All right, good morning, everybody. Thanks for joining us. I'm Brandon Couillard, Senior Life Science Tools and Diagnostics Analyst. Welcome to the 2020 Virtual Jefferies Healthcare Conference. I'm very happy to have Waters CEO, Chris O'Connell, with us at the conference this year for a little fireside chat. Chris, thanks for being here. I'll turn it over to you for some opening remarks. Good morning.
Great. Good morning, Brandon, and thank you for having me. I wish we were all in New York, but obviously we're in a very unusual time, and I just hope everybody is safe and healthy and moving forward. So let me just make a couple of quick comments to kick off the discussion. We're obviously in the middle of Q3, not in a position to provide an update. It's obviously a very dynamic time, and all of our focus remains on our top three priorities in the near term here of the number one, the health and safety of our employees on a worldwide basis, the ongoing continuity of our business and supply chain.
And then third, the acceleration of our recovery, which is what we're all very driven to do as we track and support various geographies around the world through their unique phases of containment, recovery, and return to growth. I thought I'd just start by reiterating what you're accustomed to me covering, which is our stable five-point value creation model that we continue to operate to. The first point in our overall value proposition and investment case is the very unique leading position that we hold in structurally attractive markets, notwithstanding various ups and downs in market cycles in different geographies over the years. We continue to remain very confident in the underlying secular growth drivers of our chosen markets, really driven by pharma. We have a unique concentration in pharma, and even in a time like this, our pharma customers have remained quite healthy.
In Q1, even though we had a decline in the business overall, we did see QA/ QC grow, including China, by the way, and chemistry within pharma also grew in the first quarter, including China. So those are just a few small data points that even in the most difficult of markets, we have steady underlying growth in the business. The rest of the portfolio in some of the more applied markets and industrial markets are also diverse throughout food, environmental, chemicals, and advanced polymers, and they can be a little more cyclical, but there's good underlying growth drivers there. So we are, we continue to focus on our specialty strategy. Our second point in our value creation model is to execute a growth strategy driven by organic innovation.
Even with some of the near-term cost measures, we've preserved our growth initiatives and we've built our recovery plans, simply to pursue the goal of enhancing, not just maintaining, but enhancing our near-term product flow. We've actually been able to sustain pretty significant productivity throughout R&D throughout the COVID-19 crisis. In some areas, such as software, actually gained productivity through some of the remote working arrangements. As a result, we've maintained all of our near-term milestones and in some instances, even enhanced them. New product interest remains high, and that's, you know, at the heart of our core strategy. In fact, just yesterday and at the end of last week, we had a very robust start to the ASMS meeting, the American Society for Mass Spectrometry, with record attendance at our virtual user meeting that exceeded even our own expectations.
The third point of our value creation model is to seek opportunities for continuous operational improvement throughout our P&L and innovation in our channel and operations. And I would just, you know, highlight there that some of the COVID-19 cost actions were very much designed to be short-term to enhance our near-term flexibility, but that we see a continuous opportunity to improve the overall efficiency of the company. The fourth point is maintaining capital discipline. As you've heard from me in the past, we're committed to investing in growth as our top priority, secondarily to preserve balance sheet strength and flexibility, and third to return cash to shareholders. We still do have a future capital structure goal of approximately two and a half times net debt to EBITDA.
But as you know, we have suspended our buyback program for the meantime, while our immediate focus is making sure that we maintain financial strength and flexibility under any possible scenario, and we're confident in the steps we've taken and where we go from here. And then the fifth point is our ethic about operating with a performance-oriented culture and management team. Not only have we seen great stability in our management, but we continue to actively develop the organization by both developing our great people within Waters and going to the outside to attract new and incremental talent to the company. And I could just say, we're seeing enormous engagement across the company and commitment by the organization through this COVID crisis.
I'm blown away every day by the incredible creativity and commitment and drive of Waters' people around the world to adapt and to be agile and to serve customers in totally new ways that are simply going to make us stronger. So just couldn't be more proud of the organization in terms of how they're managing through this challenging time and keeping our focus on what's important with our customers. And I think as a result of that, our brand is being built at this time for greater strength in the future. So maybe I'll pause there and now we can get into Q&A.
Well, thanks for that. It's a good segue into my, you know, I think my first question, you know, Chris. Just in this time, just curious, you know, how the organization you think has responded to the COVID situation, how significant has it been for you to not be in your customer's labs every day demoing products? Clearly it's a fluid situation, but, yeah, how's the organization responded and, you know, how much access do you have, you know, to customers kind of in the traditional sense?
