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

Hi, everyone. Thanks so much for joining us this morning. For those of you who don't know me, I am Elizabeth Anderson, I'm the Healthcare Technology and Distribution Analyst here at Evercore. I'm very pleased to be joined this morning by Jim Foster, Chairman, President and CEO of Charles River; as well as Todd Spencer, Vice President of Investor Relations.

So maybe, Jim, just to start off with, do you want to maybe give us a little bit of a 30,000-foot overview? I'm sure most people on the call are familiar with Charles River, but just to sort of level set everybody before we jump in.

Sure. I'd be happy to. We are enjoying unprecedented demand pretty much across the portfolio. It's a manifestation of significant spending over the last, I don't know, decade in biotech principally. Outsourcing -- continued outsourcing by big pharma companies and a whole plethora of new biotech companies, virtually all of which have no internal capacity to do anything so maybe discover -- the earliest discovery of the molecule. So our broad portfolio, which has been broadened in large part through M&A over the last couple of decades, it's definitely resonating with clients that would like to do more with a single partner than rest. And as we continue to buy companies to broaden that portfolio, I think that, that [indiscernible] become increasingly enhanced. We did 6 acquisitions in the last 18 to 20 months in the cell and gene therapy space, which is going quite well. We're integrating businesses with each other with them -- with themselves and also the rest of our portfolio, particularly on Biologics. And secondarily, our Safety Assessment portfolio sitting significantly on expanding facilities and hiring staff, and recently raised -- recently sort of narrowed our guidance to 13.5% to 14.5% organic growth. So we're really pleased with that growth rate, which I should comment is well in excess of our operating plan, fiscal '21 operating plans. So that's a nice place to be. [indiscernible] the file touches on our '22 plan. And we gave, uncharacteristically early indications of '22 on our third quarter call. Something we don't typically do, but it just seemed to make sense. And so we did say that we anticipated at least low double-digit growth again. Next year, we obviously will tighten that up and give more accurate numbers, and in February when we do our guidance for the year. So maybe I'll stop there, Elizabeth and let you run the show.

Yes. No, that's perfect. And maybe we'll start with a couple of just sort of shorter-term items and then we can go into some of the bigger picture ones. I know, I guess, first of all, the -- this unexciting news over the weekend about the development of Omicron or the urgence or recognition that it was here for longer than we thought or the situation seems to be changing by the hour. But sort of how, at this early point in time, are you sort of thinking through that? Obviously, data, it's sort of an unfair question given that no one knows exactly, but in terms of your sort of -- from where you sit, your visibility into a bunch of different organizations across the biopharma spectrum?

I don't expect it will have a major impact on us. Hopefully, we -- from a providing point of view, we never missed a beat in any of our labs. So all our labs were open in full and operational with a couple of small exceptions that we've already talked about ad nauseam. Historically, through all COVID, with Delta variant and not, and so -- and as a result of being open, we not only accommodated that demand and have been growing in excess of our operating plan, as I said a moment ago, but have been -- I think helping to accelerate the outsourcing trend generally because even some clients that historically didn't utilize us for whatever couldn't count on other than themselves. A lot of big pharma or some of our competitors are a lot, whomever, during some of the tougher times of COVID. So if that were to occur again, I mean, if God forbid we have lockdowns and this variant is worse, I suspect that it could be a further stimulant to outsourcing. And certainly, it could be similar work. I think we only have an incremental, whatever the number was, I think, $60 million of revenue through the first year of COVID. So while we were happy to have it, proud to do the work, and we moved it to the front of the line. And as we said, we worked on all 4 of the vaccines that got to market and the therapeutics as well. It won't be a big addition to Charles River's revenue or profitability. So we have the same concerns as everybody else does, but we're here to help whatever work that means in terms of additional vaccines or boosters or for sure, we're hearing a lot more about therapeutics these days, both on the monoclonal body side and antiviral side is because of the vaccine is not effective. At least if people get sicker, there should be effective treatment. So we work with all of these companies. And as I said, proud to do so.

