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

Great. Well, thanks for joining us here at the Citi Virtual Healthcare Conference. I'm Patrick Donnelly. I'm the tools, diagnostics and CRO analyst here at Citi. Excited to have Jim Foster, CEO of Charles River, here with us today. A very topical time in CRO land to discuss a bunch of different variables. [Operator Instructions]

But Jim, maybe we can just dive in, maybe not surprisingly, we can start on the funding environment. That's been the biggest question all week, even all year, but certainly has intensified in the last week or so. You guys put up good results. Obviously, you talked really bullishly about the bookings environment. Maybe you can just talk about the biotech funding elephant in the room. Obviously, again, your commentary, your peers' commentary certainly seems positive outside of one obvious outlier, a kind of your smaller peer. Clearly, the funding environment on the public side is going to be down a bit here in the biotech land. I guess how do you kind of take that? Obviously, the funding environment over the last 2 years has been really strong. It's coming down. I don't think that's surprising to a lot of people, but it's a big weight on the group. I guess how do you look at the funding environment versus the commentary that you have? It's again very encouraging, bookings out to '23. Maybe just talk through the 2. Feeling like sentiment versus fundamentals are a bit dislocated, so it would be great if you could just dive in your thoughts on the funding environment and how that kind of measures up to where you -- what you're seeing in the field?

Sure, happy to. I think some other commentary by other companies is interesting, but not just positive or, to some extent, relevant to how the world is occurring for us. We're obviously focused to a large extent on what the funding environment looks like as we interface with our clients and talk to them a lot about it and watch the numbers. This has been a sort of a cause célèbre for a long period of time. We've got conversations with analysts and shareholders for a decade about this, so kind of when is the funding environment going to slow? So we sit here today, we've got -- we have clients with probably 3 years of cash. '21 was the second best year in kind of biotech history. The fourth quarter, which had a lot of focus, the fifth best quarter ever. Yes, I mean the year has started, where are we -- nearing the end of February with IPOs and follow-ons being a little more difficult. By the way, it's not the first time that, that's happened. Nobody has any line of sight on how long that's going to continue or what the impact will be. So probably some companies that are short on cash, that were counting on a secondary, that will be problematic. We have thousands of clients, and we're working on thousands of molecules all the time, and the value of our business model has always been that we do lots of work for lots of companies across a very broad portfolio. And companies get bought, sold, go bankrupt, the drugs fail, the drugs succeed, and yet we have very low volatility in our business model if you go back a decade and look at our performance versus what we say. So I do think, with a canary in the coal mine, I do think that if there is any legitimate concern about access to capital that's real, we're going to hear it from clients, maybe all over the world. I understand, albeit smaller ones, on some early and consistent basis, and obviously, that would concern us. And we would we sort of massage both the headcount and capacity to meet that. But we've heard -- we haven't heard anything from any clients at all, literally, so thousands of companies. We have no bad debt. Virtually no bad debt. And it's actually the inverse of what your question asked, which is that we have the strongest demand we've ever had across our portfolio, particularly for Safety Assessment, which is our largest business, which a lot of our investors focus on with bookings already well into '23, with escalating prices, with people getting in line, with people appreciating the fact that we're providing a service that, for big pharma, they either can no longer provide themselves or don't want to provide themselves, that with small and medium, even large biotech has no internal capacity to do it themselves. And you also have to remember that while the capital markets are obviously a significant source of funding for these companies, there are also biotech companies who are also getting a significant amount of capital directly from big pharma who relies on them for discovery. And the venture capital firms seem to be accelerating the rate at which they start new funds. And so a fair amount of our work is with brand-new, highly virtual kind of start-up biotech companies. So no evidence at all that this will adversely impact our growth or that our clients are concerned about it. We'll continue to watch it closely for early signs should this occur, but we don't see any evidence that it is occurring. And I think people are overreading the market. Maybe the report from that one company you talked about caused it. I get it. I get it because that's an area of concern that shareholders have had for some significant period of time given how good the funding environment is.

