Earnings Call: Q1 2021

May 4, 2021

Good day and thank you for standing by. Welcome to the Charles River Laboratories First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Todd Spencer, Vice President of Investor Relations. Thank you. Please go ahead, sir. Thank you. Good morning, and welcome to Charles River Laboratories' Q1 2020 1 earnings conference call and webcast. This morning, Jim Foster, Chairman, President and Chief Executive And David Smith, Executive Vice President and Chief Financial Officer, will comment on our results for the Q1 of 2021. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.seariver.com. A webcast replay of this call will be available beginning 2 hours after today's Call and can also be accessed on our Investor Relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our Safe Harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During this call, We will primarily discuss non GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster. Thanks, Todd. Good morning. I'm very pleased to speak with you today about another exceptional quarter at Charles River. Our robust first quarter financial performance highlighted by 13% organic revenue growth and 170 basis points of year over year operating margin improvement, demonstrates the strength of the biopharmaceutical market environment and the power of our unique portfolio, both of which we believe are as strong as they have ever been. We believe clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions, the scientific depth and breadth of our portfolio and our unwavering focus on seamlessly serving their diverse needs. Clients are opting to work with a smaller number of CROs who offer broader scientific capabilities, which enables them to drive greater efficiency and accelerate the speed of the research, non clinical development and manufacturing programs. The complexity of scientific research is also increasing our clients' reliance on a high science outsourcing partner like Charles River. To further differentiate ourselves from the competition, We are strategically expanding our portfolio in areas that deliver the greatest value to clients and offer significant growth potential. Already this year, we have enhanced our scientific capabilities for advanced drug modalities through the acquisitions of Distributed Bio, Cogmede Bioservices and Retrogenics. Distributed Bio and Retrogenics strengthened our discovery portfolio And the acquisition of Cogmede, which was completed on March 29, provides an excellent growth opportunity by allowing us to offer CDMO services in the high growth, high science, cell and gene therapy sector. We are very pleased to welcome the talented staff at each organization at Charles River and believe that by continuing to invest in our portfolio and our people, we are maintaining and enhancing our position as the leading We believe the strength of our portfolio and robust industry fundamentals leading to unprecedented client demand across most of our businesses. In the Q1, we experienced a continuation of the robust demand From the end of last year, including new record booking and proposal levels in the Safety Assessment business, organic revenue was about 10% for 2nd quarter, even after normalizing for last year's COVID-nineteen impact. Overall, we believe our robust first quarter performance and solid business trends support our improved outlook for the year. I will now provide highlights of our Q1 performance. Quarterly revenues represented a 16.6% increase over last year. Organic revenue growth of 13% was driven by double digit growth across all three segments. The year over year comparison to last year's COVID related revenue impact, which primarily affected the RMS segment, contributed approximately 140 basis points to the revenue growth rate this quarter. We experienced broad based growth across all client segments with biotech clients leading the way as they continue to benefit from the robust funding environment. The operating margin was 20.7%, an increase of 170 basis points year over year. The improvement was driven by RMS and BSA segments and reflected operating leverage and the robust revenue growth as well as our continued efforts to drive efficiency. We expect the same factors will drive margin improvement for the year and believe the operating margin will approach 21% above our prior target. Earnings per share were $2.53 in the first quarter, an increase of 37.5 percent from $1.84 in the Q1 of last year. This outstanding earnings growth principally reflected the double digit revenue growth and meaningful operating margin improvement. Based on the Q1 performance and our positive outlook for the remainder of the year, we are meaningfully increasing our revenue growth and non GAAP earnings per share guidance for 2021. We now expect organic revenue growth in a range of 12% to 14%, a 300 basis point increase from our prior range. Normalized for last year's COVID-nineteen impact, we would still expect low double digit organic revenue growth this year. Non GAAP earnings per share are expected to be $9.75 to $10 which represents 20% to 23% year over year growth and an increase of $0.75 at the midpoint from our prior outlook. I'd like to provide you with details on the Q1 segment performance, beginning with the DSA segment. Revenue was $501,200,000 in the 1st quarter, an driven by broad based demand for both discovery and safety assessment. Safety Assessment business continued to perform exceptionally well, reflecting robust demand from both Biotech and Global Biopharma clients and price increases. Bookings and proposal volume reached Record highs in the Q1 with strength across all regions and major service areas. Bookings increased substantially more than our target. Clients are expanding their preclinical pipeline and intensifying their focus on complex biologics, And we believe they are securing space with us further in advance to ensure they do not delay the research, which in turn provides us with greater visibility. We believe this positions the Safety Assessment business extremely well and supports low double digit organic revenue growth in the DSA segment this year, which is higher than our prior outlook. We are pleased with the extensive depth and breadth of our safety assessment portfolio and remain intently focused on continuing to enhance the value we provide The Discovery business had another exceptional quarter, led by broad based demand for oncology, early discovery and CNS services. Our efforts to broaden and strengthen our discovery capabilities and enhance our scientific expertise are enabling us to expand the support we provide for our clients' discovery research, and clients increasingly view Charles River as a premier scientific partner who can support their efforts to identify new drug targets and discover novel therapeutics. We intend to build our discovery portfolio so that clients can outsource complex discovery projects to us, including for advanced modalities. Our recent acquisitions Distributed Bio and Retrogenics enhanced our large molecule discovery capability. Retrogenix, through its proprietary cell microarray technology, offers target receptor identification and off target screening services, which will enhance our clients' early discovery efforts and also enable them to explore potential preclinical safety liability. Combination of distributed bio, our large molecule discovery platform and retrogenics Capabilities will further strengthen our integrated end to end solution to therapeutic antibody and cell and gene therapy discovery and development. We are also continuing to add cutting edge technologies through our strategic partnership strategy, most recently with a new artificial intelligence or AI drug discovery partner, Valens Discovery. The DSA operating margin increased by 180 basis points to 23.8% in 1st quarter leverage from the robust DSA revenue growth was the primary driver of margin improvement, and we expect this trend will continue