All right. Thanks. Good afternoon, everyone. It's definitely our pleasure to have Inotiv, Beth Taylor with us today. I mean, we have Beth in the audience. I'm going to, I might pull on her to answer a couple of questions along the way. We'll get her mic'd up. She can use mine. Of course, everyone, I think, hopefully knows Bob. Just such interesting times in this industry right now. So many moving pieces from a macro and government standpoint. Before we jump into the company, I want you to just take a couple of minutes, Bob, if you don't mind, and just give us the lay of the land of what you've been up to over the last, you know, year to date, let's call it. Major themes.
Give us a quick summary of your last quarter's report, which wasn't that long ago, but for anyone who isn't as familiar or perhaps wasn't able to participate, just a couple of minutes, get us level set, and we'll jump right into Q&A.
All right. Thank you, Eric. Yeah, and thank you for inviting us. Just as a background, we're a fairly young company. We probably started this journey six or seven years ago, but we acquired 14 companies to build a full service preclinical CRO. In addition, we've then started up several other businesses within it to make sure we can be the full service suite from discovery to first in human testing, focusing mainly preclinical. Over the last two years, we've focused mainly on integrating these services in these companies. Along the way, we also bought an RMS business, which is research models. We're a large importer, breeder and boarder of non-human primates. We also provide things such as rabbits, rodents, and all diet for research animals. We're fully integrated. Our growth story, more in our margin improvement right now, is really focused mainly on the DSA business.
Our RMS business has been fairly stable. As we've outlined in a couple of prior quarters, we have been optimizing our RMS sites, really taking a lot of cost out, reducing our sites by, I think, 35%. Our software programs by 35%, while maintaining our capacity and really focusing our capital expenditures on the remaining sites that we have. Pleased with the performance we're starting to see in the RMS business. It's stabilized. We have a couple more sites that we will be taking out and we're building one, expanding and building out one more site, which will allow us to take out some costs next year on the RMS business. Seeing that to be fairly stable at the moment, our growth right now and our opportunity for margin improvement is a lot in the DSA business.
Moving forward to the last two quarters, we did report, our year ends September 30, so our fiscal Q2 we reported that I think we had 27% year over year growth in our awards for our DSA business. We saw some beginning increase in our awards really in Q1 in our discovery business, our safety business, safety assessment business then picked up quite a bit in Q2. In Q3, we continued to see that trend with another 25% year over year increase in awards. That's significant improvement for our backlog and for our sales. We also saw our conversion rate increase, and we saw our margins improve quite a bit in Q3. This is a trend we'll continue to look forward to in the future. Right now we're cautiously optimistic that, with these trends, it's hard to understand what the exact macro environment is in the market right now.
We, like many of you, are here to hear and listen to what people may be seeing in the macro environment. For the most part, our DSA business is a very small piece of a very large market. For us to pick up a little bit of market share is not necessarily noticeable to some of the others, but it's very noticeable to us and very accretive to us because we see 50 to 60% of the increase in sales go to our bottom line. It helps our margins. I'll just end with a couple of things where we focused our investments in addition to the site optimization of the RMS business. In the DSA business, the last two or three years, we focused on building out our biotherapeutics business, our genetic toxicology business, our surgical business, and I think those are some of the areas in our discovery business.
Those are some of the areas we're really actually seeing some of the growth in today.
That's fantastic. You sit at this unique intersection in the industry where you're not only a provider of services, you have the razor razor blade model to some extent, you do the product side, and on that front, you interact with a number of CROs and even pharmas and biotechs that maybe you're not doing services for at times. I'm curious, give us a sense on where you sit with the models business and what that tells you or informs you about the market overall. If maybe for context for folks who are newer to your story, paint a little bit of a picture about what you think about the models, TAM, your relative market share positioning. You have a big diet business. You have some interesting things, but you could weave that in. I'm really curious.
When you sell to others, you might have a sense on what they're doing both internally and externally with others. I'd like to get a feel from you on what you're seeing in terms of those demand dynamics.
