Coming off a challenging first quarter in its pharmaceutical business, Waters officials cast a skeptical eye at that business for the foreseeable future as it released its second-quarter earnings this week.
As normally the first of the large proteomics tool manufacturers to report its quarterly financial results, Waters has often provided a preview of the influences at play in the field and what to possibly expect from its competitors. As such, upcoming rival reports on pharma spending may remain gloomy.
Three months ago, Waters reported a soft pharma market, which tamped down results for its first quarter [See PM 04/24/08], a trend that other proteomics tools makers also acknowledged. This week, in the midst of reporting a 13.1-percent climb in second-quarter revenues, company officials predicted looser pharma spending for the rest of the year but checked any optimism with a guarded outlook.
“Demand from our pharmaceutical customers, which is a market segment that’s been under pressure, was in line with our expectations and was just about flat with the prior year’s results,” during which the company posted particularly strong pharma sales, Douglas Berthiaume, chairman, president and CEO of Waters, said during a conference call accompanying the earnings release.
For the second half of 2008, the company is forecasting pharma sales to fall in line with what it saw in the second quarter. “We’re not expecting a robust improvement in the pharmaceutical world,” he said. “I would tell you that some of the pharmaceutical accounts are talking about a better second half, that they have delayed investments, and that they think they’ll be investing in the second half.
“I can also tell you we’re not taking a significant amount of that to the bank in our forecast,” Berthiaume said. “It’s still a tough environment for those larger pharmaceutical accounts.”
A year ago, after a prolonged period of penny pinching, the pharma slowdown looked to be on the verge of doing a U-turn, and toolmakers such as Waters were whispering that the years-long spending freeze might begin to thaw [See PM 08/09/07]. But instead, drug makers now are facing renewed financial chaos fueled by declining sales and share prices. Indeed, some of the largest players in the space, including Pfizer, AstraZeneca, Merck, and Wyeth, have each announced large-scale layoffs during the past year.
Facing such challenges, these and other drug makers have held off investing in capital equipment. For a tool shop such as Waters, which is especially sensitive to pharma sales, the effect on its bottom line can be dramatic. According to Berthiaume, 60 percent of Waters’ total revenues are leveraged in pharma business.
“Some of the pharmaceutical accounts are talking about a better second half … and that they think they’ll be investing in the second half … [but] we’re not taking a significant amount of that to the bank in our forecast.”
Last quarter, the company said a major pharma client in Europe delayed spending, and in the process significantly impacted Waters’ overall pharma business. This week, Waters said sales in Europe were showing early signs of rejuvenation, but Berthiaume still said the company’s pharma business in Western Europe during the quarter was “weak.”
“We saw some specific orders that we thought were delayed in the first quarter [and] we did pick those up in the second quarter … but overall, I’d say the Euro pharma market is pretty consistent with the US pharma market — and that’s very cautious.”
Offsetting some of the softness in its large pharma accounts has been growth in Waters’ other pharma business, including contract research organizations and generic drug manufacturers. In Asia excluding Japan, CROs and generic drug makers have been growth markets for Waters, said Berthiaume, adding that closer to home in the Western world, Waters’ CRO clients remain largely the same as those from five years ago. The change is that they are now buying more instruments, and overall, CRO business has been consistently growing in the double digits, he said.
The company does not break out sales figures for its pharmaceutical segments.
Then there is the ongoing question of market consolidation. Roche, which owns 56 percent of Genentech, this week made a $43.7 billion bid to become the biotech firm’s sole owner. And Teva Pharmaceuticals is acquiring Barr Pharmaceuticals for $9 billion.
Berthiaume, however, suggested that those deals are comparatively small and, if transferred to Waters’ books, their impact would be minimal.
“We see real opportunity for good, solid growth for the pharmaceutical markets — maybe not from the traditional, largest pharmas, but [in] CROs — including the developing markets of Eastern Europe and Asia, and in generic drug manufacturers,” Berthiaume said. Eventually, large pharmas will have to open their checkbooks to replace old instruments, he added.
“So we think there will be pent-up replacement demand even in some of the accounts that are pretty weak right now,” he said.
Rising Revs Lift Profits
Overall, Waters posted receipts of $398.8 million for the quarter ended June 28 compared to $352.6 million during the same quarter in 2007. Foreign currency contributed 6 percent to the growth, the company said. The rise in revenues fueled a 38.8-percent jump in profits, which swelled to $83.1 million from $59.9 million a year ago.
The growth in instrument sales was “pretty evenly balanced” between chromatography and mass spectrometry, Waters officials said during the call. The company stopped reporting individual sales figures for its liquid chromatography and mass spec instruments a year ago, but according to Waters CFO John Ornell, instrument system sales rose 3 percent “against a very strong base of comparison” from a year ago.
Without providing specific figures, Berthiaume said the Acquity UPLC and tandem quadrupole MS systems were “faster growers,” especially outside the classic pharma applications, while interest in the Synapt mass-spec system continued to be strong, primarily for proteomics and metabolomics applications. He added that the company anticipates strong sales during the second half of the year for the systems.
Consumable sales also rebounded during the quarter as sales of its chromatography columns and sample prep devices grew at low double-digit rates, company officials said.
Among its other offerings, services and its chemistry business each rose 11 percent.
Geographically, Asia, excluding Japan, again set the pace for sales growth. Receipts in the region spiked 22 percent year-over year while US sales rose 6 percent and European sales inched up 3 percent.
Compared to the first quarter, when sales declined 9 percent year-over-year, the company’s Japanese market saw sales in the second quarter dipped 6 percent.
Selling and administrative expenses rose 9.5 percent to $111.9 million and were “heavily influenced” by currency translation, Ornell said. Research and development expenses rose 16.3 percent to $22.2 million on new product introductions, including the Xevo TQ tandem quadrupole mass spec launched at the annual American Society for Mass Spectrometry conference in June. The instrument is primarily for food-safety, environmental, chemical, and pharmaceutical applications.
At ASMS Waters also previewed the Trizaic UPLC combining new NanoTile technology with its nanoAcquity UPLC system [See PM 06/05/08]. The platform will begin shipping next year.
The company said it had $830.7 million in cash, cash equivalents, and short-term investments as of June 28.
For the second half of 2008, the company is projecting sales to grow between 6 and 8 percent before currency effects. Adding in those effects, growth is expected to be between 11 and 13 percent. In the third quarter, sales are projected to grow 11 to 12 percent.