Waters Follows A Narrow Course

Waters Corp. fell from number four in 2009 to number six in C&EN’s 2010 ranking of the top 25 scientific instrumentation firms. Yet Arthur G. Caputo, Waters’ executive vice president, says he’s not concerned. “We’re among the leading instrument companies in return on invested capital, return on equity, and growth in sales and profitability,” he tells C&EN.

“For us, bigger is not necessarily better,” Caputo points out, unless it comes from “expanding by focusing on our base.” Waters’ base is in designing, selling, and servicing liquid chromatography (LC) instruments, which separate chemical compounds, and mass spectrometry (MS) instruments, which determine the elemental composition of samples.

Other firms are more acquisitive, creating supermarkets of machines and technologies through acquisitions both large and small. Instrument giant Agilent, for instance, paid $1.5 billion for Varian in 2010, boosting its sales by $800 million and adding nuclear magnetic resonance imaging to its arsenal of chromatography, MS, and DNA microarray instruments.

By contrast, Waters paid just $36 million in 2009 for its last notable acquisition, the shares it didn’t already own of Thar Instruments, a supercritical fluid chromatography expert. “If you see us acquiring, it is usually going to be smaller strategic acquisitions that leverage our central position,” says Caputo, 60, who is also president of the firm’s Waters division. Caputo has been with Waters since 1977, just before Millipore bought the company in 1980. Waters Management bought the firm in a leverage buyout in 1994; the firm became a publicly owned business in 1995.

Whereas consolidation may be the filter through which others in the instrumentation industry view the future, Caputo says he sees opportunities only in the chromatography and spectrometry markets Waters has staked out as its main claim to fame. “A company goes off its narrow focus if it runs out of opportunities for growth and profitability,” he says.

Founded by entrepreneur James L. Waters in 1958 as a chromatography company, Waters added MS with the purchase of Micromass in 1996. With separations and elemental analysis, “we are dealing with one of the largest and fastest growing segments of the instrumentation business,” Caputo asserts. Pharmaceutical makers, for instance, rely heavily on Waters instruments, he notes, since every drug patent has data from LC and MS technologies.

“We feel better today about growing from this point forward than we did when we were a third or half of our current size,” Caputo says. For instance, the pharmaceutical industry, which accounts for about 60% of Waters’ sales, still has room for growth, he maintains, despite upheavals in the traditional drug discovery company model.

As Caputo sees it, a significant number of human diseases do not have treatments, and of those that do have treatments, many are not effective. Waters can aid drug industry customers cross profitability and regulatory hurdles by helping them generate the information they need quickly and accurately, he notes. Customers in areas such as food safety, environmental analysis, and chemical characterization also need the firm’s analytical equipment.

The narrow focus seems to be working. Waters’ 2010 sales of $1.6 billion were up 9.6% from the year earlier. The company faltered along with the rest of the industry in 2009, when sales fell 4.8%. But its average annual sales growth rate over the past five years has been about 7%.

Moreover, net income rose about 14% annually from $202 million in 2005 to $382 million in 2010. The firm even eked out a slight increase in income in 2009.

About 70% of Waters’ sales are in the developed regions of North America, Western Europe, and Japan. China and India are strong growth markets, Caputo says, accounting for about 20% of sales.

China in particular presents a “very large business opportunity,” according to Caputo. The firm already has research partnerships with Chinese institutions such as Shanghai Jiao Tong University.

Caputo touts Waters’ good cash position. The firm had $340 million on hand at the end of 2010. It has been using some of its cash reserves to buy back its own stock. Its most recent buyback program, for $500 million over 24 months, was announced in February. But cash on hand is also invested in new products developed in-house and through collaborations with industrial and academic customers.

“Wall Street may give you a short-term pop for an acquisition they feel good about. But the real key for us is long-term sustainability,” Caputo asserts. “The more profit, the more success we have. And with more success, we can continue to invest in innovative products and services to keep the momentum that we’ve established going.”

By way of example, he points to the development of ultra-performance liquid chromatography (UPLC). Waters began to work with James W. Jorgenson, a chemistry professor at the University of North Carolina, Chapel Hill, early in his group’s effort to extend the pressures at which high-performance liquid chromatography (HPLC) works from about 6,000 psi to 30,000 psi.

