Q3 2025 Earnings Call Transcript

Welcome to the Waters Corporation's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions]. This call is being recorded. If anyone has any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Caspar Tudor, Head of Investor Relations. Please go ahead, sir.

Thank you, Leila, and good morning, everyone. Welcome to Waters Corporation's Third Quarter Earnings Call. Joining me today are Dr. Udit Batra, our President and Chief Executive Officer; and Amol Chaubal, our Senior Vice President and Chief Financial Officer.

Before we begin, I will cover the cautionary language. In this conference call, we will make forward-looking statements regarding future events or future financial performance of the company. Additionally, we will comment on the expected timing for completion of Waters' pending combination with the Biosciences & Diagnostic Solutions business, of Becton Dickinson & Company as well as the expected financial and operational impacts of this combination on Waters. These statements are only our present expectations based on information available to us as of today as well as the forecast and assumptions of Waters' management and are subject to risks and uncertainties, many of which are outside of Waters' control.

Actual events or results may differ materially from the statements made on today's call. Please see the risk factors included within our Form 10-K, our Form 10-Qs, our other SEC filings and the cautionary language included in this morning's earnings release. During today's call, we will refer to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are attached to our earnings release and in the appendix of the slide presentation accompanying today's call.

Both are available on the Investor Relations section of our website. Unless stated otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2024. In addition, unless stated otherwise, all year-over-year revenue growth rates and ranges given on today's call are on a comparable constant currency basis. Finally, we do not intend to update our guidance, predictions or projections, except as part of a scheduling -- a regularly scheduled earnings release or as otherwise required by law. On today's call, Udit will begin by covering our key messages for the quarter.

Amol will then take you through our results and updated guidance in more detail, then we will open the phone line up for questions. With that, I'd like to turn the call over to Udit.

Thank you, Caspar, and good morning, everyone. Let me begin by saying, it is a true privilege to be on this journey with such dedicated and talented colleagues. As I reflect on my 5-year anniversary at Waters, I'm filled with gratitude. Over these years, our team has consistently delivered on our commitments and strengthened the foundation of this company.

Today, we celebrate another quarter of outstanding commercial momentum. We marked another breakthrough innovation with Xevo CDMS, the next generation of mass spectrometry and prepared to combine with BD's Bioscience & Diagnostic Solutions business, ushering in an exciting new era for Waters. Now turning to our third quarter results. We are pleased to report another excellent quarter with top and bottom line results exceeding the high end of our guidance.

This performance reflects the combined positive impact of innovation and execution, along with clear benefits from our strategic expansion into high-growth areas. It also reflects the dedication and hard work of our teams whose focus on customers, science and operational excellence continues to power Waters a success. We achieved strong results in the third quarter. Sales grew 8% as reported and 8% in constant currency.

Instruments grew 6%, led by high single-digit growth in our LC-MS portfolio. Recurring revenue grew 9%, driven by 7% service growth and 13% chemistry growth. We grew non-GAAP earnings per share by 16% to $3.40, which was $0.20 above the midpoint of our guidance. A year ago, we signaled the start of a new instrument replacement cycle.

Since then, sales activity has surged and our momentum has continued to build. We see meaningful runway ahead as customers progress through the multiyear process of replacing their aged instrument fleets. Instrument growth is currently tracking at a low single-digit CAGR versus 2019, reflecting steady mean reversion toward the long-term historical rate of 5%. Beyond replacement activity, customers are increasingly choosing Waters for new capacity investments, setting us up well for the years ahead.

Our idiosyncratic growth drivers, GLP-1 testing, PFAS testing and India generics continue to perform very well. At the same time, our innovative products are also solving clear unmet needs in bioanalytical characterization and gaining adoption. As reported, instrument sales grew 11% quarter-over-quarter, representing the largest third quarter ramp in our company's history outside of the 2020 COVID year, with orders once again exceeding shipments. The strong sequential performance underscores the strong momentum in our business.

Year-over-year, Alliance iS sales grew over 300% as the customer adoption of our flagship HPLC product remains a clear success. Xevo TQ Absolute platforms grew 30%, with continued strength bolstered by the launch of the new Xevo TQ Absolute XR earlier this year. GLP-1 testing-related revenue more than doubled, reflecting continued wins in development and manufacturing settings in the Americas and Europe, along with expanding demand from generic semaglutide manufacturing build-outs in India. PFAS growth remains robust with orders growing approximately 30%, similar to last quarter.

We saw strength across all major regions, highlighted by strong demand in Japan as labs prepare for new drinking water regulations and continued momentum from U.S. federal, state and municipal labs. Our India team once again delivered excellent performance with revenue up high teens. This was driven by strong demand from generics manufacturers and CDMOs as we continue to benefit from volume growth trends tied to the ongoing patent cliff of blockbuster drugs. Further enhancing our core performance are the unique capabilities we've built to address unmet needs in large molecule workflows.

