Charles River Laboratories International Inc (CRL) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories second-quarter 2012 earnings call and meeting with management.

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

Later we will conduct a question-and-answer session; instructions will be given to you at that time.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Susan Hardy, Corporate Vice President of Investor Relations.

Please go ahead.

Thank you.

Good morning and welcome to Charles River Laboratories second-quarter 2012 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 second-quarter results and review guidance for 2012.

Following their presentations we will respond to questions.

At approximately 9.30, when the earnings portion of the conference call has concluded, we will continue with presentations by other senior managers.

The webcast will continue through the end of these presentations which should be at approximately 12 noon.

There are two slide decks associated with today's presentations which are posted on the Investor Relations section of our website at ir.criver.com.

A taped replay of today's presentations will be available beginning at 2 p.m.

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 253408.

The replay will be available through August 22.

You may also access an archived version of the webcast on our Investor Relations website.

I would like to remind you of our safe harbor.

Any remarks that we 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 27, 2012, as well as other filings we make with the Securities and Exchange Commission.

During this call we will be primarily discussing results from continuing operations and non-GAAP financial measures.

We believe that these non-GAAP financial measures help investors to gain a meaningful understanding of our core operating results and future prospects consistent with 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 Financial Relations section of our website through the Financial Reconciliations link.

Now I will turn this over to Jim Foster.

Morning.

I would like to begin by providing a summary of our second-quarter results before providing commentary on our business prospects.

We reported sales of $285 million in the second quarter of 2012, due primarily to the negative effect of foreign exchange.

Reported sales were approximately 1% lower than the second quarter of 2011.

Strong dollar impacted sales by 3%, so on a constant currency basis the sales increase was approximately 2%.

PCS business delivered very good performance in the second quarter with sales increasing 3% over the prior year on a constant currency basis.

We were particularly pleased to see a sequential improvement in PCS sales, up $8.3 million or 8% over the first quarter.

The increase was driven primarily by the improvements in in-life sales, both non-GLP and GLP services, and also by the BPS business which you may recall had a weak first quarter.

The strategic partnership, which was initiated last November with a global pharma company, was a contributor to the in-life sales growth.

RMS segment sales increased 1.2% year over year on a constant currency basis, but, as expected, were sequentially lower than in the first quarter.

This was due to a number of factors, including the expected seasonal softness in Research Models sales in Europe and Japan, which we noted when we reported our first-quarter results.

The operating margin increased 20 basis points from the second quarter of 2011 and improved 170 basis points sequentially to 19.4%.

The improvement was driven by the PCS business.

Although declining 90 basis points year over year sequentially, the PCS margin increased by 420 basis points to 13.1%, primarily due to higher sales.

The RMS margin benefited from an insurance payment we received related to the 2011 earthquake in Japan and offset a decline due primarily to lower sales of large models.

As a result, the RMS margin was 32.8%, 20 basis points over the prior year, and just 50 basis points below the outstanding first-quarter performance.

Earnings per diluted share increased by 7.1% in the second quarter of 2012 to $0.75 per share from $0.70 in the second quarter of 2011.

The EPS increase was driven primarily by the lower number of shares outstanding.

We continue to return value to shareholders in the second quarter through our share repurchase plan with the purchase of approximately 458,000 shares or $15.3 million.

We are on track to purchase between 1 million and 2 million shares this year, which we noted when we gave our 2012 guidance last December.

We are reaffirming our constant currency sales guidance of 1% to 3% and raising our non-GAAP EPS guidance for 2012 to a range of $2.63 to $2.73.

We are confident that our targeted sales efforts are enabling us to strengthen relationships with all of our clients and to gain market share.

Although the volatility of demand impedes stronger sales growth in the near term, we continue to believe that we have positioned ourselves for higher growth as our large pharma client base increasingly turns to outsourcing for the expertise that they no longer need to retain in-house.

In anticipation, we are continuously striving to improve our internal efficiency and to employment systems and capabilities which give us a competitive edge.

The benefits of these actions, as well as our stock repurchases, are evident in our EPS and give us the confidence to increase our non-GAAP EPS guidance.

I would like to provide some details on the segment performance.

The RMS segment delivered a very good performance with sales of $173.6 million.

The year-over-year decline was due primarily to foreign exchange which reduced sales by 3.8%.

In constant dollars RMS sales increased 1.2%.

The growth rate was lower than the first quarter for a number of reasons.

First, as we discussed on our first-quarter call, we have historically seen seasonality in Europe with second-quarter sales growth lagging the first quarter.

We also commented that in Japan the fiscal year ends in March leading to higher spending in the first quarter and the usual delays in spending at the start of the new budget year in April.

Global Pharma was the third factor as earlier elimination of molecules and industry consolidation, both through acquisition and capacity reductions, resulted in lower volumes.

Finally, sales of large models declined again as sponsors continued to shift to less expensive Asian models.

All these factors were evident in sales of Research Models which decreased 3.4% in the second quarter of 2012 compared to the second quarter of 2011.

However, excluding the negative effect of foreign exchange, Research Models sales were effectively unchanged.

Europe still delivered sales growth, excluding foreign exchange, although at a slower rate than the first quarter.

Japan also had higher sales in the second quarter of last year which was impacted after the aftermath of the earthquake.

Looking at the balance of the year we expect sales of Research Models to continue to decline, primarily due to normal seasonality.

However, we expect the RMS segment as a whole to remain stable from the second-quarter levels as services and in vitro offset the decline in models.

As was the case in the first quarter, the largest RMS sales contributions came from our in vitro business followed by our Discovery Research Services, or DRS, business.

Excluding foreign exchange, these two businesses continue to drive growth in the double-digit range.

In vitro business delivered an outstanding performance in the second quarter with sales growth exceeding 10%.

As we have continuously reported, the PTS franchise, including the newer multi-cartridge system, or MCS, performed extremely well.

Instrument sales were strong and the number of cartridges used per reader per day, a key performance indicator, increased in the quarter.

The PTS products appeal to a wide variety of clients because of the ease of use and fast, accurate results.

With smaller businesses, such as nuclear pharmacies and small manufacturers, benefits are immediate.

They can test in-house without the delays associated with outside lab services.

For our larger clients, the conversion process is more complex requiring high throughput capabilities and, in some cases, revalidation for regulatory agencies.

The benefits, however, are just as compelling.

The advent of the automated MCS scheduled to launch in the second half of 2012 addresses the throughput issue for our large biopharmaceutical clients, and we are offering training and consulting services to assist with the implementation and validation process.

We already have clients committed to the automated MCS.

Based on the significant opportunity represented by these larger clients, we are very optimistic that this business will continue to grow at a constant currency rate of 10%.

Foster Jordan will tell you more about the PTS business later this morning.

Discovery Research Services, or DRS, was another growth driver in the second quarter for both RMS and PCS.

As you know, our North Carolina and Finland businesses are reported in RMS and all other non-GLP discovery services are reported in PCS.

Regardless of which segment you look at, this business is benefiting on three fronts.

First, from the decision by many of our large clients to outsource these services, as evidenced by our strategic partnership with a major global pharma company.

Second, from the shift in R&D to eliminate more molecules earlier in the process and, third, from the focus on oncology.

Our DRS business provides the non-GLP services which our clients need to make earlier go and no-go decisions on which molecules should advance through the pipeline.

Our largest therapeutic area of expertise is oncology into which the greatest percentage of research dollars is directed.

Elise Martin manages the strategic partnership for Charles River will give you more insight into our Discovery Services shortly, so I won't comment further here.

I will simply say that we believe we are very well-positioned to gain market share in outsourced Discovery Services and particularly with our large biopharmaceutical clients.

Table on slide 13 summarizes the second-quarter sales performance for the RMS segment compared to the second quarter of 2011.

On a constant currency basis Research Models sales were essentially flat at $87 million.

Services increased 0.5% to $54 million and other products increased 5.3% to $32.5 million.

Service sales increase primarily due to the DRS business.

For the first half of 2012 DRS represented approximately 10% of total Charles River sales.

About one-third of this mouth is reflected in RMS and the other two-thirds in PCS.

Both of the businesses in other products contributed to the significantly lower growth rate compared to the first quarter.

For the first quarter of 2012 we noted that in vitro's growth rate far exceeded the expected 10% and that we anticipated growth for the remainder of 2012 to approximate 10%.

In addition, comparisons for the avian business became more challenging in second quarter of 2012 as we anniversaried some supply issues which had depressed prior-period results.

As I mentioned, the RMS operating margin was 32.8% in the second quarter compared to 32.6% in the second quarter of 2011, and on a sequential basis, just 50 basis points below the outstanding first-quarter results.

The insurance payment offset the decline from lower sales of large models and our continued efficiency initiatives also help to maintain the operating margin well above the 30% level.

At $111.1 million PCS sales in the second quarter increased approximately 1% from the second quarter of 2011 and 3% in constant currency.

The sequential increase was outstanding.

At $8.3 million, or 8.1%, this was the sequential performance of 2008.

As I mentioned, the BPS business, which was a drag on first-quarter results, improved in the second quarter as expected.

However, the primary driver of the improvement was the in-life business, both non-GLP services and GLP safety assessments.

I have already discussed the increase in non-GLP Discovery Services, which is being driven by our clients' intensified focus on earlier elimination of molecules from the pipeline and moving forward only with those molecules which have the greatest likelihood of commercial success.

This focus is evidenced by the strategic partnership with a major global pharma client, as well as the increasing proportion of discovery studies in our sales mix and our continuing discussions we are having with other large pharma clients.

Discussions concerning additional strategic partnerships are ongoing as our clients grapple with the logistics of how and what to outsource.

In our opinion it is no longer a question of if but rather when.

As a result of the organizational changes and process improvements we have made, as well as the IT infrastructure we put in place, we believe we are extremely well positioned to be the partner of choice for our clients.

Nancy Gillett will discuss this concept with you shortly.

We were very pleased to see a small increase in GLP's safety assessment studies.

I mentioned in the first quarter that reproductive toxicology studies had improved, and we have continued to see some increased activity in other areas.

Given the volatility of the large pharma market and the limited visibility of demand in general, it is still too early to say that we are seeing a sustained improvement in the safety assessment market.

I will say that we are currently seeing better proposal quality and an increase in longer-term studies, and this supports our belief that this is a stable to slightly improving market.

With market stabilization and our success at winning new business at our facilities are filling.

Although we haven't reached the optimal utilization level overall, we do have some of our facilities running at or near capacity.

The actions we have taken over the last four years to harmonize and standardize our preclinical sites have been instrumental in giving our clients the confidence to place work at multiple sites.

They can choose a site based on proximity or study start timing with the knowledge that they have full access to Charles River's expertise wherever they reside and that their data can be easily obtained on a consistent format regardless of site.

Higher sales, improved capacity utilization, and BPS recovery resulted in a 420 basis point sequential improvement in the PCS operating margin to 13.1% in the second quarter.

The year-over-year decline of 90 basis points is attributable to a greater proportion of shorter-term studies in the sales mix, as well as the initial transfer of protocols under the strategic partnership.

We are making excellent progress on the transition and the partnership is working extremely well.

In addition to the direct comments they have made, we believe our partners willingness to act as a reference for Charles River indicates their satisfaction with the relationship.

We have been collaboratively with the client at every step to ensure a smooth transition of the work, and both we and they are very pleased with our progress to date.

As the relationship solidifies we truly believe that the client is viewing its colleagues at Charles River as critical partners on the same side of the table.

Not us and them, but one seamless discovery and development team.

We are very pleased to report another strong quarter for non-GAAP earnings per share and to increase both are GAAP and non-GAAP earnings per share guidance for 2012.

We believe that biopharmaceutical companies continue to move forward with outsourcing as a cornerstone of their goal to improve efficiency and enhance the productivity of drug development pipelines.

Our continuing discussions with multiple large clients concerning strategic relationships indicate to us that they value Charles River's broad portfolio of early-stage products and services, our scientific expertise, and our flexible solutions to their drug development challenges.

We continue to believe that the breadth of our integrated portfolio, our deep scientific expertise in vivo biology, rigorous management of our business, and intensive focus on our four key initiatives are the foundation for the successful execution of our business strategy today and in the future.

In conclusion, I would like to thank our employees for their exceptional work, commitment, and resilience and our shareholders for the support.

And I would now like Tom Ackerman to give you the second-quarter financial details.

Thank you, Jim, and good morning.

Before I recap our financial performance, let me remind you that I will be speaking primarily to non-GAAP results from continuing operations.

A reconciliation of non-GAAP items can be found in our press release and on our website.

Second-quarter results were quite favorable, highlighted by a 19.4% operating margin and EPS of $0.75, as well as the rebound in PCS sales to $111 million.

This was particularly impressive in light of the increasingly negative impact from foreign exchange, which reduced reported sales by approximately $9 million, or 3.1%, and EPS by nearly $0.03 when compared to the second quarter of last year.

Sequentially reported sales declined by slightly over $1 million, or 0.4%, but would have been unchanged excluding the impact of foreign exchange.

We are pleased with the meaningful improvement in the consolidated operating margin, which increased 170 basis points sequentially, and the $0.05 increase in EPS.

Higher operating income versus the first quarter contributed $0.07 to EPS driven by the improvement in PCS sales and operating margin as well as lower unallocated corporate costs.

In aggregate items below the operating line reduced EPS by approximately $0.02, driven primarily by a $2 million unfavorable shift in other income.

I will now walk you through these drivers in more detail.

PC contributed nearly $0.08 to the sequential EPS improvement as the segment sales and operating margin increased significantly as a result of improved demand across all areas -- non-GLP discovery services, GLP safety assessment, and biopharmaceutical services.

The decline in RMS sales and operating income offset the majority of the PCS improvement, due primarily to lower sales volume for Research Models, particularly in Europe and Japan, coupled with the negative impact of foreign exchange.

Operating income for the RMS segment included an insurance settlement related to last year's disaster in Japan, which benefited the second-quarter RMS operating margin by approximately 100 basis points and EPS by approximately $0.02.

In addition to the normal seasonal trends which impact the RMS segment in the second half of the year, we expect the second-quarter insurance settlement to be a sequential headwind to the RMS margin in the third quarter.

Unallocated corporate costs were also a significant contributor to the sequential operating margin and EPS increase.

