... We'll get started. Thanks everybody for sticking with us. Good morning. Welcome to the Wells Fargo Healthcare Conference. I'm Brandon Couillard, covering life science, tools, and diagnostics. It is a real treat to have Waters with us at the conference this year. Joining us for this conversation, CEO Udit Batra. Udit, thanks for being here.
Brandon, thank you for having us. I thought you had a Waters-labeled water. I saw this, and it's blue in color, so these are Waters colors, and I said: "Oh, wow! Look at this." Matches .
This minus the S. Obviously, one big topic that I wanna get into, but we're gonna start with the base business. You just reported another quarter high single-digit instrumentation growth. TA was a little soft, but, you know, generally kind of better than expected across the board. What are some of the puts and takes out of the quarter in your view, and where are we in the instrument replacement cycle?
I thought that was gonna be somewhere down the line, but yes, we'll talk about the instrument replacement cycle. But look, the base business goes from strength to strength. We saw momentum just like we did in Q1, in Q2 as well, continuing along, and it's-- we're like a-- we're boring. We say the same things, and we keep doing it again and again. So it's along the three dimensions we've talked about all along for the last five years. Number one, the commercial initiatives are going extremely well, so you can just look at our report card on service attached, that's now 52%. E-commerce is well north of 40-45%. CDMO penetration is even higher than it, than we had planned at this time.
So the commercial momentum and the commercial initiatives are driving the growth. Second, new products are doing extremely well, and they're contributing nicely to the eight-ish% growth that we saw this quarter. Be it Alliance iS, it is basically three times the sales that it was last year, so really a fantastic launch. TQ Absolute XR is setting new standards with sensitivity and robustness in its category. Our columns are going extremely well with the MaxPeak Premier, again, growing 30-ish% this quarter. So new products are contributing nicely. And then, the third piece is what we talked about at our Investor Day, idiosyncratic growth drivers. PFAS testing this quarter grew 30%. I mean, people said that's lower.
that slowed down, yes, from a 90% growth in Q1, so year to date, close to 50-ish%, lapping sort of, 40% last year and 40% the previous year. So PFAS testing's growing nicely. GLP-1 testing first half of the year, 70% growth. India generics, high teens% to low 20s%. So all the pieces that we talked about, with you in the past are delivering as we had said. Yes, there was a challenge with, with TA, especially in the U.S., that went down by about 20%, largely driven by R&D testing in material science, with material science customers or chemicals customers. But outside of the U.S., TA grew nicely. In China, they grew, high single digits, well into the double digits.
And the positive surprise came from China coming back nicely to growth. Double-digit growth also for this past quarter, driven by CDMO activity. So nice quarter. Along the three dimensions we've always talked about, good progress across many different pieces of the business. And then, your question on the replacement cycle, look, really good progress there, and the way to think about that is, look, LC-MS, LC-MS growth is again high single digits this quarter, same as last quarter, where it was in the double digits. Late last year, it was also high growth for LC-MS.
The replacement cycle, driven largely by LCs, is going extremely well, and the way to think about it is, and maybe just a couple of contextual comments as folks think about it a bit more, that is a phenomenon that occurs in QA, QC, and manufacturing, where instruments are replaced every, say, seven to ten years. Arithmetically, to see what proportion of instruments have been replaced, you just, you should just look at a CAGR. If you look at a six-year CAGR basis from 2019 to the first half of 2025, you find that the LC-MS CAGR is still 1%, right? On average, LC-MS grows 5-ish%, and that doesn't include better pricing, better new products like we are seeing now. You're far away from finishing off the replacement cycle.
We're still gonna see excess growth beyond the 5% that we see on average. So that's, I think, the first thing to keep in mind when you think about the replacement cycle, right? We're far away from being done with it. Second, there are several segments that have not even started participating. We're seeing good growth in late-stage pharma, good growth in generics, good growth in CDMOs, but China generics, discovery in pharma research, and academic and government CROs are still not participating, and biotech is still not participating in this replacement cycle. So this time around, the replacement cycle will be a bit longer.
