Charles River Laboratories International Inc (CRL) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter 2009 earnings and 2010 guidance conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms.

Susan Hardy, Corporate Vice President of Investor Relations.

Thank you.

Good morning and welcome to Charles River Laboratories' 2009 earnings and 2010 guidance conference call and webcast.

This morning, Jim Foster, Chairman, President and Chief Executive Officer, and Tom Ackerman, Executive Vice President and Chief Financial Officer, will comment on our fourth-quarter and full-year results and review guidance for 2010.

Following the presentation, we will respond to questions.

There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at IR.Criver.com.

A taped replay of this call will be available beginning at noon today and can be accessed by calling 800-475-6701.

The international access number is 320-365-3844.

The access code in either case is 143476.

The replay will be available through February 23.

You may also access an archived version of the webcast on our Investor Relations website.

I'd like to remind you about our Safe Harbor.

Any remarks that we may make about future expectations, plans and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by any forward-looking statements as a result of various important factors, including but not limited to those discussed in our annual report on Form 10-K which was filed on February 23, 2009, as well as other filings we make with the Securities and Exchange Commission.

During this call, we will be primarily discussing non-GAAP financial measures.

We believe these non-GAAP financial measures help investors to gain a meaningful understanding of our core operating results and future prospects, since this is the manner in which management measures and forecasts the Company's performance.

The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP.

In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations to those GAAP measures on the Investor Relations section of our website through the Financial Reconciliations link.

Now, I will turn the call over to Jim Foster.

Good morning.

I'd like to begin by reviewing the '09 results and will then discuss our outlook for 2010 with you.

We reported sales of $295.4 million for the fourth quarter of '09, a decrease of 5.2% over the fourth quarter of '08, including a 3.8% positive impact from foreign exchange.

Research Models And Services, or RMS, recorded a strong quarter, increasing 10.9% to $169.4 million.

Preclinical Services, or PCS, reported net sales of $125.9 million, which was down 20.6% from the fourth quarter of '08 but came in slightly higher than anticipated.

This better-than-expected performance improved our level of confidence that the market has stabilized.

Based on strong preclinical bookings for the first quarter of 2010 and early positive indications for the second, we believe we are starting to see our clients reinvigorate their late discovery and early development efforts.

Operating income for the quarter was $48.8 million and the operating margin was 16.5% compared to 19% recorded in the fourth quarter of '08.

The operating margin decrease was primarily the result of lower sales, mitigated in part by stringent control of operating costs.

Earnings per diluted share were $0.49 in the fourth quarter, compared to $0.59 in the fourth quarter of '08.

Fourth quarter of '09 capped a challenging year in which a confluence of events, including the economy, significant consolidation from the pharma and biotech space, lack of availability of funding for biotech companies, and uncertainty surrounding healthcare reform, drove our clients to reduce their spending on our products and services and for toxicology in particular.

This reduction led to excess capacity throughout the CRO industry, which in turn resulted in pricing pressure.

Recognizing that these issues would take some time to resolve and that the biopharmaceutical industry would be fundamentally changed as it emerged from this phase, we decided to use this period to strengthen our infrastructure and keep our financial base strong.

Toward that end, we implemented a number of cost savings and efficiencies initiatives and made strategic acquisitions that were intended to enhance our operations and our ability to support clients more effectively.

In terms of efficiency, we closed or disposed of smaller, less-efficiencies sites, including PCS Arkansas and our Phase I facility in Scotland, as well as two RMS sites in Hungary and Belgium.

We reduced headcount by approximately 1000 people, primarily in the PCS segment, including our recent decision to suspend operations at our PCS Massachusetts site.

We expect this leaner infrastructure to improve our operating margin without compromising our ability to accommodate future demand for preclinical services.

While evaluating our preclinical infrastructure, we considered a number of asset transfer opportunities but chose not to pursue any of them.

Given the availability of capacity for outsourced preclinical services and the fact that those assets were older and less efficient than our purpose-built facilities, we believe it is a better choice for our clients to close or repurpose those facilities and outsource the work.

The decisions remain to be seen, but our discussions with senior management through our clients on this subject suggest that the outcome will be an increase in outsourcing.

Second, we implemented an organizational restructuring of our PCS business to create a dual-accountability structure with both global functional teams and site level management.

This structure centralizes and integrates our global PCS portfolio and unites expertise from various facilities to support our client program regardless of the specific site at which the program was initiated.

The structure allows the PCS organization to easily share information and best practices globally, standardize operations and improve efficiencies.

Most importantly, it facilitates our customers' ability to take advantage of the exceptional and consistent service at all levels and across all Charles River sites worldwide.

Third, we realigned our enterprise-wide sales team, fully implementing the changes at the beginning of 2010.

Our goal is to enhance our client-centric culture through the establishment of a three-pronged sales organization which provides more comprehensive coverage of all market segments.

We've created sales teams dedicated to each of the following key client constituencies -- global pharmaceutical companies; small and mid-sized biopharmaceutical companies; and academic and government customers.

This structure enhances our ability to meet customer needs by offering customized, tailored solutions across our entire portfolio.

In addition, our mid-market pharmaceutical and biotechnology clients will benefit by additional support from a combination of account managers with broad portfolio knowledge and specialists with specific scientific expertise.

