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

All right. Thank you, everyone, for joining our next presentation this morning, and we're very pleased to have with us Charles River Laboratories. And presenting for the company is Birgit Girshick, Executive Vice President and Chief Operating Officer; and also incoming Chief Executive Officer. So Birgit, thanks for joining us.

Thanks, Charles. Thanks for having me. Excited to be here.

Great. Maybe to start, obviously, a lot of changes at the company, Jim Foster, retiring after over 30 years as CEO. Maybe just reflect a little on that and sort of provide for us sort of how your vision for the company as we go forward as you kind of start this new chapter for the company.

Yes, certainly, happy to. So maybe let me start by thanking Jim Foster for his coaching and mentoring and the years of development that allows me to be his successor. I also want to thank him for his significant contributions in building the company into what it is today. So we are an industry leader. We are working on over 80% of all drugs approved by the FDA and an absolutely critical partner to every industry participant there is. So I can't thank him enough for leaving us with a company of this size and scale and importance. So very honored to take on the CEO role. What -- maybe what I want to start with is -- so last year, as you know, we did a very in-depth strategic review. And out of the strategic review, fully supported by our Board came a variety of initiatives. And we talked about those in some of our earnings calls in the last year, and we have started to execute on those. So earlier this year, you saw already 2 acquisitions, one, a further integration into our supply chain for nonhuman primates and the other one, really an acquisition of new alternative methods offering for next-generation sequencing, supporting our manufacturing support services. And we are very excited about both of those, and both of them will contribute to 2026 and beyond. We also have already had 2 divestitures announced. So we signed definite agreements for both our CDMO and Cell Solutions businesses. And we announced a signed definite agreement for some of our European discovery services. So we will continue to execute on those initiatives, and we will continue to focus on areas that will provide increasing shareholder value and growth for the company. We will continue to look at other options for M&A to add to our portfolio to make us more competitive. We are going to continue to reevaluate where we operate. So we had some site consolidations, but we're also looking to see what are the regions that we should be participating and how much. So more to that over the upcoming months. And then we continue to look at modernizing the company. So over the last 3 years, we have executed on a digital transformation. We have taken over $300 million cumulative cost out of the company. And we will continue to look at ways to help our clients to meet their goals, which is really accelerating drug development. Those will be focus areas and then more to come over the next few months.

Great. I appreciate that. And maybe let's just jump right in and start with DSA. Obviously, from the demand side of it, when people are looking at sort of broad funding data, we have seen improvements in public funding and follow-ons while perhaps IPOs have lagged a bit. Is this dichotomy kind of consistent with what you're seeing right now in the client base?

Yes, it's an interesting question. So we obviously follow macro trends and macro data. And certainly, what we're seeing here is very similar to what you're outlining here. And then we focus on the areas that we can control. So we look at our forward-looking metrics, bookings, proposals, particularly net book-to-bill and then also a lot of discussions with our clients and seeing what their confidence levels are, what their certainty is of budgets. Have they completed their reprioritizations? And what we're seeing there is actually quite positive. So over the last months, we have -- since summer, we have seen improving biotech proposal and booking numbers since the summer where we saw a little bit of a lull. Pharma seems to definitely be back to work. So all the discussions are about bringing more clinical candidates to term and really accelerating what they have in the pipelines right now. So from that perspective, we do -- we also hear a lot of positive implications from funding, seems to be much easier to get funding if you have a good program with some good data. And that gives the industry a lot of confidence. And we're hearing that every single day when we talk to clients now. And so in terms of that, I think IPOs were pretty good this month. So we'll build on it. But overall, I do think the funding is easing up, and we can see some good progress from that.

And obviously, that's been sort of the trend we've seen in the last half year, and I think that's helped inform sort of the guide that you gave for this year. If for some reason, we were to see biotech funding stall, let's say, later this year, is there enough sort of in the backlog, you'd say, to still be able to drive sort of organic growth?

Yes. So maybe let me piece that a little bit together. So in the Q4, we had a net book-to-bill of above 1. So that was the second quarter in 2025, gives us a lot of confidence. It takes about a quarter to 2 quarters for this booking to become actually revenue generating. So this net book-to-bill in Q4 will help us to drive some of the business and revenues that we need in Q2, mostly H2, so Q3, Q4. But we need to continue seeing those stable trends. We said earlier in our earnings call that we need to see net book-to-bill to be above 1 on average. That doesn't mean that we need to see it every month or even every quarter, but we need to see it on average for the year to drive -- to fill kind of the pipeline for the later half of the year to return to growth. So we are pretty confident right now that we will be able to deliver this. And -- but it's -- to us, it's a very realistic forecast and also -- so -- but we need to see that stabilization, I would say.

