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

Okay. Perfect. Okay. Hi, everybody. Thank you so much for joining me today. My name is Elizabeth Anderson. I'm Evercore's health care services and pharma services analyst. I am here to be with Jim Foster, who needs no introduction, CEO of Charles River. Thanks so much for joining us today, Jim.

Always a pleasure.

Nice to speak with you. I think one of the things, at least from the predominant set of questions I get on the environment, and I'm sure this is not going to come as a surprise to you, it's just kind of the visibility into the pharma budget environment for 2025. How do you sort of as we kind of round out Thanksgiving and go into December, where are we in the sort of budget cycle? And sort of where do you feel like you are in terms of visibility at this point?

So we work with all the pharma companies. So they're in the process right now of locking down their budgets for 2025. Some of them will lock them down in Q4 of '24. Some of them will actually wait until -- some of them will wait until middle or the end of the first quarter. And we've seen that for multiple years. So at least we will have the benefit of engaging with all of them. What does the preclinical budgets look like for next year? How much work will you be doing internally? If any, how much will you be outsourcing? How much were you will go to us so we'll have a sense of the cadence? So it should become increasingly clearer as time goes on. Very tough to be -- very tough to call it right now without having those conversations. So they started. We have very senior relationships with most of the drug companies. So the Head of R&D or at least the head of discovery or development or some people have the dual title of discovery and development. And it's their decision on how the work is going to be how and where is it were going to be done. So more to come.

Got it. But you're -- from what I'm hearing you say, it's not necessarily a different process than it is in any other given year. It's just where we are in the sort of annual calendar cycle?

Not different at all. Feels a bit abrupt and almost ironic in that 2023, our growth was driven primarily by big pharma. And now you have this pullback, even a pullback with the GLP-2, GLP-1 companies, which is -- it wasn't foreseeable also. Here we go again with a patent cliff. Here we go again with just the competitive situation. I think drug companies are challenged to get lean, didn't really know how to get lean. So they're all working on it. It feels like the made the decisions collectively, they didn't, but you have a bit of the lemmings effect, I think.

Yes. We see that in a variety of places, too. When you're talking about sort of the pharma insourcing versus outsourcing decision, obviously, there's been a broader trend over the last 20 years to push more in terms of the outsourcing. Are you seeing any shifts in sort of how they're -- how pharma companies are thinking about the outsourcing decision or certain areas where they're retrenching more than others? How would you characterize that?

I think that except for pure discovery, very early discovery, they're wide open with some exceptions. You have some drug companies that -- particularly some European ones that I can think of, employ most of the people in the town and then they're not going to look critically at their internal infrastructure. But with almost all of them -- AstraZeneca is one of the few I'm allowed to talk about. I had a conversation with the head of R&D there some years ago, and they made the decision literally to close all of their internal capacity and give us the work. So that's not unusual. So we have a lot of situations like that where we're doing all of their preclinical work, in some cases, the majority of it, in some cases, the minority of it. When we first got into the tox business, about 25% was outsourced. Now it's about 60%. So that paradigm continues to change. And it's only about getting off -- I don't want to say this too negatively, but getting off this sort of feeling that everything has to be invented by them and they're the smartest people in the universe because I think that actually holds them back. So if you look at classic toxicology, our ability to do it faster, it's considerably lower price points. And actually, more importantly, in much higher and more complex science than even the largest drug company is something that they have to pay attention to, and most are.

Yes. No, that makes sense. Where do you see -- maybe in contrast, I think biotech funding has been a little bit of a different demand cycle. So as we think about sort of where we are in that, I know certainly, there's been a change across pharma services versus the expectations from earlier in 2024. But given where we are, how would you characterize the current environment at the end of '24 and sort of any early thoughts you have as we move into the new year?

So biotech demand, which has been the principal source of our growth for the last decade, slowed down last year and it continues to be slow this year, but beginning to pick up. So we're pleased with that. We're pleased with the demand. It's very much calibrated to interest rates and the access to the capital markets, very much correlated. So -- and I'm not going to have a prognosis on the impact of tariffs on inflation, if there...

Where's your crystal ball?

