Yeah.
Hi, everybody. Welcome to the J.P. Morgan Healthcare Conference. I'm Casey Woodring from the Life Science Tools and Diagnostics team. Pleased to be joined by Charles River Labs CEO, Jim Foster. Jim's going to give the corporate presentation, then we'll jump right into Q&A afterwards. Jim, the floor is yours.
Thanks so much. Pleasure to be here as always. Forward-looking, Reg G, and quiet period. Disclaimers, so we are a non-clinical CRO working with clients from early discovery all the way through manufacture of the drugs. We've got 20,000 employees right now and 2,500 with advanced degrees. 70% of our revenue comes from the pharmaceutical industry. We've actually reduced the number of locations that we have, but we're still at 120. So we're pretty spread out in most relevant geographies. We have the number one share position in many of our businesses, particularly Research Models , Safety Assessment, and Microbial. We're proud to have worked on at least 80% of all the drugs that were approved by the FDA over the last five years, and the market that we play in, in the aggregate, is about $25 billion.
Logically, revenue breaks down 66% in North America, where the preponderance of biotech is, 27% in Europe, and a small amount, 7% in the rest of the world. The client base is 40%-45% biotech, 25%-30% global pharmaceutical companies, 80% academic, and the rest other. Other is CROs, animal health, life sciences, CDMOs, and consumer products. Revenue, LTM is, about $4 billion. Really pleased with our free cash and operating cash flow. You see we're way up LTM. Operating margin notwithstanding declining sales the last 12 months is up a bit, as is the earnings per share. We're pleased with those numbers. Three segments. Research Models segment was sort of the essence and foundation of the company, where the global leader is a little over 20% of what we do. Discovery and Safety Assessment, which is our largest franchise.
Principally drug safety testing, largest in the world, is 60%. And our Manufacturing Solutions business is about 20%. So RMS and manufacturing are about the same size, with discovery and safety being the preponderance. And you can see we run from basic research all the way through to commercial manufacturing. So looking at RMS, where the company started, the production sale of principally small Research Models . Really important that we're in close proximity to major biohubs. We have a lot of products that's being shipped. Great to have a research model business to go in tandem with the discovery and particularly the Safety Assessment business, supplying ourselves with Research Models . Big focus on digital enterprise these days to communicate more effectively with our clients. We have a couple of big service businesses in RMS.
One is the GEMs, or genetically engineered models, where we either have knocked in or knocked out genes to express certain disease states. Our CRADL business provides space to our clients for basic R&D. That, except for the last couple of years, those two services have been growing nicely. They have really good operating margins. We are pleased with them. We have about a 40% share. We have always had a number one share position as far back as I can remember. We are obviously pleased with that. DSA, a discovery piece, is a multiplicity of things. It is both in vivo, animal-based, and non-animal-based capabilities. The principal focus is on oncology and CNS. We do a lot of integrated studies across multiple parts of the business. The largest part of DSA is the Safety Assessment business, which is where we are by far the global leader.
We've been in this business about 20 years, a little over 20 years. We have a large and growing Lab Sciences capability, particularly in bioanalysis, which we continue to invest in, and we've talked a little about doing some M&A activity in that space, which I'll talk about a little bit later. We have a sort of a plethora of very complex specialty capabilities, everything from ocular tox to infusion to inhalation to gene tox, so we're proud of that. About a 30% share. Our next biggest competitor, which is LabCorp, has a 10% share, and then it's a smattering of very small players, both in the U.S. and Europe and some now in China. We do about 1,500 INDs a year. It's a big part of our business.
Clients historically are very focused on getting their INDs done, usually by the end of the calendar year, and trying to drive these molecules into the clinic. Manufacturing Solutions, the third piece, which is comprised of three parts. The first and largest is our Microbial Solutions business, so all injectable drugs and medical devices have to be tested for the absence, or at least a low level, of endotoxins, which is a contaminant, so this is required by the FDA. This has been a fabulous business for us. We've owned this business for 30 years. It's grown steadily. It has great operating margins. We have great IP in this space. We're way ahead of the competition.