The new structure also provides additional coverage of the academic and government sector, one which offers us growth opportunities, both through market share gains as well as stimulus funds.

We just completed our international sales meeting in late January, at which we provided extensive training and strategy sessions.

Attended by 200 sales and marketing professionals from 20 countries, our sales force is now very well prepared to sell the totality of our portfolio.

Fourth, we focused on internal process improvement initiatives.

We have continued to invest in our Information Technology system in order to better serve our customers, harmonize our data and streamline our processes.

I'm very pleased to report that we successfully completed the roll out of our ERP system in the United States at the beginning of this fiscal year.

This achievement was due to the outstanding efforts of our ERP team and all of the domestic business units who worked long hours to ensure that the implementation would be a success.

Our lean Six Sigma program has continued to ramp up with more than 100 projects currently underway and more in the pipeline.

We are looking at this program as the method by which to drive operating efficiencies, which we believe will position us to offer our clients enhanced services at a lower cost.

In the absence of significant pricing power, we will rely on improved operating efficiency in order to drive profitability.

We achieved modest cost reductions in '09 and expect more significant benefits in 2010.

Finally, we have continued to make strategic acquisitions that expand the breadth of services we can offer our clients.

Specifically, the acquisition of Piedmont made us the leading provider of discovery services for oncology.

With the addition of Cerebricon, we established a strong foothold in the therapeutic area of CNS.

We also acquired Systems Pathology Company, or SPC.

As you know, SPC has developed a unique software technology designed to increase the efficiency of pathologists but automating sample processing.

We believe the software is a highly innovative technology which will reinforce our position as a market leader in toxicologic pathology.

As a result of all of these initiatives, we are emerging from this period as a leaner, stronger company with a broader portfolio aimed it is supporting our clients' drug development efforts from discovery through first and human testing.

Before reviewing our outlook for 2010, I would like to briefly summarize the Business segment performance.

Sales for our RMS segment rose 10.9% in the fourth quarter to $169.4 million.

This better-than expected result was driven primarily by higher sales of research models.

We saw growth in all geographic locales -- North America, Europe and Japan.

As you know, the fourth quarter is usually seasonally weak as researchers temporarily reduce or suspend orders during the holiday.

Although we did see this pattern, it was less pronounced than usual.

Sales to academic clients drove the growth, and this was without the benefit of stimulus funds, which we believe will have more impact for us in 2010.

Sales for the service businesses increased in the quarter, driven by the acquisitions of Piedmont and Cerebricon.

On an organic basis, sales were relatively consistent with the fourth quarter of '08.

In fact, throughout '09, demand for research model services have been relatively stable.

We believe this was the case because early research was less affected by market factors than was the case with toxicology services.

This premise was supported by the fact that sales of mouse strains, which are used more heavily in early research, was stronger than outbred rats, which is the model of choice for toxicology.

Our in vitro business derived strong growth in the quarter, due primarily to sales of the PTS product and the new multi-cartridge reader, or MCS.

This business continues to perform exceptionally well with an increasing number of PTS unit deployed in the field and sales of the cartridges increasing.

We continue to take market share with this exceptional product line, largely because of the competitive differentiation between this product and other companies' endotoxin testing methods currently on the market.

This leading-edge product is portable, produces accurate results in a fraction of the time required by other methods, and is ideally suited for both small and large drug manufacturers.

We believe that PCS will continue to deliver strong growth for some time to come.

But RMS operating margin increased to 280 basis points to 30.1% compared to 27.3% in the fourth quarter of '08.

The improvement was due primarily to higher sales of research models and improved margins for services businesses, as well as effective cost controls.

Our RMS franchise is the market-leading provider of research models and the services which support their use in research.

Research models are essential to the drug discovery and development process and the stability of demanded evidence in the performance of the RMS segment in '09.

Although our clients significantly reduced the use of outsourced preclinical services as they grappled with the challenges from patent expirations to the economy, they continued to purchase research models and to utilize our scientific expertise and capacity for their early development needs.

The importance of this business is that it establishes our relationship with the clients early in the drug-development cycle and stays with them through postapproval.

With exceptional operating margins and strong free cash flow generation, the RMS business provides a stable base to Charles River.

We intend to continue to expand our RMS portfolio strategically with acquisitions such as Piedmont and Cerebricon adding products and services which enhance our ability to support our clients' drug-discovery and development efforts.

The PCS segment reported sales of $125.9 million in the fourth quarter, a decline of 20.6% including a positive effect of foreign exchange and the revenue loss from the divestiture of the Phase 1 clinic in Scotland.

PCS trends did not change significantly over the last half of the year.

When inquiry levels increased pricing stabilized, there were less specialty toxicology in the mix and clients were hesitant to commit.

Pricing has continued to be a significant factor in the sales decline as studies initiated at '08 prices were completed and replaced by studies at significantly lower prices.

However, in selected instances, we have been able to increase prices to general toxicology.

Capacity utilization continued well below optimal levels and, combined with pricing and sales mix, translated to a margin of 10.5% compared to 18.2% in the fourth quarter of '08 and 13.8% in the third quarter of '09.

Through the suspension of operations at PCS Massachusetts and the transition of the majority of the clients to other facilities, we are already experiencing improvement in capacity utilization.

We expect the actions we have taken to streamline the PCS business, including the reorganization, infrastructure rationalization and lean Six Sigma initiatives, will position us to support our clients through the current market environment and improve the profitability of this segment as demand improves.

