Charles River Laboratories International Inc (CRL) 2002 Q3 法說會逐字稿

Good morning, welcome, ladies and gentlemen to the Charles River Laboratories third quarter conference call.

At this time I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the company we will open up the conference for questions and answers after the presentation.

I will now turn the conference over to Susan Hardy, Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning and welcome to Charles River Laboratories third quarter conference call conference call and webcast.

This morning Jim Foster, Chairman, President and Chief Executive Officer and Tom Ackerman, Senior Vice President and Chief Financial Officer will comment on our third quarter results.

In our planned remarks today we will review our business performance and financial results for the third quarter and provide general guidance on future performance.

Following these remarks we will respond to questions.

I hope you had an opportunity to view the earnings release.

If you don't have access to a copy of the release, you can find it on the Investor Relations section on our Web site under news release.

Third quarter statements for Charles River Laboratories International, Inc. will be filed with the SEC on form 10Q within a few days.

A taped replay of this call will be available beginning at 10:30 am today and can be accessed by calling 800-428-6051 and entering the numbers 262370.

The webcast will be archived on our Web site and available until November 6.

Please note that this call and webcast are the property of the company and any redistribution, retransmission or rebroadcast without the prior written consent of the company is strictly prohibited.

Finally, the Safe Harbor.

This presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may be identified by the use of words such as anticipate, believe, expect, estimate, plan and project and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters.

These are based on management's current expectations and involve a number of risks and uncertainties that could cause actual results to differ materially from those stated or implied by the forward-looking statements.

The company does not undertake any duty to update forward-looking statements which speak of the date of this document.

Those risks and uncertainties include but not limited to acquisition integration risks, special interest groups, contaminations, industry trends,new displacement technologies, outsourcing trends, USDA and FDA regulations, changes in law, continued availability of products and supplies, loss of key personnel, interest rate and foreign currency exchange rate fluctuations and changes in generally accepted accounting principles.

A full description of these risks, uncertainties and other matters can be found in the risk factors found in the registration statement on form S 3 filed on April 9, 2002 with the Securities and Exchange Commission.

Please note that the content of this call and webcast contains time sensitive information, and therefore remains accurate as of October 30, 2002.

Now I'd like to introduce Jim Foster.

Thank you, Susan.

Good morning.

Thank you all for joining us for our third quarter conference call.

I would first like to briefly review the highlights of our third quarter.

We delivered another quarter of substantial growth in sales, growth, and operating margin, earnings per share and cash flow.

Net sales gained more than 14%.

The operating margin increased by 360 basis points to 23%.

At 39 cents, our third quarter EPS was up 50% over the prior year.

Free cash flow grew to $33 million in the third quarter and 72 million year to date.

We met or exceeded our key strategic sales growth and profitability targets for the third quarter and the first nine months.

We remain upbeat about the sales and earnings outlook for the fourth quarter after 2003.

We believe the trends in biotech R&D spending and particular outsourcing within our market segments remains strong.

Finally we offer our assurances that our accounting is conservative, our controls extensive and that our numbers fairly and accurately represent our business performance.

Let's now look at the segments of our business and how they performed.

First our historical core business, the research model segment had another a strong quarter.

We reported to you over the past two years on good quarters in our core business, all of them above expectations.

We've experienced three consecutive years of double-digit growth in North America in this segment.

Third quarter of 2002 is another terrific one.

Our sales and research models increased 12% over last year third quarter and nearly 15% in North America.

We continued to see growth in our special disease models such as diabetes rats and immuno-deficient mice, and in our standard toxicology models as well.

We experienced strong demand across the board and market share gains in North America, continued operating margin improvement in Europe, and solid performance in Japan.

With respect to Japan, I should point out that our competitor's animal health problem has been resolved.

While we saw stronger growth in the first nine months of the year as we took market hare from this competitor, we cannot revenues in Japan to be flat in the fourth quarter.

In addition our large animal model business had a strong nine months due to timing of customer orders.

Since there is a finite supply of animals, we expect the fourth quarter to be impacted by earlier shipments.

While pricing and product mix contributed to segment's revenue growth across the board, pure unit growth especially North America was again a primary driver of the segment's strong performance.

In order to accommodate the significant increase in unit sales growth in the Research Models business, we have for the first time in a decade added production space in three North American locations, Massachusetts, California and in Montreal and Canada.

