Waters Corporation (WAT) Earnings Call Transcript & Summary

okay. Good afternoon everyone. Thanks for joining us. I think, next up we have Waters. Pleasure to have Udit with us. Udit has done a phenomenal job. It's amazing how the company has turned around. So there's a lot to dive in to.

Udit, may be before getting into some of the changes -- underlying changes that has happened in the business, I think, I want to knock off the near-term questions out of the way. And then we can focus on the bigger picture. The new Omicron variant and some of the lockdown restrictions in Europe, how should we think about it. Does it have any bearing for tools or life sciences in general, or perhaps Waters.

Look, the news in, I would say, days old, right? So we're still digesting it. All I would urge is lets just follow the science. Let the science tell us how much this virus is going to impact our ability to work, our ability to contribute and call upon our further contribution to public health, and on business results as well. At this point it's way too early to comment, Vijay. Lets just follow the science. But we the same processes that we did earlier, right? So employee safety as #1, public health -- and helping public health #2, and #3 is keeping the business going we have. And it -- nothing changes from that perspective. It's a new data point and we are just waiting for the science to clarify what we are going to do.

That's a fair comment, Udit. I guess where I was going with that was, that we had instruments shipment delays in 3Q. I don't know if it was pandemic related or supply chain being stressed. In that context, I guess, with this news, anything to worry on the supply chain side or ability to ship products?

Look, in some ways that was a small blip in the whole dynamics of the business, right? And we saw 12 million shift from -- a few days from one quarter to the other very safely recognized in the first part of Q4, and you will see that in Q4. I think just picking up on one comment you made, is it related to the pandemic? Of course, the supply chain stresses are related to the demand rebound that we've seen and how the demand -- how that has stressed, especially in the short term, the supply chains, right? And that had resulted in us also, towards the end of the quarter, seeing some shipping lanes getting clogged at an inopportune time. There's nothing systemic that we've not been able to deal with. To be honest, that, however, highlighted even more the need to stay very close to our suppliers, and I'll get into that in a minute; to the shipping side of the business, so what comes in and what goes out, and not just what's happening within Waters, right? Both in terms of the supply reliability but as well as shipping reliability. On the supply side, I have personally spoken to CEOs of several suppliers, several key suppliers of our instruments, which are doing extremely, extremely well. It's a benefit. And of course, you have to deal with the benefit, not only did the market pick up, our commercial initiatives started to take hold, and our new products started to do well. All going in the same direction, stressing our suppliers as much as they were stressing our own internal systems. And so I have been in conversation with CEOs of 5 different suppliers large to small, ranging from semiconductors to plastics to pumps, everything, right? Just to make sure that they understand what we're trying to do and we can cooperate. So you can be sure that, that communication channel is super open, and I don't see stresses in the system that should not allow us to meet the needs for Q4 and further. And on the shipping side, the same thing, right? Our supply chain colleagues are in constant conversations with individual shipment -- individual owners of the shipment lanes. And so I feel much better that we have transparency on both ends, but I mean the pandemic has surprised us before. It will not impact the trajectory that we're on, but definitely something that we are very closely monitoring.

Understood. No, that's helpful perspective. And for sure the pandemic, I think, it's thrown in effect a curveball to all of us. Just maybe on one more -- on Q4 and then I want to go to the broader strategic initiatives. In a year-to-date, if we look at your numbers, right, I mean let's look at 3Q, 11% organic, I mean that's a big, big number for Waters. I think you've consistently mentioned, look at the compounded growth versus 2019, it's been around 6%. When I look at your 5% to 7% constant currency for Q4, the compounded growth, obviously that slips down, right? So I'm curious, is that just conservatism on outlook, where no one else is out there? So conservatism versus any other factors that went into that Q4 guide?