Although visibility remains somewhat limited, there are a number of factors which reinforce our belief that there will be a pickup in demand for preclinical services beginning in the second quarter of 2010.

The stability of the fourth quarter of '09 and our expectation for a comparable first quarter of 2010, stronger inquiry levels coming into the first quarter, the fact that the majority of our first-quarter sales are already booked and backlogged as our substantial portion of second-quarter sales, and inputs from senior research executives at most of the major pharmaceutical companies indicate an improving environment.

We expect demand will ramp slowly as our clients refocus their attention on the early development portion of the drug development pipeline.

Ultimately, with limited growth in R&D dollars and pressure to improve their productivity, we believe that biopharmaceutical companies will continue to embrace strategic outsourcing as the means by which to improve the efficiency and effectiveness of their drug-development efforts, preferring to use our infrastructure rather than invest in their own.

Increased outsourcing will benefit both RMS and PCS, so in the long term, we believe our consolidated sales growth rate will reach low double-digit levels.

At this point, however, we view 2010 as the year of slow but steady recovery.

We expect sales growth for Charles River to be in the low single digits, reflecting growth in RMS and flat sales for PCS.

The majority of the business units within RMS expect higher sales to 2010, in part due to an average 2% price increase and despite the negative impacts we are anticipating from pharma mergers.

We expect the PCS operating margin to improve as a result of operating leverage from the many initiatives we implemented and from improved capacity utilization.

We also expect the RMS margin will hold at the '09 level, which as you know was nearly 31%.

Corporate costs will increase to a range of 5.5% to 6% of sales, resulting in a consolidated margin flat to moderately lower than '09.

Taking all these factors into account, we estimate 2010 earnings-per-share in the range of $2.20 to $2.40.

Tom will give you more detail about this guidance in a moment.

We are anticipating free cash flow in a range of $130 million to $150 million in 2010, reflecting higher operating cash flow and lower capital spending.

We expect capital expenditures to be in the range of $60 million to $70 million, which will be primarily for maintenance projects.

Our scheduled debt repayment obligations are limited, so we're likely to deploy cash for strategic acquisitions and are considering stock repurchases.

In summary, though we were not satisfied with the results we posted in '09, taken as a whole and considering the difficult operating environment, we believe we weathered the storm well.

We know we are entering 2010 as a stronger and leaner company and one that is well positioned to leverage improving demand.

We continue to believe that, as the efforts of major pharma mergers, the economy, and uncertainties surrounding the administrative administration's healthcare policies wane, we will experience renewed demand for our broad portfolio of essential products and services.

We are confident in this belief because our clients are challenging themselves to improve the productivity of their pipelines at the same time they improve their operating efficiency with the goal of reducing the cost of drug development.

We believe that recent reductions in force announced by many of the big pharmas will promote outsourcing.

Having foregone the costs associated with maintaining in-house capabilities, they will opt to use our extensive scientific expertise and efficient facilities.

Our discussions with clients continue to reinforce their desire to increase strategic outsourcing based on our deep expertise in in vivo biology, global network of facilities, and focused client support, to do so with Charles River.

During these complex and challenging economic times, I particularly want to thank our employees for their exceptional work and commitment, and our shareholders for their continuing support.

Now, I will turn the call over to Tom Ackerman.

Thank you, Jim, and good morning.

First, let me remind you that I will speak primarily to non-GAAP results, which exclude acquisition-related amortization, charges related to cost savings actions, convertible debt accounting and other items.

This morning, I will focus my discussion primarily on our 2010 financial guidance.

For 2010, we expect sales to grow in the low single digits and non-GAAP EPS to be in the range of $2.20 to $2.40.

The increase in sales and the benefits from cost savings actions and efficiency programs will be offset by cost headwinds associated with the implementation of our new ERP system and incentive compensation.

In total, these two items are expected to increase costs by approximately $0.35 per share in 2010.

Minor changes to below-the-line items in 2010, such as the expected tax rate, interest expense, and other income, are not expected to have a meaningful impact.

We also do not expect any significant changes in our share count for 2010.

I will discuss many of these items in more detail shortly.

Foreign exchange reduced sales growth by 2.3% in 2009 but generated a 3.8% benefit during the fourth quarter as we anniversaried the strengthening of the US dollar.

As we look ahead to 2010, foreign exchange is expected to have a less meaningful impact based on current rates.

Foreign exchange is expected to benefit first-quarter sales by similar rate as the fourth quarter, but we expect foreign exchange to average just a 1% benefit to sales growth for the full year.

However, foreign exchange is expected to reduce operating income by $1 million to $2 million in 2010 due to the effect of Canadian dollar exchange rates on our PCS Montréal facility.

You may recall that approximately half of PCS sales are invoiced in US dollars while nearly all of the costs are incurred in Canadian dollars.

Unallocated corporate costs totaled $57.3 million, or 4.8%, of sales in 2009, which was in line with the level indicated on our third-quarter call.

For 2010, we expect unallocated corporate costs in the range of 5.5% to 6% of sales.

The anticipated increase over 2009 is primarily related to ERP costs and incentive compensation expense.

Our new ERP system was rolled out to all US sites in late December to begin the new fiscal year.

Implementation has been successful to date.

