James L. Waters (1925-2011), the founder of the specialty measurement and instrumentation giant in Massachusetts that bears his surname, died on May 17 at age 95. However, the guiding idea behind the company’s business and actions—“Deliver Benefit”—seems to have found new life over the past year.

Waters president and CEO Udit Batra, PhD

“If I were to summarize what’s been happening the last 11 months since I’ve been here, we’ve tried to go back to the philosophy of Jim’s, the philosophy that made Waters a strong company for the first two decades of its existence,” Waters’ current president and CEO, Udit Batra, PhD, told GEN Edge.

Batra discussed Waters’ turnaround and its efforts to drive future growth during an interview held the day after the company announced positive second quarter results. September 1 will mark Batra’s first anniversary at the helm of Waters, which he joined from Merck KGaA, Darmstadt, Germany, where he led that company’s Life Science business to 2019 sales that rose 11% to €6.86 billion ($8.07 billion).

Soon after becoming president and CEO, Batra oversaw the crafting of a turnaround plan he unveiled in January at the virtual 39th Annual J.P. Morgan Health Care Conference. The plan called for Waters to regain commercial momentum with specific initiatives, enhance its portfolio and capabilities, and strengthen its performance management process. Batra pointedly contrasted Waters’ results with the rating of some 90% of employees as “meets expectations” or “above expectations.”

Behind those three components, Batra said, were three other values that Waters promotes as building blocks of a renewed corporate culture.

“One, to get back to the basics on execution. Execution is simply doing what you say and saying what you do, and just following up on what you said,” Batra said. “Two, go back to a culture of focus and urgency: Focus on a few things, do them quickly, move on. Focus on a few things, do them quickly. That requires a lot of courage and a lot of thinking before you focus on a few things. We reinstated that, and I’m very happy that it’s something that has been well received.”

Returning to roots

Jim Waters, founder and first CEO of Waters.

The last piece called for Waters to return to its roots in innovation. Jim Waters founded the company as Waters Associates in 1958 in the rented basement of the Framingham, MA, police station. The “research boutique” specialized in developing custom instruments for customers, enabling Waters to apply skills learned as a U.S. Navy officer, university math teacher, project engineer, and entrepreneur.

Waters launched its first successful instrument in 1963—the GPC 100, a gas permeation chromatograph that used gel columns to analyze polymers. Among the first customers was Dow Chemical, which footed the bill for the design of the unit’s refractometer, with Waters exclusively licensing the technology from Dow, and Dow later investing $400,000 in the fledgling company.

Waters developed its first liquid chromatography system, the ALC 100, in 1967, though it took the company about a decade for the technology to get over with customers; Waters even trademarked the tagline, “The Liquid Chromatography People.”

Millipore acquired Waters in 1980, transforming the company into its Waters Chromatography Division before selling it to Waters management for $360 million in 1994. The company went public in 1995.

Waters finished this year’s second quarter with net income of $167.29 million, up 36% from Q2 2020 on net sales that jumped 31%, to $681.65 million. For the first six months of 2021, Waters’ net income soared 79%, to $315.42 million from $176.49 million in January–June 2020, as net sales rose 31% to $1.290 billion.

Within its three business segments or “end markets,” Waters enjoyed sales jumps during the first half of 2021 of 33% in the pharmaceutical market, 31% in the industrial market, and 20% in the academic and government markets.

Instrument sales have propelled Waters’ growing sales, jumping 43% year-over-year during Q2, to almost $314.5 million, and 46% during January–June 2021 to $577.54 million. Chemistry sales rose 33% and 28%, to $126.46 million and $245.43 million; while service revenue grew 17% and 18%, to $240.69 million and $467.22 million.

Acknowledging that year-over-year comparisons are skewed by the COVID-19 pandemic, Batra offers a two-year comparison: Waters’ rise in quarterly Q2 sales from $599.16 million in Q2 2019 represented 7% organic growth in constant currency, compared with between 2.5% and 5% for “key” competitors, which include Agilent Technologies, Danaher-owned SCIEX, and Thermo Fisher Scientific—all of which saw greater mergers-and-acquisitions growth than Waters during the period. (SCIEX results are not disclosed individually; it is part of Danaher’s Life Sciences segment.)

Waters has projected sales growth increases of 7–9% for the third quarter, and 13–15% for all of 2021, both in constant currency.

“We really benefited from focusing back on the basics, having a renewed sense of urgency in our team, and the new products we’ve introduced,” Batra said.

