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

Awesome. All right. So let's get started. Hi, everybody. I am Elizabeth Anderson. I'm the health care technology and distribution analyst here at Evercore. I'm very pleased to be joined by Jim Foster, who I'm sure many of you know and CEO of Charles River and Todd Spencer, who does IR. Thank you very much for joining us today. Happy to have you.

Maybe just to start off, I know hot topic, as always, is sort of the current demand environment across many different businesses and tools and other -- in the clinical side of CROs. Maybe just talking through a couple of the different points in your business. How do you sort of think about sort of the lay of the land in terms of RMS. We've heard about some of the comments on China, but maybe sort of differentiate between sort of the environment in China and then ex China.

So our demand in RMS is continues to be solid. We get -- I think we'll always get price in that business. We've got -- in addition to biotechs, we've got a lot of work with pharma and actually government and academics which, in some ways, buttresses that part of our business from any concerns that biotech companies have about spending? So that's been good. So U.S. and Europe, revenues have generally been strong. The service businesses have been really particularly interesting in that business over the last few years and continue to be so. So we have this recently large genetically engineered model business. But in particular, we have this in-sourcing solutions business that we made an acquisition in last year. We have these CRADLs. I can never remember the acronym, I shouldn't even say it. Anyway, we have these facilities that clients -- we thought they would all be small, but they are all different size companies. They use a room to do their basic research. We staff it. We do sometimes a little bit of the services. We hope to do more, and it's a great lead in. If you look at that business on a see-through basis, it's really a great lead into discovery and ultimately to safety. So we like that business a lot. We've made a bunch of investments in new facilities, East and West Coast of the U.S., some stuff in Europe and China as well. So research model business feels good. Margins are good. The Chinese market is funky. Demand is slower than we would have anticipated. I don't know how long that will last. Having said that, that business continues to perform comparatively well to other competitors in China. So it's still reasonably high-growth business. We've been investing nicely in facilities, but it also has a service component. I'd say the whole business is slower than usual because there's less investment right now -- government investment in China. So I would think that was transitory but it's probably the slowest piece of our message. But that business feels solid and strong.

Got it. Okay. That's very helpful. Maybe digging into a couple of things you said there. I think you talked about continuing to get pricing in the models business. How do we think about it? We think about the recent sort of inflation that we've been through and that's sort of providing a boost potential to pricing? Is it sort of -- how is the pricing in sort of the models business been versus what we think of sort of consumer pricing and the spike and sort of now they come down. Is that sort of something that's been more consistent? Are you sort of seeing less inflationary pricing on that like this year versus maybe last year? How do we think about that?

I mean we've always gotten a meaningful amount of price in that business given the fact that clients don't produce their own research models and just given the size and scale of our business, we have just a very large market share. So price is always an important part of what we do. We're obviously paying our people more, we have investments in facilities and benefits...

You continue to evolve the models and -- yes.

We do. So I guess it's quasi-inflation related. We don't actually sit down and say what's inflation and price above it, that would be a nice thing to do. It's difficult to do, obviously. But we're pricing sufficiently to cover things like wage increases and any build up to continue to retain our people is really the biggest issue. But it's a business that even when it goes the other way, when there's no inflation, we've been able to get price. So I don't remember a year where price is not 1 of the levers that we're able to pull.

Got it. And then maybe what you were saying about the services business and the sort of demand there from sort of clients across the size spectrum. What is it about CRADL that sort of makes it an attractive offering? I can understand, obviously, if you don't have the facilities or that kind of thing. But like maybe on some of the mid or larger-sized customers, like why are they using you guys?

It's a really good question. And as I said, when we put this business together, we felt it would be very small start-up virtual biotech companies have had a limited amount of cash, no space, no desire to have space. And there's a lot of those and they can rent a rack of cages, a room full and they're doing basic R&D so they may not even get any traction. So we have a lot of those. The surprise has been that we have a lot of big pharma and some who have just finished space or -- and they moved into it and don't have enough space. And so we're seeing midsize and very large clients who take a reasonable amount of space for relatively long periods of time. Often they do it while they're building a facility. When they finish the facility and they use it all and they often still need us. So it's been a great lever. In this economy, it actually cuts both ways, but I would say as a general proposition. In this economy, it's even a better business. So everybody is really nervous about spending their money. Little biotech companies can't afford and big companies aren't going to want to build another building if they don't have to. The flip side, of course, is that some of their R&D expenditures are down. So it kind of cuts both ways. But we think it's a great lever. It's a good-sized business now. It's been growing nicely, has great margins. And we don't talk about it enough. So we will start to. It's, I think, very much about the flow-through from that business, particularly in the discovery and then into safety because as -- if and as the drug gets traction. That's what we kind of want to do. And obviously, we have the best opportunity to say, well, great. So we can do this discovery where we do this pharmacology work for you and then as the drug continues we can get you into non-GLP and then ultimately, GLP safety. So if you look at it on a holistic basis, it's a great feeder for our clients. Our strategy has always been to start with the clients as early as possible. That's as early as you can get.

