Sergott from Barclays. I cover life science tools and diagnostic. With me, it's my pleasure, Jim Foster, CEO of Charles River. This is probably his first fireside chat I think you've ever done, so this is gonna be some learning curve here. Seriously, thank you. It's a pleasure to have us as your-
Nice to be here.
as your send-off swan song.
Nice to be here.
With that, I guess we can start on the overall demand environment as you're thinking about your transition and giving the keys over. Walk us through where you feel like the business is now from a jump-off perspective. How much more, investment or changes might need to be made to catch some of the growing tailwinds that you see within the business?
Yeah. I think it's, I mean, our demand has been so tightly tied to biotech funding. We, we've always had big market shares with big pharma. Still do. Big pharma has been sort of going through their recapitulation of their pipelines for the last year or two, as they seem to be through that or almost through that. Solid there. Biotech has been, you know, very much underfunded. Fourth quarter of last year was a very strong quarter. January and February were strong as well. You know, it's tough to call what the pace of the demand improvement will be, but it's definitely turning. So much of our growth and margin accretion has been related to biotech spending.
It goes all across the portfolio, what we do, and none of those biotech companies have any internal capacity to do any of the work that we do for them or others could do for them. You know, it feels like the sort of trough that we and others have been in for, you know, a couple of years is turning nicely.
All right. As you think about, I mean, it feels like it's in that transition phase, right? You're starting to see cancellations normalize. Your bookings have been solid for the last few quarters, up and down a little bit, but it's certainly not, you know, collapsing like we saw three or four years ago. As you think about that, and then with pharma doing M&A on the biotech side and starting to backfill their pipelines, talk about the conversations you're having where there's this sentiment of cautious optimism, right? You have, like, the approvals on the FDA are a little bit slower. Walk through what the different dynamics in the conversation you're having with, as these pharma companies start to release their budgets. Is it like full bore? Give a sense of timing on what it's gonna look like.
Tough to tell. It seems like R&D budgets are at least flat, so they're not. I don't think they're down. I think there's a fair amount of pent-up demand in biotech for sure. What we're hearing from them and our expectation is that there's been a fair amount of drugs developed and sort of paused over the last couple of years. They didn't get INDs filed, so we think that that'll come back for us, sort of filing of INDs. It'll swing back to discovery at some point. We think they need probably another quarter or maybe two quarters of sustained inflows of capital from the capital markets to really feel like they can spend the way they'd like to.
Mm-hmm.
Again, that's a little bit difficult to predict. We have seen that historically. I don't think they wanna start and not be able to finish. You know, if they've developed fivecompounds against a particular target, maybe they're only working on two. Maybe they're the wrong two.
Yeah.
Maybe they've got three parts. You know, what if you go back even a couple of years before the sort of trough, 2021 and 2022 in particular were incredibly strong years. There was a plethora of cash, you know, available to those folks and, you know, they were working at a different pace. Seems to be a more positive look. As you said, cancellations have flattened. Bookings are up. Proposals are sort of flat to up, and those are good indications. Backlog looks like it's kind of nine months.
Mm-hmm.
Just kind of a healthy backlog, so when things slip, you can or cancel, we have things to slot right in behind them so w e like the way that that's congealed.
Yeah. I guess on as you're thinking about, like, the efficient and this is kind of an AI question, the efficiency gains that are coming, but you're talking about pharma taking instead of taking five drugs, they'll take or biotech, they'll take two drugs right now. As you think about the AI, and I think this as an efficiency tool and how that's playing out, but this is the bogeyman weighing on all of CROs, and particularly your business, which to me seems. I mean, you're mostly a wet lab business. It's not like a cost plus provider of service. Talk about where a lot of these efficiency tools and gains are going to be implemented within your business and where pharma's actually demanding this stuff right now.
Yeah. On our side specifically, I mean, we have a huge investment in just more technology. Less white space, more technology, less paperwork.
Mm-hmm.
We've been able to speed things up pretty significantly. I mean, I think the whole AI thing has great promise. I think there's been an overreaction in terms of the potential benefit and how soon it is. I mean, it's another NAMS. It's a ways off. It's definitely complementary and sort of additive to what we're doing, and it's not a replacement for what we're doing. We think that NAMS, including AI, can accelerate the ability of clients getting to a lead compound in discovery. You're seeing the NAMS pronounced mostly in discovery and not in safety.
Mm-hmm.