Unallocated corporate cost declined by $3.3 million sequentially to $16.3 million in the second quarter, almost entirely due to very favorable health and fringe-related costs.

We continue to expect unallocated corporate costs to be at or slightly above 6% of sales for the full year.

Net interest expense was stable in the second quarter at $4.4 million, representing a slight improvement from the first-quarter level of $4.8 million.

We continue to benefit from lower average debt balances as well as lower interest rates.

Based on these continued benefits, we now expect net interest expense to be approximately $18 million to $20 million in 2012.

As I mentioned earlier, other income was unfavorable by $2 million on a sequential basis.

This was driven by several factors including losses related to certain investments, primarily those associated with the deferred compensation plan, and changes in foreign exchange translation.

Since changes to other income are primarily driven by market-based returns, we do not forecast this line item.

Our non-GAAP tax rates of 26.1% for the second quarter and 26.4% for the first half were slightly more favorable than our guidance range of 26.5% to 27.5% for the year, primarily due to true ups of prior-year tax returns in Canada.

Since this discrete item is not expected to recur in the second half of this year, we continue to forecast that our tax rate for 2012 will be within the guidance range.

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

Free cash flow in the second quarter was $47.9 million compared to $58.6 million last year.

Year-to-date free cash flow totaled $59.1 million.

We continue to expect to achieve free cash flow in a range of $160 million to $170 million for 2012, as we typically generate greater free cash flow in the second half of the year.

CapEx in the first half was $23.6 million, which puts us on track to spend approximately $[15] million in 2012 as we previously expected.

We continue to balance our capital priorities between modest capital expenditures, stock repurchases, and debt payment while evaluating potential smaller acquisitions.

We repurchased approximately 458,000 shares for $15.3 million in the second quarter and 806,000 shares for $27.8 million in the first half of 2012.

As of June 30, we had $88.5 million outstanding under our stock repurchase authorization.

We continue to anticipate that we will repurchase between 1 million and 2 million shares in 2012.

Our total debt declined by approximately $18 million in the second quarter as we continue to repay debt modestly ahead of the scheduled installments on the term loan.

We expect accelerated repayment activity to continue over the remainder of the year.

You may have noticed that our balance of current debt totaled $134 million in the second quarter.

The increase relates to the June 30, 2013, maturity of our $350 million convertible debt which now occurs in less than one year.

As a result of the impending maturity, we were required to include a portion of the debt as short term, but only the portion of the convert that could not be refinanced utilizing the existing capacity available on our current revolving credit facility.

The remainder continues to be classified as long-term debt.

We are currently evaluating our options to address the convert obligation, but do not expect to provide further details until a decision has been made.

We are very pleased that S&P reaffirmed our investment grade credit rating and upgraded our outlook to stable from negative during the second quarter.

As Jim discussed, we have maintained our 1% to 3% constant currency sales guidance while upgrading our reported sales outlook to reflect the more significant headwind from foreign exchange.

Foreign exchange is now expected to reduce reported sales by 2% compared to our prior estimate of 1%.

Based on our current estimate foreign exchange is now expected to reduce full-year 2012 sales by nearly $25 million and EPS by approximately $0.07 versus last year.

The primary driver of this change is related to the weakening of the euro, which has a more significant impact on our RMS segment.

We recently completed an extensive review of our euro zone exposure and concluded that our exposure to higher risk regions is quite limited.

We generate less than 5% of total sales and operating income in higher risk euro zone countries, including Italy and Spain, and have thorough and continuous credit monitoring for clients in this region as we do for all of our clients.

In addition, while sales growth in Europe slowed somewhat in the second quarter, our European businesses continued to perform quite well and posted another constant currency sales increase.

We believe the slower growth rate was related to ongoing site consolidations and cost savings programs at several large biopharmaceutical clients and not the macroeconomic conditions in the euro zone.

Since our exposure is weighted toward the more stable Western European economies, such as Germany and France, we do not anticipate that macroeconomic issues will have a meaningful impact on our second-half results beyond the translational impact of the weaker euro.

For the year we raised our non-GAAP EPS guidance to a range of $2.63 to $2.73.

We recognize our EPS exceeded expectations in each of the first two quarters of 2012, but remain cautious with our outlook due to a number of factors.

First, as I just mentioned, movements in foreign exchange rates, particularly the euro, were unfavorable during the second quarter leading to the $0.07 headwind for the year.

In addition, we expect normal RMS seasonality in the second half of the year, which would result in slightly lower sales than the first-half level, and operating margin slightly below 30%.

Following the significant sequential increase in PCS sales, we remain cautiously optimistic that PCS trends will be stable in the second half of the year.

The business has stabilized and demand improved in the second quarter.

However, visibility remains limited, and based on our experience in the last few years, preclinical activity has trended lower in the second half.

As a result, we expect pre-clinical sales to be slightly lower in Q3 and 4 versus the second-quarter level of $111 million with some moderation in the PCS operating margin.

I would also like to point out that the lower level of our sales an EPS outlook takes into account the uncertain macroeconomic and funding environment.

We understand that demand would need to take a meaningful step down to approach the lower end of our guidance range and, while we do not expect this will occur, we believe our guidance range is appropriate in light of the market uncertainties that persist.

Our outlook incorporates these headwinds, which we believe will culminate in third-quarter consolidated sales and EPS being at the low point for the new year.

This is consistent with historical seasonal trends in the last two years, although we do not believe the RMS sales decline from Q2 to Q3 will be quite as pronounced this year.

In addition, we expect the tax rate and unallocated corporate cost to be slightly higher sequentially and we do not expect to benefit from the Japan insurance settlement that contributed $0.02 to second-quarter EPS.

To conclude, we are pleased with our strong first-half performance and remain cautiously optimistic that underlying business trends will remain stable for the remainder of the year.

Thank you.

Be happy to take your questions now.

(Operator Instructions) Ross Muken, ISI Group.

Good morning, guys.

As we think about the assumption on PCS for the rest of the year, I realize some of the visibility is limited.

As you feel like the trend has happened in terms of the roll in of the new strategic partner as well as maybe some of the moving parts on the big pharma and mid pharma side.

Where do you feel like you were most surprised, it seems like positively, relative to how kind of the second quarter or the entire sort of first half has played out in that business?

Where were we most surprised, is that what you said?

Yes.

I am not sure we were surprised.

We were certainly pleased with the results.

I think we are executing quite well.

I think we are doing extremely well competitively.

The strategic deal that we did we worked several years to get that, so we are now seeing the benefit of that.

So the strength that we have seen in the first half of the year, particularly in the second quarter with preclinical, I think has been a long time coming.

I think it is a combination of our competitive strength, our flexibility in the marketplace, and how we are utilizing our capacity.

Given what has gone on for the last four years, given the lack of visibility, the inherent volatility of the business model, it is really difficult for us to just assume that things will continue to improve going forward and that we will continue to build share sort of at the rate that we have in the second quarter.

Would obviously be delighted for that to happen.

So I think we are taking a very -- an appropriately realistic look at the business.

We have also had sort of a second-quarter decline for the last few years just generally.

People seem to get out of the starting gates faster and crank up and off in the second quarter.

We see some seasonality in the third and fourth quarters, so again I think we have defined the year as we see it based upon our historical experiences and kind of real life activity.

Thanks.

I guess on the cost side you guys have been very strong in terms of pulling extraneous costs out of the business.

You've gotten some pretty good leverage even when top line wasn't sort of where it needed to be.

I guess in the context of -- and I don't want to steal too much thunder from later, but do you feel like the margin progression, the path that you are on there is still quite a bit of headroom there in terms of rationalizing the SG&A line?

Or do you feel like more of the benefit going forward as we think about margin expansion here is probably going to come more from the gross line?

We continue to have a process improvement program internally.

We did mention at the outset of the year that through that program we expected to realize $25 million in savings during 2012, which we are on track to do.

And given the competitive environment that we continue to find ourselves in, process improvements for our efficiency and quality continue to be a high priority within the Company.

So I continue to believe that we will do that.

We are focused a lot more on the preclinical environment historically.

We are focusing aggressively as well on the Research Model market and Services segment as well at the current time.

We will continue to leverage SG&A as best we can.

Some of those expenses were a little bit lower this quarter, as we mentioned, due to some of our health-related benefits which were a little bit hard to predict.

I do think that those will pick up a little bit.

So I think looking forward as you asked I think we will find a little bit more leverage in the operating margins and probably a little bit less of that will come from the SG&A.

That is our target and we are going to continue to work hard at that.

Great.

Thanks, Tom.

Okay, thanks.

David Windley at Jefferies.

I have a three-parter on the strategic deal.

So, first, can you call out how much it really improved sequentially on revenue?

How much did it contribute sequentially in revenue?

From your comments -- second part of it.

From your comments on the protocol transfers affecting the margin, was it actually dilutive to margin in PCS in the second quarter?

Third, in your bullets in some of the slides you talk about this moving toward 5% of revenue in 2013?

Jim, I have also heard you talk about it trending toward kind of $100 million run rate, which would, I think, be quite a bit higher than 5% of revenue in 2013 and so I wanted to get clarification on what the top end looks like for the strategic deal.

So sequential revenue, margin, and then top end.

I think we talked about the client increasing to 5% of sales, going from 2.5% there.

This particular client historically has been at 2.5% so they would increase to 5%, so essentially doubling to put the upper end range on where we are.

We do hope, ultimately, that we will do more than that with the client but, as defined in the terms of the agreement, that is kind of where we expect it to be.

We are looking at and have been in successful in some areas of actually pulling in other ancillary business not contemplated into the deal in with that client.

We didn't say specifically what we grew sequentially from the strategic partnership, but sales are up.

I don't think at this particular point in time we want to break that out quarter to quarter, but the sales are improved somewhat.

And given the number of facilities that we are using, some facilities actually the margin has increased and other facilities where there is a greater transfer of assays we have actually seen some expense headwinds, which is I think the comment that Jim had made a little earlier.

I was at this client for most of the day a couple of days ago and there is an enormous amount of additional opportunity for us to work with them beyond this particular deal.

We really have gotten to the point -- the conversation was such that it wasn't the client and a bunch of Charles River people.

It felt like we were the client, which is definitely our goal here.

I certainly think $100 million is in our foreseeable future.

Maybe 2013 was a little bit early, just to clarify that.

Maybe not, but perhaps.

We continue to talk about additional services that we can provide them as they continue to rationalize their cost structure.

And I do think, as we said before, this is a really good template for other deals and other relationships and other conversations we are going to have with clients.

All of the big drug companies are going to have to rationalize their infrastructures faster.

As we continue to demonstrate our capability to have multiple sites working in unison, great IT interface, quality of the science and data, and as they begin to see us as same, I think it is a very powerful transformation that we are actually in the midst of right now.

Okay.

If I could follow up on a clarification on the guidance, if we do the math the second half, Tom, as you kind of talked about, second half is pretty substantially down on a run rate basis from what you have done in the first half.

And I want to make sure I interpret your comments.

Unless things get really bad you are kind of taking the bottom end of the range off the table, but the factors that could drive sequentially the earnings down would be the healthcare costs were a big benefit, about $2 million swing in the second quarter; tax rate was a little low; the insurance settlement was a couple of pennies positive in the second quarter, those kind of factors.

Is that the right interpretation and did I leave anything out?

Thanks.

Pretty much, Dave.

That is a good summary.

We have -- as Jim said earlier, the Research Model business is down in the third quarter due to seasonality, both on the top line and the margin.

As we said, we think that the preclinical business itself on a sales basis will be reasonably stable.

We did say that it would be moderately lower but still higher than Q1, meaningfully higher than Q1, and a little bit lower than the Q2 number.

So I think it is fairly consistent with what we have seen in the past years with the exception of a couple of the one-offs that you actually referred to.

Garen Sarafian, Citigroup.

First, congratulations on the PCS, the uptick after numerous quarters of declines.

I was just wondering (multiple speakers) -- Garen Sarafian, Citigroup.

On PCS how has the recent changes in the toxicology competitive landscape contributed to the results?

Is it just a coincidence or if you could just maybe even qualitatively speak to the supply consolidation, rationalizations and the fact they are impacting your results?

And how long do they typically last if it is a tailwind?

Our competitive situation is really strong in preclinical.

We did a lot of our internal rationalization on space and staff earlier than some of our competition.

We spent a lot of time on IT interface, and we are really listening to the clients and not trying to drive this sort of this is the way we work and you need to work with us in this fashion.

We are seeing share gains with multiple competitors, large and small.

And so a lot of that has to do with the fact that we have been working really hard with what we call our mid-tier clients, the small pharma and biotech clients, to make sure they understand that not only are we not too large to interface with them but we can do that well and we are structured to do that efficiently.

So we have seen an uptick in our mid-tier clients.

We have several clients that we have all of the share.

We have increasing share with others.

We have seen share gains with some clients and in competitive bid processes, which we are in constantly, with large and small competitors we are winning an undue number of those bids versus what happened historically.

So I don't know; there is a lot of factors where I think we have really figured out how to put our best foot forward.

The final analysis, putting price aside, which is hard to do, but as we are able to compete competitively it continues to be all about the science and all about the interface and all about the responsiveness and turnaround time.

I think we are actually continuing to do that better.

The conversation, for instance, that we had with this large client that we are working with that we have this big contract with we are servicing this contract from multiple Charles River sites.

And they said the other day that they are so pleased with the fact that the molecule goes in one place and they get the answer back and they have no sense that they are dealing with multiple sites.

And that has actually been our goal in preclinical for years.

I do think that we have achieved that in large measure and we are continuing to enhance and drive efficiency that we can do that even better going forward.

And you mentioned price; when does pricing -- when capacity becomes more rationalized then there is more leverage for stable and perhaps even increasing pricing.

How has pricing trended in toxicology the last six to 12 months then?

I think pricing is relatively stable.

It is a big issue with everyone.

Our capacity is filling.

As I said in my prepared remarks, some of our sites are actually at what we call our full capacity utilization levels, optimal capacity utilization levels.

I think that is going to continue to be helpful.

We constantly test price, we bid on things, but we are not assuming that we are going to have it.

We just sat down and did our three-year plan and we have very little price in there.

We have some, but we have very little price.

