Revvity (RVTY) Earnings Call Transcript & Summary

Thanks, everybody, for joining us. Excited to kick off the Citi Healthcare Conference here with Revvity. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Prahlad Singh, the CEO of Revvity with us. Prahlad, thanks for being here.

I guess maybe we can start just high level. You guys just reported last month. There's been a lot of noise in tools land on the positive side, which is nice in terms of some of the pharma conversation. Maybe just give us a lay of the land in terms of how you're feeling at the moment coming out of 3Q. Again, what the right way to think about some of the pharma news is and then what it might mean to you?

Sure, Patrick. Thanks for the invite. It's always good to kick this off with you in the morning. Look, I think just starting with 3Q, it pretty much played out the way we thought it would. And just breaking down between the businesses, Life Sciences was flat. Diagnostics was slightly up. We were up 1% on OG. We did slightly better on margin. And obviously, we beat our EPS because of below-the-line items. From an end market perspective, as we had said in our earnings call, we've started seeing more activity on the Life Sciences side, which is great to see. Especially as we look on the Life Sciences instrumentation, there was more activity there. And while it was still down, it was better than -- it did better than what we had anticipated. On the reagent side, it was slightly softer and some of it might be the summer or government shutdown, but it wasn't far off from where we are. On the Diagnostics side, reproductive health did well. It was up mid-single digits. Newborn screening was up high single digits, close to double digit. And immunodiagnostics ex China continues to do very well. 85% -- 80%, 85% of our immunodiagnostics business is ex China. And those geographies are doing very well, especially the United States. And software, of course, was up 20-plus percent in the quarter, and it continues to do very well. So overall, I would say that the dynamics of the market played out as anticipated with the positive around pharma biotech activity picking up, especially on the instrument side. And the dynamic in the market environment as we look from then on, it's pretty much similar. It hasn't changed, right? On the Life Sciences side, we continue to see more activity, especially around instrumentation. On the Diagnostics side, ex China, we continue to see great performance from our businesses and product lines. If you look at it, what we have seen is from 3Q to 4Q, there's an uplift of about $60 million, right? And there are 3 primary drivers for it. One, on the Diagnostics side, you've got the gel contract coming through, right? It contributed around $2 million in the third quarter, and it's around $7 million in the fourth quarter -- is more mid-single digits higher in the fourth quarter, and that's where you see one uplift coming from. On the scientific instrumentation. On the Life Sciences platforms instrumentation side, we continue to see activity. I think that's similar to what it was in September, October. So that performance has stayed as on. Overall, again, on the immunodiagnostic side, ex China, it continues to do very well, and it has also a much easier comp from fourth quarter of last year. So those are the 3 drivers that sort of gives us the uplift. Seasonal uplift that you see on the Life Sciences instrument, what we are assuming and what we are seeing is more of the normal seasonality you see rather than any big budget flush that you have typically seen in the normal market environment. So it has played out pretty much as we've seen in the third quarter and the trends are similar in the fourth quarter. With the one difference being on the FX side, right? Even though there is a tailwind from the FX, it's lesser than what we had predicted because we typically pick up the FX which is at the end of the third quarter. Since then, the FX has been a drag. And while it does not impact obviously growth and has very minimal impact on EPS, it does impact the absolute dollar amount by $5 million to $7 million, or 1% lesser of a tailwind than you would have had otherwise. So sort of that's more of detailed view of what we think of end markets.

Yes. That's a great start. So maybe we can start on Life Sciences, we'll do Diagnostics, and then we'll certainly talk to guide as well. I guess in Life Sciences on the reagent side, to your point, maybe a little softer. Can you talk through, I guess, government piece and then obviously, a little more biotech sensitive piece. What are you seeing there? Is it -- again, what happened with the shutdown? Maybe we can start on the reagents and kind of work our way around.

Sure. So as you know, BioLegend is about half our reagents business. And then I think that's where on the academia and government side, you have seen some impact and a modest impact from the shutdown. But the pharma biotech has continued to do very well. And I think that is going -- I would say this is sort of the first -- last quarter and this quarter, it's the first time, as I've said that pharma biotech is starting to show signs of what would look like normal and coming back.

