All right. Great. Thanks, everybody, for joining us today. Welcome to the JPMorgan Healthcare Conference. My name is Casey Woodring from the Life Science Tools and Diagnostics team here at JPM. I'm pleased to be joined here today by Charles River. CEO Jim Foster's here. So Jim's going to go through the corporate presentation, and then we'll do the standard Q&A session afterwards. So with that, Jim, take it away.
Thanks so much. Nice to be here, as always. Safe Harbor, Reg G, and Quiet Period disclaimer, so we're working with clients from discovery and early stage development through safe manufacture of life-saving therapies. Pleased with our role in drug development, so we're the largest non-clinical CRO. We have about 20,000 employees. We have a couple of thousand clients. We have 130 locations, and we have the number one position in several of our businesses. Work done about 80% of all the drugs that have been approved over the last five years. We're about a $4 billion revenue company in a $25 billion-plus marketplace. The breakdown tends to be sort of 70-ish, 67%, but 70-ish North America and the balance, the rest of the world. 40% of our revenue is with biotech, 30% with pharma, about 10% with academics, and 20% with others, so we've got three segments.
We have our research models segment, which is fundamental tools for drug discovery and development. So the essence and original technology of the company. We have a large discovery and safety assessment business. We are a global leader, and that's principally focused on preclinical work, looking at the safety profile. And we have a full-service process development, growing manufacturing solutions business. So we're working from basic research all the way through to commercial manufacture. So we like our role in the drug development ecosystem and the nature of the clients that depend on us. So a little over 60% of our sales are in our DSA segments, by far the largest part of the company. Research models, which was our initial business, is about 20% of our revenue, and manufacturing is also approaching around 20%.
On an LTM basis, research models and services declined about a little over 1%, with almost 24% operating margin. Our discovery services business declined actually 8%, with a 26% operating margin, and our manufacturing segment grew about 3%, with a little over 26% operating margin, so really stunning operating margins. Our five-year CAGR in revenue is about 9%. Our free cash flow growth has been about 10%. We had a spectacular third quarter growth in our free cash flow. We've always been a great free cash flow story, so we're really pleased with that. Our EPS CAGR is about 6%, and non-GAAP operating margins have been around 20%. We've had years at 21, and last year was a little over 20%, so I think the distinguishing feature of the company has been the breadth and depth of our portfolios.
We've done about 70 acquisitions since we went private at the end of 1999. We continue to be an important part of who we are and how we're going to grow the business. Our clients are concerned primarily, obviously, with great science, but everyone's in a rush, so they're all interested in speed to market. So we've been focused on getting the white space out of our business and driving efficiency by technological improvements and changes to help them accelerate the drug development process. We made some investments in technology that I think have helped us a lot. Our clients can now get real-time access to data. They can self-educate. They can book studies on their own, and they can track how their studies are doing. We've had a lot of e-commerce initiatives that have benefited our entire portfolio.
Spent a lot of time on innovation and looking at ways to alternative technologies to our animal business. Spending a lot of time on that and continuing to look at these technologies. It's still early days. And I think I'm obviously biased, but I think we have a unique culture. And I think that our employee base is really lit up by our mission of bringing life-saving drugs to patients around the world. And we have great longevity statistics and pretty rational turnover. Really pleased with our ability to advance our corporate culture through our commitment to corporate citizenship. We like to be generous in the locales in which we work. As I said earlier, we worked on more than 80% of all the drugs that were approved, and I think close to 100% of the oncology drugs. Our board is about 45% women right now.
We're pleased and proud of that. We have a big emphasis in our employee ERGs, employee resource groups. We have about 4,000 employees in that domain, and that really has lit up a lot of our employees. We have about 42% of our executive staff are women. Proud of that as well. And we've had a big focus on sustainability, and Scope 1 and 2 greenhouse gas emissions have decreased 37%. We've achieved 100% renewable electricity across all of our sites. So very pleased with our focus on our employee base, on the planet, and on giving back to the communities in which we work. Take a look at the segments. Our research model business, which was the essence of the company, as I said earlier, we've got a 40% share. One out of every two research models used anywhere in the world by anybody comes from us.