As we grow, we are continuing to focus on biosecurity, continuously strengthening procedures to insure that maintain our statutory as the highest quality producer of specialty Research Models.

In addition to maintaining the highest levels of biosecurity we continue focus on the welfare of the animals in our care.

It's extremely important to us to set the world wide standards for animal welfare and enrichment.

To insure we focus on animal welfare daily we have added a new position to our research group, Director of Animal Welfare and Enrichment.

Dr. Marilyn Brown, an international expert in the field of animal welfare joined us earlier in the year to focus on these issues.

When sales exceed expectations in research model segment, much of the incremental revenue drops straight through to the operating income line.

This was true in the third quarter when our operating income increased nearly 40% over the prior year.

Essentially, all of this growth is organic.

Our operating margin in the research model segment improved by more than 600 basis points over last year to 32.8%, and this business continued to generate excellent cash flows for us.

Now let's turn to our Biomedical Products and services segment where we provide preclinical discovery and development services on an outsource basis, principally for our pharmaceutical and biotech clients.

We have built a broad portfolio of services that allows us to provide our customers with the full range of government mandated testing services to identify drugs safe to move into the clinic to be tested on people.

Our reported sales growth for the third quarter was up 16% over the prior year.

One of the largest contributors to the growth rate was our Transgenic service business where we work alongside researchers to develop new targets, pathways and new drugs.

Our new 7 ,000 square foot state-of-the-art facility is rapidly filling to accommodate greater than 50% revenue growth year to date.

We continue to add numerous new customers evidencing our continued penetration to our biopharmaceutical client base.

The near and long-term opportunities for this business is truly outstanding.

We saw also strong growth in most of our development services businesses, particularly drug safety assessment and biosafety testing for companies producing drugs for human proteins.

BioLabs, our Irish-based human and animal sciences company which we acquired in June of this year is performing well and in line with expectations.

Because our development services businesses have grown so quickly, we recently promoted Dr. Nancy Gillett to Corporate Vice President drug discovery and development.

Dr. Gillett is a world renown veterinary pathologist who has been the Senior Vice President and general manager of our Sierra biomedical division since 1999.

She knows this business, particularly outsource toxicology and pathology services, from the inside having been a customer when she was at Genentech.

In her new roles, Dr. Gillett has responsibility for all six divisions comprising our drug discovery organization.

Dr. Gillett's focus will be on continuing to grow the business and improve the margins of all units and insuring they provide services seamlessly to our many clients.

The growth rates for the services business was impacted by two small nonstrategic businesses that experienced lower net sales in the third quarter of 2002 compared to last year.

Both units were part of Proteomic which we acquired in the first quarter of 2001.

After these two businesses which contributed only $2.5 million of sales in the quarter.

The growth rate for the quarter would have been approximately 2 to 300 basis points higher than we are reporting.

We are currently assessing the value of a contract reduction business that provides production services to support early stage clinical trials.

We are one of the smaller players in the market and evaluating how to manage the business to satisfy our customer's needs.

We expect to complete our evaluation before the end of the fourth quarter this year.

We have already completed our assessment of a small analytical chemistry business.

This provides similar services to another one of our businesses which provides analytical chemistry services.

In order to improve operating efficiency and sales focus, we are consolidating the two units into a single facility and plan to complete the consolidation during this quarter.

This has freed management talent and space that will be better utilized to house our new Charles River Proteomic services joint venture.

We believe the startup business has significant potential are enthused to satisfy the outsourcing needs of our clients in this area.

We are continuing to improve the operating margin in the Biomedical Products and services segment.

For the quarter the margin was 20.2% up 190 basis points from last year.

Within the services segment, our discovery group including Transgenic, laboratory testing and contract staffing services has grown almost entirely organically.

Is already well above our 20% operating margins standard.

Our development group which includes the sire range of preclinical drug testing services and is nearly twice the size of the discovery group as been built through acquisitions over the past four years.

It's operating margin is lower by progressing steadily toward our stated 20% goal.

We view the lower margins in the acquired companies is a major opportunity to apply our systems and discipline and to utilize our world-wide infrastructure to achieve steady improvement towards our 20% goal.

On October 1 and2, we added two new businesses to our group.

Located in Ohio, Springborne, Ohio, Springborne laboratories is a leading provider for testing services preclinical drug development principally in evaluating drug safety.

