Terrific. I think we could start. Dan Brennan, Life Science Tools and Diagnostics analyst, TD Cowen. Really pleased here at 46th annual conference to be joined here on stage with Udit Batra, who is our CEO of Waters Corporation. Udit, welcome.
Thank you, Dan. Pleasure to be here.
Terrific. Obviously it's been quite a start to the year for you closing the long way to BD deal, integration ongoing. Listen, you've laid out plans for the business in great detail. You know, now that you've had a little bit of time owning BD business, maybe just zooming out, what are some of your early impressions? Feel free, if you'd like, talk about 4Q and kick off that way. Just in terms of, you know, setting the table here for the conversation.
I think, firstly again, thank you for having me here. It's been three weeks since the close occurred, it's been some time, as you say. I've been very busy just traveling and going to different sites. Last week I got some of my colleagues in the U.S. together at our Baltimore site, which is the old Diagnostic Solutions site for BD. This week I'm heading to Europe, it's Asia after that. Traveling a fair bit, meeting a lot of customers. I think I'm meeting a lot of colleagues. I think three things stand out, right? The first is these are fantastic businesses, right? How do you tell? You basically ask yourself is if you talk to some customers, if you talk to them about flow cytometry, what brand do they mention, right?
I was telling some people earlier, go search in AI if you feel like, and ask them, ask AI, whichever tool you would prefer to use, "I want to buy a flow cytometer. I want to buy reagents. Which company should I go to?" BD will be at the top of the list, right? Now Waters. Microbiology, go to any hospital, it's one of two vendors who supply most of the microbiology workflow in those hospitals. Leading brands, customers have a very strong impression of these and have had them for years, and that you tell by just looking at the gross margin, right? For most of the business, the gross margin's around 60%, which is healthy, right? It's been there for a while. You go and talk to the teams and you...
especially the R&D teams, I mean, you do searches on PubMed or you search in any sort of publication, go to any conference in flow, in microbiology, you'll find BD colleagues presenting, right? Teams are highly engaged, and I'll come back to that in a bit. The challenge has been execution. I think we've been pretty clear about that during the time that we've gotten to this point, but it's pretty clear that the level of precision that is required to run such a business, especially in a dynamic environment, I think needs improvement. I think that's it, right? I mean, so fantastic businesses, great brands, highly engaged teams. The question is, can you focus on a precise few things, right? I've been spending a fair bit of time with the teams sort of assessing that.
As I said, last week, I was with our U.S. teams. What I'm trying to do now is I'm gonna go region by region, and we're gonna get the top commercial people together and the top finance people together in a room and go business by business and say, "Hey, tell me about the past four, five years. Tell me about quarter to date sales and orders, and quarter to go sales and orders. What are your risks and benefits? Tell me about your organization." We go team by team, and we say, "Okay, tell us about one or the other." It's just an awesome learning experience. You see cross-pollination.
For instance, our Waters, our incumbent Waters business, the analytical science business, has been passing on pricing for a while. We have something called the pricing desk, the deal desk. They talked about it, and they said, "This is the deal desk. Yes, during this time, there was some pressure on A, B, and C customer segment, and this is how we passed on 250 basis points this year." You could see the bioscience colleagues or the analytical science colleagues who've had 0 basis points- 50 basis points of price being passed on look at it and say, "Okay, I can implement this, and this." Really fantastic discussions. To sort of talk about the softer side, we had our town hall where we welcomed all the colleagues.
Roughly 12,000 people joined live. We broadcast it across four different sites. My leadership team was spread out, the rest sort of had it on replay. I must say there's a lot of energy in the organization. Very happy with where we are, very happy with the starting point. Yes, focused on execution now.
Awesome. maybe just sticking on Q4 for a sec since I introduced that. you know, I think obviously the core Waters business has been doing quite well. you know, BD in the, you know, in their calendar fourth quarter, you know, they had a, you know, pretty steep decline, 11%. I know there were a bunch of numerous non-recurring factors which you kind of flagged and, if you strip those out, maybe the growth was more like flattish. What do you think the message is? I think that's been a key factor. Kind of what's the message on BD's Q4, and should those results in any way lead to lower confidence in the asset or the outcome?