Finally, I am so relieved to see some of our competition also talk about replacement because I was getting tons of comments from my board saying: "Hey, you didn't invent the word replacement cycle." In fact, it's not attributed to Waters. It's attributed to the previous CEO of Agilent, Mike. Mike had used the word replacement cycle when I had joined the industry and said: "What the heck is this replacement cycle?" And I got to know him better, and he taught me what the replacement cycle is and what math I need to look at. So I'm so glad our competition's also talking about the replacement cycle finally, about a year after we did so.
It really started to pick up for them in the quarter, you know, they reported last week. I did want to ask you about one thing that they did mention. Agilent talked about seeing the CapEx approval process being just much smoother and easier now. Are you seeing a similar dynamic?
I'm very factually driven. Sorry. So the way we measure the CapEx approval process is not just by the people who are approving it. I mean, there is, of course, a hierarchy in any company, but also by the velocity of the funnel, right? The velocity of the funnel, meaning from the time an order gets into sort of concept to the time it's released and becomes a sale, slowed down post-pandemic, and it's at that same pace. The velocity has not improved. The replacement cycle is going very well, but the approval processes are still similar as far as we can tell, so.
Any comment just on the competitive dynamic, the pricing environment in LC, you both going after, I imagine, a lot of the same customers at the same time with something new?
Yeah, I think you wanna be, again, be a bit more precise, right? On the replacement part of the business, which is 70% of LC, at least for us, I suspect it for other competitors as well. There, it is very difficult in QA/QC to displace a competitor who hasn't done anything wrong to the customer. If they're doing good service, if their instrument works, even with the Alliance iS, which is by far the best LC in the industry, it is very difficult to replace another competitor's instrument in the replacement domain. 30% of the business is new products and new users. That's where you win more, right? And that's where our win rates have been spectacular. And there, the customers are largely rewarding innovation.
And with the Alliance iS, which reduces errors by 40%, introduced about a year and a half ago, it's doing super well. Customers have de-risked everything, and there, that's, as I said, is now three times the sales as it was last year, so 300% growth. TQ Absolute XR has now made it into the drug metabolism segment. That's doing extremely well. And I think our columns are now growing 30% for a third year running with the MaxPeak Premier technology. So there, the 30% part of the business that is new users and new customers, that's where the share changes occur, right? And there we've been doing extremely well, and we monitor that separately from the replacement cycle.
Okay. Switching gears over to the BD deal. When you and I spoke after the second quarter, a few weeks ago, you said you actually passed twice on the deal the first time it came across your desk. What changed your tune? What was the hook that kinda clicked in your mind to actually look at it again more seriously?
I think I wouldn't overplay how many times we passed. I think bankers come every single day, and sometimes they come twice a day with the same idea. So I think all I want to say is, look, we were not proactively-
It wasn't entirely obvious, at least.
So one part of the business was well understood, and we've known it for over... at least I personally have known it for a decade. The other part was not, right? And I wanna talk a little bit about how the process occurred, right? So we got in a room with the management presentation, and what convinced us more were several things, right? So one, the strategic fit is impeccable, right? So we were after building a biologics QC domain, and for that, you needed two pieces, and we were very public about it. And we're nothing, as I said, we're nothing if we're not boring. We talked about this almost five years ago, that we wanna take our business model and build the same business model that exists in small molecules for large molecules.
For that, we need larger number of bioanalytical instruments, instruments that are used to characterize large molecules. So that's why we went after Wyatt. That's why we acquired this technology called HALO to look at particles, and flow cytometry and faster PCR and single cell analysis are technologies that are used to assess large molecules as well. And they were on our roadmap. And in fact, if you go back to my presentations in different conferences, you'll find flow as one of the boxes on our Empower chart where we wanted other instruments. So that was number one. Number two, in order to build strength in the biologics consumable space, you need a reagents portfolio, and we were after a reagents portfolio for a while, especially antibodies. And here, you get one of the best antibody portfolios in the industry, right?
one of the best capabilities in the biologics arena, right? So those two were big tick marks as we looked at the portfolio. Number three, in mass, with mass spec. With mass, mass spec is currently used in specialty diagnostic labs, and I'm not talking about core labs with high throughput, et cetera. But specialty diagnostics labs and hospitals today use mass spec for newborn screening, for endocrinology tests, for therapeutic drug monitoring, for drugs of abuse testing, tests that are difficult to do with immunoassays, right? Mass spec already is there. We had the ambition to automate that workflow and increase the number of tests that are used with mass spec, right? That's a $1.5 billion end market, grows high single digits. We've been growing double digits in that market.