The second piece is the Biologics Testing business, which is sort of testing both antibodies, cell and gene therapy products , and both RNA and CRISPR products, just to make sure that they also haven't become, let's say, contaminated with human viruses, making sure the purification methodology works. So we do some cell banking and characterization there. It has been a very, very good business for us historically, and our last piece, which is a new piece for us, which is Cell and Gene Therapy , CDMO. Our primary expertise is in gene-modified cell therapy, which we're very complex, and we're proud of doing that. Our Microbial Solutions business has sort of a razor and razor blade component to it, and 65% of our revenue is repetitive, as folks buy the new blades to go into our equipment. We are definitely focused for long-term value creation here, particularly in our preclinical drug development piece.
Our global pharma business has finally bottomed out as clients continue to reduce their cost structures and sort of reprioritize what they're doing. We've seen really positive signs from our small and mid-sized biotech clients in the second half of last year. And of course, the fourth quarter of last year was the highest infusion of cash from the capital markets into biotech. So we're beginning to see our biotech clients, which are thousands, be better financed. That should drive demand going forward. We continue to be focused on expanding our portfolio, principally through M&A. That's been the principal driver of our growth and how we've created this portfolio over the last, let's say, 20 years. We're also very interested, particularly with big pharma. Even though they don't necessarily contract with us through the life cycle of the drug, we want as much wallet share of the client's business.
We have very big shares with all the big pharmaceutical companies, and with most of them, we have long-term contracts right now. Focus on NAMs, so non-animal technologies. We anticipate that we will be the conduit for validation of non-animal technologies, both with the FDA and with our clients. Clients are unlikely to do it on their own, nor is the FDA, so they'll need us to do that and sort of compare and contrast things with using Research Models . So we continue to be really focused, obviously, on free cash flow generation. You saw in a preceding slide that that was quite significant last year, and we are intently focused on improving our operating margins continuously. So we've had a lot of interesting actions in 2025. We did a deep strategic review of our entire portfolio. Everything was on the table.
Every possible change or incarnation of the portfolio, we looked at with deep financial analysis. The decision was to divest some businesses that are non-performing. They represent about 7% of our revenue. We anticipate that we'll get that done by the end of the first quarter. We also focused on some M&A. We announced two deals at the close of the market yesterday, which I'll talk about in a moment, and we remain focused on very disciplined capital deployment. I talked about protecting our operating margins, which are amongst the highest in the industry. We expect to deliver about $300 million of annualized cumulative cost savings by this year. We announced an additional $70 million last year. We had a board refresh last year. We took four board members out and put four new board members in. That reduced our average tenure to six years rather than 12.
We also established a new committee of the board to focus on these non-animal technologies, which I think is going quite well. The same committee of the board that did the strategic review, we every quarter take a look at capital deployment. What's the best use of our capital? We look at everything. We look at stock buybacks depending on the share price. We look at, obviously, reducing our debt. We look at strategic acquisitions. Most years, we do some of all of that, but it really depends. We also recently refreshed our stock purchase authorization with a new $1 billion capability. We announced these two deals yesterday. One was an agreement to acquire a Cambodian NHP supplier. The purchase price is a little over $500 million. Important strategic move. That will strengthen and secure our supply source. Really important.
Equally important, this will be largely accretive to our operating margin and EPS. We talked about this year alone; it'll be EPS accretive $0.25 and next year $0.60. To have control of the site, both from a nutrition point of view, a veterinary medicine point of view, sort of husbandry point of view, is really important and positive. The demand continues to increase. We want to have control of supply. Between our Mauritian farm that we bought last year and this one in Cambodia, we're in a really good place with reduced cost of the animals. We typically have been buying about 30% of our NHP supply from this Cambodian operation. We also announced that we exercise our option to buy the rest of a company, a small company called PathoQuest. It's about a $60 million deal. That's a NAMs.
