Okay.
Okay.
Okay. All right. Hi. Good afternoon. I'm Dave Windley with Jefferies Healthcare Equity Research, CRO coverage. Thanks so much for attending or listening to our 2025 Healthcare Conference here in New York. Our next presenting company is Inotiv. The NOTV is the ticker, and the company's CEO is here with us, Bob Leasure, Beth Taylor here in front of me in the audience. The company's CFO is also along with. Bob, we just said this not to put you on the spot, but you've done a lot to stabilize the business. You had a better bookings quarter in the first quarter, and I thought maybe I'd just let you recap that real quickly as we get started.
Sure. Thank you, Dave. Yes, we did our last release in the first week of May. I thought we indicated at the time that the back half of that quarter ended March 30 seemed to pick up a little momentum. As a result, we were close to, I think, a 1-to-1 book- to- bill, and we had, I thought, some momentum going into this quarter. I indicated in May that I thought that April and beginning of May had started this quarter off fairly strong. We have come through a couple of challenging years. I will grant we're coming off a couple of quarters last year that were pretty weak. Exceeding those quarters, hopefully, is something that we can do. I think I indicated that I thought the back half of our year would exceed the back half of last year.
I think we've gone through a lot. I think we've got a lot behind us. I think we're much more integrated, much better value today for our customers than before. I'm pleased with the momentum and the way it's coming together this year.
Yeah. So let's dig in on that a little bit. Bookings in particular in your DSA segment fared well, certainly better than has been the trend, not only for you, but really for your peers as well. That's really despite some policy, some D.C. noise, et cetera, that could have had impact on the business. Perhaps drill in a little bit and tell us parts, say, segments, business lines, client cohorts that were more responsible for the strength in the bookings.
Yes. You referred a little bit to the, I think you called it noise out of Washington. Yes, we've heard a lot of things come out of Washington, whether tariffs or NHP-related, FDA-related. I don't know that we've really seen a change in our business because of some of those comments that have come out of there. I think we've seen more of an impact in the stock market at times than the comments that we have in our business. I don't know that our clients refer to it as much, maybe as some of our investors may. That, I think, hopefully addresses some of that. What was the back half of the question?
Just so within the strength in bookings, were there particular business lines or client sectors, client cohorts that are the drivers?
Yes. I think I alluded to in December and again in May or in January and May that we were looking for, hopefully, to lead our recovery this year to be the Discovery Translational Sciences business. Then we have our Safety Assessment business, and we have our Research Models, of course, and diet. We were hopeful that this year, after seeing a couple of year-over-year declines in discovery, that this should be a much better year for discovery. I have talked about this a little bit for the last 18 months, but in December and January of 2024, basically about 18 months ago, we changed the way we go to market with discovery, much more of a scientific and a business-to-business approach. We built a new sales team, and we have been adding to that sales team.
I was hopeful we'd start to see some of the benefits of that this year. I believe the first quarter awards year-over-year were up, and the second quarter were a little bit, I think through the first six months, we were up a little bit over the first six months of last year. We're really hoping to see that trend continue and then go into revenue. I think that's where we have some low-lying opportunities in terms of our margin dollars because that's a very high fixed cost business. A lot of those increases hopefully will help our margin dollars. I also talked about, Dave, last quarter, the need for us to improve our DSA margins. There were a couple of things I think we indicated that would lead towards that.
One is using some of the capacity that is available, our fixed cost capacity and some of the scalability that we have as we see some growth in the areas such as the medical device business, biotherapeutics, genetic toxicology, and the discovery businesses, which are ones we invested in a couple of years ago and have been taking to market. The other opportunity I thought could be somewhat in pricing. I think the pricing a year ago at this time was probably some of the weakest, and I think at this point is stronger than it was. I think the market's better than it was a year ago. We'll look to, and then the third thing, I think we had some higher cost research models coming through that quarter, last quarter.
This quarter, I also hope we will be able to see some improvement beginning to take place in the margins of the DSA business.
