Charles River Laboratories International, Inc. (CRL) Earnings Call Transcript & Summary

Okay. We're going to go ahead and get started. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce Charles River Labs. We'll do a breakout right after in the Olympic room. With that, let me turn it over to Jim Foster.

Thanks, Tycho. Good morning. Always a pleasure to be here. The safe harbor, Reg G and quiet period statements. So we are the leading nonclinical CRO. Just a few stats. We worked on 85% of the drugs that were approved last year. We're very proud of that. Our revenues have doubled. In the last 5 years. We are -- sort of total collective marketplace is north of $15 billion and growing nicely, so we have a long runway. Our growth rate is in the high single digits these days. We -- our Early Discovery business has worked on 80 novel compounds for our clients. So we've done target identification for 80 compounds, we're quite proud of that. Since 2015, we spent $2.5 billion on M&A on a bunch of deals. I've got a slide on that later, and we've got a greater than 10% return on invested capital on those deals. Our LTM revenue is about $2.5 billion; headcount is about 17,000 right now; and our client concentration has actually continued to reduce as we buy new businesses and get new clients, so we have no clients that accounts for more than 2.5% of our revenue. Shift between pharma and biotech clients to change -- continues to change in a material way. We used to be the supplier to big pharma. Biotech, as you can see, has about 43% of our revenue now and growing nicely. It's the principal driver of our growth. We also have a fair number of -- fair amount of business with other CROs, agrochemical companies, medical device companies, et cetera. The geographic breakdown is largely North American. So you can see here, almost 70% of our revenue is North America, and that's a manifestation of the number of drug -- the number of biotech companies in the U.S., principally on the East and West Coast. Portfolio is the principal distinguishing feature of Charles River, the breadth and depth of the portfolio, the fact that we can start with the clients very, very early in the discovery process and stay with them all the way through market approval and often after market approval. You can see here our 3 business segments on the right and also where each segment stands in terms of what aspect of the drug development process we are in. So the Research Model business is a large marketplace. We have about a 40% share. Our largest client is a non -- largest competitor, sorry, is a not-for-profit, organization called Jackson Labs, which is about half of our size. We still have about one out of every 2 research models used anywhere in biomedical research is coming from us. And China is the principal driver of growth. It's a market that's still quite nascent, smaller than the U.S. and Europe. Large amount of money is being invested by the Chinese government in life sciences. And so we're building facilities as quickly as we can to satisfy that demand. Market is about $1.5 billion. We also have a large service component to this business, particularly in genetically engineered models, some models where genes have either been knocked in or knocked out to express certain disease states, growing very nicely on a worldwide basis. We also have a large insourcing solutions business, where we manage other folks' facilities, often government and academic institutions. We closed -- we did a big acquisition in April of last year, and we closed on an acquisition just a week or so ago in the cell therapy space, so we're quite excited with, that's being reported in the Research Model segment. So that deal that we just closed on is called HemaCare. We're providing human derived cellular products using cell therapies, really excited about this, and we have human primary tumor types that we're providing on sort of a customizable basis in a -- we have a donor network that's consistent, and recall but we're also doing GMP quality work. So we're going to be providing these tools for folks in the cell therapy space starting very early in research going all the way through development and manufacturing. And this is obviously going to be a -- it's an exploding market, there's 1,300 cell therapy drugs in process somewhere in the drug development scheme, about 75% of which is addressable by HemaCare. So we're very, very excited about this deal. We're generally interested in the gene and cell therapy space more broadly, and we'll continue to look at this both for organic investment and further M&A. So I touched on China. It's about slightly less than 10% of our Research Model revenue, but growing significantly faster than the rest of the world. We have become the largest user of research models, in other words, Charles River's businesses have become the largest user. About 5% of our unit volume is used internally. That obviously gives us a competitive advantage in our service businesses to actually produce and sell the research models, continuing to get a price and