Charles River Laboratories International, Inc. Aktie

All right. While I get myself opened up here. Thank you for attending the conference. Good morning. I'm Dave Windley with Jefferies Healthcare Equity Research here in the States. I identify that since it is a global conference. We're very pleased to have all of you here.

Also very appreciative of Charles River's consistent and regular attendance through now multiple -- now we can say 2 leadership regimes. Jim was in the seat for an awfully long time. And now Birgit Girshick has taken over as CEO just recently. So thank you for being here. I think you're going to make a few remarks about recent performance. I'll let you do that.

Yes. Thank you. Thanks, Dave, for having us. Really excited to be here. Also really excited taking on the role of CEO. It's a huge privilege for me and particularly following Jim after all these years. So yes, I just wanted to update a little bit on what my focus areas are. What we are looking to do is making Charles River simpler, better margins and better growth. We just rolled out our strategy Pathway to Purpose. I touched on that in our earnings call a little bit. And we are already executing.

So we have divested 2 of our businesses. Our European early discovery businesses, that divestiture completed on May 22. And our CDMO and cell supply business was divested on May 6. We have also started to execute or executing on cost savings that will help us to improve margins. We are delivering this year over $100 million of cost savings cumulative over the last few years, that translates to $300 million. And this year, we are between the divestitures and some acquisitions as well as our cost savings, we will deliver 120 to 150 basis points improvement.

Touching on some of the acquisitions. We have completed an acquisition of K.F. (Cambodia), which is a nonhuman primate farm in Cambodia, securing the nonhuman primate supply for us and our clients, making us the only provider of Safety Assessment solutions for our clients in the Western world with our own primate supply and the only one who can guarantee it and also provides us with good margin expansion. We also acquired PathoQuest, which is a NAMs provider, supporting the reduction of animals, particularly in the in vivo lot release testing.

A couple of other things to maybe touch on. We have continued to do stock repurchases. In Q1, we have done about $200 million worth of stock repurchases, translating to about $650 million since 2024. So an important and balanced capital allocation approach. And yesterday, we have reaffirmed our guidance.

So with that, I'm handing it back over to Dave.

Excellent. All right. Fantastic. So I certainly noted in your first quarter results and the releases, I'll say, the first thing I noted was the deck was only 25 pages instead of 50 pages. But in the deck, some emphasis on a few things: speed, agility, maybe further integration of the business and more cost savings, and you just touched on some of those. As you think about those speed, agility, maybe particularly the cost savings, how do you plan to use those?

Yes. So you kind of framed it really nicely. So what we want to do is become simpler, faster, more efficient for our clients, more competitive because of our time lines and -- but also more automated and digitized. Use of AI, everybody talks about it, is also second nature within Charles River. So we are driving a lot of it is competitiveness, time lines, being a better and even more critical partner to our clients, but we're also looking to be a better margin company.

Okay. So we should -- I mean, very simply, you've got cost outs that if dropped through, would improve margin. You want to do some of that, but you also want to redeploy that in a way to be more competitive in the market. Do you have a rule of thumb or an algo about how you're thinking about applying those or how to divide that bucket of opportunity?

Yes. So for this year, we -- as I said, we have 120 to 150 basis point margin improvement. For the second year -- second half of the year, we have clear sight to about 500 basis point margin improvement. For our long-range financials, it's a little bit early to tell. We have actually an Investor Day in September, where we'll touch on that quite a bit more. For now, looking at the $300 million cumulative cost savings that we have done over the last recent years, think about 50% are durable and sustainable, 50% were more about taking volumes out. And if we grow as we grow and as we accelerate growth in the second half of the year, some of that will come back. So it's a mix of it, and we will give a lot more details and guidance on that in September.

Okay. Let's move forward into the businesses a little bit, but focusing on technology. The -- to me, the AI debate in the market that is affecting so many companies and particularly CROs more on -- to me, it seems like the clinical end of the spectrum. Maybe NAMs are the AI to animal testing. What's the competitive landscape there? And how do you think about who are the players to actually develop these NAMs?

Yes. Obviously, a very important scientific and ethical question and direction and something that Charles River is utmost committed to implement and to lead. So we have utilized NAMs for literally 2 decades. It's been part of our 3R program: reduce, refine, replace. In 2024, we actually formalized AMAP, Alternative Methods Advancement Program, which was our signal to the outside world that we are heavily investing in new technologies, methods, technologies, digital technologies to make an impact on the reduction of animals in research.

In 2025, we have established a Scientific Advisory Board. We have brought in a fantastic high-level leader from the FDA, Dr. Bumpus, who is leading our Scientific Advisory Board and leading our strategy that includes development of NAMs. So we're actually playing in that field, but also the in-licensing, partnering and M&A. And I already touched on PathoQuest, one example, a great example of NAMs technologies that we just acquired.

If you look at the industry itself, there are probably what we found over 1,000 companies that are focusing on the development of NAMs, many still in the very low majority stage, many not validated, many with a very narrow context of use and many with great promise. We have brought in technologies, and we're using them for our clients as in-licensing. We have done other M&A. So for example, we have brought the Retrogenix technology platform in. So we will continue to evaluate that landscape and often work with those companies to see if we can validate and scale up that technology.

To me, and I think that's really the reality, eventually, it will not be about technology. The race, who is competing best in this space will be all about integration. And there's no other company that is really well positioned other than a large-scale safety assessment provider like Charles River. So we will lead that space.

So Birgit, let's hover on the integration. So when you use that word in that context, can you bring that to life a little bit in terms of what you mean?

Yes, happy to. So think about NAMs not as a straight replacement of an animal. So it will never be a technology where you're saying this technology will replace a rat or a mouse. What it is, is NAMs technologies will provide us answers that we can use to assess a risk or an outcome and then decide if we do an animal study thereafter or if we -- our clients will go back to the drawing board and trying to find a better molecule or a better compound before they take it ahead.

In some cases, like in virtual control groups, for example, that we are developing, we have certain studies where virtual control groups can be applied and thus reducing the need for animals in the study itself. In other cases, it will give us additional information, making the scientific outcome maybe better, more translational and allowing the clients to move their programs into the clinic and managing their clinical trials better and thus having a better effectiveness and better success rate.

So NAMs will need to be integrated into the Safety Assessment workflow. They need to be part of a safety assessment study. They need to be run under the regulatory framework. They need to be validated that they give you the same results or better results than using other methods. And that's when I talk about integration. There is never going to be a NAMs business unit at Charles River, and there's never going to be a competitor that offers NAMs, but not Safety Assessment solutions.

Got it. Very helpful. So I do think you hit on the point really well there that we who have never run an animal study don't understand all the nuance to it. And so the thinking tends to jump to, well, a NAM will replace a full study. And I think what you're suggesting in actuality is it replaces a part of the continuum, not the full battery.

Yes. You're completely right. It will answer some questions, a question. Sometimes you need several technologies to answer a question. But the technologies will become better, and we will have kind of a surrounding in vitro or in silico environment that is part of the safety assessment continuum.

And then another vertex on this is, is kind of the service line impact or applicability where, for example, in PathoQuest, I think that one is more of a manufacturing environment application, right? And so a little not as core to your animal testing focus, how should we think about, I don't know, breadth or where your focus is in trying to bring these capabilities in?

Yes. That's a really good point. So animals are used not only in safety assessment. They're used in early research in the lead up to safety assessment studies, but also in lot release. So meaning every batch that is manufactured that goes into a human in either clinical or commercial has to be tested for being free of contaminants such as viruses or bacteria. Some of the conventional methods are using animals. And this is an area that we are utmost focused on because there is a lot of animals being used in this space. And so what we have done over time, actually starting with the introduction of our Endosafe franchise, finding better ways of making sure that those drugs that are manufactured are free of those contaminants. So the PathoQuest technology is a next-generation sequencing technology, and that will replace eventually the use of animals for this specific use case.

Got it. Let's move into perhaps somewhat more traditional questions in your core business, DSA. So demand seems to be -- there are indicators that would suggest that demand should be improving. I think you're seeing some of that, but describe what you are seeing in the demand environment right now for DSA.

Yes. A topic I'd much rather talk about. So demand has been stabilizing for us. We're seeing good signs of improvement. So our biotech bookings in the last 2 quarters have been the best in over 2 years. We are seeing midsized to large biotech and later-stage programs getting really good funding. Some of that even mega funding, which indicates that there's a lot of cash out there. Where we still would like to see some improvement is in biotech company formation. So that indicates that the funding in early phase and small biotech isn't quite there yet, which impacts one of our business units specifically, which is CRADL. But overall, we are quite happy what we are seeing so far.

Pharma, for the most part, is through the restructuring, reprioritization of pipeline. We saw quite a bit of an uptick of bookings last year that has very much stabilized. Revenue is up for global biopharma in the first quarter. And very happy to say that our proposal volume is up in both segments, high single digits. What I'm most excited about is that our KPI trends indicate a return to growth for our DSA segment. So seeing really good momentum there. And that is something that we are building on.

That return to growth, can you give us a sense of the trajectory? So you're seeing this build. Is that a return to growth that you think happens by the end of '26, pushes out into '27? I think guidance maybe implies that, that happens kind of at the tail end of this year.

Yes. So a little early to talk about 2027, but we are seeing a gradual improvement in our DSA segment. So we're looking at growth for H2.

Yes. Within this global construct, China has become a more active geographical participant in global drug development. You have your Vital River acquisition from years ago and your participation in the models sales market in China, but not in your services businesses for the most part. How are you evaluating entry into the China market with services? And what are the pros and cons of doing it?

Yes, a really good question. So yes, we have our research models and services business. It's a leader in China. It is operating fully under Chinese leadership. It is a provider for Chinese biotech, pharma, government, academia and CROs. So a very high reputation in China, very strong franchise for us and a foundation that we feel we can build on.

You're absolutely correct that our services portfolio is not represented right now in China. And with the uptick in innovation in China, with the emergence of really good growth and a biotech industry that is growing and bringing out a lot of innovative drugs in -- has a good portfolio. It becomes a market where we feel that it's an addressable market that we feel that we should potentially play in. Now we are evaluating the market. We're looking to see -- making sure that we understand all the geopolitical challenges in there, looking to see what our competition is, who the clients are, getting them to know and a little bit early to tell, but obviously, there is interest from our side, and we will eventually build on our foundation in research models in this marketplace.

It's interesting to me to think back like the foundation of the company was in research models. I mean that's where, I guess, the elder, Dr. Foster, started the business. And then through a period of kind of '90s and acquisitions added on the services business. And so China kind of sets up in the same way. Do you think it's -- given the experience that the company now has in services, is it a market that you could add that organically? Or do you think it makes more sense to acquire to add that capability?

Yes. So we're obviously evaluating the potential for both. But because it's a regulated space, it requires quite a bit of capabilities. So drug development, safety assessment is extremely complex with a very high amount of different protocols and expertise needed. It takes quite a bit of time to build something organically. We have done it a few times in different locales. So M&A goes a lot faster. So we're evaluating both, but obviously, M&A would give us a quicker entry.

Okay. If we move on to NHP supply as a topic, you mentioned the K.F. acquisition. CRL has now done a couple of deals in that market with Noveprim as well. How do you -- how should investors think about your ability to supply your volume of trials with your vertically owned farms? Is that 100%, less than 100%? How should we think about that relative size?

Yes. So we did acquire the farm in Mauritius a few years ago and then K.F. (Cambodia) just earlier this year. Our goal and where we currently are is that about 80% of the supply of nonhuman primates that we believe we require for safety assessment studies comes from our own farms. This gives us the ability to scale up and scale down. It gives us also the ability to continue to work with trusted and contractually negotiated third-party providers to really give us all the different sources that we require for the studies, but also the maximum amount of scaling up, scaling down, flexibility of when animals are coming in. So we are at that goal, and we believe that gives us the best ability to execute our studies and guarantee supply for our clients.

Thank you for that. And Birgit, can you quantify or give us a range, a window of the difference in cost structure for you sourcing in the open market versus breeding and raising your own?

Yes. So it's a little more complicated when you look at our Noveprim acquisition because they were a JV before, so there were some benefits that we had previously. What we had sized back then and now with K.F. is that we will have a consolidated margin improvement of about 50 basis points for each of the deals. But most importantly, again, for us is to secure supply, the ability to invest in those farms, making sure that we have the animal welfare standards that Charles River require, the logistics, the compliance. So the cost benefits are nice to have. The security of supply and the control over those farms is the ultimate goal here.

So I want to take a minute to go back to the to invoke the earlier commentary about your cost saves and how that affects competitiveness. So you now have the ability through supplying your own NHPs to probably have a competitively differentiated cost structure. You mentioned certainty of supply is also a factor. Is the certainty of supply strong enough in the clients' mind that, that is a competitive differentiator and you win business for that reason? Or do you use the cost structure benefits to also be more price competitive to win more market share?

Good question. So our clients, what they need most is a guaranteed supply. They need the animals when they need to run the studies. They need the flexibility. And they also need to make sure that the animals come in at the right health, the right weight and with the right compliance. So our -- again, our focus is on delivering to our clients the best and most critical research animal possible, and that's the focus.

Okay. So in terms of -- maybe before I leave DSA, in terms of your interest in participating in the D part of DSA, you divested -- as part of some of the recent deals, you divested pieces of discovery. Help us understand where you do and where you do not want to compete in discovery.

Yes. So we divested certain European discovery assets. That deal was actually completed this May. What we were looking at is businesses that are -- where the market has either structurally changed, where we are underscaled, where our clients have a lot of choices, and we are not necessarily the #1 choice. So those are the areas such as chemistry, but also a few other ancillary businesses. We are refocusing into the space of more regulated work where we have the highest dependency and highest value solutions for our clients. So we are here to answer their most complex and most time-pressing questions, and that will be our focus.

Okay. Moving on to RMS. That business is expected to be down low to mid-single digits in FY '26. Within that portfolio, can you help us understand which are the under and overperforming businesses within that perspective?

Yes. So our Research Models and Services business, because of where the industry is going in terms of 3Rs, has a gradual decline of volumes for decades, and this will continue. This year, the -- I should also say this business is -- has historically and is still now getting good pricing, which offsets a lot of the volume declines. Plus, we always have been able to add on solutions in which we are very competitive and very attractive to our clients, such as the CRADL business, where we're providing a vivarium solutions business or adding to our research models portfolio and bringing in higher value, more complex animal models that will drive the revenue growth.

This year, this business is impacted by 3 discrete areas. Number one is our North American research models volume, mostly impacted by academia and government. The volumes are stable, but not growing where we normally see that. We are relating that back to the uncertainties in academia and government. And even so we believe that these will resolve itself, and we're already hearing that, our forecast and our guidance right now assumes that we have stable volumes there but not growing.

Another area I already touched on is our CRADL business. The CRADL business is focused highly on biotech start-ups, companies that may not even have a company name yet that need a space to do their research and our demand in that area has been lagging. So we have consolidated a lot of the space. We are rightsized, but we're not seeing that revenue uptick.

And then thirdly, by nonhuman primate volumes. From some of our own farms, we are actually selling animals directly to third-party customers because we either cannot use the animals like in China ourselves or because we have contractual obligations and that volume fluctuates at times, and this year is a little bit down on the volumes compared to 2025. We do believe that RMS structurally is going to be growing again eventually. So -- but this year, we are guiding down.

Okay. In the time we have remaining, let's move to manufacturing and touch on that a little bit. That business pre CDMO was a very attractive margin business in the mid-30s. CDMO now divested. We are still waiting to see what that profile looks like. We don't have a clean quarter yet. Can you help us with what the manufacturing margin should be -- is and should be, in other words, can it continue to grow?

Yes. Happy to. So it's a critical mission division for us, very important great margins and great reoccurring revenue stream, which was really good growth opportunities. The remaining 2 businesses, our biologics testing and microbial business have not structurally changed at all. So you will see even in Q2, a margin uplift, and we expect this business to go back to historical margins. So again, it's a great business to have, and we are looking forward to the time post CDMO in that margin profile.

So attempt to pin you down a little bit, we would -- I would look at historical margins in the late 20 teens in the 34% to 35%, 36% range. Is that what you think of when you call it historical margins?

Let me say, above 30%.

Okay. All right. Very good. I think we're out of time. Thanks, everybody, for your attention.

All right. Good morning, everyone. Thanks for joining us for the management presentation here. My name is Max Smock, and I'm the research analyst here at William Blair, who covers Charles River. We're pleased to be joined this morning by CEO, Birgit Girshick.

Before we get into the presentation, I need to mention 2 things. First, the breakout session will be held in Richardson on the second floor immediately following this presentation. And second, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at www.williamblair.com.

So again, very pleased to have Charles River here with us today. And with that, I'll turn it over to Birgit. And before I do that, the presentation will likely end a few minutes early. So for those who are unable to attend the breakout, this is a good opportunity to ask a few questions following the conclusion of the presentation. And if we don't get any questions, I'll maybe lead a few minutes of Q&A on my end.

Thanks, Max. Is my mic on? Yes. Okay. Great. So thank you for having us today. I'm really excited to be here, and thanks for joining us for this presentation today.

During the presentation today, I will focus on 3 things: how we are restrengthening the core, how we reaccelerate growth and how this will translate into margin expansion and durable shareholder value.

Before I get started, I want to refer to the safe harbor statement. I will make forward-looking statements and non-GAAP financial measures. So Charles River is a scientific partner of choice. We enable our clients to move faster, to reduce complexity and ultimately to move molecules into the clinic more efficiently. Accelerating biomedical innovation is not abstract to us. It is shown in every molecule we advance and in every patient outcome we enable.

Charles River operates at a global scale. We have over 18,000 employees, of which approximately 2,000 are scientific professionals with advanced degrees. We operate in over 100 sites and locations close to our clients in approximately 20 countries. We support approximately 1,500 INDs every year. And we compete in an over $20 billion addressable market with a long runway for future growth.

Maybe most importantly, we support 80% of drugs approved by the FDA for the recent years. This doesn't just show scale, but it shows embedded criticality in the drug development ecosystem. Also important to note is that our diverse client segments, the largest client is still under 4%, but also our diverse end markets provide a reinforcement of our resilient business model.

Charles River provides a comprehensive portfolio throughout the drug development continuum. Our research models and services provide the foundation that enable our clients to discover new molecules. Because of our scale, our portfolio and because of the geographies we operate in, we are the global leader in the production of the most widely used small research models and associated services.

Our Discovery and Safety Assessment business, or short DSA is our core growth engine and is enabling preclinical success and efficiently advancing ideas into the clinic for our clients. Because of our scale, our science and our client relationships, we are the largest global partner for outsourced nonclinical drug development and regulated safety testing services.

Our Manufacturing Solutions are mission-critical for the support of clinical and commercial manufacturing. Because of the recurring revenues and good growth opportunities, this is a very important division for us.

In summary, Charles River operates at the highest value and highest dependency points of the drug discovery and drug development continuum, particularly in early stage.

To accelerate Charles River into the next phase of growth, we have a strategy. It's called Pathway to Purpose. It is simple and focused. We will modernize the company by building a future version of Charles River that will be faster, more agile, more data-driven, more automated and help our clients to move faster. We will strengthen our portfolio by refocusing on our core into areas where our clients need us most, where our clients need to have the most complex answers to their questions. We will grow by delivering a customized client-centric approach. We will remain a preferred partner to the biopharmaceutical industry by building even deeper, broader and more customized relationships with our clients.

In summary, we will be a simpler, better-margin, faster-growing company. We are already executing on this. This year, we're driving operating efficiencies through process optimization and cost initiatives with over $100 million in incremental savings. Cumulative, we have taken out over $300 million of cost or about 5% of our cost structure over the recent years. Now our focus is on identifying additional initiatives to continue to support future operating margin expansion and competitiveness.

We're refocusing our core through M&A and divestitures. We completed the divestiture of certain European discovery services on May 22 and the CDMO and Cell Solution divestitures on May 6. We had already completed 2 acquisitions this year, one for a nonhuman primate farm in Cambodia to give our clients a secure access to critical research animals as well as PathoQuest, which is squarely in the NAMs portfolio. We will evaluate future M&A opportunities to expand in vitro testing capabilities, including lab sciences as well as geographic footprint and new technologies.

Our recent actions refine and strengthen our portfolio, but also expect and drive meaningful operating margin improvement. We are leveraging technology, including AI, to enhance sales effectiveness, KPI transparencies and client engagement. Apollo is a great example of that. Apollo is a platform we have developed over the recent years to allow our clients to work with us in a less complex way, a more simpler way. It allows clients to have access to their data, to their study information, to pricing and other information 24/7. Apollo is now available in our DSA, RMS and manufacturing support business.

I want to touch a bit more on NAMs because it's such a buzzword right now. Charles River is fully committed to the implementation and development of new alternative methods. We have a track record of several decades of reducing the number of animals used in studies through our 3R program: replace, refine, reduce. We also have several years ago, formalized a program called AMAP, Alternative Methods Advancement Project, under which umbrella we are implementing and investing in NAMs technologies to reduce the number of animals used in research.

In 2025, we have launched a NAM strategy and a Scientific Advisory Board with some of our brightest and best scientists and led by former FDA Principal Deputy Commissioner, Dr. Namandjé Bumpus, who is now our Chief Scientific and Innovation Officer. She, together with our scientists, are driving the strategy to implement, develop, in-license and potentially M&A for NAMs technologies, always focused on reduction of animals while maintaining patient safety.

We are currently expanding NAMs capabilities in many different areas. A couple to call out, our virtual control groups for safety assessment studies, where we're reducing the number of animals used in control groups and replacing it with a data-driven approach. And again, our PathoQuest acquisition is a NAMs technology. PathoQuest provides next-generation sequencing solutions that replace in vivo virology assays used in large release.

I also want to touch on AI because no presentation today can start without AI. We believe AI is a structural tailwind for us. The focus of AI investments in drug development currently is very heavy in the early stage of research and discovery, particularly in target identification and molecular design. The investments are geared towards making discovery and development more productive, less failure rates. Nearly 60% of R&D executives expect AI investments to result in an increase in investigational new drug approvals and a faster pace of drug discovery. More programs equals more opportunities entering Charles River's pipeline.

Now let me pivot to the demand trends, very important. So we believe demand trends have stabilized, and we see good signs of improvement. Biotech net bookings in the last quarters were highest level in over 2 years. Mid-sized biotechs have now better access to capital as they approach IND and enter the clinic. We still would like to see better funding available for start-up biotech and early discovery to increase the number of company formation in the industry. Our global biopharma clients, for the most part, have progressed through the restructuring and pipeline activities and are back to work.

Let me talk a little bit about Q1. We have delivered Q1 in line with our expectations or above expectations. Our Q1 revenue is $995.8 million, which is a decline of 1.5%, definitely not where I would like to see it, but what we had forecasted. Our non-GAAP EPS was $2.06, and despite discrete headwinds, our non-GAAP operating margin was 16.3%. We expect the Q2 financial results to improve as discrete margin headwinds subside.

I want to reaffirm our 2026 guidance. We expect revenue to range between 1.5% to 0.5% decline. Our non-GAAP operating margin will increase compared to 2025 in the range of 120 to 150 basis points. We have a clear line of sight into a 500 basis points improvement for the second half of the year. Our earnings per share will range in the area from $10.80 to $11.30 on a non-GAAP basis. And our free cash flow will be between $375 million and $400 million despite some discrete headwinds.

Maybe most importantly is to point out that we are seeing favorable DSA demand trends in Q1 that leave us well positioned to return to DSA organic revenue growth in the second half of the year.

We have a balanced and disciplined approach to capital allocation and we'll continue to do so. Our capital expenditures are down from a peak level in 2022 and range as a basis of 2025 revenue at 5.5%. Our net leverage ratio of 2.6% is considered to be in an optimal range, allowing us future M&A, but also shows our discipline in net -- in debt repayments.

We have initiated stock repurchases since 2024. And since then to the end of Q1 have repurchased $650 million of our stock. And we will continue to focus on M&A, particularly in the area of science, geographic expansion and new technologies.

Let me take a step back and talk about what's most important, which is performance. Charles River is a story of resilience. Despite up and downs and market headwinds, we have a very resilient business model and great results. Our revenue has increased from $1.3 billion in 2015 to $4 billion in 2025. In line with that, we have improved our non-GAAP operating income threefold during this time. Our free cash flow went from $225 million to $518 million. And maybe most importantly, our non-GAAP EPS has increased threefold as well. Again, this is a story of resiliency.

As I end the presentation, I want to point out 3 things. Charles River is critical to the drug development ecosystem. This is shown by us working on 80% -- over 80% of drug approved by the FDA. It also is shown by our commitment to be the leader in the NAMs implementation. Charles River will be a structurally improved company. This is shown by our drive to modernize the company and how we are executing on cost savings. And Charles River will reaccelerate growth and move into a growth phase. Biopharma demand has stabilized. Our DSA business shows momentum and our client partnerships are stronger than ever before. We believe we are well positioned to deliver durable shareholder value. Thank you.

Okay. I know we have about 10 minutes here. So we'll spend the rest of the time doing Q&A. Birgit, thank you for walking through. That was extremely helpful presentation. Maybe just following -- I'll kick it off and then I'll open it up to the audience for questions. I think one of the topics that we talk a lot with investors about that didn't really -- I don't think came up a ton during the presentation was around your end markets today, particularly with respect to competition from China. And I know as more drug development activity shifts toward China, how are you all thinking about your presence and capabilities in that region? Is there any sense of urgency to add capabilities there in order to remain competitive over time?

Yes, Max, thanks for that question. And it's certainly an important initiative of ours to evaluate the market and see what we want to do there. So I'll approach it from a couple of different things. So the addressable market in China for our services is quite interesting. Biotech and pharma in China had great growth spurts, is reemerging. And so China for China, offering our services in addition to our current business, which is the research models and services business, is of interest. We have had a long history of working in China through our research models and services business. We had a joint venture in the beginning. Now it's fully owned. We are -- it's an organization that is 100% led by Chinese leadership. And we believe we have a great reputation and servicing just about all the participants in the drug development ecosystem there. So we believe we can build on that and have a great foundation for doing more such as services in China for the Chinese ecosystem participants.

Looking at Western companies doing work in China, this is something that has happened and has a little bit accelerated over the time, but just probably for about 10 years now. So it was heavily focused on chemistry and biology that accelerated, particularly in a downturn that we have just seen in the industry. Clients are looking for better, maybe, price points. And so we have seen that chemistry and biology just in a quite heavy percentage is now being done in China, but also in India.

The toxicology space is still very small in China. There are certainly players that are providing toxicology services. but they're mostly focused on companies that want to do their Phase I clinical trial in China and want to file at least initially in China. However, we are going to watch that and make sure that we are providing the necessary capabilities and value to our Western clients so we can maintain that work here. So we'll see what happens over the next few years in this space, but definitely of interest is China for China. And -- so working with our clients here to make sure that we have the right value, the right insights, the right speed for them to operate on a day-to-day basis.

And if you do see more of that toxicology work start shifting to China, have you thought about the ways that you would make sure you remain competitive in that market? Is it inorganic, organic, a mix of the 2? Like how do you all think about just the different routes you can take to maintain or build your presence there over time to remain competitive?

Yes. So from an entry into China with services, M&A would be easier because it's faster. You also can build on capabilities. But again, I want to point out that I personally would be most focused on China for China, providing services to the clients that are located in China. That could be Western, but also Chinese-originated companies. The other area that we are really focusing on is modernizing the company, becoming faster, becoming more cost competitive, providing more insights, and that is really geared to providing our clients here the incentive to work with our sites here in North America as well as in Europe.

Does anybody in the audience have a question? If not, I can keep going here. Okay. Maybe one on NAMs, which I think you spent -- the overview in the presentation was extremely helpful. I think when the news broke, it was last year, there was a lot of concern. We're all -- we're moving away from animal models overnight. And I think over time, people have realized that there's a long way to go before that becomes a reality as well as the fact that you all can actually take a leading role in driving that initiative. But I'd be curious to get your thoughts on what you've been hearing from your clients in terms of their willingness to adopt NAMs as well as just more context around the limitations associated with the models that are out there currently. I know you mentioned the virtual control groups. But just in general, like where are we at in terms of willingness to adopt these models? And what are the bottlenecks that are preventing more adoption of these models here in the near term?

Yes. It's certainly a hot topic and been a hot topic now for the last year. For us, NAMs has been a topic of investment, topic of discussion for nearly a decade now. Overall, our clients, I think there's not one person who doesn't think that it's the right scientific and ethical direction. And everybody would like to see fewer animals used in research. So there's zero doubt about it. What we need to make sure is that the answers we're getting maintain patient safety, that the answers we're getting are as good or better than what we currently have and that we can actually scale it up and make sure that the studies that we are given to execute on can be executed on.

So that said, there are a lot of interesting technologies out there. We are evaluating them all as they come into our pipeline. What we're looking for is what context of use can they be used for. So a lot of times, they can answer one question, but not the whole host of questions that we would like to see. And sometimes, they're just really early stage and cannot be scaled yet. Technology will advance. We'll move through this.

The way you should see NAMs is there is no technology that will replace an animal. There will be multiple technologies to provide us more answer that allows us eventually to reduce the number of animals. So think about virtual control groups, that is one way of reducing animals used in control groups. We will not have virtual control groups ever available for every single study, but we can make a big difference in animals used in that space by implementing this, teaching the models more and more and getting our regulators and clients comfortable with that new technology.

At the end of the day, eventually, it won't be about technology. It will be about integration. And a company like ours is well positioned, maybe best positioned, maybe the only positioned company out there that can actually bring multiple technologies into a safety assessment study and have this integrated approach for our clients using fewer animals, but giving them as good or better data. So we are leading that effort in the area that we are operating in, and we are committed to continuing to invest, continuing to develop and continuing to lead.

Maybe a final one here, I know we have a couple of minutes left, on AI, right, which I think you made a very compelling case and certainly one we agree with in terms of AI being accretive to your business over time. I think where we hear the most concern from investors is around AI in the discovery space in terms of pharma in-sourcing those capabilities. It seems like that's where a lot of the investment from larger players has gone in particular. You divested actually some of your NAMs capabilities in that discovery space. Can you just maybe frame out for us the total exposure you'll have to discovery today? And then just thinking about how that market evolves moving forward in light of those investments that we've seen from large pharma in AI-based drug discovery.

Yes. So we divested some of our European early-stage discovery assets because we want to refocus on our core. We still have discovery assets, but they are really closely linked to our Safety Assessment businesses, either supporting them, those studies really closely or are located in our facilities. What our goal is to really serve our clients primarily in that regulated space. So if you look at AI and you look again where the investments are in target identification, molecular design, that is now pre-Charles River, but the wet lab that still needs to be done once you have that target identified is the work that we are doing. So -- and that's why we believe this is actually a tailwind for us. We are very excited about it, both from what the industry is doing, but also what Charles River is doing here.

All right. I think we have a couple of minutes. We'll go ahead and wrap it up there, save a few for the breakout. Thank you, everybody, for joining. Birgit, thank you again for your time. It was great catching up and looking forward to seeing everybody upstairs for the breakout here in about 10 minutes or so.

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories First Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions] I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Charles River Laboratories First Quarter 2026 Earnings Conference Call and Webcast. This morning, I am pleased to be joined by Birgit Girshick, who became our Chief Executive Officer this week, and to introduce our new Executive Vice President and Chief Financial Officer, Glenn Coleman.

They will comment on our results for the first quarter of 2026 as well as our financial guidance. 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.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on the Investor Relations section of our website.

The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated. During the 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 of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on our Investor Relations section of our website. I will now turn the call over to Birgit Girshick.

Thank you, Todd. It is a privilege to speak to you today as the CEO of Charles River. I would like to acknowledge Jim Foster for building this company into an industry leader and reiterate my gratitude for the mentorship that he has provided to me over the years.

I step into this role with a clear understanding of Charles River today, what we can become and the tremendous responsibility we have to our clients, to the patients who rely on us, to our nearly 20,000 employees worldwide and also to you, our shareholders. I'm not taking this responsibilities lightly, and I'm energized by what lies ahead as we continue to work to help create healthier lives to capitalize on the significant opportunities ahead of us, both in science and in the marketplace and to enhance shareholder value.

Our teams have already put forth significant efforts to plan for the future, and I'm proud to lead the company into its next chapter of growth and evolution.

The world is changing rapidly around us. Science is advancing faster than it ever has, and our clients require greater speed, best science and more collaboration. As the industry changes, Charles River will evolve alongside it and lead the way.

Together as a company, we will create our own future by reimagining the way we operate and embracing the opportunities ahead of us. We will accomplish this through our refreshed strategic framework, which we are calling pathway to purpose. Pathway to Purpose is a disciplined approach to driving growth and shareholder value through the following key priorities: modernizing our company and the industry, strengthening our world-class scientific portfolio by enhancing our capabilities in strategic locations, while delivering a customized client-centric approach.

We will also continue to maintain rigorous oversight on animal welfare, biosecurity and regulatory compliance as well as fostering an exceptional employee experience. We have already established a solid foundation, including through the execution of strategic initiatives and enhancements made over the past few years.

And this refreshed focus pathway to purpose will enable us to realize our full potential and ensure our future success. This will lead us to drive profitable revenue growth and optimize our financial performance. We will also continue to take a balanced and disciplined approach to capital deployment, including organic investments, M&A and other uses of capital.

We plan to take a much deeper dive into our overall pathway to purpose strategy and these priorities when we host an Investor Day in September. For now, I will provide a high-level overview of each priority as well as some of our recent accomplishments.

First, we are diligently working on opportunities to modernize Charles River by building a future version of the company that will be faster, more agile and connected and data-driven. We endeavor not only to transform operationally by driving greater efficiencies and streamlining and simplifying processes, but by creating an environment that allows scientific insights and information to move more quickly.

This will enable us to partner even more seamlessly with our clients and expedite the speed at which we're able to deliver solutions, supporting their goals and deepening our relationship with them. We have already made substantial progress in our efforts to drive greater operating efficiencies and optimize processes.

As previously discussed, we expect to generate at least $100 million in incremental cost savings this year above the 2025 levels, primarily driven by efficiency initiatives. Cumulatively, we expect to generate over $300 million in cost savings on an annualized basis from actions taken over the past few years.

However, our pursuit of operating efficiency does not stop here. We are evaluating new initiatives designed to enable us to continue to modernize the company and how we operate and drive additional savings to generate meaningful operating margin expansion in the future.

We have already made great progress on our efforts to further strengthen our leading scientific portfolio, including through actions taken as part of our comprehensive strategic review last year. As we mentioned last quarter, our acquisition of the assets of K.F. Cambodia earlier this year, now Charles River Cambodia, further strengthens and secures the non-human primates supply chain for our Safety Assessment operations.

Combined with Noveprim, in which we acquired a controlling stake in 2023, we own and expect to internally source most of our future NHP supply requirements for the DSA segment. In April, we completed the acquisition of PathoQuest to continue advancing our NAMs or new approach methodologies capabilities by adding this in vitro next-generation sequencing platform for quality control testing for biologics drugs.

We are pleased to have completed the previously announced divestiture of the CDMO and Cell Solutions businesses on May 6. We also expect to complete the planned sale of our certain European discovery sites later this month in May. These strategic transactions will help us refine and refocus our portfolio on our core competencies and drive synergistic growth in areas in which we have differentiated scientific expertise, including drugs development testing.

In addition to our efforts to modernize the company and drive incremental efficiency savings, these divestitures and the K.F. acquisitions are expected to be meaningful levers for future operating margin improvement, including the principal drivers of margin expansion for the year.

As we move forward, providing the best science will remain paramount at Charles River. With the combined strength of our core capabilities and scientific rigor, we intend to set new standards for what modern science can achieve and to help our clients enhance the efficiency and speed to market for their life-saving therapeutic programs. We will continue to build our world-class portfolio by investing in core growth areas and providing scientific solutions that are critical to our clients. In particular, we will further strengthen our capabilities in a regulated testing environment, including early-stage drug development, where we remain the industry leader and in complementary testing opportunities to support the clinical and commercial phases.

We have identified areas of future growth, including in vitro and related testing services to extend our existing capabilities as well as adding additional NAM solutions and continuing to evaluate our geographic presence, particularly in Asia. To further enhance our growth profile, we are doubling down on our client-centric approach with a go-to-market model that deepens and further customizes client relationships and reinforces our position as a preferred partner to the biopharmaceutical industry.

We are leveraging technology, including AI, to improve sales effectiveness, KPI transparency, and lead generation while investing in collaborative tools that enhance how we engage with clients and generate insights. Our Apollo cloud-based platform has already been a core enabler of our client-centric strategy and differentiates us in the marketplace through the speed that we can work with our clients.

Apollo delivers a seamless self-service client experience with real-time access to scientific data and decision support tools. Its scope has expanded from RMS e-commerce and DSA pricing into study design, CRADL and our manufacturing businesses with further expansion underway. Technology is embedded throughout our strategy and in everything that we do.

We are investing in broadly using technology to help harmonize and streamline processes, including through digitizing core work streams and lab automation, which will enable us to gain better data insights, enhance connectivity with our clients and accelerate their speed to market.

AI has been a particular focus in the recent months. Our view is quite simple. AI will support the work that we and our clients do. We believe the efficiencies gained from AI over time will be reinvested in R&D by our biopharmaceutical clients, enabling them to work on more programs throughout the regulated drug development process, including safety assessment.

To support this constructive view, recent discussions with our clients and industry surveys indicate that large biopharmaceutical companies are primarily utilizing in R&D to enhance the speed and efficiency of the early discovery process, including target identification, drug design and screening capabilities and also around clinical trial monitoring and logistics.

In addition, the Deloitte survey last year indicated that nearly 60% of surveyed biopharmaceutical R&D executives expect AI and lab automation investments will result in an increase in IND approvals due in part to a faster pace of drug discovery over the next several years.

Like NAMs the use of AI will be an exciting but gradual evolution led by science and the proper validation of new capabilities. We are leveraging AI and machine learning across the company, including as part of our strategic priority to strengthen our NAMs portfolio through our pioneering approach to virtual control groups or VCGs for safety assessment studies.

The recent independent scientific review demonstrated the effectiveness of our VCG process, which preserves scientific integrity with no observed adverse effects compared to traditional control groups while reducing reliance on animal models.

The VCG program is guided by our Alternative Methods Advancement Project, or AMAP initiative, focused on reducing the use of animals in research and is also a key priority for our Scientific Advisory Board led by our Chief Scientific and Innovation Officer, Dr. Namandjé Bumpus.

Before I discuss our first quarter financial performance, let me provide a brief update on the end market trends. The overall biopharma demand environment stabilized last year, and we are currently seeing pockets of improvement for both global biopharmaceutical and small and mid-sized biotechnology clients. Many of our global biopharma clients progress through their restructuring and pipeline reprioritization activities and demand trends have improved even so overall spending levels aren't yet back to historical norms.

Revenue from our global biopharmaceutical client segment increased in the first quarter. From a biotech perspective, demand trends from our biotech clients improved over the past 2 quarters as a result of the reinvigorated funding environment as we exited 2025 and continued health in 2026.

The recent increase in biopharma M&A activity has also provided another source of capital infusion for an exit strategy for biotechs, which we also feel favorably. Mid-sized for the more mature biotechs have better access to capital as they approach IND or enter the clinic, while demand from start-up biotechs remains tepid because the earlier-stage and seed funding environment remains constrained despite a recent uptick in IPO activity.

Overall, revenue from our small and mid-sized biotechs declined in the first quarter, primarily reflecting softer DSA booking activity last summer and a normal lag between booking and revenue generation. However, even the recent biotechs KPIs, we expect the revenue trend to improve in the next upcoming quarters.

Government uncertainty, including funding-based pressures at the NIH has modestly impacted client spending levels, but revenue from our global academic and government client base remained stable in the first quarter, reflecting the essential nature of research solutions that we provide to them.

Moving to our financial performance. Let me start by providing several key takeaways from the first quarter. First, we delivered our first quarter results despite the anticipated pressure from several discrete margin headwinds and now have a clear line of sight into the meaningful operating margin improvement that we have forecasted in the second quarter and beyond. In addition, the DSA demand environment remains solid as demonstrated by a net book-to-bill of 1.04x in the first quarter and continues to support a return to DSA organic revenue growth in the second half of the year.

And finally, due to the execution of our strategic initiatives around acquisitions, planned divestitures and efforts to modernize our operations, we continue to expect to generate significant operating margin expansion of approximately 120 to 150 basis points in 2026, which supports our goal of driving profitable growth for many years to come.

Overall, the first quarter results were in line to slightly favorable compared to our prior outlook. In the first quarter and as expected, revenue declined 1.5% on an organic basis. The non-GAAP operating margin declined 280 basis points to 16.3% and the non-GAAP earnings per share declined 12% to $2.06.

The quarterly operating margin earnings decline were largely driven by several discrete factors, including higher stock compensation expense, NHP study-related costs in the DSA segment as well as lower NHP revenue in the RMS segment, primarily due to the timing of shipments. RMS revenue declined 5.5% organically, driven principally by lower revenue for small models in North America and for NHPs due to the timing of shipments.

However, these declines were partially offset by solid demand for small models in China from mid-tier biotech and CRO clients. DSA revenue declined 1.4% organically, driven by lower revenue for discovery services, although revenue for Safety Assessment services was essentially unchanged in the quarter.

As previously mentioned, we are encouraged that the overall DSA demand environment is tracking to our expectation, resulting in a net book-to-bill of 1.04x and a slight sequential increase in backlog to $1.92 billion at the end of the first quarter.

Net bookings totaled a solid $622 million, remaining above the $600 million threshold, driven by continued strength from our small and mid-sized biotech client base. Over the past 2 quarters, Biotech's net book-to-bill and net bookings were at the highest level in over 2 years, showing a resurgence in demand on the heels of the robust funding environment.

Demand trends for global biopharmaceutical clients also remained solid in the first quarter, but declined moderately year-over-year after pharma bookings rebounded to start 2025 following a period of budget cuts. Proposal activity posted a healthy increase in the first quarter, a signal that the positive bookings momentum may continue.

The strong bookings performance at the end of 2025 and a continuation of favorable trends to start this year leave us cautiously optimistic that the net book-to-bill will average above 1x for the year and support the upper end of our DSA outlook, including a return to organic revenue growth in the second half.

However, as a reminder, our business isn't linear, so this does not mean net book-to-bill will be above 1x every quarter. Manufacturing revenue increased 2.9% organically, driven by continued solid demand for Microbial Solutions. Overall, underlying demand trends for Microbial Solutions and Biologics Testing, our manufacturing quality control testing business remains strong as clients continue to advance their late-stage development and commercial programs.

The Biologics growth rate is expected to rebound as the year progresses after we anniversary a client-specific challenge that has been a headwind for the past several quarters. As we look ahead, I'm energized by our refreshed strategic vision, and I am confident in the path we are taking to create the future for Charles River.

Our focus remains on enhancing our clients' experience, delivering results and increasing long-term shareholder value. I also want to thank our employees for their continued dedication, hard work and commitments to our clients and mission, as well as our shareholders for their continued support.

I'm pleased to welcome our new CFO, Glenn Coleman, who joined Charles River on April 6. As I mentioned last quarter, Glenn is a seasoned financial leader and operationally oriented CFO with over a decade of experience in the health care industry. Glenn has been CFO for 3 public companies and also has extensive international operating experience.