Yeah. That's a great question because we've all had to pivot significantly. Obviously, at the height of the crisis, we had to narrow, you know, our participation in our own facilities as well as with customers. On the customer side, which is the most important, that's very much dictated by their policies. Every country is different. We rigorously track access into customer labs. You know, in certain geographies like China and in parts of Asia, you know, we're back to close to 100% of access to customer labs. It's first and foremost on the service side. There's actually varying degrees of access between service and sales even. The mission-critical business operations of our customers is sort of the leading edge.
And in those geographies that experienced COVID first, we've grown back to something close to full service access, and we're continuing to ramp on the sales side. You know, in other geographies, it's a little more differential depending on where you are. Even within a large geography like Europe, for example, there's some countries that are progressing very quickly through the recovery phase. And there's others that are slower in Southern Europe, for example, the UK, faster in Central Europe and the Nordics. And the US has similar differences. I'd say overall the US is somewhat behind where Europe is, but you know, in the same ballpark.
You know, as it relates to, you know, how we then do our work and serve our customers, we've made some significant investments in the last couple of years, behind the leadership of a new CIO we hired, to substantially upgrade the digital infrastructure of Waters, and that's proven to be very timely, and we've been able to transfer a significant amount of both service work, but also sales work and demand generation activities to digital means. You know, I alluded in my opening comment to ASMS, but we had a user meeting with multiples and multiples times the size of the audience virtually to talk through, to have customers as well as our own scientists present at our user meeting the latest data on things like Cyclic IMS or the latest applications on BioAccord, the future of mass spectrometry, in terms of our investments.
And it's been eye-opening, honestly, to serve customers in more flexible and remote ways. And it's been incredibly inspiring for our team to pursue those new avenues. And it gives us a pathway to, you know, maybe more of a hybrid model in the future where yes, we want to increase the human element, relative to being in customers' labs, but there's a lot of things we can do remotely, perhaps even more efficiently and get even greater value out of the human interactions as those come back. So it's a massive learning opportunity. And bottom line is our team's been incredibly agile and very purpose-driven. You know, there's a strong sense of purpose and values in the company. People want to contribute to customer success. They want to contribute to the various vaccines and therapies under development for COVID.
We are in the heart of many of those opportunities. I'd say the energy levels are at an all-time high right now.
Great. If we look at, you know, so the first quarter organic growth was down about 8%. The only indication you really gave around the second quarter you expected to be, you know, somewhat more challenging. And given that we are sort of two months through the period here, is there any color you can share with us in terms of how the business has progressed sequentially through April and May? Or any, you know, color on, you know, specific end markets or geographies that you think, at least directionally better or worse?
Yeah. Thanks. I, you know, I'd as we said at the end of the quarter, we did suspend our guidance. So I want to stay away from, you know, any updates intra quarter. You know, I just go back to some of the comments we had made there at the quarter. You know, we have a very clear framework that we developed of placing each geography into a kind of a category, if you will, of containment, recovery, or return to growth. And that's how we're tracking both our facilities and our geographies. And every country's different. That really is a reflection of both the public health response of the individual country and government, as well as the knock-on economic effects and how that impacts our customers.
So as we looked at Q2, what was happening was, you know, Q1, China was in, you know, major containment mode all the way from really the beginning of January into February at the time of the Spring Festival, and really was in containment for much of the quarter. And that's why you saw this significant driver of our decline in China. China obviously came out of containment into more of a recovery phase in Q2.
Then when you put the whole composite picture together, of U.S. and Europe heading into more of a containment mode in Q2, and not really knowing how long that would last until certain recovery activities started in Europe and the U.S. in Q2, that's why we made the comment that we expect Q2 could be more challenging than Q1, but not putting a specific number on that or guiding. All I can say is that, you know, we continue to follow the statistics, as I mentioned earlier, such as service access, you know, customer uptime activity, and, you know, make those progressions as we move through the quarter. You know, China and Asia are ahead. You know, there's a steady recovery going on in China. It's a very controlled recovery, very much led by the government policy.
Other parts of Asia have sprung back faster. Sometimes you do see bumps in the road with little flare-ups of secondary COVID, COVID infection outbreaks, but, for the most part, it's been very well contained. And then Europe, everybody's on a different curve. So some parts of the world are seeing somewhat of a V-shaped recovery. Others are seeing a U-shaped recovery. And you know, some are more of a gradual, kind of swoosh recovery. So, you know, we're just stepping through that and you know, I think, making good progress, but still certainly in the middle of this.
