Well, hi. Okay. Well, thank you everyone for joining us again this morning. This is always one of the my most fun presentations and fireside chats of the annual event. My name's Eric Coldwell, the Pharma Services Analyst at Baird. Jim Foster, thank you for being here. Charles River, a big, big draw, a lot of interest. Also Todd in the audience, I couldn't twist his arm to have him come up on stage, but we're gonna... no, no formal comments, we're gonna jump right into Q&A, and I'm gonna start it off with a zinger. Jim, you have a virtual investor day next week. Why don't you just tell us what you're gonna say then, so we can all go home?
Nice try.
All right, I have to ask a serious question or two. Big picture, without the details, fiscal 2020 or calendar 2024 guidance, is that on the table for next week? These are the things I'm getting asked from investors.
Um, so-
Long-term plan, is that on the table?
What we'll do principally next week is give medium length guidance.
Okay.
Not too long, not too short. So reasonable guidance where we think we can get our arms around the timeframe. Embedded in that, obviously, is 2024, without being terribly explicit, but I think, I think the shareholder base will have a real good understanding of what 2024 looks like and what the trajectory ought to be. And then we'll, we'll do deep dives into all of our businesses, with the folks running it.
In the past, medium term, I think, typically meant three years. Is it?
That's probably the timeframe.
Probably?
Yeah.
Okay. That was easy enough.
Mm-hmm.
See, it didn't hurt too much. We're gonna make it through this. Look forward to next week.
What did you have for breakfast today?
Not enough, obviously. Big picture, look, we continue to hear of pockets of the R&D ecosystem being pressured. Other areas, we're seeing investment, we're hearing some companies that say things are, everything's great. Some of the clinical CROs sound really good. Not all of them, some of them. It's just such a mixed dynamic in the market right now. I'm curious if you have any latest and greatest thoughts. It's only been a handful of weeks since you reported, but where do you think the overall market is going in terms of investment? I mean, what's the big shift occurring now? This debate between tools and bioprocessing being weaker, or maybe it's not so weak, and we're back and forth every day. What's really going on in this ecosystem?
I mean, sort of our universe is a lot different than the tools-
Yeah
F olks for sure, right? So, I mean, so much of what we do is required both for discovery and development and to get drugs into the clinic. So I think, I think the focus these days are get your INDs filed. Everybody's in a rush to get the drugs into the clinic, so get your INDs filed, get your drug into the clinic, and obviously, try to get it into the marketplace. So we're, you know, demand has been good for us,
Not in all categories.
No, I mean, it's not... Yeah. So.
I want to go through the individuals-
Okay
... so if you wanna add that in.
So, I mean, the research model business has been strong. The safety assessment business has been very strong. The discovery business, because of what I just started to say-
Yeah
... has been softer. So I think there's a push to get through preclinical and into the clinic, to the detriment of discovery. That can't continue for too long, right? 'Cause then you have nothing to get through preclinical. But we've seen this before, so that's slower for sure. We began to see it probably 12, maybe 18 months ago, sort of hesitancy to lock down studies. We also have some slowness in our biologics business, but often the first quarter is slow and usually bills in the back half of the year. And that's probably a slight commentary on the fact that some biotech company... Look, we think that our client base is well-financed.
We only have 5% of our clients that have less than two years of cash, but even those folks we think are well-financed. Why do we say that? If you have a good drug for unmet medical need and you're tight on cash, Big Pharma probably rides in and funds that. I just don't think those companies go under. You probably have a small number of companies that are folding, but you know, we had 700 new clients last year. So, you know, we think the client base is well-financed. Yeah, but people in this room probably have a better sense of this than I would, but I mean, everybody has a different take on when the capital markets open up again.
So if you've done an E round, when can you get public? And if you went public, either prematurely or not, when can you do a secondary? And so, I mean, everybody has a different take on that. So I think that phenomenon is causing some of our clients, particularly in discovery and biologics, to pause. And I do think that changes pretty rapidly when things open up, because, like, there's lots of great new potential, new drugs. There are a bunch of new modalities, particularly cell and gene, and, and I think some of these companies have had to prioritize their portfolios, probably to the detriment of some of the drugs that they'd like to develop.
Discovery, biologics testing, maybe some seasonality, certainly some COVID comps there, but maybe a little bit softer right out of the gate this year. Sounded like 2Q was better there. Anything else in your total portfolio you would highlight? What I'm getting to is what percent of your total revenue base, and if I just take those two businesses, we're give or take 20%, a little over maybe, but, you know, in that ballpark.
Yeah, I mean, the rest of the portfolio seems more usual-
More usual.