We have a global footprint that's close to the clients, so proximity has always been important. All things being equal, the clients want the research models to come close by for obvious reasons. We also have a growing services business, particularly in the genetically engineered model space. So those are research models that have either genes knocked in or knocked out, so they express certain human-like diseases. So those are very powerful research models that we're proud of. We also have a CRADL business, which is incubator space for we thought it was going to be principally small companies, but we've had very large pharma companies and a whole host of biotech companies utilizing our space to do their basic research. It's a very important strategic and somewhat recession-proof business that, on a see-through basis, will feed other parts of our portfolio, particularly discovery and ultimately safety assessment.
We have always had price in this business and always will. Nobody produces their own research models. Our competition tends to follow us. From a pricing point of view, they kind of see what we do, and then they follow along. So price has always been an important part of this business. Service businesses have been growing nicely, both on the top line, and they have very good margins. We have an international footprint there, and those businesses should continue to grow. China has been a great market for us. We are producing research models in China for China. We have sort of less capable Chinese competitors. None of our typical competitors have moved into China. So to a large extent, we have the market to ourselves.
As we continue to build new facilities in that very large country, we're able to grow this business, both top line and bottom line. It's important from a publication point of view that people are able to reference utilizing Charles River animals. DSA segment, which is Discovery and Safety Assessment, we have about a 30% share. We have about 100 targets that we have helped our clients discover. They were unable to discover them on their own. And some of those are in the clinic, so we're proud of that. We do about 1,500 INDs annually. That's a big part of our business. All of our clients are always in a rush to get their INDs filed as quickly as possible and move on to post-IND work. Our discovery business is obviously the earliest.
Besides our CRADL business, discovery business is where we engage with our clients very, very early, both in vivo and in vitro activities. We have a big pharmacology footprint in oncology and CNS and broad capabilities across small and large molecules. And so we're very interested in selling both discovery and safety together, being able to have pulled through from discovery into safety and having those businesses be closely allied. We're the world's leader in safety assessment by a lot. We're proud of our role. And if you think about the fact that none of our biotech clients, which are the principal driver of our growth, has any internal capacity to do any of the work that we do, eventually they will come to us. Very broad scientific capabilities in toxicology, pathology, pharmacology, drug metabolism, et cetera. And we have very strong capabilities in specialty tox.
So all of our competition does general tox, which is sort of more vanilla-type studies. We have a big footprint in very complex studies, so inhalation, infusion, bone tox, ocular tox, genetic tox, things like that. So about 50% of our work are sort of these basic studies and the balance of specialty work where we have a better value proposition. So we continue to have very large market shares. The outsourcing penetration in discovery is only about 30%, and we think that'll get to at least 50% over time. And in safety assessment, it's about 60%. We think that will get to at least 80%, probably 90. There's no logical, scientific, or regulatory reason that anybody would do the toxicology work internally. We have a very large infrastructure with thousands of employees and millions of sq ft of space and a lot of institutional knowledge.
Most of our employees come from big pharma or biotech and have seen hundreds of compounds. So the value proposition that we bring there is quite exceptional. There are some companies that will always do the work internally, but I think increasingly, besides the fact that biotech is entirely outsourced, that pharma will increasingly be as well. So our biotech clients have no internal capacity. Our big pharma clients have historically had internal capacity. I would say most of them have either retooled that space, closed it, sold it. They no longer have the staff. So I've asked a lot of questions today in our one-on-ones about, "Will people bring the work back in-house?" And the answer to that is there really isn't in-house anymore in the toxicology business. So we and our competitors are the place where they have to go.
So we're working hard to add additional digital capabilities to this business and try to increase the synergies between discovery and safety. So if you look at our biotech clients over the past year, biotech funding has begun to normalize. There's a lot of conversation and wringing of hands and psychological concern. I think it's psychological about access to capital. The reality is that in 2024, $70 billion was raised, and that's a really good number. That's a sufficient number to, I think, fund these companies. But the comparison is always 2021 and 2022, sort of the sort of COVID years. And so there's been a slowdown in demand. As I said, I think it's primarily psychological, but it has stabilized. And we're beginning to see an improvement and an increase in demand year over year. We obviously hope that that continues.