I would like to thank the many employees across the US for their hard work, particularly around the holidays, to help ensure a smooth transition to the new ERP system.

We plan to move ahead with the second phase of our ERP roll out plan and go live with the system in Canada and Scotland at midyear.

Total ERP costs are expected to be $17 million to $18 million in 2010, of which approximately $12 million to $13 million will be incremental over 2009.

Approximately $2 million to $3 million of the 2010 costs relate to the implementation and remediation costs that will be weighted towards the first half of the year.

While we expect some operational benefits from the ERP system in 2010, we do not expect more substantial savings until 2011.

Net interest expense of $9 million in 2009 was in line with expectations.

We don't anticipate any significant changes in our debt levels or interest rates for 2010 and therefore expect non-GAAP net interest expense to be in the range of $9 million to $10 million in 2010.

We continue to exclude non-cash interest expense related to the convertible debt accounting change from our non-GAAP results.

Other income was $2.1 million in 2009.

This was primarily driven by investment gains associated with our deferred compensation plan.

Consistent with our historical practice, we have not budgeted for other income in 2010, since gains or losses on these investments are correlated with market returns and are unpredictable.

The non-GAAP tax rate was 29.2% in 2009.

In 2010, we expect the tax rate to decrease to a range of 28% to 29% as a result of a more favorable earnings mix and lower unbenefited tax losses.

As you know, in January, we announced plans to suspend operations at our PCS Massachusetts site.

The action is expected to reduce our PCS cost structure by $20 million in 2010 and $25 million on an annualized basis.

We expect to complete all contracted studies at the facility by midyear and transition the majority of clients to other PCS locations.

As a result of the PCS Massachusetts action, we expect to incur several charges that will be excluded from non-GAAP results.

In the fourth quarter of 2009, we recorded a $700,000 charge related to the anticipated reduction in certain tax benefits associated with PCS Massachusetts.

In 2010, we expect to incur severance costs and other charges of approximately $6 million, predominantly in the first half of the year.

We also plan to exclude operating losses at PCS Massachusetts in the first half of 2010 as we wind down our operations, as well as stranded costs thereafter associated with holding I/O facility, most of which is non-cash depreciation expense.

These items are expected to total approximately $13 million to $14 million in 2010.

We have also completed the asset impairment test in the PCS Massachusetts facility and do not expect to incur any charges at this time.

I will now provide an update on our cash flow and capital structure.

For 2009, we generated free cash flow of $139 million, including a strong fourth-quarter performance of approximately $47 million.

In 2010, we expect free cash flow to be in the range of $130 million to $150 million.

Capital expenditures were $80 million in 2009 and are anticipated to be $60 million to $70 million in 2010, almost entirely for maintenance projects.

Depreciation is expected to increase to approximately $73 million in 2010, including depreciation from PCS Massachusetts.

This represents an increase from $65 million in 2009 primarily related to the new ERP system.

This year's amortization expense is forecast to remain essentially flat from the 2009 level of $28.4 million.

We expect our capital requirements to remain low for at least the next two years, given the availability of capacity within our PCS network and future expansion options that require little capital investment.

As a result, our capital priorities for the significant free cash flow generated in 2010 remain consistent with our historical objectives.

As Jim noted, we intend to use the excess funds to enhance shareholder value and are likely to deploy cash with strategic acquisitions and will consider resuming stock repurchases.

Given our strong cash flow generation and relatively low debt balances, we have maintained a solid yet conservative capital structure that allows us to weather the difficult economic environment over the last 18 months.

Our total capitalization stood at approximately $1.9 billion at the end of 2009.

Total debt outstanding was $541 million, or a 1.9 times non-GAAP EBITDA.

In January, we were to extend exploration of our $50 million term loan facility to coincide with the maturity of our larger facility in July 2011.

The term loan facility, which has an outstanding balance of $44 million, would have expired in June 2010.

Cash and equivalents, including short and long term marketable securities, were $255 million at the end of 2009, which represents a $40 million increase from the third quarter.

DSO remains relatively stable and within our targeted range at 43 days compared to 45 days at the end of the third quarter and 40 days at the end of 2008.

In 2010, RMS sales are expected to benefit from a 2% average price increase as well as a modest volume improvement, driven in part by NIH stimulus funding and increased demands from (inaudible) used in toxicology.

We have factored in some disruption in RMS sales from anticipated R&D facility closures in the pharmaceutical industry.

Our guidance also assumes a gradual improvement in preclinical demand beginning in the second quarter of 2010, as projects move forward once clients finalize their budgets and merger integrations near completion.

We have taken significant action in 2009 and in January of this year to better align our cost structure with current demand levels.

These actions were focused on our preclinical business and are expected to contribute to the PCS margin improvement in 2010.

Benefit from these anticipated sales improvements and cost savings is expected to be further supplemented by more meaningful savings from lean Six Sigma and other efficiency programs as these initiatives gain momentum throughout the year.

However, these EPS contributions will be offset by meaningful cost headwinds, the most significant of which is the $0.35 related to the ERP project and incentive compensation cost.

Earnings will also be pressured by dilution from the acquisition of SPC, which is currently in the development phase, as well as the small operating loss from FX and nominal (inaudible) cost increases, including the resumption of merit-based pay increases.

Based on the timing of these factors, we expect first-quarter sales and segment margins to be relatively stable compared to the fourth-quarter levels, and EPS to be approximately 10% below fourth-quarter EPS of $0.49 due to the ERP and incentive compensation cost headwinds.