No, that certainly makes sense. And it seems like, obviously, besides the flexibility and sort of the overflow on that, do you also -- like do you have a sense of like what your average? How much you're saving like a large pharma company having it versus them building their own facility. Do you think it's more about the like flexibility component of that?

It's probably less about the cost for the big guys. Definitely about the cost for everybody else. And then the geographic proximity to where they're located. So Cambridge Mass in San Francisco to obviously, huge biotech hubs, but lots of others. So to have the ability to utilize the space and not pay for it, I think it resonates pretty much with clients, large and small.

Got it. And that to your sense, like I think 1 of the things investors worry about with the macro sensitivity is just having excess capacity and sort of the negative drop-through on margin. So some of what you're saying seems like that could help to offset that sort of cyclical miss that we saw maybe in sort of the financial crisis type time frame.

Yes. I mean, in some ways, it should be the most recession-proof thing that we're doing. It provides an opportunity for clients who are worried about the cash or just simply don't have the time to build facilities to get in them quickly, to utilize them and move their work along at a reasonable price point, not withstand the fact we still have great margins. So I think to them, the price points are reasonable, the setup cost to do that on their own would be significant.

Yes. No, that makes sense. Okay. Maybe switching away from RMS maybe towards DSA. I'm sure what your favorite topic NHPs. So obviously, thank you for the additional disclosure that you guys in the 3Q. That was very helpful. Maybe talking about the NHP services revenue versus like the NHPs themselves. Is that like a -- what's the biggest -- is that a function of the number of NHPs being used in a given year? Is that sort of like the right way to think about it? And how do we think about the level of inflation in that services component? Obviously, we have spoken practically ad nauseam about NHP pricing itself?

You have to look at the whole NHP activity kind of holistically as part of study design and kind of the totality of our studies. So we don't think of it as we're doing NHP work, or we're doing broader work because both are required and it sort of depends on what stage we're in and whether the drug is in the clinic or not. And so as a general proposition, we're interested in making sure that we have a sufficient number of NHPs, but the study design is such that we can accommodate to clients. So capacity is important, location of capacity is important as well. So this year, for instance, the share number of NHPs is down a meaningful amount. And it's not a manifestation of lack of being able to find them or the price point, which has been hideously high, but it's not actual actually not related to that, it has to do with the phase of drug development that they're in. So our Discovery business is very slow right now because a lot of our clients are spending less money in Discovery right now. That, by definition, has to be a short-term phenomenon because if they do that for too long, they won't have anything later. But putting that aside for a moment, there's a fair amount of work in getting your IND filed, but even more work these days and post-IND work. So that would be something like us in a [ genicity ] studies, which are long term. Don't use NHPs, obviously required by law. And your drug is not getting to the market. Those studies are done contemporaneously with the drug in the clinic often in Phase III. So you're using less or no NHPs there. The price points for those studies is quite high and the margins are terrific. So on a kind of a balanced portfolio basis, we're doing lots of small and large animal work, but the -- just the general economic malaise has caused slower growth rates in the DSA businesses. And so as a result that -- and 1 of the results of that is using less NHP. So it's less about the price because whatever the price is, we pay it and we pass it on. Less about the volume is because there's actually a substantial amount of volume right now, there's plenty of NHPs.

So you think that, obviously, we saw that step down based on the phase you think that maybe could go back up next year sort of beat. Would you expect the number of NHPs -- the volume...

The volume, I mean it totally depends on the demand. So I wouldn't want to speculate. It's all tied to the economy and the amount of approvals and what's in the clinic and what it's about to go into the clinic and we'd have to look at a composite. So tough to tell.

Maybe just 1 more on NHPs. What sort of current backlog is looking like? I know there was backlogs but how are you sort of thinking about that kind of number of bunch...

