CRL — Q2 2023 Earnings Call Transcript

Good morning, and welcome to Charles River Laboratories second quarter 2023 earnings conference call and webcast. This morning, I am joined by Jim Foster, Chairman, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2023. Following the presentation, they will respond to questions. There is a slide presentation associated with today’s remarks, which is posted on the Investor Relations section of our website. A webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through next quarter’s conference call. I’d like to remind you of our safe harbor. All remarks that we make about future expectations, plans, and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially than those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster.

Good morning. We were pleased with our second quarter financial performance, including organic revenue growth of 11.2%. As expected, the revenue growth rates in the RMS and Manufacturing segments improved from first quarter levels, and the DSA segment had another strong quarter with low double digit revenue growth and operating margin improvement. DSA performance reflected the substantial scale and duration of our backlog, which has enabled us to effectively manage the business. For the year, we are narrowing our revenue growth and our non-GAAP earnings per share guidance to the upper ends of the previous ranges. This update largely reflects the successful implementation of our mitigation efforts around NHP supply, for which I will provide additional details shortly. However, we continue to expect for second half growth rates to be pressured primarily in the DSA segment as a result of three primary factors. First, the current market conditions are resulting in a continuation of the lower backlog and booking trends. Second, the DSA segment faces a challenging year-over-year comparison after having generated organic revenue growth of 23.6% in the second half of 2022, and finally, we still expect a modest impact from NHP supply constraints principally in the third quarter. We are also closely monitoring the near-term demand trends of our biopharmaceutical clients as they appear to be reprioritizing their pipelines and tightening their R&D budgets. This is affecting our industry and our company, but we will continue to leverage our significant DSA backlog and intend to appropriately manage the business amidst a more cautious biopharma spending environment. During times of funding or macroeconomic uncertainty, clients are looking for even more efficiency and speed to market, and we believe they will continue to choose an industry leader like Charles River to derive additional value from our flexible and efficient outsourcing solutions. With regard to NHP supply, we have been effective in our efforts to leverage our global safety assessment infrastructure to alleviate the overall impact of supply constraints caused by the suspension of Cambodian imports into the U.S. and have made significant progress to better utilize our sites outside of the U.S. Based on our progress to date, we believe that we have successfully mitigated the logistical challenges posed by the current NHP supply constraints by conducting more studies outside of the U.S. and better leveraging our global infrastructure, which is a competitive advantage for Charles River. We have been able to effectively transfer safety assessment work between sites because much of our capacity was built flexibly to accommodate multiple species of both small and large models. The transition of this work to our international sites this year has required time to implement study scheduling, logistics, quarantine operations, and retraining of some staff, as well as working with local government agencies. However, we have already made significant progress with these initiatives and do not foresee any meaningful NHP supply constraints affecting the business in the fourth quarter and next year. As a result, we now expect the impact from NHP supply constraints will be less than our initial outlook of a 2% to 4% impact to consolidated revenue growth this year. We have narrowed our DSA organic growth and growth outlook to the mid-single digits or the upper end of the prior range to reflect this positive update on NHP supply. But we also expect the favorable impact to be largely offset by the current DSA demand trends. Going forward, we are operating under the assumption that we will conduct meaningfully less NHP-related study work in the U.S. as our international infrastructure will be sufficient to accommodate this work. I will now provide highlights of our second quarter performance. We reported revenue of $1.06 billion in the second quarter of 2023, an 8.9% increase over the last year. Organic revenue growth of 11.2% was driven by strong performance in the RMS and DSA segments as well as an improvement in the manufacturing growth rate led by the CDMO business. By client segment, second quarter revenue growth was broad-based across global biopharma, biotechs, and academic and government institutions. However, demand from global biopharmaceutical clients modestly outpaced small and mid-sized biotech clients for the second consecutive quarter. This demonstrates the diversity and stability of our overall client base as globals continue to move their critical programs forward at a time when biotechs are being more selective with spending to extend their cash runways. The operating margin was 20.4%, a decrease of 140 basis points year-over-year. The decline was driven by continued margin pressure in the manufacturing segment as well as higher unallocated corporate costs. Earnings per share were $2.69 in the second quarter, a decrease of 2.9% from the second quarter of last year. As anticipated, the year-over-year increase in interest expense and the tax rate continued to be meaningful headwinds to earnings growth this year as was the divestiture of the avian vaccine business. As I mentioned earlier, we have narrowed our revenue and non-GAAP earnings per share guidance ranges for the year to the upper ends of the ranges due largely to the successful implementation of our NHP mitigation