Charles River Laboratories International Inc (CRL) 2024 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories fourth quarter and full-year 2024 earnings conference call.

This call is being recorded.

(Operator Instructions)

I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations.

Please go ahead, sir.

Good morning, and welcome to Charles River Laboratories fourth quarter and full-year 2024 earnings and 2025 guidance conference call and webcast.

This morning, I am joined by Jim Foster, Chair, President, and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer.

They will comment on our results for the fourth quarter of '24 as well as our financial guidance for 2025.

Following the presentation, they will respond to questions.

There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on our Investor Relations website.

The replay will be available through next quarter's conference call.

I'd like to remind you of our safe harbor.

All remarks that we make about future expectations, plans, and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated.

During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance.

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 comparable GAAP measures and reconciliations on the Investor Relations section of our website.

I will now turn the call over to Jim Foster.

Thank you, Todd, and good morning.

We're pleased to end the year with a fourth-quarter performance that was slightly better than expected, yielding annual revenue and non-GAAP earnings per share higher than guidance that we issued in November.

Before I provide more details on our fourth-quarter results, I will provide an update on the market trends in our 2025 financial guidance.

Beginning with an update on the market environment, I can say that our view of biopharmaceutical demand remains consistent with our last update.

Overall, DSA demand KPIs, including the net book to build ratio, were stable compared to the third quarter, and we expect similar trends throughout 2025.

Many of our global biopharmaceutical clients continue to move forward with their restructuring and pipeline reprioritization activities, which are expected to constrain early-stage spending by many of these clients again in 2025.

Small and mid-sized biotechnology clients continued to benefit from a more favorable funding environment through the end of 2024 compared to the previous two years, and we expect biotech demand trends will be stable to slightly improved in 2025 versus last year.

These combined trends are expected to result in flattish DSA demand sequentially within 2025.

However, we expect steady volume to be at a lower level than in 2024 because many global biopharmaceutical clients reset their budgets in the middle of last year.

We're closely monitoring our clients' R&D spending patterns, the funding environment, and interest rates, as well as new biotech company formations, which have slowed over the past couple of years and believe our expectations for 2025 are appropriately measured.

As discussed at a recent investor conference, the primary factors in influencing our 2025 outlook are as follows.

The first relates to our expectation for stabilizing DSA demand environment in 2025, as well as an anticipated headwind from lower DSA pricing throughout the year.

The second item is lower commercial revenue in the CDMO business, which will reduce consolidated revenue by approximately 1% in 2025.

And finally, our site consolidation actions are expected to reduce revenue by an additional 50 basis points this year.

The cumulative effect of these factors is expected to result in a revenue decline of 3.5% to 5.5% on an organic basis this year and when including a foreign exchange headwind of over 1%, a reported revenue decline of 4.5% to 7%.

We have taken significant action to protect the operating margin and shareholder value, including restructuring initiatives that are expected to yield annualized savings of approximately $225 million in 2026, of which over $175 million will be realized this year.

However, we will not be able to fully offset the revenue decline in 2025, particularly in the DSA segment, which is expected to result in a modestly lower consolidated operating margin and a non-GAAP earnings per share in a range of $9.10 to $9.60.

Now, I'd like to quickly recap our fourth quarter and full-year consolidated performance.

We reported revenue of $1 billion in the fourth quarter of 2024, a 1.8% decline on an organic basis from the previous year.

For the year, we reported revenue of $4.05 billion with an organic revenue decrease of 2.8%, driven primarily by lower DSA revenue.

Our full-year revenue slightly outperformed the range that we provided in November, led by a better than expected fourth-quarter performance in the RMS segment and a robust year end for Microbial Solutions.

Sales to both the global biopharmaceutical and small and mid-sized biotech client segments declined for the full year, but in the fourth quarter, we were pleased to see revenue from biotech clients return to growth for the first time since the third quarter of 2023.

The operating margin increased 80 basis points year over year to 19.9% in the fourth quarter, principally driven by lower unallocated corporate costs and margin expansion in the Manufacturing segment.

The cost-saving initiatives also helped to limit the margin declines in the DSA and RMS segments.

For the full year, the operating margin declined by 40 basis points to 19.9%.

The decrease was primarily driven by the DSA segment as well as higher unallocated corporate costs.

Earnings per share were $2.66 in the fourth quarter, an increase of 8.1% from $2.46 in the fourth quarter of 2023.

The fourth-quarter operating margin expansion as well as favorable below-the-line items, including reductions in interest expense, the tax rate, and share count, led to the earnings improvement.

For 2024, earnings per share declined by 3.3% to $10.32 due primarily to the lower revenue and operating margin partially offset by the benefit of cost saving initiatives.

Turning to segment performance.

I'll now provide you with additional details on the fourth quarter in each segment's outlook for 2025.

DSA revenue in the fourth quarter was $603.3 million, a decrease of 3.5% on an organic basis.

The decline reflected lower study volume as well as slightly lower pricing.

As anticipated, Safety Assessment pricing turned negative in fourth quarter as the moderating pricing environment during 2024 started to work from backlog into the revenue stream.

In the current demand environment, pricing has become a point of discussion with clients, particularly small and mid-sized biotechs.

We have strategically and selectively utilized pricing and other commercial enhancements, including better integration of our DSA sales force with the global -- with the goal to gain additional market share and believe the strategy has been successful as demonstrated by an improved DSA capture rate during 2024.

DSA demand KPIs were also stable in the fourth quarter, including the net book-to-bill ratio and cancellation rate.

The net book-to-bill remained below 1 times in the fourth quarter, with global biopharmaceutical and small and mid-sized biotech client segments in a similar range.

This was consistent with the third quarter, following the divergence in trends during the second quarter that resulted in revenue to global biopharmaceutical clients taking a step down in the second half of 2024, which will continue to impact 2025.

Cancellations also remained at lower levels in the fourth quarter as they have for most of the past year and closer to targeted levels.

We believe the clients have largely completed the process of cancelling lower priority programs that remained in our backlog so that the key for the DSA segment to return to revenue growth will be a sustained improvement in booking activity, which has not yet occurred.