If you can see at the very bottom of the chart, one of the things we pay attention to is how many new companies were created by the venture capitalist every year because biotech companies go bankrupt. They get bought. They get sold. They come and they go. But there's usually 400, 500 new ones. Last year, there were only about 250 new ones. That's interesting and probably dispositive of, to some extent, the slowdown. On the pharmaceutical side, while there's definitely going to be a slowdown in R&D spending, we've seen across the board very suddenly last year, 2023, pharma was the principal driver of our growth in early 2024. They were very strong. And then in the second quarter of 2024, they pulled back dramatically.
We're seeing across every pharmaceutical company in the world pull back in spending, reordering of their pipelines, and softer demand than we had anticipated and we had seen previously. That seems to have stabilized, but we don't see any indications that that's going to improve anytime soon. We're assuming that that paradigm will persist into 2025. Manufacturing segment, we have three businesses. We're dealing with a whole host of large molecules there, both cell and gene therapy, RNA, and some of the older ones like monoclonal antibodies. We have this microbial business, which is quality control testing required by the FDA. Any lot of medical devices or injectable drugs have to be tested to make sure they didn't become contaminated during the manufacturing process.
This has been an extraordinary business for us from a growth point of view and an operating margin point of view as well. We have great technology there where we have pretty exquisite IP, and we're constantly iterating new generations. We also have a large biologics testing business where we're testing a whole host of large molecules also to make sure that from a quality control point of view, to make sure they haven't become contaminated before those drugs get into the clinic, and because we did so much testing before the drugs went into the clinic and actually after they come out of the clinic, we had a lot of requests by our clients to go back into the CDMO business, which we were in years ago, to actually manufacture the drugs for them.
So, we have a cell and gene therapy CDMO where we're principally doing gene-modified cell therapy manufacturing. And that's been a really good fit for us and a very strong synergistic fit, particularly with our biologics business. So, about 70% of the revenue from our microbial business is recurring, so this is a razor-blade business where we have this device, and our clients are buying cartridges to test their drugs. And so we have recurring revenue with constantly buying these cartridges. So manufacturing segment has been a really strong one for us, both from a growth point of view and particularly from an operating margin point of view. So, we have no competitors that have the sort of comprehensive, rapid, efficient testing of microbial detection, and nobody has the technology that we have there.
So we've had probably a couple of decades of really strong growth with. We have competition, but none of very strong competitive response. And we feel that we have attractive long-term capabilities to manufacture cell and gene therapy products and link that work with our biologics business. So the CDMO business has been a complicated one for us. So we moved into an adjacency that's quite complicated from a technology point of view and a manufacturing point of view. We've had to sort of retool the companies that we bought from a facility point of view and a manufacturing point of view and a staffing point of view. And we have three centers of excellence. One is cell therapy manufacturing. One is viral vectors, and one is DNA plasmids. We've been working hard to enhance our commercial capabilities, which needed some work.
Most of our clients are clinical, moving into a commercial domain, and so we've been working hard on those transitions, so I think we have a solid footing in that business. However, that business will be impacted by lower commercial revenue in 2025. We had an 8-K on this this morning, so we have one of our cell therapy clients, commercial clients, has reevaluated its manufacturing network and told us that they were going to terminate their relationship with us and use another provider. These things happen. We also have another commercial client where we'll have less revenue from them next year, so we're also finding that the demand is not quite as robust in the short term, as we think, but we still believe there are attractive long-term metrics for this business and opportunities exist for the CDMO business.
It's been a challenging business for us, challenging to move into an adjacency. Some headwinds going into next year. There'll be about 1% headwind to our overall sales with a decline in business from these two clients. We also gave an early look at our 2025 outlook this morning in the same 8-K, where we expect our revenue will decline organically in a similar range to 2024. We're not going to be more detailed than that. So DSA client demand is going to remain relatively consistent with 2024 trends. We anticipate the same sort of spending by pharma and biotech. So pharma, we think, will be stable but probably not growing, and same sort of demand metrics will persist into next year. We believe that biotech is improving slightly as we move into next year. We think DSA pricing will be a headwind as well.
