One year into its turnaround, Waters has continued its recent string of good news to investors and others watching the specialty measurement and instrumentation giant.
Following a 36% leap in second-quarter net income that Waters said showed early success for returning to the philosophy of founder James L. Waters, the company earlier this month reported third-quarter results showing a 27% jump in net income, to $161.18 million, on net sales of $659.23 million, up 11% from Q3 2020.
For the first nine months of 2021, Waters saw its net income soar 57% over pandemic-challenged Q1-Q3 2020, to $476.6 million on sales of $1.95 billion, up 23% as reported, with foreign currency translation benefiting sales growth by 2%.
“From an overall perspective, the third quarter has been really another data point in a steady stream of success for our transformation,” Waters president and CEO Udit Batra, PhD, told GEN Edge. “The transformation continues to pay dividends.”
During Q3, Waters saw its sales into the pharmaceutical market increase 16%, compared with a 9% rise in industrial market sales. However, academic and government market sales fell 9% as reported and 11% in constant currency. But academic/government sales for the first nine months of this year are still 6% above Q1–Q3 2020 in constant currency, while pharmaceutical sales zoomed 24% and industrial, 19%.
Industrial results were buoyed by sharp growth in sales to materials customers, explaining why Waters’ TA Instruments division enjoyed a 28% leap in year-over-year sales, to $77.42 million.
Other highlights included:
- GAAP earnings per share (EPS): $2.60, up 28% from $2.03 in Q3 2020; $7.66 in Q1-Q3, up 58% from $4.86 a year earlier.
- Global regions: Sales rose 8% in Asia, 8% (constant currency) in Europe, and 16% in the Americas (13% in the U.S.). For the first nine months of 2021, sales increased 24% in Asia, 19% in the Americas (17% in the U.S.), and 19% in Europe, all in constant currency.
- Instrument system sales: $296.09 million, up 10% from Q3 2020; $873.63 in Q1-Q3, up 29% in constant currency from a year earlier.
- Recurring revenues: The combination of service and precision chemistries revenues rose 11% in Q3 and 15% in constant currency in Q1–Q3.
Also during Q3, Waters joined the University of Delaware (UD) to announce a five-year research partnership through which Waters will sponsor the Immerse™ Delaware innovation and research lab, set to open early next year within UD’s campus in Newark, DE.
Batra recently discussed Waters’ Q3 results, the UD partnership, and the company’s plans for generating future growth with GEN Edge:
GEN Edge: In its Q3 2021 earnings call presentation, Waters spoke of solving critical problems in three “high-growth adjacencies.” How does Waters define those? And how will they shape Waters’ future growth?
Batra: When we were developing our strategic plan, it had three parts. The first was, ‘Let’s get back our momentum on the commercial side; let’s really fix the base.’ Second, ‘What can we do from an innovation standpoint internally? Can we invest more in R&D? What are the core areas where we can invest more in? Can we invest in sales and marketing, better capabilities, e-commerce, etc.?’
The third was, ‘Are there adjacent areas which have inherent tailwinds, that are growing faster than our LC-MS area? Are there problems to solve there where we can take our capabilities? We said, ‘What are the problems? What are the grand challenges in the pharmaceutical industry?’
There were three areas that made total sense: Number one was to be able to purify and separate novel modalities. For mRNA, for instance, I had a chat with the head of R&D for the Andover [MA] site for Pfizer. He said, ‘There are application problems with plasmids, challenges in purifying mRNA, challenges when you encapsulate it into different nanoparticles to purify further because of aggregation issues. We have to develop better separation techniques. What expertise do you have in your physical chemistry and engineering arenas that can help us solve this problem?’
We have the expertise in separation of purification with LC and mass spec, and better columns, and better engineering, but we need to work with someone who understands these macromolecules natively, and therein comes the grand challenge.
The second area is bioprocessing, where there are two grand challenges: Speed to market and decoupling the process from the product.