For the full year, DSA revenue decreased 6.2% on an organic basis, which was consistent with our expectation in November that DSA revenue would be favorable to our previous outlook of a high-single-digit decline.

At year end, DSA backlog modestly declined to $1.97 billion from $2.12 billion at the end of the third quarter.

In 2025, we expect DSA revenue will decline at a mid- to high-single-digit rate on an organic basis, which will be slightly less favorable than in 2024.

We expect that both lower pricing and steady volume will have a similar impact on the 2025 decline.

As I mentioned earlier, we expect study volume will be relatively stable sequentially throughout 2025 for the global biopharmaceutical and biotech client segments but at a lower level than in 2024 due primarily to the softer demand from global biopharmaceutical clients that emerged in the second half of last year.

In addition, lower realized DSA pricing will add an incremental headwind in 2025 that was not present in 2024 when realized pricing was essentially flat for the full year.

We have not assumed any meaningful improvement in the DSA demand environment during 2025 at this time, so the quarterly gating of DSA revenue dollars should be relatively consistent over the course of the year aside from a modest seasonal impact in the first quarter.

In recent weeks, NHP supply has once again made headlines as a result of a recent proposal at the Standing Committee meeting of CITES, an international body that oversees the trade of animals, including NHPs used in biomedical research, to potentially suspend the trade of NHPs from Cambodia.

We were very pleased the studies did not enact a trade suspension at the meeting in early February and postponed the agenda item on this matter until the end of the year.

This decision underscores the international community's strong support for a fair, accurate, and science-based review process, providing the necessary time to review the facts and counteract the misinformation being disseminated by other groups.

Let me be clear.

Charles River firmly believes that any action to restrict the availability of purpose-bred NHPs from Cambodia could have significant and unintended consequences that will impact biomedical research globally.

Legally sourced NHPs are critical, regulatory-required models to help ensure human patient safety and advanced biologics drug development for the global biopharmaceutical industry.

Charles River will continue to work collaboratively with regulatory agencies, government officials, industry trade associations, and our biopharmaceutical clients to promote patient safety and educate our partners about the scientific importance of NHPs, particularly when viable alternatives do not currently exist.

With regard to our NHP supply, we will continue to diligently work to diversify and secure our supply chain by procuring NHPs and the various supply arrangements outside of Cambodia, including through our controlling interests in Noveprim in Mauritius.

As a reminder, we will be able to utilize an increasing number of Mauritius NHPs in our DSA segment after 2026.

In the appendix of our slide presentation today, we have also updated certain key statistics for 2024 that were included in our NHP report last year.

DSA operating margin was 24.7% in the fourth quarter or a 130 basis point decrease in the fourth quarter of 2023 and was 25.7% for the full year of 2024, representing 180 basis point decline year over year.

Both the fourth quarter and full-year declines were primarily driven by lower revenue, which was partially offset by the benefit from cost savings.

RMS revenue in the fourth quarter was $204.3 million, a decrease of 0.4% on an organic basis.

For the year, RMS revenue was essentially flat with just 0.1% decline on an organic basis.

For both the quarter and the year, lower revenue for Research Model Services, including CRADL, NHP sales in China, and the Cell Solutions business was mostly offset by higher sales of small research models in all geographic regions, principally driven by higher pricing.

Cell Solutions 2024 growth rate was impacted by the consolidation of its operations to its largest California site.

In 2025, RMS revenue is expected to increase at a low-single-digit rate, driven primarily by higher pricing in the North American and European models businesses.

Improved growth prospects for Research Model Services, including CRADL, and from higher NHP sales to Noveprim third-party clients.

Unit volume for small research models continued to be lower in 2024, due in large part to the softer biopharmaceutical spending environment.

However, higher pricing and higher revenue from academic institutions more than offset these unit volume declines.

We expect similar trends in 2025, with higher pricing in North America and Europe, more than offsetting lower unit volumes.

We also expect small models revenue in China to be flattish as the life sciences environment continues to be somewhat challenged.

Given the recent news around NIH funding, we will closely monitor the health of our academic and government client base.

Our direct exposure to the NIH represents less than 2% of our total revenue, largely related to insourcing solutions contracts.

For academia, small research models are critical components to academic research projects and considered direct research costs, but we will monitor what, if any, impact the NIH's new directive to cap indirect costs will have on these clients.

Overall, large models are not expected to be a significant contributor to RMS revenue growth this year as anticipated increase in Noveprim's third-party NHP revenue will be partially offset by lower NHP revenue in China.

Demand for research model services is expected to rebound and become a notable contributor to RMS revenue growth in 2025.

Our GEMS business is expected to get back on track as clients increasingly utilize these services to support their complex research efforts and maintenance of the genetically modified model colonies.

Moderate growth of CRADL operations is expected to deliver an improved top-line performance in 2025, primarily driven by new CRADL sites.

To limit risk in this tighter budgetary environment, the new sites will either have dedicated or anchored clients.

Clients are continuing to view CRADL as an attractive model to access flexible vivarium space without having to invest in internal infrastructure, which provides a powerful value proposition for clients who are looking to reduce costs and conserve capital.

The RMS operating margin decreased by 30 basis points year over year to 22.8% in the fourth quarter but increased by 70 basis points to 23.7% in 2024.

For the year, the operating margin improvement was primarily due to higher pricing for small research models, cost savings related to our restructuring initiatives, and a favorable revenue mix related to higher sales of NHPs due to the Noveprim acquisition.

We expect similar drivers to contribute to the RMS operating margin in 2025.

Manufacturing Solutions revenue was $194.9 million in the fourth quarter, the growth rate of 2.1% on an organic basis, and the full-year organic growth rate was 6.8%.

The slower fourth-quarter growth rate was primarily driven by lower commercial revenue in the CDMO business, offset by a robust year-end performance for the Microbial Solutions business.

These same drivers will likely result in essentially flat Manufacturing revenue in 2025 on an organic basis.

Biologics Testing benefited in 2024 from certain client projects that will not repeat, which will result in a moderated growth rate in 2025.