No, I mean that could have a chilling effect too. So there's a lot of chilling effects. So biotech wants a runway that looks clear where they can continue to get access. If they're a premature IPO they wanted to be able to do secondaries. And if they're a venture, they want to be able to get into capital markets. They want to be able to do their IPOs and that's really murky right now. So until unless that changes, which it will, they will get back to business. And it won't happen overnight. It will probably take them a couple of quarters to focus on that. It's such classic supply/demand and the frustrating situation right now is that we have a really robust portfolio, all sorts of products and services that they need, I think better than the competition and a slowdown pretty much across the board by our client base. And the $64,000 question is, when does it pick up and accelerate? And as it does and space fills, pricing power will accompany that. I mean it's just classic supply/demand. So we're -- so it's a bit murky. I mean everybody had the prognosis on what would happen with the capital markets this year, which was nothing. And similar prognosis for next year, I don't know where that will be, but some of it I think was tied to the election, some of it was tied to interest rates. And so we're thankfully seeing an improvement and an acceleration of biotech demand, albeit slower than we had originally anticipated.

Okay. No, that makes sense. And I think you sort of touched on pricing there broadly. Are you seeing sort of pricing used as sort of like a competitive like work like tweak to things? Or like are you seeing it sort of just broadly as sort of part of the cycle and this is sort of traditional? How would you like characterize that sort of changing pricing demand?

Yes. I mean our competitors compete with us only on price. That's the only competitive lever that they have.

That's not new?

No. Well, the aggressive nature of it, I would say, is on the new side, right? So everybody competes with us on price. Sometimes, those prices are 30%, 40% or 50% below. So if a client has made a decision, they want to work with Charles River because they didn't think we get a better value proposition that way. And we're going to help them with all the regulatory, getting through the FDA, they'll pay a premium within reason. So I would say that in a situation where we're dealing with a competitor who's drop their prices 40% and we want to buy share, gain share or whatever word you want to use or maintain share, we might reduce our prices 20%. And so the clients will still play that 20% premium to get better science and better regulatory oversight. And I don't think that's going to change. Competition is smaller and more fragile and -- so I think companies that are really worried about running out of cash or don't know better or have a consultant that leads them to one of our smaller competitors, they will attempt that. Also, some of the work has gone to China, probably going to come back out of China because of the BIOSECURE Act even if it's not -- even if the legislation doesn't happen, there's a lot of tension and critical looking right now to change that.

Yes. No. And that kind of leads into my next question about that like how are you seeing that? And I know that's been an evolving conversation across this year. How are you seeing sort of your customer base react to that? Are they sort of waiting to see what the final picture looks like? Are they taking preemptive action? Like how do we think about that?

It's a fair amount of conversation and not a fair amount of action. So we have clients that -- we have VC clients that have told us that they've instructed their portfolio of companies not to do work in China. That's kind of a bold statement. I was surprised by those are 2 really big VCs because they're nervous. That doesn't mean they're going to stop doing studies that are ongoing. It just means that they're going to preempt them from signing one. So if it's toxicology work, that will come back to the U.S. and Europe. If it's a chemistry work, it will probably come and go back first to India and then some of it to U.S. and Europe. If it's CMC work, it's going to come back to probably U.S. and Europe as well. So we've had a trivial amount of benefit from it. So I don't want to get over our skis here surprised how slow it is by the same token, there's a fair amount of conversation about it. And of course, the legislation hasn't been passed. No idea what the new administration will do or not do with regard to that, although they're pretty tough in China. So it's likely, just my opinion, it's likely that, that will pass. So we should see -- that should be a tailwind for us. Here we are in early December. I think it's unlikely that we'll build that into our operating plan for next year. It's just too amorphous because we'll keep talking to our clients about -- we don't hear about it enough that we think is going to make a material difference anytime soon.

Okay. No, that makes sense. And if we think about your sort of broader small model business in China, how do we think -- are there any impacts to any of the questions or sort of like policy, early policy pronouncements that you think would have a negative impact on that? I mean that's like has been a nice secular growth story, obviously, for you in that market?

Yes. Doesn't look like. It looks like the research model business in China is unique from a quality point of view, from a scale point of view and for a reputational point of view. If you want to do really great science in China, you want your abstract to say that you use Charles River animals. So I do think that, that's -- that it continues to be a very strong market for us just in terms of growth rate, operating margin and expansion opportunity as we continue to build new locations. So we haven't had any vibrations that I think the government, assuming that they pay any attention to us at all, we're not literally a huge industry there. But I think we're an important industry to biomedical research. I think we acknowledge that it's higher quality. They acknowledge that's good for China. That's good for Chinese pharmaceutical and biotech companies.