Yes. That's a really helpful overview. And I guess on that topic there at the end, kind of the misreading of the market. I guess, what do you guys look at in terms of, I don't know, a leading indicator? Is it just conversations with customers, again, to your point? You guys have really good visibility at the moment, out probably farther than you had. I guess how do you get comfortable that again, what we're seeing, given the past few years, is not surprising to a few people. But I guess how do you get comfortable that this funding environment softness, doesn't all of a sudden cause [ omission ]? I guess what's kind of the leading indicator for you guys? Is it just customer conversations, to your point, with thousands and thousands of customers?

First of all, brand-new clients, it would be an extensive analysis of the balance sheets to make sure that they were solvent and could pay for what they were ordering from us well out into the future, so we're looking out that far as I said. While occasionally it happens, we have -- I can't remember the last time we had a bad debt, which is an amazing statistic, right? So people, our clients, are extremely well financed. We have hundreds of people talking to thousands of clients on a daily basis. Kind of as we end the year, particularly in the fourth quarter, we have intense conversations with our clients about what the number of products they have in development are, how many of those they'll be outsourcing, how many they'll be outsourcing to us and what's the time frame associated with that. And then, of course, we get the pricing conversations out of the way. So I would say we have an exquisite understanding of the puts and takes of the client base, what they are concerned about, what the capabilities are. And as I said before, I do think if there was any evidence of concern, we would hear that, and we're seeing just the opposite.

Okay. That's helpful. And then, I guess on kind of the emerging biotech field, small biotech. Do you guys have a sense what your exposure is to those really small -- and everyone kind of defines it different ways, whether it's under $100 million of R&D, is it $200 million R&D, whatever it is. Do you guys give some sense of what your exposure is to those really, to your point, I mean, you guys obviously check the sell and see their balance sheet and feel good about your customers. But maybe just high level, if you have a sense of your exposure to the really early stage, really, really small biotechs versus the more established loans?

It's probably a 1/4 of the drug companies that we deal with, large and small, to the Safety Assessment, which is principally what we're talking about here even though we have a much larger company. And while the pre-revenue is small, they're typically really well financed. So they have a technology. They have a molecule. They have some -- they have IP. They have a shot or 2 on goal. Usually venture capital-backed with sufficient money to get them usually to proof-of-concept. And so those companies, in some ways, are the most intense in terms of having us move quickly, are less price-sensitive, are very interested in our expertise and our ability to bring them over the finish line, particularly with regulatory knowledge and some understanding of perhaps the type of -- the specific type of drug that they're working on. So it's not as significant, but it's probably 1/4 of those.

Okay. And you mentioned you kind of have people who do an exercise and look at the balance sheets of your customers. I mean a lot of people are asking about this durability of cash, how many years of cash are on the balance sheet. Do you feel like it's a few years? What's kind of your guys take on that?

We do. We do. We still think there's probably 3 years of cash. And of course, I've just said that '21 was the second best year. So it's a plethora of more cash that came into the system, and the fourth quarter was fine. And this kind of violent reaction to the slowness of IPOs, it's happened many times before. So nobody has any idea. There are opinions, of course, but nobody has any idea when this will [ normalize ]. No. Is it suddenly going to come [ running ] back in March or the second quarter or tomorrow? I don't think anybody knows that. So -- and I think companies will make other plans. They get cash elsewhere. Maybe they'll do less work, but that's going to be a really small number of clients that are counting on secondaries, may accelerate sales or combinations of companies. So we stay close to those. As I said, they come and go and merge and go bankrupt and get sold, and we really don't feel it. And that's the kind of the strength of our business model.

Okay. And maybe last one on funding. I did promise that I would not ask all the questions on funding. I guess when you kind of look around, one of the questions we get is the cash is there on the balance sheet, but maybe some of these small biotechs might treat it differently given the funding window is, I don't want to say closed, but it's not quite as open as it used to be. Again, maybe they'll be a little more conservative in terms of trial work. It just doesn't seem like that's what you're seeing or hearing at all.

