Boom to Bust

By Deborah Gage  |  Posted 2003-10-01 Email Print this article Print

A manufacturer of scientific instruments forced a troubled British subsidiary to do things its way.

Boom to Bust

Go Back in Time to Sept. 25, 1997. Overnight, Waters Had Become the World's Leading Provider of Two Technologies Essential to the Discovery of New Drugs. First, There Was High Performance Liquid Chromatography, Which Waters Had Introduced in 1994. to That, It Added Mass Spectrometry, Which It Acquired That Day When It Finalized the $188 Million Purchase of Micromass.

Even Ornell says Waters didn't realize how well the two would work together. The chromatography system was effective at separating mixtures into their components, using principles of absorbency to help determine the presence of proteins.

Using optics, spectrometry could then analyze the molecular structure of those proteins. This allowed more rapid testing of protein combinations for possible new drugs. As investment in life sciences boomed in the late 1990s, the Micromass business would triple in size to $300 million a year.

All was well at Waters from 1996, when company revenues were $346 million, to 2000, when the Micromass acquisition helped push annual revenues to $795 million, for an annual compounded growth rate of 23%.

But the rosy picture was soon shattered. In June 2001, Waters warned that second-quarter earnings could drop by four cents per share, as big customers held off on purchases of spectrometry products while they evaluated new products from competitors. Ten months later, three of those rivals—MDS, Applera and Perkin-Elmer Sciex Instruments—won a $47.5 million judgment against Waters for patent infringement. Waters executives and employees were stunned.

The company restated financials for 2001 and 2002, setting aside $75 million before taxes to cover costs related to the court decision. It also pulled several Micromass product lines—worth 2.5% of its $859.2 million revenue in 2001—off the U.S. market.

To their dismay, Waters managers found they had acquired the disputed technology along with Micromass. "We didn't have enough resources looking at their pre-existing intellectual property," Ornell says. "We needed to do better."

In part, this spurred the 99-day transfer campaign. One problem, Newton now says, was that Micromass still functioned like a "mom-and-pop" business, even though it generated hundreds of millions of dollars in revenue each year.

Micromass, for instance, couldn't definitively say which customers had purchased which of its products. Customers could—and did—request hardware and prices to fit their desires. Just about every system that went out the door was unique, which meant Micromass engineers had to go around the world to handle tech support. In some cases, Waters and Micromass salespeople even competed for the same customers.

Senior Writer
Based in Silicon Valley, Debbie was a founding member of Ziff Davis Media's Sm@rt Partner, where she developed investigative projects and wrote a column on start-ups. She has covered the high-tech industry since 1994 and has also worked for Minnesota Public Radio, covering state politics. She has written freelance op-ed pieces on public education for the San Jose Mercury News, and has also won several national awards for her work co-producing a documentary. She has a B.A. from Minnesota State University.


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