Probably pricing will be in the low single digits, and as I said a moment ago, lower commercial CDMO revenue. We're also going to have some, in our efforts to refine our cost structure and reduce our costs, we're going to consolidate some space, which will have a headwind of 0.5%. Also, FX should be 1% headwind as well. We also expect a non-GAAP operating margin will be modestly below our estimated 2024 level. We've worked really hard to reduce our costs to try to hold our operating margin. Really difficult to offset the decline in revenue totally. We will have this modest decline. We obviously will issue full guidance in February. We'll get into the details on a segment basis, but we wanted to set the table for next year, and we're pleased that we've done that.
So we've been working hard to really lean ourselves out to try to get our cost structure in sync or even more than in sync with our revenue expectations. I think a lot of our effort is going to be we have a sort of a retooled and reorganized selling effort, much more sophisticated sales effort selling across the portfolio. The goal is to gain share across the portfolio, but particularly in the safety assessment business. We've already seen a 300 basis points improvement in our capture rate in the safety assessment business, which is really, really important. So given our scale and given our prominence in that field and given enhanced sales effort and given the pull-through from discovery, we do think that we'll be able to grow share. Also working to right-size our infrastructure, as I said a moment ago, driving efficiency to protect our operating margins.
So we've had a greater than 5% reduction in our cost structure through these restructuring efforts, which we feel good about taking those initiatives. It's not optional. And obviously, we're working to protect shareholder value. And we've had a stock repurchase authorization of $1 billion, and we purchased $100 million worth of stock to offset dilution from options earlier in 2024. So trying to do everything we can to manage through an environment where the demand is less robust than we would anticipate and get lean in the process. So a lot of client centricity. I think we can do a much better job selling across our portfolio. Our principal competitive advantage is the breadth of the portfolio and this connectivity amongst and between all the parts of the portfolio. Competition tends to be more siloed. And so selling across the portfolio is a very important initiative for us.
We're looking to have a cost savings of about $150 million in 2025 and estimated $200 million in 2026. As I said a moment ago, the actions that we've taken should reduce our cost structure by 5%. We've had a 6% headcount reduction, and we're consolidating 20 small sites. We do a lot of acquisitions. We tend to get a lot of small sites as a result of that. And I think we can pull things together in a much more efficient fashion. A lot of focus on our digital platform and our clients being able to self-educate and doing things much less manually than we used to. And obviously, a balanced approach to capital allocation. Our CapEx is obviously and appropriately coming way down. We got as high as 8.2% of our revenue. It's about 5.8% on an LTM basis. We've been paying down our debt.
Our leverage is the lowest it's been in a decade, I think. At the end of the third quarter, it was 2.2 turns. So we're pleased with that. As I said a moment ago, $100 million of stock repurchases in the third quarter. And we continue to think that strategic acquisitions is the best use of our capital. We have a lot of conversations going on right now with a whole host of companies. None of them, I would say they're all relatively small deals. Private equity is a seller in almost every case. So all of the companies that we're looking at are available. We think there's an opportunity to continue to expand and enhance and improve our portfolio and be a better solution for our clients. So no promises that we'll get any deals done.
But we have identified several companies that are right down our alley in terms of our background. So we're going to continue to get lean. We're going to continue to stay close to our clients. We're going to continue to drive share. And we're going to continue to be poised for when the demand comes back, which is inevitable, but a little bit difficult to call at the current time. So now we take some questions.
Great. Thanks, Jim. So to start with the preliminary 2025 outlook, you noted you expect similar organic declines in 2025 as seen in 2024, and within DSA, you talked about expecting current demand trends to remain consistent in 2025, with biotech stable to slightly improving and large pharma remaining weak. Can you just walk us through how you arrived at these assumptions for 2025 on DSA demand between the two customer groups there and why you wouldn't expect demand to accelerate over the course of 2025?
Yeah, well, it would be great if it accelerated. We can't hope that it accelerates. We don't really have any concrete discernible information that tells us that it will. So we believe that what we're seeing with big pharma right now, which is a pretty aggressive reduction in their infrastructures and sort of a pullback in demand while it's stabilized, we don't see any indications that that's going to materially change. As I said, it'd be nice if it did. Biotech, slightly on the other hand, also seems to be stable but slightly improving. Will that improve greater than we anticipate? Don't know. But again, until the bookings improve and until our Book-to-Bill gets above 1, which it isn't, we're not comfortable saying that.