Replacing workhorses

Over the past year, Waters has reached out to customers about replacing their aging instruments, like the workhorse Alliance HPLC® system introduced to market in 1996 and redesigned in 2013 (above)—with newer Waters High Performance LC systems, such as the higher-efficiency Arc™ HPLC System, introduced last year. [Waters]
Driving Waters growth this year has been efforts to replace aging instruments of customers who bought the company’s longtime workhorse high-performance liquid chromatography separation instrument. Waters aims to replace Alliance™ HPLC systems, introduced to market in 1996, with newer Waters High Performance LC systems, setting a target in January of 10–15% market penetration over 2–3 years.

In addition to Alliance, Waters’ HPLC systems include the Breeze QS HPLC System, designed for labs with limited budgets and minimal experience in chromatography; and the higher-efficiency Arc™ HPLC System, introduced last year.

“Usually instruments are replaced every five to seven years, and we have instruments that have not been replaced for 20 years,” Batra said

Waters is also well underway with replacement efforts for its tandem quadrupole mass spectrometry instruments, having launched in June its Waters™ SELECT SERIES™ MRT, based on its Multi Reflecting Time-of-Flight (MRT) tech platform. SELECT SERIES features both enhanced Desorption Electrospray Ionization (DESI) and new Matrix-assisted laser desorption/ionization (MALDI) imaging sources.

The company also aims to replace customers’ “ultra performance liquid chromatography” family of instruments for development labs, notably the ACQUITY UPLC™ System launched in 2004. UPLC—Waters’ branded version of what later came to be generally referred to as ultra high-performance liquid chromatography—operates at higher pressures (15,000 psi) and allows for lower particle sizes in columns compared with HPLC.

Waters aims to replace ACQUITY UPLCs with newer UPLC systems such as its next-generation ACQUITY Premier System, launched in February, and the Arc Premier System (pictured), launched in June. [Waters]
Waters aims to replace ACQUITY UPLCs with newer UPLC systems such as its next-generation ACQUITY Premier System, launched in February, and the Arc Premier System, launched in June. Both use Waters’ MaxPeak High Performance Surfaces (HPS) Technology, designed to effectively reduce non-specific adsorption losses due to metal interactions; and its Arc Premier System.

Batra said Waters has contacted 80% of the 8,000 customers whose Alliance HPLC Systems are old enough to warrant replacement. The company has also reached out to about 50% of the customers with mass spec systems ripe for replacing, and “roughly 30–40%” of customers that own Waters’ UPLC systems in line for replacement.

The Premier instruments, Batra said, can address key concerns of developers of mRNA vaccine developers, such as aggregation and selective binding of plasmids and mRNA molecules to various surfaces. Those concerns arose, he said, among customers he met with at Waters’ Immerse™ Cambridge collaboration lab, which opened last year to accelerate COVID-19-related collaborative research in the Kendall Square biotech hub, about 35 miles northeast of Waters’ corporate headquarters in Milford, MA.

“We had our scientific crew in the room, and there were three of our customers and we debated and discussed what experiments we’re going to do together,” Batra recalled. “This resulted in zero sales that day, and I couldn’t care less! We simply want to solve these problems. And when we solve these problems, I’m sure there will be some financial benefit.”

Instrument business grows

As a result of the customer outreach, he said, Waters’ HPLC instrument business grew 45% from the year-ago quarter, while the mass spec business grew 35% versus last year—both above-average rates of increase.

“We’re doing something unique, which is replacing these instruments at a much higher rate than we would have under normal circumstances,” Batra said.

He said Waters has begun reaching out about replacement to customers that have integrated the company’s offerings—such as its flagship Empower Chromatography Data System software—with “competitive” instruments from its rivals.

“When they’re about to retire, we want to be at that doorstep to say, ‘Hey, come back to Waters!’” Batra said. “Because they’re plugged into our software, we know exactly where they are, and we know exactly the age of those instruments. Of course, that’s a slightly more difficult task, but it’s still a task that we can give our sales reps. This is an impact that we will see for several years.”

Batra would not disclose a precise timeframe for the competitive instrument replacement effort, or how soon the company expects to benefit from it, but did say: “It’s something that you should expect in the next 12–18 months to have a meaningful impact on our business.”

Waters’ replacement efforts set a bar for future growth that will be challenging to surmount, according to Puneet Souda, managing director, life science tools and diagnostics and a senior research analyst with SVB Leerink.

“While this effort creates more difficult comps [year-over-year comparisons] for the future as easy wins are taken, it also builds [Waters’] commercial competency, enhances their customer data, and deploys newer instruments which tend to have higher utilization and consumables pull through,” Souda said August 3 in a research note.

“A good sign,” but…

“Strong instrument sales are a good sign and suggest more consumables and service contracts revenue to come,” Souda added, while also cautioning that “the real transformation of the enterprise with new products generating growth and driving utilization will still take some time.”

Waters sums up its mission at the entrance to its headquarters in Milford, MA.

“Ultimately [Waters] has to take market share back from Agilent, TMO, and SCIEX—which is likely to take time,” he added.