No, I think that's helpful. So maybe digging into some of the business segments. Obviously, RMS has undergone quite a change over the last few years with the addition of Cellero, HemaCare. Can you talk about how you sort of see the round back of those 2 businesses as we sort of move through fourth quarter and beyond, at least qualitatively? I know that you guys have done a lot of work helping to redesign spaces and things for patients there to sort of make them comfortable with coming back. So how do we just sort of see that kind of trajectory going over the next little while?

Yes. So we put the self-supply business with an RMS because we feel it's a similar type of product, you sort of -- basic research and cell therapy. And also for, obviously, process development and ultimately for manufacturing. When we bought those businesses, we articulated the fact that we anticipate they would grow at 30%-ish a year. That certainly hasn't happened this year. We have limitations in our donor facilities because of COVID. It's the only kind of continuing negative legacy of COVID to our franchise. We don't have a lot of control over that. People are less comfortable donating, coming in to donate blood, sitting next to somebody who they don't know. We have done some substantial redesign of the facility to accommodate social distancing and also change some of the hours. So we're more flexible. And we also -- I think we're doing a better job accessing donors through more aggressive social media and explaining what we do in the importance to biomedical research, which is the principal reason that people donate. Having said all of that, the greatest benefits that we bring to this whole situation is the fact that between the 2 acquisitions, one of which followed, we now have 4 donor rooms as opposed to the one. We just had one in California, now we have East Coast, West Coast and South of the U.S. So that's just going to give us more capacity even though the capacity may have been more constrained or restrained than we originally thought. So we did give some further clarity on that in our third quarter call. So just to reiterate that, we indicated that we had a stronger October than the prior month. So we generally don't talk about a particular month, but we thought that was relevant. But we anticipate a stronger fourth quarter than third quarter. And we actually anticipate that next year, even though we're not giving specific guidance for that yet, should grow at the growth rates that we anticipated when we bought these businesses. So we think we're coming out of it. We kind of lost a year in terms of our capacity and availability. And while that was frustrating, it was very much beyond our control. So...

I think that's a fair comment. And then those 4 facilities now are permanent facilities that should serve to support the growth broadly and give you a bit more geographic diversity for all that entails as well going forward, right?

Exactly.

Got it. Okay. And maybe just another question on RMS. How would you sort of characterize the Chinese sort of model market currently in terms of sort of growth and sort of their strategy around COVID mitigation? Because I know, obviously, you answered -- obviously, for many years you talked about sort of the faster growth in that market and your sort of expansion plans in Western China. So just sort of where does that stand now, given everything that's going on?

And the Chinese government has obviously been more aggressive and allegedly more successful in managing COVID than anyone else in the world, so you can make your own judgment as to the veracity of all of that. But it appears to be the case. We're back in business and our research model business, they are faster than any other place in the world, and we've continued that. Business there, our business in China is principally research models. We have a small microbial solutions business. The research model business continues to grow very quickly. We don't give the actual growth rate, but very quickly with great operating margins. We continue to build out new facilities in other parts of China. It's a very big country and we need to be proximate to the clients, a great infusion of capital from the government into pharma and more recently, in the last couple of years, into biotech in China, so a big uptake. We have competition. We're definitely the market leader by a long shot and growing disproportionately fast. We have competition essentially all backed by the Chinese government. So -- But while they are well financed, they tend to be relatively unsophisticated about the complexities of this business, and I think they take a superficial view of it. And some of them have run into difficulty, so -- and either have shut down entirely or just have difficulty servicing the demand, so it allowed us to take share generally and also to continue to take share as we build facilities. We only have one of our larger international competitors in China, and they've done that just recently, so they're almost a decade behind us. So we think we will -- we're confident we will continue to be the market leader in that locale. And [indiscernible] our -- kind of sort of relationship with the government has been fine. And I think they -- assuming they pay attention to, quote, "this industry at all". I think they recognize the importance of very sophisticated high-quality research models for high-quality research. And if the Chinese are going to play on the international scene and published data, I think it's incumbent upon them to have the best quality research models to that. I think they get that. We spend a lot of time educating the marketplace about the importance of it, and so I do think that they sort of leave us alone even though they're creating companies to compete with us and also to service the market. So that business continues to grow really well.