So that's a non-animal technology that replaces certain aspects of our Biologics Testing, actually speeds up the process for GMP and non-GMP testing. So we hope to close that deal by the end of the quarter. We hope to close the KF deal soon. So we've always had and continue to have a serious focus on capital allocation. We've worked to get our CapEx down as a percentage of revenue. Obviously, we need to do that, I think, generally, but particularly as our revenue has declined. So we got up to 8.2% in 2022. We're down to 5.1%. So we're pleased with that. We continue to be very serious about that. We reinitiated stock purchases to offset dilution from options. We bought $450 million back last year. We'll see what we do in the future.
That committee of the board, which I'm actually on, we'll take a look at that every quarter. We do that at every board meeting. Our gross and net leverage is at the lowest it's been in a long time. It's 2.1 turns, so we're in a really good position to do more M&A. We have a bunch of debt, three-quarters of which is fixed rates. We generate a lot of cash. We have a lot of borrowing power. So I think we're in a very good place to do that, and M&A has sort of been the hallmark of the company over the last couple of decades, so we invested $4.5 billion in acquisitions since 2012 and, of course, announced a couple of deals yesterday, and we have others that we're working on right down the alley in areas in which we participate.
So NAMs has been a big conversation, maybe forever, but definitely for the last year or so. There's been a focus on this by the FDA. I think everybody in biomedical research agrees with this notion. But of course, the science has to work. So these technologies have to be at least augmentative and preferably a replacement. We've set up a committee of our board to focus on that. We have a couple of medical doctors on that committee. We announced yesterday that the former number two person in the FDA is now going to oversee all of our NAMs activity. And so she's just been hired as our Senior Vice President and Chief Scientific and Innovation Officer. We're very excited about that. And the FDA has said that very long-term NHP studies for monoclonal antibodies probably aren't all that necessary, that short-term studies are. That's probably nothing new.
I think that's been going on for several years, and monoclonal antibodies tend to be a very specific way to treat diseases. We think that the NAMs will have, over the next decade, a meaningful impact on improving discovery for our clients, hopefully to help them get to a lead compound faster. I think that would be better for society. That would be better for Charles River as well. That's great. A little bit in safety, but we don't see it at all in small molecules or with most of the large molecules. The science just is not even close to being there yet. These technologies are very nascent. They're pretty crude right now. They're anecdotal, but directionally, they may be impactful. We have $200 million of annual revenue, DSA revenue from NAMs. You can see here some of the areas.
So these dark blue circles establish applications for us. The D is obviously discovery, and the S is Safety Assessment. So most of the activity is in discovery, as I said a moment ago. So we're looking at things like organs-on-a-chip and organoids. And as I said, they're anecdotal. So you've got, let's say, heart cells beating in a dish. So there's human heart cells and media that are beating in a dish. And so if you've got a drug, a cardiac drug, you'll get some information from that. It's very different than putting a drug into a human being, where you have the multiplicity of systemic reactions of all of the organs in your body reacting to that drug. So it's highly unlikely that the FDA is going to take any sort of crazy step forward. And they would never risk safety of the patients.
So we're confident that we're going to see this grow substantially in discovery and very little in safety. Demand is beginning to improve. We've had a couple of years of really soft demand. It's been frustrating, but it is what it is. That was as a result of the pharmaceutical companies reducing their infrastructure as they approach a patent cliff and also a lack of biotech funding. So we're seeing sort of an improvement in demand. As I said a moment ago, the fourth quarter was the highest quarter in the history of biotech for inflows from the capital markets, which is great. We saw demand from pharma beginning to increase at the beginning of last year. And R&D budgets seem to have flattened out and normalized. So I think we're poised to see more spending by both our pharma clients and biotech.
Pharma has already started, and biotech needs to accelerate. So we've seen a reduction in cancellations. We've seen an improvement in bookings for our clients. And we've seen an improvement in proposal volume for biotech. So we were very pleased to see a continued improvement since the beginning of the third quarter in our book- to- bill. We said in our release yesterday that preliminary DSA net book- to- bill was 1.1 times. So it's been a lot of focus by our shareholder base on that. So we're very pleased with that. We're seeing that mostly driven by small and mid-size biotech clients. We also said that we expect the top end of 2026 guidance range for organic revenue growth will be at least flat for both consolidated outlook and DSA. Our non-GAAP operating margin is an interesting issue.