Seems stronger. I mean, I do think the safety assessment business is normalizing, and we had this incredible growth in 2021 and 2022. Backlog was elongating to 18-24 months. That's really good news and bad news. You know, the good news is it's-
Yeah
... that's kind of nice. Bad news is that the clients were booking studies so far in advance, that they were booking slots so far in advance that they often didn't have a study associated with that. So we're at about 13-month backlog now, probably normalizing to 9. Kind of 9's probably a good place to be. Clients don't have to wait too long. We still have some leverage just in terms of getting them to prioritize. I think we have some pricing power as a result of that, and we have a really good sense of at least 2 quarters in the future and perhaps 3. So. But we don't know exactly where it's gonna settle out. Could be higher. I doubt it'll be lower.
Historically, let's just jump down to safety, specifically within the DSA segment. You have $2.8 billion of backlog today. You're at 13 months. I think you averaged out at 17 months. Historically, you were 7.2-7.3, if I look at a 5-year average-
Yeah
... pre-COVID, months of coverage.
Yeah.
You historically set a 6-9-month range, and you're saying now maybe we should target 9 months. So if I'm at $2.8 billion of backlog, thinking about where revenue is, that means we need to pull out another big chunk from backlog over the next year.
That's fine. So, you know-
Yeah
... we have, we always have, slippage and cancellations in our business model, and, and so do the drug companies internally, right?
Yeah.
Drugs aren't ready on time. They, they have trouble formulating them. They're too toxic, they're not effective, what- whatever, right? And so slippage and cancellations are higher because it's really almost impossible to plan on what drug you're gonna be working on 18 or 24 months from now. So we're gonna see a reduction in slippage and cancellations in sort of in tandem with shorter backlog. But not a short backlog, just a shorter backlog, and I think that's fine.
Yeah. Well, for what it's worth, I mean, I'm taking $800 million out of my model for the next year. Everybody's got their own model and guess, and we'll find out what reality is, but it's. I don't think this is a surprise. It's just where, how does the street get comfortable? Because you have the reality that nobody's modeling your backlog actually translating to revenue, right? If we had modeled that, we would've had 40%, 50%, 60%, 70% growth rates built into our models a couple of years ago.
Right.
That was never gonna happen.
Right.
So this isn't a surprise or new news. The question is, and what's so hard for investors to get over the hump on, is just optically, it's hard to buy a company when the book-to-bill's below one. It takes time to get used to that. So what do you think on this cancellation phasing or process or magnitude? How long does that happen until we get to a juncture whereby that's all behind us, and we're at stable awards, net awards each quarter, maybe moving a little higher eventually? When does that... Do you have a sense on when that could happen?
Yeah. I mean, a lot of that backlog was booked in 2020 and 2021.
Yep.
So we're working through that rapidly, and as clients prioritize their pipelines, which they all are, large and small, well-funded and poorly funded, you're gonna see a meaningful reduction in cancellations. Slippage is always there. Slippage is not a problem. That just means the drug wasn't ready, but any backlog will provide other work to be slotted right into that gap. So, you know, I think we will be, we're approaching that time, and that should normalize. We always have some percentage of our revenue that slips or cancels, and that's fine as long as the backlog is sufficient. So, I think we're getting to that point.
Well, I hope me taking $800 million out of my model ... in the next year is, is conservative, but we'll, we'll see. The good news is, historically, you would have done this revenue growth with $1.5 billion, $1.6 billion of revenue.
That's right.
So when things normalize, you don't need-
That's right
... a backlog. You wouldn't need $2.8 billion of backlog to get there. The other part of this for me, and maybe you have another perspective on it, but I think about cancellations of backlog that at least we never modeled coming to fruition-
Mm-hmm
... is one thing. That's, for me, that's more optics. What's the gross booking environment look like? Because I assume those awards, if a client's giving you a gross booking today, I assume they actually have work that they're ready to do. This is, this is real backlog now. They, they're not, they're not reserving space 2 years out because they're worried everybody's gonna be getting the, the best sites and the best, the best CRO. Today, if they're giving you bookings, they actually have work to do, is my sense. So what is the, what does the gross booking look like, and how quickly is that- What is the average duration of current gross awards? Has to be a lot less than 13 or 17 months.
I think the closer they are to when the study can start, the stronger the work is, right?
Right.