The assumption is that we are going to have to drive efficiency, which we are, and the combination of efficiency and volume I think is conspiring to help improve the operating margin.

Tim Evans, Wells Fargo.

Could you talk a little bit about your IT infrastructure?

Where you are in that build out, where you have left to go, and how that might be contributing to, I guess, the improved win rate that you were just talking about?

Sure.

We went through an ERP process a few years ago and we saw the benefits in our preclinical business almost immediately.

We were able to get very refined data, particularly on the cost side, to enhance our ability to bid successfully.

So I think some of the share that we are getting, frankly, particularly with these competitive pricing scenarios is based on really understanding our costs well and knowing how far we can go.

So that is improving dramatically.

We have to still roll out our ERP with our European locations.

In RMS, we are in the final stages of developing a plan to do that and we understand where the benefits came and how to roll out certain aspects of that.

So that is on the drawing board.

In terms of our IT interface with our preclinical clients who have very, very specific needs, in particular they want to get online and see the data.

They want to know that it is confidential, they want to know that it is relatively real time, and they don't want you to necessarily tell them.

They want to see it or discuss it with you.

And in this big deal that we did last November and in others that we are beginning to work on, we are putting together, I don't want to call them unique, but sort of quasi-unique structural relationships with the clients from an IT point of view.

So they will have to be somewhat customized.

The point being that they want to see the reports and not recognize them as coming from Charles River.

So the best complement that we got the other day was the client saying we are getting all these reports from you and it feels exactly like it is coming from our own internal operations.

So we will continue to do that, we will continue to refine our interface with them, and we will continue to build out our ERP capabilities.

Great.

Then just one clarification on the strength that you are seeing in regulated safety assessment.

How broad is that from a client perspective and from a maybe -- are you seeing it in both small clients, large clients, etc.?

Also, can you just clarify is it up both year over year and sequentially?

Yes, up both.

We have a really good composite right now, so we are seeing particular strength in the small clients.

The problem with the big clients is you have very, very big wins and then you have major consolidations with some of your customers that you kind of offset that.

But for the companies that aren't sort of dismantling themselves we are seeing some very big wins there as well.

So, yes, the studies are still shorter than we would like them, or that they have been historically.

But having said that we are seeing more specialty work right now, we are seeing the studies elongate so they are better, we are seeing more complexity in the studies, and we are seeing higher quality proposals from the clients coming in asking us to bid.

So this is all sort of working together to improve the mix a little bit and to improve the overall volume.

Obviously, the sequential pop was more significant.

Good morning.

Doug Schenkel from Cowen.

Thanks for taking the questions and thanks for hosting this this morning.

First, really a question for I think Tom.

A very nice improvement in TCS margin in the quarter; it doesn't sound like the strategic partnership had a meaningful impact on operating margin, good or bad, relative to what you reported in the quarter.

At least if I am understanding things correctly.

If that is the case, would you be willing to provide any color on how much of the margin improvement is attributable to utilization versus product mix versus any other notable contributors -- FX, price?

Again, it seemed like it was a very nice improvement relative to Q1.

I think the largest contribution to the margin improvement of PCS is obviously volume, which relates to capacity utilization of course.

I think the strategic partnership is contributing.

It is contributing at or above where all of our preclinical businesses are.

So we are seeing some headwinds in at least one location as we ramp up assays, but a couple of the other locations that are more mainstream are doing better.

Of course, some of that work is actually on the RMS so we are seeing some benefits in the RMS from the strategic partnership as well.

So I think the key driver, as I said, and you referred to was really the capacity utilization.

Okay, thanks for that.

Then I may be jumping the gun on Foster's presentation for later this afternoon -- sorry, later this morning -- but I guess I'll ask the question anyway.

Any changes in how you're thinking about the total addressable market opportunity in in vitro?

Do you have a pending launch of the automated MCS?

Just be interesting to hear how things are building into the second half; any backlog details that you would be willing to share and anything that you might be willing to share in terms of just how things are going geography by geography.

I am not sure exactly what you are getting at.

From an addressable market point of view, as we continue to enhance these products, and particularly as we move into the central laboratory we have increased the market size.

Yes, that is what I am getting at is just how has that evolved over the last few quarters.

We are taking share as we convert our clients from our competition's technology.

It is still early days there, so that is actually quite positive.

As our technology improves and we get deeper with our clients we are quite confident we are going to be able to continue to grow this business at sort of 10%-ish top-line run rate.

We have got very, very attractive operating margins in that business as well, and we have gotten very efficient in terms of our ability to both manufacture the devices and price them.

On a per test basis the price is actually higher for the client, but their overall labor component internally will drop, and the speed with which they get the answer is so much more profound that they are happy to do that.

So we feel we are going to be able to continue to convert the market for the next few years, and I am sure we will have new products coming out over that time frame as well.

Good morning.

It is Tycho Peterson, JPMorgan.

Just following up on your comments on the strategic deal.

I am wondering if you can talk to your appetite and bandwidth for other deals.

Should we assume that these all would also come with some margin pressure initially as you ramp?

And as you have had success with the first deal do you expect follow-on deals to start kind of piecemeal with the trial period, or can you actually go and shop a larger deal from a strategic perspective to other partners?

This deal has definitely helped us generate conversations with other clients.

In fact, we have indicated a couple of times now that we have actually used the big client that we have.

By the way, I was with them, as I said earlier, this week and we talked about how nice it would be to be able to name them so we don't have to euphemistically keep talking around in circles here.

But nevertheless.

It has helped us in a lot of ways to enhance the conversations and -- so two things are happening at once.

One is that we are establishing the fact that this sort of work can be done externally by someone like Charles River over multiple therapeutic areas without losing speed.

Speed is a big issue for these clients, so without losing speed and without in any way sacrificing the quality of the science.

At the same time, many, many other companies have drugs rolling off patent, reducing infrastructure, and are going through exactly the same situation.

The preclinical capacity is and can be used for regulated studies and nonregulated studies, so from a capacity point of view we definitely have the bandwidth to add additional large contracts.

I think we have said publicly two or three of similar scale.

We have much of the senior scientific staff that we need, but in specific therapeutic areas.

I think we are going to need to flesh that out further, so we are talking about adding primarily technician level people and making sure that the IT interface is specifically designed for that client.

Will we be able to do them faster?

Perhaps.

It really depends on the client and the geography and the mix and their therapeutic area and what their individual assays look like.

For sure there is going to be a startup period with everyone where you are transferring the protocols.

We are making sure that we are getting them right and they are happy with it.

So if it takes a half a year to ramp these things up I think that will be fine.

There is a modest impact on margin as you do that, but it is modest, and I think once you're up to full strength we will be able to offset that.

Then as a follow up, you touched on M&A as one of the uses of capital.

Should we assume that (inaudible) to add additional capabilities?

And, if so, are their obvious areas clients are asking about?

And alternatively, geographically are there areas that would be interesting?

There is obviously another Chinese asset up for sale, so just curious as to your thoughts there.

So without specifically answering that question, we are quite active in M&A right now and I would say it is across three or four different buckets.

Yes, we are looking geographically.

We are looking to expand some of our current service offerings with additional technical capabilities, and we are looking to expand the whole offering with some capabilities that we don't have now.

We continue to look entirely upstream, so the whole focus is earlier as the drugs are developed.

And perhaps more to come on that.

Greg Bolan from Sterne Agee.

So to follow up on the earlier question on the in vitro business, would you characterize the addressable market as going from $50 million about three or four years ago to about $200 million today?

Yes, I think we have sized it about $400 million.

It is about $400 million now.

And it is in the multi-cartridge system included in that $400 million estimate?

Yes.

And then just thinking about the leverage ratio now it seems low.

What is the thought process between the accelerating debt payments versus adding more to a share repurchase program?

We are comfortable with our leverage ratio at this particular point in time.

As we have mentioned in the past, we have a split rating with the two agencies, one is investment grade and one is a couple notches below.

For a lot of reasons the Company is pretty comfortable with that, so we did lever up to do a lot of share repurchases the last couple of years.

As we look at capital deployment going forward we will continue to buy some shares, which we are doing this year.

In terms of M&A, Jim mentioned there is some things that we are looking at out there, smaller type acquisitions.

We will look at the impact that that has on our available cash, and we will probably monitor our debt closely.

We did talk about the convert briefly.

We will be working hard to look at options for that next year, which we have been doing already, so I think the Company is pretty comfortable with our debt basically where it is.

Thanks, Tom.

Ricky Goldwasser, Morgan Stanley.

Thank you, good morning.

So, Jim, it sounds like your strategic partnership provides you with a lot more clarity in deciding to how your large customers are thinking about prioritizing their work.

Has this changed in any way your overall view on the value given the type of work, not necessarily the pricing and the margin structure for the PCS segment, on a steady state perspective?

Sorry, Ricky.

It is really hard to hear your question.

I can repeat it.

Can you hear me better now?

A little bit.

Speak slowly.

The question is really around how the strategic partnership that you now have that gives you more clarity and more insights, how large customers are thinking about their work.

Does this change your overall view on the value and margin structure for the PCS segment on a longer-term basis?

Does it change our view on what, Ricky?

On the value and margin structure for PCS.

And is it given the type of work that the large customer wants to do with you, not necessarily the pricing structure?

So I think you are asking about additional large strategic deals and the impact it will have on operating margins in that sector going forward.

And so if that is the question, with regard to the preclinical assets and margins, we are aspiring for mid to high teens these days.

I think we should be in the hunt to do that.

Some of the services that we actually report in the RMS sector, particularly from our Finland and North Carolina facilities, have higher operating margins and we would be quite confident we would be able to maintain those as well.

Ricky, what I would add, and Tycho referred to that a little bit before, is certainly the strategic partnering environment is competitive from a pricing standpoint.

Some of the benefits to the Company are clearly the incremental volume, which allows us to fill some of our space.

We do collaborate quite closely with our clients and, as smart as we think we are, we have found a number of different ways to actually do the work more efficiently through our clients and interacting with them.

As Jim mentioned, and we have already seen this in some small areas, there is incremental other work that can be gained outside the partnership.

And one of the things that we are learning more closely with our partners in these particular areas is the importance of gaining consistent stream of work.

So our clients are coming to learn that better as we work more closely with them, the value of providing forecasts in a steady state of work that allows us to use our workforce and our space more consistently and keep running more smoothly.

So I think that while it has continued to be a competitive pricing environment, I think there are number of other factors that allow us to believe that, as Jim said, our margin will stay about where it is and improve into higher levels as we move forward.

We just have time for one more question at this point.

We have other periods of time for question-and-answer later in the program.

John Kreger, William Blair.

Thanks very much; hopefully you can hear me.

Just a follow-up question on the strategic discussions you are having.

First of all, the current strategic client.

Can you give us a sense of when you would expect that to get up to the 5% revenue range?

And then, more broadly, the other discussions you are having with other strategic opportunities; are you seeing those focus mainly in the Discovery Services area or are you seeing a mix of both regulatory and nonregulatory tox work?

So we will exit the year at the 5% run rate and we are tracking nicely towards that, pretty much according to the schedule in terms of the protocols being transferred to us and us getting up to speed.

So we are quite confident -- and we just reviewed that with them two days ago.

Conversations with other clients are both sort of classic non-GLP discovery and also safety assessment, so I think we are going to get some relationships that are one or the other or some that are both.

That sort of space is being dismantled at multiple pharma companies.

They are taking vivarium space out that will impact all of that.

So on the safety assessment side they have obviously known for years that we can do that, so that is a little more straightforward.

On the Discovery side, a lot of it has been getting the word out that we have those capabilities, particularly across multiple therapeutic areas.

I think we will continue to see it in both lines of business.

Great, thanks.

Jim, one quick follow-up.

It sounds like you are getting some nice lift in your capacity utilization on the PCS side.

Can you give us a sense about in aggregate how much more the business would have to grow before you would start bringing on additional staff?

Additional staff?

Oh, we have been bringing on additional staff this year at a couple of our locations.

So we have been running lean, appropriately lean and as new work has been coming in we have been adding staff to make sure that we have the capability to do that.

And will continue to do so, mostly at the technician level.

Great, thanks very much.

Thank you.

Before we continue with Jim's next presentation, we would like to show you a brief video about Charles River which we hope gives you an understanding of what motivates us to come to work every day and our pride in our company.

(video playing)

We have been showing much longer versions of that at our employee all-hands meetings around the world to remind people about the relationship between what we do and lifesaving drugs.

And it has been really, really quite powerful.

So I want to give you a strategic overview before the break and then I will introduce my colleagues before the break.

So if you want to grab one or some of them to chat with you can do that and then several of them will be making presentations later.

So as you all know we have a unique portfolio of products and services that we are quite proud of.

As we go about our M&A activity we are looking to make it more unique and to distinguish ourselves more powerfully from the competition.

I just want to point out one piece of the pie chart on the left-hand side and that is academic and government at 24%.

So if I was making -- when I was making this presentation and some of you were here for that, I don't know, five years ago, that would have been in the mid-teens.

So we are getting really good traction with our academic clients.

That is a function of the price points for Charles River had been compressed versus the competition.

We don't have as great a premium and so they can get higher quality products at competitive prices.

There is also lots of money being spent in academic medicine, some of that is coming directly from big pharma companies.

In fact, it has really been a wonderful area of high growth from us.

We have also enhanced and added to our sales organization to do that.

So I just wanted to point that out.

So sort of our drug development pipeline chart showing our activity.

So we are meeting the clients very, very early, the discovery stage, with our animals.

A lot of the discovery work that we are talking about, the non-GLP talks, is becoming increasingly more important to us.

The first time drugs are put in animals and they are looking for a determination of whether a drug looks like it is going to be effective and safe.

Obviously, some of those molecules move into regulated tox studies and we have got a couple of post-market -- we have a post-market product and service.

We will be continuing to work to fill in areas where we either need additional enhancements or we don't participate at all.

When we meet with our clients again, as we did this week, part of the conversation is what services do you not want to do internally?

Who are you working with externally that maybe you would be happier if they were part of the Charles River family?

We are getting advice and counsel on areas to move into and actually specific targets.

There is one company that we are looking at right now that this big drug company has been using and we are really able to get time to early due diligence in the process.