Yes, and that's a good point, Eric. Some of our competitors are definitely some of our customers and some of our suppliers, because we also buy from them. As far as the RMS business right now, I don't know that we see a large increase in the size of the market. If we see an increase in sales or decrease in sales, it's probably more related to market share. If you go to look at the DSA business and the small animal business, it's relatively flat. Increase or decrease is probably moving market or increases in price, which would be small. The NHP market is completely different, because the NHP market's gone through so much in the last two or three years from where we could import from and where studies are being done.
If you look at some of the macro things which you're asking about, I think we see that, as a country, we are importing probably about half of what we imported over three years ago as far as NHPs.
That's in total, not just from the one country in question. Vietnam, Mauritia.
We no longer, in the U.S., import any longer from China or Cambodia. It's not because of the U.S. that's prohibiting us to do that. It's usually Cambodia or China. It's the other countries that are prohibiting that. The source of origin of NHPs has changed. In addition, I think over the last two or three years, we've probably, and it's harder to get these numbers, but we've probably seen an increase in domestic breeding as people have looked to diversify. We really don't have any great numbers there, but that's where I would guess we're seeing some increase.
Are those productive farms at this point? There were several that were invested in over the last few years, or at least announcements made, but it takes four or five years.
It takes, you know, if you think of an NHP farm, it's much like a small city. You're going to have to build a sewer system and water, ability to feed, hospitals, homes, caging, infrastructure, roads, and security. It is, we've been building all the above. Once you have that infrastructure, then you can build the houses, like building a development. We've spent the last couple of years redoing all of our water systems, the metro infrastructure, roads, transportation, and now we are increasing the boarding and breeding facilities. We ourselves are our contract breeder and breeder here in the U.S., so we're limited by our boarding capacity, but that's been growing much, probably the fastest growing part of our NHP business has been boarding and breeding for third parties. I think that'll continue to be important.
In addition, we now import from other countries and have other relationships and spent now three or four years investing in other relationships and farms. I think the other thing that we're seeing is that, you know, why, how's our U.S. getting by with half the NHPs that we did three years ago? I think you see that the other countries who have increased their importing, being Korea or Canada, China, quite a bit, even now that we see some Cambodians going into China, as China is increasing rapidly. China now is an increasing % of the preclinical market, a much larger % than it was, say, four or five years ago, and it's growing much quicker than the U.S. is growing. I think those are some dynamics we're seeing in the RMS business. I think there's still quite a bit of opportunity there.
We've focused quite a bit on our animal welfare, as I've announced in the last quarter, very, very proud of the fact we've got the exemplary rating from ALAC in our last audits this summer for both our facilities down there. I think that says volumes about how we're doing with our animal welfare and the improvements we've made to our facilities.
It sounds like one of the changes you've made over the years, among many changes, is that you've invested much more in veterinary science and higher-end professionals, sort of lead with operations.
We've grown our scientific base, our pathology team, our veterinary team, and we involve our scientists, and they're very involved in the sale process for us, more so on the DSA side. It's very important that we have that strength. I'm proud of the progress that we've made on our DSA business and the RMS business. We have a very good team, and they stay together. We've gone through some challenges in putting all this together, and then our industry's gone through some challenges. It's made us much stronger. I think when we look back a year or two from now, we're going to look back at these times and think about, if it weren't for the challenges and the downturn in the industry and some of the things that we faced, we would not have been as open to change as we are.
As a result, we've made a lot of changes, and I think we're performing at a much higher level. If we look at a lot of customer nicknames, customer complaints, on-time delivery, not even the day, what time of the day do we deliver? How long does it take to turn around a quote? How did we accurately increase the input that quote? Did we get the invoice out on time? Anything related to a customer interface we want to track. Our on-time delivery of reports, not only just the trucks. We bought our transportation and built out our transportation just so we could control our customer interface. That's been a very, very big improvement for us. A lot of those things now are starting to make a difference. It's over two or three years. Now our brand is starting to mean something.
