Q4 2021 Charles River Laboratories International Inc Earnings Call

Okay.

Good day, and thank you for standing by and welcome to the Charles River Laboratories fourth quarter 2000 2021.

Earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during this session you will need to press talking your telephone.

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I would now like to hand, the conference over to your Speaker today, Todd Spencer Vice President of Investor Relations. Please go ahead. Thank.

Thank you good morning, and welcome to Charles River Laboratories fourth quarter 2021 earnings in 2022 guidance conference call and webcast. This morning, Jim Foster Chairman, President and Chief Executive Officer, and David Smith, Executive Vice President and Chief Financial Officer will comment on our results for the fourth quarter and full year of 2012.

One and our financial guidance for 2022.

Following the presentation. They will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the investor Relations section of our website at IR Dot C River Dot com our.

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.

A replay will be available through next quarters conference call I would 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 1095 actual results may differ materially materially from 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 to or a substitute for results from operations prepared in accordance with GAAP in accordance with regulation G. You can find the <unk>.

Parable GAAP measures and reconciliations on the Investor Relations section of our website I will now turn the call over to Jim Foster.

Good morning.

I'm very pleased to speak with you today about another exceptional year for Charles River, and our expectations for 2022.

We believe that Charles River is a stronger company today than it has ever been.

We were extremely pleased to report organic revenue growth of 15% for the full year or low double digits.

Growth normalizing for the COVID-19 impact in 2020.

And a second consecutive year of a 100 basis points of operating margin expansion.

We are seeing unprecedented demand across most of our businesses and we believe that this demand coupled with robust industry fundamentals will fuel low teens revenue growth in 2022.

As a result, we are continuing to invest to add people and capacity to accommodate growing client demand.

And to build a scalable operating model to enhance scientifically distinguished portfolio and to strengthen our relationships with clients through our flexible efficient outsourcing solutions.

To further differentiate ourselves from the competition, we have strategically expanded our portfolio to provide clients with the critical capabilities they require to discover develop and safely manufacture new drugs.

We have enhanced our scientific capabilities for advanced therapies in areas that offer significant growth potential.

With six acquisitions over the past two years.

So we have built an end to end non clinical portfolio of cell and gene therapy solutions.

Look support clients from early stage research to cgmp production, and we expected to generate nearly 15% over.

Total revenue in 2022.

The greater complexity of scientific research is encouraging the biopharmaceutical industry to rely on Charles River as high science capabilities, when choosing an outsourcing partner.

Because of our extensive scientific expertise client centric approach and unique non clinical portfolio.

Worked on more than 85% of the FDA approved drugs in 2021, including all of the CNS drugs and more than 90% of the oncology drugs. We are proud that our biopharmaceutical clients continue to choose to partner with us as they recognize the value that we provide.

Now, let me give you the highlights of our fourth quarter and full year.

We reported revenue of $905 1 million for the fourth quarter of 2021, an increase of 14, 4% on a reported basis organic revenue growth of 10, 5% was driven primarily by continued double digit growth in manufacturing and RMS segments Covid impact.

In 2020 and resulted in a modest 50 basis point increase to the organic revenue growth rate.

For 2021 revenue was $3 $5 4 billion with reported growth rate of 21, 1%.

And.

Organic growth rate of 15, 1%.

On an annual basis, the Covid impact in 2020 resulted in a 280 basis point increase to the organic revenue growth rate adjusted for the Covid impact.

Very pleased that we achieved low double digit normalized growth on a consolidated basis basis.

Each segment to achieve its longer term organic growth target 2021.

Operating margin was 29% in the fourth quarter.

An increase of 10 basis points year over year for the full year, we met our outlook of 21% representing the second consecutive year of a 100 basis points of operating margin improvement.

This demonstrates the operating leverage inherent in our business as well as that continued efforts to drive operating efficiency and build a more scalable infrastructure, we expect to generate modest operating margin improvement in 2022, which will moderate from the past two years as we continue to make the investments needed to support.

Growth principally related to staffing and because of a 20 basis point headwind from the 50 <unk> week this year.

Earnings per share were $2 49 in the fourth quarter, an increase of four 2% or $2 39 in the fourth quarter of 2020.

Strong revenue and operating income growth was partially offset by a higher tax rate and interest expense for the full year earnings per share were $10 32.

At 26, 9% increase over the prior year.

We exceeded our prior guidance range of $10 20 to $10 30.

<unk> the second consecutive year with earnings growth above the 20% level.

And the outlook for 2022, which we initially provided in January .

Constraints, our firm belief that the sustained demand environment will continue this year. We believe this trend combined with higher pricing will drive organic revenue growth in the range of 12, 5% to 14, 5% in 2022.

We continue to expect non-GAAP earnings per share will be in a range of $11 50 to $11 75.

Earnings per share are expected to grow at a similar rate to revenue is modest operating margin improvement will be largely offset by less favorable below the line items, including a higher tax rate.

Our enthusiastic about the year ahead, and look forward to new opportunities to scientifically differentiate ourselves in the marketplace enhance our ability to meet clients' needs and achieve our financial goals.

I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2022, beginning with the DSA segment's results.

DSA revenue in the fourth quarter was $534 $1 million.

Six 7% increase on an organic basis biotechnology clients remain the primary driver of DSA growth in the fourth quarter as the industry remains well funded and ended the year on a strong note.

As anticipated the DSA segment to organic growth rates for the quarter was below 10%.

But also as expected DSA achieved a low double digit growth rate for the year at 12, 2% as we have said before growth rates for our businesses are not linear so quarterly fluctuations should be expected.

In 2022, we expect DSA organic revenue growth will be in the mid teens.

The increase from last year's growth rate is based on a belief that sustained client demand will continue and higher price increases than in 2021 will help offset higher compensation costs and <unk>.

Other inflationary cost pressures.

DSA growth rate is expected to accelerate during 2022.

Due in large part to the current pricing working through the backlog.

First quarter growth rate is also expected to improve from the fourth quarter level.

Our safety assessment business continued to perform very well benefiting from strong demand and price increases bookings and proposal volume remain at record levels with total DSA backlog, increasing 70% or by $1 billion.

Two 4 billion.

At year end 2021, we are booking work into 2023, which translates to greater visibility and a strong book of business that supports our growth expectations the acceleration of demand during 2021.

Selected and the fact that we added nearly twice as many safety assessment staff in the second half of 2021 as we did in the first half.

We expect these recent hires will help us accommodate client in the end of 2022.

In addition to closely manage the workload by continuing to add staff.

Taking a similar approach to capacity additions investing in new space in a disciplined manner to ensure we meet future demand.

Discovery services business also continued to perform well with strong performances for early discovery and CNS services similar to the safety assessment business.

<unk> robust client demand for discovery services that closely managing staffing levels, and adding cutting edge capabilities.

We believe this will continue to enable us to achieve our annual growth rate in the low double digits or better or.

If it's to broaden and strengthen our discovery capabilities and enhance our scientific expertise are enabling us to expand the support we provide for our clients' discovery research.

As a result clients increasingly view Charles River as a premier scientific partner, who can support their efforts to identify new drug targets and discovering novel Therapeutics.

This is leading to new opportunities.

Every business, including significant client interest and integrated drug discovery programs, and which clients Trust us with multiple services or their entire discovery program to advance their early stage therapies.

We intend to continue to build our discovery portfolio, including through strategic partnerships and acquisitions.

Wired in early 2021, retro <unk> with its proprietary cell microarray technology and off target screening services had a very successful first year as part of the Charles River family violence.

And violent distributed bio's large molecule discovery platform.

Clients can now partner with us for integrated end to end solutions for therapeutic antibody.

Cell and gene therapy discovery and development.

Our partnership strategy has proven to be a successful approach to stay current with cutting edge technologies, and adding innovative capabilities with limited upfront risk.

We recently signed a new partnership with Valor health to deliver a new type of offering that combines validus artificial intelligence or AI enabled drug discovery and development platform with our own capabilities to expedite the discovery of the small molecule therapies for clients. This partnership has the potential to ask.

<unk> the discovery process as we utilize Dallas Opal closed loop and silicone platform to rapidly identify compounds and optimize them using our leading in vitro and in vivo capabilities.

We also recently announced an expanded partnership with Sandy tax innovative assay technology to further expedite the discovery process around high throughput screening.

Yes.

Our innovative discovery toolkit will enable us to become a technological disruptor in the industry and positions us as an indispensable research partner, who can enable clients to identify and discover new drugs faster, which will ultimately reduce the time to market.

The DSA operating margin was essentially unchanged at 23, 1%.

Fourth quarter, despite a 40 basis point headwind related to foreign currency translation. The 2021, the DSA operating margin improved by 30 basis points to 23, 7% Foreign exchange is an 80 basis point headwind.

<unk> segment is expected to be the primary contributor to the company's operating margin improvement in 2022.

RMS revenue in the fourth quarter was $165 6 million an.

The increase of 13, 3%.

And organic basis, which excludes the RMS Japan divestiture.

The comparison to the Covid impact in 2020 increase for fourth quarter growth rate by two 3% for the year.

Organic revenue increased by 19, 5% with approximately half the increase or 98% being driven by the comparison to the COVID-19 impact in 2020.

Normalized for the Covid impact, we reported high single digit growth in 2021, which is consistent with the RMS organic growth outlook for 2022.

Our 2022 outlook reflects a continuation of the strong global demand for research models and associated services Jenna.

<unk> generated by the ongoing robust early stage research activity within the biopharmaceutical industry as well as that academic and government institutions. This outlook includes robust growth for our insourcing solutions business as we continue to expand <unk> footprint.

It also assumes an improvement in the cell supply growth rate throughout 2022, as our efforts to enhance the operating performance of heme accounts. So we're out gained traction during the year.

Underlying industry fundamentals within the cell therapy sector remains strong.

Research models remain foundational regulatory required tools for early stage research and toxicology and a vital component of our abilities to support our clients.

For research models has increased globally joined the COVID-19 pandemic due to both higher pricing and improved demand, reflecting the renewed focus on scientific innovation and the critical role that research models play in generating scientific breakthroughs and ensuring the safety of lifesaving therapy demand in China was exceptionally strong.

In 2021.

Selecting the resurgence of biomedical research activity following China's emergence from Covid related shutdowns in 2020 as well as the shift towards the mid tier Biopharma and CRO client base and our expanded product offering.

While we expect the growth rate in China will moderate in 2022, including in the first quarter. After an exceptionally strong start last year.

We're continuing to expand our geographic footprint to support the continued double digit revenue growth that is expected in this region.

The heightened level of research activity is also driving demand for our research model services, which continued to perform very well in the fourth quarter and full year, we are a natural partner for Jim <unk>.

<unk> solutions or IMS.

With our extensive animal husbandry expertise and our ability to provide clients with flexible and efficient solutions. James is benefiting from strong outsourcing demand driven by the greater complexity of scientific research.

Prior carrying models that our clients are creating.

<unk> is benefiting from the continued growth of about Cradle initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity in our sights and facilitates the use of other Charles River services.

As the research progresses, we intend to continue to expand our existing cradle footprint, and the Boston, Cambridge, and South San Francisco Bio hub.

And also into new regions in 2022, including Southern California, and China.

Significant client interest in this service the RMS operation operating margin was 26, 9% in the fourth quarter.

<unk> of 180 basis points from the fourth quarter of 2020.

The increase was driven by operating leverage from higher sales volume in the research models business, particularly in China for.

For 2021, the RMS operating margin increased by 530 basis points to 27, 3%.

This significant improvement was primarily due to the comparison to the depressed margin in 2020 associated recovery related client disruptions.

Manufacturing revenue was $205 3 million in the fourth quarter, a growth rate of 21, 2% on organic basis.

Driven primarily by double digit organic growth across the microbial solutions biologics testing and avian vaccine businesses for the full year.

Organic revenue growth was 26%.

With 210 basis points of it.

The increase coming from the comparison to the Covid impact in 2020.

In 2022, we expect mid teens organic growth for the manufacturing segment.

Iteration from the exceptional in 'twenty, one performance reflects a return to more normalized growth rates for the microbial solutions business after an incremental benefit from COVID-19 related instrument and cartridge reef replenishment in 'twenty one.

And then the biologics testing business due to a reduction in some COVID-19 vaccine tested revenue is that revenue stream settles into a steadier state.

We're very pleased with the mid teens growth rate forecast for 2022 and expect the manufacturing segment will achieve its 2024 target of approaching 20% growth once the benefit of the high growth <unk> business is fully reflected in the organic growth rate and see Dms scale can.

<unk> to increase microbial solutions growth rate in the fourth quarter and for the year remained well above 10%, reflecting strong demand across our portfolio of critical quality control testing solutions.

We were pleased with the strength of the demand for endotoxin testing systems, and cartridges, which perform FDA mandated lot release testing and injectable drugs and medical devices.

Advantages of our comprehensive portfolio continued to resonate with our clients and.

And we believe that our ability to provide a total microbial solution will enable microbial solutions to continue to deliver revenue growth at or above the 10% level.

The biologics testing business reported another exceptional quarter and year of strong double digit revenue growth.

Robust demand for cell and gene therapy testing services continued to be the primary growth driver with COVID-19 vaccines and traditional biologics also being meaningful contributors, while we expect a moderation of the Covid vaccine testing revenue in 2022.