an attractive mix as the animal models become increasingly more sophisticated, particularly in areas where we have immunocompromised animals for instance. So that business is about a little more than 20% of our revenue and about 23% of our operating income. Our 2-year target is for the operating margin to be in excess of 25%. Our Discovery business is a nice growing business for us. The -- it continues to be quite fragmented. You can see in the pie chart that the top 4 players, including Charles River, have a 35% share. And the rest is other players. So lots of small players, a lot of academic competitors in this space. This is a $5 billion market, actually slightly larger than the Safety Assessment market, and we've now been doing this for about 10 years. This is the aggregation of a bunch of relatively small acquisitions. The strategy here was to start with the clients as early as possible, with the discovery activities, and I talked earlier about target -- small molecule target identification. We have a medicinal chemistry business. We do a bunch of in vitro screens, which is something that Charles River didn't do before. That's in the growing in vivo capabilities, particularly pharmacology capabilities in oncology and CNS. And I talked about the novel molecules. We have a South San Francisco site that we just opened a few weeks ago to support this marketplace for Discovery, have a similar one in Cambridge, Mass. I'm going to talk about distributed bio in a moment. Safety Assessment business is a slightly smaller market, about $4.5 billion. You can see here, we have a 30% share. So we did 3 big acquisitions over the last 4 years. We bought Citoxlabs last year; MPI Research in '18; and WIL Labs in '16. Those were the largest second-tier competitors that we had in the marketplace. We've, as a result of these deals, have acquired hundreds of new clients, a whole bunch of new capabilities, and we've enhanced some of the capabilities we already had, like medical device testing, for instance. And we've enlarged our footprint, particularly in Europe and also in Canada. So very pleased with our position being the largest player. We have a significant general toxicology capability in the world's largest specialty toxicology capability areas like immunotoxicology and reproductive toxicology, in particular. So the punchline on the toxicology business is what the pathologist read. We have the largest collection of veterinary pathologists in the world, I think the headcount now is over 130 of them. And so we're providing solutions and answers that our clients couldn't do on their own and that biotech clients don't want to think about doing on their own. Now the next segment is the DSA business, which is about 61% of our revenue. So the preponderance of what we do is now in Discovery and Safety Assessment. Operating margin is about 52%. Our goal there is to get the operating margin to the mid-20s, which we continue to approach. And the strategy is really quite simple. We have thousands of biotech clients now, many of whom are virtual, none of whom have internal toxicology capabilities, except a few very large ones, and even they have become dramatic outsources. So we're providing the service to clients that both don't want to and don't have the financial means to do it internally. And big pharmaceutical companies have rapidly reduced their internal infrastructure and outsource that work to companies like us because we can do it much more quickly at probably 30% to 50% lower cost. And our science is dramatically deeper, and our experience is larger than even the pharmaceutical industry. So that's holding us in good stead. Our global network is larger than the competitions'. And all things being equal, clients will always prefer proximity. So if you can get the work done and the study monitors can go and hang out with our people live real-time and participate in the study, that's just better than flying across the country or across the ocean or doing everything by phone. So our strategy here with the Discovery piece is to have our clients work with us at the Discovery business and stay with us through the development of the drug, assuming that it progresses. And we have about 20% of our DSA clients working in both Discovery and Safety. We're quite confident that, that will get to 50% over a period of the year. So we're working hard to make sure that our legacy safety assessment clients understand the full breadth of our Discovery portfolios and vice versa and is working quite well. Our Microbial Solutions business has grown at double digits, I think, since we've owned it, which is over 20 years. It certainly has for the last decade, and we feel it will continue too almost indefinitely. Half of the tests that are done in the world we perform, this is about a $3 billion market, and this is very sophisticated quality control for drugs that have been manufactured, drugs and injectable drugs and -- sorry, devices and injectable drugs to make sure they didn't become contaminated in the manufacturing process required by the FDA. So