So this is a breakdown of our sales.

You ought to pay attention to this because we are disclosing some things for the first time in response to continued requests from you folks.

One is the discovery research piece which is both in RMS and PCS, and you can see here right now it is about 9% of total revenues.

That is going to get up to about 10% by the end of this year as this deal increases, and I think it will continue to increase over time.

So I hope next year when we make this presentation it is even larger.

Lots of conversations about what is in other.

The principal question is how big is in vitro?

So there is your answer.

So 7% of our revenue, a bigger piece of our operating income, but you won't see the margins but a bigger piece.

We are really obviously pleased with the growth and development of that company which was quite small when we bought; has a disproportionate fast growth rate to our other businesses at the current time.

It is going to continue to get increasingly more important to us as we penetrate our clients and also release new products.

So the market outlook is an interesting one.

Our clients used to -- I used to go into some of these big drug companies and they used to say let me tell you the 20 things that are core and that we will never outsource.

Now virtually all the big drug companies say there is nothing core.

So anything that you can do as well or better, at faster, faster, and for a lower price point we will outsource to you.

So everything is on the table right now.

We have seen pharma fund biotech for years, so the conversation is about capital markets supporting biotech companies I have always thought was a red herring.

Really good companies with really good science and molecules will get funded.

Some will get bought, some will get merged in with other biotech companies, and others will fall by the wayside.

And there will be a new crop every year.

I just spoke about academic medicine, which is a really important client base for us.

We are going to stay focused on that and continue to grow our share there.

So it has been a certainly challenging few years, which is why we haven't had one of these meetings.

We are happy to be back talking to you.

We spent a lot of time refining our infrastructure and driving efficiency and getting lean and getting nimble and having all of our employees, whether they are bench-level scientists or managers, be thinking about how they can run their businesses more effectively and more efficiently.

We have had outside consultants help us with that.

And so we are really pleased with our profit improvement program.

It is something that all of our businesses are focusing on all of the time.

Without the benefit of knowing that we have pricing in some of our businesses it is essential.

Our clients are going to continue to drive us to be more efficient and they are also going to want us to share some of the gains that we have with them.

As I said earlier, our ERP system has really, really been helpful for us in terms of getting better KPIs, understanding what drives our business, refining our cost structure, winning proposals, and enhancing our bottom line.

Bill is here and going to talk a lot about our sales force, but we trifurcated the sales force a few years ago.

We are doing an extraordinary job with our large drug companies, an increasingly better job with the mid-tier clients and our academic clients as well, and that is in large measure the structure that we have in the sales organization both in the US and abroad.

Some of the areas that we have been focused on with our process improvement initiatives, just to take a couple.

Looking at the labor component with certain types of studies and looking at the site where we do it the most efficiently and trying to get our other sites at the same level.

Really harmonizing processes so the clients see it in a seamless way.

We are being demanding with our suppliers as our clients are being demanding with us, and we will continue to do so.

And, of course, we have found strategic alternatives for nonperforming assets.

Just to further focus on IT, I think I covered this when I was answering that question.

Our interface with our clients is in some cases better than the clients' ability to interface with us.

In other words, they have actually learned some things from us.

That has been very interesting.

And we see several instances where we have exceeded our competitions' ability to interface with the clients and that is really critical.

So we have harmonized our systems and we are really staying focused on the client interface as well as possible.

Also, giving our sales force enhanced tools so they have up-to-the-minute information on clients as they call on them and are able to continuously access that and monitor it.

We have been spending a lot of time and talking a lot about our four initiatives with our shareholders, so just a quick update on the four.

The first one was drive additional operating margin improvement.

It has always been the way we run our company.

We are very operating margin focused.

It is a company that historically has run at 20% pretax.

We are 19%-and-change this quarter.

Our goal is to get to and past 20% as quickly as possible, but you can see here the dramatic improvement from 2010 to 2011.

We were able to improve our operating margin 130 basis points and that is about focusing -- obviously driving sales, but focusing on cost savings all the time.

We have always been a free cash flow story.

We took a few years off from that to invest aggressively in our facilities -- 2006, 2007, and 2008 -- where we spent $600 million on new facilities, primarily in the preclinical arena.

We have our CapEx now pretty much level.

It is at the $50 million range, about half of that is for maintenance and the rest for growth.

We think for the next few years we will be generally in that area.

As our operating cash flows increase, our free cash flows should pop as well and you can see here the nice improvement from 2010 to 2011.

We have given our guidance for 2012, $160 million to $170 million, and we are really quite pleased with that.

We are going to invest only in our businesses with the best growth potential.

So we have just built a new laboratory for our RADS business, which is a nice growth and high margin business.

We built additional capacity for our in vitro business, arguably the best business in our portfolio.

We have invested further in our GEMS business as well and in our Discovery business, particularly in Finland.

And we will continue to do this.

We are obviously spending a lot of time on returns to shareholders, and we have most effectively impacted that by repurchasing our shares.

You can see here we bought almost one-third of our float back, so that is a big check that we wrote to do that.

So we are kind of three quarters of the way through our strategic plan.

We do a three-year plan that we update every year.

So what it is looking like is sort of mid-single-digit growth for the next three years organically with operating margins close to 20%.

Our goal would be to hit it, but it is coming out close to that; with continued improvement in free cash.

We are quite pleased with this trajectory, particularly from whence we have come the last three years.

The primary organic growth drivers are additional strategic contracts with our large clients.

We think there will be several more of those.

Look, there is a finite number of big drug companies.

Our goal is to get a majority of the big deals with a majority of the big drug companies, and we are having conversations with most of them right now.

Also, I would say similarly would like to have the majority of the deals with the big biotech companies as well.

As I said earlier, academia is a big focus of ours and one that will continue to be.

Discovery is an area where we are going to be able to utilize our capacity, utilize our folks, expand our therapeutic area capabilities, and help our clients take space off-line.

In Vitro will be a continuance process of adding new capabilities and new products, new generations of current products.

Ones that help us to operate faster and also ones that help expand that $400 million market that we talked about earlier by going into new areas.

I am not going to name those yet, but as we move into those we will give you more market information.

And we think are Genetically Engineered Model business is particularly critical.

We were talking about it this week with this large client about the importance of complex genetically-altered animal models being better predictors of how the drugs will work in people and providing translational information.

So, as we have indicated a couple of times this morning, we are quite active in M&A at the current time, mostly upstream, mostly services, some geographic.

There is never any assurance that any of these deals get done, but we are working on several.

We are enthused with all the possibilities.

They will make us a better company.

They will improve our strategic abilities.

They will enhance the unique portfolio and they will improve the client experience.

And so, hopefully, we will have some more to talk about.

I think that is often the best use of our capital to increase our top line and bottom line on an accretive basis.

So we are going to continue to focus on the top line.

So we think with M&A, I should say, that we can probably get a couple of points more in growth, so we feel that we are in the hunt for the next three years to be at high single-digit growth, both organically and through acquisitions.

Continue to improve the portfolio and stay focused on great science, great execution, great IT interface, and provide better service.

Our clients have options and we want to be first among the options that they have.

So I am going to introduce some folks here, people that you have been wanting to hear more from you ought to grab at the break.

One of the hallmarks of Charles River that I think is a distinguishing feature is some of the longevity of some of our employees, so we are relevant I will point that out.

So Patty Leavitt, you may just want to stand or raise your hand or both, who is the Vice President of North American Research Models, who started with the Company when she was eight years old has been with 42 years.

Bill Egan, sitting next to her, is our senior Vice President, Corporate Controller, and Treasurer.

Notwithstanding that baby face, he has been with us 23 years.

Katie Sullivan, four years but working on longevity.

She is our Vice President of Corporate Tax.

One of our newest Directors, Bob Bertolini, in the front row.

Really happy to have Bob with us; previously the CFO of Schering.

And George Milne who has been with us for, I think, most of the time we have been public now.

Former head of R&D at Pfizer and a very, very important and effective Board member for us.

Nancy Gillett, our Executive Vice President and Chief Scientific Officer.

We give Nancy credit for a company that we acquired, Sierra Biomedical, and so 18 years of service.

Bill Barbo, who is our Senior Vice President of Sales and Marketing, who has been with us 30 years.

Glen Bunnell, who is our Vice President and Controller for our European and Asian operations, who has been with us seven years.

Elise Martin, who you will hear later, also came to us through an acquisition; 18 years with us.

She is the Director of Discovery Research in Wilmington and Senior Program Director.

She is the principal link, operational link with this big client that we have and Nancy Gillett is the principal scientific contact, so if you want to talk more about that deal, even though we can't tell you who it is, you should talk to both of them.

Really happy to have [Mike Luther] with us; has not started with the Company yet.

So Mike is our Vice President of Global Discovery Research Services.

Discovery is one of our two fastest-growing businesses and we needed somebody heavy to run it for us.

And we are really, really delighted to have you with us, Mike.

Brian Bathgate, Senior Vice President of European Preclinical Services.

We were happy to meet Brian when we did our Inveresk acquisition in 2004, so he has a combined service of 21 years.

Runs our operations in Scotland and Ireland and oversees our BPS business, if you want to grab him during the break.

Arthur Hubbs, Senior Vice President of -- he is our CIO.

Actually comes to us from Pfizer, has been with us a couple of years.

Foster Jordan, our current rock star; actually 21 years with Endosafe and the heart and soul and brains behind that operation.

He is our Senior Vice President In Vitro Operations and he will be speaking later.

And Dr. Jorg Geller is our Executive Vice President of Europe and Asia; has been with the company 27 years and runs all of our operations overseas.

I hope I haven't missed anyone.

If I have then you are sitting in the wrong place.

So thank you all and let's take a break.

We will be back at 10.15.

If we could take our seats then I will come on here.

Thank you all.

So we are going to have several members of management make presentations so you can get to know the business better, get to know who is in charge of these parts of the business.

So I will introduce Bill Barbo, who is our Global Head of Sales and Marketing.

As I said earlier, he has been with the Company 30 years and Bill has been in the lab at the bench.

He has been in the lab as a manager of lab services, he has run several of our businesses, and spent some time in sales in a global account manager role.

And for the last year-and-a-half I think -- I am sure it seems like longer, Bill -- last year-and-a-half he is running Sales and Marketing on a global basis.

So, Bill?

Thank you, Jim.

Good morning, everyone.

It is a pleasure to be here to talk to you a little bit about our Sales and Marketing strategy and organization.

I want to start off by just kind of framing the biopharmaceutical R&D universe a little bit before I get into our specifics organization and structure.

Clearly, nothing new here.

Global pharma, if you are one of the big global pharma companies we have seen tremendous pressure on R&D programs, rationalization of pipelines, some consolidation in that space, and clearly a fundamental shift from where innovation is coming from.

On the biotech side, on that mid-tier segment, if you are a biotech company I think that is part of the filler for that innovation gap clearly.

But here these companies are much more focused on maybe specific molecules, single drugs, or classes of compounds, maybe therapeutic area, and clearly becoming the R&D engine for large pharma.

Of course, if you are an academic account in the R&D universe this is true innovation clearly more on the basic research side replete with key opinion leaders.

Great funding availability and I will talk a little bit about that in a minute.

We obviously have to talk about NIH if we are going to talk funding, but Jim actually alluded to lots of funding being available to these institutes, especially the larger ones, and that bodes quite well for us.

A very important group of clients and segments for Charles River.

So the roadmap for our sales strategy is really about the portfolio.

We obviously have our basic tools segment, a euphemism for the Research Models and Services division.

Discovery, Jim highlighted that as a very important growth driver for us going forward, and, of course, our regulated safety assessment.

Our sales and marketing strategy really drives across the entire portfolio.

I think it works really well for us.

I actually believe that that is critical and certainly that is our roadmap.

We are really perfectly structured and aligned with that universe that I just described for you.

So a little bit more information for you on the Sales and Marketing organization itself.

We are a centralized integrated global organization.

We sell across that entire portfolio.

Jim mentioned we kind of realigned ourselves in that trifurcated structure, which I will go through in a bit more detail in a minute.

It is not just about the field sales force.

Of course, there are business and sales specialists that help to support the field sales team organized by specific therapeutic area or specialty or business.

And, of course, behind that under Nancy's direction are our scientific experts; a great strength of the company.

Jim likes to say that everyone in Charles River sells.

Certainly our scientific experts, while they are critical at the bench, they are also very active outside the Company working with our clients directly.

We have a great, highly focused, and really talented marketing organization, and we are driving our sales through a very tactical and strategic approach on the marketing side.

So a professional sales team organized by client segment, widely supported across the business top to bottom, senior management science operations, and really being driven by these marketing and strategic teams.

So digging in a little bit deeper into the organization itself, so we are structured kind of in three parts.

We have our global key account managers.

This is a team of very senior relationship managers really that are establishing deep and very wide contacts within our large pharma segment.

Again, supported widely by the highest levels of the Company.

I look across the front row here at our senior management team and Jim included, he has alluded to it several times this morning, very, very active in this segment.

They are active across the entire portfolio, but really in particular with our global key accounts.

Many of them sit on governance teams that work directly with these clients in helping us to manage those strategic partnerships.

So great engagement across the board and I think we have really hit a home run with the structure of this particular group.

Next up is the mid-tier, the mid-tier segment.

Again, a field-based group of sales professionals.

These folks are selling across the entire portfolio.

Obviously organized geographically, live and work in the regions that they serve, and, again, are supported by those business and scientific experts.

Finally, in our academic and government sector similar structure to the mid-tier.

Again, a field-based professional sales organization.

In this case they are obviously much more focused on the product side of the business, in particular RMS, but, again, very important structure for us globally.

So a very, highly focused, client-driven sales approach.

I am going to dig into each segment just a little bit for you.

We will start with global pharma.

Very important for us to win these big strategic partnership deals and to own this space.

Jim alluded to that just a few minutes ago in his strategic comments.

They may be small in number, but still a very significant base of R&D spend and a very important part of R&D investment going forward, whether they are doing that internally, supporting it through partnerships and collaborations in biotechnology or academia, or working with outsourced strategic partners like us.

Happy to see a little bit more stability in that segment more recently and delighted to see that they are really exclusively focusing on that outsourcing equation.

So, again, Jim mentioned the sort of core/non-core discussion that we are having with clients.