Everybody's in a rush to get to market. So they line up as quickly as possible, and as I said, I think this sort of nine-month situation. So what we said to all of our clients, particularly over the last couple of years, was, "All of your drugs aren't created equal. They're not all gonna be blockbusters. So you've got 10 drugs you're working on, pick the one or two that will have the smallest amount of competition or the greatest revenue opportunity, or are solving some horrendous unmet medical need, and we'll prioritize those for you." I think we've done that really well. Clients are staying with us, we're gaining share, and they can plan really well, except if it gets too long.
So they have book slots with no work, the further out it gets, assuming that they will have work, and assuming the last thing they want to hear or the last thing they want to tell their boss is, "We just couldn't get a slot at Charles River or anybody else." So this normalization I think will be a positive thing for all of us.
All right, that's probably your least fun topic, and that one probably wasn't a ton of fun, but we have to hit on NHPs.
We don't have to.
Well...
Yeah. Yes.
I'm waiting for tomatoes, you know? So-
Go ahead.
Look, I, I'll just jump to the... you know what the conclusion is-
Yeah
... what the punchline is. You've done a great job navigating so far, a heck of a lot better than I would have ever expected. A lot of heavy lifting, getting sites transferred, where certain origins went to other countries, et cetera. But now the, now the market concern is, what if another foreign government makes the similar move as the U.S., with, concerns over Cambodian imports? Or what about the CITES meeting in November? I'm just gonna leave it open-ended and I just want to get your general thoughts and updates on where we are with the health of this market, the sustainability of it, actionable events or key dates that could be, happening over the next few months and quarters.
So the whole subject and the way it broke is sort of bizarre, right?
Yeah.
It came out of nowhere, we think, without merit and no pace. By that, I mean, the government is not engaging at all. We've had a couple of conversations, but it's not. There's nothing progressing. So that's frustrating, and annoying, and was very concerning at the beginning of the year, too, for sure. So the good news is that we've used our international footprint, which is quite large. We've got great facilities all over the world. We have people with lots of experience with very complex toxicology studies in large animals, and we have capacity. We have friendly governments, and by that I mean, working with us for permitting and tax breaks for building and hiring staff, and it's quite distinct from what's going on in the U.S.
Which is unfortunate, but we're really thrilled that we have all of this. So we were able to pivot really quickly, and I will tell you that the places that we're doing it, they're inspecting every shipment that comes in, and it's really going well. We delayed no client work. I mean, the very beginning, it was very difficult to give clients an exact time when we could start a study, but as things played out, we were able to accommodate clients. So, talked to our clients, they're really pleased with the quality of the work. And we're getting NHPs from multiple geographies around the world. So the irony is that there's actually a surplus, which is insane, right? So there's plenty of NHPs.
The irony is that we're able to start studies relatively quickly for our clients, and we've demonstrated for them, if nothing else, that, because we have some competitors that have one site, we have some competitors that have a couple of sites, and we have a dozen in the Safety Assessment business, and so that's really beneficial for the clients. So I thought this thing would be resolved in two weeks, 'cause as I said, it's without merit and came out of nowhere, and I thought, "This is a mistake." We produced this extraordinary white paper that talked about the necessity of using NHPs to do all of-
Yeah
... the development work on large molecules, and it was not a debatable proposition. So I figured people would read that, and then somebody would call us up and say, "We're really sorry, we made a mistake here." So we're almost a year into this, whatever is going on. I don't even know how to describe it. So we are moving... We, we've moved forward. I, I, I think if, not if, I think when this is reversed, when the U.S. government is fine with Cambodian, NHPs coming into the country... By the way, Cambodia is furious at the U.S., so I think if it was allowed, I don't think they would ship them into the U.S. But assuming that, that this whole thing ameliorates, we're not gonna pivot back to the U.S.
We do a bunch, we do a bunch of NHP work in the U.S., with some other sources of supply. It's fine, but, the preponderance will be done, elsewhere. So it's, besides being, besides being aggravating and all sorts of innuendo that isn't true, I, you know, I think I'm proud with the way we've managed it. Our clients are thrilled with that, and the work is getting done in a very high-quality fashion.
Where to go with that? Okay, how is there a surplus? We talked about for so many years the shortages, how long it took for animal farms, new breeding facilities to open up, get captive parents, have captive infants, have those raised, build a breeding stock, go through all of these processes... how did we suddenly wind up in a surplus?
I don't think it's suddenly. It's a function of having additional geographies-
Yeah
providing the animals. And-
So this would be Vietnam, back to Mauritius, Philippines.
Yes, a bunch of places. And the animals basically have the same genetic background and profile, even though they come from different countries.
Other species of macaques? Not, not a transition yet? No. Okay.
I mean, the whole industry pivoted 30 years ago to these.
Yeah.