Yes. We keep shortening, which is probably a good thing so backlogs were up to 17 or 18 months, probably longer.

When was that? Would you...

Probably 1 point, I don't know, is probably...

Last year?

And it's probably a year now, I think we were saying at the beginning of this year, it was 16 months, something like this. So it's probably a year. So it's plenty of time to plan to have predictability about your revenue model to have sufficient numbers of animals and staff and capacity. Then the other thing that was happening is we had an increased amount of cancellations and that was tied to the fact that clients were nervous about not being able to get a slot doing their work.

Is that particular to NHPs or the broader business you're talking about?

I'd say both. So the book studies got, they're like, I don't know, I've got all these drugs and I need a slide. I don't even know which drug I want to work on 18 months from now. So I book a slot and then when they get to 16 months, like we just didn't have anything, so they cancel, there's a cancellation fee. But that's very disruptive. And if it's an NHP study since they are very expensive and the housing and the feeding and the caring is a big deal when you allocate those animals to go on study you want to use them and you don't necessarily have a replacement study of the same scale in your backlog, you could, you almost always have a small animal study in the backlogs. We don't have much volatility or variability there. So that's really been the situation. I don't know if we will get less than 12 months. We've had backlogs years ago that were 6 or 9, 12 feels better than 16 and in some ways, cancellation rates are dropping. It's a really good thing. Also study slippage just kind of balanced out. And so the model is less volatile and we're able to start studies more when the clients want us to, which is why they don't have to flail around start studies a year out. So it's probably a better business model and it's perfectly fine in terms of planning for utilizing NHPs.

Got it. And then any kind of update in terms of -- I know we spent some of the beginning part of this year talking about like new testing and libraries of far and monkey. Like is there anything that sort of moved on that front? Or that's still sort of still out there, still pending, but not really much momentum on that.

Still under conversation we have the capability to do that in multiple places. We're going to do a big update on the whole NHP situation in terms of diversity of supply in terms of testing, in terms of where we'll do the work, in terms of numbers, in terms of pricing next year. So we'll get into that.

Sort of over the course of the year, that's a sort of what guidance you're talking?

We'll do that relatively early. And we'll talk about all of those things, including, I hope, some progress which I can't speak for the government. It's including some progress with testing because that's for sure, something that we're forgetting the whole government things for sure, something that we want to do long term for ourselves.

Yes. No, that seems to make sense. I know 1 of sort of the persistent concerns is -- and I understand obviously, what you've said that NHPs are passed through, people sort of nervous like if we start to see pricing come down does that's going to have like a major negative effect on DSA margins as we think about sort of the out years. Obviously, you've given long-term guidance. But what do you sort of say to people who are worried about the stability of sort of those DSA margins over the next couple of years.

It's contributed to incremental revenue in a meaningful way and probably in a small way to incremental margins. But if you take the dramatic increase in price out, which we passed along that's a business that still would have -- is growing -- would have grown at high single digits. So since it's a pass-through, it's been relatively insignificant on the margin front. We priced the study and the totality of the study, which is time and staff and capacity and the cost of the drug and all of that. And obviously, the animal price is in there. But as they've gone crazy from $5,000 whatever it was 5 years ago to 40 or 50. We just passed that one. So we don't look at that as a great source of margin accretion and I actually hope it comes down. I mean I just think it's a much more rational business model for everybody. So we'll pay less. We'll pass along less. But the margins in that business have been the DSA business, particularly the SA part have been quite good and have been increasing nicely. It's partially manifestation of volume, but also efficiency initiatives, particularly of the IT things that we're doing things like Apollo, which is this interface between the clients and us in terms of being able to get the data that saves time and money and staffing. So definitely still additional margin to be had also probably a small amount to margin to be had in the Discovery business.

Got it. And as Apollo rolled out across your whole customer base or...

In Safety, it is.

In Safety, it is. Okay. And then how do you think about sort of the plans to roll that out through the rest of -- are there plans...

We're in the midst of doing that. Clients love it. I mean it's -- so the goal is for clients to you find a slot, book a study, get a price, sign the study online and get the data without ever talking to anybody. So you can imagine that, that dramatically accelerates the velocity with which the drug can get into the clinic, which is 1 of the things we can do for them. It reduces the amount of PhDs we have to have, available to talk to them about these studies. We only want people to talk to us if they have equivocal results and the question and where the wonderful results in the question, but not when can I start my study. They shouldn't have to talk to anybody to do that. And they should be able to get the data real time all the time through some sort of confidential methodology. So it's been working great. Clients love it. It has accelerated things and we are rolling it out to the rest of the portfolio.