Again, as a young company, that's very important internally and externally. We look at the on-time reporting in the DSA and we've been able to now track it for about 14 or 15 months. It took two or three years to put an assistant to track everything to the detail. We don't want to track based on when the scientists want to deliver. We want to track it based on when the C-suite expects that to be done, and the venture capitalists want to see that done. That's the time that really matters. The scientists may say we changed scientists. Venture capital, their company's still going to run out of money if we don't deliver on time. We need to track to that expectation, not anything else. That is a standard in the industry that we need to be a leader on.
We have a lot of biotech, small and mid-sized companies, and that's really critical to them.
I don't want to put words in your mouth, but it doesn't sound based on what you're seeing, feeling, hearing in diets or models that there's a sustained market recovery that's clearly happening. What you're getting, the benefits you're getting, the higher booked bills, the higher growth rates, it's because of self-help, self-improvement at some level.
I think if there's something going on out there, there are other people who are growing their small animal business, their dive business. I can't speak on behalf of them. I'm just saying we're not seeing a macro growth in that area right now. Nor if you look at our roll forwards and where we're expecting to see our sales and margin improvements, other than some pricing improvements, you don't see us saying we're going to take great market share to grow that business.
Yeah.
Could we? Yeah, I think we have some opportunities with our delivery, but it's not, and I hope we do, but it's not something that we put forth in our go-forward model. Hopefully it'll happen, but yeah, I don't think it would be, it's not going to be a 20% opportunity growth. I do think we have that kind of opportunity growth in the DSA side.
You mentioned the incremental margin in DSA, and of course discovery is at the high end of, I mean, it's much better than that.
Yeah, probably 70 to 80%.
is still a relatively small business. You've made a number of investments, enhanced and opened some new capabilities and labs over the last few years. Talk to us about what you're seeing in terms of the greatest incremental demand, and is it more because you built it, you built it hopefully right, it sounds like you have, and now clients are coming, or do you see any green shoots at all in the discovery market in general? Has there, is it very much, again, being very specific to that business? Is it because you made the investment, now you're here, now you can do it, clients are beginning to trust you, to listen to you coming into those offerings, but again, not because of a market recovery there so much?
Yes, our discovery, a lot of the discovery is centered on oncology in the marketplace. We are not focused on oncology as much. We'll probably play into a different market, maybe more head, heart, gut, inflammation, neuro, where those things may right now be seeing a little bit of uptick from the GLP-1 research. I think we're seeing some benefits from that. I think that that's, again, our brand is important. I think that people are looking to us for that kind of input. We have some very good science that is help leading that way. We want to be a partner with our, and I know a lot of people say this, but that's what small and, or, and even sometimes large pharma is now looking for is they've outsourced a lot of their things.
How can we look to you to help us develop and just develop this drug or this molecule and not just say we need a vivarium room and we need somebody to lead slides and we need a mass spec, but how do we now sell a comprehensive suite of development services to help develop something other than just outsource a machine need or a human need? That's where we're seeing our strength is in the development process.
That's great. I may have even missed news today because I know we're getting close to a conversation on NIH budgets and there's a lot of things going on in D.C. Give us your take on what you're seeing on the regulatory and political landscape right now. Any recent twists or turns since earnings? I mean, it feels like there's a new headline every day, but any of them actually meaningful?
I think we've seen stocks, our stocks move with headlines. I would think that sometimes the words move things more than, and we see more words than actions. I think actions take a lot longer than the words. The headline that we're going to reduce the use of animals, that's a great headline. Our stock moved very quickly that day, over about a 30-minute period. Truth is, that's a 10 to 15-year journey, at best. In CROs, all of them, and many people in our company have been working on NAMs for 20 years. We've developed many of them, and they take 5, 10, 15 years to develop and be accepted. It is a journey. It's not something because somebody said a headline that it's going to change. I think that's one thing, it's aspirational. It's very important.
