Inotiv Inc (NOTV) 2023 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Inotiv Third Quarter 2023 Earnings Conference Call. (Operator Instructions) This call is being recorded on Thursday, August 10, 2023.

I would now like to turn the conference over to Mr. Bob Yedid. Thank you. Please go ahead.

Thank you, operator, and thank you, everyone, for joining today's call with Inotiv's management team.

Before we begin, I'd like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected.

Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter.

Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures are included in the company's earnings release, which has been posted to the Investors section of the company's website, www.inotivco.com and is also available in the Form 8-K filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release, you may do so by going to the Investors section of Inotiv's website.

Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; Beth Taylor, Chief Financial Officer; and John Sagartz, the company's Chief Strategy Officer. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results, and then we'll open the call for questions from our analysts.

It's my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Bob, and good afternoon, everyone. Before we dive into the quarter's results, I'm going to start the call by framing some of our efforts today, noting how far we've come in the last few years and how we position ourselves to continue to execute on our plans and goals.

Our investments and growth have been guided by 7 strategically planned key objectives. First, right-size the infrastructure. After several acquisitions, we are currently in the final stages of optimizing our infrastructure, rightsizing the company's global footprint in order to improve client service and program management as well as competitively position our company as a midsized, full-service CRO research model and diet provider. We feel that completing this objective will allow us to keep this even more effectively with smaller as well as larger CRO and research model providers.

Second, we reduce the dependency on third-party providers and focus on becoming a full-service provider. In order to meet our clients' needs, we developed internal capabilities, both organically and through acquisitions. And in doing so, we have been able to reduce our reliance on third parties for external services. This, in turn, reduces cost but also enhances speed, quality, overall value for our customers. We expect this will support continued gross margin improvements.

Third, strategic capital investments. Our capital investments have included updating our global technology, which was appropriate and necessary, now that Inotiv's a significantly larger organization. We've also updated our enterprise resource planning and customer relationship management systems as well as our enterprise solution and laboratory systems for managing preclinical studies and our labs. Additionally, we are committed to addressing deferred maintenance and acquired site and expanding acquired facilities to allow for growth and leveraging our fixed cost structure.

Fourth, rebranding. We've rebranded our services business as Inotiv, and we are driven by a philosophy that customers should expect more from their CRO and further the awareness that we now provide a more complete spectrum of services.

Fifth, animal welfare. We are passionate regarding our continued commitment to and standards for animal welfare. This has included focusing increased monies and attention to retain experience caring staff, recruiting and retaining talented and passionate leadership, providing appropriate training, implementing our site optimization plan and making the investments in facilities when required.

Sixth, workplace satisfaction. We have worked diligently to foster a positive and entrepreneurial work environment around our shared purpose of helping clients bring lifesaving therapies to people around the world. This shared purpose combined with fair compensation goes a long way to recruiting and retaining top talent. To this end, we are very proud to have been selected as the recipient of Energage's Top Workplaces USA Award earlier this year and have seen significant improvement in our ability to recruit and retain people.

Seventh, supply chain synergies. We've been working with our supply chain and vendors to generate synergies from increased volumes from acquisitions in a broader range of services. This has led to additional vendors and alternative supply opportunities, which enables cost reductions from greater purchasing power that we continue to realize.

I also think it's important to reiterate briefly how the company has evolved over the past 6 years and how our focus on these key objectives outlined today have prepared us for the next chapter of our story. Early 2018 with 2 locations and 120 people, the company was firmly focused on preclinical safety assessment segment of the drug development market. In 2018 and 2019, we completed several acquisitions and began to develop new services organically. That organization became Inotiv in 2019, targeting small to midsized biopharma companies that our clients believe were being underserved by larger CROs.

Over the next 4 years, some of these organically grown service offerings included safety pharmacology, juvenile toxicology, SEND reporting, clinical pathology, biotherapeutics and genetic toxicology. Expanding our range of services has now enabled us to reduce our reliance on third-party suppliers to meet our clients' needs, enhanced margins and improve the overall value provided to our customers.

In 2021, we began to further expand our offer through the acquisitions, which not only enhanced Inotiv's preclinical services but also provided a strong foundation to build our discovery-based platform. In fiscal year 2022, we secured access to key research models to support and complement our DSA services and became a major supplier of both small and large research models and diets to the acquisition of Envigo and subsequently 2 other critical research model providers.