As mentioned at a recent investor conference, we expect lower revenue from two commercial CDMO clients will reduce consolidated revenue by approximately 1% in 2025 and the Manufacturing segment's growth rate by more than 5%.

Despite the commercial setbacks, we believe our efforts over the past two years to enhance the CDMO operations have established a solid foundation for this business through investments in facilities, leadership, and scientific expertise.

Although demand in the cell and gene sector is not as robust as it was when we acquired the business in 2021, we believe attractive long-term growth opportunities exist, and we have a healthy pipeline of biotech clients with early-stage clinical candidates ready to help move the CDMO business forward.

The Microbial Solutions business reported a strong year-end performance with solid growth across all three testing platforms: Endosafe, Celsin, and Accugenix.

Endosafe continued to lead the way with robust growth for testing consumables, as well as another strong quarter for instrument placements.

We believe the 2024 performance thoroughly demonstrated that demand for Microbial products has rebounded and that clients are increasingly utilizing our comprehensive, rapid manufacturing quality control testing solutions to enhance their product release testing speed and efficiency.

The Manufacturing segment's operating margin increased by 330 basis points to 28.7% in the fourth quarter and by 560 basis points to 27.4% for the full year.

We were pleased by the operating margin expansion, which was driven by operating leverage from improved demand in the Microbial Solutions and Biologic Testing businesses and our continued focus on generating greater efficiencies across all businesses, including CDMO.

We believe the Manufacturing segment remains on track to reach its goal to return to an operating margin above the 30% level within a couple of years.

To conclude, we are currently operating in a challenging biopharmaceutical demand environment with continued constrained client spending, but we believe that demand trends are stabilizing.

On the positive side, biotech is trending favorably.

We have not seen signs of further deterioration from our global biopharmaceutical clients.

However, we're not forecasting a recovery in 2025.

We are taking decisive action to manage the company through the current environment, including appropriately right-sizing our infrastructure and eliminating over 5% of our cost structure.

We remain committed to initiatives to generate more revenue, contain costs, and protect shareholder value.

To ensure our future success, we continue to make progress on strategic actions in these three main areas: restructuring and other initiatives to manage costs and generate greater efficiency by reducing staffing levels to align with the pace of demand, optimizing our global footprint, and streamlining processes and operations.

We have made meaningful progress on this front and continue to selectively evaluate additional opportunities to cut costs and drive efficiency and now expect to generate approximately $225 million of annualized cost savings from these initiatives.

The second area is concentrating on commercial enhancements to promote a client-centric focus and gain additional market share.

Our goal is to enhance the client experience and reinforce our role as a flexible and responsive partner to our clients, including through leveraging technologies such as our Apollo platform and our RMS e-commerce initiatives.

As I mentioned earlier, our enhancements to our DSA salesforce and dynamic pricing strategy have enabled us to gain market share over the past year.

And finally, we are taking a balanced approach to capital allocation and regularly revisiting our best uses for capital.

We are very pleased that our leverage remains low in the low 2 times range, and as we have routinely done, we continue to evaluate select M&A candidates.

Based on our anticipated capital needs this year and coupled with our belief that we are currently undervalued, it is an opportune time to allocate most of our free cash flow to stock repurchases in 2025 under our $1 billion authorization.

We intend to repurchase approximately $350 million in stock over the next month or two, which exceeds our initial goal of $100 million last year to offset annual dilution from equity awards.

We have navigated challenges before, and we believe our strategic actions will enable us to emerge from this period as stronger, leaner, and more profitable company and an even more responsive partner for our clients.

We have always distinguished ourselves through our exquisite science and preclinical focus, extending our leading position as our clients' preferred global non-clinical drug development partner.

I'd like to thank our employees for their exceptional work and commitment, and our clients and shareholders for their continued support.

Now, Flavia will provide additional details on our financial performance and 2025 guidance.

Thank you, Jim, and good morning.

Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude a goodwill impairment in the fourth quarter of 2024, amortization and other acquisition related adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments, and certain other items.

Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, and foreign currency translation.

We are pleased with our fourth-quarter financial results, with revenue and non-GAAP earnings per share slightly exceeding our annual outlook.

In the face of a challenging domain environment, we have taken decisive actions to navigate these headwinds.

Our efforts include aggressive actions to rationalize costs and align our infrastructure with the current demand.

As Jim noted, the restructuring initiatives we implemented are expected to result in approximately $225 million in annualized cost savings in 2026, including over $175 million realized this year, slightly ahead of our prior target as we selectively implemented smaller additional initiatives.

The multi-year cost savings program is expected to reduce our cost structure by over 5% through headcount reductions and network rationalization efforts, the majority of which are underway and are on track.

To further balance our capital structure, we leveraged our strong cash flow generation to repurchase $100 million in stock in the third quarter of 2024, achieving our goal to offset the annual share account dilution from equity awards.

As Jim mentioned, under the $1 billion Board authorization, we intend to increase the level of stock repurchases in 2025 to approximately $350 million.

We believe allocating free cash flow to stock repurchases this year will be prudent in light of our low leverage levels and our current valuation, which is certainly depressed because of the current industry headwinds but also does not ascribe enough value to the favorable long-term growth fundamentals that we expect to again re-emerge once the biopharmaceutical industry refocuses on investing in their pipelines.

We are particularly pleased with our strong free cash flow generation of $501.6 million in 2024.

This achievement reflects the effectiveness of our tightly managed capital expenditures, disciplined working capital management, and the early success of our cost savings initiatives.

By maintaining a balanced approach to capital deployment, we continue to demonstrate our commitment to enhance long-term shareholder value.

I will now provide additional details on our 2025 outlook.

As Jim discussed, 2024 reflected a constrained biopharmaceutical spending environment, which is expected to persist into 2025.

Therefore, we expect a reported revenue decline of 4.5% to 7%, including the foreign exchange headwind, and 3.5% to 5.5% on an organic basis.

FX has become more of a headwind in recent months as the US dollar has strengthened and is now expected to reduce reported revenue by 1% to 1.5%.