If there were ways to reduce the use of animals, we'd be doing it. So would others. If it was there and safe. I think, again, probably a lot of headlines, and I think people will focus on it, but I don't think it's changing overnight. Some of the NIH funding, I do think it has impacted universities and it's impacted some of the research. I know we have contracts. Most of them have been renewed. There are one or two that have not. They're fairly small. I don't think they'll be material to us.
Was that government or was that academic derivative via less funding?
We have some government contracts, and some of them got renewed, but on a delayed basis. Instead of maybe in the spring, it came through in the summer. I think that things are still going forward. I think there are some changes or some of those things are still trying to be figured out. When there's change, though, as Eric, there's always opportunity. I think that, for me, when you hear that change, we got to think about how things are going to be different. How are we going to be able to take advantage of that? I think that's what we'll look for.
If that's a client, you better take it.
It's my daughter. It's her birthday, I guess. Reminding me it's her birthday. I forgot to say happy birthday to her. Thank you, Eric. I appreciate that.
I told someone earlier, I have seven family members with July and August birthdays, and I get a little confused at times.
I'll get that when we get out of here.
I think it maybe is premature to talk about capacity, but you have, as you mentioned, there were what, 14 acquisitions, I think was the number, a number of acquisitions, a number of site closures, moving pieces, investments here, growth shift, a lot of change in the last handful of years. I am curious if you could speak maybe to your major businesses or if you want to just do the enterprise overall. Talk a little bit about capacity and let's suspend disbelief and say the market does recover and start to actually come back more fully in 2026 or 2027. How long can you grow, at what pace can you grow before you would actually need to potentially become?
I don't know that we're going to necessarily make the statement we need the market growth for us to increase our sales.
You specifically, yes.
Yeah, I think that we are, again, a small player. Our brand is, I think, developing and we've seen the last two quarters very positive. Now, can that continue? I can't, I'm not going to talk about what going forward. Obviously, I know how the quarter's going, but I'm not going to speak about that. I think that's what we're looking for. We have the ability, I think, to see if we did last quarter. I think we were on a run rate probably of, on the DSA business, Beth, what, $190 million? If we were to take that up another 20% to $240 million, 20, 30%, we have plenty of capacity there.
We're just now getting our brick and mortar situated, and we're getting up, becoming a lot more efficient, and we can make, I think, a lot of minor tweaks to our facilities yet to get another 10, 20% out of there. I think we're in pretty good shape for brick and mortar. There are some areas that we're out of, that we're pressing on our capacity limits, and larger animal safety assessments, one of them. I've looked at that and we've talked about it for a year or two because we knew we were bumping up against it at some point. I think the industry doesn't need that capacity right now, although we may, I'm not sure the industry does, and it takes two or three years to build that out. Personally, I think that there'll be other opportunities in the next couple of years.
I think we can do some minor things to improve our capacity a little bit before we start spending big dollars. We need to, we have invested quite a bit. We need to mine the dollars that we've invested before we start investing more. It's a little bit like a farmer. We've sowed the seeds. We need to see, we need to grow and harvest. Once we do that, then we can evaluate what do we want to add to that capacity, how we want to grow.
Let me jump off that and put you in a tough spot. You did file for a $350 million shelf recently. Maybe any quick words on that, what you've done, what you're thinking with that shelf registration?
We've had that. We just extended what that was on there.
You extended, yeah. Was it not increased or am I incorrect? It was the same. Okay, it's still 350.
We wanted to keep that up there, keep our options open. I do believe in our last earnings call, I announced that we were looking to start addressing our financing. We have a term debt that expires November of 2026 and converts that expire in October of 2027. We think it's important to start addressing that balance sheet. We've been through a lot of changes. We know where we are and we can see that we know where the cash flow is. We'd like to address the balance sheet. I think I said that on the call. We hope to do that between now and the end of the fiscal year or the end of the calendar year. It's something that I think I also said that we'd be hiring a third party to help us facilitate that.