We have incremental cost savings of about $100 million, which will help offset a lot of the annual cost inflation. We don't have either now or in anything I've said yet. We don't have any of the impact of the divestitures that we're in the process of making, hopefully no later than the end of the first half of the year. There's a big headwind of losses from that 7% of our revenue. Nor do we have the impact of the two acquisitions we announced yesterday in our non-GAAP operating margin. So they will add to that. So we'll obviously give much more in-depth discrete guidance in 2026 when we have our February call. We announced my retirement a week ago. So on the 5th of May, which is our annual meeting, I stopped being the CEO. I've done this for over 30 years. It's a long time.
We have a very smooth, I think very well-planned five-year plan, actually, with our current COO to replace me. She's been with the company for 35 years and knows the business really well, has run basically all parts of our business herself over a period of 35 years, has begun to know the shareholder base, and knows the clients really well. So I'm confident it will be seamless, and we have a lead independent director who will become our chair. I've been chair for the last, whatever, forever, and so best practice is to split CEO and chair. So we're pleased with that, so succession plan in process, so we will continue to work on strengthening the portfolio, principally through M&A. We're going to continue to do everything we can to enhance our speed. Clients are maniacally focused on speed to market.
We have a lot of digitization of the company and e-commerce right now. Very early days of AI, but AI will definitely have a role in designing better trials with better predictability of how they'll come out, both for preclinical and clinical CROs. And if we can do that on the preclinical side and have known biomarkers that we track all the way to the clinics, that'll be really powerful. As I said earlier, big focus on NAMs with a committee of the board and an internal committee with new leadership. So we intend to be the leaders in that and continue to make a purpose-driven culture. We continue to have very low turnover and really thousands of people who have been with the company 10 or 20 years. And now I will take your questions.
All right. Great. Thanks, Jim.
Sure.
Maybe to start with the positive second half and 4Q DSA demand trend update that we heard from you guys yesterday. You reported a preliminary net book-to-bill of 1.1 in DSA and 4Q, with improving trends primarily driven by small and mid-size biotech clients. Can you just unpack the performance more in the quarter? Maybe talk about how that improved biotech funding that you talked about in the presentation played into the strong performance in book-to-bil l. And then any high-level thoughts on how you expect book-to-bill to trend over the course of 2026?
Yeah. I mean, it's been a major focus of ours. And it's been well below one for a while. And that's principally with our biotech clients. But as I said earlier, we saw a monthly improvement.
It's kind of impossible to predict it, but we're anticipating that it will continue to be strong. And we should see the benefit of that because it has to work through the backlog. But we should see the benefit of that in the back half of, say, the second half of this year, which we're thrilled with. So pharma stabilized much earlier, probably the beginning of 2025, and biotech at the end of 2025. So I think we're in a really good place. You couple that with the inflows of capital from the capital markets. Venture capital funding has been terrific. A lot of money comes directly from big pharma, both to fund discovery work and also, obviously, there's been a fair amount of M&A.
Yeah. You talked a little bit about it just now, but biotech funding has improved recently, obviously, and it seems to be correlated with DSA demand improvement. That said, it seems like a lot of the funding that we've seen had been concentrated more towards clinical assets versus early stage or new company formations, at least, that's our interpretation. Curious to hear your thoughts on that.
I mean, I think that's predictable. I think if you're a drug company and you've got drugs that have gotten through preclinical and not in the clinic yet, you're going to emphasize that, particularly if you're worried about a patent cliff. That makes sense, and I don't think it's either/or. I mean, I think it's nuanced towards the clinic, but usually is, because that's where most of the spending is to develop any drug.
I think that we're seeing a significant enough inflow of capital that we are beginning to see this in preclinical as well. Eventually, in basic discovery, if these companies don't get back to doing basic discovery, they're not going to have anything to work on in four or five years. So I think it helps all the CROs, both preclinical and clinical.
And then along those lines, can you just elaborate on biotech decision timelines? This has been an area that has hampered growth over the past couple of years for you guys, where funding spikes haven't always correlated with increased bookings, given customers have tended to hold on to funds longer than normal. So just kind of curious on how you're thinking about that trend.