Hiring these businesses enhanced our ability to access critical research models and addressed a major risk we identified in supply chain. Also, these acquisitions provided our customers with additional confidence in our ability to meet their needs, which is even more important now that access to NHPs is limited. Since the expansion into research model business, we prioritized improvements in animal care and welfare by enlarging our veterinary team, consolidating facilities, which allowed us to make significant infrastructure improvements in the remaining facilities.

Ultimately, we believe these efforts will allow us to increase our margins, remain competitive with regards to new business development, while continuing our key strategic objective of enhancing annual welfare. Today, through these acquisitions and the 8 organically developed service offerings, we now currently operate 24 sites across the U.S. and Europe, serving with 3,000 customers, employing over 2,200 professionals worldwide, including industry-recognized experts across a wide range of scientific disciplines.

We have evolved into a CRO with the ability to serve clients who require a full breadth of products and services under one reward delivering those services with a personal touch and being highly responsive with scientific credibility. We still have room for improvement, but we are -- we get better every month, and we believe we will be much better in the future.

If you haven't done so recently, I encourage you review the solutions page of our Inotiv website, there, you'll find a comprehensive fleet of discovery preclinical and clinical safety assessment services and an extensive offering, our standard and custom research models, support services, diets, and bedding for research and development.

At present, Inotiv has become an organization that enables clients to advance programs from concept to clinic a strategic filling the gaps with our spectrum of services and products. Now our story is shifting to Inotiv's next chapter, and our strategy will continue to evolve in 2023 and further take shape in 2024 as we plan to further improve our service levels, profitability and continue our growth.

With this in mind, let's get to the financial results. Year-to-date 2023 revenues were $431.7 million, which are up 9% versus the same period last year. Our revenue for the last 9 months of our Discovery and Safety Assessment and research model services grew 11% and 8%, respectively, as compared to the same period a year ago.

The third quarter of 2023 was the strongest performing quarter of the fiscal year with revenues of $157.5 million, with Q3 2023 versus Q3 2022, revenues were down 9% year-over-year. However, it was our first quarter of profitability. DSA revenue decreased 5% year-over-year in Q3, primarily driven by our Discovery Services, which we believe is a result of the decline in the overall biotech funding in the market, plus the timing of some general toxicology services, somewhat offset by increased revenues from general -- from the genetic toxicology services in connection with the new business at a Rockville facility.

RMS revenue for the quarter was down 10%, mainly due to significant reduced volume of NHP and a small animal sales, somewhat offset by increased pricing. Integration plans remained on target for this quarter. This has been important to increase effectiveness and reduce our costs. We have previously announced 9 site closures and completed 8 as planned by the end of this June. The ninth previously announced plant closure is Blackthorn facility in the U.K. This consolidation into Hillcrest is expected to be finalized by the end of Q3 of next year.

In addition, we are closing a small facility in Spain, which is now substantially complete, and we will relocate our facility in Everett, Washington to our expanded operations in Fort Collins, Colorado, we expect -- which we expect to complete in fiscal Q1 of 2024. Over the last 12 months, we have largely now completed 9 of the 11 closures, mainly by consolidating the operations of these closed facilities into existing operations.

Moreover, most of the planned expansions are now also completed. The final expansion of Fort Collins remains on track to be completed by the end of the fourth quarter of this fiscal year. We already have work booked to fill this increased capacity and expect revenue to begin in Q1 for fiscal 2024.

We are now focused on the sale of assets from sites which were closed, including Boyertown and Cumberland, along with our Israeli businesses, which are under contract and negotiations are ongoing regarding the sale of other locations in Haslett, Michigan, Spain, France and Blackthorn in the U.K. We believe these asset sales may potentially be completed over the next 2 to 3 quarters.

Our integration efforts and site closures also give us the opportunity to restructure our transportation system for research models business, which is currently in process. In addition to improved margins related to consolidating our operations, we also believe the sale of the sites planned for closure will generate additional cash for the company.

From a perspective of future growth, we will focus on optimizing operations with our new facility footprint, realizing the benefits from the investments recently made hit many of our sites, which will also allow us to bring more service capabilities online.

Overall, we expect to grow our DSA business from $160 million in 2022 to an estimated $180 million in 2023 to an excess of $200 million in 2024. We ultimately believe this DSA expansion projects that we've just recently completed will allow us to grow our DSA sales by 40% to 50% above the 2022 DSA sales levels allow us to leverage our DSA fixed cost structure and infrastructure.

We also anticipate we have capacity to grow the RMS business and expect to reduce our RMS expenses by approximately $20 million after all these restructuring changes are implemented. We believe the lack of NHP imports from Cambodia continues to affect the industry's entire supply of research models being imported to the U.S.