We isolated that business or separated that business a few years ago, took it from a low single digit to a high single digit grower, and we were on the hunt for regulatory, commercial capability, and automation capabilities to enhance our portfolio there, and here comes BD with that exact same portfolio, so strategically, the fit is impeccable. Second, and I'll stop here with the monologue. As we looked at the value creation opportunity, this is not pie-in-the-sky stuff. This is concrete operational improvements. On the revenue side and the cost side, it's very tactical, but on the revenue side, these are operational improvements that we've made at Waters just now, over the last five years. There's an instrument replacement opportunity, there's an e-commerce penetration opportunity, and there's a service attachment opportunity. Where have we heard that before, right?
And so we will. We're just gonna simply apply those into a new portfolio, and we did a ton of work during diligence to get comfortable with that, right? The strategic synergies are pretty obvious. Then on the cost side, we saw we signed up for $200 million in synergies. In my previous experience with a large acquisition, we signed up for about $100 million, and if we had signed up for the same proportion, we would have about $135-$140 million more in synergy. So we have room there. Thirdly, on the microbiology business, we haven't signed up for anything that we're gonna do to improve that business. So we felt very comfortable on the value creation side. And then it's a question of what you pay for it, right?
We felt we paid quite a reasonable price to get this asset.
You are definitely sharing a remarkable amount of detail. It's pretty clear the amount of diligence that's gone into the workup and the numbers, and I gotta give you high marks for that. I've never seen that before. I mean, it's $290 million of revenue synergies, not $300 million, right? It's very specific. And appreciate the detail. Why share all that with the street and kind of sign up for that? But at a higher level, right, BD's gonna own 40% of Waters. They have a vested interest to actually ensure that those synergy numbers are real, too. So when you went through the process, did you go in separate rooms and come up with your own numbers, and then put them together and to validate them?
Highly, highly collaborative process, and I sort of gave you an example of that when we talked about the instrument replacement or e-commerce or service attachment, right? And remember, there's a reverse diligence because BD owns 40% of the company, of the new company, right?
Yeah.
There was a reverse diligence as well, and when we presented our instrument replacement protocol as just an example, right, which started off as a spreadsheet on my computer back in twenty twenty, is now a protocol that is in a CRM system. I mean, BD said: "Hey, why the heck aren't we doing this," right? So it's an operational improvement. Yes, it's called a synergy because we've done that, and the new business hasn't done it, right? So highly collaborative process. In terms of the specifics that we gave, look, Brandon, that's what we've done at Waters in the last five years, right? I mean, five years ago, we gave sort of these five initiatives, instrument replacement, service attach, e-commerce, new product launches, and CDMOs, and every year at the J.P. Morgan conference, sorry, not here, at another conference, I presented the report card.
And for five years running, we've done that. So I think it's less trying to pander to any ideas, more habit. I mean, we like to be specific, and we'll share specifics, so you can make up your own mind if you like the story or not. Same thing we did at Investor Day, that was well before the BD acquisitions. We sort of said, "Okay, these are the four or five idiosyncratic growth drivers. There's pricing that contributes this much, PFAS that contributes this much." And part of it is also got a method to its madness because if I show those externally, and I show those internally, and I have names across each of those, I have people accountable, both internally and externally, to those numbers. Makes it much easier to run the business.
Maybe just start with cost synergies. I mean, I covered Sigma. It was a well-optimized company, right? It was already at peak margins. People say the same thing about Waters. What's different about the two transactions that, you know, would, you know, use that as the comp, right? You said you could probably get another $100 million of cost. Now, what's different about those two and-
Yeah.
But which of the buckets will actually be hardest and take the longest?
I think you answered your own question. Sigma-Aldrich was, in twenty fourteen, at an EBIT of 30%, only second to one other company. Guess who? Waters. Waters was at 31%, right? So it was a superficially well-optimized company. Millipore was in the mid-20s%. If you compare it to BD today, BD is in the mid-20s%, and Waters is still at 30, 30-plus%, right? So there is more efficiency to be had from BD. I think that's lesson number one, just, just looking at the math top-down. Second, when you compare the synergies we extracted, only costs, forget revenues for a second, only costs. We delivered between 7.7% and 8% of the total cost base of Millipore and Sigma, not Merck and Sigma, but Millipore and Sigma.