We think Springborne is a great fit with our existing portfolio of value added drug development outsourcing services.

It expands our market share geographically, enabling us to serve midwestern customers in their own locale.

It also adds to our customer base since many of its customers are small and medium-sized pharmaceutical companies that often rely on outsourcing services.

At $27 million, the purchase price was between 5-6 times trailing twelve months EBITDA nicely reflects our commitment to value approach to our positions.

We expect the transaction to be neutral to slightly lucrative this year and add 5-6 to EPS to 2003 before amortization of intangibles.

Our current estimate we expect EPS after amortization to be 3-4.

We also announced the establishment of a joint-venture.

Charles River Proteomic services with an organization that is a world leader in the field of Proteomics, Australian-based Proteo Systems Limited.

Capitalizing on Charles River leadership providing critical research tools and integrated support services for drug discovery and development, our goal is to become the leading provider of fee for service Proteomics testing and analysis services.

These service will support drug recovery customers in the identification of proteins, which have commercial potential as targets for development of new drugs or diagnostics and biomarkers.

The joint venture is 80% owned by Charles River and 20% by Proteomes systems.

Proteomes-based research programs are incorporated into the R&D programs at nearly every major pharmaceutical company.

The Proteomics market has been estimated at $2 billion growing to $6 billion by 2005.

The margin for outsourced Proteomics testing services where we play has been estimated to be approximately $400 million.

We believe this business has significant potential, and by 2005 expect it o contribute at least 5% of development services revenues, which is the largest part of the biomedical products and services segment.

We are very pleased with the third quarter results which achieved all of our corporate targets.

Revenues up 14%, operating income up 35% and an operating margin of 23%.

Significantly higher operating income and the benefits of having repaid all of our LBO debt earlier this year contributed to a 60% gain in income before extraordinary items.

The resulting earnings per share of 39 cents represented a 50% increase over last year's third quarter.

Free cash flow increased to $33 million in the quarter and $72 million in the nine-month period.

Moving on to forward-looking guidance, we expect the fourth quarter to be another solid one for us.

We expect to once again experience the historical year end seasonality associated with the research models business.

Model sales tend to be lower in the fourth quarter as customers slow their pace from Thanksgiving to New year's.

Because of the seasonality, it's best to compare this year's fourth quarter with last year's rather than with the third quarter.

We are projecting our fourth quarter net sales at current exchange rates to be 15% higher than last year.

Diluted EPS are expected to be in the range of 35-57.

For the full year we expect EPS before extraordinary items between $1.41 and $1.43.

More than a 50% increase over the prior year.

Our business continues to perform well and committed to continuing to improve our performance through growth.

Our long-term strategic goal is to be the global leader in providing products and services that support and enhance drug development and discovery.

In pursuit of that goal we believe we can achieve-15% revenue growth from our existing portfolio businesses.

In addition, we will continue to pursue our focused strategic acquisition program.

We are also committed to growing earnings per share at a rate greater than our revenue growth.

For 2003, we are again projecting strong net sales in EPS growth.

Bending on preclinical research and development by the pharmaceutical and biotech industry is expected to increase as is the trend toward outsourcing the services.

We will benefit from increased spending and expect net sales to increase more than 15% and EPS to grow at a faster rate than sales.

More detailed guidance for 2003 will be provided on our fourth quarter earnings conference call.

This guidance is, of course, exclusive of acquisitions that may occur during the balance of 2002 or 2003.

I'd like to spend a few minutes discussing corporate governance.

We think it is important for investors to know we are committed to governing judiciously and strengthening that governance at every opportunity.

At our recent Board of Directors meeting on October 23, we appointed a new director.

It is with pleasure that we welcome back Doug Rogers the on our board.

He served on our board following LBO until the end of 2001.

Most recently a managing director with Credit Suisse First Boston, Doug is a longtime investment banker with the focus on healthcare.

Doug will provide us with valuable insight into the drug development industry and the capital Markets.

He and Dr. George Milne, formerly Executive Vice President of global research and development with Pfizer, who was appointed to our board in July are the sixth and seventh members of our now truly independent board.

All our committees audit compensation and a committee on governance have only independent members.

We have an experienced director, Bill Walter, who adds as lead independent director.

Our leverage buy-out investor group DLJ, now CSFB, no longer owns shares in Charles River, nor does our former parent, Bausch & Lomb.