Look, I mean, it was as much of a surprise to many of you outside as it was for us, in some places. Each individual item can be explained, and we will get out of this idea of explaining all the time, right? I think that's something that as Waters we don't try and do. If there is a challenge, what did you precisely do to surmount it? Sort of to explain the facts first, and then we'll get to 2026 in a minute. There were three non-recurring items, and we've cross-examined this at a lot of detail, right? I'll get into that in a minute. Three non-recurring items and one recurring item. If you take those out, as you said, the business was flat, right? You shouldn't be taking those out, right?
Just as a matter of record. The three pieces that were non-recurring were the licensing costs for the licensing revenue for the bioscience business that didn't recur, the point-of-care slowdown due to the flu season, and the third was the government shutdown sort of impacting exports into China, right? The recurring item, which is the DRG headwinds in China, we think that will still persist into this year. It sunsets in July in the baseline, and then the baseline is a bit better. If you take three of these in turn just to sort of first stick to the facts, and then we'll come back to sort of what we're doing to make it a bit different in the future. Overall, the business declined about 10%. You take these out, it's roughly flat.
In Q1, we've said, look, the DRG piece is still gonna be there, so we're gonna guide to -2.5% or so, 2%-3% decline in the, in Q1. As you progress through the year, that gets a bit better, so it's flat to low single digit growth in Q2 and Q3, and then low single digit to mid single digit in Q4. Sort of a mathematical progression that just benefits from the baseline progressing. That's all it is. We've said we're gonna haircut the versus the deal model, the top line for the full year by 200 basis points, and that's largely due to the DRG headwind, in China, right? We've said, look, we'll take it down by $65 million, which is about a 30% decline on top of what has already taken place.
Rather conservative starting point. It does not include improvements in pricing, on tariffs, on the daily sort of sales mechanism I mentioned. It does not include the revenue synergies. A whole bunch of things are not included in the operational improvements, but we think it's a prudent starting point because it allows us also to adjust the cost base and still deliver the EPS that we had promised, right? Even with all of this, we said, look, the EPS commitment is still sacrosanct, and we're gonna deliver the EPS growth that we promised. Now to the four issues and why I said the explanation business will at some point stop, and I just wanna take one case in point, which is the weaker flu season impacting the diagnostics business by about $30 million, right?
We looked at it, my CFO and I had run a diagnostics, a flu business back in 2008 and 2009. You never forecast a flu business to be great. You usually forecast it to be lower, and if it's better, you claim victory, right? This is what we did when we were in charge of those businesses. Here we've said, look, we're gonna forecast it at a medium or a high level. The question is not that you were down by $30 million. The question is precisely in which hospital, in which setting, how many patients, why is that number a round number at 30 and it's not 3.5 or 21.8?
The level of precision missing means to me that it was a reason as opposed to being a precise...
Mm-hmm.
causal impact, right? I think that was a big discussion we had last week when we were sitting together as a team and we cross-examined it. I think my BD colleagues or my past BD colleagues simply said, "Look, we've never had that sort of precision being requested." I said, "Look, you've got to go back and you've got to fix these things yourself. If point-of-care went down, something else must have gone up. Why didn't you focus on that?" Right? I think, going forward, you should expect us not to get into this reasoning for why things missed. Yes, there's force majeure. Things happen and those everybody in the industry is impacted with, but you will not see unique things.
Yeah. Maybe just one more kind of on this area and then, you know, we can jump out. Just particularly on the bioscience business in the U.S., I know that was weak and you had the IP comp, but that business was still down 10% and those were some questions we got. On that business itself, can you elaborate a little bit on that business being down and kind of what type of growth are you planning for 2026 for, you know, for that business?
I mean, similar sort of theme, right? First, take a step back. I mean, the businesses are exceptional, right? I mean, flow cytometry, BD in the past and our bioscience business sets the standard with the BioAccord System, with Facts Lyric. Our antibodies set the standard in the industry with reagents and dyes that only we produce, right? Roughly 50% of the business is in regulated applications that are no different than our QA QC business. The structure of the business is exceptional, right? When you look at the facts and you say - 10%, yes, that's lower than the market.
