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

Hi, everybody. Thanks so much for joining us today. I'm Elizabeth Anderson. I'm the health care technology and distribution analyst here at Evercore. I'm thrilled to be joined by the famous, Jim Foster, CEO of Charles River Labs. And one administrative note before we get started, there is a separate chat log in. So if you have any questions, feel free to drop them in there. Thanks so much for joining us today, Jim.

Sure.

How's going on across your many businesses. Maybe we can start with the CDMO business. I mean you obviously started on your last earnings call, you were talking about some of the early improvements and then with sort of a more of them coming next year. Where are we in terms of like hitting those milestones and getting that business sort of back to where you'd like it to be?

So Elizabeth, it's been a year of transformation for sure. We bought several cell and gene therapy/CDMO businesses in a relatively short period of time, a couple of years. They sometimes companies are available when they're available. So there was -- it's definitely been a lot to integrate both geographically and otherwise. As we said in our last couple of calls, we really retooled the management team, the sales organization. We have a much better understanding of the sales cycle, which was longer than we anticipated. We finished brand-new capacity at 3 different and the 3 primary locations and made them centers of excellence. Work is definitely picking up from a client point of view, probably the most positive thing that's happened is we had an EMA audit in our Memphis facility, which is our cell therapy manufacturing facility, which -- that's the regulatory agency kind of European agency that is comparable with the FDA. That was a really positive happening. So that kind of validates our regulatory compliance and strength and quality facilities for others. We have a bunch of clients for whom we are making clinical trial and lots of products. Several of those clients about the finished Phase III are finishing, and we are in conversations with them about scaling up to a commercial quantity for them. Complicated thing to do for them to sort of understand what the scale will be, what the revenue contribution will be, what they'll charge for the drug, et cetera, et cetera, particularly since cell therapy is so new, but very exciting stuff. And obviously, as we move from the clinical genre to commercial, we have graded our rapidity and consistency of manufacturing. It should be more efficient. We should be paid better because they're getting paid better. And so, all I can say is it's been a challenging year for sure. We've been 100% transparent about that. It will be a much better year next year. They are easy comps. I mean, obviously, I have to acknowledge that, but I do think that the businesses will be performing well. They're behind their acquisition plan from a return point of view, but I do think they will ultimately return in excess of our weighted average cost of capital during sort of our standard time frame, which is between year 4 and 5. So quite confident that, that will still happen. So we're pleased with the trajectory of the improvements that we made, not done yet. Integration is still working hard on it -- integration with the legacy Charles River businesses, particularly biologics, and secondarily, safety is also critically important. I'd say that's going really well. That's a bit more straightforward. So those businesses that we've been running for years, and we're quite at it. And I think those are distinguishing and enhancing features between us and competitors in the CDMO space.

No, that makes a ton of sense. Do you think there's also potential for the sales cycle to sort of change again? Like I'm almost wondering if some of the sales cycle elongation is just kind of getting out there to the market they're like, yes, we now have a CDMO business and that's sort of something else that takes. I mean you guys have announced some wins since earnings and since over the course of the fall. But it's almost like you have to build that you're in this business now.

There's no question that there's an educational when marketing process going on. People know that what we do in cell business and then the safety business and in our other businesses, but this is new to everybody. Certainly, new to us. So there's some of that for sure. Some of us having a better understanding of the cadence and when we talk to the clients and where we will be a month or 2 months later. I do think of the product side of the CDMO business by definition, have a shorter sales cycle, so the plasma DNA, principally in the viral vectors than the actual production of the product. So I think we have a better line of sight there. I think we've done a really nice job retooling our product portfolios and having centers of excellence. So rather than, for instance, making viral vectors in the U.K. and the U.S., we're just doing it now in the U.S. And so we're able to focus and have our talent to be focused there and have our clients understand that. So we've had an awful lot of trade show client interface, scientific posters and papers in the fourth quarter. So what we do now is critical to what the sales will be in the second and third quarter of '23. So time is of the essence. So yes, we're trying to accelerate the educational process and also present sort of a blueprint of what it looks like across our whole portfolio which definitely distinguishes us from other CDMOs who are pretty siloed. They can manufacture a drug, but it can't test it and they can't do the safety work either.