We have emerged from a very challenging year in 2009 with a leaner, more efficient infrastructure through implementation of initiatives that were structured to enhance our operational efficiency and deliver benefits for years to come.

While we view 2010 as a year of recovery, we are pleased to have built a solid foundation that is poised to generate even greater profitability as demand returns to growth levels.

That concludes our comments.

Operator, would you please take questions now?

Thank you.

(Operator Instructions).

Greg Bolan, Wells Fargo.

Jim or Tom, assuming the PCS cost structure has been right-sized and obviously incremental resources would need to be added to facilitate a substantial improvement in study volumes, but what is your goal for sustainable PCS operating margins in the future?

Our goal for many years is 25%.

Aspirationally, that is still a goal that we have.

Obviously, we dropped way below that but we have operations that are performing above 20%.

So I would say our short and medium-term goal is to get back to above 20% level and we certainly think that, given the right-sizing of our infrastructure as capacity fills and we get a bit more pricing, the capability that we will be able to achieve those goals.

That's helpful, thanks.

I am going to sneak one more in here.

Tom, for the fourth quarter, we were modeling about a 4% revenue contribution from Piedmont and Cerebricon.

Does that sound about right?

That's a little bit on the higher side, I would say, Greg.

Okay.

All right, thanks.

Dave Windley, Jefferies & Company.

Good morning.

Thanks for taking the questions.

A little twist on Greg's question -- if we think about a trajectory of revenue in PCS and your staffing changes there, I guess what I'm looking for is how much revenue your PCS business can add before you need to start adding staff to execute those studies.

I presume you have some slack capacity, including staffing.

Obviously, we can't quantify that exactly for you, Dave, but suffice it to say that we have some slack capability now to be able to take on some additional business at current staffing levels.

Obviously, we have a significant amount of capacity, so space is not a problem.

At a certain point, we will have to add back our technical staff, our technician level folks, some of whom I think would be prior employees and others would be new ones.

But we are confident that, given unemployment levels in the markets that we work in and the time frame in that it takes to get people up to speed that have been previously trained and to train new ones, that we will be able to do that in a sort of measured fashion given the growth rate that we anticipate for this business over the next three to four quarters.

Jim, you mentioned in some cases you would expect to be able to hire back some of your former employees.

Are any of those on some type of, say, small retention of some sort, or is there no financial tie to those types of folks?

There's no specific financial tie.

We retain virtually all (inaudible - background noise) scientific staff and most of the study directors.

There are probably a few of those people that are still available and that we would be -- we left on good terms and there are just some people with insufficient work.

So we would be hopeful that the very good ones which we had a long-term relationship with would be to come back but it's not economically feasible to be holding them in anticipation of a timeframe that we are not entirely sure of.

Got it, thank you.

Ross Muken, Deutsche Bank.

Good morning.

So as you've sort of done the work to sort of dig deeper into what's going on in the end markets and you've had conversations with executives and the like that you noted, as they talked about the increased outsourcing that they are likely to do, what was driving it?

Was it them both trying to get productivity and cost cuts?

Was it not having the right staffing levels internally?

Was it purely savings in price base?

I'm just trying to get the sense for what's -- now that the budget cycle has been reset, what is sort of on the top of mind of most of the executives in terms of why now versus waiting until later in the year or '11?

Well, I mean, on top of mind is the fact that they have a limited number of resources and they've come up with priorities on how they want to spend them.

That's going to be in very early discovery, either internally or licensing end products from large molecule companies, and/or driving things to the clinic.

Those tend to be the things that they are holding onto.

So we are seeing -- and also we've had some asset transfer conversations, which means that the clients have literally been not just reducing infrastructure and headcount but actually trying to jettison it as well.

We indicated in our remarks that's not something that we think makes any sense for either our clients or ourselves, and we told them that and we actually think some of our clients will close those sites.

So they come into a new calendar year having seen the Pfizer and Merck deals finish and those businesses go through the beginnings of pretty dramatic infrastructure realignments such as reducing space and people and focusing on specific therapeutic areas.

I think other companies have been waiting to see what that looks like to sort of realign their own infrastructures.

We've seen, in the last month, several large other drug companies also make very large announcements.

It is really about as the patent cliff continues to loom and it tends to be maybe a short-term abeyance in healthcare legislation being enacted, it's apparent to them to I think more aggressively utilize their internal resources.

So, that, sort of combined with the anticipation that capacity will get tight over time, and that's just a fact, we all in the CRO industry have excess capacity at the moment because obviously no one is building any more.

We suspended operations in that so our clients can take the space out.

So space will get tight.

Clients will think increasingly about getting in line and how long they'll have to wait.

They didn't have to wait very long for the last year or 18 months.

I think they will be -- there is beginning to be greater thought about where they stand in the queue, and also what they have been getting from a quality point of view from players that they have been forcing to provide services at much lower price points.

So we think that the pricing dramatic reduction has ceased and actually has for some time.

As I said earlier, we've seen some limited very early ability to push back on prices not just for the fun of it but because we really need to be paid better to perform these exceptional services.

I think the clients have recognized that and are willing to try to buy the best services possible at a fairer price going forward, recognizing the fact that they no longer have the capacity and capability to do it themselves.

