Waters' Q3 2025: Contradictions Emerge on China Growth, Biosimilars, Tariff Impact, and Budget Flush

Date of Call: None provided

Financials Results

• Revenue: $800M, up 8% as reported and 8% in constant currency vs Q3 FY2024
• EPS: $3.40 non-GAAP, up 16% YOY; GAAP EPS $2.50
• Gross Margin: 59%, up 70 basis points sequentially vs prior quarter
• Operating Margin: 30.3% adjusted operating margin (Q3); full-year guidance ~31% adjusted

Guidance:

• Full-year 2025 constant-currency sales growth raised to 6.7%–7.3% (7.0% midpoint); reported sales growth 6.5%–7.1%.
• Full-year gross margin ~59.2% and adjusted operating margin ~31%.
• Full-year adjusted EPS $13.05–$13.15 (~10%–11% growth); net interest expense ~$36M; average diluted shares ~59.7M; tax rate ~16.5%.
• Q4 2025 constant-currency sales growth 5%–7% (reported 5.2%–7.2%); Q4 adjusted EPS $4.45–$4.55; one extra day ≈100 bps recurring revenue tailwind.

Business Commentary:

* Revenue Growth and Strategic Expansion: - Waters Corporation reported sales of $800 million in Q3, up 8% as reported and 8% in constant currency. - The growth was driven by strong performance in instruments, recurring revenue, and strategic expansion into high-growth areas.

• Instrument and Recurring Revenue Growth:
• Instruments grew 6%, led by high single-digit growth in the LCMS portfolio, while recurring revenue grew 9%.

• This growth was attributed to a surge in instrument replacement activity and increased product adoption.

• Chemistry Performance:

• Chemistry sales grew 13%, fueled by the positive market reception of new launches like SEC and affinity bioseparation columns.

• The increase was supported by strong performance in bioseparations, enhancing analytics across discovery, development, and manufacturing.

• Geographic Performance and Market Dynamics:

• Sales in Asia grew 13%, with particularly strong growth in China where pharma sales grew by over 20%.

• This was driven by robust instrument replacement activity and market demand for new capacity investments.

• Upcoming Product Launches and Synergies:

• Waters Corporation raised its 2025 full-year guidance based on strong third-quarter performance, with plans for new product launches and integration with BD's Biosciences and Diagnostic Solutions business.
• These actions are expected to drive future growth through innovation, increased market penetration, and operational synergies.

Sentiment Analysis:

Overall Tone: Positive

• Management described "another excellent quarter" with "top and bottom-line results exceeding the high end of our guidance," raised full-year guidance, and highlighted multiple product launches (Xevo CDMS, EmPOWER enhancements) and BD combination synergies as drivers of continued momentum.

Q&A:

• Question from Tycho Peterson (Jefferies): Unpack the pharma strength — how much is replacement cycle vs other drivers in the U.S.; durability of momentum in China and the role of CDMOs/anti-involution; and what is driving chemistry's above-trend growth?
  Response: Management: Pharma strength is broad-based — continued instrument replacement cycle plus accelerating adoption of new LCMS/bioseparations products (e.g., Alliance iS, Xevo TQ Absolute) are primary drivers; China strength is CDMO-led adoption; chemistry growth is driven by new bioseparations columns (SEC, affinity) built on MaxPeak Premier.

• Question from Jack Meehan (Nephron): Update on BD transaction revenue synergies and confidence to achieve them; and implications of the FDA biosimilars draft guidance for Waters?
  Response: Management: Integration planning validated revenue and cost synergies with confidence in EPS accretion within the first 12 months (and partial-year 2026); FDA biosimilars draft could materially increase demand for analytical characterization but timing/pace of adoption is uncertain.

• Question from Puneet Souda (Leerink): Are you expecting a budget flush or pull-forwards into Q4 and can you break down Q4 contribution by instruments vs chemistry; and on Empower, how should we think about incremental upside vs perpetual model?
  Response: Management: No pull-forward observed; Q4 guide is prudent (chemistry ~6%, service ~8% with one extra day ≈100 bps, instruments ~5%); Empower is transitioning toward subscription with sizable upside potential—early traction in small/mid pharma and late-stage discussions with large pharma.

• Question from Casey Woodring (JP Morgan): TA business outlook as it recovers faster than expected; order funnel dynamics and replacement-cycle runway — could this cycle last longer?
  Response: Management: TA is recovering as tariff volatility normalizes; order funnel is rich (large pharma and CDMOs driving replacement), cycle is mid-innings with significant runway remaining and potential extension aided by new product launches and reshoring clarity.

• Question from Doug Schenkel (Wolfe): Why did you raise full-year guidance by less than the Q3 beat; how should we interpret margin/tax timing and modeling for 2026 growth and margin expansion?
  Response: Management: Q3 included timing items (bonuses, commissions, discrete tax items) that affect quarter-to-quarter comparability; focus remains on full-year guidance and catalysts for 2026, with confidence in continued top-line momentum despite tougher comps.