No doubt, that makes sense. And then maybe just to sort of talk about your -- probably your favorite question over the last 11 or 12 months. How is the demand environment going with the biotech funding?

So it's a tale of 2 cities, and it's very interesting. So the demand pretty much across the board for what we do with a couple of exceptions, but certainly for safety, which is our largest business by far, the demand has never been as strong. So as we reported in the second and the third quarter, we're booked well into '23 and some studies into '24. That's unprecedented. Not only are we booked well into '23 and '24, but we are doing so at escalating price points. So you're paying significantly more in the back half of next year than you are in the back half of this year with virtually no pushback, which is fabulous. And the demand's been great across the research model business and parts of microbial and biologics and so demand curve is quite good. We see very little from our clients about concern about funding. Virtually nothing from the safety clients, a little bit from Discovery, but it's more about their actions than what we -- they tell us. So if they're working on 4 drugs, maybe they work on 2 now and they pause a little bit. The interesting there in Discovery is the proposal volume is higher, continues to increase. That's kind of an interesting, good sign. So while there's some hesitancy about locking things down, particularly with clients that have less than 2 years of cash, we're quite confident that if a client has less than 2 years of cash, but they actually have a very promising drug for an unmet medical need, they will get it financed, probably from big pharma or another round from the VC partners. We are starting to see some secondaries now. So some of these companies who went public perhaps prematurely, are getting financed. So just to put a fine point, I know you know this, Elizabeth, but people listening probably don't. It looks like the whole funding paradigm for biotech will be comparable to 2019, which was a really good year.

2019 or 2002?

'22, yes. 2020 was a better year and '21 was a crazy good year, but '19 was a very strong year. And the third quarter -- the quarter we just finished on this year is the fifth best quarter of funding for biotech. So funding is fine. People are nervous about the IPO market, and I get that. But look, we always have a little bit of churn. We -- there will be 400 new companies this year created by the venture firms, many of those companies will work on. So we don't feel -- there is churn in our business model, we just don't feel it because we have thousands of clients with thousands of drugs. So -- look, we obviously watch it, it's not just because the shareholders are watching it, but we're obviously interested in our clients being well funded. I would say that it feels like they're very well-funded, and we hear very little otherwise.

Okay. No doubt. That makes sense. And then if we just think about just in terms of the backlog visibility and sort of stability of that, like if I am a biotech and I say, hey, Jim, or I'm like I know I had that study in backlog, but like I'm freaking out, can I cancel, extend, move, like, can you tell us like how solid is that backlog?

It's solid. So back -- it's never been this elongated. So that's, as I said before, that's unprecedented. But we always have what we call study slippage, always. It's about -- we haven't finished formulating the drug. We're not sure that the animals will tolerate, or the people will ultimately tolerate it. So we're still at work or we've reprioritized either that particular drug or that therapeutic area. It happens all the time. It's usually test article, which is our term for the drug not being available when the client thought and they say, we got to push it a month. Particularly with the backlog this pronounced, we can almost always slot something in immediately. So there's no churn. There's no variability. Cancellations, almost always have a penalty. So sometimes with a very big client, it gives us lots of notice. And if we can slot something else than maybe not, but usually there is. So I'd say that we're managing that well and the backlog is our friend with regard to slippage and cancellations.

Sure. No, that makes sense. And then if we think about pharma demand, I mean, that tends to be something that's broadly held up across the course of this year, but maybe pulled back slightly in terms of broader R&D spend, but still growing like what are you seeing in terms of like pharma RFP over the recent months?

