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

Okay. Good morning, everyone. Welcome to the Charles River Laboratories session. I'm Bob Jones. I'm joined by my colleague, Jack Rogoff. Together, we cover the CROs here at Goldman. Very excited to have Girshick -- I'm sorry, Birgit Girshick from Charles River Laboratories with us today. Welcome and thank you so much for doing this.

Thank you very much, Bob. Thanks for having me.

Just for a background, Birgit actually has quite a number of responsibilities these days, Executive VP of Discovery and Safety Assessment, Biologics Solutions, CDMO and Avian Vaccine Services. So several hats, and I'm sure you've been very busy these days given all that's going on within Charles River.

I thought for starters, just given that really these segments that sit under you were really the drivers of the long-term guidance range that we recently got at the Analyst Day. I was hoping maybe we could go in order of these 4 areas and just maybe spend a few minutes getting your thoughts on what the key drivers are, what you're most excited about as far as the growth within the areas that you're responsible for. So maybe take them in pieces, maybe start with CDMO, if that's okay, just because I think that's the kind of newest and most exciting franchise given some of the recent acquisitions. So maybe that would be a good place to start and just get your thoughts on what you're most excited about and how you envision the growth from the CDMO business.

Sure. I would love to. So obviously, the CDMO business, we acquired and we're actually acquiring another piece in not too future distance with Vigene that we announced a few weeks ago, is in the space of cell and gene therapy, which everybody knows is a fast-growing area, 25% growth rates to be expected, maybe even more. And for us, so it's an interesting space because all our businesses, starting with Discovery, Safety, our Biologics business, our Microbial business, our RMS business all support cell and gene therapy already. So we have already worked with the clients. We know or understand the market really well. And the gap that we really felt we had and our clients were talking about was the CDMO business and, particularly, because of the challenges a typical biotech company would have in that space. And that means that the cell therapy and gene therapy manufacturing requires inputs from so many different areas. And when we looked at the space and we said, wow, we already have some of those areas that we can cover. So for example, the testing component, which is very, very big in the cell and gene therapy, we could actually provide our clients with an integrated solution for their whole development, not just the manufacturing. So we now, through these acquisitions, can take a client from the discovery stage to development to the safety assessment work while actually working with them already on the development of their manufacturing process and selecting the components which cells for validation and process development, the plasmids, the vectors, which we all can provide, the testing part of their manufacturing and seamlessly moving them into GMP manufacturing for the clinical and then hopefully, if they're successful, to commercial stages. So together, the -- both the growth rate of the industry, but also that integrated solution really is driving for us our expectations for growth and then also for scale and margin expansion.

No. That's super helpful. A good overview. I'm sure we have some follow-up questions around CDMO and some of the interplays that you mentioned with other areas of the business. But maybe, again, just to kind of think about the pieces, maybe Biologics Solutions, that's obviously another exciting area that's driving some of the long-term growth rates that we saw. Just maybe your thoughts on what you're most excited about within that business, too.

Sure. This is actually a really exciting business, hugely fast-growing and really made a name for itself in the industry besides the fact that it's highly synergistic with the CDMO business. And we were expecting quite a bit of pull-through from combining those 2 businesses because currently, the CDMO business is outsourcing or the clients of the CDMO business are outsourcing to multiple providers, and we can actually streamline that by doing the testing for them. And every client so far has said, absolutely, let's do that. Obviously, it has to be done with new programs. It also supports many other areas. So large -- so it's really focused on biologics. So large molecule manufacturing, clinical and commercial is growing. We -- they are supporting other cell and gene therapy clients' biotech. So that's a huge growth area. We actually have expanded our portfolio to have cell and gene therapy area specific assays that we are now bringing online, and that is working well. We do the cell banking and testing for those clients as well. And then just COVID has actually provided some uplift for that business in addition. So we're supporting testing for COVID vaccines. That is a nice growth area for us right now. And we believe that it's here to stay with maybe annual manufacturing or new variants. And it's definitely an area that is quite challenging right now because of the volumes, but it's also a nice area for us to grow.

