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Waters Sees Slowdown in Fourth Quarter HPLC Business - Is Pharma Spending Less?

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Earlier this month, Waters revised downwards its sales and earnings outlook for the fourth quarter. While the company had earlier predicted sales would grow 4 percent, before currency effects, it now expects sales to decline by 2 percent. Quarterly earnings per share, originally estimated at $0.46, will now likely be $0.38-$0.40.

The main reason for this downward revision, according to the company, is a weakness in its HPLC business, which accounted for 60 percent of its revenues in 2001, according to Gene Cassis, Waters’ director of investor relations. During the third quarter, Waters netted about $216 million in total revenues.

The announcement came as a surprise to analysts, since the HPLC part of Waters’ business had been growing robustly, increasing in the low double digits during the third quarter. This growth starkly contrasts with the company’s mass spec business, which had been suffering over the last few quarters due to increased competition and patent related issues (see ProteoMonitor 11-04-02). “The question is, is this a one-quarter phenomenon, or is this a more protracted cycle?” asked Lakshmi Bhojraj, who covers Waters for Salomon Smith Barney.

Opinions differ on the reasons for the sudden slowdown, which Waters apparently did not anticipate in late October, when it delivered an initially optimistic forecast during its third quarter conference call. In its recent statement, the company said the slowed demand for HPLCs is due to “tightened capital spending, primarily from customers involved in research and development activities.” According to Cassis, Waters has identified about 30 large pharmaceutical companies in the US and in Europe that are not spending at the level the company had expected. Traditionally, he said, the month of December had been a strong one, as researchers tend to use up their budgets for the year. “What we do know is that the effect we are seeing is not at the laboratory level, it’s at one or more levels above that,” said Cassis.

But some say that the slowdown does not necessarily reflect a trend in decreased customer spending, and suggest that it could be the result of competitors taking market share, or could be related to Waters’ recent integration of its sales force with that of Micromass. According to Kenneth Goldman, who covers Waters for Lehman Brothers, other companies in the separation and purification industry have so far not reported a decrease in spending by their customers.

Cassis said that the HPLC sales organization “has been focusing exclusively on HPLC,” and will continue to do so, denying that the field force integration had a negative effect on the HPLC business.

Until other instrumentation companies report their results, and pharmaceutical companies reveal their spending for the fourth quarter, it might be difficult to judge whether Waters’ HPLC sales slowdown is specific to the company or reflects a trend.

Waters is planning to give an update of its 2003 outlook after further analysis at its fourth quarter earnings conference call, scheduled for January 28, 2003.

— JK

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