So I would say that pharma demand is -- I'm assuming your stats are accurate, are dislocated from R&D expenditure percentages, if those are flat or down. I'd say that our pharma business and the demand from pharma is as good as we've ever seen it. They have become very aggressive outsources. They've acknowledged that we can do so much of the work that they historically did faster at a better price point, and these days with much better science. We've just -- over the past year, we don't call them out anymore, but we've renegotiated a bunch of very large multiyear deals with very big pharma with escalating prices. They get better pricing because the contracts are so large. But while we have more revenue and a higher growth rate with biotech, the chunks of business that we get with big pharma are much larger, and it's a very strong part -- particularly strong part of the demand curve at the moment.

That makes sense. And is there anything is one of the trends, obviously, that people are thinking about, and I think you alluded to a little bit in your statement is like biotech gets acquired by pharma instead of doing another funding round, does that sort of create any short-term disruptions to the demand environment? Or do they usually just sort of continue the current program and it gets looped in later to that pharma company's broader program?

All over the place. But most of the time, they bought a company because they have promising drugs, neither the company that they've acquired or most of the time, not all the time, the acquirer has internal capacity. Certainly, if we're already -- if the acquired biotech company is already a client, that work is just going to continue. Unless they skinny down the portfolio, which can happen, but there's very little variability and volatility connected with that as well. So we don't have any control over it. We watch that carefully. Most often, the acquirer is already a client of ours, with regard to Safety Assessment field. And so it could actually work the other way that target wasn't a client of us, but the parent was, and the parent will ask the target to utilize us.

Got it. No, that makes sense. Could you -- I know this has become a hot topic this fall, but can you sort of provide us an update with supply situation given recent developments, there's been a lot of speculation and whatnot. So how does that -- what's the lay of the land right now on that?

So very complex. NHP situation is always complex. It's a very fluid situation, and NHPs have been an increasingly higher demand over time as biologics have exploded and that's kind of the model of choice for testing biologics. And during recent times, we've seen analysts and media reports talk about pricing and supply chain. And most recently, there's been an indictment of one of the Cambodian NHP suppliers. So we get a bunch of our NHPs from Cambodia. Charles River was named or referenced and these proceedings that charge the Cambodian supplier, there were also a couple of Cambodian officials that were named in this indictment, and we don't have any direct contacts with that supplier either. So the supplier runs a follow of the sort of transportation and shipping laws with the Department of Justice and they pulled back. So we have -- as we've talked about a lot, we worked arduously for the last few years, in particular, to have additional supply sources, which we have. We have multiple supply sources and multiple suppliers in individual countries, including Cambodia, but Cambodia is still the primary country of origin of most of the imports into the U.S. and into Charles River. But in light of this indictment and subsequent statements made by the Cambodian government, we anticipate that for some period of time, there's going to be some disruption and difficulty in getting NHPs into the U.S. That is speculation. We have no idea how pronounced that will be, how long it will be. And as I said, it's totally fluid. Obviously, we're working really hard to mitigate any potential adverse impact with other supply sources with our current supplier in Cambodia, with government, et cetera. So we're all over this to enhance and improve our supply arrangements. And I guess the last thing I would say is we work really hard with our supplier due diligence in terms of their management practices, veterinary practices, shipping practices, husbandry practices to ensure the quality of the supplier relationships and to ensure that what we do is fully compliant with U.S. and international regulations. So really complex of situation at the moment, more complex by the fact that one of the big suppliers from Cambodia, who's not a supplier of ours is unable to ship. So that's going to hurt some folks. And we have a little bit of a dialogue from government officials who were displeased with the action taken by the DOJ with regard to one of the Cambodian suppliers. They were, I think, defensive and a bit reverent about the U.S. government saying that things aren't being done well that there's -- we're concerned about some pushback by the government. So we don't know that for a fact, but watching it closely. So I would say that the complex NHP situation at the moment is more complex, but we're confident that we will work through as well.

Got it. And then when do you sort of see like from a COVID perspective, like obviously, there's been changing in the supply arrangement. When do you see that supply constraint kind of easing? Is that like a -- like a cross 2023 event? Is that more of a 2024 event in terms of supply increases in that market?