efforts. We are narrowing our organic revenue growth guidance to a range of 5.5% to 7.5% and our non-GAAP earnings per share guidance to a range of $10.30 to $10.90 for 2023. We have increased the lower end of the ranges by 50 basis points and $0.40 per share, respectively. We believe our existing DSA backlog and our in-depth assessment of the normalizing demand trends gives us continued confidence in our financial outlook for this year. I'd like to provide you with additional details on a second quarter segment performance, beginning with the DSA segments results. DSA revenue in the second quarter was $663.5 million, an increase of 11.7% on an organic basis. The Safety Assessment business continued to drive DSA revenue growth and contributions from base pricing and study volume. NHP pricing was a small benefit to the growth rate, although less of a benefit than in prior quarters. The second quarter performance of the discovery services business, which posted lower revenue compared to the prior year, was reflective of the current market environment coupled with the shorter-term nature of both discovery projects and the business's backlog. DSA backlog decreased modestly on a sequential basis to $2.8 billion at the end of the second quarter from $3 billion at the end of the first quarter. Net bookings and proposal activity continued to trend lower, with net book-to-bill remaining below one times on a quarterly basis. This was primarily driven by the cancellation rate which trended higher and accelerated in the second quarter. We believe the cancellation rate has increased because during the peak demand environment over the last few years, clients booked studies further in advance of when the work would be required. Now the clients are rationalizing lower-priority projects in their pipeline; they are canceling the associated studies. We view this trend as largely a reversion to the mean and expect that as clients complete the pipeline rationalization process, cancellation rates will decline and the backlog will more reliably reflect the actual study demand. We believe the cancellations will decline because incoming new Business Awards or gross booking activity that is not adjusted for cancellations remain robust, resulting in a gross book-to-bill remaining about one times in the second quarter. We now see clients booking closer to when studies are required, which increases the reliability of the backlog. The current level of gross bookings can support healthy revenue growth rates which suggests that solid underlying growth prospects for the Safety Assessment business will return once the rate of cancellation subsides. We believe the stabilization of the demand trends will be supported by encouraging macroeconomic indicators as well as stable to improving biotech funding levels. In the second quarter, biotech funding showed the first quarter-over-year increases in seven quarters on a trailing twelve month basis. We also have an average of thirteen months of revenue coverage and our safety assessment backlog. This solid backlog coverage affords us the ability to appropriately manage the business through fluctuations in the demand environment, backfill gaps in study schedules, and meet our near-term financial targets. This, along with our level of backlog coverage for the remaining quarters in 2023, is well above the historical pre-pandemic averages, which gives us additional confidence about the resilience of the business and our ability to achieve our financial goals. The DSA margin was 27.6% in the second quarter, a 230 basis point increase from the second quarter of 2022. The increase continued to be driven by operating leverage associated with higher revenue in the Safety Assessment business. In addition, we are closely monitoring capacity utilization for both physical infrastructure and labor, including the pace of capital spending and hiring, and are committed to keeping these metrics closely aligned with the current demand environment as the DSA growth rate normalizes. RMS revenue is $209.9 million, an increase of 13.9% on an organic basis over the second quarter of 2022. The RMS segment continued to benefit from broad-based growth in all geographic regions for small research models and another exceptional performance from our in-sourcing solutions business led by our CRADL initiative. In addition, as we referenced last quarter, the timing of large model shipments within China benefited the second quarter growth rate, leading to the outperformance compared to our full-year RMS outlook of high single-digit organic growth. The growth rate for small models in China also benefited from the comparison to last year's modest impact from COVID-related restrictions in the Beijing and Shanghai regions. While growth rates cooled a bit in the second quarter, we are continuing to see stable demand and pricing for small research models in North America and Europe, which reinforces our growth outlook for the year. As you know, these models are essential tools that enable scientists to move their biomedical research programs forward. The stable demand trends also reflect a large base of clients in the RMS segment, as more than half of RMS revenue is generated from academic and government institutions and large biopharmaceutical clients. The Services businesses continue to be the primary growth driver for RMS, with in-sourcing solutions or IS leading the way. IS’s CRADL operations are continuing to expand and generate excellent client interest. We recently opened a new site in Seattle and our first location in Philadelphia. Including these locations, we now have 32 CRADL sites totaling over 400,000 square feet in five states with growing biohubs, as well as in London and China. The Philadelphia site is expected to cater to a large base of cell and gene therapy companies in the region, a sector of the market which we continue to believe will generate abundant growth opportunities across our portfolio. Our CRADL network supports the flexible growth of the entire life sciences ecosystem in each biohub, allowing researchers to utilize our flexible Vivarium rental space instead of building their own infrastructure. In