Got it. Obviously, last year, we saw a lot of significant disruption, FDA turnover or a lot of turmoil at the agency of some NIH funding cuts. How are those risks evolving? And it's sort of anecdotal, but are you seeing really any evidence yet of that affecting programs?

Yes. So obviously, a lot of discussions with our clients about the rhetoric coming out of the FDA and some of the actions happening there. And with a very small number of clients being impacted on their review dates, very small number, we are not seeing a disruption in the marketplace in general. So our clients have found ways to either work around it or it has eased up a little bit. So it became a business as usual on that. The discussions about NIH, will they have the budget? Will they not have the budget? Now they have the budget. Those are the discussions that impact a little bit more our academic clients, which is more of a research models clientele segment for us. And I don't think it has a direct impact because for us, we have seen NIH has resubmitted their contracts that we have with them, for example. But it did create a little bit of uncertainty with academia, universities, also some of the other discussions with universities directly [Technical Difficulty] indirect rates and things like that. So we have stable business with this clientele, but maybe a little bit of a slower growth rate than we would normally see.

Okay. But overall, it's kind of returned back to sort of a stable environment.

Absolutely.

Yes. I know you can probably talk about this for a while, but the topic du jour, obviously, is AI and its potential impact here. Maybe talk about it in 2 ways. Sort of how are your discussions on AI with your clients going and sort of their thoughts on the ability to accelerate drug discovery and then sort of maybe the opportunities that you see for Charles River to deploy AI as well?

Yes, certainly, happy to. So obviously, there are discussions with our clients. And just like us, clients are looking to see how any new technology can be used to support their drug development programs, potentially accelerate. There is quite a bit of funding going on into very early stage. So designing a better structure, finding that molecule that binds to a specific target. The outcome, if they're really accelerating drug development is yet to be seen. There's about, I think, about 150 AI-assisted drug programs in the clinic, still a very small number. Over time, we'll see what that will do. I think most of our clients, in addition to really focusing on the early stage, focus on the clinic, finding the better patient pool, but then mostly really focusing on operational aspects. How can they speed up manufacturing, maybe looking at vials, if they're cloudy or not and other things. And that's the same for us. So we have some initiatives going on where we're trying to answer some scientific questions, mostly to reduce the number of animals used in an animal study. So we're very committed to NAMs. But then also things like how can we speed up writing a report, how can we do a better job scheduling our staff, things like that. And I'm personally very excited about those technologies. So we'll see where we can take them. From a drug development standpoint and the impact on it, I think this is an evolution, not a revolution, and it will take a little bit of time. Drug development is more complex than rocket science. So it will be quite a bit of time before we know and can actually make some impact areas. And as some of the pharma CEOs even have said, we're not going to design a drug and bring it to market in 3 months. This is a 10- to 12-year period.

And I guess at the end of the day, is it fair to think that if there's efficiency gained and time saved because of deploying AI, do you think that leads to then more targets being introduced into the clinic into the pipeline versus less or the same? Or I would think maybe more.

Yes. So that is our assumption. And when I talk to clients, obviously, that's their assumption. If your return on investment in a particular drug program and you have fewer cycles in chemistry or less iteration, less dead ends, now you're saving some money, you can actually have more goals -- shot on goals and bring more drug programs into maybe toxicology safety assessment and into the clinic. So we're looking at this as a supporting tool. We're looking at this as a net upside, hopefully, in the future and not a threat to our business.

Great. I want to go back to the announcement you had the other week on divestitures. And one of them was sort of you're talking about divesting some of the European sites which did include some NAM assets and some small molecule AI platform. Can you talk through a little bit of strategic rationale because it would seem like some of those are sort of interesting and where you are making investments as well?

Yes, certainly, happy to. So yes, so we announced definite signed agreements -- signed definite agreements to sell our European -- some of our European discovery assets. So this was a quite surgical move to see that some of the assets may not be as synergistic to our business, may not provide us to pull through that we would like to see. From a NAMs perspective, we are maintaining all the capabilities that we would like to have to bring future NAMs to our portfolio. And we are retaining about 60% of the NAMs revenue that we had talked about in 2024. So when we announced the NAMs revenue. So from that perspective, there is a ton of questions to answer in drug development. We kind of outlined the road map of what questions we want to answer using new alternative methods, and that's what we're going to focus on going forward. So more towards our regulated toxicology studies versus the earlier discovery study.