We believe cell and gene therapies will continue to be significant growth drivers over the longer term to support our 20% target for the biologics business this year and beyond.

Our <unk> business is continuing to make great progress on the integration as we gain traction in business development activities to support its robust growth outlook 2022.

We've established an end to end gene modified cell therapy solution, which we believe is critical to support our clients more seamlessly.

Comprehensive cell and gene therapy portfolio is resonating with clients and they continue to explore opportunities to streamline their biologics development workflows and drive greater efficiencies by outsourcing to us.

The strength of demand for <unk> services necessitates a continued investment in capacity to ensure we have available space to serve our clients and to build upon our extensive portfolio of manufacturing services.

The manufacturing segment's operating margin declined by 160 basis points to 35, 7% in the fourth quarter.

Of 2021 by 320 basis points to 34, 2% for the full year. These declines primarily reflects the inclusion of the CMO acquisitions in 2021 of Cognex and value chain. These businesses are profitable.

Margins are below overall.

<unk> segment.

We expect this margin headwind to gradually dissipate as we drive efficiency and as a significant growth, we anticipate generates greater economies of scale and optimize throughput NFC demo sites.

In 2022, we will continue to move our growth strategy forward.

The planned M&A and strategic partnerships remain vital components of our strategy as we endeavor to further enhance our scientific expertise.

Mobile reach and innovative technologies that we can offer clients across all three of our business segment.

We will also focus our efforts internally and sharing that ensuring that we have the necessary staff and resources to meet the needs of our clients and support the robust growth in our market.

On enhancing our real time digital connectivity with clients.

<unk> to integrate our end to end non clinical offering to create a more seamless solutions across all dry modality. It's.

It's incumbent upon us to be the scientific partner, who can help clients move the programs forward from concept to non clinical development to the safe manufacture of their life saving therapy.

By providing exceptional value to our clients. We believe we will continue to achieve our financial targets and deliver greater value to our shareholders.

In conclusion, I would like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment.

Now I'd like David Smith to give you additional details on our financial performance and 2022 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 the amortization.

Acquisition related charges costs related primarily to our global efficiency initiatives. The gain on the sale of August Japan, and venture capital and other strategic investment performance and some of those items.

Any of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions divestitures and foreign currency translation and the 50 <unk> week in 2022.

My next question. This morning will focus primarily on additional detail regarding our financial guidance for 2022.

Which was originally provided on January 11.

We continue to expect reported revenue growth of 13% to 15% in 2022 and organic revenue growth of 12 514, 5%.

Our revenue growth outlook for 2022, and supported by the continuation of unprecedented client demand and healthy spending environment, along with price increases to help offset inflationary.

Inflationary cost pressures.

We remain well positioned to expand margins, while continuing to invest in the business, resulting in non-GAAP earnings per share between $11 50, and $11.75 per share or approximately 11% to 14% growth compared to 2021.

By segment.

Outlook is also unchanged from last month, we expect organic revenue growth in the high single digits of the RMS segment.

Results of continued robust global demand for research models and associated services.

As well as improvement in the self supply growth rate.

This will be partially offset by a moderation in the RMS China growth rate after an exceptional performance in 2021.

The DSA segment, we expect mid teens organic revenue growth driven by continued strong contributions from both discovery and safety assessment.

The growth rates of the safety assessment business is expected to accelerate during the year, principally as current pricing works through the backlog.

We also expect mid teens organic revenue growth in the manufacturing segment, reflecting a slight moderation in the microbial solutions biologics growth rate.

Along with the incremental contribution from behind growth 17 <unk>.

Once we anniversary as a company and banking acquisition.

CDMA business is expected to contribute nearly 150 basis points to our consolidated organic revenue growth rate in the second half of the year.

We continue to expect foreign exchange to provide a headwind of approximately 100 basis points to our reported revenue guidance in 2022.

This strength.

Bob.

Thanks Rachel.

Based on the bank forecast for the year.

Which are currently very close to the spot rate if somebody is currency.

Based on our current base assumption. Thanks.

It will be a moderate headwinds earnings per share we have provided information on our 2021 revenue by currency and the foreign exchange rate that we are assuming for 2022 on slide 32, and we will continue to monitor fluctuations in the currency market as we progress through the year.

We were pleased with the operating margin of 21% last year and the fact that it was the second consecutive year as 100 basis points of margin improvement.

We remain well positioned to drive modest operating margin improvement in 2022, although the improvement will be less than the prior two years due to two principal factors.

Compensation costs due to both hiring and wage increases.

And the impact of the 50, <unk> week, which is expected to reduce the operating margin by approximately 20 basis points.

On a segment basis the <unk>.

Operating margin is expected to be the primary contributor to the margin improvement in 2022 and leverage from higher revenue growth is expected to drive the operating margin towards its longer term target in the mid 20% range corporate expenses are expected to be in the mid 5% range and so slightly.

The 2021 level of five 6% opportunity.

We expect unallocated corporate expenses to be a small contributor to the margin expansion. This year, because our scalable infrastructure investments, including disciplined price enabled us to drive greater efficiencies and leverage corporate call.

The non-GAAP tax rate for 2022 is expected to be in the low 20% range, which will be a slight increase from 18, 9% in 2021.

The increase is principally due to the discrete tax benefits in 2021 associated with R&D tax credits.

Favorable excess tax benefits related to stock based compensation, neither of which is expected to be kind of at the same level.

Our 2022 tax rate guidance assumes no impact from potential U S tax reform initiatives at this time.

As a reminder.

First quarter tax rate has been meaningfully lower in recent years due primarily to the excess tax benefit related to stock compensation.

Given our current stock price, we expect it to continue to be true in 2022, resulting in a non-GAAP tax rate in the mid teens for the first quarter.

Total adjusted net interest expense in 2022 is expected to increase to a range of $83 million to $87 million compared to.

$79 million last year.

We expect the year over year increase to be driven by this outlook, our highest variable interest rates, primarily in the U S, partially offset by repayments of debt.

Our assumptions for interest rates includes several rate increases this year, which is generally consistent with the federal reserve's Scott.

It is important to note.

So the impact will be somewhat muted.

Slightly more than 50% above that.

Phase III.

For Julian.

At the end of the fourth quarter.

Spending debt balance of $2 7 billion.

<unk> to gross and net leverage ratios of approximately two five times.

Continuously evaluate our capital priorities and intend to deploy capital to the areas that we believe will generate the greatest return.

Strategic acquisitions remain our top priority for capital allocation.

Absent any meaningful M&A, we will evaluate other uses of capital including debt repayment.

Our expectations for the diluted share count will be to exit the year with.

Slightly more than 52 million shares outstanding which does not assume any stock repurchases at this time.

In 2021 free cash flow was $532 million, an increase of 40% from the preceding year and above our prior outlook of approximately $500 million.

Due to the strong operating performance and look to optimize.

We indicated in January we expect free cash flow for 2022 to be approximately $450 million.

This is a decrease of $80 million from last year due entirely to an anticipated $113 million increase in capital expenditures are expected to total approximately $360 million in 2022.

With robust client demand exceeding our expectations in 2021 unexpected to continue we believe we will require capex of approximately 9% of total revenue in 2022 to provide the additional capacity needed to keep pace with demand.

Let me legacy businesses driving most of the year as the capital increase with safety assessment responsible for approximately two thirds of the increase in <unk>.

So in the manufacturing segment.

Selling around 2022 financial guidance can be found on slide 14 as.

As a reminder, we will add a 50 <unk> week at the end of the fourth quarter of 2020, which is periodically with clients.

Our fiscal year two in December .

Calendar year end.

Third we have historically been characterized as a partial week of revenue since it because during the holidays, but a full week of costs.

Looking ahead to the first quarter of 2022.

Look includes year over year revenue growth of approximately 10% on both the reported and organic basis.

As Jim mentioned.

Se revenue growth rate is expected to improve in the first quarter compared to the fourth quarter now this.

This will be offset by a little RMS growth rate, reflecting the comparison to an exceptionally strong start in China last year.

We're also confident that the revenue growth rate will accelerate during the year, reflecting the robust BSA order book, which extends into 2023 and includes higher pricing.

Well as the anticipated improvements in the RMS growth rate from this dose level.

First quarter non-GAAP earnings per share are expected to increase at a high single digit rate from $2, 53% last year, reflecting a mid teens tax rate on a year over year increase.

The increase in interest expense.

In conclusion, we are very pleased with our financial performance in 2021, and believe that we are well positioned to deliver another strong year in 2022.

<unk> 2022 performance reflects our ongoing focus on disciplined investing to support the growth of our businesses.

To drive efficiency speed and responsiveness with which we operate and our goal is to continually enhance our relationships with our product.

We are also confident in our ability to achieve our 2020 financial targets.

<unk> approximately 150 basis points of operating margin expansion from the 2021 level. Thank you.

Okay.

That concludes our comments operator, we will now take questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

We ask that you please limit yourself to one question.

Our first question comes from Derek Brown with Bank of America. Your line is open.

Hey, good morning, Thanks for letting me have the first question Hey.

Jim I'm, just getting some questions. This morning from people that are trying to square your.

Your commentary on the really high bookings number and.

I think some people think that maybe the fourth quarter DSA came in a little bit light and the Q1 guide is a little bit below what some people thinking can you just sort of walk through sort of like how to reconcile the bullish outlook into the bookings number with what people are perceiving is maybe a little bit softer numbers.

Sure good morning.

It's a it's a further.

Further manifestation of.

Our continued articulation that these steady sort of start and stop when they start and stop and then they.

They don't care about our fiscal quarters.

Yeah.

But by the same token we've been able I think to call. The year is pretty accurately very accurately. So we had 12% growth in DSA segment.

Last year, which.

Which we're proud of it and where we just guided to stronger growth mid teens this year.

So I can say several things so.

And it kind of ended the year, where it ended.

We just said that the first quarter will be better.

We have a lot of things going on Derek we have.

Literally study is booking into 2023, you've known us a long time.

That's sort of new.

We ended the year, we ended 2021 with a backlog that was $1 billion higher than the prior year.

Also quite extraordinary we're getting a lot of price, we're going to stop short as usual breaking out that price, but we'll get a significant amount of price and a lot of that price sort of builds.

Through the back half of the year.

As we've had all these studies book into the back half of the year. So we have I would say the best visibility we've ever had we've had bookings elongated out more than they ever had.

I don't know if its the best pricing I think it's probably the best pricing that we've seen as well so.

And very strong.

Conversations about clients about focused primarily or primarily on do you have a slot for me.

And when can you start.

Do you pro forma sort of work rather than always starting with price. So.

We're very pleased that we're getting paid for what has become.

I know you understand as well very very complex studies and studies have grown increasingly more complex as youre looking at immunological impacts or genetic impacts. So we feel really good about about DSA really good about safety assessment in particular really got about having hired.

More people in the second half of the year.

Talking now about 20%.

Sorry, 'twenty one than the beginning of the year, which means that we're rolling into 'twenty, two where the workforce is trained and available to do the works. So I hope that helps we we feel particularly strong about.

How we've guided you all for the year in that business.

I mean, I know you normally don't give bookings numbers, but is there any sort of light.

Color you can give on the quarter to quarter improvement.

Tough tough to do it on a quarterly basis, but.

I think that backlog numbers quite interesting.

That's a big pop year over year.

Quite solid a lot of pricing in there so.

So we will see it continue to improve as the year unfolds.

Great.

I can squeeze in one follow up and I'll leave the biotech financing question to somebody else, but I'm getting a bunch of questions on.

Cell and gene therapy demand and just your confidence in that.

Demand for that market sort of being there I think some investors are a little skeptical at the cell and gene therapy.

Yes.

Vacations about demand being built out of that capacity be about there is ultimate can be filled just given the complexities of that market I guess, what's your confidence that that the capacity you're building out the demand youre, assuming for cell and gene therapy is going to going to materialize.

Yes so.

We're relatively early days here, but deep into the integration of all of these assets, we bought last year I would say that.

Client facing.

Capability and design is being well received.

Demand is increasing and business is improving.

And most of those businesses.

It's for US it's about getting the word out that we have the services and what the what the breadth of the portfolio is but.

We think we're in a very strong.

Our competitive position, particularly if you link that with the rest of the portfolio. It gives us 15% of our revenue is going to come from there. So we're seeing good demand from cell and gene therapy, we're going to see that we're going to see that exemplified in the manufacturing segment.

Both in biologics both in the <unk> space, we're also going to see that play through.

Some aspects of discovery.

And safety so.

So we're seeing the.

Anticipated level of demand.

Expected when we when we did those deals.

Thank you.

Sure.

Our next question comes from John <unk> with William Blair. Your line is open.

Hey, Thanks, very much I'll ask the biotech funding question.

Jim You said in your comments that funding is great. It looks like the first quarter at least from an IPO standpoint.

Maybe the first quarter there'll be down quite a bit from your standpoint is that sort of impact. The way you guys think about the year and budgeting or do you think funding from other sources is still big enough to offset slowness there.

It really doesn't.

It really doesn't John .

Last year was very strong.

Second strongest.

Even the fourth quarter was I think in the top five strongest.