Not quite, Vijay. Look, of course, I mean you want to do even better, but there's not a heck of a lot of conservatism. I mean if you just compare the full year number, if you just look at the guide at the midpoint, it's roughly 6% stacked growth, right? I mean when is the last time we saw 6% stacked growth for the full year from Waters? It's been a while, right? And so we feel very good on a sustainable basis where we are. Compare it to sort of our peer group, do a weighted average, it's very difficult as an exercise but the data is available to do it. And you find that sort of weighted average on a 2-year basis close to 5%, right? So 1% lead over the market is not bad in such a time. Instruments are doing well, even on a stacked basis, mid-single-digit growth. Recurring revenues is high single digit with chemistry doing extremely well. So super happy about it, and the same trend continues in Q4. Q4 has 6 fewer days, which impacts our consumable sales and recurring revenue. We've talked about that in the past. And that accounts for sort of what you might say, well, should it be even more? Of course, we would like more but I think it's a reasonable starting point. And as we think of the end of the year, the focus is on landing the quarter.

Fair enough, fair comment. I mean we still have 4 quarter -- 4 weeks, excuse me. And again with Omicron, I think there's enough question mark. I think switching over to some of the bigger picture, if I just look back at the last 12, 18 months, Udit, I was shocked at how the business turned around, the pace at which it has happened, right? I don't think people question whether Waters would turn around. I think it's really the pace which surprised the market. Your presentation did a really good job laying out the 5 pillars, right? When I think about the some of the numbers you laid out on your 3Q call, instrument replacement is expected to be 40 million versus 20 million -- 30 million contribution. I think there was a number of new products, et cetera. Service attach rate is going up. If I just look at those 5 pillars, right, everything is doing better in '22 versus '21. What's the incremental growth rate from those 5 pillars? Is that like a 100 basis points contribution to Waters?

No, the overall sort of net of cannibalization and overlap is roughly 100 basis points, right? And I think the more important thing to keep in mind, Vijay, is -- are 2 things: one, that we have nailed down what is it that makes or has made Waters successful in the past, right? And we've kind of communicated that through and through the organization. It's a very simple business. I mean we are in the business of making food safe, water safe, medicine safe, especially in the QA/QC domain, and we insert our products into development and research with the idea of industrializing those instruments. And once you industrialize those instruments within the QA/QC and manufacturing space or repetitive as measurement space as a recurring revenue, right? So very simple model, everything is geared to returning back to that operational excellence with those simple levers and not complicated more than that, right? And then if you keep that in mind, you say, "Okay, well, okay, so how are you going to build this for the future?" Well, it's -- you can, of course, do better from a commercial standpoint, and we laid out sort of those 5 pieces. instruments, consumables, additional channels and customers. And we can talk at length about those. But then thinking further along, you'd say, "okay, well, that's all good. New products is on top of it, and new channels is on top of it." Right? So you can see the idea is rather straightforward. It's not too complex. And we feel very good about the fact that it's well understood in the organization and everything that we're doing is to sustain that understanding and sustain their execution. So be it CRM, application of CRM with all the sort of customer contacts. Be it using e-commerce, and we've just started on e-commerce in a meaningful way in this day and age. I mean that sounds like a -- like an anachronism. But it is something that we've just started with. And there's a lot to do, and I'm excited about it, and it will yield benefits. We've gone after the faster-growing channels like CDMOs and CROs. So I think it's -- it sets us up to deliver on the operational side for a longer period of time. And the pace of change that you commented on, it's always easy to talk about change and what has changed. It's more difficult to talk about what is constant and what is -- and the reason the pace of change is fast in this case is because what is constant. Waters never forgot how to be close to customers, and Waters never forgot how to do -- how to be strong technically. And these are the 2 key success factors in our business. I mean you're doing science and you're getting science to customers. And our people know how to do it. All it was, was to take out all the sort of smoke and say, "okay, these are the 2, 3 things that matter. Let's just focus on them." And the organization delivered. Super proud of what the teams have done and the organization has delivered but we're getting started.

Fantastic. I think that segues us nicely into '22. I think on your 3Q earnings call, the presentation laid out as mid-single-digit-plus. And I think there was a lot of debate on what the plus signifies. So before we get into what the plus means, I mean instruments have grown 30% year-to-date, right? Should we just assume consumables are going to grow 30% next year? What's the right instruments versus consumables math?