According to the USDA's global agricultural trade system, 2023 imports of NHPs to the U.S. year-to-date through June are now 47.9% lower than those in the same period of 2022. We have begun to identify additional suppliers and increased our imports of NHPs from countries outside of Cambodia. Pricing of NHPs and related costs continue to increase. We continue to generate positive margins we've been meeting our customers' requirements. Our safety and assessment service offerings have not been impacted by the industry shortage.

However, the suppliers identified in countries other than Cambodia in China and the NHP volume available from them are not sufficient to make up for the volume of NHP exports than Cambodia in prior years. We sold fewer NHPs in Q3 than we did in Q2. Q2 was less than Q1. We expect to have fewer NHPs available for sale in Q4 than we actually sold in Q3. We will sell NHPs in fiscal 2023 versus fiscal 2022.

And if the situation in Cambodia and China stay the same, we expect we'll have fewer NHPs available for sale in fiscal 2024 versus fiscal 2023. Due to increases in pricing, our sales dollars have remained fairly consistent this year despite the reduced volumes. If we're able to implement continued price increases, we could see similar sales dollars in 2024 compared to '23 on lower volumes.

Based on the current trends and taking into account the unknowns that exist for the NHP situation. We believe the future quarters for the company will be able to achieve normalized average EBITDA run rate of about $20 million per quarter, and that should be achievable through all of fiscal 2024.

As we begin to utilize the recently added DSA capacity and selling new services and if there is an increase in supply of NHPs available for sale. These estimates may increase. We continue to expect improvements in our business as we optimize and integrate our DSA and RMS segments and see results from our focus on key initiatives.

We will continue to monitor the NHP situation and adjust our plans accordingly with or without imports from Cambodia. We understand this is a significant industry issue in the U.S. and needs to be resolved in order to maximize the industry's ability in the U.S. to bring important life-saving therapies to the market.

Looking to the future, as we continue to explore how we can better support our customers and their development of novel medicines going forward. We have embarked on a program to standardize the capture of our data generated in discovery, safety and clinical studies. The goal is to structure our data in a way that should, in the future, enable an AI approach to integrate them to find correlations between discovery and safety data and clinical outcomes that can innovate and accelerate our translational medicine offering.

Longer term, we are confident in the product service portfolio we have assembled and continue to optimize. And our customer service value proposition that is particularly attractive to the biopharma sector and in the skill and experience of the team we have globally executing on our vision.

With this, I would like to turn the call over to Beth for the financial overview.

Thanks, Bob. For the 9 months ended June 30, 2023, revenues totaled $431.7 million, a 9% increase from the $397.2 million recorded during the first 9 months of 2022. RMS revenue for the 9 months increased 8% to $296.8 million from $276.1 million in the same period in 2022.

In RMS, we continue to operate in an extremely dynamic pricing environment for larger research models, in particular, NHPs. DSA revenue for the 9 months increased 11% as compared to the same fiscal period last year. The increase in DSA revenue was primarily driven by additional year-to-date fiscal 2023 revenue generated from integrated laboratory systems that was acquired in January 2022, plus new services related to genetic toxicology and organic growth in general toxicology services.

These increases in DSA service revenues were partially offset by decreases in our Discovery Services primarily related to the decline in overall biotech funding in the market. For the 2023 third quarter, total revenue decreased 9% to $157.5 million from the $172.7 million recorded during the prior year period. DSA revenues for the fiscal third quarter decreased by 5% to $46.8 million when compared to the prior year period.

As previously mentioned, the lower revenues experienced in our DSA segment were primarily driven by declines in overall biotech funding in the market plus the timing of general toxicology services, somewhat offset by increased revenue from genetic toxicology services in connection with our new business at our Rockville facility. RMS revenue for the fiscal third quarter was down 10% to $110.7 million year-over-year, mainly due to a reduced volume of NHP sales, somewhat offset by favorable pricing over several products, particularly the NHP.

For the quarter, total gross profit improved to $55.2 million or 35% of total revenues from $50.9 million or 29.5% of total revenues in last year's third quarter. Gross profit for our DSA segment in the fiscal third quarter decreased to $17.3 million or 37% of segment revenue from $21.8 million or 44.3% of segment revenue in last year's third quarter.

Overall, we were pleased with the DSA gross profit as it showed improvements over the last 12 months. The decrease in gross profit versus last year Q3 was primarily due to the unusually high gross profit in Q3 of 2022 due to the mix and timing of studies in our Safety Assessment services. The SA gross profit in 2023 was also impacted by the lower revenue in our Discovery Services. As our new services start to come online, we expect to generate further demand from both new and current customers alike.