And then I guess with the pharma biotech piece, obviously, we see biotech is doing quite well. I mean how long -- how quickly does that kind of react to you guys in terms of flowing through in terms of at least seeing funding pick up a little bit? How quickly can biotech recover for you guys and start to become this area of really nice growth again?

I don't think there's one particular event, Patrick. I think it's more around calming down of the chaos and the uncertainty in the marketplace. I think pharma biotech is now seeing more of a sense of -- we know what the future is going to look like -- future operating environment is going to look like. And I think once there is a little bit more certainty to it, you start seeing more M&A activity. And M&A activity in biotech, I think, is a great initial sign of markets getting back to normalization. And it will take a quarter or 2 quarters. I don't think there is any prediction by any form here that this is going to get back to normal or what historical normals would be. But I think we are starting to see the path to getting back to what normal would look like in pharma biotech over the next couple of quarters.

Yes. And then the academic government side, to your point, I mean, the shutdown, you guys had baked in a certain impact. We're now past it. Any surprises from the shutdown in terms of the length of it? Are you guys relatively comfortable with how it shook out in terms of what you guys guided for it?

Yes. Look, academia and government is 5% of our total revenue. It's 12% of our revenue in the United States. But I think we had sort of already predicted that it would be there. It was a couple of weeks more than what the shutdown was. I mean it will have some modest impact, but it's nothing to write home about.

Okay. And then yes, I mean, reagents going forward, I guess when you look at -- obviously, you guys gave some preliminary '26 commentary, which we can get into. But what's the right way to think about reagents, just that path back to normal to your point? I mean, what are the key things you're looking for? And what's the right way to think about expectations about reagents as we head into '26?

I think every sign that gives a certainty into what the operating environment would be for pharma biotech is, I would call a green shoot or more of a certainty as to getting back to what normal growth looks like. The announcement yesterday of the trade tariff deal for pharma between the U.K. and the U.S., that's a sign, right? M&A activity of biotech, that's another sign. I think the more certainty that the market has and the lesser chaos there is the more you start seeing uplift in business for us tools providers to pharma biotech.

And across the reagent side, I mean, it seems like even the peers are seeing similar trends. I mean has there been any, in your view, share shift, any changes on the reagent side in terms of the competition? Obviously, there's been some acquisitions here and there over the last couple of years in the space. Have you seen the market dynamics changed at all on the reagent side?

No. I think our reagents business has been doing very well. If you go back and look at the past 5 quarters, we've been talking about single digits or low single-digit organic growth in a very depressed market environment. And I think that should be, if anything, a real sign of not only have been doing well, but I believe that we've been taking some shares. And look, if there is uncertainty in the market from acquisitions, et cetera, it gives us an opportunity to gain share and be more competitive, and that's what our focus will be.

And then the other side of Life Sciences, obviously, the instrumentation piece that pressured for the entire industry for some time here. What are you guys seeing on the instrumentation side? You talked a little bit about the year-end. We'll see what the budget flush looks like. I think there's some optimism that with some level of certainty on pricing and things like that on the pharma side, policy risk easing up a little bit, maybe you see those budgets loosen up a little bit. What's about the instrument side and just the budget expectations as we go year-end and into '26?

I would say that it's more of a normal seasonality uplift that you have from 3Q to 4Q rather than a budget flush. And that's sort of the assumption that we have in our forecast. But the key really is that there is more increased activity around the instruments, which was not there. And I don't think it was because of any one factor. It is just, again, it was a depressed market environment and pharma biotech is coming out of it. So we are starting to see that activity taking place and then sort of resulting in more orders and more quotes being placed. And I think that's the first sign that we have seen in a while on the instrument side, especially to see that uplift. And I think what's more heartening is more on the high content screening side, things that pharma biotech use a lot for screening their drugs. And that is more -- that is, I would say, another indicator that pharma biotech is sort of getting back into the sub end markets where we play an important role.