AI as well. There has to be data, so they have to come to us or directly to clients for data. You know, we probably eight years ago went to all of our clients and we said, "We wanna use your data on an anonymized basis to work on AI for our clients." Nobody would share the data, even on an anonymized basis. You've got that sort of competitive dynamic going on with the clients, which is getting in the way. Will that change? That's kind of unclear.
Mm-hmm.
You know, the science will prevail here and, you know, AI is gonna be a slow developing phenomenon, you know, probably a decade for it to be impactful. We think it'll be impactful in a beneficial way. There should be more drugs for us to work on, more drugs getting into the clinic, hopefully more drugs getting into the market, but that's a little bit difficult to discern. If you can use the knowledge that you've gained from a whole bunch of studies that were done historically to educate you on whether you should spend a lot of time and money on a particular drug, that's pretty powerful. We can have an acceleration of drugs moving through discovery and development into the clinic, which obviously would be great for patients and us as well
For clients, yeah.
Yeah. I guess from that data aspect and pharma not sharing it, are you guys developing something where, okay, recognizing that they're not gonna share the data, you're not gonna be this data repository, could you build out a certain module where you can plug into their data system, they can use the Charles River, you know, application set for whatever downstream pieces they need?
Maybe. I mean, I think we have to have access to their data. Then in the final analysis for any of this to move into safety, which we think little or none will, we'd have to validate that both for the FDA.
FDA
for our clients. The whole validation thing's a big deal. Will clients pause long enough to actually validate that this stuff is beneficial and predictive? If you don't know what the mechanism of action is of a disease, how can you predict how a certain drug will work?
Mm-hmm.
How do you biosimulate that? You can't.
Right.
You know, the FDA's talked about a small sliver of large molecules, particularly monoclonal antibodies, maybe not having to do longer term animal studies. That's been going on for two or three years.
Yeah.
There's nothing new about that. We definitely don't see that with small molecules or other large molecules as well, which is why we think that it'll be most pronounced in discovery.
Okay. On that, continuing on that with the NHPs, I mean, you guys have probably the largest NHPs book in the business, totally underappreciated. Where are you getting the most interest from biotech and pharma on that discovery piece? 'Cause like you said, from the safety side, you're not gonna be able to simulate that for the most part. Or you can, but it's a much smaller use case. You know, right now, where's that, the most demand coming for your NHPs business? Is there anything out there that you guys don't have that is, you know, of where you would like to add or anything like that?
We're seeing it in multiple places in the business.
Yeah.
You know, we're in the process of buying this small company to add to our biologics business, is a great example. That's a NAMS that actually is a replacement for research models. Gives you better information faster. That's an important move for us. We don't see a lot of those.
Mm-hmm.
We're looking all the time. We make a bunch of investments. You know, they feel like R&D investments for us, so if they pan out, great. We bought a company a few years ago that shows you off-target effects of a drug. That's a NAMS that's really, really important. Another company that we bought a few years ago that has a transporter educational impact on how drugs get to the patient. We continue to look. We get offered these businesses all the time.
Hmm
or opportunities to invest, and people say, "Oh, this will be a replacement." What we find is that you're getting anecdotal information that's beneficial very early in the drug discovery process, where maybe you have an equivocal answer on what the animal work is telling you, rather than put it on another group of animals, you just get this quick answer kind of in vitro. That's quite beneficial. You know, I think all of our large clients have their own in vitro screens. They've had them for years. Some of that stuff's proprietary, some of it's very standard. The extent to which people will continue to work on these things, I mean, I'll just give you one example.
Sort of the leading NAMS company that I'm not gonna name the company, but I met with them five years ago and met with them recently about six months ago, and they had the same revenue five years later that they did. That means lots of companies have tried it. The technology was interesting. It looked like it would be beneficial. Proved out maybe not to be. It doesn't mean that someday it won't improve. We stay as close to these things as possible. We don't want to get over our skis on this, invest needlessly in that. You know, we have a committee of our board that looks at this. We have an internal committee. We just hired the former number two person from the FDA to run this.
She's probably the world's leading expert on NAMS. We're quite serious about it, and we've been working on NAMS's for
Forever
You know, for forever.
Yeah.
You know.
I mean, that's always been the trend. Speaking of the recent deals, we're talking about those deals. Like, you guys have been a lot more acquisitive, I guess, buying here over the last six months to nine months. You've done acquisitions across all three segments. Just walk us through like over, you know, adding $200 million of revenue. You have Cell Solutions, you know, manufacturing, like this is. As you're building out, and it's kind of the legacy, but like, as you're continuing to build out the base business, walk us through the strategy behind each one and what they're actually gonna bring.