Ultimately, based on this broader range of services and growth, we believe we will be able to boost our DSA margins from 30% to the mid-30% range in 2024 with long-term targets going into the upper 30% range. The net book-to-bill ratio for DSA in the third quarter was 1.08x with a slightly positive book-to-bill for the trailing 9 and 12 months. DSA backlog was $149.1 million at June 30, 2023 compared to $143.2 million at June 30, 2022.

Additionally, our conversion rate, which is our ability to convert our backlog to sales has continued to improve over the last 3 quarters. RMS segment gross profit in the third quarter of fiscal 2023 was $37.9 million or 34.2% of total revenues compared to $29.1 million or 23.6% of revenues in last year's period. The increase in margin in the current quarter was driven by several factors, including improved pricing for several product lines, partially offset by the absorption of duplicate costs as we implemented our site optimization plan.

General and administrative expenses rose to $26.6 million in the third quarter of fiscal 2023 and from $21.7 million in last year's second quarter. However, these expenses were down by $2.5 million from Q2 of 2023. G&A expenses for the third quarter reflected $4.1 million in legal and third-party fees primarily related to podium NHP matters, the Cumberland, Virginia ongoing investigation, defense on pending securities litigation and recognition of the charge to fully accrue for our settlement of purported class action and a related action in California.

The settlement is subject to court approval. This compares to the previously reported legal and third-party fees in Q2 of 2023 of $6.7 million. Operating income for the quarter was $8.8 million, an increase from $4.8 million of operating income during last year's third quarter reflecting both the $4.9 million in higher G&A expenses and a $4.6 million decrease in other operating expenses driven primarily by decreased acquisition, integration and restructuring expenses.

Interest expense increased to $10.8 million, up from $8.4 million in last year's third quarter, reflecting our higher debt balance for borrowing obtained for acquisitions and capital investments and higher interest rates. Consolidated net income attributable to common shareholders in the third quarter of fiscal 2023 totaled $1.8 million or $0.07 per diluted share. This compared to consolidated net loss attributable to common shareholders of $3.7 million or a $0.15 loss per diluted share in the third quarter of 2022.

Adjusted EBITDA was $30.5 million or 19.4% of total revenue as compared to adjusted EBITDA of $37 million or 21.4% of total revenue in last year's third quarter. We are pleased with the $30.5 million of adjusted EBITDA this quarter as it sequentially increased each quarter this year, up from adjusted EBITDA of $17.1 million or 11.3% of total revenue in the second quarter of fiscal 2023 and a negative $5.5 million of adjusted EBITDA in Q1 of fiscal year 2023.

Net cash provided by operations for the third quarter was $3.7 million compared to cash used by operations of $9.4 million in the same period last year. The increase in cash provided by operations was primarily driven by improved net working capital compared to the same period last year. CapEx in the third quarter was $4.5 million or 2.9% of total revenue and reflected investments in completing our DSA capacity expansions in Rockville, Maryland and Fort Collars, Colorado, enhancements in laboratory technology and improvements for animal welfare.

For the first 9 months of fiscal year 2023, capital expenditures totaled $21.3 million. Our balance sheet as of June 30, 2023, included $22.2 million in cash and cash equivalents as compared to $24.6 million at March 31, 2023. Total debt, net of debt issuance costs as of June 30, 2023, was $375.6 million compared to $374.1 million at March 31, 2023, the balance sheet also includes assets held for sale of $8.7 million and liabilities held for sale of $2.3 million.

Due to the decreasing availability of NHPs in the U.S., we are recasting our full year revenue guidance to at least $570 million in revenue, which is down from $580 million in previous guidance. We are also updating fiscal 2023 adjusted EBITDA guidance to be at least $60 million, down for the year from the previous guidance of $70 million. We expect to continue to remain in compliance with our financial covenants for the fiscal year.

We still expect capital expenditures to be approximately 5% of revenue in fiscal 2023. We anticipate a more modest level of capital investment in 2024 of less than 5%. The capital expenditures are down from our 5-year average of 14% as we build capacity, new service offerings and implemented our site optimization plan.

We are pleased with our sequential financial performance this fiscal year and the progress that we are seeing from our investments, our site optimization implementation and additional capacity investments in our DSA segment, and we remain optimistic as we continue to grow and capture a significant portion of the opportunities in our market.

And with this financial overview, we will turn the call over to our operator for questions.