You keep trying. Look, the best way to do it, Vijay, is to look at the historical growth rates and ask yourself, what has fundamentally changed in the market, and what has fundamentally changed in the company, right? Those are the best ways to do it. Historically, instruments for Waters in our best years have grown 3% to 4%, right? And in 2016 to '19, in fact they were flat. So prior to that, it was 3% to 4% sort of weighted average over a 10-year period. So that's a good guide, right, as a starting point. And say, look, everything goes on like it has been in our top-end customers. 3% to 4% instrument growth is a reasonable assumption for someone who is a leader in this market. Second, on the chemistry side, on the recurring side on the chemistry, it's slightly north of 5%, right? And again, the same logic, right? If you go before 2016, so just leave out '16 to '19 and say before '16, 5.5% to 6% growth, right? I mean the best years that we had. And service is about 5%-ish. You take a weighted average, you land up mid-single digit. Is it 4.5%, is it 5%, is it 5.5%? I don't know, right, but that's sort of the long-term average. So then you have to ask yourself what has changed in the market, and what has changed in the company? What has changed in the market x the pandemic, is not a heck of a lot, right? The drivers are the same. It's the biologics revolution. It is the novel modalities coming in. It is digitization. None of that has really dramatically changed in areas that we play in, in QA/QC, in food testing, in environmental testing, in -- even in instruments, in the TA business. So none of that has really fundamentally changed. So you say, okay, so the market is similar. So then mid-single digits, let's say, 4.5%, 5%. Let's say 5% for now, right, just to give a bit more positive about it. Then you say, okay, what is it different -- what is it that's different in the company? We outlined the 5 initiatives, and we said roughly 1%. So add 1% to 4.5% or so if you plan at 5.5%. And you say there are new products beyond that, so I'll add a little bit more to it. So you're planning at mid-single-digit-plus. Don't ask me is it 5.5%, is it 6%, is it 6.5%? But it's somewhere in that sort of general vicinity that you see where the market is -- market and the company is heading. So that's our sort of logic of putting the plan together in the short term. And of course, in the midterm as the portfolio changes and evolves, you can think of other drivers as well.

That's a helpful perspective. And certainly, I can do the -- I can -- I'm still good enough to count 50 basis points. So, not here. And that segues us into -- there's been some tantalizing hints about pipeline and what Waters could look like in 3 to 5 years, right? I feel like there are certain stories for you might perhaps ever take a longer-term view. And I think the 2 things that come out of Waters is biopharma, large molecule to be more specific, and diagnostics. And I want to start with the biopharma, BioAccord and large molecules, right? What has Waters done year-to-date? And is there some inflection point for those end markets when you think about the next 2 ] to 5 years?