Just to sort of follow up on that, Jim, it seems like, in general for this industry, price is obviously fairly key to profitability and that's no surprise.

But as we think about sort of the recovery in that level, I know you sort of talked about some of the different factors.

Obviously it's heavily capacity utilization weighted.

As you thought about the last time this industry maybe went through a downturn, even though it's not necessarily as comparable, how should we think about the time period or show the sequence of events that need to happen to get to that sort of next incremental price being up versus flat.

How do those sort of discussions start with the bio pharma heads?

It's beginning to happen subtly and slowly right now.

As you said, it's directly related to current available capacity, but more importantly, how much space do the clients feel will be available to them when they need to move quickly.

I think that will be less and less -- they'll have less flexibility than they have for the last year or so and they've been able to book (inaudible) in a matter of weeks and historically it's been for months.

So while we do believe we are beginning to get some pricing capability and will increasingly do so, we haven't built our internal plan on it.

Our plan is built upon filling capacity, being more efficient, and improving our margins top line and our margins that way.

To some extent, I think pricing will just sort of be the icing on the cake, will be sort of an additional benefit.

But we are driving -- right now, we are driving efficiency gains through the restructuring of our preclinical organization and our Six Sigma initiative and our procurement initiative as aggressively as possible to sort of fill in wherever lack of pricing has left us.

But we are certainly moving in a direction where pricing will become something that will be available to us.

We are sort of anticipating that it's not going to be a lever that we are going to be able to pull (inaudible) any significant degree in fiscal 2010 though.

Okay, great.

Sandy Draper, Raymond James.

Please go ahead.

Thank you very much.

Longer-term question -- you had made the comments about getting to -- eventually getting back to a double-digit growth number.

When you look at that, is that really predicated on eventually getting back to some more normal growth around PCS?

Do you think it's sort of a balanced growth between the two?

Is there, without trying to get specific 2011 guidance, would that even be a reasonable shot at 2011 or are you really looking at more of a three to five-year target to eventually get back there?

So we have been tagging directionally in longer-term, so 2011 is difficult to comment on.

We certainly wouldn't go so far right now to say that we are in the hunt for double digits in '11 but anything is possible.

Look, RMS -- we should continue to get price.

The models business should continue to be solid as a result of continuing to take market share across all geographic locales and the academic sector in particular these days.

We do think our new sales force realignment will be extremely beneficial (inaudible - background noise) see more rapid topline growth from the services side of our RMS business as infrastructure realignments continue to take place in our pharma company -- for the pharma companies.

As capacity tightens and space is reduced inside of our clients on the preclinical side, that will begin to stimulate growth there.

So it's difficult to call when we get to that level, but we are sort of inherently thinking that RMS will get back to high single digits, preclinical at low double digits.

Obviously, (inaudible) some pricing power again in the preclinical business, that could be more easily realized.

So you know, it is a more midterm goal, I would say.

Okay, that's really helpful.

Thanks, Jim.

Doug Schenkel, Cowen & Company.

Good morning.

What's been the early feedback from clients regarding transitioning studies from Shrewsbury to other facilities?

It sounds like there haven't been any real problems yet.

I just want to make sure there aren't any new concerns specific to not having a facility right in the neighborhood of East Coast clients.

We are very pleased with the clients' response.

I think it's a testament to the quality of the relationship that we have with them, their belief in us as a company, actually their belief in being comfortable using multiple sites to get the work done.

There are certainly some clients in the greater Boston area that would have preferred to use a local supply source because they like being able to go there by car pretty much whenever they wanted to.

But since that is no longer available by us or anyone and they have multiple high-quality options at other facilities -- and some of our clients, we use a single facility, some will use several of our facilities.

Really holds us in good stead and continues to give us good flexibility and should continue to ensure capacity well-utilized.

So I would say the conversations have been extremely professional.

Clients have been -- I can't say that they are thrilled about this but they are very comfortable with it.

They're working with us.

They are happy to stay with us.

It has gone I would say better than we had anticipated, both in terms of the amount of work that's moving and in clients' openness and willingness to work closely with us and in some cases to get out and audit other facilities that they weren't necessarily familiar with.

Okay, thanks, Jim.

One real quick follow-up -- it was clearly very good to hear some encouraging words regarding the Pharma, I guess the outlook for hopefully a pickup in PCS demand heading into G1 and Q2.

Any color you can provide regarding certain product areas or geographies within PCS that you think are going to pick up prior to other areas?

Not really.

We hope it will be the sort of usual balance we have between specialty work and also long-term and short-term work.

That would be a more normalized market.

Obviously, you have a bigger footprint in specialty work; it tends to have better margins.

A healthy dose of that is obviously beneficial to our P&L but I think supporting the clients across the whole range of tox studies is sort of a testament to them doing work, both early and contemporaneous with the longer clinical trials.

Given the footprint that we have with different of our facilities having different capabilities, the more we can keep space full across the entire portfolio, the better the P&L, also better client support we will be able to manifest by using our entire infrastructure.

So hopefully it will roll out pretty much across the board.

Isaac Ro, Leerink Swann.

Good morning, guys.

Thanks for taking the question.

First off, on RMS, I'm just wondering if you could remind us what price increases you guys realized for 2009, and then maybe if you could comment on any further mix trends that you might expect in 2010 that could help the business, that would be helpful.