We're not seeing it, and interestingly, I'll assume this -- what I'm about to say is implicit in your question. We actually don't see it the other way. So when that money is pouring in, business is steady and strong, but we found the biotech companies to be very thoughtful with the way they spend their cash. And so I don't think we're going to get whipsawed one way or another if all of a sudden, it pulls in or it pulls back. I think they have a sufficient number of cash to get their molecules to some point, some [ piece ] of commercial and economic point without having to slow it down. So we don't anticipate any sort of change one way or another. We've been doing this a long time with lots of biotech companies as they grow and progress and becoming an increasingly more important part of the sort of pharmaceutical universe and, of course, a much more important part of our client base, and it's been one of the reasons that we're growing more quickly, one of the reasons that we have more beneficial pricing and one of the reasons that I think we have greater visibility. So client base is really important to us, and I think to the development of modern medicine generally.

Yes. That's helpful. And then at the Analyst Day, I thought it was -- which it doesn't feel like it was so long ago, but one of the comments that kind of stuck out to me is you've obviously been in the industry a long time, kind of said this is the best backdrop, this is the best environment I've ever seen for what we do. I mean, do you still feel that way today?

Yes. I think it's better than when I said it. I know it was last May, because this kind of booking kind of a year in advance is -- it's elongating. And I'm not going to tell you the clients are thrilled about it. I don't really know how they feel about it, but that's the supply and demand quotient right now, right? There's x amount of space, there's an x amount of clients, and we're working with them to prioritize their molecules. And then they're getting in line and I think it gives us -- so I think that's a manifestation of the overall demand, the competitive environment, some enhanced patient level on the [ priority ] clients. And I think they're working more strategically and thoughtfully with us. We're really a partner. We're not a vendor, I mean, I hate that word. It doesn't describe us well. So I do think the demand has intensified, and you're seeing that in our guidance. So we had 12 -- a little over 12% sort of pure organic growth last year. Our guidance this year is 12.5% to 14.5%. So if you take the midpoint of that, we're guiding to increase and intensify growth across the whole portfolio. Obviously, DSA is the biggest piece. And that makes a lot of sense, given just the sheer number of new companies and the new science is being used to develop and treat a whole bunch of unmet medical needs.

Okay. That's helpful. And then to your point there, maybe we can pick up on the bookings side. Again, I thought one of the most encouraging metrics you guys gave on the call was the bookings going out to '23, which feels like the longest it's gone out. The visibility is among the best you've had. I guess can you just talk about that dynamic? Is it just, to your point, these customers need the capacity, they want to book it out as far as they can given the demand environment? I guess, what's causing this elongation of the booking cycle? And is it the most visibility that you've had in your time?

I mean it's the things that I said. It's lack of capacity internally. So that would be big pharma and big biotech. They have some, using less of it than they used to. Definitely not building new space and often decommissioning the current space or repurposing or often selling it actually. So you have that. You have biotech, who never had any internal space and never will. So there's constantly new work. You have new ways to treat diseases working both on a commercial basis and on a scientific basis. So that's very, very promising. You do have the backdrop of a lot of funding. So there's a lot of work being done. So years ago when the business was more cyclical, the industry was more cyclical, there'd be a huge amount of spending on discovery, and then there'd be a long period of time where that worked its way through the pipeline through early and late-stage development and into the clinic and kind of going back and forth. And that's, of course, when a lot of the work was done internally. You don't see that now. You see a heavy emphasis on discovery. Most of the biotech companies are discovering and doing kind of late-stage discovery and often selling the molecule before they get to commercialization or Phase II. So all of those things, and then because the work is so much more complex, there is additional price, which is improving and increasing. That just feels appropriate to us. The studies are so complex. There's so few places to get the work done, whether doing it yourselves or going to a competitor of ours. There's a host of things that we do that none of our competitors do, and none of the big pharma either ever did or does now. So there are some things we do where we're the only place you can go. We get very good pricing on them. We need to be careful to be appropriate with our prices, but it feels good to be paid well. I do think that provides an opportunity for escalating operating margin enhancements, particularly in DSA, but also the whole company. I'd say that DSA would be the biggest driver of operating margin expansion since it's about 60% of our revenue. So that's a promising thing. And if you take the pricing and you couple that with a host of efficiency initiatives, that should drive better margins.