And how do you think about that? That totally makes sense in terms of the visibility and the answering basic question, the kind of things like how do you think of that versus sort of the relationship and sort of being able to sort of bring the whole Charles River to an organization? Like how do you think about kind of the balance between those 2 things?

I think it's extremely helpful to all of that. Look, our principal overriding goal and strategy is to have the clients be utilizing our products and services across the entire portfolio. I think to some extent, we do that really well and to some extent, we can still do that better, spending a lot of time right now thinking about ways to do that better in the short term. And obviously, if the IT connection is -- facilitates that across the whole portfolio so they have the data in a central place and they can move a drug from Discovery into Safety easily that's really powerful. And I think it's a dramatic competitive edge that we have.

Yes. No, that makes sense. I think you mentioned this in terms of talking about Discovery and passing on 1 of the other questions, but can you help us tease apart the demand trends in Discovery between sort of biotech and pharma right now?

Yes. I was going to say there's not much of a difference. I'm sure there's a difference. But I think it's less about the client base because for a while, I was asking, well, 2 things have happened. Number one, the pharma business has been stronger than biotech, much stronger in the second quarter, for instance. So that's just a manifestation of probably some concern about spending on the part of biotech. But interestingly, the big pharma companies that have, if nothing else, they have tons of cash, still have budgets, and they still have shareholders, and they still have guidance. And so I would say that they're watching their spending a bit more carefully than we've seen in other time frames. And the biotech folks are doing that even more carefully. So as I said earlier, there definitely have historical periods where there's been slow spending in Discovery to the detriment of Discovery and Safety and work in the clinic have been stronger and vice versa. And then there have been lots of years like the last 5 or 6 the go-go years where we've had kind of balanced spending between Discovery and Safety. So Discovery spending is certainly significantly below where we would like it. I don't think that has anything to do with Charles River right? I think that's just a spending phenomenon, and this mania to get stuff into the clinic and then post clinic work that we're doing. The good news is that the studies are quite short term. There isn't necessarily a lot of planning before we get them. So they come in fast and they are short term in duration and they go out fast. So it could and will turn on a dime. I don't want to predict when.

That was going to be my next question. How long...

Yes, I have no idea. I just don't think that. I would say that as soon as you see either a moderation or flattening out of rates. And as soon as you see the IPO market really opening up, I would be surprised if we don't almost immediately see significant increased spending in Discovery. Well, across the whole portfolio, but Discovery in particular. So I think that's the concern. And so if I have some hot drugs and I have a high degree of confidence that they'll get into and through the clinic and into the market I have to spend my money on that. There is also a patent cliff smaller one that we had years ago, but there is another patent cliff coming. So they're all cognizant of that as well. But you're not going to have drugs whatever X number of years from now to get into the clinic on compared to Discovery. So it's not if at all, it's just when.

Right. Maybe sort of just 1 more on Discovery. Like if we think about more like broadly and sort of like on a secular trend basis, like Safety, obviously, the outsourcing penetration has really moved up over the years. Discovery has been a little slower on that front. Like how do you sort of think about like is that sort of that slower trend like you sort of think that's kind of the right go-forward rate to think about that? Is there anything you think that would shift that? And then how do we think about sort of how you're tracking like the crossover work trends between sort of doing Discovery for someone and then moving on to doing their Safety studies?