Yeah. I think our greatest competitive strength is the power of the portfolio. It's wider and deeper than anybody else's. We're all about the depth of science, and once a molecule is discovered, and by the way, we do discover some molecules, but most of the time the molecule's been discovered by the client, then we have to take it and run with it, and as I said earlier, biotech doesn't have the capability to do this, and many of the pharma companies don't either. We wanna start as early with the clients as possible. We wanna stay with them through the life cycle of their drug. You know, most of the drugs don't get to market, so one of our values is to say, "Stop working on that drug.
It doesn't look promising," or conversely, it does. You know, we're playing in a $25 billion market. You know, we did about $4 billion-
Yeah
Last year, there's a lot of running room in the core business. We're gonna stay close to the core business. The CDMO business, which we're in the process of divesting, was an example of moving into an adjacency that looked promising. The science hasn't panned out the way any of us thought that it would. I think it's been a bit of a distraction. It's been a headwind from a margin point of view, so we're really pleased to move away from that. That'll invigorate the operating margin and provide more time to focus on the basics.
The two businesses that we're in the process of buying, one is this NAMS that I just talked about with biologics, which is right down our core, and the other is an NHP supply business which is fantastic just in terms of certainty of supply. The price point with which we will charge ourselves with those NHPs will be extremely beneficial. That will drive the operating margin, increasing the operating margin nicely.
Yeah. On the Noveprim acquisition.
Yeah
We've actually heard a lot of good feedback from channel checks of just it making a lot of sense from that vertical integration. You know, as you think about that margin impact and the lower price that you can charge yourselves, but you know, when you're running this business, can you scale this and kind of accelerate it any, given your reach, or is this just kind of more of that kind of margin just being prudent with the overall P&L?
I mean, now we have two big NHP
Yeah
companies that we own, one in Mauritius and one in Cambodia, and we buy elsewhere. And yes, and we will invest in both of them and grow them significantly as the market grows. That will ensure supply, you know. We'll be on the ground operating it, so all the sort of veterinary oversight, nutritional oversight, transportation, modality we'll have control of. Both the quality of the NHPs and the availability, the right ages and weights and things and having them in country in our facilities ready to go on studies quickly is hugely beneficial from not just a competitive point of view, but to be able to service our clients who are not very patient once they have a study to start.
It's been a complex situation for years just getting the supply. Owning the supply and having oversight on how the work is done, the quality of veterinary oversight, as I said, and the animals themselves is hugely important. Look, we'll do everything we can to stay at least providing sufficient enough supply to service our clients and hopefully more than that as the demand invigorates.
Yeah. You know, with the DSA business is the larger piece, right? You talked about the demand. You had over 1.1 book-to-bill in 4Q. You said, like, you'd like to see a little bit more of the VC funding or the biotech funding be consistent over the next couple quarters. It feels like, as we said, that you're at that trough. You kinda look at your guide for the year, starting down low singles, a little bit of headwinds there from one-offs and comps, and then as that kinda scales. Is this still that mid- to high-single-digit business that you guys had talked about for a long time, or is there something structurally different with the
I don't think anything structurally different. I don't wanna give it any percentages.
No
Yet. You know, we'll have an investor day this year where we'll refresh our goals. I don't know what it'll be. At least three years probably. There's nothing structurally different. This has all been about access to capital and demand. I'd say that the science and the drug modalities are as strong as they've ever been. Biotech continues to be the discovery engine for big pharma, so they're dependent on them. The inflows have been pretty good. The venture capital funds have been raising more money more quickly, so instead of every three to five years, they're doing it every two to three. You have money coming in directly from big pharma into biotech. Capital markets has been a big missing.
You know, we've seen this movie before.
Yeah.
Been here before. It's a little bit frustrating because we know how this is gonna change and turn. I'd say our competitive stature is better today than ever, just in terms of the strength of our portfolio and the work that we're literally doing right now with the divestitures and the acquisitions literally tightens up the portfolio, gets rid of the things that have been a distraction, improves the margins and sort of a greater focus on our ability to kind of accelerate the service that we provide to our clients. Again, we don't wanna predict what the capital markets are gonna do. It's happening. You know, the fourth quarter was the strongest quarter in the history of biotech. January and February were strong as well.
If that continues, and I don't know why it wouldn't, and there's a lot of stuff going on in the world right now.
Sure.
Obviously. Putting that aside, you're seeing some IPOs go off. I think hopefully they will continue to get the confidence throughout the rest of this year that cash is available. People that did IPOs and haven't done secondaries wanna do those. Private VC-owned companies wanna get public. I think all of that is in the offing.