I think it's a good question. Let's break biopharma LC-MS into 2 different parts, right? Maybe even 3, right? There is a development opportunity where the customers are not terribly unhappy with a complex LC-MS workflow if they have to do it just once in a while, right? The second opportunity is LC-MS, a very simple workflow. And I'm just talking biopharma here for a minute, LC-MS workflow in QA/QC. And that was the promise of BioAccord when it was launched initially. And I think we've convinced you that it takes a bit longer than one might have initially thought. You have to seed the product earlier in the stream. But what I'm most excited about are simple, robust and efficient, again, Waters' calling cards, right? Our LCs are simple, robust and efficient because they are in QA/QC or in those spaces. If you take that value proposition of LC-MS of BioAccord, so it's a simple, robust and efficient instrument that engineers like me, or even interns at many of our companies can use. You take that value proposition, there are many places to apply it. And we just highlighted our collaboration with Sartorius, where we found an area where we could take a 6-week workflow and narrow it down to 2 days. And not just in our hands as in Waters' laboratories, but also in Sartorius' laboratories and also in customers' laboratories, to take the selection and introduce a simple, robust and efficient workflow, so that the engineers could save a lot of time and get these novel therapies faster to the market. I think that's a clear value proposition. Now I don't want to get us overly excited without having sort of a few runs on the board, right? And the teams are working on this now, as you can imagine. We know there are 800 ambers out there or so. We know that they are with certain customers. We have a very good relationship with Sartorius. We together believe we can do something special in the mid- to long term. So in the short term, we're just trying to get our customers this particular tool and putting it next to the ambers wherever relevant. And don't ask me if it's 1 per amber or if it's 1 per 10 amber. And that's why I'm a bit sort of reluctant to sort of dimensionalize it today. But it is an incremental opportunity. It is in new space that we're carving out. We're taking LC-MS into a space that we might not have imagined in biopharma earlier. Now you can -- of course if that becomes successful and we learn more about it, there are 3 or 4 vectors from an R&D standpoint, which we're already pursuing. How to combine the 2 things. To make it simpler for the customer, first, from a data analytics standpoint; and second, from a workflow perspective. Then you can take that same idea and take it to other bioreactors, right? And you can count the number of bioreactors that are out there. And I don't want us to get super excited about this until we have done the first set of homework, and next year will be -- will tell us a lot. Now that is sort of the tactical and immediate benefit. But Waters has now become and will become a meaningful player in bioprocessing, right? I mean that is a bigger benefit. Our organization will learn the full workflow, and I will no longer be the expert in bioprocessing in the company, right? So I think that's a bigger benefit in the mid- to long term. And I believe we have found a way to get into that space that is consistent with our simple, robust and efficient mindset. And BioAccord is yielding benefit. Another area where LC-MS as a simple tool is accessible, is an antibody characterization for monoclonal antibodies for lab use, right? So there are many players who develop reagents and are always looking to validate the antibodies that they develop. Think Techne, Think Abcam, Think CST, think New England Biolabs, think even smaller players. All these biologics need to be characterized, but nobody has the patience to wait for 6 weeks to characterize them. If you can do them in half a day and write -- and put a certificate of approval on the documents, then probably your customers can believe you -- that can believe that your antibodies have a higher quality. So -- And there are a few other vectors to pursue with a simple LC-MS tool: first, just as an application; and then second, as a pipeline for further development. So I've said enough about sort of the excitement we have in this space, and it's a great learning experience for the organization. Next year will be telling.

That's helpful perspective. Maybe on starting with the near-term tactical, the Sartorius example you gave. What -- maybe if you could just simplify, what exactly did Waters do? Like 6 weeks to 2 days for me, that's like companies growing from 3% growth to 30%, right? It's a big [ jump for me. ] What changed? And maybe talk about -- yes.