So obviously the Discovery is different than Safety in as much as the drug companies think that's what they do. I think that's what they do well. I think biotech probably does it better than pharma, but putting that aside for a moment. So it's a larger market than Safety. So Safety is probably 60% outsourced and maybe it's a $4 billion or $5 billion market and Discovery is probably at least $1 billion more, but it's like 30% outsourced. The pure Discovery, although we do some, we discovered about 100 targets that our clients couldn't discover on their own and a bunch of those. They pay drugs against and they're in the clinic. So we do that periodically. But our Discovery activity is more comes after the earliest Discovery I would call it, kind of more early development actually we're doing a whole bunch of things to kind of move the drug along, and we're doing it better, faster and cheaper than any of the clients, particularly the big clients could. So we have a good portfolio. It has enough scale right now. The science is deep, it's internationally dispersed. There's great connectivity with our Safety business. We've got about half of the Discovery clients moving into Safety. I think it should be more. Hopefully, it will be more. And so increased spending knowledge that they don't have to do it all. There's often a little bit of I know when I talk to clients about Discovery, the knee-jerk reaction is, why would we do Discovery with you? This is what we do. And I said, let me explain what facet or aspect of Discovery we do. And I think once they understand that, it's relatively easy to get the buy-in. So again, just going back to what I said earlier, we want to engage with the clients as early as possible. That is as early in the discovery process as possible. And as long as they have a drug that is promising and is moving positively through toxicology and into the clinic and efficacy and safety to promising we want them to stay with us. So Discovery is not a surprise. I mean, it's disappointing because it was -- that business a couple of years ago had extremely high growth and extremely high margins. And that's because there was more money available in the system. And so if they had 5 drugs to prosecute, they would work on all 5 and maybe today, they work on 2 or 3. So the dynamic was different, but our capacity and portfolio is the same. And so when it comes back, we should be able to reengage with them relatively quickly.

That makes sense. Okay. Maybe switching over to microbial, I think that was sort of maybe a little bit of a surprise for some of us in the third quarter. Is the right way to think about that business as maybe similar to other like life science tools companies in terms of who are selling a bit more of equipment and sort of that's the right way to think about that? Or are there sort of factors in the microbial business? Do you think that following another tool company commentary is probably not the right way to think about that?

Probably yes and no. So tools companies. So if I have to -- if I'm a client and I have to spend money to move my drug forward or spend whatever, $0.5 million on an expensive medical device, I'm probably going to delay that spending from a cash point of view. So I haven't looked at what the mass aspect...

Yes, I realize that's a little bit of an unfair question too, but I...

I mean so -- but I would imagine because we have -- we do a ton of mass specs work ourselves. So if we can wait another year to spend $0.5 million or we will. So in that way, I would say, no. So I'd say several things are happening with microbial. Number one, clients overstocked our products and the disposables that go with them.

And that just COVID...

Absolutely. We had crazy, call it, overstocking at the end of last year and the end of the year before. We also did some COVID work ourselves. But so they're working down the backlog, number one. Number two, while our equipment is not nearly as expensive as mass specs, it still costs something. And so I just had a business deal with these guys recently. So we while we've sold lots of equipment this year, there's still clients that are saying, I think I'll wait until next year's budget. I just don't have the budget to spend. And since there are less QC work that they're doing now on a smaller portfolio, we're definitely seeing less razor blades where the cartridge is being used. So yes, this is a business we've had for 25 years. It's grown to double digits for all 25 years. It's growing more slowly right now. I think that's transitory, too. It's very much connected to the general economy. Our technology is fabulous. I think it's way ahead of the competition, it actually saves the clients lots of time in terms of releasing their products to be sold into the marketplace. The margins are still stunning in that business, and we continue to work on new generations of product. But it's really those things. And then the last thing I would say is we have a small but not immaterial business in China and the demand there is a way off.

Okay. Similar to -- and that's just sort of similar to the spending slowdown that you were talking about earlier. Okay. What's the typical replacement cycle to microbial boxes?

Replacement cycle for the...

Not for the -- like the equipment itself, is it kind of like -- not for the -- well, I assume the [ cartridges ] you're just using as they growing out but like in terms of the equipment side, is it like every 5 to 7 years, more quickly than that? Hard to say.

It's hard to say because we keep coming out with new versions and some people will switch to get the new version...

Okay. So it's more upgrade cycles...

Some people won't. Yes, I would say, it's very much related to new software and new capabilities entirely driven by our clients.

Okay. And it's still sort of the rapid testing portion of it? Is that still sort of outgrowing the sort of more traditional parts of the market and that's sort of a key sort of driver sort of use cases increasing for that? Or is that maybe not less of a factor than it has been...

We're converting folks to the rapid technology as quickly as we can. It's expensive and time-consuming to switch. That's probably something else is going on now. It's more expensive on a per test basis when they switch. But it's much faster. So if you've got, I don't know, $50 million worth of drug that you just manufactured, and it's sitting somewhere to be released, and you can release it in a few hours as supposed to several days, you'll spend more money on the test. So it's still a very powerful technology.