You mentioned, I think in your prepared remarks, the pharma QA/QC actually grew in the first quarter. Pharma overall as a bucket was down about, I think 6%. You know, so can you just sort of split up for us, you know, remind us how much of your business is tied to QA/QC, development and then research? And I imagine that must suggest that the earlier stage sort of research portion, you know, would've been, you know, down much more substantially.
Yeah. Yeah. Exactly.
Differs between sort of those segments of the market.
Sure. I'll give a quick reminder. And your point about research is exactly right. In fact, the area that's most heavily concentrated in biomedical research is actually in the government and academic sector, which is, you know, in the first quarter down most significantly for Waters as academic labs and government labs were just not really engaging, but if you start at the top, about 55% or so of our overall corporate revenue is within pharma and biopharma. And within that, you know, about 80%-90% of it is either in late-stage development or QA/QC, and in total about 40% or 50% of our pharma exposures in QA/QC. Late-stage development is closely tied to QA/QC.
So those activities, you know, largely continued, although on the development and reaching back into discovery, as you point out, that's where you began to see some of the slowdown. You know, small molecule in particular is tied to QA/QC, where large molecule, our large molecule business tends to be a little more concentrated in development. But in QA/QC, when you kind of slice all that up and look at QA/QC, QA/QC has been more resilient in Q1 and did actually grow. So, you know, there were differences, Brandon. It's not all the same. So in Europe, in the U.S., try not to overly generalize, b ut for the most part, pharma production continued through this process, not at perfectly normal levels. There's a lot of split shifting going on.
There's a lot of containment and social distancing activities. But by and large, pharma QA/QC has continued through this process. In China and in India, though, where the lockdowns were much more severe, China in Q1 and India, you know, at the beginning of Q2 and working back from that now, there was outright closure of many factories. So there's more of a restart process, in China and India. And that's why, you know, a lot of people ask, a lot of investors ask, well, okay, is China a template for, you know, the rest of the world in terms of that recovery? And the answer is not in this case.
In some cases, China provides, you know, a canary in the coal mine, but not, not really in this case, just because, as I said earlier, every country and every government has a different approach to both the health part of this as well as the economic part of it. And, you know, like I said, in some cases, operations continue. In some cases, it's start and stop. And that's why recoveries look different.
Any update to share with us in terms of the China 4+7 initiative, the big theme of the pharma market last year? They've gone through round, I think at least round two now at this point. Just update us on where things stand, from that perspective in China.
Yeah. Absolutely. The 4+7 pilot, which is now referred to as the GPO program, which is a competitive bidding process for generic drugs that started out as a pilot last year in the first quarter. I'll remind everybody that was 11 cities and 25 of the top drugs. And it was very much a pilot program because the government is trying to bend the cost curve on generic drug costs for all the right reasons, to actually increase the ability of the government to fund a supply to the population and to continue the type of growth of access to life-changing medications to more and more of the population. That was successful. The official first round came later in the year, and it was really those same 25 drugs, but in more provinces, up to 27 provinces.
Then, round two was actually at the beginning of this year, and that would be 32 new drugs, but for all provinces, and that was delayed from the January timeframe to the April timeframe. You know, there was a meaningful supply of winners from round one and round two. It's become a little more clear that the larger and more well-equipped companies are being more successful in the tenders. To some degree, there's some outside participation from international companies, namely Indian companies. We've seen a clear trend where the winners of these tenders, who can handle the bigger volumes and scale production, have actually been some of our better customers. You know, we think, overall directionally, this could be a benefit to Waters, as it plays through.
If we look very carefully at those who are losing and we have less participation with some of the folks that are not winning the tenders, just in general, there's some different spots here and there. But, you know, for the most part, it's unfolded, you know, as we've expected. I think it has created some short-term disruption. Obviously we saw that in the market statistics last year and our growth of our own business. But we think in the long term, it's being done for the right reasons and it will ultimately lead to higher volumes of pill count and prescriptions that will benefit our business in the medium to long term. I think you're on mute there, Brandon.
There we go. If you look at your small molecule business overall, you know, it's been somewhat of a mixed bag. 4+7 last year was part of that. You sort of walked through sort of the, you know, the current end market dynamics, you know, sort of, I guess, we're putting COVID aside and just, what is the pathway to a more consistent level of steady demand there that you've historically seen? And has anything changed competitively in that market?