Glenn will help to ensure that we continue to take a balanced and disciplined approach to capital deployment, including M&A and also ensure we maintain the rigor to drive additional cost savings and efficiencies across the company.

Now I will turn the call over to Glenn to provide more details on our first quarter financial performance as well as our 2026 guidance. Thank you.

Thank you, Birgit, and good morning. I'm pleased to be joining the Charles River team as Chief Financial Officer. I was joined to the company because of its mission-driven culture and is positioned as a leader in the life sciences industry. Over the past 3 decades, I have led global organizations through financial and operational leadership roles and have been committed to instilling operational and financial discipline, effective capital allocation and driving long-term shareholder value.

I look forward to leveraging that expertise and experience as I partner with Birgit and the leadership team to build upon Charles River's strong foundation. As I step into this role, my priorities are clear and fully aligned with supporting our pathway to purpose strategy and driving profitable growth.

I'll be focused on continuing to efficiently manage costs, including the delivery of over $100 million in incremental savings this year and identifying new areas of efficiency and process improvement to generate additional savings and drive future operating margin expansion.

We will maintain a disciplined and balanced approach to our capital priorities and invest to drive our growth strategy forward. This includes executing on M&A opportunities that strengthen our core capabilities, ensuring the successful integration of acquisitions and regularly evaluating all areas for capital deployment, including organic investments, stock repurchases and debt repayment.

Before discussing our financial results, I'll remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition and divestiture-related adjustments, costs related primarily to restructuring and efficiency initiatives and certain other items.

Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation.

I'll now provide highlights of our first quarter 2026 performance. Overall, our financial performance in the quarter was in line or slightly better than expected across our key financial metrics. We reported revenue of $996 million, representing growth of 1.2% compared to last year. On an organic basis, revenue declined 1.5% and was in line with our February outlook of a low single-digit organic decline.

The operating margin was 16.3%, a decrease of 280 basis points year-over-year. The expected decline was primarily driven by lower NHP third-party revenue in the RMS segment, the timing of stock compensation related to the CEO transition and higher NHP sourcing costs and study starts in our DSA segment.

As I will discuss in more detail shortly, we do expect the second quarter operating margin to improve meaningfully from these levels as many of these first quarter discrete margin headwinds subside, and we begin to see a margin benefit from divestitures.

Earnings per share were $2.06 in the first quarter, a decrease of 12% from the first quarter of last year, primarily driven by the lower operating margin. This exceeded our prior outlook of a high teens decline, largely due to better-than-expected operating performance in the Manufacturing and RMS segments. Another highlight from the first quarter is the repurchase of approximately $200 million in shares under the $1 billion stock repurchase authorization approved last October.

This supports our balanced and disciplined approach to capital deployment as well as the confidence we have in our long-term growth and strategic plan. Moving to details on our segment performance. DSA revenue was $597 million in the first quarter, a decrease of 1.4% on an organic basis compared to the first quarter of 2025.

Lower revenue for discovery services due in part to prior site consolidation activities was partially offset by stable revenue for Safety Assessment services. The DSA operating margin decreased 290 basis points to 21.0% in the quarter, mostly due to increased study-related direct costs, including higher NHP sourcing costs and study starts.

In RMS, revenue was $208 million, representing an organic decline of 5.5% year-over-year due to lower sales of small and large models as well as research model services. Small models revenue was pressured by lower volume in North America, partially offset by a solid increase in China volume. As previously anticipated, large model revenue is primarily affected by the timing of NHP shipments with NHP unit volume in the first quarter expected to be the lowest point for the year.

The RMS operating margin declined by 240 basis points to 24.7% in the first quarter due largely to an unfavorable revenue mix from the timing of NHP shipments and lower sales volume of small models in North America. The Manufacturing segment reported first quarter revenue of $191 million, an increase of 2.9% on an organic basis due to strong growth from the Microbial Solutions business, primarily driven by Endosafe and Celsis manufacturing quality control testing platforms.

The segment operating margin improved by 280 basis points to 25.9%, driven largely by leverage from higher revenue and the benefit from cost savings. As a reminder, the first quarter CDMO growth rate was negatively impacted by the loss of a large commercial client last year. And as a result, the CDMO performance reduced the manufacturing organic revenue growth rate by approximately 350 basis points in the first quarter. However, this comparison will no longer have a meaningful impact going forward because of the completion of the CDMO divestiture this week.

Moving on to other financial metrics. Unallocated corporate costs totaled $63 million in the first quarter or 6.4% of revenue compared to 5.3% last year. The anticipated increase was primarily due to the timing of stock compensation expense related to the CEO transition. For the full year, we continue to expect unallocated corporate costs will be approximately 5.5% of total revenue.

Net interest expense was $26 million in the first quarter, a decline of $0.8 million year-over-year. For the full year, our net interest expense outlook has increased by approximately $8 million to a range of $103 million to $108 million, primarily attributable to short-term borrowings to fund stock repurchases in the first quarter.

At the end of the first quarter, our net leverage was 2.6x. The non-GAAP tax rate in the first quarter was 22.5%, a decrease of 20 basis points year-over-year due primarily to the favorable impact from last year's enactment of OB3 or the One Big Beautiful Bill.

Our non-GAAP tax rate guidance for the full year remains unchanged at 22% to 23%, although it's currently trending towards the lower end of the range due to a favorable geographic mix. Free cash flow was negative $15 million in the first quarter or a reduction of $127 million compared to the prior year period.

This decline was expected and mainly driven by higher performance-based cash bonus payments for 2025, which are paid in the first quarter. CapEx declined modestly to $56 million or approximately 5.6% of revenue in the first quarter from $59 million last year. Our free cash flow outlook remains unchanged at $375 million to $400 million in 2026.

Turning to 2026 full year guidance. We are reaffirming our organic revenue and non-GAAP earnings per share guidance, which have previously factored in the impact of the divestitures. All of our guidance referenced today assumes the planned divestiture of certain European Discovery sites being completed in May. And as Birgit mentioned, we have completed the divestiture of the CDMO and Cell Solutions businesses this week.

We continue to expect an organic revenue decline of 0.5% to 1.5% and non-GAAP earnings per share of $10.80 to $11.30 or 5% to 10% growth over 2025. This guidance includes earnings accretion of approximately $0.10 per share from the divestitures.

On a reported basis, we reduced our revenue outlook by 50 basis points to a 4.0% to 5.5% decline because FX rates have become less favorable this year due to the recent strengthening of the U.S. dollar. From an earnings perspective, this FX headwind compared to our original outlook will be essentially offset by the accretion from stock repurchases.

As a reminder, the acquisition of the assets of K.F. or Charles River Cambodia, the divestitures and incremental cost savings from our efficiency initiatives are expected to result in meaningful operating margin expansion this year. We expect approximately 120 to 150 basis points of improvement in 2026, with most of the benefit generated in the second half of the year.

Combined with the abatement of the discrete margin headwinds in the first quarter, we expect the second half of the year operating margin will be over 500 basis points higher than the first 6 months of the year, with over half of this improvement being driven by completed acquisitions and divestitures as well as the planned sale of certain European Discovery sites.

From a segment perspective, our organic revenue outlook for each of the segments remains unchanged from February. Our reported revenue outlook for the segment has been updated to reflect the impact of the divestitures as well as less favorable FX impact.

As a reminder, the divestitures are expected to reduce our reported revenue outlook by approximately 500 basis points in 2026. By segment, we now expect a reported revenue decrease in the low to mid-single digits for the DSA segment and in the mid-single digits for both RMS and Manufacturing segments. We expect the most significant margin improvement in 2026 will come from the Manufacturing and DSA segments.

Moving to our second quarter outlook. As I mentioned earlier, we expect financial results to improve substantially on a sequential basis due primarily to operating margin improvement and normal seasonal trends in the DSA and biologic testing businesses.

We expect reported revenue to decline at a mid- to high single-digit rate year-over-year due primarily to the impact of the divestitures, while organic revenue is projected to decline at a low single-digit rate year-over-year, similar to the first quarter.

However, we expect second quarter earnings per share to improve significantly on a sequential basis, increasing at least 30% from the first quarter level of $2.06. The first quarter headwinds from the timing of NHP shipments in RMS and the NHP sourcing costs and study starts in the DSA segment are expected to subside in the second quarter.

In addition, the manufacturing operating margin is expected to benefit from the CDMO divestiture. As a result, we expect all 3 segments will show a sequential improvement in operating margin in the second quarter.

To conclude, as I step into the CFO role, I'm focused on driving initiatives to generate profitable growth through the disciplined execution of our pathway to purpose strategy. This includes advancing our M&A priorities, successfully integrating acquisitions and delivering on our efficiency initiatives.

Collectively, these efforts will strengthen our foundation and position us to deliver long-term shareholder value. Finally, I look forward to meeting many of you in the coming months. As Birgit mentioned, we plan to host an Investor Day in September, where we will provide a more comprehensive update on our strategy, priorities and long-term financial outlook. Thank you.

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

[Operator Instructions] We'll take our first question from Elizabeth Anderson with Evercore ISI.

Welcome, Glenn. Nice to be with you again. And for my question, I wanted to just sort of double-click maybe on the demand environment. I appreciate all of the questions comments about the environment. Can you talk about the typical seasonality that we sort of think about in terms of the demand cycle? I know we've typically seen a little bit of a slower start to the year sometimes as people get ramped up in January and February. And then it sort of seems to do that plus obviously, what you were talking about, about some of the funding environment.

And then as a funding -- follow-up question, I was wondering if you could comment on sort of NAMs and what you're sort of seeing, any updates in terms of demand conversation with clients?

Certainly. Thanks, Elizabeth. Happy to update on demand seasonality and names. So let me start maybe with the seasonality. So we have several of our business see somewhat seasonality in terms of bookings, even proposal volume. Our DSA business is one of them where we're seeing proposals and bookings starting a little slow in the beginning of the year, sometimes also on a revenue basis that we see a slow start.

And it generally has to do with budgets being approved, our clients coming back to work, often in January, there's a reprioritization of programs. So it just takes a little while to ramp up. We have a couple of other businesses. Our biologics testing business definitely has a seasonality. They support manufacturing of biologics.

And more often than not, the Christmas time is the time that manufacturing is closed down for maintenance and revalidations. And so we are not seeing the same amount of samples coming in. Our microbial business is another one where we see definite seasonality into the fourth quarter actually for this business, where the business is ramping up often in the fourth quarter because companies may have budgets they want to use up because this is there basically a range you can keep on the shelves in inventory often, we see a spike in businesses there.

So nothing abnormal. We have seen the same seasonalities in some manner this year. It's expected, and we generally consider that when we do our budgets and our guidance here. As far as the demand environment, I think we all share cautious optimism. Biotech funding quite a bit better over the last couple of quarters, IPO reopening, again, cautiously optimistic that this will continue.

And then our pharma clients have definitely worked through a lot of their restructuring, reprioritization of programs. Any discussions we have with them is about speeding up their work, getting more programs through the pipeline rather than holds and reprioritization.

So from that perspective, we're quite comfortable with what we're seeing. But certainly, it's early stage, and we always will be cautious about going too far over on our skis.

Then let me jump into the names or new approach methods. So names new approach methods are a part of what we do. So they are part of a toxicology study. And we have spent basically 3 decades on the reduction of animals. Names have always been a part of that. NAMs availability has accelerated a little bit over the last maybe decade we have made some acquisitions in this space. We just did one literally a month ago. So the PathoQuest acquisition is squarely in the names category. So as we continue to evolve our business, we will continue to bring names into our business model, either through organic development, in-licensing or M&A.

And as technology evolves, as maybe AI -- the ability of AI to predict insights evolves, we will evolve our business model with it. It's an evolution. It's not a revolution. So it will take time, but you will hear more and more and more about us bringing those technologies in. What I want to point out, it's not a separate business. It will always be part of our DSA and other divisions revenue model, and it will just continue to grow. I hope I answered your question.

Yes, that was super helpful.

We'll turn now to Max Smock with William Blair.

Glenn, maybe just following up on that prior question around activity so far here. Start to hear there was some commentary in the deck around seeing a healthy increase in proposals in the first quarter. Wonder if we could just get some more color around what proposals looked like year-over-year and sequentially? And then just more detail around how proposals trended among each client segment would be helpful.

Yes, happy to. So we've been quite happy with the proposal volume year-over-year in both segments, so both in our global biopharmaceutical as well as in our biotech segment, proposals were up quite nicely in the, I would say, high single digits. And which would -- gives us a lot of confidence that our booking trend will continue and our net book-to-bill trends will continue.

So it does show us that there is a lot of clients that are ready to get restarted on work and the smaller clients and that our pharmaceutical clients, as they have indicated verbally to us, are looking to put more work, more programs through the pipeline to get to more INDs, to get to more programs into the clinic. So quite happy to see that.

And I would just add there on a sequential basis, we've seen proposals come up 3 quarters in a row sequentially. So positive trends sequentially as well.

Got it. So the high single digit was year-over-year for both cohorts. And then Glenn, you're saying you've also seen some improvement sequentially as well.

Correct. We're 3 quarters in a row.

Okay. Maybe another unrelated question here on AI. Birgit, it sounded like your comments -- your prepared remarks, it sounded like you feel pretty comfortable with this idea that AI investments in drug discovery are going to lead to more preclinical testing longer term.

Are you seeing that play out at all yet? Or is that more something that we really probably don't see until we get a couple of years into the future here?

Yes. Thanks for that question. So I'm actually personally very excited about AI and what it will do for the industry and for Charles River in particular. So right now, the sample set of AI discovered or assisted, I should say, drug programs is very, very small. So it's hard to make a real conclusion from that. What I can tell you is that AI-assisted drug discovery companies generally work on a lot of different programs rather than one program at a time.

And as we're working with most of them or all of them on their programs as they are wet lab, I'm optimistic that this trend will show itself and that we will see more programs coming through from AI. It also should still need to be seen, lower the cost of early discovery. And with that, there's more money for reinvestment. But again, it's very early days. There's so few programs in the pipeline that are AI assisted. But just theoretically, hypothetically, we know that AI will have a nice impact on that.

We'll move next to Patrick Donnelly with Citi.

Glenn, maybe one for you on the margin side. Certainly appreciate the color on the 2H step-up. And again, it feels like you guys have real tangible reasons to kind of do that build. Can you just talk through a little bit? It sounds like half of it is M&A, half of it some of the other moving pieces.

Can you just talk through kind of the bridge there on 2H? And then any reason why that momentum wouldn't kind of continue to build into -- obviously, it's early to talk '27. But just going forward, given the K.F. acquisition, what that means to margins, any reason that momentum wouldn't continue into the go forward?

Sure. No, thanks for the question. If we look at the first half of the year, obviously, year-over-year, we're expecting to be down, but we do expect a pretty significant sequential increase in our margins going from Q1 to Q2 that supports the greater than 30% increase in earnings per share. So we do expect a pretty meaningful step-up in our operating margins. That being said, when we look at the half-to-half numbers, we're going to be in the high teens margin-wise in the first half of the year and expect 500 basis points improvement in the second half of the year.

I did mention in my prepared remarks, over half of that improvement just coming from acquisitions and divestitures. In addition, if you look at our corporate costs, the onetime discrete items in Q1 that don't recur and some cost savings initiatives, that will drive another big portion of the half-to-half improvement, coupled with the timing of the NHP shipments in RMS and some additional lower costs we're expecting to come out of DSA.

So we've got clear line of sight. I know it's a big jump when you look at the half-to-half numbers, but we feel very confident in the numbers, and we've got a clear line of sight about how we get there. Relative to 2027, I think the only comment I'll make is from an acquisition and divestiture point of view, we've already given numbers around the annualized impact of acquisitions and divestitures. So we said for acquisitions on an annualized basis, about $0.60 from K.F. and for divestitures is $0.30. And for this year, in 2026, the equivalent numbers on a part year basis is $0.25 for acquisitions and $0.10 for divestitures.

So said differently, if you take the $0.90 less the $0.35, you can expect roughly $0.50 to $0.55 of accretion just from the acquisitions and divestitures in 2027 versus 2026. I think that's the only comments we're going to make around the '27 margin numbers.

Yes. Makes a lot of sense. And then, Birgit, maybe just on the demand side, I certainly appreciate all the color you've given. Can you just talk about that kind of small mid-sized early biotech portion, what you're seeing there? Obviously, to your point, the funding has looked really healthy here for a couple of quarters.

How much improvement are you seeing in those conversations? Are those dollars really starting to show up? Where are we in the cycle of that early piece from your perspective?

Yes, happy to. So the -- when we talk about our biotech clients there's obviously considerable size differences between the clients. A lot of the funding we're currently seeing IPOs are a little bit bigger companies, later stage. They have easier access to funding. That's definitely also where we're seeing quite a bit of an uptick in their demand.

I would say the smaller biotechs, very early stage, that is still a little sluggish, and we see that the funding is a little lower and then also the discussions are still more cautious in that regard. We do see that clients often when they see just general funding come in, get more confidence in their ability to get funding later on and start spending.

So we're seeing that a little bit. But we still have this segment was that early company starts being a little bit lower than we would like to see. So we have areas of our business like our CRADL business unit where we don't see the demand being where we would like to see it yet. So still a little bit mixed and still opportunity for improvement there.

We'll hear next from Kallum Titchmarsh with Morgan Stanley.

Just as we think about the business review and some of the acquisitions and divestitures announced over the past 6 months or so, any incremental ambitions to add or subtract from the business today? Or can we assume most impactful changes have been actioned. And obviously, see the buybacks, too. So maybe just level set us on capital allocation ambitions from here.

Yes, happy to, Kallum. So we will continue and always have to look at our businesses to see which ones are synergistic to the business, which are profitable, where should we be located, what solutions should we provide to our clients. So that will be an ongoing review that we do with our Board.

And at times, you will see certainly that we will either consolidate a site or close a site or divestitures could come up again. So that is just the nature of how we run our business. From an M&A perspective, you already saw a couple of M&As this year. We have a clear road map of where we believe the company should be investing in, in terms of M&A and a couple of other smaller partnerships.

That is hard to predict as you quite never know when the target is available, can you actually acquire the target? Does it make sense from a returns perspective? And then we continue to invest organically in our business. And then you already mentioned the buyback. So we will continue to look at all areas of capital allocation and make decisions for the best returns for long-term strategy execution as well as shareholder value.

Great. And I think you called out $200 million of annual DSA revenue from NAMs before. I'm not quite sure where that is post these acquisitions and divestitures, but could you just give us a sense of the latest slides and how that's been growing?

Yes. So that was the number we had provided, I think, in 2020 -- late 2024, 2025 and since then, we have added a few different programs and actually in M&A, so the PathoQuest acquisition is squarely in the NAMs space, where we are replacing in vivo virology work with next-generation sequencing, a really good technology.

And then you're right, with the divestiture of the discovery assets in Europe, there is roughly -- we will retain roughly 2/3 of the NAMs revenues that we had called out. So if you take those 2 together, a little bit of organic investment we have done in other areas, we're probably kind of back to where we were. But we will continue to drive that and our focus is on the regulated space here where most of our business is.

So it continues to be a very strong commitment of Charles River. And we have established a Scientific Advisory Board under Dr. Bumpus. And we have a lot of activities going on in that space right now. So you will continue to hear about technologies and how we look at this, how we bring new technologies in, what it will replace.

We also just made an announcement on virtual control groups and was actually part of our remarks. Just another example of how we look at NAMs for our business and we see it as an integrated approach where we will bring in more and more technologies and run them as hybrid studies together with our conventional approach.

We'll hear next from Justin Bowers with Deutsche Bank.

So 2-parter for me. One, can you talk about the conversion rates and the velocity of decision-making that you're seeing across the increasing proposal volume over the last 3 quarters? And then part 2, I just wanted to clarify on the comment on large pharma verbally saying that they want to put more work into the INDs. Does that imply that pharma is increasing their overall budget or intend to for preclinical spend this year and beyond?

Yes, happy to. So let me start with the conversion rates. So if you look back to the, I guess, the COVID time lines where capacity was quite tight, companies had to plan way ahead. Discussions were like literally 2 years ahead of placing a study. So really long. customers booked out very long because they had to. What we're seeing currently is quite an acceleration of when clients come in, want a proposal and then book and place the study.

Generally, when we model it, we're saying from a discussion to proposal to bookings, it's 1 to 2 quarters and then maybe 1 to 2 quarters to get to revenue. However, in some instances, particularly with customers we have a long-term relationship with, that often accelerates because they got scientific data or they're reprioritizing a program, and we sometimes see literally from a proposal to getting revenue within the same quarter.

And so conversion rates are obviously generalized accelerated. And this is actually something that gives us a better quality of our backlog because we know that those programs are actually being run and not being canceled later on because reprioritization of budgets have changed.

To the second question about the INDs, as you can imagine, every pharma company we talk to talks about more programs into IND, more programs into the clinic. And our counterparts, our contacts will always talk about, but we have to do it with the same budget. But you can imagine that's obviously not possible. But we do see a refocus on the preclinical and earlier-stage efforts in those companies. Otherwise, they would not get the programs to the clinic.

We'll hear next from Joshua Waldman with Cleveland Research.

Birgit, I wondered if you could comment more on what you're seeing from global pharma accounts here to start the year? Were bookings from these accounts any better or worse than you expected? And then did the trend improve through the quarter?

It sounded like you saw a slow start, but I'm curious if you were more encouraged based on what you saw here in March and April.

Yes. So for the Global Biopharma, bookings specifically was below last year's bookings. But let me take you back to last year. We had an incredible booking quarter last year because a lot of the global pharma companies had literally reprioritized for months and then they -- early in the year, they got their new budgets, and there was just a slew of bookings that came in.

So this isn't something we didn't expect. We feel bookings are adequate and they are supporting what we're hearing from them that they want to do more work. So with that, I would say that overall, this is a segment that is quite stable and increasing for us. We also see proposals up for them, which will -- which tells us basically that in the next quarters, we should see that bookings rate to come up.

Okay. And then you mentioned more biotech M&A being favorable in terms of funding for these accounts. But I'm curious, in the past, have you seen higher M&A activity drive improved access to biotech wallet share? I guess just given your stronger share position in large pharma, do you think large pharma accounts acquiring small biotech ultimately means you get better access to these accounts? Is this a dynamic you've seen historically?

Yes. So a lot of times, we actually do work with those small biotechs before they get acquired from pharma. And in that case, we retain the work, and we'll continue to work with them. Some cases, they get acquired, and we actually -- we work with a pharma company and any new programs we get access to.

So it's a little bit of a mixed model. So as long as they continue the program, and that's why they're actually acquiring them, we will get our share -- our focus is certainly on making sure that we get a higher and higher share of the wallet from our -- particularly from pharmaceutical companies.

And that is why our client centricity program, our initiative of making working with our clients easy and easier, providing them with better solutions and faster time lines is so important. So it could go either way. But in general, it's not a headwind. It is either a tailwind or it's just net neutral.

We'll turn next to Cassidy Vanepps with Jefferies.

Cassidy on for David Windley today.

So digging a little bit more into margins. So with most of your NHP supply now internally owned, how should we think about the margin impact specifically within DSA? And does this change management's longer-term margin framework for the segment?

I'll jump in and take this one. Just keep in mind, we're still working through some higher NHP costs really for the first half of the year. It will get a little bit better in the second quarter, but the real big improvement is Q4 for our DSA segment. We're not going to specifically call out the margin improvement.

I think a big part of the reason why we bought K.F. was the supply chain resiliency and giving us better predictability of the supply chain. And obviously, with that, you come improvements in our financial performance, but we'll give more guidance on 2027 and what it means when we get to February of next year.

Okay. Perfect. And then following up, so how much of the NHP supply from Noveprim and K.F. is still obligated to external customers? And then when does that fully become available to Charles River?

Yes, I can talk about that. So the external customer that you're referring to is actually from our Mauritius farms. And the -- and when we bought the Mauritius farm, we bought the external relationship with the supply. Ultimately, the goal is to use the animals on safety assessment studies and moving them over.

And that will kind of be a transition over the next few years. And as you can see, you'll probably see that we already have more and more animals on our safety study. And then that will kind of end over the next few quarters.

I'll turn now to Casey Woodring with JPMorgan.

This is Sebastian Sandler on for Casey. I wanted to first double-click on expectations for biotech revenue pacing over the balance of the year. Within that bigger, later-stage client segment that's been benefiting from M&A and funding starting towards the end of last year, do you expect this specific segment to return to growth in 2Q, maybe ahead of smaller biotechs and biopharma? Or should we just expect more of a back half rebound consistent with your expectation for total DSA growth?

Yes. So if you -- so what we're currently seeing in Q1 is that this segment from a revenue perspective is still down. That is coming from the lower bookings last year. And we think -- we believe that will rebound over the next quarter or 2 because of the bookings we're currently seeing. So there's a lag of about a quarter to 2. And so we will definitely see this segment to rebound to more of a growth rate as we enter, I would say, Q3, Q4 for sure.

And then you called out strength in research models in China. Can you remind us of the revenue base in China within RMS, what that grew in the quarter and then just expectations for the full year? And then more broadly, how are you thinking about your current exposure to the China market within RMS and DSA outside of the recent NHP acquisitions? And what is your overall level of interest in expanding that through M&A in the future?

Yes. So our RMS China business is a small part of overall Charles River revenue. It's approximately 5% and -- or actually less than 5% but it is a critical asset for us as it provides us access to the Chinese market. So the Chinese RMS business is one of the leaders in the industry for providing research models as well as many services that are -- that we also offer here in the Western part.

From other services and solutions, specifically the DSA that you asked, we currently don't have any facilities in China. We do get some work from companies that work in China or want to file INDs in China, but not a physical presence. We are continuing to watch this market very closely as a lot of the drug programs are in-licensed from China because of the accelerated innovation.

And we certainly will continue to look at this to see if we should expand our structure in China based on customer demand growth rates, but also looking at geopolitical risk on that.

Our next question will come from Ann Hynes with Mizuho Securities.

Your $300 million cost program, can you remind us what you'll be annualizing as we exit 2026 and any incremental uptake for 2027 and 2028? And then secondly, just on AI, and there's been in the news a lot, some of the big pharma companies investing in AI. And I know during the Great Recession, a lot of the big pharmaceutical manufacturers closed their capacity for early development. Do you think there could be a risk that they increase their capacity again over the next few years?

Yes. Let me start and then on the cost savings, and then I will move over to AI. And if Glenn has any additional add-ons to the cost saving, I will ask him to chime in here. But -- so the cost savings are roughly $300 million of costs that we have taken out over the last several years, about 5% of our cost base. For this year, we said it's an incremental $100 million.

It's too early to talk about '27 and '28. But as we said, we are continuing to look for cost efficiencies, modernizing the company, seeing how we can reduce time lines, making the operations more efficient. So you should continue to think that -- think about us having cost efficiencies, but we're not in a position right now to give you any specific numbers on '27 and '28. We will provide long-range financial numbers probably through in our Investor Day, and we will also talk more about where those cost efficiencies are coming from.

AI is an interesting topic, both for cost efficiencies but then also for how drug development is being performed. So for us specifically, we invest in AI in multiple areas to, a, be more efficient, maximize our capacity, streamline our communication with our clients and also to reduce the number of animals needed on a drug program.

Our clients are investing primarily in the early stage and a little bit in the clinical space. In the early stage, that is things like target identification, molecular design that will allow them, hopefully, at some point, if AI delivers to bring drugs into the regulated safety assessment space faster and maybe more programs.

I do not think that our clients will want to in-source any of the work that we are doing. So our work that we do is very highly outsourced and not a lot of companies still have capacity nor the skill set to do the work. So -- and from what we're hearing with our clients and the discussions, they are actually looking more for a collaboration on how they can utilize AI in the earlier stage.

So before we get the work rather than doing the work that we are doing. So you might see more of in-sourcing in the really early or even in the clinical trials. But definitely, I would not expect it in the preclinical stage. There's just so many complexities and capacity and regulated expertise that is required, it would not make any sense.

Birgit, the only thing I would add to your comments is a lot of the great work the team has done over the last couple of years of taking out all of these costs and $300 million of cost has been needed to preserve margins because the top line has not been growing. And so a lot of the cost increases that we see in the business for inflation and normal increases across the business have been offset by these initiatives and cost reductions. I just want to make that point.

We'll turn next to Yujin Park with Baird.

You mentioned that for RMS, 1Q saw increased demand in small models from CRO clients. Was that comment specifically on China? Or was it broad-based geographically? And is this a normal pattern? Or could this be a signal of improving market dynamics?

So that comment was specifically to China. We have said that we saw much better demand in China and specifically for CROs and biotech. So we see this as an indication that the Chinese market is rebounding and accelerating and for the need and the demand of the research models that we're providing to them. So a positive indication for the business.

We'll move next to Charles Rhyee with TD Cowen.

I'll just leave it with one question here, and this is just kind of going back to the demand environment. Birgit, you kind of mentioned in the slides, biotech kind of highest levels you've seen in the last 2 years, maybe more large pharma kind of slowly rebounding or maybe just more of a year-over-year comps.

It kind of suggests maybe that biotech is going to present more opportunities perhaps over the next couple of years? And does that change at all sort of your go-to-market strategy? And maybe any kind of impact on how. Maybe give a sense of how any of those businesses are priced on either side of that? And any kind of comments on that and where you see that mix going?

Yes. So we are pretty balanced in our revenue stream from pharma versus biotech. So we have -- historically, we have a very big share with the pharmaceutical clients, but we are -- also have a considerable share with the biotech industry. So our go-to-market strategy for years has focused on a customized approach to make sure that we cater to both small as well as large companies, making sure that they get the collaboration they need and that our teams are basically on the same table with no matter if it's a small or a large company.

So -- and that won't change. However, we are investing in a lot of tools and platforms and training to make sure that we are continue to improve this go-to-market customer centricity program that we have in place, so we can be an even better partner for our clients, but also get more of a share of their wallet.

In terms of pricing, we see a pretty stable pricing environment. It has really not changed over the last couple of years. Discounting is still strategically, it's still happening. Pricing will change when capacity is changing. So something that will come probably automatically.

But at the current time, we are making sure that we stay competitive and that we get the share of the wallet that we want from our clients. And from our proposal volumes, bookings and capture rates, I think we're on the right track here.

Great. Congrats on the results.

Our final question will come from Ryan Halsted with RBC.

Maybe going back to the discussion on Asia, but asking it from a different perspective from a competitive standpoint. A lot of attention, I think, has been made on competition from Asia and drug development work. And just would appreciate your perspectives on the competitive landscape for the business.

Yes. Thanks, Ryan. Interesting question. So yes, so from an Asia perspective, specifically China, a little bit in India, there definitely has been a trend of more outsourcing, early-stage routine work outsourcing going to lower-cost countries. And this is something that we have evaluated for quite a while.

We still don't see a lot of outsourcing going to China in complex work or regulated work where we do most of our revenues, but we are evaluating that. And that is also why we said a couple of times now that overall, we're looking at the Chinese market to see how or when we should play in a larger scale there and what are the solutions that we have the right to play with in a marketplace like that. From another perspective, obviously, the in-licensing of more programs from China into the U.S., into global biopharma is another area that we are watching. A lot of times, we actually get to work on some of those programs, but it will have an impact on the industry itself, and we'll need to see where this is playing out too.

So definitely, China, a little bit of India outsourcing is a focus areas of us to make sure that we understand what's going on there. But at this point, our core market and our core relationships are very, very strong here in North America, the EU and a little bit in Asia, and we will continue to double down on that.

With no further questions in queue, I will turn the conference back to Todd Spencer for closing remarks.

Thank you for joining us on the call, and we look forward to seeing you at upcoming investor events. This will now conclude the call. Thank you.

Thank you. That does conclude today's Charles River Laboratories First Quarter 2026 Earnings Call. Thank you for your participation. You may now disconnect.

All right. Good morning, everybody. It's Luke Sergott from Barclays. I cover life science tools and diagnostics. With me, I have my pleasure, Jim Foster, CEO of Charles River. This is probably his first fireside chat, I think you've ever done. So there's going to be some learning curve here. Seriously, thank you. It's a pleasure to have us as your...

I send off swan song.

So with that, I guess we can start on the overall demand environment as you're thinking about your transition and giving the keys over, walk us through where you feel like the business is now from a jump-off perspective? How much more investment or changes might need to be made to catch some of the growing tailwinds that you see within the business?

Yes. I think it's -- I mean the demand has been so tightly tied to biotech funding. So we've always had big market shares with the big pharma. It still do. Big pharma has been sort of going through their recapitulation of their pipelines for the last year or 2. They seem to be through that or almost through that, solid there. And biotech has been very much underfunded. And then fourth quarter of last year was a very strong quarter. January and February were strong as well. So it's tough to call what the pace of the demand improvement will be, but it's definitely turning. So much of our growth and margin accretion has been related to biotech spending. And it goes all across the portfolio, what we do. And none of those biotech companies have any internal capacity to do any of the work that we do for them or others could do for them. So it feels like the sort of trough that we and others have been in for a couple of years is turning nicely.

All right. And as you think about -- I mean, it feels like it's in that transition pace, right? You're starting to see cancellations normalize. Your bookings have been solid for the last few quarters, up and down a little bit, but it's certainly not collapsing like we saw 3 or 4 years ago. So as you think about that and then with pharma doing M&A on the biotech side and starting to backfill their pipelines, talk about the conversations you're having where there's this sentiment of cautious optimism, right? You have like the approvals on the FDA are a little bit slower. So walk through with the different dynamics in the conversations you're having with as the pharma company start to release their budgets, is it like full bore? Give us a sense of timing on what it's going to look like?

Tough to tell. It seems like R&D budgets are at least flat. So I don't think they're down. I think there's a fair amount of pent-up demand in biotech for sure. So what we're hearing from them and our expectation is that there's been a fair amount of drugs developed and sort of paused over the last couple of years. They didn't get INDs filed. So we think that, that will come back first, sort of filing of INDs that will swing back to discovery at some point. I think -- we think they need probably another quarter or maybe 2 quarters of sustained inflows of capital from the capital markets to really feel like they can spend the way they'd like to. But again, that's a little bit difficult to predict. We have seen that historically. I don't think they want to start and not be able to finish.

So if they've developed 5 compounds against a particular target, maybe they're only working on 2, maybe they're growing 2. Maybe they've got 3 products. So if you go back even a couple of years before the sort of trough, '21 and '22, in particular, were incredibly strong years. There was a plethora of cash available to those folks, and they were working at a different pace. So it seems to be a more positive look, as you said, cancellations have flattened. Bookings are up, proposals are sort of flat to up. And so those are good indications. Backlog looks like it's kind of 9 months. It's kind of a healthy backlog. So when things slip, you can -- or cancel, we have things to slot right in behind them. So we like the way that, that can shield.

Yes. And I guess on -- as you're thinking about like the efficient -- and this is kind of an AI question, the efficiency gains that are coming. But you're talking about pharma taking -- instead of taking 5 drugs they'll take -- or biotech will take 2 drugs right now. As you think about the AI, and I think this is an efficiency tool and how that's playing out, but this is the bogeyman weighing on all of CROs and particularly your business, which to me seems -- I mean, you're mostly a wet lab business. It's not like a cost-plus provider of service. So talk about where a lot of these efficiency tools and gains are going to be implemented within your business and where pharma is actually demanding the stuff right now.

Yes. So on our side, specifically, I mean, we have a huge investment in -- just more technology, less white space, more technology, more -- less paperwork. And so we've been able to speed things up pretty significantly. I mean, I think the whole AI thing is -- has great promise. I think there's been an overreaction in terms of the potential benefit and how soon it is. I mean it's another NAMs. It's a ways off. It's definitely complementary and sort of additive to what we're doing, and it's not a replacement for what we're doing. So we think that NAMs, including AI will -- can accelerate the ability of clients getting to a lead compound in discovery.

So you're going to see -- you're seeing the NAMs pronounced mostly in discovery, not in safety and AI as well. And so there has to be data. So they have to come to us or directly to clients for data. We probably 8 years ago, went to all of our clients, and we said we want to use your data on an anonymized basis to work on AI for our clients. And nobody would share the data even on an anonymized basis. So you've got that sort of competitive dynamic going on with the clients, which is getting in the way. Will that change? That's kind of unclear.

But the science will prevail here and AI is going to be a slow developing phenomenon, probably a decade for it to be impactful. But we think it will be impactful in a beneficial way. So there should be more drugs for us to work on, more drugs getting into the clinic, hopefully, more drugs getting into the market, but that's a little bit difficult to discern. So if you can use the knowledge that you've gained from a whole bunch of studies that were done historically to educate you on whether you should spend a lot of time and money on a particular drug, that's pretty powerful. So we can have an acceleration of drugs moving through discovery and development into the clinic, which obviously would be great for patients and us as well.

Yes. And I guess from that data aspect and pharma not sharing it, are you guys developing something where, okay, recognizing that they're not going to share the data, you're not going to be this data repository. Could you build out a certain module where you can plug into their data system, they can use the Charles River application set for whatever downstream pieces they need.

Maybe. I mean, I think we have to have access to the data. And then in the final analysis for any of this to move into safety, which we think little or none will, we have to validate that both for the FDA and for our clients. And so we hope that validation I think is a big deal. Where clients pause long enough to actually validate that this stuff is beneficial and predictive. If you don't know what the mechanism of action is of a disease, how can you predict how a certain drug will work? How do you biosimulate that? You can't. So the FDA has talked about a very sliver -- a small sliver of large molecules, particularly monoclonal antibodies, maybe not having to do longer-term animal studies. That's been going on for 2 or 3 years. There's nothing new about that. We definitely don't see that with small molecules or other large molecules as well, which is why we think that it will be most pronounced in discovery.

Okay. And then on that -- continuing on that with the NAMs, I mean, you guys have probably the largest NAMS book in the business, totally underappreciated. So where are you getting the most interest from biotech and pharma on that discovery piece? Because like you said, from the safety side, you're not going to be able to simulate that for the most part or you can, but it's a much smaller use case. Right now, where is that the most demand coming for your NAMs business? And is there anything out there that you guys don't have that is where you would like to add or anything like that?

We're seeing it in multiple places in that business. So we're in the process of buying a small company to add to our biologics business is a great example. That's a NAMs that actually is a replacement for research models, gives you better information faster. So that's an important move for us. We don't see a lot of those. So we're looking all the time. We make a bunch of investments. They feel like R&D investments for us. So if they pan out, great. We bought a company a few years ago that shows you off-target effects of the drug. That's a NAMs, that's really, really important. Another company that we bought a few years ago that has a transporter educational impact on how drugs get to the patient.

And so we continue to look -- we get offered these businesses all the time or opportunities to invest and people say, this will be a replacement. What we find is that you're getting anecdotal information that's beneficial very early in the drug discovery process where maybe you have an equivocal answer on what the animal work is telling you, you rather than put on another group of animals, you just get this quick answer kind of in vitro. And that's quite beneficial. And I think all of our large clients have their own in vitro screens. They had them for years. Some of that stuff is proprietary. Some of it's very standard. So the extent to which people will continue to work on these things.

I mean, I'll just give you one example, sort of the leading NAMs company that I'm not going to name the company, but I met with them 5 years ago, I met with them recently about 6 months ago, and they had the same revenue 5 years later that they did. And so that means lots of companies have tried it. The technology was interesting. It looked like it would be beneficial, proved out maybe not to be. It doesn't mean that someday it won't improve. So we stay as close to these things as possible. We don't want to get over our skis on this, invest needlessly in that. We have a committee of our Board that looks at this. We have an internal committee. We just hired the former #2 person from the FDA to run this. She's probably the world's leading expert on NAMs. So we're quite serious about it. And we've been working on NAMs forever.

I mean that's always been the trend. Speaking of the recent deals and we're talking about those deals, like you guys have been a lot more acquisitive, I guess, buying here over the last 6 months to 9 months. You've done acquisitions across all 3 segments. Just walk us through like over adding $200 million of revenue, you have cell solutions, manufacturing. Like this is -- as you're building out and it's kind of the legacy, but like as you continuing to build out the base business, walk us through the strategy but behind each one and what they're actually going to bring?

Yes. So I think our greatest competitive strength is the power of the portfolio. It's wider and deeper than anybody else's. We're all about the depth of science. And once the molecule is discovered -- and by the way, we do discover some molecules, but most of the time the molecule has been discovered by the client, then we have to take it and run with it. And as I said earlier, biotech doesn't have the capability to do this. And many of the pharma companies don't either. So we want to start as early with the clients as possible. We want to stay with them through the life cycle of the drug. We -- most of the drugs don't get to market. So one of our values is to say, stop working on that drug. It doesn't look promising or conversely, it does.

We're playing in a $25 billion market. We did about $4 billion last year. So there's a lot of running room in the core business. So we're going to stay close to the core business. So the CDMO business, which we're in the process of divesting as an example of moving into an adjacency that looked promising. The science hasn't panned out the way any of us thought that it would. I think it's been a bit of a distraction. It's been a headwind from a margin point of view. So we're really pleased to move away from that, that will invigorate the operating margin and provide more time to focus on the basics.

So the 2 businesses that we're in the process of buying, one is the NAMs that I just talked about with biologics, which is right down our core. And the other is an NHP supply business, which is fantastic just in terms of certainty of supply. The price point with which we will charge ourselves with those NHPs will be extremely beneficial. So that will drive the operating margin -- will drive accretion in the operating margin nicely.

Yes. On the K.F. acquisition, we've actually heard a lot of good feedback from channel checks of just making a lot of sense from that vertical integration. So outside -- as you think about that margin impact and the lower price that you can charge yourselves, but when you're running this business, is it -- can you scale this and kind of accelerate it at any given your reach? Or is this just kind of more of that kind of margin just being prudent with the overall P&L?

So we've got -- now we have 2 big NHP companies that we own, one in Mauritius and one in Cambodia, and we buy elsewhere. And yes, we will invest in both of them and grow them significantly as the market grows. So that will ensure supply. We'll be on the ground operating. And so all the sort of veterinary oversight, nutritional oversight, transportation modality will have control of. So both the quality of the NHPs and the availability of the right ages and weights and things and having them in country in our facilities ready to go on studies quickly is hugely beneficial from not just a competitive point of view, but be able to service our clients who are not very patient once they have a study to start. So it's been a complex situation for years, just getting the supply. And so owning the supply and having oversight on how the work is done, the quality of the -- as I said, veterinary oversight in the animals themselves is hugely important. So look, we'll do everything we can to stay at least providing sufficient enough supply to service our clients and hopefully more than that as the demand invigorates.

Yes. And with the DSA business is the larger piece, right? You talked about the demand. You had over 1.1 book-to-bill in 4Q. You said like you'd like to see a little bit more of the VC or the biotech funding be consistent over the next couple of quarters. But it feels like, as we said, that you're at that trough, then you kind of look at your guide for the year, starting down low singles, a little bit of headwinds there from one-offs and comps. And then as that kind of scales, is this still that mid- to high single-digit business that you guys have talked about for a long time? Or is there something structurally different with it?

