Q4 2022 Charles River Laboratories International Inc Earnings Call
Speaker 1: I.
Speaker 2: Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories Fourth Quarter and Fully Year 2022 earnings conference call. This call is being recorded. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.
Speaker 3: To ask a question during this period, you will need to press star one on your telephone. If you want to remove yourself from the queue, please press star two. Lastly, if you should need operator assistance, please press star zero. I would now like to turn the conference over to our host Todd Spencer, vice president of Investor Relations. Please go ahead, sir. Thank you and good morning and welcome to Charles River Laboratories' fourth quarter in full year 2022 earnings in 2023 guidance conference call and webcast. This morning, I am joined by Jim Foster, chairman, president and chief executive officer and Flavia P's, executive vice president and chief financial officer. They will comment on our results for the fourth quarter of 2022, as well as our financial guidance for 2023. Following the presentation, they will respond to questions. There is a fly presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately two hours after the call today, and can be also accessed on our Investor Relations website. The replay will be available through the next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects,
Speaker 3: for the company, constitute four looking statements under the private securities litigation reform act of 1995. Actual results may differ 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 the core operating results in guidance. The non- GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAP. In accordance with regulation G, you can find the comparable GAAP measures and reconciliations on the investor relations section of our website. I will now turn the call over to Jim Foster. Good morning. Before I speak about our strong forward court results, I want to provide an update on the non-human primate or NHP supply situation. As many of you are aware, there has been an ongoing industry-wide investigation into NHP imports from Cambodia. On February 17th, we received a subpoena from the US Department of Justice relating to an investigation into the Cambodian NHP supply chain. We have been informed this investigation relates specifically to shipments of NHPs received by Charles River from our Cambodian supplier. We intend to fully cooperate with the US government.
To conclude I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their support.
Now I'd like Flavio to give you additional details on our financial performance and 2023 guidance.
Thank you Jim and good morning, before I begin may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition related adjustments.
Costs related primarily to our global efficiency initiatives.
James or losses from our venture capital and other strategic investments.
Gain on the sale of the avian vaccine business and certain other 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.
Our discussion this morning will focus primarily on our financial guidance for 2023.
We're very pleased with our fourth quarter results, which included revenue and earnings per share that outperform our previous guidance, including quarterly revenue exceeding the $1 billion level for the first time.
Our 2023 guidance ranges reflect multiple scenarios with regards to the estimated impact from the NHS supply constraint as Jim outlined.
The impact of which is expected to result in reported revenue growth of one five to four 5% and organic revenue growth of four five to seven 5% in 2023.
Notwithstanding the NH be supply situation, our outlook reflect sustained underlying trends in most of our businesses and our resilient funding environment.
We expect non-GAAP earnings per share between $9 70.
And $10.90, reflecting meaningful headwinds associated with both NH be supply and non operating items.
Not provide two menu more comments on the NH be supply impact since Jim covered it.
Ill focus my comments on the other headwinds which include the impact of the avian vaccine divestiture, a higher tax rate and increased interest expense.
In combination these non operating headwinds will reduce earnings per share by approximately $1 20 to $1 40 for the year, partially offset by an FX benefit to earnings per share of up to 25 cents in 2023.
These items will reduce earnings per share growth by nearly 10% at midpoint.
I'd like to provide some additional details on the three non operating items that we expect will generate headwinds for all financial performance in 2023.
First we completed the avian vaccine divestiture in December as expected.
The transaction will reduce 2023 revenue by approximately $80 million and non-GAAP earnings per share by approximately 25.
Net of the interest expense benefit since we used the proceeds to repay debt.
Second the non-GAAP tax rate is expected to move to the top of our long term low 20% range to $22 five to 23, 5% in 2023 reps.
Representing nearly 400 basis point increase at midpoint.
Compare to the 2022 tax rate of 19, 2%.
The increase will be primarily driven by a year over year reduction in the excess tax benefit related to stock compensation.
As a lower stock price will generate less of a benefit in 2023 compared to the prior year.
As well as discrete tax benefits in 2022.
Not expected to reoccur this year.
The higher tax rate is expected to reduce 2023 earnings per share by 50 to 65 cents and the earnings growth rate by over 500 basis points at midpoint.
Finally total adjusted net interest expense in 2023 is expected to increase to a range of $133 million to $137 million compared to $105 million last year.
We expect year over year increase will be driven by higher variable interest rates, primarily as a result of the federal reserve's actions, partially offset by repayment of debt.
We anticipate the higher interest expense will create an earnings per share headwind of 45 to 50.
And reduced the earnings growth rate by at least 400 basis points.
As we mentioned last quarter, we entered into an interest rate swap agreement effectively locking in a fixed rate for two years on $500 million of our revolving credit facility.
At year end, approximately three quarters of our $2 $7 billion that was at a fixed rate.
We believe the federal reserve will increase rates in the near term.
Our outlook accommodates an additional 100 basis point increase in rates in 2023.
The recently announced February increase.
At the end of the fourth quarter, our gross and net leverage ratios were approximately two two times and two.
Two one times respectively.
This is a meaningful decline from the third quarter due in part to a cash gain on the avian divestiture.
We continuously evaluate our capital priorities and as always intend to deploy capital to the areas that we believe will generate the greatest returns.
Our outlook assumes an average diluted share count of approximately 51, five to 52 million shares outstanding in 2023.
From a segment perspective, our 2023 revenue growth outlook reflects sustained client demand trends offset by the NH be supply impact in the DSA segment.
Similar to the prior year. The RMS segment is expected to achieve high single digit organic revenue growth. The result of continued robust demand for research models and associated services.
As a reminder, the Cambodian HB supply situation does not have an impact on our RMS segment.
These large models are sourced and used to support our safety assessment operation.
For the DSA segment, we expect the organic growth rate will be between low to mid single digits based on our NSP supply assumptions around the timing of the resumption of imports.
The manufacturing segment is expected to generate low double digit organic revenue growth.