More focused on putting pretty much everything on the table, more interested in doing those kind of partnerships with us, and doing more collaborative work outside of their four walls, doesn't need to be invented here.

Those are certainly new terms that we have heard in the last few years.

And lots of academic collaborations.

We see a lot of the large pharma companies announcing these kind of across the board and globally, and I think that bodes really well for us because we are very strong in that segment.

So we can help link our academic clients with our pharma partners.

These global pharma clients obviously are increasingly choosing to build strategic partnerships with a smaller number of CRO partners.

I think our portfolio, our scientific expertise, our quality and flexibility, these are all really key differentiators that are making us the partner of choice evidenced by the fact that we are indeed winning and closing significant PPAs, preferred partnership agreements, and strategic partnerships.

I am going to let Nancy talk more about the details around that.

I think each one of them is quite unique, you have heard some description already about a few, and they are really cutting across the whole portfolio.

So it is really the value of that portfolio that is driving this particular segment.

I want to give you a little bit more color on the revenue model of the large strategic partnership that we announced at the end of last year.

It is kind of an interesting story and I thought it was worth sharing.

So if you look at the revenues through the first half of 2012 versus 2011 we actually see a decline in the small animal model revenue for this client of about 3%.

That is not surprising.

They have outsourced a lot of work that they were doing internally.

They were buying research models, using them in house.

Now they are not doing that anymore; they are doing it with us.

So while our sales to those clients for the small animals has declined, you can see what has happened to the services revenue both on the RM side and the PCS side, 275% growth, 60% growth.

For the first half of 2012 that particular client will be up more than 30% in total revenue, and we are clearly expecting that to continue to grow for us in the future.

So these are partnerships that are really structured for a win-win.

From the client side greater efficiency in driving their R&D programs at a better cost margin, cost savings for them, and for us that increased volume gives us the opportunity for margin expansion.

Digging into the mid-tier a little bit, we have seen some solid growth in this segment as we have alluded to earlier this morning, but it is a very challenging marketplace.

So delighted to see our growth, but we get significant churn in this segment.

Again, because of their laser focus on sometimes individual molecules or drugs it can create a little bit of variability in demand, especially across our portfolio.

Clearly, there has been uneven funding.

The chart there on the right side of the graph, the yellow bars and the green bars are showing year-over-year and quarter-over-quarter decline in global funding for biotech from venture capital firms.

However, we also see funding coming from other sources to help make up for that, and I think Jim hit it right on the head.

The companies with the best technology, science, and drugs are going to succeed regardless of what the funding environments look like.

The diamonds on that chart represent our growth over those same periods of time.

So even though we see real challenges here with regard to funding, potential for them to be acquired, etc., we do believe that we are taking share in this segment through our enhanced sales positioning and the whole portfolio [itself].

So first half of the year we are up a little bit over 5%.

On the academic side, again we are expecting growth in this segment and we also believe we are taking share here.

This is, again, a very important piece of our business for the Company.

We are really exclusively focused on the large academic institutions globally.

They do draw significant funding from a number of sources.

We will talk about NIH in a minute, but again there is lots of collaborations.

There is funding coming out of the biopharma sector and from other sources.

Historically, of course, these folks are focused more on the earlier side of the equation in life science innovation.

They are beginning to move a bit more downstream in drug development.

They need to do that in order to attract those additional funding sources; that is boding quite well for us, making us an even more important partner then relying on our expertise.

We have got the relationships to help link those two together so that is working out in our favor.

Any conversation about this -- I had a couple of questions at the break on it -- leads to questions around NIH funding.

Usually one of the first or second questions that I get.

While we do see some variability, unfortunately, NIH funding, and in fact it has actually been down in total funding, it has relatively little impact on our business.

People are often surprised when I say that, but when you think about it these institutions, large, well-funded NIH institutions, are going to continue to win a disproportionate share of the funding.

So the bottom line is that the Stanfords and Harvards and MITs of the world aren't going to go away.

They are not going to get acquired or go out of business or have the same sort of churn pressure that you see for some of our other R&D segments that I mentioned earlier.

In fact, if you look at the chart there on the right, the blue bar is representing the change in funding, both for the top 25 in 2011 versus 2010 and the top 50 in 2011 versus 2010.

And in both cases they are actually winning more funding dollars year over year despite the environment, so up a little over 1% for the top 25 and close to 2% for the top 50.

And the yellow bar presents our change in sales at the same pace, so 4% and 5%, respectively.

So I think we are really, really well positioned here.

I think these top 50 funded academic institutions really is our roadmap for our strategy in the academic segment, and we are continuing to do really well there.

So I just want to close with what I am calling out-of-reach differentiators.

Researchers across everything that we do access information in a wide variety of ways and so we have got to do a great job from a marketing and IT perspective to present that information to them in a variety of ways to capitalize it.

So we have got a variety of sources, I am just highlighting a few here.

Of course, our website, public website, at criver.com.

The Source; The Source is relatively new.

This is a secure environment where scientists can register, so they have to subscribe to this, then that way they can get access to specific scientific and educational information and a variety of resources.

Really getting good feedback from this from our clients.

It is great for them because they can get access to very specific information that they need or are interested in.

Great for us because we know who they are.

They have registered to be there; we know that they care about that.

We can track them, monitor their trends, and sort of help to position ourselves and adjust accordingly.

Eureka is another relatively new site.

Again, really creative and innovative.

It is an interactive site where scientists can collaborate and connect and hear stories about what they are doing in innovation, etc.

If it is something you haven't seen yet, you might want to check it out.

It is really quite compelling and interesting.

You can access it right off the main website and we are getting tremendous feedback here.

Again, just creating a forum, leveraging our expertise and our scientific acumen to help connect in a different way with our clients, especially in this information age.

Have other tools that allow clients to communicate with us a bit more virtually through the Internet or through AskCharlesRiver.com.

Not everybody picks up the phone these days to speak with people, so we have got all kinds of mechanisms to do that.

Of course, we are very active in the big trade shows.

I think our marketing team does a fantastic job with those.

The Charles River Short Course; have to mention that.

We are in our 26th year of providing a full week of training where, literally, hundreds of laboratory animal scientists come, generally to the Boston area, to participate in a course that is critically acclaimed and well-known throughout the world led by a number of our scientific team and experts.

We are very active in social media, as most are these days.

And, finally, and certainly not least are the data portals so I think Jim covered that pretty well in his talk.

But on the IT side we have launched mypreclinical for study access for clients.

Obviously, a safe and secure environment where our customers can get real-time access to their data and use that data and manage that data and interact with us in a way that they are telling us is truly leading the industry.

So really, really important stuff that we are getting great feedback on.

We have a number of data access portals for our different businesses, this being one of our most recent and, I think, greatest successes.

So, in quick summary, I really think the structure is working.

I am delighted with the way it is set up and how the team is working.

We are adding resources, as Jim alluded to, in the various segments to continue to capitalize on the share opportunities that we see.

I think that is clearly going to be a driver for our future growth.

The client base is the evolving, but in a good way I think.

Becoming more virtual, more in tune with that outsourcing message, more savvy around what is core and truly non-core.

Each segment, of course, has different needs but I think we are structured in a way to really meet those needs head on.

And we are supporting that with a very good practical and strategic marketing effort.

So I am going to leave it there and turn it over to Dr. Nancy Gillett, who is going to take you through strategic partnering.

Thanks, Bill.

So I am pleased to introduce Nancy Gillett.

As I said earlier, Nancy was one of the founders and owners of Sierra Biomedical, which is actually the first toxicology company that we bought.

Operated our tox business for years and is our Chief Scientific Officer now.

Nancy is responsible for our professional staff and she is the principal scientific link, in some instances corporate link, with many of our large clients.

She is a world-renowned scientist and she sets the tone and the bar really high in terms of our scientific excellence.

And I think the principle differentiating feature of Charles River versus the competition is the quality of our science and Nancy makes sure that it is extraordinary.

She is also the lead interface from a scientific point of view with this large strategic deal that we have, so she has a unique view in terms of explaining to you our strategic partnering capabilities.

So, Nancy?

Thank you, Jim.

Good morning.

Really delighted to be here this morning to talk to you about a progress we are making with strategic partnering with our big accounts.

As all of you know, pharma outsourcing is changing, particularly within larger pharma.

They are consolidating the number of vendors.

We talk to clients that used to have 40 vendors; they want to get down to five.

So it really is changing the landscape of the type of vendors they want to work with and it really is leading to an advantage for us.

They are redefining the core competencies, both Jim and Bill talked to that.

It is interesting; they don't really want to use the terms core and non-core.

They talk about flexible core, because all of these services are necessary.

It is not that it is non-core.

It is the fact that it is core work that can be done outside the company.

Interestingly, they are using us to help harmonize themselves.

You all know the challenges we have had over this number of years to integrate all of our sites.

Now we are having clients say to us, you are harmonized, help us get harmonized across our sites because they increasingly need to do things similarly across their various sites.

They are willing now to bundle to a single provider, whether it is a sole source, whether it is a single IMD package, whether it is combining bioanalytical with the toxicology, whether it is a single therapeutic area.

So, again, a very different strategy than what we have seen in years past.

And they are also managing the vendors very differently based on the value that they see in that relationship.

So we, literally, have large pharma clients that regard some of their vendors as being very tactical, others being very strategic based on the risks that they would associate with the type of work that we do with them.

And for those relationships that they regard as strategic they are willing to devote time and energy of their senior staff to really work with governance and make sure that we all stay on track and it remains very strategic.

Just use this slide to kind of remind us of the business units within our reported business segments of PCS and RMS.

What we have done, as Bill talked about, is get much more efficient at linking across these different business units.

So as we are understanding our clients better we have strong relationships with them in on portion of the business.

We then use that to introduce scientists on both sides to other portions of the business.

So we have a relationship in research models, we use that to gain access into safety assessment or Discovery and vice versa.

So we have a number of strengths that our smaller competitors don't have.

Talked about these pre-existing relationships, which in many cases are long-standing and very deep, and again we are able to link across.

We have financial stability.

These are uncertain times, still in a global recession, and the fact that we are a publicly-traded company with reported earnings companies are very comfortable working with us.

They know that we are going to be there for the long term.

We have a global platform.

We used to be concerned about our numerous different sites and services, but now that we have gotten quite harmonized it is actually a strength.

So we have the same global footprint that our clients have, we can have local relationships, we are where their sites are, so it is really quite a strength to have the diversity and locations that we have.

Of course, we have the full range of services.

Comprehensive data delivery; we are in the data business.

Services is now a larger part of our portfolio than products and services means that you are providing end data.

So our investment over the last few years in IT is serving us very well right now in order to be able to give a very comprehensive data delivery to our customers.

Finally, and I really wanted to emphasize this point, our commitment to humane animal care is really regarded as a differentiator for Charles River.

Our clients are concerned about the vendors that they use having the highest standards of animal care.

We have a long history of that and, again, it is a differentiator for us.

We have three overall distinct competitive advantages.

The first, which we have highlighted earlier, is our scientific expertise.

We have over 400 science professionals with advanced scientific degrees across the Company.

We continue to invest not only in our capabilities, but in people to maintain and enhance our leadership and in vivo biology.

When we get feedback from customers' surveys or we look at external surveys, consistently the number one reason that people choose Charles River is our scientific expertise and differentiation.

We are very focused on quality.

We have to have the quality and execution.

We also have a very strong regulatory compliance group.

What is different about us today is we have gotten very metric driven, so we really use key performance indicators to track ourselves in quality areas, looking at deviations, looking at different aspects.

And we can really measure how we are doing and consistently strive to improve it, so it really helps us maintain a very high quality standard.

Finally, flexibility.

We are a large company but we pride ourselves on being very flexible.

We understand that every client, whether it is a big global client, a mid-tier, a smaller client, or an academic, has individual requirements.

Not all customers value the same things.

We do (technical difficulty) we have been told by this leading global pharma company that flexibility was a critical decision factor as to why they chose us as their strategic partner.

So when we go in and work with these clients we try to listen very carefully to what they value, whether it is timeliness, whether it is their specific protocols, their animal requirements, and we really build that into our structure and information database such that we can configure our products and services to customize our support to them.

We really do feel that we do that better than the competition.

I think the change in the clients that we have seen over the last few years and the investment that we have put into our structure over the last three years are really coming together, such that we are uniquely positioned to be the strategic partners for large pharma.

Remember us talking for a number of years -- well, fairly recently actually, the last three or four years -- about the matrix governance that we put in place around preclinical services.

That really allowed us to integrate and harmonize our PCS sites.

We have talked a lot about process improvement.

We got to being experts in Lean Six Sigma; we are using KPI so we continue to really focus on process improvement that is driven by metrics.

IT investments we have mentioned multiple times.

I do want to emphasize in addition to our ERP and our client relationship management IT investments we invested a lot in key scientific systems that really harmonized across the platform.

As I will talk to a little bit later in the presentation that is really paying off right now.

It was an investment that took three to four years, a lot of work, a lot to harmonize, lexicons and protocols and processes.

But now we are really able to leverage that harmonization and provide this data to our clients in a consistent manner.

Lastly, the regional structure that we put in place last year has basically eliminated the silos that existed to some extent between preclinical and RMS, so we are now able to work as a very unified group to present a unified portfolio to the clients.

Again, that is paying dividends.

So as several of us have mentioned, we are signing incremental preferred provider agreements and strategic partnerships.

We are really seeing momentum building in a lot of very exciting discussions with a number of clients and really building on a base that we already had.

We had very good relationships but we are seeing an expansion and an interest and, again, an extension across the entire portfolio.

That is the biggest difference in the last two years.

The keys to executing that success are fourfold and those are governance; client portfolio management; the IT interface, which is where we really think of ourselves our lab is your lab, think of us as the lab right down the hall; and again, KPIs or key performance indices.

So let's talk about governance, because I think that is really an important part of these affective strategic partnerships.

We, in a very formalized manner with each of our big partners, are setting up relationships that extend from the study's project team up to functional teams in specific areas into larger operational teams where you might have the site heads involved or the leaders of toxicology.

And, finally, culminating in an executive steering group that consists of executive and senior leaders on both the client and the Charles River's side.

