The paragraph introduces the Charles River Laboratories' First Quarter 2025 Earnings Conference Call. Todd Spencer, Vice President of Investor Relations, opens the call, introducing key speakers: Jim Foster, the CEO, and Flavia Pease, the CFO. They will discuss the company's first-quarter 2025 results and take questions afterward. A related slide presentation will be available on the company's Investor Relations website, where a replay of the call can also be accessed shortly after the live event and will remain available until the next quarter's call. Todd reminds listeners about forward-looking statements and the use of non-GAAP financial measures for a better understanding of the company's core operations. Jim Foster then takes over the call.

The paragraph discusses the FDA's recent initiative to accelerate the adoption of New Approach Methods (NAMs) to reduce animal testing in preclinical safety assessments. Charles River Laboratories supports this vision, aligning with its mission to improve drug development efficiency and promote responsible animal use. The company highlights its long-standing efforts, over 50 years, to reduce animal use through better translational models and technologies, such as genetically modified models and advanced in vitro applications. This shift has led to a significant decline in the use of traditional research models, like outbred rodents, while increasing revenues, indicating a broader trend in preclinical research towards NAMs.

The paragraph discusses the potential and limitations of non-animal methodologies (NAMs) in biomedical research and safety testing. While NAMs are being explored to complement and potentially replace some animal testing, they currently can't fully replicate the complexity of living systems, making them insufficient for comprehensive safety assessments. NAMs show promise, particularly in drug discovery, due to their focus on drug design and optimization, but they require rigorous validation and scientific advancements before broader adoption. The transition to using NAMs will be gradual, as ensuring patient safety remains the priority for the biopharmaceutical industry and regulators.

The article discusses the evolving approach to regulated safety testing in drug development, advocating for a hybrid model that integrates non-animal methods (NAMs) alongside traditional animal testing. It emphasizes that although animal models remain valuable for certain complex endpoints, the future involves combining both approaches. Charles River aims to expand its non-animal platforms through innovation, partnerships, and acquisitions, leveraging its scientific expertise and regulatory insights to aid clients in transitioning to NAMs. With a strong commitment to ethical research and significant databases of toxicology information, Charles River positions itself as a key partner in advancing reliable and efficient safety methodologies that prioritize patient safety.

In April 2024, a new initiative called the Alternative Methods Advancement Project (AMAP) was launched to reduce animal testing by developing alternative methods, such as using organ-on-a-chip platforms, human tissue models, and AI-assisted in silico modeling. Investments have been made in computational modeling and off-target screening technologies, and a pilot program using virtual control groups has been launched. The initiative generates significant annual revenue and holds potential for future growth. The FDA's recent announcement focuses on reducing chronic non-human primate studies for monoclonal antibodies, which generally have lower toxicity. This initiative aligns with existing FDA practices of waiving certain studies based on scientific evidence.

The paragraph discusses the challenges and financial aspects of safety testing for monoclonal antibodies and other drug modalities. It mentions that chronic studies on monoclonal antibodies contribute significantly to annual revenue, but there is no immediate business impact expected. The focus is shifting gradually towards understanding the safety of small molecules and advanced biological drugs, which is more complex and lacks sufficient data for non-animal testing methods. There is a need for extensive validation and collaboration among regulatory bodies and industry players to develop alternative methods. Charles River is committed to leading this transition, working with stakeholders to implement efficient processes for nonanimal technologies in regulatory submissions, and staying dedicated to ensuring patient safety.

In the first quarter of 2025, the company experienced a 2.7% decline in revenue compared to the previous year, with a 1.8% decrease on an organic basis across its three business segments. Despite challenges such as government funding cuts and market uncertainty, the company's DSA segment performed better than expected, leading to a modest increase in financial guidance. Revenue from small and midsized biotech clients grew for the second consecutive quarter, while global biopharmaceutical client revenue declined due to previous spending reductions. Overall, global academic and government revenue saw a slight increase, and the operating margin improved by 60 basis points to 19.1%.

The improvement in financial performance was primarily due to cost savings from restructuring initiatives that enhanced margin expansion in the DSA segment. A favorable mix in the DSA segment and reduced unallocated corporate costs also contributed positively. The earnings per share increased to $2.34 in the first quarter, up 3.1% from the previous year. Other contributing factors to earnings growth included reduced tax rates, interest expenses, and diluted shares outstanding. The company, guided by its first-quarter DSA performance and outlook, adjusted its 2025 revenue guidance to a 2.5% to 4.5% organic decrease and increased its non-GAAP earnings per share guidance by $0.20 to a range of $9.30 to $9.80. The DSA segment's first-quarter revenue was $592.6 million, a 1.4% organic decrease due to lower Discovery Services revenue, though there was a slight improvement in DSA pricing driven by a favorable mix. The DSA backlog increased slightly to $1.99 billion, and starting this quarter, net bookings and net book-to-bill data have been disclosed.