We are seeing clear progress in bioseparations and bioanalytical characterization reflecting the success of our deliberate long-term strategy and the investments we've made, both organically and through our acquisition of Wyatt. In bioanalytical characterization, we saw strong growth of multi-angle light scattering instruments in pharma QA/QC applications as large pharma began new waves of instrument purchasing in quality labs. This was enabled by the recent launch of Empower onto Wyatt light scattering platforms. BioAccord LC-MS System sales also saw strong growth, underscoring the sustained momentum and expanding adoption of this platform in the bioprocessing domain as customers increasingly standardize on its proven performance and ease of use in routine large molecule workflows.

In the quarter, chemistry grew 13%, fueled by the positive market reception of our newly launched SEC and Affinity Bioseparation Columns with strength that more than offset pull-forward dynamics from the second quarter. Bioseparations grew more than 20% with small molecule applications growing 10%. 5 years ago, Waters MaxPeak Premier Columns set a new standard of performance in reverse phase separations across both small and large molecule pharmaceutical applications. Today, this high-performance surface technology remains the benchmark for customers seeking the clearest peaks, maximum reproducibility and highest confidence in results.

All of this helps accelerate analytical decisions across discovery, development and manufacturing. Since 2023, we have made further advances in combining the bio-inert benefits of MaxPeak Premier with our novel innovations in other chromatography techniques such as size exclusion chromatography and affinity chromatography, both critical to bioseparations. These products have an immediate success serving pre and post clinical development and manufacturing applications of novel large molecule therapeutics. New products launched over the past 5 years grew approximately 50% in the quarter and have been a key contributor to our 11% year-to-date chemistry growth.

By end market, our results were led by pharma which grew 11%, driven by double-digit growth in Americas and Asia and high single-digit growth in Europe. In Asia, we saw particularly strong growth in China, where pharma sales grew by more than 20%, reflecting continued spending improvement amongst Chinese CDMOs and biotech customers. In our Industrial segment, sales grew mid-single digits, with the TA division returning to positive growth sooner than expected. In the Academic & Government segment, sales grew 1%, driven by stimulus tender wins in China and a lower-than-expected decline in the United States, where our teams delivered strong results at customers' fiscal year-end.

Our growth strategy is delivering, driving exceptional performance and positioning us for sustained momentum ahead. At the same time, the external environment continues to improve across our key end markets, supported by more stable global trade conditions and a clearer policy backdrop for our pharma customers. With our strong third quarter performance, we are raising our full year 2025 guidance. We now expect constant currency sales growth in the range of 6.7% to 7.3%.

This represents a 7% midpoint, which is an increase from our prior outlook. We are also raising our adjusted earnings per share guidance and now expect a range of $13.05 to $13.15, which represents double-digit growth. Looking ahead to 2026, we are well positioned to build on our momentum. The same growth drivers that have powered our performance this year, instrument replacement, higher service attachment and increased product adoption through e-commerce will remain key contributors.

We also expect the innovation tied to our idiosyncratic growth drivers and our unique offerings within bioseparations and bioanalytical characterizations to deliver a sustained contribution to our growth. This puts us in a fantastic position to deliver strong performance again in 2026. Further reinforcing our outlook for next year, we are launching a wave of new products that build on our recent success. At the same time, our pending combination with BD's Biosciences & Diagnostic Solutions business represents a powerful catalyst for near-term synergy realization and long-term value creation. A few weeks ago, we launched our Xevo Charge Detection Mass Spectrometer, which marks a new era in mass spectrometry.

It is a perfect example of how our team takes complex technology that meet clear unmet needs and turns them into simple and easy-to-use instruments without losing the sophistication of the measurement. Xevo CDMS represents a transformative breakthrough in bioanalytical characterization. It enables direct high-resolution measurement of largest and most complex therapeutics in high-volume applications. The system is a major advancement offering, faster results, easier operation and requiring much smaller sample sizes and traditional methods such as ultracentrifugation.

It provides process development and lot release characterization insights up to 10x faster while requiring 1% of the sample volume, accelerating what was previously required days of analysis. This launch is relevant for 40% of the large molecule pharmaceutical pipeline and serves a total addressable market of approximately $350 million, which is growing between high single digits and low double digits. We also have exciting updates ahead for Empower, which has long set the standard for compliant informatics in pharmaceutical applications. It is used in more than 80% of novel drug approvals by the FDA, EMA and China's NMPA.

Over the last several years, we have steadily expanded the value and reach of Empower, adding new detectors to the platform. Earlier this year, for example, we successfully launched multi-angle light scattering from our acquisition of Wyatt on to Empower. These advancements are helping us extend Empower's leadership from small molecule analysis into the faster-growing large molecule applications where biologics and complex modalities now represent more than half of the global pharma pipeline. Looking ahead, Empower will continue to evolve as a more complete panel for bioanalytical characterization across multiple techniques, including flow cytometry, creating a unified, compliant data environment for our customers' most advanced analytical workflows.

In 2026, we will begin a significant release cadence introducing a series of premium features that will progressively evolve Empower into a modern, connected and more intelligent platform. These cloud-native features will leverage artificial intelligence and machine learning to reduce manual interventions, save analyst time and minimize compliance risks from human error, which are all key value drivers in QA/QC labs. They will also enhance instrument utilization and uptime through predictive maintenance and automated operational insights. The value add that these new features offer will answer our customers' unmet needs and will help accelerate our customers as transition from a perpetual license model to a subscription-based model where we are already seeing growing traction with several large pharma customers.