We have provided additional information on FX rates and our currency exposure in the appendix to our slide presentation.

Non-GAAP earnings per share are expected to be in a range of $9.10 to $9.60. On a segment basis, we have also provided the reported and organic revenue outlook for 2025 on slide 31.

In 2025, we expect the consolidated operating margin will be modestly lower from 19.9% in 2024 as the cost savings associated with restructuring initiatives will not fully offset the lower revenue this year.

This is particularly true in the DSA segment, for which we expect an operating margin decline.

However, there are opportunities for margin expansion in the RMS and Manufacturing segments.

Unallocated corporate costs in 2025 are expected to be approximately 5% of total revenue.

These expenses normalized in the fourth quarter of 2024 to 5.2% of revenue, primarily driven by performance-based bonus.

However, the 40 basis point increase to 5.7% for full-year 2024 was primarily attributable to higher health and fringe-related costs throughout the year.

We expect corporate costs to decrease in 2025 because of benefits from cost saving actions.

The non-GAAP tax rate for 2025 is expected to be in the range of 22.5% to 23.5%, an increase from 21.3% in 2024.

The anticipated increase in the tax rate is principally due to an increase in the global minimum tax as well as a modest impact related to stock-based compensation.

In addition, we have not assumed that discrete tax items, which benefited 2024, will repeat.

As it's typically the case due to the timing of equity awards vesting, the headwind from stock-based compensation will be more pronounced in the first half of the year, including an expected first-quarter tax rate in the mid-20% range.

Total adjusted net interest expense in 2025 is expected to be in a range of $112 million to $117 million compared to $117.7 million last year.

The slight decrease will be primarily driven by lower interest rates on floating-rate debt.

We do expect to borrow during the year to balance the timing of the stock repurchases earlier in the year with the free cash flow that we will generate, but overall, expect that balances will be similar at the end of 2025.

In 2024, we lowered our net interest expense by repaying approximately $400 million in debt, the highest repayment in recent years, bringing our growth and net leverage ratios to 2.2 times at the year end.

Additionally, in December, we amended our existing credit agreement to establish a revolver with borrowing capacity of up to $2 billion, reduced from our previous $3 billion facility due to our lower current leverage and anticipated capital needs.

Importantly, we're able to obtain competitive pricing on this new agreement.

At the end of the fourth quarter, we had outstanding debt of $2.2 billion with approximately two-thirds at a fixed interest rate compared to $2.3 billion at the end of the third quarter.

For 2025, we expect free cash flow will be in a range of $350 million to $390 million, representing a decrease from $501.6 million in 2024.

The decrease will be driven by lower earnings and higher working capital to build inventories, particularly for NHBs, and that stabilization of receivables after favorable collections in 2024.

Capital expenditures for 2025 are expected to be essentially flat from 2024 levels at approximately 6% of total revenue or about $230 million with projects primarily related to a mix of maintenance capital and the completion of ongoing projects.

This outlook reflects our discipline approach to aligning capacity and capital investments with client demand and is well below our peak CapEx in recent years of 8.2% of revenue.

A summary of our 2025 financial guidance can be found on slide 37.

With regard to the first quarter of 2025, we expect revenue will decline at a mid-single-digit rate on an organic basis and at a mid- to high-single digit decline on a reported basis due to several factors including first quarter seasonality in the DSA and Biologics Testing businesses as well as a modest headwind from the timing of NHP shipments.

From an earnings perspective, we expect non-GAAP earnings per share of at least $2 in the first quarter.

The decline from the fourth quarter will be primarily driven by lower operating margin due in part to the seasonal business trends and the timing of NHP shipments.

And as I mentioned, we expect a meaningfully higher tax rate in the mid-20% range, reflecting a headwind from stock-based compensation.

Unallocated corporate costs will also remain slightly above 5% of revenue in the first quarter.

We expect revenue and operating margin will improve after the first quarter, principally as we move beyond the seasonal trends at the beginning of the year.

In conclusion, we're confident in our ability to emerge from this period of softer demand as a stronger, more agile organization.

Our decisive actions, including aggressive cost optimization initiatives, stock repurchases, and a disciplined approach to capital management, demonstrate our commitment to enhancing shareholder value.

We believe our leaner infrastructure will position as well to capitalize on new business opportunities when they emerge and drive sustainable, profitable growth in the future.

Thank you.

That includes our comments.

We will now take questions.

(Operator instructions) Elizabeth Anderson, Evercore.

I just had a question about your bookings expectations.

Like given the backlog number that you guys had in the fourth quarter, it seems like maybe the book-to-bill, at least on my math, may have taken a bit of a step down sequentially.

And I just wanted to understand like if you look at it on the current quarter basis -- so I just want to understand if there's timing.

Obviously, on a TTM basis, it's more stable.

So one, could you confirm my math?

And then b, like, how are you seeing things in the first quarter?

And sort of can you talk a little bit more about your sort of trending expectations in that regard as we move through 2025?

Elizabeth, I can maybe start just with your question on the book-to-bill, and then I don't know if Jim wants to add additional commentary on the overall outlook.

Actually, the fourth quarter, both growth and that book-to-bill was sequentially -- essentially stable.

There was no deterioration or improvement either.

So we were pleased that after the second-quarter decline that we saw, especially with our global accounts, we had a bounce back in the third quarter and then stayed flat in the fourth quarter.

Yeah, so Elizabeth said we would -- for the first quarter, which is typically softer for us, we anticipate some seasonality in DSA and Biologics.

And back half of the year, we'll see stronger sales in Noveprim for NHPs, should have sort of consistent sales growth across the year.

We feel that biopharmaceutical client demand has stabilized and that biotech demand has stabilized to be -- or to be slightly up.

So we don't anticipate any further deterioration in demand from a volume point of view.

We'll have a little bit of a step down on price in DSA though.

And the first-quarter trend that I just talked about is embedded in our guidance.

Okay, that's super helpful.

Thank you.

Matt Sykes, Goldman Sachs.

Maybe just on RMS.

I know you quantified the direct NIH exposure at less than 2%.

Could you just talk about academic as a whole, including NIH, what that is in terms of percentage of MRS?