the second quarter of RMS, the operating margin increased by 150 basis points to 26.4%. This improvement was driven primarily by leverage from higher revenue growth in China due to the timing of large model shipments and last year's COVID-related impact. Because the timing of large model shipments in China is not linear, we are expecting the third quarter RMS revenue growth rate and operating margin will be a bit lighter than the second quarter as a result of fewer shipments. Revenue for the Manufacturing Solutions segment was $186.5 million, an increase of 6.6% on an organic basis compared to the second quarter of last year. The increase was driven by the CDMO and Microbial Solutions businesses, partially offset by continued softer demand for biologics testing. The cell and gene therapy CDMO business had a strong quarter, reporting a solid double-digit growth rate. We are very pleased that the initiatives the CDMO team implemented over the past eighteen months to improve performance have been successful and are beginning to generate the intended results. The creation of centers of excellence in gene modified cell therapy, viral vectors, and plasmids has more optimally aligned the business, and investments in the commercial readiness of our operations and efforts to continue to improve the sales funnel for new projects have also contributed to the performance improvement. We are also pleased to be working with a commercial cell therapy client in Memphis and have a few other clients who are nearing commercial launches over the next one to two years at both Memphis and our Gene Therapy Center of Excellence in Maryland. Microbial Solutions delivered a solid second quarter performance led by the continued strength of the Accugenix Microbial Identification platform. Last month, we were very pleased to have completed the launch of our Endosafe Trillium recombinant cascade reagent, or rCR for bacterial endotoxin testing. This animal-free solution reinforces our commitment to sustainability initiatives and provides a recombinant alternative for indecisive clients who wish to become early adopters of more sustainable testing methods. Trillium utilizes three biological proteins, which we believe provides superior accuracy and testing outcomes to competitors' single protein alternatives as well as equivalents to LAL-based testing measures. With the launch of reagent kits in July, we plan to have Trillium cartridges available this winter, which clients will be able to utilize in their existing Endosafe systems for a seamless transition from LAL to rCR. We believe that client adoption will be gradual over the next several years, as most clients will likely continue to rely on our LAL-based Endosafe cartridges, which utilize 95% less LAL than traditional methods. The introduction of the animal-free Trillium solution supports our advancement of responsible science and further enhances our industry-leading position as the only provider who can offer a comprehensive solution for rapid manufacturing and quality control testing. Testing volume in the biologics testing business improved from the seasonally soft first quarter level. But the year-over-year growth rate continued to be pressured, particularly for viral clearance and cell banking services. We believe the performance is indicative of the current market dynamics of clients reprioritizing projects and becoming more budget-focused, particularly for services that could be conducted at various times during the development process. Manufacturing segment's operating margin declined by 570 basis points year-over-year to 22.9% in the second quarter of 2023, but did improve sequentially as anticipated. The year-over-year decline was primarily driven by the biologics testing and CDMO businesses, but we do expect the segment margin to continue to trend higher, particularly as the CDMO performance continues to improve. We were very pleased with the second quarter results, which gave us the confidence to narrow our 2023 revenue growth and non-GAAP earnings per share guidance to the upper ends of the previous ranges. Although some demand trends are moderating, we believe that the fundamental drivers of our business are intact, and we are well-positioned to manage through any near-term fluctuations for several reasons. First, clients are under intense pressure to bring new drugs to market; we believe they will always want a large experienced scientific partner like Charles River who can provide the greatest value to them through unmatched scientific expertise and flexible and efficient outsourcing solutions. Second, the scale and duration of our DSA backlog provides us the visibility to more effectively manage the business through timing and location using our global network of facilities. And third, we will continue to drive a culture of continuous improvement, speed, and efficiency. As a result of our digital transformation, we have better access to data and insights internally to appropriately manage costs and investments and enable our clients to access real-time data, e-commerce solutions, and other self-service tools. Finally, we believe that the power of our unique portfolio differentiates us today more than ever from other companies that provide R&D support services to the biopharmaceutical industry. As part of our annual strategic planning process, we recently completed a thorough review of the current market environment, our growth prospects, and the strategic imperatives for our company. Through this process, we believe the current market trends could be characterized as a normalization from the past several years when there was unprecedented focus on investment in biomedical research and scientific innovation. However, we are optimistic that we will be able to capitalize on the many opportunities our markets provide. We intend to share more of our conclusions and update our longer-term financial targets at our Virtual Investor Day, which we have planned for Thursday, September 21. To conclude, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now, Flavia will provide additional details on our second quarter financial performance and 2023 guidance.