I don't want to get too excited about just the timing piece. I mean it's, of course, it's super exciting, but I would not start to do the dimensionalization that you just did. That said, I mean scientifically, it's rather straightforward, right? I mean once it's -- you do a multi-well experiment with amber, right? So you have 16 wells and you pull samples. And you take these samples. And you send them to a core lab which has a complex LC-MS workflow. And then they come back with the results. And then you do the next experiment, and then you send it back to them. And then you come back 6 weeks later with the result, right? So the whole workflow itself is highly inefficient. What if you could put the box right next to the amber. And as a simple engineer, take out the sample and inject it, and 6 minutes later, that you have the result. right? So that's how long the experiment takes, 6 minutes, right? And the workflow itself takes 6 weeks. So putting it next to the amber is the first step. Now how it came up was, I mean, it's an interesting story. I don't want to put too much romance into it. Having spent 6-plus years in bioprocessing, I know the key players in the industry, and had a discussion with my counterparts, or my former counterparts at that company. I have a good relationship with their top leaders and said, "Hey, do you think we should take analytical testing right next to the bioreactor system and walk through open doors?" Because it's very simple for anyone to understand. Anybody who's been in bioprocessing can understand that this is sort of the holy grail. And we talked at even a more conceptual level, and then we looked at simple experiments that we could pilot. And this is the first one we piloted, and it worked, right? There are many other ideas in the workflow that where you could insert a simple instrument. Now if you take sort of a 10,000-foot view, the holy grail or the grand challenge in bioprocessing is -- in biologics, is to separate the process from the product. Even today when we file a biologic product, we're asking for a license to manufacture the product. It's called a BLA. We get a BLA from the FDA. Yes, as soon as you change the manufacturing process, you have to go back to the FDA and file a change in your drug master file, right? So this prevents manufacturers from changing the manufacturing process, even if it is totally primitive. I mean even today, measles and mumps vaccines are manufactured out of chick embryo eggs, while we have bioreactors -- cell culture bioreactors, where you could manufacture these probably much more efficiently. But we haven't transferred the process because there was no need to, and the industry has enough sort of margins not to take a risk from a manufacturing perspective. However, the world has changed with complex biologics, right? Manufacturing is more and more becoming a bottleneck. And there is a need to separate the process from the product by measuring the critical quality attributes of the product at different steps in the process. And that's what -- and you -- and to do that, you need a powerful enough technique. You can't just measure it through IR or through Raman spectroscopy. You need a more powerful technique or a multitude of techniques to measure all the critical quality attributes at different steps in the process. Enter the canon ] mass spec, right? Where you obliterate the molecules and reconstruct them, and there is no more powerful technique. The challenge was to simplify it and put it next to these different unit operations. And that's the grand challenge, right? And there are, of course, several other challenges in being able to see this vision of measuring critical quality attributes at different steps in the process. There is an issue with sampling, there is an issue with the analytical technique, and there's an issue with data analytics. And for that reason, we opened up our collaboration with the University of Delaware to look at the further development of this. So our pipeline on bioprocessing and our path is conceptually pretty straightforward, Vijay, right?

That's -- thanks for taking the time to explain that. it's -- I can't say I've mastered everything, but it's -- I now have a little bit better understanding. The other thing that you mentioned earlier was characterizing antibodies. Are these -- when you say characterize antibodies, this is not the monoclonal antibodies in biopharma. I think you're referring to research use antibodies. Maybe talk about how it can help?

Indeed, it's very early days. We've approached some of those players and offered this as an idea. It's extremely, extremely early days to talk about that in any detail. My team is not going to be happy that I even mentioned it. But they are working with the colleagues in these different companies and trying to understand how a simple workflow with LC-MS could help them measure quality -- again, quality attributes to ascertain the value of these different antibodies that are used for experiments. And you know who the key players are, and most of them are not analytical instrument experts. And again, Vijay, it comes down to what we are good at: simplicity, robustness and efficiency. I mean that applies in QA/QC. And you know what, guess what it applies in many other spots in the value chain of many others, become more complex biologics. And again, the bigger value proposition here is our learning of that space, right? So Waters was classically just an instrument player, while we're moving into the bioprocessing domain, and we'll move into the reagents domain as a consequence.

That makes sense to me. And maybe one last on bioprocessing before we move on to other topics. I think you guys are spec-ed into the -- Biogen's Alzheimer's drug. Again, it comes up in conversations. Is it meaningful, not meaningful? Is that -- should we even be spending time thinking about it? Or is this, look, there are a lot of products, and it's one of them?

Yes. I would be reluctant to comment on it any more than we have talked about it in the past, right? So at this point, it's a drug out there, where like many other large drugs and large molecules, we are spec-ed in the processes. And we go where our customers go, but it's one of many, many, many, many molecules and many customers. It happens to be one of the larger ones if it reaches its potential or perceived potential, but we are in the early days of that development.

Got you. And then a couple of bigger picture macro questions maybe. Clearly, there was some pent-up demand in pharma. CapEx budgets were really, really healthy in '21. As you look at '22 and beyond, how long do these cycles typically last? Do they last like a couple of years, these pharma cycles?