Tough to say. I would say as a general proposition, we have had a sufficiency of supply for '22. And directionally, have had -- have developed sufficient supply for the next fiscal year, subject to our now concern that the government of Cambodia could be problematic. So I think that we have and will continue to do a really positive job in staying close to our suppliers, increasing our relationships with our suppliers both contractually and otherwise, we have some joint ventures. We have the elongation of contracts. We have new geographies. COVID made it a little bit difficult for us to go and inspect all of these facilities. Facility that we work with in Cambodia is extremely high quality one, all the ones that we work with are high quality ones. So we'll keep up that oversight and our intention, obviously, is to work really hard. So we don't have any disruption of supply for ourselves and obviously for our clients.

Okay. And I understand if you can't comment on this now. It just actually came across that your stock got halted. Is there anything you can say on why that might have happened? There was a new breaking news phenomenon in a conference chat. Okay. I guess there's an 8-K that just came out.

I think it's related to the fact that an 8-K came out contemporaneously without conversation, which talks about what you and I just talked about, about the whole Cambodian situation. So there's obviously some reaction to that. Since I haven't seen it either since we're chatting, I don't know more about that -- I'm sure it's related to that.

Yes. Yes, it is. Okay. It does do that. Okay. So all right, for those people -- everybody who's listening, the 8-K, just hit. So if you take a look at it, they have 3 statements and being about not being named in the DOJ proceedings, the difference in the supply sources and then the continued mitigation efforts in terms of supply. So everybody can roll that up. I've never had breaking news. This is a new experience for me.

And the 8-K is comparable to what I just said verbally. So -- it's a restatement of that.

Got it. Okay. That's real-time information, while you're actually answering the question, that's a good timing, I guess. Okay. So in terms of maybe going on in terms of I think you said a little bit of like an air pocket in demand in terms of the Discovery segment more broadly. What -- how is that developing? And are there things you can sort of do to like move studies around to sort of fill that in near term? Or how should we think about that?

Yes. As I said, Discovery is kind of interesting. Proposal volume is really strong. So directionally, I think that business has some opportunities to improve. I think we have a strong franchise scientifically and geographically, and there's also a really strong, meaningful connection between the Discovery business and the safety business, which most of our -- or many of our Discovery clients -- sorry, competitors don't have. We do a lot of discovery work, not just for small companies, but for big pharma as well. And we do work for them usually after the very, very earliest phases of discovery, it's sort of a late-stage discovery situation. So -- we like our portfolio. It's scientifically rigorous. There's a little bit of hesitation as we -- as I said earlier. And while the clients aren't particularly verbal about, it's definitely tied to some questions and concern about what the funding environment looks like going forward. I would say that the proposal of volume improvement is a bit of a manifestation of some perhaps change in the way they're looking at things. And it hasn't changed yet. So I don't want to say that, but we would be optimistic that, that business will improve as we move into next year.

Got it. And sorry to just circle back on this one more time. Based on the 8-K that you just obviously put out, is there any financial like near-term financial impact from this, just to make sure that people understand this and hopefully clarify that.

No near-term impact. So that will have no impact on the guidance that we have out there for '22. It's way premature to speculate on '23 because this is late breaking. A lot of this is late breaking for us as well. And so as we strengthen and shore up our supply paradigm and as we take another look at price and see what the Cambodian government does or doesn't do, how this thing continues to unfold, we'll provide more clarity then that, but it would be sheer speculation at this point of time.

Okay. But presumably, you will keep us posted, as you know?

Yes, indeed.

All right. Okay. Perfect. That makes sense. Okay. So if we think about sort of your capacity expansion from your sort of new CRADL and Explora sites. There was an announcement about Chicago and, et cetera. Like how do we sort of -- how are you sort of expecting that pace to continue vis-a-vis sort of what you've talked about in terms of demand? And just maybe for the back half and if you can comment on '23.

