global sales, Berthiaume said.

For full-year 2008, the firm said receipts inched up 7 percent year-over-year to $1.58 billion from $1.47 billion. This helped profits during the year swell 20.3 percent to $322.5 million. Meantime, SG&A expenses rose about 6 percent to $426.7 million.

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