Yes, I think it's again a good question, right? So I wouldn't think of it as pent-up demand. And the way to think of it is, and the way to normalize it, is to think of the 2-year growth, right? That's why we just stopped looking at the 2020 growth and congratulating ourselves too much, right? On a 2-year basis, every percentage point matters. So we are seeing faster growth than we have seen historically for Waters. For the industry, the comparisons are also very healthy. And the way I look at it is, I say, look, the baseline is what, 3 to 4 for instruments, as I mentioned earlier. I won't repeat the full numbers. and then you should expect a little bit faster growth than that given our commercial initiatives. And also the new products, right? And the new products are not just BioAccord. It's Arc HPLC and Premier that are doing super, super well, really meeting a clear unmet need in HPLC and UPLC spaces.

Understood. And I think related to a similar question on the academia side, has been making the rounds. Again, who knows what happens. But if it does get approved, does it matter for Waters? I know the infrastructure bill got passed. I don't know if TA has a role in that infrastructure bill. Maybe talk about those budget cycles on the academic side.

So I mean as you know, academia is roughly 10% of our overall business, and that is academia and government, right? And I think you also saw that, that is probably the slowest growing part of our portfolio so far this year, and has been for probably a very long time, 5% to 6% year-to-date, with Europe doing extremely well, China and U.S. sort of trailing growth. Some of that, of course, has to do with COVID; but some of it also has to do, in all honesty, with a lack of meaningful focus on the academic segment partly because of the portfolio, but partly because the other pieces we're doing so well historically for Waters. And guess what, we're looking at that very carefully, and I was very transparent about this in Q3. We're looking at our KOL network. We're looking at how well our e-procurement and e-commerce channels have had uptake in academia. And I see positive signals on both. Europe is a bit ahead of the other 2 regions on this, and there'll be more to talk about that as we implement those initiatives. But as far as the budgets from governments are concerned, look, I mean it's too early to say what's going to happen with the new idea. I think it's probably positive but let's wait and see. And I think we have our homework to do, which will -- which we're heavily focused on. But if there is an incremental budget, I'm sure we'll benefit, right? I mean we're always supportive of more biomedical research and biomedical research in a way that it's funding sort of longer-term ideas, right? So I think that's from an academic perspective, I'll remind you, it's still only 10% of our business.

Understood. The -- I guess switching gears to the other interesting longer-term opportunity for you guys is the diagnostics. Certainly, some of the costs have done like LC-MS, there is a place for sure in diagnostics. I think the pushback we always get is it's very complex. How -- like when can we expect a simple system from Waters where the average lab technician can use these tools and techniques?

It's a great question. Look, as I think your research tells you, mass spec belongs as a tool -- as an unbiased and highly, highly sensitive, multi-flexible tool in addition to immunoassays in diagnostics. There's no question about that. Whoever we've spoken to, all the voice of customers tells us that. The challenges are, of course, the simplicity of use, the speed of the result. And there, we've made some significant advances and we have a bit of work to do as well. right? So first on the advances, during the pandemic we worked with the National Health Service in the U.K. to provide LC-MS as an alternative to PCR, right? We only started with that, I would say, mid- last year. Then it got accelerated in September, October time frame when I joined the company and I saw this as a massive opportunity to have an impact on public health. We were successful in the proof of concept in showing that LC-MS for SARS-CoV-2 is equally sensitive and selective as PCR. The speeds are similar. The costs are even cheaper because the disposable costs are much lower for LC-MS. However, we were a bit later than one would have desired because the infrastructure investments have already been made for PCR, right? And I still have hope that as the U.K. government and others need an alternative tool, we will have LC-MS ready to go. And in addition, LC-MS, and as you know, has a benefit over PCR, in that it has much fewer false positives. PCR still has 5% to 10% false positives; whereas LC-MS, as it's measuring the spike protein, doesn't. So we have experience in taking LC-MS into the clinical diagnostics space. And now we're working on a multiyear plan, and the investments have already begun to look at different pieces of the stream, right? Can you -- how do you simplify the sample prep? How do you make the multiplexing? How do you do the automation? And I would say we have made significant advances. And I'll remind you about 150 million to 180 million of our business is in clinical today already. So it's not a new space for us. We know the space. It's just that -- it's not just one where we've had the stamina to sort of develop a solution. We think there's a pretty significant opportunity. Through organic development, through partnerships and through targeted acquisitions, we could accelerate this journey dramatically. And we see more significant opportunities even beyond infectious diseases in oncology and in endocrinology, where the need for sensitivity especially in endocrinology for thyroid, is very significant, especially in pediatric patients. You could detect diseases much, much earlier. And our people, our teams are very inspired by that, right? You detect thyroid disorders at a much earlier time frame using mass spec where you can -- where you have a much higher sensitivity than immunoassays at much earlier ages for these kids. I mean why wouldn't you want the tool to be available much more widely? So you can be sure the teams are working on it, but it's something that will show benefit over the mid to long term, Vijay, unless we're able to accelerate it through partnerships and acquisitions. And that's something we're looking at very carefully.