(Operator Instructions) And your first question comes from the line of Tim Daley from Wells Fargo.

So Bob, a very impressive book-to-bill here in DSA at $1.08 implies roughly $5 million sequential increase in the net orders in the quarter. So were there one-offs here and pull forward just how are bookings going in the fourth quarter so far? Just trying to kind of help us figure out a bookings rate on a sequential basis moving forward.

Bob or Beth, are you there to answer, Tim's question?

I'm sorry. I'm sorry, I think it was on mute. I've been talking here, nobody could hear me. I apologize. So Tim, to answer your question, our bookings for the third quarter were actually very strong, one of our strongest ever. The net bookings to came just over 1 because of the cancellations. So we're still seeing a high level of cancellations as we have in previous quarters, and I think that will continue. It's one of the reasons why we increased the sales force over the last year. And as we've done that, we've seen our ability to increase some quotes. So our quoting level for the quarter was probably a record for us as was our closing. And I think we hope to see -- continue to see those trends.

One of the areas where we've been out in the last 6 to 9 months is in the discovery services as we talked about, our revenues and discovery one of the reasons we decreased guidance. Is because our discovery revenues are going to be out this year from what we originally projected. However, as I also said in the last call in March, we added a specific discovery sales team to the market that back in the first half of this calendar year in January, February, March.

And we're starting to see really a significant improvement there, and I'm starting to see a really good trend in the discovery, which maybe is an indication that some of the biotech funding is back and then they're coming back and putting some of the projects back in because that's been one of the strengths so far in the first part of this quarter. So I don't have an ability to predict going forward kind of how -- what the bookings will be. But I do expect cancellations will continue as people are very cautious with their money. I think that the quoting activity remains very strong. I'm hopeful that we'll continue to close a good level. And so far, so pleased with what we're seeing so far this quarter.

And then I guess just for Beth, I think you guys called out assuming that Cambodia and China conditions remain a $20 million quarterly run rate of EBITDA is a good number for 2024. So is that kind of a way to be thinking about at least the baseline for 2024 is $80 million of EBITDA for the full year.

Yes, I would be thinking of it in terms of $80 million for the year with an average of $20 million per quarter.

We average -- if you look at the last 2 quarters, we're probably 48, which is an average of 24 and I would say that we look at the 48% reduction of what's coming in the country. In fact, that there'll be a significant reduction. We're looking at that and pricing and saying, okay, let's make sure, as I said, let's set a conservative estimate that we feel like we can depend on. And then if things change, if the biotech funding goes up, if we have to recover some of the discovery sales, if we're able to see some other additional opportunities for those then that would be great. But at this point, let's recognize the environment that we're in.

And your next question comes from the line of Matthew Hewitt from Craig-Hallum Capital Group.

Congratulations on navigating what's a pretty challenging environment. Maybe first up, regarding the NHPs, I heard what you said as far as Cambodia still pretty locked down. It sounds like you're finding some supply and some other geographies or some other countries. But as we think about opportunity there, I guess, well there's maybe 2 questions. First, were you able to unlock some of your existing inventory or sell some of the existing inventory? And I guess, number 2, is there an opportunity for you to take in animals and one or more of your international sites or is that not an option?

What was the last question again Matt?

Would it be possible to take custody of animals in one of your European locations?

Okay. First of all, we do actually distribute NHPs in Europe, and we have. And that market, we don't -- we have not taken Cambodia into New York. Don't expect to net markets really not changed for us. So that has never been part of our -- the Cambodians have been part of our European plan. And we don't anticipate changing that. We're not going to do anything with Cambodians for the moment anywhere. So I think that was a part of it. And the first part of the question was, yes, we have been able to bring in from other countries and others. And it kind of depends on what also our customers want. But you asked about our inventory. I don't want to get -- really don't want to get into a lot of the inventory. But yes, we have, I've said in the past, sold from our inventory. But no, we have not sold all of our inventory, and we've not released all of our inventory.

Got it. All right. And then maybe a second question. As you look -- as you've rolled out some of these new services, clearly, you're having some success there. Have you looked -- or is there any kind of a metric that you could provide that would -- if you look across your 3,000, over 3,000 customers worldwide, how many are using 2 services or 3 services? And maybe how is that metric changed over the past year?

