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Waters’ Q2 Revenue Drops 9 Percent Atop Smaller Decline in Instrument Sales

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This story originally ran on July 28.

By Tony Fong

Waters' instruments sales were down 8 percent, but its Acquity UPLC system continued to gain traction in the market, and its recently launched Synapt G2 is receiving as strong a reception as any instrument launched by the company in recent years, it said Tuesday as it released its second quarter earnings results.

For the three months ended July 4, the firm said total receipts slipped 9 percent to $363 million from $399 million. Currency exchange contributed 5 percentage points to the drop, Waters said.

For the period, profits contracted 16 percent to $70 million from $83 million a year ago.

While the demand for instruments receded year over year, the decline was more moderate than in the first quarter, which marked a 16 percent drop. The decline in the second quarter prompted company officials to say guardedly that the instrument business may be on the rebound.

In the conference call accompanying the earnings release, Douglas Berthiaume, chairman and CEO of Waters, attributed the decline in instrument sales to "weak demand" from its industrial chemical accounts, which the firm believes is related to the global recession. Also blamed was shrinking demand in certain geographies, most notably India and Latin America, due to economic factors and the effects of local currencies.

But within the instruments business, there was some good news, particularly among its high-end instruments, which Berthiaume said experienced stronger demand than "routine analysis instruments," which are often purchased to replace older systems.

"Customer interest was strongest for research mass spectrometry and Acquity UPLC instruments," he said.

During the second quarter, Waters introduced the second generation of its flagship Synapt HDMS system, the Synapt GS, at the American Society for Mass Spectrometry conference in June [see PM 06/04/09] and has since received "several" orders for the instrument, with orders in the current quarter "accelerating," Berthiaume said.

"I'd say the customer response has been as strong as any instrument we've introduced in the last five years,” Berthiaume said.

The system won't be shipping until the fourth quarter. That will result in lower sales for high-end mass specs in the third quarter, he said, but Waters’ outlook for that business for the entire second half of 2009 is more optimistic than prior to the launch of the Synapt G2.

And depending on the firm's ability to manufacture and ship the platform, the instrument could be "a defining factor" if fourth-quarter financial results exceed the company's current internal forecast, he added.

Additionally, officials said sales of the Xevo TQ tandem quadrupole, introduced at last year's ASMS, and the Xevo Q-TOF, launched in January, were "strong" in the quarter, though the company did not provide figures.

On the Synapt, the company said that it was continuing to make headway into the liquid chromatography space, especially among its largest pharma clients. Last year, the firm said a large unnamed European pharma had replaced its old LC instruments with the Synapt. This week, Berthiaume said an unnamed "very large" US drug firm had similarly switched to the Synapt.

"So even in a time of tough instrument placements, we're seeing Acquity continue to grow year over year, and that's largely a pharma dynamic," Berthiaume said, adding that in addition to R&D applications, the platform is now being adopted for QC work.

Shipments of the instrument grew in the second quarter and "were positively impacted by broader adoption of the technology by large drug companies, a trend that we believe will continue throughout the second half of this year," he said.

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In addition, sales of Acquity columns, which are specifically designed for that instrument, "suggest a continued near-complete column utilization rate to the installed based of Acquity systems," and rose double-digits in the quarter.

In a recent report, Isaac Ro of Leerink Swann noted Acquity's dominance of the UHPLC market saying it has a "considerable leadership position, a large installed base, and a wide menu of proprietary columns."

According to Ro, the Acquity business, both instruments and consumables, drives about 40 percent of Waters' total business [See PM 06/25/09].

For full-year 2009, Waters instrument sales are still anticipated to soften compared to a year ago, with sales projected to be down mid- to high-single digits, Waters CFO John Ornell said during the conference call.

Meanwhile, recurring revenues, which comprises Waters' consumables and services businesses, grew 2 percent year over year during the quarter, and for full-2009 that business is anticipated to grow in the mid-single digits.

The company also expressed relative optimism over its pharma business. The overall sector was down "slightly" in the quarter and business with contract research organizations, and generic drug firms remained soft. Sales to the top-15 pharma customers, though, were up in the second quarter "and showed some acceleration from the growth we witnessed in the first quarter," Berthiaume said.

Ornell added that Waters' top 15 pharma accounts had stabilized and their interest in the Acquity and the new mass specs "will allow us to see growth in that segment of our business."

For full-year 2009, its pharma business is expected to contract low-single digits, he added, while total sales are projected to decline between 5 to 7 percent with foreign currency contributing 3 percentage points to the decline.

Projecting ahead, Berthiaume said that he believes the brunt of the economic slowdown — and in particular, its impact on Waters' instrument sales — has passed. The past three quarters has seen "fairly stable" spending from pharma, and in 2010, the full effect of research dollars from the economic stimulus bill should hit.

"Despite current challenges, I feel we're close to seeing an improvement in our business," he said. "In the second half of this year, the combination of our new mass-spec platform, continued penetration of the LC market with Acquity UPLC, and reaching the anniversary of last year's economic slowdown give me confidence in a stronger finish to 2009."

Sliding in the US

During the quarter, the biggest drop-off year over year was in the US where revenues slowed 6 percent before the effects of foreign exchange, while sales in Europe were 4 percent lower, Ornell said.

Japan was up 5 percent while Asia outside of Japan was up 1 percent.

R&D spending decreased by 11 percent year over year as a result of currency effects, but Berthiaume said that the pipeline remains active. "We plan significant new product launches in the coming quarters," he said.

SG&A spending also shrunk, by 8 percent compared to a year ago, due to currency effects and cost-cutting measures taken by the firm.

Waters said it had nearly $506 million in cash and cash equivalents as of July 4.

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