Dave Windley, with Jefferies Healthcare Equity Research. Very pleased and gratified for your support of our conference. Thanks for coming again and listening in on the webcast to those in the ether field. Appreciate your, again, appreciate your support of our Jefferies Healthcare Conference here in New York in June. I cover CROs and CDMOs, as well as managed care, as many of you know. I'm very pleased to have Inotiv with us for this next session. Bob Leasure, the company CEO, and Beth Taylor is also with us in the seats in front of us, the company CFO. So thank you very much for being here.
As folks listening in probably know, Inotiv is a player in the discovery and preclinical CRO space and has built a business through a number of acquisitions over a period of a handful of years, but has spent a good amount of time over the last, what, year or two years really integrating those acquisitions and realigning the business. So in light of that, I wanted to start in your DSA segment, discovery and safety assessment segment, where you've not only acquired, but you've also organically launched some businesses. And perhaps just talk about, first, kind of operationally how that has come together, and then we'll get into a little bit of demand trend. So first, your kind of alignment of the business.
Well, thank you, David, and thank you for having us to this conference. The new services that we've started with the DSA, we started up about a year ago, are going quite well. It's one of the key reasons why our safety assessment sales year-over-year for the last two years have probably been increasing. That and the fact that, as David said, we acquired a lot of, put together about 14 companies, we acquired a lot of customers, and existing customers continue to expand the services they use with us. The new services have turned out to be meaningful. They've attracted some new customers. It was probably the new services were an area where I think there was a void in the market because some people left that market. It's given us an opportunity to expand our customer base and expand our sales.
Numerically, your safety assessment or DSA business grew, I think, high single digits, like 8%-9% in your fiscal Q2, which ended March. Competitors certainly are not seeing that kind of growth rate, and book- to-b ills have been pretty volatile. To what would you attribute your high single digit growth rate in DSA?
I think the main factor is probably the new services. We've also added new capacity across over the last year. We've talked about expanding. We have not used a lot of that new capacity, but we've also stayed at a high level of utilization. So with that 8% growth, probably has seen some pricing pressure. So the utilization of the new services are probably a critical part of that. I think it will continue to be going forward.
Interesting. So on the price pressure, I'm guessing that that's still fairly moderate, maybe low single digit type price pressure. Can you put a number on that?
I think the pricing has come down, and I think there is some price pressure. I would call it moderate, and it's single digits, but it does exist. And so we keep an eye on what's going on. Not all studies are the same. Not everybody quotes them the same. But I think overall, we can see that there is a little sensitivity to pricing. At the end of the day, our customers still, the old adage is it's quality, service, on time, and price. And pricing is one of those elements, but it is not always the determining factor still.
So we've talked new services in generic terms, but I believe you'd point specifically to GeneTox and your biotherapeutics units. How much, I guess, first of all, how much are they contributing now? Can you give us a rough ballpark?
Percent-wise, if you go back 18 months ago, probably been very little to zero. Right now, we could be seeing that represent starting to move towards 5%-10% of our quarterly sales. So as I said, if we're up 8%, that's a big part of it.
That's a big chunk of it. Sure. And then I believe you described what helped me to understand the kind of fluidity of the cross-sell there was that you mentioned to me that some of these services might be part of a broader package that you would be hired to do, but you would have been previously subcontracting those to somebody to do it because you didn't have that capability. And now you're essentially able to retain that. Am I understanding that right?
That's correct. Mostly, it was a competitive disadvantage, and it would be a reason why we may not have won a package in the past. So I would say, yes, there are times we had to outsource it, but it was such a competitive disadvantage for us that I think many times we did not get a package that we can now get. In addition, with some of these new services, they're now at the entry point for a customer to start using us. And I would say we've done a nice job of bringing, especially the genetic toxicology business, up online. So that was really the old BioReliance, who had a great reputation in the market.
As we've developed those assays and expanded that service, and people have done their quality audits, and we've done a little bit of work with them, they're coming back and they're expanding the amount of work they're doing with us. That's growing nicely.