Yes. And maybe we can pick up on the pricing point there. You guys have talked about -- obviously, '21 put through a pretty good increase. I think you talked about a bigger increase in '22. Again, similarly, is that just being opportunistic given the demand environment, what you guys are seeing, it just makes sense to push these through? How sustainable should we expect this kind of annually? Because again, I think that's an encouraging sign that you're able to pass it on. It doesn't seem like there's much resistance, if any, from the customer base.

Yes. I mean they're paying us really for 2 things. Besides our capacity and know-how, they're covering our increased cost of inflation. And as I said earlier, they're paying for these complex studies. So it's unlikely that the slope of enhanced pricing is going to change. I wouldn't get into '23, it's too early, and I can't really predict it, but I don't see the competitive dynamic changing. I don't see the overall demand curve changing. I don't see, notwithstanding what we talked about for the first 10 or 15 minutes, I don't see the funding environment changing. And even if it did, I think it takes several years before there's any impact to us. And I would argue that, that could engender more outsourcing rather than less. But -- and then just the continued complexity of the work, the continued complexity of the molecules themselves. I mean, the knowledge base of cell and gene therapy, for instance, for all of us, the people discovering the drugs and developing them, is evolving. And so there's a learning curve that has to be paid for, and there's an expertise that has to be paid for. So we feel really good about the anticipated pricing dynamic going forward.

Okay. That's helpful. And I guess when you think about that 12.5% to 14.5% guide, do you think about it? Is it kind of a price/volume? Do you have kind of the way that each contributes, -- what's the right way to think about those 2 as contributors, if you break it out that way?

We don't break it out externally that way. But I mean, except to say it is both for sure. So we get substantial amount of volume and price. We've definitely had years where we expect it and believe we should get more price than we did for a whole host of market dynamic reasons. And both the volume and the price are escalating. And hence, the booking well into next year, and hence, adding [ $21 million ] more in backlog than the prior years, a really big number. And so it feels good to have that kind of clarity and visibility and to be working through the backlog with escalating prices as you move into the back half of the year, second half of the year, pretty much already booked.

Yes. Yes. No, I think that's an interesting dynamic that as the year goes, that pricing increase goes in, but it doesn't get revenue until a little later. It's a good point. And then you kind of touched on it there. I guess when you think about the year, that guidance, how much is kind of already contracted? And I guess, it would be a little more specific to the DSA piece, but I guess how much is already contracted versus is there incremental room to keep bringing in more capacity as the year goes? What's kind of the right way to think about that piece?

We don't break that out. I mean we're very busy. Capacity is extremely well utilized, which is always our goal. Having said that, we obviously have incremental available capacity to bring on new clients because we're signing up new clients all the time. We also -- since we're asking clients to tell us on a priority basis what they truly need to start sooner than later, and those would be often shorter-term studies. We're trying to reserve -- we are reserving some capacity for clients that have to start early just because of the competitive dynamic. So I think we're doing a very good job of accommodating clients who need work done sooner than later and also getting clients to prioritize and get in line and understand when they have to wait. That's a very -- I'd say that's a new dynamic for the last couple of years. It just has never been that sort of rational and thoughtful and respectful and balanced. I think that we've had years of imbalance with clients that, "I need this study this time in 3 weeks. If you can't start it, I'm going elsewhere." I guess that's the other part of the dynamic that I think if they go elsewhere, they come back and say, "Well, elsewhere doesn't look like they have capacity that allow us to start either." So that's kind of a good thing. Clients may not agree with me, but I think that's a good thing. Capacity is well utilized. So it's providing a much more rational supply-demand curve and strategic conversation with our clients. And again, I don't see what will change that dynamic.