In some ways, the CRADL/Explora business is one of our best businesses. it's quasi recession proof. I mean I think the tougher the economy is the better this business is. The more clients, large and small, it's quite interesting, we try to -- we would only have small tenants, and we have really a bunch of big pharma tenants as well. So clients are hesitant to rent or build or buy space. And so utilizing our capabilities has been really a terrific business. So we continue to open new facilities. Chicago is 28th site. We're approaching 400,000 square feet in the aggregate. Margins for our historical Explora business are exceptional margins -- sorry, margins for our CRADL historical business are exceptional. Margins for Explora are good. They're not quite as good as ours principally because some of the facilities were smaller. I think directionally, as we said when we bought the business, we'll be able to improve the margins of the Explora piece and hopefully, the whole -- all of those businesses. . So like them a lot. We're definitely not done opening facilities. And I would say that the other sort of subtle aspect of this business is the fact that we've got people in there doing sort of early research studies and if and as the drug progresses. And we're either just taking care of the animals, helping them run the study or literally running the study for them, but as the drug progresses, we're likely to get straight up discovery work and hopefully, safety work. So I think on a see-through basis, if you were to look at the P&L of this whole business and what it would accrue to, it's actually a more important business strategically than it might appear to be on the surface. So we love the deal. The integration has been really smooth and straightforward. It's a business that we're in that we do. This was a competitor of ours. It adds geographic proximity and space. Clients are thrilled with it and it's really tracking exactly as we anticipated when we did our valuation model.

Got it. And can that capacity be flexed. Like let's just say in some in a hypothetical state, there wasn't as much demand. Can you kind of flex it up and down? Or is that not quite the right way to think about it, you're kind of bringing it on board as you sort of see longer-term demand, but once it's on, it's sort of part of the basin?

Yes. I would think that it's very well utilized. So space is pretty full. I think the only flexing is flexing up when we open something new. We don't open anything new without clients already indicating that they have an interest. They haven't necessarily signed, although sometimes they have. So we're moving into geographies where we have client demand, limited competition and a pretty good appetite for the space. So our concern tends to be the exact opposite of your question, which is while that's held fast and than we had thought, now we need another space wherever. A lot of space is opening up in and around Kendall Square and South San Francisco and now San Diego, with this acquisition, Cambridge, England, et cetera, Shanghai, et cetera, et cetera. So we will continue to add space as long as the demand continues. And I don't see what would slow that down, particularly if you go back to my opening statement, which is that this is somehow correlated to people really watching their cash and being part of the whole outsourcing paradigm.

Okay. That makes sense. And maybe because you just made a side reference to China in a totally different context. Can you sort of help us understand sort of what's the current situation in China vis-a-vis sort of like lockdowns? And how that's impacting your business? And then, how do you sort of -- are there any sort of new thoughts in terms of the broader expansion plans in China outside of some of the largest cities that you've talked about historically?

So we had modest adverse impact in the second quarter from the lockdowns, then in the third, little, if none in the fourth, although I read the news like everybody else. So there's a lot of lockdowns going on. It would have to be a lockdown that adversely impacted our clients' ability to receive the animals. So -- and I asked about this yesterday to our Chinese operations. So at the moment, not a problem. We'll watch that. And I think if it's a problem, again, it will still be subtle. It was mostly academic clients for some reason they closed. We're -- our strategy -- our business there is primarily the research model business, although we have a small microbial business. And it's all about geographic expansion in a very large country. So we started in Beijing. We moved to Shanghai. Then we moved west China to Shangdu. Then we moved south to Shanda. And then we moved to central to Wuhan. . So we've got all of those facilities now. Small cities, have 5 million or 10 million people. So -- and you've got big research centers. They are in a really significant investment. So we got pretty small fragile competitors. Really have no -- we have really no non-Chinese competitors. So we're competing with, I don't want to insult them, but relatively unsophisticated competitors for no other reason than the business is new to them, and they think it's more straightforward than it is. So that business is growing very well. Really nice operating margins. Obviously, a lower cost structure and price point, but margins are comparable. We have a service business that is growing up around the research models, including CRADL business, including genetics business, including a laboratory business, which we call RADs because that market needs it exactly the same. Besides the political tension, which we'll put aside for a moment, from a pure business and market point of view and assuming the government wouldn't interfere with us, it would be an attractive place to continue to grow our franchise. I think that's not possible because we're not going to greenfield anything there, except maybe new research model facilities, and the valuations and price points of anything that we would want to buy, let's say, there's a tox company over there that we would love to buy and they would like to sell, with the multiples like 5x what it ought to be. So we're just not going to do it. We're not going to chase it. We're not going to overpay for things. And if you combine that sort of unreasonable price points with the potential government interference or tension, we're kind of happy with our Chinese footprint right now. The government, assuming they even acknowledge we exist, I think they respect us for 2 reasons. One is we bought an existing Chinese company, we didn't buy all of it. So we own most of it now, but I think it's kind of have always looked at it as a Chinese enterprise. And we've elevated the craft so dramatically in terms of the pristine quality of the animals vis-a-vis Chinese competitors that they -- I think they appreciate what we're doing for the researchers in China. So they're leaving us alone both from a regulatory or taxation or an interference point of view. In fact, I would say, for the contrary that they've been pretty supportive of what we've done over there. So for the foreseeable future, I mean, the economics could change over there. We're going to stay focused on our current footprint in China.