This clearly marks our transition from an LBO company into an independent company.

I'd like to comment briefly on management ownership.

Sales of shares that management purchased in the LBO transaction have been in modest levels and pursuant to 10 B 51 plans.

As of October 18, 2002, the five offices listed in this year's proxy statement owned 3.3% of the shares outstanding.

In short management, continues to hold a significant equity interest in the company.

Any small loans expended to management in the LBO to purchase shares have all been repaid in full.

For those of you interested, we will be speaking at two conferences in November.

Tom Ackerman will be presenting at the SJ Cowan global healthcare conference in Paris on November 12, and I will be presenting at the Credit Suisse First Boston healthcare conference in Phoenix on November 13.

We look forward to seeing many of you there.

I'd like to close by taking this opportunity to publicly thank our 5,000 employees for their hard work which earned us special recognition this month.

In their cover story, Forbes magazine named us number 26 in the 200 best small companies based on several performance indicators including growth, profitability and the strength of our stock price.

It's an honor that belongs to all of us at Charles River as we work together for the search for healthier lives.

Thank you for your time this morning.

On behalf of our 5,000 employees world wide, I'd like to thank all of our investors for their continued support.

And now like to introduce our CFO, Tom Ackerman.

Thank you, and good morning.

Jim has given you the sales highlights, so I will provide color on margins, expenses and working capital. et sales of $141.4 million in the third quarter included a net-favorable currency impact of 2%, the result of a strong euro and yen.

Year-to-date impact was negligible.

Approximately 74% of our sales in the third quarter were in the US.

Gross margins in the third quarter were 37.8%, an increase of approximately 3% versus last year.

Research models gross margin were 44.7%, a 4.2% improvement from last year, with significant improvement in North America and Europe.

Margins improved due to higher sales, demand for specialty models and price increases.

Cost savings achieved from our facility consolidation in France also contributed.

Biomedical services margins were 33.2%, slightly higher than Q2 and a 2% improvement over the third quarter of last year.

We experienced solid improvement in pathology services, biosafety testing and in-vitro products.

On a year-to-date gross margins were 37.9%, versus 36.4% last year.

Research models gross margin were 45.6% versus 41.8% last year.

Biomedical Products and services were 32.4%, a 2.2% improvement over last year.

SG&A in the third quarter was 14.2% compared to 13.8% last year.

On a year-to-date basis SG&A was 15.1% of sales, versus 14.7% last year.

The major reason in both the quarter and year-to-date were administrative expenses as a public company and a decrease in pension income versus last year.

Amortization expense decreased $1.3 million in the quarter and $3.8 million for the nine months from 2001 principally as a result for changes in accounting rules for goodwill and the FAS 142.

Change added 2 per diluted share in the quarter and approximately 6 cents per diluted share year to date.

By adjusting 2001 to reflect the implementation of FAS 142, EPS before extraordinary items increased 39% in 2002 when compared to 2001.

Operating income in the third quarter was 23% of sales compared to 19.4% last year.

A 360 basis point gain was a result of strong sales and improved gross margins.

Research Models improved to a 32.8% margin rate from 26.6% last year, the result of higher sales volume.

Biomedical Products and services increased to 20.2% margin rate from 18.3% last year due to margin improvement in most areas and reduced amortization expense under FAS 14.

On a year-to-date basis operating income was 22% of sales versus 20% last year.

The margin for Research Models was 33.6% versus 27.3% last year and a margin for biomedical services was 19.7% versus 17.9% last year.

Interest expense was $2.3 million in the third quarter and 9.2 million year to date compared to $5.5 million and 18.4 million last year.

Decrease was principally the result of retirement of our 13.5% senior subordinated notes in the first quarter and retirement of term debt in the second quarter.

The income tax rate in the third quarter was 36.1% versus 35.1% last year.

This is the result of a valuation adjustment taken in the third quarter which yielded a benefit of slightly less than one cent per diluted share and a reduction in the company's effective tax rate.

For the nine month period and full year, we have reduced our effective tax rate to 38.5% from 39%, not including the one cent valuation allowance adjustment.

This is due to the favorable tax rate for BioLabs, our subsidiary in Ireland.

Income before extraordinary items was $18.9 million in the third quarter, or 39 cents per diluted share, compared to 11.8 million, or 26 cents per diluted share last year.