I don't have a good metric on that, Matt. I know that we have -- we're bringing our DSA groups together, discovery and with our safety assessment group and combining those. We are now looking forward. We're starting to discuss and figure out, how to do a better job of bringing our research models, our customer base to our discovery base, which will evolve into our safety assessment base. And to do that, we'll be making some changes and adding some scientific strength to our bench, in the coming year and looking quite forward to evolving that part of the business so we really can bring the RMS business a lot closer with the discovery business and have them cross-sell more than they have in the past.

But do that, I think we need to make some improvements to the scientific team. And we're planning to do that, and those will be announced in the future. So looking forward to that. And I think what we can do now that we've kind of, what I'd say, finished a lot of what were the brick-and-mortar changes that we needed to make. But I think there's a lot of opportunity there, a lot of opportunity that we've not touched yet.

And your next question comes from the line of David Windley from Jefferies.

Bob, I'm wondering if you wouldn't mind breaking out your bookings from some of your newer services, I think you've called out in the past biopharmaceutical, gene tox. I'm wondering how much traction, how much those are contributing so far?

Yes, let's say. I think I do have a somewhat awareness of this and I don't have the right in front of me, but we started those services up at the end of calendar year last year, and we've started to see that in that backlog grow and those services start to grow. It's still -- we still are not exceeding 1 million a month in those services of those new facilities but it's grown fairly rapidly over the last 6 months. And that backlog is growing quite a bit, but it's -- it may be put it in perspective of maybe $3 million or $4 million or $5 million of that backlog, $4 million of backlog now. And it's really hard to pull apart because many of those services are part of much larger programs. And some of those services were things that we were selling before that we are outsourcing. So it's sometimes really hard to say that's something we didn't have in the backlog before because of what we were outsourcing before.

Okay. Okay. That's a good reminder there. In that regard, sticking on that side of the business, but thinking about your adjusted guidance, I think you're attributing most of the revenue decline in the full year guide to availability of NHPs. You also mentioned in an earlier answer a little bit of discovery. It looks like overall revenue, you expect your revenue to be sequentially down by $30 million-ish. And should we think about that all coming out of RMS? Or is some of that DSA and I'm thinking again because your net book-to-bill this quarter was pretty decent as I think Matt said, how should we think about cadence?

We're going to see most of that come out of the RMS. And it's not down $30 million. I think it's down -- we brought it down $10 million.

$10 million reduction guidance. I mean sequential from the third quarter, sorry, that wasn't clear enough.

Yes. So I think it's intended from what we thought. And I think that will come from the RMS side, not the DSA side. And that will be primarily NHP related. So for the year, our NHP revenue was probably a little higher than I thought really big. It's our DSA sales, they're a little lower than I thought we would be for the year.

Okay. So then on the RMS side, can you or Beth give us a sense of how much of the revenue either for the quarter or year-to-date is still tied to NHPs? How much are NHPs driving RMS now?

Well, it's always been an important part of our revenue but I would -- trying to put a little bit of perspective for it. The volume of NHPs that we sold in the third quarter this year were probably in excess of number of NHP, were probably at least 40% most than we sold last year. So when I say that the imports in the U.S. are doing 40 -- I think what I say, 49%, we're seeing that. And as a result, we have much less going out the door now on a quarterly basis. I don't think we break out any fee revenues from RMS revenues.

Okay. Okay. But thinking about your commentary, which appreciate the helpful comments to begin to frame '24, thinking about a $110 million number in the third quarter. And it sounds like your base case expectation is that the volume of NHPs that will be available to you will continue to shrink and so I guess I'm wondering how much of that revenue run rate is subject to the decline in accessibility to NHPs and how much is kind of more stable because it's tied to rodents?

It is an interesting thing. I think when I just told you the volumes the number -- the volume of NHPs that we met for the third quarter was down over last year. If you -- so that 110 included that 40% reduction in volume from last year, okay? I think overall, we could be down 40%, 45% next year. So I don't know that we -- I think I don't know we're going to -- I don't know if we could see a greater fall off next year in the sales of NHPs than we saw from in the RMS business than we saw in the third quarter because now that is baked in. That reduction is significantly baked in.

I do think that based on when things are coming in, we could have some variations between quarters of when they go out. So it may not be every quarter's even. It may be some quarters are better than others. But I think overall, on average, the quarter that we saw may be the quarter that with that significantly less line that we could see.

Okay. Last question for me…

I hope that helps out.

Yes. Yes. So you're kind of seeing no more decline from the third quarter?

In that level…

Third quarter volumes.

On average, David, we could have quarters that we -- in total, I think that we see it fairly consistent. It doesn't mean every quarter is going to be the same. And that's -- it could -- but on average for the year, I think that's counting on that 40% decline is something that 40%, 45% decline is something that we going to have to maybe get used to.