propel the DSA margin into the mid-twenty percent range for the year. RMS revenue was $176,900,000 an increase of 14.8% on an organic basis over the Q1 of 2020. Robust demand for research models in China was the primary driver of 1st quarter RMS revenue growth and higher revenue for research model services, including CHEMs and our CRADLE initiative also contributed. Approximately 6.20 basis points of the increase was attributable to the comparison to last year's COVID related revenue impact from client site closures and disruptions. Demand trends for the research models were largely consistent with those prior to the pandemic, With growth in China widely outpacing mature markets, the research models business in China had an exceptional quarter Even after normalizing for last year's COVID-nineteen impact, driven by a resurgence in demand across all segments, Biomedical Research in China has returned to pre COVID levels and in some areas even greater levels. In the U. S. And Europe, client order activity has Research model services also continued to perform well. GEMS is benefiting from renewed outsourcing demand As our clients seek greater flexibility and efficiency afforded to them when we manage their proprietary model out of model colonies, as we did for many clients during the COVID-nineteen pandemic. In addition, complex research models will play an increasingly critical role as Drug Research continues to shift to oncology, rare disease and cell and gene therapies, which reinforces the value proposition for the GEMS business. We are also continuing to generate substantial client interest for our CRADLE initiative or Charles River Accelerator and Development Labs As both small and large biopharmaceutical clients increasingly seek turnkey research capacity, which allows them to invest in people and research instead of infrastructure. We have Cradle sites in the Boston Cambridge, Massachusetts area and sell San Francisco Biohubs and are actively expanding in these regions to accommodate client demand. Utilizing Cradle also provides clients with collaborative opportunities to seamlessly access other Charles River services from Discovery to GEMS, which further enhances the speed and efficiency of their research programs. Revenue growth for our cell supply businesses, HemaCare and Solero, remained below the targeted level in the Q1 due to some limitations on donor access. We believe cell supply revenue will increase during the year as donor availability continues to improve. We are also continuing to work diligently to expand our donor base in the U. S. And add more comprehensive capabilities at all of our sites to accommodate the robust demand in the broader cell therapy market. We believe that the acquisition of Cognate is particularly timely because it creates new business opportunities for Hemacare and Solero in the cell and gene therapy development area. Our expanded capabilities are expanding Now establishing Charles River as a trusted partner, we can move clients' programs forward using the same cellular products through each step of research and early stage development phases and into cGMP production. In the Q1, the RMS operating margin increased 5 70 basis points to 28.7%. This significant improvement is due to two factors. First, last year's 23% margin was depressed by the onset of COVID related client disruptions and the resulting impact on the research model order activity. In addition, This year's performance reflects the operating leverage attributable to the robust revenue growth, particularly for research models in China. Revenue for the Manufacturing segment was $146,500,000 a 15.6% increase on an organic basis over the Q1 of last year. The increase was driven by double digit revenue growth in both the Biologics Testing Solutions and Microbial Solutions Businesses. The Manufacturing segment's 1st quarter operating margin was stable at 35.5%. This is consistent with the historical trend in the Q1 and in line with our revised expectations in 2021 for a mid-thirty percent Operating margin when factoring in the Cognate acquisition. Microbial Solutions growth rate rebounded above the 10% level in the Q1, reflecting strong demand for EndoSafe endotoxin testing systems, cartridges and core reagents for all geographic regions. We continue to work through the delayed instrument installations that resulted from COVID-nineteen restrictions and are gaining access to more client sites. We are pleased with the strength of the underlying demand for our endotoxin testing platform, which performs FDA mandated lot release testing for our clients' critical quality control testing needs. Clients prefer our comprehensive and efficient microbial testing solutions Because of the quality, speed and accuracy of our testing platform, the Biologics business reported another exceptional quarter of Strong double digit revenue growth, principally driven by robust market demand for testing cell and gene therapies and COVID-nineteen therapeutics. COVID-nineteen vaccine testing is intensifying as these therapies move on to the commercial production phase even as some of the early stage testing activities subsides. Given the strength of the demand environment, we are continuing to build our extensive portfolio of services to support the safe manufacture of biologics and ensure we have available capacity to accommodate client demand. We believe the acquisition of Cognate will be highly complementary to our Biologics business and our portfolio as a whole. The acquisition establishes Charles River as a premier scientific Partner to cell and gene therapy development, testing and manufacturing. Our broader services will provide clients with an integrated solution for basic research through cGMP production, enabling them to outsource cGMP cell therapy production and the required analytical testing to one scientific partner, Reducing the bottlenecks and inefficiencies of utilizing multiple outsourced providers. Because we already were a provider of Our integration process, which is proceeding smoothly, is particularly focused on unlocking new business opportunities across our portfolio. The acquisition of Cognate is part of our ongoing As biopharmaceutical clients seek to drive greater efficiency and leverage scientific benefits by working with fewer trusted partners who have broad integrated We have transformed our business over the last decade to accommodate their needs through M and A, Scientific partnerships, internal investment and by promoting a culture of continuous improvement in everything that we do. We built the leading safety assessment franchise in the world and established an integrated end to end discovery offering for both small and large molecules. So given the emerging importance of complex biologics and cell and gene therapies, adding CDMO capabilities is a logical extension for our portfolio. We will continue to move our growth strategy forward. Disciplined M and A and strategic partnerships remain vital components of our strategy as we endeavor to further enhance the scientific expertise, global reach and innovative technologies that we can offer clients across all three of our business segments, investing in our scientific capabilities as well as internally and the necessary staff and resources will help us ensure that we can meet the needs of our clients and support the robust growth in our markets. The biotech funding environment has never been stronger. Clients are investing more in research and development And it is incumbent upon us to be the scientific partner who can help them move their programs forward from concept to non clinical development to the safe manufacturer of the Life Saving Therapeutics. We look forward to discussing our strategy with you and where we think that we can take the company over the next several years at our upcoming virtual Investor Day on May 27. In conclusion, I'd like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment. Now David Smith will give you additional details on our Q1 results and 2021 guidance. Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non GAAP results, which exclude amortization and other acquisition related charges, costs related primarily to our global efficiency initiatives, Our venture capital and other strategic investment performance are certain as items. Many of my comments will also refer to organic growth and growth, which excludes the impact of acquisitions and foreign currency translation. We are very pleased with our accomplishments in the Q1, which widely outperformed our outlook. Delivered strong revenue growth well above the 10% level on an organic basis and significant operating margin expansion of 170 basis points, which drove earnings per share growth of 37.5 percent to $2.53 The operating margin performance was particularly encouraging As a consistent margin improvement reflects our efforts to build a more scalable and efficient infrastructure and leverage the robust growth in our end market. As Jim mentioned, we've increased this year's financial guidance to reflect the enhanced growth profile for the full year, including the strong performance of the Q1 and the addition of Cognate and other acquisitions that we have completed. We now expect to deliver reported revenue growth of 19% to 21% and organic revenue growth in a range of 12% to 14% for the full year. Given the robust top line performance, We expect to drive meaningful operating margin improvement this year with the full year margin approaching 21%. This is expected to drive better than expected earnings per share in a range of $9.75 to $10 which represents year over year growth above 20%. By segment, our outlook for 2021 continues to reflect the strong business environment and the differentiated capabilities we provide to support our client needs. RMS organic revenue growth guidance for the year is unchanged from our initial high teens Outlook reflecting recovery from the impact of the COVID-nineteen pandemic last year, exceptional growth in China and the expectation that our cell supply revenue growth was improved during the year. The DSA segment is now expected to deliver low double digit growth for year, reflecting the strong Q1 performance and intensified early stage research activity. For the manufacturing segment, We now expect to achieve mid teens organic revenue growth with both the Biologics and Microbial Solutions businesses contributing, Including the acquisition of Cognate Manufacturing's reported revenue growth rate is expected to be in the high 30% range. With regard to operating margin, RMS will continue to be a primary contributor to the overall improvement for the year, with the segment margin meaningfully above 25%. We also expect the DSA segment operating margin to increase over the prior year into the mid-twenty percent range. When factoring in Cognate, the Manufacturing segment's operating margin is expected to be in the mid-thirty percent range this year or moderately below its 2020 level. The cost was slightly higher than our expectations, totaling 6.2 percent of total revenue or $51,200,000 in the 1st quarter compared to 5.6% of revenue in the Q1 of last year. The increase was primarily the result of continued investments to support the growth of our businesses and higher performance based compensation costs due in part to the 1st quarter operating outperformance. Despite the higher expenses in the 1st quarter, We continue to expect unallocated corporate costs to be in the mid-five percent range as a percentage of revenue for the full year. The Q1 tax rate was 14.5%, a 20 basis point increase year over year and consistent with our outlook in February, which calls for a tax rate in the mid teens due to the cating of the excess tax benefit from stock based compensation. We continue to expect our full year tax rate will be in the low 20% range on a non GAAP basis, which is unchanged from our outlook provided in February. Total adjusted net interest expense for the Q1 was $17,100,000 which was essentially flat sequentially and a decrease of nearly $2,000,000 year over year due to lower average debt levels, which resulted in interest rate savings based on our leverage ratio. At the end of the Q1, we had $2,200,000,000 of outstanding debt, representing a gross leverage ratio of 2.3x and a net leverage ratio of 1.9x. In March, we issued $1,000,000,000 of senior notes We used to redeem a previously issued higher rate $500,000,000 bond to pay down the existing term loan and the portion of the revolving credit facility and to finance a portion of the Cotnate acquisition. In April, we also amended our existing credit agreement to establish a new revolver with borrowing capacity of up to $3,000,000,000 The net result of these actions will reduce our average interest rate on debt by approximately 50 basis points to 2.65%. An overview of our current capital structure is provided on Slide 36. On a pro form a basis, Including the Cognate and Retrogenic acquisitions, our gross leverage ratio was just under 3 times and we had total debt outstanding of slightly below $3,000,000,000 For the year, the higher debt balances due primarily to the Cognex acquisition will be partially offset by the lower average interest rate from these and securities, which is expected to result in total adjusted net interest expense of $83,000,000 to $86,000,000 Free cash flow was $142,200,000 in the 1st quarter, a significant increase compared to $42,900,000 last year. The primary reason for the improvement was the strong first quarter operating performance along with our continued focus on working capital management. Capital expenditures were $28,000,000 in the Q1 compared to $25,700,000 last year. Looking ahead, we are increasing our CapEx guidance for 2021 by $40,000,000 to approximately $220,000,000 The increase primarily reflects the investments we are making in Cognate to support its high growth business. Even with the additional capital, we expect CapEx will remain below 7% of our total revenue this year, which is consistent with the target that we provided at our last Investor Day in 2019. For the full year, we are updating our free cash flow guidance to the upper end of the prior range and now expect free cash flow of approximately $435,000,000 for the full year. We are pleased to be able to increase free cash flow due primarily to the strong Q1 operating performance even after incorporating the transaction costs and capital needs of Cognex. A summary of our revised financial guidance for the full year, including Codney, can be found on Slide 38. For the Q2, our updated outlook reflects a continuation of the strong demand environment. We now expect 2nd quarter reported revenue growth at or near the 30% level, including the contribution of Cognate. On an organic basis, we expect 2nd quarter growth rate should be at or near 20%. This reflects the prior year comparison to the COVID related revenue impact, which will contribute approximately 700 basis points to the 2nd quarter revenue growth. As a result of the impact of COVID-nineteen on the Q2 of last year, we This year's 2nd quarter non GAAP operating margin and earnings per share to increase significantly versus the prior year. Our expectation for non GAAP earnings per share is a growth rate of more than 50% year over year. In conclusion, we are very pleased with our strong first quarter performance, which included robust revenue and free cash flow growth. We remain confident about our prospects for the year and our ability to consistently grow the That concludes our comments. Operator, we will now take questions. Please limit your comments to 1 question with 1 follow-up question. Please stand by while we compile the Q and A roster. Our first question comes from John Kreger of William Blair. Your question please. Hi, thanks very much. Jim, given all the cognate commentary you gave us, can you just Step back and help us understand what part of the CDMO industry are you interested in playing in Over