And what are you kind of seeing real time from that customer base in terms of the metrics that you're observing or feedback that you're getting, just given all the uncertainty in that segment?

So I don't think -- we're not seeing much or hearing much yet.

There's a fair amount of speculation about what's such an indirect cost recovery of support they'll actually be.

But assuming that things are as anticipated, as you say, it's about 2% of the total.

It's about academic and governments, about 40% of RMS.

A lot of that is related to government contracts, but the academic impact of that will be much less, let's say, a little bit over the entire company even though most of it's an RMS.

It's about academic and government are about 10%.

And if you peel that back, a bunch of it's outside the US.

A bunch of that is in academic institutions, and a relatively small amount is government related.

So we'll have to see what impact, if any, that we have, particularly with long-term contracts for things like producing animals for certain institutes at NIH. (inaudible) is possible, but that would be pretty destructive to the researchers.

So we feel that given the relatively small percentage of revenue that's associated with that, we should be fine.

Got it.

And then just on sort of large pharma demand, I mean, you've been calling that out as an area of weakness.

As you think about sort of the reprioritization cost cutting cycle that we've been through, you kind of mentioned we're maybe towards the end but no view on terms of recovery.

But are you expecting any sort of improvement to that dynamic in the second half of '25?

Or we should be thinking more about '26 in terms of recovery from that customer segment?

So we -- in '24, we just assumed that things would get better in the back half of the year for a whole bunch of reasons.

We thought the capital markets would open up and this reprioritization stuff would be over.

And assuming that things are going to get better, it's not a very good strategy.

So all we can do is have a guidance based on conversations with clients.

Now, we're dealing with every large pharmaceutical company in the world.

They're reprioritizing the pipelines and restructuring their infrastructures to deal with the patent -- impending patent cliffs, et cetera.

And depending on who you talk to, much of that has been done, and there's still a fair amount still to be done.

And it's impossible for us to predict what that will be or when that will be concluded except for what the clients tell us.

So we would anticipate that while things have stabilized and while we don't anticipate things would get worse or deteriorate further, that pharma would be pretty much consistent for the balance of the year, and the biotech is more stable and would be slightly improving throughout the year.

That depends very much on capital markets.

They have some several IPOs that have gotten off and priced well, so that's encouraging.

There's been some really good inflows into venture capital firms.

That's encouraging as well.

While there definitely has been some reprioritization for the biotech companies, they don't have the same sort of large infrastructures to reduce, and they don't do anything internally.

So they very much need us and other companies like us.

So we anticipate kind of consistent revenue throughout the year, a little bit of a step down in DSA over 2024 because of the pricing headwinds.

And if it's better than that, that would be terrific, but we don't have any indications now that would cause us to guide differently.

Thank you very much.

Tejas Savant, Morgan Stanley.

Maybe one for you, Flavia.

On the CDMO business, just a couple of housekeeping items for me.

Any cancellation payment benefit in the fourth quarter?

Do you expect one to come through in '25?

And then what can you do to cushion the margin impact on the segment from underutilization?

I think I heard you mention that there's opportunities for operating margin in Manufacturing to actually grow year over year in '25.

Yeah, hi, Tejas.

Thanks for the question.

And I'll take the latter part first.

You're correct.

We will -- we are forecasting margin expansion for the Manufacturing segment.

Margins will be challenged in the CDMO business as you pointed out, given the loss of those commercial clients.

But we're taking actions there to right-size our infrastructure and staffing to the lower sales.

And then in addition to that, the other two businesses within Manufacturing are going to continue to do well and perform well.

We saw, as Jim mentioned in his prepared remarks, a very strong finish for the Microbial business, which will continue to help with margin expansion.

Going back to your first question, there are some contractual obligations that we will benefit from.

Those are embedded in the 2025 guidance that we provided for the segment, and so I'll leave it at that.

Got it.

That's helpful.

And then one for you, Jim, on the CITES decision to defer the decision on the Cambodian NHP trade.

I was just curious as to whether there's any steps you can take proactively over the next 12 months to further derisk your supply chain there, perhaps increasing sourcing from other countries in Southeast Asia?

Or is it basically Noveprim ramping in that 2026 plus time frame that's the real meaningful offset for any Cambodian supply disruptions here?

We will do everything we can as we always have, by the way, even without a potential disruption like we might have from CITES [decision] to source NHPs from multiple geographies and multiple providers, some of which we have long-term contracts, some of which we buy on markets, some of which we have an ownership position like in Mauritius.

So we will do everything we can to protect ourselves in the eventuality that that doesn't go well.

Obviously, we and the rest of the scientific community will provide valid and valuable scientific input to the CITES folks to make the decision to underscore the criticality of these animals for drug development, particularly for large molecules around the world, given the fact that there are no general alternatives.

So we're very optimistic that that will go well.

If it doesn't, we will use multiple sources of supply to obviously to try to satisfy the needs of our clients.

Got it.

Thanks for the color, guys.

Appreciate it.

Dave Windley, Jefferies.

Jim, you've commented in your remarks about your expectations for demand throughout 2025 and then also commented about pharma continuing its restructuring.

You may have seen in a couple of surveys we've done recently where a number of large pharma respondents talk about expecting kind of a second round of restructuring.

And so my question to you is, how much visibility are clients able to give you on that type of thing?

For example, if there's another restructuring coming and the internal people seem to know about it, are they sharing that with you such that you're able to incorporate that in your expectations?

And then kind of relatedly, your thoughts about '25 is as far out as the end of the year, is that based on this type of conversation?

Or are you just having to take a conservative posture given limited visibility?

Thanks.

David, we're staying, as we always do, as close to our clients as possible.

We have a long term, very senior relationships with folks of pretty much every drug company.

They depend heavily on us for a whole range of things; many of them buy across our entire portfolio.

Is there another shoe to drop?

We're not hearing that.

I suppose, anything is possible.

Some of them have told us that they're (inaudible) done and moving away from this, and we'll be spending more.

Some of them have announced that just in terms of their overall R&D expenditures.