Got it. Okay. That's very helpful. Okay. What about biologics demand? How do you sort of think about where we are with demand in that business and how that will sort of play out for the next...

So has had a similar -- not quite as deep a trough but similar situation as Discovery this year, but it will come back faster. So the biologics testing is obviously all large molecule and we're testing it before the drug is going to the clinic and when they're about to be approved. So there's been a huge steady stream of work there for a long time. It's been a very good business for us. And again, a couple of years ago, very high growth in exploding operating margins. We just built a bunch of new space, and it has been filling up nicely. Technology is terrific, and we've had sites in the U.S. and in Germany and Ireland. So our geographic footprint is quite good. Again, it's simply a manifestation of the overall economy, less drugs being tested overall, less drugs getting to the clinic overall and just sort of a slowdown and a pullback by clients, large and small. That will come back faster than Discovery...

Why does that come...

And we've seen that begin to improve, by the way in the back half. Why will it come back faster because so much of the emphasis is to get drugs into the clinic and you can't get it into the clinic without doing this testing. You're looking for human viruses, for instance. So that will come back. I don't know when it will get back to where it was 2 or 3 years ago. But when we have more of a balanced spending and a larger portfolio to work on, I think that business will be very strong and it has nice margins. And so we're optimistic. But again, not unlike Discovery, that work comes in with virtually no warning, just a good thing comes in very fast. Studies are very fast. It goes out quickly. So we'll see that turn quickly. We will see that Discovery business turn quickly as well. I think that the biologics business will turn first.

Okay. That makes sense. And you said you're starting to see that sort of pickup.

Yes. I mean it's improving somewhat.

Somewhat. Okay. Got it. And then obviously, having improving volumes, I'm sure is helpful to the margins in that business. And then also, I was going to ask like on the facilities and sort of the new fill up of those new facilities, that should be sort of a longer-term driver of that, too. But it's mostly function of the new volumes coming back, right? Is the way to think about the margin?

Right.

Okay. Got it. Maybe turning to some of the businesses. When do you think that -- now that you've had the sort of cell and gene therapy CDMO business for a couple of years, like how do you -- what would you say is Charles River is competitive advantage in that business.

It's been a really tough couple of years and that's a result of a whole bunch of things that we've said before, but just repeat a couple of them very, very quickly. We bought a bunch of businesses at the same time. In an adjacency that's scientifically complex and scientifically new. So I would say that we are all kind of learning as we go, including the clients and the regulators. So it's been interesting. Those businesses are in really good shape right now. So I just visited all of them. We have new general management in all of them. We have new sales in all of them, we have new regulatory folks. We have added capacity, which actually had started before we bought them, but the capacity has been finished in our gene-modified cell therapy business, which is the largest one. That's one in Memphis. We've had multiple regulatory audits successfully and a couple of European regulatory audits for clients who one has a commercial product that we're making and the other one is on its way and so we're seeing lots of things developed there. We're seeing the plasma DNA business improve nicely, viral vector business had probably a little bit behind that, but also improving well. So I think we understand the business very well. We understand our competitive dynamic. We understand the pricing, appropriate pricing strategy and versus a competition, just to go back to your question, we have a couple of big competitors in this space that don't produce plasmids and they don't produce viral vectors. But even more importantly than that, the principal instigator of us going to this business was that we had this big biologics business. So those are closely tied together and so Safety. So you're not going to get -- you're not going to be able to do this work unless you can prove the safety of these compounds. So I would say that our overall portfolio is a huge competitive advantage in this space. We feel really good about this business right now. I think we can be the largest player in cell therapy manufacturing only and I think the totality of our portfolio really buttresses that and strengthens our ability to engage with the clients at different places in the drug development sort of paradigm. But it feels like it's in a very good place as we go into next year.

Got it. And I've heard from some people that there was a lot of companies were doing some of that internally in terms of the manufacturing side, and maybe they built up some capacity and then post COVID, maybe some excess capacity. Is that something you sort of like encountered on your side or maybe some talking about a very specific situation that we shouldn't probably broadly generalize?

Yes. Some of the very large pharma companies because they can afford it and because they were concerned that maybe the overall capacity of all of us was not sufficient. But we were still building it or whatever. And I know several big pharma companies that have built their own. No biotech companies ever going to build their own. So I can categorically say that. So the preponderance of the clients, I think, will be small, very focused cell and gene therapy biotech companies. I mean you'll obviously have some pharma. So I think that is what it is. That's not a major issue for us from a scale point of view or from a client interaction point of view.