Mm-hmm.
If you apply the same ratio to this transaction on a $4.5 billion cost base, you end up with $335 million in cost synergies alone, so that's 135 more than the 200 we have signed up for, right? That's just math. That's just arithmetic, comparing what used to be an optimized company in Sigma's case, a little bit less optimized in BD's case. When you do the math, and you said, "Well, you did that with Sigma, what if you did that same thing with BD?" You have a $135 million extra that you can do. But I think it's more interesting to look at the specifics. Where do you see it, so we did this top-down math. That's what I do for a living.
Then my team goes and says, "Okay, either you're silly, and this is, this number has no justification, or we can come up with justification for this that is specific," right? So the $200 million contemplates... I just take one or two line items, right? Take procurement for a minute, right? Anytime you do a merger, you have a larger cost base of things that you procure, indirect, for indirect procurement and direct procurement, right? For COGS and for non-COGS, domains. We have signed up for about 2%-2.5% cost reduction on indirect and directly procured, equipment and the like. That number is around $50 million out of the $200 million. If I just move it up to benchmark, which is external benchmarks, that's about 5% of the cost base.
That would be about another $50 million increase in the procurement line on its own, right? So that just gives you a sense of where we have room, additional room on the cost synergies. Take another example, G&A. On G&A, all we've done is we've said we'll take out overhead, overlapping overhead in different functions. What we have not done and included is an optimization of the organization that is improving, decreasing the number of layers from me to the front line and improving the number of people reporting to it, each individual, basically increasing the span in the organization. So improving the spans and layers, which is something we did with Waters, and you talked about Waters being so optimized.
Back in 2023, we took out 5% of the headcount at Waters when the market slowed down by increasing the spans and decreasing the layers in the organization. You apply that logic here, that's another $30-40 million, right? So you and purely on BD alone, right? So on the cost side, we've backstopped. We've got a lot of backstops. You say again, go back to the collaborative process. We sat down with BD, and we shared all of this, and we together said, "Well, we'll announce $200 million," and there were some other pieces on that had to do with the negotiation. That's why we signed up for $200 and not for $300 on the cost side.
Got you. On the revenue synergy front, I mean, I think the commercial excellence bucket is pretty easy to understand, and you've executed that playbook very well at Waters. The high-growth adjacent applications are a little bit more debatable, I'd say. I mean, it doesn't feel like to me that channel access has been the gating factor for mass spec becoming more prolific in DX labs, right? It seems more of a, what problem is it solving?
I think-
For an example, but maybe touch on just that and you know, what the actual use case is for things like PCR and flow in process development.
Yeah. So let's take flow first, and then we go to mass spec, right? Because it'll illustrate how we got excited and how BD got excited, right? So let's start with BD. BD got excited when they saw that Waters was gonna be the party that they come together with because they've been, for the longest time, trying to get flow cytometry's use increased in cell therapy. Today, flow cytometry is used. So just taking a step back on cell therapy. For cell therapy, you extract cells from a patient, you analyze them using flow cytometers to see what you've extracted. Then you modify them through a process, basically different types of processes, but let's assume you're modifying the cell.
The modification is tracked in process using a flow cytometer, and the final release of the product, which is then fully modified cells, different types of cells that go back into the patient. Guess what you use? You use flow cytometry to determine if the cell has been modified as you said you were gonna modify it, right? So the tool that is currently used is flow cytometry. Now, when you look at the market today, there's about, what, 9-10 cell therapies in the market, maybe a bit more, maybe a bit less. About 30% of those use BD's flow cytometers, right? There are about 700-800 cell therapies in the pipeline globally. Less than 10% use BD's flow cytometers today.
When they saw that Waters was coming in, they said, "Geez, do you have access to all these folks?" Especially in the manufacturing domain, there's no one better than us as Waters to take a product into QC or into manufacturing, right? So that excited the team. We sat and looked at all the customers. We looked at their locations. We looked at our commercial footprint and said, "Yep, we can generate easily $40 million over the next five years with this particular synergy, probably sooner," right? It's a cross-selling opportunity, if anything. Second, which is something we don't have in the synergy numbers today, the more important strategic value is simplifying the flow cytometry workflow like we have it for LC.