You brought up a couple of points, Udit. One is that partnership, right? I think one of the questions we get is these labs -- diagnostic labs, they like integrated solutions. So do you need -- is installed base an issue? Like do you need to partner with an existing immunoassay company to be part of an integrated solution? How important is that?

Too early to say, right? Let's come up with the value proposition. Let's make sure that the workflow works. I am absolutely certain that we'll be able to find a solution, if the workflow shows a significant benefit for the clinic.

Understood. And I think the other point you mentioned, Udit, was M&A. It's certainly -- the sense we get is Waters is now perhaps a little bit more open towards deploying capital on the M&A side. Any thoughts on leverage levels or size of the deal? Or how are you thinking about acquisition as being a new pillar for Waters?

We've said quite a bit about it already, more so than probably I would like in any case, right? Look, I mean the area's I've highlighted pretty openly, right? So we think there is an opportunity for us to add value in the reagents area, especially in novel modalities and biologics and bringing that closer to our chemistry portfolio. And there is significant unique value that Waters can bring to the table there in bioprocessing. We just talked about the starting point on partnerships. And as we learn more about the area, we'll fill in the gaps. And you can see that that's starting to take shape. And then third, we just talked about mass spec. Outside of the health care space, there's also the materials space, which I'm super, super excited about. In fact, this morning, I was with our Innovation Board. And we reviewed with the impact of sustainability on physical and mechanical testing and where TA plays a pretty significant role. So as you recycle polymers, they are inherently contaminated with many different types of polymers that you initially did not have in a, say, a bottle or a -- or even a single-use bag for that matter for bioprocessing. How do you ensure that the physical integrity of that material is the same as it was before it got mixed up with other things that you recycled it with? And you use TA instruments, thermal analysis instruments and mechanical analysis instruments that we produce. So we spent a good 2 hours this morning reviewing the strategic view and the tactical view on that direction. I'm super excited about what we're going to be able to do for our customers in that space. So -- and there are some acquisitions one could do in that space as well. So the -- what you can take away from the narrative that you've heard from us is that we are open to deploying capital in M&A. There's no question about it, provided it makes sense from a financial standpoint. We were a financially disciplined company. As I mentioned earlier, I mentioned 2 aspects of the Waters culture. One was the technical aspects and the customer closeness that allowed us to do the turnaround. The third one I forgot to mention, which is that we're very cheap. We want to make sure that we are -- our ROI metrics are met, and our finance team is pretty robust on that front. So we'll remain financially disciplined. And finally, the team is excited. We have built a leadership team that has experience in this area in the M&A area. So we're looking actively. Timing, size, more specificity, of course, is not something that I can comment on.

Understood. The one question in my inbox here, on the competitive landscape, I guess when you think about biopharma as an application for mass spec and LC, have you -- I think some of your competitors are offering instruments. It's almost like a reagent rental model outlays instruments. Give me a contract for a few years. Have you heard anything about that? Or should that impact your approach? I mean it feels different but I would be curious on your perspective.