I see. So it's more like kind of dividing within that universe where we focus on. Okay. Before maybe jumping to -- I just want to make sure we do touch on some of the broader outlook questions for the company. And then maybe we'll dive back into some of the segment specifics. But certainly, I know capital deployment is something that I want to make sure we touch on it. And maybe the first question here is you're expecting a slight step-up in shares for '26 and said you'll be obviously prioritizing debt paydown and also maintaining dry powder for M&A. But in that context, how should we think about share repurchase plans for '26 and potentially beyond?

Yes, certainly. So we guided to -- when we guided, we had that slight step-up on shares and no stock repurchases. However, our stock took quite a bit of hit with the hype around AI and the discussions lately. So we're continuously looking at capital allocation, where should we put our capital, where does it have the best returns? And with the current stock price, you should expect some stock repurchases this year.

Okay. That's really helpful. And maybe one more broader question. Obviously, we have a looming patent cliff coming for large pharma over the next several years. Can you remind us of how do you navigate through that? And what kind of impact would you expect from sort of this upcoming LOE cliff?

Yes. So pharma companies continuously look forward to what challenges they have and how they need to react to that. So if you think about the restructuring a couple of years ago, where every -- basically every pharma company reprioritized their programs, had big restructuring programs, cost savings that they announced. This is now 18 months later for most of them. Most of them are through executing on those restructuring programs. They have reprioritized their drug programs. They know exactly what therapeutic areas they want to play in. So this, in my opinion, is built into what they have already done. And now they're just going to move forward and see that they're bringing new drugs to market either organically or through in-licensing or acquisitions. So I wouldn't expect any additional restructuring or reprioritization programs coming about.

Okay. One question on margins before I jump into the other segments. So -- and this relates to K.F., you kind of talked about K.F. helping normalize NHP-related costs after the first quarter. Do you think the acquisition of K.F. kind of helps raise the long-term margin potential of this business?

So yes, maybe let me take that a little bit from what happened in Q4 and then forward. So when we -- last year, we had more nonhuman primate studies in our Safety Assessment business that we originally had anticipated early in the year. And how our supply chain works there is we plan on a certain number; we import a certain number. And then when there's more studies, we -- in this case, had to buy on the open market. So basically, from suppliers where we don't own the supply chain nor did we have any contracts in place. So with that, the pricing for those, that spot pricing, not the general market pricing was higher than we normally would pay. But it's still a benefit to us to do the work for our clients. We want them to get their programs advanced. And so it's something we need to do if this comes about. So this had an impact on Q4 cost in our DSA segment, has an impact on Q1 still. As we come out of Q1 into Q2, we're going back to our normal supply. So by itself, even without the K.F. acquisition, we will see a reset of our cost base, and it will have -- will not have the headwinds we're seeing currently in Q1. In addition to that, the K.F. Cambodia acquisition, we have announced that it will have a [ 50 ] basis points improvement to our DSA margin and 100 basis points to our company margin. So it has a considerable positive impact -- and -- but I also want to remind you that we do make those acquisitions to get better control of the supply chain, take the uncertainty out and to invest in those businesses, into those farms from a compliance and quality and regulatory standpoint. So a very important acquisition for us.

And that also helps explain some of the -- when we look at RMS, right, sort of the NHP headwind there, you talked about 200 basis point headwind to growth. And then that's related same with that shipment timing. So assuming sort of comparable demand, do you think this makes '26 sort of a rebasing year that sets up for a return to growth in '27?

Yes. So this is actually a little bit a different dynamic, and sorry for the complexity about -- around our supply chain here. But when we own a farm and we have either more animals than we need or in this case, we actually have a supply contract with a third party that we are committed before we even had bought the farm. This is when we sell through our RMS segment animals to third-party customers. And what's happening here is that last year, we had a very strong demand. So some of the volumes that we actually probably would have sold in '26 went into '25. And so we have a little bit of a headwind in 2026 in our RMS segment, where we're selling fewer numbers to third-party clients. This is just timing. This is just when things happen depending on the age of the animals and the demand that the third party has and this is unfortunately a supply chain or a sale that is not linear and not every quarter the same amount. So you will see those variables. It's a little early to tell about 2027, so I don't want to go into 2027 yet. Plus, I want to remind everybody that eventually, we plan to use those animals mostly on our DSA studies. So the margin profile will actually move from RMS into DSA, but the revenue profile will change here a little bit. So the acquisitions of those farms were solely done to secure the supply chain for our DSA business.

Okay. Maybe a question about CRADL. You kind of talked about lower demand for CRADL from early stage biotechs will be a little bit of a headwind as well. But if we see continued improvements in biotech funding, do you think that kind of changes that assumption? How should we think about I guess the question being like would we need to see increasing funding above the current levels to maybe change that dynamic? Or how should we think that -- those 2 kind of related together?