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results which exclude amortization and other acquisition-related adjustments, costs related primarily to our global efficiency initiatives, gains or losses from our venture capital and other strategic investments, and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, and foreign currency translation. We're pleased with our results for the second quarter, which included organic revenue growth of 11.2% and non-GAAP earnings per share of $2.69. These results, which are consistent with our prior outlook, reflect the continued resilience and stability of our businesses even during times of macroeconomic pressure. As was the case in the first quarter, increased interest expense, a higher tax rate, and the divestiture of the avian vaccine business continue to restrict the year-over-year earnings growth rate. Our first half results and our updated NHP supply outlook support our revenue growth and earnings per share guidance for the full year, which has now been narrowed to the upper end of the prior ranges. We continue to be well-positioned to deliver reported revenue growth of 2.5% to 4.5%, organic revenue growth of 5.5% to 7.5%, non-GAAP earnings per share between $10.30 and $10.90, and free cash flow of $330 million to $380 million for the year. Our updated revenue growth outlook for 2023 reflects our revised assumptions about two headwinds that will affect the second half growth rates, particularly in the DSA segment. First, the impact of NHP supply is expected to be below our original estimate of a 2% to 4% impact to total revenue growth. This favorability will be largely offset by the impact of macroeconomic and funding pressures on biopharma client demand trends. For the DSA segment, we expect the cumulative effect of these factors to result in a slightly more favorable outlook for the year with revenue growth rates in the mid-single digits on a reported and organic basis for the year. The Manufacturing segment benefited from continued traction in the CDMO business in the second quarter, but we expect continued pressure on the biologics testing growth rate due to a more budget-focused client base. As a result, we're reducing our reported growth outlook for the manufacturing segment to a low to mid-single digit decline and narrowing our organic segment growth outlook to a high single-digit increase. The RMS segment growth outlook remains unchanged with a high single-digit growth on both a reported and organic basis. With regard to the consolidated operating margin for the full year, we expect the margin to be flat to slightly lower than in 2022. We will continue our efforts to manage costs, reduce discretionary spending, and drive efficiency, as well as monitor the demand environment to ensure our cost structure is closely aligned. I will now provide some additional details on the non-operating items in the second quarter. Unallocated corporate costs totaled $65.1 million or 6.1% of total revenue in the second quarter compared to 4.1% of revenue last year. The increase was primarily related to the timing of corporate expenses, which fluctuate on a quarterly basis with a lower level in the first corporate costs averaged 5.2% of revenue in the first half of the year, and we expect approximately 5% for the full year. The second-quarter tax rate was 23.3%, representing a 220 basis point increase from the same period last year, but consistent with our full-year outlook. The year-over-year increase was primarily due to a lower benefit associated with stock-based compensation and other headwinds related to discrete tax items. For the full year, we continue to expect the tax rate will be in a range of 22.5% to 23.5%, which is unchanged from the outlook we provided in May. In the second quarter, total adjusted net interest expense was $33.6 million, which is essentially flat sequentially. For the full year, we now expect total adjusted net interest expense will be in a range of $131 million to $134 million; this is slightly lower than our prior outlook, primarily as a result of our assumption that the Federal Reserve will take a less aggressive stance towards interest rate hikes for the remainder of the year. As a reminder, at the end of the second quarter, approximately three-quarters of our $2.68 billion in debt was at a fixed interest rate. Regarding the variable rate portion of our debt, our outlook can accommodate an additional 50 basis points of rate increases for the remainder of 2023. At the end of the second quarter, our outstanding debt balance represented a gross leverage ratio of 2.1 times and a net leverage ratio of 2 times. We continuously evaluate our capital priorities and intend to deploy capital to the areas that we believe will generate the greatest returns. Over the longer term, we continue to believe that strategic acquisitions will generate greater shareholder returns by enhancing our growth potential. But in the near term, we intend to continue to focus on debt repayment. Free cash flow was $80.7 million in the second quarter compared to $66.6 million last year. The year-over-year increase was primarily due to favorable changes in working capital. For the year, our free cash flow guidance of $330 million to $380 million remains unchanged. Capital expenditure was $67.4 million in the second quarter compared to $82.9 million last year, primarily as a result of the timing of projects. We will continue to monitor the demand environment and intend to keep capacity and capital investments closely aligned with market trends. We continue to expect to make capital investments in the range of $340 million to $360 million for the full year, which is in the 8% range as a percent of total revenue. A summary of our updated financial guidance for the full year can be found on Slide 40. We’re expecting the second-half consolidated organic revenue growth rate to average in the range of flat to low single-digit growth. The slower growth from first half levels is due to three principal factors, including the modest NHP-related supply impact in the third quarter, a more cautious biopharma spending environment, and also difficult growth comparisons to the second half of last year. These items will have the most significant impact on the DSA growth rate. The Manufacturing segment’s performance is expected to continue to improve from the first half levels, and the RMS segment is expected to continue to deliver solid performance, with a third-quarter RMS growth rate and operating margin a bit lighter due to the timing of large model shipments in China. For the third quarter, we expect low single-digit revenue growth on both a reported and organic basis. Non-GAAP earnings per share is expected to decline by approximately 10% from the third-quarter 2022 level. In closing, we continue to focus on the execution of our strategy and delivering solid financial and operational results. We're pleased with our first-half performance, and despite some macroeconomic and funding pressures on our biopharma clients, we believe the fundamental drivers of our business and our solid financial position will enable us to successfully navigate this environment. We operate in a durable industry with attractive long-term growth prospects and will continue to leverage our capabilities, expertise, and proven strategy to fully support our clients' evolving needs and achieve our full-year financial outlook. Thank you.