• Question from Dan Arias (Stifel): For biosimilars, how much of the revenue upside is driven by increased unit volumes (pill-count analogy) over the next years; and will new product launches pressure margins early?
  Response: Management: Shifting biosimilar approvals toward analytical characterization should expand volume and access (meaningful long-term opportunity); mix is expected to be gross-margin accretive overall (chemistry and software lift margins) while instrument launches may have near-term drag that value engineering will mitigate over time.

• Question from Catherine Schulte (Baird): Confidence in BD biosciences' ~4%–4.5% top-line for next year given BD's preliminary notes on academic headwinds; and why is Q4 chemistry guide modest (≈6%)?
  Response: Management: Chemistry Q4 guide is conservative to allow for prior Q2 pull-forward dynamics; BD assumptions have been validated in customer outreach, reception to FACSDiscover platforms is strong, and management is confident in their BD underwriting and execution plans.

• Question from Brandon Couillard (Wells Fargo): China has shown consecutive double-digit quarters — is this unique to Waters and how sustainable is this for 2026; what are you assuming for China long-term?
  Response: Management: Current China outperformance is execution- and product-driven (CDMO demand, localized footprint, stimulus wins); long-term modeling remains low–mid single-digit, but near-term strength is sustainable while stimulus and CDMO activity continue.

Contradiction Point 1

China's Growth Expectations

It involves differing expectations for China's economic growth and performance, which significantly impacts geographical revenue projections and company strategy.

What factors drive China's strong performance, and how sustainable is it through 2026? - Brandon Couillard (Wells Fargo)

2025Q3: China's growth is driven by strong execution with new products, academic stimulus tenders, and pharma activity. While expectations are for single-digit growth over the next five years, current performance outstrips assumptions. - Udit Batra(CEO)

What factors drove China's better-than-expected performance, and is it sustainable? - Daniel Gregory Brennan (TD Cowen)

2025Q2: We're maintaining conservative growth assumptions for the back half. - Udit Batra(CEO)

Contradiction Point 2

Biosimilar Opportunity and Market Impact

It highlights differing perspectives on the expected market impact and growth opportunities associated with biosimilars, a key strategic area for the company.

Could you explain the biosimilar opportunity and potential for increased pill counts? - Dan Arias (Stifel)

2025Q3: Biosimilars have a volume growth opportunity as they increase access to biologics and reduce patient costs. The opportunity presents a significant volume increase as more biosimilars come to market. - Udit Batra(CEO)

Can you discuss the potential synergies from the acquisition, particularly in mass spec and MALDI for microbiology, and the FDA strategy? - Jack Meehan (Nephron Research LLC)

2025Q2: Biosimilars hold significant market potential. The FDA's biosimilar guidance could increase analytical instrument demand and compliance-ready workflows. - Udit Batra(CEO)

Contradiction Point 3

Tariff Impact and Pricing Strategy

It involves the company's approach to tariff impact and pricing strategy, which are critical for financial forecasting and investor expectations.

What supply chain realignments have been made due to tariffs, and are you impacted by IP and transfer pricing issues affecting APIs? - Puneet Souda (Leerink)

2025Q3: The gross impact of tariffs is $45 million, offset by $15 million in surcharges and $14 million in cost actions. - Amol Chaubal(CFO)

How are you managing pricing in the current environment, and are you concerned about pushback from pharma companies on pricing? - Tycho Peterson (Jefferies)

2025Q1: Achieved 200 basis points of like-for-like pricing with selective surcharges due to tariffs contributing an additional 50 basis points. - Amol Chaubal(CFO)

Contradiction Point 4

Budget Flush Expectations

It involves the company's expectations for a budget flush in the fourth quarter, which can impact cash flow and financial forecasting.

What are your expectations for the fourth-quarter budget flush and the contributions from instruments, chemistry, and service? - Puneet Souda (Leerink)

2025Q3: There is no expected budget flush. The fourth quarter is expected to grow 5-7% with instruments at 5% and chemistry at 6% due to pull-forward dynamics from Q2, while service grows by 8% due to an extra day in the quarter. - Amol Chaubal(CFO)

Can you discuss the replacement cycle dynamics in the pharmaceutical industry and its customer segments? Additionally, is there any impact of tariffs on the replacement cycle? - Jack Meehan (Nephron Research)

2025Q1: The slowdown, however, is more pronounced in China and U.S. academia than in pharma. And we assume no significant budget flush in the fourth quarter. - Amol Chaubal(CFO)

Contradiction Point 5

China's Growth Outlook

It involves the company's growth projections for China, which are crucial for strategic planning and investor expectations.

What drives China's strong performance, and how sustainable is it through 2026? - Brandon Couillard (Wells Fargo)

2025Q3: China's growth is driven by strong execution with new products, academic stimulus tenders, and pharma activity. While expectations are for single-digit growth over the next five years, current performance outstrips assumptions. - Udit Batra(CEO)

What are your expectations for China for the remainder of the year, and is there hesitation in customer spending? - Catherine Schulte (Baird)

2025Q1: China's growth was driven by stimulus, but we assume low single-digit growth for the remainder of the year. - Udit Batra(CEO)