No. That's helpful. I think that's kind of good and bad news at the same time. I guess moving on to Discovery and Assessment, just thinking about the main growth building blocks there would be helpful.

Certainly. So our Discovery and Safety Assessment business is the business that probably sees the most direct impact from the biotech demand and funding. It's early stage. A lot of new programs are coming in. We see -- again, we see some growth here from cell and gene therapy as well. There are thousands of programs with preclinical right now that are moving through. But we've seen actually growth not just in that area, but continued growth in small molecule, continued growth in large molecule. A couple of years ago, I would have handicapped that there's only so much money in the industry and cell and gene therapy might decrease the small molecule programs, but we don't see that at all. We're actually seeing all areas growing. And we also see outsourcing continue to increase. So for Safety Assessment, we believe the outsourcing penetration right now is about 60%. And for Discovery, it's still much less mature at 25%. And throughout the pandemic, we actually saw an acceleration of that trend. A lot of the companies that closed down completely felt the need to outsource because they wanted to get their -- have their programs just to continue over those months. We have stepped in. All our sites were operational and we have picked up quite a few programs from clients that either have not outsourced that kind of work before or have not outsourced everything, and we did the work for them. We believe that we will maintain most of that work. We have shown those companies that outsourcing is possible. Some of them believe beforehand that they had to do the development work and that in many cases, that it's more efficient. And the people, their employees are coming back. They have more programs in the pipeline. They will just rededicate them to new programs and other work from what we heard. So -- and that was a nice little uplift and a nice acceleration of the trends we have seen before.

And would you say similar views on Avian? I know it's obviously probably not as big, but it does fall within your responsibility set. Any just quick thoughts around the outlook for that business, too?

Yes. So the Avian business is playing a little bit in a different area of animal veterinary products was a small component of human product and human vaccine manufacturing. We actually have seen some uplift from COVID there because there were some programs and they're actually going -- continuing to going on where they're looking to see if production in eggs would be possible. And so Avian too had a bit of an uplift there and continues to be a strong business for us.

Very good. I wanted to go back to -- you touched on this in your opening comments about CDMO and specifically how it interacts with biologics. I wanted to get a little bit more perspective there. I thought maybe it could be helpful if you could give us the customer's point of view, maybe like the customer's journey and how they might engage with Charles River within CDMO and/or biologics and how they might end up obviously using the other side of that offering.

Right. It's actually quite a bit of a learning experience for us when we looked first into the cell and gene therapy manufacturing. And what was really impactful to me was talking to clients and how much complexity there is in this modality specifically. So if you think about that, first, the clients need to develop a manufacturing process, sourcing cells from a company like HemaCare that we own now where we have donors that come in to donate their cells, donate their live -- the fresh products, ship it somewhere to create some PBMCs or other intermediaries, they have to find a clinic to actually get the actual patients for those products and have the patient recruitment. They have to have a CDMO that is on ready to go at any time when they have the patient ready to go. They need a testing organization and that has the same time slots in their CDMO. It's literally a logistics nightmare. And so when we looked at this and we said, we will not be the clinic, obviously, but we -- CDMO actually comes with a clinical coordination group that will work with the clinics on their patient samples, but we can actually provide everything else. So our clients going forward no longer have to coordinate 5, 6, 7, 8 different companies, not just sites but companies, and do that on their own because the CDMOs don't do that for them. That is really the selling point and the benefit of our portfolio for our clients. And that's really, if you look at our acquisitions, what we have sampled. So last year, we acquired HemaCare and Solero to provide the cell supply for our clients for both validation, process development and then also allogeneic programs. We have acquired cell therapy CDMO with a plasmid and viral vector component in Europe. We just announced that we acquired Vigene, which is a extremely strong player here in the U.S. for viral vectors also offering plasmids. And we are already a market leader in the testing space, and that doesn't even play into the fact that we do their safety assessment. So you can see the synergies on our side, but you also very much can see how the client journey is going to change.