The company is providing new transparency on key performance indicators, highlighting improvements in net book-to-bill ratio and booking activity, particularly in the first quarter. This growth was driven by higher gross bookings from global biopharmaceutical clients and fewer study cancellations. These changes are expected to boost revenue in the first half of the year, prompting a slight increase in full-year revenue guidance for the DSA segment, now anticipated to decline in the mid-single-digit range. However, the company remains cautious and does not expect the same booking momentum to continue into the second half of the year.

The paragraph reports a 40 basis point increase in DSA operating margin and a 2.5% decrease in RMS revenue, which was in line with expectations, mainly due to timing issues in China and lower Cell Solutions revenue. Revenue from small research models increased due to higher pricing. Concerns have been raised about potential NIH budget cuts affecting academic and government clients' future funding, though no significant revenue loss has been seen yet. These clients account for over 20% of RMS revenue but only about 6% of total company revenue. Any budget cuts would likely affect spending later this year or in 2026. Additionally, early-stage biotech clients facing funding difficulties may reduce demand for CRADL services, potentially slowing capacity utilization.

The paragraph discusses the company's revised outlook and performance for the year. The RMS segment's revenue growth expectation has been adjusted from low single-digit to flat or slightly positive, with an operating margin decrease due to lower NHP revenue partially offset by restructuring cost savings. The Manufacturing segment experienced a 2.2% revenue decline, mainly due to lowered CDMO business and Biologics Testing revenue. Despite this, the company maintains an expectation of flat revenue on an organic basis by 2025, with anticipated Biologics Testing growth supported by strong bookings. The CDMO business faced challenges with reduced revenue from two commercial cell therapy clients impacting growth by 500 basis points, but gene therapy CDMO revenue grew. The company continues to enhance its CDMO operations, holding an optimistic outlook for long-term growth opportunities with a robust pipeline of biotech clients.

The Microbial Solutions business of Charles River reported strong growth, driven by Accugenix microbial identification services and Endosafe's testing consumables, with increased demand for NEXUS instruments enhancing cartridge demand. The Manufacturing segment's operating margin dropped to 23.1% due to lower CDMO revenue, but is expected to recover and approach 30% as Biologics Testing sales improve. Additionally, changes in the Board with the addition of new members from Elliott Investment Management are anticipated to foster value creation and growth, while four current Board members are stepping down.

The paragraph expresses appreciation for the strategic guidance provided by board members, emphasizing the importance of their contributions to the company's industry leadership. It announces that the Strategic Planning and Capital Allocation Committee will conduct a thorough review to identify ways to increase value. The speaker looks forward to collaborating with both new and existing board members and highlights the undervaluation of company shares since the FDA announcement, making value creation initiatives crucial. Gratitude is extended to employees, clients, and shareholders. Flavia Pease then discusses the financial performance, noting that first-quarter revenue and non-GAAP earnings per share surpassed expectations due to strong DSA results and a lower tax rate, and mentions ongoing efforts to maintain operating margin.

Over the past two years, the company has implemented a restructuring program to reduce costs by over 5%, which improved operating margins and earnings despite a slight revenue decline. They aim to achieve annualized cost savings of over $175 million by 2025 and $225 million by 2026. Capital is being allocated in a disciplined, shareholder-focused way, including a $350 million share repurchase in early 2025. They anticipate having under 50 million average diluted shares outstanding for the year. Nearly half of a $1 billion stock repurchase program has been completed, based on the belief that the company is undervalued. First-quarter free cash flow increased significantly to $112.4 million, driven by lower cash bonus payments and capital expenditures, which decreased to $59.3 million. The company expects free cash flow of $350 million to $390 million and CapEx of $230 million for the year, maintaining its previous outlook. Additionally, revenue and non-GAAP EPS guidance have been slightly increased.

The paragraph discusses updated financial expectations for the company in 2025. It predicts a decline in reported and organic revenues, with a slightly reduced foreign exchange headwind compared to earlier predictions. Non-GAAP earnings per share are expected to range from $9.30 to $9.80. The company has adjusted its segment revenue outlook, raising the DSA outlook due to strong first-quarter performance but tempering the IMS outlook due to challenges with the CRADL business and academic/government clients. The manufacturing outlook remains unchanged. The consolidated operating margin is expected to decline slightly. Unallocated corporate costs decreased due to cost savings, and the full-year non-GAAP tax rate is expected to stay within the previous range. The paragraph ends by acknowledging recent news about tariffs.