Then the third area was application of mass spec in diagnostics. During the pandemic, we’ve had the opportunity to work with the U.K. Government to develop an alternative to PCR using LC-MS, and we successfully did it. We started about September-October last year. Had we started a bit earlier, you’d have seen LC-MS as an alternative to PCR, or augmented PCR in every lab. The only reason it’s not there is because we started a bit late, and the infrastructure was already there for PCR testing.
GEN Edge: What advantages does LC-MS confer?
Batra: LC-MS is equally sensitive, equally specific, but has much fewer false positives. PCR has 5% to 10% false positives. With LC-MS, you can reduce that to have a zero, so it has a place in testing proteins and molecules. With that experience, we feel like we can take LC-MS into unbiased clinical testing for oncology biomarkers. Same thing for endocrinology. We feel that that’s an area where we can make a difference.
GEN Edge: During Q3, Waters’ sales into the pharmaceutical and industrial markets rose while academic and government sales fell. Why the decrease there? Is that falloff expected to stretch beyond the third quarter?
Batra: It’s partly because many academic labs are opening and closing due to the pandemic. Partly, it’s a slow return to capital purchases in that arena. It goes to 10% of our business. Historically, it’s not been a real strength for Waters. In our transformation, we also started to focus on it and I didn’t highlight it publicly because it’s such a small portion of our overall business. That said, if you look at the academic performance of Waters year-to-date, it’s about 6% growth in constant currency while the overall business is growing 20%, so it’s a bit slower.
As we delved deeper into our academic business, what we found is we had lost our KOL [key opinion leader] relationships in many different markets. Our business is driven by deep relationships with KOLs. We’ve told our team, ‘Let’s start reviving. We have a plan.’ It just takes a bit longer to come up that curve.
The primary focus is getting back the key relationships, which we are heavily working on.
GEN Edge: What will it take to rebuild relationships with academic KOLs?
Batra: Having spent a fair amount of time in academia myself, when you lose a relationship with a serious academic, it’s very difficult to rebuild it. I’ve spoken to some of them myself. It’s going to require serious one-on-one relationship-building. The heart of KOLs and academics, of course, is the science. That’s where we’re strong, so I’m deeply confident that we build it based on science, collaborations, and scientific areas where we feel we have a common interest.
Losing the relationships took some time. Regaining it also is going to take some time, but I’m keen that we get them back. If people are leaders in their field, leaders have to work with them and they deserve to work with Waters. We have to reopen that channel of communication and collaboration. We have the best instruments in the industry, the best scientific people and we just deserve to work together.
We will not stop until it’s done. It’s really about establishing direct relationships with key opinion leaders in fast-growing areas. Our recent announcement with the University of Delaware is a case in point.
GEN Edge: Speaking of University of Delaware, it joined Waters in announcing a five-year research partnership that included an Immerse™ laboratory. What does Waters hope to accomplish through the partnership?
Batra: With the University of Delaware (UD), initially we have three thrusts: One, better measurements of what matters in the manufacturing process, so better sensors. Second, better analytical techniques to be able to analyze it. Third is data analytics—using AI techniques to take all this data and make a smart manufacturing process. All of those really benefit over different periods of time.
We’re going to kick off with the physical site early next year. The program plans are in place. The funding is procured. We’re recruiting people now. They’ll be internal Waters people as well as UD faculty and students and postdocs in the same physical location. I’m just so excited about this, to be able to be in a domain where you have collaborations occurring with people that have completely different competencies.
GEN Edge: What bioprocessing challenges does the partnership with UD aim to solve?
Batra: There are two grand challenges in bioprocessing. There are probably others, but the two that we’re keenly focused on is: 1) speeding up the process of manufacturing to get these drugs as fast as possible to people, and [to have] manufacturing not be a great limiting step. That’s the work that we’re doing with Sartorius.