Extraordinary item of .4 million is the result of cancellation of a resolving credit facility.

At this time we do not have a credit facility, but will look to put something in place shortly.

In calculating earnings per share, we adjust income by one million tax effected to eliminate the interest expense on our convertible debt and are using a diluted share count of 51.4 million, which includes the shares as if the convert occurred.

For the nine month period, income before extraordinary items was 50.9 million with a $1.06 per diluted share, compared to $29.6 million or 68 cents per diluted share last year.

For both the quarter and nine months, a significantly prior operating income and lower interest expense were the main contributors to the results.

Comments on working capital.

Working capable was $173 million at the end of the quarter, an increase of $36 million from the end of the second quarter due to the increase in cash from operating activities.

Cash provided by operating activities was 40.4 million for the third quarter, increasing our cash on hand to $117.4 million, compared to $84.7 million at the end of the second quarter.

Free cash flow was $33 million in the quarter and $72 million year to date.

A number of factors contributed to the increase in cash flow.

Net income was significantly high with increases in gross and operating margins and lower interest expense due to balance sheet deleverage.

DSO was 65 days, a two-day improvement from the end of the second quarter in 2002 and a nine-day improvement from the end of 2001 reflecting continuing and effective collection efforts.

Actual accounts receivable decreased $1.1 million from the end of the second quarter and increased only .2 million from the end of 2001 on a nine-month net sales gain of 21.2%.

Inventory levels remained stable with a slight increase reflecting our acquisition of BioLabs and consolidation of Mexico.

In the third quarter we-restructured our investment in the joint-venture Charles River Mexico.

As a result, we consolidated the balance sheet as of September 28, 2002, and will report Mexico sales and operating income and reported results on a perspective basis.

Capital expenditures were 7.3 for the third quarter and 21.6 million year-to-date.

We expect the total year capital expenditures will not exceed 35 million less than the 40 million we estimated.

All of these will continue to influence cash generation in the balance of the year.

For the year we expect operating cash flow to exceed 120 million and free cash flow to be more than $85 million versus 35 last year.

EBITDA was 38.9 million in the third quarter, an increase of 7.7 million or 25% over last year.

G&A was 6.3 million in the third quarter.

On a year-to-date basis EBITDA was 108.7 million, an increase of 21.6 million over 25% over last year.

Year-to-date D&A was $17.4 million.

Now, we would like to take your questions.

Thank you.

The question and answer session will begin at this time.

If you are using a speaker phone, pick up the handset before pressing any numbers.

If you have a question pess 1 on the push button telephone.

If you wish to withdraw that question, press star-2.

If you have a question press star-1 on the push button telephone.

The first question is from Eric Schmidt with SG Cowan.

Congrats on another nice quarter.

Jim, I wonder if you could give more color on R&D trends, outsourcing trends heading into 2003.

I know some of your customers are in their budgetary processes right now.

Sure.

Hi, Eric.

We continue to speak to most of the pharma and biotech clients weekly if not daily.

As you said there in the budgetary process as we are and indications that are R&D spending will be up significantly in the preclinical sector and even more so that the trend towards outsourcing which is driving our biomedical services business should continue.

So we're seeing really sort of continued interest and demand and strength expressed by these clients who, of course, are consistently working to improve the quality of their pipelines.

Of course, this has been reflected this year also in the increase in unit sales we are seeing in our North American animal business, which is clearly in both ends of the bar bells in discovery and later stage safety testing.

On the animal models business, you guys have had terrific gross and operating margins and benefitting from some unit growth in 2002 and falls to the bottom line.

Obviously you're going to have more unit growth in 2003.

Not going to see the numbers of animals decrease.

How should we think about what your base line spending going forward and with lower year-over-over growth in 2003 where the margins might be in that business?

Eric, it's Tom.

Obviously as you said we had a good year in research models.

For the last years we've seen good improvement.

I think on a positive note we don't expect to see retrenchment in margin because of the Japan or anything like that.

I think that the margin gains going forward will be difficult to get, if you will.

We have expanded capacity which we are excited about because it shows growth in the business.

Also adding additional expenses finance line with that growth more so than what we'vebeen able to do in the past which is to utilize our space more effectively.

To sum it up, we can continue to improve the margins in the Research Models.

Probably at a lower rate than we've seen over the last couple of years.