Got it. And I think you sort of mentioned the viral vectors may be coming back a little bit more slowly. Is that just a function of sort of like therapeutic needs? Is that something specific to you guys? Like how -- what's sort of what do think?

I mean, business is doing well. We went back and recapitulated, we used to do the viral vectors and the plasmids in a couple of places. And then we selected 1 site to do 1 and 1 site to do the other. It's just kind of the time frame associated with getting those to a significant commercial scale.

Okay. And is there anything else you need in terms of like capacity or sort of technical things in that broader space in the CDMO business? Do you feel like in the past 2 years are just in a good spot, continue to grow this and you kind of have the right portfolio.

There's probably some small subtle things. We certainly wouldn't do any more M&A in this space until and unless these businesses are really rocking, really growing at the rate that we wanted them to, generating the margins that we wanted them to, capacity full and people banging on our door. I mean there are some other acquisitions out there they're relatively small. And there's a few nuances on the service side, but I'd say it's a good portfolio right now.

Okay. And maybe just -- you sort of touched on it tangentially in that answer, like -- are there any -- what sort of areas are you looking at in terms of potential M&A now? And has the current macro volatility sort of helped on the valuation front?

I wish and hope. We have several conversations going on right now. I wouldn't say that any of them have seriously gotten to the point where we're talking about price, but the inference from the sellers that they stuck remembering what the multiples were. 2 or 3 years ago or some competitor that was bought or some competitor went public. I think that's foolishness. But that may be the way it is. So don't know yet. There's a bunch of things available that as I said, we're looking at. We always have several things going on. But certainly, things in Discovery, certainly things in several therapeutic areas, certainly, things in our broader laboratory portfolio capabilities, which I think is a really important part of our business. Actually, a couple of things in the research models business and a couple of things geographically, which would expand the current portfolio that we have. So they're all private equity owned, except for 1 company that's owned by an individual that started them. None of them are huge. I'd say they're all -- except for 1 that's sort of modest in size, 1 is a little bit bigger. And of course, none of them may happen.

Okay. Yes. No, then that's similar to what you have said for many years, right. And I said I was going to ask you about sort of private equity valuations, but it seems like the comments that you made versus sort of founders, but it sounds like what you said was sort of applicable for both of those groups.

I don't think the private equity guys are in the business of selling their assets for lower price points. We'll see.

Not a good business model...

No. I mean, we try to incentivize and to pull the deals forward because I do think it's important to get to monetize these -- monetize some of these deals within a particular year or a particular fund. We've been quite successful in doing that. We have 1 conversation going on right now. We're trying to talk them into accelerating. But I'm not sure how what the cash flow is going to be.

Okay. And then how do you think about on the spending side balancing some of the longer-term investment needs? And what are clearly like very nicely growing, like secular business -- growth businesses with sort of some of the shorter-term demand environment.

Yes. I think we've done a very good job for at least a decade now matching our CapEx in particular, with our current and anticipated growth rate because you got to build the stuff 18 to 24 months in advance. So you really have to call it relatively early. Our capacity right now across all of our businesses is well utilized, it's not dragging our margins down really anywhere. Even the businesses that are slow growers. So you should expect CapEx to moderate. We got -- we used to be at 6%. We got up to 9%, probably moderates to 7% or 8%. And we'll build more capacity in advance of when we think we need it only in the businesses that are growing significantly. And so there's no need to do that. We're also driving efficiency in lots of our businesses. So I think we will be able, particularly in Safety, we'll be able to get more revenue out of similar amount of capacity by using them more flexibly and new space that we build will be more flexible. In other words, the rooms will be able to be larger or smaller, use multiple species in that, and that's really quite powerful because some of the older facilities, you can only use them for certain type of work. So I'm positive about the spend that we'll have both operationally and from a CapEx point of view.

Got it. Well, we only have 40 seconds left. So maybe the 1 last question. What do you think is the least well understood thing about Charles River by investors?

That the NHP situation is largely behind us, and we have sufficient numbers and clients, we didn't delay studies. Clients are happy, and it's really something that's pretty much in the rearview mirror.

When do you think the next time you go to a conference and have someone not ask you about it.

I hope so.

Sounds good. Well, thank you very much. it's pleasure.

Thank you.

Thank you so much.