Yes. No. That's [Audio Gap] of how naturally those assets fit together. Yes. I think maybe if you think about cell and gene therapy as it gets to the commercial stage, is there more that the company feels like now that you're kind of taking them all the way up to that point in the journey or at least you have the capabilities to do so? Are there more assets? Or is there the ask from the client to have the capabilities to be more supportive on the actual commercialization side of these biologics?

Sure. So if you look at it, just I want to go back to the biologics testing that we are doing. We are already supporting clients in the commercial phase. So we have the assays, both -- most of them similar or the same than large molecules. We have the assays to do that. We have the regulatory compliance, the facilities to do that. And then we have also developed some cell therapy and gene therapy specific assays to do that. On the CDMO side, we are currently supporting our clients in early to late-stage clinical. And with the late-stage clinical customers, we are working hand in hand to make sure that we are ready for them and with them on the timing of their submissions to have, a, the regulatory compliance components in place, to have the capacity in place and also have the skill sets from a technical expertise in place. Most of the cell and gene therapy programs that are currently moving through are relatively small patient numbers. So it's a nice way for our clients, but also ourselves move into commercial without going from 0 to 100, but they're generally small patient numbers. And it's a nice way to really ease into that, and we will do that with our clients.

That's helpful.

Great. I wanted to follow up on that. Just is there any other sort of natural development areas for the CDMO space, whether it's organic or inorganic, for you guys from here? Especially like we said, as these assets get to commercial stage, is there anything other from a capability standpoint do you think you need to add?

Sure. Thanks, Jack. That's a good question. So obviously, some of you might know that we had owned a small molecule film CDMO a few years ago that we divested because it was a space that we did not feel where we can add a lot of value to our clients. There's many different players. We also had looked at API manufacturing in that space both in small molecule, biologic manufacturing, and there is a really good network out there. So when we looked at the CDMO space, and that's continue to be our focus, we want to make sure that we can provide value to the client that they currently don't get, that we provide either the regulatory compliance or the scientific input. We want to work with our clients just like we do in the CRO business as the experts in the field and just -- not just another group of hands or a need to much bigger providers. We see that definitely happening in the cell and gene therapy space. We could also see that in other modalities, advanced modalities. So if we are looking for other organizations or expansions, it would either be geographically or it would be into other advanced modalities where we really can play to our strengths, which is the science and our partnerships with our clients and our regulatory compliance.

Got it. And are there any other specialized areas that stick out today that you think are like an analog to what you're doing with cell and gene therapy?

I mean there's always things that our clients will bring up. You just probably saw that we acquired Retrogenix and the Bio, which were gaps in our portfolio for our clients, and we will continue to look for those. You're also are aware that we have a very strong partnership strategy where we continuously look at the market technologies, what is out there, what don't we have that the client might be interested in, potentially looking at technologies that we want to test drive first that are very new in the market. And we will add those on generally first as a strategic partnership and then potentially with add-ons in -- as an acquisition later on, then we see it is really synergistic and beneficial for us. But that is part of our strategy together with M&A, and we have done 9 partnerships just over the last few years, and that is an area that we will grow definitely.

Got it. No. That's definitely helpful. I guess just you mentioned the discovery assets you have, but like specifically, within cell and gene therapy, is there an actual pull-through pre- and post-IND approval where maybe Charles River is providing the safety assessment services and then you're also scaling up on the CDMO side? Is that sort of pull-through part of the vision and something that happens today?

Yes. It definitely is. And it's obviously the decision-making of whom to use could be very separate. The reason why we think there is a strong pull-through is that currently, when a client, the biotech company comes to a CDMO, they already defined their process. They already know where -- what testing provider they want to use, what is their actual manufacturing process, which is quite manual in this space, where are they getting their intermediaries, what are they using to do their process development on cells. And for us, by working with those companies in preclinical, we actually have the relationship at the end to be able to insert ourselves at that point and say, let's work together so that when you get to the stage with clinical, you don't have these logistics nightmare in front of you, but you can actually take your process and you're GMP-ready, you're scalable and you don't have those nightmares in front of you trying to coordinate multiple organizations. So we see a strong -- quite a strong pull-through from there. And interestingly, the first synergistic pull-through that we saw was actually a CDMO client placing their safety assessment work with us. So we're actually going the other way because of the relationship we had. So they were giving us another program, an early-stage program right away. So it goes both ways. A lot of it is pull-through is really based on the relationship with the client.