We've done a very careful analysis.

So balance sheet.

All of our clients.

We think that is.

Still three years of cash available for them from a sort of capital markets.

Well I guess I guess from a variety of choices.

And so we've got the capital markets, they've got direct inflows into the VC fund question that directly from pharma as they always have so.

As I think we are literally the Canary in the coal mine I can tell you that we have.

No conversations at all with.

Any clients about their concern about about several things about any sort of articulation of a pullback slippage Wade.

We can prosecute that full portfolio with none of that.

Other current or forward looking.

Nobody just not paying the bills and so I do think that.

Sure.

For many years.

Biotech industry, particularly it's expensive 90 thoughtfully.

Not not Wastefully I think they're very well banked right now I think the.

The multiple modalities, particularly many of the new ones, particularly of cell and gene therapy in the air and AI drugs continue to strength in the <unk>.

Outlook in funding capabilities for these.

To these companies and I think.

I think.

Quarter blip, if it even last quarter and the IPO market relative to interest rates and all the other stuff that's going on.

I understand why you asked the question people looking at I think it's potentially overriding situation or kind of kind of waiting for things to.

To be less robust, but we think they're very well finance going forward.

And then on articulating any concern.

We pay attention to.

That stuff.

Every day.

And we listened, Florida, as well and we make sure that.

We're communicating with our clients in a way that we understand how they are looking out into the future.

Conversely, if somehow this.

Situations I just described would it change in any meaningful way with significant way, which I absolutely don't think it will I think we'd hear it first.

Given our footprint given how much interface, we have with so many clients so.

No indications at all or is this any concern and I don't really think that if any.

Significant impact to their spending abilities.

It's reassuring thank you.

A quick follow up on Capex, it looks like your budget and Tony up about $130 million can you just talk about where those investments are going.

Sure.

I think I think the first thing is just think about just the scale of the company. So it's about so much larger company.

And we are growing faster so there's a sort.

Two is kind of basic.

Comment third is that we have a pretty big infrastructure whatever it is 5 million square feet of space, So on a maintenance basis.

We have a lot of facilities to take care of having said that most of the increase is.

As for new growth and development, it's incremental.

Work and most of that is in legacy businesses and particularly in safety assessment. So we are working really hard with safety assessment.

Continues to escalate growth rate escalators, which it is.

All the pricing all the things, we just talked about.

We have to get the capacity in place.

Relatively.

Well in advance so as we've said previously kind of 18 to 24 months in advance so.

Increasing that capacity builds for probably the back half of 'twenty three 'twenty four which is what we're doing now because we've already built what we need for 'twenty two in the first half of 'twenty three isn't optional.

We're very careful not to over step our pounds not overbuilt by the same token we definitely don't want to be capacity constrained with the market.

That's growing quickly and we're gaining share and.

And encountering.

More work so.

I think there.

We have new businesses, particularly the cell and gene therapy, CMO businesses, which are adding to that but.

Adding to that in a way that somehow intensifies. The spend it's just it's part of a larger business.

So I said I'd say the principal determinants itself is a growth rate.

Space needs for safety assessment business.

Great. Thank you.

Sure.

Our next question comes from Tycho Peterson with Jpmorgan. Your line is open.

Hey, good morning, Jim I hate to split hairs here, but are you able to talk at all about January trends year to date trends I understand youre booking studies out to 2003 and you are checking the team throughout the <unk> savings here, but can you just talk as to what other things did hold up the beginning of this year so far.

Yeah.

We typically don't do that I think I'd, rather stay that way.

We ended the strong we anticipate.

Improvement in several of our businesses.

In the first quarter, principally in particularly the DSA business.

The demand is certainly there.

For those businesses in particular.

And as I said.

One ago answering another question we see.

Those bookings and the escalation in the price continuing to unfold.

Through the back half of the year.

We don't see any logical rationale why that why that.

It won't happen.

Right.

First time, we book that far out into the next year I think ever and that's a commentary on the volume of work.

How well capacity is utilized across the system not just for Charles River.

<unk>.

And.

How much.

The robust nature of the discovery pipelines with these clients.

So we're looking for.

Sequential improvement principally in DSA in the first quarter.

And the follow up I know, you've shied away in the past on kind of quantifying the price increases but is there any way you can just help us think about kind of the magnitude whether this could be a source of friction with clients and then I guess.

In your view, what constitutes margin Mark of op margin improvement.

How do we think about the tradeoff between wage inflation, JD mall, and Youre integrating and the price increases you talked about.

Yes so.

I'll, let David jump in in a minute.

Without again without giving any explicit price increases or price increases.

Principally in safety assessment, which I think.

Good question.

Increased in 2021 over 'twenty meaningfully and will increase.

Meaningfully again 22 over 'twenty, one and Thats like fat.

These are booked studies.

As I said, they actually improve in the back half of the year continuing to improve in the back half of the year. So yes. It is.

All a function of the manifestation of demand and capacity.

Available space and the complexity of the work that's going on so.

Okay.

Feel very good about that pricing and we feel that it's a.

At appropriate levels, David Lynch takeaway.

Offsetting nature of the price increase in place et cetera.

Yes.

Just to pick up on the price conversation.

It is fair to say that the.

<unk> segment, where we have the highest price increases is actually in our logic.

What your DSO and <unk>.

You've already heard.

You had mentioned earlier that <unk> one.

$1 billion increase in the order book going out into 'twenty three so we've got a our biggest.

<unk> segment has a massive step up in the order books and we have the highest price increases in the area so that that helps.

Offset some of the.

Hi of inflationary costs.

Everybody is seeing in 2022.

So and we've also got continued investments in our business not least of which is digital.

It's worth calling out that despite that we are going to we expect to deliver modest margin improvement and we have a 20 basis point headwind from the 50 <unk> week this year.

So it would be nice if we didn't have the 50 <unk> week, because we said at that 20 basis points in and you might get a bit more than the modest improvement.

Last year, and we still believe in the long term target for 2020 for another 150 basis points you could take this year and the next couple of years.

So we do feel that we're in a position that we can.

Pass on if you like.

Some of these cost pressures.

Our customers through the pricing so it's nice to be in a position that we can do that.

Okay.

Okay.

Thank you our next question from Dave Windley with Jefferies. Your line is open.

Hi, Thanks. Good morning, Thanks for taking my questions I wanted to try to tie a couple of things together and questions that I'm also getting so.

Around thinking about growth in the progression of growth it sounds like.

Particularly in DSA.

You're expecting to improve off a I think it's about an 8% number in the fourth quarter, but if I'm to read the tea leaves it sounds like maybe not quite reaching double digits. Your full year expectation is mid teens for DSA. So maybe you could help us understand you've mentioned pricing unfolds as the year progresses.

But help us understand.

How you get to the mid teens target for the full year against comps that get a little tougher as we progress through <unk> and <unk> starting off at a level that maybe it's about a little better than half of that growth rate.

And then.

Okay.

Well, we do but we get that.

Increased demand, so accelerating demand with sufficient capacity.

Yeah.

Considerably higher price points and the knowledge that this will occur given how.

<unk> back.

Back in the back end of the year.

This is Bob.

<unk>.

It's actually the best visibility we've had in an awfully long time so.

I mean, that's how we get there Dave.

Yes, let me.

Yes, Dave go ahead.

Go ahead quite there.

So Dave Q1.

Q1 is somewhat handicapped by a drop in our net which we called out because of the strong competition that we had in Q1 last year with China.

Alright so.

In a way that kind of compressed Q1 at the same time DSA.

Well from our perspective, as we pick up from Q4 position.

So that one one store just.

Bear in mind.

Another way of putting it if we didn't have that compression from RMS, we would be posting high end numbers.

The point to bear in mind is that.

As we get into the second half of the year, we do have the.

<unk> business is becoming organic and.

And we did call out that there is a 150 basis points improvement in the second half of the year or broadly that.

That sort of ZIP code in the second half of the year. So that also helps.

With the second half of the year.

So those are two of the softer point to point out the major point is the one that Jim pointed out that we've got more demand more price great visibility, we can see it we can see what being booked in Q3 and Q4.

And we know what prices that put into those places too.

So from our perspective, the Q1 is somewhat depressed because of RMS, but as you go through the remainder of the gap.

We'll get that bounce from the PD <unk>, becoming organic but the real driver here the core driver here.

And improvement in DSA with the volume and pricing.

Got it Thats helpful again, focusing on on DSA and particular, Jim you said earlier that the.

To John's question on Capex that spending your.

In embarking on now is more for late 'twenty three 'twenty four capacity you have the 'twenty, two and 'twenty three capacity in place I.

I guess I'm wondering does that mean now or is it rolling out through the year or another way to ask the question is.

Are you somewhat capacity constrained from a volume standpoint to start off the year until maybe some new capacity comes on.

Or is that another way to ask the question is when your clients are approaching you and saying do you have a spot for me why isn't the answer yes, I do and <unk> to start off the year even faster.

Yeah.

I would describe it that we're not capacity constrained.

We have lots of long term studies that are booking out for a long period of time, we have reserved spots for shorter term studies to get people in earlier.

It's it's it's a very it's a very.

Positive situation just in terms of kind of a supply demand quotient that we have.

We have sufficient space to accommodate our clients' needs. We're also getting our clients to prioritize what studies they actually need it.

Early as opposed to saying we have 10 studies, we want them. All just started two months, which is typically what we've had in years past. So I'd say, it's a much better dialogue.

We're causing requiring our clients to plan, which is not something historically they've done well with.

Cause them to have caused them to prioritize which is very very powerful for us and we've been able to slot them in.

Throughout the year.

Wouldn't say that we're capacity constrained I would say that.

Capacity for the industry, if you can call us and the industry is sort of appropriate.

So the demand curve is enough to accommodate new work, but not not tomorrow.

There's some waiting period.

And of course, we build space slightly in advance of how much we think we'll need.

Which of course, we have a plan for the next five years and we have to we have to extrapolate extrapolate that and build it out accordingly, So I think we've done it.

Good job for probably 10 years now staying ahead of the demand curve, which which is obviously and clearly intensifying.

Just as we've become a bigger player.

I feel very good about the capacity both in terms of.

Overall square footage, but perhaps more importantly, the proximity of our sites to clients, which puts us in a stronger position than that.

Competition.

Great. Thank you very much sure.

Our next question comes from Patrick Donnelly with Citi. Your line is open.

Hey, guys. Thanks for taking my questions.

Jim maybe one on China, obviously, you guys have exposure areas like RMS there more than the corporate average. So can you just talk about the outlook. There obviously not a direct impact, but there's been some disruption on the <unk> side with the unverified list and things like that so can you just talk about your outlook. There. It's been a nice growth growth vertical for you guys in RMS I'm just curious the outlook on that.

Ron.

Yes.

Pretty much the same as it always has been.

We have once we even have a small business the microbial business, but basically with the research models and services play for us in China.

<unk>.

And we really have no plans to expand that let's say the research model services businesses performing so well.

Just from a quality point of view.

We have.

I don't know how to put it no interference with support from the government.

Put it that way, but I think there is an acknowledgment that we are an important element in the whole drug research and development paradigm in China that there is real professionalism and ensuring bacteriological and virological and genetic quality of animals.

And so it's a market that is.

Very big it's huge investments recently sort of the mid tier and in biotech.

<unk> cropping up.

Investment obvious also in the pharmaceutical industry.

Sort of a bunch of lower quality government competitors suddenly cut for a period of years. So.

So the business is growing.

Double digit growth business has very good operating margins to vary capacity dependence because it's a big country. So.

The necessity and our ability to expand geographically is sort of underlying our growth rate. So we continue to add new sites.

Pretty much an immediate uptake.

Our uptick in the demand rather than trucking and flying animals.

Very good.

Long distances, we're very close by.

I've said for a number of years it sort of feels the way Europe and the U S.

Several decades ago. So I think it's a long runway I think this will be a meaningfully.

<unk> business for us.

Beginning to branch out we start with the research model production side of the business, just making a truck models.

Now we are in all of our services, including gems.

Reds and ice.

So now we have a cradle operation over there so all the things that we do in that business on a worldwide basis.

What to China.

So the government either doesn't care about us or.

Kind of quietly acknowledges that we're enhancing the level of play of the quality of research in China.

Supporting us and I'll, just remind you just sort of that that will totally makes sense Steve.

We bought a pre existing Chinese company.

And we didn't buy all of it.

We own almost all of it now, but we didn't buy all of it at the beginning so what do you think that that asset has always been looked at.

The Chinese government as a Chinese company, even though it's owned by a U S company.

So we were in.

Joining a run there I think it's an important business. It's one of the growth drivers of our research model business that we.

We don't anticipate any sort of government.

If a copy or in convention, we think the competitive scenario is quite favorable for us.

That's helpful. And then maybe just a quick follow up on the capital allocation side. I know you mentioned share repurchases are possible given where the stock is maybe just on the M&A side can you talk a little bit about your philosophy and it certainly doesn't sound like you are wavering on leaning in on areas like cell and gene therapy areas that are a little more tied to the high growth funding environment.

Any changes to your desire to continue to increase exposure to those types of areas Inorganically here.

Yes.

Strategic acquisitions continues to be our preferred use of capital always.

