Waters Corporation ($WAT)

Okay. We're going to go ahead and kick it off. I'm Tycho Peterson from the life science team. It's my pleasure to have Udit from Waters with us today. So welcome, Udit.

Maybe we can just start with a quick look back on 1Q. Obviously, very strong growth in the legacy Waters business. We'll start there, up double digits. Clearly, humming along in the replacement cycle. Just talk about some of the gives and takes, particularly on the biopharma side you saw in the quarter.

Firstly, thank you for having me, Tycho. It's great to be here. A fantastic quarter, double-digit growth. And we saw that this is the legacy business that you're talking about. Instruments still high single digits, LC-MS replacement cycle going very strong. New products doing extremely well, Alliance IS, TQ Absolute, XR, MRT, nice from new products across the board, the idiosyncratic growth drivers with GLP-1 testing, PFAS testing, India generics, all contributing nicely. On the recurring side, chemistry had another terrific quarter, even with the extra days, which was -- it was about 13% growth. Service grew 12%. Even if you adjust for the extra days, it's high single-digit growth. So really fantastic quarter. And I think you asked about the end markets, especially pharma. Pharma was a standout, mid-teens growth, high single-digit growth in U.S. and Europe, driven by large pharma replacing and new products. India generics doing just as well as it has over the last used to high teens growth in India, and that it didn't disappoint. China was the standout. In pharma, China grew over 50%. And this is driven by the local biotech industry fueling the growth of CDMOs and the local pharma companies. And so fantastic growth, nothing to complain about. And we had virtually something for everyone in this particular quarter across the board. Equally in the guidance itself, we said, look, we're going to use the opportunity. We beat the guidance by about $60-ish million on the top line. The EPS was nice mid -- actually almost 20% growth. And there, too, we had room, but we just said, look, let's just derisk the second half of the year and use this opportunity to create a bit even more prudence in what we see as the latter of the year. So feel very good about where we sit. And just as a last comment on where we are now, you'll remember at the Analyst Day about 1.5 years ago, we had laid out an algorithm. And we had said, look, if the industry grows between 4% and 6% on top, you add about 100 basis points of additional price versus last several years, take [Audio Gap] take 100 basis points away from China being slower than it has been in the past for the industry and for us. At the idiosyncratic growth drivers, 170 basis points, we upped that to 200 basis points in the recent times. And then we said, look, as long as the replacement cycle goes on, you should expect us to grow high single digits to high single digit plus. And that's been sort of the ZIP code we've been in for the last 1.5 years, high single-digit plus and this time, double-digit growth. So I feel good about what we said in motion. The operational inertia, the operational sort of tactics that need to get in place after you layout concept is out of the system. And so we're executing that plan, I think, really well.

Anything you wanted to say on pharma strength post 2Q, we've heard some of the peers, April and May actually has picked up for a lot of the customers...

I mean you do -- good try.

Let's double-click on China then over 50% growth. It's more CDMO biotech right now than generic, right? So maybe just talk about those end markets and then obvious we can talk on stimulus and academic.

So I think -- start with biotech, roughly 1 in every 3 molecules that are in licensed now out of China into the rest of the world, roughly every 1 in 3 molecules that is in licensed in the biotech industry comes from China, right? And this is something that's been built up over a long period of time. This has not happened overnight. The Chinese government brought in a lot of talent from the U.S. and Europe, into the academic institutions, they have now been funded to start their own biotech companies. The Chinese FDA has made preclinical trials much and early-stage clinical trial is much simpler to run in China itself. So there are structural advantages of starting work for biotech in China. That is, of course, now supported by world-class CDMOs like -- And equally, which is most important, in my view, is you're starting to see the rise of large pharma companies again to Pfizer and Merck with discoverer led and research led institutions in China itself, right? So is starting to build that and a couple of other pharma companies are building their version of Pfizer, GSK, et cetera, in China. So this is not a onetime impact. Don't expect pharma to grow over 50% every year in China for us or every quarter in China for us. But it is now a secular trend, and we intend to take advantage of it. And I want to just share one example with you. I mean we talk about onshoring and we talk about talk about localization of portfolios and local manufacturing, but equally important is the technology development that is taking place in China now, right? So we saw one of our large CDMOs take our high-resolution mass spec, and this is the first globally, our Xevo MRT, use it for a GLP-1 in quality control. This has never happened before. We've been trying with bio cold for the last 3 to 4 years. We have a compliance software. It is an enterprise-level software. It serves all the needs to get into QC. It has entered QC for some large pharma companies in the West, but at a modest level. But this is a first for a high-resolution mass spec like Xevo MRT to enter into QC. What does that mean? That means -- and that's for a GLP-1 for one of the large GLP-1 manufacturers globally. What does that mean? That means that once these high-resolution mass specs enter QC for impurity testing in China, they will then -- the same thing will start to happen in the rest of the world. I'm super excited about that, right? And so it's not a laggard, -- it's not a localization of portfolio. It is a leader. China is a leader for us now. [Audio Gap] So you here now you're referring to the Bioscience business, right? So unlike our Analytical Solutions business and Geosciences business, which is legacy Waters, where we localized our full portfolio, and we're able to compete in local tenders for any customer for Bioscience, we've been restricted from doing that, right? Because we haven't localized the portfolio. And it's actually true for microbiology as well. And for those businesses, for some reason, the portfolios were not localized even to the tightest degree. So we approved that, right, when the deal closed, and we will start to see actually sales come in, in Q3 and Q4. And you just say, well, how can you localize so fast? I mean, localization doesn't mean local production. Localization means different pieces of the value chain have to be localized to be able to compete in local tenders with the you localize more over time. We have a site in Suzhou. Sometimes that is a constraint if you don't have a site itself, which is ready to actually take these workflows. We've already tech transferred them. They're going through local approvals. As I said, we move at water speed only second to China speed. So it's fantastic when the two things come together. So in Q3, you should start to see orders from locally made flow cytometers and next will be locally made tactic FX instruments.