we're testing sterile and non-sterile products. We have a host of capabilities, both in the endotoxin testing field and in the rapid microbial detection field. So we can tell you that there's a bacteria in your manufacturing facility and what it is, so you can go and take care of that. We provide these solutions much faster than conventional technology, usually in hours versus days. Very high growth, very high-margin business. We've done some M&A over the last few years to really bulk up our capabilities here. Biologic Testing business is simply that, so we're testing large molecules to make sure that they're safe before they go into patients, either in the clinic or when drugs have been approved. Very high-growth business. This market, as you can see, is about $1.5 billion, and being driven dramatically by monoclonal antibodies historically, and you can see here cell and gene therapy, which is growing quite quickly. We will be adding and have been adding additional assays to do cell and gene therapy testing. The market is growing at double digits, low double digits. We're growing faster than that. We've just completed capacity renovations for facilities, a large one in the U.S. and several in Europe. So a very buoyant market tied to the plethora of large molecule products that are out there. So if you look at the Manufacturing Support business, which has Microbial Solutions and Biologics in it, also a very small -- or a smaller avian business, where we produce clean eggs, vaccine production, it's a little less than 18% of our revenue but almost 25% of our operating income. So this is a very high-margin segment. Our goal for this segment over the next 2 years is to have it be -- to get it to 35% pretax. It's been there periodically, and it's actually ended some years at 35%. So we're quite confident that we can get there and stay there. So low double-digit growth segment with operating margins approaching and will soon get to 35%. So we've -- we get a lot of questions about biotech funding, not really sure why. Probably because it's so good, people are worried that somehow that won't continue. It has continued. The raise in '19 was $83 billion. I think it was the second best year in history. There's at least 3 years of cash in the coffers of these companies, perhaps more. We do a lot of work straight up with venture capital firms who used to raise a fund every 5 or 6 years. They seem to be raising funds every 2 to 3 years now, so there's a lot of money coming directly into these venture funds, and they're starting these virtual companies, many of whom we work with. And of course, there's a lot of money coming directly from big pharma into the biotech companies because they become a discovery engine. So -- we're quite confident that this will continue. The number -- a sheer number of biotech companies is really quite significant and growing dramatically as you have these new modalities, like cell and gene therapy and RNA, et cetera. So feel quite good about the funding environment. Feel very good about numbers of drugs that we get in the market, 48 in '19, seems to be increasing, and just the sheer number of drugs in the preclinical pipeline for us. So while we worked on 85% of the drugs that were approved, we probably worked on a similar number of drugs that weren't approved. We get paid either way. And of course, our goal is to help the drug companies discern as quickly as possible whether the drug should move down the drug development pipeline. And clients have become somewhat disinterested in who discovers the molecule, whether they discover it on their own or they license it in. They're increasingly agnostic to whether they're larger or small molecules, they just want to find druggable targets. So we're very much focused on strengthening the portfolio. We've done that, obviously, through M&A, we've been extremely active over the last few years. Just to be clear, we're not interested in buying companies just to buy them or just to be big. We're interested in having a much broader, holistic portfolio because the clients, definitely, particularly the small biotech clients, which are becoming an increasingly larger proportion of our client base and our revenue, don't want to stop at every phase of the drug development process and find another provider, work on the pricing, negotiate a deal and get to know them. They want to move as quickly as possible. Everything is about speed-to-market, and we have many clients who are prosecuting the same target and competing with multiple companies that are doing the same. So whoever gets to market faster, will be in a better place. So we continue to fill in the portfolio, both geographically and in terms of the constituent parts and pieces. We can see the next 5 years' worth of M&A, it doesn't mean we'll -- in other words, we've identified companies and have conversations going on with them. It doesn't mean that we'll get the deals done or that we'll like the price points, or that we'll like them when we get into due diligence, but we have a vision for getting