The collaboration led to the 2004 launch of the Acquity UPLC system, which Waters considers the first real advance in chromatography since the early 1970s when HPLC was introduced. HPLC was headed toward commoditization, Caputo says, and the introduction of UPLC “took chromatography off that course and revitalized the whole segment.”

These days Waters formalizes its relationships with research partners through its Centers of Innovation program. The innovation centers, mostly at major universities, are intended “to give thought-leading scientists access to our next-generation technology, allowing Waters to enhance its technology through their feedback,” says Rohit Khanna, Waters’ vice president of worldwide marketing. They are also places where Waters can help academicians with key challenges through Waters’ applications and technology expertise.

The centers focus on important research areas. One at Imperial College London, for example, targets metabolomics and the work of biochemist Jeremy K. Nicholson. Late last month, Waters designated the Translational Genomics Research Institute, in Phoenix, and its Center for Proteomics, led by Konstantinos Petritis, as another innovation center.

The firm’s R&D budget, $84 million in 2010, is generally just under 6% of annual sales, says Daniel McCormick, vice president of research, development, and engineering. Helping to keep R&D costs under control is Waters’ focus on its core separation and molecular analysis business, McCormick says. Competitors spread their investments over a larger set of technologies, he notes, and so find it difficult to achieve the same leverage. If Waters can be said to stray at all, it is in research—such as in sample preparation, automation, and software—that’s related to its core technology.

McCormick says he is aware of the trend in the instrumentation industry to build portable equipment that’s simple to operate. That sort of miniaturization often works “if you know what you are looking for,” such as when soldiers in the field use a portable device to sniff out chemical weapons. But for the experiment precision required of investigative research, nothing but the most accurate instruments will do, he says. Although a “no compromise” approach may limit Waters’ participation in the field-testing market, the company is working on methods to more easily stabilize samples in the field so they can be brought back to the lab and analyzed.

Analysts give Waters high marks for its profitability and focused strategy. Tony Butler, senior pharmaceutical and life sciences analyst with securities firm Barclays Capital, estimates that 70% of Waters’ sales come from its LC business. “From the science community’s viewpoint, it is the brand to go to,” he says.

Some may think that using the Acquity UPLC to do everyday analyses “is like driving a Ferrari to the grocery store,” Butler says. But for those who need accuracy, the Waters instrument is outstanding, he says. And even for those who might be on a routine shopping trip, UPLC can offer savings.

UPLC instruments use far less solvent than their HPLC cousins, which is no small consideration given the hundreds of dollars per liter that some solvents can cost. With UPLC instruments, “you can do with a cup of solvent what you did before with a gallon,” Caputo says.

Until recently, Waters’ closest competitor in LC/MS was Agilent, notes Peter Lawson, a life sciences analyst with investment banking firm Mizuho Securities USA. But in May, Thermo Fisher Scientific completed the purchase of Dionex, a maker of chromatography instruments. The hookup will allow Thermo to link its existing MS instruments with Dionex’ LC products, creating a “new powerhouse” for Waters to contend with, he says.

Still, Lawson considers Waters “one of the highest quality life sciences franchises, with a strong record of innovation driving above-market growth.” The firm, he says, is “at the top of its game.” But as a niche company in the life sciences, he adds, it could be bought and folded into a larger instrumentation business.

Before Thermo Fisher bought Dionex, rumors swirled that Waters would be Thermo’s next acquisition target, Lawson says. And Waters could still be in the sights of another acquirer, he suggests. “Every company has a price, and shareholders will push if an offer is appealing.”

Asked if Waters is a takeover target, Caputo tells C&EN, “We sure can be bought. But I suspect we’d be quite expensive.” He also suggests that a takeover is unlikely. “When companies are bought, they want to be bought,” he says.

Waters executives know what an acquirer would get from their company, Caputo says. But any deal would also have to benefit Waters and its shareholders too, he notes. “We feel that as long as we continue to lead in this marketplace and keep the higher level of financial performance that we have, being bought is not likely at all.” ◾