Got it. That's very interesting. I guess just the last one on this topic. What does the competitive landscape look like? I think what you've built makes a lot of sense in terms of the path of cellular to supply, discovery, safety assessment, CDMO and biologics. Is there anyone else out there that's combining all of these things together or different components of it just as we think about the unique things seemingly that Charles River has built versus what other pieces others have out there?

Right. So yes, at this point, there's no other organization that has all the pieces. Certainly, there are very -- bigger players in the cell therapy space was Lonza and WuXi and the gene therapy with Thermo Fisher, for example, but they don't quite yet have the full portfolio. And obviously, I'm not privy of if they are planning to, but in none of the cases will they be able to add the preclinical engine that our company has. So this is for us the real differentiator, being able to work with the client early on. As I said before, it doesn't -- you're too late trying to create a pull-through of intermediaries and vectors at the stage when they seek out a CDMO. You need to do that much earlier. So that's why I'm so excited about this portfolio. And that's why we get so much requests from our customers already to say, talk to us, how would this work, what will we do on that, when are we engaging? So I think that's the real differentiator.

Makes sense.

It's interesting. You mentioned WuXi. And actually, we did get a question from the audience. It was just around wanting to hear your thoughts on the emerging competition from China in the CRO space, obviously, I think specifically within what Charles River competes in. Just wanted to know if their cost base provided them with a competitive advantage or if you felt like Charles River was obviously still well positioned relative to some of those companies coming out of China.

Sure. It's actually an interesting question, and I want to bring it a little bit back to our discovery business because that's where we have a little bit more of an experience. So we have early-stage discovery with rudimentary chemistry and high-quality biology. And when we first initially bought this business, we were competing very generally with every provider out there. And a lot of times, we did not win the projects because they got lower cost in China. And then what we did was we repositioned our business to where Charles River really should be, and it's the strengths and that is high science, high guidance, very much really high touch for the client. We don't necessarily need every project that's out there. If a pharma company has an army of outsourcing people who can work with the Chinese company, they will not come to us and pay the higher price nor should they. But for all the biotech companies, which is the engine of the drug development, that may not have an army of people to throw at it, that may not have the capabilities and expertise to handle it, this is our audience and this is our client target client. And we made -- we changed our discovery business completely. Looking at it this way, we brought talent in, we changed our business model. And I do believe that for the CDMO business, that is no different. We want to take this business to be high science, high engineering, high touch for the client. And in particular in cell and gene therapy, that is so manual and so complex, that is the route to go. I would think it's really hard to take a very manual manufacturing process and put that in China or India or anywhere where you can't get to and try to do that there. We have clients in our side all the time. We work hand in hand with them. And I think that is the differentiator from doing the work here, doing it with talent that knows the space and versus outsourcing into a low-cost country.

No. That's really helpful. I mean maybe just to stick with discovery. Can you maybe give us the factors as you think about what's helped with margin expansion in this line of business? And then from here, kind of what do you envision being able to help continue to expand the margins of discovery?

Sure. So we built the discovery organization over the last few years with several M&As. And really, we're focusing on putting together a solution for our clients where we can take drug programs from literally target identification into safety to IND. And we have done that and particular strong in oncology and CNS, but we also offer quite a bit of services in the other therapeutic areas. And again, when I talked about the -- making the -- our discovery organization, the expert rather than just hands or just executing on a study and handing over the data has really driven, a, the margin expansion, it has driven price, but also has positioned us to do a lot of work as an integrated solution where clients will come to us and say, "This is the target. How would you approach that, create a research program and then relatively, independently move those programs through our various services and portfolio program managed by people who might have been previously in pharma or biotech with real truck hunters, and they actually can execute on something like that. So that integrated solution certainly will allow us to have better pricing points and margins. And then as usual, scale was obviously also a component of that. We believe that we have positioned our discovery business now really, really well. They're of high demand. They're literally on fire, and we're -- we think this -- we have picked the right strategy, and we'll continue to see that going forward.