So what this allows us to do is to develop a deep understanding and relationships with these clients on multiple levels.

We have yearly goals established.

We have targets around the KPIs, but it also allows issue escalation to occur so it keeps things from being stuck between a problem that might exist outside of your project team or functional team.

We can quickly, if necessary, escalate it up, get a decision made, and make sure that it doesn't in any way jeopardize the partnership.

So it requires a big commitment on our part and on our clients' part, but I think on both sides what we are finding is that it ensures that the partnership continues to evolve and progress such that year over year we are finding an even deeper relationship and expansion of the commitment on both sides.

Another critical component that we have found very useful is the client (technical difficulty).

Bill talked about the global account manager, which is the representative on the sales side that goes into these accounts and makes sure that they understand the wide range of what we have to offer.

The client portfolio manager sits on the operational side, so this is a seasoned scientist, often with a study director background, who is that single point of contact that really interfaces with that client and back into our side.

So they really have a dual role.

They are an advocate of the client, so they understand what the client requirements are.

They make sure that those requirements are met regardless of the site or the work that is performed.

But they are also a Charles River advocate in that they understand what we can do and how it can be most efficient and maybe how we might come together to meet the clients' needs but have it be in a very efficient fashion for Charles River.

So the CPM really sits in the center to make sure it is a win-win for both the client and for us.

Global Technology, a couple of times giving a little bit more detail about that.

Again, as we have now mentioned several times, we have invested significantly in harmonization and IT automation.

So what are we able to do with that?

The ERP is more of a back office, but what I want to talk about is one of the client-facing aspects that we have done through our harmonization of scientific systems.

It has allowed us to accelerate reporting so now we have best-in-class standard report timelines.

We actually have goals to improve that buy an additional 25% over the next 12 months.

We are able to be very customized in our client format.

They want it not in a Charles River report.

They want it in their report, according to their format just as if they were doing it internally.

So we are able to customize.

Whether it is something as simple as a font or as complicated as how they want the interpretation presented, we are able to customize that for our clients, whether they are very large or even if necessary some of the smaller ones.

The other point that I don't think has been mentioned is that this harmonization has allowed us to optimize our workload across our sites.

By having a common lexicon, by have common SOPs, common protocols in many cases we can use pathologists at different sites to read studies.

We can, if necessary, have slides prepared at different sites.

We can use QA auditors because they are familiar with SOPs at different sites.

So obviously the in-live work, per se, you can't move but there are aspects of the studies that we can leverage our flexibility and capacity across the sites, which have been an advantage.

And probably most exciting piece for us has been the development of the portal.

So we understand the value of easy and quick access to data, so we have got a very clean, intuitive interface on our new portal that we are rolling out.

It is in near-real time data access.

You can download it on your iPad and put it into Excel tables and view your own stats, which is very exciting for our clients.

It fully supports our compliance with SEND, which will be the standardized format required by the FDA we expect beginning at the end of 2012.

More importantly, if you don't like doing it this way, we are also willing and in many cases are working with our clients' portals or our clients' internal systems such that we can dump the data directly into their systems.

So you can use our portals, but if you want to do it directly through a linkage like a VPN we are able to accommodate that as well.

KPIs really put a quantization to it and provide a basis for a successful partnership, so these are objective measurements that track performance over time.

We use these to track yearly goals and targets for the clients.

Again, they are very flexible based on the customer's specifications.

So if they are very focused on report timelines that is what we focus on.

If they are very focused on minimal deviations or financial spend or all of the above, we develop KPIs that we can track and measure and present.

Typically these are bilateral, so they are giving us feedback but we are also giving them feedback.

So it yields a very constructive relationship on both sides.

And, finally, they are visual.

So when we get into an executive steering committee meeting we have a quick snapshot -- what is working, what is not.

We always want to see it always green.

Sometimes it is not, but our success in continuing to show improvement again is what really provides that basis for the strategic partnership.

So we are a single provider with this very unique upstream portfolio with integrated services; have done a lot of investment and innovation and technology.

Animal welfare and humane care initiative, I do want to leave you with that thought as well as to how important it is for these big clients as they outsource the work, feel like they have a little less control.

They really want to feel assured that they are working with a company that has the highest standards in humane care.

This local relationship, the value of our multiple sites right next to where our clients are, I don't think we can underestimate.

So to summary, this unique portfolio provides the basis for this strong strategic partnership.

Our differentiators we feel are our scientific expertise, quality, and flexibility, but the tools for how we execute those partnerships really is the governance, the client portfolio management, the KPIs, and the seamless IT integration.

We are excited by the opportunities.

I am talking to clients all the time, as is Jim and a number of us.

We see a lot of opportunity to expand these relationships.

It is a really fun way to work to be on the same side of the table with the clients.

Thank you.

Thank you, Nancy.

Elise Martin has a very fundamental role in overseeing a lot of our discovery operations; is the point person in this big strategic deal that we signed in November; is doing an extraordinary job at it.

Speaks to this client, I suspect, daily or multiple times a day.

When we were all there together earlier in the week you could see that the line between who is Charles River and who is the client is blurring in a very positive way.

And she is going to talk to you about our whole Discovery Services operation.

So, Elise?

Thank you, Jim.

Thank you, everyone, for giving me the opportunity today to talk to you about our Discovery Research Services.

It is something I am very excited about and really something that has been taking off with us.

So to go over it, what we are seeing in the market is a rapidly changing discovery biology outsourcing landscape.

Large pharma, as we said, is increasingly sharing discovery biology with external partners in an integrated partnered approach which yields substantial benefits.

Discovery biology outsourcing has accelerated in the last 18 to 24 months.

Many large pharma's are committed to outsourcing substantial portions of their discovery biology.

Early discovery screening, which has been previously been considered core, like we have talked about, and conducted in-house is increasingly being outsourced.

Integrated partner programs across multiple therapeutic areas and functions are being established.

Large pharma is beginning to establish partnerships in early discovery biology, but how they do it differs.

Pharma is looking across their portfolio, consolidating the efforts to leverage flexibility and cost savings without compromising the scientific program team oversight and involvement in these programs, although, as we said, they are all approaching it somewhat differently.

Our approach at Charles River is to provide tailored, large-scale solutions.

We build and manage partnerships to meet clients' scientific and operational needs.

We are positioned to provide the scientific depth across the key therapeutic areas with established program management to provide flexible customer support and achieve cost-effective quality and rapid study results.

Concurrent with efforts to streamline infrastructure, large pharma is constructing better approaches to drug development.

The most notable change has been the focus on eliminating molecules at earlier stages of in vivo work.

If the efficacy of a molecule cannot be confirmed, it is eliminated.

Previously in a situation where a client may have taken two molecules forward in parallel, efforts are on a more robust panel of discovery tests to identify the flags earlier to increase the likelihood of success in development.

The objective overall is to reduce the chance of attrition of drug candidates at later stages in the process.

When I'm talking about Discovery Research Services there are a number of platforms that exist in support of it.

We have in vitro and in vivo PK, ADME, or DMPK for looking at the behavior of the drug to providing insight on how it is likely to perform in a clinical setting.

It doesn't matter how potent a drug is, if it doesn't get it where it needs to go it is not going to work.

So that is what these tests are doing in evaluating new compounds.

It is really important to be aware of a poor profile early on in the process.

In vitro toxicology or a variety of in vitro screens that may provide early indication of safety risks.

Looking at in vitro metabolism helps to identify drugs with metabolic liabilities and it also could flag drug-drug interactions.

This is important because metabolism and metabolic-related toxicity is one of the major causes of failure of drugs in the clinic.

In vivo pharmacology we have been speaking about quite a bit.

These are the efficacy studies conducted in disease models.

Does the drug work in models established to predict efficacy in human conditions?

So, for example, if you are testing drugs aimed at treatment of diabetes, if administered to a diabetic animal do they improve the clinical condition?

They also can evaluate the effects of these drugs on related systems, so in case of a diabetic compound, a compound for treatment of diabetes you might also want to look at some cardiovascular effects.

In vitro pharmacology is focusing on in vitro screens which provide confirmation of mechanism of action and activity on the intended target.

It also can be used to rank order the activity Kennedy on how well the compounds hit the target.

Then the non-GLP safety assessment are real early safety screens that are used to identify potential compound liabilities before you go into the full development.

Current estimates are showing a total discovery spend about $8 billion, only about 25% of that is currently outsourced.

Now that reflects the potential opportunity.

Based on the trends we're seeing in the market, we expect to see the outsourcing efforts increase year over year.

Within the past 10 years companies have started to focus on discovery and over time they have been increasing these efforts.

Up until about four to five years ago discovery was core, remaining in house.

Now R&D models have fundamentally changed looking at the overall costs and efficiencies as well as the process of expanding the scope of what is non-core to include discovery with the overall objective being to increase efficiencies and focusing internal expertise on improve R&D efforts.

Our vision is to be the preferred partner for leading global pharma companies in in vitro and in vivo screening assays and drug development support across the major therapeutic areas.

The DRS business model provides high-volume, gold standard assays.

These gold standard assays are established within therapeutic areas as considered the most predictive of clinical performance.

Our scientific expertise in boutique, specialty models is a competitive differentiator for Charles River.

We are utilizing our global footprint to provide services from centers of excellence.

We have different expertise at various sites, but we are willing to use all our non-GLP and GLP space based on the client needs and preferences, which gives us flexibility.

We have significant capabilities to support drug development across the major therapeutic areas.

Within research models we have the well-characterized genetic disease models.

As discussed, we have the robust in vivo biology capabilities with the gold standard models established for efficacy testing.

We have scientific oversight of the assay developments and validation efforts, and we also have extensive biomarker discovery services.

We have multiple platforms established for high throughput in specialty assays, including ELISA, PCR, meso scale, clin path panels, and beyond.

This is a very busy you slide.

I don't expect you to take it all of it in at this point, but really what it is doing is it illustrates the breadth of our capabilities.

We have got the genetic models, the hypertensive rats for example.

We have induced models, asthma respiratory disease models, and we have the ability to support the biomarker assays, so histamine and IgE quantification in support of these assays, to give you a really good picture of what is going on with your molecule.

Our ability to provide PK/ADME in vivo pharmacology and non-GLP and GLP safety of assessment draws on the expertise across our organization.

Requires a keen understanding of research models, as well as PK/PD and interaction of drugs in in vivo applications.

PK/ADME and exploratory nonclinical safety assessments are available to assess druggability.

And we offer support of the major therapeutic areas including oncology, CNS, cardiovascular, inflammation, metabolic, bone, and ocular diseases.

Non-GLP testing is the bridge between discovery and preclinical development, when clients make these critical go/no-go decision.

Our scientists across Charles River work together to achieve outcomes which would not be possible without their combined in vivo biology expertise.

Working with clients from discovery through preclinical development it provides a deep understanding of their drug candidates.

As mentioned, I am very involved in the execution of our strategic partnership with a leading global pharma, something I have really enjoyed.

As background, we demonstrated to this client that we were able to offer a flexible services model which supports their goal of more efficient, cost-effective drug development.

Charles River is the client's primary in vivo biology partner providing non-GLP in vivo pharmacology for multiple therapeutic areas, drug metabolism and pharmacokinetic support, and GLP and non-GLP safety assessments.

In order to successfully execute the partnership, we establish direct face-to-face collaboration with Charles River scientists and the client's therapeutic area experts to facilitate a seamless transfer of the existing methods.

We determine collectively best practices within the groups for each therapeutic area.

We are improving on solid models while providing data consistent with their internal benchmarks.

Our approach, as we said, is our lab being an extension of their lab.

We leveraged our global footprint for seamless delivery.

Global footprint allowed us to focus our expertise in the centers of excellence while our consistent approach allows us to efficiently manage capacity and provide assurance of supply.

We have coordinated programs in seven therapeutic areas across five Charles River sites, utilizing the centers of excellence for each therapeutic area.

However, our ability to connect to all of these activities really was one of our successes.

Our client at times -- I have regular communications with them.

In some cases, the leads for therapeutic areas would be contacting me and they thought I was residing at the site where that work was being conducted.

It was so seamless that we were in close communication regardless of geography.

We did implement the program according to the clients' timelines and format requirements, and our ability to implement communication and information flow within our strong scientific network allowed us to utilize this capacity across all of our facilities.

Our successful execution of this partnership is based on the strength of our consolidated portfolio.

As we have talked about, our robust IT infrastructure, our governance framework, and best-in-class workflow processes.

Charles River is able to deliver high-quality assays in support of multiple therapeutic areas according to the required timelines, meeting the expectations of quality and turnaround times our client established as benchmarks for their own laboratory.

As mentioned, one of our best achievements here is the client told us they cannot differentiate the data being produced in our laboratory from those being collected down the hall in their own facility.

The program is really a differentiator for Charles River and a template for future strategic partnerships.

As mentioned, this client has been a reference for Charles River regarding new strategic partnership opportunities.

Charles River is the preferred partner for in vitro and in vivo screening assays and drug development support across the major therapeutic areas.

We want to continue to be the preferred partner for clients as they increase their outsourcing of discovery work.

One of our competitive advantages is how we are able to utilize our portfolio services, including research models, assays, and biomarker support, and our ability to provide flexibility and value by utilizing our multiple sites.

One of the reasons we were able to secure our strategic partnership was, because of our unmatched scientific expertise, clients are able to consolidate their efforts in the major therapeutic areas with Charles River.

We have demonstrated our flexibility to structure services to suit individual client needs, and we are evaluating opportunities to broaden existing capabilities to enhance client support and maintain market leadership.

Based on our strong portfolio we think we are well covered in the main therapeutic areas, but there are always opportunities to pursue complementary capabilities.

Thank you.

Thanks, Elise.

We will be happy to answer any -- this panel would be happy to answer any questions you have.

(Operator Instructions)

The slide with the circles on your DRS services is really helpful, I appreciate that.

So if I look at that slide, and compare, Elise, to what you described you are doing in the case study for the strategic partner, not trying to nitpick, but just as an example it looks like several of the in vitro services were not ones that you listed.

And so should we think about those as areas that the client wanted to keep in-house?

I just listed out in vitro tox, in vitro pharmacology, in vitro metabolism.

Where those things that maybe you just didn't mention and they are doing or are they deciding to keep those in-house?