You went to discovery first. We were with you last week at your investor meeting in Rockville. The Gene Tox, I'm just kind of interested in laying out the different pieces. The Gene Tox and biotherapeutics businesses, for my clarity, are in safety assessment or discovery?
Safety assessment.
Safety assessment. Then the things that are classified in your discovery business, maybe give me the short list or the top two or three, and where are you seeing client uptake there?
Safety pharmacology discovery is where we're seeing some improvement. We have really redesigned to sell much more of a scientific approach where we have some scientists that are uniquely respected in the industry. People come for us for the scientists. I referred to that before as a little bit, sometimes maybe if you were to have a, if you need brain surgery, you're going to look for the best brain surgeon. You're going to go to the hospital they recommend and stay at the hospital they recommend, and you may stay there several nights and get the work done. We try to lead with our science and some of our scientists and then sell from that scientific strength. I think that's worked well for us.
Are the relative contributions, so if I think about what I might call core safety assessment within DSA, core safety assessment, the new businesses that you've added, biotherapeutics, Gene Tox, not sure if there's any other ones there, and then discovery, are they a third, a third, a third? What's the relative size of this business?
Discovery is probably closer to 25% of our DSA business. Then the Gene Tox and the biotherapeutics, the small molecule bioanalytical safety assessment, DART, we consider that to be in our safety assessment business. That DART, reproductive toxicology.
Right. Okay. Through you talked about that we got the book- to- bill. Your most recent report would have been through March. Your report was in May. Through that time, you were seeing, I'm just basically asking the sustainability of the trend. You were seeing that stronger quoting activity continue into the.
I said, yeah, I saw it continuing in the beginning of May. We do not know how the quarter is going to end up. I guess we tend to look at the trailing 12 instead of month to month or quarter- to- quarter. If it has picked up in March and April and May, maybe we have two or three months of a trend of it picking up. I do not know that that is enough to say that the trend is sustainable. I do believe that overall, I have reiterated this many times, we are a very small piece of a very large pie. For us to pick up a little bit of market share is very meaningful for us.
I think that if we do a great job with the increased sales force that we have of bringing in a few new customers and doing a great job of delivering so we have great repeat customers, increasing the type of work that they bring and do for us, that they have a great experience with one facility, maybe they're going to use us for multiple services, I think we have the opportunity to grow. That is very, very dependent on creating a great client experience. That is something we have to track, and we're trying to make sure that it is very important to us that we maintain that experience and see if we can't grow that reoccurring customer base. That is the other trend we're looking at, not churning customers, but are we really winning a great reoccurring customer base?
Got it. Okay. On that front, how are you tracking? I'm guessing you are. How has the repeat business percentage trended over the last, say, year or so?
I think we're much better today than we were a year ago. We track the on-time delivery and the customer complaints and customer satisfaction. Those are key metrics for us, I think, in growing our business. We want to be the first call, not the second call. We don't want to really necessarily have to compete on price. The key is how can we be that first call? I think it's about delivering that integrated science and delivering it on time and with some speed. I think that our systems, and it's taken us two or three years to build these systems, the HR systems, project management systems, communication systems, and the culture to start getting that right. The better we are there, then I think the more that we control our own destiny and we're that first call.
That's really what we're trying to do. It'd be great to have some tailwinds and have the market pick up. Maybe that's happening a little bit. Maybe it's not. I don't think we have enough data points for us to make that statement.
Got it. So correct me if I'm wrong. It seems like you make these investments in customer experience. The first thing you might see is better repeat business. And along with that, you'd see an improving win rate. I mean, can you put metrics on either one of those?
We can put metrics on both of those. We also can look at how many sites and how many services that client may be buying. If he's coming initially to us for Gene Tox, is he moving into other services as he has a positive experience with one facility or one site? Is he expanding that across other places saying, "I had a good site, good experience. We can grow." I think we may have even had a chart about that on analyst day about the growing clients using multiple sites.
Got it. Okay. From a client cohort standpoint, so generally think about, given the size of the company and in safety assessment and thinking about some of your commentary from probably as much as two or three years ago that your focus was primarily smaller, maybe mid-biotech, small and mid-biotech. But in this most recent quarter, you highlighted that some large pharma business was a call-out positive. I think you kind of educated me on there are certain parts of your business where you have regularly done large pharma work, but just maybe explain how large pharma is becoming more important to the business.