And you have local -- it's local?

Totally. It's a Chinese company. They're amazingly entrepreneurial, I have to say. They run the business kind of like they own it and they're fast moving, very committed, and it's a high-quality business of some scale. So we're pleased with that. It doesn't look like there'll be any disruption. And that isn't what the BIOSECURE Act, for instance, is focused on, right? We're producing those research models in China for Chinese companies. Nothing is coming outside. So I don't think -- even if the tariffs punish China, I don't think it will impact our business.

Got it. No, that makes sense. One thing post the sort of funding bubble, I guess, we could call it in 2020, 2021. Backlogs across the industry, yours included, got extended. We've seen sort of the backlog come back to sort of working its way towards more normalized levels. Some of that was cancellations. Some of that was obviously burning off the backlog. How do we think about where we are in that sort of backlog like rightsizing process in terms of the broader cycle of that?

It's unclear what a perfect backlog is for us. But we historically were running sort of 6 to 9 months. So that gives you a couple of quarters. So studies always slip. The drug isn't ready, they reprioritize another drug instead of that drug, whatever, there are reasons, and they slip inside of their own companies as well. So that's just a function of what we do for a living. And if we have a couple of quarters of backlog, almost without exception, we have something to slot back in, particularly with a small animal study. So, sure, we're at the kind of 9-ish month backlog situation right now. We've got up to 12 to 18 months, which felt really good until it didn't. And what I mean by that is, I think clients were so concerned about getting a slot that they just book slots and elongated those slots without necessarily having a study and then when they got within a month of the study, they would just cancel it or slide it. And that's disruptive to our business model. So 6 to 9 months feels great. And so I think we're in a good place right now. Demand is obviously not what we would like it to be, particularly from pharma, it's increasingly improving from biotech. But this is a matter of not if, but when our clients, large and small, big pharma and small biotech to discovery developing and discovering drugs very early. And if they don't do that, they're not going to have anything in the clinic a few years from now, and they're not going to have new drugs in the market. And of course, as I think everybody knows, the preclinical spend is only 20% to 25% of the cost of producing a drug. So it's actually all the money spent in the clinic. So you don't want to start discovery and development for too long. And I think that we will be moving through that phase as the funding paradigm improves as pharma is done with their shrinking their infrastructure and readying themselves to the patent cliff we'll see more spending. You're starting to see the spending in the clinic actually slowed down a little bit. So that's quite interesting. So what is that about? I think that's about them pulling back and saying, okay, where should we be spending our money? Will we be the beneficiaries of that? Don't know yet. But it kind of feels like you could be moving in that direction.

Okay. That makes sense. And if we think back to prior cycles and that kind of hit to preclinical versus the broader clinical spending, do we typically -- how does that typically like flow through this cycle? Maybe there is not a typical cycle. But like if we see the preclinical getting whacked, like does it take sort of a year or 2 and then people who sort of freak out about their clinical possibilities and that kind of thing that we see sort of a rebound off of that? Does it kind of ramp back slowly? What have we seen in prior cycles?

Yes. I mean the cycles are always different and still...

D, all of the above? Yes?

Yes, still unsure whether this is a cyclical business. It's cyclical only to the extent that when clients get their backs against the wall, they will favor the clinic, and they will obviously ultimately favor getting drugs into the market. And that's what we've been living with now. Now it feels like you might have some stabilization there. They just can't starve the early discovery work for too long because it's going to hurt them. I think everyone is cognizant of that. And we know that lots of our clients, both large and small sort of parked -- sorry for the Boston accent, have parked their drugs.

That's part of your charm.

And so maybe they've got to develop 5 drugs against a particular target, and they're like, you know what, we only have the time and the money to work on 2 of them. And maybe they picked the wrong, too. We're hearing this a lot from our clients that they're getting back and taking these drugs that were parked and working on them again. So that's going to continue to slide back. And sort of any sort of stability from the capital markets with biotech, the extent to which they pause on these drugs, they will get back to it for sure in pharma. So that's what we'll be talking -- we are talking to pharma about right now in Q4 to talk about all of our clients. The difference, of course, is that biotech doesn't have any internal capacity. So they're always open to outsourcing because they have to outsource and they'll never bring the work in-house. So that's, in some ways, always a more robust market.