Yeah. No, that's a good question. I mean, we obviously have significant concentration in small molecule pharma, with about 70% of our total pharma revenue, which, as I mentioned earlier, is 55% of our business tied to small molecule, which is principally QA/QC. There's a whole bunch of factors that make that market somewhat cyclical, even while at the foundation is a steady drumbeat of underlying growth and demand. By a number of estimates, the compound annual growth rate of pill count in the world is somewhere in the mid-single digits. And yes, while the operational side of the industry becomes more efficient over time, there is underlying growth there that is very reliable for the medium to long term. That said, there can be swings, as you know, both market events and corporate events shift priorities for investment.
It is possible to stretch infrastructure for QA/QC, particularly in LC workflows, even though that, when that happens, it does tend to create pent-up demand. So, you know, we've seen various cycles within countries, like what we experienced in India two, three years ago, and what we experienced in China last year. You know, we've also seen some of the multinational companies tilt their more recent investment portfolios towards large molecule, where we also, by the way, benefit because we have a meaningful concentration in large molecule testing as well and characterization. But you know, sometimes that comes at the expense of capital cycles for small molecules. So, you know, competitively, you know, we still believe we have by far the best portfolio in the industry. We continue to enhance it, while a lot of our near-term product launches recently have been in the mass spectrometry area.
You know, don't mistake that for a lack of focus on LC. We've done some great work in product development on LC and have a lot in the pipeline, and we continue to invest, so you know, our LC business and our small molecule business is, as we mentioned, very heavily weighted towards QA/QC, where we're very much specced in to workflows. Market share is extremely stable. It you know, when you look at charts over time, it can wiggle around a little bit, but it's been very stable, and that's backed by you know, import-export data that we're able to glean in various countries around the world.
And so we're just trying to, we just focus on the fundamentals of serving our customers while developing the technology, advancing the workflows, and continuing to secure our position with very unique competitive advantages, such as our Empower Chromatography data system, which is very much the industry standard for regulated QA/QC and development activities, and all the compliance needs that our customers have.
That's a, I think a good segue. You just came out of, of ASMS earlier this week. You know, clearly a new product introduction has been a big theme of Waters, for at least the last year or two now. Several major introductions last year. You speak to the degree to which those may be beginning to have, some impact and seeing some uptake in the market. Are you happy with the productivity out of the R&D organization and where your competitive position sits now in mass spec, relative to, you know, some holes that you perceive in the portfolio?
Yeah. Absolutely. So, you know, I think we've made a lot of comments in the past several years that, you know, we had seen competitive pressure in the mass spec side of the business. And, certainly that was the case. And, you know, when I came to the company a little more than four years ago, my first priority was to really reinvigorate the R&D engine of Waters. And, we've significantly grown our R&D investment over this period. And one of our early priorities was to shore up our mass spec portfolio. And, I was amazed at some of the technology that was lying around, ready to be developed.
And so, you know, we've seen a renaissance in our portfolio everywhere from the workhorse tandem quads that came out last year to complete what we believe is the industry's most competitive overall line of tandem quads, to the high-end research instruments like the Cyclic IMS, which is totally unique, and the new SYNAPT XS workhorse. And of course the BioAccord, which is a game-changing technology for the future of biomolecule characterization and QA/QC. We began to see the muscle there in the fourth quarter where our mass spec business grew in the mid- to upper-single digits and by any estimates ahead of industry.
And then, as I mentioned in the first quarter call, up till the very end when we saw the disturbance of Europe and U.S. shutting down, we were actually growing our mass spec business outside of China, you know, in a very encouraging manner, and so, you know, I think we just remain focused on the underlying market development activities. The ASMS users meeting highlighted the incredible interest of the groundbreaking data that's emerging off the Cyclic IMS, and we're continuing to invest in that platform with more iteration this year.
And then BioAccord is very front of mind, not just as a, as sort of the right technology for the future for characterization, but it's also found use in the immediate time with some of the newer applications, such as oligonucleotide analysis and glycan analysis, even in some of the new COVID vaccines that are under development. So, you know, we really believe the BioAccord is the right technology at the right time and in a sense ahead of its time, but also something that has a lot of legs for the long term.
Certainly we're out of time. We'll have to leave it there. This was great. Thanks, Chris. Good to see you, and have a great day.
Yep. Thanks so much. Talk to you soon, Brandon. Thanks a lot.