There are two pieces to it: one, taking the box and making it simpler, and two, having the software be compatible with Empower. Where have you heard that before? You've heard, just heard it recently with Wyatt. We acquired Wyatt with light scattering. That was exactly in the same place where flow is today, and we took it into QA/QC by making it compatible with Empower, right? That's the part that is not in the synergy numbers that we signed off for. Very practical again, right? This is not pie-in-the-sky stuff. This is very practical that has been diligence with the teams together. On the mass spec side, mass spec today is used for newborn screening, for therapeutic drug monitoring, for drugs of abuse, for endocrinology in hospitals. 80% of the tests are done in hospitals with mass specs.
Unfortunately, that workflow is not automated, and anytime you have to expand the number of tests, it requires regulatory and medical expertise. Unfortunately, we have neither of those two capabilities at Waters. We've been building those, but we have neither of those two capabilities, and we had said in our strategic plan that we will develop these two capabilities, and, but it'll take us some time. BD has both of those capabilities, number one. That's a strategic imperative. Again, that's not in the numbers. What is in the numbers is just having extra access to more labs. Today, in that $1.5 billion specialty diagnostics market, we have roughly a $300 million business, okay? We don't access most of the hospitals globally because it's a smaller business. Our Waters division has better access to QA/QC labs, but not to hospitals.
With BD, we get that access immediately. That's part of the $40 million. The other part is service. Clinical laboratories pay a lot to get 24- to 48-hour service turnarounds. We simply don't have enough service people associated with our clinical business to consummate that for our customers. With BD, you have service engineers present in each and every hospital around the globe, right? So service. A small amount of commercial expansion that gives you the diagnostics number. We've not included the strategic value that we would generate over the 3- to 5-year time frame, right? So again, very, very tactical. So none of this is theoretical stuff. This is all sort of diligence with spreadsheets, and that's why we're comfortable providing the details.
Gotcha. That's incredibly helpful. Let's just think about the risks, and they're really, I don't know, intangible. Think about culture, power struggles, leadership, attrition. Like, BD actually has more employees than Waters does.
Yes.
How are you gonna put all the organization together? And I don't, I don't know. It's just like, how do you just smash them together without, you know-
You don't, you don't ever smash anything together. Let's again break it down a little bit, right? First thing is to sort of make sure that the home base is secured, that the base business is running well, right? And I think you'll agree with me that the Waters base business is running reasonably well, and we provide incredible amounts of detail to judge how it's going. And it's not just me or my CFO, Amol, it's actually a broader team, and many of you who were at the Investor Day would have seen those folks. They're running different parts of the business. So the base business is in good shape, and that's task number one during this time. Task number two is from now until close, and thank goodness we have a few months, right?
Even though there's no regulatory challenge, close is in Q1 in 2026. From now until then, what we're doing is taking the plans that we developed together before the announcement, validating them. There's an integration planning team that's working on both sides with a few members who are validating these numbers, validating the customers, without sort of overlap. So there's something called a clean team that sits aside. But most importantly, their task is to find individuals who are gonna be accountable to deliver these initiatives, deliver the improvement of flow penetration in cell therapy customers. Who's the individual who's gonna do it?
At Waters, we have something called the deletion experiment. We love our teams. Okay, don't get me wrong, we love what we do, we love the problems we're trying to solve, but a team has individuals, and we say: If you don't exist, how would we miss you? So if you were not there, or more provocatively, deleted, how would we miss you? So what is your unique contribution to the mission of the team? And the whole idea from now until close is to find the individuals who we will miss if they're not there and not able to deliver the flow synergy or the mass spec synergy, right? So the whole idea from now until then is that. And the third piece that you mentioned is around culture.
It's absolutely critical, and I want to take you back five years ago. I think it's September first, five years ago, is when I joined Waters. Waters has always been a technologically strong company, as is BD, right? You go to the flow headquarters in San Jose, my God, I mean, you have per sq ft, probably one of the highest concentrations of IQ, in a building, right? Superb, superb folks who understand flow cytometry, understand cell therapy, understand everything about lasers, about dyes, et cetera. I mean, you name it. Same as Waters. Similar culture. Very focused on customers' problems, right? The challenge for Waters was not being commercially as strong and executionally not focused on a few topics, not having enough accountability and delivering fast, and that's exactly the challenge that we find at BD.