Okay.

And my last question, I missed what you said about taxes in the quarter and why they were below expectations.

Well, a little bit lower, not below expectations.

We lowered our effective tax rate for the year to 38.5% from 39%.

So our acquisition in Ireland biolob labs had a positive impact on our rate going forward.

In addition to that we took a evaluation adjustment associated with state income taxes which was not $500,000 so that actually pushed down the tax rate a little bit more in the quarter, but really as a nonrecurring type item.

The rate for the quarter was 36.1% but expect to see it at 38.5%.

And you'll give guidance for '03 taxes on the Q4 call.

The next question from Paul Knight with Thomas Weisel.

State your question.

You says the Transgenic service business led the way, can you give us more color on that.

Growth rates or expansion plans.

Hi, Paul.

This is Jim.

Transgenics service is our fastest growing business.

We opened a 77,000 square foot facility here in our headquarters outside of Boston.

It's filling up quite rapidly.

We certainly have additional space to continue to grow.

We beeve that similar rates than we've been experiencing and discussed that those are well in excess of 40% annually.

We also have space on the west coast of the U.S. that we are continuing to fill up as well.

I would remind you that since this is clearly an international phenomenon, the growth in the service driven by the whole genomics explosion.

We also have facilities in Japan and France which we are continuing to grow as well.

We expect to see this growth rate continue, and we have good capacity situation for the foreseeable future and we will continue to add capacity ahead of when we need it as we go forward.

You mentioned on the press release specialty models on the animal model side of the business.

Could you define what you mean?

Those are not Transgenic models, are they?

That's a euphemism for disease models/animal models with a greater specificity models and distinguish those from standard models.

We sell a lot of immuno-compromised mice with no immune system which are widely used for aids and cancer work.

Most of our inbred models, many of which are used to create Transgenic models in this category, and then we have a whole range of diseased models for diabetic animals, hypertensive animals, obese animals, so animals bred and rebred to express certain traits.

But that's to be distinguished from the way we report, numbers, anyway, to providing services through genetically altered animals that our clients create.

So you're saying that the geno type part animal model business is doing well.

Yes.

And increasingly we'll see a shift toward animal models that we can call disease models and higher ASPs and hopefully we'll return a better information to the researcher and facilitate the drug development process.

Thank you.

Our next question comes from Michael Martorelli with Investec.

You can tell us more about the space additions and basic animal business where you haven't added in ten years and now you're adding?

Tell us more about percentage capacity or some other way to measure that?

Okay.

We've done that at three locations.

One is our facility in Montreal, Canada where we've added, if I can remember, I think 20-plus percent, so 25-30% growth in that specific facility.

Then added production production space primarily for immuno-compromised mice which, of course, is research model that we sell the most of, the highest growth rate.

We've added substantial space here and in California.

What would you say the percentage is?

I can give you a percentage of the immuno-compromised space, 20 also, Mike. 20% incremental space for that particular strain which is growing fastest, as I said.

Canada is a very effective location for us because it's relatively close to the major pharmaceutical centers in New Jersey and New York and able to ship right down.

So we're delighted to add space there as well.

This is clearly an indication and manifestation to the fact we are seeing for us significant pure unit growth.

Not only have we -- selling more units but fully utilized our current facilities and exciting and heavy for us to be adding space on both coasts and actual in another country to supply this growing market.

As I said in my remarks earlier, this is really the third year of double-digit growth in North America.

Only 4-5% of that was pricing.

We are seeing consistent sustained unit growth and hope to continue to add space in the future.

Great.

Now you did comment on your comments, Jim, about some new management positions in the biomedical area in particular.

I'm curious how much of your revenues in that segment now really does involve multiple units across biomedical and even the research model segment.

Try that again, Mike.

Do you have a good handle on the cross-selling that's going on across the biomedical segments, the biomedical units and with more management positions in that segment, it sounds like you're poised for more of that.

Yeah.

I got you.

We aIso spoke about specifically is we now have particularly, having just bought Springborne at the beginning of the month.

We have six separate companies and hopefully in the company there will be additional ones because we built a significant business in the drug development area and safety testing in particular.

We put all these businesses under one general manager, which is obviously extremely important.

We also have discrete selling and marketing capability in-that group and investing in IT specifically to enhance that group's ability to isolate data and report that data out to clients in an effective fashion.