I don't think anything structurally different. I don't want to give any percentages. So we'll have an Investor Day this year where we'll refresh our goals. I don't know what it will be at least 3 years probably. So there's nothing structurally different. This has all been about access to capital and demand. I'd say that the science and the drug modalities are as strong as they've ever been. Biotech continues to be the discovery engine for big pharma. So they're dependent on them. The inflows have been pretty good. The venture capital funds have been raising more money more quickly. So instead of every 3 to 5 years, we're doing every 2 to 3. You have money coming in directly from big pharma into biotech, but capital markets has been a big missing.

So we've seen this movie before. We've been here before. It's a little bit frustrating because we know how this is going to change and turn. I'd say our competitive stature is better today than ever just in terms of the strength of our portfolio and the work that we're literally doing right now with the divestitures and the acquisitions literally tightens up the portfolio, gets rid of the things that have been a distraction, improves the margin and sort of a greater focus on our ability to kind of accelerate the service that we provide to our clients. So again, we don't want to predict what the capital markets are going to do. It's happening.

The fourth quarter was the strongest quarter in the history of biotech. January and February were strong as well. So if that continues, and I don't know why it wouldn't, and there's a lot of stuff going on in the world right now, obviously. But putting that aside, you're seeing some IPOs go off. And I think hopefully, they will continue to get the confidence throughout the rest of this year. That cash is available. People that did IPOs and haven't done secondaries who want to do those. Private VC-owned companies want to get public. So I think all of that is in the open.

And so I always thought about when you get the secondaries of the IPO raise, it's more on for late-stage clinical. How much do you -- is -- like do you guys end up seeing for that? I understand that they're all different from a platform perspective. But let's say, a biotech raises whatever x amount, like how long before you guys start to see any of the downstream discovery piece of that, whatever that was earmarked for?

It's tough to say. There's usually sort of a delay of 2 or 3 quarters just to make sure the certainty of availability of cash. A lot of the work that we do, a lot of the post-IND work we do, which is very complex and much more expensive, we do contemporaneously with the clinical trials. Not all the tox work is done before that. A lot of people don't know that. And so as the money sort of shifts from discovery into development and then into the clinic, we get the benefit of that as well. So as they get more comfortable and the work moves downstream and the capital does, we should benefit from that.

How big -- so how -- like from a portion of your business, how much is the post-IND side? Because I feel like it's...

I mean it's often about half and half. So we like to see -- we like to have both. We like the early stuff and the late stuff. Sometimes you get the late-stage stuff and some competitor will do the early-stage stuff. But typically, they start early. And if the drug progresses well into the clinic, you continue to get the work, which is obviously a few years.

And on the competitive dynamics, China has been a key -- not a key region, but it's been key for the pharma industry. You've always had a smaller presence there, a much larger player over there from a region perspective. Just talk about China in general from you guys and then from an overall competitive dynamics within the U.S. and Europe.

So China is very interesting and it's changed, and it's changing rapidly, I would say. So we have a small research model business there. It's done quite well. It's growing nicely. It's got great margins. And we had always intended to do everything that we do in the U.S. and Europe and China. We tried to do the WuXi deal 15 years ago, which would have been a great move. We're hearing that from our clients. So we didn't get to do that deal. So they're obviously the world's leader in chemistry. And then we tried to do some other deals and the valuations were just too high. So what's happened in the intervening period is that some of the discovery work has gone to China, and they do really good -- actually do really good work in discovery at very low price points. That's not coming back. Chemistry, in particular, is not coming back.

And there's some safety work that Western companies are doing in China, mostly companies that are starved for cash. So if they can get the work done for 50% less and the work isn't great, but it's good enough, that's what they'll tell you. It's good enough, they'll go there. I think a lot of people don't want to go there. And I don't think we get to bid on very much of that work. It's just below the radar for us. That could change as the Chinese get better at it. But the primary thing that's happened in China, I'd say, over the last 5 years, but it seems to be accelerating is that they're innovating, they're innovating big time now. So you're seeing U.S. and European pharma companies buy assets from Chinese companies. A lot of it happened in 2025.

And so all the work that you do on a drug that was discovered in China has to be done in China. So we have no access to any of that work. China is at least the #2 country in the world for drug development. Will it be the #1 country? Maybe. I mean it's a bigger patient population, probably spending more money now than the U.S. is. And so directionally, I think that's a -- I don't think -- directionally, that's a place we want to play. There are some opportunities there for us. We're looking at it very seriously right now. Just like the way we went into China and kind of elevated the craft for research model quality, we could elevate the craft for safety if we bought a local player.

And so historically, we've kind of been worried about how does the Chinese government treat us. I think they treat us really well. I think we'd be happy that we were there. And that would allow us a little bit defensively to maybe get some of the work that's going from Western companies to China. So a small amount of that, but a more significant amount to be able to do the work for China in China.

And when you -- when pharma is buying those Chinese biotechs and assets, how much duplicative work needs to happen when it come when...

I mean some of it doesn't need to be repeated. Some of it does. Obviously, the clinical work has to be repeated. So -- but it's fast for them. And obviously, it's -- pharma companies are buying assets from biotech companies, but historically, it's just been from U.S., a little bit of Europe. So the fact that they're buying it from China just means that the quality of the science has improved dramatically over there. High school educated math and science is comparable to college math and science in the U.S. and the work ethic is amazing. And the government clears away a lot of the regulatory stuff that they have to deal with. I'm not saying that the Chinese version of the FDA is still quite serious, but they tend to help a lot of the companies. I know when we're trying to do the WuXi deal, WuXi would get a whole bunch of buildings free from the Chinese government. All they had to do is find employees. So they're tough to compete with and moving quickly.

Yes. Great. I mean that's all the time. I really appreciate it.

Pleasure.

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

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

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

Yes, certainly, happy to. So maybe let me start by thanking Jim Foster for his coaching and mentoring and the years of development that allows me to be his successor. I also want to thank him for his significant contributions in building the company into what it is today. So we are an industry leader. We are working on over 80% of all drugs approved by the FDA and an absolutely critical partner to every industry participant there is.

So I can't thank him enough for leaving us with a company of this size and scale and importance. So very honored to take on the CEO role. What -- maybe what I want to start with is -- so last year, as you know, we did a very in-depth strategic review. And out of the strategic review, fully supported by our Board came a variety of initiatives.

And we talked about those in some of our earnings calls in the last year, and we have started to execute on those. So earlier this year, you saw already 2 acquisitions, one, a further integration into our supply chain for nonhuman primates and the other one, really an acquisition of new alternative methods offering for next-generation sequencing, supporting our manufacturing support services.

And we are very excited about both of those, and both of them will contribute to 2026 and beyond. We also have already had 2 divestitures announced. So we signed definite agreements for both our CDMO and Cell Solutions businesses. And we announced a signed definite agreement for some of our European discovery services.

So we will continue to execute on those initiatives, and we will continue to focus on areas that will provide increasing shareholder value and growth for the company. We will continue to look at other options for M&A to add to our portfolio to make us more competitive. We are going to continue to reevaluate where we operate. So we had some site consolidations, but we're also looking to see what are the regions that we should be participating and how much.

So more to that over the upcoming months. And then we continue to look at modernizing the company. So over the last 3 years, we have executed on a digital transformation. We have taken over $300 million cumulative cost out of the company. And we will continue to look at ways to help our clients to meet their goals, which is really accelerating drug development. Those will be focus areas and then more to come over the next few months.

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

Yes, it's an interesting question. So we obviously follow macro trends and macro data. And certainly, what we're seeing here is very similar to what you're outlining here. And then we focus on the areas that we can control. So we look at our forward-looking metrics, bookings, proposals, particularly net book-to-bill and then also a lot of discussions with our clients and seeing what their confidence levels are, what their certainty is of budgets. Have they completed their reprioritizations?

And what we're seeing there is actually quite positive. So over the last months, we have -- since summer, we have seen improving biotech proposal and booking numbers since the summer where we saw a little bit of a lull. Pharma seems to definitely be back to work. So all the discussions are about bringing more clinical candidates to term and really accelerating what they have in the pipelines right now.

So from that perspective, we do -- we also hear a lot of positive implications from funding, seems to be much easier to get funding if you have a good program with some good data. And that gives the industry a lot of confidence. And we're hearing that every single day when we talk to clients now. And so in terms of that, I think IPOs were pretty good this month. So we'll build on it. But overall, I do think the funding is easing up, and we can see some good progress from that.

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

Yes. So maybe let me piece that a little bit together. So in the Q4, we had a net book-to-bill of above 1. So that was the second quarter in 2025, gives us a lot of confidence. It takes about a quarter to 2 quarters for this booking to become actually revenue generating. So this net book-to-bill in Q4 will help us to drive some of the business and revenues that we need in Q2, mostly H2, so Q3, Q4. But we need to continue seeing those stable trends.

We said earlier in our earnings call that we need to see net book-to-bill to be above 1 on average. That doesn't mean that we need to see it every month or even every quarter, but we need to see it on average for the year to drive -- to fill kind of the pipeline for the later half of the year to return to growth. So we are pretty confident right now that we will be able to deliver this. And -- but it's -- to us, it's a very realistic forecast and also -- so -- but we need to see that stabilization, I would say.

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

Yes. So obviously, a lot of discussions with our clients about the rhetoric coming out of the FDA and some of the actions happening there. And with a very small number of clients being impacted on their review dates, very small number, we are not seeing a disruption in the marketplace in general. So our clients have found ways to either work around it or it has eased up a little bit.

So it became a business as usual on that. The discussions about NIH, will they have the budget? Will they not have the budget? Now they have the budget. Those are the discussions that impact a little bit more our academic clients, which is more of a research models clientele segment for us.

And I don't think it has a direct impact because for us, we have seen NIH has resubmitted their contracts that we have with them, for example. But it did create a little bit of uncertainty with academia, universities, also some of the other discussions with universities directly [Technical Difficulty] indirect rates and things like that. So we have stable business with this clientele, but maybe a little bit of a slower growth rate than we would normally see.

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

Absolutely.

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

Yes, certainly, happy to. So obviously, there are discussions with our clients. And just like us, clients are looking to see how any new technology can be used to support their drug development programs, potentially accelerate. There is quite a bit of funding going on into very early stage. So designing a better structure, finding that molecule that binds to a specific target.

The outcome, if they're really accelerating drug development is yet to be seen. There's about, I think, about 150 AI-assisted drug programs in the clinic, still a very small number. Over time, we'll see what that will do. I think most of our clients, in addition to really focusing on the early stage, focus on the clinic, finding the better patient pool, but then mostly really focusing on operational aspects.

How can they speed up manufacturing, maybe looking at vials, if they're cloudy or not and other things. And that's the same for us. So we have some initiatives going on where we're trying to answer some scientific questions, mostly to reduce the number of animals used in an animal study. So we're very committed to NAMs. But then also things like how can we speed up writing a report, how can we do a better job scheduling our staff, things like that.

And I'm personally very excited about those technologies. So we'll see where we can take them. From a drug development standpoint and the impact on it, I think this is an evolution, not a revolution, and it will take a little bit of time. Drug development is more complex than rocket science. So it will be quite a bit of time before we know and can actually make some impact areas. And as some of the pharma CEOs even have said, we're not going to design a drug and bring it to market in 3 months. This is a 10- to 12-year period.

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

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

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

Yes, certainly, happy to. So yes, so we announced definite signed agreements -- signed definite agreements to sell our European -- some of our European discovery assets. So this was a quite surgical move to see that some of the assets may not be as synergistic to our business, may not provide us to pull through that we would like to see. From a NAMs perspective, we are maintaining all the capabilities that we would like to have to bring future NAMs to our portfolio.

And we are retaining about 60% of the NAMs revenue that we had talked about in 2024. So when we announced the NAMs revenue. So from that perspective, there is a ton of questions to answer in drug development. We kind of outlined the road map of what questions we want to answer using new alternative methods, and that's what we're going to focus on going forward. So more towards our regulated toxicology studies versus the earlier discovery study.

I see. So it's more like kind of dividing within that universe where we focus on. Okay. Before maybe jumping to -- I just want to make sure we do touch on some of the broader outlook questions for the company. And then maybe we'll dive back into some of the segment specifics. But certainly, I know capital deployment is something that I want to make sure we touch on it.

And maybe the first question here is you're expecting a slight step-up in shares for '26 and said you'll be obviously prioritizing debt paydown and also maintaining dry powder for M&A. But in that context, how should we think about share repurchase plans for '26 and potentially beyond?

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

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

Yes. So pharma companies continuously look forward to what challenges they have and how they need to react to that. So if you think about the restructuring a couple of years ago, where every -- basically every pharma company reprioritized their programs, had big restructuring programs, cost savings that they announced. This is now 18 months later for most of them. Most of them are through executing on those restructuring programs.

They have reprioritized their drug programs. They know exactly what therapeutic areas they want to play in. So this, in my opinion, is built into what they have already done. And now they're just going to move forward and see that they're bringing new drugs to market either organically or through in-licensing or acquisitions. So I wouldn't expect any additional restructuring or reprioritization programs coming about.

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

So yes, maybe let me take that a little bit from what happened in Q4 and then forward. So when we -- last year, we had more nonhuman primate studies in our Safety Assessment business that we originally had anticipated early in the year. And how our supply chain works there is we plan on a certain number; we import a certain number. And then when there's more studies, we -- in this case, had to buy on the open market.

So basically, from suppliers where we don't own the supply chain nor did we have any contracts in place. So with that, the pricing for those, that spot pricing, not the general market pricing was higher than we normally would pay. But it's still a benefit to us to do the work for our clients. We want them to get their programs advanced. And so it's something we need to do if this comes about.

So this had an impact on Q4 cost in our DSA segment, has an impact on Q1 still. As we come out of Q1 into Q2, we're going back to our normal supply. So by itself, even without the K.F. acquisition, we will see a reset of our cost base, and it will have -- will not have the headwinds we're seeing currently in Q1. In addition to that, the K.F. Cambodia acquisition, we have announced that it will have a [ 50 ] basis points improvement to our DSA margin and 100 basis points to our company margin.

So it has a considerable positive impact -- and -- but I also want to remind you that we do make those acquisitions to get better control of the supply chain, take the uncertainty out and to invest in those businesses, into those farms from a compliance and quality and regulatory standpoint. So a very important acquisition for us.

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

Yes. So this is actually a little bit a different dynamic, and sorry for the complexity about -- around our supply chain here. But when we own a farm and we have either more animals than we need or in this case, we actually have a supply contract with a third party that we are committed before we even had bought the farm. This is when we sell through our RMS segment animals to third-party customers.

And what's happening here is that last year, we had a very strong demand. So some of the volumes that we actually probably would have sold in '26 went into '25. And so we have a little bit of a headwind in 2026 in our RMS segment, where we're selling fewer numbers to third-party clients. This is just timing.

This is just when things happen depending on the age of the animals and the demand that the third party has and this is unfortunately a supply chain or a sale that is not linear and not every quarter the same amount. So you will see those variables. It's a little early to tell about 2027, so I don't want to go into 2027 yet.

Plus, I want to remind everybody that eventually, we plan to use those animals mostly on our DSA studies. So the margin profile will actually move from RMS into DSA, but the revenue profile will change here a little bit. So the acquisitions of those farms were solely done to secure the supply chain for our DSA business.

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

Yes. So our CRADL business is a services business where we offer space and then animal husbandry, so basically the vivarium space to clients. A lot of very early-stage clients are our clientele here, some later stage, even some pharma companies. But we are heavily reliant here.

So the business model is really geared towards new companies coming in, having their first funding, needing a space to do their research and where -- so what we've seen over the last few years is with biotech funding being at a low that demand wasn't quite as robust as we would like it to see.

So we made some consolidation of the CRADL facilities. The demand right now is stable, but we're not seeing the growth that we would like to see in that business yet. I do believe that biotech funding will help, particularly if we can see an increase of new companies being started up again. So I think that is the key indicator for this business. And eventually, we'll get there.

Yes. Okay. That makes a lot of sense. You kind of hinted at before sort of thinking about where geographies we need to be in and being sort of aligned on that. And I guess the question then kind of points to China a little bit. Obviously, I think most of your China exposure is through RMS today.

Can you -- I don't know if you've shared it, but can you kind of talk about sort of how much of RMS is coming from China? And if we think about sort of the in-license coming out of the country currently, does that maybe change the way you think of maybe offering DSA services there as well?

Yes. Interesting question. So China, obviously, is a very big market for drug development. We currently have a very good, very sizable business for our research model in China. For research models, that's about 15% of the revenue, for Charles River in total, 4%. So Charles River total is relatively small. This business is a critical partner to the biotech, mid-tier and pharma industry in China, so China for China, and has grown for many years.

And we are obviously a little bit through that lull in China, in the mid-tier segment there, but we're seeing a good rebound there as well and should going forward, see this accelerating here. From a DSA segment, it's an interesting territory for us. So currently, we don't have any services there.

We are evaluating if and how and when we should play there. And so there will be a little bit more work going into that and see what is the opportunity for us? What's the geographic risk? Is the current in-licensing accelerating the market or not? So quite a bit of work going into this question right now and more to come on that.

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

Yes. So the academic and accounts and government accounts for our research models business is a sizable segment, and it's stable. So I would say just that the growth rates slowed a little bit. So academia and government for our RMS segment has been a good grower.

And just with the uncertainties last year, we see a little bit of a pullback, a little bit of just slowing the growth rate, but still a very, very stable business. It's still where fundamental research is being done. And so we would expect that we are seeing a rebound as the universities are working through the uncertainties here.

Okay. In the last few minutes, I want to touch on the manufacturing segment. So you've now made a decision to sell the CDMO assets. Can you maybe remind us what is remaining, right? So obviously, biologics and microbial testing. And so within those 2 kind of core parts, which I think has generally still grown pretty well, maybe hidden a little bit by the headwinds of CDMO.

Maybe talk through sort of the growth expectations between those 2 pieces, how we should think about growth there? And maybe as you think about future M&A, is this an area where you would maybe look to expand again or just overall thoughts there?

Yes. So our manufacturing segment, we expect to grow this year mid-single digits overall, you're right. The 2 primary businesses that are remaining is our Microbial Solutions business and our Biologics Testing business. Both are supporting clinical trials, clinical studies as well as commercial, so manufacturing as well as commercial manufacturing.

So generally, a stable segment that gets a lot more the funding than early stage. Our microbial business has -- is a very -- it's a rock-solid grower for us. We have 3 franchises there, the Endosafe, Accugenix, and Celsis. All of those have good prospects, and we are a market leader in providing those fast and rapid testing solutions for commercial manufacturing and clinical manufacturing.

So everything from endotoxin testing to microbial testing and we expect that to continue. So we are continuing to morph our portfolio in this business to stay ahead of the competition and remain to be a critical partner to our clients. Our biologic's testing business was an extremely fast grower throughout COVID.

We had a little bit of a reset because of just the programs coming in, coming out. So growth wasn't quite as good as we would like to see it there. And then in the last year, we were impacted by one client, and we are coming out of this, and I expect this business to resume growth and rebound to its previous growth levels.

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

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

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

Thank you.

Okay. Thank you, everyone.

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Fourth Quarter and Full Year 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions]. I would now like to turn the conference over to your host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Charles River Laboratories Fourth Quarter and Full Year 2025 earnings and 2026 Guidance Conference Call and Webcast.

This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; Birgit Girshick, Executive Vice President and Chief Operating Officer; and Mike Knell, Senior Vice President, Interim Chief Financial Officer and Chief Accounting Officer. Jim will comment on our results for the fourth quarter of 2025 as well as our financial guidance for 2026. Following the presentation, they will respond to questions.

There is a slide presentation associated with today's remarks, which we posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through next quarter's conference call.

I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During the 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 of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on our Investor Relations section of our website.

I will now turn the call over to Jim Foster.

Thank you, and good morning. As Todd mentioned, I'm pleased to be joined today by Birgit Girshick, who will become our next CEO when I retire as well as our interim CFO, Mike Knell. Birgit will provide an overview of our 2026 guidance and the key drivers behind our outlook, but before I hand the call over to her, I will provide details on our fourth quarter and full year 2025 financial results as well as an update on our latest developments and market trends.

We were pleased that our 2025 financial results were at the upper end of the revenue and non-GAAP earnings per share ranges that we provided in November. Beyond our financial results, the fourth quarter capped a year that was marked by the stabilization of the biopharma demand environment, including substantial improvements in DSA net bookings, particularly during the first and fourth quarters.

We also advanced several strategic initiatives that will enable the company to better capitalize on future growth opportunities and renewed our focus on scientific innovation that will reinforce our position as the leader in preclinical drug development. At different points during 2025, demand from both global biopharmaceutical clients and small- and mid-sized biotechnology clients showed signs of improvement.

Many of our global biopharma clients progress through their restructuring and pipeline reprioritization activities and after holding back spending in 2024, move their programs forward with more urgency when new budgets were released in early 2025, which led to strong DSA bookings at the start of last year. The biotech funding environment slowed in the first half of 2025, and we subsequently experienced softer demand trends from our small and midsized biotech clients during the summer months; however, with a reinvigorated funding environment in the second half of the year, including a record level of $28 billion in the fourth quarter.

Biotech clients were the primary driver behind a steady and sequential increase in the DSA net book-to-bill in each month during the second half of the year. As we disclosed at an investor conference last month, the DSA net book-to-bill improved to 1.1x in the fourth quarter. Taking these factors into account, we are cautiously optimistic that the favorable DSA demand trends will continue in 2026 and result in a return to organic revenue growth in the second half of the year for both the DSA segment and the overall company.

We've also made substantial progress on the strategic actions that we outlined in November to unlock long-term shareholder value, including strengthening and refining our portfolio, driving greater efficiency and maintaining a balanced yet disciplined approach to capital deployment. To strengthen our portfolio, in January, we announced the planned acquisitions of the assets of KF Cambodia and PathoQuest. Both of these acquisitions are squarely aligned with our core competencies and are the result of lengthy successful partnerships. KF, the acquisition of which has already closed, has been our long time NHP supplier in Cambodia, and will further strengthen and secure our DSA supply chain.

We expect it will generate meaningful operating margin improvement later this year through significant cost savings on NHP sourcing. Between KF and Noveprim, we expect to own and internally source most of our future annual NHP supply requirements for the DSA segment. We continued to advance our NAMs capabilities with the planned acquisition of PathoQuest, which is expected to close within the next month.

The company has been a partner of our biologics testing business since 2016 and provides an in vitro approach to manufacturing quality control testing for biologics. The KF and PathoQuest acquisitions are excellent examples of capital deployment in core areas that will enhance our financial profile and advance our scientific capabilities as we endeavor to capture greater share of wallet from our clients.

We will continue to evaluate additional M&A, including in the areas of bioanalysis and geographic expansion in order to support our clients as they seek to drive greater efficiency and success in the drug development programs. We are also focused on continuing to build our NAMs portfolio or new approach methodologies in areas that are most relevant to clients and their scientific needs. We believe we have already established a solid foundation of NAMs capabilities, including our Retrogenix cell microarray platform for off-target screening and toxicity, our development of virtual control groups for safety assessment studies that utilize machine learning and other techniques and most recently, PathoQuest innovative next-gen sequencing platform.

We are excited about current and future applications for NAMS and related innovations, including AI, and we view these as enabling technologies to support the work that we do and is complementary to it. NAMs, including AI, has promise, but it still has challenges with data availability and proof of concept, so it will be a gradual longer-term evolution led by science and the validation of new capabilities over time, particularly in the regulated safety assessment environment where patient safety is paramount.

Since we began to discuss NAMs in more detail last spring, there have not been any significant technological changes in drug development, and we have not experienced any notable changes in client behavior other than more frequent conversations about NAMs. We also continue to make progress on our plan to divest businesses totaling approximately 7% of 2025 annual revenue. These processes and negotiations with potential buyers are ongoing and we continue to expect the planned divestitures will be completed by middle of 2026.

Assuming all transactions are completed, expected non-GAAP earnings per share accretion of $0.30 on an annualized basis from the planned divestitures will be less for the partial year 2026 or closer to $0.10 per share because expected improvements in the operating performance of these businesses throughout the year.

Now I will recap our fourth quarter and full year consolidated performance. We reported revenue of $994.2 million in the fourth quarter of 2025, a 2.6% decline on an organic basis from the previous year with revenue declines in all 3 business segments. For the full year, we reported revenue of $4.02 billion, with an organic revenue decrease of 1.6% driven primarily by lower revenue in the DSA manufacturing segments.

By client segment, sales to both the global biopharma and small and midsized biotech client segments declined modestly for the full year. In the fourth quarter, sales to global biopharma clients rebounded meaningfully versus the prior year as these clients got back to work after pulling back on spending at the end of 2024. Sales to small and midsized biotech clients decreased modestly in the fourth quarter, largely reflecting softer DSA bookings during the summer months. As a reminder, there's a natural lag between when DSA studies are booked and when they start and begin to generate revenue. Therefore, it will take 1 to 2 quarters to see the benefit of the stronger fourth quarter bookings.

The operating margin decreased 180 basis points year-over-year to 18.1% in the fourth quarter, principally driven by 3 anticipated factors: lower revenue, higher staffing and NHP sourcing costs in the DSA segment and the timing of NHP shipments in the RMS segment. For the full year, the operating margin declined by just 10 basis points to 19.8% as the cost savings from restructuring and efficiency initiatives helped to protect the operating margin, which has been our stated goal.

Earnings per share were $2.39 in the fourth quarter, a decrease of 10.2% from $2.66 in the fourth quarter of 2024. In addition to the lower operating margin, the tax rate was also a meaningful year-over-year headwind in the fourth quarter. For 2025, earnings per share were nearly flat at $10.28 compared to $10.32 in 2024 as lower revenue was largely offset by the benefit of the cost-saving initiatives.

Below-the-line items largely netted out with the higher tax rate in 2025, primarily offset by lower interest expense and a lower share count and stock repurchases earlier in the year.

I will now provide additional details on the segment performance. DSA revenue in the fourth quarter was $591.6 million, a decrease of 3.3% on an organic basis. The decline reflected lower study volume, particularly for Discovery Services, while DSA pricing and mix were relatively stable. For the year, DSA revenue decreased 2.6% on an organic basis.

As a result of client demand, we experienced a meaningful increase in revenue from NHP studies, resulting in an increase in the number of NHPs used in these studies in 2025 for which additional information can be found in the appendix of our slide presentation. These trends reflect our clients' continued reliance on traditional in vivo methods to help ensure drug safety, even as we and our broader industry continue to evaluate applicable uses for NAMs and further expand our capabilities.

We experienced a higher number of NHP study starts in the fourth quarter and this trend is expected to continue into the first quarter. As we mentioned in November, the higher-than-expected NHP study demand led to increased NHP sourcing costs in the fourth quarter. and will again in the first quarter. However, due in part to the acquisition of we expect NHP sourcing costs will normalize over the course of the year.

As we previously disclosed, DSA demand KPIs improved in the fourth quarter, led by net book-to-bill of 1.12x on net bookings of $665 million, representing a meaningful increase from 0.82x in the third quarter. The sequential improvement was principally driven by small and midsized biotech clients, while global biopharma clients also contributed with both sequential and year-over-year bookings increases.

Proposal value continued to be stable to improved in the fourth quarter as it was for most of the year and cancellations remained at lower levels, consistent with the third quarter. At year-end, the DSA backlog modestly improved to $1.86 billion from $1.80 billion at the end of the third quarter. Collectively, these trends lead us to believe that the favorable DSA demand environment will continue in 2026. However, it is important to note that this improvement may not be linear as demonstrated in 2025 and also that fourth quarter and more recent bookings activity will not more fully benefit DSA revenue growth until the second quarter due to the normal lag between booking and study start.

The DSA operating margin was 20.1% in the fourth quarter, a 460 basis point decrease from the fourth quarter of 2024 and was 24.2% for the full year, representing a 150 basis point decline year-over-year. Both the fourth quarter and full year declines were driven by lower revenue and higher costs related to increased NHP sourcing costs and study starts in the fourth quarter as well as higher staffing costs as we had previously anticipated.

RMS revenue in the fourth quarter was $206.3 million, a decrease of 0.9% on an organic basis. For the year, RMS revenue increased 1.2% on an organic basis. The fourth quarter decline was primarily driven by 2 factors: lower NHP revenue and lower sales volume from small models in North America. NHP revenue was impacted by the timing of certain shipments, which, as previously noted, have been accelerated to earlier in the year.

In the small research models business, lower sales volume in North America reflected that in-house research activity by our large pharma and midsized biotech clients has not fully recovered. Revenue from academic and government accounts remain very stable, but the growth rate has slowed compared to prior year, due in part to the government uncertainty, including the -- with NIH budgets. Small model pricing in North America and Europe continued to be a positive contributor to RMS revenue and in Europe is offsetting the expected volume declines.

In China, small model unit volume continued to grow nicely. Revenue from research model services increased in the fourth quarter, but occupancy for our cradle sites remain pressured by the early stage biotech market environment. The RMS operating margin decreased by 90 basis points year-over-year to 21.9% in the fourth quarter, but increased by 110 basis points to 24.8% for the full year.

The fourth quarter margin was primarily impacted by lower revenue for small models in North America and an unfavorable revenue mix due to the timing of NHP shipments. For the year, the operating margin improvement was primarily due to a favorable mix related to higher NHP revenue as well as cost savings related to our restructuring initiatives.

Manufacturing Solutions revenue was $196.4 million for the fourth quarter, a decrease of 2.1% on an organic basis, and full year revenue declined 1.6% organically. The lower fourth quarter and full year growth rates were primarily driven by lower CDMO revenue, principally the result of the loss of 1 commercial cell therapy clients whose revenue declined by nearly $25 million in 2025.

Microbial Solutions had a strong year with growth across all 3 testing platforms: Endosafe, Celsis and Accugenix. However, year-end plant ordering patterns were not quite as robust as last year, which caused the fourth quarter growth rate to slow. We were pleased to see the performance of the Biologics Testing business modestly improve and return to growth in the fourth quarter after a year that was impacted by lower sample volumes from several large clients due to project delays or regulatory challenges.

The Manufacturing segment's operating margin increased by 340 basis points to 32.1% in the fourth quarter and by 140 basis points to 28.8% for the full year. We were pleased that the segment's operating margin continue to improve and move closer to the 30% level in 2025, driven principally by a solid performance from the Microbial Solutions business as well as restructuring actions to generate incremental cost savings, including in the CDMO business.

Before I hand the call over to Birgit to discuss our 2026 guidance, I'd like to take a moment to reflect on my long and fulfilling career at Charles River. As many of you know, in January, I announced my planned retirement effective at the conclusion of our Annual Meeting of Shareholders on May 5, but I am pleased to remain on our Board.

Leading the extraordinary team at Charles River as CEO for more than 30 years has been a profound experience and one of the greatest privileges of my life. Together, we built an industry leader with a culture shaped by our remarkable people, a strong and supportive workplace and world-class science, all of which has enabled us to deliver meaningful outcomes for our clients, and patients who rely on us. While I'm proud of our accomplishments from taking the company public on the New York Stock Exchange to transforming Charles River into a global leader in preclinical drug development services and then becoming a respected member of the S&P 500.

I am most proud and appreciative of the relationships that I've built over the last 5 decades with my colleagues, our clients and all of you, our shareholders and analysts, I sincerely thank you.

We have made tremendous progress over the last 12 months, ranging from NAMs and NHP supply to the biopharma demand environment and our strategic review making this the right time to transition the company into its next chapter. I'm delighted that Birgit Girshick will become our next CEO, and it will be in her capable hands to drive forward Charles River's strategic direction, future growth and operational excellence for many years to come.

Birgit has played an instrumental role as COO for nearly 5 years, leading our global businesses, guiding our digital evolution and most recently, driving our strategic vision. I have worked closely with Birgit for many years and have the utmost confidence in her leadership abilities and I will continue to work closely with her in the coming months to ensure a seamless transition.

As I sign-off on my final earnings call, I'd like to thank our employees profoundly for their exceptional work and commitment. It is their dedication to exclusive science and exceptional client service that has distinguished us as the preeminent provider of preclinical services. And always, I thank our clients and shareholders for their support over the years.

Now I will introduce our next CEO, Birgit Girshick, who will provide details on our 2026 financial guidance.

Good morning, everyone. First, I want to sincerely thank you, Jim, for the tremendous mentorship and close partnership you have provided over the years to prepare me for this incredible opportunity and also for your significant contributions to build the company into the industry leader that we are today. I also want to thank and acknowledge our Board of Directors for the trust that they have placed in me. I'm deeply honored to become Charles River's next CEO, and I am committed to building upon the solid foundation that Jim has established.

With a talented team at Charles River, we will continue to work tirelessly to lead the industry to accelerate the progress we have made in scientific innovation to advance drug development through our best-in-class science and client service and by continuing to focus on ensuring the company remains leading edge with world-class processes, a client-centric service offering and technology enablement.

I am very excited to be Charles River's next face of growth. I will now provide details on our 2026 financial guidance and the improving trends that we expect. Organic revenue in 2026 is expected to range from down 1% to at least flat compared to a 1.6% decline in 2025. We expect the operating margin will improve by 20 to 50 basis points from 19.8% in 2025, driven principally by the benefit from the acquisition of the assets of KF Cambodia.

This is expected to translate into non-GAAP earnings per share in a range from $10.70 to $11.20, representing growth of approximately 4% to 9%. We continue to expect that the acquisition will add approximately $0.25 to earnings per share this year, which has been embedded in this guidance. By segment, we expect RMS revenue to decline at a low- to mid-single digit on an organic basis in 2026.

There are 2 primary factors driving the decline. First, NHP revenue is expected to be below 2025 levels and represents an approximate 200 basis point headwind to the RMS growth rate. This is primarily due to the timing of shipments, which favored 2025 and will have a particularly significant impact on the year-over-year comparison in the first quarter of 2026. A reduction in NHP volume commitments to certain third-party clients will also affect the growth rate.

The other meaningful RMS headwind in 2026 will be cradle occupancy levels, which are expected to continue to be constrained as demand from early stage biotech clients remain subdued. Global revenue for small research models is expected to be flat to slightly higher in 2026 as unit volumes decline, particularly in North America and will continue to be offset by favorable pricing.

We expect DSA revenue will be in a range between slightly positive and a low single-digit decrease on an organic basis in 2026. As Jim discussed, we are cautiously optimistic that the favorable DSA demand trends will continue in 2026 supported by the recent improvement in biotech funding. We believe the strong bookings performance at the end of 2025 and and a continuation of favorable trends this year will result in a return to DSA organic revenue growth in the second half of 2026.

In order to achieve the top end of our DSA revenue outlook for the year, it would require continued momentum in the bookings environment resulting in the net book-to-bill average and above 1x for the year. This does not mean that every quarter will be above 1x, as our business isn't linear, and factors like backlog conversion and the timing of bookings or study starts also heavily influence the DSA growth potential.

For the Manufacturing segment, we expect the organic revenue growth rate will rebound to a low single-digit increase this year. This favorable outlook compared to a 1.6% organic decline last year principally reflects the anniversary of the loss of a commercial cell therapy client, whose program generated about $20 million in CDMO revenue during the first half of 2025. Microbial Solutions is expected to report a growth rate in the mid-single digits, similar to its 2025 levels, and we expect that some of the client-specific challenges that impacted the biologics testing growth rate last year will be alleviated, resulting in a slightly better performance in 2026.

Moving on to operating margin. We expect that the DSA segment will be the primary driver of the 20 to 50 basis points of consolidated margin improvement in 2026. As previously mentioned, the margin expansion will largely be driven by the acquisition of KF, as lower sourcing costs to procure NHPs to support DSA studies will generate meaningful margin improvement in the second half of the year once the model source post acquisition begin to be placed on studies.

For the year, we expect KF acquisition will benefit the operating margin by more than 50 basis points on a consolidated basis and by more than 100 basis points in the DSA segment. We expect the RMS and manufacturing operating margins will be stable in 2026. From an earnings perspective, we expect most of the earnings per share improvement in 2026 will be generated from operations, driven by margin expansion.

We expect to generate at least $100 million in incremental cost savings above the 2025 level to help protect the operating margin because revenue growth will not offset the level of annual cost inflation this year. As we discussed in November, the incremental savings will be primarily driven by initiatives designed to drive greater operating efficiencies through process improvement, procurement synergies and implementation of an integrated global business services approach.

As a reminder, we are now expected to generate a cumulative total of over $300 million in cost savings on an annualized basis based on actions that we implemented over the last 3 years. I have personally led many of the company's efforts to reduce costs through restructuring and efficiency initiatives designed to keep cost structure aligned with the pace of demand and to drive process improvement. I will continue to focus on streamlining our processes and ensure we operate a nimble, responsive and technology-enabled organization going forward.

In addition to significant cost savings and the $0.25 per share benefit from the KF acquisition this year, below-the-line items are expected to contribute more than a $0.30 benefit at midpoint to 2026 earnings per share, principally driven by a lower tax rate. We expect the first quarter operating margin will be in the mid-teens pressured by a few discrete factors, including an unfavorable mix from the timing of NHP shipments in the RMS segment, the acceleration of stock compensation expense to do the CEO transition and higher DSA costs primarily related to NHP sourcing and staffing.

These factors are not expected to be a meaningful headwind after first quarter, and we expect the operating margin will improve significantly thereafter. Mike will provide additional details on our first quarter outlook as well as the below-the-line items shortly. Before I conclude, I'm pleased to announce that we will be adding 2 experienced senior leaders to our team this spring. will join us on April 6 as Executive Vice President and Chief Financial Officer. Glenn is a seasoned financial leader and operationally oriented CFO with over a decade of experience in the health care industry.

Glenn has over 30 years of strong financial and operational management experience and has been CFO for multiple public companies as well as a Chief Operating Officer with experienced managing clinical, R&D and manufacturing teams. I also would like to thank Mike Knell for his leadership of our finance organization during the CFO search. Mike will continue in his current position as Senior Vice President and Chief Accounting Officer, and will play an instrumental role in the success of our organization. I'm grateful for his dedication and commitment to Charles River.

We are also pleased to have Kerri Daley join us on March 30 as Senior Vice President and Chief Legal Officer. Kerri brings 25 years of sophisticated legal experience to Charles River and is an experienced leader that has been focused on advising multinational life science companies across complex regulatory environments. We are pleased that she will enable us to proactively manage our highly regulated science-led organization by combining our legal, compliance, communications, government relations, security and ESG initiatives under 1 leader.

I look forward to welcoming and partnering with both Glenn and Kerri in the coming months. I would also like to reiterate my appreciation for being named Charles River's next CEO. It is an honor that I'm proud to accept. I am firm in my commitment to drive forward the company's strategic direction and growth imperatives, including the actions that we outlined in November to enhance long-term shareholder value.

Over the past 5 years and more, I've had the pleasure of meeting many of you at various investor conferences and related events. These interactions have provided valuable opportunities to exchange ideas and insights which I look forward to continuing. I'm eager to reconnect with those of you I have met previously and for those who might have not yet had the chance to meet, I look forward to doing so in the coming months.

I'm committed to maintaining open and transparent communication with our investor community and welcome the opportunity to introduce myself and discuss our vision for the future of Charles River.

Now I will turn the call over to our interim CFO, Mike Knell. Thank you.

Good morning, and thank you, Birgit. It's an honor to lead our talented finance team for the last several months and I look forward to continuing to work closely with them and our new CFO to drive our future success. I would also like to thank you, Jim and the Board for the opportunity to be interim CFO.

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, impairments, costs related primarily to restructuring initiatives gains or losses from certain venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation.

Let me start by providing some additional details on our 2026 guidance. Birgit highlighted our organic revenue growth and non-GAAP earnings per share outlook. On a reported basis, expect revenue will be between at least flat and 1.5% growth. FX is expected to be a tailwind as the U.S. dollar has continued to weaken and is expected to benefit reported revenue by 1% to 1.5%. We also expect a small revenue benefit from PathoQuest, once the acquisition closes later this quarter.

We have provided additional information on FX rates and our currency exposure in the appendix of our slide presentation. On Slide 31, we have also provided the segment outlook for 2026, which includes reported and organic revenue expectations. As Birgit mentioned, we expect several headwinds to impact the first quarter operating margins and earnings per share.

Our outlook for the first quarter of 2026 assumes revenue will be essentially flat to slightly negative on a reported basis and will decline at a low single-digit rate on an organic basis. By segment, the RMS growth rate will be negatively impacted by lower NHP revenue due primarily to the timing of shipments, which will have a nearly $10 million impact on first quarter RMS revenue.

The Manufacturing segment's growth rate will reflect the difficult year-over-year comparison with regard to commercial revenue in the CDMO business, which also has an approximately $10 million impact on first quarter manufacturing revenue. We expect the DSA rate of decline will improve slightly from second half 2025 levels. But as a reminder, the benefit from strong bookings activity in the fourth quarter will not yet be evident in DSA revenue in the first quarter.

From a first quarter earnings perspective, we expect non-GAAP earnings per share will decline at a high-teens rate year-over-year. As Birgit mentioned, there are several discrete factors that will impact the operating margin in the first quarter resulting in an operating margin in the mid-teens. The 2 primary factors are the timing of NHP shipments and higher stock compensation costs due largely to an acceleration of the expense related to the CEO transition.

Stock compensation is expected to approximate a $0.15 headwind to EPS in the first quarter. In addition, the DSA margin will continue to be pressured in the first quarter as it was in the fourth quarter by higher NHP sourcing costs due to higher-than-anticipated demand for these studies as well as increased staffing costs, but these DSA headwinds are expected to dissipate after the first quarter.

Normalizing NHP study-related costs, due in part to the KF acquisition, improving demand trends and the strong year-end bookings are expected to benefit revenue and generate sequential improvements in the DSA operating margin as the year progresses.

I will now provide details on nonoperating items. Unallocated corporate costs in 2026 are expected to be similar to the 5.5% of total revenue reported in 2025. We expect unallocated corporate costs in the first quarter to be elevated due to the timing of stock compensation expense related to the CEO transition, but this does not have a meaningful impact on the full year.

For the remainder of the year, we expect unallocated corporate costs to trend favorably because of the benefit from prior cost-saving initiatives and performance-based bonus accruals are expected to be lower as targets are reset for the new year. The non-GAAP tax rate for 2026 is expected to be in the range of 22% to 23%, a decrease from 24.6% in 2025. The anticipated decrease in the tax rate is primarily driven by the 2026 tax rate benefits related to the enactment of the One Big Beautiful Bill Act or OB3 and a favorable geographic mix.

In 2025, we lowered our net interest expense by shifting debt to lower interest rate geographies and by repaying debt borrowed for stock repurchases earlier in the year. At the end of the fourth quarter, we had outstanding debt of $2.1 billion, with approximately 70% at a fixed interest rate, compared to $2.2 billion at the end of 2024. This equated to a gross leverage ratio of 2.1x and a net leverage ratio of 2.0x at the end of the fourth quarter.

We expect gross and net leverage ratios will remain below 3x after funding the KF and PathoQuest acquisitions. Total adjusted net interest expense in 2026 is expected to be in the range of $95 million to $100 million compared to $102.1 million last year. We expect higher average debt balances in 2026 as a result of the KF and PathoQuest acquisitions, but the decrease in net interest expense reflects the full year benefit of 2025 interest rate reductions and the favorable geographic interest rate mix.