I always thought about when you get those secondaries that IPO raise, it's a boon for late-stage clinical. How much, like, do you guys end up seeing for that? I understand that they're all different from a platform perspective.
Mm-hmm.
Let's say a biotech raises, you know, whatever X amount. Like, how long before you guys start to see any of the downstream discovery piece of that, whatever that was earmarked for?
It's tough to say. There's usually sort of a delay of two or three quarters.
Mm-hmm.
Just to make sure the certainty of availability of cash. You know, a lot of the work that we do, a lot of the post-IND work we do, which is very complex and much more expensive, we do contemporaneously with the clinical trials. Not all the tox work is done before that. A lot of people don't know that. As the money sort of shifts from discovery into development and then into the clinic, we get the benefit of that as well. As they get more comfortable and the work moves downstream and the capital does.
Mm-hmm.
We should benefit from that.
How big is it like, from a portion of your business, how much is that post-IND side? 'Cause I feel like it's I mean,
It's often about half and half. We like to have both.
Yeah.
We like the early stuff and the late stuff. Sometimes you get the late-stage stuff and some competitor will do the early-stage stuff. Typically, they start early, and if the drug progresses well and into the clinic, you continue to get the work, which is obviously a few years.
On the competitive dynamics, China has not been a key region, but it's been key for the pharma industry. You've always had a smaller presence there, a much larger player over there from the region perspective. Just talk about China in general from you guys, and then from an overall competitive dynamics within the U.S. and Europe.
China's very interesting and it's changed, and it's changing rapidly, I would say. We have a small research model business there. It's done quite well. It's growing nicely. It's got great margins. We had always intended to do everything that we do in the U.S. and Europe and China. You know, we tried to do the WuXi deal 15 years ago, which would have been a great move.
Right.
We're hearing that from our clients, but we didn't get to do that. We didn't get to do that deal, so they're obviously the world's leader in chemistry. We tried to do some other deals, and the valuations were just too high. What's happened in the intervening period is that some of the discovery work has gone to China, and they actually do really good work in discovery at very low price points. That's not coming back.
Yeah.
Chemistry in particular is not coming back. There's some safety work that Western companies are doing in China, mostly companies that are starved for cash. If they can get the work done for 50% less-
Mm-hmm.
The work isn't great, but it's good enough, that's what they'll tell you. It's good enough, they'll go there. I think a lot of people don't wanna go there. And I don't think we get to bid on very much of that work. It's just below the radar for us. That could change, as the Chinese get better at it. But the primary thing that's happened in China, I'd say over the last five years, but it seems to be accelerating, is that they're innovating big time now. So you're seeing U.S. and European pharma companies buy assets.
Mm-hmm.
From Chinese companies. A lot of it happened in 2025. All the work that you do on a drug that was discovered in China has to be done in China, so we have no access to any of that work. China is at least the number two country in the world.
Yeah.
for drug development. Will it be the number one country? Maybe. I mean, it's a bigger patient population, probably spending more money now than the U.S. is. Directionally, that's a place we wanna play.
Mm-hmm.
There are some opportunities there for us. We're looking at it very seriously right now. Just like the way we went into China and kind of elevated the craft for research model quality, we could elevate the craft for safety if we did, you know, bought a local player. Historically, we've kind of been worried about how does the Chinese government treat us. I think they treat us really well.
Yeah.
I think they'd be happy that we were there. That would allow us a little bit defensively to maybe get some of the work that's going from Western companies to China. A small amount of that, but a more significant amount to be able to do the work for China in China.
When pharma's buying those Chinese biotechs and assets, how much duplicative work needs to happen when they come, when they bring them over here?
I mean, some of it doesn't need to be repeated, some of it does. Obviously, the clinical work has to be repeated. You know, it's fast for them, and obviously it's, you know, pharma companies are buying assets from biotech companies, but historically it's just been from U.S.-
Yeah.
A little bit of Europe. The fact that they're buying it from China just means that the quality of the science has improved dramatically over there. You know, high school educated math and science is comparable to college math and science in the U.S., and the work ethic's amazing.
Yeah.
The government clears away a lot of the regulatory stuff that they have to deal with. I'm not saying that the Chinese version of the FDA is still quite serious, but they tend to help a lot of the companies.
Mm-hmm.
I know when we were trying to do the WuXi deal, WuXi would get a whole bunch of buildings free from the Chinese government.
Yeah.
All they had to do was find employees. They're tough to compete with.
Yeah.
Moving quickly.
Yeah. Great. I mean, that's all the time. I really appreciate it.
Pleasure.