This shift will unlock long-term growth accretion within informatics and deepen customer engagement across Waters' digital ecosystem. Further development could expand the opportunity ahead in bioanalytical characterization came last week as the U.S. FDA issued new draft guidance aimed at modernizing and accelerating the development of biosimilar drugs. The proposed framework will reduce the need for routine comparative clinical efficacy studies and instead rely primarily on advanced analytical characterization.

This could represent a meaningful shift towards analytical testing becoming the primary gatekeeper for biosimilar approval which has the potential to increase demand for analytical instruments and compliance-ready workflows such as our BioAccord LC-MS System, multi-angle light scattering and flow cytometry. Taken together, these developments strengthen our confidence in the high-growth opportunity that exists in the years ahead across bio separations, bioanalytical characterization and large molecule compliant informatics. Now turning to our pending combination with BD's Bioscience & Diagnostic Solutions business.

We have a compelling opportunity to create value for our shareholders and begin realizing year 1 synergies following completion of the transaction. Our goal is to hit the ground running and quickly apply the same execution and operational discipline that has defined Waters over the past few years. Integration planning is well underway and progressing rapidly. We've hosted 2 highly energizing integration summits at our Milford headquarters, bringing together 120 leaders from both organizations to establish a unified vision.

We have refined our pre-day 1, day 1 and day 100 master plans and achieved alignment on operationalization of transition service agreements in collaboration with the BD team. And we are well on our way to readying our synergy delivery action plan, 6 big business unit work streams and 10 functional work streams are now fully mobilized and focused on day 1 readiness. We remain on track to complete the combination of BD's Biosciences & Diagnostic Solutions business with Waters Corporation around the end of the first quarter of calendar year 2026. I will now turn the call over to Amol to cover our financial results in more detail and provide further details on our guidance.

Thank you, Udit, and good morning, everyone. In the third quarter, we delivered sales of $800 million up 8% as reported and 8% in constant currency. Momentum remained strong with as reported sales increasing 4% quarter-over-quarter, while orders continued to outpace shipments leading to backlog growth. By end market, Pharma grew 11%, Industrial grew 4% and Academic & Government grew 1%.

In Pharma, all major geographies grew high single digits or above led by low double-digit growth in the Americas and Asia. This trend reflects robust instrument replacement activity, key wins in greenfield CapEx projects, such as those related to our idiosyncratic growth drivers and new instrument system deployment in bioanalytical characterization. We also saw significant market uptake on our new chemistry products such as those serving bioseparations which grew mid-double digits. In Industrial, Waters division grew mid-single digits led by mid-teens growth in food and environmental testing where PFAS-related demand has remained a key growth driver.

TA performed better than expected and returned to growth with sales up 2% as improving macro sentiment drove stronger customer spending. In Academic & Government, growth was led by China, which grew approximately 20% as we leveraged our local presence and new product innovation to capture stimulus tender opportunities. Meanwhile, the Americas saw a low single-digit decline as spending came in better than reflected in our assumptions. By region, Asia grew 13%, while Europe and the Americas, each grew 5%.

In China, sales grew 12%, driven by double-digit growth in Pharma and Academic & Government. India grew in high teens, reflecting continued strength in Pharma Generics where we are benefiting from the ongoing patent cliff. By product line, instrument sales grew 6%, led by high single-digit growth in LC-MS System reflecting continued strong performance as we move beyond the first year of the instrument replacement cycle. Recurring revenues grew 9% with service up 7% and chemistry up 13%.

Our strong chemistry performance was driven by price optimization and volume growth in small and large molecule applications and new product introductions, which more than offset the pull-forward dynamics from the second quarter. Adjusted earnings per share were $3.40, representing 16% growth. GAAP earnings per share were $2.50. Gross margin for the quarter was 59%, which was a 70 basis point sequential increase versus the prior quarter, reflecting normalization of tariff remediation costs. Adjusted operating margin was 30.3%.

Our operating tax rate came in at approximately 14%. Free cash flow was $160 million after funding $25 million of capital expenditures and $14 million of transaction-related expenses. Our net debt stood at $948 million at the end of the quarter. Now I will share further commentary on our full year outlook and provide our fourth quarter guidance.

Our growth strategy is delivering, driving exceptional performance and positioning us for sustained momentum ahead. At the same time, the external environment continues to improve across our key end markets, supported by more stable global trade conditions and a clearer policy backdrop for our pharma customers. With our strong third quarter performance, we are raising our full year 2025 constant currency sales growth guidance now to a 7% midpoint in the range of 6.7% to 7.3%. Net of currency translation, full year reported sales growth is now expected to be in a range of 6.5% to 7.1%.

We expect full year 2025 gross margin to be approximately 59.2% above our prior outlook and adjusted operating margin is expected to be approximately 31%. Below the line, we expect $36 million in net interest expense and average diluted share count of 59.7 million and tax rate of 16.5%. With these updates, we are raising our full year 2025 adjusted earnings per fully diluted share guidance to the range of $13.05 to $13.15. This is approximately 10% to 11% growth. This guidance incorporates the expected impact of the current tariff structure on our business including the recent increases in tariff rates since our last update.