That concludes our comments. We will now take your questions.

Great. Thanks very much. And I apologize; hopefully Jim you didn't cover this. I had to jump on the call a little bit late. But in terms of the demand environment is there a noticeable split between the types of customers—large pharma, mid-size pharma, emerging biotech—that is it coming in any particular area, whether by size by therapeutic classes, any way to think about sort of, or is it broad-based that you're seeing sort of come a little bit more cautious across all the different therapeutic classes and all the different sizes? Thanks.

Pretty broad-based for different reasons, obviously. The big pharma companies, which are typically flushed with cash, have budgets, and they are holding very tight to them. So we have some careful spending there, and you've got a whole category of very small biotech companies with some potential concern about burn rates and running out of cash. So we would say that both of those groups would be careful, subject to the following caveat that we have particularly, I think, strong performance from the pharmaceutical sector in the second quarter. Some of the companies are quite strong. Our growth rate has been juiced for the last, I don't know, decade, principally by small and mid-sized biotech. Big pharma has always been an important client base for us, but they have been particularly active and strong to a point, and the point being budget. So I'd say some careful spending across the board would be probably the best way to characterize it.

Great. Thanks, Chairman. I'll just keep it to one question for now. Thanks.

Thanks very much. Good morning. Two-part question on DSA first, I know it's modest and better than you originally expected, but would you care to quantify the more specifically quantified the third-quarter impact from NHPs and what you're seeing for the full year versus the original 2% to 4%? And then secondarily on the commentary around backlog declines and cancellations, while that was, I think, fully anticipated, I am curious what your perspective is on the $2.8 billion today, how much of that do you think could be at risk? Or where—and maybe another way of saying this, would you be looking at similar backlog declines over the next one, two, three quarters? Just trying to get a sense of what you think the underlying safe base is in that backlog that you're disclosing now? Thanks so much.

Yes, difficult to say where it settles out. So we had a sickly frothy market, and clients, definitely—concerned about getting slots? And so they booked way out. So yes, we got as far out as, you know, seventeen, eighteen months. We talked about that. We got about thirteen months of coverage right now, which feels good. We will have less slippage, so slippage increased, sorry, we've always had slippages increase just because the sheer volume of work has increased; by the same token, I think people were holding slots without necessarily knowing what drug they would put into that slot. That's exacerbated by the fact that everybody's sort of refining their pipelines. So as things continue to normalize, which they are and we think they will continue to, I think the good news is that they'll be booking studies somewhat closer to when they start. So that's a good thing for them and for us. We should see a reduction in slippage for sure, but we should still have a substantial amount of business and backlog. Where it shakes out is a little bit difficult to call. What we've said is it's normalizing instead of returning to the mean, and I think all of that's true. We've gotten a significant amount of price each year for the past half a decade anyway, increasingly so because the studies are more complex. So as we look to the current and the future, we think the price will continue to be an important part of the equation, as will some substantial volume. So we'll just have to walk through this together as we walk through the quarters. The other thing which we keep saying that I'm not sure people pay a lot of attention to it, is we don't have linearity in our business. So, last year we had a very slow first half and a very strong second half. This year we've had a very strong first half and a less, sort of pointing to a less strong second half. That doesn't necessarily tell you much because our clients look at the spending throughout the whole year, and we've—I think we've been able to call, so the annual cadence really well. But we feel that that business is good, demand is solid, we have a strong competitive situation and that our clients will be focusing on studies to start more rapidly than they have over the last two years.