Was I suspect to some extent.

We always will be.

We've built a very broad portfolio, principally through M&A and that's distinguishing feature of the company and Thats what.

Accelerated our growth rate.

We have.

Fair number of assets that we're always looking at but we're looking we're looking in.

February discovery assets, particularly in the large molecule space, we're definitely looking at more cell and gene therapy assets. I think that was your question. We're looking at some things in the research model space.

Looking at some geographic moves.

We're looking at kind of some lab services capabilities, we're looking to continually.

Build out enhance expand our portfolio.

That could mean.

Filling in sort of a narrow gap that we have we have a lot of gaps, but we have some small ones I mean.

We had no CMO space capability.

Capability a year ago, so we fill that gap.

And some of the areas that we were and we'd like to be we'd like to have larger capabilities and some of the areas we'd like to have.

Broader geographic reach so we.

We're staying focused in the areas in which we play in which we have oftentimes the leadership position or at least a strong position.

And which is responsive to continue.

Continued demand from our clients our expectations for our clients in terms of the products and services that we provide.

They can't get elsewhere, it can't get at all or don't want to give themselves.

So.

Yes.

Additionally, I would add that we have.

These 16 technology deals that we've done.

Some of those deals distributed bio, which we saw large molecule discovery platform will become acquisitions. Some of those will fall by the wayside because of technologies don't work, but.

Some of those will become acquisitions after a very thorough due diligence so yes, we could.

We aim to continue to strengthen the portfolio principally through M&A.

Great. Thanks, Jim.

Okay.

Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, guys. Thanks, so much further question I guess on the first side just on the bookings commentary that you mentioned is there anything you can say in terms of mix of clients I guess any has there been any changes in terms of.

Larger clients are larger biotech or anything like that that's sort of different from historical trends that you've been seeing.

Probably not we don't we don't give that sign.

Two in clarity when we talk about with you folks except to say that.

Pharma continues to.

Outsource more work they continue to definitely.

Definitely don't build any new space to do the things we do.

I would say they are rapidly outsourcing most of the things that we deal with with some but very few exceptions.

They look to biotech to be the discovery engines for sure.

They provide funding.

And then I would say that biotech both large medium and small.

Is it a disproportionate driver of our growth for obvious reasons.

Okay.

Biotech companies.

Handful literally one of a handful of exceptions and you can name all five of those companies and even those companies have.

Principally outsources, but for any biotech startup.

A biotech company, that's a few years old or that's come public and pre revenue they have no internal capability to do anything that we do.

No internal capability.

Get us they have no internal capability to develop their own drugs. So they have to they have to go outside they have to externalize. It is not optional.

Decides that they're going to work with.

And interestingly I know you've heard this before but I think it's worth repeating interestingly.

Say, it's a class of clients they are less price sensitive and big pharmaceutical companies.

Because they are in a race to get to market. They often have one shot on goal. They often have a single drug a single modality.

A single <unk>.

Concept that maybe they have IP on.

Getting a slot working with a company like us actually understand the science and the regulatory environment.

Getting them over the finish line as is more important to them than the price of the study because if they don't do it in a timely fashion, if it's not done well.

They can miss.

Getting to market. So we like the blend of clients.

This is why does it maybe there's 10 drug come big drug companies left in the World and I think there'll be further consolidation so we love them.

Three big clients very big Outsources.

But on a forward going basis.

We will continue to be the principal driver of our growth.

That's very helpful.

And I think if I look back historically.

Last time, there was sort of like a decline in biotech funding on that where does that where SCA unless you have maybe the 2016 kind of timeframe and indicated that youre actually your organic growth accelerated and then the growth actually slowed in the in the subsequent year.

And I know obviously your business mix is different versus then but is there anything you can point to in terms of visibility and to say 2023, I know you've talked about some of your.

CSA book sort of through that time period that could sort of help give us comfort into sort of that longer term growth profile.

Sure I mean.

Just sort of reflect further.

Just wanted to said earlier that it's unprecedented to be booking this far in advance.

The strength of the pricing power.

Paradigm, it's quite interesting I mean, I think that's a commentary on how.

How much work there is out there and limited.

Number of providers and the complexity of the work for sure because we basically said your studies are way way more complex.

You need to pay us for that because you can't do it yourself with regard to big pharma and biotech certainly can't do it themselves.

<unk>.

I'd say a multiple years of cash.

Much of which came from the capital markets, but pharma will continue to be a principal source of funding as well money that's going into the <unk> sector, we have a lot of.

Work from VC clients I think we said at the last time we.

One of these calls around or slightly more than 10% of our revenue is coming from.

VC portfolio companies, so that's quite quite positive so.

And just again, we have no dialogue about pricing of concerns about funding, we only have a dialogue about can you accommodate.

Our so.

I don't have a crystal ball.

That provides great clarity on what's going to happen.

The future Budd.

Given the strength of the modality is given the strength of our competitive posture given the funding environment, even if it even if it moderates a bit.

We think we're in a very strong position to continue to grow our franchise.

<unk>.

We've talked about.

Our low double digits I.

I think we said through 2020 for operating margins came to train two 5% we remain very confident.

Pat and I would say that the current situation with starting the year with bookings that much higher than the prior year $1 billion higher and start looking at work putting into the next year is is a bit unusual and I think so.

Of.

A manifestation of the demand curve.

That's helpful. Thank you.

Yeah.

Our next question comes from <unk> <unk> with Morgan Stanley . Your line is open.

Hey, guys good morning.

Just wanted a quick follow up there Jim.

Question regarding customer mix.

Is there any sort of data points that you can share on what your exposure is to pre commercial stage customers.

The question, we're all getting is the public market funding slowdown might sort of disproportionately impact customers in that category versus large or midsized pharma that already have products on the market.

So just curious as to anything you can Sharon along those lines.

Yes.

We've never broken it down that way.

Obviously lots of companies maybe most.

Most companies in the biotech space.

Space are pre revenue.

So I'm not sure.

How helpful that distinction would be for you. So if the companies are well funded at the companies more importantly have.

Breakthrough technology at the company is a technology that could.

Provide either a therapy.

Unmet medical needs it should've been conceivable to us.

There would be funding either directly from the capital markets or from Big Pharma, who will who will want those assets.

Again.

We've built up.

Our analysis on how much money is available.

Client that client and we've had with clients every day.

We have no concern at all about funding either immediate or in the future just none its all part of the dialogue so.

I have no idea.

Or when that would change I don't see why it would.

Given that there are several years of cash.

Available to them so.

Sure.

We haven't sort of a meaningful amount of our clients probably fit that category I don't know the exact percentage.

Never broken it down that way publicly.

Got it.

And then on hemoglobin collateral Jim I think you called out sort of.

Hoping for an improvement here through 'twenty. Two can you just give us an update on some of the initiatives you have in place.

Outside of the market dynamics itself that can help you get that.

Yes, well, we continue to strengthen.

The management team.

Team, there I'd say kind of particularly on the sales side.

Connected with other parts of the company.

Both the specific cell and gene therapy assets that we have bought but also.

Other parts of the business. So that we had this sort of sort of elegant pull through.

So thats number one number two we have.

We've redesigned our governor wants to accommodate for Covid concerns and perhaps more importantly than that we've opened additional donor runs so our capacity has expanded dramatically.

And the last thing that we've done.

Is dramatically enhanced our social media outreach.

Two.

To both identify donors.

And qualify them.

So much more rigor and that process rigor and the capacity.

Much more I think elegant conservative outlook.

<unk> remains quite strong and so we're.

We're mindful of the fact that that fits that we will continue to improve.

Throughout 2022.

Got it and one final clean up for me on Biologics safety testing.

You mentioned this COVID-19 vaccine lot release testing revenue that is expected to moderate and finally do can you just help put some numbers around what it was like in 'twenty, one and where we should expect that to go this year.

Yes.

So we won't give you the numbers except to say that those were big contracts that have moderated.

Blue the.

Biologics revenue up to 30% growth rate we reported this.

Great quarter.

If you back those out that business is growing at about 20%.

We reiterate this morning so.

It's nice to have it will still have some of that because obviously there is considerable work still going on with.

Uh huh.

The older vaccines, and perhaps some new ones anticipating some variance and just sort of vaccine work generally, but the principal driver of growth for the biologics business, establishing a plethora of large molecule generally, but specifically demand for cell and gene therapy drug. So we continue to feel very good about.

The short and long term growth rate of that business, we anticipate improving operating margins of that business.

Very strong.

Competitive.

Capability, particularly enhanced by the cell and gene therapy.

Assets that we bought.

So from a competitive point of view, we just have a much broader.

Portfolio.

Our products and services that we can sell.

Got it appreciate the color Jim Thank you.

Sure.

Okay.

Our next question comes from Donald <unk> with Keybanc. Your line is open.

Great a lot of questions have been asked here I'll just stick with kind of one for me kind of high level, Jim you've been asked this a number of times, but I'll ask it again just to hear any updated thoughts you you called out balogh the partnership there and the AI ml space I'm. Just wondering if you can provide any updates around any case.

Using AI and ml in different ways that actually can impact what youre doing.

And we're more than just theory and is there any kind of pushback from from staff around change management to the extent that any of that stuff disrupt people's daily workflows.

So it's very very early days.

<unk>.

It was just signed.

That.

The company looks to have some promising technology that should help.

Debt to a lead compound.

Quicker or Conversely to two two.

Chile potential lead compounds that really won't pan out.

And that technology in concert with some of the things that we do bucks in vivo and in vitro should benefit.

The discovery part of our business in particular, but also the services that we provide to clients who are looking all of them are looking to get things to market faster. So.

It's very early days I won't be the only AI deal that we do.

There are multiple AI technologies.

Probably going to have several shots on goal, but this is a.

The company is pretty advance and quite sophisticated in.

Technology looks extremely promising.

If it works I think that's.

Disruptive at all of what we do I think for enhancement.

What we do to provide that as part of our service in our portfolio.

Two probably not probably to reduce the timeframe.

I would anticipate increased revenue.

Profit is a result of being able to pull things forward since time is certainly money.

For these folks and.

Yeah, I mean to your question I think so much of AI is anecdotal.

I'm not sure.

AI.

Should work and should benefit both preclinical and clinical aspects of drug development designing trials.

Better predicted outcomes.

Everybody believes that some aspect of that as possible question is.

How long will it take and how profound will it be and how much will it transform things.

We're looking at it.

So to very surgically that that would help us with certain aspects of our discovery business to get.

To get to.

Lead candidate faster. So, we'll we'll give we'll give updates as this.

Relationship develops.

We will probably give its own updates.

We've tried to do some things.

Five basis, but it's going to take a while to prove the thesis out for sure.

Okay. Thank you.

Our next question comes from Sylvia with UBS. Your line is open.

Alright, Thanks for taking my question.

Microbial is expected to normalized growth this year after some of the benefits still grow 10%.

Can you talk a little bit on the sustainability of that outlook and what is the current market penetration in any way to think about what percentage of the manufacturing segment is microbial.

Sure, it's a business that has.

Pretty much for the entire time, we've owned it which is 25 years growing at double digit rates. So it's an extraordinary business, where we have the only business that we do pure R&D and we have we have IP on all of our technology and were.

Our generation two ahead of the competition and so it's a.

We have very good visibility.

A lot of that business now is sort of razor and razorblade.

Structure when we have these handheld devices that we sell that have packages that are used and thrown away.

Usually daily.

So we have this built in base and we have thousands of those machines out there and once clients validate.

Working without machine, which by the way, it's a higher <unk>.

Price per test.

And then the competition or even our own historical.

Technology, but gives you.

Faster answer which and speed.

Clients so.

<unk> had a little bit of disruption from Covid because machine deliveries.

Reagents, we're back up we're past that.

We think that we have.

We have several technologies that business we have.

Testing business, but also business it looks a bacterial contamination and also identifies what the bacterial contamination was so if you produced a lot of drug and it was contaminated.

You need to know how it got containment dinnerware contaminated we're able to do that is all required by law by the way.

So.

Business has enormous long term benefits.

The market leader.

We've.

It was not going to give you explicit numbers because we've never done it but we are in the process of trends.

Transferring some of them.

A lot of clients that have used historical technology to this new technology.

Don't have a long way to go in that transformation.

And it will be much higher price points.

Higher margin so.

We're well into it.

Providing advancements in the technology all the time.

Staying close to the regulatory authorities all the time and.

Really continuing to have terrific penetration into some very very big.

Pharma companies.

<unk>.

And a whole host of both medical device and drug companies as well as some ways. The most stable.

High growth business.

It's just been growing.

At this double digit level.

As I said the whole time, we've owned it its going to be a very big business now I think we've given some.

Details, we may be able to figure out the size of it.

As my portion of the manufacturing piece, but we don't.

<unk>, specifically break that out.

We've said we said.

Microbial biologics testing the Navy and the full unit.

Those four units microbial is the largest piece we have called that out.

Thank you for taking my question.

Sure.

Thank you and I'm currently showing no further at this time I would like to turn the call back over to Todd Spencer for closing remarks, great.

Great. Thank you for joining us on the conference call. This morning. This concludes the call. Thank you.

This concludes today's conference call. Thank you for participating you may now.

[music].

Yes.

[music].