As we discussed in November, we will continue to take a disciplined approach to capital deployment and plan to regularly evaluate the optimal balance between acquisitions, debt repayment, stock repurchases and other uses of cash. For 2026, with the deployment of over $500 million in capital for the KF and PathoQuest acquisitions, we currently intend to focus more on debt repayment and maintaining dry powder, as we continue to evaluate potential M&A opportunities.

We will also continue to regularly evaluate all uses of capital throughout the year, including stock repurchases. However, we currently expect the average diluted share count will be slightly higher in 2026. For 2026, we expect free cash flow will be in the range of $375 million to $400 million, representing a decrease from $518.5 million in 2025.

The decrease primarily reflects 2 main drivers: higher performance based cash bonus payments due to the 2025 outperformance which are paid in the first quarter of 2026 and deferred compensation payments related to the planned CEO retirement. Capital expenditures for 2026 are expected to be approximately $200 million or approximately 5% of total revenue and a slight reduction from the 2025 level of $219.2 million.

This outlook reflects our disciplined approach to managing capital investments while continuing to invest strategically in areas to support client demand. A summary of our 2026 financial guidance can be found on Slide 39.

In conclusion, we remain encouraged by the recent demand trends and by the potential to return to organic revenue growth in the second half of the year. We are laser focused on driving our strategy forward, including through selective and strategic M&A that aligns with our core competencies, taking decisive actions to deliver continued benefits to drive efficiency and process improvements that will strengthen our organization and enhance our flexibility as demand rebounds and through maintaining a disciplined capital allocation approach. These actions position us well to drive long-term shareholder value creation.

Finally, I want to thank Jim for his tremendous leadership and many contributions during my time at Charles River and throughout his career, and we look forward to continuing to execute on our strategy under Birgit's leadership. Thank you.

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

[Operator Instructions]. And we'll go first to Eric Coldwell with Baird.

I wanted to dig into the broader topic of NHPs. There seem to be some, I don't know, dichotomy in the outlook and results here between RMS and DSA. Hoping you can just walk us through this and help clear it up. So RMS is facing material headwind from lower NHP volume. We've also heard lower sales from one of your competitors, but at the same time, DSA is facing a material headwind from higher NHP sourcing costs and strong demand for NHP studies.

So I'm just hoping you can walk us through some of these dynamics, the nuances between what's happening in RMS and what's happening in DSA and then talk about some of the drivers of the higher sourcing costs that are impacting you in the near term.

You guys want to take that?

Yes. Happy to take it. So let me start with the RMS volume. So the RMS volumes, the impact in Q4 is primarily timing. So looking for the full year, the shipments have shifted, so -- and with that, Q4 was lighter than the year before. Looking forward, we talked about RMS volumes being a driver of less revenue in Q1, that is both timing as well as a little bit lower volumes.

For our DSA business, we talked about higher sourcing costs, particularly in Q4, having some impact in Q1, we had more NHP studies coming in than we had expected in 2025 and early '26. So with that, we had to go to the open market and buy some NHPs at a higher price, which will have an impact on ROI. Part of the disconnect or that what you're seeing here is also the fact that we have -- always have 2 sources, so an Asian source as well as the Mauritius source, and they don't always connect perfectly of what we have available and internally from our own farms versus what we have to buy on the open market.

So it's really mostly timing as well as timing between the RMS business, shipments when they're coming in, but also what kind of stores we are needing, how quickly we're needing them and that we had to source from the open market, if that makes sense?

It does. And if I could just ask a follow-up. What is the -- you provide in your appendix the NHP utilization for '24 and you gave an update for '25, which was a pretty notable growth. Is it too early? Or would you care to share your thoughts on the full year for internal demand compared to that data point provided in '25?

For 2026, yes, it's a little bit too early. We're really just starting the year. But for 2025 compared to 2024, what you're seeing here is a higher number of NHP studies coming through, which is a little bit of mix, but also substantiate the need for this very important research model and that this research model is here to stay for a long time, which also required us to assert our supply chain, and therefore, the KF Cambodia acquisition.

We'll go next to Luke Sergott with Barclays.

So I just kind of want to talk about the backlog here and the DSA bookings they're starting to ramp continued strength there. But you guys also hired ahead of what was expected to be that demand. So as bookings environment, baked within your guide, continue to improve, can you talk about your hiring needs as you continue to ramp whatever you're going to do on the DSA to exit the year? Do you guys have enough or should we expect some type of pickup there? Just trying to rightsize what the cost outs plus the capacity utilization and your hiring needs of what's going forward.

We -- from a capacity point of view, we have sort of 2 issues. We have physical capacity, which is in pretty good shape right now. So we're not optimally using our facilities, which obviously that's a goal of ours, but still as the -- hopefully, the demand increases, we'll be able to utilize space that's already built and be able to fill that.

We've been really careful for years, actually, but really careful in the last 2 or 3 years to get our headcount in sync with with demand and with our revenue. Obviously, this is a people business, and it's more than half of our costs. And last year, in 2025, we had some incremental people in our lab sciences building business and to fill vacant spot. So I think we're in good shape.

Senior scientific staff and study directors and people like that are particularly good shape. And principally, we're looking at direct labor. We need to bring direct labor on probably a quarter before we actually need them because there's some training associated with that. But we're quite confident we'll be able to do that in a measured fashion to both accommodate the work and not be a drag on our operating margins.

Got it. And kind of related to that, and this is kind of the overall with the AI fears based within the market and particularly within your business, you kind of gave the number there from an FTE perspective of percentage of cost. But as you guys continue to restructure, get more efficient, talk about -- I don't think that there's AI risk, but clearly, the market doesn't agree with me. So kind of walk us through the bull case and why you aren't going to be impacted by any AI coming through considering how much wet lab work you guys need to do?

Yes. Thanks for that. So we were frankly surprised at the sort of violent share price reaction to the AI conversations been going on across multiple industries actually for the last couple of weeks. So it is what it is. We get caught up in that. And so there are several things that we'd like to say about that. AI is a NAMs, and we're focused on NAMs to the extent that the science is beneficial, the science is additive.

And we view AI as an enabling technology to support our work over the long term to complement it. But we don't see it as a disruptor. AI and -- so Discovery has been around for a while by many of our large clients. So that's not new. The conversations really haven't changed at all. And so for us, AI and NAMs is sort of a broader, longer-term evolution rather than something that's immediate.

We continue to see ourselves as an essential and logical partner to help validate NAMs, including AI as the if and when they become beneficial and additive, as I said. And so we hope to be able to run interference in a positive way for both our clients and the regulatory agencies to validate these technologies if they're beneficial, so the NAMs are basically crude right now, AI is really early.

It's a promise of AI that we think could be beneficial to Discovery and we don't quite see it in safety. We've had some investments in AI to virtual control groups, which we talked about in our prepared remarks, some of our scientific report writing, our sales effectiveness. We have data scientists that are working on this.

So we're embracing -- I guess, the bottom line for us is we're embracing alternative technologies sort of strategically, but the science will prevail. So the extent to which these technologies are beneficial, we'll use them -- we think we'll use them more. We, the whole industry in discovery to help our clients get to a lead compound faster. Hopefully, that will have more molecules moving through preclinical tox and more molecules moving into the clinic and hopefully more molecules being approved.

So we acknowledge it. We embrace it. We are participating in it. we actually don't see this as a threat to the company. And if these technologies are better in any way besides just being augmented, they'll be embraced by the whole industry. Definitely nothing to add.

We'll go next to Max Smock with William Blair.

It's Christine Rains on for Max. Congratulations to both Jim and Birgit on what lies ahead. And for our question, just hoping you can give some context on DSA cancellations in the quarter? I think you said they were consistent with last quarter levels. But curious if they were within your normal range. And if you could remind us what your normal range of cancellations is? And also the distribution of cancellations due to client funding versus clinical and other competitive reasons were in line with expectations in the quarter?

So cancellations and slippage, as we call it, are sort of elements of our business. So slippage is when studies don't start when we anticipated they would start, when the clients initially anticipate. And things just canceled because, I don't know, priorities change, therapeutic area focuses changes or the drug just isn't performing well before we even get a hold of the clients just can't get it to a dosage that won't be harmful to the patient.

So we have cancellations all the time and always will. We have penalties for cancellations with insufficient notice, which tends to cover whatever cost we've been impacted by up to that point. And with a decent backlog, we managed this really well. There's very little variability without the slippage or cancellation. So we've never given the actual percentage or dollar amount or whatever nor will we. But we're definitely back to sort of normal expected anticipated cancellations and we can manage that really well, again, without the volatility in our business model and to be able to accommodate clients across the board, both large pharma and biotech.

And the cancel -- and just to go back to the sort of 9 months backlog we have. We like that. It gives us a really great line of sight if a study cancels or slips, we can almost always, not always, but almost always be able to slot something in the queue into real-time revenue-generating work to replace whatever has slipped and canceled. So as you know, because you asked the question, cancellations had gotten a couple of years ago much higher than we would have liked that we had seen historically, improved last year and is now sort of back to normal levels, impossible to predict, but we wouldn't anticipate, given the sort of market dynamics, cash coming into biotech, pharma companies finishing sort of skinning down their portfolios that they would increase again in any significant way.

We'll go next to Dave Windley with Jefferies.

Congrats, Jim. It's been a nice ride. I looked back at my initiation, I think this is 100 conference calls with you, so thanks for the ride.

It's been a pleasure. It's a pleasure, Dave.

My question for you is basically a temperature check on demand or urgency of clients last year, you entered into '25 with some clients kind of booking some fast burn wanted to start quickly type studies. Your demand book-to-bill in the fourth quarter certainly was strong. It sounds like month-to-month continued to improve. Just interested in any color you can provide about how that has continued into the early part of '26 knowing that you often remind us that it's not linear in January sometimes gets off to a slow start. But just kind of comparisons to maybe this time last year and continuation out of the fourth quarter, would be great?

So I'll start and maybe Birgit wants to elaborate. Demand is improving from a host of factors, so significant inflows of cash into the biotech coffers pharma company sort of finishing some of their blood and shrinking down their infrastructures and just the tariff stuff being sort of over and whatever pricing situations going on between Washington and the pharma company. So we think that, that sort of passed them.

So demand seems to be improving. We -- as I said a moment ago, we like the backlog situation you will recall, Dave, 2 or 3 years ago, the backlog got to about 18 months and we do we love to tell we hated it. It was just way too long. And clients got to the point of canceling studies because they just book slots with study.

So last couple of years, we've seen a lot of post IND work. We'll always have both pre and post. We're seeing more sort of general talks now, which is earlier than the So that's good. we're moving towards a greater balance. So that would indicate clients are anxious to the studies and we'd want to do that earlier, which obviously is a good thing for us.

And while we do get some late-stage work, sometimes we don't do the early stage work that's typically we like both and get both. So if we get the early work and the drug is progressing nicely, we'll typically get the post IND work as well. So sort of a balanced demand quotient right now. Birgit wants to add to that?

Yes, happy to, Dave. So maybe just to add that the environment feels a lot more stable than last year. So discussions with is all about how they can increase the number of candidates for -- in the upcoming year and upcoming years. So they are ready -- they're definitely ready back to work, they have their programs lined up. From a biotech -- small and midsized biotech, a lot more positive in the marketplace that we are hearing about.

Certainly, there's still some uncertainty in pockets. Certainly, we're happy about our net book-to-bill of above 1 in Q4, so we're hoping that the demand trends will continue and get us back to growth in the second half of the year.

Great. If I could follow up real quickly. Relative to that, better environment, continuing improvement, the book-to-bill that you just posted in the fourth quarter, your comments about achieving the higher end of your revenue guidance range requires a 1.0 book-to-bill again with caveat that things aren't linear, but that strikes me as a relatively conservative bar compared to what you just did, perhaps add some perspective to that, please?

Yes. I'm happy to start and then certainly -- I mean, yes. So as you outlined, we need a book-to-bill above 1, and it's not going to be linear. So the quarters are not all going to be above 1, most likely. And the reason for our outlook and looking at H2 for growth on top end is really that there's other factors in there. Start times, so bookings are still 1 to 2 quarters out before they can actually start; the conversion of the backlog, the timing for that; and just then overall, the study starts from the book, but when we're getting the booking to when we actually can start and get it done in there. So just a lot of different factors that are playing into it, but certainly very positive of those trends continuing.

We'll go next to Charles Rhyee with TD Cowen..

Maybe first Jim and Birgit, congratulations to both of you and Jim, good luck for the future, and Birgit looking forward to meeting you soon.

Maybe if I could just ask about sort of the guide for coming up here. Understanding the headwinds that you kind of laid out, particularly for the first quarter, and when you talk about sort of this material improvement in margins going forward, it sounds like you're saying that, obviously, some of these kind of reverse as we exit the quarter, can you kind of lay out which ones fully ended or which ones might carry through? Or should we really kind of assume sort of a big step function in margins into the second quarter and then it kind of flattens out there? Or should we be modeling more of a gradual ramp back in margins as we think through the course of the year?

Mike, why don't you take that?

So when I think about the sequential improvement in the operating margin is really 3 main drivers for that. The first one, we're going to get continued benefit from the cost savings and our efficiency initiatives as we go throughout the year. And then second one is the lower sourcing related to the KF acquisition. So we're going to -- we solidified that supply chain.

And I think the headwind that we're seeing in Q1 of having more bookings and have to go out to the open market to purchase those is really dissipated by the fact that we have such a majority-owned portion of that supply chain. So that will go away. And then our cautious optimism that demand is going to continue to improve over the course of the year. So that strong book-to-bill that you saw in Q4, that's going to materialize into revenue as we progress into 2026.

And maybe just a follow-up then, does that -- the extra sourcing cost where you kind of had -- because of the greater-than-normal number of study start, so you have to kind of go outside more demand in the spot you had. Is it that you expect that kind of level of sourcing required and that chaos then offsets that or is it that you expect sort of that kind of bolus of studies are to maybe subside and so you don't need to tap the market outside of your existing supply?

Yes. I think it's a little bit of both, right? You're going to get the impact of the KF in the second half of the year. We've had obviously more time to plan for the increased demand in the second quarter. The other pieces of Q1 are the NHP timing, so that is just a function of when the models are ready to be used and shipped and when the demand is, and that's simply timing in Q1.

And then, of course, in Q1, you've got a stock comp, right? That's just the accounting rules of how you have to accelerate the expense over the service period. So with the retirement and the succession, we're going to get a pretty heavy headwind in Q1 on the stock comp, that's improves throughout the year, too. It's not a headwind on the year.

We'll go next to Elizabeth Anderson with Evercore.

Congrats, Jim, Birgit, on your new roles. I think that would be a good transition. Maybe just digging into the outlook here. Can you talk about the demand environment in China right now, particularly in regards to RMS, but anything else you're seeing there? And then anything you would the improvement in biologics to -- that you mentioned for the fourth quarter?

So our China business continues to perform well. It's all RMS, as you know. And it's an important market for us, and we feel that we've elevated the craft of producing really high-quality pristine animals and sort of industry the benefit of utilizing those in terms of the quality of the work that they do. And China is becoming a more sophisticated, innovative local, for sure, a lot of investment by the government.

And you didn't specifically ask this, but I'm just going to this in there, we're looking closely at China with regard to what additionally we can do there besides RMS given that it's a big -- obviously, a big patient population, drugs developed in China have to be tested in China and so -- except for the research model power, which we're thrilled with, we're not accessing any of the service revenue associated with that.

So China may become a bigger part of our own portfolio going forward. Biologics was -- has been a really good business for us for a long time and had sort of a complicated '25 due to some lower sample volumes from a couple of large clients due principally to project delays and regulatory challenges. But the business returned to growth in the fourth quarter of '25 due to higher demand, principally from Europe, and we would expect some of those client-specific challenges.

Those are behind us, as we move into '26. So an important business, obviously, only testing large molecules at least half of the drugs that are approved are large molecules going forward. So a business that we think we have a strong position in, it has had years of very nice growth and escalating operating margins. So it's beginning to sort of come back. It was a business that was very much benefited by COVID and things sort of slowed down and now we're beginning to see them ramp up again.

We'll take our next question from Michael Ryskin with Bank of America.

Great. I'll just do one given the time. Just following upon your earlier comments on DSA demand environment, what you saw in 4Q expectations for the coming year? I kind of want to go back to 2025, you had a pretty strong start to the year and a little bit of a lull over the summer months in terms of demand and then a pickup again in the recent months. Just wondering, that volatility, that uncertainty, those fluctuations, would you attribute that more to the macro environment, the geopolitical environment, rates environment?

What I'm getting at is what gives you confidence that we wouldn't see something similar this year or the 4Q -- the strength you saw in '25 is a little bit of a red herring and we take a step back? Just what makes you think that last year was an outlier in that regard?

I mean, the big impact from us was overall soft demand from our client base, both large and small companies, both new and old companies who are really working on the -- biotech companies were really concerned about access to capital, whether they had enough funding to to work on a whole range of drugs. So it's quite clear to us that they paused some drugs before they got filed their IND. So we think they're going to be back to that.

And big pharma is facing another patent which we saw this, I don't know, 12, 13, 14 years ago, they begin to pull back on that cost structure. By the way, 1 of the things we do is help them alleviate or reduce some of their internal costs because we can -- the work that we do in safety assessment is as fast, if not faster, lower price point and probably in most cases, better science. So we're being cautious. We said that. We're trying not to overcall it because it's not linear.

And one quarter doesn't necessarily portend the next, but what is beginning to change is the massive amount of funding that went into the biotech companies, $28 billion in the fourth quarter, was quite significant. And so if that continues, January was a good month as well, but if that continues, that should generate incremental demand going forward. There's usually a lag time between cash coming in and then booking studies.

So we're going to see that in the second quarter, but more pronounced in the back half of the year. The fact that book-to-bill was above 1x and much higher than that in December is obviously a very important point, and that's also going to benefit the second quarter and the second half of the year. So we're trying not to overcall it. But what we have been looking for and what we've been hearing from our clients just in terms of funding and access to continued funding is beginning to happen.

And since the preponderance of our revenue, we have really big market shares in big pharma, but the preponderance of our revenue and the growth rate for the last decade has been principally from hundreds and hundreds and hundreds of biotech companies, none of whom have the internal capacity to do anything that we do for them. So they must outsource. They don't have to outsource to Charles River, but most of them do. So they must outsource. And so -- just given the number and diversity of new modalities to treat or cure diseases, these folks have to get back to work and that should generate additional volume for us.

And we're obviously comfortable with the guidance we've just given today. And again, we're being -- I think cautiously optimistic is really a good way to put it.

We'll go next to Casey Woodring with JPMorgan.

Jim, again, congratulations on retirement and Birgit looking forward to working with you in the new role. Yes, maybe just sticking to one. On the capital deployment comments, so you talked about maintaining dry powder for M&A. How should we think about that in relation to some of the comments you made about the opportunity in China?

And then how do we balance that versus repos this year? You mentioned the violent share price movement of late. And then also curious if you're looking at other deals like KF that could potentially alleviate some NHP sourcing costs, some of the headwinds that you've seen in DSA to start the year?

So our NHP sourcing volume is in really good shape now given Noveprim and the deal that we just did with KF. So it's how that we'll need to source anything further or buy anything further. We already had plans to increase the Mauritian operation. And if the demand continues, we can increase both of them. So we feel that just in terms of quality of the NHPs price point, just the quality of the farms that on, we're really, really comfortable in that.

Capital deployment for us is pretty straightforward. We like to keep our leverage below 3 turns, and we've been able to by many, many businesses over the years, and we lever up to high 2s, occasionally over 3. And we usually delever within 12 months, so we feel really good about that.

Our balance sheet is in really strong shape pre these deals and even after these deals, our leverage is just in the high 2s, and we'll continue to work it down. So yes, we have a committee of the Board that I sit on and we try to object -- not try to, we objectively look at uses of capital every single quarter in tandem with our Board meetings. Paying down debt, share buybacks, M&A is always on the table.

So we're certainly continue to look at M&A in some of the areas that we've talked about bioanalysis is probably top of our list, and as I said, we're beginning to look closely at China, way too early to predict that. Buying back stock is totally dependent on -- what else do we have a better use? And what does the share price look like? And we continue to pay down our debt.

So I think we have a lot of flexibility right now. We just had a Board meeting last week, where we talked about all of these things have another one in May, and we'll continue to stay on it. But there's definitely some areas that we'd like to continue to fill in the portfolio from M&A. And every once in a while, we may come of our businesses where we don't think it has long-term value for us. And so we would take a look at divesting those as well.

Our next question comes from Justin Bowers with Deutsche Bank.

Congratulations, Jim and Birgit. So I want to sort of follow up on earlier question. And hopefully, you can educate us a little bit more on NAMs. If I recall, it's about 20% of DSA revenue. Can you provide us with a sense of how the client base is using these methods? And just the question is, are these technologies being platformed by a high-end full of clients are more concentrated? Or is adoption and uptake fairly diverse across a large number of clients that are using this technologies perhaps to validate existing in vivo methods?

So we're seeing NAMs across big swath of our client base. We would say that big pharma has been looking at utilizing in vitro or non-animal technology sort of forever, lots of that's proprietary to each company and some of it's just sort of standard stuff. It's definitely more pronounced in discovery, as we've been saying now, as we've been talking about this most of the last year, and everybody hopes that some of these technologies, albeit somewhat anecdotal, help the process of accelerating our clients getting to a lead compound and spending less time on drugs that have a low probability of getting into the clinic and more time on drugs that have a higher probability because we get paid either way, whether the drug advances to the clinic or not.

So we're there to help them and if the technology helps us make a determination with and for the client, we're certainly happy to do that. As we've said before, there's PathoQuest deal that we just talked about on this call is a non-animal technology, next-generation sequencing that literally is replacing some of the animal base work that we do in our biologics business. And that's a really good that we're happy to provide that service and our clients are demanding it and it gives better answers faster.

We also have another business we talked about in the call, Retrogenix. We're looking at off-target effects of drugs, which is really, really important. So there are some NAMs now that are beneficial and utilizable. There are some that are sort of hopeful, but still early days, and we believe we're only going to see it in safety in a sort of narrow monoclonal antibody swath that the FDA has talked about. And too much of a safety risk to be focusing on these as replacements, but likely to be augmentative to some of the wet lab work, particularly in the early phases.

So we'll continue to license in technologies and periodically buy something that we think is really beneficial for our clients and we generate decent revenue and margin. We'll work with our clients in validation, but this is a long-term marathon and not something that's going to be done quickly or overnight.

And if I may, with just a quick follow-up since this is so topical. I was speaking with a top 10 pharma last week, and we were talking about AI and how that would potentially impact early stage. And they said, well, maybe we can see a scenario where we start with 20,000 targets instead of 10 at the top of the funnel. Can you help us understand how that would sort of flow through your business? And if that would be accretive, dilutive, neutral?

Yes. More targets would be -- if you can screen through more targets at the same pace or faster that's obviously really beneficial for our clients and could be beneficial for us as well. As I said, if they can go -- just using it as if they screen through 20,000 potential drugs that hit the target and then they can focus on the ones that have the highest probability of actually working and being tolerated by patients and get into the clinic that should generate incremental work for us, and it should also have a higher hit rate for the drug companies.

It's sort of shocking, I would say, that all of the U.S. pharmaceutical and biotech companies in the aggregate only -- we only have between 40 and 50 new drugs a year, right? So if that could be 100 or 200 or 500 that obviously would be better for society, and obviously, would be better for human health, but definitely will be better than Charles River, and we'll be better for our clients.

So the extent to which AI can get its arms speaking to it as if it's a first to get it sounds around, more data earlier and have a bigger funnel that I think that would be beneficial for all of us.

We'll go next to Patrick Donnelly with Citi.

Maybe just one -- actually covered a lot of ground here. Maybe the divestiture process. Jim, can you just update us where we are there? It sounds like negotiations still going with the buyers? What hurdles are left? It sounds like it'll be done by midyear, when that capital comes in the door? Is that deployed relatively quickly? Just a quick up on that process would be helpful. .

The process is ongoing. We have sophisticated investment banks working on these divestitures. We have interested parties. The comment that we made in our last quarter call still seems reasonable that we hope to close the divestitures sometime in the first half of this year and perhaps, and hopefully, we can sign something sooner, but it's difficult to tell. I mean, these deals are signed until they're signed and they're not closed until they're done. So we're very committed to finalizing the process.

We think we have some interested folks and should be a good result. In terms of what we do with the proceeds, again, it's sort of what we do with any of our proceeds, what we do with any of our cash as we look at M&A, debt repayment, share repurchases, all of the above or just 1 of the above. And it's always contextual and depends on what's going on with market demand, what the rest of our M&A portfolio looks like what the share price looks like and -- we do that, I think, very well, very objectively, very thoughtfully every quarter. We don't have any sort of preordained feelings about that. So when we bring these deals to closure, we'll see what the world looks like at that time in terms of what we do with the assets.

Okay. And then maybe one last quick one on the NHPs. Obviously, KF is a nice impact this year. As you look out beyond this year, is it almost a compounding effect on the NHP side where you benefit more on the savings as you in-source more in '27 from Noveprim and being on board there?

Do you want to take that, Mike?

Yes, absolutely. So we said that there would be a $0.25 benefit this year and then even next year would be even further, we think that there's approximately $0.60 accretion from KF as we go into 2027.

We have no further questions in queue. I will now turn the conference back to Todd Spencer for closing remarks.

Great. Thank you for joining us on the conference call this morning. We look forward to seeing you at upcoming investor conferences in March. This concludes the call. Thanks again.

Thank you. That does conclude today's Charles River Laboratories Fourth Quarter and Full Year 2021 Earnings Call. Thank you for your participation, and you may now disconnect.

Hi, everybody. Welcome to the JPMorgan Healthcare Conference. I'm Casey Woodring from the Life Science Tools and Diagnostics team. Pleased to be joined by Charles River Labs CEO, Jim Foster. Jim is going to give the corporate presentation, and then we'll jump right into Q&A afterwards. Jim, the floor is yours.

Thanks so much. Pleasure to be here, as always. Our safe harbor, Reg G and quiet period disclaimers. So we are a nonclinical CRO working with clients from early discovery all the way through manufacture of their drugs. We've got 20,000 employees right now and 2,500 with advanced degrees. 70% of our revenue comes from pharmaceutical industry. We've actually reduced the number of locations that we have, but we still have 120.

So we're pretty spread out in most relevant geographies. We have the #1 share position in most -- in many of our businesses, particularly research models, Safety Assessment and microbial. We're proud to have worked on at least 80% of all the drugs that were approved by the FDA over the last 5 years. And the market that we play in, in the aggregate is about $25 billion.

Logically, revenue breaks down 66% in North America, where the preponderance of biotech is 27% in Europe and a small amount, 7% in rest of world. And the client base is 40% to 45% biotech, 25% to 30% global pharmaceutical companies, 8% academic and the rest other and other is CROs, animal health, life sciences, CDMOs and consumer products.

Revenue, LTM is about $4 billion. Really pleased with our free cash and operating cash flow. You see our way up LTM. Operating margin, notwithstanding declining sales the last 12 months is up a bit as is the earnings per share. So we're pleased with those numbers.

So 3 segments. Research Models segment was sort of the essence and foundation of the company. We're the global leader, a little over 20% of what we do. Discovery and Safety Assessment, which is our largest franchise, principally drug safety testing, largest in the world is 60%. And our Manufacturing Solutions business is about 20%. So RMS and manufacturing are about the same size with Discovery and Safety being the preponderance.

You can see we run from basic research all the way through to commercial manufacturing. So looking at RMS, where the company started, the production sale of principally small research models. Really important that we're in close proximity to major bio-hubs. We have a lot of products that's being shipped. Great to have a research model business to go in tandem with the discovery and particularly the Safety Assessment business, supplying ourselves with research models.

Big focus on digital enterprise these days to communicate more effectively with our clients. We have a couple of big service businesses in RMS. One is the GEMS or genetically engineered models where we either have knocked in or knocked out genes to express certain disease states. In our CRADL business, where we provide space to our clients for basic R&D. So that -- except for the last couple of years, those 2 services have been growing nicely. They've got really good operating margins. So we're pleased with them.

We have about a 40% share. So we've always had -- we've had a #1 share position as far back as I can remember. We're obviously pleased with that. DSA, discovery piece is a multiplicity of things. It's both in vivo animal-based and non-animal-based capabilities.

Principal focus is on oncology and CNS. We do a lot of integrated studies across multiple parts of the business. The largest part of DSA is the Safety Assessment business, which is -- we are by far the global leader. We've been in this business about 20 years, a little over 20 years with a large and growing lab sciences capability, particularly in bioanalysis, which we continue to invest in, and we've talked a little about doing some M&A activity in that space, which I'll talk about a little bit later.

And we have a sort of a plethora of very complex specialty capabilities, everything from ocular tox to infusion to inhalation to gene tox. So we're proud of that. About a 30% share. Our next biggest competitor, which is LabCorp, has a 10% share, and then it's a smattering of very small players, both in the U.S. and Europe and some now in China. We do about 1,500 INDs a year. It's a big part of our business. Clients historically are very focused on getting their INDs done usually by the end of the calendar year and trying to drive these molecules into the clinic.

Manufacturing Solutions, the third piece, which is comprised of 3 parts. The first and largest is our Microbial Solutions business. So all injectable drugs and medical devices have to be tested for the absence or at least a low level of endotoxins, which is a contaminant. So this is required by the FDA. This has been a fabulous business for us. It's been -- we've owned this business for 30 years. It's grown steadily, has great operating margins. We have great IP in this space, and we're way ahead of the competition.

Second piece is the biologics testing business, which is sort of testing both antibodies, cell and gene therapy products and both RNA and CRISPR products just to make sure that they also haven't become, let's say, contaminated with human viruses, making sure the purification methodology works. So we do some cell banking and characterization there, a very good business for us historically.

And our last piece, which is a new piece for us, which is cell and gene therapy CDMO. And our primary expertise is in gene-modified cell therapy, which we're very complex, and we're proud of doing that. Our Microbial Solutions business has sort of a razor and razor blade component to it and 65% of our revenue is repetitive as folks buy the new blades to go into our equipment.

So definitely focused for long-term value creation here, particularly in our preclinical drug development piece. Our global pharma business has been -- has finally bottomed out as clients continue to reduce their cost structures and sort of reprioritize what they're doing. We've seen really positive signs from our small and midsized biotech clients in the second half of last year. And of course, the fourth quarter of last year was the highest infusion of cash from the capital markets into biotech.

So we're beginning to see the biotech -- our biotech clients, which are thousands, be better financed that should drive demand going forward. We continue to be focused on expanding our portfolio, principally through M&A. It's been the principal driver of our growth and how we've created this portfolio over the last, let's say, 20 years. We're also very interested, particularly with big pharma, even though they don't necessarily contract with us through the life cycle of the drug, we want as much wallet share of the clients' business. So we have very big shares with all the big pharmaceutical companies. And with most of them, we have long-term contracts right now.

Focus on NAMs, so non-animal technologies, we anticipate that we will be the conduit for validation of non-animal technologies, both with the FDA and with our clients. Clients are unlikely to do it on their own, nor is the FDA. So they'll need us to do that and sort of compare and contrast things with using research models. So we continue to be really focused, obviously, on free cash flow generation. You saw in the preceding slide that, that was quite significant last year, and we are intently focused on improving our operating margins continuously.

So we've had a lot of interesting actions in 2025. We did a deep strategic review of our entire portfolio. Everything was on the table. Every possible change or incarnation of the portfolio, we looked at with deep financial analysis. The decision was to divest some businesses that are nonperforming. They represent about 7% of our revenue. We anticipate that we'll get that done by the end of the first quarter.

We also focused on some M&A. We announced 2 deals at the close of the market yesterday, which I'll talk about in a moment and we remain focused on very disciplined capital deployment. I talked about protecting our operating margins, which are amongst the highest in the industry. We expect to deliver about $300 million of annualized -- cumulative annualized cost savings by this year, and we announced an additional $70 million last year.

We had a Board refresh last year. We took 4 Board members out and put 4 new Board members in. That reduced our average tenure to 6 years rather than 12. And we also established a new committee of the Board to focus on these non-animal technologies, which I think is going quite well. The same committee of the Board that did the strategic review, we every quarter, take a look at capital deployment. What's the best use of our capital? So we look at everything. We look at stock buybacks depending on the share price. We look at obviously reducing our debt. We look at strategic acquisitions. We -- most years, we do some of all of that, but it really depends.

We also recently refreshed our stock purchase authorization with a new $1 billion capability. So we announced these 2 deals yesterday. One was an agreement to acquire a Cambodian NHP supplier. The purchase price is a little over $0.5 billion, important strategic move. So that will strengthen and secure our supply source, really important. Equally important, this will be largely accretive to our operating margin and EPS. So we talked about this year alone, it will be EPS accretive, $0.25 and next year, $0.60. So to have control of the site, both from a nutrition point of view, a veterinary medicine point of view, sort of husband tree point of view is really important and positive. And the demand continues to increase. So we want to have control of supply.

So between our Mauritian farm that we bought last year and this one in Cambodia, we're in a really good place with reduced cost of the animals. We typically have been -- we've been buying about 30% of our NHP supply from this Cambodian operation.

We also announced that we exercised our option to buy the rest of a company, a small company called PathoQuest, it's about a $60 million deal, and that's a NAM. So that's a non-animal technology that replaces certain aspects of our biologics testing, actually speeds up the process for GMP and non-GMP testing.

So we hope to close that deal by the end of the quarter. We hope to close the KF deal soon. So we've always had and continue to have a serious focus on capital allocation. We've worked to get our CapEx down as a percentage of revenue. Obviously, we need to do that, I think, generally, but particularly as our revenue has declined. So we got up to 8.2% in 2022. We're down to 5.1%. So we're pleased with that. We continue to be very serious about that.

We reinitiated stock purchases to offset dilution from options. We bought $450 million back last year. We'll see what we do in the future. That committee of the Board, which I'm actually on, we will take a look at that every quarter. We do that at every Board meeting. Our gross and net leverage is at the lowest it's been in a long time. It's 2.1 turns. So we're in a really good position to do more M&A. We have a bunch of debt, 3/4 of which has fixed rates.

We generate a lot of cash. We have a lot of borrowing power. So I think we're in a very good place to do that. And M&A has sort of been the hallmark of the company over the last couple of decades. So we invested $4.5 billion in acquisitions since 2012 and of course, announced a couple of deals yesterday. And we have others that we're working on right down the ally in the areas in which we participate.

So NAMS has been a big conversation, maybe forever, but definitely for the last year or so. There's been a focus on this by the FDA. I think everybody in biomedical research agrees with this notion. But of course, the science has to work. So these technologies have to be at least augmentative and preferably a replacement. We've set up a committee of our Board to focus on that. We have a couple of medical doctors on that committee.

We announced yesterday that the former #2 person in the FDA is now going to oversee all of our NAMS activity. And so she's just been hired as our Senior Vice President and Chief Scientific and Innovation Officer. We're very excited about that. And the FDA has said that very long-term NHP studies for monoclonal antibodies probably aren't all that necessary that short-term studies are. That's probably nothing new. I think that's been going on for several years. And monoclonal antibodies tend to be a very specific way to treat diseases. So we think that the NAMs will have a -- over the next decade, a meaningful impact on improving discovery for our clients, hopefully, to help them get to a lead compound faster. I think that would be better for society. That would be better for Charles River as well. So that's great.

A little bit in safety, but we don't see it at all in small molecules or with most of the large molecules. The science just is not even close to being there yet. These technologies are very nascent. They're pretty crude right now. They're anecdotal, but directionally, they may be impactful. So we have a couple of hundred million dollars of annual revenue, DSA revenue from NAMS. You can see here some of the areas. So these dark blue circles are established applications for us. The D is obviously discovery and the S is safety assessment.

So most of the activities in discovery, as I said a moment ago. So we're looking at things like organs on the chip and organoids. And as I said, they are anecdotal. So you've got, let's say, heart cells beating in a dish. So there's human heart cells in media that are beating in a dish. And so if you've got a drug, a cardiac drug, you'll get some information from that. It's very different than putting a drug into a human being, where you have the sort of the multiplicity of systemic reactions of all of the organs in your body reacting to that drug. So it's highly unlikely that the FDA is going to take any sort of crazy step forward, and they would never risk safety of the patients. So we're confident that we're going to see this grow substantially in discovery and very little in safety.

Demand is beginning to improve. We've had a couple of years of really soft demand. It's been frustrating, but it is what it is. That was as a result of the pharmaceutical companies reducing their infrastructure as they approach a patent cliff and also a lack of biotech funding. So we're seeing sort of an improvement in demand. As I said a moment ago, the fourth quarter was the highest quarter in the history of biotech for inflows from the capital markets, which is great. We saw demand from pharma beginning to increase at the beginning of last year. And R&D budgets seem to have flattened out and normalized.

So I think we're poised to see more spending by both our pharma clients and biotech. Pharma has already started and biotech needs to accelerate. So we've seen a reduction in cancellations. We've seen an improvement in bookings for our clients, and we've seen an improvement in proposal volume for biotech. So we were very pleased to see a continued improvement since the beginning of the third quarter in our book-to-bill. We said in our release yesterday that preliminary DSA net book-to-bill was 1.1x. So there's been a lot of focus by our shareholder base on that. So we're very pleased with that.

We're seeing that mostly driven by small and midsized biotech clients. We also said that we expect the top end of 2026 guidance range for organic revenue growth will be at least flat for both consolidated outlook and DSA. Our non-GAAP operating margin is an interesting issue. We have incremental cost savings of about $100 million, which will help offset a lot of the annual cost inflation. We don't have either now or anything I've said yet, we don't have any of the impact of the divestitures that we're in the process of making, hopefully, no later than the end of the first half of the year as a big headwind of losses from that 7% of our revenue. And we -- nor do we have the impact of the 2 acquisitions we announced yesterday in our non-GAAP operating margin. So they will add to that.

So we'll obviously give much more in-depth discrete guidance on 2026 when we have our February call. We announced my retirement a week ago. So on the 5th of May, which is our annual meeting, I stopped being the CEO. I've done this for over 30 years. It's a long time. We have a very smooth, I think very well-planned 5-year plan actually with our current COO to replace me. She's been with the company for 35 years and knows the business really well, has run basically all parts of our business herself over a period of 35 years, has begun to know the shareholder base and knows the clients really well. So I'm confident it will be seamless.

And we have a lead independent director who will become our Chair. I've been Chair for the last, whatever, forever. And so best practices is to split CEO and Chair. So we're pleased with that.

So succession plan in process. So we will continue to work on strengthening the portfolio, principally through M&A. We're going to continue to do everything we can't enhance our speed. Clients are maniacally focused on speed to market. We have a lot of digitization of the company in e-commerce right now. Very early days of AI, but AI will definitely have a role in designing better trials with better predictability of how they'll come out, both for preclinical and clinical CROs. And if we can get -- if we can do that on the preclinical side and have known biomarkers that we track all the way to the clinic, that will be really powerful.

As I said earlier, a big focus on NAMS with a committee of the Board and an internal committee with new leadership. So we intend to be the leaders in that and continue to make a purpose-driven culture. We continue to have very low turnover and really thousands of people that have been with the company 10 or 20 years. And now I will take your questions.

All right. Great. Thanks, Jim.

Sure.

Maybe to start with the positive second half and 4Q DSA demand trend update that we heard from you guys yesterday. You reported a preliminary net book-to-bill of 1.1 in DSA in 4Q with improving trends, primarily driven by small and midsized biotech clients. Can you just unpack the performance more in the quarter? Maybe talk about how that improved biotech funding that you talked about in the presentation played into the strong performance in book-to-bill? And then any high-level thoughts on how you expect book-to-bill to trend over the course of 2026?

Yes. I mean it's been a major focus of ours. And it's been well below 1 for a while, and that's principally with our biotech clients. But as I said earlier, we saw a monthly improvement. It's kind of impossible to predict it, but we're anticipating that things will continue to be strong. And we should see the benefit of that because it has to work through the backlog, but we should see the benefit of that in the back half of, let's say, the second half of this year, which we're thrilled with.

So pharma stabilized much earlier, probably the beginning of '25 and biotech at the end of '25. So I think we're in a really good place. You couple that with the inflows of capital from the capital markets. Venture capital funding has been terrific. A lot of money comes directly from big pharma, both to fund discovery work and also, obviously, there's been a fair amount of M&A.

Yes. You talked a little bit about just now, but biotech funding has improved recently, obviously, and it seems to be correlated with DSA demand improvement. That said, it seems like a lot of the funding that we have seen have been concentrated more towards clinical assets versus early stage or new company formations, at least from -- that's our interpretation. Curious to hear your thoughts on that.

I mean I think that's predictable. I think if you're a drug company and you've got drugs that have gotten through preclinical and not in the clinic yet, you're going to emphasize that, particularly if you're worried about a patent cliff, that makes sense. And I don't think it's either/or. I mean I think it's nuanced towards the clinic, but usually is because that's where most of the spending is to develop any drug. I think that we're seeing a significant enough inflow of capital that -- we are beginning to see this in preclinical as well, eventually in basic discovery. If these companies don't get back to doing basic discovery, they're not going to have anything to work on in 4 or 5 years. So I think it helps all the CROs, both preclinical and clinical.

And then along those lines, can you just elaborate on biotech decision time lines? This has been an area that has hampered growth over the past couple of years for you guys, where funding spikes haven't always correlated with increased bookings, given customers have tended to hold on to funds longer than normal. So just kind of curious on how you're thinking about that trend?

Yes. I mean it's tough to tell. As I said in these prepared remarks, I mean, bookings are up with biotech. Proposals are up, bookings are up and cancellations are down. I think typically, we see -- there's not an immediate change in the slope of spending. But I think typically, we see them take a quarter to make a decision on a proposal and then maybe a quarter or 2 to book the studies and get them going. So they'll be very measured about how they spend their money.

And then maybe looking ahead, you provided a preliminary 2026 outlook calling for the top end of the organic revenue growth guide to be at least flat on both a consolidated basis and in DSA. Can you talk more about what this embeds from a DSA standpoint and what the implied sort of book-to-bill is to get there? It seems like you think that you'll see a continuation of some of the favorable demand trends you've seen in 4Q over the course of 2026. So maybe just walk through kind of the puts and takes there and what could drive upside, downside to that range you gave?

Yes. So I think a couple of things could happen. One is that obviously, the book-to-bill remains above 1, that's great. And I think that drives top line growth for us, and that's why we're saying the back half of this year. You also -- we also look at how fast things move through the backlog. So if we have studies that start faster, and have shorter duration, which some studies are, some are longer and some are shorter, even not being above 1x could drive growth. So I think the combination of those 2 will be quite powerful. We're hoping to see that. I mean, we have to work through the backlog for the first half of this year. We're quite confident that the back half of this year, we'll begin to see the benefit of the book-to-bill being above 1. And hopefully, that continues.

And then on the DSA capacity front, you had clarified that some of the recent staffing increases were not necessarily ahead of increased Safety Assessment work seems like you're seeing increased Safety Assessment work. So maybe can you just talk about what your current capacity looks like and thoughts about that in 2026?

Yes. So we added a small amount of staff in 2025, which surprised some people since our sales were declining, but we explained that it was really for 3 things. One was we had some openings to replace turnover. Two is that we were investing. We were increasing the staff in our lab sciences part of our business. We do a lot of associated lab work with the safety testing, and that part of our business has been growing really nicely. So we were pleased with that.