there. Additionally, we're doing something quite interesting, which is that we are -- since we have to have access to either cutting-edge technology or close to cutting-edge technology, and it's very difficult to determine whether a new technology will have legs, in other words, whether it will have any longevity, we're signing deals now where we make a small equity investment or loan them some money, and we have a marketing arrangement with them for a year or 2 to see whether the technology works well, to see whether the clients -- where the client's feedback is in terms of the quality of the science. We often have a predetermined takeout multiple for those deals. So we'll get to try the technologies before we actually buy the companies. We'll continue to work with them. It will be like an R&D portfolio. If we do 10 of these over the next 3 years, probably 2 to 3 of the companies, we'll buy, probably 2 to 3 of them won't pan out, and probably 2 or 3 or 4 of them, we'll continue to work with from a marketing point of view. We have announced a large molecule discovery deal, which was distributed bio, which was on an earlier slide, and we've also announced an artificial intelligence deal. So we like these deals a lot. A lot of focus on cell and gene therapy. As I said, we just bought a cell therapy company. We certainly would be open to doing more deals in that space. Just a huge number of INDs filed, a huge amount of preclinical work in this space, and it pretty much touches everything that we do. So we have about $150 million worth of revenue in the cell and gene therapy space now, and obviously, growing, including HemaCare, the company we just bought. We have immunocompromised animal models that are quite important to this space. We have analytical testing capabilities in our Biologics business, critically important in our microbial business to make sure that these cells are safe. We have combination pharmacology and safety trials, which are required for these drugs to proceed. So we're very interested in this space and very interested in both the product and the service side. M&A continues to be our top strategic priority from use of cash. You can see here, we've done $2.5 billion worth of deals. It's about 14 deals in that 5-year period. The returns have been quite good. We've gotten -- we're aspiring to be world-class. We've gotten very good at integration. So we have a full-time integration team that does the due diligence on these deals, puts together a 100-day integration plan and sees it through. We also put a full-time integration lead into these businesses. So you can see here the 3 big tox deals that we did, WIL, Citoxlabs and MPI. Agilux was a bioanalysis deal, Brains Online was a CNS deal; KWS was an immuno-oncology deal; and HemaCare, of course, was a cell therapy deal. So we're going to stay in the areas that we're in. It's at least, as I said earlier, a $15 billion market growing quickly, and we think that M&A makes us a better company. We're looking to continue to drive efficiency. We're committed to getting our operating margins of 20% over the next 2 years. We will get there. We're looking at synergies and operating efficiencies across all of our businesses to ensure that we get there. Just to reiterate our 2-year targets: RMS, low to mid-single digits and above 25% pretax; DSA, high single -- sorry, high single in the mid-20s; Manufacturing, low double and in the mid-30s; and total consolidated business in the high single digits; and operating margins at 20%. So we're quite confident that we'll achieve these goals. Everything that we do is about speed-to-market for our clients. So we've decentralized the structure of the company, we've decentralized decision-making, and we're working to do everything we can to be as flexible and responsive -- as flexible and responsive to our clients as possible. And we've committed to take another year out of the drug development process. So while we can't necessarily help them get more drugs to market, we can absolutely help them get drugs to market more quickly and at a lower price point. So we are committed and focused on doing that. Spending a lot of time on a digital enterprise, where we have so many biotech clients now that we need them to be able to self-educate, so to be able to discern how their studies are tracking on their own, and if they need to speak to somebody to discuss the data, they can do that. But most of the time, we want them to be able to do that on their own. And we hire an awful lot of people every year. We actually hired 5,000 in 2018, and so preserving the culture that we have and having our employees be engaged, focusing on things like corporate citizenship are really important, getting a lot of people coming directly from big pharma and biotech to work with us. So focused on strategic growth, additional M&A in these technology deals that I talked about, we're going to enhance the portfolio, drive efficiency and productivity and continue to dramatically enhance our speed to market. And thanks. Thank you, all, we will see you in the breakout.