time, longer term, development, drug product, drug supply, if you could just elaborate on that, that would be helpful. Sure, John. So Cognex gives us the ability, and particularly in combination with HemoCure and To actually provide the cells, to do the process development, To do the clinical trial scale up and ultimately to provide commercial quantities, specifically its cell therapy products. And secondarily, we have some of the capabilities that are involved in and facilitate Gene therapy manufacturing as well, but I'd say that the pure CDMO business will be primarily Cell therapy related. Great. Thanks. And then Last month, you guys talked about Valence strategic relationships, which had some references to AI and machine learning. Can you just talk a little bit more about How you see machine learning having applicability within Isoom DS and A mainly? Sure. Look, there's a huge amount of focus on utilizing data to inform the design of Preclinical trials to achieve better outcomes and I think ultimately to design better clinical trials And then to provide some correlation between the 2 of them. And so there's a rich amount of data, and I think Valens It's a particularly strong AI company. We're going to see Attributes or aspects of this, I think all around our portfolio, we don't see this as replacement for things that we do, but we see them as Augmentative and or earlier provide earlier indications of how a drug is likely to perform before we get into, Say non regulated and certainly regulated safety trials. So, the advent of AI should both Enhance speed and hopefully outcomes in terms of the numbers of drugs that get to market and Between the rich data sets that we have and their facility with AI, it should be a very interesting combination, albeit very early days. Very helpful. Thank you. Sure. Our next question comes from Eric Colwell of Baird. Your question please. Thank you very much. Impressive quarter. I'm focused on Safety Assessment DSA segment. You cited record RFPs, record demand in Q1. That obviously follows the 2020 DSA segment ending backlog of $1,400,000,000 was up 40% year over year, yet you're only forecasting low double digit organic revenue growth in the segment this year. When we look at prior year's beginning backlog and how that compared to the resulting revenue growth, the math would frankly suggest multiples of what you're guiding to. I'm just curious what Explains this disconnect from past backlog growth to your outlook for low double digit growth this year. I'll take a shot at that, David. Hello? I think we lost David. He might have to go back in. Okay. That's okay. So The way we look at this, Eric, is that we've got we're thrilled with the demand, we're thrilled with the backlog, we're Delighted with the way the year has started, we're really optimistic about the guidance that we provide, the fact that, that segment It will be organic double digit growth rate. It's still early in the year, so We want to see how more of the year unfolds, but we're quite confident and comfortable with our guidance for the year. And again, as we discussed quarter after quarter, there is non linearity in our business. So We've got things that are moved identically quarter to quarter or increased literally necessarily at the same rate quarter to quarter. So We think this will be a very strong year that we've guided to. Well, Jim, it certainly doesn't look like You're going to miss that target. I'm just curious, I mean, pricing, I mean, can't be bad in this environment. And It just leads me to wonder if there's a big mix shift in the nature of the work, if there's capacity constraints happening. It makes me wonder if there's something in that backlog report from last year that you changed how you look at backlog or the reporting of the Because it's just historic trend, if I go back even stripping out acquisitions the last 5 years, it's just The growth rates would be if history repeated itself, the growth rates would be materially higher than what you're talking about. And it just seems These are awesome numbers. I'm not complaining, obviously, but it seems like a bit of a disconnect. So maybe we'll take it offline, but just to provide some I'm confident, Eric, and I understand an interesting question. Pricing is fine. Capacity is well utilized, but we have And as I said in my prepared remarks, we actually have clients booking more work earlier, I don't know, because they have more work because they're better funded and Maybe there's an underlying concern that none of us and our competitors will have the capacity that they want when we need it, although we work really hard to do that. The mix is solid and we're getting a significant amount of work From big drug companies, a little bit instigated by COVID, but also just a plethora of new biotech companies. So Nothing but good things are happening. We're pleased with our articulation Good things happening and what that looks like in terms of our financial guidance. But Maybe we should just talk to you offline and get you more comfortable with the ebbs and flows. Yes. That sounds great. And again, congrats on Overall performance really good. Thank you. Yes. And I'm back on. I'm sorry. I hit speaker button instead of the mute button. I was happy chatting away to And the one I think is the mute. I realized that I hadn't heard what Jim was saying, but I get the impression that you were discussing about how the backlog is being built up People are booking out further afield. And one of the reasons why we've been able to increase our outlook this year is because we can see much more of the year. If that was discussed, I want to repeat it. Eric is pleased with what we're doing, but Since that the guidance for the back half year should be materially higher given how we ended the year, given where we are now and given the absence of the business Pricing and I explained that we were pleased with the year over year guidance that things went linear, that nothing but good things was going on Our next question comes from Dave Windley of Jefferies. Your question please. Hi. Thanks for taking my questions. So I won't exactly follow on Eric's question. I think you addressed that well enough. But You have pointed out, Jim, Discovery's stronger performance for a couple, maybe 3 quarters. And you also commented in general in your Prepared remarks about continuing to seek ways to add value for clients in DSA, which is a general comment, but I wonder if Maybe it's not related to the growing Discovery business and potentially pull through there, which we've asked about for years. So Wondered if you could kind of elaborate on the adding value to clients in DSA part of your comments. Yes. Yes. The Discovery business, as we've been talking about for at least a couple of years now, has really come into its own just in terms of Client utilization, understanding of the depth and strength of the scientific portfolio. We've been adding additional businesses like D Bio and RetrogenaX and we have scale now. So we've got terrific organic growth, right, even though we Break that out and meaningfully improving operating margins in that segment as well as a pull through into safety. And of course, we're seeing high growth rates and nice margins in the safety business as well. And I think we have a very strong capacity situation in both of our businesses. So we're really pleased with the demand. We're really pleased with the client uptake. It's largely driven by biotech clients. Having said that, we have a lot of big pharma clients who are So I'll say more of their work to us for sure in safety and they have been for a while, but increasingly in discovery. And as we keep adding these assets either through direct Straight up acquisition or through the strategic initiatives that we've been pursuing vigorously, I think that will only intensify. When you think about thanks for that. To follow-up, when you think about your capital deployment appetite, I guess there are some deals