[music].

[music].

Good day and thank you for standing by welcome to the Charles River Laboratories fourth quarter and 2020 'twenty one.

Earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during this session you will need to press down on your telephone.

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Any further assistance please press star zero.

I'd like to hand, the conference over to your Speaker today, Todd Spencer Vice President of Investor Relations. Please go ahead.

Thank you good morning, and welcome to Charles River Laboratories fourth quarter 2021 earnings in 2022 guidance conference call and webcast. This morning, Jim Foster Chairman, President and Chief Executive Officer, and David Smith, Executive Vice President and Chief Financial Officer will comment on our results for the fourth quarter and full year of 2010.

One one and our financial guidance for 2022 following the presentation. They will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the investor Relations section of our website at IR Dot C River Dot com.

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 quarters 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 1095 actual results may differ materially materially from those indicated.

During this call we will primarily discuss non-GAAP financial measures, which we believe help investors gain meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP in accordance with regulation G. You can find the.

GAAP measures and reconciliations on the Investor Relations section of our website I will now turn the call over to Jim Foster.

Good morning.

I'm very pleased to speak with you today about another exceptional year for Charles River, and our expectations for 2022.

We believe that Charles River is a stronger company today than it has ever been.

We were extremely pleased to report organic revenue growth of 15% for the full year or low double digit growth when normalizing for the COVID-19 impact in 2020.

And a second consecutive year of 100 basis points of operating margin expansion.

We are seeing unprecedented demand across most of our businesses and we believe that this demand coupled with robust industry fundamentals.

Low teens revenue growth in 2022.

As a result, we're continuing to invest to add people and capacity to accommodate growing client demand.

And to build a scalable operating model to enhance our scientifically distinguished portfolio and to strengthen our relationships with clients through our flexible efficient outsourcing solutions.

To further differentiate ourselves from the competition, we have strategically expanded our portfolio to provide clients with the critical capabilities they require to discover develop and safely manufacture new drugs.

We have enhanced our scientific capabilities for advanced therapies in areas that offer significant growth potential.

With six acquisitions over the past two years.

By doing so we have built an end to end non clinical portfolio of cell and gene therapy solutions support support clients from early stage research to cgmp production and we expected to generate nearly 15% and total revenue in 2022.

Greater complexity of scientific research is encouraging the biopharmaceutical industry to rely on Charles river's high science capabilities.

Choosing it outsourcing partner.

Because of our extensive scientific expertise client centric approach and unique non clinical portfolio. We worked on more than 85% of the FDA approved drugs in 2021, including all of the CNS drugs and more than 90% of the oncology drugs. We are proud that our biopharmaceutical.

Clients continue to choose to partner with us.

They recognize the value that we provide.

Now, let me give you the highlights of our fourth quarter and full year.

We reported revenue of $905 1 million for the fourth quarter of 2021, an increase of 14, 4% on a reported basis.

Organic revenue growth of 10, 5% was driven primarily by continued double digit growth in manufacturing and RMS segments Covid impact in 2020 and resulted in a modest 50 basis point increase to the organic revenue growth rate.

For 2021 revenue was $3 $5 1 billion.

The reported growth rate of 21, 1%.

And.

Organic growth rate of 15, 1%.

On annual basis, the Covid impact in 2020 resulted in a 280 basis point increase to the organic revenue growth rate adjusted for the Covid impact.

Very pleased that we achieved low double digit normalized growth on a consolidated basis basis.

And at each segment to achieve its longer term organic growth target 2021.

The operating margin was 29% in the fourth quarter NIM.

An increase of 10 basis points year over year for the full year, we met our outlook of 21% representing the second consecutive year of 100 basis points of operating margin improvement.

This demonstrates the operating leverage inherent in our business as well as our continued efforts to drive operating efficiency and build a more scalable infrastructure, we expect to generate modest operating margin improvement in 2022, which will moderate from the past two years as we continue to make the investments needed to support.

Growth principally related to staffing and because of a 20 basis point headwind from the 50 <unk> week this year.

Earnings per share were $2 49 in the fourth quarter, an increase of four 2% from $2 39 in the fourth quarter of 2020.

Strong revenue and operating income growth were partially offset by a higher tax rate and interest expense for the full year earnings per share were $10 32.

At 26, 9% increase over the prior year.

We exceeded our prior guidance range of $10 20 to $10 30.

For the second consecutive year with earnings growth above the 20% level.

And our outlook for 2022, which we initially provided in January .

Constraints, our firm belief that the sustained demand environment. We will continue this year. We believe this trend combined with higher pricing will drive organic revenue growth in the range of 12, 5% to 14, 5% in 2022.

We continue to expect non-GAAP earnings per share will be in a range of $11 50 to $11 75.

Earnings per share are expected to grow at a similar rate to revenue is modest operating margin improvement will be largely offset by less favorable below the line items, including a higher tax rate.

We're enthusiastic about the year ahead, and look forward to new opportunities to scientifically differentiate ourselves in the marketplace.

Hence our ability to meet clients' needs and achieve our financial goals.

I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2022, beginning with the DSA segment's results.

DSA revenue in the fourth quarter was $534 $1 million.

Six 7% increase on an organic basis biotechnology clients remain the primary driver of DSA growth in the fourth quarter as the industry remains well funded and ended the year on a strong note.

As anticipated the DSA segment's organic growth rate for the quarter was below 10%.

But also as expected DSA achieved a low double digit growth rate for the year at 12, 2% as we have said before growth rates for our businesses are not linear so quarterly fluctuations should be expected.

In 2022, we expect DSA organic revenue growth will be in the mid teens.

The increase from last year's growth rate is based on our belief that sustained client demand will continue and higher price increases than in 2021 will help offset higher compensation cost and other inflationary cost pressures.

DSA growth rate is expected to accelerate during 2022.

Due in large part to the current pricing working through the backlog.

First quarter growth rate is also expected to improve from the fourth quarter level.

Our safety assessment business continued to perform very well benefiting from strong demand and price increases bookings and proposal volume remain at record levels with total DSA backlog, increasing 70% or by $1 billion.

Two 4 billion.

At year end 2021, we are booking work into 2023, which translates to greater visibility and a strong book of business that supports our growth expectations acceleration of demand during 2021.

Selected and the fact that we added nearly twice as many safety assessment staff in the second half of 2021 as we did in the first half.

We expect these recent hires who have helped us accommodate client in the end of 2022.

In addition to closely manage the workloads that are continuing to add staff.

Taking a similar approach to capacity additions investing in new space in a disciplined manner to ensure we meet future demand.

Discovery services business also continued to perform well with strong performances for early discovery and CNS services similar to the safety assessment business.

<unk> robust client demand for discovery services by closely managing staffing levels, and adding cutting edge capabilities.

We believe this will continue to enable us to achieve our annual growth rate in the low double digits or better.

If it's to broaden and strengthen our discovery capabilities and enhance our scientific expertise are enabling us to expand the support we provide for our clients' discovery research.

As a result clients increasingly view Charles River as the Premier scientific partner, who can support their efforts to identify new drug targets and discovering novel Therapeutics.

This is leading to new opportunities for our discovery business, including significant client interest and integrated drug discovery programs, and which clients Trust us with multiple services or their entire discovery program to advance their early stage therapies.

We intend to continue to build our discovery portfolio, including through strategic partnerships and acquisitions.

In early 2021, retro <unk> with its proprietary cell microarray technology and off target screening services had a very successful first year as part of the Charles River family violence.

Violent distributed bio's large molecule discovery platform clients can now partner with us for integrated end to end solutions therapeutic antibody.

Cell and gene therapy discovery and development.

Our partnership strategy has proven to be a successful approach to staying current with cutting edge technologies, and adding innovative capabilities with limited upfront risk.

We recently signed a new partnership with <unk> health to deliver a new type of offering that combines validus artificial intelligence or AI enabled drug discovery and development platform with our own capabilities to expedite the discovery of the small molecule therapies for clients. This partnership has the potential to ask.

Celebrate the discovery process as we utilize Dallas Opal closed loop and silicone platform to rapidly identify compounds and optimize them using our leading in vitro and in vivo capabilities.

We also recently announced an expanded partnership with <unk> innovative assay technology to further expedite the discovery process around high throughput screening of lead.

<unk>.

Our innovative discovery toolkit will enable us to become a technological disruptor in the industry and positions us as an indispensable research partner, who can enable clients to identify and discovering new drugs faster, which will ultimately reduce their time to market.

The DSA operating margin was essentially unchanged at 23, 1% in the fall.

Quarter, Despite a 40 basis point headwind related to foreign currency translation of 2021, and the DSA operating margin improved by 30 basis points to 23, 7% and foreign exchange is an 80 basis point headwind.

DSA segment is expected to be the primary contributor to the company's operating margin improvement in 2022.

RMS revenue in the fourth quarter was $165 6 million.

An increase of 13, 3%.

And organic basis, which excludes the RMS Japan divestiture.

The comparison to the Covid impact in 2020 increase for fourth quarter growth rate by two 3% for the year RMS organic revenue increased by 19, 5% with approximately half the increase or nine 8% being driven by the comparison to the COVID-19 impact in 2020.

Normalized for the Covid impact, we reported high single digit growth in 2021, which is consistent with the RMS organic growth outlook for 2022.

Our 2022 outlook reflects a continuation of the strong global demand for research models and associated services <unk>.

<unk> generated by the ongoing robust early stage research activity within the biopharmaceutical industry as well as that academic and government institutions. This outlook includes robust growth for our insourcing solutions business as we continue to expand our cradle footprint.

Also assumes an improvement in the cell supply growth rates throughout 2022, as our efforts to enhance the operating performance of heating accounts. So we're out gained traction during the year.

Underlying industry fundamentals within the cell therapy sector remained strong.

Research models remains foundational regulatory required tools for early stage research and toxicology and a vital component of our abilities to support our clients' revenue for research models has increased globally. During the COVID-19 pandemic due to both higher pricing and improved demand.

Reflecting the renewed focus on scientific innovation and the critical role that research models play in generating scientific breakthroughs and ensuring the safety of lifesaving therapy demand in China was exceptionally strong in 2021, reflecting the resurgence in biomedical research activity following China's emergence from Covid related.

It shutdowns in 2020 as well as the shift towards a mid tier biopharma and CRO client base and our expanded product offering.

While we expect the growth rate in China will moderate in 2022, including in the first quarter. After an exceptionally strong start last year, we are continuing to expand our geographic footprint to support the continued double digit revenue growth that is expected in this region.

The heightened level of research activities also driving demand for our research model services, which continued to perform very well in the fourth quarter and full year. We are a natural partner for gems that insourcing solutions R. I S.

Our extensive animal husbandry expertise and our ability to provide clients with flexible and efficient solutions.

<unk> is benefiting from strong outsourcing demand driven by the greater complexity in scientific research and our proprietary models that our clients are creating.

<unk> is benefiting from the continued growth of our Cradle initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity in our sights and facilitates the use of other Charles River services assay research as the research progresses, we intend to continue to expand our existing cradle footprint in the <unk>.

Boston, Cambridge, and South San Francisco Bio hubs.

And also into new regions in 2022, including Southern California, and China.

Significant client interest in this service.

<unk> operating margin was 26, 9% in the fourth quarter, an increase of 180 basis points from the fourth quarter of 2020.

The increase was driven by operating leverage from higher sales volume in the research models business, particularly in China.

The 2021, the RMS operating margin increased by 530 basis points to 27, 3%. This significant improvement was primarily due to the comparison to the depressed margin in 2020 associated recovery related client disruptions.

Manufacturing revenue was $205 $3 million in the fourth quarter growth rate of 21, 2% on.

Organic basis.

Driven primarily by double digit organic growth across the microbial solutions biologics testing and avian vaccine businesses for the full year.

Organic revenue growth was 26%.

With 210 basis points of it.

The increase coming from the comparison to the Covid impact in 2020.

In 2022, we expect mid teens organic growth for the manufacturing segment.

<unk> from the exceptional 'twenty one performance reflects a return to more normalized growth rates for the microbial solutions business after an incremental benefit from COVID-19 related instrument and cartridge reef replenishment in 'twenty one.

And then the biologics testing business due to a reduction in some COVID-19 vaccine test revenue is that revenue stream settles into a steadier state.

We're very pleased with the mid teens growth rate forecast for 2022 and expect the manufacturing segment will achieve its 2024 target of approaching 20% growth once the benefit of the high growth <unk> business is fully reflected in the organic growth rate and see Dms scale <unk>.

<unk> to increase microbial solutions growth rate in the fourth quarter and for the year remained well above 10%, reflecting strong demand across our portfolio of critical quality control testing solutions.

We were pleased with the strength of the demand for endotoxin testing systems, and cartridges, which perform FDA mandated lot release testing and injectable drugs and medical devices.

Advantages of our comprehensive portfolio continued to resonate with our clients and.

And we believe that our ability to provide a total microbial solution will enable microbial solutions to continue to deliver revenue growth at or above the 10% level.

The biologics testing business reported another exceptional quarter and year of strong double digit revenue growth.

Robust demand for cell and gene therapy testing services continued to be the primary growth driver with COVID-19 vaccines and traditional biologics also being meaningful contributors, while we expect a moderation of the Covid vaccine testing revenue in 2022.