Thanks.

Yes.

2009 was probably around 3%-ish, maybe a little better, so we obviously expect it to be a little bit lower than that in 2010 but not significantly.

The second part -- did you have a follow-up on the question?

Mix.

Mix.

Oh, the mix.

In RMS or --?

Yes.

You know, I think you touched a little bit on the mice versus rats [data mix].

I'm wondering if there is anything else in the animal mix that we should be thinking about.

Not really.

The stimulus funding will primarily be beneficial to our mice sales, variety of mice activity.

As Jim referenced with the tox rebound, that would primarily be driven towards larger outbred rats.

I can't say that's a significant profit driver in terms of those two.

Our toxicology rats are probably bread-and-butter, but many of the inbred mice are also very favorably priced and have very good margins as well.

Got it, thanks.

Then just secondly, if you could touch on progress in China, maybe how that performed in the quarter and then your outlook for that region in 2010.

Yes, so China has generally gone more slowly than we had anticipated initially because of construction delays and secondarily because there's a whole industry pullback.

So remember that our clients or large international drug companies are not Chinese-based.

They do have Chinese-based discovery organizations out of their own or contracted out.

They have been very careful about spending in China, as they have everywhere else.

They've also been reasonably priced-sensitive even in China.

So we've had a large number of audits.

We've had a large amount of non-GLP work and we currently have several GLP studies going on at the same time with several large pharma clients.

So the work is beginning to get done in a more significant fashion.

Clients seem quite pleased with this facility and the quality of the work.

The site continues to be a drag to the P&L.

We are unwaveringly committed to China as having vital strategic importance to our business and our industry going forward.

So we are out there working hard to bring in more clients.

I think we have a pretty healthy client roster lined up for 2010 of both very large pharma clients and some slightly smaller ones, so the client base is actually fine (inaudible).

It's going a little more slowly than we would have liked but improving all the time.

Great, thank you so much.

Douglas Tsao, Barclays Capital.

Jim, just how are you sort of managing the process in terms of negotiating these asset -- or potential asset transfer deal and sort of balancing what you view as sort of your near-term and perhaps even long-term sort of financial interest, versus the risk in terms of sort of some competitor potentially coming in and making a deal on less favorable terms than what you are willing to accept?

In sort of addressing this, what I'd almost characterize as a prisoner's dilemma of some sort with some of your large competitors.

Also largely are most of the sites that you've been in these asset transfer negotiations currently active tox sites, or have these already largely had operations wound down, perhaps not all the way but at a certain level -- but already had significant pullback in terms of their level of activity?

This is really a classic example of how timing is everything (inaudible - background noise).

So I would say that, if you went back five years ago before we started our very aggressive investment in CapEx to build and renovate and refurbish facilities, basically these asset transfer deals, they would obviously look more attractive.

You'd get facilities and people and business in one fell swoop and we would've had a different orientation to them, so is the competition.

I think we would be out there negotiating very aggressively for that.

It's not sort of strategically something that we are interested in on the face because of the obvious reason that there's too much space out there.

All it does is exacerbate the problems for Charles River, frankly for our competitors, and actually for the clients, too, because (technical difficulty) doesn't really solve an issue for them except sort of transfer responsibility to manage their employee base instead of them doing it.

That doesn't really feel like the proper thing for us to do.

Having said that, while we sort of have a general negative predisposition, we are obviously very respectful of our clients.

We live to serve them.

Also, every preclinical tox site is not created the same, so some of them are better than others; some are newer than others; some are more efficient than others.

To the last part of your question, some are more full than others.

But in any event, I would say they are all somewhat less than full and in the process of winding down, obviously they don't need the space.

We are willing to -- we've done thorough investigations, including run the numbers, visit the facilities, met the people and thought very carefully about them and pass.

We are willing to take the risks that a competitor sees the situation differently, although I can't imagine why given that they all have too much capacity, but we are willing to take that risk or pain as it were, because it doesn't make good economic sense for us.

We actually don't think it's the best thing for the client.

So we pass them having started through thoroughly and we are having no sort of -- not feeling that we leave anything on the table as a result of that.

John Kreger, William Blair.

It's Natalie [Nadler] in for John today.

I was hoping you could expand on the demand dynamics that you're seeing in the market right now, and more specifically what you're seeing from large pharma clients versus mid-sized versus small biotech, and how much of the improvement that you're currently seeing is being driven by the different segments.

Well, we try very hard to service -- we serve -- in the way we restructured our sales force, we are looking at our client base in sort of three different constituencies.

One is academic and government, which obviously falls mostly on the preclinical side, and we've had a lot of traction there.

Historically, sales were up in 2009, and we anticipate a good 2010 generally, specifically because of the stimulus money and more sales force.

There's a lot of mid-sized companies, sort of small pharma and mid-sized biotech companies.

It is a challenging client base to support just because there are so many clients.

We are very optimistic that our new structure with generalists and technical experts supporting them will allow us to infiltrate and support those clients more readily.

We really have a much enhanced focus on the big pharma clients where we have dedicated very senior people as global account managers servicing them as well.

So there will be a lot of business available from all three of those segments.

There probably will be a disproportionate amount of money available relatively quickly from big pharma companies.

I only say that because their spending on an individual basis is so much more and their movements in terms of shrinking their own infrastructure and immediately having to look for outsourcing capabilities will be more dramatic.