And maybe just rounding it out on China, how do you think about kind of normalized China growth once the headwinds roll off?

It's a tough question, especially if you come of the back of an 18%, 20% growth quarter, right? We have still modeled mid-single digits in our guidance. But to fast pass the red face test everywhere you look especially where we are exposed and the choices we've made to be in pharma to support the biotech industry, to support the academic institution and to support microbiology, I see no reason why shouldn't to traverse towards high single digits by the time of the year it year ends.

Maybe just stepping back and looking at BD, 1Q came in better than expected, obviously, reset numbers on the 4Q call. Maybe just level set us now. It's been a few more months since the deal closed. As we think about what's under your control, where are you most excited? Where are you seeing the most tangible benefits from some of the changes you're enacting -- is it commercial, operational?

So just take a step back, right? I mean, let's just sort of look at the full context, right? Whenever you look at a business, you want to look at the characteristics of the end market. You want to look at commercial execution and then you want to look at innovation, right, those are the choices you make. From an end market perspective, Waters has always been focused on downstream regulated settings where volume is easy to understand, will count infections, number of patients that you can verify publicly, right? And so we are always looking at those sorts of segments and we want to get stronger in those sorts of segments. And for the last 5, 6 years, at incumbent Waters, we've basically been in that space. We've executed well commercially and then we've introduced new products, go from what used to be a low single-digit grower to high single-digit to a double-digit grower. And we are starting the same journey with the acquired businesses now, right? They are largely downstream and they're in high-volume regulated applications like microbiology, like clinical for flow cytometry. The only things that are missing are an intense focus on commercial execution. And then once you've done that, launching new products really well, right? And so those are the two things we'll enact now. So now to answer your question specifically, I mean, think of the transformation plan and the integration in 3 phases. First is the 180-day plan. This is self-help. This was nowhere underwritten, but when you look at such a business, you say, "Okay, are you actually going to your customers often." At Waters, what we found is we were going to customers as many -- 2x more, twice as more as some of our BD colleagues were. And so we implemented a tracking mechanism in the U.S., in particular. Second, we said, okay, that's all well and good. How strong are your funnels, right? Is it just a conversation between two people? Or do you actually know if the lab head actually has funding and if they have approval for funding to buy the instrument that they're saying -- So the fidelity of the funnels allowed us to meet our forecast for this particular quarter. And after many quarters, these two businesses have met their forecast. And that has to do with the robustness of tracking of the funnels. And then we said, look, that is all well and good. Think about pricing? Are you actually able to come on pricing? And what is your pricing mechanism and pricing control mechanism? It's one thing to have a high list price is in order to have a high landed price, how are you controlling discounts and what has -- what I call deal desks. These are people who meet twice a week who reviews hundreds of different deals over a month and approve them or modify them so that we can win versus competition, right? This is a discipline that's been there at Waters. It's being now implemented in bioscience and diagnostics. The second part of pricing was compliance. These are reagent rental businesses, where once you agree to a price volume curve with a customer, the customer has to comply with the volume in order to get that price. And what we saw is close to 50% of the customers in the U.S. as business, we're not complying. They're buying lower volume, and that's a double-digit million delinquency that we are now starting to recover. And then finally -- and this is again self-help, right? Finally, when you talked about China already, we that the business had not localized products in China, and we were somehow our teams were handicapped versus competition. And we wanted to remove that handicap. We have already done it and handicap once removed, will allow us to capture market share and capture the growth that we see to capture. That's just the 180-day plan, that I call setting the tone, right? And that gets you -- sort of gets everybody to understand the culture that -- Then you talk about the synergies on the revenue side, right? So there are tactical synergies. These are ones you can feel and touch and you know that we've executed them in the last 5 years is increasing service attach, instrument replacement, e-commerce, launching new products, and we have 3 fantastic new products across the businesses. In fact, we had a press release this morning on our FXI approval for microbiology in the U.S. as well. It's already approved in Europe and Japan. Very excited about the replacement opportunity, about the placement opportunity of that new product. A7 is a high-volume flow cytometer for routine applications that will be launched in the second half the year. And thirdly, we've launched our HPV solution, home collection kit. These are three massive launches. You're lucky to get one every 3 to 4 years. We're getting three all at the same time, so we have to launch well. So this is for me the second bucket, which is tactical synergies. Here and now, we can all see it. They're tangible. We've just done that over the last 5 years. And then there are the strategic synergies. Can you enter the industrial segment with microbiology? There's a market that's already ready. We have to modify our portfolio. We've already assigned a team to do it. Can you improve your bioseparations growth from double-digit growth to even higher by having access to antibodies? We have access to world-class antibody, so we're going to do that. Can you take flow into QA/QC? You're starting to see benefits of cross-selling already with mass specs into drug metabolism. This is in the reverse direction. And can you automate LCMS? All of those motion. But from short to long 180-day plan is already showing benefit. The tactical synergies will start to show benefit now in Q2 and onwards and the strategic synergies latter half of the year. So it conceptually is very clear. The accountability is very clear. Now the question is how do you get the inertial friction out of the system so we can execute like incumbent Waters is executed.