Got it. No, that makes sense. And I think you've sort of talked about it previously, but just in terms of -- and you just mentioned it in your last question, mind on that, in terms of like M&A, you've obviously -- you're digesting the CDMO acquisitions, and that was definitely something that pace of acceleration -- pace of acquisitions accelerated in the past couple of years. Do we consider just kind of you're pausing now and that we should consider that would perhaps maybe increase again as we think about the back half of '23 or something like that? Is that kind of like the right framework to think about it?

That's a possible framework. Look, we did the Explora deal even in the midst of the integration challenges with the CDMO business because, a, it was available; b, it a business we know well; c, we had pursued it previously; and d, it strategically enhanced our portfolio. So it's possible. We do these small technology deals. I could see maybe one of those small deals comes available, we have these predetermined takeout formulas or right of first refusal. Or another -- we have a bunch of conversations going on right now in M&A, and it's possible that we can't get control of the timing, and it's totally unrelated to the CDMO business and we could pull the trigger. So that's possible. I would say that the pause, if we -- just to use your word, is, we're certainly not going to add any straight up CDMO/cell and gene therapy assets until we get the current ones seeing performing extremely well, being accretive to top and bottom line and getting us the returns that we want. Having said that, there's something else that's totally unrelated to that, that we might want to do, as you say, sometime next year. Our balance sheet is really strong. We continue to pay down debt. We have great borrowing power. And we do have always multiple conversations. So I know what the next 5 acquisitions are that we'd like to do. I have no assurances that we'll get them done, but we're going to keep those conversations moving. And since most of the sellers are private equity firms, we want to continue to make it known that we are a potential buyer. So I think that will work well. We're growing nicely. We don't buy companies just for the fun of it. I would be surprised if we don't do something in '23, but I wouldn't be disappointed. So if we don't do another M&A deal, it was because we didn't like what we saw when we got into the companies, the price points were too high, the challenges in CDMO got worse, which I don't think will happen. I mean there's all sorts of reasons why we may not get some deals done. I'd say given our history over the last 2 decades, it's more likely than not that we'll get a deal or 2 down now.

Okay. That makes sense. And sorry to circle back around this again, but you'll be happy to know that when your 8-K dropped, the attendance in the session doubled. So -- and there are a number of additional questions, which are sort of all sort of similar and maybe related to the 8-K. Is there anything you can say on either one, the percentage of revenues from NHPs and then -- or maybe like the percent of NHP supply that comes from Cambodia and sort of like -- can you replace all of that? Can you replace most of it? Is that like a work in progress? Is there anything else you can say on that front?