So very helpful on that. As you think about, you mentioned you've added capacity. You kind of said you're not using that or using all of that capacity yet. Maybe talk about, I think you at times will talk in terms of what you believe is your total dollar of capacity in DSA. Where does that stand? Is that kind of an end state or an interim end state number, or there's still capacity expansions that are in flight that haven't been put in service yet? Talk about the status of that.
Most all of our expansions now are in service. So we're not starting up any new expansions at this point, and we've kind of reduced the CapEx. And yes, we have, I think in 2022, that business was just $165 million. We moved up to $185 million maybe last year. And I think now we have the capacity to probably move up to about $250-$260 million if we can. I think that we see a couple things changing in the market that could work in our benefit now. I think one is that could use up that capacity. One is that we have biotech funding reoccurring again, and that's helped, I think, in the last four months. Second of all, we now have a Biosecure Act that has created some anxiety in the market for some people, which is moving some things from China back into the U.S.
or other parts of the world. But I think that, again, we're a small player in a very big market, so it doesn't take a big chunk to fill us up. And third, I think that we have seen some competitors in some of the industry reduce their capacity. And so the combination of those things, I think, give us the ability to look forward and say, if we've added additional sales and marketing, if we can continue to pick up some market share, then that could work out fairly well for us.
The reductions in capacity that you mentioned, are those specific to a particular area? Like, I think I'm aware of some discovery reductions, so kind of fishing for, is it discovery versus safety assessment or particular therapeutic areas?
Well, some of the public people have reported that they're closing tox facilities. Some have reported closing discovery facilities. And then there are private companies out there that have also maybe gone out of business or reduced their capacity or reduced the headcount. We've added some capacity. We have not, we have laid off some people, but we've tried to make sure that we have not put at risk our ability to respond and to service our customers and to be all things that our customers we want to be. And it's a critical part of our strategy is to grow that DSA business. And I think the incremental margins for our growth are significant, and that's one of the things we really want to focus on.
Got it. You mentioned the sales and marketing investments that you've made. What's the status of those? Are those also complete? Do you feel like you've top-graded the sales force adequately? What kind of new customer capture or traction are you tracking with the sales force to satisfy yourself on that?
Yes, they're really. I guess there are a couple metrics that get reported that we can look at, and then there's the intangibles. So we have, one, what are the orders coming in? What are the quotes coming in? And then the intangible is what are people hearing in the market? We have a recurring customer base, and what are we hearing that they're looking at doing over the next 12-18 months? It's a little further out looking, but it's critical. And so those are the key metrics we look at. And then we look at our quality pipeline. And we can identify how many customers we are working with, how many customers that are in our space that we're not working with that we want to target. And we're fairly specific in a target with our sales approach.
We do marketing, but we are very specific in the sales approach. We have significantly added to a discovery sales team that wasn't in place a year ago. We've put all that in place by the start of this calendar year. I think that does take time to develop, but I think we're seeing some momentum. It's too early to say that that is successful, but I think we're seeing a lot of positive movement at the moment.
Got it. And so on that last point, between SA and safety assessment and discovery, not just yourselves, but across the market, discovery has been more impacted by the biotech funding downturn. Have you experienced? I'm keen on your point about putting the discovery sales force in place. Have you seen that same kind of disproportionate impact to discovery? And are you seeing that come back, i.e., your decision to invest in sales?
I do think we're starting to see some positive momentum on the discovery sales, but again, we've not seen it, we've not reported it in revenues yet, so it's too early to say that it's all working. But those are generally, it's a very fixed cost business. So if we see those type of sales recover, we're going to start seeing 80%+ of that sales dollar return on the bottom line because it is such a fixed cost business for us. So it is significant. I think we said year-over-year, the discovery segment was down 12% while the safety assessment was up. And so we'd like to reverse that.
Yeah, I find safety assessment growth of eight was, and the discovery sales, at times I can be frustrated with it, but I also can look at some of the public reported data and say, we may be doing a lot better than I expected in picking up some market share. And I do see some of the right things going forward for what we're doing. So we're going to stay committed to what we think is working currently. And right now, I don't see a need to make a change.
Got it. Okay. Let's pivot to RMS. So the NHP environment has been challenging, to say the least. I mean, funding is certainly an impact, but then the interruptions to global supply chains exacerbate that environment. So maybe talk about what you see as the current state of affairs in NHP. Let's talk about supply, and then I'll follow up with you and we'll talk about inventory levels at customers. So maybe first on supply.