You sort of do a survey, and this we did over the last two weeks, of all similar competitors, given the markets, the business should have been down low to mid single digits, not double digits. There's a 500 basis points underperformance versus what I would have called the market.
Mm-hmm.
Again, sort of let me go into a little bit of detail and how we're gonna fix it. First, just the math. Into Q1, we're saying this business is still gonna be down mid single digits. Remember I said 2.5%. The diagnostics business will be down low single digits. This one will be down mid single digits. We want to sort of give the teams a bit of time to recover, right? That's for the own period. Over the year, it'll start to get better.
Digging a little bit deeper on the sources of underperformance and why I'm confident that these types of things will not recur, let's just take, one of the explanations that I had sort of talked about earlier was, the decrease in shipment of, or the decrease in getting licenses for shipment to China.
Mm-hmm.
Right? With a 45-day government shutdown. The government was shut down for 45 days, and remember I said last week we had all our U.S. heads together. I said to them, I said, "Why don't you review your business by end market?" Right? The U.S. general manager reviewed his business by end market, and in the U.S., our academic and government segment grew 14%. Americas was up 10%. The shutdown impacted them as well. How did you manage to grow 14%? One university was not growing, another one was growing. We knew the shutdown was coming, so we preloaded some of the orders and had the customers buy in advance of it, and customers did.
Mm-hmm.
I mean, I'm witness to the fact that we had a run-up in orders and sales right up to the government shutdown, and an immediate buying and then a slowdown towards the end. We saw that, whereas our bioscience team said, "45 days, the government is shut down. I can't get licenses." Why didn't you go to the folks and say, "Hey, you can get these licenses before the shutdown"? The shutdown was telegraphed. It was not a surprise, right? That showed us the difference in precision and execution. As I said before, the businesses are great, customers love them, the teams at the ground level are great. It's a question of precision of management, right? Being resilient during those times. I think that piece I expect to have as immediate impact on.
The second one is pricing, right? I mean, in this business alone, with the most differentiated portfolio in the industry on reagents, right? I, at the town hall two weeks ago, I took our whole set of businesses and I put them on an XY chart and I said, "On the X-axis, we'll have growth, on the Y-axis, we'll have gross margin, and we'll go two or three levels deeper into the portfolio." The highest margin business in the new company is the reagents business of bioscience by a lot. Higher than our chemistry, higher than our informatics. That tells you how profitable that business is. The challenge is if you do this XY axis, the top right is great. I usually tell people, "Don't ask me, just keep going." Top left is accretive to margins, but growing slower than the company average.
I say, "Just stop everything else, especially if you're the reagent business, find ways to grow." In that business, we've been getting 0 basis points-50 basis points of pricing. We are the most differentiated reagents company in the market. Why aren't we getting better pricing? Why aren't we getting better distribution, right? The marching orders become clear, and that is 70% of the bioscience business.
Mm-hmm.
You see, there are sort of immediate opportunities to impact the business, that's where my attention is focused. I was sort of talking to my IR head, who's a fantastic guy. Casper is here. Casper keeps sort of. He says, "You know, it's your job also to go and talk to investors." I said, "Yeah, but I gotta go and talk to the teams and gotta talk to the customers because the business has to start moving." He said, "You're not that as necessary as you think you are." I'm enjoying that part a lot.
Maybe just kind of putting a bow on this conversation then. You set the guide, you talked about the cushion that you baked in, then subsequently in the last two weeks, you've done a lot of these meetings, town hall, forensic analysis. How do you feel after all the forensic analysis versus the guide that you set on BD?
I think the 2.5% is sort of our... As we said in the open call, in the quarterly call as well, I mean, it's a prudent estimate, right? You know us for several years now, we have five, seven ways of getting to the 2.5% and more. It doesn't include pricing, it doesn't include the operational improvement, it doesn't include all the reagent stuff that I just talked about. Definitely doesn't include the revenue synergies.
Mm-hmm.
I feel pretty good about, pretty good about the 2.5%.
Okay. Maybe switching gears to core Waters, right? The core Waters, I think 2026, you're like 6.25% organic guide for standalone. You grew it a little bit faster than that in 2025. Maybe what are the puts and takes kind of underneath that guide? Should there be a slight deceleration? Still very healthy growth versus the rest of the industry. We're just wondering or is it, you know, kind of rounding error?