Turning to the fourth quarter of 2025, we expect constant currency sales growth in the range of 5% to 7%. Net of currency translation, reported sales growth is expected to be 5.2% to 7.2%. At the midpoint, this guidance assumes a 16% quarter-over-quarter increase in the reported sales between the third and the fourth quarter, prudently below the seasonal pattern we observed last year. We also have one additional day in the fourth quarter versus the prior year, representing roughly 100 basis points tailwind to recurring revenue sales growth.

We anticipate our fourth quarter adjusted earnings per fully diluted share to be in the range of $4.45 and $4.55, which reflects a year-over-year growth of approximately 9% to 11%. With that, I will now hand it back to Udit.

Thank you, Amol. So in summary, momentum in our business remains strong. We have continued to deliver high single-digit growth as we move into the second year of the instrument replacement cycle, driven by consistent execution and the positive impact of innovation across our portfolio. Reflecting this strength, our raised full year 2025 outlook now calls for high single-digit sales growth and double-digit adjusted EPS growth at the midpoint, underscoring the success of our global teams delivering on our long-term growth strategy.

Looking ahead, we will enter 2026 with a robust cadence of breakthrough product launches, expanding adoption in large molecule applications and an exciting opportunity to unlock meaningful near-term synergies and long-term value creation through our pending combination with BD's Bioscience & Diagnostic Solutions business. I will now turn the call back to Caspar.

Thanks, Udit. That concludes our prepared remarks. We are now happy to open the lines and take your questions.

[Operator Instructions] Our first question will come from Tycho Peterson with Jefferies.

Nice quarter. I'd love to unpack the pharma strength to start. America is up low double digits, China up over 20%. Can you maybe just provide a little more color on both those markets in the U.S., how much of this is on the back of the [indiscernible] announcements?

And how are you thinking about kind of year 2 of the replacement cycle? And then durability of momentum in China, is this increased R&D investment? Is it a multinational activity? And how do you think about anti-involution there?

It seems like that could be a tailwind in China going forward. And then lastly, just on chemistry up double digits. Can you maybe just provide a little bit more color on what's driving that? Because you are tracking above historical growth trends.

Look, very happy with what we're seeing in pharma. It grew double digits again this quarter. And as you mentioned, the growth is across all regions. Starting with the Americas.

Look, I mean, double-digit growth overall. But if you just take U.S. and Europe as a combination. I mean the growth was driven by the success of our replacement cycle in large pharma and equally the traction of our new products, right? I mean you'll note now Alliance iS grew 300% versus last year.

Xevo TQ Absolute start to enter the DMPK space, and that's benefiting the pharma growth in the U.S. and across Europe quite a bit. GLP-1 testing is doubled versus last year and increasingly our biologics characterization instruments as well as our bioseparations portfolio is doing extremely well with large pharma across U.S. and Europe. If you go to China, in China, same as last quarter, activities being driven by CDMOs supporting the local biotech industry. And again, here, our new product portfolio is doing extremely well, right?

I mean these customers are supporting biotech customers who then have to transition many of these molecules globally, and they want the best characterization techniques, the best chemistry, and that's benefiting us quite a bit. and not to leave India out, I mean the India generics market continues to grow in the high teens. Now that said, there are still pockets of low growth, right? Like we mentioned in the past, China generics, pharma discovery and CROs are still a bit slower. So as those improve, the setup is extremely good as we go forward for pharma and as we look ahead.

So great execution across U.S. and Europe and globally, great traction with new products and still some pending end markets or segments that are not yet growing. Now turning to your question on chemistry, right? I mean this is a real success story of our focus on innovation, especially in bioseparations. Like this quarter, we grew 13%.

Year-to-date, the growth is 11%, and there is a significant contribution of our bioseparations portfolio, right? So we launched MaxPeak Premier roughly 5 years ago that created the bio-inert surface category. And on top of that, we've been step-by-step launching new products targeted to different types of novel modalities and large molecules. First came the SEC columns, basically helping us resolve large molecules that we can separate through porous particles.

We launched Affinity Chromatography last year, again, with the MaxPeak Premier as a base and that is growing really, really nicely. Let me have Amol jump in just to sort of give you some help on the modeling as you think about this in the future and the contribution of new products.

Yes. And just to build on what Udit said, right? I mean, think of it this way. Our teams are pursuing critical customer unmet needs.

So when they are able to solve those unmet needs, very quickly, the demand and the sales pickup on that new product and reach sort of $8 million, $10 million, right? And if you have 2 such launches in a year, you're quickly adding $20 million, $25 million in that year when it happens. And on a base of a little over $600 million of chemistry, that's like 300 basis points accretive in the year that happens. And then think of it from a BD vantage point, right, like BD just unlock 8 to 12 projects that were stranded that gives us a very meaningful runway in the next 5 to 7 years to unlock this accretive growth through bioseparations.

Look, I mean, at the end, the success in pharma, the success in bioseparations or chemistry is all due to sort of a deliberate focus that we put a few years ago on launching products that meet unmet needs across our customer segments. And we're seeing fantastic uptake of these products.

Your next question will come from Jack Meehan with Nephron.