And we were simply even though revenue was declining, we were operating ahead of our operating plan. So we had to add people. Capacity -- physical capacity is well utilized, but I would say not optimally utilized right now. So demand has to pick up for that to happen. That's not an if, that's a when. We have enough incremental capacity to take on additional work without going out and building new space, and we really haven't built much new space except in our lab sciences part of our business over the last couple of years.

And can you walk through your latest assumptions around DSA pricing contribution in '26 and how to think about DSA margins as a result of...?

I don't want to get too deep in pricing, but I guess I would say a couple of things on pricing. One is the spot pricing is stable. So that's really a good sign. We've seen the stability in that. We definitely have competitors that have been using the price to compete with us. We try to be sort of surgically and strategically and responsive to that to maintain or build share. If we don't have much pricing power, we have a lot of reductions in our cost structure, I think will be very beneficial as will mix.

So this is such a pure supply-demand business. So as the demand increases and as space fills, which I think is in the process of happening, price will be less of a focus by our clients. I mean I think they're, first and foremost, interested in getting a slot, starting the work and getting into the clinic as quickly as possible. Only 20% to 25% of the cost of developing a drug is in preclinical, and you're not going to get into the clinic until you do the preclinical work. So we should see over time an improvement in price. Impossible to call right now. We'll try to talk about that some more in our February call, but I'm not sure how much we'll know.

Maybe a couple on China and the DSA environment there. I guess the first one, are you seeing increased competition from Chinese competitors?

Yes. So China is quite interesting right now. There are definitely Chinese-based -- Chinese-owned and Chinese-based way lower price competitors. I think we see little of that work. So this is for probably small biotech companies that are underfunded that have to make a decision on price, almost price alone. So some work has gone there. I think the work is okay. So if you're star for cash and you're in a rush to get to market and you think that the Chinese CROs can do the work okay enough to get into the marketplace, I think you'll do that.

I think most clients would prefer that the science is spectacular. I do think that China is beginning to innovate. I mean you're all seeing just by reading the public press that lots of Western pharmaceutical companies are buying assets out of China. Biotech companies you're seeing China invest more aggressively in these assets. And in most everything they do in China, the cost is much lower and the speed is faster. So maybe you're going to get to a question on this. But if not, we are taking a serious look at China from the vantage point of potentially doing something in DSA in China.

Yes, that was my next question. Is that a near-term...

Happy to help.

Is that a near-term opportunity? And then how are you weighing that potential growth opportunity with maybe taking a hit on the margin front if you scaled up in China?

Yes. So sort of 2 issues in China. One is the prior question that you asked. If we were there, assuming that more clients would like to go there, that would be an important defensive and maybe to some extent, offensive move to make sure that we garner a bunch of that work. Equally, if not more importantly, it's a massive market, right? You have 4x the population that you have in the U.S. The studies for drugs developed in China have to be done in China. It's not actual. So if we're not there, we can't perform that work. So we directionally would like to be there. I can't make any promises. We're looking very carefully at it, trying to figure out the best way to be resident in that country.

Got it. Helpful. Maybe turning away from DSA, looking at the rest of the business for a few minutes here. It's an interesting acquisition, the K.F. Cambodian supply for NHPs. Any potential improvement to operating margins that you see from this acquisition? And then maybe just walk through the level of conservatism embedded in your projections there for EPS accretion in '26.

So the price for these animals will be much less than we've been paying. So we've been getting 30% of our animals from this farm. So since we own it, the price points will be much lower. And as I said earlier, that's going to be $0.25 accretive to EPS this year and $0.60 next year. So that's a double competitive advantage. Competitive advantage is a supply advantage, which is critically important, both in terms of numbers, but also timing. And also, if we do nothing with the price of our studies, which is just to go back to your pricing question, just leave the prices as they are, our cost structure will be significantly lower. So it will be beneficial to the operating margin.

And then during 3Q, you announced plans to divest underperforming businesses. I think it was 7% of estimated 2025 sales. Any updated time line on when you expect those divestitures to be completed? And then any further color on next steps as you implement the next phase of your strategy?

I mean, those are businesses that we obviously liked and added to the portfolio, and we thought they had great promise. I think you have to step up to those things when that doesn't work out. So these businesses are a big time headwind to our operating margin. So we're really pleased with the decision to do that. We have investment banks working on those deals right now. So I'm quite confident that they will get done. And what we've said is we anticipate that they'll be sold by the end of the first half of the year.

And maybe one on RMS. So during 3Q, you called out soft biotech demand is impacting small model volume in the quarter. How correlated is that piece with biotech funding? And given some of the proposal increases we've seen in DSA during the quarter, should we expect subsequent improvement in RMS as well?

Yes. We try to offset as much of the increase in cost with price. We get a lot of price in our RMS business. And sometimes that's beneficial. Definitely, we had an impact on small animals and some of the service businesses associated with RMS as a result of biotech funding. So arguably and directionally, as biotech funding invigorates, that should improve. I think it will take a while, though.

Okay. And maybe one quick one on the CDMO. Just how should we think about revenue growth in '26 there, the puts and takes between some of the different commercial customers?

We just -- we don't have the headwind that we have from last year where we lost a large customer. We still have a lot of clinical work going on there. So we're a bit more optimistic about it going forward.

Okay. Maybe the last couple of minutes of the presentation, just wanted to acknowledge. As many of you know, Jim will be retiring from Charles River in May after a 50-year career with the company, serving as CEO for more than 30 years. I just wanted to take a minute to acknowledge Jim's contribution, not just to the life science industry, but also to this conference.

Todd and I were catching up earlier, and he mentioned that this is your 26th year in a row. presenting at our conference. That has to be some sort of record here. We got to double check that. Not to date yet, Jim, but when you presented for the first time at JPM, I was in first grade. So in all seriousness, on behalf of JPM, thank you for helping make this conference the great event that it is today, and congratulations on retirement.

Appreciate it. That's nice of you.

We can end it there. Thank you, Jim. Thank you, everybody, for joining us today. Have a great rest of the conference.

Good morning, everybody. Thanks so much for joining us. I'm Elizabeth Anderson. I'm the health care services and CRO analyst here at Evercore. I am very happy to be joined by a man who needs no introduction, Jim Foster, Chairman, President and CEO of Charles River.

And so let's start with the 8-K that you guys put out this morning. That was very nice to see. For those of you who haven't seen it, it mentioned that book-to-bill has continued to improve each month since the beginning of the third quarter. And although the holidays may impact demand, you're encouraged by the positive momentum and upward trend since the middle of the year. So can you expand on that and sort of say, what's been going on and sort of what are some of these trends that you've been seeing?

So there's been a real focus on our book-to-bill by you and everyone else. And so we have had sort of sequential improvement in book-to-bill since the sort of beginning of the third quarter, including the last couple of months. So we were pleased to see that. And since it's an area of focus for shareholders and analysts alike, we thought that we would sort of give an update on that. We're not going to give the exact book-to-bill number nor are we going to predict what's going to happen in December and January. We hope that continues.

The holiday times are a little bit funky or maybe not. I mean, we'll see what happens. So the issue sort of behind all of that, which are, I think the pharma companies who are dealing with a patent cliff and have been reducing some of their costs demand from them has been better, particularly good in the first quarter of this year. Biotech funding has definitely invigorated in the third quarter. And I guess last month was the second best month in the history of biotech in terms of funding. So those are good back drops to all of this. And so obviously, the funding paradigm continues to improve. That's a good thing and that should invigorate more work.

So we just -- we wanted to shine a light on that because it's definitely been a focus of our shareholder base and obviously something that we're -- and the only -- the primary headwind that we've had for the last 18 months is biotech demand and that's 100% sort of affiliated with access to capital or lack thereof.

Yes, that makes sense. Do you think that, that's a result of some of the clearing of -- maybe partial clearing is the way to think about it, overhang of some of the regulatory situations in terms of drug pricing? Is there something else you would point to? Or you just think it's sort of broad-based and more a reflection of that?

Yes. No, I think it's more a reflection of spendability. I think it's -- I think we definitely have clients that have discovered drugs and intended to work on them and a pause that sort of park them. And I think there's a fair amount of frustration in our client base. So if you develop 5 drugs against a certain target, you only have money to work on 2 of them, maybe you're working on the wrong two, maybe the ones that you parked are the ones that will hit the target more effectively.

So we've seen this movie before, biotech funding sort of wax and wanes. The fact that last month was the second best month ever could portend continued improvement in the future. We hope so, but we have to see. And we're not going to I think we made the mistake in 2024 predicting when the market -- stock market would turn, it's a foolish thing to do. So we're not going to make any predictions. Let's let it happen. Let's let the demand invigorate and then we'll talk about it.

Okay. No, that makes sense. And obviously, you focused on your comments on biotech because that's where the inflection happened. Anything to call out in terms of the pharma demand environment more generally stable, anything?

Yes. I mean it's quite stable. It was very robust in the first quarter. Pharma has been spending a lot of time reducing the cost structure and trying to figure out what the optimal portfolio is to take care of an impending patent cliff. We have very big footprints, I would say, with all the big pharma companies. And most of them we have long-term contracts. When I say long term, 2-, 3-, 5-year contracts where pricing and volume are locked in.

We really like to have a larger share of wallet with those folks. So it's a more stable base for us in some ways. They're obviously extremely well funded. Money is not the issue for them. And while pharma drove our growth forever, the principal driver of our growth probably for the last 15 years has been biotech. So we got into the high teens several years. And so there's not enough pharma revenue in even in the aggregate to offset the sort of sluggishness with biotech.

Yes. No, that makes sense. And I think one thing that has confused people, at least on the investor front and maybe on your front as well is that there's been this sort of delayed decision-making timelines. Have you seen any sort of change in that dimension of things in terms of people going and going? Or is that -- it's the funding, but maybe we're still seeing some portion of that as well.

I think we're seeing some pickup in the decision-making. So proposal volume is way up for both biotech and pharma, which is great to see. Cancellations are way down for both segments, which is good to see. So I think we're seeing more proposal volume and it's probably taking a month or 2 for those proposals to turn into bookings and for the bookings to turn into work actually starting. So yes, I think there's more confidence by both sets of clients.

Okay. That makes sense. In the 4Q guidance that you guys put out with the 3Q earnings call, you talked about some additional hiring in DSA. Can you talk about your plans there and how that sort of lines up with the demand expectations, which you sort of just answered the question on that portion?

Yes. So I think that when we first talked about that, that was a bit confusing to some people because demand has been off and there's some modest decline in revenue. So why would you be adding more people, it's pretty basic. Number one, it's not that many people; number two, we're adding them in our lab services part of our business. So the associated laboratory work that we do with a safety study, which is actually quite strong. And sometimes we do work when we go into the study and sometimes we do some clinical samples even though we don't do the clinical work.

So we've been investing significantly and organically in our lab services capability, and we can talk about this later, I'm sure, but we flagged that as an area of potential M&A. So yes. So that's been an important area of growth for us. And also, we have some turnover, so we have some openings. So we wanted to replace those. And I guess -- and the kind of simple answer is that we are operating well in excess of our operating plan, which is why we've raised our guidance a couple of times, and we need to have enough people to do the work. It's just as simple as that.

Okay. That makes sense. I think in that sort of bucket of questions, at least I was getting post the call, you also mentioned higher spot NHP cost. How do we think about that versus, obviously, you have the most vertically integrated supply chain in that regard. So can you just talk to us what the dynamics are driving that?

Yes. Again, a little bit confusing. So I would say that NHP costs have been reduced. We're generally spending less and we do have more supply opportunities in multiple geographies, and we're going to continue to strengthen that as time goes on. So a good place to be. But since we're operating well in excess of our operating plan, as I said a moment ago, we're buying more NHPs than we had originally anticipated or maybe that we've originally contracted for or provided for and so going out in the spot market, it's more expensive. I mean it's supply is okay, but not so plentiful, and suppliers will take advantage of that opportunity if we need the animals to charge us more.

That makes sense. And speaking of job openings, though not related specifically to DSA, how is the CFO search process going?

Good. So we have one of the big search firms working on that. They're -- we've seen a bunch of potential candidates at least on paper, and we've interviewed a bunch and we want to have a fabulous person. So we're going to do this thoughtfully and thoroughly and take our time, but the process is off and running.

Great. Okay. That makes sense. How should we think about -- maybe just sticking with DSA for one more question. Like the levers on the DSA margin if growth remains sort of subdued in '26. Can you talk about where you see the $70 million in incremental cost coming from that you announced on the 3Q call and what do you think about that sort of opportunity set as we look forward to next year?

Yes. I mean it's -- Yes, it's a variety of areas. Some of that is labor, some of that is procurement being much more efficient with procurement. Some of that is offshoring, some things that we've done historically internally, some of that's automation. I mean we're always trying to drive efficiency. Those savings are not going to all drop straight through. I mean a lot of that will be used to offset sort of inflationary costs. So something that we have to continue to do to be more efficient.

Okay. That make sense. You also mentioned plans to divest about 7% of revenue on non-core assets. How do you think about what the criteria was that sort of got you to that determination? And how do you think about the sort of reinvestment opportunities for the proceeds?

So we went through a very, very thorough deep dive in our whole portfolio, very objectively. As you know, we have 4 new directors. The benefit and the power of having new directors is a totally objective. They don't have any sort of historical, I don't know, allegiance to anything. Why we bought a business, what we initially anticipated, for instance. And so they've been -- they've been very helpful in the process. So we looked at everything very objectively and kind of on a zero-based basis.

What was the original -- what do we originally anticipate? And how is it going? Where is it going? And by the way, we've done this before, maybe not quite at this depth, but we've had businesses. We had a [indiscernible] business, for instance, it was great until it wasn't. We had a research model business in Japan. It was great until the Japanese economy wasn't so wonderful. And so we have periodically divested some businesses. And so this isn't all that different except it was a deeper dive and doing more at once.

So we have some headwinds with some businesses that we don't think you're going to ameliorate. We don't think that the original expectation of where these businesses would go with the demand question would be, what the technology looks like, the competitive dynamic or sort of the power of particular modality and in a couple of cases, what the geographic competitive dynamic would be. So things change.

And so we don't think these things are going to continue to improve. And so we are out now with some bankers looking to divest certain assets to alleviate the headwind. We'll use those -- the funds that we get from there to do whatever, to do M&A probably. Maybe to buy back stock or not, we look at it every quarter, certainly to pay down debt and conversely, I think you may have asked this.

Conversely, we have several things that we're looking at to buy. Do you want to talk about those?

Sure.

Okay. So -- and I would say that a couple of things that we're thinking about divesting could be deemed as non-core. And so I think it's really important when you're looking at your portfolio to try to stay, if possible, with your core assets stuff that you know like the back of your hand. And by the same token, you don't want to be so risk-averse that you don't move into adjacencies if the technology is powerful enough to invigorate our portfolio.

So I would not want to be that black and white. So we flagged several areas. We flagged bio-analysis, which is one of our lab services businesses. When we talk to clients -- when I talk to clients or any of our people type to clients and you say to them, what else would you like us to do? Or what would you like us to do more of almost without exception, every client says bio-analysis. And so there are opportunities for us to do more large molecule bio-analysis and actually clinical sample bio-analysis, which tends to be hundreds of thousands of samples. Very high margin, very, very aggressive throughput.

So some clients would prefer that we do all of that, both the preclinical and the clinical stuff and have the capability to do large and small. We actually have a pretty big business in bio-analysis now and in lab services generally. We are investing organically. It just takes a while.

So it takes a while to build. It takes a while to hire the people. And so we're doing that. We will continue to do that. I'm sure it will be some part of our CapEx for next year, but we're also looking to do some straight-up M&A. So that's important. We're going to look at some non-animal, in vitro NAMs technologies some of which we already have, there's one thing in particular that we've had a deal on that we probably will buy a small acquisition. We have other technology deals that we're working on. We've always looked at this landscape. Some of these technologies look better than they are practically. So ones that are practical that could be adjunctive to animals or in some cases, maybe replace animals, particularly for discovery, we want to be in those businesses.

There's also geographically, there are some businesses we have in the U.S. that we ought to have in Europe, some things in Europe that we ought to have in the U.S. And we are generally taking -- relooking at China. So just for people that don't know the history just quickly, 15 years ago, we had -- well, I'm going to back up before that.

So we built a toxicology facility in China in 2006, probably prematurely, 2008, the economy blew up, clients pulled back. A couple of years later, we sold that. Then we had a deal 15 years ago to buy WuXi. Most people know that. It was banked and signed. We had a little bit of a shareholder revolt, and we had some activist activity. It's a deal that we didn't do. Imagine what Charles River look like today if that deal got done. Probably the only good idea I've actually ever had, Elizabeth, we didn't get to do it. But I think it was sort of prescient. It really was a good idea because China is beginning to innovate, which is quite interesting.

A little bit surprising, quite interesting. And so WuXi -- when the WuXi thing blew up, we kind of paused and we pulled back. And a few years later, we went back into China to look at options. There were some M&A options with the valuations were sky high and just inappropriate. The multiples were crazy and the deals would have been dilutive, so we didn't do anything.

And so fast forward the tape to today, we just had a bunch of people to go to China, just to kind of look at the landscape and talk to people on the ground, there could be potential acquisitions or partnerships or folks that just knew the Chinese landscape that could advise us on is that a smart thing for an American company to do. And so I would say without getting ahead of my skis here that we're thinking seriously about what, if anything, we should do in China in addition to our research models business because two things are happening. One is -- three things that are happening actually. One is that, and you know this probably better than I., there's lots of assets coming out of China that are being bought by U.S. and European drug companies. That's totally new. And at least to me, that's a surprise. So these folks that we thought were just copying everything or innovating really well.

There's a bit of a brain drain for some of these great U.S. academic institutions and they're going to play, number one. Number two, the -- obviously, the patient population is 4x bigger than the U.S. And most of the work for drugs that will be utilized in China, the work has to be done in China. So we have a research model business there. It's small, but it's doing quite well. But if we want to play in that environment, we're going to have to have something on the ground there. And then I don't want to overstate this, but there's definitely some work probably with less well-funded small biotech companies that we probably don't even get to bid on the work.

And if we do, it's probably a small amount. But if you strap for cash and you would like to work with Charles River, but whatever, but you can go to China and have the work -- toxicology work be done at 20% of the cost or whatever, kind of 10% to 50%, what we're seeing you may go. So some of that work is going there. Will that continue? I don't know. But -- and some of the expertise that China didn't have, veterinary pathology is a great example that I always use. Even if you can't get a degree in pathology -- veterinary pathology over there, you can virtually get that work done by having somebody in the U.S. or Europe read the slide.

So it's becoming a different environment and geography just in terms of its potential. So I have no idea whether we can get a deal done or whether we can afford a deal, whether there's regulatory, environmental, political issues or not, but I think we'll study it.

But it sounds like from that there's a wealth of opportunities in these different areas.

I think there is. I think China will be a bigger market probably than the U.S. And I hope that -- I think one of the great treasures of the U.S. business is the biotech industry, and I hope that we don't sort of lay back and let China get a lead.

Yes. Makes sense. Can I double-click on one thing you said on the NAM side. You said that there's a lot of cool-looking technologies that -- I'm not asking you to name anyone specifically, but like that maybe don't work -- pan out as well and there are sort of some things that are maybe like more impactful short term. As investors are kind of learning about that market incrementally and wrestling through there and sort of all the changing dynamics. What would you flag as sort of like the thing to call out that says like this has better short-term applicability? Or these are the kinds of things that you should make sure that these companies are addressing.

Yes. It's a big subject and a big question. So let me back up. So first place, none of this is new. The drug development industry has been working on alternatives using research models forever. We have a bunch of companies that approach us every year and say, we have this technology, it's going to put you out of business, you need to buy this company. They all look very interesting. It's very, very interesting science coming out of some August academic institution or sometimes the government, and they just practically don't pan out. They're not comparable. They're certainly not replacements.

And so we have -- I think we've indicated we have a couple of hundred million dollars worth of revenue with the NAMs related. We have NAMs across our whole portfolio. As I indicated a few minutes ago, we have a couple of potential M&A opportunities, and we will continue to look for those and make some investments. So we have an AI deal. We have one of our companies look for off-target effects. It's all non-animal based. We have a portion of our safety studies that we don't -- the control groups don't need to be animals. Immuno-tox, we can do it without animals, some of the skin absorption tests we can do without animals and it goes on and on.

So -- and by the way, I'd say every big drug companies had their own either proprietary or nonproprietary in vitro capabilities mostly for discovery. And so we're quite confident that over time, these NAMs will have an increasing role in discovery that will help clients get to lead compound faster, not focus on molecules that have the lowest propensity to get to the market that will save the client lots of time should accelerate speed, should help to get more drugs into the clinic for sure, and maybe get more drugs into the market eventually.

That would be beneficial to our tax business actually if more good stuff is coming through the pipeline. So we're looking very carefully for those technologies. If we actually think they are seriously adjunctive or maybe replacements for discovery work will buy those companies. We don't see the NAMs having much of an impact at all in safety testing. The FDA has come out with this pronouncement about...

That will be my next question. There you go. Yes. Keep going, yes.

Happy to help. Happy to help. And that's really nothing new, but it's interesting to sort of unpack that, which is they've come out and they sort of rediscussed it yesterday with some guidelines just saying that not required for certain types of monoclonal antibodies to do long-term NHP studies. So we do 3 months NHP studies in sometimes 6-month NHP study. So they're saying, that if you do the 3-month studies and you have other supporting data, like you don't have dangerous off target effects and our PK work has panned out and et cetera, et cetera, that you probably don't have to do the longer-term work.

Now what that really is, is a recapitulation of something that's been going on for a while. So we have a lot of clients that only do 3-month monkey studies. We have some that only do 6-month monkey studies, and we'll do that regardless of what the FDA says because they think it's better from a safety profile point of view, and that's going to be their decision, obviously. And monoclonal antibodies, you know, it's a very discrete refined specific tool to get to a very specific target. So there's not a lot of off-target effects and there's not a lot of variability. So I think that's an appropriate place for the FDA to unpack that.

Is that going to spill over to small molecules? We don't think so, is it going to spill over into other types of large molecules? We don't think so, but we'll see, but I think over the next decade, you'll see the NAMs have some discernible impact on discovery.

Yes. And it seems like from what you're saying, there was no sort of scope increase or anything like that. So we're just seeing sort of a well-trodden pathway down this monoclonal antibody like specific.

Yes. Just a further clarification on what the clients are already doing and what the FDA is already supporting just to make it clear. And I think that's fine.

Yes. No, that makes sense. And what are you seeing clients do on your side to sort of -- are they reacting? Are they waiting until we get more guideline update? Or does it only matter? Are they changing any of the behavior? Are they ...

I would say that the clients pretty much without exception, support the notion that if possible and when possible and when appropriate, they would rather not use animals. To look at the systemic multi-organ effect of swallowing a drug or being injected with the drug, it's virtually impossible to do that with some sort of alternative at least with the technology now even for targets for which there are drugs, but for unmet medical needs where there are no drugs, they call the neurodegenerative diseases. There's no way anyone is going to simulate that. We don't even know what causes Alzheimer's or ALS.

So how could we simulate that? And why would you take a drug that was based upon some computer simulation. So I can't say never because how would I know never. It just seems unwieldy and dangerous.

Sure.

So our clients are saying what I said a moment ago, which is that they have some proprietary technologies that they're using for discovery. They get -- they applied what the FDA is saying but they have no desire to do anything differently in terms of the way they do their animal studies right now because they are maniacally and appropriately focused on safety profile.

Okay. No, that makes sense. Maybe looking at sort of Discovery and Safety probably separately. How do you think -- as we've gone through this funding cycle and the pandemic and the pharma re-prioritizations and Biotech itself, like have their needs, ultimately the things they're asking for from you change like do we think about it in terms of like do they want to outsource more, less different types of things? Like how would you sort of say I'm happy to answer Discovery and Safety separately, which probably really makes sense?

Yes. So Discovery is complicated. So you've got sort of 4 things working here.

Sorry, it's a big multipart question.

Okay. So one of the things is there's a fair amount of Discovery work that's going to China. Chinese are doing really good work for a dramatic reduction in price and some of it's also going to India, beginning to go to India more so. Safety is not going to go to India, but chemistry, chemistry is and Discovery is in large measure. So that would be one thing.

Second thing, Discovery has been somewhat of a challenge for us to sell because the initial reaction of the client is, yes, we do that. We don't really understand what you mean by Discovery. So -- and typically, the Discovery we do, I would say, is more kind of sort of large volume work after the drug actually has been -- you identify the target and you come up with a drug against it, all of the, I would call it, sort of later-stage discovery development work like transplanting human tumors into new mice and then challenging them with a chemotherapeutic agent would be a great example of that.

So you've got the proprietary nature of the work. You've got the Chinese work and you've got sort of clarifying for the client what we want to do for them. I think once we clarify that, pretty straightforward for us to get to work, but probably only 25% to 30% of the Discovery is outsourced right now. We've said historically that, that will probably get to maybe 40% or 50%, but I have no idea over what time, and I do think a bunch of that is going to go to China.

Definitely, Discovery is somewhat of a feeder into Safety. We have these integrated multipart Discovery initiatives that we have with our clients. Sometimes they ask us to actually find the target and actually help us actually ask us to help design the drug against the target. So we have a fair amount of that work.

And then Safety is, I think, a totally different situation where even the big drug companies very -- some still do, but very few of them still do their own Safety work and very few of them want to do their Safety work and even the ones that still do their own Safety assessment work, their capabilities are trivial compared to ours. I mean they're just much smaller, much less depth of science, much less expertise.

And as I said, we have a little bit of that work going to China for people that are very price sensitive. But -- so that's probably, I don't know, 55% or 60% outsourced. We think it will get to at least 80% or 85%. And I used to say we'll get to 100%. That's probably an overstatement because I do think that some of the European drug companies, particularly some that are family-owned will keep doing the work themselves.

Okay. That makes sense. Maybe switching to the manufacturing segment. Where are we on the CDMO journey going back towards sort of a better growth footing? How do you think about the potential for positive revenue growth in 2026? And how have you sort of continue to work on the client diversity mix there going forward?

It's been a complex and challenging business for us to say the least. It's replete with very new cutting-edge science, which -- it's a learning curve for us and our clients and the regulators. I think that the -- what we thought the initial demand curve would be for CDMO work is not as robust as we thought. As you know, there's a fair amount of fits and starts and some -- obviously, some concern about the safety profile of these drugs messing around with people's genes and cells. And I think the FDA is concerned about the sort of untoward effects. Of course you've had these patients with brain bleeds and some deaths and blah, blah, blah. So you've got out of 3,000 potential compounds that we're all working on, probably 2/3 of those from preclinical.

It's only 30 drugs that have been approved. And some of that's been really rocky. So it's been a rocky road than we thought. The assets that we bought weren't as good as we thought just in terms of quality facilities and staff and regulatory expertise. We fixed all of that. So the facilities are terrific right now. We've recapitulated the staff. We've had regulatory audits by the FDA and comparable European folks, and they've gone extremely well and lots of audits by our clients. We have some commercial work. We lost our largest commercial client, which we're obviously not happy about, but it happens.

And we have -- the work is primarily clinical and every clinical client assumes the drug will get to market, could be commercializable. So they're talking to us about that. We kind of have 3 buckets. We have plasma DNA. We have viral vectors, and we have gene-modified cell therapy manufacturing. We've got a commercial client -- at least a commercial client instead of all 3 of those buckets, which is promising. But it's a business that continues to have some challenges for us.

We felt it was really important to be in this business because our clients expect us to have expertise in all modalities. And so this is obviously a very promising model. You know that some of the blood-borne cancers. People are being -- people with stage IV cancer being cured in 2 or 3 weeks with some of the cell therapy work.

So the promise is extraordinary. But the actual therapy is very complicated. It's even tough on the patients. And so what we've heard, we have a bunch of KOLs that provide us with input. What we've heard is probably like every modality like monoclonal antibodies and the RNA stuff and the immunotherapies, we're probably in the first generation of cell and gene therapy science.

And they said there will be at least a second generation, probably 1/3. So that's interesting, that's promising. That means that there's going to be a continued learning curve. I think the playing field for us from a competitive point of view, even though we lost some work to a competitor that did more CDMO work than we. What we find out by sort of public disclosures is that we all have the same types of challenges and the science is complex and that we're also learning our way through this. So I think that business is in a good place right now.

That's great. And maybe speaking of the Manufacturing segment, how have you seen the biologics market change over the past few years? You have a bunch of scaled players now in that market. So how would you characterize the competitiveness and sort of what the go-forward opportunity is for Charles River there?

Yes. So it's been a -- it's a really important business for us. I mean you're testing large molecules, which is at least half of what the FDA approves every year. It could be -- it could be in the future nuanced to be more than half, it's at least half. It is the most, as you said, the most competitive situation we have. We -- all of our competitors are companies as big or bigger than Charles River. We're all capable of doing the work. We're all about the same size in terms of the amount of biologics work we do approximately.

We had a big pop in COVID in that business, just a huge pop with high teens growth and escalating operating margins and then sort of pull back after COVID, some hesitancy now -- hesitant is not the right word, some softness in demand right now totally related to biotech funding. So it's been kind of a slow year began to improve in the third quarter. And we still think it's a really important business for us. What we like about the whole Manufacturing segment. I think I haven't said this today is I like the barbell effect of a bunch of businesses that are -- some businesses in discovery, a bunch of businesses in preclinical and then all the manufacturing ones are really clinically based. So as the funding sort of ebbs and flows and moves, we love it when it's sort of equal spending in preclinical and clinical, but when it shifts around like it has been for the last 18 months, heavy into the clinic, for instance, it's nice to have some assets that are clinically related.

Yes. No, that makes sense. And maybe the same question about the microbial market. That's a market you guys have obviously have a very nice presence in and have had for years. What do you see as sort of the next stage of drivers in that market over the next couple of years?

So just an extraordinary business that we've owned almost for 3 decades with incredible operating margins and sustainable high growth pure IP, probably the only business we have that's really pure IP. We have some iterations now that are this is a technology that uses the blood of horseshoe crabs, it is the reagent this now sort of non horseshoe crab based technology that I think we have a leadership position.

So this is an amazing business because the testing, which is a medical devices and injectable drugs is required by law. So you're constantly sampling drugs after they've been manufactured to make sure they didn't become contaminated. So it's sort of the gift that keeps on giving. Our technology is a razor and razor blade technology. So we have this huge installed base of machines, large and small machines around the world and constantly using these disposable cartridges. And so this is a net result of this is it's a very high margin. We keep improving the automation of manufacturing of the machines and the cartridges and sort of how we run that business.

So I do think we can continue to improve the margins. So really important business for us. We do have some serious competitors in that business, companies that are sort of comparable to us, I think they're way behind us from a scientific point of view and from an IP point of view.

Got it. And maybe talking about going back to some of where you were seeing a little bit of the CDMO, but maybe more broadly across your business. Where are you seeing the most success in your cell and gene therapy portfolio today? And as we sort of move into the current cycle and maybe go into the next generation of drugs, like where is Charles River's real differentiation for those -- for that sort of drugs and sort of do the full set of capabilities that you want in that, the right set? Like how do we think about that?

Yes. I think the capabilities, as I said, we have these 3 buckets. I think that we are playing well from a quality of technology point of view in all 3 buckets. So I don't -- there's no need to do any more M&A in that space. I don't think there's any need to any time soon to expand the facilities.

As I said, we've invested significantly in them. They're in very good shape right now. We have enough incremental capacity to take on additional work. So it's really all about these clients that are moving from a sort of a clinical genre into a commercial genre to stay with us and to have significant needs and more -- the goal would be to have a more stable revenue generating cadre of clients that order several years out. And so you have much more stability, you have much more predictability, and I'm sure you have much better margins.

Got it. No, that makes sense. When we're sitting here in December 2026 on the same stage, what are you going to be most excited to have done in 2026 to sort of accomplished? And how would you think about sort of from a longer-term perspective into '27 and beyond, the broader opportunities for Charles River?

Yes. So I think short term, we want to complete the divestiture of these businesses, which we've said, we're confident we'll do that in the first half of this year. So we feel good about that. We have several M&A opportunities that we're working on right now that we will complete sometime in 2026 as well. Right down our core, the 3 or 4 things that I mentioned earlier, continuing to refine the portfolio from an efficiency point of view, reduce our costs, reduce our G&A costs as a percentage of revenue, get some stuff offshore, more investments in automation in digitization for sure, we will do that.

We're going to continue to look at -- we have a committee of the Board that looks at best use of capital every quarter, and that's everything from debt repayment to share buyback to M&A or all of the above. So I feel very confident that -- and we'll have a CFO at some point.

So I feel very confident that we're going to be able to do all of those things. I also didn't mention that besides M&A and some deals in the NAM space, we have sort of 2 groups looking at this. We have actually a committee of our Board that works on NAMs.

Two of the marquee people on that committee. We have the former CEO of Sloan Kettering and the former Dean of Duke Medical School. So very heavy medical doctors who understand the space well. And we have an internal group, which is a bunch of Charles River experts in NAMs, but we have a new leader of that group, who is a former #2 person in the FDA, who is an expert in NAM. So really doing quality science being familiar with the landscape, making the proper investments in NAM space, I think, will be very important.

And I think beyond '26, I think we have a huge market opportunity in the core businesses. That's not to say that there aren't some adjacencies that would make sense. But I think further investment in the core, greater depth of science, greater geographic expansion like China, as I said earlier, I think, would hold us in good stead.

Well, that seems like a good place to end it. So thank you very much, Jim.

Pleasure.

All right. Good morning, everybody. It seems like the morning is flying by. I'm Dave Windley with Jefferies Healthcare Equity Research. I'm based in the States, actually in Nashville, Tennessee. I cover CROs for Jefferies and I passed my 25th year of doing that for Jefferies this year. So I have hair, but it's all gray.

We're very pleased to have again Charles River Laboratories here with us and Birgit Girshick, the company's COO. Thank you, and Todd Spencer is lead IR in the audience with us as well. But Birgit, thank you for being with us.

Thank you.

We've done a triple header with Charles River this year. We went to one of their important sites yesterday and a breakfast this morning. And so Birgit is definitely tired of me already.

But we'll -- let's start off just with a discussion of the demand environment. I think that's been topical. The bookings, softness in biotech that you saw through the summer and how you're seeing that kind of accelerate, I should say, bookings, RFPs, request for quote, but how you're seeing that progress as you move out of the summer and into the fall and winter?

Yes, certainly, happy to. So in our earnings call, we discussed what we're seeing in forward-looking KPIs as well as backward-looking KPIs really. So we discussed what we have seen in Q3 which was kind of a little bit of a mixed bag still. So we announced our net book-to-bill to be at 0.82x, flat from Q2. We also indicated that was -- it was mainly driven by biotech being a little bit -- had a little low in Q3. But what we've been seeing is improving bookings in biotech over the last few months.

So going from a low in the summertime with improving month-over-month bookings, which is a positive indicator for us. We also have seen good proposal volume, both in our biotech segments, in our global segments, which gives us a lot of confidence in the future and into the upcoming quarters.

With the book-to-bill is -- there's actually 2 factors to it. So there's the actual net book-to-bill, which is still not quite over 1x, but we are also looking at how quickly work is being booked, which has accelerated for us in the last few quarters. So we often see work being booked in the same quarter or the next quarter, which certainly helps our top line.

So a little bit of good news story here with some mixed indicators like the net book-to-bill. We are seeing pharma being a lot more stable for us and biotech improving. So looking forward to hopefully more stable net book-to-bill in the future. But at this stage, that's where we are.

Got it. Very helpful. Within that, consistent with attracting the business, pricing discussions have touched on using pricing strategically, trying to defend or gain share. I think pricing, discounting was a little more aggressive in the market generally and maybe for Charles River included earlier in the year. Maybe discuss the progression of that. And should we think about the pricing in the backlog that we'll see in revenue in the near term as being better than, worse than? Is there a pricing factor that we should be thinking about in the near term?

Yes. Maybe let me touch on competition here for a second first. So Charles River in the Safety Assessment market holds about 30% market share. That's our estimate. Our next largest competitor is about half the capacity than Charles River has. And then the competitors after that are considerably smaller. So Charles River is known to compete based on regulatory compliance, our client centricity, our strengths of our portfolio. We are definitely the market leader in specialties and providing consistent and high-level quality to our clients.

In a market where demand is a little bit softer than we all would like to, many of our competitors are using price discounts to buy themselves better capacity utilization. During a time like this, we will strategically use price to maintain market share, to gain new clients and to win work that we really, really want, like some of the specialty work as a follow-on work of like a 4-week study.

So in 2023, 2024, we saw quite a bit of a shuffling going on with pricing. Since then, what we have been seeing is really a stable price -- stable spot price. So if you think about it this way, the discount hasn't gotten worse, but pricing also haven't gotten much better since then.

But we are in a stable environment for that. And if you look at our quarters over the last 3 quarters, we've actually seen a price/mix ratio. So we're always looking at price and mix together that has been actually a tailwind for Charles River. So we are not seeing a headwind from price, particularly in our Safety Assessment business. All our other businesses are getting price as well. So that's also good news. Going forward, we don't see any indicators that this needs to necessarily change. So not looking at headwinds from pricing per se.

Okay. Within DSA, Discovery is a relatively smaller -- quite a smaller part of that business. I think logically, maybe an area for clients that can be sacrificed in the short run when budgets are tight. And so that has been softer for some time. How is that environment stabilizing or not?

Yes, certainly happy to touch on that. So our Discovery business is a relatively small part of our company. So it's actually -- it's 10% of our DSA segment, just to size that. Dave, you're right. So Discovery in a time when biotech funding is hard to come by is -- has been quite soft for us. And we're -- even so we are in a niche play for our discovery services, where we work with biotech clients mostly that don't have the internal capacity to run studies themselves.

We have seen certainly the need for Discovery services decline over time. We do believe that this will rebound with the better biotech funding. And we do think that many of our services are required in that space for clients to get actually into -- towards the toxicology services. And so therefore, we should see some uptick in that. And we will certainly continue to refine our portfolio to make sure that we have the most competitive portfolio available for the company.

Got it. And then remind me from a sales go-to-market and strategy standpoint, I think some years ago, you went to a combined DSA sales force. So how does the sales force adjust to that demand environment? And how much is -- I think the answer is small, but how much is Safety Assessment dependent on pull-through from Discovery -- your capture of clients at the Discovery stage?

Yes. Let me start with the second question here. So because of the size of our Discovery services, the need for pull-through and even the pull-through from Discovery into Safety Assessment is relatively minimal in our sales strategy. The way we look at it is that we provide a portfolio to our clients that will maximize the -- for us to be able to get a share of the wallet of the client. So a lot of times, we actually start working with them in Safety Assessment. And then because of the reputation, the quality, the service we provide to clients, they actually backwards integrate and give us some Discovery services.

So rather than starting necessarily with a very early stage and it goes into Safety Assessment, our clients are picking and choosing throughout the portfolio and not just in DSA, but also in manufacturing and RMS, where they want to enter with us and what the work they want to do. So everything we look at -- the way we look at our services and products is how can we maximize the share of the wallet.

So that said, about a year ago, we decided that it would be more synergistic for us to operationally and from a go-to-market perspective, run our DSA business holistically as one DSA. That allows us to utilize scientists, leadership, sites and our sales organization and marketing organization better and more holistically. And particularly for small clients there, we're touching on a lot of times the same contact or at least the overall same decision-maker in an organization.

So for our sales reps to go into a client, and have this holistic discussion, not just a point-in-time discussion or point of service discussion is helpful to create that synergistic buying pattern. And so this is why we went there and did that. So that's about a year in now. I think it helps us to understand the client better and in some cases, helps the client to understand our portfolio better.

Thank you for that. That confirms what I had thought you had done. So thank you. Let's talk about China as it relates to this. So first of all, you do have some lower-cost competitors to your DSA business in China. And then I want to get to the growing licensing activity by Western Pharma out of China. So talk about how kind of that competitive interplay with China preclinical CROs.

Yes, certainly. So China is actually a story of a few different legs for us. So I'll start actually with the in-licensing of programs from China by many of the larger companies here in the U.S. and Europe. So about 30% of all the programs are now in-licensed from China. This is something that we are watching very closely out of 2 reasons. Number one, most of that work is already done in China, the preclinical work and often the clinical work. So by the time it's in-licensed by one of our clients, the need for preclinical work is minimal. Sometimes they will redo a study. Sometimes there is post-IND work that still needs to be done. Sometimes it's just some pushback from a regulatory agency. But generally, the touch from us for Charles River on this work is minimal. So obviously, we -- that's one reason we continue to watch it.

Second reason is just the impact on biotech in general. How will this impact the funding, the studies that are being run in the U.S. by biotech companies, which programs will they do versus what comes out of China. So definitely a concern of ours.

The other area that we are watching with China is particularly drug discovery going to China. So that's a trend that has happened now for a few years. A lot of the chemistry work is done in China. Some of the biology work is now done also in China. So there are some really good providers. You might remember one of the acquisitions we were trying to do with WuXi. So now basically one of our main competitors in China is there.

This is a train that seems to have left the station a little bit. So obviously, we'll continue to see what other services they will take market share from. Regulatory work is still very, very infrequent. But certainly something we will be watching.

And then thirdly, the market that is China for China. That is an area that is of interest to us. Obviously, a market that we are not playing in a lot right now. We have some RMS products and services in China. And -- but we are looking to see if, when and how we will expand our services portfolio there.

So the -- that expansion, I wanted to make sure we got to. And I think of the -- in China for China being more of the low-cost development work for products to be commercialized in China and perhaps in China only as distinct from global pharmaceutical companies wanting to develop at GLP standards to commercialize ex China or globally, is your interest in both?

The interest is in both, but the market there is quite split. So there's players that are servicing outsourced work from Western countries into China. And there's players that are primarily servicing the China for China. So at this point, we're learning more about the Chinese market -- the Chinese players. And that's why I said if, when and how, we need to learn a lot more of the market, the right timing. We're certainly watching the geopolitical pressures that are going on as well. And so there will be quite a bit more information gathered before we do anything there.

Got it. So let's transition to RMS. You had some benefit in the third quarter from NHP shipments and the timing of those pulled from third quarter to fourth quarter. Maybe using that as a step off, where is the NHP market today in terms of quantity of use, price stability, sourcing, all that fun stuff?

Yes. Happy to talk about it. So for RMS specifically, what we talked about was an NHP shipment that we had planned for in Q4 that was pulled forward into Q3. So the full year guidance was still accurate, but the timing between the 2 quarters just shifted. So just see it as a shift as of such.

Maybe as a background, so the nonhuman primates are being used in our Safety Assessment DSA segment on studies, but we also have nonhuman primates from farms that we own that are sold in the open market, both in China as well as in Mauritius.

In China, we're doing that because we don't have any activities in China right now and can't get the animals exported. And then in Mauritius, when we took ownership of the Noveprim supply source, there was contract in place, and we are honoring those contracts with sale directly to a customer here in the United States.