Right. Okay. Last question for me. Earlier in the year, both at the Inotiv level and the industry level, there's a lot of conversation about working with the U.S. Fish and Wildlife service to both get approved, kind of have a pathway and get approved a parentage test to try to satisfy and kind of reopen the supply chain, satisfy the Fish and Wildlife service about the providence of animals coming from Cambodia and reopen that supply chain, your competitor yesterday, it really didn't come up. I'm wondering if you could give us an update on where that stands, what progress has been made, if any, and what upcoming Port Basin side East meeting might mean for that dialogue?

Well, David, I've come to conclusion that we're not big enough and important enough to really make a big difference in what's going to take place with U.S. Fish and Wildlife, the DOJ, the government and those actions. We follow it closely, but they're going to do what they want to do, what they choose to what they think is best. And I really don't have the ability to predict what they're going to do, which I think is why we're trying to just be realistic. Given the landscape we have today, we're trying to figure out how to play within the landscape we have today. If that changes, you know what? Great.

We're ready for it. But if it doesn't change, let's make sure that -- let's make sure our business model works based on status quo today. And I think it's a very tough thing for our industry. It's very tough for drug discovery development in the U.S. to see that happen. But as far as our company, let's take that as the basis and move forward from there. And still at every day wake up frustrated that it's not -- that's not changed. Let's wake up realizing that is today's normal, and when it's ready to change, we'll be ready for it.

And let's set that expectation. And it's really important. I think they had for our management team, and I think for our leadership team, I want them to wake up every day knowing they're successful and having them come to work every day thinking they're not successful because something we're waiting for the government to do or not do is not fair to them and not fair to us. So let's adjust our plans, so they can get feeling successful every day and not feel like we're dependent on something we can't control.

Your next question comes from the line of Frank Takkinen from Lake Street Capital Markets.

I wanted to clarify on the renewed EBITDA guidance. I understand the revenue guidance change, but I was hoping to get a little bit more color on the EBITDA guidance change. I figured it would be maybe a little bit less than the same proportion of revenue coming down, but maybe talk to margin expectations? And then is there an expected uptick in operating expense as well to get to that $60 million?

Well, for the year compared to the year, I'm pretty pleased with -- even with the reduction in volume the pricing for the NHPs has held up, the RMS sales held up pretty well. But there were really 2 major things for the year that we're offering. Discovery sales may be down about $10 million from where we'd like to plan for them to be, and that's a reduction in top line. And then we probably have legal fees in excess of $110 million where they got to be.

On the discovery sales, you have probably 80% of that goes to the bottom line. So those 2 things make up a pretty big between that and legal, it should make up the biggest difference where we are for this year versus where we hope to be. But given all the challenges we have this year and all the changes that are taking place in the industry and the biotech funding and the NHPs, we're pretty pleased with this quarter, very pleased with where we are today and the ability to get all of these things that we had a year ago in December, people talk and say, how in the world are you going to finish 4 or 5 expansions and 8 or 9 site closures and change this and that.

The good news is our organization has done that. And now those things are done. So we have a lot less variables. As far as this quarter, what we thought is, again, just what I told David, let's look at where we are realistically with NHPs and where we are in the market. And let's make sure that we identify something realistic. Yes, we could leave guidance really high and try to stretch and do something that's not natural for the company and achieve the short-term quarter to meet the guidance. But that probably is not the best long-term decision for our company. What I tried to give guidance to is what I think is the best long-term decision for our company. And what Beth referred to in her point was what is really a reoccurring expectation. Our last 2 months quarters are pretty good. They're $24 million. Do we think we can maintain that? Yes, our goal is obviously to maintain at least that.

But let's set an expectation that we can within -- that we feel comfortable with, with those lower volumes of NHPs that we may see in the future and the timing when they may come in and be available for sale. Some cases, we're expanding the quarantine periods, that may take -- if we do that, we take an extra 4 weeks of quarantine for whatever -- we've been very careful that may change when things go out. And when we ship things, you always say now you -- if the NHPs going at 30,000, 40,000 piece, you change when 300 NHPs go, we just changed the top line by -- in the bottom line significantly. It's $10 million there. 50% of that go to the bottom line, at least 30%.

So we've got to be very careful of how we set those expectations plus we have -- as far as that NHP business, if you think about it, we have a very high fixed cost structure and a very high standard for animal welfare. So even though we have less NHPs going, we still have to cover that fixed cost structure. So those -- on that lower volume that remains -- we can't take a shortcut on animal welfare and our investments. So we're watching those things very closely.