Yeah. Put it in some perspective. Large pharma, small, middle-sized pharma is an important customer to us, and as are the biotechs. When you look at large pharma, though, that's probably less than 5% of our DSA sales. It is an RMS customer, but less than 5% of our DSA sales, where we have seen some increase with the large pharma. They come to us specifically for genetic toxicology or for some of the discovery services that we may have that are unique, probably coming to us more for science than they are for just using a, "Can you read a slide or do you have a vivarium room available?" Where we can separate ourselves a little bit and some of the skill sets, usually with science, then we have seen large pharma come into our business model.
I think that's something that we're not afraid of specifically with the discovery business and the Gene Tox business.
Okay. I was going to follow up with, is that an area given, say, more stringent audit and kind of administrative expectations or hurdles that kind of go along with serving big pharma, the competition you're going to see from the bigger players in big pharma, payment terms, and all the things that are a little bit less attractive in big pharma, is that an area of pursuit or is it more, "We'll take it if it comes"?
I would say area of pursuit. We talk and we communicate. And it's not undesirable business, but I would say we're not seeking out a large they could overwhelm us. Our discovery business is not that big, and we want to make sure we're delivering a great experience for all those clients. We really can't be overwhelmed by one client wanting to dominate one site and dominating the science. We have to make sure that we have a very responsive culture to all clients. Sometimes we get a little concerned if any one client thinks they're going to dominate our business or our science. That being said, obviously, everybody likes revenue and sales, and we're not going to turn it away.
Sure. I think if I understood your answer from earlier about discovery versus safety assessment, it's 25-75 in terms of the mix of the segment. What kind of cross-sell, agnostic to client base? I'm not talking specifically large pharma, but just thinking about the segment in general, how much cross-selling do you get between safety assessment and discovery? Do you see either cross-sell backward or pull through from discovery to safety assessment?
We're starting to see more of that. As I said, looking at the multiple sites and multiple services and providing that experience. That translational science is important. What we learn in the discovery stage can be used in the safety assessment stage or vice versa. I think we're starting to see more of that. I think that creates maybe a stickier relationship for us where they're coming to us through the science and the integration of the science and the interpretation of the data, not just for delivering data itself.
Got it. Okay. Let's transition a little bit to RMS. Fiscal 2Q had a solid margin improvement. Do you think that's a trajectory that can continue? We spent a little bit of time at the investor day talking about the remaining cost outs in that business. Maybe walk us through that.
I think that was a bright spot in that quarter. The margins are starting to come back and normalize, I believe, where they should be. I think we have a few points we can gain there as we have referred to additional $6 million-$8 million of cost to take out of that segment of the business. I think we also have some new capacity coming on board to increase our quality management services, which should be fairly good margins to us. I think there is some room for improvement, but it is good to see us get back to the mid-20s. Hopefully, we can take it a little bit up from there. We kind of gave a longer-term goal where we thought we would be.
You'll notice in those goal numbers, other than the cost coming out and maybe small growth, we didn't identify that we were going to look for a lot of growth in those areas. I should point out that that business model that we outlined also didn't show a lot of NHP growth. The NHP volume right now, compared to where it was two or three years ago, two years ago, three years ago, as a country, we would import 30,000 a year of NHPs. Now we import, as a country, about 16,000 a year. Obviously, the market is much smaller. I think we've maintained our market share. I do think that I don't see the market returning back to 30,000. I don't think they're available to bring that kind of NHPs back into this market right now.
We do not project a strong recovery or any recovery really coming back from the importation of additional NHPs into the market.
Okay. So that speaks to NHP volume. What about NHP pricing at this point? Is that stable or are we still lapping higher prices?