All right, let's begin.

Why don't we start with HemaCare businesses. Jim, can you just talk a little bit about how long you will do the business? It sounds like there's a good opportunity set to do more kind of M&A around that? So can you talk a little bit about that?

So for people listening, this is Jim Foster, and David Smith up here. The question is, how long were we looking at HemaCare? And are we likely to do more in this space? So we're -- I don't know, we knew the business for a couple of years. We tend to do that with M&A. We tend to -- the last 15 acquisitions we did, I think, were either private equity-owned or a small business -- a small public company. So obviously, in the private equity genre, everything is for sale. So we start conversations very early, and we express an interest, and we speak to them probably every 6 months, and we have some dinners and we talk about timing. And they're pretty transparent in terms of growth rate and size of company and margin. So we know all of the attributes. We study the science as best as we can. So we're quite interested in it -- look, we're interested in space that our clients are interested in. So we don't just go and buy things, as we always said, to be larger. We do these deals because we have a lot of inbound requests from clients of products and services that they like us to have, either they don't like their current supplier, or they don't have a supplier, or they don't want to do it themselves or all of the above. So we like this deal a lot. We like the people. We're always interested in the people. We like the quality of the service. They're a relatively small company by our standards, but relatively large in the cell therapy product space, very high-quality business with a very good reputation. So we're interested in probably more products and services in the cell and gene therapy space. In addition to the slide that we showed earlier that shows that, with HemaCare, we have about $150 million of revenue now in the cell and gene therapy space across pretty much everything we do. So we need more assays in the Biologics business, we probably need more immunocompromised animal models in the animal business or enhanced ones. We may need some tweaks some things in our Microbial Solutions business in these combination therapies, which are really critical. So if we have Discovery competitors who don't have safety, they can't do a combination therapy program and vice versa. So having immunocompromised animals ourselves, being able to plant the cells and being able to do the work is important. So we're excited with this. It's just a ton of work going on in this space and a ton of INDs being filed. So it's going to be a lot of work for us.

And you said they could address 75% of the market, what can't they do?

Yes, I don't know. I don't even know what we were eliminating in that slide.

Talk a little bit about the [ data of ] operation that you just signed, the financial and [indiscernible] associated with that? And could we sort of see that [indiscernible] for other partnerships going forward?

So a question about the Takeda partnership that I think we announced yesterday. We're enthused about this deal. This is a very thoughtful deal, definitely on their part, so -- I think on both of our parts. But -- so they came to us and they said we're going to have a bunch of molecules, small and large, that we will want you to prosecute. There's an upfront payment. We weren't specific about that, so I think we'll stay away from being specific. And we have the right to prosecute them or not. We'll take a look at them and we'll study them. Our scientists are quite capable of, I don't know, at least being able to discern what we think is likely to go well. They'll be across multiple therapeutic areas. And so we can opt in or out. They can opt in or out in terms of whether or not they want the drug back, or they don't like the way it's progressing, they do like the way it's progressing. And there are milestone payments all along the way. The further along the development pipeline the drug progresses, the larger the payments. So we don't want to get out over our skis here. We just signed it, we just announced it. It hasn't started yet. We think it was very thoughtful, it's big pharma, it's very smart of them to have others do this kind of work for them. I don't know whether it will become a template. But we're quite interested in working through this one thoughtfully and seriously. If we do well with it, I think it could be. I think others will see this, so we could have some inbound requests, while you do that to [ cater ] what about us. We'll see whether we like the deal, see whether we like the potential client, or whether it's already a client, whether we think they're serious, what the size of the payments will be. So something I think that we need to do. We need to be open to different ways that the clients want to work and not. Years ago, we might probably wouldn't have done this, probably would have said, "Yes, we don't do those types of things." We have a few smaller deals like that, that we have done and are doing. I don't think this is going to necessarily become a way that we work, but perhaps something that we're open to. So more to come, but it will take a while for this to play out.

Why do you think the [indiscernible] there's something we should [indiscernible]?

So the question is, why has this occurred now? I don't know. Takeda just did a big acquisition, a big merger. I think that they're stepping back and take a look at -- yes, the plethora of drugs that they have and how they do it efficiently, what they do internally or not. I don't remember what the cost synergy number was for that deal, but it was probably significant like most of them are. And so I think a way to expand their bandwidth, I don't think we're the only company doing this. We have to expand their bandwidth to get these drugs prosecuted without doing all of the upfront work. So I think it's clever on their part.