And then now that you have a lot of the site closure broadly speaking, site optimization behind you, you've got a solid infrastructure to grow off of now. Maybe speak to your confidence behind your longer term 18% to 22% EBITDA margins. And if you're at all thinking about a time line to when we could reach a profitability profile like that?

Well, I think as biotech funding or as we increase our market share, we have great leverage, I think, in our DSA model. And I think it out, I think there's outlined those before, how we get to this 22% on the -- with the increased margins from the DSA business as we grow that. And as the costs continue to come out of our RMS side. And those things will continue over the next 6 to 9 months. What I'm doing by outlining this current guidance is probably taking a lot of pressure of growing the DSA sales business in the midst of a reduced biotech funding.

I hope we can, we grew it and about 10% last year were 160 to 180. So maybe it's [160] so maybe low single dig double digits. Maybe we can do that again next year. When we were doing this 2 years ago when biotech funding is high, we were growing that business at 25%, 30% a year. But this environment is a little different. So what I'm trying to say is look, okay, it's okay. It doesn't matter if it takes us 12 months to get there or 18 months to get there, it doesn't need to take it 6 months. And let's put a realistic expectation.

Yes, I hope we can get there sooner. Our team would hope to get there sooner. We're looking at how to drive it sooner. And every once in a while, we see some pretty good momentum. So if we don't get there next year to the 22%, we do 19% here, obviously, it's possible, and we don't have all the cost and savings in and we don't have all the margins in. So it's obviously possible for us to get to 22%. But I think what we need to do is make sure we get the in a way that we're building the company with a very strong foundation for the future. We don't need to be in a hurry. We have to be smart.

And your last question comes from the line of Yuan Zhi from B. Riley.

Bob high level, can you provide some comments on the demand of NHPs? How does that compare to last year based on your observation. You mentioned the supply part from government tracking data, then have a couple of follow-up questions.

Yes, our demand is staying fairly high. And I think it's going to continue to be there because I think it's going to -- it took -- when the supply chain takes a while to (inaudible), people have inventory, people have things in quarantine, people have things getting acclimated. So it takes a while for the supply that existed in November to start to be reduced.

Now that we're only importing half of what we had before, the supply bottlenecks are going to get a little tougher, I believe. There are also some changes going on to what type of NHP somebody may want. Now it may not be a Cambodian, maybe they're choosing to go to a different species. So I think there's a shift in what people are looking for. We continue to look at that closely. But I think that the demand is still there. If we had more, I think the demand would be there for more, but that's -- I don't think that's going to be the case.

Got it. In addition, can you please clarify the accounting method related to the NHP biologic assets? Did you use first-in first-out or last-in first-out to calculate the inventory and COG?

We use actual cost. So we -- each animal have its cost of what it costs to bring by it to buy it and import it. And so as we sell at the actual cost is against that. We do, as we -- as I may not believe to here, we do have overhead that has to be covered by those margins, such as feeding, labor, utilities, sewage, insurance, transportation. A lot of our -- those costs are expense. They're not in our inventory. We test those as we go.

Got it. And one last question. On the supply of NHPs outside of Cambodia, have you noticed an increased our cost of those suppliers? And do you have some kind of contract or price locking in place for those supplies?

We do have some price, contracts, lock in prices. And yes, we have seen prices increase. And I expect that all continue to.

Thank you, Mr. Leasure. There are no further question at this time. Please proceed.

All right. Thank you everyone for joining today's call. It's a lot of great questions, a lot of information. Our team looks forward to what the future holds for Inotiv. We have positioned the company for strong growth.

I would like to thank our investors for being part of this journey with us. We understand our industry has faced some challenges and some changes, and we've made adjustments to address these challenges. We also believe that we are substantial opportunities going forward as all of our efforts to date have significantly enhanced our capabilities in the marketplace.

Moreover, our capital investment program has largely been accomplished already, and we expect lower CapEx spend as a percent of revenue going forward. And completing the necessary infrastructure upgrades to the business, we now have the advantage of both scale and in-house capabilities. We believe that we can continue to effectively increase our sales volume through greater cross-selling to our existing customers while developing relationships with new customers alike.

We are now well-positioned to better control the timing of start and delivery of projects as well as to provide high levels of customer service at all times. We look forward to the next call and seeing many of you at upcoming healthcare investment conferences. Thank you, and I may add one more. Happy birthday, Robert. Thank you very much.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you all for participating. You may all disconnect.