Our guidance philosophy has not changed, right. We start the year at a certain point, and then we get constructive as the data point comes in. Second, I'd also said this in the call, in the analyst call earlier, the year has started off well, right. The funnels look very strong. I mean, the end markets have stabilized, so it's quite a good setting. I mean, notwithstanding what's happened over the weekend.
Yeah. Right.
That said, the end markets have stabilized. The funnels are strong. There's no reason to believe that there should be any deceleration.
Mm-hmm.
That said, if you just look at the guide very simply, the lower end of the guide, the 5.5%-ish or 5%-ish is the instrument number, at least as a starting point. The top end of the guide is the recurring number. On the recurring side, chemistry we've assumed grows between 6% and 7%. I'm saying this with a straight face for now. Service is 7%-8%. Chemistry has grown 12% in 2025. Service has grown 7% in 2025. On the chemistry side, yes, new products are coming in. We just want some room, given the stronger baseline.
Mm-hmm.
On the service side, we've expanded our attachment rate by 400 basis points in 2025, right? I mean, we've given Rob Carpio and his team 100 basis points of the target. They did 400, we didn't set the target right. We need to take a look at it. Every time you get 100 basis points of service attachment improvement, the next year you'll see 70 basis points of revenue increase. That's 250 basis points, 280 basis points just like that we are spotting for the next year. Feel pretty good about the guide. As I said, as the runs come on the board, we'll start to get more constructive.
To sort of complete the story on instruments, on the replacement cycle, on a six-year CAGR basis, we're at a 2.5%. Still low single digits. Idiosyncratic growth drivers are contributing nicely, and we have a very good position in GLP-1, PFAS testing, and dia genetics. New products are now augmented with CDMS, with the ever-expanding chemistry portfolio. Super excited about the Empower Cloud, really going from an on-prem to a subscription model. Feel good about the Waters-based business, and we have a fantastic group of people managing that business.
Maybe just on the LC-MS replacement cycle you just mentioned, where you're stacking on a six-year CAGR. I think you've talked about getting back to high single digits. Where would you put that duration then? Like, where do you think maybe the peak quarter would be on LC-MS?
Yeah. I think, I mean, we're probably in the mid-innings, right? I would think sometime in 2027, it starts to go back to the average.
Mm-hmm.
Remember, we haven't yet seen any meaningful replacement in biotech and pharma drug discovery. To some extent, the CROs are starting to come to the table. We haven't seen anything in genetics in China. Those segments are still pending.
Mm-hmm.
In spite of that, we're seeing nice replacement, especially in large pharma in U.S. and Europe. That's what's been driving the replacement cycle a lot more. Mid-2027, what happens then, we have sort of good customer discussions on reshoring. I mean, we will not quantify that. I mean, we're not afraid to quantify anything. I think there's just not enough facts available to say precisely this is what the upside is, the conversations are there. The ground has been broken. You look at the different announcements of the pharma companies, we're all over those, and we'll see a benefit starting sometime in 2027, that dovetails nicely into the finish of the replacement cycle sometime in 2027. You start to see probably another growth cycle for instruments.
I mean, it's not a long-term benefit, this reshoring, but in a strange way, you might see a strong LC-MS growth for a while.
Mm-hmm. Right. Typically when it peaks, the goal would be what? Kinda get back to like a 5% growth?
Yeah.
What typically happens there?
5-ish %. 5-ish %.
Mm-hmm.
It stays there, and then it'll probably saturate. People get more comfortable with their instruments, and they extend the use too much. Our service team is very proud, so they extend the use as well with the customers, and then they realize, 'Geez, this is too late,' and there's a new sort of instrument coming in, and then it flips again. It'll always be. Just human behavior is such that you'll get excited, you'll get this replaced, and then they'll extend the life too much. It's like driving your car as a graduate student.
Mm-hmm.
I mean, I remember I used to drive my wife in a when we started dating in a car which had a hole in the middle. I had to pull the gear shift out and then move it. Then she said, "Hey, I don't... Is this the car? It's the best you can do?" I said, "Yeah, you have an extra window." You find a way.