Yes. No doubt that makes sense. How are you seeing cancellations trend in terms of pharma versus biotech, maybe sort of related to this broader cycle that you were talking about?

So in addition to slippage, cancellations is an issue and as I said a while ago, we had an increase in cancellations because the backlogs were getting too long. We didn't know that they were too long until that happens. So we've been seeing an improvement or a reduction in cancellations, both in pharma and biotech. It's not quite at optimal historical lows, but it's much better. We don't think they'll continue to degrade any further. So from a predictability point of view and a planning point of view for Charles River just in terms of staff and people, I think we are -- with the backlog shortening and the cancellations leveling off, that puts us in a much better place for predictability, for guidance, for staffing and for capacity in our business. It doesn't look like anything will stimulate more cancellations.

Okay. That's helpful. Have there been any other levers customers have been open to when thinking about value creation besides price, like certain other things that they're interested in or sort of opportunities that you can create for them?

So everything is about speed, Elizabeth, everything. And so it doesn't matter how big or small the drug company is. And so our competitive advantage is the breadth of our portfolio. So our competitive advantage is they can start with us very early in the drug's development and stay with us literally all the way through to market approval that ensures speed, that ensures continuity, that ensures that a company like us will know as much about the drug, maybe more than the client knows about the drug. It helps get it to market faster also. So if you look at the fact that we can start with them with very early discovery, take them into safety and then do all the biologics testing if it's a biologic before it goes into the clinic, test the drug after it's approved in our Microbial and also our Biologics business, there's just great continuity there. So that's a lever that, to use your, for parlance and your credit, that's a lever that a client can pull by deciding to stay with us, as opposed to working with 10 different providers in stopping and negotiating price, slowing things down, having a provider that maybe doesn't understand the molecule very well. So 20 years of M&A and whatever it is, almost 70 deals, I think, has built a portfolio that is pretty much soup to nuts except running human clinical trials, but we do everything around the running of the human clinical trials. And so they stay with us through the life cycle of their drugs. And I think that's really important to us. I remember going to a meeting years ago with J&J, who said, we have 200 providers in R&D, and we want to get that down to a dozen. It's kind of a dramatic comment, right? And so 200 is just, even for a company that big, it's unmanageable. It's sloppy. They don't get the best value proposition, and it's slow. So going back to my comment about speed, I think that we allow the clients to move as quickly as possible. And by the way, a lot of it is just -- it's not just a go decision, it's a no-go decision. If the drug is too toxic, for instance, and it just won't be tolerated by a human being, they can stop spending or wasting money on that drug. So we get paid both ways and I think it's a really important part of our value proposition.

That makes sense. Have you ever talked about -- like what percent of your portfolio or for the drugs that you work on in a given year sort of do that whole soup-to-nuts thing in terms of like thinking about the future opportunity there?

I don't know what the percentage is, but a lot. I would say that most of the big drug companies use us all the way through some of the big drug companies buy everything that we sell. And certainly, a biotech company even middle-sized ones that have no internal -- they've discovered something. They have a patent on it. It's a novel technology, hopefully for an unmet medical need, then they have no ability, desire or financial capability to do anything with that, except to outsource it. So I think we provide a valuable solution for them. I don't think that model changes ever. And why would they do it? So big pharma has been reducing their infrastructure, let's say, for preclinical toxicology and letting us do it. We were a small or even a large biotech company go the opposite direction. I just think it slows them down and is wasteful.

Yes. Makes sense. Across 2024, you've been consolidating some of your sites, whether it's sort of multiple sites around Boston, for example, or San Francisco or whatnot. Where are we on that facility consolidation effort? And can you talk about sort of the benefits that that's brought so far?