But we do anticipate that some of that is not over yet.

So I think we have very -- we have as good visibility as we possibly can have.

I mean, they are very much dependent on us doing the work for them, so they need to get out ahead of that in terms of booking slots and communicating with us in terms of how much work they anticipate having us do or not do.

And when they get done with their infrastructure reductions, it's likely that they'll want to crank things up meaningfully, getting back to (inaudible) filings or maybe discovery spending.

So I do think it's incumbent upon them to keep us well informed.

As I said earlier, we're just not going to make any overall assumptions on what's going to happen aside from what they tell us is going to happen.

And so all we can do is stay in very close communication with them, which we do constantly.

And so we anticipate that things won't deteriorate further, that things will be stable there, even if some have a second round, some of them will be out of that and will be moving forward.

So it should be a decent offset.

If I could ask you a quick follow-up in the deck, around DSA and pricing, you highlighted that in the current environment, pricing has become a topic of discussion.

I wanted to clarify whether that was the -- in the current environment part of that, is that kind of an extension of what you have been telling us?

Or is this a signal that the pricing is -- kind of the pricing demands from clients are intensifying and maybe taking another step down?

Thanks.

Yeah, no, it's a continuation with the biotech guys that are -- where access to capital is difficult.

And even the big pharma companies who have been reducing their infrastructure, they have been more price sensitive.

And of course, as we've reported multiple times, we do have several competitors, particularly in the safety assessment business that compete with us primarily on price.

So price becomes both an issue and an opportunity for our clients.

As we've also said, we both strategically and selectively will utilize a reduction in our own prices to either preserve or garner new share.

We don't go to the point of matching our competition because those price points we feel would be too low, given the complexity of the studies and the cost of the studies that we're doing.

So it's an issue.

The work that we've done to continue to lean out our infrastructure, which I think we've done a really good job at, allows us to be slightly more aggressive with our pricing if our cost structure is lower and still be able to protect margins as well as possible.

So a continuation of kind of the dialogue that we saw last year.

I don't think that's a new intensification of it with regard to price.

Got it.

Appreciate the clarification.

Thank you.

Anne Hynes, Mizuho.

What do you think is different about this downturn versus other downturns?

And do you think the recovery from this downturn would be different?

I guess what I'm trying to get at is you gave long-term growth rates right before the industry started decline.

Do you think those growth rates will be intact post the recovery from this downturn?

Or do you think there's a structural shift in the growth of any of your business lines?

Thanks.

Yeah, so I don't think this downturn is -- and the last time we had a situation like this, it was after the economic meltdown in '08, so we had a tough time in '09, '10, '11, and '12.

During that period, things were fundamentally different from a marketplace point of view.

Number one, many of our competitors, we now own, so I think we have a bigger infrastructure.

I'm talking principally.

About safety assessments, there were a modest amount of biotech companies, and now there are hundreds if not thousands, so many more companies that need that capability.

And in those days, the big pharma companies were doing a lot more -- first, there were more big pharma companies, and they were doing a lot more work internally, and that's changed.

That's changed fundamentally.

We also -- we and all of our competitors have built a lot of space, and we were really swimming in excess capacity, which I think allows the clients to really push pricing way down and margins down as well.

So the situation isn't -- I mean, everything that I just said is different.

Thousands of biotech companies, pharma is much leaner.

We have -- I would say, our capacity utilization isn't optimal and isn't where we would like it to be, but it's not nearly in the position that we were in previously.

So the thing that's similar is these clients are approaching a patent list, and that's somewhat circular.

I mean, that's probably every decade or so, we see a patent that's happening.

This one's pretty profound because there's a lot of very expensive drugs out there.

But we do think that there's a necessity for all of our clients, both large and small, to get back to work as soon as they feel comfortable doing that from an affordability point of view.

The host of drug modalities right now to treat really tough diseases is the best, maybe, it's ever been, and there's definitely a lot of drugs that have not been pursued.

So they're either parked somewhere or -- and they may be parked before the IND phase, so we're not seeing that as well.

So we can't predict exactly when the recovery will be, but it feels like a fundamentally different situation than the last time.

And it feels like there's a significant amount of pent up demand and need on the client's part to develop these drugs, as I said, which are very powerful and meeting unmet medical needs.

Great.

And just as a follow-up, I believe you said in 2025 you're assuming some growth in biotech.

Can you just elaborate how much growth and what gives you confidence in that growth?

Yeah.

I mean, just that we're being -- we began to see it take up a little bit in the fourth quarter.

And we're in it, and it feels more stable than the big pharma folks.

And as I said, everything that they do is outsourced.

So given the both current and anticipated inflows from the capital markets and into the venture firms, we anticipate an improvement but modest -- a modest improvement.

So that's embedded in our guidance, and the modest improvement will not be sufficient to offset the situation from the big pharma companies who will be pretty much stable but definitely not increasing.

Great, thank you.

Justin Bowers, Deutsche Bank.

Just pivoting back to DSA.

One clarification on Liz's question, with the bookings being stable sequentially, is that in terms of like the nominal bookings and net bookings or just on the book-to-bill?

And then part two of this is, can you just help us understand some of the underlying dynamics in DSA?

You've discussed a fairly stable demand environment from the second half of the year, stability in global, some modest improvement in biotech, but it looks like organic is down mid-single to high-single in 2025.

So is that delta?

Is that price or mix or discovery?

Just sort of help us peel the onion back a little bit there.

Let me just take the back half of the question and Flavia can take the beginning of it.

So it will be down in a similar range to last year, slightly more.

Last year, the decline was principally volume.

And this year, it's going to be sort of half price and half volume.

So the price is coming through the backlog as work comes out of the backlog and that we actually do it where we have prices that were lower than previously.

So the good news about that is that we anticipate that the volume decline will be lower than it was the prior year, so that's a good thing.

And but we do have a pricing headwind, which we should move through for the balance of the year.

I'll let Flavia answer the book-to-bill question.

Yeah.

Justin, I was talking about growth in that book-to-bill in my earlier comments about stability in -- sequentially in the fourth quarter versus the third quarter.