Since you brought up reshoring, just one question. I think Waters has sized it at $300 million. You're not willing to quantify. Do you think, I mean, any comment on their sizing?
No. I think it's too early, Dan.
Got it.
I mean, we'll quantify. Look, I mean, we're very precise on our quantification on the, on the GLP-ones, on PFAS, on India genetics. I think just let's get a bit more factual before we start to quantify everything.
kind of baked in with that, you know, 5% growth for instruments this year, what did you assume for LC-MS growth in 2026, and what do you think a range of outcomes could be?
Similar sort of high single digit-ish, right?
Okay.
No, no different. I mean, I can't promise exactly what will happen one quarter or the other. I mean, sometimes these are large purchases.
Yeah.
that'll happen at the end of the quarter or the beginning of the quarter, that might change things. overall, no real change.
Right. Maybe just on chemistry, I think you just articulated the conservatism or the conservative nature of the guide on several fronts. Just on chemistry itself, you talked about the three, you know, the kind of the 300 basis points, 2.5 points of upside that that could generate. With the new products, like Just talk about some of the new product and the opportunities on the chemistry-
Yeah.
If you stack those.
Yeah.
you know, where the theoretical upside is.
I mean, the strategic reason, I mean, the strategic board was set sort of four, five years ago when we said we're gonna take our investment and move it from small molecules to large. Over 70% of our R&D spend in chemistry goes into bioseparations.
Mm-hmm.
That has started to pay dividends, right? I mean, we launched the MaxPeak Premier technology with the bioinert surfaces on top. We built specific columns for large sort of species like AAV with the SEC columns. We said, "Hey, oligonucleotide needs a specific solution," so we come up with this thing called Slalom. We said, "Look," this is the latest one. We said, "We're gonna take affinity chromatography from bioprocessing," my previous world, "we're gonna move it into high-pressure chromatography," which is something that most people have not been able to do with reproducible results. We're gonna do it in such a way that you can tune these columns, right? That's what we were able to do with our affinity columns with Protein A.
Now we've launched another column, which is MicroFlow, which is specifically for proteomics applications. This will keep going. I mean, there are seven to eight new launches coming this year. This will keep going for a while. The difference is that this is not only targeted towards QA/QC. This has gone upstream, right? When you go upstream, and you are sort of one of the largest players in that space, and if the product is doing what it's supposed to do, that column stays with the molecule. The customer has no reason to change it. Customers do change those, as we've experienced ourselves in phase II, phase III. You usually qualify two vendors.
If you are the only solution, and you have customized the separation with the customer, especially with affinity columns, where you sort of are taking a sticker and you're designing the sticker that is only relevant to the molecule that the customer is developing, it's unique. It's a one-to-one link. That then, as it moves downstream, is like bioprocessing.
Mm-hmm.
Expect it's a low double-digit grower, right? I'm not promising low double digits now. All I'm saying is, as we progress, we can. That is, there is line of sight to that, right? 12%, I mean, if I say double digit right now, you'll say, "Well, double digit all the way through." No, there will be ups and downs because it's in discovery right now, right? High single-digit to low double-digit is a reasonable expectation for chemistry.
Okay. maybe jumping over to margins. You know, I think implicit margin assumptions of BD are for like mid to high teens operating margin to begin the year, and I think they were like low twenties prior to the year. Just talk a little bit about the cost you're digesting, the margin guide, and kinda where do you think, you know, BD margins should kind of normalize?
There's a few moving parts. Let me sort of take it in turn, right. The most important thing to know is 22.4% is the full year margin.
Mm-hmm.
Right? I mean, that's BD or bioscience and diagnostic standalone, not including synergies.
Yeah.
There are two or three things to keep in mind. One is that. Then first on the phasing and then on the amount.
Right.
On the phasing, Q1 is the smallest quarter, so BD has a specific phasing. Q1 is about 23% of sales. Q3 is the largest quarter, that used to be their Q4, so that's 27%. Q2 and Q4 are 25% each. That's the revenue phasing. The cost phasing is such that the Q1 is about 300 basis points lower or 200 basis points or so, 200 basis points-300 basis points lower than the average, and Q3 is 300 basis points higher.
Mm-hmm.