discussed in the public markets Regarding monetization spin off of potential assets, You've now dipped your toe into contract manufacturing. To John's question, that's a relatively capital intense area. I wonder if you could kind of give us a rank order or a priority list of where your Capital deployment appetite primarily resides. Thanks. Sure. Besides continuing to invest appropriately in our businesses, All of which are growing. So most of our CapEx is growth related, but as we reiterated in our prepared remarks, we're going CapEx has been a stay below 7% of revenue even with the addition of Cognite And the capacity that's required there. But all of our businesses require additional capacity, certainly safety does as well. So Putting that aside, we're going to continue to do these technology deals, of which we have about a dozen that are signed and another dozen in conversation. Distributed Bio was one of those that turned into an acquisition. RetroGenics began to be one of those and just pivoted immediately into an acquisition. And we have Other deals in AI and bioinformatics and digital pathology, next generation sequencing and bioinformatics and 3 d We're modeling that are cutting edge technologies and we're going to invest small amounts in those businesses. We're rolling some money and some of those for sure will be acquisitions. And They don't be particularly large companies and particularly expensive acquisitions, but they will grow rapidly. They'll enhance the portfolio And they will distinguish us from the competitions, not entirely, but particularly in the Discovery. And I would say besides those deals, which I don't know what the cadence will be, but I think we'll have a couple of dozen things that we're kind of participating in and we'll buy some of them. We're going to do some straight up M and A in the discovery space. Hopefully, do some more straight up M and A sort of in the general ambit of cell and gene therapy. We'll do some more straight up M and A sort of in the lab sciences Our area will do more work in sort of aspects of biologics and microbial, and we actually have a couple of things That would fall into RMF. So the conversations as always are several. They're almost all private equity owned businesses, which means that they're all for sale at the right time and at the right price. Nothing would take us off the reservation. There would be continued additions of what we're doing. If you have if the question if your The underlying thesis of the question is, what additionally might you do in CDMO space? Specifically, I can't say that categorically except to say that our focus for the foreseeable future is Primarily in cell therapy and secondarily in aspects of gene therapy. And I think that we are Currently a meaningful player in the cell therapy space and could be the most meaningful player in that space where we could just continue to grow the business and I'll add additional parts and pieces. And I think you understand fully that surrounding the CDMO Activities in cell and gene therapy is the cell product businesses and petrostatobiologics business. So that's a powerful portfolio and then that's Added further with the combination trials for pharmacology and toxicology. So it's a broad suite of offerings And a challenging therapy, which is the largest and potentially the most exciting modality. We'll see where it all goes. There's a couple of 1,000 drugs that are being worked on right now. We're probably working on a significant number of those. Yes. So that's the nature of our focus in M and A, particularly in cell and gene therapy. Great. Very helpful. Thank you. Sure. Our next question comes from Robert Jones of Goldman Sachs. Your question please. Great. Thanks for the question. Jim, I just had 2 related to capacity on the safety assessment side and I know on Safety Assessment, just wanted to get a little bit of a better sense on your comments around Clients booking further in advance of actual work. And just related to that, how you're thinking about capacity? Do you think As what you're seeing trend that you might need to be adding capacity, I know it's always a tricky dynamic to match supply and demand within And then just the second question around CDMO. I know last quarter, you said you were going to assess if you needed to add more capacity there. Just I know it's not too Far from when you made that comment, but just curious if there's any updated thoughts on the CBM footprint. Sure. So We have been adding incremental amounts of capacity every year. I'm going to say 5 or 6 years, but I think it's longer, Because the Safety Assessment business began to come back strong, began to sort of flatten out in 2012 and Begin to come back strong in 2013. So it's probably 7 or 8 years. And since proximity is important and since we have a dozen safety assessment We can't and won't just add space at one locale nor would we add all the space in the U. S. Or all the space in Europe. So I don't know. We added at least a half a dozen sites incremental amounts of space depending on client demand, depending on capabilities, depending on how the space is currently utilized and depending on where we see the market going. So We have always done that. So we did in 2020 for this year. We're doing it now for next year and probably for 'twenty three. We're obviously real time as we as the demand is exceeding our plan and our original guidance, which is a high class problem, Thinking very carefully about do we have to add more incremental capacity for this year? And I don't think we have an answer to that. If we do, it will be subtle. So those of you who are concerned about our CapEx spend for whatever reason that might be shouldn't be concerned. We have a high growth business. We have to provide the capacity or we won't have the business. We love the fact, by the way, that clients are booking earlier. That's so good for us. It's so much more orderly. I think there's a conduit there with pricing. So I think that pricing is still an issue with them, don't get me wrong, but think they're less concerned about price and more concerned about science and getting a slot. So keeping capacity relatively Hi. So our margins are good and so clients are desirous of getting in the queue early. It's a really good thing, Subject to the caveat that you don't want to run out of space and turn clients away. So as you indicated in the question, we're always walking that tight rope. I think we're really good at it. It's not a perfect science, but we will add additional space. We're adding it right now. We probably will crank it up a little more than we would have as long as we feel that this demand will continue certainly from the back half of this year, which I We're glad to answer next year. On the CBMO space, particularly on the Cognate space, particularly the cell therapy manufacturing Aspects of it, there is we bought incremental capacity that's in place, so we're fine. We obviously have to Finish add and finish additional space for next year and beyond based upon Not only the client demand, but the nature of the demand. So is it some do the clients in Phase II? Are they in Phase III? And are they hinting About and wanting us to gear up for commercial launch or not. So we have to roll all of those things up. We have Certainly sufficient capacity to accommodate the demand for this year and probably the beginning of next year and we'll add more space there. So capacity and headcount The rate limiting factors in the business, not demand. Demand is not a rate limiting factor right now, which is a beautiful thing. Having the space is, I don't mean to be flip about it, but it's relatively straightforward. It's just planning and cash. And you've got to get it to planning really early because it takes a while to build space. And it talks, it's probably 18 months or so, maybe 2 years to get the space built and validated if it's greenfield or maybe 12 to 18 months if it's an addition. Maybe it's a little bit