So we think it's appropriate to, as we see the world right now, which is why we got that 8-K out, we think that we have a similar trend across the portfolio, particularly in DSA, that it'll be pretty much consistent with what we're seeing this year.
Okay. On the large pharma piece in DSA, in 3Q, you noted that large pharma demand had improved in the quarter. You just kind of mentioned that you're not expecting improvement really here in large pharma in 2025. So just curious how demand trended to end the year and how that informed the 2025 guide.
I can't tell you what happened at the end of the year because we haven't reported that yet, but we had very strong pharma growth in 2023. We had very strong pharma growth at the beginning of 2024 and began to pull back at the end of 2024, so again, not seeing any indications that that's going to change anytime soon. Yeah, there's no question that our pharmaceutical clients are going to have to get back at spending in discovery and certainly in sort of late discovery and early development and getting their INDs filed, and so we will see a balanced approach between the clinic and the preclinical phase at some point, and we had pretty much a decade of that. We're just going to have to wait and see.
Okay. Wanted to ask one just on biotech and the customer conversations you've had there. You had a slide earlier that showed funding improvement in 2024 for their biotech clients. So just kind of walk through how they're thinking about things in 2025.
Yeah, I think the biotech clients are very much concerned about consistent access to capital. So there are amazingly exciting new drug modalities from gene therapy to immunotherapies to RNA. And so much innovation is coming from biotech. And as I said earlier, even though 2024 was a great year in terms of raising capital, it wasn't insufficient for these folks. So I think they've been nervous about investing more in their pipelines until they feel that they have a longer runway. I think the venture capitalists that start all of these companies have been putting in more money for longer periods of time. And so I know that there's a bunch of IPOs lined up for this quarter, literally. Biotech IPOs are lined up.
If those price well and it continues, I do think that they can get confidence to continue to spend more aggressively than they have been. So you've got hopefully more money from the capital markets. You have money always from big pharma, and you have big inflows from the venture capitalists to initiate and start these companies. Probably going to need two, maybe three quarters in a row where they feel that the access to capital is sufficient for them to feel confident to get back to spending.
Okay. I wanted to touch on the CDMO and the update there. So you flagged a 1% headwind to revenue growth from commercial weakness there from one large customer that terminated its commercial agreement. And then another customer that is expecting lower cell therapy revenue this year. On the terminated contract, can you just give us a sense as to why the customer chose to move away from Charles River and then how material those two customer relationships are for the CDMO's forward outlook?
Yeah, I mean, it's unclear what the rationale is. This client had multiple providers, including Charles River. And I think that for a host of reasons, they wanted to have a single one. They determined that wherever they moved was a provider that maybe had greater experience and greater focus on contract manufacturing, was less new at it than maybe we were. We don't know exactly the reasons because we had a really good relationship with them. We've immeasurably improved our operation and it was going well. So we're obviously disappointed in that. It happens. You lose clients for reasons that sometimes you understand, sometimes you don't. Those were our two commercial clients. So this is a business where most of the clients are clinical, moving into a commercial domain.
So we have other clients, which we hope to see them make that transition to pick up the slack and to offset the decline that we have from these other companies. But that's not going to happen immediately in 2025.
On the margin side for 2025, you noted adjusted operating margins will be modestly below 2024. Can you just walk through the moving pieces there between some of the cost-out initiatives that you have in place, DSA pricing for next year, and the revenue mix dynamics here, just given the updated CDMO outlook?
Yeah, I mean, as I said, we've done everything. We are doing everything that we know how to do to try to hold our operating margin constant. I mean, that would be our overriding goal. As I said, we took out 6% of our cost structure, including a host of facilities. The recent change in the CDMO revenue is definitely exacerbating the opportunity to hold that margin. And then if you add on to that the FX headwind, the headwind from the CDMO business and declining pricing in the safety assessment business, it makes it difficult to hold margin. But we do think that we can get close, which is why we're seeing a modest reduction.