With the increase from the 2022 growth rate principally driven by the expected rebound in the <unk> performance during the year.
While foreign exchange was a 350 basis point headwind in 2020 to the weakening of the U S. Dollar since November is expected to result in a slight FX benefit.
250 basis points to revenue growth in 2023, assuming current foreign exchange rates.
This will drop down to a more meaningful contribution to the bottom line.
It's projected to generate up to a 25 cent earnings per share benefit due largely to movements in the Canadian dollar.
You may recall in Canada, we invoice most of our revenue in U S dollars, but essentially all of our costs are incurred in Canadian dollars.
We have provided information on our 2022 revenue by currency and the foreign exchange rates that we are assuming for 2023.
<unk> presentation.
But the operating margin, we would have expected to generate moderate margin improvement in 2023 without an HP supply impact.
But given the meaningful headwinds we expect the 2023 operating margin to be flat to down 150 basis points, depending on the timing of the resumption of Cambodia and HB shipment.
Longer term, we still believe there is operating margin improvement that is inherent in our business from a combination of leverage from higher volume pricing and continuing to drive efficiencies.
We will not provide free cash flow or capital expenditure outlooks at this time because these metrics could vary based on the level of NH be supply impact that is incorrect.
For 2022 free cash flow totaled $333 million compared to $532 million for the prior year.
The decrease was due to higher capex as we added capacity to accommodate the robust demand as well as unfavorable working capital movements.
The timing of which contributed to our free cash flow being below our prior outlook.
Capital expenditures for 2022 increased by $96 million to $324 $7 million with most of the increase driven by the continued capacity needs of the safety assessment business.
Even the current NH be supply situation, we will reassess our capital needs for this year.
Longer term the targeted level for Capex remains at approximately 9% of revenue as we expect to continue to invest in capacity in order to keep pace with the sustained underlying demand environment and support our long term growth forecast.
The next slide shows a summary of our 2023 financial guidance.
Looking at the first quarter of 2023, we expect that year over year revenue growth will be in the high single digit range on a reported basis.
At or above the 10% level on an organic basis.
Expecting stronger revenue growth in the first half of 2023.
Due to the comparisons to last year when growth accelerated throughout the year as well as the gating of the HB supply impact.
We expect only a small impact related to NH be supply in the first quarter. Because these large models are already in place to start the scheduled study.
We expect earnings per share will decline at a mid single digit rate in the first quarter compared to $2 75.
In the first quarter of last year.
In addition to the impact of the avian divestiture.
Non operating headwinds will have a greater impact to earnings per share in the first quarter.
Specifically, the higher tax rate and increased interest expense.
As previously mentioned the tax benefit from stock compensation is expected to be lower in 2023 with the greatest impact in the first quarter.
We also will not have anniversary last year's federal reserve more aggressive interest rate increases in the first quarter.
Two items I expect it to result in a combined earnings headwind of approximately <unk> 40 per share.
In addition, the manufacturing segment faces a difficult comparison versus the first quarter of last year with regards to commercial readiness milestones in the <unk> business and Covid testing revenue in the biologics testing business.
This will result in a lower growth rate for the manufacturing segment in the first quarter.
Each of these headwinds will improve throughout the year beginning in the second quarter.
In conclusion, we're very pleased with our 2022 financial performance and we'll proactively manage the challenges in 2023.
We're confident in our ability to generate value for our shareholders by consistently growing revenue earnings and cash flow.
Over the last five years, we have achieved compound annual growth of 16% for revenue and 17% for earnings per share generating robust.
Operating and free cash flow, while continuing to make necessary investments to support the growth of our business.
We're focused on continuing to drive growth executing our strategy and enhancing our position as the leading global non clinical drug development partner working with our clients from discovery and preclinical development through the safe manufacture of their lifesaving therapies. Thank you.
That concludes our comments, we will now take your questions.
At this time, if you would like to ask a question. Please press the star and <unk> on your Touchtone phone.
Remove yourself from the queue at any time by pressing star Q.
Once again that is star one to ask a question.
And our first question will come from Derik de Bruin with Bank of America. Your line is open.
Hi, good morning, Thanks for taking my question.
Yes.
Jim I'm just curious.
What are your customers doing.
In the in the <unk>.
Biotech space and elsewhere to two in terms of their studies I mean is.
Is are other vendors having.
Similar delays and some issues basically are you at risk of losing business because other vendors have.
Better access to some of the model systems.
Yeah.
Tough to kind of that kind of competition.
Right.
I guess my overarching comment would be number one we are a much larger scale.
Number two we have different supply sources and different capabilities, but I would say that with regard to Cambodia were at 60%.
The animals come from we are all at least temporarily for clothes from bringing.
Animals and utilizing them on studies.
In the United States. So if you want to extrapolate this and say this is an industry issue.
So relatively profound because drugs aren't going to move.
Through preclinical and then to the clinic biologics I couldn't move.
To them.
Animals, it's going to have.
To be.
NIH piece, so we are.
Our focus now is to work efficiently to.
Come up with a collaborative methodologies.
They have an agreement with them and we can execute to show parentage, which is sort of the underlying issue here, it's going to be some.
Sort of lap.
Elaborately assay.
But we have to be able to do that quickly and cross the large population of animals.
B G.
Just to re set the table for you.
Irene.
Is that demand is really significant for us I can't comment on the competition.
I assume similarly, so demand is exceptional we're well staffed.
Capacity is tight we actually have enough animal supply in terms of our relationships with various suppliers that we have where we either own a piece or havent wanted to contract.
Hit this anticipated.
Speed bump with fish and wildlife for saying that.
They're concerned about parenthood so.
I don't.
Can't guarantee anything I don't think this is a situation that we've been concerned about losing share it's a situation of high.
We.
And Thats, both Charles River and the competition to some extent who've passed that somebody can support the clients to get drugs through preclinical and to patients.
Pretty much 100% of our focus going forward.
We're optimistic that we will be able.
Quest, we're optimistic we'll be able to beat that.