And I would add that, that this type of deal is not new. Companies like ours have been doing that type deal for years before Charles River acquired the Discovery unit. And those companies were doing that type of deal with large pharma in the past. And just to quantify some of the numbers, Safety Assessment is about 6x larger than Discovery. And the vast majority of what discovery does is a fee-for-service you pay for the work that we do. We do do, occasionally, deals like this. But since some of our competitors are doing that, it's actually good to get it out there that we are also prepared to do a similar type of deal. We wouldn't want customers to walk away from Charles River and go to our competitors because we're not open to putting out an innovative type structure like this.

So is that what changed on your end? [indiscernible]

I think -- look, we -- they're never our drugs, okay? So we're the bridge between the drug companies and the patients. So -- and the way that our clients have worked with us changes all the time. The nature of our clients changes all the time. Takeda just did this deal, and we've done a couple of deals now, and it's a much bigger, different type of company than it was. We have a, to David's point, we have requests like this from smaller companies as well, who don't have any internal resources to develop these drugs themselves, but they look like promising molecules. So it's kind of like, well, will you take some risks? They ask us to take back stock, we're not going to do that. So every once in a while, you have that. Royalties on a drug, that's not a good proposition either. I mean the vast minority of drugs get to market. So that's a lousy proposition. But milestones, where we have a huge role in providing that very good science to progress the drug, I think, is something that we need to be willing to do under the right circumstance. What I like about this one is that they'll offer us several compounds and we can opt in or opt out. I suppose, they could offer us 5 and we could opt out of all of them. I doubt that will happen. That would be silly. But we're going to evaluate each one, one at a time, and we have really good scientists who are knowledgeable in each one of the therapeutic areas, who will be able to do that in a creative way.

Are these milestones limited to preclinical aspects? Or can they span the entire...

They go all the way through it.

Are they front or back loaded?

They get richer as you go on, yes.

Jim. In the presentation, you referenced the goal of getting to 20% of customers who are using both Discovery and Safety 50% of the time. I was wondering if you can maybe [ discuss ] what are the action steps to do that? Is this a function of awareness, where you just let the customers know you've got Discovery capability? Or do you have to change their behavior in some way or change some of your internal capabilities?

A lot of it's awareness. And our Discovery business is a meaningful enough size now for people to, I think, take it seriously and to utilize it. There is an initial reaction, particularly with some of the big drug companies, not on a we-do discovery, you're not doing discovery for us. So I think once we explain what we do, so we have a lot of work with big pharma, once we explain what we do and they see how we can help them progress their drugs at a faster rate and a reasonable price point, they're quite open to it. Once they -- and we saw this with safety, particularly the large drug companies and larger pharma companies and larger biotech companies, just have to strategically reach the point internally where they're open to this, and that process is accelerating. Also, companies that have worked with us, either in Discovery or Safety and trust us, because this is so much about trust, like our science, are open to working in one of the other [indiscernible]. So some of it is just time, but it's progressing quite well. We're pleased with the progression as we add capabilities, either in Safety or Discovery, it just makes it easier. Sometimes it's just geographic proximity helps. Sometimes it's just a therapeutic capability that we didn't have, but now we have. Sometimes, it's just being able to have a more elegant handoff than maybe they were even doing internally. And it's interesting that some of the big drug companies hand things off less well internally than we do with their own drug when we're doing it. So it's all about efficiency and how we can help them do things. Either they don't do it all on their own, which tends to be biotech. And with pharma, what they're open to doing, if they weren't a few years ago. And that's why I referenced a few years ago. If we were to show you a graph of the 10 remaining pharmaceutical companies' outsourcing philosophy and ethos, it's just changed, and will continue to.