Executing. And maybe just diving in on -- first of all, the announcement a couple of hours ago on FXI, you're pulling forward the time line. So maybe just talk about how...

Let's give credit where it's due because when I saw that, and we said, look, we've accelerated the launches. I went to the R&D head at Micro -- in our Diagnostics business and say, "Hey, how could Waters have accelerated the launch? We -- the acceleration is longer than the time from the close to now." And he said, "Look, as soon as we knew we were going to be acquired. And during integration planning, we sort of saw how you guys are operating." People said, "Okay, we've got to get out of the gates fast." So there is an acceleration, but I wouldn't say that it's happened under Waters' management. It has happened under that team, which is exceptional, right? It goes to show with increased focus, with increased ambition, I mean people want to do well. And these are fantastic portfolios. As I mentioned, these are great end markets where we have privileged positions. We have a bit of self-help to execute, and then we start to address the significant unmet needs that exist in these areas.

And let's just spend a minute specifically on microbiology because I know that's been a focus and a pressure point. You just had a good first quarter there low double-digit ex China. Just talk about where you're feeling better on microbiology, in particular?

So again, I mean go back to the framework I set up upfront. It is just looking at the market itself, the end market. Volume grows on the high end of low single digits, say, 3-ish percent. Our nearest competitor has been commanding pricing between 200 and 400 basis points. From 2019 to '24, that segment -- that end market grew 6.5%, way faster than any diversified tools company, including Waters. Waters was one of the fastest. And we didn't come close to it, right? So it is a fantastic end market. The unmet needs are very significant. I mean for a sepsis patient, it takes roughly 18 hours from the time they enter a hospital to the time they are prescribed by antibiotic. Every hour delay increases the mortality by 5% to 10%, roughly 300,000 people in the U.S. die of sepsis every year, right? So unmet needs are significant. Technology solutions need to be brought in. But there is need for self-help, right? I mean we -- it's a market that grows, but we've been underperforming in the market. And in Q1, we got out of the gate strong. As I mentioned, 180-day plan starts to show impact. Microbiology as a whole grew for the full quarter roughly 5% for the stub period a bit faster than that. And if you look at -- if you take out the China impact, it's even faster, right? China was -- with China declined about 15%. So grew really rapidly, right? So you already start to see momentum of just focusing on the business. And that said, there are two or three, as I mentioned, self-help topics. One, we had a supply challenge with our back tech bottles. We are still only about 80% to 85% of the utilization prior to the supply challenge. There is zero reason why we shouldn't be 100%. In fact, Brazil is a -- so the creative folks have actually used that supply issue to increase penetration and others have said, "Oh, you know what, maybe I can't supply, right? So we're pushing the team to get back to 100% or 100-plus, right? So there's an opportunity there. Second, we have about 12,000 or so instruments that are out there, the FXI instruments, and there is a significant replacement opportunity that is basically instruments that are over 5 years old. And there roughly 4,000 or 5,000 that are over 10 years old. We have just launched the new version of it, FXI, which is the most automated platform in the industry. It is a closed system. It is able to use the highest number of bottles per unit per in an incubator. So a new product has been introduced exactly at the time when the replacement cycle is picking up. So the self-help pieces will allow us to get, I mean, I don't want to sort of set the milestones too high, but there is no reason why we shouldn't be growing faster than our competitor because we have trailed them for many, many years. And our consumption on the consumables is lower. Our instruments are aged, so we should be playing catch up like we did with Waters in '21 and '22. We grew faster than the industry because we catch up. And so we have catch up here for the next 1 year, 1.5 years, where microbiology should grow faster than the industry, and there's only one other meaningful competitor in the space. We should be commanding better pricing. And then you can address the significant unmet needs, right? So it's a fantastic end market. I mean there's a lot of self-help to be executed there.