That may prove easier said than done, since as Souda himself has observed, Thermo Fisher has enjoyed strong business recovery in analytical instruments this year (growing in Q2 41% year-over-year to $1.48 billion), while Agilent’s core LC and mass spec instrumentation has continued to gain share, helping fuel a 28% rise to $674 million. Souda added, however, that instrument orders could be impacted if variants of concern lead to government-mandated shutdowns.

Waters says it has also shown dramatic growth over the past year in net sales of products and services to contract manufacturers.

“Contract manufacturing has picked up quite dramatically in the pharma industry, yet Waters had not necessarily followed that trend in terms of serving those customers. We started to focus on that and on a year-on-year basis, even on a two year basis, cumulatively for the first half of the year, that growth rate was 60% above what it was two years ago,” Batra said. “It was a dramatic change on the commercial side by just focusing on delivering what we already had.”

Another area where Waters has made progress, Batra said, was in e-commerce sales, reflected in a year-over-year increase from less than 20% to “well above 25%” in the percentage of consumables sold through that channel.

Wall Street has begun warming up to Batra’s upbeat assessment of Waters’ growth prospects.

Following the Q2 results, Jefferies equity analyst Brandon Couillard raised his earnings per share (EPS) forecasts for the company to $10.65 from $10 for this year, and to $11.55 from $10.80 for 2022, while also raising his price target to $375 from $300 a share.

Also raising price targets while maintaining their current ratings on Waters shares—a sign of continued analyst caution—were Baird (from $297 to $360, Neutral rating), Citigroup (from $315 to $400, Neutral rating)—and SVB Leerink (from $370 to $385, Market Perform rating).

“We’re encouraged by the changes/progress management has made thus far in its tenure and think the potential for M&A could add another layer to the story near/mid-term,” Catherine Ramsey Schulte, senior research analyst with Baird, said.

Two other firms raised their ratings on Waters last month: Zacks Investment Research (from “hold” to “buy” with a $378 price target) and Evercore ISI (from “in-line” to “outperform,” $400).

Investors, however, appeared more cautious than the analysts last week, as Waters shares inched up 1.7% on the strength of the Q2 results, to $395 on Friday, from $388 on August 2, the day before the earnings release. However, traders have embraced Waters stock over the past year, pushing the share price up 88% from a $210 close on August 6, 2020.

Declining profits, revenues, and jobs

Batra succeeded Christopher O’Connell, whom the company said “mutually agreed” with the board to step down after five years in June 2020—two months after Waters responded to the COVID-19 pandemic by carrying out cost cuts totaling $100 million “to preserve liquidity and enhance financial flexibility.”

Those cuts included about 100 jobs, reducing the workforce to approximately 7,400 by year’s end, a level Waters has maintained—though the company has 150 positions it is looking to fill in its home state of Massachusetts. The company blamed COVID-19 for a falloff in demand that resulted, it said, in Waters’ net income falling 15% on a 13% drop in sales in the second quarter of 2020, following declines the previous quarter of 51% and 10% in net income and sales, respectively.

Waters’ year-over-year revenue growth had slipped since 2017, from 6% (9% on a reported basis) to 4% (4.8%) a year later, to 1% (-0.6%) in 2019, followed by last year’s 6% decline (-1.7%).

Those woes, and a resulting loss of market share to competitors, wasn’t apparent looking at the company from the outside-in, he continued: “You couldn’t tell how the service and the reputation was in the industry. I knew from my friends who are still in the lab that their reputation was terrific. So I said ‘Wow, what an opportunity! What a great brand! What super technology!’”

Technology and innovation were among topics Batra discussing the first time he met Waters’ founder Jim Waters, when he was a board member of a company acquired by Merck KGaA.

“We debated things on the board and we hit it off and we stayed in touch for a while. And even after I joined Waters, we spent a fair bit of time together talking, of course, about Waters, but also about our mutual interest in science education starting at the grassroots, to ensure that the next generation of people, agnostic of their background, are getting educated in the right way and have a love for science.

This year, Waters launched the latest of numerous science education efforts—a six-week immersive education program for about 10 high school students at its Milford headquarters focused on science education.

Waters also impressed upon Batra his “Deliver Benefit” approach to business: “Think about how you’re going to solve a problem and everything else takes care of itself afterwards. To me, the solution is not strictly measured financially, but on the scientific problem that you solve using your skills and resources that advances our ability to create better health. And I think that’s where Jim was a beacon, and he was a leader.

“Jim’s experience and knowledge really reinforced your understanding of what makes lasting change: Education, and focusing on benefits for everyone, not just for yourself. We want to leave a place that’s better than we found it,” Batra recalled. “I was super inspired to have met Jim, and so fortunate that I had a chance to overlap with him even for a short period of time.”