Yes, just a little bit difficult to determine exactly when it will be resolved as exactly when we will get.
Animals into the U S. We've sized our guide.
As we say in the prepared remarks.
Either have animals kind of late in the third quarter for utilization in Q4 that would be sort of a best case worst case would be that.
<unk> has opened up at all for fiscal 'twenty, three and of course, it's about 60% of the supply source.
Charles River and the industry at large so it's.
I don't know how else to say this it's not really optional that we fix it.
Fix it for our clients and for patients and for ourselves.
I think Lee.
U S government authorities understand the criticality of.
Of the work that we do in the room with me and Hp's play and we're hoping that work closely with us as we work through the resolution.
Great and that was sort of my next follow up on this one it's like how closely are FDA and fish and wildlife.
Working together I mean do they currently understand.
The importance of what this is is there did you get any sort of suggestion on timing on when this will be resolved or what the milestone C.
The timing side, only because they're pretty much consistent that we could package by the same token fish and wildlife absolutely understand how these animals are used.
Critical nature of them.
Sure.
Various government agencies.
Conversation was the one that I think I'll look at the world towards different labs.
But.
Yeah.
It's going to be essential to move drug development forward for hundreds of clients and.
Doug.
That.
That we have a resolution so we're off working on that were off with an open dialogue with efficient wildlife about what exactly they need.
We have to explain to them that they already have.
Yes, it's going to take some time to get this up and running.
But we are well intentioned, we have deep science on Iran, or collaborate with others to get this up and running and we'll provide these tests, which yes.
That's the basis of the total.
Situation.
Wild animals being use of biomedical research.
Okay. Thank you.
Sure.
Thank you.
Our next question will come from Eric Coldwell with Baird. Your line is open.
Thanks very much.
The subpoena are there any additional details you can provide on.
The timing of the receipt, what what Doj, perhaps might think they have come across that would drive this.
And then can you confirm that the decremental margin on the rough $80 $160 million revenue headwind is about 50% to 60% that's what's embedded in the guidance and then third.
Could you talk about the supply expansion you've.
To what extent <unk> been able to achieve supply expansion beyond Cambodia is there any additional detail you could be would be willing to provide on countries of origin, new suppliers increases with existing non Cambodian suppliers is there anything you can share to let us know.
What what might be the ultimate outcome. This let's say worst case scenario Cambodia doesn't reopen.
Sure subpoenas relatively recent Eric.
Yes.
Where we're subject here, meaning that they wanted to get information.
From us.
No.
In other Cambodian supplier was indicted.
Or.
That's not something that we work with.
So we.
We took a couple of our competitors to work with and that's the whole.
<unk>.
Questioning and.
<unk> proven methodology.
So they're now looking at.
All of the suppliers Cambodia.
One of whom we get I don't know it keeps dropping.
We're just there in the audience.
I guess I should say without sort of weighing in on what the government thinks it doesn't think we believe it's a professionally run operation from a culinary.
A view from nutritional point of view from a wholesale point of view from a shipment point of view.
And it's a big funnel.
And they take care of our types of accounts that were really well. So we feel that we have some input into modeling.
Capability with them.
We believe that.
As this Doj investigation continues we're confident that they.
I will conclude that any concerns they had with the kinds of Charles River.
Eric.
We can pull if we did anything wrong to the contrary.
We always fully comply with U S and international laws.
Well, we'll work closely with them.
We'll be collaborative we'll be transparent and we will take the high road in terms of coming up with that.
A solution that works for them works for us and probably will work for other providers competition, which is which is great.
The supply thing is.
I mean it is what it is it's frustrating we worked really hard over the last I'd say COVID-19 year, So probably three years now maybe four.
Particularly after China stopped in 2008.
A key.
To have a multiplicity of suppliers and I won't go through where they are and what the names that we have multiple supply sources and so we were starting this year with more than a sufficient number of monkeys to do the work.
Now we have the orders last year way into the back half of 'twenty, three 'twenty, four and hopefully some sort of incremental on top of that and as I said earlier, we had staffing space. So.
We're heading into this.
We had an extraordinary second half of last year, so heading into this year really optimistic about our supply.
So I would say that we have multiple supply sources, which was great I would tell you.
In specific answer to your question that if Cambodia never opens up there will be an insufficient number of monkeys to do the work for the whole industry.
And I'm not just saying this through Charles River Labs, that's not a taller.
Tolerable situation, that's not an acceptable situations before.
For the health of patients for drug development for getting drunk throughput.
Through preclinical into the clinic, so we have to find an accommodation.
The dialog with that was quite okay.
They've been really clear to say you just have to show heritage.
Got that.
What we mean by that.
That you can track the Oxford to others.
But those are part of a purpose bread.
Operation. So we believe that we can do that we believe that.
Cambodia will open up at some point, we're hopeful that it will be.
S K it should be.
For the quarter with the animals fourth.
Because it's a big industry go am I asking that can't happen.
I V.
Drill down on the.
Financial impact of what we just gave in our guidance.
Thanks, Tim and good morning, Eric.
Our EPS guidance.
Obviously assumes different scenarios as we mentioned in our prepared remarks, obviously the revenue loss dropped down at a fairly high rate.
Right initially, but I prefer not to comment on the specifics.
Yeah.
Alright, thank you.
Our next question will come from Sandy Draper with Guggenheim. Your line is open.
Yeah.
So you said youre on mute, we can't hear you.
Oh, yes.
Thanks Todd.
Just a quick follow up on HP and then my bigger question is on the <unk> business.
Sure I understand it correctly, you've decided Jim too to stop but we ordered to stop taking on.
Primates from from the supplier to this resolved and basically.
Just youre waiting from signals from.
The food and wildlife for the FDA and to your hands are tied or once you think things are clear you can make the call. So just wanted to make sure I understand that and then the bigger question is just on <unk> clearly encouraging signs on the CMO in your guidance yet going back to the Miss in 'twenty. Two is this just a function of time and that you sort of gone through.