And in terms of the biopharma, as we talked about the policy risk easing up a little bit, have your conversations, has the tone from biopharma changed over the course, I guess, it's been about 2 months. Are you sensing more optimism? Are you sensing those folks willing to loosen up a little bit, not only on instrumentation, but just broadly on the biopharma side. Obviously, reshoring is a multiyear opportunity. But in the meantime, is that environment a little healthier on the back of some of the policy risk overhangs?

I would say the discussions are more active and there is a lot more conversation. I mean, at the end of the day, it's not immediately going to flip to and result in an order and a quote and a sale, right? But I think the fact that there is a lot more activity and a lot more discussions happening with customers is an indicator that there is signs of life coming back into the pharma biotech, especially on the instrument side because they tend to be, as you know, high CapEx item. And in most of what we sell or the areas that we play in are generally non-commoditized, specialized high-priced instrumentation. And then I think if you start seeing signs of activity there, that's a clear indicator that CapEx purse strings are getting loosened up.

Yes. And then maybe staying in Life Science on China, obviously, we'll touch on China Diagnostics. But China Life Sciences, what's -- you guys have actually held in relatively well there, certainly relative to peers. What's the right way to think about China Life Sci going forward? Because that's been a pretty good market for you guys.

Yes. I mean, I think we were the only ones in our sector over the last 3 years in Life Sciences that have done well. And I think that is a major -- that continues to be a growth driver for our Life Sciences business on the reagent side, especially. And I think that's also an indicator that the CRO activity continues to be fertile and active in the China market. And that's where we -- both on the reagent side and on the instrumentation side, play an important role. And we have continued to see that activity either be getting closer to normal or after the whole reshoring thing that had happened on the CRO side, getting back to what normal would look like on the CRO side.

And you guys obviously aren't the most sensitive to the stimulus piece. Are you seeing any activity there? And anything to call out on the China stimulus side?

Post our divestiture of PerkinElmer, stimulus doesn't really play that an important needle mover for us.

Yes. And then maybe on the software side, you touched on it a little bit. I think it's grown over 20% every quarter this year, well exceeding the guidance. It's been a great spot for you guys. Maybe just at the core, how has that done so well? I think you guys guided 10% low double digits -- incredibly well relative to that. What have you seen in that business in terms of driving that significant outperformance on the software side?

I think it's diligent investment, our focus on our customers, the way we interact with our customers. As you know, we've talked about this before, right? We have 3 to 4 user group with our customers on an annual basis. We talk to them what our pipeline is. And we've got the largest installed base in every pharma biotech on the software side in their research labs. And then I think as this shift that we will see over a multiyear period where you're going from being a wet lab first and then modeling to what machine learning and AI is going to do, they are going to play an integral role in molecule discovery and development. This is where being in every lab on every benchtop is going to play a critical role for Revvity as we look into the future of drug discovery and development. And that is sort of the whole genesis and the basis on where we are continuing to overinvest on the Signals business because we strongly believe that in half a decade or so, drug discovery is going to move more and more towards leveraging machine learning and AI. And that's why you are starting to see now the uplift on the reagents and assays and instrumentations on life sciences now, which is going to be used by CROs for data gathering. And that data is going to be eventually used for drug discovery and development using machine learning and AI. And I think of this, Patrick, if Signal software is on every benchtop and you don't need to be a computer scientist to use that, and that becomes the marketplace or the platform that you use for drug discovery, Revvity is very well positioned with its Signal business. And that's what has been one of the growth trajectories that we've seen for the software business with its current pipeline and the future pipeline that's coming through.

Yes. And I guess to that point, I know the business historically we've had the renewal piece and then the new signings piece. I guess remind us what percent is each? And then has the new signings piece been the real upside where you've seen just broader adoption and kind of that greenfield opportunity pick up a little bit for you guys?