shorter in the CDMO space. It's probably 9 to 12 months. So getting the space Built ahead of when we need it and getting people hired and trained ahead of when they need it, accommodates the There's sufficient capacity to accommodate to the demand and allows us not to be sure. And by the same token, we don't want to have too much space or too many people sitting around, Sure. Our next question comes from Tycho Peterson of JPMorgan. Your question please. Hey, thanks. Jim, on manufacturing, you talked about COVID vaccine testing intensifying. I'm curious how we should Think about that dynamic. I'm curious if you can quantify what's actually baked into the outlook on COVID. I think last year you said it was about $60,000,000 across the portfolio. And then as we think about Cognate, one question that comes to mind is why people would work with universities, Catalent that has Paragon and MasterShield, Thermo that has Brahma. So can you just talk a little bit How do you think about competitive positioning for Cognite? Sure. The numbers that we called out last year that were clearly COVID related, I think fall into a different category Is that what we're going to see this year? What we're seeing this year? Plus, I don't think it's useful to tease it out. I mean, we tease it out last year because We had a tough second quarter where revenue was down in RMS and a little bit in microbial and a few other things that we were watching on costs tightly and We're trying to make sense of it for our investors. I think on a forward going basis, While there's going to be some meaningful but modest, because it was modest last year, Couldn't be some amount of continued work on COVID related therapeutics, monoclonal antibodies and antivirals, drugs to treat people that get the disease, Perhaps if they've been vaccinated or not. On an ongoing basis though, Our biologics business is going to do a lot of testing of COVID related vaccines. And I think we're probably going to move into a genre of it being flu like and there'll be booster shots next year and new variants every year. And they will always make it I don't know who they will be, at least the 4 companies who already have vaccines and perhaps others and companies like us will continue to test it. So I don't think it's all that useful to I'll try to break it out going forward because I think it will just be an ongoing business. And so biologics, while a really strong business for us and Lots of large molecule products besides what I'm about to say like monoclonal antibodies and that is There's no question that cell and gene therapy COVID related work will be Really, really critical. Why someone would work with us? Well, the company I think the 2 companies that you mentioned Principally in the gene therapy manufacturing space. So cell therapy manufacturing space, we have smaller clients, sorry, Smaller competitors who are around the same size as we are in cell therapy manufacturing, that don't have the large suite of services. So the ability to work with us from very, very early research to process of our portfolio. And by the way, we continue hope to continue to add to that. So hopefully, more of a holistic Approach on our competition helps clients with speed to market and they don't have to pause at each step and work with somebody else. Okay, that's helpful. And then follow-up, just curious about the sustainability of some of the trends you called out. At RMS, you talked about gems, This resurgence around outsourcing, managing proprietary colonies, how much of that came from the pandemic and how much of that do you think is sustainable? And then Separately for DSA, you called out the pricing increases and client securing space ahead of time a number of times on this call. I'm just curious how you think about the sustainability Of those trends as well. I feel really good about the sustainability of both of them. So GEMS has been a Nice growth business for us for at least a decade. Those models are critically and increasingly important for basic drug research. There's a whole bunch of services associated with producing those animals and they're complicated to produce and providing them to the clients. I think we got a little pop because of COVID, which we will keep. And I think the demand for these models, which Continue to be more sophisticated, made more easily through CRISPR and other technologies It's a really strong demand for us. We're doing that pretty much across the globe at all of our sites. We're pleased with DSA pricing even though we're not going to break that out, and we're really pleased with The growth in development and demand there, I don't see any rationale given the funding environment, giving the new modalities, excellency therapy and immunotherapies that and yes, we got a little bit of incremental work there To your question, specifically in Discovery, I would say, that caused some clients to take a look at us that hadn't. So and I think they're quite happy. So we will retain that work. And as we add new services like D Bio and like Retrogenics, I think we'll get incremental work. So I would say that the pricing paradigm would hold up. I would think that clients as much as the demand We made strong. There was no reason or indications that it will soften, but we'll see more clients booking slots earlier, Which is great for them and as I said earlier, way better for us in terms of visibility and planning and getting our calendar Okay. Our next question comes from Ricky Goldwasser of Morgan Stanley. Your question please. Yes. Hi, good morning and congrats on the quarter. Jim, I wanted to go back to the comments around clients securing Broom, on the detox side earlier on, I mean, this is something that we've been talking about for a long time. So are you starting to have any conversations with Your customers around sort of pay or play type of deals and securing capacity for longer periods of time, given considering that it takes about 18 months, right, to build capacity? Yes. That would be nice. I think that would that logically follows from the market situation. I'm a bit we had this over a decade ago. We had a couple of clients that would book just book capacity on a take or pay basis and Pay for it to be empty until they needed it, so they never had to get in line. I think I've said to you and others countless times, If I was running R and D for 1 big drug companies, I for sure would commit to space like that. So I didn't have to worry about it. It's a relatively trivial amount of the cost of developing a drug and the whole preclinical cost is about 20%. The cost of developing a drug and getting on toxics some percentage of that. So, most of the money is spent in the plant. So, We've had a few passing questions and thoughts about that, some vibrations with some clients. So thinking about it, I wouldn't want to project to predict whether that will happen or not. They just seem reluctant to do that, although increasingly we have seen people Booked slots earlier. I think if they booked slots earlier and they're for whatever reason unhappy with the slot, So let's say they it's May, let's say they want to start a study In June and we say to them, yes, we can't start until September, then that requires them to either back it up Further or do something about taking the space on a take or pay basis. So anything is possible. I do think the market The dynamics are such that it would support the basis for your question. I just think that the big dry companies in particular have been reluctant to do those sorts of deals. And I would say that We don't have any concrete evidence that that's on the horizon. And then as a follow-up question, I mean, you've been consistently And raising organic growth goals and your sort of forecast for the different segments. Considering sort of the mix of business and your performance, why what's kind of like still holding you back from upping long term guide? Nothing. We're going to give New long term numbers in our investor