The paragraph discusses the financial performance and expectations of a company, highlighting that the current universal tariffs are expected to have a limited impact, with plans to offset costs by passing them on. The first quarter saw a net interest expense of $26.5 million, and the annual expectation is to be at the lower end of $112 million to $117 million. The company’s debt grew from $2.2 billion to $2.5 billion, increasing leverage ratios, mostly due to stock repurchases, but is expected to be repaid through cash flow by year-end. Second-quarter revenue is anticipated to decline slightly, but earnings per share should improve. The first quarter benefited from implemented cost-saving measures, which will continue to be explored for future savings and efficiency improvements. These efforts aim to align operations with demand and allow investments in business growth.

The paragraph discusses the impact of recent FDA guidance and leadership changes on drug development, particularly regarding the reduction of animal testing. Max Smock from William Blair raises concerns about mixed messaging from the FDA potentially hindering progress, referencing Dr. Prasad's appointment as Head of CBER and comparing the situation to the FDA Modernization 2.0 Act, which didn't lead to significant changes. Jim Foster acknowledges the complexity and unpredictability of these changes due to varying opinions and evolving leadership at the FDA but notes that the initiative to improve drug development processes has been ongoing for a long time.

The paragraph discusses the participation of the speaker and others in the development of New Approach Methodologies (NAMs) with a focus on monoclonal antibodies as a starting point for testing and pilot projects. They express excitement about leading efforts to align clients with regulatory agencies globally and emphasize the importance of reducing research model usage. The science behind NAMs is cited as the primary driver, with significant validation efforts needed. The pace of progress is uncertain, contingent upon FDA staffing and leadership. There's a mention of biosimulation techniques like PBPK and QSP, with questions around their current use in preclinical settings and the hurdles facing their wider adoption.

In the paragraph, Jim Foster discusses the use of advanced technologies in drug discovery and the complexities of applying them to regulated toxicology testing. He emphasizes that while some technologies may prove beneficial, others might not, and the shift from using whole animal systems to simulating human reactions is a significant challenge. He notes that continued investment in proprietary technologies is crucial, but regulatory bodies like the FDA prioritize patient safety over adopting new technologies quickly. Eric Coldwell then asks a question about where Charles River stands out as an industry leader and has a competitive edge in the areas they've invested in, which generate substantial annual revenue.

In the paragraph, Jim Foster discusses areas where they feel underrepresented and their approach to potential investments and mergers and acquisitions (M&A) in the field of New Approach Methodologies (NAMs). He reflects on their history with acquiring a microbial business almost 30 years ago and notes the challenges in finding new technologies that are practical and reliable replacements for traditional models. Despite seeing several new technologies annually, many are not viable. He expresses their interest in acquiring or licensing technologies that can effectively aid drug development without compromising patient safety. They have previously acquired companies like Retrogenix, which specializes in cell microarray technology to detect off-target effects.

The paragraph discusses the importance of identifying off-target effects in toxicology studies and mentions a pilot program that uses virtual control groups instead of whole animals. A collaborative deal is underway to combine AI technology with traditional methods to expedite lead compound identification for clients. Despite previous unsuccessful AI collaborations, the company remains committed to continuing such efforts. They aim to use anonymized toxicology data from past clients to improve preclinical trial predictions, highlighting their leadership in this area. The company has an Alternative Methods Advancement project and a board committee with experts to evaluate scientific advancements and decide on practical and beneficial technologies for their portfolio. They prioritize science and client safety while ensuring responsible spending.

The paragraph discusses the impact of a recent FDA announcement on customers, particularly in relation to study procedures and drug development methodologies. While the reaction from customers has been positive, acknowledging the FDA's encouragement to adopt new technologies and methodologies to accelerate drug delivery and reduce costs, there appears to be no immediate change in procedures. The FDA's waiver of long-term studies for monoclonal antibodies, due to their lower toxicity, benefits drug companies by saving time and money. Customers are in a phase of digesting the announcement, and it fundamentally doesn't alter their goal of developing effective and safe drugs.

The paragraph discusses the use of new technologies in drug testing, suggesting a future hybrid approach where both animal data and New Approach Methodologies (NAMs) data are submitted to regulatory agencies like the FDA. While these technologies will benefit certain drugs, such as monoclonal antibodies, they may be less effective for small molecules or complex therapies like cell and gene therapy. The discussion then shifts to Flavia Pease addressing recent strong booking performance, noting a significant increase in net book-to-bill ratios for the first time in over two years, with broad-based growth and fewer cancellations. Ann Hynes from Mizuho Securities poses a question about the long-term growth impact of FDA changes on the company's long-term growth rates.