I think for the last 12 months, it's remained a lot more stable. I think last year at this time, we had a lot of higher cost NHPs that were going through the system. By the end of the year, the pricing stabilized and came down. The price that our costs, I should say, and the price that we're selling for has maybe stayed within a 10% range for the last 12 months. We had a little bit of margin challenges where we had the higher price cost of NHPs coming through while the price had already come down. I think now we're back in a normal range. It would be nice to see it stay in this range for a while. I think that fluctuation frustrates the industry. It's tough for us, tough for a lot of people.
Hopefully, we're more and more in a stable environment. As I've learned over the last three or four years, that environment can change. That's why we've had to diversify our customer base, our supply base, the countries, and why we've increased our quality management services and third-party boarding and breeding to reduce our reliance on the importations of NHPs and the price change.
A couple of tangents on this. One, I guess, tariffs. To what extent are tariffs impacting the business? I think predominantly it's an NHP impact, if any.
Really, if we see a tariff, it's going to be in the NHP industry. It's on the cost of the product, not the service. People need to remember that. I think that's, so there are a lot of services added in the NHP business before we sell it. It's not on the sale price. It's on the cost of the product. We have talked with our customers, and we've talked with our suppliers to mitigate these potential cost increases. We do have long-term contracts. We view this as a bit of an unusual item. We treat it more like a surcharge, if you will. If you look at the overall cost of that tariff compared to the study, it's probably relatively small, maybe less than 1% of a study.
If NHPs can be used in a study, there's a lot of revenue coming from that NHP. I don't think it's we may be adding a point or less to the overall cost of a study, if you will, from that tariff. It's not as a big issue as I think some people have made it out to be. Our customers and suppliers are working with this, and we've been able to try to mitigate some of that.
On the mitigation strategies, I think you really have a, I mean, your quality management services are a strategy that really predates the threat of tariffs. But they could serve as a mitigant to tariffs, yes?
Very much so. I think it also, when we talk about quality management, some of these are third-party services. Most of what people are looking to is reduce the risk. The more that they either have their NHPs domestically that they can count on that they need, or they begin boarding and breeding domestically, they view that they are reducing their risk. That is what we are seeing, good growth. Now, it is a capital investment to create the facilities and have the, we have created now the infrastructure, the electric, the water. It is like developing a community. You have to have all those things in place before you build your house. The last three years, we have built up that infrastructure. We have the ability now to build the houses, if you will. We have started building those houses. As we can build those, we have been increasing that revenue.
Some of that is done for and a lot of it's done for third parties. Sometimes we'll allow the third party to actually build that house. Some capital we invested, some of this capital that third parties will invest. I think it's a business model that will take time to develop. I think it's a safer way for large pharma to mitigate risk and for CROs to mitigate risk.
I had a follow-up question that slipped my mind. You are building or you presented last week a bridge, I'll call it, of EBITDA from your recent run rate up to kind of a first landing spot of about $70 million and a second landing spot of about $100 million of Adjusted EBITDA with some relatively high incremental margins on the revenue that you would hope to add from, say, around $500 million to up to $600 million. I guess let's take that in two steps. First of all, how visible do you see or what parts of that revenue growth do you see as visible to get beyond your current run rate? Talk about revenue first, revenue visibility first.
One of the reasons why we did not get a timeframe we were going to do that, do I feel comfortable that we could do that work and that we have the facilities right now to do that work and the talent? I think the foundation is in place. How quickly can that happen? I think it is two things. One, continue to delight our customers so that we can grow our existing customer base. And two, do we pick up any tailwinds? At one point, when we had tailwinds, we saw that we could grow 30% a year back in 2021 and 2022. That is obviously not the timeframe we are in right now. We are talking about trying to get back to a book- to- bill of 1- to-1 .
We'd have to start seeing book- to- bills of 1- to-1 , 1.1- or 1.2- to-1 , I think, to be able to start seeing some of that growth. That being said, again, we have seen some of the areas that I pointed out earlier. We have seen some opportunities to grow in those areas. We'll see how this quarter goes and what we can report in August, see if we can continue to make that kind of momentum that we saw last quarter and take advantage of some of the client feedback that we're getting.
Got it. Okay. If we presume over some period of time the revenue comes, the incremental margins that you're looking at in that presentation represent contribution after variable or I guess.