So it is essential that no matter how many individual pieces we have, that they operate internally as one unit and externally that they report that way.

And for sure there is cross selling not only opportunity but cross selling subsidy, I think, in order to really maximum I was the potential of these pieces.

We're excited to be pulling in together.

We're excited to have added a terrific company like Springborne which gives us geographic and clint growth and continue to tighten this, talking about the development piece, continue to tighten that up as we go forward.

Thank you.

Next question in queue from Ken Kulju with CSFB.

Hi, Jim and Tom.

Congratulations on a great quarter.

A couple questions on the seasonality associated with the research model business.

Your fourth quarter margin tends to back down a bit as your volume pulls back.

I wanted to make sure we had a good fix on '03.

You were mentioning it not going to retrench.

I wanted to get a little better feel for how you see the margin in the fourth quarter, and then on the yearly basis, am I correct in assuming that that's where you expect to see the business to operate at for '03.

That was my first question.

Second question was just on Primedica.

It still sounds like you have a lot of operating leverage in that business.

I was wondering if you can quantify where the margins are on Primedica year over year.

It looked as if you hit a little bit of an air pocket in the analytical chemistry and the contract production area.

Can you give us an idea when you expect that to be behind you and are you assuming you can bring Primedica operating margins up to at least corporate averages as you look forward from here?

Thanks a lot.

I'll start with Proteomics and Tom can take the other question.

We are continuing to improve the margins in proteomics substantially.

We have continued to do that where we are clearly getting leverage as we continue to grow the size of that entity and use the leverage of our international infrastructure.

Also the benefit of what we were talking about as sort of it being a larger more cohesive entity, so we are happy with the performance performing up to our expectations, and our goal and belief is that we will still be able overtime.

We announced when we bought this business that we take three years to get us thee. years to get us there.

We are only a year and a half into it that we can get 20% pretax.

It's Tom.

On your Research Models question, if you look back historically, the sales of research models in the fourth quarter is down from the third as is the gross margin.

The inverse of what Jim talked about in his comments where the significant sales growth is falling through to OI because we are utilizing existing capacity so you get the opposite effect.

Last year the sales weren't down that much but we had a couple of things going for us.

That was the contamination in Japan where we were getting more share and the acquisition of GMI in the middle of the year where we had the new strains.

If you look at the gross margin third and fourth we went through 40% to 36-37% and I would expect that kind of difference, we'ret a higher level this year in our gross margin to be kind of consistent going into the fourth quarter in terms of a decrease in margin rate third to fourth quarter.

Our margins year to date be high in the Research Models. 45-ish%.

It will come down obviously with the fourth being lower and as we look to 2003, I think that year-end margin is where we were looking to be somewhat better than next year, but as I said earlier, not the kind of increases we are seeing in '02 versus '01 if you would.

Hopefully that answers your question.

Thanks, very much.

Our next question in queue is from Hans Riegels of Bank Corps.

Congratulations on a great quarter.

I was wondering if you could break out in rough terms the break out between specialty models and your more normal outbred models and overall research model business and perhaps describe how the growth rates stack up relative to one another.

I'll try.

I think first place probably specialty models is probably 15%-ish of the total.

And that's going to be a trend that will continue as a much higher growth rate;

I don't know that off the top of my head.

Much higher pure unit growth rate than sort of our standard animal models doing quite well.

I would expect that we would continue both to see the percentage of the total increase and the rate to continue at least as these levels.

And one thing we are watching is so the relative margins of those two sectors to sort of standard animal models because of the quantities we produced at least at the moment consistent with more profitable.

We certainly hope as the volume increases on the specialty models we'll increase profitability as well. 15% of the whole and growing.

Okay.

And if I might ask a follow-up, you've guided to approximately 15% growth for Q4 by sort of backout 3.5-4 million for Springborne based on what you decided for their results and get the remainder of the business would be growing at 12%, which is slightly below what we've seen.

And I'm wondering if that's mostly the result of the factors you've described with the research model business or is this something also in the biomedical service business or what factors are involved there.

Right.

I think the answers to that, Hans, would be the research models as I described it.

While it's seasonal and the comparison to last year, the impact of Japan, for instance, is not necessarily seasonal.

Where as Jim said we are pretty much flat with last year.

That obviously takes a little bit out of research models, if you would.