I think it's been both because even now, despite the SaaS piece growing at a faster rate, it is still only 33%, 35% of our total business. And that's why sometimes when you look at it through from a lens of an organic growth perspective, you tend to see more of a lumpiness. But the true way to look at these software businesses is APV, the annualized portfolio value that normalizes for this. And this is where I would say it's not one or the other, but it's the renewal component that allows us to upsell the new NPIs that we launched into the marketplace. It takes a few quarters before you get the upselling opportunities on the contract renewal. So for example, we had launched Signals Clinical, Signals Synergy. I think towards the beginning of last year or late '23. And it takes about 4 to 6 quarters for it to start selling. And then you are seeing the impact of that now coming into the renewals in 2025, where you do the upsell, and that brings up sort of the APV or even organic growth, whichever one you want to look at.

Yes. And obviously, the software, I mean, it's been a big growth driver this year. Next year, you're going to come up against these massive comps in terms of the numbers you put up this year. What's the right way to think about the trajectory? I think the LRP is 9% to 11%, obviously, well exceeded that this year. Is it just thinking about this comp dynamic as we model out the software for next year? Obviously, the trend is very healthy, comps get challenging. How do we balance those two as we get into '26?

That's a good question. I think you've got to look at it which lens are you looking for from, right? If you're looking at it from an organic growth perspective, there will be lumpiness until the SaaS component goes from what is 34%, 35% to 60%, 65%. And I think that is where it's going to eventually settle down. But if you look at how you are to -- you should be looking at a software business, which is from an annualized portfolio value, as I said, right? This has grown, I would say, 13% to 14%, right? This year, it's more like 19%. So yes, it is slightly higher than what we would have said. But the way I would look at the software business is more from an APV perspective, and that's a metric now that we've started sharing. But if you look at our LRP, we've said that, that will be more of a 9% to 11% grower, and I think it's more -- has been more of a 12% to 13% growth. So yes, there is some level of prudence built in it, but that business whichever lens you look at, it is going to continue to do very well for the future.

Yes. And obviously, you guys -- I think it's been the software side, maybe a little more -- I know you kind of look at small mall, large mall. I mean, where do you see the opportunity on that front in terms of expanding? Is there share opportunities in one versus the other? How do you kind of stack that up?

Yes. I mean unfortunately, there is no industry -- third-party industry data that I can point you to. But look, we feel very good. We are in, I think, every pharma biotech company bar maybe 1 or 2 in the top 50. Patrick, the way I look at the software business is we've launched now Signals Clinical, Signals Synergy. They have started doing well. BioDesign is coming out, I think, first quarter of next year. That is going to be one of the most important launches for the Signals business. As you know, the Signals business predominantly has been more on the small molecule side. And I think with BioDesign, we are entering and we are starting making a foray into more of the large molecules and the biomolecule side, which has been one of -- that our customers have been asking for. And again, the way we've designed BioDesign is based on the input that we get from the user group of our customers. So it is not something that it is being done in isolation. It is one that has been in sync with our customers. So I think that is going to be an important launch and is going to be the next major growth driver for the Signals business. But the one that I'm really excited about is in a couple of new NPIs that will come out maybe towards the end of '26 or in '27, which has got its sole focus around AI for drug discovery. And the whole idea of building that platform, which as the few quarters goes by, I'll talk about it in a whole lot more detail. It sort of lays out the road map and it makes Revvity the marketplace of how you are going to use AI or machine learning for drug discovery irrespective of what software or what drugs you are developing or what platform you're using. It makes it the marketplace for the development of -- for the discovery of new drug candidates.

Yes. I guess just touching on the AI point there. Obviously, a huge theme across the markets. You guys seem to have a pretty interesting kind of perspective on it and position in the market. Can you maybe just talk about broadly the AI opportunities for you guys, both internally and then to your point on the software side externally?