It's not necessarily that different, Vijay. If you ask the Waters colleagues, it's something that we offered over 2 years ago as a lease model for our instruments. It's had some uptake in some smaller biotechs and smaller CROs, but not necessarily in the big customers who want to purchase and who want the instrument and want to replace the fleet at a certain point in time. And the larger customers are the larger CROs and CDMOs who are more focused on robustness, on simplicity and efficiency as opposed to the cost or the capital outlay right at the beginning. So I think different value propositions, but the customer set there is much smaller today than the larger sort of pharma, large pharma and CDMO CRO end markets. Yes, so I think something that we've heard about or at least launched a couple of years ago, with some success but not a huge market.

Understood. So I guess the conclusion is there's been no impact to Waters, that would be a fair statement.

Yes, none at all. I mean we have the alternative value proposition. And if the customer asks, it's available. But for our larger customers, it is a nonissue.

Got you. And then one on China, anything -- I mean China always tends to be a little tricky for us when these regulatory changes happen. I mean food comes to my mind a couple of months years ago. They always catches us by surprise. Anything on the macro front in China that we need to be aware of? I mean the shorter-term lockdowns, et cetera, it is what it is. But any big regulatory changes or tenders, et cetera, that we need to worry about?

Look, I mean from a -- and let's take it for our largest market and the smallest one, just to provide contrast, right? The pharma market is driven by the demand of molecules and biologics and increasing penetration of CDMOs, right? We work with the largest CDMO in China and probably soon to be in the world, right? And there is no stopping, right? I mean that thing is going super, super well. The demand for their products is very high, and as a consequence the demand for our products. There is no sense that we hear from our customers about replacement or buy local on any aspect of what we do, right? They're not looking to sort of internalize or do vertical integration for analytical instruments. They trust Waters. They want to make sure that our service engineers have time and energy to go to their sites, even if their own employees are not. And I'm in constant conversation with their CEO, if there is something that changes. So I don't feel from the large customer perspective, anything is changing. Of course, the undulations due to the pandemic, nobody can predict. But that's not a longer-term impact. Now if you look at the smallest end market, which is academia. Academia, we are not the largest player, as you know. And that fluctuates -- that end market fluctuates quite dramatically, right? And I think there some of the customers, although it doesn't, given it's not a huge part of our business, has not shown up in our numbers. But some of the customers indeed were waiting for the VAT rules to sort of bared and the buy local rules to sort of bared, and then decide what they wanted to purchase and when, right? And if there was going to be a change in taxation, they wanted to wait until it was completely clear what the implications were. And I think that's it. That's what we've seen from our business perspective. But again, academia, I'm sure there are others who could comment and give you more richness. But on the pharma side, on the CDMO side, on the food side, no real issue that we have perceived, I mean. And then just to kind of say one more thing, China for Waters, and Waters went as China went in the past. Those days are over. Meaning China will do well for us I'm absolutely certain, and is doing well. But the U.S. and Europe are regaining significant strength. And that's the real reason why our business has started to turn. I'm very, very happy and excited about that.

Maybe last question for me, Udit. The -- some of your peers have made commentary about fiscal '22 pricing being above historical trends, just given the current inflationary pressures. How should we think about the pricing contribution for Waters in fiscal '22 relative to your peer commentary?

I mean the objective is the same as you've heard from our peer group, which is highly competitive and competent teams. The idea is the same, right? So as we see inflation in some of the raw materials and labor costs, we are, of course, working hard to realize efficiencies internally but also passing on the costs where relevant to the customers, right? And so when you think of instruments, instruments are shipped sort of over a certain period of time, and ones that are shipped this year, probably have a slightly higher markup. But then when you think of consumables, that's just sort of a longer-term trend that we keep an eye on. But a very detailed pricing analysis and where it makes sense, passing it on to the customers.

Fantastic. I think with that, we're at the end of time. Udit, thank you so much for spending the time this afternoon. This is my

Same here, Vijay. Thank you so much for having us, and thank you for your continued interest.

Bye.

Okay. Bye-bye.