Okay. That's very helpful. And maybe switching away from RMS a little bit. Can we just talk into switching maybe over to your CMO business. How are -- can you speak to how your new business wins are ramping? Obviously, you guys have made a number of sales since closing the Cognate acquisition. I know it's a little bit of revenue tail off that you sort of was done under the prior owners that you obviously alluded to on the 3Q call. So can you talk about just sort of that ramp transition and update us there? And then maybe sort of speak to how you see the customer concentration mix like once the sort of dust settles on this shift?

Sure. We essentially had 6 acquisitions in this space over the last 18 to 20 months. We spent a lot of time on integration of those businesses to each other because they're all cell and gene therapy based, but also to other legacy parts of Charles or principally Biologics and secondarily Safety Assessment. And so we have a portfolio that's distinctive from the competition, distinctive from what the clients can do themselves. So we're the only ones that have this sort of very early analytical capability, process development capability, testing capability and manufacturing of the drug for the clinic capability. We built this portfolio very strategically and I think surgically and thoughtfully with very good assets. Relatively small companies, one of them sort of Myocyte but they're relatively small companies, but they have the potential and the ability to grow at 25% to 30% a year, at least. Now, the client feedback has been very positive. We're spending a lot of time on early integration about client-facing activities, so this linkage that I just talked about in presenting the portfolio. We're bringing in new business all the time. So we're trying to understand the sales cycle better, the sales cycle on the cell therapy side is not trivial. We're manufacturing things for the clinic, but the client knows relatively early when they will need that production. And so we're getting accustomed to the cadence of the business and the competitive scenario and how we need to sell this, both with the sales force that we inherited. Our own sales force, particularly the biologics sales force where much of this reports, and additional people that we have brought in and will continue to bring in. So we're pleased with the way it's going. The client base is clients that are large and small companies, a lot of small biotech companies that are specifically created to develop and sell a cell or gene therapy drug. So they're very needy. They did the early discovery and they have no internal capability. They're very patient, but we're used to that. So yes, we're enjoying the products and pieces a lot and working hard to amalgamate them.

Yes. No, that makes sense. And I think that's helpful to sort of get an update on that. What have you found in terms of the areas that have been relatively earlier, sort of easier to integrate so far?

Not sure any of...

[ Not anything is ] exactly always easy, but you know [indiscernible]...

It would be [ dangerous ]. Integration is never easy, and, look, we try to only buy companies that are high quality with great science and have a good reputation because we always check that out and have good management. You always find things when you get in there that need to be enhanced or changed somehow. Integration -- aspects of integration, some aspects happen very quickly and some take a period of time. I -- as I said, we're working through this well. The cell therapy manufacturing business is new to everyone. It's new to our competitors, it's new to us. It's new to the clients.

Yes.

1 And so it's a very complex, very interesting field. We're spending a lot of time trying to get world-class in terms of hiring people and consultants and getting our structure right, making changes to the facilities, adding on to them, enhancing them because we're making the drug. I mean, that's new for Charles River. The cell therapy is the drug. It goes right from us. I think it's going directly into patients so it's going right from us to the client, to patients. And so I'd say that, that's the biggest learning curve. Maybe, I'm not sure that's exactly what your question was. And it's a very important learning curve because most of the companies in the cell therapy space have no internal capacity or financial ability to build internal capacity. So we have a huge societal obligation to get this right, to get the scale right and to do the work in a timely fashion. So we take that responsibility very seriously, the size, the pure business aspects of it, a societal aspect. So as our portfolio just generally gets more pronounced and larger, more geographically dispersed, our central role in working on, as we publicly say, 80% of all the drugs that are approved in the U.S. over the last 3 years, that could be it could be 90% or 100% and probably a similar number overseas. It's an increasingly more central role in moving drugs through the pipeline.

Yes. No, that makes sense. So it sounds like just maybe to circle on to the other part of the question that, that should increasingly diversify your client base over time to, whether geographically size, size wise, et cetera, right?

For sure.

Yes. Okay. Perfect. So at this point, as we stand, as you said, you've done a number of acquisitions over the last 18 to 20 months. Is anything that's broadly missing at this point? Or do you feel like we sort of -- we're in sort of digestion phase now before sort of thinking about adding anything else in?