If you're going to make me talk about Signals, we'll be here all morning. I think the way you -- we have to think of AI. I've talked about AI for signals enough, so I'm going to sort of move to the other aspects of the business. We look at AI from 3 pillars in the company. One is product AI, right? Where are we using and leveraging AI. Second is enterprise AI in the company. And the third is around QA/QC governance. On the product AI, outside of Signals, think about this, right, microscopes. EUROIMMUN has some of the fastest microscopes that are used in the marketplace for diagnosis of diseases. How can we automate that? How do we use machine learning, all our in vivo imaging instrumentation, high content screening. How do you bring in AI -- Signals AI that we have in the instrumentation side of business. Looking at areas of interest, allowing automation to do more of the work which was manual in terms of both the actual work, but more importantly, the interpretation of data. This is where rather than talking a lot about it, we started incorporating it into our platforms. And that has been one of the growth drivers of the success that we have -- we will start seeing on the instrumentation side. At the enterprise level, Revvity AI is fully operational as a company, has been used across the board. And it is going to result in a lot more productivity and efficiency in the marketplace. But I think for us, also equally important is the governance QA/QC of how do we monitor, how do we ensure that we are responsible citizens and employees in terms of how we incorporate AI, both within the operations of the company itself, but also as we introduce this into our product. And most of what I talked about was on the Life Sciences side. It's no different on the Diagnostics side for newborn screening. Look at Transcribe AI that we have launched. It sort of takes away all the manual accession and the reading of the cards of the samples that come in for testing. It's all automated now. So there are so many opportunities to leverage machine learning and AI in the company. And I think we are just at the cusp.

Yes. Yes, maybe that's a natural segue to the Diagnostics business. Maybe we can start on ImmunoDx -- maybe we'll do ex China and then we'll go into China. Can you talk about the immunodiagnostics outside of China? That's been a pretty good story, maybe a little bit clouded by the China piece. But what are you seeing on the ImmunoDX side? And where can that go as we work our way towards next year?

Yes. Look, you've heard me say this. I think EUROIMMUN has been one of our best acquisitions and it will continue to be 80%, 85% of our revenue on immunodiagnostics comes out of ex China, and that market continues to grow mid- to high single digits, closer to double digit. U.S., for example, was 5% of total EUROIMMUN revenue when we acquired the company. It is 15% now, 15% to 20%. It should be 40% to 45%. That's the natural share that it should take. As we continue to introduce more assays into the market, as we bring in more automation into the U.S., it will continue to be one of the major growth driver markets for the immunodiagnostics business. And I'm just using U.S. as an example. Autoimmune testing as a whole, I think there was an article in the Wall Street Journal talking about it a week or 2 ago as to how underpenetrated that is. And that's what has been one of the successes of our autoimmune and immunodiagnostics business continue to be so.

And in terms of the U.S., to your point, obviously, a huge opportunity from the get-go when you guys bought it. Is that -- is it a competitive environment? Is it just getting the menu expansion? What are the key opportunities for you guys to drive that, to your point, from 15% of revs today to maybe a little more 40%, 45%? Is it internal development? Is it just chopping wood on the competitive side? What's the right way to think about that?

I mean there are some sub end clinical markets where we've got IP around it. So there's not really much competition, neuroimmune testing. Neuroimmunology, I think we are the only player in the marketplace and have a very strong position there. In nephrology, again, an area in autoimmune testing, which is just at the nascency of being able to even know that there is -- there's a lot of immune, autoimmune diseases related to nephrology. So these are -- our focus is really on esoteric and specialty testing. Our #1 hurdle to continue -- I shouldn't say hurdle, going from 5% to 15% to 20% is no mean task. Of course, we want to be at 40%. It's time, approvals and bringing in continued automation and assays into the marketplace.

And then maybe the China piece, obviously, a lot of noise there this year, not only with you guys, but across China diagnostics. Maybe talk through -- I guess we can start on the reimbursement side, then I would love to talk the multiplex, single-plex side. But maybe just talk through what has happened and then the confidence level that we've reached some level of stability heading into next year? I mean, certainly, from our investor conversations broadly, I mean, there's just worries about China diagnostics as a market. How do you guys frame up what you're seeing there and the visibility into, again, some level of stability?