Speaking of changing customer behavior, how is the mobility initiatives going, kind of getting customers from the alternative sites?

Well, we have clients that, as we bought a bunch of our competitors who weren't -- either had never used that -- one of the sites of that company or weren't comfortable for whatever reason, reputation or what they alleged the reputation was, and when they call us and say I would like to start a study at X site, and we're like, yes, we were full there, what about Y site? And having alternative sites to offer them if they've already audited, they're comfortable, confident that science is really quite helpful. So we'd like them to have a strong familiarity with management team or teams at the sites, and so this is a good working relationship, but we also want them to have the flexibility of utilizing multiple sites. So most of the big clients use many sites often simultaneously, either for something specific or for something that's closer to the site that developed it or, as I said earlier, when a site is full. So it's going well.

Two questions. You mentioned about China. Can you just elaborate on how you do things differently there compared to [indiscernible] competitors in China? The second is, a general question. So you offer the service [indiscernible] confidentiality stops and where your expertise starts. So with same target in multiple [indiscernible], how do you say, this knowledge belongs to [indiscernible], and that knowledge is ours and we can leverage that?

Yes. So 2 questions. One is in confidentiality period for prosecuting multiple drugs in the same target, and also what we're doing in China, how that market is progressing, what's different about it? So while we have a small Microbial Solutions business in China, actually, a large number of tests, but at much lower price point. So it's still a relatively small business. Our principal business in China is the Research Model business. We bought an ongoing concern, we bought a Chinese company about 6 years ago, and it's quite different. So it was a company that had started using Charles River animal strains to propagate its production colonies, so they actually were our analysts to begin with, and actually have knocked off our name, they use the name Vital River instead of Charles River. So everyone thought it was our company anyway. And they somehow have gotten a hold of one of our production facilities. So I know when doing due diligence, walking through the facility, thinking, this looks familiar, and it was literally one of our sites. But anyway, there's nothing nefarious about that. That was all above board and we're actually happy. So we kind of bought our own site, actually. But we purposely didn't buy it all, and the rationale there was for the local Chinese marketplace to look at the business as a local company. And while we bought almost all of it now, we still -- there's a small piece that we don't own, and the founders are still there in a very senior role. So I do think the local Chinese market looks at it as a Chinese company, even though an American company owns it, number one. Number two, the quality of the animal models is significantly better than their local competition, all of whom, are Chinese government-owned entities, very low prices for sure, very often, very superficial approach to the business, just assuming that you put a male and a female mouse together, and you have baby mice, and then you ship them, and it's a simple business, when the reality is it's incredibly complicated to make a live product. It has to be free of opportunistic viruses and bacteria and have a certain genetic profile. So a lot of them are struggling. Some going out of business, some going into business and, interestingly, almost no competition at all in China from our commercial competitors in the rest of the world. So we're doing really well there, growing quite rapidly, building new production facilities and trying to educate the market as thoroughly as possible to the, not just the benefits, but the necessity to use animal models that are actually not sick. You're getting flawed data when you do that. So if the Chinese market wants to make drugs even for its own population, and certainly, to sell them elsewhere in the world, they're going to have to enhance that quality of the research. So we like the animal business there. It's kind of like going back 30 years to the U.S. or Europe and growing disproportionately fast, and a huge investment by the Chinese government. So that will continue. Your other question. Look, our ability to keep things confidential is one of the very essences of the business. Our inability to do that, it's a huge failure for us. So we kind of have a wall between the various groups that are working on these various compounds, so that they don't share data or talk to one another. And we've been able to do that quite successfully and keep our clients happy.

Can you talk about the competitive dynamics in RMS in China, just [indiscernible]?