Absolutely in the digestion phase. So we've got 6 companies that we bought, so that's 6 integrations literally going on simultaneously. It's a lot. On the one hand, it's a lot. On the other hand, they're all related in terms of the essence of what they do, so it's fine to do that. But we spent a lot of money and we have another 1,000 employees, and we have a bunch of new locations, so we're adding to them. And because there is some learning curve there. So yes, we're definitely spending a substantial amount of time digesting them. There's definitely subtle gaps that we would like to fill. We'll be fine if we don't -- don't fill them or can't fill them because there's nothing to buy or we're not successful buying them. But as we add these businesses, they're always client -- there are always services that the clients ask us to provide that we don't, that somebody else is providing for them and they're not happy with the service or the product, and they like us to acquire. We get a lot of our ideas for M&A from our client base. There's definitely -- we have a very sophisticated map of the whole drug development process and more to streamline in, let's say, cell and gene therapy, and we have multiple targets already identified in all of those spaces, all of whom we're talking to. Whether we pull the trigger and pursue them, whether they want to sell now or later, whether we get beat out by a competitor, whether we actually like the businesses or not, it's entirely unknown. But I would say as we've demonstrated over the last 2 decades, we're acquisitive by nature. And we built a very successful and unique franchise in large measure through M&A. And of course, that's now in our organic growth rates, which has now accelerated to -- into the double digit genre. We hope, if not forever, certainly for the next 3 to 5 years. So I do think it's an important part of kind of who we are and providing a more holistic solution for the clients. So it's unlikely that we will digest for too long, just to use your phraseology. I think our balance sheet remains very strong. Leverage is coming down. Debt is cheap, as you know. And we don't have a lot of strategic competition for the things that we look at. Oddly enough, we have a lot of financial competition, so we have a lot of private equity sellers, most of the sellers of private equity firms. And most of the people at the table, we don't always know exactly who's there, but we find out usually after the fact most of the buyers at the table are other private equity firms. So the private equity firm who's only paid for an asset will often sell to another private equity firm who will overpay for that asset when we won't overpay. And so we may lose some deals because the prices just get at the nose bleed level, and we just don't think the returns will be good. The growth rate of so many things that we bought are so substantial, and the amount of investment we have to make and CapEx of people is substantial enough that that will keep us busy if we're not successful. So you should expect us to do M&A, but I don't think it's critical. So we may still have some gaps that we'll have to periodically outsource [indiscernible].

Yes. Maybe to that point, I mean, when you're seeing sort of some of these financial -- other financial bidders and things in situation. Is that kind of just sort of speak to your broader strategy of trying to -- I know you've done it a number of times, get in early and sort of look at sort of noncompetitive situations? Or how do you sort of -- how I guess, how -- what are you -- what would you -- how would you characterize your core areas of strength when you're competing on sort of financially motivated players who are maybe willing to overpay for assets?

We do start a dialogue. I should back up by saying that I don't want to jinx it, but we've never read about a deal that we could -- that we wanted to do, that somebody else bought a company that we didn't know about. Sorry for the bad english. No, it's never happened. We never said, I said, "Oh my god, we never heard of that," it's never happened. So, I and -- while it could happen, I think it's unlikely. So we have broad tentacles out there. We know what's going on. We talked to all the players and immediately applying a private equity company buying something that we would like. We say, I just want you to know, this is an asset that we would like. And we know, we just bought it, but maybe you're going to sell it next year, maybe you're going to sell it 2 years, whatever. We're going to talk to you 3, 4 times a year, just seeing how it was going. So we tend to develop those relationships early, and we tend to be the first call that they make. We also have developed a model where we tend to be able to do our valuation modeling and due diligence faster than most of the competitors, although not always. So from a deal certainty point of view, we'll often say, you know as we've done all these deals, we'll get this deal done, we'll get it done in a timely fashion and we will close. And -- And there are some private equity firms that actually care where the asset goes. So that's a rude way of saying, I think a lot of them don't care. But I think they actually care that something that they invested 2 to 3 or 5 years in goes to a good home. And often, the founders still have a small piece of these private equity-owned businesses. And so, out of respect for the founders, they care where it goes. So -- We often get it in side track, and we also are able to pull the time frames forward to -- or delay it to when we want to do the deal. And we also often get preemptive pricing. Not the same pricing, but not so they don't run an auction. I would say that I don't know, at least half of our deals, maybe a slight majority of that we've actually got -- we've done on a preemptive basis and not been in an auction. So that's always our preference. We don't get to call it. We get to try to run that play, and it's often successful. I do think the private equity is -- can do some of the things that we just said though. They do move quickly. They pay a lot, and they're always at the table. So we'll see. I think it's a slightly shifting landscape at the moment. We should be able to prevail given our constant revenue synergies. We don't always though, so we'll see. I would be surprised but not necessarily disappointed if we didn't do a deal for a while. But we'll certainly get back to pursuing them in some reasonable period of time.