So all of the, all the research, and all the papers, and all the background data is developed on these species of animals.
I'm doubtful, but I have to ask the update on other large animal models, mini pigs, canines?
Yeah, any clients moving in that direction?
No. A perfect solution would be to produce micro pigs, so very small pigs that are 40 or 50 pounds.
I have a daughter that would probably buy one as a pet, but-
40 or 50 pounds, use a small amount of drug.
Yeah.
They have a cardiovascular system that's probably closest to humans. They're also a great model for dermatological work-
Yeah
particularly things like skin cancer. There's, like, two small colonies in the world. So it's possible. Take five years. So nothing could replace the current models, immediately.
Even a 40- or 50-pound pig is what, 10 times, 5 times larger-
It's big
drug volume that would be needed? I mean-
That's the drug volume is a big issue.
Yeah. Okay. What happens to pricing with excess, with surplus supply?
Look, we price the studies well. By that I mean, so much of our work has become way more complex than it used to be. So we do Immunotox, so, looking at the effects of the drug on your immune system, or Genetic Tox, the effect on your genome, or Oculotox, effect on your eyes, and that's really complex stuff.
Yeah.
Most of our competitors don't do it, and even the big drug companies don't. So we price those, and we didn't always. You know, you heard me say for years that I didn't think we were being paid well, but I'd say the last five or six years, the pricing has been appropriate. So we're getting paid well for an NHP study, and then we're just passing along the increment, crazy increments to our clients, sort of the way airlines pass along gas prices, right? So I think, if, and as, and when prices come down, I'm not concerned at all about the margin of the studies themselves-
Sure
... because there's more to the studies than the animal cost.
Would the dollars come down, though?
Only with regard to the additional pass-through. So you could have a subtle effect on revenue and little or no effect on your operating margin.
Okay. Last one on discovery. We spent a lot of time here. I do want to hit, RMS in particular, and also manufacturing. So discovery, ten to fifteen percent-ish of your DSA segment. It's been weaker. That was to be expected. I think temporarily discretionary work, you're not going to invest in something that doesn't have a payoff for ten or fifteen years. It will come back. In past cycles, and I know it's a different business today-
Yeah
a different client base, but in past cycles, how long did it take? How long was discovery weak, and how long did it take to come back?
Yeah. I, you know, I still don't think the business is cyclical, but I get your point. Cycle being the fact that there's a-
Periods. I-
There's a business-
I call them periods of turbulence or disruption.
Okay
That usually been called, caused by multivariate equations, and it's. I sort of agree that it's not as cyclical-
It's still.
it's just a bunch of stuff happened, but-
It's still different than historically. So what you have today that's different is you have thousands more biotech companies, you have less pharma companies-
Yeah
... at all.
Yeah.
Most of them outsourcing, and you have a bunch of new modalities. So the harsh reality is that if an insufficient amount of money is spent in discovery for any of these companies, at some point down the road, they have a problem. And so spending's been fabulous for the last, I don't know, 5, 6, 7 years, pretty evenly paced. So, as I said earlier, I would think that relatively soon after folks were confident that the capital markets were really open, and they could get access to funding that would fund studies that maybe they had shelved or didn't think they would get back to, that we'll see investment back in discovery. We like our discovery portfolio a lot. We've got some good scale, some great science It's definitely a feeder for the toxicology business, and it provides a competitive advantage that most of the competition doesn't have. So we like it. We also like to start as early with the clients as possible. If I step back in time, generations, I think of, and I think most people think of Charles River as a research models company, a catalog company, mostly product, a little bit of wraparound service. You've grown your service business portfolio tremendously over the last 20 years. And more recently, the investments in CRADL have been, at least so far, have been, you know, very contributory and I think exciting. Where do products and services stack today in terms of the revenue mix within RMS? Used to be all product.
Within RMS?
Yeah. I mean, is it, is it 50/50, or service-
It's getting close.
Yeah.
The services are growing disproportionately fast.
Right.
The margin profile for some of the services is accretive, not all of them. They're international, and the sort of services that we're providing... So if you look at the CRADL thing where we're providing facilities-
Right
... and mostly providing the animals and the animal facilities and people taking care of them. That's hopefully going to evolve, that we actually do run the studies for them. And it's, this is R&D, this is early, right?
Give a one-liner just for people who aren't as familiar. Give a one-liner on what you do in CRADL and how much it's grown, how many sites you have.