Pretty strong results here. I had 2 questions for you. The first is on BD transaction. It sounds like there's a lot of efforts underway.

Udit, I was curious on your latest thoughts on the revenue synergies and confidence to achieve that. And then my second question, I'll go on mute is, last week, there was an FDA update around biosimilars for analytical assessments with LC-MS. Just curious if you could help us understand what that might mean for Waters?

Thank you, Jack. I think your line was breaking up a little bit, but your first question was around BD, right? Look, a very busy few months since we last spoke. I've had the opportunity to visit several customers across bioscience and microbiology.

Equally, we've had a lot of discussions with our future colleagues in workshops. So let me just give you some color on both of those, and then I'll let Amol comment on the immediate impact of different types of synergies. Look, from a customer standpoint, the FACSDiscover S8 and A8 are a significant advancement in the field of flow cytometry. I had the opportunity to visit academic customers, small pharma customers and large pharma customers.

And now you couple this with a more stable CapEx environment going forward where customers are able to plan without many perturbations their CapEx. I mean, we see a very significant opportunity there to increase the uptake of FACSDiscover S8 and A8. I mean, this was fantastic to see with the customers myself. On the microbiology side, I had an opportunity to visit automated and manual laboratories. Now to just illustrate the difference between the two.

In manual laboratories, you get hundreds of samples in a day and about 80 or so technicians will be in any laboratory basically doing a lot of these experiments manually. And if you compare that to an automated lab, you will need roughly 5 to 7 technicians to do the same throughput or even a higher throughput of experiments, right? So significant savings. And to put that in perspective, BD's Kiestra platform has roughly 10% to 20% growth in Europe over the last couple of years, whereas in the U.S., the penetration is at a very low level.

So we think there's a significant opportunity there as well. So I'm thrilled to bits to see things that we had put on paper and really verify them with customers and meet new colleagues. Now in terms of integration planning. We've had roughly 120, 130 colleagues come to Milford, our headquarters, twice in the last few months.

The last workshop really focused on day 0, day 1, day 100 planning. So there is no -- nothing lost in transition from one organization to another. And then we spent significant amount of time taking the synergies that we had signed up for and elaborating the plans with milestones and targets and assigning those to individuals across the 2 organizations and take a significant amount of progress made on that front. And I'll let Amol comment on which synergies will contribute rather quickly in the next year or so.

Yes. Just to build on what Udit said, right? I mean these 2 summits were fantastic. We got an opportunity to validate both our revenue synergy assumptions and cost synergy assumptions in a large group setting with leaders who will be responsible for delivering these synergies and working them out in the countries, in the market.

And that gives us confidence that we will not only be accretive from an EPS point of view in the first 12 months, but also in the partial year that we will have in 2026, where we will get maybe 9 months in the year. And I mean what hits the ground running day 1 are things like improving service plan attachment, deploying premium service plans to our LCMS customers, getting into customers that we today don't serve with our LCMS in diagnostic offering, getting into DMPK labs, getting flow and PCR into process development labs where we have built strong channels across BioAccord and light scattering and implementing our pricing discipline algorithm, which even in today's settings is delivering like-for-like SKU, like-for-like geography, 200 basis points of year-over-year increase.

So I mean just to build on that, really looking forward to bringing the execution focus and it's being received extremely well with our new colleagues and a sharp focus on unmet needs as we unlock many growth areas for the future. Now to your question on biosimilars, really excited to see that the guidance is now guidance is now moving towards using analytical instruments and analytical testing instead of clinical studies to show equivalents between biosimilars and originators. This could provide a significant upside as we go ahead. And if you go back a few years, we've talked about this.

This is -- this and being able to substitute one tool for another without having to redo process development and redo manufacturing submissions is the impetus for creating our bioseparations and bioanalytical portfolio. So this plays right into the hands of our strategy. And I'm really excited, a bit cautious, I mean, to see how fast the ramp will be. So I would not start modeling all biosimilars with bioanalytical characterization yet, Jack.

Let's look at one or two customers adopting it and then we'll go forward. But I'm very excited to see this.

Your next question will come from Puneet Souda with Leerink.

First one on the 4Q guidance and then I have a broader follow-up. On 4Q, just wondering if you're expecting a budget flush in the fourth quarter. If there are any pull forwards in the third quarter that you saw you had a pull forward in 2Q in China, but you grew strongly again 13% in China, I believe. So wondering if you can clarify on the pull forwards.

Or should we expect a normal seasonality in the fourth quarter? And fourth quarter contribution instruments versus chemistry, if you could elaborate?

So let me start, and then I'll pass over to Amol on the breakup. Look, Puneet, we -- I mean it's a very strong setup going into the fourth quarter, right? The drivers are the same instrument replacement cycle, idiosyncratic growth drivers, innovation, really kicking hard. So feel very good about what we are seeing going into the fourth quarter.

I mean -- and as usual, we have maintained our guidance philosophy, right? So when you look at the full year guide, I mean, we basically said 7% at the midpoint, high single-digit growth, EPS double-digit growth. That means that Q4 is at 5% to 7%, right? And when you take that math at the midpoint of the guidance, it's slightly less than a 16% ramp from Q3 to Q4, which is substantially lower than what we've seen on average for Waters, which is roughly 22% and even lower than what we saw last year, which was at 18%, right?