That.
Months of just rebuilding the pipeline that you had that sort of the air pocket or is demand actually gotten better.
Yes, so on the fish.
Fish and wildlife situations. So there was all sorts of.
Contradictory and probably erroneous information about it.
Like Cambodia was doing after this first.
What is it that it back in November .
Initial room, and what isn't the Cambodian government just closed down.
Down exports, which was.
Don't believe we've ever true. So Cambodia is from there and is open for business I would like to shift the animals will provide.
Paperwork.
The U S government is saying you can't bring them in yet.
And the ones that you have in country and we have some countries you can't use yet until we sort of workout and ensure that they are indeed.
Purpose spread so no I don't think I don't think we can just do what we want I mean, thats always permitting through the city's permits.
One has to get in.
So if we can go ahead and use.
Rising animals.
Just to you.
I guess, our hands are tied we're trying to look at that positively that is.
Within our control to get them.
They're just going to sort of wait for us to make a proposal on how we can improve.
That said what purpose spreads so as I've said, that's like a 100% of our focus right now.
Control and obviously the cash do we do it the faster.
They will allow us to utilize the animals.
<unk> business is.
It's an interesting one as we spoken to.
Distantly for Awhile now integration could complicate it the science is quite complicated and new and we really had to re.
We staff.
All three of the accompanying the major companies that we bought from <unk>.
Top to bottom you have senior management sales regulatory et cetera.
The demand has been great across the board the sales cycles long.
No.
I'm not sure that was.
Totally clear to us or the length was crystal clear to us when we bought the company and plus some of the clients that we felt we had firm commitments warrants. So firm. So I think we've done a great job with the new sales force with people that understand the science can explain it well.
Our prepared remarks, a commentary about $100 million.
Business come in.
Last year.
Memphis facility, which is a gene modified cell therapy manufacturing operation.
Particularly solid right now just in terms of numbers of clients scale with clients and by that I mean.
There's a bunch of companies.
<unk> centre pick up rigs that are kind of smaller new that you've never heard of it but there's a bunch of really big companies.
Including pig biotech and big pharma, who either don't have their own space or don't feel that sufficient space.
The system, we have several clients that we're talking to.
To clarify the finished phase III are almost we are talking to us about commercial quantities.
At least one client that we are confident that we will produce commercial quantities for them. This fiscal year, which obviously would be fabulous just in terms of.
I don't know expertise reputation capability.
Really doing it because there's so few commercial products actually being.
Manufacturers, so the business feels better stronger better demand better client understanding of who we are better integration amongst and between the cell and gene therapy companies and also between selling gene therapy in our biologics business in particular, and I would say safety.
Secondarily, we have very good facilities that have been all three of the big <unk>.
Nature.
So as has been added on to over the past year. So we've got new space incremental space.
Pretty well staffed to very attractive areas, there's lots of people that want to work in cell and gene therapy.
I think this a little bit of a positive buzz around our capability and potential so we should have.
Nice growth rates in those businesses in fiscal 'twenty three.
The margins will be anywhere near where we want them to be but they will be.
Distinctly better than the prior year, so <unk> should be accretive for sure that the manufacturing top and bottom line.
Similarly, obviously or lesser extent.
Dominated but similarly to <unk> top and bottom line Oh, so feel good about those businesses as we've entered this fiscal year.
Thanks for the update John .
Pleasure.
Thank you.
Our next question will come from Elizabeth Anderson with Evercore. Your line is open.
Hey, guys. Thanks, so much for the question I was wondering if you could comment it seems like you based on the guidance that you gave for the full year on India.
We have enough supply domestically to get you to the sort of fourth quarter at least between the Cambodian non Cambodian supply. So if that's something you can comment on.
Secondarily can you talk about the impact of potentially follow on work. After NH piece. It seems like maybe is that something that you guys have accounted for it in the guidance or is that something that would maybe impact 2020 or more than 23. Thank you.
Yeah. So.
We have.
We have some supply Charlotte.
Yeah.
We do we do a lot of vantage people work in the U S. But we also do a bunch of Europe that we have other suppliers.
For our European operations, we have other suppliers for the U S. We had monkeys in countries some of which.
Our hands are tied at the moment, but some of which are hands on time.
And I don't want to Peel it back too finely but I think that we have sufficient.
Supply for a while and then it begins to two window that we're just going to have to have conversations.
With our clients about their priorities and what they really need to be done quickly and.
Try to match their priorities and the cadence of drug development pipelines with availability of space and then HP. So.
Yes to some extent, we will have sufficient supply and to some extent, we Wellington hopefully as we've indicated.
In our prepared remarks today and the numbers in our guidance.
We'll be off and running.
In the back half of the year.
We're continuing to take orders and book orders share going into 2024, I don't want to comment on what the impact is on 24 away.
Early in the first quarter of 'twenty, three except to say that.
Our hope would be to resolve this problem because we have sufficient supply if the U S fish and wildlife service any other regulatory agencies will let us use another so and just given the importance of the work.
We have to figure it out we're confident that they will listen and they understand the importance.
It also comes with they don't have a lot of options.
Very few of our clients have internal toxicology capacity and even if they did they can't get the NH piece either.
And we have.
And capable competitors, but they have limited infrastructure is going to have limited access to hps as well so.
Given our scale and prominence.
We have to resolve it in.
We're hopeful that people, who work with us and understand that we're doing everything in good faith.
And want to come up with a scientific solution that satisfies everybody's expectations and demands.
Yes.
Yeah.
Thank you.
Our next question will come from Jacob Johnson with Stephens. Your line is open.
Good morning, this is Matt on for Jacob.
Just a quick one for me are there any areas of your business, where the funding environment actually drives additional demand or outsourcing I think cradle is perhaps one of these areas.
Uh huh.
Yeah.
Yeah.
Cradle Fisher cradles.
I don't want to overstate it I'd say, it's relatively recession proof.
Of the pure play outsourcing move.