Okay. Maybe to jump around a little bit. Cell and gene therapy, obviously, was a big focus at the Analyst Day, big vertical growth for you guys. Still a market that's heading towards commerciality, a lot of investment. How do you think about that market today? Again, do you need to see some successes to get investors to really believe in it? Obviously, it's a big focus for you guys in terms of some of your inorganic investments as well. So maybe just update us on your thoughts on that market, the growth potential and what you see there.

I mean it's a very interesting space. It's very nascent. So you've got -- and the number may have changed, but less -- I think less than 10 cell and gene therapy drugs have actually been approved by the FDA. So I would say that the technology hasn't been proven out yet or to put it more positively. It's complicated and the FDA really needs to understand it before they approve things that could have some maybe safety issues. Having said that, the last time we gave these stats publicly, there were about 3,000 molecules in development. Probably 2/3 of those were in the preclinical stage, so there's an awful lot of work for companies like us right now, and there are a lot of companies that can do this. And as you sort of referenced in your question, we've got more than 15% of our total revenue in this space growing disproportionately fast to the whole business. And with not only great connectivity between the 6 companies that we acquired over the last 2 years in cell and gene therapy, we're working really hard on bring them together, but also enhancing the connectivity with our legacy businesses, particularly biologics. So those drugs have to be tested before they go into the clinic, every batch, and if and when they're approved commercially, they have to be tested before they go to patients forever. So we love that. We have a big biologics testing business. And also our safety business would have done the testing on many of these drugs before they get into the clinic. So we think it has enormous potential, whatever it is. If, in actuality, it's better than people think, that will be terrific. If it's not, there's so much work to be -- there's so many molecules to be worked through, that I think that provides an enormous amount of work for us for a long period of time. There are also, interestingly, very few companies in the space right now, particularly on the CDMO side who actually manufacturing the cell therapy itself. So we're now manufacturing drugs that go right into patients. Pretty complex stuff. And there's terrific demand right now. So look, we think it's an area of great promise. Charles River is sort of raised on that purpose in this world is to provide drug development services for everyone in biotech and pharma and chemical companies as well are going to use us across all modalities. So both large and small molecule, and cell and gene therapy piece of this holds great promise. So we're excited about -- we like the assets that we bought. I believe we'll buy more. I can't promise that, but I believe we'll buy more. I believe we'll continue to sort of flesh out this franchise both geographically and in terms of the kind of constituent pieces along the drug development pipeline where we probably have still some subtle gaps. So we have a lot of conversations going on right now for potential M&A in this space, an area that we're obviously very excited about.

Yes. Yes. Maybe since you mentioned, just on the M&A pipeline, I guess, this clearly remains an area of focus for you guys. When you think about the M&A pipeline, I think a lot of people expects the volatility in the market maybe rattles out a few more sellers. Are you seeing more conversation, more inbounds than you typically do? Or is it business as usual, and you guys are kind of be opportunistic if that's a possibility?

Interesting question. I'm disappointed with the answer, which is that we haven't really seen much difference at all in terms of our conversations with sellers in terms of their expectations and evaluation and multiples and time frames. That could change. Most of the sellers are private equity firms. And if they're not able to monetize their investments because the market is tough, perhaps they'll sell earlier and perhaps the multiples have changed. But I don't -- I don't want you to overread that answer. We have a host of conversations going on as we always do. M&A has really supercharged our growth rate and made us, I think, more relevant to our clients. We're looking at cell gene therapy and heavily in our discovery space, we have some geographic moves, some lab science technology moves. We have actually a couple of things in research models. And interestingly, to your question, I would -- so we don't always know, but I would say that most of the potential buyers right now are other private equity firms. So less strategic competition, which should be a good thing and could be because private equity firms won't have the synergies, either cost or revenue synergies. By the same token, they have a lot of cash, and they have to deploy it. So we'll see. All those 6 acquisitions that we made over the last 2 years in cell and gene therapy were all private equity owned. And they were definitely full valuations, but very high-growth businesses. So I think those valuations go in tandem.