So we've got, I don't know, close to 40 sites now. We just did an acquisition last year. We thought it was just gonna be for small biotech companies when we started this business, and we've got big pharma in there as well. So they'll run out of space, or they'll decide they don't wanna build any more space, and so we have long-term contracts with them. So that there will be a bunch of animal rooms. We'll do some of the work on the study. The goal, as I started to say, was to do the studies for them. Even better than that, that CRADL stuff eventually will move into discovery and safety. So on a see-through basis, it's a very important activity, to engage with clients really, really early.
So we're in there with PIs who are doing basic research close to where their companies are, and most of them, you know, can't afford to build their own vivarium. So, becoming a nice business, has nice margins, pretty good growth rates, and we've got them. So far, we have facilities pretty much in all of the major bio hubs.
So you saw where I was going with the question, that services used to be a tiny piece-
Right.
And a, you know, a very successful catalog business where pricing went up globally, maybe not every country, but globally, realized pricing went up every year for as long as I can remember in models. Over time, products come down, services go up. We naturally think margin erosion. We're not seeing it. And CRADL's growing so quickly. Is that still dilutive to overall RMS margin, but getting better, or is... Can you give us a sense?
A portion of CRADL is dilutive, and a portion of it's accretive.
When it's mature-
It's probably neutral to margins right now. I think it has the potential to be accretive.
When the facilities mature in full-
Yeah
... it's, it's accretive.
The scale of the facilities is important. We've got high growth there. We have high growth with making genetically engineered models. We've got a really good mix with really specialty models like diabetic animals and immunocompromised animals, and we have always and will always get price in that business, so RMS feels really solid at the moment.
I should just stop there. So, it feels really solid. Overall, the market's got a lot of moving pieces and a lot of uncertainty and debate out there about how big pharma is responding to the economy, to labor, to inflation, to an Inflation Reduction Act, and everything else under the sun, biotech funding on the other side of the equation. What does history tell you about the stability of models, the product piece of models in environments like this? Not cycles, as you say, but challenging periods.
A fair number of those models are going to academic and government institutions.
Yeah.
A fair number of them are going to CROs, ourselves and even competitors. I think the basic models are essential building blocks for pure discovery and tox, so they'll always be a necessity, and they're getting increasingly more sophisticated. You know, that's what I meant when I said there's a solidity of that business.
Manufacturing in our last two minutes. Speed round here. CDMO?
Yeah, CDMO business is in a much better place than it was last year. Well, that's an easy comp. We have one commercial client that, you know, that we're actually producing a gene-modified cell therapy product for that client. We have several clients that are in the process, hopefully, of moving from clinical to commercial. You know, they, they've finished phase three. They're close to filing. We've had regulatory agencies into our facilities. We have most of our clients that are making that transition are talking to us about take or pay contracts, so they're gonna rent facilities, whether they're doing work in them or not. Client base is growing nicely, lots of small companies, but also some household names.
And so it's a very, it's a different business than so much of what we've done, the CDMO business, but it's a nice niche, and it's very closely related to biologics. It's very closely related to safety. It's very closely related to discovery. So on a portfolio basis, on a pull-through basis, it's a very impactful business. Of course, we got into it 'cause we were doing all the testing for those drugs anyway, and the client said, "Well, you're doing the testing. Can't you make the drug for us?
So you go from a sliver, a focus on a sliver of the cell and gene therapy market on more the research side, the pre-commercial support side. Now, you have a commercial client. We had a large CDMO in the audience this morning, a couple hours ago. They have one gene therapy client that's, you know, running around 10% of their revenue, and the street's spending all of their time thinking about one commercial product-
Yeah
... they just launched.
Yeah.
Does your revenue stream go from $150 million to $1 billion in 2 years with a bunch of commercial launches? I mean, what happens here on the commercial side? Because that is potentially a big shift over time in terms of your revenue mix.
That would be a high-class problem.
It would, and I'm being, you know, a bit-
I think-
-extreme, but-
I think it grows much more slowly than... I think
Yeah
... it'll grow nicely, but it'll grow much more slowly than that.
Yeah.
What's the dosage? How much will clients pay for this, these products?
Yeah.
What's their efficacy? I mean, I think there are a lot of questions associated with cell and gene, which is why you only have 20 drugs approved, but it's a really important modality. So I think we'll be able to manage the growth in a measured fashion. Having said that, you know, we figure this business would grow around 20%, so it should be accretive to manufacturing.
It's, it's working now?
It is.
Okay. Why don't we wrap it with, with that?
Great.
Jim?
Always a pleasure.
Thank you so much. Everyone, please join me in thanking Jim, and I'm gonna do a quick round of intros. We have, coming up in a few minutes, we have Dexcom, AMN Healthcare, REGENXBIO, and Sotera. Thank you very much.