The second is decoupling the manufacturing process from the product. For biologics, including vaccines, we well know that when you file a product with the regulatory agencies, you also file the process by which it is manufactured. That means, through the lifetime of that product, if you came up with a substandard manufacturing process, you can’t change it without going back to the agency. That’s something many manufacturers don’t want to do for obvious reasons. Nobody wants to have to go and re-file and have another discussion with the FDA based on a change at the factory. And the consequences are perverse.
Vaccines like MMR—measles and mumps and rubella—are still manufactured in chicken eggs. I noticed back in 1996 as a freshly minted engineer, I went into Merck KGaA, hoping to be dazzled by their manufacturing and research technology. I was ushered into a clean room and was told, this is how we manufacture vaccines. I said, ‘What the heck am I doing here?’ And why the heck do we do it like this? We still have that same process. It’s not because technology is not available. It is because we have not been able to decouple the manufacturing process from the product.
GEN Edge: How much does the Immerse lab in Delaware adapt from the M Lab™ collaboration centers you oversaw at Merck KGaA?
Batra: It is similar and it is different. It is similar in the sense that it’s a collaboration center. The look and feel, the open space, the ability to talk to each other is similar [to M-Lab].
It is different in the sense that we are now at the location of an academic institution. Our Immerse labs are built upon the principle of collaborating with customers in our space. This is a Waters site, but we will be co-located with the customers, with the collaborators, whereas in M Lab, the collaborators and the customers went in and out. We’ve defined mid- to long-term research programs that we’re working on together, whereas the M Labs were solving problems that existed in the manufacturing processes of customers.
The Immerse Cambridge lab in Massachusetts was announced a few days before my arrival. We simply expanded the concept and said, ‘Wouldn’t it be great if we had Immerse cohabit with customers, collaborators, and Waters employees? And wouldn’t it be great if we came up with research programs that were of common interest, that we could work on them together in that space?
GEN Edge: Waters’ Immerse lab in Delaware is within an academic setting. Are Immerse labs more suitable for academic or business settings? Does it matter?
Batra: It’s a question of where you find the best talent to solve a certain problem. It’s obvious why there’s an Immerse lab in Kendall Square, Cambridge, where there is medical biotech. So, we have people going in and out of the labs and you don’t need to invite people for collaboration. They run into each other for collaboration there, so it’s great! No justification necessary.
Why Delaware? UD has one of the top chemical and biochemical engineering programs in the country. It has funding from the NSF [National Science Foundation] and NIST [National Institute of Standards and Technology], almost in the range of $300 million to develop better biomanufacturing processes. They already have an infrastructure through NIIMBL [The National Institute for Innovation in Manufacturing Biopharmaceuticals].
Manufacturers as in Pfizer, Merck, Roche, and Novartis are already present there. Tools players like Waters and others are already present, collaborating with academics who are also already present. But most importantly, regulators are also present, so we have the right agglomeration of different expertise to solve this problem.
GEN Edge: How many Immerse labs could Waters sustain worldwide?
Batra: We have many different ideas. We’re looking at other institutions as well, with other Grand challenges coming. In Delaware, we’re focusing on bioprocessing grand challenges. There could be a place where we focus on some discovery proteomics grand challenges. There could be a place where we focus on application of mass spec.
Think of our R&D spend now being dispersed in the best institutions for those problems in the world. We’re looking at the U.K., China, Singapore, some other parts of the U.S. I don’t want to create unnecessary competition amongst different institutions, but we’re looking at many different places.
Having grown up as an engineer, my best job was when I came went to work as an R&D engineer, because you were clear what you were trying to do. You were doing science, and you knew that your science mattered to people, it was going to make a difference to medicines of people. You were making a difference.
It feels the same now! I don’t have one lab, I have so many labs in the world. Our footprint is everywhere, and I get to work with super people. There is no dearth of funding for that. We have one of the best margins in the industry, one of the best free cash flows, and if you can take our investment and put it in grand challenges that are going to have an outcome in the next five, seven, ten years, that sets us up for great success.
Waters is known for taking bold innovation steps, and we’re not stopping now.