That makes sense. And maybe just sort of circling back on the CDMO business. I'm sure you probably are sort of maybe sick of this question by now. But when we think about the CapEx spend from this business, and one of your -- one other player in the broader CDMO space has sort of talked about for every dollar they invest, they get like $1.10 of revenue like it -- with fairly short order. Is that kind of the similar type of way to how you think of the benefit of some of these increased CapEx investments, or that sort of not the framework that you think about, or that you think about it?

I mean, I wouldn't want to put that finely-tuned analysis on this yet, given that we've only been in the CDMO business for a very short period of time. Clearly, given scale, efficiency, better capacity and some of our business moving from the clinic to commercialization, we should be able to have an enhanced revenue proposition. Our recent conversations about CapEx increasing as a percentage of revenue, it's all about our legacy businesses, and principally, our Safety Assessment business. And so I certainly would have to say that the CDMO business is somewhat capital intensive. I don't think it's any more capital-intensive than other things we do at all. It's probably -- cell therapy manufacturing is probably less capital-intensive than other CDMO types of business.

In white pill CDMO business, you mean?

Yes, totally. And so -- So I don't think that, that fundamentally changes the profile. And the last thing I would say about CapEx is that we need to spend what we need to spend to accommodate a rapidly growing business that, in fiscal '21, is growing well in excess of our '21 operating plan. We have to deploy the capital, I don't know, 18 to 24 months in advance of when we think we'll need it. So you got to call it today for '23, somewhat '24. And if we don't build incremental capacity, whatever you think that means, we won't be able to accommodate demand in excess of what we budget. So it's a complicated analysis. That one so far, we've done well ahead, but we see our business accelerating. I mean we're growing way faster this year than we had anticipated. We'll tell you about '22 when we get there, but we've already signaled that it's going to be at least in a low double-digit level. So we've got this high-growth organic business that is very much about availability of capacity and also availability of staff to work on that capacity.

That makes sense. And just for -- just last question on this sort of topic. If we think about sort of just qualitatively some of the puts and takes in free cash flow for 2022 besides the higher CapEx. Is there anything else that you would call out as sort of being a major driver either positively or negatively there?

We've always been a significant free cash flow story, and hope to continue that successful run. It's kind of the nature of our businesses. Harkening back to our research models business, which generated a substantial free cash flow as we went public, and we've been able to continue to do that. Probably the principal contributor to free cash flow is our sort of maniacal focus on driving efficiency. Most recently, our investments in digitizing the company, which will generate significant efficiency savings by doing things less manual, by connecting with clients virtually and by speeding up the process of getting drugs to market. So combining all of those with building more efficient and flexible capacity and doing things like multiplexing our laboratories so that they run more efficiently and with less labor is an important part of the franchise. And so we spend all of our time focusing on operating margin accretion and whether you're on the business side or the scientific side of our business, it's an important part of everybody's management tools and focus.

No, that makes sense. We have a question that somebody brought in, specifically about your lab expansion in Cambridge plans. Can you elaborate on that?