That's interesting. Part of that strategy, as you mentioned earlier, is somebody's tech partnerships within discovery. Curious just how much of that is really adding to what you're describing right now versus just being better positioned for the future?

So the partnerships are generally very, very low revenue. So we're not doing that to bolster the growth rate of discovery. What our partnership strategy is geared towards is a couple of different things. Number one, it's -- we hear from a client that they have a gap or they would like us to offer something. When we go out, we don't have it and rather than building it over the years where we may not have the expertise, we go and do a partnership and bring them in to fill this gap and market it with us. So working very closely with them. The other area is really to test drive some of the technologies that are out there. There are so many new things coming up and libraries that are established and new technologies that come up let alone, the AI platforms. And we kind of invest in every single one of them because you never know which one will be successful. And for us, this is really a way to test drive it, offer it to our clients, learn about the companies. And if they're successful and we feel they should be part of our portfolio, then generally, we have already positioned them to be an M&A target. And so it's -- it feeds our M&A pipeline, but it also allows us to really play in technology areas that we would otherwise have a problem with or maybe not -- don't have the expertise in.

That's helpful.

So taking a step back to the overall DSA segment. At the Analyst Day, you talked about emphasizing data as an asset for this segment. I'm curious if you could elaborate a little bit on what that means. Are there opportunities to maybe monetize the data you have or feed those into some of your technology partnerships, whether you acquire them or not? Just curious like what that strategy means for Charles River and the segment?

Sure. Yes. It's -- so we are literally a data company, if you think about yes, we do the webwork, we do the lab work. But at the end of the day, what our clients are asking us is to generate the data for them to make decisions or the data to provide to the FDA so FDA can make the decisions. And so what we have for last years really communicated to our clients is that we will take a year out of the drug development time line. And the year is kind of a bit of an arbitrary number. We think we actually can take more out. And it's not that we can make a 28-day study into 21 days. Obviously, that doesn't work. But what we can do is literally take that white space out. If you think about just the COVID vaccines last year, how quickly they were developed and yes, the platforms were there. But how -- there was no downtime. There was no -- there wasn't weeks and months to wait for a report and look at the data, there was some downtime with the FDA. It was -- they did it in a record time. And we want to see as an organization that every drug program will be accelerated. So we have looked at the white space and what we can do to accelerate that. And it's all about data. So getting reports out faster, getting real-time data to our clients, having -- using the data for insights. So we have an ongoing program of organizing our data, making sure it's available for the insights. We have started using the data to make operational decisions. And as you saw, we're also working with some partner companies on either using publicly available data or using their models and platforms to provide more insights to our clients. So we're using that as a dual strategy, internal learning ourselves, seeing what we can do with the data that we have. And then on the other side is partnering with some companies, learning from them, giving our clients immediately the ability to use AI often, it's in discovery, to make better decisions or get better information about their targets. One that I find particularly interesting is Deciphex partnership where we are digitizing pathology. That used to be a -- sending slides around the world for pathologists to read. And so we -- the first step was an operational efficiency. They now can do that online. The second step is using AI in its recognition to take -- to make better decisions on the slides and really taking the workload out for our pathologists. So there's so much to be gained with AI and machine learning or just doing better work on organizing and using our own data, it's really an area that we are excited about, and we'll continue to invest in.

Got it.

I wanted to shift gears a little bit back to safety assessment. One of the kind of classic questions we always get is figuring out capacity and pricing and demand. And so I wanted to just get your latest views on where you think capacity sits at an industry level, best you can tell. And then is there -- given the demand levels, do you see there being a longer runway to perhaps take price as you look forward within Safety Assessment?