And on average, just to your first question about the DSA impact. We're not going to quantify it precisely; I'm just going to say that it was meaningfully below the previous 2% to 4% range that we provided. We're going to see a little bit of that in Q3 just as we operationalize those logistics of redistributing work across our geographic footprint. So it should be a small modest impact in Q3 and nothing in Q4. And just one additional comment with regards to the backlog; in addition to everything that Jim just said, I think we pointed out that gross bookings were above one times of the book-to-bill in the quarter. So I think it's really, to Jim's point, canceling of work that was placed when the market was very frothy and the reversed to the mean as you pointed out.

And Flavia, if gross bookings were above one, is I thinking about that right? There's about 12% revenue growth in the segment; does that mean gross bookings were up 12% plus as well? Am I thinking about that right?

There's other things there. There's price that is different year-over-year. So I wouldn't necessarily draw that direct conclusion, but growth bookings are going to be supporting continued healthy growth with DSA. That's how we should think about it.

Hi, good morning. Thank you for taking my question. So I've got two. Jim, we continue to get a lot of questions from investors about—speaking about how NHP pricing is going to roll to the business that normalizes and pricing starts to come down. People are worried about your margins. Can you sort of walk through the impact of what that has done in terms of NHP price on your margins and just sort of how you're thinking about mitigating that? Thanks. And then I've got a follow-up.

The NHP pricing has been primarily a pass-through, and so we've— we're covering our costs and getting reimbursed for them. If and as those come down, which I think everybody expects that they will, it’s a little bit difficult to call it because the availability of NHP is sort of ebbs and flows. So let's assume there is a sufficiency of them and we don't have the need to pass on anything incremental. I mean those NHP studies are priced appropriately given the complexity of the work, given the amount of labor and space that's utilized, given how prominent we are in space. So I think we'll continue to be able to hold on to very attractive prices there without being significantly adversely impacted by not having that somewhat unreasonable increase. If you look at the price of NHPs over the last five or six years, it sort of increased at an unpredictable rate. So I think everybody would be pleased with that. I think it'll have a de minimis impact on us.

Great. And then a follow-up on the Manufacturing segment, high single-digit growth now versus high single low double-digit prior. Just a little bit more color there in terms of some of the headwinds in terms of the testing business and just what you're seeing in the CDMO. Just basically the questions or goes into this is like when do we expect that business to go back to its potential double-digit growth rate? Is that feasible going back and looking at 2024?

That’s getting specific about 2024, I would say it's certainly feasible. I mean, the microbial business which is sort of tracking maybe high single has always been at low double. So it has that potential given the pricing and the complexity and diversity of the product line. So that continues to be a very strong franchise for us since it’s extremely profitable. The CDMO business, which was a big headwind last year, is improving nicely both on the top and the bottom line, so that should contribute well. The biologics business is a little bit curious. It always starts slow, so that's not a big surprise. Stayed reasonably slow again in the second quarter, but we anticipate it will continue to improve in the back half of the year. That testing has to be done before drugs get into the clinic, and the big push now is to get things into the clinic. What we're seeing thus in some of this stuff is really expensive, is that in viral clearance and cell banking, which are expensive; and I don't know, a year or two ago, they might have done that earlier in the process, we’re waiting until later in the process. So as the drugs continue to develop well, they will spend that kind of money, and we still feel very good about that franchise and the investments that we've made in capacity and staffing and assays that we put in place for cell and gene therapy, and we’re definitely holding our own from a competitive point of view, but the volume is such that's a bit of a drag right now on margin. So that will continue to ameliorate in the back half of the year. We're beginning to think and plan carefully for our investor conference at the end of September. We will try to give as much clarity on what we think the absent flows are on the specific businesses across the whole portfolio when we get there.