Yes. So the good news is that we do a lot of M&A, and we buy operating businesses that are growing and have good operating margins. And so we tend to buy and keep their facilities because they're fully utilizing -- they have robust businesses. And then when you fast forward the tape to kind of today, what, we have 150 sites, which is a lot of sites for a company our size. We're not a small company, but we're not a gigantic company. And what we found is we have a lot of very small facilities. And we've been engaging with the client based upon the size of those facilities. And so -- and kind of requiring a client to work with us based upon what we do at that facility, maybe it's close to them geographically, maybe it isn't. And the problem with that is you get all these little satellites that are inefficient that have lousy operating margins, sometimes underutilized. And then you have big operations pretty close by that you could consolidate the small ones into the big ones. So we just announced that we've done a consolidation with 7 of those small facilities. We have another 15 coming on the pike kind of in this tranche. We should be more efficient, have better margins in the bigger facilities and have them fully utilized. And proximity will still be important, but we won't have all these dangling participles. So too many small facilities with not enough infrastructure to be beneficial. And we're going to continue to work on that. So the amalgamation of that is about $40 million of savings. Those are true savings that...

In '24?

Yes.

Yes. How important is geographical proximity to biopharma these days?

All things being equal, they will always prefer geography because they want to work in local currency. They want to work in local language, they want to work in local time zones. Having said that, if they can get a better price or better value proposition that we're doing something at a single site that they don't do in the closer sites, they'll expand that. But I think it's been a competitive advantage of us. We have a dozen toxicology sites and the European folks, not necessarily solely, but they want to work with European providers.

Okay. No, that makes sense. If we think about conceptually the puts and takes of the DSA segment operating margins going into 2025, what would you kind of think about as sort of like the headwinds and tailwinds for that?

So hopefully, the demand would be a tailwind, but we'll see. It's wishful thinking at the moment, right, but biotech is improving gradually. Pharma, at some point, should be done with the blood letting with the shrinking of the businesses. Pricing is going to be a headwind. So we're moving into a situation where we've had a really enormous price opportunity, if you look at '20 and '21, even '22, slowing down in '23, still some price at the beginning of '24. I'm talking principally about DSA and now probably trailing off in the back half of this year. So we're going to have some price challenges for sure. We hope to resolve that and make that up in a couple of ways. One is significant price -- significant cost reductions across all of our businesses. We talked about $150 million in '24 -- sorry, $100 million in '24, $150 million in '25 and $200 million in '26. The majority of that will be staffing, so about 6% of our staff will be reduced. And the question you asked about the consolidation facilities, we'll continue to do more of that. So that should be beneficial. And then I think we have an opportunity to use our portfolio in a more robust way to take share. So I think that if you look at DSA, maybe we'll get some price sometime in '25. I wouldn't count on that, but the ability to take share by using the fullness of the portfolio should benefit us.

Okay. No, that makes sense. The CDMO business that you guys have acquired and been running like has had a really nice step-up in revenue growth in 2024 with some nice margins. How do you sort of see the growth rate of that business going forward? And sort of how do we think about where the fully scaled margins are for that business?

So tough to have a prognosis on the growth rate. We haven't sort of refreshed our long-term targets. We will do those sometime in '25. And of course, we haven't put our plan to bid for 2025. But the demand has been improving. I think our -- the quality of our facilities, the quality of our senior management, the quality of our regulatory folks and sales folks has been improved immeasurably. The science is complicated. And so what we anticipate is that like you saw with monoclonal antibodies years ago, there's probably going to be a second and third generation of work in cell therapy, which is our principal activity, and probably in gene therapy as well. And so we'll ride that wave but I think there'll be some fits and starts. I'm not sure what the right term is...

Yes. It's not a smooth, yes.

...in demand. And so it has the propensity to be somewhat lumpy. But we like the quality of our facilities now and the management team, and we have new clients and should continue to be able to generate a new client base.

Got it. And you talked about when you were originally starting to sort that business out, that Charles River is a new player in this market and it took a little bit of time to get sort of established as a presence in that market. Do you sort of see that you're through that and now people see you as kind of a very strong player in this market? Or like where are you sort of on that? And do you need any more sort of capabilities in that market as we think about the next few years?

We may need some subtle capabilities in that market. But a lot of the difficulty that we had early was just with the quality of the staffing and the infrastructure of the facilities, on the one hand. On the other hand, it's just new complicated science for all of us, both for companies like us, even our clients and certainly for the regulatory people, I think it's been complex. So I think we're through a lot of the complexity of working in this business. I feel really good about the general management. We've got the centers of excellence. We have a viral vector business and the plasma DNA business and a full out manufacturing business. There's probably some subtle additions that we -- assuming that we continue to be happy with the growth of the businesses, some subtle service offerings that we need to add to the portfolio, maybe some geographic ones as well, we'll take a look at that as the business strengthens.