Sure. So yes, it's hard for me to comment on the competition. I can just tell you what I see in the industry is that it doesn't seem that any of these CROs have abundant space. I think everybody is relatively well utilized. But on the other hand, we -- I think the industry, the CRO industry positioned itself to be able to add space relatively quickly and not to have any capacity crunch. So we have 30 sites within Discovery, Safety Assessment, and we have, every year, several expansion projects going on, including this year. So we are building space as we talk, but we do that. It's an always, always. That's just normal and assumed for a high-growth business. And we need to do that in different geographies because of a specialties that may be at the different geographies, so not every site has the same skill sets, but also because our clients like to have certain -- or work in certain geographies, generally close to where they are, so they can visit and they can have interactions. So from a capacity -- on the capacity question, I would summarize it was, yes, we are well utilized, but we are continuously expanding. Same for our other businesses, that's an always, always that we are modeling out and executing on all the time. On the pricing question, we don't spell out the exact pricing that we're getting. The only thing I can say is that we get the price and that we are quite happy about it. So...

No. That makes a lot of sense. I guess another resource necessary to keep up with demand is obviously talented people. I wanted to also just get your view. I think this is true for a lot of subsectors that we're hearing about within health care is that the labor market is, in fact, very tight. How do you feel as far as being able to add the right people and the right divisions given the demand that you described across all the segments within Charles River?

Yes. So it's definitely true that the labor market is becoming tighter and tighter. A little bit different in different geographies. So we don't always -- we don't see it in every geography. But -- so if we want to generalize it, yes, there is certainly something that is to be said about it. If I look at the -- of what we have done over the last 2 years, we have really upgraded how we pay, what we pay, what the benefits are, how we onboard, how we engage people. So we are quite competitive when we're hiring. We -- if we want a person, we get this person. And we are doing a lot of things to engage employees so that we can actually retain them. So that's the other equation of hiring. It's not just hiring, but also maintaining the staff. We do hire a lot of entry-level people and train them up. So we also have invested in how we train people, how we bring them on so that we can actually bring people up to speed on the work they're doing relatively quickly. So that is an ongoing effort. And then on the higher-level people that come in with expertise, how do we engage and how do we develop and keep them interesting -- interested. What we are seeing quite a bit is actually that COVID changed a lot of the outlook of people. We actually see in certain areas -- in many areas actually that people want to work for us because of our purpose. We have worked on 85% of the drugs that the FDA approved. We have developed clinical candidates, 84 of them. We work on every COVID vaccine that's out there. Our cell and gene therapy is literally -- we have the last touch before the client -- the patient gets the drug program. And so we have a lot of interest of people that may not be in the industry right now. So entry level, any support staff, anything that is not already in biotech really is looking to change careers and come to us or to other biotech companies. So that offsets that a little bit where the labor market is tight. So overall, I think we're good. We will continue to focus on that and make sure that we have the labor, the talent and the expertise that we need to execute on the work.

No. That's really helpful. I know we only have a little bit of time left, but I just wanted to just maybe get your last closing thoughts on just acquisitions, in general. We don't need to get into the specific areas. But obviously, Charles River has been an extremely acquisitive company. I feel like in the last window of time, maybe even more acquisitive than historically. Are we in a place now where it's more time to integrate and put these assets together and cross-sell and all the things that we talked about in this discussion today? Or do you think there's still more to do as far as adding new capabilities, geographies, whatever it may be?

So we continue to look at the landscape and see what is out there and what would be a benefit to Charles River. We can't obviously predict when exactly those targets become available, if they become available, if we can get them. But we will continue to look at that landscape, look at our company, talk to clients to make sure we know and understand what they need going forward because at end of the day, it's all about the clients. And so it's -- so in summary, we continue to obviously look and see. If something comes available short term, I can't say that because that's always up. And -- but we have a very robust road map of what we're looking for, and we will continue to execute on that.

Got it. Now I appreciate that. And I think with that, we are out of time. But Birgit, really appreciate your time today. Great discussion. I appreciate all the insights. Thanks, everybody, for joining the webcast. I hope everyone is enjoying the conference. Thanks so much.

Thanks, Bob. Thanks, Jack.

Have a good one.

Thank you.