Maybe a similar question on the flow side. So research, clinical grew 7% quarter just unpack what you're seeing by end market consumables versus instruments. And where do we sit on revenue synergies and starting to kind of push it into QC...

Sure. So let's start with the overall business. So half of it is clinical customers, half of it is what we call research and pharma customers. On the clinical side, the reagents business itself grew 6% for the full quarter and the stub period. So the stub period, it was much faster, right? I just take the full quarter. And for the full quarter, it was 6%. And that business in itself, our highest margin business across the new Waters is our clinical reagents business from Bioscience. And that's been growing slower than some of our other business. So their task is to grow that business faster. And as I mentioned earlier, there is an issue with contract compliance. And we just reviewed Europe 2 days ago, but the European team has done the same analysis we did with the clinical business in the U.S., and they've also found delinquency in contract compliance on reagent rentals. Now they're going back and trying to figure out the value propositions that we need to offer customers to increase compliance, so you should see that business growing faster. Fantastic business. The second is the research reagents business, which is also a very good business. There's another competitor here, who's now also been public about how they focus on quality and orders and then finally on pricing. So it's a -- the market structure there is also very good. There's only one other meaningful competitor in that space. Our challenge has not been the quality of our products. Our challenge has been on delivery. And there, we're doing two things. One, we're basically improving the front end, which is what we did with Waters to improve the e-commerce platform. And there, we've hired about 100 new people in our global capability center in Bangalore to expedite that process. And finally, the third piece is delivery, which you can't fix overnight. And usually, customers expect 24 -- between 2 hours and 24 hours. If you're in China, they expect their antibodies in 2 hours, they're outside of China, they will accept 24 hours delivery time for research antibodies. And to get to that point, you need to have your distribution network be global. So you can't do that over night. So we're going to partner with distributors who have global infrastructures, have them hold inventory for us and then partner with them to improve the demand and delivery. So that's the reagent side. Really clear plans to growth. And then on the instrument side, the A7 product, as I mentioned earlier, it's a high-volume use flow cytometer -- a spectral flow cytometer that's being launched in the second half of the year July time frame at will talk about it more next week. So really excited about that. So all three fronts we see, the base business growing faster beyond the 180-day plan as well. Now you asked about synergies on flow in QA/QC or other synergies with Bioscience. The BioScience business has already helped us penetrate drug metabolism accounts. So roughly $5 million of upside for our analytical business coming from bioscience accounts. Now equally, on the other side, taking flow cytometry into QA/QC, first, it starts with process development, where our analytical business has a much larger presence, and we're starting to see that or the seeds of that being sown. For it to enter QC, we will have to have flow cytometry be compatible with Empower, that's going to take a little bit longer, 1 to 2 years development time and then you'll start to see the penetration like we did with light scattering, right? So I think that's how I would break it up.

You touched on pricing a couple of times. Just maybe talk a little bit about when we could really start to see this show up in the P&L. I know you've implemented some deal desk...

I mean we've incorporated 50 basis points in the guide. You should see something better than that. It's -- over the long term, we've with Waters had roughly 200 basis points of pricing over the last few years. At the Investor Day, we said, look, 100 basis points above the 50 basis points that we've seen historically. So for the new businesses also you should have expectation. 50 basis points is what's been there historically, which is what is in the guide. There's no reason why 1.5 years from now, you shouldn't be seeing 150 basis points or 200 basis which is what we said also in the investor call.