Yeah. I mean, it's tough to tell. As I said in these prepared remarks, I mean, bookings are up with biotech. Proposals are up.
Bookings are up. And cancellations are down. I think typically we see there's not an immediate change in the slope of spending, but I think typically we see them take a quarter to make a decision on a proposal and then maybe a quarter or two to book the studies and get them going. So they'll be very measured about how they spend their money.
And then maybe looking ahead, you provided a preliminary 2026 outlook calling for the top end of the organic revenue growth guide to be at least flat on both the consolidated basis and in DSA. Can you talk more about what this embeds from a DSA standpoint and what the implied sort of book- to- bill is to get there?
It seems like you think that you'll see a continuation of some of the favorable demand trends you've seen in 4Q over the course of 2026. So maybe just walk through kind of the puts and takes there and what could drive upside, downside to that range you gave.
Yeah. So I think a couple of things could have. One is that obviously the book- to- bill remains above one. That's great. And I think that drives top-line growth for us. And that's why we're saying the back half of this year. We also look at how fast things move through the backlog. So if we have studies that start faster and are shorter duration, which some studies are some are longer and some are shorter, even not being above one times could drive growth. So I think the combination of those two will be quite powerful. We're hoping to see that.
I mean, we have to work through the backlog for the first half of this year. We're quite confident that the back half of this year we'll begin to see the benefit of the book-to-bill being above one. And hopefully that continues.
And then on the DSA capacity front, you had clarified that some of the recent staffing increases were not necessarily ahead of increased Safety Assessment work. Seems like you're seeing increased Safety Assessment work. So maybe can you just talk about what your current capacity looks like and thoughts about that in 2026?
Yeah. So we added small amounts of staff in 2025, which surprised some people since our sales were declining. But we explained that it was really for three things. One was we had some openings to replace turnover. Two is that we were investing.
We were increasing the staff in our L ab Sciences part of our business. We do a lot of associated lab work with the safety testing, and that part of our business has been growing really nicely, so we were pleased with that. We were simply, even though revenue was declining, operating ahead of our operating plan, so we had to add people. Capacity, physical capacity is well utilized, but I would say not optimally utilized right now, so demand has to pick up for that to happen. That's not an if. That's a when. We have enough incremental capacity to take on additional work without going out and building new space, and we really haven't built much new space except in our Lab Sciences part of our business over the last couple of years.
Can you walk through your latest assumptions around DSA pricing contribution in 2026 and how to think about DSA margins as a result of?
I don't want to get too deep in pricing, but I guess I would say a couple of things on pricing. One is that spot pricing is stable. So that's really a good sign. We've seen the stability in that. We definitely have competitors that have been using the price card to compete with us. We try to be sort of surgically and strategically responsive to that to maintain or build share. If we don't have much pricing power, we have a lot of reductions in our cost structure, I think will be very beneficial as we'll mix. So this is such a pure supply-demand business.
As the demand increases and as space fills, which I think is in the process of happening, price will be less of a focus by our clients. I mean, I think they're first and foremost interested in getting a slot, starting their work, and getting into the clinic as quickly as possible. Only 20%-25% of the cost of developing a drug is in preclinical, and you're not going to get into the clinic until you do the preclinical work. So we should see over time an improvement in price. Impossible to call right now. We'll try to talk about that some more in our February call, but I'm not sure how much we'll know.
Maybe a couple on China and the DSA environment there. I guess the first one, are you seeing increased competition from Chinese competitors?
Yeah. So China is quite interesting right now.
There are definitely Chinese-based, Chinese-owned, and Chinese-based, way lower-priced competitors. I think we see little of that work. So this is for probably small biotech companies that are underfunded that have to make a decision on price, almost price alone. So some work has gone there. I think the work is okay. So if you're starved for cash and you're in a rush to get to market and you think that the Chinese CROs can do the work okay enough to get into the marketplace, I think you'll do that. I think most clients would prefer that the science is spectacular. I do think that China is beginning to innovate. I mean, you're all seeing just by reading the public press that lots of Western pharmaceutical companies are buying assets out of China. Biotech companies, you're seeing China invest more aggressively in these assets.