Also had year to date -- it's not significant but the benefit of the acquisition we did in the middle of last year.

I think on the other side of the business, I think the only thing that you would see in the biomedical is quote/unquote the air pocket that while not significant is again just a small thing that we're sorting out right now.

Okay.

Great.

Thank you, very much.

Our next question comes from David Windley with Jeffries and Company.

State your question.

Hi.

It's Dave Windley.

My question is regarding Primedica.

You mentioned the production business there.

I wondered more broadly speaking with the various acquisitions in toxicology, number of facilities that you have that are providing toxicology safety testing, what your thoughts are on that, how easy or difficult is it to manage that with, say, four, five, or six labs in the US, and is there any thoughts to do more consolidation of your Cox business?

We are feeling comfortable in our ability to pull these pieces together.

There was a reason that we bought each one of them.

There was expertise and a part of toxicology or geographic reach that we couldn't achieve by starting something on our own or acquiring something larger.

We are comfortable with the fact that these all fit together, all being sold by the same group and managed by the same folks and can share among and between each other really different situation than the analytical chemistry thing, which was really very small piece in two places that kneed to be consolidated.

No, I don't think that there really is an opportunity or really a need to consolidate the pieces of toxicology but there is a need to pull together from a management point of view which is what we're doing.

I suspect that it's not unlikely that this is an area we continue to add on to so very cognizant of the challenges of adding the pieces but feel that it's something we need to do and can do successfully.

Great.

Thanks.

Let me -- levering on that question a little bit, can you speak to where your capacity utilization stands through the toxicology labs on an average?

And in terms of expansion that you mentioned, would that -- would you be inclined to make additional acquisitions of toxicology space?

I'm thinking particularly in the U.S., now that you've moved abroad or are you in a position where you have land around these labs that you could build more space?

All of the above.

I think that we are using our space well but have enough space to continue to grow.

Some of that we've acquired.

Some of that we've built over the last year.

I would say that several of the facilities have space to grow.

They have land right there including BioLabs which we did this year and Springborne which we did this year in particular come to mind.

I think that we need additional capacity in Europe which is likely something that we would do probably through acquisition if there was something available.

So I think it will continue to be a combination of adding growth ahead of where we need it in our current facilities.

Acquisitions only if they strategically improve the quality and size of the portfolio and probably will need to do something internationally.

Okay, great.

Last question.

Just wanted to classify on guidance that organic for the fourth quarter at 12 to 15%, that was clear, and then the acquisitions boosting that up to 15% or better.

And then for 2003, the target of 15% plus topline growth is also a total revenue number with both organic and acquisitions contributing to that number?

Is that correct?

I think the 2003 number that Jim talked about, Dave, is as the business is currently constructed today.

Okay.

More than 15% with essentially what we have today, if you will.

Okay, great.

Thanks.

Great quarter.

Our next question comes from John Sullivan with Stevens.

Hey, guys.

In the past you've given a quarterly organic revenue growth number.

Can we get that from you for this quarter?

Yes, John.

This is Tom Ackerman.

It was slightly more than 12%.

That you, very much.

Thank you.

Our next question comes from Larry Neibor with Robert W. Baird.

State your question.

Yes, could you give us an idea of the level of competition and visibility you have on contracts for the development area?

Sure.

Hi, Larry.

Our competition is significant.

We have several players in this field, several of whom are public companies and we've spoken about them previously.

I think several players are absolutely required to service the outsourcing trend which is rapid.

I think we'll be as rapid as the outsource capacity is there.

In terms of visibility, we have tracked backlogs and several months, at least a quarter backlog on average across the board and our toxicology business and a lot of that is contractual in nature, so current studies would last from 90 days to a year.

I think we have good visibility, we have steady backlog.

We continue to have space as do others.

I think that the fact this is a large and growing service enterprise in terms of outsource players real pretty much insure outsourcing trends.

The pharm and biotech companies want to do that.

As long as they have good players, I'm sure they will.

Do you have an estimate for the organic growth rate for the development services market?

Organic growth rate, I would say 12-15%.

And you expect to match or exceed that growth?

We do.

Thank you.

At this time no further questions.

I will turn the conference back over to Susan Hardy to conclude.

That concludes our conference call and webcast for today.

I want to thank you for joining us and look forward to talking to you all soon.

Thank you.

Thank you, Susan.

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