So that gives us -- and it is the same philosophy as we've had through the year, we will look at it in the rearview mirror and claim success, but I can simply say, I mean, there is a significant amount of prudence built into what we have guided for Q4. Amol?

Yes, just to add to that, right, I mean, as Udit outlined, the guidance is prudent 16% versus 18% last year, historical 22% ramp. And keep in mind, there's 1 extra day on the recurring revenue, which adds about 100 basis points. So the way it breaks down is chemistry roughly 6% because still some working down of the Q2 pull forward, service about 8% because it has one extra day and then instruments at 5%, sort of aggregating all to 6% midpoint.

I'm sorry, I didn't address your pull-forward question. No pull forward at all, right? Orders grew more than sales this quarter, and we've built a healthy backlog. So feeling very good about the overall momentum that we see going forward.

Got it. Just a quick follow-up, if I may, on Empower. If you could outline for us, obviously, a very important core product for execution in QA/QC for Waters. With the subscription-based model, how should we think about the incremental upside here versus the prior Empower model?

Yes. Look, Puneet, I mean, really excited about what we're seeing from our software teams. And this Empower innovation model or as we call it internally, the Empower Superhighway, has 3 parts, right? I mean we want to take every analytical instrument that is used to characterize biologics and be compatible with Empower.

So when our customers choose to take it into QA/QC, they have no reluctance, right? And you see that, as an example, with multi-angle light scattering on Empower, customers are moving that into QA/QC. You've already seen that with mass detection, capillary electrophoresis and we intend to do the same with flow cytometry and down the line with PCR as well. So that's the first part.

The second is then taking our large installed base that you just referred to. There's roughly 450,000 users of Empower globally, right? And it is the compliant informatic software of choice for our pharma customers. We intend to give them more value-added services with a -- and applications with a cloud-ready software, right?

So for instance, customers want to get utilization data, our system monitoring software already provides that, provided you have your products on Empower. Second, we're offering our customers a data viewer, which allows them to detect anomalies in their -- in different peaks, allows them to do integrations much, much more smoothly just leveraging their own data through advanced machine learning algorithms. And finally, the data intelligence software, which is the most exciting allows regulators and customers to determine where an audit trail might have been -- where we would -- where you might have deviated from an audit trail electronically, so they can focus on the exact challenge that they need to address in compliance.

And put this all together, this then really gives customers an impetus to go from a CapEx and a service model to a subscription-based model, and that has significant benefits. It's too early to start quantifying exactly what that is. I can tell you that there are a significant number of customers who've already transitioned in small to midsize pharma. There are several large pharma customers, where we are in late-stage discussions and just to sort of give you an example, one customer transitioning their fleet across the globe can yield roughly low double-digit millions just very, very quickly in upside.

So we'll start to quantify that as the runs come on the board like we usually do. But as you can intuitively see, this is a very significant opportunity.

Your next question will come from Casey Woodring with JPMorgan.

Great. I have two here. The first is on TA. You said that business came back faster than expected.

I think you had previously assumed TA would be down 5% in the second half, and you grew 2% here in 3Q. So maybe walk us through your latest expectations as we exit the year in TA. And then on the instrument order funnel, you talked about orders exceeding shipments again in the quarter. Maybe walk us through what you're seeing from an order funnel perspective.

And I would be curious to hear your thoughts on the replacement cycle runway. You've historically said that the cycle usually lasts around 2 to 3 years. But just wondering if this current cycle could last longer, just given the strength that you've seen here, coupled with new product launches, the FDA update, Jack referenced earlier, and perhaps any sort of reshoring benefit?

Thanks, Casey. So quickly on TA, right? I mean the thing that was causing sort of the pain in Americas was largely driven by the volatility around tariffs with some of our large industrial customers. And as that is starting to stabilize, these customers are coming back to business and releasing capital for projects that were stalled and then that, coupled with an interest rate outlook that is improving, opens projects that were stranded for last several quarters.

So in general, we feel good that the business is tracking towards a good direction. And in terms of the funnel and the order book, I mean, a lot of things are going well, right? In the sense you have large pharmas and CDMOs in middle of a replacement cycle, the innovation that we've put out in the market across both LC and MS is resonating and solving critical unmet need. And that is further than amplified by bioanalytical characterization and bioseparations where we continue to make big headways.

So the funnel is pretty rich and strong. Now having said that, 3 customer groups are still on the sideline, CROs, biotechs and branded generics in China. We start to see CROs come into the mix as we come towards the end of the year, which is great because then they add to the replacement cycle as we get into 2026 and there is still a significant runway left on both large pharma and CDMOs that positions us really well for the upcoming year. And then at some point, branded generics in China and drug discovery have to consider replacement because these instruments have aged far more than their typical useful life.

Excellent. Look, I mean, just maybe embellishing on 2 points that Amol has covered. One, the replacement cycle. I mean, if you look at the 6-year CAGR, we're still in the low single digits on instruments.