conference in a couple of weeks. So I think we'll wait to do that then. So nothing's holding us back. I think We have a good understanding of the market and a good assessment of the funding paradigm and the new modalities and what clients are telling us. And obviously, we have a big Footprint to work with virtually all the big drug companies and most of the biotech companies. So we have a really good installed base. So now we have a clear view of it and We'll be putting on a new number shortly. Great. Thank you. Our next question comes from Juan Avendano of Bank of America. Your question please. Hi, good morning. Thank you for the question. I guess building up on the backlog question on DSA and How strong it is. Can you give us an update on the mix of studies that you're seeing in safety assessment in toxicology? How is the mix from general toxicology and specialty toxicology trends? How is that trending? And how does that compare Prior years. We don't have any control over that. You don't get long term studies unless you do short term studies. And you don't get you usually I wouldn't say never, but you usually don't get specialty work unless you've done a general toxicology work. So They come in tandem. We like both. Margin profiles are kind of Not all that dissimilar, although the pricing is a bit easier on the specialty work. So It's probably around the fifty-fifty range. We like it that way. As I said, we can't control it. So every once in a while you hear us say that we have And the balance of long term stays and not enough short term ones or vice versa, Typically, that balances out over time, and it feels like we're in balance right now. Got it. Thank you. And a follow-up on DSA as well. Can you give us an update on the pull through or the revenue synergies across That you're seeing right now between discovery and safety assessment and how is that tracking against your long term goal? Yes. I mean, without processing it too finely, because I don't think that's useful or productive to kind of do this on a quarterly basis, There's no question that we have an increasing number of clients. They could have been safety clients who never did discovery with us, the discovery clients who never Safety or new clients never did anything with us that work with us to help discover and develop a compound and then I'm thrilled because we have a really deep understanding of the molecule to work with us, A, because they trust us, Because they like our science and see because it's faster. So I think over time, we will continue to have a significant amount of our clients We don't contract with them that way. In other words, we don't say we won't do the We work with us in safety and vice versa, that would be overreaching and I think dangerous. But I think increasingly, particularly as the Discovery portfolio has grown so significantly and with great scientific depth and with great cutting edge technologies that We have much more clients open to and are utilizing us for discovery, some of whom used that safety before that I'm really comfortable just continuing to have us develop the drug. Okay. Thank you. Our next question comes from Dan Brennan of UBS. Your question please. Great. Thanks for taking the questions. Maybe first one just on margins. Know you called out obviously with the strong top line operating leverage and efficiencies. Could you just maybe break out a little bit, maybe some of the components there? What was the impact from acquisitions? What was the impact from efficiencies, if you will, and just operating leverage Just in terms of the new guidance that you're providing. Yes, that's right. Well, we've given the pieces for the different deals we've done. And broadly, this year, Cognates is pretty neutral on the margin and earnings per share. So is RetrogenaX, given its size. So for this year, the majority well, all of the increase that we're seeing Is if I could get it around, is not to do with Cognate and Retrogena. It's to do with the operational businesses itself. And of course, with the top line improvements that we posted today, we'll get some fall through that will also help with the margin because We've got a lot of fixed costs embedded in there. Once upon a time, we used to break out our efficiency program and what that was doing So Charles, I was a whole, but we stopped doing that for a while now. But broadly, yes, I mean, we've got good top line growth. The efficiencies are kicking in as we described. It's all working very well together at the moment. But There isn't really the M and A that's causing sort of an upside or a drag, with the exception of Cognate on the manufacturing margin, Which is a drag, but given the overall performance of the business, we were covering that as you've seen by posting the increased towards a 21% margin this year. Got it. Thanks, David. Maybe second one would just be on HemaCare. I know it I think it grew below I think last quarter you had talked about some of the drag there given the pandemic and you had expected the recovery. Just where do we stand in terms of the guidance for 2021 now? What's baked in for HUMICARE for the remainder of the year? Well, we haven't broken out HUMICARE in precise numbers. What we have said in the prepared remarks that Humicare had a slower start than we had hoped, but we do see that improving as we go through the year. I just would like to point out that it is a relatively small business and the fact that it's had some issues at the beginning of the year because of COVID and donor Access to sites, etcetera, we see that improving as we go through the year. And of course, it's still a strong business for the future. So this year, it's a small impact on the business. Got it. And then I know microbial rebounded this quarter, excuse me, similarly had an impact last quarter from the pandemic or actually in the prior quarter. Just how do we think about the ability for that business to like is there further catch up to go Given what you saw this quarter versus what is the normalized expectation for that segment? Yes. So, again, as we called out, While we've seen a nice improvement in microbial, it's got the double digit growth earlier than we expected, so we're pleased with that. But we've not got full access to install new equipment with all of our clients. We're making headway in there, Of course, as we continue to do that, that would be an upside. And of course, that's been factored into the revised guidance this morning. Great. And then maybe last one just on Cognite. Jim, sorry if I missed it. I know you had gave a lot of details in the deck and the presentation, but what specifically It's baked in for Cognizant here. And I think at the time you did the deal, I think you were anticipating what a 15% revenue tag or is this correct? Just wondering On both of those fronts and if it's 15%, why couldn't it be higher than that given the overall growth rate of that end market? Thanks. So we added $110,000,000 in revenue, if that helps. And in terms of the when you did the deal, I think you talked about correct me if I'm wrong, was it a 3 year CAGR or 15%? Just wondering kind of what the opportunity is given the end market, I think, is certainly growing at that rate, if not stronger. The total growth rate was 25% on an annual basis going forward. Got it. Thanks, David. Our next question comes from Elizabeth Anderson of Evercore. Your question please. Hi, guys. I just wanted to ask a little bit more about how customers are moving through the like post Are you seeing sort of people sort of taking a time to sort of think through like what they're outsourcing, what they're keeping in or sort of think through changes to their discovery program? Or is it Kind of, oh, let's get moving because we had all these projects that were delayed or sort of how would you characterize the tone of your conversations? They're quite positive, except in the Q2 in our research model business when academic clients And we had difficulty placing some