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Waters’ Q3 Revenues Up 9.5 Percent in Q3 Despite Flat Rx Sales; MS Does ‘Very Well’

Pharmaceutical sales continued to be a “mixed bag,” Waters’ chief executive said this week as the company reported a 9.5-percent uptick in sales for the third quarter, which swelled to $386.3 million from $352.6 million during the year-ago period.
During the three months ended Sept. 27, Waters also saw its profits increase 34.2 percent to $71.5 million.
A quarter ago, the company projected flat pharma business through the balance of 2008, and during the third quarter, sales in that segment played out as predicted, CEO Douglas Berthiaume said during a conference call accompanying the company’s earnings.
“As we witnessed throughout the first half of 2008, flat sales to pharmaceutical customers were again a drag on the company’s overall top-line performance in this quarter,” he said. While most of the company’s larger pharma accounts grew year over year — “some growing quite impressively,” Berthiaume said — “this growth was more than offset by a minority of these large accounts that delivered significantly weaker results.
“In all, pharmaceutical spending is at best a mixed bag, and we see no reason that the situation will materially change from where it is in the short term,” he added.
Waters in recent years has had to navigate a tough pharma market, which contributes about 60 percent to its total sales revenue. Since the start of the decade, spending from this segment has been receding, bottoming out around the first half of 2005.
A year ago, there were signs that the industry was beginning to loosen its grips on its purse strings [See PM 08/09/07], but that changed quickly, and 2008 has turned out to be another challenging year for vendors like Waters.
“We’ve been dealing with their struggles there for a long time and we’ll continue to,” Berthiaume said. “We see that in our run-rate and we’re not really seeing their plans or our approach there to be much different from what it’s been for a while now.”
In the US, in particular, pharma spending has been erratic, he said. “It’s really not a homogenous story in large pharma in the United States. We have half of those accounts on track, investing in major new products, going very well,” Berthiaume said. “Another half of those customers come right up to the edge of saying they’re going to expand some projects, expand some opportunities, and then tend to back off.”
In contrast, pharma sales in Europe maintained a recovery that Waters first noticed in the second quarter. Similarly, worldwide CRO business continues to be “robust” in Q3, Berthiaume said. 
Some of the questions coming from Wall Street analysts during the conference call dealt with the current credit- and equity-market turmoil. Like executives from other life science companies, Waters executives reiterated that lower gross domestic product, higher unemployment numbers, and lower interest rates have little effect on whether customers will buy a mass spec or liquid chromatography system.
“While there are some concerns that reaction to the current financial crisis will slow customer spending, our current assessment of our end markets … suggests that businesses will continue to spend on the technologies and solutions that we provide and allow us to grow,” CFO John Ornell said during the conference call.
Berthiaume added that because pharma has “very strong free-cash flows” it has managed to stay untouched by the current crisis. Rather, weak pharma spending is due to ongoing concerns about expiring patents on blockbuster drugs and a paucity of new drugs in the pipeline.
‘Key Drivers’
Waters’ instruments business, he said, continued to perform well, and technologies such as the Acquity UPLC and the Synapt High Definition Mass Spectrometry system were “key drivers” of growth.
Acquity sales grew in the double digits. He did not elaborate on growth of the Synapt instrument except to say results were “very positive.” The Acquity, introduced in 2006, is still in its adoption cycle, according to Berthiume, and the company still sees unexploited opportunities for the platform.
Though the instrument is more expensive than an HPLC, customers are seeing that the cost difference is more than made up by faster speeds that improve productivity by a “factor or two or three,” Berthiaume said.

“In all, pharmaceutical spending is at best a mixed bag, and we see no reason that the situation will materially change from where it is in the short term.”

“And we’re really beginning to see that have an impact in a number of our high-volume applications,” he said. “We don’t see any strong new competitors entering into the scene at this point. I’d say we’re very encouraged about the continuing opportunity for Acquity for both R&D applications” and quality assurance/quality control. 
Overall, mass-spec sales did “very well” in the quarter except for Waters’ triple-quadrupole products, though the company did not provide specific numbers. Berthiaume attributed the slide to the firm’s transition from its legacy products, which are coming off the company’s portfolio, to the Xevo TQ tandem quadrupole system, which launched in June.
The Xevo is being positioned by Waters to be a workhorse triple-quad for use across a broad range of applications, including drug development, food safety, and environmental applications, Berthiaume said.
He also said that recurring revenues, including those from its chromatography consumables and instrument services, have been “well-insulated“ from economic cycles and account for almost half of the company’s total receipts.
That part of the business has grown year-over-year at about a 10 percent clip for several quarters, and Berthiaume said it will “most likely provide an attractive foundation of top-line growth for the corporation and importantly a foundation that provides high operating margins and particularly strong cash flow.”
By the Numbers
For the third quarter, currency effects contributed 3 percent to the total growth in revenues. Instrument sales grew 3 percent while recurring revenues grew 9 percent, Ornell said.
Company-wide profits rose to $71.5 million compared to $53.3 million a year ago.
Waters’ US business grew 1 percent, which Berthiaume attributed in part to a tough year-ago comparison when sales in the US climbed nearly 20 percent. Sales in Europe rose 7 percent on the strength of improving pharma business there and growth in its academic business.
Its Japanese business stopped several quarters of year-over-year declines to post a 10-percent increase for the third quarter amid “strong demand” from both academic and industrial accounts.
“We expect this improved trend in Japan to continue into the fourth quarter,” Berthiaume said.
In Asia outside of Japan, Q3 sales rose 11 percent year over year. Throughout the quarter there were fears that momentum in China would brake with the end of the Olympics. Other issues stirred up worry about potential softness in other regions. Those concerns failed to materialize, however.
“Our business momentum in China, India, and South America has remained strong,” Berthiaume said. “As worries about a global recession and its effect on these developing economies grow, we will continue to closely monitor our quote and order activity. However, at this point, we have seen no material change in demand and are encouraged that we will finish 2008 with strong results in these regions.”
As of Sept. 27, Waters reported having $892.6 million in cash, cash equivalents, and short-term investments. It reported $19.9 million in R&D spending for the quarter.
For the fourth quarter, Ornell said the company anticipates total revenues to grow 4 percent growth to about $454 million. For full-year 2008, revenues are expected to grow 10 percent to about $1.62 billion.

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