So there's a long way to go. And I think you mentioned reshoring. Look, the recent clarity on MFN, as you see large pharma negotiating with the government, really it's been a relief, right, across our customers and across our company because it allows you to plan a lot more systematically, right? And I would not underestimate the benefit of being able to do that, that then allows the customers to adopt, as I mentioned earlier, BD's FACSDiscover S8, A8 much more confidently.

It allows them to adopt our new products much more confidently as CapEx gets released. So we feel very good given that we have a differentiated portfolio that is meeting needs with the further clarity in the end markets. And that's sort of a side effect of the negotiations that have taken place on the MFN.

Your next question will come from Doug Schenkel with Wolfe.

Two questions. It was a really strong quarter. That said, when I look at our model, there's some interesting [ pacing ] dynamics. And I know you said there wasn't any pull forward or push out.

But if I look at just our model and I think street models, you beat the quarter from a revenue standpoint, but you increased full year guidance by less than the magnitude of the beat. Secondly, margins were light, but you assume a big jump in operating margin in Q4 more than previously expected. And then tax rate was low in the quarter and really helped some of the EPS upside, but then you expect a big jump in tax rate in Q4. I'm just wondering how much weight we should put on some of these puts and takes when it comes to timing dynamics as they run through the P&L? Like should we focus much on those?

Or is the bigger thing just to in your opinion, kind of say like, hey, there's going to be puts and takes in any quarter, but if you look at the year as a whole, you're tracking ahead of plan top to bottom. So that's the first one. And then really building off of that, you have some really strong momentum heading into next year. The downside to that is the comps are difficult.

I just want to make sure, as we sit here today, are you still comfortable with us modeling something like 6% to 8% core growth at the top line even with these comparisons given the strength and something like 50 to 100 basis points of margin expansion?

Yes. Doug, thanks for the question. I mean, look, at the end of the day, you have to look at the full year, right? I mean there's always puts and takes in a given quarter, right?

For example, in Q3, we are running ahead of plan. So we had to sort of true up for the annual bonus payout to reflect that. And then there is also incremental commission associated with outperforming your plan that comes in. When it comes to tax, there is always timing of discrete items and when they show up and when they get trued up.

So on a full year basis, we're still at 16.5% on the tax rate. And as Udit outlined, I mean, we have tremendous growth catalysts out there for 2026. And if there is an opportunity to accelerate some of them or to derisk some of them, we will absolutely take it as long as it's within our guide and within our P&L. And we continue to do that as we come across investment opportunities that accelerate growth.

Look, I mean, to answer your second question on next year. First, I'll tell you this year is not over, and we're laser-focused on delivering a fantastic year, high single-digit growth, double-digit EPS growth. I mean puts and takes from one quarter to the other, notwithstanding, I mean, the full year is a fantastic, fantastic performance. 2026, the setup is the same, Doug, as this year with incremental drivers from a more stable policy environment, especially across pharma. The largest customer, stable environment also across academia as we start to go into next year.

So a better -- even a better setup from an end market perspective. From Waters, the setup is excellent, right? Our instrument replacement cycle is still sort of in the mid innings. We are traversing at a low single-digit CAGR versus 2019. Idiosyncratic growth driver, GLP-1 testing, the revenues doubled this quarter versus last year.

There's still a long runway to go as the volume keeps increasing and now you have semaglutide generics coming to the market. India is putting up really nice runs on the board with high-teens growth and as is PFAS testing. Talk about innovation. I mean, our pipeline is doing extremely well.

The move towards bioanalytical characterization, bioseparations is paying off extremely well, as you saw in this quarter's results and year-to-date results and we expect that to continue next year. Now that's augmented further by strength in CDMS, which is a game-changing launch for large molecule mass spec. You then have informatics building on top of it, with malls going into Empower in the instrument space. So there are several catalysts for next year that are not even there this year.

So we feel extremely good going into 2026 on our top line growth. Now as you know, we generally don't give specific guidance in Q3. We'll talk more about that when the year-ends and at Q4, but the setup is extremely good from an end market perspective, our execution perspective and how much traction all our new products have, and that allows us to deliver the performance we're delivering in a dynamic environment.

Your next question will come from Dan Arias with Stifel.

Just Udit, a follow-up on the biosimilar opportunity over the next few years. If you look at the revenue number for the drug sales over time, they move up nicely each year, '26 is higher than this year. And then '27 and '28 move up pretty significantly as well. Obviously, there is a pricing component there.

So when you look under the cover, so to speak, to what extent do you see [ pill ] count increases underpinning that such that you can think about an incrementally larger opportunity being available to you each year because it looks good from a dollar standpoint, but I'm wondering what is the change for you when it comes to what matters most, which is obviously just the number of [ pills ]?

So look, I mean, Dan, that's a fantastic question. And it's exactly the right way to look at the biosimilars opportunity. You take any drug class. I mean you take oncology drugs or you take immunotherapies, what you find is the penetration for these really advanced therapies that make a massive difference in a patient's life, the penetration is still extremely low, right?

And some of that has to do with pricing and affordability. And when you are able to introduce more biosimilars and do them without having a further requirement for clinical studies and just use bioanalytical characterization that Waters would provide, you allow for many more biosimilars to come into the market, hence, the price goes down and the price goes down, the access increases and the penetration increases. We think this is a significant volume growth opportunity. And more importantly, it will make access to many more biologics available to a significant number of patients around the globe.