Right. Makes sense. And then I guess, organically, kind of internally, you guys have talked about kind of stepping up CapEx to build out capacity. Cell and gene therapy seems to be an area. Can you just talk about, I guess, the priority internally in terms of some of those investments, whether it's the CDMO side, to your point on cell and gene therapy, or just building out kind of capacity overall? Just where should we think about some of these internal investments going over the next year?

Yes. So we were spending about 6% of revenue in CapEx, kind of guided that, that was likely to move up to 7% and it's now going to be 9% given the guidance for this year. And it's very simple. It's basically a manifestation of our overall growth rate accelerated the overall scale of the company, which is larger, principally because of these cell and gene therapy assets. We have a bigger spend than we did last year. There's a bunch of maintenance CapEx that's required the only pretty big infrastructure, but I would say that most of the increase -- almost all of the increases is expansion related. And I'd say 2/3 of that is Safety Assessment-related, and some of that is CDMO-related. But I don't think the CDMO business is any more capital-intensive than anything else we do. Definitely not more capital-intensive than safety, for instance. We have a very sophisticated facilities. So I don't think we've moved into any businesses that particularly [indiscernible] change that paradigm. It's just that what we sell is space and people. So we don't have the space, we can't accommodate work, and the demand is increasing. So it feels like the right thing to do, as I think I said earlier. If I didn't, I'll say it again that we have to build space in many of our businesses well in advance, but particularly in safety, probably 18 to 24 months in advance. It's not all that different for discovery or microbial or certainly the CDMO business. So we have to get ahead of it. It's complicated because we have to call that right. I think we've done a very good job for the last decade in building slightly more capacity than we think we'll need so we can accommodate a year like fiscal '21 where we performed well ahead of our operating plan and be able to add capacity without adversely impacting our operating margins. So we want to continue to have operating margin accretion, no stain effect that we have all the additional depreciation. We built all that space. And I think we know how to do that quite well. We know how to add it to multiple sites and multiple parts of the world pretty much simultaneously.

Okay. That's great. And maybe we'll bounce around a little for the last 5 or 10 minutes. You mentioned microbial. I wanted to touch on that. I mean it's been a sustainable kind of double-digit grower for you guys for a long time. That's expected to continue. Maybe just an update on that business? I know you've kind of shifted to the razor, razor blade part of the business. And again, it seems sustainable, but maybe just kind of talk through the drivers there and expectations.

Yes. Very technology-laden business where we actually have IT -- IP, sorry. We have competitors. We feel that we're a generation or 2 ahead of them, and we have this huge installed base of these systems. I'm holding my hand up because most of them are handheld systems, where you're using a cartridge to get a reading. Pretty much most of the clients are using those cartridges daily and throwing them out. And once you have that installed base, it's the kind of gift that keeps on giving. It's a very high-margin business. We have more sophisticated and larger versions of that handheld that use multiple cartridges and we have these big robots that use dozens and dozens of cartridges. And then we have a couple of other businesses looking at not just endotoxin, potential endotoxin contamination but basic bacterial contamination. And a library business that I will tell you -- because the manufactured drug they tested, then they see that they somehow got contaminated, they have to figure out where and what the contamination and eradicate it. So that business has grown double digit almost the entire 25 years that we've owned it. It's amazing business. And we continue to innovate and spend. That's the only place in Charles River where we do pure R&D internally as opposed to licensing technologies from others. We don't see any evidence that, that business is slowing down any time soon.

Okay. Great. And then maybe RMS, I want to touch on that as well, not the highest growth part of the business, but -- maybe just talk about, I guess, U.S. versus areas like China, which are more growth oriented than the U.S. and where you expect I know -- you kind of talked about a mid- to high single-digit, I think growth rate at the Analyst Day for that. I guess maybe talk about how much is international. Are you seeing any changes internationally with some of the noise out there? Or is this kind of business as usual there?