Okay, and maybe just one more follow-up on pricing is if we're looking at the environment now and, call it, 1Q, is it stable versus 4Q?

Or any changes in either direction with respect to the price in DSA?

I can take that, Jim.

Yeah, I think prices is stable.

I think that's the clarification to Dave Windley's question that Jim provided additional color when we said the continuation of the environment, we started seeing some pricing headwinds in terms of the bookings we were taking as early as last year.

And we have signaled throughout 2024 about that selective pricing, selective discounting that we were conducting, and that is now materializing in a price headwind in 2025.

But we're not seeing a continuation of erosion of pricing of what we're booking in 2025 towards the later part of 2025 or 2026, if that makes sense.

So spot prices, I'd say, flattish to the end of the year.

Understood.

That's helpful.

Thanks so much.

Charles Rhyee, TD Cowen.

Hi, this is Lucas on for Charles Rhyee.

Wanted to dig deeper into the Manufacturing segment and the opportunities you see for margin expansion.

I understand that you guys are expecting margins to improve in 2025 here, driven by growth of Microbial Solutions.

You also call that right sizing actions and CDMO business and potential [receive] payments from clients who terminated their arrangements.

Should we think about those two items as the opportunities to see improved margins?

Or are there other items that you guys expect to benefit within the segment?

Jim, I can take that if you want since I was answering the question about the Manufacturing Solutions margin expansion.

So Lucas, all the items that you relayed, in addition to that, we've been looking at right sizing our, let's say, staffing across the entire company all throughout last year.

And the $225 million of cost savings that will annualize fully by 2026, but $175 of that will be in 2025, benefit all segments and all businesses within each of the segments, right?

So Biologic Solutions - excuse me, Biologic Testing, Microbial, and CDMO all had actions in the works.

And then as I mentioned, we further enhance the restructurings in CDMO given the loss of those two commercial clients.

So the focus on margin protection has been the case throughout all of last year, and it's going to impact all businesses.

Okay.

I appreciate that.

And then just as a follow-up, your guys' 10-K filing, it noted that one of your clients received a complete response letter from the FDA.

Can you clarify whether this was one of the clients -- the two clients that you discussed at JPMorgan or if this is a new client?

The filing says it took place in January '25.

It's one of the two clients we talked about at JPMorgan.

All right.

Thanks.

Michael Ryskin, Bank of America.

First, I want to just take on a little bit on margins for next year.

I think you generally just said, modestly down margins for '25 versus '24.

I just want to make sure my math is right.

Once I go through the models of adding the share buyback and some of the other non-GAAP items, I'm getting pretty close to down 100 bps, something in that ballpark.

Is that right?

Or is it more of in the like 10, 20 bps year over year.

Jim, I can take that.

I think, Mike, we're going to let each of you interpret what we mean by modestly below and update your models accordingly.

I know you would rather have more quantitative guidance than qualitative, but at this point, we're going to stick with how we provided that color.

Okay, sure.

And then a quick follow-up, then.

You touched on pricing a couple times.

I appreciate your comments on sort of like stable pricing and the answer you gave just a couple questions ago in terms of how price works through the backlog impact on '25.

That all makes sense.

But I just kind of want to take a step back and see how you think about pricing relative to historical levels.

There's been a lot of price [taken] over the last couple of years.

Obviously, you're seeing that as a headwind flow through now but maybe sort of ignoring the week-to-week, month-to-month trends of is there pricing stability or not.

Do you feel like, in general, for your business and maybe for the market overall, price is in a healthy level?

I guess put in other words is, could we be seeing something where you get some stability for a few quarters then another reset?

Or at least, maybe stability for a few quarters, but you just don't have pricing power for several years because it is still a little bit on the more expensive side relative to historicals?

Just going to take a step back and take a bigger view of the price question.

I mean, it's tough to predict except this is a certainty that the (inaudible) we're in is pull back the biotechs relative to funding and the big guys relative to getting their infrastructures in good shape is transitory for sure.

And if you look at our Safety Assessment business, just as an example, and given that it's such a large business and so impactful, it's just classic supply demand quotient.

And so as the demand rebuilds, as more drugs, more IDs are filed, and pipelines get robust again and space gets tight again, which it has for years, most recently is '21 and '22 and will -- again, we think, for a meaningful amount of time, will have a meaningful amount of price and power, number one.

And price will be less of an issue for our clients and getting access to capacity and in a timely fashion will be paramount to them, which, as I said, which we saw for years.

So that's inevitable, and that will be coming back.

We get price in the research model business every year for 76 years and will again in 2025.

And we get price in other businesses with this great demand, Microbial, in particular.

And so it's a very pure supply-demand quotient.

And Mike, just to come back to your question, as I said, I'm not going to provide quantitative additional color, but just it's helpful for 2024, where we just finished the year, we had said that margins were going to go down modestly, and they ended up going down 40 bps.

So if that's helpful, as you think about what our modestly, moderately means.

Just to provide some qualitative color.

Okay, thanks.

Max Smock, William Blair.

Let me just a quick one for me here.

I was a little bit surprised by the impairment for the Biologics Testing business.

I think over the last couple quarters, you've talked about seeing a continued rebound in that sub segment, seemed like things were going well.

I know you touched on it a bit during the call, but can you just walk through the issues facing that business and how you're thinking about growth there from that sub segment in 2025?

And then longer term, whether there's been a material change to how you're thinking about the long-term potential for that business, which, I think, going back to the Analyst Day, you pointed to as being a high-single-digit or maybe even 10% growth longer term?

Thank you.

Yeah, I can take the question on the goodwill impairment.

So we obviously do a goodwill assessment of all of our segments annually.

And in this case, the CDMO business is part of the segment where the goodwill charge was recorded.

So as you can imagine, the loss of the two commercial clients, in addition to a perhaps more -- a lower level of growth in those businesses versus what we had assumed at the time of acquisition with the primary drivers of the impairment.

So while there's still good growth potential, especially with cell and gene therapy, once the market rebounds, it is at a lower level versus what we had assumed at the time of acquisition.