Yes. So our CRADL business is a services business where we offer space and then animal husbandry, so basically the vivarium space to clients. A lot of very early-stage clients are our clientele here, some later stage, even some pharma companies. But we are heavily reliant here. So the business model is really geared towards new companies coming in, having their first funding, needing a space to do their research and where -- so what we've seen over the last few years is with biotech funding being at a low that demand wasn't quite as robust as we would like it to see. So we made some consolidation of the CRADL facilities. The demand right now is stable, but we're not seeing the growth that we would like to see in that business yet. I do believe that biotech funding will help, particularly if we can see an increase of new companies being started up again. So I think that is the key indicator for this business. And eventually, we'll get there.

Yes. Okay. That makes a lot of sense. You kind of hinted at before sort of thinking about where geographies we need to be in and being sort of aligned on that. And I guess the question then kind of points to China a little bit. Obviously, I think most of your China exposure is through RMS today. Can you -- I don't know if you've shared it, but can you kind of talk about sort of how much of RMS is coming from China? And if we think about sort of the in-license coming out of the country currently, does that maybe change the way you think of maybe offering DSA services there as well?

Yes. Interesting question. So China, obviously, is a very big market for drug development. We currently have a very good, very sizable business for our research model in China. For research models, that's about 15% of the revenue, for Charles River in total, 4%. So Charles River total is relatively small. This business is a critical partner to the biotech, mid-tier and pharma industry in China, so China for China, and has grown for many years. And we are obviously a little bit through that lull in China, in the mid-tier segment there, but we're seeing a good rebound there as well and should going forward, see this accelerating here. From a DSA segment, it's an interesting territory for us. So currently, we don't have any services there. We are evaluating if and how and when we should play there. And so there will be a little bit more work going into that and see what is the opportunity for us? What's the geographic risk? Is the current in-licensing accelerating the market or not? So quite a bit of work going into this question right now and more to come on that.

Okay. And then we kind of touched on it earlier with kind of the flux in NIH funding, but it seems like they have stabilized. Maybe can you kind of share what level of demand are you expecting from sort of academic government accounts here in '26 within RMS?

Yes. So the academic and accounts and government accounts for our research models business is a sizable segment, and it's stable. So I would say just that the growth rates slowed a little bit. So academia and government for our RMS segment has been a good grower. And just with the uncertainties last year, we see a little bit of a pullback, a little bit of just slowing the growth rate, but still a very, very stable business. It's still where fundamental research is being done. And so we would expect that we are seeing a rebound as the universities are working through the uncertainties here.

Okay. In the last few minutes, I want to touch on the manufacturing segment. So you've now made a decision to sell the CDMO assets. Can you maybe remind us what is remaining, right? So obviously, biologics and microbial testing. And so within those 2 kind of core parts, which I think has generally still grown pretty well, maybe hidden a little bit by the headwinds of CDMO. Maybe talk through sort of the growth expectations between those 2 pieces, how we should think about growth there? And maybe as you think about future M&A, is this an area where you would maybe look to expand again or just overall thoughts there?

Yes. So our manufacturing segment, we expect to grow this year mid-single digits overall, you're right. The 2 primary businesses that are remaining is our Microbial Solutions business and our Biologics Testing business. Both are supporting clinical trials, clinical studies as well as commercial, so manufacturing as well as commercial manufacturing. So generally, a stable segment that gets a lot more the funding than early stage. Our microbial business has -- is a very -- it's a rock-solid grower for us. We have 3 franchises there, the Endosafe, Accugenix, and Celsis. All of those have good prospects, and we are a market leader in providing those fast and rapid testing solutions for commercial manufacturing and clinical manufacturing. So everything from endotoxin testing to microbial testing and we expect that to continue. So we are continuing to morph our portfolio in this business to stay ahead of the competition and remain to be a critical partner to our clients. Our biologic's testing business was an extremely fast grower throughout COVID. We had a little bit of a reset because of just the programs coming in, coming out. So growth wasn't quite as good as we would like to see it there. And then in the last year, we were impacted by one client, and we are coming out of this, and I expect this business to resume growth and rebound to its previous growth levels.

Okay. Great. Any last words? We've got 20 seconds or so left. Any kind of last words as we think about maybe what are the big opportunities you're looking for and maybe how, as you step into the CEO role, a good way for investors to kind of gauge success?

Yes. So biggest focus areas for us is really returning to growth. And we will continue to execute on our modernization and cost of the organization, both areas that will drive shareholder value and maintain our company as a critical partner for the industry.

Great. Birgit, thanks a lot for being here. Appreciate it.

Thank you.

Okay. Thank you, everyone.