Yes. That's why the contributions look, so we have a very obviously high fixed cost structure and a very regulated business, and with the quality and regulatory nature of our business. The contributions we're looking at are the variable contributions. Variable contributions, for example, in our bioanalytical space, our Gene Tox space, which you saw in Rockville, and in Discovery, those variable contributions are much higher than you may see in a Safety Assessment where the variable cost might be a little higher.
Okay. Have you made, is there a cushion essentially in those assumptions for, since we're talking about kind of an undefined period of time, labor inflation or, I don't know, project overruns or whatever that, or does the execution kind of have to be perfect to get that level of incremental margin?
I don't know. I don't think perfect is where we need to go. We did anticipate some additional increase in cost in that roll forward, I believe, and specifically in labor. No, back three years ago, the DSA business was running at 35% gross margins. Right now, our margins are almost, in last quarter, we were 10-12 percentage points below that in the DSA business. We're also seeing the RMS margins recover. I do think that we've demonstrated historically we could get back there. We did build some facilities out, added to the fixed cost structure. As we can grow and take advantage of that fixed cost structure, I think we can bring that back up in the 35%-40% range. I think we have that kind of opportunity.
We were not that aggressive in putting those kind of 35%-40% margins in that go-forward goal. I think those opportunities probably exist. If we had a little tailwind in this industry, I think the barrier to entry has really probably gone up quite a bit between the regulatory and the compliance and some of the issues that we've dealt with regularly. I think that we have less capacity coming on the market while over the last three or four years, we have less some people taking capacity out of the market. Some of the small players are not expanding. I think a little bit of recovery will go a long way to creating some tailwinds and helping a little probably a little bit of margin improvement also.
Got it. And then as a last one, I noticed there was a headline about closure of the SEC investigation with no enforcement action. I do not know if there is any color you can add to that. I guess the practical question I have is, does that cut off a tail of, say, legal expense that you have been incurring that frees up a little cash flow?
Having all those issues behind us always helps. I do not know that we had had an inquiry from the SEC in quite a while. As a matter of fact, except for when we filed the AK, it is probably not on top of my mind. It was really nice to get that letter and one more validation that somebody has looked at it and does not have an issue. It is like anytime we get audited, these are bittersweet. They have to come in. We get audited frequently by a lot of organizations. I would tell you, it is great to have the audit because it is great to have a clean bill of health when they are done. As a CEO, that is just an extra level of comfort. It is kind of a bittersweet thing. Yeah, it is bitter to go through it.
It's nice when you get the letter and the verifying that your policies and procedures are in place. As a CEO, I think that's pretty important. It's just a little painful going through it. I can't say there's any joy going through it. It's nice to see the other side of it.
I'll finish with a question about capital structure. We talked last week at your investor day about your efforts to be really transparent with your lenders, have them involved on a regular basis. You do have some maturities coming up in 2026. Maybe talk about the current dialogue and relationship with your lenders.
I will say that I've been dealing with lenders for 30 or 40 years. I think we've got a very good group of lenders that we have done a very good job of communicating with. I've said this before. We set up virtual meetings monthly. They're welcome to attend. We want them to have all the updates. We try to see them in person two, three times a year. They're a very knowledgeable group. I'm very thankful for that. We've talked to them regularly. We're all aware when the maturity dates are coming up. I've used the word that we want to be opportunistic in fixing our balance sheet.
Today, I think this probably will be one of our top, one of my top focuses in the next six months is if we can start to find ways to improve our balance sheet and restructure some of those financings. I think our operations, we're in good shape. Compliance, we're in excellent shape. And investments, and I think our team is in good shape. I think the market's right in saying, what are you going to do about it? I think they're right in pointing out that it should be and it will be one of our top priorities for the next six months. One thing at a time, and we'll address that. I don't think we've got 18 months with the senior and still, I think, 30 months before the converts mature. I think we'll find a solution.
I think we're being proactive, and it's not time to panic about that.
Okay. I think we're at time. Thank you, Bob, for attending and giving us your thoughts. And to the audience for listening in, good luck with the rest of the conference. Thank you.