Yes. Patrick, China is an important market. It's the second largest market, not just for us, for everyone. So I think we should just make -- it's too important to ignore and then to just close your eyes and go under our [ arch ]. I think the key for us has always been is how do we operate and compete in China as a Chinese company. And that is what our focus is. We've had several headwinds last year, right? The whole industry, multinationals have seen this, whether it's around and local companies, by the way. It's not just unique to multinationals, DRG, VBP, Sunshine Act, there have been various policy initiatives by the government that have swung the pendulum from one side to the other. And I think eventually, as we've talked about this going from multiplexing to singleplexing, it will start to come back into the middle. But really where our focus is, is that how do we innovate in the marketplace as a Chinese company. And that is strategically what our path has been over reproductive health and newborn screening, and we are trying to inculcate that more on the immunodiagnostics side. There will be still a couple of quarters where it will take to calendarize to the whole new DRG impact. But I think overall, as we move away from that calendarization, we will start to see stability in the marketplace in China. It doesn't mean that there won't be noise still, but it's how do you deal with it, how you address it.

Yes. And I think when you guys framed up next year, I think it gets down to 5% or so of revenue, I think China ImmunoDx. Is it, to your point, annualizing the DRG and then the second half, do you start to get back to a level of growth in China diagnostics? Or what's the right way to frame up this onetime impact and then the way to think about this market going forward?

I think going forward, China will probably be in the low teens for us as a company. I think as 15% to 16% is where we had started it. I think we are at 14% now. 7% of that -- 7%, 8% of that is Life Sciences. I think China Diagnostics overall will end up being 5% to 6% of the company revenue and autoimmune a larger component of that. And I think that's where we will be comfortable with China being in the 10% to 12%, 13% range for us as a company. And that's how strategically we are positioning it.

And I guess on the Diagnostics side, is it the right way to think about it that it's just lapping reimbursement and then this market is still a growth market? Or is it, to your point, there could be noise and maybe the visibility is a little challenged right now. What's the right way to frame the Diagnostics piece specifically in China?

I think in the short term, there will be some noise. I think the question really is how do we position ourselves. I think most of what we have seen the impact of that is already in place. There will continue to be some noise, but the question really is that how do you localize? How do you get NMPA approvals faster? What strategic avenues do you pursue that gives you more in China for China opportunity. So sort of that is where our focus has been on the immunodiagnostics side of the business.

And then obviously, the rest of the diagnostics portfolio, relatively stable between newborn screening. Maybe talk about that market. Have you guys -- I think everyone viewed it as kind of mature and track birth rates, but you guys have actually put up a relatively nice growth there. And again, I know it's tests per baby in some of the emerging markets where you're able to expand. Maybe talk about some drivers on the newborn side and the right way to frame that market going forward for you?

I mean reproductive health has grown for us mid-single digits and newborn screening has grown high single digits to close to low double digit. And I think it's not just something -- an event. It has been something that has been going on for decades where we've continued to bring in more assays into the marketplace. We've continued to have geographic expansion in markets like Egypt, as I have said, it's gone from doing 1 assay on all babies to now 2 to 3 assays on all newborns. And in all markets, obviously, our Omics business is a big catalyst to bring in new opportunities around gel being one example or other countries that we have discussions with. . But the key really is that how do we partner with governments and with the local entities to bring a sample to result solution. And that's where that partnership has worked since 1976. And then I think that has been one of the major growth drivers. Also, most of the new complex diseases that are rare diseases that are coming out have a requirement or a big need for a screening assay. And I think that is where Revvity has been at the forefront of it, whether it's around Duchenne muscular dystrophy, spinal muscular atrophy and also another example being type 1 diabetes in juveniles. Our partnership with Sanofi, there is an area of inorganic partnership or growth that is not what we would have referred to as traditional newborn screening. But imagine being able to screen and diagnose a child with juvenile diabetes before an event occurs and being able to put them on therapy so that it sort of prolongs the onset or delays the onset of diabetes. It is such a powerful therapeutic tool, which was screening for a screening assay and being able to partner with Sanofi and provide that, I think, is a big growth driver again for the newborn screening business. And there are many other avenues such as these which we continue to work on, Patrick.