Okay. That makes sense. Do you think it's sort of a thing where then like you should see continued margin expansion in that business for the next couple of years as that sort of growth rate continues to give you a little scale and some of the more recent changes you put through from -- flush all the way through? Is that the right way to think about that in terms of the margin of that business?

I mean the margin expansion has definitely been a challenge. It's all about scale. It's all about the throughput and the demand curve. And so if and as that continues to increase and if and as we continue to get more price, and if and as the competitive dynamic, if and as we stay in a strong position from a competitive point of view, we could see operating margin improvement.

Okay. No, that makes sense. I think you've traditionally talked about the Biologics business as being sort of the -- one of the first to reaccelerate as the cycle turns. That business has obviously been growing well this year. How do we think about like that business this time versus sort of where we are in the broader cycle?

So it had a challenging '23, it's having a really strong '24. So you would anticipate seeing that. So our Microbial and Biologics business are much more tied to drugs in the clinic and drugs being approved. So since we've already discussed the fact that we've seen an emphasis in our clients, on the clinic. So we're doing that biologic testing to make sure we don't have any human viruses in the protein, for instance. That's an important value proposition that we have. So about -- it's about 50-50 now drugs being approved, large and small and probably close to that going through the clinic. So that business is poised, I think, for substantial growth. And Microbial is exactly the same thing. It's required by law that every batch of injectable drug or medical device has to be tested to make sure it didn't get contaminated. So we like those businesses a lot and more closely aligned to late-stage activity. They have very good margins. We have a lot of technology in the Microbial business, we have patent protection. So we should continue to see those businesses be strong for us.

Got it. And on the Microbial side, are you seeing sort of an increased willingness I know you talked about in the third quarter some nice new placement data in terms of sales there. How are you sort of seeing that? Are you seeing that on sort of also a different cycle than maybe what we think about as the core toxins and Discovery businesses?

So we have these devices that we have like sort of small, medium and large devices and we're seeing a big uptick in the large devices and which are quite expensive, and they tend to generate a significant amount of cartridge. This is sort of a razor-razor blade business. The large devices generate a significant amount of cartridges. We have great margins on the device and even better on the cartridges. And so as we place these big pieces of equipment on our clients, most of whom have been using the smaller devices for a long time, and it's become less efficient for us that's a great value proposition for us. So we should see more of that going forward.

Okay. That's great to hear. It's been -- you've had Noveprim for a little while now in terms of wrapping that into the core business. Can you talk about sort of where we are in that integration and sort of how are you thinking about this? What incremental learnings do you have now that you've owned it for a while versus what your expectations were going into purchasing it?

Yes, very well-run business with extremely high-quality animal models, great government to work with and pretty sophisticated operation there. So we obviously now have control and input on animal husbandry, veterinary oversight, nutrition, transportation, all of that. We're obviously getting research models for our tox sites at much lower price points. So that that's good for our margins. We will be expanding that operation as we indicated when we bought it. It's the highest -- those are the highest quality research models in the world. So it's doing exactly what we wanted it to do. And so we're really optimistic about the impact that we'll have and feel good about our overall supply situation right now, which is critically important at least half of the drugs that are approved are using large models.

Yes. No, that makes sense. And I think you previously talked about -- you had some -- obviously, that business had customers when you bought it, right? And you're just switching some of that over to internal supply. Where are we in that sort of dynamic? I know some of those customers had longer-term supply contracts. So how does that sort of transition over the next as we think about the opportunity there?

So there was a major client that has a 3-year deal. So we're 1 year into that. Those have nice sales, by the way, pretty good price points, but that's not why we bought the operation we bought the operation to supply ourselves and have control and make sure that the animal quality was of the highest in the world. So we'll be looking forward to that and have the contract rolling off. There's nothing we could do to have it roll off prematurely.

Okay. that probably makes sense. And then does that sort of acquisition change how to think about the growth rate of the RMS business going forward as we think about that in the next couple of years?

No. I mean it's tied principally to the toxicology.

Yes. So it comes through because of the internal sales. Okay. That broadly makes sense. Given where we are in the cycle and sort of the tech wave as well, how do we think about changes to capital deployment? Traditionally, we've seen you guys do a series of bolt-on acquisitions, which have worked out nicely over time. But you sort of see any sort of different opportunities given sort of where your stock price is, where the availability of assets? How do we think about that?