For <unk>, we thought it was probably going to be small companies as a whole range of countries is quite interesting.
For everyone at the moment, who might want to add.
The notebook space add onto the current space.
Just hold on to the capital lease small amounts of space from us.
Use our people either.
<unk> measure or small measure it I think that business is going really well.
Our whole thesis I mean, our whole the whole basis of the bargain with Charles River is.
We can be and how you're outsourcing partner you started people in our space.
We will invest in technology and capacity consistently.
It will help you get your drug into the market at Liberty to tell you that it shouldn't get into the market because of high levels of toxicity.
That's the currency.
No.
I think that.
So much of what we do all of the research model services, a pure outsourcing all of our discovery and safety work as pure outsourcing.
And so as the biologics work and so.
And everything that we've had through M&A over the last.
Or even two decades has been about providing a large cohesive portfolio too. So somebody can literally give us drug and say please tell me.
And you can get this thing to market so.
Yes.
Obviously somewhat correlated to the availability of cash.
Say that our biotech clients in particular are very judicious and thoughtful about the way they spend money. So.
They tend not to move forward unless they think they have enough time to at least get their drug.
Minimally into the clinic and maximally to proof of concept.
And we're still hearing very level.
From our clients about concern about access to capital.
And how that would impair or slow down both the demands from us an ability to step so.
We think.
And if they have those concerns.
Again, I think our portfolio is quite helpful for them and yes, I would agree with cradle, that's kind of the top of list.
Thank you for taking my question.
Sure.
Thank you.
Our next question will come from Patrick Donnelly with Citi. Your line is open.
Hey, guys. Thank you for taking the questions.
Jim can you maybe just talk through the timeline of how this all played out I mean, obviously you put out the 8-K I think it was mid to late November sorry.
And then December there were mixed reports Cambodia was shut down and then it wasn't a few days later.
And obviously you guys got the subpoena just just a few days ago. So can you just talk about when you guys started to realize hey, this might be a real disruption and this is going to shut down and just trying to get a sense in terms of how quickly you could prepare for this and just how it played out internally it would be helpful. Thank you.
Sure.
When the information came.
Public about.
Guidance in November of a supply or Cambodia or that was the first time anything about.
Any concern about Cambodia, just to remind you all.
Probably around the same percentage of our animals.
People are coming from China up until that point, we had.
Yeah.
Pretty wide scale supply agreements from China, and then the Chinese government closed.
Those exports down in favor of keeping those monkeys in country, and we and our competitor has pivoted to Cambodia, which has.
Essentially the same types of animals with the same genetic background. So we did it.
The research community would be fine with them. They also didn't really have a choice.
Sure.
Similar backgrounds, so we've been working hard too.
Validate our supply sources visiting them by telling them why not.
Kind of.
Requirements, where from an operational point of view, we are quite pleased with them. We've been quite pleased with the quality monkeys as I said earlier.
Probably the best probably we had the best year in the company's history for our safety assessment business in fiscal 'twenty two.
Really strong demand way out a year or year, and a half escalating price points in market share gains and so we're feeling very good coming into this year and so we were walking down the operating plan and in this case.
Literally out of the Blue.
And then as you say I can't I can't put a finer point in time from what you've said all sorts of rumors with tough to verify.
Hi.
Cambodia closed it's not closed it's not closed but then we've got U S government as we don't care, but you can't use them until.
You can you can determine proved to us with animals purpose, Brad So it's just.
November to now which is it feels like a decade, but it's a relatively short period of time.
We have finally opened up channels to have conversations with the Doj and fish and wildlife obviously, not only what we cooperate.
It's incumbent upon us given our scale and who we are.
To be the leaders in solving this problem we have to solve this for the client base by that I mean, we have to come up with the necessary tests that can be done quickly to determine which animals that the animals are indeed purpose spread and we will we will do that so.
We'll stay close to all of our suppliers, particularly the one that we the principal one that we use.
To provide advice and counsel on what we think they need to do Additionally on their end and will enhance our own internal testing methodologies such that we could just show fish and wildlife.
Data and hopefully we'll be pleased with it and it says.
It's as straightforward as frustrating as sort of.
Saddam as that.
It just literally.
The information in this kind of severity.
What's the government was looking for.
Seem to come out of nowhere certainly with no advance notice.
We've spoken about previously.
As I said, we had a extraordinary fiscal 'twenty two so.
Never even had took this kind of concern or investigation or conversation.
That's helpful. Thanks, John .
Sure.
Thank you.
Our next question will come from Max Smock with William Blair. Your line is open.
Hi, Thank you for taking our questions maybe one for me on the <unk> business you mentioned the stronger sales funnel for this part of the of the company and just wondering if theres any more detail you can share around how the sales funnel has grown over the last couple of quarters here and what youre seeing in terms of the strength in the cell and gene therapy market more broadly and then in terms of those potential opportunities.
Is that.
One so far I guess it'd be helpful to hear really what has differentiated here. What you think differentiates you from some of your larger competitors in the space. Thank you.
Sure.
The market is strong and has remained strong.
Or of cell and gene therapy drugs.
Had been quote discovered and need to be developed either too.
Success or failure.
So we're going to be very very busy.
We've.
As I said earlier retool the sales organization. So we've got people with great expertise in both cell and gene therapy.
I understand both the science and the processes.
For manufacturing and the timeframe as I said earlier, the timeframe is longer than we had anticipated.
Really pleased with the way, we've been signing up clients large and small.
The openness to share their anticipated plans with us.
What the market size fixing.
Drugs might have as I said earlier, we have several clients.
Some that are on the verge of commercialization that doesn't mean, the drugs get to market, but I'm, just saying from a regulatory point of view who are on the verge of having finished clinical it and we'll be filing in and one that.
Has moved into a commercial zone, so the sales funnel feels solid.
Consistent persistent.
And pretty varied in terms of the scale of the company.
The market itself.
It's probably in that but we should update.
What we quantified it last time, we said they were about 3000 cell and gene therapy drugs in development.