Okay. Wanted to ask one just on long-term targets. During 3Q, you guys talked about the 2023 to 2026 analyst day targets aren't applicable. But you haven't refreshed the long-term algorithm at this point. Just based on the changes to the environment versus the time you gave those targets to now, how much have factors like the IRA changed the underlying long-term algorithm in your view?
Yeah, I mean, I think the IRA is sort of integrated in everybody's thinking. That hasn't had a big impact. I mean, it's the overall economy. It's the demand situation. So the targets that we had out there, we believed in. Obviously, we're not going to be able to make those targets in the same time frame. Pretty confident that we can make a similar 6%-8% or maybe 5%-7% hit those targets in the intervening five-year period where we have a strategic plan. We will refresh those targets as soon as we get our arms around the demand quotient.
Okay. I have one here on just the Trump administration and potential impacts on the marketplace. How are customers talking about spending, considering some of the prospective cabinet appointees? And any thoughts on potential tariff impact and any color on how you guys handled that the last go around?
Surprisingly, hearing nothing from our clients about the new administration and how they feel about that, whether they're concerned about it or not. I mean, the IRA, I think, is embedded in their thinking from a price ceiling on some of their drugs, and I think everybody's accommodated to that. I don't think there's anything that they've heard yet or anticipating from the new administration that's concerning them, and if they are concerned about something, they haven't discussed it with us yet, so we haven't heard anything.
Okay. Wanted to circle back to the CDMO. During the presentation, you conveyed confidence in the long-term trajectory of that business, but also stated that you're assessing a potential impairment charge there. So maybe just walk us through how investors should think about the CDMO's competitive positioning in the marketplace, its end market opportunity in cell and gene therapy, and how it fits within Charles River's portfolio?
Yeah, I mean, it's a very powerful and important modality between drugs with cell or gene therapy. And the technology works. So it has some really great potential upside. The technology is complicated, and there's some safety concerns I think the FDA has expressed, which is why you only have less than 20 drugs that have actually been approved out of maybe 2,000 or 3,000 that are being developed. So I think it's going to be a slow roll for approvals. All the scientists that we have internally and KOLs that we've spoken to have said that we're pretty much in the first generation of cell and gene therapy. And for sure, there'll be a second generation of compounds, probably a third generation. So I think we all have to work through this. So we're still optimistic that it has good long-term growth metrics.
We're obviously disappointed with a couple of commercial clients that have gone away. But we like the facility and the opportunity that we have, and we like it as part of our portfolio.
Circling back to DSA, can you just clarify what the DSA pricing headwind is for 2025 and maybe just talk towards the current pricing environment and what you're hearing from customers?
Yeah. I think that our opportunity for price is going to be insignificant or really not available in 2025. The principal competitive dynamic with our competition is to throw price at us. So there is some pricing pressure. Plus the pullback from our clients, I think they've become increasingly more price sensitive. It's a classic supply-demand business. So as the demand increases, we're going to get more pricing power. We had enormous pricing power for most of the last decade. And even pricing power much of last year and a lot the year before. So as I said earlier, we're going to focus on gaining share, particularly in that business, but probably without the benefit of price to add to the top line.
With that in mind, would you expect DSA margins to be up in 2025?
What do I expect what?
DSA margins to be up in 2025.
I think I'll not talk about where the margins are going to be in 2025.
Fair enough. Had to throw that in there. Maybe last minute here, just any thoughts in terms of what's the most misunderstood part of the Charles River story and what are you most excited for 2025?
Yeah, I think our story is pretty straightforward. I don't think it's misunderstood. I think everybody understands that we are a solution for clients large and small to get a whole host of work developing to get their drugs into the clinic. I think we do that better than anyone in the world. We have a demand problem right now that we didn't cause, but we're in the midst of. We have no control over that except to lean out the company and be ready to respond when the demand comes back. It'll probably come back relatively quickly. So we anticipate that. So we're excited about getting back to servicing our clients. We're excited about maybe adding some additional technologies to the portfolio. We're excited about adding additional technology as we lean the business out.
Great. Well, it looks like we're at time. Thank you, Jim. Thank you, everybody, for joining us today. Have a great rest of your conference.