We believe cell and gene therapies will continue to be significant growth drivers over the longer term to support our 20% target for the biologics business this year and beyond.

Our <unk> business is continuing to make great progress on the integration as we gain traction in business development activities to support its robust growth outlook 2022.

We've established an end to end gene modified cell therapy solution, which we believe is critical to support our clients more seamlessly.

Comprehensive cell and gene therapy portfolio is resonating with clients and they continue to explore opportunities to streamline their biologics development workflows and drive greater efficiencies by outsourcing to us.

The strength of demand for CMO services necessitates a continued investment in capacity to ensure we have available space to serve our clients and to build upon our extensive portfolio of manufacturing services.

The manufacturing segment's operating margin declined by 160 basis points to 35, 7% in the fourth quarter.

Of 2021, and by 320 basis points to 34, 2% for the full year. These declines primarily reflects the inclusion of the <unk> acquisition in 2021 cognate and value chain. These businesses are profitable.

Margins are below overall.

<unk> segment.

We expect this margin headwind to gradually dissipate as we drive efficiency.

The significant growth, we anticipate generates greater economies of scale and optimize the throughput NFC demo sites.

In 2022, we will continue to move our growth strategy forward.

Planned M&A and strategic partnerships remain vital components of our strategy as we endeavor to further enhance our scientific expertise.

Global reach and innovative technologies that we can offer clients across all three of our business segment.

We will also focus our efforts internally and then sharing that ensuring that we have the necessary staff and resources to meet the needs of our clients and support the robust growth in our market.

On enhancing our real time digital connectivity with clients.

<unk> to integrate our end to end non clinical offering to create a more seamless solutions across all dry modality. It is.

Incumbent upon us to be the scientific partner, who can help clients move their programs forward from concept.

Clinical development to the safe manufacture of their life saving therapy.

By providing exceptional value to our clients. We believe we will continue to achieve our financial targets and deliver greater value to our shareholders.

In conclusion, I'd like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment.

Now I'd like David Smith to give you additional details on our financial performance and 2022 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 the amortization.

Acquisition related charges costs related primarily to our global efficiency initiatives. The gain on the sale of August Japan, and venture capital and other strategic investment performance and some of those items.

Many of them comments will also refer to organic revenue growth, which excludes the impact of acquisitions divestitures and foreign currency translation and the 50 <unk> week in 2022.

My discussion this morning will focus primarily on additional detail regarding our financial guidance for 2022.

Which was originally provided in January .

We continue to expect reported revenue growth of 13% to 15% in 2022 and organic revenue growth of 12 514, 5%.

Our revenue growth outlook for 2022.

Posted by the continuation of unprecedented client demand and health spending environment, along with price increases to help offset higher inflation.

Inflationary cost pressures.

We remain well positioned to expand margins, while continuing to invest in the business, resulting in non-GAAP earnings per share between $11 50 and $11.75 per share.

Approximately 11% to 14% growth compared to 2021.

By segment.

Outlook is also unchanged from last month, we expect organic revenue growth in the high single digits of the RMS segment. The result of continued robust global demand for research models and associated services.

As well as improvement in the self supply growth rate.

This will be partially offset by a moderation in the honest China growth rate after an exceptional performance in 2021.

The DSA segment, we expect mid teens organic revenue growth driven by continued strong contributions from both discovery and safety assessment.

The growth rates of the safety assessment business is expected to accelerate during the year, principally as current pricing works through the backlog.

We also expect mid teens organic revenue growth in the manufacturing segment.

A slight moderation in the microbial solutions biologics growth rate along with the incremental contribution from the high growth 17 therapy.

Once we anniversary as a company.

In banking acquisition.

The <unk> business is expected to contribute nearly 150 basis points to our consolidated organic revenue growth rate in the second half of the year.

We continue to expect foreign exchange to provide a headwind of approximately 100 basis points to our reported revenue guidance in 2022 as a result of the strengthening U S dollar.

Thanks Rachel.

Based on the bank both of.

Which are currently very close to the spot rate at some of those currency.

Based on our current base assumption FX will be a moderate headwinds for sure.

We have provided information on our 2021 revenue by currency and the foreign exchange rate that we are assuming for 2022 on slides 32, and we will continue to monitor fluctuations in the currency market.

Press through the year.

We were pleased with the operating margin of 21% last year and the fact that it was the second consecutive year as 100 basis points of margin improvement.

We remain well positioned to drive modest operating margin improvement in 2022, although the improvement will be less than the prior two years due to two principal factors.

Compensation costs due to the hiring and wage increases.

And the impact of the 50, <unk> week, which is expected to reduce the operating margin by approximately 20 basis points.

On a segment basis the <unk>.

Operating margin is expected to be the primary contributors to the margin improvement in 2020 and leverage from higher revenue growth is expected to drive the operating margin towards its longer term target in the mid 20% range corporate expenses are expected to be in the mid 5% range and so slightly but.

The 2021 level of five 6% opportunity.

We expect unallocated corporate expenses to be a small contributor to the margin expansion this year, because our scalable infrastructure and investments, including digital enterprise enabled us to drive greater efficiencies and leverage corporate call.

The non-GAAP tax rate for 2022 is expected to be in the low 20% range, which will be a slight increase from 18, 9% in 2021.

The increase is principally due to the discrete tax benefits in 2021.

Associated with R&D tax credits and a favorable excess tax benefit related to stock based compensation, neither of which is expected to be at.

At the same level.

Our 2022 tax rate guidance assumes no impact from potential U S tax reform initiatives at this time.

As a reminder.

First quarter tax rate as being meaningfully lower in recent years due primarily to the excess tax benefit related to stock compensation given our current stock price. We expect it to continue to be true in 2022, resulting in a non-GAAP tax rate in the mid teens for the first quarter.

Total adjusted net interest expense in 2022 is expected to increase to a range of $83 million to $87 million.

And $79 million last year.

We expect the year over year increase to be driven by the outlook higher variable interest rates, primarily in the U S.

I think payments of debt.

Our assumptions for interest rates includes several rate increases this year, which is generally consistent with the federal reserve's got.

It is important to note that the <unk>.

This impact will be somewhat muted by the fact that.

Slightly more than 50% above that.

Phase III bump that will not fluctuate.

At the end of the fourth quarter.

Spending debt balance of $2 7 billion.

<unk> to gross and net leverage ratios of approximately two five times.

As we evaluate our capital priorities and intend to deploy capital to the areas that we believe will generate the greatest return.

Strategic acquisitions remain our top priority for capital allocation.

Absent any meaningful M&A, we will evaluate other uses of capital including debt repayment.

Our expectations for the diluted share count will be to exit the year.

With slightly more than 52 million shares outstanding which does not assume any stock repurchases at this time.

In 2021 free cash flow was $532 million, an increase of 40% from the preceding year and above our prior outlook of approximately $500 million due.

Due to the strong operating performance and look to capital management.

Indicated in January we expect free cash flow for 2020 to be approximately $450 million.

This is a decrease of $80 million from last year due entirely to an anticipated $132 million increase in capital expenditures.

It's a total of approximately $360 million in 2022.

With robust client demand exceeding our expectations in 2021 and expect it to continue we believe we will require capex of approximately 9% of total revenue in 2022 should provide the additional capacity needed to keep pace with demand.

Let me legacy businesses are driving most of the year and the capital increase.

The assessment responsible for approximately two thirds of the increase.

But in the manufacturing segment.

So many of our 2022 production guidance can be found on slide 14. As a reminder, we will add a 50 <unk> week at the end of the fourth quarter of 2022, which is periodically with client to true up our fiscal year 2017.

Calendar year end.

Third we have historically been characterized as a partial week of revenue.

During the holiday week.

Weaker costs.

Looking ahead to the first quarter of 2022, our outlook includes year over year revenue growth of approximately 10%.

As we reported and organic basis.

Jim mentioned, the DSA revenue growth rate is expected to improve in the first quarter compared to the fourth.

No.

This will be offset by a little RMS growth rate, reflecting the comparison to an exceptionally strong staff in China last year.

We are also confident that the revenue growth rate will accelerate during the year, reflecting the robust BSA order book, which extends into 2023 and includes higher pricing as well as the anticipated improvements in the RMS growth rate from the first quarter level.

First quarter non-GAAP earnings per share.

Thank you to increase at a high single digit rate from $2 53.

Last year, reflecting a mid teens tax rate.

The increase in interest expense.

In conclusion, we are very pleased with our financial performance in 2021, and believe that we are well positioned to deliver another strong year in 2022.

Expected 2022 performance.

Our ongoing focus on disciplined investing to support the growth of our businesses.

Our efforts to drive efficiency.

Speed and responsiveness with which we operate and our goal is to continually enhance our relationship with our product.

We are also confident in our ability to achieve our 2020 financial targets, including approximately 150 basis points of operating margin expansion from the 2021 level. Thank you.

Okay.

That concludes our comments operator, we will now take questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

We ask that you please limit yourself to one question.

First question comes from Derek Brown with Bank of America. Your line is open.

Yeah.

Hey, good morning, Thanks for letting me have the first question.

Hey.

Jim I'm just getting some questions. This morning from people that are trying to square your commentary on the really high bookings number and.

I think some people think that maybe the fourth quarter DSA came in a little bit light and the Q1 guide is a little bit below what some people thinking can you just sort of walk through sort of like how to reconcile the bullish outlook.

The bookings number with what people are perceiving is maybe a little bit softer numbers.

Sure Good morning, Doug.

It's a it's a further.

Further manifestation of.

Our continued articulation that these steady sort of start and stop when they start and stop and then.

They don't care about it our fiscal quarters.

Yeah.

But by the same token we have been able I think to call the years pretty accurately very accurately. So again, we had over 12% growth in DSA segment.

Last year, which.

Which we're proud of it and where we just guided to stronger growth mid teens this year.

So I can say several things so.

And it kind of ended the year, where it ended.

We just said that the first quarter will be better.

We have a lot of things going on Derek we have.

Literally studies booking into 2023, you've known us a long time.

That's sort of no.

We ended the year, we ended 2021 with a backlog that was $1 billion higher prior year, which is also quite extraordinary we're getting a lot of price, we're going to stop short as usual breaking out that price, but we're getting significant amount of price and a lot of that price of the builds.

Through the back half of the year.

As we've had all these studies book into the back half of the year. So we have I would say the best visibility we've ever had we've had bookings elongated out more than they ever had.

I don't know if its the best pricing I think it's probably the best pricing that we've seen as well so.

And very strong.

Conversations about clients about focused primarily or primarily on do you have a slide for me.

And when can you start in.

Do you prefer one that sort of work rather than always starting with price. So.

We're very pleased that we're getting paid for what has become and I know you understand as well very very complex studies or studies have.

Have grown increasingly more complex as youre looking at immunological impacts or genetic impacts. So we feel really good about about DSA really good about safety assessment in particular really got about having hired.

More people in the second half of the year.

Now about 20%.

Sorry, 'twenty one than the beginning of the year, which means that we're rolling into 'twenty, two where the higher workforce is trained and available to do the works out. So I hope that helps we we feel particularly strong about.

How we've guided you all for the year.

Yes.

Yes, I mean, I know you normally don't give bookings numbers, but is there any sort of light.

Color you can give on the quarter to quarter improvement.

Tough tough to do it on a quarterly basis, but.

I think that backlog numbers, yes quite interesting.

That's a big pop year over year quite.

Quite solid a lot of pricing in there so.

So we will see it continue to improve as the year unfolds.

Great.

If I can squeeze in one follow up on I'll leave the biotech financing question to somebody else, but I'm getting a bunch of questions on.

Cell and gene therapy demand and just your confidence in that.

Demand for that market sort of being there I think some investors are a little skeptical that the cell and gene therapy.

Expectations are that demand being built out of that capacity be about there is ultimately can be filled just given the complexities of that market I guess, what's your confidence that that the capacity you're building out the demand youre, assuming for cell and gene therapy is going to going to materialize.

Yes so.

We're relatively early days here, but deep into the integration of all of these assets. We bought last year I would say that our client facing.

Capability and design is being well received.

Demand is increasing and business is improving.

And most of those businesses.

It's for US it's about getting the word out that we have the services and what the what the breadth of the portfolio is.

We think we're in a very strong.

Competitive position, particularly if you link that with the rest of the portfolio. It gives us 15% of our revenue is going to come from there. So we're seeing good demand from cell and gene therapy, we're going to see that we're going to see that exemplified in the manufacturing segment.

Both in biologics both the CDM space, we're also going to see that play through.

Aspects of discovery.

Safety so.

So we're seeing the.

Anticipated level of demand.

I expected when we when we did those deals.

Thank you.

No.

Our next question comes from John <unk> with William Blair. Your line is open.

Hey, Thanks, very much I'll ask the biotech funding question. Jim you said in your comments that funding is great. It looks like the first quarter at least from an IPO standpoint, well, maybe the first quarter there'll be down quite a bit from your standpoint does that sort of impact. The way you guys think about the year end budgeting or do you think funding from other sources.

Is this still big enough to offset slowness there.

It really doesn't.

It really doesn't John .

Last year was a very strong you know I don't know I forget the second strongest.