So that said, the supply chain of nonhuman primates, I would call as stable. We have done considerable amount of finding new suppliers, firming up new suppliers, finding different sources of supply, but also firming up how we oversee those farms. And we feel that we are in a pretty good state right now, and we'll have enough nonhuman primates going forward for the upcoming years.

Maybe also good news. We closed out the DOJ and SEC investigations in the past few months. SEC actually just announced that this week with no indication that there was any concerns about the animals. So we are really happy about that. And with that, took the opportunity to just implement a lot of improvements such as genetic testing and expanded audit programs, expanded oversight of the farms. So overall, we're really feeling good about that.

Got it. So you mentioned with the Noveprim contracts, you're honoring external clients. I think in our previous meetings, you had said that one of those, you have kind of a step function increase in your access at the end of '26, gradual increase and then a fairly significant increase in the end of '26. Maybe walk us through that. And like how many customers is Noveprim servicing that will kind of expire over the next couple of years?

Yes. So what we're talking here is really about one major client. We have some other spot sales from Mauritius when we don't need the full amount, but they don't make out a quantity that we should even size here. So there is a step down after 2026, at which point we can use the animals on our own safety studies if we need to and then a more gradual decrease over another few more years.

We bought the Noveprim farm primarily for having supply for our own safety studies. And so this is giving us additional supply for doing that. I should maybe point out that the -- there's 2 major supplies in nonhuman primates. One is from Mauritius and one is an Asian supply. They're genetically different. So we will always have 2 different sources at minimum, Mauritius and another Asian source to make sure that we have the right animal for our clients. So -- but that is why we were diversifying and that is why we are maintaining different source farms here.

Yes. When you have greater access to internal owned vertically integrated supply, how does that change your cost structure -- for those studies?

It certainly does change the cost structure from our -- on studies from -- for our DSA segment. That's also one reason why we're doing that. What it does take away is the external sales. So there's a little bit of a wash in there, but it will make us more competitive for safety assessment studies, allows us to be a little bit more flexible in our cost structure and with our pricing. So it's definitely a competitive advantage. However, I would stress that the availability of animals and having the steady supply is the biggest competitive advantage we have.

Okay. Let's transition to the small animal part of the business. It sounds like Europe and China have held up relatively well. North America has been the area where volume has been a little soft compare and contrast the regions for us on small on [indiscernible] ?

Sure. Happy to. So when you look at the different markets, what we're really looking at here is a different client segment. So in the U.S., we have seen a heavier volume decline in research models than we actually expected, and that was driven by the biotech segment. And if you think about Europe and China just has different dynamics in biotech and different funding opportunities in biotech. Just like with our Safety Assessment organization, we believe that when biotech funding stabilizes and the demand comes back, we will also see the research models volumes to come back equally as strong as with the Safety Assessment.

That said, it's important to note that research models volumes have come down year-over-year for decades, and that is because of our 3R programs, so using fewer animals on studies. And generally, we have enough pricing power in this business to offset any volume declines. When we talked here about the impact on the North American market, here, we were not able to use price enough to offset the volume.

Let's skip forward to a couple of topics here in the last 1.5 minutes or so. With the third quarter and with a little bit of an update on the strategic review, the company also added to your longer-term cost saving initiatives, $70 million. What are the sources of those $70 million? What levers are you pulling to be able to top that up?

Yes. So you should look at the sources very similar to the initial cost savings that we announced. So we announced about $225 million cumulative annualized cost savings with some carryover that is still going into '26, an additional $70 million that we will annualize cost savings into '26 as well. Those are everything from some site consolidations, putting efficiencies in our G&A is a big focus area, some outsourcing of maintenance activities in our facilities. There's always, always going to be some procurement initiatives.

And then really looking at how we operate in our businesses, particularly in our safety business, digital savings, automation, putting efficiencies in place. So this will be an ongoing initiative. And with that, we should be able to protect or improve margin.

Okay. So protect or improve. Still -- you're not guiding yet, so still to be seen on that, but -- but either of those could be on the table.

That's what we're trying to do.

Okay. Maybe a last -- yes, so getting close on time, I know. In terms of deployment, you talked about proceeds from the strategic review. You have relatively low leverage. I think you talked about repurchases on the table, but then also maybe some acquisitions. Where would those acquisition targets be?

So we have a clear strategic road map for acquisitions. And what we are looking here is areas that are core to our business that will help us to get a bigger share of the wallet for our clients. There are a few different areas that we are very interested in. Some of -- are in the bioanalytical area. So we do a lot of that work already, but we would like to expand our capacity and our outreach in this space. We already talked about China being a potential there. Obviously, it has to be seen. And then there are some ancillary other areas such as potential NAMs opportunities that we will look at.

Okay. That's great. Nice efficient answer. I appreciate that. I appreciate the audience's attention and enjoy the conference.

Thank you.

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Third Quarter 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions]

I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Charles River Laboratories Third Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Mike Knell, Senior Vice President, Interim Chief Financial Officer and Chief Accounting Officer. .

They will comment on our third quarter results for 2025. Following the presentation, they 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.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today. And can be also accessed on our Investor Relations website.

The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated.

During the 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 the 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.

Thank you, Todd, and good morning. Before I comment on our third quarter results, I'd like to discuss our strategic review. As you know from today's press release, we provided an update on our comprehensive strategic review. The Board strongly supports the company's strategic direction and believes we should continue to focus on strengthening our leading scientific portfolio within our core markets, divesting underperforming or noncore assets maximizing our financial performance and maintaining a disciplined approach to capital deployment.

I would like to thank our Board for the progress that it has made on such a thorough and collaborative review process. which has and will continue to evaluate a wide range of value creation options to help ensure the best strategic path forward for the company. As we move forward to support our strategy, we will focus on several strategic actions to help drive long-term shareholder value creation.

The first action is continuing to strengthen our portfolio by investing in core growth initiatives, including through M&A, partnerships and internal development efforts. We have built a scientifically differentiated portfolio, which enables us to take advantage of the unique opportunities that are present across the evolving biopharmaceutical landscape. Our focus on science and innovative solutions designed to enhance the efficiency and speed to market of our clients' life-saving therapeutic programs has positioned us extremely well to continue to adapt and lead the industry through advances in drug development such as NAMS or new approach methodologies.

We have identified areas of future growth, all of which are well within our core competencies including opportunities across our 3 business segments. Specifically, we will evaluate opportunities to enhance our scientific capabilities in the areas of bioanalysis, in vitro services and NAMs as well as to continue to evaluate our geographic presence. The second action to refine our portfolio addresses our ongoing efforts to streamline operations and maximize our financial performance.

As part of our portfolio review over the past several months, we have evaluated the strategic fit and fundamental performance of our global businesses and infrastructure. And as appropriate, will take actions to drive long-term value creation. These actions are expected to result in the sale of certain underperforming or noncore businesses, which will enable us to focus on more profitable growth opportunities. In aggregate, these businesses represent approximately 7% of our estimated 2025 revenue. Once completed, the proposed divestitures are expected to result in non-GAAP earnings accretion and of at least $0.30 per share on an annualized basis.

This does not include any benefit from the reinvestment of the transaction proceeds or impact to net interest expense. We will strive to complete any potential divestitures by the middle of 2026. We will also continue to focus on new initiatives to drive greater efficiency in our business and maximize our financial performance. As you know, we have taken extensive action with a goal to protect our operating margin and reinvigorate earnings growth. Over the past few years, we have already implemented restructuring initiatives that are expected to result in approximately $225 million in cumulative annualized cost savings in 2026 and which represents a reduction of more than 5% of our cost structure.

In addition to these actions, we are also implementing initiatives designed to drive process improvement and greater operating efficiencies including through procurement synergies and implementation of a global business services model. These additional initiatives are expected to generate incremental net cost savings of approximately $70 million annually which will be fully realized in 2026. We also expect to continue to transform our relationships with our clients through best-in-class technology platforms and access to clinical data becoming an even more efficient partner for them.

Finally, we remain committed to deploying capital in a disciplined and value-enhancing manner. We will continue to regularly review the optimal balance between strategic acquisitions, stock repurchases, debt repayment and other uses of capital. As part of our capital allocation strategy, the Board of Directors approved a new $1 billion stock repurchase authorization. This replaces the previous stock repurchase authorization for which we had repurchased $450.7 million in common stock since August 2024. We will regularly and carefully evaluate the prudent level of stock repurchases going forward and we'll take into consideration valuation, future growth prospects expected returns and earnings accretion from repurchases as well as our leverage and other uses of cash.

With these actions clearly outlined, we are intently focused on executing this plan to enhance the company's long-term value by building upon the core strengths of our unique portfolio, advancing scientific innovation and driving greater efficiency in both our operations and our clients' R&D and manufacturing efforts. Moving on to our quarterly results and demand trends. We are continuing to see clear signs that client demand has stabilized. Many of our global biopharmaceutical clients appear to have progressed through their restructuring efforts and the biotech funding environment showed increasing signs of improvement throughout the third quarter.

These are positive signals that the industry may be on a path towards recovery and the improvement we saw in DSA proposal activity during the third quarter strongly supports this view. At the same time, there is still some uncertainty in our end markets. Therefore, we will continue to remain cautious at this time and focused on strong execution to drive further wallet share gains with our clients. The business trends in the third quarter were consistent with those that we described in August.

With RMS performance benefiting from the favorable timing of NHP shipments in the quarter. DSA revenue declining sequentially as the first quarter booking strength that contributed to meaningful outperformance in the first half of the year, return to recent historical levels and manufacturing revenue declining primarily due to the completion of work for commercial CDMO clients. Collectively, trends were slightly better than we had expected which led to modest outperformance in the third quarter.

Before I provide more details on these trends, let me provide highlights of our third quarter performance and updated outlook for the year. We reported revenue of $1 billion in the third quarter of 2025, a 0.5% decrease year-over-year. On an organic basis, revenue declined 1.6% and as declines in both the DSA and manufacturing segments were partially offset by an increase in the RMS segment. Third quarter revenue slightly outperformed the outlook provided in August. By client segment, Revenue for small and midsized biotech clients declined, reflecting tighter budgets likely driven by the softer biotech funding environment as we exited 2024 and in the first half of this year.

Revenue for global biopharmaceutical clients remained below last year's level, but that was primarily due to the loss of a large commercial client in the CDMO business who's worked at our [indiscernible] wound down in the second quarter. revenue increase for global biopharmaceutical clients in both the RMS and DSA segments demonstrating that preclinical demand from this client base had bottomed and is beginning to improve. Consistent with the upward trajectory in the DSA booking activity at the beginning of this year.

Revenue for global academic and government clients increased slightly in the quarter, we have not experienced any meaningful impact from NIH budget uncertainty or the government shutdown to date. The operating margin was 19.7% in the quarter, a decrease of 20 basis points year-over-year, also driven by the DSA and Manufacturing segment. This anticipated margin decline primarily reflected lower sales volume in the DSA segment. and lower commercial CDMO revenue in the Manufacturing segment. For the full year, we continue to expect the operating margin will be flat to a 30 basis point decline, unchanged from our prior outlook.

Earnings per share were $2.43 in the third quarter, a 6.2% decline from the third quarter of last year, but modestly above our prior outlook. The tax rate was the most significant year-over-year headwind as we had anticipated, totaling $0.24 per share in the quarter due to the enactment of new tax legislation. Mike Knell will provide additional details on the nonoperating items shortly.

With 1 quarter remaining, we are narrowing our revenue and non-GAAP earnings per share guidance ranges for the year. We now expect 2025 organic revenue will be in the range of 1.5% to 2.5% decrease or the middle of our prior range. We also expect our non-GAAP earnings per share will be at the top end of our prior range at $10.10 to $10.30, reflecting a $0.10 increase from the midpoint of our prior guidance range.

I will now provide details on the third quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $600.7 million in the third quarter, a 3.1% year-over-year decrease on an organic basis driven by lower revenue for both Discovery and Safety Assessment services. As was the case during the first half of the year, lower sales volume was partially offset by a modest benefit from favorable study mix we can also report that spot pricing remained stable overall.

Although the DSA backlog declined to $1.80 billion at the end of the third quarter, from $1.93 billion at the end of June, DSA demand KPIs were stable in the third quarter. The DSA demand environment remained quite stable from the trends that I described 1 quarter ago, including a third quarter net book-to-bill ratio of 0.82x, which was identical to the level reported in the second quarter.

The cancellation rate improved in the third quarter and continued to normalize towards historical levels. Net bookings decreased slightly on a sequential basis to $494 million in the third quarter reflecting lighter booking activity for small and midsized biotech clients during the summer months. However, booking activity from biotech clients has improved since the summer leaving us cautiously optimistic that biotech demand will accelerate over the coming quarters, assuming clients continue to have access to more robust funding for their IND-enabling programs.

Booking trends for global biopharmaceutical clients remained healthy in the third quarter and were stable on both a sequential and year-over-year basis. We were encouraged by these overall booking trends that led to a steady increase in the DSA net book-to-bill in each month since the beginning of the third quarter. We were also pleased to see DSA proposal activity improved in the third quarter, particularly for biotech clients for which proposals increased at a high single-digit rate, both year-over-year and sequentially.

Collectively, this reinforces our cautious optimism that booking activity for biotech clients will continue to improve. For the year, we expect DSA revenue will decline 2.5% to 3.5% on an organic basis. The focus for us, our clients and many of you in the street begins to shift to 2026. We are closely monitoring the level of bookings that are needed to drive DSA revenue growth next year. It's still too early to provide even a preliminary outlook because we are still fully engaged in the budgeting process. And we'll need to monitor demand activity over the next several quarters.

Bookings at the end of the year and the first quarter of next year will meaningfully influence our growth potential. As will other drivers such as backlog, conversion, change orders, study mix and related factors. That said, we firmly believe that DSA business demand trends are stable. And there are positive signs indicating biopharma demand will rebound, including improved biotech funding and proposal activity in the third quarter as well as more certainty around tariffs and drug pricing in the global biopharmaceutical sector.

For the third quarter, the DSA operating margin declined by 200 basis points year-over-year to 25.4%. The decline was primarily due to the impact of lower study volume. We expect the fourth quarter DSA operating margin will face additional pressure from 2 primary factors. First, we expect higher staffing costs due to hiring in part to backfill open positions. And we also expect higher third-party NHP sourcing costs due to the procurement of additional models to support the better-than-expected demand this year.

RMS revenue was $213.5 million, an increase of 6.5% on an organic basis compared to the third quarter 2024 and essentially unchanged on a sequential basis. The higher RMS growth rate this quarter was driven by the favorable timing of NHP shipments. As we previously noted, NHP shipments were accelerated into the third quarter. And as a result, NHP shipments are expected to be a modest headwind to year-over-year revenue growth in the fourth quarter. For the year, we continue to expect RMS will report flat the slightly positive organic revenue growth as the quarterly fluctuations from NHP shipments largely normalize on an annual basis, and the underlying RMS demand environment remains stable.

From a client perspective, revenue from both our academic and government clients segments increased again in the third quarter, including a slight increase in North America aside from a small $3 million reduction in scope of an NIH aging contract that I referenced last quarter, we have not experienced any meaningful revenue loss related to NIH budgets and the uncertainty in Washington to date. Demand from small and midsized biotech clients have been more challenging this year, having a notable effect on the growth rates for small models, particularly in North America this quarter, as well as cradle site occupancy.

In the third quarter, revenue for small research models was essentially flat as revenue increases in Europe and China were offset by North America, where price increases could not fully offset unit volume declines, particularly for biotech clients. Revenue for research model services increased slightly in the third quarter driven principally by the GEMS business.

Insourcing Solutions revenue was flat because cradle occupancy has remained relatively stable this year. but overall demand from early-stage biotech clients for these services remain constrained due to funding challenges. In the third quarter, the RMS operating margin increased by 400 basis points to 25%. The improvement was primarily due to a favorable mix resulting from higher NHP revenue as well as the benefit of cost savings resulting from our restructuring initiatives.

We anticipate that the third quarter RMS operating margin would be robust due to the favorable timing of NHP shipments, and we expect and we continue to expect the fourth quarter RMS operating margin will moderate due to the timing of NHP revenue and normal seasonality in small models business. Revenue for the Manufacturing segment was $190.7 million, a 5.1% decrease on an organic basis from the third quarter of last year, largely driven by lower commercial revenue from CDMO clients.

The CDMO business as well as biologics testing are also driving a slightly less favorable outlook for the segment as we now expect manufacturing revenue to be flat to slightly lower on an organic basis this year. compared to our prior outlook of approximately flat. However, the Microbial Solutions business continued to perform very well, reporting high single-digit revenue growth in the quarter. As we have discussed throughout the year, our relationship with 1 commercial cell therapy client has ended, and the work for that client wound down during the second quarter.

This creates an approximate $20 million revenue headwind for the CDMO business in the second half of the year when compared to the first half. However, we are pleased to report that we are continuing to work with another commercial cell therapy client in our Memphis site. The Biologics Testing business reported lower revenue again in the third quarter, driven by the continued impact of lower sample volumes this year for both biopharma and CDMO clients, particularly several large clients facing project delays or regulatory challenges.

Booking activity did improve during the third quarter. So we are cautiously optimistic the demand trends in the biologics testing business will stabilize. The Microbial Solutions business generated robust revenue growth and remains on track to grow at a high single-digit rate for the year. We experienced strong demand across our comprehensive manufacturing quality control testing portfolio, including Accugenix microbial identification services led by increased access instrument placements share gains for our Endosafe endotoxin testing platform and higher sales of Celsis microbial detection products.

Clients continue to choose our Endosafe cartridge-based platform for rapid test results and we have been increasingly able to gain share due to the placement of automated systems and technology that drives efficiency in our clients' quality control testing labs. The Manufacturing segment's operating margin decreased by 200 basis points year-over-year to 26.7% in the third quarter due principally to lower commercial revenue from CDMO clients.

Before I conclude, I'd like to provide an update on our strategy for NAMs or new approach methods. You may have recently read our press release announcing our Scientific Advisory Board former FDA Principal Deputy Commissioner, Dr. Namandjé Bumpus, will lead the Advisory Board whose mission is to provide strategic guidance to our team of internal scientists and business leaders in evolving the company's comprehensive commercial and regulatory strategy to advance names in the biopharmaceutical industry.

We are extremely pleased that Dr. Bumpus has agreed to oversee this important initiative to drive alternative method innovation and adoption. Last quarter, I spoke of some of the in vitro capabilities that we are developing across our DSA sites. Today, I will highlight some of our NAMs capabilities utilized across our portfolio, including next-generation sequencing solutions in our biologics testing business to provide an in vitro approach for pathogen testing as well as genetic characterization of cell lines and drug products produced under GMP conditions.

Additionally, our Endosafe Trillium recombinant bacterial endotoxin test is an animal-free product, that reduces reliance on Horocrab-derived LAL for antitoxin testing. We continue to see increased client adoption of Trillium, albeit from a small base after its launch last year. In our DSA business, we are developing an in vitro assessment of human immunogenicity to support clients developing biotherapeutics, including monoclonal antibodies and cell and gene therapies, as well as to gain share in the biosimilars market, for which animal testing is minimal and no longer required.

By providing clients with valuable immunogenicity data, we will be able to help offer insights into the potential immune response against the drug. We continue to believe that adoption of more NAMs enabled approaches will be a gradual long-term transition by our clients because of scientific capabilities to fully replace animal models do not exist today. As a leader in drug development and manufacturing support solutions, we have the breadth of scientific capabilities regulatory expertise and access to data that will enable us to be at the forefront of NAMs innovation.

And that makes us the logical partner for biopharmaceutical companies to advance their use of NAMs as alternative technologies over time. Before I conclude my remarks, I'd like to introduce Mike Knell, our Interim Chief Financial Officer. Mike Knell been with the company since 2017 as the Senior Vice President and Chief Accounting Officer, and has agreed to lead the finance organization through the transition until a new CFO can be named.

Mike is a valuable member of our management team and has worked closely with the CFOs during his tenure. He is a deep knowledge of our business, financial reporting and forecasting processes as well as the finance team. we are working together collaboratively to ensure a seamless transition of the CFO role.

Now Mike will provide additional details on our third quarter financial performance and updated 2025 guidance.

Thank you, Jim, and good morning. I'm pleased to join today's call as interim Chief Financial Officer. Throughout my 8 years at Charles River, I have gained a great understanding of our global business and have tremendous confidence and our team's ability to execute on the company's strategic and financial priorities. I want to thank Jim and the Board for their support.

Before I begin, may I remind you that I will be speaking primarily to non-GAAP results which exclude amortization and other acquisition-related adjustments, costs related primarily to restructuring initiatives, gains or losses from certain venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation.

We are pleased with our third quarter performance. which included revenue and non-GAAP earnings per share that modestly exceeded the outlook we provided in August. As a result of the third quarter outperformance, we are narrowing our revenue and non-GAAP earnings per share guidance. We now expect full year reported revenue will decline 0.5% to 1.5% and organic revenue will decline 1.5% to 2.5% or at the middle of our prior ranges.

Non-GAAP earnings per share are now expected to be in a range of $10.10 to $10.30 or at the upper end of the prior range. The $0.10 guidance improvement at midpoint was largely driven by the third quarter operational outperformance. By segment, our updated revenue outlook for 2025 can found on Slide 29. We have narrowed the organic revenue outlook for the DSA segment to a decline of 2.5% to 3.5% to reflect better-than-expected performance to date.

You may recall that we started the year with initial DSA outlook of a mid- to high single-digit organic revenue decline. We have slightly tempered the Manufacturing segment's revenue outlook to flat to a slightly negative organic decline and the RMS outlook is essentially unchanged. The outlook for the operating margin is also unchanged. And as flat to a 30 basis point decline.

Unallocated corporate costs totaled $58.9 million in the third quarter or 5.9% of revenue compared to 6.6% of revenue in the same period last year. The decrease was primarily due to lower health and fringe-related costs. For the full year, we continue to expect unallocated corporate cost will be approximately 5.5% of total revenue unchanged from the prior outlook. I will now provide an update on the nonoperating items.

Total adjusted net interest expense was $24 million in the third quarter which represented both a sequential and year-over-year decline. The reductions were primarily the result of shifting debt to lower interest rate geographies. For the full year, we expect total net interest expense will be in a range of $100 million to $105 million, consistent with the prior outlook. At the end of the third quarter, we had outstanding debt of $2.2 billion with approximately 70% at a fixed interest rate. Compared to $2.3 billion at the end of the second quarter.

In addition to lowering our interest expense, continued debt repayment resulted in gross and net leverage ratios of 2.1x at the end of the third quarter. The non-GAAP tax rate in the third quarter was 28.3%, representing an increase of 700 basis points year-over-year. As expected, the increase primarily reflected the impact of the one big beautiful Bill Act or OB3, as well as the impact of the enactment of certain global minimum tax provisions.

For the full year, we continue to expect our non-GAAP tax rate will be in the range of 23.5% to 24.5%, which is unchanged from our prior outlook. Free cash flow for the third quarter was $178.2 million compared to a record $213.1 million achieved in the same period last year. The year-over-year decrease was primarily driven by lower earnings. However, free cash flow improved sequentially by $8.9 million as a result of continued improvement in working capital. Capex $35.6 million or approximately 3.5% of revenue in the third quarter compared to $38.7 million last year, reflecting our focus on disciplined capital spending.

For the full year, we expect free cash flow to be in the range of $470 million to $500 million, an increase from our prior outlook of $430 million to $470 million due to the robust third quarter cash generation Capex will be approximately $200 million, a decrease from our prior outlook, and at approximately 5% of 2025 revenue that will be well below our peak capital spending in recent years. The improved free cash flow outlook reflects our tightly managed capital spending and disciplined working capital management.

As Jim mentioned, the Board refreshed our stock repurchase authorization in October to a new $1 billion all of which is available for future repurchase activity. We will continue to evaluate the optimal balance between strategic acquisitions, stock repurchases, debt repayment and other uses of capital as part of our capital allocation strategy. With our strong free cash flow generation, we will regularly evaluate making additional stock repurchases under this authorization. As part of the strategic review, we will continue to work diligently to maximize our financial performance including through disciplined capital deployment and by actively managing our cost structure.

A summary of our 2025 financial guidance can be found on Slide 35. With 1 quarter remaining, our fourth quarter outlook is effectively embedded in our full year guidance. For the fourth quarter, we expect reported revenue to be in a range of flat to a low single-digit decline and organic revenue will decline at a low to mid-single-digit rate year-over-year. Looking at the sequential progression from the third quarter, RMS revenue will be lower due to the acceleration of NHP shipments into the third quarter as well as normal fourth quarter seasonality.

DSA revenue is expected to be stable to modestly below the third quarter level and manufacturing revenue is expected to improve due to the year-end ordering patterns in the Microbial Solutions business. Non-GAAP earnings per share are expected to be flat to 10% below the third quarter level of $2.43, reflecting margin pressure in the DSA segment due in part to higher staffing and NHP sourcing costs. and in the RMS segment due to timing of NHP shipments and normal seasonal trends.

In conclusion, we are pleased with our third quarter performance, which modestly exceeded our expectations and with the actions that we will undertake as part of the Board's strategic review. The initiatives we are taking to strengthen our portfolio, maximize our financial performance and maintain a disciplined capital allocation strategy will further strengthen our market position and lead to long-term shareholder value creation.

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

[Operator Instructions] Our first question comes from Patrick Donnelly with Citi.

Jim, maybe 1 just on the overall backdrop here, back-to-back quarters in that low 0.8% range on book-to-bill. Can you talk about what you're seeing from customers? Is the biotech market loosening up a little bit? I know you guys leaned in a little bit on hiring last quarter.

What's the right way to think about just the demand trends going forward here and what you're seeing from customers?

Yes, sure. We're seeing proposals up pretty much with pharma client, large prime clients and our biotech clients as well. The cancellation levels decline, which is definitely a good thing. We're seeing net bookings up for the pharmaceutical folks and biotech folks still not. We had kind of a slow summer for our biotech clients in particular, but things have strengthened post the summer and we had actually an improvement in monthly book-to-bill for the last sort of 3 to 4 months, which we're really pleased to see.

I think as everybody knows, but if not, just let me state the fact that biotech funding is way up in Q3 and biotech funding for October was the second highest month in the history of all of biotech. So 1 of the things that we've been watching, obviously, very closely is that because lack of funding for the last, I'd say, 18 months is definitely constrained expenditures by our biotech clients.

I think we're going to have to see the continued opening up of the capital markets and access to capital for those folks to feel confident that they'll stay open. But that's a really positive sign for us. And we're seeing we're seeing definitely an improvement in the demand from those folks. And we just have to continue to watch it. and see what the situation is there.

But I would say that things have bottomed out the pharmaceutical companies have finished reducing their portfolios. Biotech has a lot of work going on. I guess 1 last thing that's actually quite relevant. We've been talking a lot about we've been doing a lot of post-IND work, which is sort of the more expensive specialty work, which is great margins, a nice growth rate. but we want both. And so we have begun to see more general tox studies, more early work or IND filings.

And as I think we're seeing 2 things in the marketplace as biotech funding begins to strength and you're seeing more work going on with the clinical CROs, but also we're seeing this early pre-IND work for us. And I think as the capital markets continue to open up or stay open, maybe I should say, we should see more spending by biotech because pharma is quite strong.

Okay. That's helpful. And I guess given that commentary, given the bookings that we've seen in DSA in the last couple of quarters, is there a path to DSA growing in '26? And what does that mean maybe for the margins? Obviously, you guys had the cost outs, which is nice to see. But what is the DSA setup given the bookings and given, again, to your point, maybe a little bit of improving trends in the last couple of months as we head into '26? .

Yes, sure. So we definitely want to see the conclusion of the year, as we always do, and we want to see the beginning of next year. We also want to finish our 2026 budget, but also more importantly, we want our clients to finalize their '26 budgets, a lot of the pharma companies don't do that until sort of mid or sometime at the end of the first quarter. But assuming that happens as predicted, we would want to see continuing improvement in book-to-bill over to a sustained period of time, which we are hopeful that we will see.

And there are other things to take into consideration in addition to that, I should say, not instead of, which is what does the backlog look like, how fast do we move through the backlog and also what's the nature of the studies that we get? In other words, are they longer short-term state of the short-term studies, and they start relatively quickly. that certainly could generate incremental sales. So we'll obviously watch the bookings very closely, and we'll report to you folks whether things continue to improve.

Our next question comes from Dave Windley with Jefferies.

I wanted to drill in on a couple of topics there. You mentioned the long-term studies and wanting a balance of both inferring, want to see more short-term are you seeing that? And what is the difference in, say, what's flowing through revenue versus what you're seeing coming in short term versus long term in the bookings or backlog? .

Yes. So we're beginning to see more short-term work or pre-IND work, which is an important part of what we do and always do we like a balance short and long term and you typically don't get the long-term work until you have the short term work. So I think, as I said a moment ago, that's clearly a commentary on comfort level of our clients to spend more earlier because access to capital has improved over the last, what is it, over the last 4 months. And those and the backlogs now are sort of 9 months, is, and you'll remember, Dave, but that we were sort of 9 months 6 to 9 months, I would say, for many, many years.

And that that's a nice backlog number because it allows you to slot study when stuff slips and it also allows you to get the bookings to get the revenue relatively quickly because study for shorter. So I think that's only good news and a positive indication of incremental spending, particularly by the biotech folks. And given all the things that we just said we should see that playing hopefully through enhanced bookings and revenue as well.

Got it. So relatedly, to your point about slotting studies, 1 of your peers, I believe, talked about RFP flow bookings and then study start timing where the first 2 were okay, but it was the study start timing that was problematic. Are you seeing anything like that? Is that something maybe you've already seen and it's flowed through or you haven't seen yet. I'm just wondering if like study start timing and your ability to kind of move slots in your own calendar would be impacted by clients' willingness to move study starts.

Yes. So we have read and heard that some of our competitors are in that situation. I would say that we're able to start studies relatively quickly and in concert with the time frames that are important to our clients. As I said, so we have a nice backlog, but a shorter backlog with studies that are starting more rapidly particularly when since we have availability. So that lines up really well for us. I mean all 3 of those factors. So we're very much focused on being flexible and accommodating to our clients. It's possible in getting the work started on a time frame that they're interested in.

Okay. And if I could just slide in 1 more, which is, would you be willing on the divestiture of the strategic review, the 7% that you quantify seems like the CDMO is probably part of that, but not all of that. Would you be willing to provide some color on what those targeted divestitures are.

Yes. We're going to stay away from the specificity of that except for the fact that it's around 7% of our revenue and should generate $0.30 accretion on an annualized basis. It's important to the divestiture process, but I think we not be specific about those assets.

Our next question comes from Elizabeth Anderson with Evercore ISI.

I appreciate the updated commentary, Jim, on the NAMs can you talk about whether you're starting to see any change in behavior among any of your client groups regarding NAMS? Are there certain people who are thinking about it, no one's thinking about it. et cetera? And then two, for the incremental $70 million in cost savings, could you maybe double-click on that slightly more and just sort of help us think about pacing of that? And sort of any other details you can provide as to where those savings are coming from.

Sure, sure I'll let Mike take at this question in a minute. On NAMs, the pronouncements by the FDA and others is a recognition or a focus on the fact that if possible, and when the technology is available and works that other technologies could be used or should be used in lieu of or at least in addition to research models. And I think that that's a philosophy that everybody embraces including us, if there are general alternatives, that's great.

The scientific reality is that most of these technologies are relatively nascent and somewhat crude and provide some valuable somewhat anecdotal information relatively early in the drug development process, particularly around the discovery phase. And by the way, that will be really beneficial for companies to focus on a lead compound to hopefully get those lead compounds into the clinic faster and as a result of that to get into the market faster. It should also allow them to spend less time working on drugs to promising.

And except for a very small sliver monocities sort of poster child we don't see them having much impact on safety. So we're hearing very little from our clients, except until the alternatives are scientifically robust. They're going to keeping things the way they have always done them. And there's some internal investment by our clients in as, particularly in the discovery phase. So we're thrilled with the scientific advisory board we put together run by the 2 for #2 gross and we have a host of NAMS technologies in our portfolio and some others that we're looking at from an M&A point of view, which should allow us to provide a leadership be in a leadership position with our clients and the FDA because they're going to have to validate this stuff.

And as you've heard us say before, I think ultimately, we'll probably be filing -- or our clients will be filing data, both NAMs data and animal data simultaneously. So I think that's is going to move. And Mike, why don't you take the cost savings question.

Yes, Elizabeth. So we previously disclosed, we've identified $225 million of annualized cost savings. And then this morning's press release, we talked about an additional $70 million. And when you think about where they're coming from, really think about 5 different categories. The first one, network planning or facility consolidation, site closings, that's been going on for some time. Second 1 is really around workforce rightsizing, so not only in the business to rightsize for the demand, but also in our G&A pretty extensively throughout the company. Third 1 is in procurement savings.

So we took a pretty extensive review of our procurement spend this year, and we've made we've got some significant savings from that. We talked the fourth 1 is really around GBS. So we talked about this it's really about being more scalable, more flexible operating more efficiently, and that program is just starting now. And then the last 1 is really some internal efficiencies in automation. We've done a lot of digital investments over the years, and we're expecting to see some benefits around just internally how we operate.

And so with the carryover from some of the initiatives we've implemented this year and the additional $70 million next year, you should think about $100 million of incremental savings in 2026. Now those all won't fall and drop to the bottom line next year. We're going to use those as a lever to offset a lot of the inflationary and cost pressures that we have and really other headwinds and protect the operating income given Davana we're in right now.

We'll take our next question from Eric Coldwell with Baird.

Quite a few of mine have already been covered. I wanted to just on those last comments about the $100 million of incremental savings in '26, but not all of it falling to the bottom line. Can you possibly give us a sense on how much you would expect to fall to the bottom line? If I missed that, I apologize.

Yes, I don't think we're we have as we in the middle of our planning process right now, Eric, and it's hard to tell how much will fall through. I know we are focused on generating and reinvigorating earnings growth next year. And so that we've been really judicial and prudent in focusing on these cost savings with the intent of expanding earnings next year, but it's a little too early to tell just how much will fall through the bottom.

Jim, I'm going to circle back on a question that's going to bug you and probably isn't fair. But I think 1 of the biggest things the Street struggling with this morning is the outlook for DSA growth next year, and I fully realize that bookings over the next 2 quarters are incredibly important on many fronts.

But as you sit here now in November, a couple of months from the start of the new year, if you were in our seat on the buy side, on the sell side, Wall Street looking in where would you be framing DSA to start the year? I mean, we're coming off of 4 of the last 5 quarters, I think, have had book to bills in the 0.8 zip code. It's just it feels like this could be a down year in '26, but I know things can change literally overnight in DSA. So how would you help us frame the thought process for '26?

Yes. I mean, we want to be careful not to get too deep into '26, but I just certainly understand the nature of the question. I think the fact is that we outlined and I talked about in the first couple of questions, I think the most relevant thing. So the big drug companies seem to be pretty much done with their work. We're seeing greater access to capital for the last, certainly, 4 months or so by biotech.

We've seen improvement in book-to-bill over the last or 4 months. proposals are way up. Cancellations are down, and we're seeing net bookings improve for our global clients where we have significant market shares. And so really, everything that sort of caused the decline at DSA business over the last 18 months or so has been like 100% related to access to capital markets by the biotech clients.

So we are guardedly optimistic that if those facts remain positive and/or improve that, obviously, will be certainly beneficial for us going into next year. But we need to see that continue some benefits continue for the fourth quarter and as we move into the first quarter. So we just have to start sort of predicting what the actual numbers will be for 26, just too early.

Just a quick other 1 outside of the scope of what people are asking today. There was some news and updates around the Bio Secure Act back in October. I'm curious if you have any updated thoughts on what that might lead to. .

Yes. We haven't really seen any impact. We don't Interestingly, we hear virtually nothing about biosecure Act and others from our clients. So it's either essential part of what they're doing every day and they just deal with it or they don't think it's significant. So we're not hearing anything additionally from them, so we really have any updates on that.

Our next question comes from Justin Bowers with Deutsche Bank.

So Jim, it sounds like proposals were pretty healthy in 3Q high singles year-over-year and sequentially as well. Was that consistent across globals or biotechs? Or was it weighted 1 way or the other? And then can you also give us an indication of the slope of how DSA bookings progressed during the quarter? And if that stop continued or how this will continue into October? .

Yes, sure. So proposals for mid-tier were up over the prior year and the previous quarter. So we were pleased to see that after kind of a slow summer for Global, they were up over the prior year and not up over the prior quarter. as I said earlier, cancellations were down for both for all of our client base. So that's extremely positive. Gross bookings for Globals were kind of flat, but net bookings were up and we still have a gross net bookings issue with the mid-tiers, which we hope will ameliorate as access to capital continues to free up for them. So obviously, really pleased to see a significant increase in proposals.

Got it. And then just a quick 1 on the on the timing of the asset divestitures. Do you have LOIs for any of those assets? And do you plan on treating that as discontinued ops going forward? Or are you going to keep it in continuing ops? .

So we're actively working to divest certain assets. So we hope that I think we said in the call, we hope that will be done by the middle of the year. We're not in an LOI stage yet, but obviously, we'll move forward with the speed in some sense of urgency to make that happen. Mike, why don't you take the accounting question.

Yes. So the accounting rules have a pretty specific criteria when to go into discontinued operations. And 1 of those being a materiality concept and just based on the nature of the businesses, their impact to our operations and financial results, I just don't qualify for disco ops. So they will continue to be in our continuing operations until sometime as they're divested. .

Our next question comes from Casey Woodring with JPMorgan.

Great. On DSA margins in 4Q, you mentioned higher third-party NHP sourcing costs. Can you just elaborate on that and if that's expected to be a drag on DSC margins next year? And then my follow-up here quickly is just you've talked a lot about how book-to-bill improved each month. Is there any way to quantify what book-to-bill was in September? Or and how much that stepped up in October.

I think 1 of the questions is, if you can kind of continue this trend of sequential month-over-month bookings growth, if you can exit the year at over 1 book-to-bill in 4Q. So any color on that would be helpful.

We'll leave that to you, Mike.

Yes. In the beginning of the year, we remember in DSA, we had expected a mid- to high single decline rate, and we're meaningfully improved over that outlook by the end of the year. So when we are exceeding the expectations, we have to source from third-party NHPs that come with a higher cost since we had to procure additional models to meet that additional expected demand. So as far as 2026, no, I mean, as long as we plan and we are consistent with the demand levels, it shouldn't be a continuing drag on the business.

And then just on that month-over-month book-to-bill, any sort of color on where September kind of shook out and maybe where October landed to..

Yes. Casey, this is Todd. We're not going to provide any specificity into the months. We really don't like to call it the month because we like to look at the trends overall. I think just as Jim mentioned earlier, what we're really looking for and what we saw over the past kind of 3 or 4 months is that, that trend continued to improve. And obviously, we'll be closely monitoring to see given the strength of some of the proposal activity and biotech finding that we we're cautiously optimistic that, that will continue. .

Our next question comes from Michael Ryskin with Bank of America.

Great First I want to ask on the strategic review update. A lot of different bits. I guess in a way, is this a final update? Or are there more discussions in progress? Is there an opportunity for further updates 6 months from now, a year from now, kind of the point that you've announced several incremental cost-saving initiatives. Do you feel like you sort of finished our analysis and there's nothing more to get? Or should we kind of view this as still being open ended?

Yes. So maybe a review of your assets is never complete. But certainly, we've gone through a deep portfolio review sort of our strategic direction and how we intend to allocate capital. So I would say that, that part has been completed at least for now. And we're moving on to the implementation phase, which is trying to divest certain assets. I think we do a really good job with the Strategic Planning and Capital Allocation Committee of our Board, reviewing our portfolio sort of on a continual basis.

And looking at assets that are generating the returns that we would like, making sure that we're investing capital appropriately, both in M&A and occasionally buying back our stock and continuing to pay down our debt. So that's why I say maybe it's never complete, but certainly an intense process, which has been going on for the last 3 or 4 months. I'd say that the first phase of that is complete.

We're really pleased with the sort of focus and initiatives that we're taking both to invigorate the top line and the bottom line and to get some of the assets in our portfolio that are denied out so we can spend more time on things that have high growth potential and greater opportunity to be accretive to the bottom line. So I think it was a very thoughtful and thorough and robust.

Process. Okay. That's helpful. And then a lot has been asked on DSA and next year, I think about I want to ask it sort of from a more qualitative perspective, do you feel like visibility into customer demand, spans demand, do you feel like conversations with customers are becoming more stable. I know it's been a very uncertain time over the last 6, 12, 18 months just kind of want to talk about the planning process and how much forward visibility do you have and how comfortable you feel with plans? Is that settling down at all a little bit even though we talk about the actual bookings in like that?

I think that is definitely more stable with sort of both client segments. The big drug companies have been reducing their infrastructures. We reported over the last quarter or 2 that we have very large multiyear contracts with most of the big pharma companies, and we've been sort of working through re-ups of those. So there's definitely stability there and sort of visibility and predictability. We have a lot of biotech clients who obviously have no internal capacity to do any of the things that we do. They're very innovative and they've got a bunch of drugs in development that have paused some they're trying to push into the clinic with the money that they have and some are going back and getting the IND filed.

So yes, I think there is increasing stability and visibility. We like the backlog at 9 months when it got to 14, 15, 18 months, it actually was too long. And by the time clients got to the point where they should be starting studies, they actually often times didn't have them. So 9 months gives you a significant backlog to fill the gap when things stall, which happens all the time. but also gives you the much greater predictability of your business model.

So we're encouraged by the access to capital. We're encouraged by the sorry, quarter, we're encouraged by what we're hearing for our clients. we're encouraged by book-to-bill improving sequentially over the last 4 months. We need to have all of that continue through the back half of the fourth quarter and the beginning of the first quarter. And all of our clients have put their operating plans to bid for 2026 before we feel that we'll have our arms around what the growth rate ought be for that for the next fiscal year.

Our next question comes from Ann Hynes with Mizuho Securities.

Great just in DSA, like I know you don't want to give 2026 guidance. But if the biotech IPO really heats up market in Q4, how long does that usually end up and how long does that take to show up in your backlog and revenue? And then my second thing would be about capacity. I know you've been reducing capacity in the segment. Could you remind us how much you have reduced capacity to date and what capacity utilization you're running at and maybe where you would like that to go just to see growth again.

Yes. So we used to give exact percentages of capacity utilization that used to be sort of optimal utilization that used to be in the low 80s which surprised everybody, but if you're 95% is actually inefficient to turn over new runs. So that's sort of where we like it. We start giving those now. But capacity utilization is below that. So that's not maximum efficiency.

By the same token, it's good to have incremental capacity when and as the demand heats up. And there was a question earlier about how quickly we can start studies and having incremental capacity allows us the ability to do that. So we try to stay ahead of the demand curve historically by building incremental space and now by holding on to we've been building some incremental space in our laboratory scienti aspect of our Safety assessment business, which is important. If we don't have the space when the clients have to work, that's obviously a problem and it takes, I don't know, 18 to 24 months to build some new space.

And a longer period of time to validate it. So I would say capacity for us is in a good place as we finish the fiscal year and move into the next one. And hopefully, as demand increases, we should be able to accommodate that. Just tell remind me the first part of your question has some to do with backlog in the fourth quarter.

No, if the funding environment really heats up I think Q4.