And it's largely because it's a business in a very large medical equipment company, right? It just simply hasn't had the attention. So our intention is not to go in and start changing things left, right, and center. Our intention is to bring the cultural elements that have helped Waters become successful over the last five years, and they have less to do with knocking heads and changing people left, right, and center. They have more to do with changing the ways we do things, especially on execution, where we will focus on a few priorities, some of which have already been delineated publicly. We will do the deletion experiment. We'll say, "Who's accountable for what?" And there'll be a sense of urgency.
Not everything we do, we're gonna get right, so we're gonna move fast, and some experiments will not work, but fine, but there'll be enough experiments being done that at an aggregate level, we'll be fine. So I mean, that is what we intend to do, and you know what? You have to have sufficient level of humility to know what to not act like you know everything. We'll learn some things, and we'll talk about it once the acquisition starts. I mean, what's the fun of knowing everything and every model predicting what's gonna happen in the future? So it's gonna be interesting and fun, but I'm very, very optimistic about where we're headed.
That's really helpful. You're planning to raise $4 billion in debt to fund the deal. What's your assumed interest rate? And I expect you would probably do that maybe a few months before the close.
Yeah, yeah, yeah. So no real challenge there. I think the question behind the question is what is your leverage ratio? It's about 2.5, 2.6. I mean, and within a year or so, we will probably go down a turn, and down the line, I mean, let's say two years post-acquisition, will be well below, sort of closer to 1, 1.5, well below the 2, 2.5, right? So one can talk about capital allocation at that point.
... Gotcha. Want to get your view on just pharma tariffs, MFN. You spend a lot of time with customers. To what degree is that coming up in your conversations, you know, if at all?
Not a lot. I mean, especially so my relationships are my personal relationships are with the heads of manufacturing, the heads of QC, and the C-suite. My team sort of talks to people all along the chain. We don't hear, especially on the manufacturing and QC side, any impact of MFNs and tariffs. Now, you can say, "Okay, why not?" You can get a bit more specific geographically as well. I mean, the U.S.-Europe piece has been resolved with the 15% tariff that was just announced. With China, in particular, we've had that discussion. There is a lot of progress, but in China, we're seeing growth with the CDMO segment, so that's growing nicely.
With India, the bilateral discussions that are taking place or the headlines that we've seen have nothing to do with what happens to the generics industry. The generics industry is exempted from these tariffs, right? So while the headlines look provocative, when you dig deeper, geography by geography, bilateral relationship by bilateral relationship, you don't find a lot of reason for concern, and then lastly, repatriation of manufacturing. Initially, it was contemplated that there would be a lot of localization of large manufacturing sites. In the interim, what's really happened is pharma has started to outsource a lot to CDMOs, and you see CDMOs growing quite nicely.
In the last second or so, I mean, what's your state of the union on China? Are you seeing any green shoots? And how do you feel about sort of just local competition when it comes to analytical instruments?
I can probably answer only one of the two in there.
Yeah, there's three in there.
Look, I mean, on China itself, very happy with what we've seen in the first half of the year. We see growth in pharma, even though the generics segment is still down. We see CDMOs growing nicely to support the local biotech industry. So think WuXi, think Pharmaron. We have terrific relationships there. The consumables piece, the recurring revenue piece, is growing very nicely there. In the industrial segment, that's largely driven by more and more consumption on the chemical side, but mostly on the battery testing side, where TA, the TA business is doing extremely well, and on the academic and government side in China, what we're seeing is, of course, the benefit of localization and broader distribution, so we grew high single digits in Q2, and in Q1 also we had nice growth, but we also had some small impact of stimulus.
Going forward for the balance of the year, true to Waters's approach, we've been cautious. We're assuming low single digit to mid-single digit growth, but it's super dynamic in China right now, and I mean it in a good way, especially in the pharma segment, where we had the top eight customers of ours from China visit us in the last quarter, and they talked about how excited they are with the new innovation, especially on the biologics area.
Super. Well, I have to leave it there. This has been a fantastic conversation. Thanks so much for being here, and everyone, have a great day.
Thank you.