Even the fourth quarter was I think in the top five strongest.

We've done a very.

Careful analysis.

So balance sheets.

All of our clients.

We think that is.

We have still three years of cash available for them from a sort of capital markets.

I guess from a variety of choices.

And so they've got the capital markets, they've got direct inflows into the VC Fund question, Pat directed slows from pharma as they always have so.

As I think we are literally the Canary in the coal mine I can tell you that we have.

No conversations at all.

With any clients about their concern about about several things about any sort of articulation of a pullback or slippage Wade or.

We can prosecute that full portfolio with none of that.

Either current or forward looking.

Nobody is just not paying the bills and so I do think that as I said.

For many years.

Biotech industry, particularly it's expensive money thoughtfully.

Not not Wastefully I think they're very well banked right now I think.

The multiple modalities, particularly many of the new ones, particularly of cell and gene therapy in the air and AI drugs continue to strengthen.

The outlook in funding capabilities for these.

To these companies and I think I.

I think.

A quarter blip, if it even last quarter and the IPO market relative to interest rates and all the other stuff that's going on is.

I understand why you asked the question people looking at I think it's potentially overriding situation or kind of kind of waiting for things to.

To be less robust.

We think they're very well finance going forward.

Then on articulating any concern.

We pay attention.

That stuff every.

Every day.

And we listen for it as well and we make sure that that more.

We're communicating with our clients in a way that we understand how they are looking out into the future I guess, Conversely, if somehow this.

The situation I just described.

<unk> in any meaningful way with significant way, which I absolutely don't think it will I think we'd hear it first given given our footprint given how much interface, we have with so many clients. So.

No indications at all if there's any concern and I don't really think that if any.

Significant impact to their spending abilities.

That's reassuring thank you.

Quick follow up on Capex it looks like your budget in Germany up about $130 million can you just talk about where those investments are going.

Sure.

So I think I think the first thing to just think about it is just the scale of the company. So it's about two much larger company.

And we are growing faster, so there's a sort of twos kind of basic.

Third.

Third is that we have a pretty big infrastructure.

It is 5 million square feet of space, So on a maintenance basis.

We have a lot of facilities to take care of having said that most of the increase.

Is.

As for new growth and development.

Mental.

<unk>.

And most of that is in legacy businesses and particularly in safety assessment. So we are working really hard with safety assessment.

Continues to escalate growth rate escalators, which it is with all the pricing all the things we just talked about.

We have to get the capacity in place.

Relatively.

Well in advance so as we've said previously kind of 18 to 24 months in advance so.

Increasing that capacity builds for probably the back half of 'twenty three 'twenty four which is what we're doing now because we've already dealt with what we need for <unk> 22 in the first half of 'twenty three isn't optional as you know, we're very careful not to over step our pounds not to overbuild by the same token we definitely don't want to be capacity constrained.

With the market.

That's growing quickly and we're gaining share and.

And garnering more work so.

I think there.

We have new businesses, particularly the cell and gene therapy, CMO businesses, which are adding to that but.

They are adding to that in a way that somehow intensifies the spend.

Part of a larger business.

So I'd say that I'd say the principal determinants itself is the growth rate and space needs for safety assessment business great. Thank you.

Sure.

Our next question comes from Tycho Peterson with Jpmorgan. Your line is open.

Hey, good morning.

Jim I hate to split hairs here, but are you able to talk at all about January trends year to date trends I understand youre booking extended out to 2003 and you are checking the trust of these savings here, but can you just talk as to whether things did hold.

Hold up the beginning of this year so far.

Yes.

We typically don't do that I think I'd, rather stay that way.

We ended the strong we anticipate.

The improvement in several of our businesses.

In the first quarter, principally in particularly the DSA business.

The demand is certainly there.

For those businesses in particular.

And as I said.

Moment ago answering another question we see.

Those bookings and the escalation in the price continuing to unfold through.

Through the back half of the year.

We don't see any logical rationale why that why that won't.

It won't happen.

Right.

First time, we book that far out into the next year I think ever.

That's a commentary on the volume of work.

The how well capacity is utilized across the system not just a Charles River and.

And.

How much.

The robust nature of the discovery pipelines with these clients.

So we're looking for.

The sequential improvement principally in PSA in the first quarter.

And the follow up I know, you've shied away in the past on kind of quantifying price increases, but is there any way you can just help us think about kind of the magnitude whether this could be a source of friction with clients and then I guess in your view what constitutes margin margin improvement.

Do we think about the tradeoff between wage inflation, GDP and youre integrating and the price increase that you talked about.

Yes so.

I'll, let David jump in in a minute.

Without again without giving any explicit price increases price increases.

Principally in safety assessment.

With your question.

Increased in 2021 over 'twenty meaningfully and will increase.

Meaningfully again 22 over 'twenty, one and Thats like fast.

These are booked studies.

I said, they actually improve in the back half of the year continuing to improve in the back half of the year. So it's all.

The function of the manifestations demanded capacity.

Billable space and the complexity of the work that's going on so.

Okay.

We feel very good about that pricing and we feel that it's at appropriate levels David launch takeaway.

Offsetting nature of a price increase in place et cetera.

I mean, just to pick up on the price conversation.

Is that to say that.

The segment, where we had the highest price increases is actually in our logic.

Segment like you did cite.

And you've already heard.

Jim mentioned earlier that <unk> one.

$1 billion increase in the order book going out into 'twenty three so we've got a our biggest.

<unk> segment.

A massive step up in the order books, and we have the highest price increases in the area. So that that helps at.

Offset some of the.

Hi of inflationary costs.

What he's seeing in 2022.

And we also got continued investment in our business not least of which is digital.

With calling out that despite that we are going to we expect to deliver modest margin improvement and we have a 20 basis point headwind from the 50 <unk> week this year.

It would be nice if we didn't have the 50 <unk> week, because we could add that 20 basis points and when we might get a bit more than the modest improvement.

Last year.

And we still believe in the long term target for 2020 for another 150 basis points. If you take this year and then a couple of years.

So we do feel that we're in a position that we can pass on if you like.

Some of these cost pressures to our customers through the pricing. So it's nice to be in a position that we can do that.

Okay.

Yes.

Thank you. Our next question comes Dave Windley with Jefferies. Your line is open.

Hi, Thanks. Good morning, Thanks for taking my questions I wanted to try to tie a couple of teams together and questions that I'm also getting so.

Around thinking about growth in the progression of growth it sounds like.

Particularly in DSA.

You're expecting to improve off a I think it's about an 8% number in the fourth quarter, but if I'm to read the tea leaves it sounds like maybe not quite reaching double digits. Your full year expectation is mid teens for DSA. So maybe you could help us understand you've mentioned pricing unfolds as the year progresses.

Help us understand.

How you get to the mid teens target for the full year against comps that get a little tougher as we progressed through <unk> and <unk> starting off at a level that maybe it's about a little better than half of that growth rate.

And then we get.

Okay.

Well why don't we do but we get that.

Increased demand, so accelerating demand with sufficient capacity.

Is considerably.

Considerably higher price points and the knowledge that this will occur given how.

<unk> back.

Back in the back end of the year.

This is buck so it's.

It's actually the best visibility we've had in an awfully long time so.

I mean, that's how we get there Dave.

Yes, let me.

Yes, Dave go ahead.

Go ahead quite there so so day Q1.

Q1 is somewhat handicapped by dropping all of that which we called out because of the strong competition that we had in Q1 last year with China.

Alright so.

In a way that that kind of compressed Q1 at the same time DSA.

Well from our perspective, as we pick up from Q4 position.

One one store just to bear in mind.

Another way of putting it if we didn't have that compression from RMS, we will be posting high end numbers.

Another point to bear in mind is that as we get into the second half of year, we do have the.

<unk> business is becoming organic and.

And we did call out that there is a 150 basis points improvement in the second half of the year or broadly that.

That sort of ZIP code in the second half this year. So that also helps.

With the second half of the year. So those are two of the soft a point to point out. The major point is the one that Jim pointed out that we've got more demand more price great visibility, we can see it we can see what being booked in Q3 and Q4.

So and we know what prices that are put into those places.

So from our perspective, the Q1 is somewhat depressed because of RMS, but as you go through the remainder of the gap you get that bounce from the <unk>, becoming organic but the real driver here the core driver here.

And improvement in DSA with the volume and pricing.

Got it Thats helpful again, focusing on on DSA and particular, Jim you said earlier that.

To John's question on Capex spending.

Spending your.

In embarking on now is more for late 'twenty three 'twenty four capacity you have the 'twenty, two and 'twenty three capacity in place.

I'm wondering does that mean now or is it rolling out through the year or another way to ask the question is.

Are you somewhat capacity constrained from a volume standpoint to start off the year until maybe some new capacity comes on.

Or yet another way to ask the question is when your clients are approaching you and saying do you have a spot for me why isn't the answer yes, I do and <unk> to start off the year even faster.

Yeah.

I would describe it that we're not capacity constrained.

We have lots of long term studies that are booking out for a long period of time, we have reserved spots for shorter term studies to get people in earlier.

It's.

It's a very it's a very.

Positive situation just in terms of kind of a supply demand quotient that we have.

We have sufficient space to accommodate our clients' needs. We're also getting our clients to prioritize what studies they actually need to start early as opposed to saying we have 10 studies, we want them. All just started two months, which is typically what we've had in years past. So I'd say, it's a much better dialogue.

Sure.

Causing requiring our clients to plan, which is not something historically, we've done well with.

Cause them to have caused them to prioritize which was very very powerful for us and we've been able to slot them in.

Throughout the year.

Wouldn't say that we're capacity constrained I would say that.

Capacity for the industry. If you can call it an industry is sort of appropriate.

So the demand curve is enough to accommodate new work, but not.

Tomorrow.

There is some waiting period.

And.

And of course, we build space slightly in advance of how much we think we'll need.

What's your question, we have a plan for the next five years and we have to we have to extrapolate extrapolate that and build it out accordingly. So I think we've done a very good job for probably 10 years now staying ahead of the demand curve.

Which is obviously and clearly intensifying.

Just as we've become a bigger player.

I feel very good about the capacity both in terms of.

Overall square footage, but perhaps more importantly, the proximity of our sites to clients, which puts us in a stronger position than that.

Petition.

Great. Thank you very much sure.

Our next question comes from Patrick Donnelly with Citi. Your line is open.

Hey, guys. Thanks for taking my questions.

Jim maybe one on China, obviously, you guys have exposure areas like RMS there more.

Average so can you just talk about the outlook there, obviously not a direct impact, but there's been some disruption on the <unk> side with the unverified list and things like that so can you just talk about your outlook. There. It's been a nice growth growth vertical for you guys in RMS I'm just curious the outlook on that front.

Yes.

Pretty much the same as it always has been we we.

Once we even have a small business the microbial business, but basically with the research models and services play for us in China.

And we have we really have no plans to expand that.

So the research model services businesses, performing so well.

Just from a quality point of view.

That we have.

I don't know how to put it no interference with support from the government.

You can put it that way, but I think there is an acknowledgment that we are an important element in the whole drug research and development paradigm in China that there.

As you know real professionalism and sharing.

Bacteriological on very logical and genetic quality of animals.

And so it's a market that is very big it's huge investments recently sort of the mid tier and in biotech.

CRO cropping up.

Investment obvious also in the pharmaceutical industry and.

Sort of a bunch of lower quality government competitors for a period of years.

So the business is growing.

Double digit.

<unk> growth business has very good operating margins very capacity dependence because it's a big country. So.

Sure.

The necessity and our ability to expand geographically is sort of underlying growth rate. So we continue to add new sites.

It's a pretty much an immediate uptake.

Or uptick in the demand rather than trucking are flying animals.

Very good.

Long distances, we're very close by.

I've said for a number of years it sort of feels the way Europe and the U S.

Several decades ago. So I think it's a long runway I think this will be a meaningfully.

Meaningful business for us.

We're beginning to branch out we start with the research model production side of the business, just making a truck models.

Now we are in all of our services, including gems.

Reds and.

So now we have a cradle operation over there so all the things that we do in that business on a worldwide basis.

Brought to China.

So the government either doesn't care about us or.

Kind of quietly acknowledges that we're enhancing the level of play of the quality of research in China.

Joining us and I'll just remind you just so that that will tell them, except Steve is that we bought a pre existing Chinese company.

And we didn't buy all of it.

We own almost all of it now, but we did buy all of it at the beginning so I do think that that asset has always been looked at by the Chinese government as a Chinese company, even though it's owned by a U S company yet.

So we.

We're enjoying a run there I think it's an important business. It's one of the growth drivers of our research model against us.

We don't anticipate any sort of covenant.

Difficulty or intervention, we think the competitive scenario is quite favorable for us.

That's helpful. And then maybe just a quick follow up on the capital allocation side. I know you mentioned share repurchases are possible given where the stock is maybe just on the M&A side can you talk a little bit about your philosophy I mean, it certainly doesn't sound like you're wavering on leaning in on areas like cell and gene therapy areas that are a little more tied to the high growth funding environment.

Any changes to your desire to continue to increase exposure to those types of areas Inorganically here.

Yes, I mean strategic acquisitions continues to be our preferred use of capital always.

Was I suspect to some extent.

We always will be.