Yes. So we have this business called CRADL, which is a sort of incubator space that we have, for lack of a better term. We anticipate that it would be all small companies utilizing it. It actually ended up being very large and very small companies. But we have multiple locations now in Cambridge Mass and beginning to have locations now in South San Francisco, and soon to come other locations yet to be announced. So a major biotech hubs will require this. And so we have companies that come in and we have animal space there. We have lab space there, they can use our people to do their work. They can use their own people to do work in our facilities. And what it tends -- and besides the fact it's a very high growth and extraordinarily high margin business, so it's becoming important unto itself. As those drugs move through the pipeline and as it's successful, they'll utilize other services and products that we have. So it's actually a bit of a feeder for Charles River as a whole. So it's a business that we will continue to invest aggressively and expand geographically. And once we're working with those people in the sites, and they'll be asking us, well, do you do this, do you do this in discovery, to do this in safety? Can you manufacture my drug for me? Can you test it for me? Obviously, the answer to all those questions is yes. So we've been doing this now for, I don't know, probably close to a decade. This has really been accelerating nicely over the last few years.

Yes. No, that definitely makes sense. And maybe just sort of tilting off that point a little bit. Do you have any updates on facility bookings? I know that you said you're largely booked through mid-2022. Anything to update on that front?

Yes. It continues. We're looking into the back half of next year. That's quite unusual. That's just simply a commentary on how robust the pipelines are, how much money is pouring into the sector, particularly the biotech sector, how important and broad scale cell gene therapy development is, how many cell gene therapy drugs there are. And the limitations on capacity, which goes back to the CapEx conversation. So from our management point of view, we like a lot of the aspects of this a lot, right? We've greater visibility, greater visibility, greater predictability, greater utilization of our capacity, better opportunity for margin improvement and much better pricing power. So we like all of that, but at the same token, we don't want to frustrate our clients. So some clients we have to start stuff earlier. So when I say we're looking into the back half of next year, it doesn't mean all of our facilities are full. We're still doing earlier work earlier. But we have a better line of sight, but it also gives us a better line of sight when we work in capacity. So if capacity is this full now, we're just sort of put down for '23 and '24, assuming that funding stays the same and the competitive scenario stays the same or gets better. So it gives us a pretty good line of sight on both pricing and capacity utilization. And yes, we have just much better clarity than we've ever had.

Yes. No, that makes sense. And does that ever sort of get you in a position where you think about getting some sort of like temporary facility to sort of like accelerate capacity? Or is that just kind of your -- you think slow -- not slow and steady, but like fast and steady is the way to kind of go about that?

I don't think you could build a temporary capacity and have it be temporary. A variant of the question is we're going to build more modular space. So that means if you're going to build a 400,000 square foot facility, you build 100,000 first with the infrastructure for the 400,000. And then you sort of build out the next 100,000 foot tranche and then the next one and the next one, which keeps your CapEx down. It allows you to build the space out probably 12 months as opposed to 18 or 24 months. The client knows that that's there, and so that's probably -- that's more of a realistic hedge to what you were suggesting because if you don't think that temporary, it would just be full. And so we're building -- we'll be building more modular stuff. We'll also be building more steady runs that can flex for very large studies, very long-term studies, very short-term studies, smaller studies, different species, as opposed to some of our older facilities where it's just a large room that's for whatever larger animal models or longer-term studies. So that works really well. But you don't always have the size -- study room that you want. So greater flexibility going forward. And probably we're going to try to build at a lower price per square foot. I think that some of our facilities, they're very sophisticated. But may not be necessary to satisfy the clients' needs.

Got it. That makes sense. So one of the things, I think, that people have been asking about, particularly post the 3Q call. And obviously, you have the 22.5% margin target to 2024, and you guys noted that the path there is probably not particularly linear. So can you talk about sort of the -- how that sort of fluctuates as we get to that point? And what visibility you have on that front right now?