Sure. Without being too granular, it's a -- the majority of the animals that come for everyone, including us at the moment from Cambodia. So it's a central supply source. And just a quick history for people that don't recall, most of the monkeys used to come from China, who stopped shipping them a couple of years ago to keep them in China for their own benefit. So we all pivoted to Cambodia where the quality is actually good, and the genetics is similar and the health status is good and the numbers are good. So -- and we have a really good supplier over there and a good relationship and a big supply contract. So if we don't have undue government -- Cambodian government intrusion and preventing that from happening, it's possible we'll be fine. This is just -- and obviously, we have other sources of supply, some of which we've had for years, some of which are new, some of which are more nascent than others and kind of the background data on the animal models is not quite as well known, but I do think that both we and our clients will be comfortable using whatever models are available because we don't want to just have a chilling effect on drug development. So -- it's -- this whole thing is so new, the sort of allegations on the supplier in Cambodia was sort of dramatic. It's not a supplier of ours. It's not directed to us. It annoyed the government of Cambodia. One of their officials was arrested in the U.S. for participating in all of this. That did make them happy. It's unclear what their reaction will be, but we're trying to be cognizant of the fact that they could pull back or provide some restrictions or whatever, wait for an apology. I don't know. We're speculating right now. So has no real short-term impact. We'll do everything we can to reduce the impact, obviously, on our clients. We've done a great job always. This is pretty unusual, this eventuality, but we're working through it literally hour by hour.

Okay. That's fair. Maybe a pivot to a whole -- totally separate topic before wrapping up. If we had to think about conceptually one of the biggest margin drivers in your business in 2023, what would you say?

I would say several things. I would say the continued growth development, scale, pricing of the safety business is definitely a margin contributor. I would say they're a research model business, like the North American research model business for the first time in the years because of the weakness of competition, we're gaining share and price. So possible there. The Explora business, which you and I just talked about should have better margins next year. The whole CDMO situation integration, which has been a significant headwind, the primary headwind this year will ameliorate for sure and will provide some margin opportunity. And I'd say the last thing is that we have a big investment in a digitization initiative that investment continues to be reduced and the potential efficiency yields that we get continue to be ever present. So -- and the last thing I would say is we're going to continue to ride on G&A expenditures as a percentage of revenue, which I think we've done a really good job at. So I think if you aggregate all of those, notwithstanding the fact that for sure, our wage costs will be high again next year as they were this year. I don't know if they'll be worse, but they will not be trivial, and that's 50% of our cost. But I think we can offset that with price and volume. So yes, we're optimistic that there are several factors that should congeal to generate better operating margins. Our plan isn't even put to bed yet. So I don't want to say much more about that. But directionally, and of course, our goal for this year was to have better margins. And from a variety of factors, particularly the CDMO headwind, rates, FX, some of the Discovery study on blah, blah, blah and the wage escalation, we're happy to have been guiding towards comparable operating margins in '21 -- sorry '22.

If we -- when we're at this conference, will be Miami next year, excitingly, when we're sitting here next year in Miami, Jim, what's your prediction for like what the hot topics are going to be for this conference for next year. You've set the bar really high this year with the like 8-K in the middle. So I'm...

I mean I assume and hope that the NHP story will be in the rearview mirror, and we won't be talking about that. I think we'll be talking a lot about our CDMO business and cell and gene therapy and how those assets have improved and how they're contributing significantly. I can't say with any assurance that we'll have a client that will go from the clinic to commercialization, but we may have a greater line of sight on clients that are moving more aggressively in that sphere. I think we're going to have strong demand curve and probably an enhanced competitive position. Hopefully, we'll have the funding paradigm freed up a bit with the capital markets, but that's certainly beyond our control. But we certainly have had a lot of things to deal with this year, including this whole Cambodian thing that's beyond our control. I think we react very well to adversity and particularly things that are beyond our control, and our clients depend on us. So we'll do everything we can to work through these issues as quickly and as professionally and substantively as possible.

Sounds good. Looking forward to it. Thank you very much, Jim. I appreciate the time and your flexibility in the format today, and look forward to catching up again too.

Thanks, Elizabeth. Thanks for your questions. Appreciate it. Bye-bye.