Q1, 200 basis points lower, Q3, 300 basis points higher in margin, just because of the revenue phasing and the way the costs are. That's the baseline. On top of that, what we've done with the business slowing down last year, we said, "Look, you haven't implemented tariffs, right? We're gonna implement tariffs this year." I just want a small anecdote. When we said that, the team said, "Hey, you're gonna implement tariffs. That was a year ago. The customers are not gonna respond to it well." Our president is pretty active, he changed the tariff regime now, that's the reason to do it now.
Right.
Right. We'll implement tariffs like we did at Waters. We'll offset the whole thing in before the beginning of 2027. In 2026, there's a 60 basis points lift due to the tariffs.
Mm-hmm.
The slowdown in China should have led to a readjustment of the cost structure. Our colleagues at BD never did that, so we've already implemented that, and you'll see the benefit of that in the second half of the year. That's about 120 basis points. Right? 120 + 60, 180 basis points you add to what you would have calculated as the baseline, you get to 22.4. The margin progression through the year will reflect a little bit of conservatism at the beginning of the year. We just wanna sort of keep a little bit in our back pocket and a bit of a lift due to the cost savings and the tariff implementation towards the back half of the year. You superimpose on that the phasing, you'll get the math.
That is pretty straightforward, right? Not a lot of rocket science in it. Again, the more important thing to keep in mind is these actions are in place. They are getting implemented. No cost synergy, no operational improvement is in it. Pricing is at 50 basis points today. We think we should be at 200 +, given the differentiation in the portfolio. Don't ask me if it comes tomorrow, but it's coming. The weekly sales calls and funnel management was not a discipline. It's happening now. As of last week, we sort of showed people exactly what we do at the top level, what we expect at the regional level, what we expect at the sales level, what level of precision we expect in the funnels. Thirdly, if there's any changes, how do you sort of combat it?
I expect that to have a significant impact on the business as well. I believe the 2.5% and the 22.4% are minimum numbers that we should be achieving.
Do you feel on BD, just sticking to BD again, and like the people that you've seen so far, will there be a lot of like forced Like, how significant of change do you think you might have to implement there? Is it just pruning around the margin?
It's Dan, it's always a difficult question to answer, but go back five years at Waters, right? We turned the business without changing any of the top management, right? I mean, you remember in 2021, in 2021 alone, we had 16% growth, right? That was coming off years of sort of trailing the market, and that was one of the highest growths in the market. That was without changing anybody in the leadership team, right? Amol came in the middle of 2021, the others came a bit later. I don't. I see the same thing here.
Mm-hmm.
At the grassroots level, the sales teams, the R&D teams, the supply chain teams, and people are super dedicated. I mean, there's a lot of pent-up energy. The challenge has been focusing on a few things that are important.
Mm-hmm.
Right? I mean, focus on getting the reagents business moving.
Right
... don't just get obsessed with the instrument business, which is struggling because of the end markets. Don't be obsessed with that because 70% of your business is in reagents.
Right.
Right? That sort of thing, right? Focusing people on specifics and then holding them accountable and giving them support. On pricing, we're asking people to do more, but we're gonna train them. On tariffs, we're asking people to do more. We had the training session last Friday, right? The method to the madness on this commercial meeting that I'm having with each of the regions is also cross-pollination, right? I mean, for instance, in the U.S., A&G market, as I mentioned, slowed down. Our U.S. team found ways around it, and they shared those tactics with the bioscience team, right? I think I would expect the same sort of turn. When these turns happen, they happen very rapidly because you're not asking people to learn new things.
You're asking them to do what they knew how to do all the way, all the way in the past, and you're taking out barriers from a corporate setup. I mean, at a corporate level, our China team wants to localize a bit more of the portfolio and flow. We have done it on LC-MS very rapidly. I spoke to the GM there and he said, "Hey, Udit, I wanna localize." I said, "Okay, how can I help?" I'm not saying I'm not gonna do it. I know you know your business best, but just let me know how I can take out barriers from a corporate setup. I feel good about the baseline, but yes, there's a bit of discipline that will be put in place.
Well, great. I think that's a great wrap-up. We started on B
D, we ended on BD. Told the story in between Waters. Thank you, Udit.