And the loss of those two commercial clients put additional pressure.

Does that help?

Yeah.

And sorry, maybe I misunderstood.

Was there an impairment related to the -- it sounds like the impairment was entirely related to the CDMO business.

I maybe misinterpreted your comments around it being related more to the testing business itself, which again, I think has been one of the better performing sub segments in your broader Manufacturing business over the last couple of quarters.

Yeah, the goodwill for the CDMO business is combined with Biologics Testing in terms of how the segment is tested, conducted.

And so I would say, if you think about what triggered that, it's mostly driven by the CDMO adjustments, not the biologic testing.

Got it.

Thank you.

It's helpful.

Jacob Johnson, Stephens.

I've got two on CDMO that I'll just ask in combination.

One, just clarification, Flavia, you mentioned maybe there's some contractual arrangements around the loss of these commercial customers.

Is that something that's -- and it's contemplating guidance?

Is that something that is contemplated in the 1% headwind from the loss of those customers?

And then the second question, just has the loss to these commercial customers and you disclosed the [43] and the 10-K, has that impacted business development activities?

I think commercial therapy support is a good selling point as the loss to these customers made things more difficult.

Thanks.

Why don't I just take the second quickly, which is that -- obviously, we're not thrilled with the loss of our (inaudible) as commercial customer.

And the second one I would say, we would describe that more as reduced revenue rather than a loss.

But anyway, so I do think that having those clients has been helpful and beneficial to our sales effort by the same token.

We have a fair number of clients that we have and continue to get, many in the -- who are in the clinical phase and some in late clinical phase.

So we should continue to see a significant demand.

I think that business is actually very well run right now and very well staffed, and capabilities have been enhanced significantly.

And clients are really in need of high-quality providers.

So I don't think it's helpful, but I think that we're going to continue to get this business notwithstanding the loss of those clients.

And Jacob, just to confirm, the contractual obligations that we have with one of those clients is contemplated in the guidance and embedded and included in the 100 basis points of headwind that we talked about.

Got it.

Thanks for taking the questions.

Patrick Donnelly, Citi.

Flavia, maybe one more just on the book-to-bill.

I guess with the $150 million step down in the backlog, I was getting closer to kind of a 0.75 book-to-bill, which would have been down from the low 0.9 range last quarter.

I know you're saying it's flat sequentially, so what -- I guess, what am I missing?

Is it FX or something in there?

I'm just trying to figure out that book-to-bill comment, if you could provide a little more color.

Yeah, I won't provide additional quantitative commentary other than to say the math is -- it's like very flat quarter over quarter.

So don't know if FX is playing an impact in your model or -- remember, you have nominator and denominator, and you have the bookings but also the revenue outlook that plays into it.

So it's flat, both growth and that book-to-bill, Q4 versus Q3.

Okay, right.

I'll take a look at that.

And then, Jim, maybe one for you just to kind of talk about the DSA margin outlook going forward.

You certainly understand, this year, you have the pressure on the price and the revenue obviously down, the high-single margins will go down with it.

You talked a little bit about the Manufacturing long-term marginality.

You talk about DSA.

As we go forward here, how do you think about the margin trajectory?

Certainly, a question we get a lot about where this goes over the next few years, continue to contract?

Are there path higher here and there's a recovery?

Can you talk about, I guess, the moving pieces inside DSA?

I know you talked a little bit about the pricing environment going forward, but curious how you think about that margin trajectory over multiple years in DSA.

Thank you, guys.

Yeah.

We definitely don't think it'll continue to contract.

So you've got two issues.

One is -- three issues, really.

One is significant leaning out of the infrastructure there, which I think we've done a really good job at this year, both in terms of physical capacity and human capacity as well, coupled with technology, digitizing the company, and allowing the clients to do self-educated and book studies themselves and have things be much less manual and people oriented.

And as I said earlier, as capacity -- and by the way, we're being very careful in terms of how much capacity we add given what the demand is right now, which is why CapEx will be down in 2025.

And as the capacity fills and the backlog elongates, people will be willing to pay more.

We've seen that, as I said earlier, for multiple years, for long periods of time, where pricing suddenly becomes much less of an issue.

And I would remind all of you that while the preclinical spend is not insignificant, and it's obviously very important to get a drug into the clinic, it's 20% to 25% of the cost of developing a drug and 70%, 75% is in the clinic.

So they can and should and will begin to spend more in discovery and in early development.

So if you combine those three issues, we should see improvement in operating margin.

I'm not going to give you a number or quantify that, but I think they could be meaningfully better than they are now going forward.

Understood.

Thank you.

Casey Woodring, JPMorgan.

I just have one two-part question on the new administration.

The first is on tariffs.

So earlier this morning, President Trump said he would likely impose a 25% tariff on pharmaceutical imports that could come as soon as April 2.

So just any quick thoughts on how something like that would impact pharma budgets and that customer groups pre-clinical drug development spending?

And then second, on the new administration, just kind of curious to hear your general thoughts around how customers are thinking through any other potential impacts, such as RFK's confirmation, just given in the past, we've talked about greater scrutiny of pharmaceutical approvals?

Any color you can share there.

Thank you.

Yeah, I mean, it would all be a, probably, speculation at this point.

So we're really not hearing much from our clients on the RFK situation.

And he's talked a lot about food, and he's talked a lot about vaccine spending.

And we'll just have to see how that that pans out, what impact, if any, will he have on both the rate and the quantity of new drugs being developed and what, if anything, will happen to the FDA.

I've seen the situation this morning relative to the tariffs, and that's trying to support the US development of drugs.

So that could be beneficial to US drug companies.

So we'll just have to see how that plays out as well.

Great, I think that concludes the questions for today's call.

In fact, sir, yes, that is the final question in our queue.

Mr. Spencer.

I'm happy to turn it back to you, sir, for any additional or closing remarks.

Sorry, that was me.

Yeah, no, that is the conclusion of the call.

Thank you, everyone, for joining us this morning.

That does include the today's Charles River Laboratories fourth quarter and full-year 2024 earnings conference call.

Thank you for your participation, and you may now disconnect your lines.