And then just thinking about chemistry on the base business. Talk about what you're seeing in durability above the historical trends there, call 8% to 9% versus traditional 7%. I think given pricing is sort of unchanged at 5%, it suggests 1% to 2% from new markets, new products. Just talk a little bit about...

And I think you need it. I mean the simplest way to first answer your question, the simplest way to think about it is, historically, chemistry has grown 7% with our bioseparations growth and our products there, you should expect 150 to 200 basis faster growth just coming from those, right? So that's the simplest way to think about it, assuming similar pricing. Now you take a step back, and I think it's instructive to look at the journey about 5-ish years ago, we decided that we're going to spend bulk of our R&D spend in chemistry on bioseparations. So over 70% of R&D spend went towards bioseparations. And step by step, we started to build the portfolio. And last year alone, we launched 12 new products on the back of our MaxPeak premier column, right? It takes 4, 5 years to sort of build these portfolios and start to see the benefit. And with MaxPeak, the insight was very simple, large biologics basically gets stuck to surfaces. And we said, how do you build an inert surface without having it leach off. We built that with MaxPeak. And then on top of it, we started to sort of come up with better particles, better surface chemistry that will be compatible with the biology of these complex molecules. Our nearest competitor launched their inert column 5 years later. So we have the market to ourselves for roughly think of it this way, right? Each of these new modalities now that are being separated with our columns has that 4- to 5-year window. And once they get spec-ed in, they are sort of for the long term going to grow like bioprocessing does high-single digit, double digits. So we are now in a zone where you will see us grow way faster in one quarter, a little bit slower because we are specking into discovery columns. So you'll see a spike and then you might see a bit of a slowdown. But over the steady state, you should see a high single-digit growth, right? And as you think of the balance of the year, we've said, look, it's going to be mid-single digits. Q2, in particular, remember, we had a $10 million pull forward in China in Q2 last year, and that sort of is a headwind that one has to surmount. So that's why we've said chemistry, think of it as a 4-ish percent grower in Q2, maybe a bit higher, maybe a bit lower, but add the $10 million, that's another 6% of growth. That also gets you into a high single-digit, double-digit domain, right? So no matter how you look at it, we're traversing at least high single-digit domain for a while in chemistry.

And just part of the excitement around the deal was getting access to the antibody library. When should we think about stranded products -- projects on the BD side take Los...

So two parts to that answer. First, existing antibodies, we looked at the existing library of antibodies. And out of the 12 programs that were stranded, 8 have been kicked off already, right? So we found antibodies that existed that already manufacturing that we have substituted external vendors for our internal capabilities already, right? And it takes, give or take 6 to 12 months to basically do the conjugation, do the experiments, work with the customer start to see if they're interested in embedding that into their workflows. But 6 to 12 months from the time you start, you start to see first impact. It probably launch the product in 2 years, right? So that's sort of the time frame for these 8 antibodies. Then there's the additional 4 that we said we need to build sort of develop those antibodies internally, and we're doing something slightly more than that now. We're now looking at our global infrastructure and saying, "Hey, given that we produce antibodies, should we not think about expanding our library of antibodies and supply them for use in other areas as well, right? So you can already see a hint towards building an antibody business, and why not, right? I mean there is a plan that's ready to build an antibody facility in Singapore. We've sort of mixed it and we said, "No, let's look at our internal capabilities in every geography. And can we take -- can we build a brownfield approach. So we're examining that. So they're a 2-pronged approach: One, support our bioseparations business; and two, can we expand our antibody production capabilities to have a liability of antibodies available for our customers and not just be a producer of flow antibodies?

Great. Just kind of few seconds left, I guess, maybe just coming out of ASMS any message you want to take away? Obviously, new introduction here, maybe slowly moving into kind of high-rise.

I think incredibly proud of the team that's leading mass spec. I mean it's gone from a team that was obsessed with high-resolution mass spec 6 years ago to one that builds strength in high volume, tandem cards, absolute, absolute XR, then equally had skunkworks projects behind the scenes to improve our high-resolution offering with the Xevo MRD and now a benchtop MRD, which is the fastest high-resolution instrument on benchtop available today in the industry. Equally improving cyclic, and this is where your question is going to start moving into proteomics, make no mistake. I mean that's an area that's attractive. We just felt 5, 6 years ago, we were in no position to build while we were losing in our home base, which was volume mass spec. So we're winning in our home base now. We're attacking drug metabolism as well. We feel we have a right to win there. And yes, the answer to your question is yes. We are interested in proteomics we are working on ways of making a difference [Audio Gap]