So of all the things that I've seen in policy improvements over the last few years, if this one takes traction, it is a significant improvement in patients' health.

Okay. Maybe just a second -- just a follow-up for Amol. Amol, it sounds like you have a good number of new products coming to market over the next 12 months. Is there a margin impact that we should be mindful of there?

I know in the early days, there can actually be some downward pressure even on a product that has a higher gross margin profile just until that product itself actually kind of gets up to scale. So I'm just wondering if there's something to be -- to think about there.

I mean, think of it this way, right? I mean the products that are coming to market are a healthy combination of bioanalytical characterization, bioseparations and Empower. And clearly, bioseparations being chemistry and Empower being software are meaningfully accretive to our underlying gross margin profile and that will offset sort of any instrument-related new products, which, as you know, out of the gate are not fully value engineered. And then keep in mind that products like Alliance iS and TQ Absolute and TQ Absolute XR, while they were not fully value engineered out of the gate in the last 2 years, it now becomes a time for us to value engineer them and our teams are laser-focused on that, and you'll start to see the accretive effect of that value engineering flow through.

Your next question will come from Catherine Schulte with Baird.

I'll just go ahead and ask my two. First on BD, I know we'll have to wait for later this week to get the full results. But in their preliminary announcement, they called out some incremental headwinds in academia for biosciences. So can you just talk to your confidence in that 4% to 4.5% top line for that asset next year?

And then maybe on chemistry for the 4Q guide, I think you said up 6%, which would be a low single-digit sequential increase. We haven't seen less than a high single-digit sequential increase in the fourth quarter since 2012. So I just wanted to understand that a bit more. Was there less burn through the second quarter pull forward in the third quarter than you expected? Or any other timing dynamics we should be thinking about there?

Yes. So let me take the chemistry one first. That's simple, right? As we guide, we assume chemistry is 7% grower.

We adjusted it a little bit for the Q2 pull-forward dynamics and that's it. We didn't sort of relate the Q3 performance into Q4, just to be prudent at this stage, right? On the BD side, right? I mean, look, we had meaningfully reduced the A&G numbers because in our models, in U.S.

A&G came down by as much as 40% over the time '25 to '27 in our underwriting. So what we are seeing in the A&G market is largely in line with what we underwrote. But then in any business, there's always going to be new headwinds and new tailwinds like we had with Wyatt, right? I mean, right after the Wyatt transaction, the biotech market meaningfully softened.

And as a true resilient team, we rose up to that challenge, and we accelerated synergies and found ways to make sure that we deliver the numbers we committed to the Street, right? And so that's generally the DNA of this team. Whatever the cards are, we always rise up. We look at every crisis as an opportunity, and we make sure we deliver what we commit.

So Catherine, just to build on what Amol has said, we feel very good about what we are seeing with BD. As I mentioned, I visited customers myself. I had a chance to talk to academic customers, small pharma and large pharma customers. And on the Biosciences business, especially with the FACSDiscover S8, A8, which are clearly setting a new benchmark in that category.

I mean we're seeing very, very good reception. And now couple that with a more stable pharma environment, you should see CapEx start to go up in that environment, a more stable academic environment, you should see -- you should start to see that go up. And as far as the sort of early indication from BD on that market, it is largely in line, in fact, even better than what we have assumed for that business. So really feel very good about our assumptions going forward.

Your next question will come from Brandon Couillard with Wells Fargo.

Udit, second quarter in a row, China has been up double digits, a lot better than peers. Do you think that's unique to Waters in your portfolio? And what are you assuming for China for the year? And how sustainable is that as you look out to '26 based on kind of how you're feeling about the macro there?

Look, I mean, yes, China again grew double digits. And Pharma first grew largely because of our CDMO customers supporting the local biotech industry. And again, our new products allow us to basically again show what I would call more differentiated performance and this is largely to do with execution and new products. When you look at the academic end market, that also grew almost 20%, and there, again, we took actions a couple of years ago to localize our full portfolio, expand our distribution.

You couple that with fantastic execution -- fantastic commercial execution at the ground level and we've been able to win a significant share of the latest stimulus that has come through. So the academic end market has been doing pretty well. As we look at Q4, I mean, we're seeing the same trends persist. We are modeling a high single-digit growth, a bit of a slowdown from Q1 -- from Q2 and Q3 which if you just take it in all, the first half grew double digits and the second half grew double digits.

So China would have had a double-digit year who would have thought that, that's possible in this environment. So I'm extremely proud of what the teams are doing on the ground and how they're taking new products and really operating effectively in a pretty dynamic environment.

The only thing I would add there, Brandon, is the Academic & Government stimulus-related revenue, you have to take it with a grain of salt, right? I mean, we very well know in our industry that it is just moving money from one year to another. And once the stimulus is done, you hit an air pocket, right? So that's not new or specific to anyone.

And as we outlined at our Investor Day, we are modeling China low to mid-single digits in the 5-year time frame, and this outperformance versus that assumption is amazing.

This concludes the Q&A portion of the call. I will now hand it back to Caspar.

Thank you, Leila. This concludes our call. We look forward to connecting with many of you at upcoming events and conferences.