And the growth rate of that business continues to escalate and increase. On the core animal business, we have slight increases in the U.S. and Europe. We have dramatic or significant increases in China, just given the scale of that country, the level of investment in life sciences and the competitive dynamic. That should continue for a significant period of time. We're also seeing significant growth in the services related to the Research Model business, particularly both investing and producing these genetically engineered models, which are great predictors in how a drug will work in humans. And also our Insourcing Solutions business and particularly the turnkey operations we have for clients to use at the moment, principally in Cambridge Mass in South San Francisco, but others popping up in other parts of California and in China, and we have some other geos as well. And then if you add on top of that the cell supply business, which should continue to accelerate over time, it's -- I've been calling it the renaissance of the RMS business. We're seeing accelerating growth rates. We've been operating margins moving in the high 20s. I do think that, that business can continue to grow substantially in all of those areas. I don't see any reason why that would slow down. We also have always gotten a meaningful amount of price in the research model business forever. And nobody produces their own animals, for instance. So we have a fair amount of pricing power in that business.

Great. And then maybe on the P&L side, you touched a little bit on margins earlier for areas like DSA with pricing. You just mentioned pricing in RMS. I guess how do you think about the levers on the margin side? Obviously, you guys gave some long-term guidance at the Analyst Day. But I guess we're seeing all this inflation. People always ask about the wage side. Labor, obviously, again, you guys seem to be offsetting it nicely with price in other areas. But maybe just talk about the margin construct where we should expect the most expansion. It seems like DSA is kind of the spot. But maybe just touch on the different segments and how you're feeling on the margin side there.

We're organized to drive operating margin improvement all the time across all of our other businesses. So I do think it's possible everywhere. It probably will be very much pronounced in DSA because of scale. Discovery continues to be more profitable. So that's nice to see, and I think that will continue. In the safety business, we're deploying a lot of digital technology to take a lot of the white space down in the process and to drive efficiency, which means less labor, less manual activity, continued significant pricing, enhanced utilization of capacity. And we still have some legacy businesses that we acquired that [ we promised ] on improving every year, but I think there's a ways to go. And on the manufacturing side, our biologics business continues to be more profitable. And right now, while we've guided to sort of mid-30-ish percent operating margins, that business has been in the high 30s previously. We have a headwind now in the CDMO business, which is less profitable. And what we will see is as that business scales and as some of the clients, we hope, go from clinical scale work to commercial work and we start to make larger batches of drug more regularly and we get to really fine-tune the manufacturing methodology, we should see the margins. I don't know if or when they will get better than the mid-30s, but they will get increasingly better so that they're less of a headwind. So -- and we see margin improvement in RMS. The cell supply business is quite profitable. The genetically engineered business is as well. The CRADL business is also, of course, we get price. So -- and that digital comment doesn't just apply to Safety Assessment. It applies to our whole portfolio. So we did say at our Investor Day last year, we did -- the operating margins would get at least to 22.5% by the end of '24. We definitely stand by that number. We'll take a look at it the next time we do an investor conference and decide whether or not we want to refresh that and if so, to what extent. But, yes, we directionally will continue to improve margin.

Okay. And maybe last one, I know we just have a minute. You talked about M&A. It seems like still a preferred use of cash. Seemed like on the call, you're kind of willing to be opportunistic with the stock I think, below $300. How do you think about, I guess, share repos in the near-term balance with, again, the appetite to continue to buy up assets?

Yes. So strategic M&A continues to be the preference for sure. Everything is contextual. We have -- at the Board level, we look at the totality of our cost structure. We look at our leverage. We look at the share price, and we look at available acquisition targets. And everything is on the table all the time, right? So what's the best utilization on cash? I'm not going to predict how that might change except to say that we look at it periodically, and we will, as we have historically, I think use our cash in the most beneficial fashion for our shareholders.

All right. I think we'll leave it there, Jim. So it was very helpful. I appreciate the time. We'll talk to you soon.

Thanks so much.

Thank you.