There probably will be opportunities to lock in clients for longer and lock out the competition, and so we are very focused on that as well.

So we are trying our best to service the very large client base to take advantage of available business at all of them.

Obviously, biotech companies, by definition, do very little of what we do internally, at least smaller ones.

For instance, they don't do toxicology work at all.

Those that do, we don't see investing in infrastructure and don't see them investing in discovery services or in the RMS Services sector at all.

So we are really particularly well poised at the current time when clients really need -- it's really not optional; they really need to invest aggressively in outsourcing.

I think, as the price points begin to soften somewhat, we will really see material benefits.

Okay, great.

Then just given that the environment has improved for biotech funding, have you started to see an increase in inquiries from that client segment?

I think somewhat.

It -- our biotech clients tell us somewhat but some of that slack was picked up by direct investments by the pharmaceutical companies, particularly for those biotech companies that had compounds that they wanted to license or support in some way.

But we are probably just beginning to see an uptick as a result of more money being available from the capital markets.

Tycho Peterson, JP Morgan.

Good morning.

Maybe just following up on actually Doug's earlier question on capacity transfer, you've been pretty clear that you don't want to go down that path, yet at the same time you've talked about the increasingly strategic nature of your discussions with clients.

So are there other paths that you are looking to go down, or is it your view, once the demand starts to firm up, we will go back to kind of a normalized business-as-usual environment?

I don't know what a business-as-usual environment means anymore.

I think what's happened historically is not really relevant and it's not a particularly good predictor.

We have a client base that has totally changed, totally morphed and continues to shrink.

What we are really trying to discipline ourselves to do is deal with every client on an individual basis and not try to force them into some specific paradigm that we worked out for all of our big drug companies for instance.

Some will continue to want dedicated space; some may want to transfer assets; they may not transfer them to us; some will be -- want longer term preferred provider agreements with some sort of specialty ability to be in the front of the line in return for large amounts of work; and many will be comfortable just getting in line and waiting.

I do think just being comfortable getting in line and waiting will dissipate as space begins to shrink.

So that's the only thing I do think is relevant for (inaudible) historically.

So right now, if you can book a study in a few weeks, you don't really have to think about it all that much or plan that carefully.

If that hopefully get to the point where it's a couple of quarters, let's say, and clients are very impatient because they have a new compound that will change the market dynamics significantly.

So I do think that we continue to be in uncharted waters in terms of what the competition looks like, what our clients look like, and what we look like.

We've tried, with all of the changes that we made in fiscal '09, to be very creative and flexible and open to working with clients differently and we don't really think that's going to change anytime soon.

I don't think we're going to get back to any specific way to work with most of our clients.

Okay.

Then on Shrewsbury, can you talk about what you would be looking for in terms of a sign that you would consider reopening that and just talk mechanically about what it would take to ramp that facility back up if and when the demand does return?

It's very straightforward.

As you know, while we haven't given the specific percentage, our capacity utilization is quite low.

We reckon it's quite low for all of our competitors as well.

It will improve literally as a result of us taking Massachusetts off-line but still won't get to the point that we would like it to be probably even by the end of fiscal 2010.

As we see our preclinical space beginning to get to the point where it is approaching optimal levels -- so optimal levels around 85%, let's see -- we see ourselves getting close to 80%.

We will be looking to bring that facility back online.

The facility of course only needs to be re-validated and it would take us a relatively short period of time to get a small crew in there to do the validation and to open in a small period of time, meaning about six months.

It probably takes us a year to year and a half to be fully at the level we were at when we closed it.

So let's say it's sort of takes us a year to get back at a reasonable capacity to take on additional work.

So we definitely will have additional time to do that.

We also have some (inaudible) available in Reno that just aren't fully outfitted but they are done and ready to go.

We have some additional space in Ohio as well.

So we are very flexible from bringing new space online.

If we happen to call this wrong and business comes back faster -- this would be a nice problem to have -- we certainly have sufficient space to do this.

It is entirely then a factor of how quickly we can bring on both old staff and train new staff to be able to do quality work.

Okay, thank you very much.

Robert Jones, Goldman Sachs.

Thanks for the questions.

On the use of cash, I know you mentioned strategic M&A and then also share buybacks.

On the M&A, can you discuss what types of deals you might be looking at?

I wouldn't imagine these would include taking on any additional toxicology capacity.

Then on share buybacks, Tom, I believe you mentioned that there is no change to the share count in 2010 guidance.

If that's right, how should we think about the potential for share buybacks going forward?

Yes, I will take your last question first and then flip it to Jim, but we do have $145 million remaining on our prior authorizations or existing authorizations (inaudible).

As we said, we will look at a myriad of options as we move to the first quarter.

To the extent that we do reinvigorate, that potentially would push down our share count during 2010.

On the M&A side, we continue to be interested in looking at mostly service businesses, mostly upstream, to fill in our portfolio.

The kind of optimal deal size for us has kind of been $50 million-plus from a purchase price point of view.

It doesn't mean we restrict ourselves to deals that size.

It means we would be certainly willing to take on a reasonable amount of debt to do bigger deals if it made sense for us strategically and it continued to distinguish us from our competitors and provide the services that our clients want.

So deal flow continues to be good and we are always active in that space.

Thanks for the questions.

Thank you.

That does complete our last question.

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