So what we're trying to guide to is that it's difficult or impossible to call the growth per year to get to the 22.5%. And you can see that from past years. We've had years where we grew 100 basis points and years we grew none at all. Years we grew 10 basis points. But the journey was to continue to drive the business to drive overall efficiency and improve our operating margins. And as I said before, we're just organized to do that. We did get a little bit ahead of ourselves talking about '22 before actually giving guidance, but we wanted to acknowledge the reality that everybody in the world knows, I don't care what you do for a living, is that labor is tougher to find and keep and more expensive to attract and to accommodate for. And so it would be -- it would be naive of us not to assume that in our operating model for fiscal '22. So what we're saying is that -- and we'll obviously give real guidance in February, but what we're saying is while we anticipate that operating margins will improve next year, you just want people to acknowledge that we, like everybody, maybe not everybody is just talking about it, but we are, we're going to have some bit of a headwind from basic comp. A lot of entry-level comp for a lot of, not unskilled labor, where we're competing with Walmart for the person, and we have a better mission. So I think we can attract them intellectually, but then we have to attract them fiscally as well. So we are anticipating that headwind and just trying to call that out. And look, maybe business will be better than we guide you to our operating plan. Maybe we'll drive greater efficiency. Maybe we'll get more price. Maybe it will, maybe margins will improve more than we tell you. It feels irresponsible today. And I don't think it will be much different in February, but we need to see how the year ends. We're only just coming into December, but we're always talking about the fact that our business is nonlinear. I don't think people listen to that, by the way. But it's so true.

It's just so easy to model things linearly in the spreadsheet versus a real, real company. Come on, Jim, like [ that ].

Of course. We just can't call when a study will start and finish in an aggregate for hundreds of millions of dollars. We just can't do it. But we can call a year pretty well. And we've done that, I think, really well. And we feel that we can call the sort of 3.5-year guidance that we gave you very well. And we also have a lot of efficiency gains that will be coming through in '23 and '24, in large measure through this digitization work that we're doing, which will save time, reduce manual activities, get rid of some of the white space, improve the connectivity amongst the parts and pieces of Charles River and with our clients. So we do see some of that, for sure, coming to fruition regardless of the labor cost. And that's all -- that was always sort of -- I don't want to say -- I hate to turn back on [indiscernible], but that was more in the outer years. So -- but again, not nearly impossible to call at the moment how that will unfold, except we're quite confident about the overall 22.5%. And we've got a fair amount of feedback -- pushback from people saying, why is it better than 22.5%. I frankly think it's a bit greedy.

Well, yes. And I mean, I guess, some people a little spoiled by your overachievement on your prior long-term goals. So that's what you get for being the [indiscernible]. So yes, and maybe just -- I know we added a couple of minutes left, but maybe can you just talk us through some of those digitization projects and sort of how you see some of the specifics about how you see those unfolding and where the benefits were likely to accrue?

Yes, it's been fabulous. It's a very comprehensive exercise. We haven't sized it because it's kind of operating our business. It's not -- it's going to be forever. It's about the fact that we have thousands of clients with thousands of molecules, and the scalability of this business is dependent upon connect -- enhanced connectivity. It's got to be digital. So if -- pick your business, but we're sort of starting with Safety Assessments, it's our biggest business. If I'm a Safety Assessment client, I should be able to find out whether we do a certain amount of study, whether we have a slot, get a preliminary price and design my study with whatever talking to a person, and probably initiating a study with [ ever ] talking to a person. And actually getting my data and only talking to one of our [ PhDs ] if something is equivocal, problematic or very positive and you want the nuances. And so -- If you think about that on a comprehensive basis, that really just accelerates everything. Probably requires less labor, not probably, definitely requires less labor and very much collapses the time. If we could do things faster, we take a lot of cost out of the system. We probably can actually [ charge ] for that as well. So while we can never promise our clients, because that's what they're doing that what we do, that we can assure them that they will get more drugs to market. We can promise our clients that we can help them get the drugs to market faster, that's what they pay us for. So we're all about that. So we're committed to take a year out of our development process. It's the whole digital enterprise and activity is all about that. It's about greater connectivity and speed, and it's about data utilization. And eventually more and more about design of studies using more AI machine learning to actually design studies. So use the data to predict outcomes. And so -- don't even start that study because we've worked on another 1,000 drugs like that that never got to market or let's use this particular study design. So we're very excited about this. Client feedback has been amazingly positive. They're enjoying work with our clients to roll this out and to capture it, and we'll continue to enlarge the multiple aspects of this and roll it out to additional businesses over the next year or 2.

That makes sense. Well, unfortunately, we are out of time. But, Jim, this was awesome. Thank you so much for joining us today. Look forward to connecting again as we get into the new year. But thanks again for your time today.

Thanks, Elizabeth. Always a pleasure.