Supply, I guess, and not inventory levels, supply. Well, I think now we learned in November 2022 when we woke up one morning on the 16th of November and found out that we could not import from Cambodia anymore, that Cambodian indictment took place. We made a decision we were not going to import from Cambodia. And then we found that the government also made that decision that they were not going to allow imports from Cambodia. So you realize that things can change on a dime. So to make sure we can protect ourselves and our customers, we now have to have qualified farms in multiple parts of the world and be able to adjust very quickly if need be.
We have veterinarians that are at farms and working with farms to improve their quality and monitor what they're doing so we can adjust our supply as need be. We do have more suppliers now than we've had in the past. Not all farms are the same. Not all NHPs are the same. But we're doing the best we can to manage through what's been a very tough situation as we took Cambodia out of the marketplace.
Right. And so I think most of us would have looked at that and said that the industry would have a supply constraint. It seems that kind of maybe because funding has been soft for a couple of years, that demand has dropped in such a way that now we hear from your competitors, and maybe you included, that we have plenty of NHPs now. Would you agree with that? Like supply is fixed or maybe overfixed?
Looking back over the last year, it's clear that we probably have had plenty of supply. But if you look at the USDA data or the U.S. Fish and Wildlife data, what's coming in the country, significantly less came in the country last year than the prior years. And we probably also used a lot less in the U.S. than we have in prior years as we saw a lot of studies move over to Canada or Japan or China. So I think, yes, our supply has been fine. And I believe that your reaction is what happened last year with many of our customers. They thought supply is going to be a constraint. Let's buy 25%, 30%, 50% more than we need in order to make sure we protect our future revenue stream and the safety assessment and our customers.
Then I think they got through half to three-quarters of the year, and some of our customers and not all customers are the same, but many of our customers are CROs. And some of them then found that their sales may be and their usage may be down 20%. So if you make a decision to buy 25%, 30%, 40%, 50% more, and all of a sudden your demand, your usage is down 15%, 20%, 30%, you can end up with nine months to 12 months of inventory on hand very quickly. Now, I think a lot of these people, and again, they're all different and different by each customer, what they did and what their demand is. But I think that most of them started figuring that out in the fall of last year. So we're probably six to nine months through this correction process.
For that reason, last year, everybody bought wherever they could and abandoned contracts. This year, they didn't need contracts because they had a lot of inventory. So now we're kind of coming back out of this, and we could come out of it fairly quickly because the Biosecure Act could also move work back into the country very quickly. So I think what we have taking place now is, I think in the back half of this year, we will see some demand pick up. Right now we have people saying, let's get long-term contracts back in place. This has been two years of uncertainty, and I think they like certainty in price and certainty in supply and certainty in somebody who can board for them. So I'm hopeful that we get back to more certainty in the future.
I have said openly that we would give up margins in order to improve our predictability and go back to longer-term contracts. And I think we could do a better job for our customers with that too. So that's what we will do. Whether there will be enough, I think, whether there is enough, there has been good supply. I'm not going to sit here and tell you what the supply is going to be for the next six months compared to what the market could be because the market could switch and the demand could switch very quickly. I think those people who are importers are probably looking at also and saying, we don't have a lot of demand right now. We're going to be very careful. So I think we could see that switch. And we'll see what the back half of this year looks like.
Yeah. On maybe the more immediate-term inventory levels, so appreciate your perspective on or answer on that last. You had said on the first quarter call that, or I'm sorry, your fiscal second quarter call, that a number of customers, not just one, so kind of dissuading people from thinking that it was just your one largest customer, but a number of customers had excess inventory and really didn't need to buy NHPs in the March quarter. Do you have visibility into their inventories to know how quickly they are depleting those inventories as this demand kind of tries to restart itself?
I would say we have better insight today than we did three to four months ago. Three to four months ago, maybe they didn't need to talk to us and they didn't have demand, and now that may be switching. We've significantly diversified our customer base, first of all, so we have many other customers. And I believe now that we're getting into the back half of the year and they're calling and saying, okay, we may have demands and we're working on 2025 contracts, we're getting a little bit more visibility than maybe we would have had three to six months ago when the demand wasn't there. They had plenty. Some of them didn't care to share where their inventory was. So again, we don't have good insight into all of them.