of our microbial solutions systems. All of our sites remained open and virtually all of our clients, It's just a handful that were open. So our clients have been busy. They're well financed. The vast majority of our clients have no internal capability to do many things, Discover drugs and all the rest of the development that comes to us. So I wouldn't say that there's been a dramatic Change, we just have increasingly intense demand across the board for what we do Based upon really robust portfolios, early stage portfolios that most of our clients have And enough money to prosecute them broadly as opposed to chunk it. And we don't see any indications that those elements would soften The demand would soften certainly as we move through this year. And as we said earlier, we'll give longer term guidance and our thoughts on Where our business is going, the demand is going at our investor conference. Okay. That's helpful. And then as a follow-up, you talked about some of the capacity In terms and expanding capacity in terms of the physical infrastructure, are you seeing any change in terms of like the availability of employees or any Cost pressures on wages or anything of that sense out of versus a couple of months ago? We're hiring a lot of people. We're actually hiring more people than we had Plan to hire because the demand for everything we do is exceeding that. So as I said earlier, it's a high Class Challenge. It depends on the geographic locale. I mean, some geographic locales, it's easy to hire people, some of those greater competition. I do think we are in an attractive place and lots of people like to work or want to work at. We've worked on over 80% of the drug for the last 3 years, It's probably our best recruiting tool. We're always trying to we have 110 locations now, so So the competition for headcount, as I said, is different in different places. Then the Kind of wage levels are fluid. So we're always trying we're working hard to stay up to or ahead of it, So that pay is never an issue. So I'd say it's the ultimate rate limiting factor in our business is Availability, not just of anybody, but of really strong people who understand that we're working for patients and the criticality of their work. So I'd say we're doing a very good job. I think we did a really good job in the Q1 with our recruitment. We anticipate significant recruitment to the back half of the year pretty much Across the board and around the world. And so we're working hard to stay ahead of it. Great. Thank you very much. Our next question comes from Patrick Donnelly of Citi. Your question please. Great. Thanks guys. Maybe another one on the cell and gene therapy piece. I understand it's still early days, but you just talk about some of your customer conversations around cell and gene therapy business now that you've closed Cognate? Have you seen any increased interest in areas like HemaCare and Telero, now that you're more kind of end to end CLLNG therapy player, or should we expect those benefits to be a little more long term? I mean, it is early. So we have the combination of sorry, Revenues up more slowly in the Q1 in Hemokian and Solero because of lack of access to donors, Coupled with the fact that Cognex is relatively new, it's a month or 2 old. So I think it's early to tell. We have no doubt that the thesis is a very strong one, that clients who can use us starting very, very early in the process Through process development and scale up through the clinic and ultimately to commercial quantities is powerful. No client is going to build Virtually no client is going to build this stuff themselves. I think the competitive marketplace is attractive for us. I think we have a unique portfolio that Clients are definitely resonating too based upon conversation and based upon the uptake in business and our ability to sell A whole suite of cell and gene therapy services, including pharmacology and safety testing, including Biologics testing, including some microbial testing, including some across our research models business, it's becoming a very big business for us. Look, it's no different than everything else we do. We provide a comprehensive holistic portfolio of Products and services, so that's more of a solution for clients because particularly small biotech companies, Everyone, but particularly them, they don't have the time or the ability or the desire to work with Half a dozen different providers across those different streams of business. And so our whole thesis is about Being the largest non clinical CRO, so that we can do more for our clients And they don't have to do it themselves because they don't want to, and they don't have to work with multiple players. Got you. Thanks. That's helpful, Jim. Our final comes from George Hill of Deutsche Bank. Your question please. Hi, it's Maxi on for George. Thanks for taking the question. Could you talk about your thoughts on the changing dynamics competitive dynamics in the industry following the recent vertical integration trend and if recent deals in the space create opportunities To move upstream into later stage research services? Thanks. Yes. I think I followed that. You said that really quickly. But Yes. Look, the consolidation on the clinical side of the business, which What you're referring to is really no different than the consolidation that not only we saw, but we participated heavily in the preclinical side. So as you know, we have 12 different sites and probably 8 or 9 different acquisitions in the safety business. So that whole business is the directly side of the acquisition and consolidating the industry so that We had more scientific depth and capabilities and we had a broader geographic footprint. So you are Seeing and will continue to see the exact same phenomenon in clinical space now that it started. I think it will continue. I don't know where it will end up, 2 or 3 players probably. Your question about what that means, of portend, for us, Look, we look at the clinical space often. Look, when I say look, I think we at least discuss it often. I think you know that we used to have a clinical small clinical CDMO capability, which And it was a small molecule which we sold just because it was under a scale, and now we're back in it We're selling gene therapy. So we sort of have 2 big moves. 1 is CDMO space and 1 is the clinical space. So we put our toe into the CBMO space and like it at least on the cell therapy side. On the clinical side, we could do that, I guess. It doesn't seem that there's a client need and I don't think we should make even contemplate a move like that unless the clients are requesting it. So the only company that has a clinical and preclinical capability is Covance. I think it's a failed experiment. I don't think clients buy from them On that basis, no one ever contracts to do preclinical work all the way through the clinic. That's years. Nobody buys that way. So we haven't had a conversation in the last decade with a clinical CRO about getting together. No one's ever called me a Clinical CROs that came together with them. And I don't think any of us would even contemplate that move, although it would provide a bigger share of the client's wallet, So that would be attractive. But since the clients aren't buying that way or thinking that way and not Desirous of any of us doing that. Until unless that changes, I don't see any logical rationale for Us on the preclinical side and other people on the clinical side to get together. Having said that, I learned a long time ago never to say never about anything. So I don't know at what point the demand quotient will change and clients will want 1 company or multiple companies to do both. Well, that concludes the call today. Thank you for joining us on the conference call. We look forward to speaking with you during our upcoming investor events, including our virtual Investor Day on May 27. This concludes the conference call. Thank you. Thank you for participating. You may now disconnect.