Maybe I'll spend the last few minutes on 4Q and '26. I mean you touched a little bit on 4Q in terms of the gel contract, a little bit of just that typical seasonal pickup. Can you talk about the revenue side, just the confidence level, the visibility you guys had when you provided that guidance? The shutdown was obviously a little bit of a variable that we talked about. But you guys have historically been somewhat conservative in nature. So how do you think about just the visibility into the 4Q guide when you gave it? What were the key variables that we should be thinking about?

Yes. Again, I think there were 3 pillars that we had said to the seasonal uplift from 3Q to 4Q of roughly $60 million. One, as I said, the activity around the scientific and our platforms, Life Sciences platform side, which we had seen in September, October and continued, right? The second one was the gel contract, which was $2 million to $7 million. And the revenue -- absolute revenue for 4Q for the Signals business. It might be lower in OG, but a higher absolute revenue number. And the third one was ex China immunodiagnostics. On 4Q, it had a very low comp that it was coming out. So there were 3 growth drivers. Now again, as I said in the beginning of our conversation, that there is an impact of FX on the absolute number, not on OG and very minimal on EPS, but on absolute number where the tailwind is lesser. And I think one of your peers has actually had a -- something out earlier this week that sort of talked about the same thing. So that might impact the absolute number by $5 million, $6 million, but not OG or EPS, but we feel pretty good about it.

Yes. And then maybe on the margin side, you obviously typically have a 3Q to 4Q step-up. Can you just talk about the margin step-up sequentially? Is that just a lot of revenue flow through? Obviously, you guys are doing a lot on the cost side as well. Maybe we can spend some time there on the margins.

Yes. I mean not focused -- not specifically focused on 4Q, but I mean the margin drivers for us and I think Max and Steve have talked about it over the last several months, whether it's around restructuring, consolidation of rooftops, continued integration activities of the 12, 13 acquisitions that we have made, gross margin improvements around procurement and sourcing. So there are several initiatives from the top of the P&L to the bottom of the P&L that will be continued drivers of margin. And we feel very good about the way we are placed both in '25 and what we've laid out for our '26 plan.

Yes. And then maybe for '26, you guys thankfully gave some initial commentary on it, which was helpful. You're talking about 2% to 3% growth, 28% margins. I guess on the growth side, similar to the way you just broke down 4Q, what are the key things that build into that? Obviously, we talked about software comps, reagents. I guess the confidence level in that 2% to 3%, the visibility, maybe the variables that you guys are thinking about as you laid that out?

Yes. I mean when we laid out, we accounted for obviously a stable market environment, and it has played out as we have said, and we feel good about that. We accounted for the impact of the calendarization on the China drag on IDX for the 2 quarters, which has been accounted for. So our intent really was, Patrick, to go out with a number on the top -- we feel very comfortable with. And on the 28% margin, we've already laid out plans, and we have operationalized it starting in the fourth quarter. So that will sort of lap into it. We feel very comfortable with the numbers we have laid out in 2026.

Okay. And maybe last quick one. Just on the capital allocation side. Obviously, you guys, since you've taken over, have done quite a bit. What's the right way to think about priorities at the current moment, where you are on leverage? Are you guys -- what's the appetite look like for the deal side? Or is it maybe a little more conservative share repurchases? How do we think about the capital allocation piece?

Yes. I mean we did an acquisition last -- was that last quarter or this quarter, ACD. Even for my muscle memory, it was an acquisition after 2.5, 3 years when we had done 13 acquisitions. Look, we are very acquisitive by nature. And we will continue to be so. We just don't want to pay absolute multiples. And our focus is on to be sensible and be strategic in the acquisitions that we make. ACD/Labs is a classic example of how we can leverage our Signals infrastructure, our channel, our R&D and bring in a business which is sort of essentially maps with what we do. So we are going to focus on acquisitions that make strategic and financial sense. Outside of that, our share is the best opportunity, and we are going to continue to be opportunistic in doing that.

Prahlad, thank you so much. Appreciate it.

Thank you, Patrick.