Some of them, though, have begun to share some of their, so we can start our planning in the second half of the year in 2025.
And maybe without knowing that you don't want to talk about deep details on contracts, but this point that you make about like 23 customers kind of abandoned contracts because they were desperate to find supply. And if you didn't have it, they'd go someplace else to find it. Now they find themselves oversupplied, so they don't need the contract because they don't need to buy. How does that resumption of a long-term contract work? How are you revisiting that and reestablishing that as the history kind of thrown out and you just start fresh?
I would say a lot of these are new contracts, new customers. So to that extent, they are fresh. Some people are looking at planning for the next two to five years. They want to make sure that a couple of things that may change. They want to ensure they have a consistent supply. They want to have maybe a few more that they're boarding on our site. I mean, they need a boarding facility. And that may mean we may need to build some boarding capacity for them. And if those are going to be investments, then we may be talking a multi-year contract in some cases. So again, not all customers are the same, but I think people are looking to solidify their base.
Some people try to go overseas maybe and do their own importing or looking at how other ways they can reduce price or take care of themselves. It's a tough business. You're not just importing. You got to qualify another farm. You need to have vets there. You need to work with them on their quality. You need to do a lot of testing before they get them out. You got to transport in the air. You have to transport on the ground. You have to quarantine. And it's important to have a quarantine facility, a hospital, and a tremendous veterinarian staff. Things have changed in the last three or four years in that industry. If you go into three or four years ago, when an NHP may be $3,000, if you lose 100 of them, it's $300,000.
You now lose 100 NHPs or mortality and have something wrong with them. It becomes a $3 million issue. One of the reasons we got in this, I thought this industry needed to change and was going to change. I think animal welfare; we've talked about it. We've invested a lot of money in our infrastructure and systems. I think the return on that money now is better than ever. But because I think at 25,000, the cost of a life is much greater than 3,000 numerically. So some of these investments into the water and the hospitals, surgeries, vets, infrastructure, electric, just caging have been significant. I think it's starting to pay off. I think the industry is starting to see that we have something unique.
We even now have medical records by NHP that's much like you would have in a hospital for humans where we can track their history, where they came from, and what illnesses they've had in the past. This is something I don't think the industry has seen in the past. I think we're trying to be leaders in this area, and I think our customers are starting to appreciate it.
Yeah, that's very interesting. So enough on that. Let me move over to the small animal, the rodent side, which we forget that's historically been the majority. What trends are you seeing on the small animal side? And do you think they're simply tracking with declines in study demand, or are you seeing share shifts within the small animal environment?
I don't have a real good answer for that because I don't know what's, but I can tell you that our small animal diet demand revenue was down 10% the last two quarters. I believe that the discovery and CRO sales in general have probably been down more than 10%. So it does seem to mirror maybe a downturn in the industry. This quarter, I would tell you that we appear to, we don't see a downturn right now. I don't know if that's in the early stage of anything or not, or if we're just doing a better job of selling and marketing. But right now, I would have to say it's more of a general downturn in the industry. I would expect at some point because of the new technology and people with AI and things, we could see that in the future.
But if that's what you're asking, right now it seems to be more correlated with just the downturn and the discovery in the CRO industry.
Got it. And then on the pricing side of things, I think in 2023, as the business was kind of transitioning away from NHP, you were able to take some price across the business, including in small animal. Is that holding as we move through 2024, or is the kind of softness in study demand starting to put pressure on the actual animal price?
No, we've not changed the animal price. In 2024, we had some increases, some decreases. We were probably a little bit more scientific in how we approached it, our pricing. We had more industry and market knowledge than we did in prior years. We tried to use that to be much smarter about how we priced.
The net of that, you said some up, some down is about flat on price then in 2024?
I wouldn't say flat, maybe up a point or two, but nothing significant.
Okay. Okay. All right. So that brings us to the end of our time. I'll yield the floor to the next group. Thank you, Bob, for being here.