Are those a revenue enhancement or revenue growth opportunity down the road?

What is the client again, which one is it?

I think it is probably a little bit of a combination.

I think we were able to successfully win the majority of the lines.

The in vitro capabilities there came in, as I recall, some of that in-house and they are working with some other providers as well.

So we do see that as an area we will continue to try to grow and augment going forward.

We are already performing some of the in vitro support and really the focus on this partnership was really in the in vivo biology area.

Okay, great.

Thanks.

So to broaden the discussion, Jim, so in thinking about vendors or, I am sorry, clients narrowing their vendor lists and engaging in more strategic relationships with suppliers, with partners, how do you position Charles River as being very broad in the, say, early development area?

You have ruled out clinical, you are moving upstream.

So I guess the point of the question is strategically do you see a day where clinical does become important again because the client is continuing to broaden what they define as their strategic partner, or are you a category killer in early development?

Hopefully you understand the spirit of the question.

So we continually ask our clients whether our lack of having clinical capabilities is an issue, or putting it more positively, whether we really need to have clinical capability to fully service their needs going forward.

And whether they can foresee a time where they are going to say, you know what, you really need to understand our molecule in animals and humans and if you can't do both you're not getting the work.

It is certainly subject to change.

Obviously it is always a dangerous question to answer, but categorically, certainly from the big drug companies and the big biotech companies, they say absolutely not.

Not necessary.

We don't buy that way, we don't think that way, we don't operate that way.

In fact, the preclinical guys don't talk to the clinical guys and they don't like them very much either.

All kidding aside.

Budgets are different.

There is sort of a lack of coordination, even with some of the big biotech companies than is the case.

Look, the extent to which that changes and they say we want it all in one place.

We really want to outsource this stuff, and particularly as these companies become more virtual, it is something that we -- we are not close to looking at it again.

It is just not something that we are actively pursuing, because that is not where our expertise is.

Our expertise is in in vivo biology.

Having said that, you could obviously acquire expertise and learn that over time.

We have seen how fast our clients have changed over the last even five years, so it would not be totally unforeseeable for a dialogue in five years to be so we want you to do it all.

So we will continue to watch and listen and dialogue with them.

Todd Van Fleet, First Analysis.

I'm just trying to get a better understanding of the opportunity that Charles River sees going upstream.

Non-GLP work, from my understanding of the marketplace, has been the portion of the market that has been most subject to pricing pressure, commoditized, and so forth.

When Charles River talks about expanding and capitalizing on opportunities in discovery, I guess, through the materials and everything you have talked about, my interpretation is still that it is really primarily non-GLP tox driven.

Is that the wrong impression to take away?

If not, what is it in the marketplace that has evolved that suggests that this is the right time for a company like Charles River to really excel at that part of the market?

Maybe I will just start.

I don't see it as a commodity-oriented at all.

So if you want to look at the, let's call it drug efficacy testing, so therapeutic area testing, which we are doing for this large client across multiple therapeutic areas, that is really important stuff for them.

So they are going to get an answer on a drug that they could have been working on for years and it is do we kill the drug or run with it.

So I think they are willing to pay for that sort of expertise, particularly if it allows them to dismantle some of their own internal expertise and/or have us augment it.

It was gratifying to us to see how well our scientists held up versus this company when we all kind of got together and talked about specific therapeutic areas.

And we are going to continue to invest in that and enhance it.

So, yes, there is non-GLP tox aspects to it but other aspects, I think, have a higher value proposition.

So we are going to see operating margins, [as I said] earlier, for this category to hopefully take us from the mid to high teens I think and maybe even higher than that.

Yes, a couple of other comments.

I think you really need to emphasize the power of everything we do, so what we are really seeing is it is not so willing to come in and just work on the discovery work.

They are also doing safety or they are buying research models, so it is really that combined portfolio that I think we are being much more effective at selling.

The other part about the maybe lower margins in the Discovery space, which I think depends upon the type of assays and how niche it can be, but what we are seeing is the power of volume.

So if you are able to do those assays to the clients' specs and really run high volume through, we can gain efficiencies that they didn't even realize themselves.

So that is where we are seeing an ability to expand our margin is the repetitive nature that we are able to almost industrialize some of these assays and do it in a very robust fashion.

So that is why we are excited about the opportunity because there is still so much that is done internally that if we can take pieces of it out and put more of a CRO industrialization model on it, it is really win-win for both sides.

Thanks.

Let me just ask a follow-on.

So how far upstream in the process can you go before kind of the curtain gets closed essentially, there is just things that are too proprietary to that drug sponsor that they don't want anybody taking a look at?

How far can you take that?

I guess I am just trying to understand in my own mind the development process, the discovery process.

Because we are talking about market adoption and strategic partners changing behavior in order to try to really get a growth story going for this part of the market, for Charles River in particular and I'm just trying to think about adoption and then how much Charles River can assist sponsors with before they say, look, we can't go there.

Obviously proprietary screening tools that all the drug companies have will remain proprietary to them and we won't have access to those, nor do we need to.

But there are certainly things that are done of an in vitro nature, let's say, or a non-biology nature that is done earlier in the process as the compound is conceived, large or small molecule, that we could contribute to.

Since we are participating with a client very early on in the process anyway, if we can get even earlier -- and that is really powerful with a lot of these mid-tier biotech companies.

Once they have their idea then be able to take it all the way through to when it goes into the clinic is really powerful.

So we are continuing to evaluate all multiple areas in sort of the upstream space earlier than where we are now.

And if we are able to acquire something that continues to distinguish us and really adds value to our portfolio or to the clients -- remember I said earlier that we are getting some recommendations specifically from the clients in terms of assets or technologies that we should look at -- we will pursue them.

But I don't think anyone is going to wholesale allow us to get a hold of their proprietary technologies, nor do we necessarily want to do that.

I think when you get back to target identification that is where maybe there is some concern but if you think about it all the way out through the work that we are doing through drug development is very confidential.

In some cases can be proprietary.

There is certainly concern about competitors on their side, so I think the history that we have of having worked on the GLP side, being very confidential and knowing how to work with multiple clients in a very confidential manner, again gives the credibility and the confidence that we can go further upstream.

So I think we understand very much that these are valuable proprietary information that we have to keep confidential, but that is true early discovery as well as further out in development.

(inaudible) from Citigroup.

Two quick questions; one for Bill.

Bill, I think you mentioned in academic and government that you expect to go in the mid to high single teens.

Just wondering what is the market growth rate at?

Was it because the growth was an expectation of just market as well as just market share gain?

Yes, I think it was mid to high single digits for our growth.

Combined?

For our growth segment, yes, for that segment.

It is hard to peg that in terms of market.

In terms of market growth we have seen it be relatively flat in that environment; certainly hard to call the government piece at this time.

The bit of the wildcard in the academic space is that they are continuing movement down through the drug development process, but we do think there is some share gain there based on our current growth rate.

It is way more about taking share than de novo.

Okay, perfect.

Then the second for Nancy.

Nancy, you had mentioned about scientific expertise being a key advantage for Charles River and the feedback that you get from clients.

So I am just wondering, when you don't get the business what has the feedback been as to where Charles River could make improvements or just areas where --?

A lot of times -- and we do track when we lose proposals.

A lot of times it is pre-existing relationships with another CRO.

Again, I think this is a business that you can't underestimate the importance of trust and relationships between scientists that they might have developed from previous lives.

Sometimes we will lose things on price.

We certainly always watch for areas that we need to continue to expand in scientifically, but we are also -- if it's something that we really can't do then we won't bid it until we can do it.

So I don't see that as an area where we lose proposals; we do have a comprehensive list of services.

But if it is not price specifically, because they have got a relationship with another CRO.

Vijay Kumar from ISI Group.

Thanks for taking my question.

Jim, when you announced this large strategic deal you mentioned that you were in detailed discussions for an additional three or four clients, so could you provide an update on those discussions?

And what has changed with this large client now willing to serve as a reference?

So I will be appropriately vague with my response.

This deal opened up the opportunity to talk to a lot of other customers.

Some were already ready so they were poised for it, and some were concerned that a competitor could have an edge because they were being more thoughtful about outsourcing and they were going to get their cost structures cleaner than they.

So it doesn't really matter what the situation was.

So we have several conversations going on now.

They are at different stages of advancement.

It is impossible to predict whether we actually win them, and if so, how big and for how many years, but they are advancing nicely.

We have a couple of clients that a year ago were saying we are not even considering this who are engaging in a conversation about the fact that they are now interested in what could we do for them.

We have some others that we are bringing along that were skeptical and resistant.

We have some that have already decided to outsource some of the work and we are talking to them about it.

So as I said earlier, our goal is to get a majority of the big guys and have a majority of their work.

What is powerful about this is that you are excluding your competitors for some period of years and it is powerful both ways.

So you don't want to be excluded, that is a very, very bad situation.

So we are always massaging and debating and balancing pricing pressure from the clients with the ability of not having the work at all.

Of course, once you get it, as the volume increases and as you drive efficiency, we are usually to walk the margins back up.

So I think we will fare well with many large clients.

I think our portfolio is unique and powerful.

When you have a client serve as a reference so you sort of get out of it and say, fine, don't even ask us; why don't you ask someone that we are doing it for?

That changes the paradigm dramatically.

You are probably standing there because you would like us to move on?

Just one follow-up, so what are your assumptions for NIH budgets?

Are you assuming sequestration, even if it is temporary?

I don't know; what do we have?

It does actually decline a bit next year.

We are assuming that total funding for NIH will actually decline a bit next year, but as I alluded to in my remarks, it is not a particular concern for us.

It is likely not to have a big impact on us.

Given the pre-existing contracts and given the price points of our animal models in particular, we tend to do well, notwithstanding those budget cycles.

We will do one more.

(multiple speakers)

We will do them both.

I was just hoping you could perhaps provide some clarity in terms of the competitive landscape for these details.

Is it typically Charles River versus your largest competitor, or is the landscape a little bit broader into that sort of tier of other companies that have some scale?

And also just as a follow on to that, what level of exclusivity are they looking for in these partnerships?

Obviously, you are looking for the lion's share of the work.

But are they looking at potentially saying, well, we will do two or three partnerships and we might give Charles River 50% and then we will give everybody -- we will look for two other parties to do 15% to 25% of the work?

Just sort of curious in terms of how you see that dynamic playing out.

So we never know for sure who we are competing against, Doug, but, for sure, we are often competing with our largest competitor and I would say the next tier on the preclinical side of private companies.

And you know all of those.

Also, our largest competitor in the research model business is sometimes at the table, because they obviously have some tox capability as well.

So we are liking the fact that not only do we have this big deal, but we have some others that we are having conversations with clients that seem to be going well and we seem to be competing effectively against large and slightly smaller companies who may have even smaller cost structures and/or be desperate and be willing to do crazy things from a pricing point of view.

So that is working well.

The second part of your question was what?

(inaudible - microphone inaccessible)

How does the client --?

It is all over the place.

So what they say is we may give it all to one of the bidders, but we have no obligation to do that and we reserve the right to split that up anyway that they see fit.

In this big deal that we have we didn't get 100% of the work, but we got the vast majority of it for multiple years.

As I think several of us have alluded to several times today, what you find is that additional opportunities to grow, not necessarily the contract, but to growth the relationship happens as you are in the room with them constantly.

Which is one of the really powerful parts of the deal.

Not only did they benefit from a pricing point of view, but after a while you are them and they don't actually look at you as an outside company.

There tends to be an advantage from a trust point of view and a confidentiality point of view and we respect your science point of view to give us more work rather than less.

So I can't stress enough, and we live this every day, the power and importance of prevailing in as many of these deals as possible.

Just a quick one, Jim, on your geographic footprint.

You talk a lot about being a global provider.

In your own slide you highlight the fact that 62% of the business is still from the US.

How do you see that evolving going forward or in a world of mobility for projects?

Does that not even really change five years out?

Hard to say.

Lot of clients have said to us recently the more work we can do in the US or Europe at attractive price points the happier we are, because we are having some complex times managing some of the foreign entities, foreign locations.

So I think continuing to invest in and strengthen our businesses here are critical.

Having said that, I do think the Asian opportunities are developing.

There is lots of work going straight there without ever stopping in the US or Europe.

I think that is going to continue.

Whether the drug companies discover drugs there or not, a lot of the service work is going to be done there.

We are going to have to figure out a way to play effectively.

I think generally we have said this before; we are thinking about how and when do we place our current business activities in China in particular.

How do we in that locale, set the standards for price and quality of lab animals for it and then all of the ancillary services?

And that is probably the way it will roll out for us.

So I think a larger proportion of the pie will be non-US, even though people will have a preference for it, because they want to participate in that part of the world.

There is still a short term, and I don't know how short it is, but there is still a short-term price benefit from being there.

Then if I could ask just one quick follow-up.

Do you see any risk long term to the RMS business from some of the companies that are trying to industrialize stem cell production?

Obviously it won't replace animal models all together, but it looks like they're trying to kind of replace some of the early animal model work with IPS cells.

I think probably not.

We will participate in as much of that as we can.

I think as the process gets more refined it will probably help having better animal models, sort of with the same biomarkers.

We have never looked at that as a threat.

We have looked at it as a way to sort of refine the lab animal utilization process.

Okay, we have to stop.

Okay.

So Foster Jordan, who runs our Endosafe business, was there when we bought the business.

Does it all -- science, sales, R&D, production -- and does it all really well.

And so he is going to enthusiastically talk to you about what is new in our in vitro world.

So I'm glad to be here.

I want to start by saying it is not often you get to run a business and you can wake up every morning knowing confidently you are going to take share, you are going to do it with a higher ASP, and you know your customer is going to be happy when you left because of the benefits.

So it is a great time for us.

I want to try to explain to you a little bit more in detail about the strategy.

So what is endotoxin?

Endotoxin in a nutshell is really just the cell wall of a gram negative bacteria.

So whether E. coli, salmonella; we are all familiar with those.

Those are certainly toxic if you ingest those to a high concentration, but they are very toxic, even dead, if injected directly into the bloodstream.

So they are found everywhere in the environment, especially -- you can imagine a pharmaceutical manufacturing operation there is water all over the facility; sterile product manufacturing injectables.