Hi guys, good morning. I want to go back to that earlier question on price, Jim if I may. You know in the past you've always told us that clients are less focused on price and safety assessment, more focused on start times. Now obviously that concern around start times no longer seems to be as acute anymore and will likely keep coming in lower. If you will, so with that sort of backdrop and the macro cross currents that you're seeing, how should we be thinking about pricing into sort of not just the back half of this year, but perhaps into 2024?

You should assume that pricing will—that we will continue to be able to garner meaningful price given the complexity of the work. You should assume. Can't really speak for all of our competitors, but I will. You should assume that the capacity is going to be tight; so while we can start studies faster and the backlog is shorter, the backlog is not trivial and we're very busy on a worldwide basis. We've added more capacity last year and this year, but only enough to accommodate for what we think the anticipated demand will be. So I think as long as there's lots of healthy drug development, which there is, as long as there are multiple new modalities which there are, as long as access to capital improves which I think probably everybody on this call has a different sense. But the second quarter was better, and yet there’s more M&A. If we have IPO markets open up, let's say at the beginning of next year, cash will be readily available. So we're not—it’s not a major focus of ours. And of course, that’s also going to have inflow depending on how busy we are and depending on how people feel about the economy. Some of this is sort of a sector-related response, and a lot of it's just an overall economic response. So pricing will continue to be meaningful in terms of our ability to get a significant amount.

The only caveat on that I would include is—over obviously the last couple of years, inflation has been unusually high. And as Jim pointed out, given the complexity of the work that we perform, we are able to pass inflationary pressures to our clients, and as that modulates and normalizes, that level of pass will also adjust. So that's the only thing to keep in mind.

Got it. That's helpful. And then Jim, quick follow up there. You talked about sort of framing the long-term targets at the Analyst Day, but you also sort of mentioned that normalization of elevated growth that you've seen here over the past decade or so. So is that sort of essentially foreshadowing perhaps your long-term growth targets coming in a little bit to that high single-digit range?

Yeah. So you'll have to be patient for another month. We'll give you chapter and verse on where we think we're going, both on the top line and bottom line. Let's wait until we do that on Mass.

Thank you. My first question on the NHP situation. It sounds from your remarks that the solution you have in place to utilize your global footprint is permanent. What are the implications of that for margins or otherwise?

Nothing's forever.

But it's possible that it's permanent, right?

We're not looking at it as necessarily transitory; look, we're looking at it as utilizing our infrastructure, which is bigger than everybody else's of clients and competitors. Continuing to use it to our competitive advantage, and that means multiple supply sources of NHPs that might mean multiple geographies and multiple facilities. So the good news is we have a very big infrastructure and enormous amount of expertise in NHPs around the world. And we'll be able to slide in different providers of NHPs let's say in the U.S. market if you don't bring them in from Cambodia. And if we do bring them in from Cambodia, then we'll use multiple sources. I don't believe it's going to have any impact on our margin without being too specific about we're doing all of this work and then we're getting healthy prices everywhere. Obviously, costs are not identical everywhere that we do work, but on a blended basis. As we keep the volume up, we should be able to generate hopefully increasingly better margins. We're also spending a lot of time on efficiency initiatives, particularly through our digitization effort and sort of standardization of activities. So if a client is used to getting work done somewhere in the U.S. and now it's getting it done, for instance, somewhere in Europe, they should feel that the work will be identical.

Understood. And I have a follow-up, Jim, on your CDMO business. You mentioned that you have a few other clients reaching commercialization in the next one to two years. Possibly you could speak to whether any of these are more meaningful indications and could be more needle moving. Thank you.

Yes, very difficult. I mean, the needle moving from the point of view that we're having vigorous regulatory and client audits. And if those are successful on both, I think that puts us in a very rarefied position from a competitive point of view. So we would anticipate that gives us sort of a clean bill of health, and other clients would follow. It's impossible to gauge what the volume will be with these companies. It's possible to gauge what the volume will ultimately be, but I think most of these will start relatively slowly both from a regulatory point of view, insurance coverage point of view, doctors being comfortable with it. Of course, as you—I think you all know of cell and gene therapies, facts are still only whatever fourteen drugs that have been approved. So there’s a very serious safety profile. We're thrilled to have multiple clients that are either commercial or talking seriously about it or going through these audits. Hopefully that will pick up, and of course almost regardless of the volume itself, you're doing the same thing over and over again. So since the client is now in a commercial milieu, we should get—they should get more price, we should get more price as well, and we should be able to continually refine the process. So there's only positives about the work moving in new commercial domain.