Yes. it was a lag, always tough to predict. I would say that while they're sort of waiting for the eval markets to open up and they've been more backed up. They tend to be kind of judicious and thoughtful about how they spend their money because they want to make sure that the capital that access to capital will remain. So it's typically not overnight. It usually takes a couple of quarters anyway. But I think once they have the confidence that the capital markets are open for some period of time for private companies who want to do IPOs or relatively recent IPO biotech companies that we're counting on secondaries that are worrying about access to capital.

I mean, that definitely changes a slow for demand these are the discovery engines for the big drug companies, and this is where a lot of the innovation is coming from as we continue to say they have no internal capacity to do the work that we do. So it obviously will be a positive. It's a little bit tough to discern how quickly they begin to spend except to tell you what they've done historically, which is to be a little bit careful.

This could be different because I do think there's a fair amount of pent-up demand and the desire to get INDs filed, which is something that these companies focus on intently every year. And we know that there's a bunch of drugs that are sort of stalled before they got the IND filed. So hopefully, we'll see that pick up.

Next question comes from Max Smock with William Blair.

I know we're over yourself to one. I just wanted to ask a higher-level one, Jim, on your comment about still seeing some uncertainty out there from clients. And it sounds like on the biotech side, another month or 2 of good funding will take care of that uncertainty. But on the large pharma side, what do you think they're really waiting to see before accelerating spend? It feels like the MSN and tariff headwinds that we've discussed seem to be resolved or at least moving in the process of being resolved.

This further progress there eliminate the remaining uncertainty? Or are there any other factors out there that we should consider as having an impact on Pharma spend here over the next couple of quarters?

We feel very good about pharma spend, given that bookings proposal volumes, et cetera. given these long-term contracts that we have and given the fact that a lot of the reductions in the cost structure in anticipation of the pad and Cliff has happened. Obviously, the drug companies have plenty of money. So ability to spend is never a problem with them. And they spend in their for their to support their own R&D shots, but they also access molecules from the biotech community, either licensing them or buying entire companies.

So I think they're in a good place generally and increasingly for us should be stable to growing part of our client demand. And we have significantly higher shares in the competition in pharma. But biotech has I'd say, for the last decade or 1.5 decades, been the principal driver of our growth, just given how many companies there are, how many new companies are created every year, how innovative they are and how much they need our capabilities.

So we are intently focused on biotech and being accessible to them and flexible with them and guiding them to the regulatory process to get the drug into the clinic and into the market. So we're very pleased to see the capital markets begin to open up. We've been looking forward to this for a while, but they need to really open and stay open for a while for things to substantially invigorate.

Jim, if I could just ask a quick follow-up there. On your point about replenishing our pipelines with licensing and M&A, there has been a nice uptick in both so far year-to-date. Just wondering to what extent M&A either helps or hurts how you think about that recovery and in particular, licensing from China what impact that would have relative to maybe some of the licensing deals that have been more U.S.-centric, does that limit your opportunity to benefit from large from a replenishing their pipelines? Or is it more of a net neutral? .

No, I think that that's kind of an always the buying and accessing molecules from China. I wouldn't say it's brand new, but it's relatively new and increasing somewhat because the gamut of innovation coming out of China. So I think that's fine. The extent to which the big drug companies need to further develop molecules that they access out from China or somewhere in the U.S. or Europe that would certainly thrilled to have that work since we have with very few exceptions, pencil market shares with all of the big drug companies, it's likely that we'll get work if they're further working in an those files and depends on what stage they're at, and for a lot of the obviously, U.S. and European small biotech companies, we're already doing work for them. So it's unlikely that a pharma acquirer would change for stream. So we're likely to keep that work and get the incremental work as well.

Next question comes from Luke Sergott with Barclays.

Great. I just wanted to think talk about the increased staffing on the DSA. And from a timing perspective, how you guys continue to add the service piece to match the oncoming volumes. Is that still in line with what you had done in the past, like, let's say, like 3 to 6 months as you continue to look out there? .

Yes. I mean the incremental hiring it's essential. We need to do it to accommodate demand we need to backfill some positions because we have some turnover like all companies. We're adding head count to our laboratory sciences part of Safety Assessment, which has been growing nicely. And is a major focus for our clients. So we're really we're at exactly where we're seeing growth.

And I just want to remind you that what we're seeing in our DSA business, particularly the Safety Assessment business is we have a level of demand that's meaningfully above what we initially thought for this year. I got some of our operating plan, and we have provided guidance to that. So having the people in place is obviously essential to being able to do the work. So we're happy to have some incremental capacity.

We were getting to the point where it was tight on having sufficient staff to do the work in a time frame that our clients want. And obviously, everything with us is about both the quality of our execution and the speed of our execution because all of our clients are in a rush to get the drugs in the can ultimately into the market. So we feel that as we move through the back half or the rest of the fourth quarter as we move into next year that these incremental jobs will be essential to be able to accommodate work in 2026.

Great. And then from a follow-up, just as you guys think about the investments going forward? I understand there's a lot of moving pieces with divestiture and cost out, et cetera. But you also talked about some strategic view adding new technologies or capabilities. Elizabeth talked a little bit about the NAMs. Just talk about appetite here from an inorganic sense bolt-on versus more strategic?

And then kind of where you would be willing to take the balance sheet or your leverage levels given that you continue to take those down right now, but if you need to do something more strategic.

Yes. We've always felt that strategic acquisitions was the best use of our capital and still believe that there are some areas that we pointed out in our prepared remarks that we have a lot of focus by our clients and we need to continue to look and invest to invigorate our pipeline. But we're going to stay in our core, so we're looking at things like bioanalysis, which is part of our laboratory sciences capability.

We're looking at some geographic expansions in some of our businesses that maybe something from Europe that we don't have in the States vice versa. We're looking at a host of in vitro technologies that sort of fall squarely under the NAMs nomenclature. So it's there are several things that we're looking at that will be important to our growth, to our margins, to our competitive strength. Our leverage is in the low 2s, where we're certainly comfortable levering up to the mid or even the high 2s because almost always, we've been able to reduce our leverage substantially within 12 months.

And so our free cash flow is really quite substantial. Debt is coming down just related to that debt is coming down as well. So balance sheet is in good shape. We're certainly comfortable in the mid-2s or even the high 2s once we go down we're pretty much committed to keep it under 3 turns to.

Our final question comes from Rob Cottrell with Cleveland Research.

I guess I'm just encouraged to hear you say that spot pricing is stable for the second straight quarter. is the selected discounting that you all were discussing last year, still a headwind year-over-year into the fourth quarter? And at what point do you expect pricing to flip from a headwind to a tailwind.

Yes. I'm not sure it's a headwind. I mean, we're trying to do it very strategically. And so the extent to which it minimally allows us to protect share, that's obviously important and maximally allows us to take share, which obviously helps our growth rate and could help our margins as well from just covering that level of volume. I think we're using it really well if a new client calls and once you get a price on something, we'll give them pretty healthy prices.

A lot of the big clients that we have line or contracts with prices are prenegotiated. And so we know what that is going to be. So and pricing, absolutely, if you look historically and as we look to the future, as demand picks up and space gets tighter, pricing will be available and easier for all of us. And nobody sort of I could just speak for us.

Certainly, there'll be no need to reduce prices to compete in the marketplace. So we feel that we're using it thoughtfully and strategically and beneficially and is well, they are pretty good versus the competition, there's still pieces of business that we're desirous of getting and if that's what's required initially to get the business, and we'll play that guide.

And then along those lines, any change in win rate during the quarter?

No, Todd we ever disclosed that.

No. I mean we didn't really we haven't disclosed that. I would just kind of echo Jim's comments that we continue to look at price selectively to at a minimum, we try to the goal is to maintain share, if not win share. .

We have no further questions in queue. I will turn the conference back to Todd Spencer for closing remarks.

Great. Thank you, Angela, and thank you, everyone, for joining us on the conference call this morning. This concludes the call.

Thank you. That does conclude today's Charles River Laboratories Third Quarter 2025 Earnings Call. Thank you for your participation, and you may now disconnect.

Good morning, everyone. My name is Eric Coldwell. I cover pharma services, health care distribution at Baird, and it's a great pleasure to have Charles River with us today. Jim and I have spent a lot of days together over many years, and we've seen the ups and downs of this space, but I'm very excited always to have a good conversation with Jim. We have a lot of fun on stage. So hopefully, we can keep that going.

Always a pleasure.

And of course, we have support from Todd here in the audience as well. So I couldn't convince him to jump on stage with me today.

Jim, I'm going to have to ask the obligatory, boring, bad question, which you can't answer, but you are in a strategic review. You have obviously had some news and noise this year with, let's call it, a partner on the investment side. What -- you mentioned this yesterday. I have to ask for my audience. Tell us the latest and greatest, what you're thinking on time frame when we might hear something. Maybe step back a little and talk about how you always are under a review, whether or not it's formal, you're always thinking about these things.

So we're deep in the midst of the strategic review. We are working with some urgency and at a, I think, a significant pace to kind of get to a punch line, whatever that might be. We've done a very thorough financial analysis of our entire portfolio, some of the parts analysis, looking to see whether there are additional ways to unlock value, which was the original thesis of this sort of new partner as you put it. I don't want to give an exact date because we may not hit that, but we want to get that response now as soon as possible.

It's been a very collaborative, positive, respectful professional process. We have a refreshed Board that I think has actually been beneficial. And I think there's a fair amount of objectivity that goes into the analysis, and something that I didn't anticipate is that it's quite interesting to have a large shareholder sort of inside kind of helping you look at your portfolio with some objectivity, pretty much on behalf of everybody else, to some extent.

So we had a situation with another group 10 or 12 years ago, which was less professional and much rougher and not -- didn't really come to too much of a conclusion. This is a -- this is really a collaborative endeavor. So as soon as we can -- I had a bunch of one-on-ones yesterday where people were sort of pushing about, well, is it going to be in the third quarter call or whatever, we'll see. When we have what we think is an answer, we'll get it out there.

So you're not willing or able to commit, one way or the other, as to whether we would hear something with 3Q results at this point?

Right.

Yes, fair enough. Have to hit on DSA, the segment that seems to get most of the noise most of the time. I have a hypothetical question, and really step back as if neither I nor anyone here is that familiar with the business. It's a quick burn business. Obviously, you don't need the kind of book-to-bills that, say, a clinical CRO historically would need to generate growth.

But hypothetically, what would be a long-term consistent book-to-bill that you would need to be flat or generate some modicum of growth? In other words, could you grow on a 1.0 book-to-bill over time because there's stuff one and done inside of a quarter or some things that don't fully fall into bookings? Would it be possible to generate modest growth on a 1.0 book-to-bill over time?

I mean, yes, it'd be better to be above 1. So we'll work hard to obviously drive that and to enhance our bookings. We have small biotech demand issue related to capital markets being closed. And that's been a principal driver of our growth over the last decade, I would say, small biotech with a lot of innovation and -- but there's definitely some hesitancy and some concern about access to capital and their ability to do these things. So we were above 1 in the first quarter, dropped down in second. What we said is for the balance of the year, that will be pretty much constant. So we anticipate that. We'll stop short of talking about next year because I think it's premature.

I agree on that. So your guidance, you don't imply, you don't guide, you don't promise 1.0 book-to-bills in the back half. And it sounds like you truly anticipate something below 1. I'm not going to -- I don't want to put words into your mouth because sometimes there's a -- what's built into guidance versus what you actually expect or what you think is maybe more probable, but you're not willing to go there. It sounds like you actually are anticipating book-to-bill below 1 in the back half.

How does that translate into -- all else constant, how does that translate into a growth -- I know you're not giving guidance. But if backlog is at $1.93 billion and you're burning backlog at 10 months, and backlog does, in fact, come in a little bit the next 2 quarters on a sub-1 book-to-bill. Barring an improvement in the burn rate, it would imply revenue being flat to down next year in DSA. So I'm just curious how you're thinking about this market because you have the juxtaposition of saying you're seeing green shoots and you're actually getting back to hiring.

Yes. I mean it's a dynamic market and a lot of these studies come in relatively quickly in the short term in nature and sometimes continue and expand and have additional bells and whistles associated with them. So I think we need to see what the action is going to be for several quarters in a row. It's way premature to call 2026. There's just too much happening.

I mean the good news is that our pharmaceutical base is very solid and a very strong beginning of the year. Obviously as well financed and the same with mid- to large biotech companies, which is kind of acting the same way as big pharma. And the $64,000 question is what's the access to capital for the small guys where I think a lot of the innovation is, a lot of the work is. And there's no question, they've got drugs that they've developed that they paused on. Do they have to hate that. So there a bunch of one-on-ones this morning people saying, well, do you think there's some pent-up demand on their part? For sure, there is. For sure, there's pent-up demand, not to go and do the work, but to continue to work and get their INDs filed.

So that's been a very fertile ground for us. That's been the innovation driver for pharma for, I don't know, almost 2 decades now. 50% to 70% of the drugs that are coming in from the outside could be from NIH, but often from biotech. And you've got -- it used to be 700, there's maybe 400 or 500 new biotech companies created every year with no internal capacity to do anything. We're going to get a bunch of the work. So we're staying very close to them right now.

Last year, we made the mistake, as you will recall, predicting when the IPO market was going to open up, which was foolish because we have no idea. So no predictions this year, no predictions next year, but I do think it's totally linked to that. And if you've done -- if you went public and you thought you'd get a secondary, you're just kind of stuck. And if you're VC-based and you're assuming that you would get public, they've also been a bit stuck. So besides M&A for those folks, if they're still independent and in a growth phase, access to capital is everything. And I think we'll have to see [ a couple of 3 ] quarters of that before they're comfortable that it's sustainable -- on a sustained basis.

With the announcement that you're going to be -- you are in the process of getting back to a little bit of hiring. You talked about some -- look, that's a positive sign. Nobody is going to take that away from you. It does introduce a little bit of cost in the back half, about $10 million. I just want to clarify, that $10 million, is that a gross cost? Or is that net of any incremental revenue that perhaps I know it's early and these people will need a little time to get up to speed. But is that net of incremental revenue? Or is that a gross?

I mean, those people are necessary. We are functioning ahead of our operating plan, and hence our guidance, which we've raised. I think people have been working very hard. And in order to accommodate work that's in-house or we know is coming in-house, we need to add those jobs, which is probably 100 folks. So it's not huge. So the work will be there to pay for those folks.

Got it. Perfect.

And we had a fair number of questions this morning about, well, if the demand came back quickly, can you staff up for that? And that's kind of an always, always for that, right? So we try to stay slightly ahead of the demand from a head count point of view and -- but this will just catch us up to where we actually should be right now or need to be right now. The only thing that I think gets in the way of us continuing to take share and get business is the quality of our execution. And so we don't want to do anything to impair that.

You've had some fits and spurts with cancellations in the segment. And some quarters, the gross awards are better, but you get a cancel, sometimes it goes to the other direction. Cancels were a little higher last quarter. Was there any -- I know there were some consistency or theme behind the nature of work broadly that was canceled. I'm not sure I understand exactly why. But is there any read on that, what you're seeing in the client behavior with cancellations that you could extrapolate to drive a view of where growth or bookings or demand may be over the next year?

I think not. I think there was nothing sort of structural in that or any sort of shift or change in demand by any segment of our client population. So we always have cancellations as sort of part of running the business. Drug's not ready on time and they're not formulated on time or whatever. It's not really predictable, but we have sort of a run rate on a percentage basis.

Cancellations were down in the first quarter and up again in the second. It was kind of the nature of the studies that were associated with that. So more expensive, complex stuff. Studies don't sort of start and stop at the beginning or the end of quarters. So I don't think that portends anything. I don't think it tells anything about the future.

Let's shift to research models. So you have some vagaries with timing. There's the inevitable timing of China shipments. That stuff we can look through. Overall, on an annual basis, it looks like you're going to be relatively flat year-over-year, give or take. Business seems stable.

How have you managed -- I think there's, at least for me, and I think some of my peers, I think there's some -- still some surprise that all of this noise negativity in D.C., the turmoil with CDC, FDA, you name it, 3-letter acronym agency, it's had incredible turmoil this year. How has that not rippled into your business in any meaningful way? I think one NIH contract or maybe a couple of small ones, but a few million bucks. How have you not seen a bigger impact? And by the way, you were right, you always said that would happen, but how is it the case?

There's a lot of speculation about what's happening or going to happen and what the ramifications are. Obviously, we watch that closely. We speak to our clients about that. We have lots of government contracts. And we have -- we don't have a huge amount of work that's sort of academic and government. It's about 20% of RMS and about 6% of the total company and straight NIH is 2%. So it's kind of de minimis.

We've had a lot of long-term contracts with NIH and NIA, which is aging, NIAID, which is allergies and infectious disease. And we've had them for long periods of time. What's interesting is the dialogue at the NIH, they talked about a 40% reduction and then a 15% reduction and then the recent conversation is there'll be no reduction. And I think that's probably true. And that's -- forgetting Charles River, that's a really important thing. NIH is the -- a lot of great sciences coming out of NIH and a lot of company creations and technology. So I think that's really important.

So yes, there's a couple of things. One is that probably has -- the noise probably has an impact on if you want to buy a mass spec for $500,000, maybe you pause on that and say, well, maybe I should wait, I think, to utilize small research models for basic drug discovery. I think those tools are necessary, important and actually not all that expensive. And a lot of these contracts hold these institutes, the various institutes of NIH, in good stead. So we were, I think, appropriately cautious in our dialogue. I'm trying to remember whether it was the first quarter or the second, it doesn't matter.

We talked about that we had at least one contract that we had indications that, that would be canceled. It's about a $3 million annual hit and while we had no evidence that there would be any others, in the eventuality that there were, we were going to be careful with the way we guided. I think it's possible that there won't be anything further. And I just think it's the nature of the work that we're doing, the importance of it and the fact that it really has kind of a fundamental negative impact on drug discovery that's probably not fixable if you unravel some of those contracts. So some of those have been going on for really long periods of time. So obviously, we're pleased with the situation, but still watching it closely.

Now that universities have kicked in the new school year, the last 2 to 3 weeks at most universities, is there any seasonal pattern there? Do you get any updated vibes early in the year?

Usually not. I mean, again, our academic business is that we sell to most of the academic institutions, but it's relatively small. Some of that money trickles down from the government, some of it doesn't, but I would say no.

Yes. Fair enough. One of the services that you've introduced in recent years in RMS is CRADL, accelerated development labs. So if you could maybe -- for people who don't know, you could maybe give a one liner on that business. But that was another area where I felt like maybe there would be some incremental pressure as you're effectively providing lab space to the market when the market needs lab space and in a world where biotech funding has been down and some biotechs have maybe built some capacity that they don't need, there's perhaps a little extra lab space. I think maybe quite a bit of extra lab space in the market.

Business hasn't blown up. It's -- the growth rate slowed. But talk to us about where you are in the moment with CRADL, position the sizing there and give us an update on what you think the growth rate may look like as we move into the next few years.

Sure. So we like that business a lot because we start with the clients in the earliest phases of R&D. We provide the facilities and the staffing for them. And if the drug progresses and looks promising, there's an opportunity for us to take it into Discovery and Safety and all the way through to the clinic.

We have multiple facilities in all the major biohubs. We did a reasonably large acquisition, I think it's 3 years ago, where we add incremental space. There was a little bit of duplication of space. So we shut down some of the smaller facilities. That's been a nice high-growth business for us. And if you look at it on a see-through basis, all the way through to, as I said, Discovery and Safety, I think it has the potential to generate a lot of margins and for us to hold on to clients for a long period of time. So we love the strategy.

We had pretty high growth metrics before the last kind of 18 months, has very good operating margins, even though we don't disclose them. So it's kind of stable and flat this year. That is definitely a direct result of the legacy of lack of access to capital by the biotech companies. So they're pausing. They're certainly not building their own facilities, which is why so much lab space is empty, but also probably reluctant to add more space with us or any space with us if they don't have it. That also should ameliorate and change fundamentally when they get access to capital. So we continue to like that business a lot. We don't really have much competition there and lots of clients.

And the other thing that was quite interesting is that while it's very much premised on the small clients, we have a fair number of medium-sized and very big pharma clients who build the facility and not have enough space and will want incremental space. So I think we're solving a lot of issues for them. Look, our whole portfolio is a way for our client base to manage their cost more effectively and get the work done as well or better than doing it themselves.

I want to shift to manufacturing and 3 different businesses. Each have had periods of -- moments of glory and periods that have been a little slower. Microbial Solutions in the moment seems to be tracking very well. Biologics Testing maybe still has a few struggles. It's been a little weaker in recent periods. Before I get to CDMO, I want to hit on those 2. So maybe you could give us an update on Microbial Solutions and Biologics Testing and really what are the dynamics in those marketplaces? And how are their growth rates varying, perhaps why they're varying?

Sure. So 2 long-term businesses that were acquired probably 3 decades ago. Microbial business is a -- the service is required by law. So you have to test -- you have to sample manufactured injectable drugs and medical devices to make sure they didn't become contaminated. So that's kind of the business that keeps on giving. We have a technology that is superior to the competition. So we've had a lot of business. It's a razor-razor blade phenomenon. So we have lots of disposable revenue with exceptional margins. We've never disclosed them, but it's a very high-margin business. You've probably figured it out. It's had very good growth metrics. I mean, it's kind of high single digits, but it's been higher. It's been low double. And it doesn't seem to be slowing down at all, and we've been able to continually tweak the margins and have them improve. So we love that business a lot.

The Biologics business, we bought it around the same time. I mean one other thing, the Microbial business is the classic [ NAMS ] technology. So when we bought it, it was the only FDA-approved alternative to using lab animals. It still sort of is.

Biologics, we bought around the same time. And that's the business that's totally tied to testing large molecules to make -- which often are derived from human proteins to make sure you don't have any negative viruses in there. So we do a lot of work there with heavy competition, popped during COVID. There was a ton of business. Slowed down post-COVID. And right now, we -- the demand is still quite good. We have a few clients that have had kind of unique situations. One was bought. One had a drug that's failed, whatever. So they just have less volume this year. I do think that directionally, that's a business that will also have reasonable growth rates and improving operating margins. So we like them both. They're somewhat related to sort of quality control, manufacturing related.

And the other reason we love these businesses, it's sort of a barbell effect with the preclinical business. So those businesses are all around the clinic and the commercialization of drugs. And so as the money ebbs and moves back and forth, we get to play in both spheres.

So you're forcing me to go into territory that I don't want to go into because I don't think you're going to be able to comment, but one of the -- my view historically has been you've been in these businesses, as you said, for decades and decades. They're very unique. They're, yes, competitive, but your competitors are, for the most part, traditional, more what the market would call life science tools companies, companies that get higher multiples, maybe have a little more [ patina ] than some of the more headcount-based outsourcing models that are out there, especially in clinical, for example, companies that get better multiples on lower growth rates historically. And you have historically had really good growth rates. And now you're mentioning the tie-ins with Discovery and Safety and other things that you do.

But there's also been this market view of strategic alternatives where perhaps Charles River could monetize these businesses and generate a bit of a onetime hit for investors. I know you can't go into this, but I think this is the crux of the whole argument with Charles River in the moment, which is these -- historically, those 2 in particular, amazing businesses in manufacturing that you didn't get enough credit for, are things you've done forever and they tie in nicely to the rest of the organization. And what do you want to be for the next 30 years? You can't really answer that question, but this is what I think a lot of us are very much struggling with in the moment.

We get that, and we get that that's kind of the essence of the strategic review. And looking at the portfolio today for the future, what's the connectivity amongst the pieces. We're getting maximum value for the -- not just the pieces but for the whole that keeps us in a very strong competitive posture, but not by -- how else, if at all, could the business be structured? So we'll -- as I said, we'll get to that punch line soon.

So One Big Beautiful Bill. There are some potential advantages to companies to buy things from you that are in that bill, accelerated depreciation, some tax advantages perhaps, has it, does it, will it stimulate incremental demand for one or more -- and it could be across the organization, but I tend, for some reason, to think about that perhaps being more impactful for the manufacturing subsegment?

Yes. I think it's too early to tell. I think if the pharma industry builds more in the U.S., which they say they're going to, and I think they made some -- at least some verbal commitments to do that, that would be very beneficial to our whole portfolio. I think we would have more business as a result of that. I think they would want to keep the outsourcing of the services in the U.S. as well. So yes, I think that holds for some positive results. Those facilities are not going to be built overnight, though. So it's going to take a while.

Yes, a long while. But it wasn't just a few announcements. I think we're tracking just in the last year at over $300 billion of announced...

I think it's probably a good thing for the U.S., and the service businesses that supply those companies should be beneficiaries.

Yes. So let's go to CDMO. Boy, so much to ask there. So you did cite strengthen your preclinical noncommercial portfolio. I think there have been some signs of life in terms of maybe not as high as what you expected when you first did the deals, but perhaps a bit of a recovery in the pre-commercial portfolio? You're not in...

No, I think the precommercial portfolio is stronger. We've -- the businesses have been a challenge. Science has been a big challenge. The methodology of production has been a huge challenge. The facilities have all been totally redone. The staff is new. The regulatory folks are new. We've had a bunch of audits by the FDA and the European regulatory authorities. I think we have a presence now that perhaps we didn't have 2 or 3 years ago. So we like that. But we have to fill the gap from the large commercial client that we lost.

Yes. Is this healthy pipeline that has recently been referenced? Maybe you're not reaffirming that today, maybe you are. But recently mentioned that the pre-commercial pipeline was actually pretty healthy and you felt better about where your operation was post the facility improvements, the staff adjustments, upgrades, maybe I could say, the regulatory approvals. You've done a lot to get that business humming. Is the strength that you're seeing because the market came back somehow off the lows? Or is it because you regained commercial momentum versus other cell and gene therapy CDMOs?

I think it's more of the latter. So I think cell and gene therapy has not grown at the rate that we anticipated. And I think the -- I don't think -- I know the science has been more complex than people had anticipated. You have a lot less drugs approved than people hoped. And we're probably in the first generation of cell and gene therapy, and we're going to probably go through at least one more and perhaps 2 more.

So it's a little bit of building the plane as you fly it, both for the clients and for companies like us that manufacture this stuff. By the same token, it's an important part of our client base. Business is very closely related and relying upon the biologics business, which is how we got into it in the first place.

So it's obviously quite dependent on whether you get large commercial clients who need you on a continuing basis. But we have several of our clients are in the late stages of the clinical trials and are talking to us about commercialization. So I do think we have a better franchise now than we did when we bought them, much better. I think the marketplace acknowledges that. We have some work to do, though. This is a business that's a -- it's a commentary on the complexity of moving into an adjacency.

Maybe 2 offshoots on that. And again, I know I'm stepping on dangerous ice here -- or thin ice when I get into numbers and the long-term outlook. But once you've annualized the headwind from the commercial -- the 2 commercial situations, one, a little less, one gone, this pipeline, maybe you build up, you manage the business better, you get a little bit of momentum. Could this be a profitable business in '26 and beyond? I mean, are we -- I don't think we're there yet, but is it possible that you get back to profitability next year?

I think that will be a challenge.

Okay. Any final thoughts? We're at 30 seconds. I want to give you a chance to...

Yes. We still think that -- we still know that we have a uniquely distinguishable portfolio that all of our clients, big pharma and smallest biotech company need because they have no internal capacity. I think the quality of our science is next to -- is the best in the industry. And this is all very much related to our very small clients getting access to capital. So the demand will invigorate when that happens.

Well, I'm looking forward to this market stabilizing and you continuing to do what you can do. And hopefully, next year, when we're on stage, we're having a lot more fun and talking about moving forward away from the last few years that have been up and down and all around.

We look forward to that, Eric.

I do too. Thanks, Jim.

Thank you.

Appreciate it.

Okay. Great. I think we can get started. Kallum Titchmarsh here from the life sciences team at Morgan Stanley. Really pleased today to be joined by Jim Foster, Chair, President and CEO of Charles River Labs. And just before I get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. So Jim, thanks so much for being here, quite a year.

Maybe you could talk us through how 2025 has played out so far versus your initial expectations. Just beyond the numbers, what are the key accomplishments you're most proud of and perhaps flag some of the challenges as well you've encountered?

So good to be here, as always. We had a very strong first quarter, which we're really pleased with. We had some pent-up demand by big pharmaceutical companies. So they were very strong in the first quarter. We had a strong second quarter as well just in terms of kind of beating our guidance. And it's a little bit of a tale of 2 cities, big pharmaceutical companies seem -- we have greater stability with them for sure. Same with big biotech and midsized biotech and same with the smaller biotech companies, are working hard to try to access capital, which is really sort of difficult. We've -- just given the demand curve, we've been spending some time over the last few years but this year as well, obviously and appropriately reducing our cost structure. So we're making some progress on that. It's going to be sort of $75 million-ish a year for several years.

We did buy back some stock early in the year. We're in the middle of this sort of strategic review precipitated by a new shareholder. And so we're working hard at that as well. So it's all about trying to calculate when the demand is coming back, certainly not enough, there's been a little bit of cyclicality, I would say, in this business, in this industry. And pretty much everything we do, very few of our clients do internally. They just don't have the capacity, the desire, the interest or the scientific history of doing that. So we're really critical in terms of getting drugs to market. So we know that the demand is to some extent being pent up.

So I think we -- I think our capacity is in a pretty good situation, pretty good condition right now to take on new space. We've been very judicious with our CapEx over the last couple of years, just kind of watching it and not adding incrementally as -- given the sort of slowdown in demand. So it's all about demand for us. We had a really strong '21, '22 and most of '23 and things sort of slowed down the last 1.5 years. But so much of that was premised on access to capital by the biotech clients.

Great. A lot to dig into there. And maybe let's start with DSA. I think a lower bar here heading into '25 but you've been able to come in nicely ahead of Street numbers for Q1 and Q2. You've then begun to increase staffing levels, thanks to the kind of improved demand outlook there. So maybe just give us a bit more color on what you saw supporting that more optimistic view.

Yes. So we've obviously been very careful with our staffing. That's a big organization for us. And over the last kind of 18 months, we pared that back commensurate with what we thought the demand would be. So a lot of this was driven by Big Pharma, as I've said a moment ago. So we are operating right now well in excess of our annual operating plan for fiscal '25. So obviously, we're obviously delighted with that. We need to staff up a little bit. It's not a huge amount. We need to staff up a little bit to accommodate the current demand. And physical capacity is one thing. We can't do the work without the people capacity. So that's what we're up to.

Great. And then on the large pharma side, that seems to be stabilizing. You've seen an increase in proposal activity from this group. Maybe just talk us through how you think sentiment is from this group of customers amidst all the policy dynamics that we're seeing at the moment.

Yes. It's pretty interesting. We don't hear much from our clients about what is or isn't happening in Washington. We also don't hear from them much about price. So I think that's -- I think focus on price has been there kind of with every administration. I do think that the drug companies are cognizant of that. I think that's part of the calculus of running their businesses. I think they anticipate that for me-too drugs, there will be pressure on drug pricing. For novel drugs to deal with unmet medical needs, I think if there's going to be innovation, they have to be paid properly for that, if they amortize the cost of all the drugs that fail over the few that make it. So I think that we don't hear a lot from our clients about that. It's difficult to tell whether or not that's because it's kind of an always, always with them that they have these sorts of pressures or they're just taking it in stride.

We have a lot of innovation coming out of NIH historically. The latest we've heard from the NIH is that it's likely to be -- the budget is likely to be flat. I think that's a really good thing. A lot of that stuff ends up in the hands of Big Pharma or the VCs to develop new biotech companies and compounds. So -- and probably the drug companies are trying to wait till things settle down. So there's been -- there are lots of changes out of Washington. So I think the lobbyists are hard at work trying to understand what's really going to stick and what the implications are for them.

Great. And on the proposal front, have you noticed any changes in the competitive dynamics? When you're at the table, are you seeing more or less competitors there with you?

The competitive landscape and universe hasn't changed at all just in terms of numbers of players. The -- I would say that we have more competitors, particularly in our Safety Assessment business, which is our largest business. We have relatively small competitors, almost all of whom are using the price card. So we're seeing a lot of that. And so our clients who are concerned about their funding probably are paying a lot of attention to that. Some work has gone to China. That's new and tends to be increasing somewhat. I don't think we get to bid on a lot of the Chinese work. I think it's mostly with regard to smaller competitors. So the work in China is dramatically lower price point. The work is probably not great but it's good. It's probably good enough.

I think clients that want exquisite science, really good regulatory prowess and for whom proximity is relevant and important and that's true for lots of them, particularly small biotech companies that want to be there while the drug is being worked on, we tend to get a disproportionate amount of that work. We are trying to use -- I think we've said this probably for the last year, maybe 1.5 years. We're trying to use the price surgically and strategically and thoughtfully to either protect share or gain share. But the studies are increasingly more complex, costing us more. So we fundamentally feel that we got to be paid well for the work that we're doing and the work is critical. And since the clients can't do it internally, I think that holds us in good stead. So it's a very interesting inflection point right now, where we have clients, principally the very small biotech companies worrying about access to capital. And until that changes, no, I think that will continue -- that sensitivity will continue.

And with all the policy dynamics, the potential pricing headwinds from the pharma companies, how do you think that impacts the value proposition of outsourced R&D?

I think so much of their work has to be and will continue to be outsourced. The irony or the oddity about how this feels for us is that demand is slower than we have -- than we would like it and what we've seen historically. By the same [ token ], we're one of the solutions for them for all of our clients, including Big Pharma to be able to do their work faster at a lower price point. So if they're really worried about cost of drug development and access to capital, then outsourcing is an essential element for them. So look, that's why we do what we do for a living. I think very few of our clients have any internal capabilities. So if they want to progress their drugs, they don't have to work with us but they have to work with somebody like us and most of the big companies will work with us.

And how should we think about the pricing environment from here onwards? It seems perhaps to be stabilizing. And perhaps it would be helpful as well if you could give us color what a project would cost today versus maybe a year back like-for-like?

Well, I don't think -- well, we brought our cost structure down. So I mean, I can't give you a percentage. I mean we're working all the time to take white space out of the process to speed up the process and not to do things that we've done historically that aren't adding value. And a lot of it isn't required from a regulatory point of view. So I think we've brought that down meaningfully. By the same token, our cost of running our business increases. We're paying our people more. And so we have to get paid for that and we want to get the best people that we possibly can. So all I can say is that we're working really hard to run as lean as possible, to pass that on to our clients but to do that thoughtfully.

And biotech, obviously, big debate there. Funding itself seems still relatively soft from the levels we saw in prior years. But you mentioned, I think, on a recent call, you have different tiers of those biotech companies. So maybe break down those tiers and let us know what you're seeing across each one.

Yes. I mean, as I said, the very big ones are no different than Big Pharma. I mean those are very large companies that are extremely well financed. Several that I'm thinking of in particular in the Cambridge, Massachusetts area are large, high-growth companies and amongst our largest clients. I mean they're sort of in their -- their -- our work with them is kind of at the same level as Big Pharma. So those are large stable companies. They're almost indistinguishable. This kind of mid-tier biotech, some are pre-revenue, they're very well financed. They've got great science and they've got a bunch of pharma deals usually and they're much better financed and they're less price sensitive. I would say that probably everyone is price sensitive to some extent.

And then we have hundreds, probably a few thousand but definitely hundreds of small biotech companies that are very sensitive to their current financial situation. I think they thought the capital markets would open up in '24 and then again this year. Obviously, haven't opened up and I'm not going to -- I have no crystal ball of what's going to happen the next year. But what's probably very frustrating -- not probably, what's very frustrating for them is the fact that they have really very important science, important new modalities to treat disease. They are the discovery engine for Big Pharma. And yet they -- if they've got 6 or 8 compounds that they've developed, maybe they're only working on 2 of them because it's all they have the money to work on.

So I do think there's some pent-up demand. A bunch of those companies are getting bought. Some will go bankrupt. There will be 400 or 500 new ones this year, every year actually. So we always have a new cadre of new clients, which is terrific. But -- so somebody asked us earlier, what percentage of the small ones, it's probably 20% of those small, definitely pre-revenue, pre-everything kind of start-up biotech companies that have a great technology, that comes out of some university or the government somewhere that they've established a company that is -- that was much more active even 2 or 3 years ago. And we'll see that again. The issue is when.

Understood. And I know investors like to focus on book-to-bill here. I think that dipped below 1x for the second quarter. How should we interpret this metric? And I guess, zooming out, we've obviously begun to see a steady increase here. But anything we should just keep in mind for the remainder of the year and I guess, beyond?

Yes. I mean we've been pretty clear about that. So book-to-bill was above 1x in the first quarter, dropped below it in the second. We were quite clear to say we don't think that's going to get above 1x for the balance of the year. It's been improving for the last 18 months, though. So we need to see the bookings, particularly with the small biotech companies invigorate. I mean that's the whole conversation here. Proposal volume is quite good with Big Pharma. But it's all about bookings and probably cancellation levels. So we're not going to predict that because it's an impossible thing to predict. We're going to have to see a few quarters in a row of sustained improvement to generate top line growth, particularly in our safety business, which most of the questions that you and others ask focused on that given that that's our largest business and one that's critically important and one that we have a dramatic leadership position in.

And those cancellation rates, I think, were slightly higher in Q2 than prior quarters. Again, just some color on that dynamic would be appreciated and how we should think about that for the remainder of the year.

Yes. Cancellation rates are kind of an inherent part of being in this business, both -- it's kind of 2 things, studies slip because the drug isn't ready yet. The dosage isn't ready yet. Toxicity is a problem, whatever, they're reprioritized. And so we have studies slip all the time. We have some studies that cancel. There's a penalty for that. We have backlogs that are kind of 9 to 10 months. So we love that. So when stuff slips, we can almost always slot in something new, same with cancellations. Cancellations were down in the first quarter and up in the second. I don't think that's predictive of anything. I don't think there's any sort of change in the slope of demand or has anything to do with the client base.

It has to do with the nature of the types of studies in a particular quarter, probably longer term, more expensive studies that we were moving towards the clinic that some of the clients have pulled back on, particularly those that are trying to reduce their cost structure. So obviously, we watch it. We try to stay close to our clients. We try not to be surprised by cancellations. Sometimes the people that cancel are surprised themselves because the work comes down from on high. But I think it's manageable and I think our backlog levels right now are in a very good place to be able to accommodate for that.

Great. And then another topic this year that was quite frequently discussed with us but the NAMs, the announcement earlier in the year from the FDA. What was your initial reaction to that? I know the stock obviously had its own reaction that didn't line up with where you guys shipped out. But curious how you're thinking about that rate of change, if at all, we will see a significant one.

It was a very dramatic headline, probably unnecessarily dramatic, which I think got a lot of people's attention, which definitely is not a positive for the stock. Look, the notion is actually really quite straightforward. The units in terms of research models has been declining probably for 30 years. That's been offset by a mix enrichment in terms of much more sophisticated animal models. So genetically engineered models. We have diabetic animal models. We have hypertensive animal models that are hundreds of dollars a piece or thousands. So we've had this mix shift and we've had a lot of price every year. And animal models, particularly some of the genetic ones, particularly the smaller ones, are really a critically important research tool. So I don't think that's changing anytime soon. And I don't think that's changing anytime soon in terms of the utilization of research models in drug development, particularly toxicology.

I do think that we're going to see that increasingly in discovery and I think that's probably a good thing that could speed up drugs getting into the clinic or getting into preclinical tox that could speed up clients getting to a lead compound faster. So probably -- not probably, every pharma company has their own proprietary in vitro technologies. We have a couple of hundred million dollars worth of revenue at Charles River from that. We have several companies that work on those things. We have relationships with others. We will work on that. We said we're going to invest another $300 million over the next few years. We probably will be the linchpin for our clients and the regulatory agencies to work on validation of these NAMs. And the FDA has started with monoclonal antibodies, which is a much more straightforward, simple way to look at replacements and probably is apropos. But we can't see it working maybe at all. I'm not going to say ever, ever for a long time but with small molecules and for most of the large molecules.

So I think we'll see it in discovery probably over the next decade. I don't know whether we'll ever see it in large measure in toxicology because I think it's important to see the systemic multi-organ reaction inside of a human body to taking a drug, whether it's injected or swallowed. And it's very tough to simulate that reaction, particularly when you don't know the mechanism of action of the disease. And so obviously from -- look at all the neurodegenerative diseases, we, the research community have really no idea right now. So there's no -- so you won't be able to simulate. So look, our clients' reaction to the FDA's pronouncement was the science will prevail. We're going to do things the way we've always done them. But we're really interested in looking at alternative technologies even if they're just adjunctive, particularly if they help speed up the discovery process.

So they haven't really changed any of their habits. Again, it's been...

No. It's -- no. And they won't -- if there's any risk that, that doesn't give them necessary data to get into the clinic. It's all about getting into the clinic and ultimately to get into the marketplace. So whatever the -- the FDA in the final analysis is really only interested in drug safety. So they won't do anything to impair drug safety. So what they're saying is, if there are alternatives, even if they're adjunctive, let's use them and let's make some investments to try to develop them. I think that's going to fall in our lap. I think that we're going to play a very important role in that and we're looking forward to that.

Talk us through that $200 million today that you're generating. What areas excite you most within that group? Because I know you have competitors that are kind of pure playing one specific new approach. How do you think about broadening out your portfolio there?

Yes. So we have it pretty much across the portfolio. We have it in discovery. We have it in safety. We have it in our microbial business. We have it even in the research model business. So we have things like -- we have a company that just looks for off-target effects. That's all in vitro. We have another technology that's called next-generation sequencing, which is replacing in vivo studies. We have a big AI deal with a company that's trying to develop drugs virtually and we're using our wet lab capabilities with their in vitro technology to see whether we can help our clients get to a lead compound faster. It's very early days. We have a bunch of clients that have signed up. It's pretty expensive stuff for them. It takes a while and we'll see. So we have several external relationships where we are always looking for more. Some of this may end up being M&A, some of it may end up just being licensing technologies, some of it we will organically develop on our own. And again, I think the science will lead us to where we invest and what's practical for us.

Understood. And on small research models, I think volumes here continue to be pretty soft. How should we think about maintaining the balance between price and volume looking forward here?

We've always had price in the research model business, whatever it is now. It's almost 80 years. So that's not going to change. So we get a significant price increase every year. We have a pretty good mix enrichment, as I was pointing to earlier with animal models that are much more predictive of human diseases and other drugs that might work in people. We have better growth in China than anywhere else in the world. While that's been a little bit slow, the Chinese government is definitely investing pretty aggressively in the life sciences. So I think that's going to continue to be a good market for us. And definitely, there are certain animal models where we're seeing some growth. So we've had price and mix, I think, forever. We periodically get a pop from a unit point of view but primarily in China.

And how has the demand for CRADL services evolved in '25, especially in light of the kind of funding constraints you're seeing?

CRADL has been and is going to be -- continue to be a really important business for us. If you think about how early we start with clients in that business, which is at the basic R&D stage, on a see-through basis, that should pull through work into discovery and into safety and all the way through into our clinical work. So it's really important. So we've got -- while we've amalgamated and shut a few facilities, we had some duplication as a result of an acquisition, we're in all the major biohubs there. Pricing is pretty good and we like the margins in that business. But I would say that since a lot of that work is with kind of early phase biotech companies that are looking for cash, that business is kind of in a stable place right now as opposed to a growth phase. But it -- historically it has grown nicely. And I think once we see biotech funding invigorate again, we'll see that grow again.