It is important that even if it is a sterilized product, a terminal sterilized product, endotoxins can be present in the product so it is a very important test.

And if it does get in the product and it is not detected and injected into people or animals it can cause fever or even death.

It can actually even diminish the effectiveness of some therapeutics, especially some cellular therapy treatments.

And if you exceed the limit in a pharmaceutical manufacturer on any of your waters or your in-process material you have to cease manufacturing, conduct an investigation, clean up the system, and understand exactly where it came from.

So continuous monitoring of your systems and of your raw materials is very important.

So what do we use to detect this endotoxin?

We call it LAL.

It is limulus amoebocyte lysate.

Limulus is for the North American horseshoe crab, amoebocyte for a single blood cell, and lysate is an intercellular material from the crab.

So every spring we borrow the crabs for a little while.

We bring them in, take some blood, clean them up, send them back out to the ocean, and we collect our raw materials through the rest of the year.

We do that for about two months.

The rest of the year we process the final product which is a freeze-dried product.

You can imagine it is used with any product that would come in contact with the bloodstream, anywhere from biotech products to medical devices to vaccines.

Anywhere, anything that comes in contact with the bloodstream.

Very important test.

So it is the only FDA mandated in vitro test.

When I say mandated, you are required to do an endotoxin release test.

FDA is the only FDA-licensed in vitro test for this.

Doesn't mean you can't use another method.

You could use another method but you will be required to validate it, submit it to the FDA, and get pre-approval, which as most people know you wouldn't want to do that when you have an already preapproved method.

So we sell primarily three LAL product lines -- the conventional reagent, which is mainly a central lab based test; the portable PTS machine, which is the first and only FDA approved point-of-use endotoxin test; and we sell -- we are moving into the higher volume central lab cartridge technology with our multi-cartridge machine and our Nexus, our fully automated machine, which can process up to five cartridges or more, depending on how many multi-cartridge machines you have linked together, every 15 to 20 minutes.

So what are our product lines?

We have all FDA licensed LAL reagents to include, as simple as your gel clot which is just a plus or minus, yes or no.

Believe it or not, it is still 20% of the total test volume we sell.

We have kinetic instrumentation which includes software.

We have multiple drivers that will interface or will connect to a broad range of just standard laboratory 96-well microtiter plate readers or even tube readers.

We have a portable PTS machine, which actually I think we brought some machines you can take a look at and some of the cartridges.

So just imagine the change in the technology when before you were bound to a central lab, processing samples from all over the manufacturing floor.

So you, literally, send someone out through the manufacturing floor, collect all the samples, roll the cart in the central lab, and wait for the next day.

So we have pretty much changed the game on that which I will talk to more specifically.

The MCS is the five-slot machine, the fully automated machine.

We offer contract testing and all the technical support.

Main areas of use -- injectables, all injectable drug manufacturers, water, raw materials, finished product, medical devices, cell culture, compounding pharmacies, dialysis clinics, nuclear pharmacies, and cell therapies.

So we have a really broad customer base.

Everybody who is doing anything that comes in contact with the blood is required to do this test, as I said before.

PTS changing the game.

So as you can see your machine before we had a very highly labor-intensive central lab based test which did not lend itself to decentralization, did not lend itself to real-time manufacturing inputs, so it was not really supportive of the FDA's new initiative to do real-time analysis.

You don't need an experienced technician.

If you guys had a pipette and a cartridge here, you could test the water right here in 15 minutes.

It is very simple to use.

Obviously it reduces the assay error associated with the technician.

It really streamlines what we call out-of-specification test results investigations because you get the result very quickly.

It decreases all the pipetting errors and technician errors associated with it.

And it reduces accessory inventory, things you need like pipettes and tips and plates because we have put everything onto a central cartridge.

The instrument will run other assays that we have and we will continue to look at.

We currently have almost 4,000 machines in the field operating and running cartridges on a daily basis, so it has been very successful to say the least.

Benefits of the technology, decentralization of in-process testing has been key for me personally to try to drive.

When you go to a pharmaceutical company and you watch this stop-start, stop-start manufacturing process while they are waiting on test results, we can really improve the throughput through a pharmaceutical company's manufacturing by placing these assays on the floor, putting them in the hands of the production people, linking them to their LEMS system, driving efficiencies through the system.

So that is a huge benefit.

When I said earlier that customers are willing to pay a higher price, why wouldn't they with the efficiency we are driving through the system?

Reduce the sample turnaround time.

You could go in a pharmaceutical company and they are waiting to fill the sample.

They have a crew of 20 people and they are waiting to refill the material, but there are waiting on that QC test results.

A lot of our companies have these PTS machines in their sterile suite running the test in real time, getting the results, and then going straight into filling.

So it reduces inventory holds, it improves the laboratory productivity.

Most all of our clients, whether they are still running the central lab based test or not, they have a PTS machine in there for third shift work or second shift or Saturdays or STAT samples.

So it helps them there.

The training costs, you don't have to teach someone about standard curves or CV requirements or statistics.

The machine just tells you a result, so you're focused on the results, you're focusing on benefiting your manufacturing process.

You are not wasting a lot of time training someone on how to run the test; we have taken care of that for you.

But, again, the training costs and the lab investigations dramatically improve.

So what is the value proposition?

Again, we know with all the benefits that we have talked about in streamlining the manufacturing operation, reducing lab investigations, minimizing regulatory compliance risk that the cartridge technology is a value proposition.

So what is our dilemma?

It is not taking market share.

It is how fast do we take market share and at what price do we take market share?

We are still gaining share in the core business and we are still gaining share with the cartridge-based technology.

So for us it is just continuing to add value to the client from software integration to LEMS.

All the surrounding things that we can continue to drive value to the customer to pay the premium price.

Again, it is all about benefits to the customer.

There is really currently no competitive threat that we know of.

Obviously we know something will come.

Our intellectual property is covered, so any approach that is taken would have to come from another angle other than mixing reagents through a cartridge and reading it in a portable machine.

So we think we are in a pretty good position to move forward with penetrating the market.

If you just look quickly at the evolution of product, these were the original gel clot products.

Very labor intensive; you had water, you had tips, you had tubes, pipettes.

37 degree water incubating by which moved into the still central lab based kinetic systems, but we have software.

We have driver interfaces with 96-well readers, but still very central lab.

Did give you quantitative test results, but still bound to a lab.

So, ultimately, this machine which boils down to a portable machine, all the technician is required to do is deliver the sample and mash enter.

We have built-in positive products, we have built-in standard curves; they are standardized to the US reference government standards so there error is reduced.

Due to popular demand from our customers -- they are like this machine doesn't process enough cartridges, would you please make a multi-cartridge machine.

And we have.

So now we have multi-cartridge machine with both single, individual use for on the floor, on the manufacturing floor, or for a central lab with bulk packaging.

So depending on how many samples you are processing, we have a packaging configuration to cover that.

Even through more demand from our customers we have had customers implementing the multi-cartridge systems in the central lab and they have technicians just running cartridges through them.

They said could you automate that process, so we are in the process of doing that.

So now we have the multi-cartridge machine interfaced with a laboratory robot, so you can take the technician completely out of the central lab as well.

So what does that mean?

If you look at our strategy, our strategy is to really help the customer control their endotoxin testing protocols and procedures through the whole industry.

From a batch-driven central robot to decentralized test machines, all connected through what we call a fleet management software or a LEMS management integration software that controls the data, controls the security on the instrumentation, controls the metrology, just controls the whole system.

QC, QA, can control that process and feel comfortable with the way the data is being handled.

If you think about our strategy, if you implement this strategy, think about anything else you might could integrate to the platform.

There is just a lot of other testing than just endotoxin testing that goes on in a pharmaceutical company that can benefit from streamlined testing, real-time analysis driving forward.

So what do we want to do to accelerate the conversion?

Again, we are going to operate full range of cartridges from point-of-use real-time analysis to high-volume central lab testing.

We want to add other assays to the platform as we find them suitable.

We have a dedicated field support system that actually goes in, people go and calibrate, do the service, do the software upgrade, do the training.

We do provide product validation and SOP training.

We do, like I said, training for a lot of our customers.

We used a combination of the decentralized PTS machine, the MCS, and a high-throughput Nexus machine for in-process and final product manufacturing.

That will certainly drive the conversion.

So when you want to look at market share -- I know a question came earlier as what do we think the addressable market size.

We control the market size.

We have the only product, we have the premium priced cartridge, we set the price so, therefore, we set the market share.

So depending on how well we want to penetrate the market, how fast we want to drive conversion, we can control it by the premium.

My strategy is as long as we are adding value to the customer by continuing to add surrounding services, like software, integration to LEMS, automatic laboratory investigations, the value of the cartridge will continue to go up.

So we think that if you looked at the total addressable market is somewhere around $400 million, assuming that that is 100% conversion of the cartridges.

That is obviously an aspirational goal.

Where we settle in with ASP and market share conversion, obviously it depends on how well we execute the strategy.

Again, lends itself to again looking at other rapid technologies in the future.

Again, overall strategy.

We want to convert our existing traditional, so-called conventional LAL agents to the premium priced cartridge technology.

We want to use the Lab of Tomorrow strategy that we laid out to help decentralize that strategy which helps our customers improve efficiency and also gives us a higher ASP.

We want to expand the capabilities to look at different types of contamination.

And, again, obviously we are going to gain share and we are going to do it at a higher price, and the customer is going to be happy.

That in itself is our strategy.

We probably have time to have some questions for Foster.

So can we give those folks a mic?

Foster, this Greg Bolan from Sterne Agee.

Just thinking about your approach to the central lab, obviously an ROI hungry industry, how do you show -- I mean what kind of schedule can you show them to, I guess, push them to purchase this multi-cartridge system?

Just kind of thinking about pent-up demand into the back half of next year, or this year, excuse me.

The ROI of our model the central lab is generally driven on, again, training, technician training.

The traditional LAL assay is very labor intensive and it takes a long time to train a technician to run the test, so that simple.

Laboratory investigations, if you have a lab failure at a pharmaceutical company the regulatory environment is so strenuous now that you just can't say someone messed up and I need to run the test again.

You have to do a lab investigation, which requires looking into the assay -- why it failed, what is the corrective action so it doesn't fail again.

Again, the FDA is frowning more and more upon just saying, okay, retest it because there was a problem in the lab.

That in itself can drive a product from sitting on the shelf and not being released for seven whole days because you are conducting a laboratory investigation to get the product released.

So we have had customers who I never thought would convert, because they are so cost-conscious, from the central lab model in the central lab to the cartridge technology purely from those alone.

Just the reduction in costs when you are looking at lab investigations and streamlining your inventory to release.

That is a great business.

I am just wondering, based on some of the numbers that we have been provided here, so I think in vitro is about 11% of revenue, or RMS revenue, I guess at this stage or at least for 2011.

You have given us the market share for you guys in this market, about 45%.

Suggests that the market is not quite 50% penetrated I guess at this stage, but thereabouts.

I am wondering what portion of that $400 million market is comprised of kind of the high-volume central lab type of activity in your mind.

Most of it is in the central lab now which is one of the reasons we are growing so rapidly.

We are giving the customary the capability of moving out of the old model into a decentralized model, which is driving their efficiency and their manufacturing.

So I would say 80% of it is still in the central lab.

Okay, so 80%.

So the addressable market is $400 million; do you think that conceivably you guys are able to get -- I don't know, if you have a 45% share, maybe you expand that.

Is there 20% of the market you will never be able to address you think?

I think as long as we continue to provide value to the client and we are going to drive efficiencies and improve their testing, I don't know why -- we have always taken market share from the very beginning.

I don't know why we wouldn't continue to take market share.

If you had to ask me now what is probably the least addressable market, it would probably be China somewhere at the time.

Huge test volume, but when you look at price and you look at labor and you look at China and you look at India, it is a little more difficult to push the ROI model because of labor in general.

But other than that I would say the whole other is an opportunity for us.

And just on margin profile is it fair to say it is above corporate average?

Yes.

Well above corporate average?

Yes.

Just to clarify one of the comments you made earlier, the in vitro for 2011 was 7% of sales, so I just wanted to clarify that.

Just a quick question.

On the earnings call you had mentioned that there is an automated MCS launch second half of 2012 whereas I think last quarter it was midyear, so I am just wondering what pushed the schedule back towards the second half.

Yes, I can be very specific.

So have been selling what is so-called 21 CFR Part 11 compliant software in the central lab for quite a while, since I would say '91 or '92.

We made a decision as Windows transitioned from the old XP to Windows 7 that we needed to move the code from Microsoft Visual Basic 6 to dot-net, so I sort of decided earlier in the year let's get the conversion done.

Don't launch the product on the Visual Basic 6; let's get the conversion done to dot-net.

That is completed, it is being validated.

The robot is running in our lab now.

We are actually scheduled to do some beta testing within the next four or five weeks, so we just scheduled to get that dot-net conversion behind us first instead of having to do it twice.

That's why.

I think the answer is we are dealing with software, right?

So, Jim, I think this question is more directed to you.

I am just curious how you see synergies between the in vitro business and the core business.

Have you ever considered perhaps separating it from the business and somehow keeping value for shareholders that might not right now the recognized more broadly by the Street, just given the continued strength of the performance in the business?

It has done so well.

We look at the portfolio periodically and we look at the parts and the pieces and we ask ourselves that very question.

So, yes, we consider multiple possibilities in terms of how the structure works for us, both short and long term, and we will continue to do that.

This is a business that -- remember why we got into it.

So this is what we hoped would be the first of many in vitro alternatives and we still believe that, even though there are very few others out there.

But that doesn't mean that will be the case.

So strategically it is a critically important business.

It is in large measure the same client base and it has a lot of connectivity with other parts of the business, particularly our safety testing business given the GMP environment and others.

Again, as we do more and more big deals what we have been achieving with our clients is selling across the whole portfolio and I think this is really a critical part of that sale.

So, yes, we think it is an important part of the current portfolio and obviously we are delighted to have it.

That is all I want to say on that.

Any more questions for Foster or anyone else?

Thanks as always.

Thank you all for coming.

I hope you have a better sense of the Company and its management and its strategy, and I hope you know why we are so excited about the future.

We look forward to continuing to interface with many of you in the future.

Thanks a lot.