We're in the process of that at the moment and we're looking forward to getting that done next.
Perfect. If there are any questions from the audience, feel free to jump in. I certainly could have a few more here, but a small room. Anybody can raise their hand. I can hear you. Anyone? All right, let's jump on to the next one. This is a real bummer to have to ask about because you had so much momentum in bookings and it felt like the company's really starting to make some nice strides with some of the investments. Then you get hit by the criminal attack, the cyberattack recently.
We did. We filed an 8-K, I think a few weeks ago.
Happens to so many companies, wouldn't be the first time in this industry, but tell us what's going on there and how you're addressing it.
It's the first time we've had that serious of a cyberattack and we've been through it with some of our vendors as our vendors have been hit. We have backup programs, how we address it, how we go to paper, and how we investigate and bring it back. That's what we've done. I don't have any more news to break today. I think we said that we're not aware of a material event. We have been operating, and it's still something that's being investigated. I think that it was still something we're learning from. I think I need to leave it at that, but I think it's one more of those things, Eric, that as I pointed to, we've gone through a lot in the last three years in a downturn of what you need to do to harden your systems and improve.
This is just one more of those events where we come out much stronger. Fortunately, we've been able to remain operational.
To what extent does that change the nature of the dialogue in marketing in the quarter or business development RFPs that may be underway?
It takes a lot of customer communication because, you know, you file that and a lot of people have questions. We have to respect those questions and address them. It takes time, so we do that. It's not something, you know, you don't want to divert your time from all the other things that you're doing, but you have to give it all the attention that it deserves. That's what we're doing. I'm once again very pleased with the way the organization's responded.
Notwithstanding that event, if you think about the last few quarters, maybe let's say the last year, has the nature of the timing of when awards get done, has that, have you noticed any shift, any change? I'll preface that by saying in the clinical side of the world, clinical CRO, I'm hearing almost across the board ubiquitously that more so than ever, clients are pushing awards to the last week or the last day of the quarter. Early stage is different. I mean, these are things that can be one and done inside of a quarter. I don't know if you have those same dynamics, but I am curious.
Yes, I think last quarter we saw our conversion rate, Beth, what, 35%? That was really our highest conversion rate in a while. You go back three or four years ago, we were in the 20s, mid to high 20s. I think that's another indication that people are waiting longer and then we're turning it faster. You also see that our discovery business is growing. Our discovery may come in and go out within 60 to 90 days, whereas a safety assessment may still come in and go out within three to 18 months.
Yeah, right.
We're not getting things now two years ahead of time. I think at one point back in the 1920s, you booked things out 18, 22 years ahead of time. People were reserving space. What we saw was a lot of cancellations. We get asked about cancellations all the time. Cancellations are just part of the business. It's not.
Anything abnormal though?
No, I don't. There's a new normal, just abnormal.
Abnormal wouldn't be the new normal.
I think again, if you look at cancellations and you let your organization focus on that, it becomes an excuse. I think we just got to be, it's a new normal. It's not an excuse. Let's expect it. I'm not being surprised by it. I think that's got to be our approach.
Any last comments? We have a minute 30. You've hit the main ones that I wanted to get through. If anyone in the audience wants to jump in, and if not, you can take 10 seconds or 90 seconds and we're moving right up here.
Appreciate the questions and the opportunity to present and be here at the Bayard Conference. You know, to the extent that some of our people listen to these very much, really appreciate the way that they have responded, not only over the last two years, but in the last two or three weeks. It's fantastic to see them come together, become closer. I feel that, really appreciate the support of our suppliers and our customers and being patient as we get through this. I know many of them listen to these things. Really appreciate what they're doing. Again, thank you for your time.
Yeah, wish you the best. Thanks for being here. Everyone, please join me in thanking both Beth and next time, Beth, I'm going to force you to come up on stage with us. I definitely want to hear what you have to say. Bob, thanks again. That was great.
Thanks, Eric.
Thank you.