Probably two thirds of which were preclinical domain and obviously some meaningful portion of these.
We will get to work on.
Differentiating factor for Us and the reason, we went into CMO space, having kind of fleet.
It is ago, because it's kind of a crowded space is that this is kind of an interesting niche.
We have a couple of very good players in the space.
Which is fine the market needs them.
The differentiating feature is that we don't just manufacturing a drug we have there.
Biologic testing business, which is kind of how we.
Ended up pivoting back to enter this space because clients were saying speed is of the Hudson, We give you our molecule does.
Relative for US we can't tolerate you.
Sending us out to find some window manufacturer in negotiating prices, maybe some of them. We don't know what trust, we'd like you to be able to do that for us. So if you think about it we can do some of the discovery development. We can do all the toxicology work to say it.
Then we can test that molecule.
Before it goes to the clinic. So we can now manufacture molecule then tested before it goes into the clinic and then test it.
As it goes into commercialization so I do think it is.
Is it holds true not just for cell and gene therapy, but premature we think we do.
You just have this broad we have a broader portfolio than the competition and even if they are bigger companies and even if they're bigger and have a.
Larger reputation and us.
For being a CMO.
Don't have the pull through that we have and they don't have the comprehensive portfolio and we think that gives us a significant and distinct competitive advantage.
Thank you.
Sure.
Thank you.
Our next question will come from Dan Leonard with Credit Suisse. Your line is open.
Thank you for taking the question.
I have a couple of follow ups to derek's question at the start on what customers are doing with the NHS supply constraints.
How actively are pivoting to different models like mini pigs are dogs, and our clients being more discriminating about NH P use in line with the recent FDA guidance and then finally is there any chance Jim that the heightened and HP concern reduces long term demand for NH piece from Biopharma.
As clients reconsider their NH P needs and if that happens what does that do to Charles river's business opportunity. Thank you.
Very smart and sophisticated question not an easy one to answer I think that.
We all particularly given the complexity and HP.
Availability and by the way, it's always been complex. It's just more complex these days because of the sheer numbers.
If there isn't an alternative.
Species that was yes.
Let's start with your Pink question, you could produce diverse.
<unk>.
They havent been doing this as opposed to one off spring you couldn't get significant numbers.
Problem is and by the way, we do a fair amount.
Swine work right now mostly for dermatology cardiovascular work.
It's not a bad model.
Several problems.
Several of them number one is I don't know.
Swine either number two is if you use.
Sort of farm size swine are just too big too big I mean at that stage drug companies have made it very small amounts of the drug which is extraordinary.
Extraordinary amount.
So they would like to put it in small animals. So if you put it in mice rats, that's obviously, a small amount of drug.
And the markets that we use are quite small as well and plus it's yes, and yes, yes data.
Using an HP so.
I would say that swine theoretically a law.
Long term solution, but should have to have Watson validation work done by our clients.
<unk> by the FDA and then in massive breathing operation, which we would add the tech tenant just it's not it's not around the corner.
Yes.
Utilization of NIH piece, and small animal model, usually Iraq is required by the FDA comparable.
Organizations around the world So that's unlikely to change.
It's a good question as well that's really interesting, but what is not available what happens.
And you know that the FDA has.
The protector of the public safety. So they wont do anything to impair safety biologics are complicated drugs make some human proteins or artificial human proteins and so.
You really want something that's as closely.
Lives with a human being as possible so.
I don't see.
A significant pivot out of that and what it reduced demand I mean, if you have a whole. So so let's take the worst case, the Cambodian never opens up.
That would beg the question of what the.
The FDA accept.
Smaller numbers in animals per studies.
Now I don't know the answer to that and if they did accept that would that be significantly significant enough to give them enough data to approve the drug.
Maybe probably not.
Couldn't pivot overnight to another animal model. So again I just have to go back.
So where I've been on this whole call the animals are available.
Nothing animals available.
The firm that we use we provided really good oversight and we think that.
We think it's well run program and we can see animals are.
Of high quality.
And we have to get through the log.
<unk> <unk> not like think about your question, it's not like literally nothing animals available in the world to satisfy that demand because because there aren't these.
These animals typically pass.
In these countries and then they take the past and they use them as initial brief stock. So they are wild and then we see how the actual event.
Second generation occasionally with first with the second generation. So the animals are clean and we've had an opportunity to ensure.
Insurance environment, bacteriological and genetic profiles.
Laura.
As you want it to be so.
Trust Me, we talk daily about alternative models, what are what our responsibility would be how we would go at it.
How we support our clients that may happen over the next I don't even know what the timeframe it let's say five years.
That doesn't satisfy any of the short term needs right now so I do think that.
We're quite hopeful in the final analysis organizations like can I actually think FDA will weigh them seriously about how important these handles our support us and the work that we do.
Sure.
Since these animals are available.
Thank you for that perspective, and if I could ask a quick follow up can you help me better understand the complexity of showing parentage for NH PS presumably this isn't just 23 and me test, it's more complicated than that but I'd love to be able to better understand that.
Yes.
I don't think it's all that complicated you just proven genetics.
There are all sorts of genetic assays are available.
The issues actually my trivia with just its.
It's just actual scale, depending on how many of the animals tested and how do you do that.
Large enough scale quickly enough. So it does compete.
Speed the velocity of your business so.
We've got we're hopeful was speaking to a few organizations right now we're hopeful that we can enhance the technology to be able to do it faster.
So that would be good for us that'd be good for our clients I think that's the speeds and issue the regulatory folks.
Maybe just talk about that.
I appreciate that perspective, thank you.
Sure.
Thank you. Our next question will come from Casey Whitman with Jpmorgan. Your line is open.
Hi, Thanks for taking my question.
So just curious is this your Max impact from NH piece or do you think there's more downside to that range for 2023.
I guess does that headwind include any pricing offset.
Is there any way to go back to the table and renegotiate price for work that you maybe had booked last year pre supply crunch here.