In the paragraph, Jim Foster and Flavia Pease respond to questions about pricing and long-term growth. Foster notes the need to update long-term growth goals due to new FDA initiatives and input from clients and experts, which will be shared during an Investor Day. Pease discusses the current pricing environment, stating it has improved slightly due to a favorable mix, particularly in longer duration specialty studies that offer more pricing power. Compared to the Great Recession, the pricing situation is better managed with more prevalent outsourcing, leading to less severe price pressure and decline. However, the current environment is not as strong as during the COVID-19 period. Overall, the first quarter showed stability in pricing and mix results.

In the paragraph, David Windley discusses pricing trends and fluctuations with Flavia Pease. He notes that there was a drop in pricing and demand earlier in the previous year, which led to a lower pricing plateau that influenced revenue. Windley is seeking clarity on why pricing cadence is fluctuating, especially after hearing that the market environment in early 2025 is more pressured than at the end of 2024. Flavia responds by stating that spot prices were stable in the first quarter compared to the end of the last year, confirming the selective discounting strategy implemented previously, and notes that the mix had a positive impact, which was somewhat unexpected.

The paragraph discusses the potential impact of NIH funding cuts on a company, emphasizing that direct revenue from NIH comprises only a small portion of its overall revenue, mainly through its Research Model business. While there's uncertainty about government actions concerning long-term contracts, the company hasn't faced any adverse effects yet. It notes that 20% of its RMS revenue comes indirectly from academic and government sectors, indicating caution in its long-term guidance due to possible funding cuts. Since no changes have occurred by May, any potential impact is expected later in the year or the next, though this is speculative.

The paragraph discusses the significance of the company's contracts with the government, particularly for basic research, and suggests it would be shortsighted for the government to alter these agreements. Flavia Pease clarifies that NIH Direct accounts for 2% of the company's total revenue, and combined with academia, it is about 6%. During the Q&A, Michael Ryskin from Bank of America inquires about the strong DSA bookings in the first quarter, noting quick study start dates. Jim Foster attributes this to clients wanting to start studies quickly due to available capacity but indicates this may not be sustainable throughout the year and considers it a one-time occurrence for that quarter.

The paragraph discusses the strategic review process that the company is undertaking. It highlights that there's a committee called the Capital Allocation Committee, which has existed for some time. The committee is now comprised of three new directors, including a senior employee from Elliott. The review process involves evaluating the company's entire portfolio, analyzing returns on mergers and acquisitions (M&A), and considering strategic additions to the portfolio. The goal is to objectively assess the competitive dynamics, identify potential gaps or underperforming areas, and explore different strategic avenues, such as divestment or reorganization. However, it is emphasized that the review is in the early stages, and no definitive outcomes or decisions have been made yet.

The committee is actively evaluating the entire company, assessing past expectations and future directions. Once their review is complete, they plan to communicate their decisions promptly. During a Q&A, Justin Bowers from Deutsche Bank inquired about faster study initiations. Jim Foster clarified that these fast starts have been observed broadly, not limited to large pharma, and were notable in the first quarter, especially among smaller biotech clients. However, while pharma bookings improved, smaller biotech companies faced capital access challenges. Foster noted that faster study initiations are unusual and possibly a one-time occurrence. Flavia Pease added that despite the lack of detailed intra-quarter reporting, these faster study types are noteworthy.

The paragraph discusses the visibility and impact of business activities in Q1 and Q2, noting quicker starts affecting the first half of the year. It highlights a rise in licensing deals from China, driven by big pharma's interest in smaller biotech firms for innovation. This trend is intensifying in China, alongside significant investments in local biotech companies. While these activities don't dramatically impact the speaker's business, they have a research model business in China that supports both biotech and big pharma. They aim to continue preclinical work for larger firms engaging in acquisitions, regardless of the target's location, as they already do substantial work for pharma and biotech companies.

The paragraph discusses Charles River's business segments, specifically focusing on Biologics Testing and the CDMO (Contract Development and Manufacturing Organization) cell and gene therapy manufacturing business. Biologics Testing has seasonal and unpredictable demand but is expected to perform well for the rest of the year. The CDMO business has seen a decline in revenue from some major commercial clients, but underlying demand for cell and gene therapy remains strong. Despite concerns about the safety profile of these therapies affecting market uptake, Charles River is optimistic due to strong staff, facilities, and improved capabilities to support commercialization.