So we look at this sort of on a zero basis and objectively every quarter. What's the best use for our capital. We've been saying for years that our preference would almost always be strategic acquisitions. I think it sort of made the company. We've done about 70 deals in the last 2 decades, and it's so much of who we become what we become. But it's all contextual. So it depends on the share price. So we bought back some of our stock to offset dilution from options, which we had done years ago, every year years ago, and we paused that to keep our powder dry for M&A. We think we can do both. So we're paying down our debt where we bought back some stock. We haven't done any M&A this year. But we have a lot of conversations going on, almost all the sellers are private equity firms. So that means everything is for sale at some point. I don't know if the price points are going to come down or not, I doubt it. But a lot of the things we're looking at, I think there'll be little competition, at least a little strategic competition. I think most of it will be other private equity firms. We should be able to win on a competitive bid process as we have both cost and revenue synergies. So there are several things that we'd like to do that were right down the alley, nothing particularly new that would enhance our service offering and expand our service offering for our clients. So I think that strategy is critically important. And -- but we'll continue to look at it from a contextual point of view, depending on share price, depending on the overall economy, depending on how the core business is doing. And depending on the demand curve, I think, on the competition. I mean all of those things go into that. But we try to engage with the private equity firms really early, right after they buy these companies and say, we're likely to be interested in that. We get together with them 2 or 3 times a year. We asked to be the first call that they make if they decide to sell it. and with almost no exceptions, there's a couple, but almost no exceptions, we tend to be the first call that we make, at least we have somewhat of an inside track at the beginning.

Okay. No, that makes sense. If we think about that in sort of capital deployment and some of the internal investments you've been making, particularly around sort of the efficiency in Discovery, where people have said, okay, that's an earlier example of where AI could potentially benefit the drug discovery process. Where do you sort of see the next set of capabilities? I know you've, for a long time said, you don't want to compete with customers, so it's not like you're going to go off and develop your own molecules, but where do you sort of see the incremental opportunities to sort of push that process along further in terms of efficiency or speed or value creation?

Yes. So we won't make our own drugs. Our digital footprint has been a huge -- has had a huge impact on our clients' capability to book their own studies and self-educate and I think that's picked up the process, that sped up the process and reduce the cost to our clients. I think AI is definitely going to have an impact on drug development Yes. both at the clinical phase and at the preclinical phase, but most urgently for us, I think, in the early discovery phase. So there's no question, we have a deal right now with a biotech company. We're using our wet labs in tandem with their AI capability to see whether we can help the clients get to a lead compound faster. We'll see whether that works. There's a fair amount of interest by our client base. And that would be -- look, our goal would be anything we can do to get -- help the clients get the drugs to market faster would be an enormous role that we can play in this ecosystem. And if we could help the clients get more drugs to market faster, that would be a home run. So we'll be all over it. We want to -- we don't want to overinvest in AI because there's too many sort of what do people even mean by AI, but for sure, we should be able to use the data that we have across thousands of drug studies on an anonymized basis in tandem with the people that have developed these technologies, we should be able to design early discovery studies better. And I don't think toxicology is going to hijacked by AI at all. I think whole animal models are critically important, but we'll see at Discovery. And you'll see it in the clinical trial studies as well.

Okay. No, that makes sense. In the last 2 minutes that we have here, as you sit in your seat now, what's the thing or maybe 2 couple of things about Charles River that you think that investors sort of don't understand that would be helpful to clarify?

I think they don't understand the sort of symmetry between discovery and preclinical, that that's an important collection of capabilities that enhances speed and so much of that work moves from there to there. Similarly, with the CDMO business and Biologics, Biologics is actually part of the overall sale. And it's -- and we moved into the CDMO space because of our Biologics capability. And so it's the knowledge that the portfolio is quite broad and quite significant and that all of our biotech clients are using much of the portfolio in pharma as well. And so as we continue to add things to it, that enhances our capability to garner the work but also to accelerate the speed. So I think that as we do a better job with our clients and I guess, just to answer your question, with our shareholder base on the strength of the totality of the portfolio, that provides us some really good stead.

Makes sense. Thank you so much, Jim, for joining us today. Thanks, everybody.

Always a pleasure.