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Waters Instrument Sales Fall 6 Percent in Q3 as Total Revenue Shrinks 3 Percent

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This story originally ran on Oct. 27.

By Tony Fong

In the midst of reporting a 3-percent decline in third-quarter sales, officials at Waters touted the relative success of the Acquity UPLC system, on the heels of additional sales of the instrument to the US Food and Drug Administration.

Today, the company reported that for the three months ended Oct. 3, revenues slipped to $374 million from $386 million during the year-ago period. Profits for the quarter rose 6 percent to $75.9 million, or $0.80 per share, from $71.5 million, or $0.72 per share, a year ago.

Last week, Waters announced the FDA had recently purchased nine Acquity systems for food-safety testing purposes, adding to the three it already had. During the firm's earnings conference call, Waters CEO Douglas Berthiaume said adoption of the platform by a regulatory authority could have a trickle-down effect to other food-safety customers.

Food-safety testing is still in its embryonic stage, he said, and how regulatory agencies will tackle the issue is still evolving. "But certainly it's a very encouraging first step that the regulatory authorities are looking at our … technology … as a basis for what they can embody in the regulations."

Responding to a question about Agilent Technologies' launch of its 1290 UHPLC instrument to directly compete with the Waters platform, Berthiaume said that aside from Acquity's technology, the fact that it has been on the market for five years will make it that much harder for other systems to penetrate the market.

The Agilent 1290 began shipping in July, but, according to Berthiaume, while "a number of competitors" have made noise about their own UHPLC systems, very few have actually made it into customer hands, making it difficult to evaluate "in real terms what the competitive dynamics are."

But any new platform is likely to face a long ramp-up and adoption period, whereas the Acquity has already been through that "and we're still feeling very good about it," he said. "The continued sales growth of Acquity UPLC systems, even through these tough market conditions, indicates both its compelling performance advantage and an increase in [the] adoption level of [Acquity] UPLC technology for regulated methods."

Traditionally, adoption of Acquity has been in the "research and earlier-development stage of company processes … kind of the people who set the standards for downstream [use of the] instrument in things like biopharmaceutical labs," he said.

More recently, the growth in sales has been in regulated applications, especially among QA/QC laboratories. "We've always known that this [was] going to be the secondary application because these labs are slower to convert," Berthiaume said.

Along with Acquity, sales of the Xevo mass spec also grew in Q3, though the company did not provide specific numbers.

Slumping Still

Overall, though, the slump that has gripped the life-science industry hasn't lifted, and though Berthiaume said that he was encouraged that overall business has improved throughout the year and customer reception to the company's new products has been "enthusiastic," he stressed that "customers' overall spending levels have not yet enabled us to grow our top line as the customers continue to deal with the effects of the global recession."

In particular, recurring revenues were up 6 percent for the quarter but instrument sales shrank 6 percent, in part due to a "significant backlog" for new high-end mass spec platforms, especially the Synapt G2, the second generation of Waters' flagship mass-spec technology.

Launched at the annual conference of the American Society for Mass Spectrometry in June, the platform is not yet being shipped, though Berthiaume said that that should begin within the next few weeks [See PM 06/04/09]. Still, the reception to the instrument has already created a stir among researchers, he said.

"The interesting thing is that even though we don't have any G2s out in actual customer hands right now, the initial response has been as strong for a new introduction as we've ever seen," Berthiaume said. "The backlog build is something we totally expected … and the third-quarter build in this order rate is very encouraging.

"Researchers around the world are looking at our G2 HDMS system as much more than an incremental improvement to alternate technology platforms that have been introduced over the past few years," he added.

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The mass-spec backlog resulted in a moderate decline in sales to the company's biopharmaceutical customers, which is consistent with trends seen earlier in the year, Berthiaume said.

Instrument sales were further softened by delays in replacement sales as customers put off buying new instruments to replace old ones in order "to focus their capital spending on research purchases," he said. Replacement business, he added, has been under the greatest pressure during the ongoing economic crisis largely because labs have been choosing to stretch the lifespan of existing instruments.

To be sure, Waters saw a similar scenario in the 1990s when pharma "longed-out" their capital improvements, a decision that eventually created pent-up demand for instruments. Once pharmas opened their wallets again in ensuing years, however, a catch-up period followed that lasted about four years, Berthiaume said.

Eventually, the same cycle will reemerge, he added. "I don't think that the physics have changed; the instruments are going to wear out [and] they'll need to be replaced," he said. Customers will "begin to see the downtime tick up on them, and the demand for new technologies [will] begin to click in."

'Consistent' M&A Strategy

Also, as proteomics continues to see an increase in M&A activity since the summer — just last week, Eurogentec announced it was acquiring AnaSpec — Berthiaume said Waters remains on the lookout for smaller buying opportunities.

In February, Waters acquired supercritical fluid chromatography firm Thars for $18 million. Berthiaume said in his conference call that Waters will "remain consistent in our strategy of targeting companies that are close to us technologically, [are] profitable, and [have] top-line potential to be accretive to our overall growth rate."

Acquisitions contributed about 2 percent to the company's total revenue during the third quarter.

On the stimulus funding front, Waters officials said it had no material impact on Q3 earnings. The company anticipates seeing benefits from such funding in Q4, but Berthiaume cautioned that the effects may not match earlier hype.

Though quote activity for stimulus grants for instruments has been "extraordinary, measured in the tens and hundreds of millions of dollars," Berthiaume expressed doubt that all of that would come to fruition. Looking ahead, the effect from stimulus funding is anticipated to have a low-single digit effect on Waters' growth rate in Q4 2009 and Q1 2010, he said.

However, he said he expects 2010 to be a transitional year for Waters marked by increased demand for its products. As the company plans its budget for next year, it expects its top line to grow again, though not at historical rates, and with periodic lumpiness. He did not elaborate.

As a result, the company will start the year continuing its pattern of conservative expense control "until we are certain that a somewhat smooth and sustainable business recovery has materialized," Berthiaume said.

Asia-Pacific Up, Elsewhere Down

For Q3, currency effects contributed 1 percent to Waters' overall 3 percent decline, CFO John Ornell said. Before foreign currency exchange effects, sales remained soft in the US and Europe, which were down 3 percent and 2 percent, respectively.

Sales in Japan were down 8 percent against a strong year-ago comparison, whereas sales in Asia-Pacific outside of Japan rose 4 percent.

Looking ahead to the fourth quarter, Ornell said that marginally improving economic conditions and a weak year-ago basis of comparison "should provide for better instrument sales performance." Total sales before currency effects for Q4 are forecast to be flat compared to Q4 2008. At current currency rates, total sales would rise 4 percent from a year ago, he said.

Waters spent $19.3 million on R&D during the quarter and said it had $578 million in cash and cash equivalents as of Oct. 3.

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