Hi, guys. Thanks so much for the question. Maybe I have sort of a two-part question, one on the short-term side and one on the longer-term side. If we talk about sort of what—your commentary on DSA bookings and cancellations, I'd be curious sort of if you could talk about whether you saw the accelerating cancellations continuing into July? And then on the longer-term end of the spectrum, can you help remind us if we've gone through other sort of biotech funding cycles? Like if we think back to 2016, 2017 or even back to the financial crisis? How do we sort of like thread this sort of improving biotech funding environment that we've been seeing your sort of cancellation commentaries in terms of like when those things sort of the funding sort of might come through to offset that? Thanks.

Yes. So we're going to stay away from giving in to quarter numbers. So we'll stay away from the July question. Sorry about that. The historical cycles are difficult to compare to because every single one of them is something different is instigating it. Overall economic conditions are different, and the client base is different both in terms of modality and scale and funding abilities. So it's tough to say. And I've said for years, I don't think this business is particularly cyclical. But we're seeing a little of it now for sure, with clients favoring the clinic to the—a bit certainly to the detriment of some of the early discovery work. I don't think much to the detriment of the safety work because you're not getting anything into the clinic without that. So again, we feel that it's normalizing right before our eyes. We don't know exactly where it's going to shape out—end up except it was unusual, it was fun, but it was unusually frothy and sort of instigated by COVID and real concern about running out of space. So I think we'll be in a different place, and I hope a better place where clients can book somewhat sooner, not necessarily overnight but somewhat sooner. Prices hold up for sure; cancellations and slippage would be reduced as a percentage of the whole, and we would be working much more closely with the clients and having less surprises way down the road with this slippage. So everybody is sort of saying the same thing. The really big guys are saying, look we have budgets, and we can't blow them, and the little guys are saying we're—things are looking up, but we need to be a little more cautious until things improve. So depending on how you feel about the next year or two, I think most people think that we'll see an improved economy, which should strengthen the demand and should shake out into a more favorable place. And I think I could certainly speak to a little bit of the developing biotech market for example. Most of our biotech clients, including dollars raised, are very good and quite strong in the two, three, four rounds and that's where they, so they can manage serious burn rates for one or two additional raises before they need to go back to the market. So their protocols are becoming more efficient, including accelerated trials, combined studies and so forth. It really leads to effective efficiencies; I would say more now than a year ago. But that being said, the early discovery work isn't lost; it’s just taking care of budgets.

Thanks, everyone. We'll take the next question.

Hey good morning everyone. Jim, can you talk about the improvements in the CDMO business and how that's performing this year relative to the growth expectations when you entered the business a couple of years ago?

Sure. We've got three centers of excellence in that business now, which is a change from the companies that we bought. So one company doing gene-modified cell therapy manufacturing, another one doing viral vector manufacturing, and another one doing plasmids. We've spoken previously; we have enhanced change and we upgraded pretty much staffing across the board from sales for regulatory folks to our general managers. We definitely have improving books of business in all three of those locales, subject to the caveat they all have a slightly different time frame to generate new business. As we said a moment ago, we do have a few clients that we're talking to about moving into a commercial domain in the cell therapy manufacturing business. So it takes some time for the world to actually acknowledge that we're in this business, that we do it seriously, what our products and services are and how they can contrast that with others that they could do their work with. So we had a rough year last year, for sure, just kind of retooling these businesses. They feel like they're in a much stronger place right now. Clients seem much happier. We've got some regulators in. So we're confident that we're going to have higher growth rates this year and meaningful improvement over the past year. We had great hopes for these businesses, both in terms of top line growth, significant top line growth that would be accretive to both manufacturing for sure and the company as a whole and that the margins would improve as the scale improved, which we still believe. As for the right word I would be cautious enough in regard to how it had undertaken in previous years. And while it's becoming sustainable, we will still need to address some of the supply chain aspects as well as human resources. However, having been in this for many decades I can say with much confidence that as we recalibrate the pipeline we’ve sort of improved existing aspects of the hiring process, product line adjustments to complement capacity in preparation for additional company expansion.

Thank you, everyone. We will now conclude the Q&A session.

Thank you for joining us on the conference call this morning. We look forward to seeing you at some upcoming investor conferences as well as our Virtual Investor Day on September 21. This concludes the conference call. Thanks again.