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Waters Watches Mass Spec Sales Drop by 30 Percent as it Lays off Workers, Buys NuGenesis

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Waters this week reported a 30 percent decrease in fourth quarter 2003 mass spec sales year-over-year amidst reports of layoffs and the announcement that it would acquire a second information systems company, NuGenesis, for $43 million.

The decrease in mass spec sales was not entirely unexpected, but Waters’ CEO, Douglas Berthiaume, said during the company’s quarterly conference call that the reality was harsher than what Waters had anticipated. “Mass spec came in weaker than expected — the original forecast for the quarter was achievable because it called for revenues to decline quarter-over-quarter in the mid-teens,” Berthiaume said. In the end, the company said, mass spec sales grew marginally quarter-over-quarter but did not pick up enough speed to overcome the significant negative comparisons with 2002.

The report follows on the heels of a move earlier this month to eliminate 2 percent of Waters’ workforce, amounting to layoffs of 50 to 80 of the company’s 3,500 employees worldwide. Gene Cassis, Waters’ vice president of investor relations, told ProteoMonitor that the layoffs were “not specific” to any particular division and that there were no current plans for further cuts. Cassis blamed overall lower-than-expected growth for precipitating the move and said that last year’s mass spec patent lawsuit with Applied Biosystems was “obviously one of the key factors,” but not the only one. “This has to be looked at in the context of sales over the last two years,” Cassis said.

The poor showing in mass spec was somewhat offset by better-than-expected growth in HPLC systems, which grew 10 percent in the fourth quarter of 2003. “Large pharma customers returned to more normal levels of instrument purchases,” Waters’ chief financial officer John Ornell said during the call, in explanation of the strong HPLC sales. But this pick-up did not extend to mass spec sales. “With the addition of the Quattro Premier, we were able to grow mass spec sales marginally versus our 2003 third quarter sales, but the continued weakness in the proteomics market made year-over-year comparisons quite unfavorable,” Ornell said. Overall sales for the company increased 7 percent in Q4 2003 compared with the comparable quarter in 2002.

Q4 2003 was the third quarter in a row that Waters reported a double-digit decline in mass spec sales compared with year-ago figures. Berthiaume continued to blame proteomics mass specs for the slowdown, calling the triple quad market “pretty strong,” and expressing confidence in the performance of the recently-released Quattro Premier, which he predicted would continue to increase in popularity. Berthiaume added that because the Quattro Premier was released “late in the year,” it had not yet affected overall sales as positively as it could.

As for why the proteomics mass spec market was so frustrating, Berthiaume put some of the blame on overall market dynamics, as he has in past quarters (see PM 7-25-03, 10-24-03), but also admitted that Waters was experiencing internal problems. These problems included the loss of Q-TOF sales due to the lawsuit with ABI that forced Waters to pull its Q-TOF from the market (see PM 4-1-02, 4-29-02, 3-17-03) — a factor which the company has cited in the past — as well as a reorganization of its sales force in Asia, an apparently new factor for the fourth quarter. “We think there was clearly a slowdown in the proteomics market in 2003,” Berthiame said. “We were probably weaker than most in the marketplace. … We predict a better marketplace in 2004.” Waters’ reorganization in Asia, which Berthiaume said was “largely in process in the fourth quarter” but would continue to be an issue in the current quarter, has involved transitioning from using mass spec distributors — through which Micromass traditionally sold its instruments — to selling mass specs through direct Waters subsidiaries. “It’s taken us a while to work through the transition with the agents, to see if they were going to join Waters or if we were going to hire new people,” Berthiaume said.

Berthiaume predicted that Waters would experience a strong recovery in mass spec sales in 2004, with “high single-digit growth” over the year. He said that the introduction of Waters’ new Q-TOF at ASMS in May would kick off an acceleration of sales. “We’re improving the front end with both chromatography and software that we think has some novel capabilities. We think, combined with our new generation of Q-TOF, you’re going to see a new proteomics system capability from us that will answer a number of issues we’ve had in the marketplace and with a competitive price,” Berhiaume said.

Berthiaume also noted that the new HPLC system that Waters plans to roll out at Pittcon in March (see PM 11-21-03) would “be traditionally paired with a mass spec” and that the system was “buil[t] on novel and proprietary separations chemistry.” He predicted that “it won’t be easy for competitors to engineer or introduce on a time frame with ours a system that competes with this capability,” which should give Waters an earnings boost, at least in the short term.

Waters often offers its mass specs already bundled with HPLC and software systems, and Berthiaume said that the company plans to further extend this systems approach, partly with the continued acquisition of software companies.

Concerning the recent NuGenesis acquisition, which Waters expects to complete during the current quarter, Berthiaume said that the company has “a long-term strategic interest in developing a data and software platform that expands into a total scientific data management arena.” The company expects to add $25 million in sales for 2004 from the NuGenesis acquisition and to “largely break even” before considering acquisition charges. Waters acquired software company Creon Lab Control in 2003.

Waters’ Q4 revenues increased to $275.1 million, from $256.4 million a year ago. R&D expenses for the quarter climbed to $16.8 million, from $13.4 million during the same period last year. Waters net income surged to $58.4 million, or $.48 per share, for the quarter, compared with $40.3 million, or $.31 per share, the year before. As of Dec. 31, 2003, Waters had cash and cash equivalents of $356.8 million.

— KAM

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