The paragraph discusses the company's performance, particularly in the DSA (Discovery and Safety Assessment) bookings, where the book-to-bill ratio has exceeded 1x for the first time in a few years. Jim Foster expresses cautious optimism, noting that while the recent quarter's performance is encouraging, sustained improvement over several quarters is necessary to indicate a fundamental shift in booking trends. Flavia Pease adds that the strong performance in the DSA segment is encouraging, but the company maintains a cautious outlook for the second half of the year regarding segment margins.

The article discusses predictions for manufacturing improvements in margins throughout the year, despite a slower start in the first quarter due to challenges in CDMO and Biologics Testing. Margin guidance has been refined to be minus 20 to minus 50 basis points compared to last year, reflecting previous guidance but with more specificity. The company is pleased with its cost-saving efforts over the past 18 months to protect operating margins despite demand contraction and plans to continue enhancing margins. In response to a question from Casey Woodring of JPMorgan about biotech and DSA, as well as potential tariffs, Flavia Pease indicates that revenue from biotech clients grew, cancellations declined, but large pharma drove gross bookings. She mentions that while there are concerns about potential tariffs, they have not yet impacted R&D spending by pharma clients.

The paragraph discusses the impact of tariffs on the business, noting that while their effect is modest, it cannot be controlled and will be passed on. Jim Foster emphasizes the challenges in predicting biotech trends, especially with regard to funding difficulties, but he indicates that biotech companies will continue to be key clients seeking quality science and regulatory expertise. The company is being strategic with pricing. The discussion also touches on declining cancellation rates within the Drug Safety Assessment (DSA) sector, suggesting lower risk due to quick study starts. Cancellations are normal for the business, and penalties are in place to manage them.

The paragraph discusses the positive trend of decreasing cancellations in a market over the past year, indicating improved demand stability. Despite initial declines being less severe than anticipated, there is still a desire for business growth. There's a notable amount of work and fast study starts, with sufficient backlogs not leading to cancellations as they did previously when clients booked slots without corresponding studies. The approach is more measured, and cancellation rates continue to drop, which is favorable. Additionally, Jim Foster addresses an FDA inspection at a facility, noting collaboration with the FDA to meet improvement requests. This gives confidence that facilities will meet client needs if they move into commercial production. The Operator introduces Tejas Savant from Morgan Stanley, who asks about the fraction of monoclonal antibody (MAB) studies requiring chronic non-human primate (NHP) studies and those getting FDA waivers.

The paragraph discusses the continued reliance of pharmaceutical companies on animal studies to ensure patient safety, despite advancements in non-animal methodologies (NAMs). Although there are some specific cases, such as monoclonal antibody studies, where NAMs can be applied, traditional animal studies remain essential for comprehensive assessments. The FDA has allowed the use of more NAM technologies, but pharmaceutical companies prioritize proven methods. A hybrid approach that combines NAMs with traditional animal studies is likely to be beneficial in answering different research questions.

In the paragraph, there is a discussion about the future development of technology and its potential as a substitute, with regulatory acceptance and validation being crucial. Tejas Savant asks about the timeline for a strategic review and cost-cutting measures. Jim Foster responds by explaining that the strategic review has not started yet, as they have just signed a deal with Elliott. The review will thoroughly evaluate their businesses, market dynamics, technology development, acquisition returns, and margin profiles. While they aim to complete this promptly, it's unlikely any concrete conclusions will be available by the next earnings call.

In this paragraph, Flavia Pease discusses the company's cost-saving measures, mentioning that $75 million of the $225 million in identified savings are sustainable and won’t require additional staffing. The company aims to continue exploring efficiency opportunities. An unidentified analyst asks about the demand environment differences within DSA, specifically between safety assessment and discovery work. Jim Foster responds by acknowledging that discovery work was weaker. He explains that while they are employing an integrated sales approach to improve client engagement, large and small drug companies have yet to reinvest significantly in discovery due to ongoing efforts to progress their projects through clinical stages. Foster expresses hope that improved sales focus will boost discovery work in the future.

During the Charles River Laboratories First Quarter 2025 Earnings Conference Call, Rob Cottrell inquired about sales growth in the biotech sector, specifically among small and midsized companies, despite funding challenges. Flavia Pease responded that they observed growth in biotech for the second consecutive quarter but do not differentiate between small, mid, and large-sized biotechs in detail, only between large pharma and biotech. The conference concluded with Todd Spencer expressing gratitude for participation and anticipation of future investor conferences. The call was then officially ended by the operator.

This summary was generated with AI and may contain some inaccuracies.