And then just as a follow up how much of your existing supply we have burned through in 2023 does that downside case that you laid out assume you'd be entering 2024 with only 40% of your H P supply available. Thank you.
Yeah, so I'm going to stay away from 24.
Too far away and we don't know.
Going forward in terms of access to new animals, and so the supply will be.
It's hard to call what it'll be going to the next year, which of course is more than 10.
10 months away.
We believe.
Based upon everything we know today and based upon our conversations with the tissue wildlife and others.
The guidance range. So we have now accommodates for sort of.
Close to the best case and close to the worst case.
And so we're pretty comfortable with that so you know with like our shareholder base to just sort of Kevin Kevin that genre.
The price points for work.
Kind of the back half of this year and definitely for 24 continue to escalate.
You may not be quite at sea.
Escalating point, because we had it last year.
Really covenant inflationary costs, but meaningful practices.
I don't know.
It feels unclear as to what we do from a pricing point of view to accommodate for this.
This lack of demand.
I think we need to be paid well for the complexity of the work, we do and for the animals that we have but.
We may have a small amount of pricing power only if the costs go up dramatically, but I wouldn't think that we can make up much of this by significantly increasing the cost to our clients.
Yeah.
Alright, thank you.
Our next question will come from Ken Bailey with Wells Fargo. Your line is open.
Great. Thanks, first I wanted to ask on RMS So within the RMS organic growth guidance for the year are you assuming any divergence in product versus service above or below the segment average and then secondly, a few quick yes knows for you Jim on DSA.
Will you be providing intra quarter updates to investors regarding developments in the U N. H P dynamics. So does your guidance assume any resumption of China and HP exports to the U S and just a quick follow on to Dan's first question on the FDA Modernization Act, where you sit today is there any meaningful mid to long term risk to the <unk>.
The assessment addressable market through to synthetic models.
Thank you.
For power.
So I would say that.
The FDA modernization act is well intentioned and.
He is pointing to alternatives to the extent that they are available and viable.
And we would be the first company to own those technologies what are they available in viable I think it is very limited technologies right now we try to invest in that when we see them. We bought one company in the last 25 years. It was clearly in vitro or non animal based to replace an animal.
<unk> technologies is the FDA.
Required it's done quite well, but I remember when I made the decision to buy it many years ago I assume by now that the 20 other technologies and there's simply aren't so.
While the FDA modernization act means well and it's.
It's sort of pointing towards less animals more sophisticated animal models.
<unk> assays in vitro I think some of that will happen I think youre going to see.
AI and machine learning.
The utilization of data to design trials used.
Potentially more in the early discovery phase to give you an indication of I don't know.
Whether the new drug is likely to work as well as an old man.
Minimally.
And and toxicology.
We hear every month.
And I totally ignored by the way we hear every month to China is opening up again for exports I don't know why we're hearing it I don't know if this thing is I don't believe it so China is.
With the U S probably Europe right now.
Have lots of animals that would potentially give them I don't know about it.
Leased.
Access to Keith.
It's hard to imagine what the scenario might be that they would.
If they were to open up again, so we're certainly assuming for all of our.
All of our guidance and assumptions in plan.
But we don't have them available for.
Perhaps you have another question.
I can't imagine that we would get into inter quarter updates DSA. So I would leave it at that.
And on the RMS business. Yeah. This is a business that's really rocking right now it's kind of moved up into sort of high single digit genre, we did 9%.
For fiscal 'twenty two that's the best.
A long time.
Got it.
China doing well, we've got North America doing really well im only laughing because its been years since that's happened so it happened in 'twenty two.
Uh huh.
We mentioned 23 as well.
<unk> business with the acquisition that we made last year, particularly well that genetically engineered models business. It's also doing.
Particularly well and so.
So we see really good opportunity to take share we always get price in those businesses.
And our clients.
Pretty much halfway dependent on us it's been nobody producing their own animals or provides a level of services.
That we do so the business feels continually stronger.
Pretty much.
Oh, good geographies in which we participate.
Some of our competitors, particularly because of Covid.
Had a rough time.
I dunno, having enough infrastructure breakthrough Covid I think they've been had some financial issues as well.
And some of them are only in the research model business, sorry, I think they've been had a lot of pressure on them. So feel really good about that business its growth rate potential in its operating margin potential and really feel good about how it ended up in 'twenty two.
Great, Thanks, and sorry for the multi part of that.
Right.
Okay.
Thank you. Our next question will come from Dave Windley with Jefferies. Your line is open.
Hi, Good morning, Thanks for taking my questions. Jim I wanted to ask one on kind of availability you touched and one of the earlier answers about the test.
I wondered if you could you could.
Give us a framing as to whether you think this is a test that kind of the assay exist, but you need to repurpose it and validate it in your area or are you kind of starting from scratch and then more broadly in terms of.
Kind of longer term availability of in hps.
I wonder what consideration.
You have given to establishing domestic colonies and or working with U S. Primate research facilities that I think are mostly used for NIH, but is there any opportunity to.
To leverage those for access to primates.
Yeah.
Uh huh.
Yeah.
The domestic economy question, two really quick one David.
Can't tell you how many times, we've discussed it and I think that we did at once so we set up a domestic colony in southern Florida.
Yeah, it's extraordinarily significant expense.
And has had the bad luck of.
Even though what you built hurricane proof enclosures dependent hurricane which.
Really grew into a bunch of the facility actually benchmark he's got out.
The at the time.
A long time ago. It was I don't remember the project looks like cash flow negative for over a decade at just a brutal.
Drop so you have two problems with it one thats crazy expensive now.
Underlying your question was could you go to the federal government and say can you help us with this this is critical national resource and they probably would.
So that would take some of the financial staying out of it.
It's still it takes forever.
About what can we do between now and because of this year.
It just it just would be forever. So.
It's just it's not a practical.
Practical approach.
On the test I think it's I think it's both the answer to your question is both.
Current tests that can be utilized by the setup.