The question is about the competitive dynamics in RMS. I'd say that our primary remaining competitor in Research Models is Jackson Laboratories, which is a not-for-profit genetic research institute that has kind of an [indiscernible] reputation because of its not-for-profit's stature and it does quite well. We have this odd relationship with them, where we produce and sell all of their models in Europe and Japan, but compete with them quite seriously in the U.S. And they're just beginning to do some things in China. So -- and the in vivo thing is kind of a nonevent for us. That continues to be a competitor of ours, principally in the small animal space. Has always competed with us on price, and will continue to do so. We have a couple of other small competitors who, I think, are struggling. I think it's tough just to be in the research model business these days, which is one of the reasons why we branched out a couple of decades ago. We're just so much larger than the competition and so much more dispersed geographically that puts us in a very good place. And of course, we've become the largest user of our own animals, which is kind of interesting.

On one of your slides, you put AI. It was at the bottom of the slide, in very small print. I know you do a lot of pathology, and I' like to know what is your intent -- or what was your intent on putting that little line there. How will you implement that to enhance your performance?

So a question about artificial intelligence, and why was it -- so in such small print in one of our slides. That wasn't done on purpose. So if you get 100 researchers in a row and you ask them what they mean by artificial intelligence, you'll probably get 100 different answers, so I probably want to start there. So a couple of things. I think as a general proposition, there's a feeling that technology and data will be and must be used to inform and design better trials, both preclinical and clinical. So I think that's -- I think that should be coming, whether it actually gets there or not, don't know. We're doing some work on that, early work, and I know a bunch of clinical folks are as well. What I did talk about on that slide, I am staying with the question, but I just want to remind you of, since you saw it, is that we're doing a bunch of technology deals. And by the way, we could do additional AI deals. So we don't know who has the best technology or whether anyone has the best technology, whether any technology is useful. But there's a fair number of small companies that are out there that say that they're the solution for all artificial intelligent issues. So we make small investments in those businesses, we did with his AI one with a small print. We're just starting relationship with them. So we're helping sell their technology to our clients and offering that as part of what we do. And as I said, we may have some other ones. And so we're going to get to trial run it and see whether it's really useful, whether the clients like it, whether it helps us design better trials and give them better outcomes. If it does, we may buy the company, sometimes we have a predetermined structure to do so, sometimes, we just do it when we get there. So just putting our toe in the water because I think we feel that we have to. A lot of questions of our clients, what are you doing in artificial intelligence space? I don't even think they know what they mean by it when they ask it, because I'll often say to them, well, what are you doing? And they'll be like, well, I'm not really sure kind of thing. But certainly, data and probably machine learning and the sort of ability to scope out and design trials with a thought that there will be better outcomes will obviously be very helpful for everybody in the whole drug development paradigm. So that's...

So the data resides with your customers?

That's right.

Is it hard to do [indiscernible]?

It's the clients' data. We've had some conversations with them about anonymizing their data and us using the data and crunching it, some of the clients think that -- some clients are okay with that proposition, some aren't. So yes, we obviously have to get their concurrence in order to use their data. Yes?

[ It's like ] the $2.5 billion of capital redeployment to expand your portfolio into [ newer ] space [indiscernible]. Should one expect, and may be taking a segue from the Takeda opportunities and so on, that at some point in the next 5 years, a new capital redeployment cycle will start taking you vertically down to meet the CDMO space?

Yes. We mapped out the whole drug development paradigm, and we've mapped out what we want to do from an M&A point of view. We have a large and growing marketplace. And so for sure, we're going to do more Discovery, invest in more Discovery assets, both large and small molecule, probably some niche things in Safety, probably -- definitely more in cell and gene therapy and antibodies, maybe some more in China, although the deals there are pretty expensive. CDMO space, we were in and got out of -- we come back to that space, I would say, about once a quarter, when we talk about it, does that make sense? So I would say, from a strategic portfolio point of view, it probably does. From an actually getting a deal done point of view, it's going to be really hard for us to do that. There's just too many big players in that space that will want every good asset. You saw the deals that Catalent and Thermo did, buying very good assets in that space. So there might be some niche opportunities for us. We'll see. And we do all of the testing before and after the drugs are manufactured, so doing some of that on our own might be useful someday. Anyone else? Great. Thank you.

Thank you.