In most everything they do in China, the cost is much lower and the speed is faster. Maybe you're going to get to a question on this, but if not, we're taking a serious look at China from the vantage point of potentially doing something in DSA in China.
Yeah. That was my next question. Is that a near-term? Happy to help. Is that a near-term opportunity? Then how are you weighing that potential growth opportunity with maybe taking a hit on the margin front if you scaled up in China?
Yeah. Sort of two issues in China. One is the prior question that you asked. If we were there, assuming that more clients would like to go there, that would be an important defensive and maybe to some extent offensive move to make sure that we garner a bunch of that work.
Equally, if not more importantly, it's a massive market, right? You have four times the population that you have in the U.S. The studies for drugs developed in China have to be done in China. It's not optional. So if we're not there, we can't perform that work. So we directionally would like to be there. I can't make any promises. We're looking very carefully at it, trying to figure out the best way to be resident in that country.
Got it. Helpful. Maybe turning away from DSA, looking at the rest of the business for a few minutes here. Did an interesting acquisition, the KF Cambodia supply for NHPs. Any potential improvement to operating margins that you see from this acquisition? And then maybe just walk through the level of conservatism embedded in your projections there for EPS accretion in 2026.
So the price for these animals will be much less than we've been paying. So we've been getting 30% of our animals from this farm.
So since we aren't at the price points, we'll be much lower. And as I said earlier, that's going to be $0.25 accretive to EPS this year and $0.60 next year. So that's a double competitive advantage. Competitive advantage is a supply advantage, which is critically important both in terms of numbers, but also timing. And also if we do nothing with the price of our studies, which is just to go back to your pricing question, just leave the prices as they are, our cost structure will be significantly lower. So it'll be beneficial to the operating margin.
And then during 3Q, you announced plans to divest underperforming businesses. I think it was 7% of estimated 2025 sales.
Any updated timeline on when you expect those divestitures to be completed and then any further color on next steps as you implement the next phase of your strategy?
Yeah. I mean, those are businesses that we obviously liked and added to the portfolio, and we thought they had great promise. I think you have to step up to those things when that doesn't work out. So these businesses are a big-time headwind to our operating margin. So we're really pleased with the decision to do that. We have investment banks working on those deals right now. So I'm quite confident that they will get done. And what we've said is we anticipate that they'll be sold by the end of the first half of the year.
And maybe one on RMS. So during 3Q, you called out soft biotech demand is impacting small model volume in the quarter.
How correlated is that piece with biotech funding? And given some of the proposal increases we've seen in DSA during the quarter, should we expect subsequent improvement in RMS as well?
Yeah. We try to offset as much of the increase in cost with price. We get a lot of price in our RMS business, and sometimes that's beneficial. Definitely, we had an impact on small animals and some of the service businesses associated with RMS as a result of biotech funding. So arguably and directionally, as biotech funding invigorates, that should improve. I think it'll take a while, though.
Okay. And maybe one quick one on the CDMO. Just how should we think about revenue growth in 2026 there? The puts and takes between some of the different commercial customers.
We don't have the headwind that we have from last year. We lost a large customer.
We still have a lot of clinical work going on there, so we're a bit more optimistic about it going forward.
Okay. Maybe the last couple of minutes of the presentation, just wanted to acknowledge. As many of you know, Jim will be retiring from Charles River in May after a 50-year career with the company, serving as CEO for more than 30 years. I just wanted to take a minute to acknowledge Jim's contribution, not just to the life science industry, but also to this conference. Todd and I were catching up earlier, and he mentioned that this was your 26th year in a row presenting at our conference. That has to be some sort of record here. We got to double-check that. Not to date yet, Jim, but when you presented for the first time at JPM, I was in first grade, so such a nasty comment.
In all seriousness, on behalf of JPM, thank you for helping make this conference the great event that it is today, and congratulations on retiring.
We appreciate it. That's nice of you.
S o it looks like we can end it there.
Thank you, Jim. Thank you, everybody, for joining us today. Have a great rest of the conference.