We built a very broad portfolio, principally through M&A and that's distinguishing feature of the company and Thats what <unk> accelerated.

Our growth rate.

We have.

Fair number of assets that we're always looking at but we're looking we're looking in.

Have more discovery assets, particularly in the large molecule space, we're definitely looking at more cell and gene therapy assets.

As your question, we're looking at some things on the research model space.

Looking at some geographic moves.

We're looking at kind of some lab services capabilities, we're looking to continually.

Build out enhance expand our portfolio.

That could mean.

Filling in sort of a narrow gap that we have we have a lot of gaps, but we have some small ones.

We had no CMO space capability.

Capability a year ago, so we fill that gap.

And some of the areas that we were and we'd like to be we'd like to have larger capabilities and some of the areas we'd like to have.

Broader geographic reach so we.

We're staying focused in the areas in which we play in which we have oftentimes the leadership position or at least a strong position.

And which is responsive to continue.

Continued demand from our clients our expectations for our clients in terms of the products and services that we provide.

They can't get elsewhere, it can't get at all or don't want to do themselves.

So.

Yes.

Additionally, I would add that we have.

These 16 technology deals that we've done.

Some of those deals distributed bio, which we saw large molecule discovery platform will become acquisitions. Some of those will fall by the wayside because it technologies don't work, but.

Some of those will become acquisitions after a very thorough.

So yes, we can.

We aim to continue to strengthen the portfolio principally through M&A.

Great. Thanks, Jim.

Okay.

Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, guys. Thanks, so much further question I guess on the first side just on the bookings commentary that you mentioned is there anything you can say in terms of mix of clients I guess any has there been any changes in terms of.

Larger clients are larger biotech or anything like that so that's different from historical trends that you've been seeing.

Probably not we don't we don't give that sign.

Fine tuned clarity when we talk about with your trucks, except to say that.

Pharma continues to.

Outsource more work they continue to display.

Definitely don't build any new states to do the things we do.

I would say they are rapidly outsourcing most of the things that we do with some but very few exceptions.

They look to biotech to be the discovery engines for sure.

They provide funding.

And then I would say that biotech both large medium and small.

Is it a disproportionate driver of our growth for obvious reasons.

Okay.

Biotech companies.

Handful literally won a handful of exceptions and you can name all five of those companies and even those companies have.

Principally outsource, but any biotech startup.

A biotech company, that's a few years old or this kind of public and pre revenue. They have no internal capability to do anything that we do.

No internal capability.

Yet they have no internal capability to develop their own drugs. So they have to they have to go outside they'd have to sterilize, it's not optional.

Besides that we're going to work with.

And interestingly I know you've heard this before but I think it's worth repeating interestingly.

Say as a class of clients they are less price sensitive and big pharmaceutical companies.

Because they are in a race to get to market. They often have one shot on goal. They often have a single drug a single modality.

Single.

Concept that maybe they have IP on.

Getting a slot working with a company like us actually understand the science and the regulatory environment.

Getting them over the finish line as is more important to them than the price of the study because if they don't do it in a timely fashion, if it's not done well.

They can miss.

Getting to market. So we like the blend of clients.

What does that maybe there's 10 drug comes big drug companies left in the World and I think there'll be further consolidation so we love them.

Good clients.

Big Outsources.

But on a forward going basis.

And we will continue to be the principal driver of our growth.

That's very helpful.

I think if I look back historically.

Last time and the rest of it as like a decline in biotech funding on that where does that rusty analyst or it may be that 2016 kind of timeframe and indicated that youre actually your organic growth accelerated and then the growth actually slowed in the in the subsequent year.

I know obviously your business mix is different versus then but is there anything you can point to in terms of visibility and to say 2023, I know you've talked about some of your.

CSA book sort of through that time period that could sort of help give us comfort interest or does that longer term growth profile.

Yeah.

Sure.

Just sort of reflect further.

That's why I said earlier that it's unprecedented to be booking this far in advance.

The strength of the pricing power.

Paradigm, it's quite interesting I mean, I think that's a commentary on how.

How much work there is out there and limited.

Number of providers and the complexity of the work for sure because we basically said your studies are way more complex you.

You need to pay us for that because you can't do it yourself with regard to big pharma and biotech.

Certainly can't do it themselves.

I would say a multiple years of cash.

Much of which came from the capital markets, but pharma will continue to be a principal source of funding as well the money that's going into the <unk> sector, we have a lot of.

Work from VC clients I think we've said the last time we.

One of these calls.

Round or slightly more than 10% of our revenue is coming from.

D C portfolio companies. So so that's quite quite positive so.

And just again, we have no dialogue about pricing of concerns about funding. We all have a dialogue about can you accommodate.

Our so.

I don't have a crystal ball.

That provides great clarity on what's going to happen.

The future but.

Given the strength of the modality is given the strength of our competitive posture given the funding environment, even if it even if it moderates a bit.

We think we're in a very strong position to continue to grow our franchise.

<unk>.

We've talked about.

Low double digits I.

I think we said through 2020 for operating margins getting to 22, 5% we remain very confident.

Pat and I would say that the current situation with starting the year with bookings that much higher than the prior year $1 billion higher and stuff work.

Looking into the next year is is a bit unusual and I think.

Instead of.

A manifestation of the demand curve.

That's helpful. Thank you.

Yes.

Our next question comes from <unk> <unk> with Morgan Stanley . Your line is open.

Hey, guys good morning.

Just wanted a quick follow up there Jim.

Question regarding customer mix.

Is there any sort of data points that you can share on what your exposure is to pre commercial stage customers.

The question, we're all getting is the.

Public market funding slowdown might sort of disproportionately impact customers in that category versus large or mid sized pharma that already have products on the market.

So just curious as to anything you can Shannon along those lines.

Yes.

We've never broken it down that way.

Obviously lots of.

Companies maybe most.

Most companies in the biotech space.

Space are pre revenue.

So I'm not sure.

How helpful that distinction would be for you. So if the companies are well funded at the Companys more importantly have.

Breakthrough technology companies have technology that could.

Provide either a therapy.

Unmet medical needs it should've been conceivable to us.

There would be funding either directly from the capital markets or from Big Pharma, who will who will want those assets.

Again.

We've built up.

Our analysis on how much money is available.

Client that client and we've had with clients every day.

We have no concern at all about funding either immediate or in the future just none that's not part of the dialogue so.

I have no idea.

Or when that would change I don't see why it would.

Given that there are several years of cash.

Available to them so.

Sure.

We haven't sort of a meaningful amount of our clients coupled with fit that category I don't know the exact percentage than we've ever broken it down that way publicly.

Got it.

And then on if you look at ancillary.

Jim I think you called out sort of.

Hoping for an improvement here through 'twenty. Two can you just give us an update on some of the initiatives you have in place.

Outside of the market dynamics itself that can help you get that.

Yes, we can.

Continued to strengthen.

Hence the management team.

Team, there I'd say kind of particularly on the sales side.

Connected with other parts of the company.

Both the specific cell and gene therapy assets that we have bought but also.

Other parts of the business. So that we had this sort of sort of elegant pull through.

So thats number one and number two we've.

We've redesigned.

Owner wants to accommodate for some of the Covid concerns and perhaps more importantly than that we've opened additional data rooms.

Capacity has expanded dramatically.

And the last thing that we've done.

Is dramatically enhanced our social media outreach.

Two.

To both identify and qualify them.

So much more rigor and that process rigor and the capacity.

Much more I think elegant conservative outlook as the demand remains quite strong and so.

We're mindful of the fact that that business will continue to improve.

Throughout 2022.

Got it and one final clean up for me on Biologics safety testing I know you mentioned this COVID-19 vaccine lot release testing revenue that is expected to moderate in 'twenty. Two can you just help put some numbers around what it was like in 'twenty, one and where we should expect that to grow this year.

Yes so.

I'll give you the numbers except to say that those were big contracts that have moderated.

<unk> the.

Biologics revenue up to 30% growth rate, we reported this quarter.

Quarter.

If you back those out that business is growing at about 20%.

We reiterated this morning, so that.

It was nice to have it will still have some of that because obviously there is considerable work still going on.

The older vaccines, and perhaps some new ones anticipating some variance and just sort of vaccine work generally, but the principal driver of growth for the biologics business. It's obviously the plethora of large molecule generally, but specifically demand for cell and gene therapy drug. So we continue to see.

Feel very good about the short and long term growth rate of that business, we anticipate improving operating margins of that business.

Very strong.

Competitive.

Capability, particularly enhanced by the cell and gene therapy.

Assets that we bought.

So from a competitive point of view, we just have a much broader.

Portfolio.

Our products and services that we can sell.

Got it I appreciate the color Jim Thank you.

Sure.

Okay.

Our next question comes from Donald <unk> with Keybanc. Your line is open.

Great a lot of questions have been asked here I'll just stick with kind of one for me kind of high level, Jim you've been asked this a number of times, but I'll ask it again just to hear any updated thoughts you you called out Vallo the partnership there and the AI ml space I'm. Just wondering if you can provide any updates around any case.

Using AI and ml in different ways that actually can impact what youre doing.

And more and more than just theory and is there any kind of pushback from from staff around change management to the extent that any of that stuff.

Disrupt People's Daily workflows.

So it's very very early days.

So it was.

It was just signed.

The company looks to have some promising technology that should help.

Debt to our lead compound.

Quicker.

Or Conversely to two two.

Chile potentially compounds that really won't pan out.

And that technology in concert with some of the things that we do both in vivo and in vitro should benefit.

The discovery part of our business in particular, but also the services that we provide to clients who are looking all of them are looking to get things to market faster. So.

It's very early days.

We won't be the only AI deal that we do there.

There are multiple AI technologies that we're probably going to have several shots on goal, but this is a.

The company is pretty advance and quite sophisticated in the technology looks extremely promising.

If it works.

Yes.

Disruptive at all of what we do I think it's an enhancement to what we do to provide that as part of our service in our portfolio.

Two probably.

To reduce the timeframe.

I would I would anticipate increased revenue.

Profit is a result of being able to pull things forward since time is certainly money.

For these folks and.

Yeah, I mean to your question I think so much of AI is anecdotal, but so much of AI.

Should work and should benefit both preclinical and clinical aspects of drug development designing better trials with better predicted outcomes I think everybody believes that some aspect of that as possible, but the question is.

How long will it take and how profile would be and how much will it transform things we're looking at it.

So to very surgically that that would help us with certain aspects of our discovery business to get.

To get to.

Lead candidate faster. So, we'll we'll give we'll give updates as this.

Relationship develops.

We'll probably give its own updates.

We've tried to do some things on that.

Five basis, but it's going to take a while to prove the thesis out for sure.

Okay. Thank you.

Our next question comes from Sylvia with UBS. Your line is open.

Alright, Thanks for taking my question.

Microbial is expected to normalized growth this year after some of the benefits still grow 10%.

Can you talk a little bit on the sustainability of that outlook and what is the current marketing penetration in any way to think about what percentage of the manufacturing segment is microbial.

Yeah.

Sure, it's a business that has.

Pretty much for the entire time, we've owned it which is 25 years growing at double digit rate. So it's an extraordinary business, where we have the only business that we do pure R&D and we have we have IP on all of our technology and were.

Or generation two ahead of the competition.

So it's a.

We have very good visibility, it's a lot of that business now as a sort of razor and razorblade.

Structure and we have these handheld devices that we sell that have packages that are used and thrown away.

Usually daily.

So we have this built in base and we have thousands of those machines out there and once clients validate.

Working with our machine, which by the way for higher higher price per test.

The competition or even our own historical.

Technology, but gives you.

Faster answer which.

And the speed is.

Clients so.

<unk> had a little bit of disruption from Covid because machine deliveries.

Reagents, we're back up we're past that.

We think that we have.

We have several technologies that business, we have an endotoxin testing business, but also business. It looks a bacterial contamination and also identifies what the bacterial contamination was so if you produced a lot of drug and that was contaminated.

You need to know how quite containment dinnerware contaminated we're able to do that is all required by law by the way.

So.

Business has enormous long term benefits.

The market leader.

We've.

I'm not going to give you explicit numbers because we've never done it but we are in the process of trends.

Transferring some of.

A lot of clients that have used our historical technology to this new technology, we still have a long way to go in that in that transformation.

And it will be much higher price points and much higher margin. So.

We're well into it.

Providing advancements to the technology all the time.

Staying close to the regulatory authorities all the time at.

Really continuing to have terrific penetration into some very very big.

Pharma companies that utilize that.

And a whole host of both medical device and drug companies as well, yes in some ways its the most stable.

High growth business.

Just been growing.

At this double digit level.

As I said the whole time, we've owned it its going to be a very big business now I think we've given some.

Details, we may be able to figure out the size of it.

What portion of the manufacturing piece, but we don't we don't explicitly specifically break that out.

Yeah, We've said we said.

The microbial biologics testing <unk> and avian the full unit of those four units microbial is the largest piece we have called out that.

Thank you for taking my question.

Sure.

Thank you and I'm currently showing no further at this time I'd like to turn the call back over to Todd Spencer for closing remarks.

Great. Thank you for joining us on the conference call. This morning. This concludes the call. Thank you.

This concludes today's conference call. Thank you for participating you may now.