Not on a very large scale, so we'd have to scale them up or you find a partner to scale them up.
So minimally we'll do that what we're really hoping for particularly with one or two of the collaborators.
Talk to us.
The quality of the science is so sophisticated that they can help us refine.
The tests in a way that we can do more have more throughput faster with better and unequivocal results, obviously because that in their own labs, because you know that we have.
Got it.
A big labs.
All around the world in that facility. So we have really good capacity.
Really capable people that would know how to do this work.
We just would like to get ahead of it. So it's kind of it's kind of a work in progress literally as we speak we're working on and I am confident.
That we will minimally have kind of something relatively new.
Not yet standard and potentially something better than that.
Something that's new that.
Would be.
I don't care, so much about the cost.
Speed and accuracy. So we're all over that and we'll update you folks on.
What our progress is in it.
If the relevance of our partners and we have an appropriate partner if we.
That's meaningful to our shareholder base, we'll share that with you as well.
Great and if I could follow up on.
Kind of the I guess, the breath of the effort do you see.
I mean, you mentioned industry understand that certainly makes sense to kind of be collaborative to solve an industry problem, but for your purposes.
Are you needing to scale this up to.
Validate parentage with your primary supplier in Cambodia or is it kind of need needs to apply to all of Cambodia and get the U S government comfortable with the whole thing as opposed to just.
Okay, Yes.
Your case.
I mean, eventually I think it's good for the industry. If you can even call what we do in the industry and certainly for our clients that you could certainly there aren't industry I think it would be good.
The whole Cambodian source.
A couple of really big players and then some smaller ones if I could use a similar methodology to show who has them on and who are the offspring.
If we're successful we won't be.
Selfish about it.
I think the way we see the landscape right now we're unlikely to work with anybody besides our principal supplier because we we just know them, so well, we'd like to scale at which they work and they really take our advice of counsel really well. So we're quite confident that work with us.
So maybe that will be the knife's edge will start with our supplier will work with them, we'll show efficient wildlife what we've.
Bush.
Then we can offer too sure that I don't care, if you could share that with our competition. We don't have 100% sure. So we just want to be.
The biopharmaceutical industry to be well resource here and have access to companies that can do the work well for us.
And I do think that the.
U S providers are quite well.
We will be quite reliant on Cambodia for.
The foreseeable future just given the genetic.
Similarity between Kimberly in monkeys, and the Chinese wine, that's much better search or sort of background data.
Point of view, so that's how I see it unfolding, it's possible that our competition will do something similar.
Yeah.
Maybe they got there first I don't even care.
We're not going to spend a lot of time I think working with them because we just have different.
I think viewpoints and capabilities and scale and just the way we deal with our suppliers and the government. So while we may talk to them and get each other supporting that I think we I think we have to do this alone.
Do it quite quickly.
Right understood. Thanks for the perspective, and good luck with that.
Sure.
Yeah.
Thank you.
Ladies and gentlemen, we have reached our allotted time for questions and this does conclude today's trials preferred laboratories fourth quarter I'm School year 2020 earnings call. Thank you for your participation and you may now disconnect.
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Ladies and gentlemen, thank you for standing by and welcome to the Charles River Laboratories fourth quarter and full year 2022 earnings conference call.
This call is being recorded.
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 period, you will need to press star one on your telephone.
If you want to remove yourself from the queue. Please press star Q.
Lastly, if you should need operator assistance, Please press star zero.
I would now like to turn the conference over to our host Todd Spencer Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, and welcome to Charles River Laboratories fourth quarter and full year 2022 earnings in 2023 guidance conference call and webcast. This morning, I am joined by Jim Foster Chairman, President and Chief Executive Officer, and <unk>, <unk> Executive Vice President and Chief Financial Officer, They will comment on our results for the <unk>.
Fourth quarter of 2022, as well as our financial guidance for 2023.
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 <unk>.
IR Dot C River Dot com a webcast replay of this call will be available beginning approximately two hours after the call today and can be also accessed on our Investor Relations website.
The replay will be available through the 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 from those indicated.
During this call we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of the core operating results and guidance.
non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP.
In accordance with regulation G. You can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website.
I will now turn the call over to Jim Foster.
Good morning, before I speak about our strong fourth quarter results I wanted to provide an update on the non human primate or NIH P supply situation.
As many of you are aware there has been an ongoing industry wide investigation.
NHK imports from Cambodia and February 17th we received a subpoena from the U S Department of Justice relating to an investigation into the Cambodian an HP supply chain, we have been.
Florida specification relates specifically to shipments in Hps received by Charles River from our Cambodia and supplier, we intend to fully cooperate with the U S government. Once the department of Justice concludes its investigation, we believe it will find but any concerns with respect to Charles River without.
Meera.
As we have stated before we are committed to ensuring our operations are fully compliance with all U S and international laws and regulations, and we maintain risk based supplier due diligence and.
And management practices to help ensure the quality of our supplier relationships and compliance with applicable laws, including the status of the NH piece, we import.
Based on ongoing investigations and the heightened focus on the Cambodia, an HP supply chain.
And months, we have voluntarily suspended planned future shipments.
<unk> and hps until such time that we in the U S fish and wildlife service can develop and implement new procedures to reinforce confidence is the NIH fees, we import from Cambodia. Our purpose spread this will take time to implement and the duration of which is unknown the investigation.
Current NHS supply situation will result in study delays in our safety assessment business.
By the way of background in Hps are the most scientifically relevant large model from the regulatory required safety testing of biologics drugs as mandated by the FDA and other international regulatory agencies.
Collagic drugs cannot be approved for commercial use without in hps and given the proliferation of biologic drug development activity in recent years and Hp's have been in high demand as an example, all of the COVID-19 vaccine is developed in the United States and Europe utilized in Hps.
In recent years and HP source from Cambodia had been responsible for approximately 60% of the NHS supply to the United States and the Charles River for drug research and development. While there is no other near term global source to replace a supply we are continuing to actively work to diversify.