And academic, obviously, again, another one of the areas people have been focusing on this year. RMS, I'm pretty sure has 20% U.S. academic and government exposure. You, I believe, called out that customer group growing mid-singles in Q2. How have you been able to manage some of the challenges in that end market? And how sustainable do you think those more recent growth levels are for the remainder of the year?

So the government situation with us is sort of running counter to everything that you're hearing. And so tough to figure out, to make of that. So there's a lot of conversations coming out of Washington. I don't think a lot of that's settled down, except that they were talking about big cuts in NIH and now we're hearing that's going to be flat. So I think things will be much less dramatic than we're hearing. I think there's a focus in every administration on drug pricing. I think that's an always, always. We have a relatively small amount of our business in academic and government, 20% in RMS, 6% across the whole company, 2% only with NIH. So it's relatively small. It was up for us in the first quarter. And we have a situation right now. We're only, we have one contract, one piece of one contract that's been curtailed and nothing else. And we have a fair amount of government contracts.

So we -- I think we talked about the last time we [ messaged ] our guidance that we said we would anticipate there would be more of that. We just haven't seen it. So it's possible that we won't see it. NIH has been really -- just to talk about them, NIH has been really important in terms of innovation and the development of new drugs and new modalities. So I think an investment by our government in NIH, I think is quite important. A lot of discovery initiatives come out of Harvard. I don't need to talk about that. But -- so we'll see where that all settles down. But so far, we've had a de minimis impact from all of that.

Understood. And NHP, again, a lot of headlines always here. So just give us the latest on the space. I know revenue can be choppy given timing dynamics. So just help us think about that.

So sort of 2 issues with NHPs. One is that we sell some to end-use clients, mostly in China. very difficult to predict. But in quarters where we have those sales, the margins are stunning. So we get a little bit of a pop in margin. It seems to shift from quarter-to-quarter. We would prefer probably not to sell those. We prefer the demand be so significant in the safety business that we need to utilize all of those ourselves and kind of that's the relationships we have from a supply point of view. So I think until the demand invigorates further, we may continue to sell some.

Demand for NHP tox work is quite significant. It's tied to all the large molecule work. I would say that our supply situation right now is quite good. We own some of the farms. We have long-term relationships with others. We have at least 4/5 locations where we're sourcing NHPs, which I think is really important. And we've added some capacity in the U.S. and Europe to sort of house those animals and quarantine them before they go on study. So that enhances the speed of the study. So I think we're in a good place right now.

Just anything nearer term on that, Q3, Q4, anything we should be keeping in mind?

No, I don't think anything in particular.

Okay. Good to hear. I want to give some time to manufacturing as well. So microbial has been doing well this year. What's driving the growth, I guess, across Endosafe, Accugenix, Celsis? Just walk through.

I mean it's been a stunning business ever since we've owned it. We have extraordinary technology that's been patented, which is way ahead of the competition. The work that we do is required by law to find out whether drugs and medical devices got contaminated during the manufacturing process. We've got this sort of razor and razor blade structure. So the disposables across all 3 of those technologies is the gift that keeps on giving. The margins are terrific in that business. So we would anticipate that business will continue to be strong for us.

And on the CDMO side, I think earlier in the year, I think 2 customers, some commercial setbacks there from them that impacted you. How do you go about addressing that impact? And what time lines can you put on filling that capacity?

Yes. So we had a couple of big commercial clients. One chose to go elsewhere, which happens. We do get a large payment from them, which were passed. The second one is still working with us but to a lesser extent, that's less about us and more about the trajectory of the drug. The rest of our clients and we have a couple that are kind of finishing up Phase III and where they're talking to us about moving into the commercial domain. But that client base is clinical. Obviously, as those clients move from a clinical situation into a commercial one, the opportunity for significant increase in revenue and margin is there. The demand for cell and gene therapy has been less robust than we originally anticipated when we did these acquisitions. The science is just very complicated. We probably in the -- are in the first generation of cell and gene and we probably have at least 2 or 3 generations right now. So we've been working our way through that.

So I think we've made some very significant fundamental improvements in our facilities and in our operating staff and particularly in our regulatory folks. I think we've done very well with regulatory audits and with client audits. So I think we're poised to do more work there. It's all about what the shift is from the clinical clients into commercial domain and how quickly. So it's a little bit difficult to predict when that will offset the work that we lost because we had those clients when we bought the business. And there's only probably less than 30 cell and gene therapy drugs have been approved throughout the whole world and some of them have had some patient issues. So we're focusing seriously on that business. I think we have a very sophisticated sales organization. I think the work that we've done, particularly the audits that we've had, I think word is getting out on those in a very positive way. And so -- and hopefully, this work will continue to convert to commercial work.

I think there's been a lot of folks as well in the pharma space on ensuring, I think, north of $400 billion worth of commitments from pharma companies in the U.S. Do you think that could potentially benefit your CDMO business?

Yes. I mean there's a lot of conversations about lots of initiatives and work that's supposed to come to the U.S. I think that probably will happen. I don't think they're building facilities tomorrow. But that will, for sure, generate incremental work for us. I don't think anybody is going to build new space doing the type of work that we do. I think they'll build space for very early R&D and very early discovery and they'll build manufacturing facilities for their drugs. But all the development work that we do, I think, will continue to be outsourced. So that would be very positive. Those companies invest materially in the U.S.

Yes. And few minutes on financials if we have time. Market is still obviously choppy. So how should we be thinking about margins for the business for the remainder of the year and into 2026? What are the key points that you think are worth considering here?

Yes. Well, I'm not going to say anything about 2026. We did say that this year, our margins would be -- I forgot the exact -- off, I think it was 40 or 50 basis points. Given the cost reductions and given the fact that revenue is declining a bit, being in the ballpark close to last year's margins, our margins are quite good. We would be happy with that. Look, we're always working to drive our margins higher. I think our operating margins are among the highest in our peer group. We have several businesses that for sure will improve the margins. And as we take out costs, both direct costs and G&A, I think we'll be able to sort of buttress whatever is going on with the top line. So -- but I wouldn't make any predictions on '26 yet.

Tried my luck. The strategic review, maybe just give us the latest on there. Again, I appreciate you probably can't go into too much color but we'd just appreciate an update here.

Yes, sure. We're deep in it. It's been a very thoughtful process. We're working with definitely a sense of urgency. A lot of questions from shareholders about where are you? And when is that over? And when will you tell us what the punchline is. So we're looking at our portfolio very carefully and objectively. We've got some new Board members who are pretty helpful with that. Process has been very collaborative and positive and respectful so far. So I don't have a exact date when we'll have a punchline. But as soon as we have it, we'll clarify what we're doing.

Great. We got a minute left. Last question from me. What's something you wish investors ask you more often or something that we should be paying more attention to that perhaps is going under the radar?

I think sort of looking at the long-term potential and growth metrics of our business in concert with where the client base is moving, the necessity for them to outsource, the competitive dynamics that we have. And so there's been -- we're in this strange inflection point right now, which I think has caused too much of a quarterly focus. So I think looking longer term would be refreshing.

Great. Well, thank you, Jim, so much. Appreciate it.

Pleasure.

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Second Quarter 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions]

I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Charles River Laboratories Second Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the second quarter of 2025. 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.criver.com. A replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through next quarter's conference call.

I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated.

During the 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 comparable GAAP measures and reconciliations on the Investor Relations section of our website.

I will now turn the call over to Jim Foster.

Thank you, Todd, and good morning. We reported another solid financial performance in the second quarter, meaningfully exceeding our prior outlook due primarily to favorable DSA results. The DSA business benefited from the strong booking activity that was recorded in the first quarter, and the corresponding lift in first half results is the primary driver leading us to raise our financial guidance for the year. To a lesser extent, favorable movements in foreign exchange also contributed to the outperformance in the second quarter and to our increased outlook for the year.

We have continued to see clear signs that the demand environment is stabilizing. Over the past several quarters, global biopharmaceutical demand trends appear to have bottomed, and we believe they are beginning to slowly move upward as more clients have progressed through their restructuring activities and getting back to work. The biotech environment is stable but mixed with smaller biotechs still being more cash constrained due in part to the slowdown in biotech funding, whereas midsized biotechs are performing better as many are able to support their own R&D programs without external funding.

Key DSA demand trends, coupled with constructive discussions with our biopharmaceutical clients, have also reinforced our belief that the preclinical demand environment is stabilizing. In the second quarter, both gross and net DSA bookings increased at mid-single-digit rates year-over-year, resulting in a solid 6% and 13% increases in first half gross and net bookings, respectively. While this bookings performance reflected an improving demand environment in the first half, the net book-to-bill dipped back below 1x in the second quarter to 0.82x, which we had anticipated and was largely driven by a sequential increase in cancellations and the DSA revenue outperformance.

We never expected a straight-line recovery in the net book-to-bill or broader DSA demand trends and, in fact, have often said that the sustained improvement in our businesses will not be linear. However, we are pleased that the net book-to-bill trends over the past 18 months have reflected a steady upward trajectory, starting with a net book-to-bill of 0.80x in the first half of 2024 to 0.85x in the second half and most recently improved to 0.93x in the first half of this year. The DSA business and our overall non-GAAP financial results continue to significantly outperform our expectations, and we are making gradual progress towards achieving a return to organic revenue growth. We recognize that some uncertainty persists across the broader health care landscape. And as a result, we continue to take a measured and prudent approach to our outlook. While we have not factored in further demand improvements this year, it is encouraging that the overall demand environment shows signs of stabilization.

To date, we have not observed any meaningful impact on client spending patterns stemming from tariffs or drug pricing concerns. Additionally, the effects of covering at the NIH have been minimal, which I will address further in the context of RMS results.

Before I provide more details on these trends, let me provide highlights of our second quarter performance and updated outlook for the year. We reported revenue of $1.03 billion in the second quarter of 2025, a 0.6% increase over last year with nearly half of the revenue outperformance driven by foreign exchange. On an organic basis, revenue declined 0.5% driven by a low single-digit decline in the DSA segment, partially offset by low single-digit revenue increases in the RMS and Manufacturing segments.

By client segment revenue for small and midsized biotech clients improved slightly for a third consecutive quarter. Revenue for global biopharmaceutical clients remained below last year's level but did improve sequentially from the first quarter. Revenue for global academic and government clients increased at a mid-single-digit rate in the quarter. The operating margin was 22.1%, an increase of 80 basis points year-over-year, with margin improvement across all 3 segments primarily reflecting the benefit of cost savings from our previous restructuring actions and operating leverage from better-than-expected first half sales volume.

You may recall that we are on pace to generate a run rate of over $175 million in cost savings this year. In addition, the CDMO business benefited from revenue and payments from commercial clients, most of which will not repeat in the second half of this year, as we previously disclosed.

Earnings per share were $3.12 in the second quarter, an increase of 11.4% from the second quarter of last year.

Operating margin improvement was the primary driver of this robust earnings growth. Most of the earnings outperformance versus our prior outlook was operationally driven with an additional $0.12 benefit from a lower-than-expected tax rate. Flavia will provide more details on the tax rate shortly, including the second half tax headwind from the new U.S. legislation. We are raising our revenue and non-GAAP earnings per share guidance, largely to reflect the outperformance in the quarter. We are increasing our 2025 organic revenue guidance by 150 basis points to a 1% to 3% decrease and raising our non-GAAP earnings per share guidance by $0.55 at midpoint to $9.90 to $10.30.

In addition to the DSA-driven operational outperformance, full year guidance will benefit by $0.14 from more favorable FX rates versus our May outlook. Below the line items will largely offset each other as the second half tax headwind that I just mentioned will be offset by lower interest expense for the year.

I will now provide details on the second quarter segment performance, beginning with the DSA segment. Revenue for the DSA segment was $618 million in the second quarter, a 2.4% decrease year-over-year on an organic basis, driven by lower revenue for both Discovery and Safety Assessment services. Lower sale volume was partially offset by favorable mix of higher-priced, longer duration and specialty studies again this quarter. Consistent with our commentary in May, the favorable mix does not signal a broader improvement in the pricing environment as we continue to believe that spot pricing remains stable overall.

Moving to the DSA demand KPIs. The DSA backlog was $1.93 billion at the end of the second quarter, a slight decline from $1.99 billion last quarter. As I mentioned, gross and net bookings both improved at mid-single-digit rates year-over-year in the second quarter but declined sequentially primarily for global biopharma clients. The sequential decline in the net book-to-bill was not a surprise. We had previously said that global biopharmaceutical clients started the year strong with the resurgence of booking activity for projects that they had delayed or deprioritized at the end of last year and wanted to start quickly.

However, we did not expect the first quarter booking strength to continue through the remainder of the year proposal activity for global biopharmaceutical companies increased at a healthy pace in the second quarter, both year-over-year and sequentially, which reinforces, I believe that demand for this client base has stabilized. Demand KPIs for small and midsized biotech clients remain consistent with the overall trends that we described in the first quarter with little change aside from a moderate decline in proposal activity, supporting our belief that demand for this client base is also stable.

We also experienced an increase in DSA cancellations in both client segments to levels consistent with the first half of 2024,but higher than the last 3 quarters. The higher cancellations were more focused on longer term post-IND work. These trends have cumulatively resulted in quarterly net bookings of $506 million and a net book-to-bill of 0.82x. While below 1x for the quarter, our first half net book-to-bill was at its highest level since the end of 2022 and reflects an upward demand trajectory compared to recent years.

Reflecting our solid second quarter performance and the DSA KPIs that underpin our outlook, we now expect DSA organic revenue will decline at a low to mid-single-digit rate in 2025, an improvement from our prior outlook of a mid-single-digit decline. The demand environment continues to support our outlook for the year, which is not predicated on the net book-to-bill returning to 1x. Furthermore, we believe the DSA business has stabilized and is beginning to show signs of gradual progress. In support of our improved demand outlook, we have begun to modestly increase staffing levels in the DSA segment. We are doing so to ensure we can fully support our clients' programs and to position resources appropriately for the second half of this year.

Due to the increased hiring, DSA headcount costs are expected to create a headwind of approximately $10 million in the second half when compared to first half levels, which is one of the factors contributing to the company's second half operating margin outlook. For the second quarter, the DSA segment reported another solid operating margin, increasing by 30 basis points year-over-year to 27.4% in the second quarter. This was primarily a result of the operating leverage from better-than-expected demand that we accommodated without meaningful headcount increases in the quarter as well as the benefit of prior cost savings actions.

Before I provide commentary on the RMS and Manufacturing segments, I would like to provide an update on our NAMs strategy, or new approach methods. We recently updated the Board on our road map and strategic imperatives to continue to build our growing NAMs portfolio. As we said last quarter, we firmly believe that utilizing more NAMs-enabled approaches will be a gradual long-term transition by our clients and that the scientific capabilities to fully replace animal models do not exist today.

As the leader in preclinical drug development, we have the scientific capabilities, regulatory expertise and access to data that make us the logical partner for biopharmaceutical companies to advance their use of NAMs and alternative technologies over time. We already have a growing NAMs portfolio that has generated a meaningful amount of revenue or approximately $200 million in annual DSA revenue and increased interest from our clients. In addition to some of the well-established capabilities that we discussed in May, we are also working on enhancing our NAMs solutions across many of our DSA sites. For example, in Montreal, we are working on developing an in vitro liver-on-a-chimp assay to replace in vivo gene tox testing. Our site in Hungary is working on a number of in vitro models for advanced modalities, including using steroids for long-term metabolism studies.

Our team in Den Bosch continues to develop and validate a growing number of in vitro assays for regulated safety assessment, and our Retrogenix business has generated considerable interest for their in vitro off-target screening platform. Overall, clients interested in our NAMs portfolio continues to build. One of our top priorities in the coming years will be to continue expanding this portfolio of premier NAMs capabilities through a combination of partnerships, selective M&A and internal development. We look forward to continuing to update you on our progress towards the NAMS-enabled future.

RMS revenue was $213.3 million, an increase of 2.3% on an organic basis compared to the second quarter of 2024. The year-over-year revenue increase was primarily driven by the timing of NHP shipments and higher revenue for research model services including in the GEMS and Insourcing Solutions business. The overall trends in the RMS segment are consistent from our commentary last quarter as little has changed aside from the typical quarterly modulations in the timing of NHP shipments to third-party clients in China and for Noveprim As a result, we are maintaining our RMS revenue outlook for the year of flat to slightly positive organic growth. The third quarter is expected to be an even stronger quarter for NHP revenue due to the acceleration of certain shipments from the fourth quarter.

Revenue from both our academic and government client segments increased in the second quarter despite frequent headlines of our potential NIH budget cuts. To date, we have only experienced a small impact from the uncertainty in Washington due to a modest reduction in scope of an in-sourcing solutions contract for the NIH's National Institute on Aging, totaling an expected revenue loss of approximately $3 million annually. Beyond that, we have not experienced any meaningful revenue loss related to NIH budgets to date. As a reminder, north American academic and government client base represents just over 20% of total RMS revenue or approximately 6% of total company revenue.

In addition, demand for Insourcing Solutions CRADL operations is tracking as planned and occupancy remained stable since our last update. CRADL revenue increased slightly in the second quarter versus the prior year, but as we discussed in May, demand from early-stage biotech clients for our CRADL services remains constrained this year due to funding challenges. Revenue for small research models in all geographic regions was relatively flat overall as higher pricing continued to offset unit volume declines. China was an exception as volume continued to increase albeit at a more moderate pace than historical levels.

In the second quarter, the RMS operating margin increased by 220 basis points to 25.3%. The improvement was primarily due to a favorable mix resulting from higher NHP revenue and higher revenue from research model services as well as the benefit of cost savings resulting from our restructuring initiatives. We expect the third quarter RMS operating margin will also be robust due to the favorable timing of NHP shipments that are accelerating into the third quarter, followed by the moderation of the fourth quarter operating margin due to the timing of NHP revenue and normal seasonality in the small models business.

Revenue for the Manufacturing segment was $200.8 million, a 2.9% increase on an organic basis from the second quarter of last year. The revenue improvement was driven by another solid quarter from our Microbial Solutions business as well as revenue from commercial CDMO clients, most of which will not repeat in the second half of the year as one relationship has wound down, creating an anticipated revenue and margin headwind. The Biologics Testing business had another slow quarter due to project delays associated with regulatory or funding issues for several clients.

Collectively, we continue to expect Manufacturing revenue will be essentially flat on an organic basis this year, which is similar to the first half performance. The Microbial Solutions business reported another quarter of robust growth, led by our Accugenix microbial identification services and Celsis microbial detection platform. Endosafe also performed well as clients continue to choose our leading portfolio of rapid manufacturing quality control testing solutions. We believe Microbial Solutions is well positioned to grow at a high single-digit revenue growth rate for the year as it did in the first 2 quarters.

The Cell and Gene Therapy CDMO business reported essentially flat revenue, principally related to work for one commercial cell therapy client to wind down and transfer their program, and revenue from our gene therapy offering also continued to be strong. While our CDMO relationship with one commercial client has ended, we look forward to continuing to work on our other commercial cell therapy program going forward. Collectively, we expect the loss of commercial CDMO revenue will reduce the Manufacturing Solutions growth rate by less than 500 basis points for the year. However, CDMO revenue grew nicely in the second quarter when normalized for the commercial cell therapy revenue impact.

We are continuing to enhance the quality of our operations, build our gene therapy presence and reinforce our healthy pipeline of biotech clients with early-stage clinical candidates and are continuing to gain traction with those clients.

The Manufacturing segment's operating margin increased by 620 basis points to 32.8% in the second quarter, due principally to revenue and payments from commercial CDMO clients as well as operating leverage from Microbial Solutions robust growth. Due to the fact that revenue from one commercial CDMO client will not repeat, we do not expect the manufacturing operating margin to be above 30% level for the second half of the year. However, we believe the progress we have made on the cost structure and the operating leverage that we are able to generate from the robust growth in the Microbial Solutions business will result in a higher manufacturing operating margin for the year.

Before I conclude, I would like to briefly address our ongoing strategic review and also provide a positive update on NHP supply. First, the strategic review is well underway, and I am encouraged by the progress that we have made so far. This thorough process takes time, but we are moving forward with a sense of urgency and do not intend to provide updates until the strategic review has been completed. This is a comprehensive process that is evaluating multiple avenues for value creation, including a strategic review of our portfolio, capital allocation strategy and market position while balancing it with the understanding that the strength and value of Charles River lies within our broad scientifically distinguished portfolio and leading nonclinical market position that truly differentiates us from the competition.

Our goal is to further enhance long-term shareholder value, and we continue to believe that the company remains undervalued. We are pleased with the progress that we have made this year at the company, including the substantially better performance of the DSA segment and actions to unlock value through stock repurchases and cost savings, which we believe leaves us well positioned for the future.

With regards to the NHP supply update, in July, the Department of Interior and U.S. Fish and Wildlife Service cleared for legal entry into the United States all of the NHP shipments from Cambodia from late 2022 and early 2023 that were under investigation. In addition, we have been informed that the U.S. Department of Justice is no longer conducting investigations into these shipments. These positive developments validate what we have said from the start. Once the DOJ investigated, they would conclude that any concerns with respect to Charles River's conduct are without merit.

I would like to thank our shareholders, clients and employees for their patience, trust and support as we navigated this process. Now Flavia will provide additional details on our second quarter financial performance and updated 2025 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 restructuring actions, gains or losses from certain venture capital and other strategic investments and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation.

We are pleased with our second quarter performance, which included revenue and non-GAAP earnings per share exceeding the outlook provided in May. This outcome was primarily driven by operational improvement from better-than-expected DSA results and, to a lesser extent, a $0.12 benefit from lower tax rate and a $0.03 benefit from favorable FX rates in the quarter. As a result of the second quarter outperformance, we're raising our revenue and non-GAAP earnings per share guidance. We now expect full year reported revenue will decline 0.5% to 2.5% and organic revenue will decline 1% to 3%.

Non-GAAP earnings per share are now expected to be in a range of $9.90 to $10.30. The $0.55 guidance raise for 2025 at midpoint is expected to be driven by two main components: operational outperformance in the second quarter and a favorable movement in foreign exchange rates from our forecast in May. As you may recall, we forecast FX based on recent bank forecast rates rather than current rates. Based on the continued weakness of the U.S. dollar, we now expect foreign exchange will represent an approximate 50 basis point tailwind to 2025 revenue compared to our prior outlook of an approximate 1% headwind. This 150 basis point revenue benefit translates into about a $0.14 contribution to EPS, with most of this EPS benefit in the second half of the year.

Our outlook for the tax rate and interest expense have also been updated since May, but the net EPS impact will largely offset each other. I'll discuss each of these items shortly. Our updated EPS guidance implies that the second half operating margin will be below the first half level of 20.7%. This is largely for reasons consistent with our expectations at the start of the year, and the gap was further widened by our first half outperformance. For the year, we now expect the consolidated operating margin will be in a range between flat and a 30 basis point decline, which represents an improvement from our prior expectations of a 20 to 50 basis point decline due to our outperformance to date and operating leverage from the increased revenue outlook.

Our full year operating margin outlook also includes several headwinds, which are occurring in the second half of the year. The first headwind is in the CDMO business and primarily relates to commercial cell therapy revenue that will not repeat in the second half since one commercial relationship has ended. The CDMO revenue generated from this client was sizable in the first half at approximately $20 million. The second is hiring in the DSA segment, where we need more people in order to accommodate the current and forecasted demand. As Jim mentioned, additional DSA staffing in the second half represents an approximate $10 million cost headwind versus the first half. And finally, the timing of annual merit increases for our employees was at the beginning of July this year in most geographies, which creates a headwind when comparing to the first half.

To be clear, the CDMO and merit timing-related headwinds were known and contemplated in our initial outlook. Our decision to begin investing back into DSA headcount was a result of the improved demand trajectory this year and to appropriately position staffing levels for the remainder of 2025 and as we move into next year.

By segment, our updated revenue outlook for 2025 can be found on Slide 33. Aside from FX modifications to the reported growth rates, the only change to our segment revenue outlook is that due primarily to the second quarter outperformance, we now expect DSA organic revenue to decline at a low to mid-single-digit rate, better than our prior outlook of a mid-single-digit decline. And as a reminder, this does not require an improvement in our net book-to-bill metrics. And for the RMS and Manufacturing segments, those outlooks remain unchanged.

Unallocated corporate costs totaled $60.7 million in the second quarter or 5.9% of revenue compared to 4.9% of revenue last year. The increase was primarily due to higher performance-based compensation. The higher bonus accruals will also result in an incremental earnings headwind in the second half, which is the opposite impact of last year when bonuses were a tailwind. As a result, for the full year, we now expect unallocated corporate costs will be at approximately 5.5% of total revenue or the upper end of our prior outlook of 5% to 5.5%.

I will now provide an update on the nonoperating items, starting with our favorable outlook for interest expense and our higher tax rate expectations for the year. As I mentioned, these items will largely offset each other and not have a meaningful impact on our EPS guidance. Total adjusted net interest expense was $28.9 million in the second quarter, representing an increase of $2.4 million sequentially. This increase was primarily driven by the impact from short-term borrowing to facilitate the first quarter stock repurchases. For the full year, we now expect total net interest expense will be in the range of $100 million to $105 million or approximately $7 million to $12 million lower than our prior outlook. This improvement will primarily be a result of our diligent capital activity including shifting that to lower interest rate geographies.

At the end of the second quarter, we had outstanding debt of $2.3 billion with approximately 65% at a fixed interest rate compared to $2.5 billion at the end of the first quarter. As a result of that repayment, the gross and net leverage ratios also declined to 2.3x at the end of the second quarter. The non-GAAP tax rate in the second quarter was 22.7%, representing an increase of 160 basis points year-over-year. The increase was primarily due to the impact from stock-based compensation. However, the second quarter tax rate was more favorable than our prior expectation; benefiting EPS by approximately $0.12 because of the timing of the enactment of certain global minimum tax provisions as well as an increase in foreign tax credits.

For the full year, the tax rate will now be an earnings headwind that had not been anticipated at the beginning of the year. This will more than offset the second quarter favorability because of U.S. tax legislation changes enacted on July 4 as part of the One Big Beautiful Bill Act, or OB3, which allows for accelerated bonus depreciation and expensing for domestic R&D expenditures. These changes will increase the effective tax rate in the short term but generate over $40 million of cash tax savings this year and, therefore, increase free cash flow. We expect the non-GAAP tax rate in the third quarter will be elevated to the 25% to 30% range due to the enactment of OB3 and expected enactment of certain global minimum tax provisions. And for the full year, we now expect our non-GAAP tax rate outlook will increase by approximately 100 basis points to a range of 23.5% to 24.5%.

Free cash flow for the second quarter remained strong at $169.3 million, an increase from a $154 million. The improvement was primarily driven by higher earnings and improved working capital. CapEx was $35.3 million or approximately 3% of revenue in the second quarter compared to $39.5 million last year, reflecting our focus on disciplined capital spending. For the year, we expect that free cash flow will be $430 million to $407 million, an increase from our prior outlook of $350 million to $390 million, primarily driven by stronger earnings, anticipated cash tax savings resulting from the recent tax legislation changes and continued working capital management. CapEx will be approximately $230 million, consistent with our prior outlook, and continues to be well below our peak capital spending in recent years.

Strong free cash flow generation is one of the hallmarks of Charles River, and the increase this year will enable us to repay debt more quickly and position us to continue investing in our strategic priorities.

A summary of our 2025 financial guidance can be found on Slide 39. Looking ahead to the quarter, we expect reported and organic revenue will decline between 2% to 4% year-over-year. As I mentioned earlier, we expect manufacturing and DSA revenue will decrease moderately in the third quarter, partially offset by higher RMS revenue due to the favorable timing of NHP shipments in the quarter, a portion of which accelerated from the fourth quarter. Non-GAAP earnings per share are expected to decline at a low double-digit rate year-over-year, reflecting the impact of lower commercial revenue and associated client payments in the CDMO business and increased staffing in the DSA segment as well as the meaningfully higher tax rate within the 25% to 30% range for the quarter.

In conclusion, we are pleased with our performance through the first half of the year, which reflects stronger-than-expected demand and solid operational execution. Our restructuring program, the goal of which has been to reduce our cost structure by over 5%, is on track to deliver annualized cost savings of over $175 million in 2025 and approximately $225 million in 2026. In addition, the repurchase of $350 million in shares during the first quarter reinforces our commitment to maximize shareholder value and diligently deploy capital. We remain confident in the resilience of our business and are committed to be financially disciplined as we drive long-term value creation. Thank you.

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

We'll take our first question from Elizabeth Anderson with Evercore ISI.

Congrats on the quarter. I was wondering if you could sort of talk about the current demand environment, I think for the commentary about the differentiation between the different biotech segments, that was helpful. But maybe could you hit upon sort of how pharma is thinking about the current demand environment? And then anything that you've seen in July and early August would be very helpful.

Sure. We'll stay away from July, but suffice to say that, that's baked into our guidance going forward. We're pleased with the demand situation. It's definitely stabilizing for pharma. We feel that these -- some of the demand trends have bottomed. Revenue is up sequentially, proposals are up year-over-year and sequentially and so is cancellations, but that's sort of a commentary on the longer term post-IND work for some of these programs. We had this big resurgence of bookings in the first quarter, having to do with projects that clearly were delayed at the end of 2024. So we've got a bunch of bookings in the first quarter, which helped us significantly in the second quarter but won't necessarily repeat.

But pharma feels stable and improving and a lot of the improvements and changes in the cost structure and drug development sort of product lines have been skimmed back. And biotech is just a tale of two cities. Also, the demand seems stable, but it's a bit mixed. The smaller companies continue to be cash constrained, and until the IPO market and secondary market opens up, that probably is a continuing scenario -- not probably. I think definitely that's a continuing scenario. Mid-tier biotech companies seem to be performing better and seem to have enough money to sort of prosecute and develop the drugs that they have in their portfolios. Revenue improved slightly year-over-year for the third consecutive quarter. Also cancellations were also pretty much for the same reasons.

And I think we're most pleased -- if you take a look at the DSA net book-to-bill, it sort of had a steady upward trajectory for the last 18 months. So I guess the bottom line is that we have stabilization across all client bases, Pharma seems stronger right now just given their access to capital, for instance. Aspects of biotech are strengthening as well, but we have to watch the ones that are cash constrained. And I think we've called it well, there's the amount of uncertainty out there in the marketplace and with the government and obviously with access to capital as well. And we feel good about our guidance for the balance of the year.

Got it. No, that's very helpful. And maybe just one further clarifying question. You mentioned that for the new revenue guide, you don't need book-to-bill to go back above 1. Is it fair to say that it should be sort of at current levels going forward in terms of how you're thinking about that? Or it's fair to say that maybe we just like look at sort of the general seasonality and improved DSA revenue performance, and that's kind of the way to think about it in the back half of the year.

Want to take that, Flavia.

Sure. Elizabeth, I think you should think of the current code for the first half is continuation towards the second half. I know you talked a little bit about the second quarter being seasonally lower and we did see that for the last 2 years. And then things rebound a little bit. But I think overall, we have seen this steady improvement for the last 18 months, as Jim said, right? And we're not, as you pointed out, expecting book-to-bill to recur to above 1 to meet our guidance. But to stay within -- over the last 18 months, we've been between 0.8 and 9.3 -- 0.93, excuse me for the first half of this year. So in that general range is, I think, what you can continue to expect.

We'll take our next question from Eric Coldwell with Baird.

Let's see here. I'm toggling a couple of things this morning. So hopefully, these aren't too off base. But on the CDMO, I'm just wanting to dissect the 2Q performance. It feels like maybe there's some extra twist with the revenue that came in, in the quarter. I know you quantified one client at $20 million, but was it just that there was particularly high margin on that amount, like less work, but final payouts? I'm just hoping you can help us understand the actual impact of the CDMO performance in the quarter versus what's expected in the back half.

And then if I might, is there any technical impact of U.S. Fish and Wildlife clearing the Cambodian NHPs? I mean, what actually happens at this point now that, that has occurred? Are there financial benefits or other operational changes that come as a result of that?

Let me take the last part first. Obviously, we're thrilled with this and we're thrilled that we've been able to evidence the fact that the alleged concerns that anybody has with us were without merit. But what it does is it gives us an enormous amount of flexibility to utilize animals that were already in the country for work, but also to take Cambodian animals into wherever we would like, including the United States.

So NHP -- access to NHPs, sufficient numbers from multiple countries is an important aspect of managing the business given the proliferation and increase in NHP toxicology work. And obviously, Cambodia is a big source of high-quality NHP. So we're really pleased to have this sort of, I don't know, regulatory yolk lifted from our next year. And I think it provides us great facilities that do better planning for the not just the back half of this year but for next year as well. So we're thrilled with this noise -- this information from these agencies. I'll let Flavia take the first half of the question.

Yes. Eric, I'll take on the CDMO. So just a couple of things. The $20 million, as you pointed out, that's the wind down of revenue for the first half, not just the second quarter, and that's what will become the headwind in the second half of the year as we don't -- we'll no longer be manufacturing for this client. And yes, the margin on this work throughout the first half is, I would say, it's a little bit higher than normal margin. And so second quarter as well as the first half of the year in CDMO was a little bit buoyed by the continuation of this work as we wind down the client. And then I think we also talked about there was revenue and also a payment that we received. That payment in the second quarter only, that also helped the margin in the second quarter.

Did you quantify that payment, Flavia? .

We did not, we did not.

We'll take our next question from Dave Windley with Jefferies.

I'll follow up on Eric. So cadence-wise, Flavia, do I understand on the CDMO, you quantified in the prepared remarks that the headwind to full Manufacturing Solutions for this year is 500 basis points? I calculate that to be about $38.5 million. So is it right to think that something a little south of $60 million is your comp number from last year? You've got $20 million in the first half. You don't have anything in the second half that, that overall headwind for the year is that $38 million, $39 million. Is that the right kind of framing for the CDMO client that you're losing?

Yes. I would just clarify a couple of things. Yes, in the beginning of the year, you might recall we talked about a $40 million headwind from changes into our CDMO client base. We spoke about 2 commercial clients, one that had terminated the relationship with us, and then another one that we were adjusting the level of work that we were going to be doing for them. On that second client, I think in Jim's prepared remarks, talked about doing some level of work for them this year. So that's what adjusted original guidance, I think, to your point, Dave, we said about 500 basis points, and now we said slightly below 500. So it's a little bit better. But your math that you just described is in the right zip code.

Yes. Back to DSA and thinking about the cadence of revenue, Jim, appreciate the kind of 6-month sequential progression here. I guess the factor that kind of supports the near-term revenue is really conversion. And in your preclinical history, backlog conversion has varied quite widely. It went down a lot when you were booking so much during and immediately after the pandemic. It's kind of on its way back up. Now this comment that you made about some cancellations in the longer-term study arena probably actually serves to increase the burn rate in the near term as well. I just wondered, the bottom line question here is, where can that go, both near term and long term, I guess, to support a revenue base despite a backlog decline?

We think the backlog is in a robust place. It's about 10 months, and it's been sort of stable there for a while. So that should allow us to continue to draw from a current backlog replaced study for that is slip or cancel. Cancellation rate, sort of an interesting one, you don't get to sort of pick and design the study in advance. And we had a fairly large number of really complex large dollar studies that typically are connected with sort of later stage phase of drug development process. So that can be offset by other types of studies, things like in general toxicology and earlier studies in the late Stage 1.

So I think that we are in good shape from a physical point of view. As we indicated in the prepared remarks, we actually are performing meaningfully ahead of our operating plans. We actually have to hire some people now to make sure that the work is done both in timing and high-quality fashion. It feels like pharma is -- has strengthened meaningfully and sort of getting through some of the issues that they have to protect themselves against the patent lift and that bigger biotech companies are stable as well. When we begin to see capital markets opening up for the smaller folks, I think that will also enhance demand. So we feel that the -- both the backlog and our current capabilities are in a pretty good place right now.

We'll take our next question from Patrick Donnelly with Citi.

Jim, maybe a follow-up on that, to you point feeling a little bit better in terms of the hiring piece. You've seen a lot of these cycles. I guess, just the confidence that stepping in this hiring, the confidence that we are turning the corner here, and again, I think the some of the other questions, if you have this book-to-bill of, let's call it, 0.9 area for the rest of the year, does that support DSA growth next year? Just trying to square up what book-to-bill, if that's the right metric, is necessary to think about launching to positive growth next year just given you're hiring and, again, I'm pretty constructive, particularly on the large pharm piece.

We'll stay away for next year because we have a lot more this year to accomplish. But both the book-to-bill and the overall demand curve, I think are improving in the right direction. We're not getting ahead of ourselves on the hiring, if that's sort of the essence of your question. We're really catching up with where we need to be given the current level of activity vis-a-vis our operating plan. And so this is very much a totally a people-related enterprise. We're engaged in the quality of the work and the speed of the work is essential.

I think the things that will help the growth in development next year is access to capital for the biotech folks and some settling down of some of the things that were going on in Washington, I think, will be helpful as well. As we said, we do think that pharma is moving slowly but nicely in the right direction, so is large biotech. So the trajectory is positive, but we'll stop short of trying to give any indications of what we think the growth rate of DSA might be in the next fiscal year.

Understood. Okay. And then maybe just on the pricing side. It seems like it continues to be stable and you guys sound pretty good on that. Can you just talk through that? And then what -- maybe it's one for Flavia on the back end, what that implication means for margin, certainly understand the hiring piece, moving some of margins in the second half, maybe just the moving pieces on margins between pricing, headcount, et cetera, would be helpful. .

Why don't we both take that? So price particularly in DSA is also stable. Stock pricing seems to be pretty solid. We definitely have competitors. I would say most, if not all of our competitors are using the price card to compete with us. Sometimes those are very small companies that just don't have any choice but to go to where the lowest provider is. Having said that, I think anybody that can afford it and really want speed, quality and regulatory prowess will work with us. So the mix seems to be enriching nicely, and we'll use price intermittently and necessary to either protect or it take share.

But it feels like there is reasonable stability in the marketplace given the fact that the capital markets are a little bit sluggish and demand has been off for a while. That seems to be coming back. And we need to distinguish ourselves on our science and the quality of our work and our geographic proximity more than anything and sharpen our pencils periodically.

And I'll add on the price. I think what we have seen in the first half, as we said, especially in the DSA was mix favorability that has helped with the price/mix equation. So price has been stable to slightly better than we anticipated coming into the year because of mix. Again, as we said in Q1 and again in Q2, we don't count on mix being favorable. So that can play into a little bit of the margin dynamics that you described, Patrick, in the second half. But spot price is stable at this time and mix has been what has enhanced the price/mix dynamics in DSA.

And we'll take our next question from Casey Woodring with JPMorgan.

So you noted the higher cancellations this quarter and were focused on longer-term post-IND work. Can you just elaborate on what's driving that? What sort of margin differential in the work that's getting canceled looks like? And then how should we think about this dynamic moving forward? Do you expect that to continue in the second half?

I have a huge difference in margin, both the price and the margin profile for different types of work, both earlier and later are often comparable. Some of the specialty work is perhaps slightly higher margins and it's a little less competitive but not significantly. So we're -- we don't -- it's tough to predict how long this will continue. It seems to be just a point in time. Very much the nature of the bolus of work that we had booked in the quarter that -- you don't necessarily get the same type of work to book the next quarter, the quarter after that.

It's just the way the studies fall. So I don't think it portends really much of anything. It's prioritization of portfolio by our clients. It's what they have ready. It's what they are moving -- emphasizing more work in the clinic, what they're trying to push forward much more quickly. So we'll obviously continue to watch that and provide clarity on that. But I don't think this is something that will continue.

Got it. That's helpful. And then just on the large pharma piece, last week, we saw the administration set a 60-day deadline for pharma to implement pricing. There's noise around tariffs. You talked in your prepared remarks about not really seeing any impact on either of these dynamics from pharma company spending currently. But just on the forward outlook, how should we think about potential headwinds here for large pharma demand?

We've tried to be prudent and thoughtful on what our prognosis is for the balance of the year given the significant amount of uncertainty in the world and in the country, particularly some of the things coming out of Washington with regard to drug pricing. What will the NIH do or not do going forward, what will the FDA do or not do going forward. So as we said in our prepared remarks, we have had a miniscule adverse impact from any of this so far. We're not really hearing about the tariffs from our clients. That doesn't mean that won't change.

We've had a very small amount of NIH work that we know has been canceled, but we are hearing about that clearly often from particularly academic clients, that they do have concern about when the next two will fall. So we believe that our guidance accommodates for things to be rougher and that we've been thoughtful and prudent about that. And probably if the shoe does fall in any of the sort of 3 buckets that I just outlined, it's likely to have a greater impact on us in 2026 and for the balance of this year.

Yes. And just to echo that, I think when we've been talking about the net book-to-bill ranges and, again, my earlier question to Elizabeth around it staying in this sort of 0.8-ish level that we had seen over the last 18 months with sequential improvement over the last 3 halves of the year. Again, the second half book-to-bill will actually be more relevant to next year's performance, as Jim just said. So I think we feel that we are well positioned for the guidance that we're providing this year given what we have visibility to at this point.

We'll take our next question from Charles Rhyee with TD Cowen.

Yes. Maybe just touching on the margins in the back half just to make sure I'm understanding really sort of the headwinds as we think about it. Is it really just, one, in DSA, we have some headwinds from extra hiring? I would imagine that's a little bit of a temporary issue as you kind of ramp up ahead of expected demand. And then secondly, we just had better margins in CDMO in the second quarter which don't persist. And so it's really more of a kind of going back to what maybe more normalized margins for CDMO is? Just want to make sure, is there anything else that I'm missing? Or as I think about sort of the factors driving that, as we think about first half versus second half.

Yes, Charles, I think you're thinking about it correctly. I think the last component is also, I think I talked about the timing of our merit this year was July 1. So you have that a little bit playing into the first half, second half comp as you can expect about 3.5% increase in our, let's say, salary and labor cost pool base when you compare the 2 halves of the year. But yes, the DSA and the CDMO comments that you made are spot on.

Got it. And is there any benefits to DSA margins with the DOJ investigation concluding? Or were any of those legal expenses considered onetime and not really in the numbers? .

Yes. At the time, both the legal expenses as well as we actually did write off the inventory of those NHPs. And we both -- we non-GAAP both expenses. Now that we will be able to use these NHPs for their intended purposes will expense them as we incur the costs as we run the studies, and so essentially unwinding the non-GAAP expense we had done for the inventory. So they will be treated as a normal cost, yes.

We'll take our next question from Max Smock with William Blair.

Maybe just a little bit of a technical one here on DSA. You mentioned that the outperformance was driven by strong bookings activity in the prior quarter. But -- and I think something that kind of new at the time of the first quarter earnings call. So I'm kind of wondering how that exactly drove the outperformance in the second quarter. Is it just that, that work burn faster than expected? Or is there something else beyond the strong bookings in the first quarter that helped explain why DSA outperformed in 2Q?

It's a significant amount of work as a result of pent-up demand by our clients, the things that they paused in the back half of last year. And again, the mix of that work is not something that we can predetermine or form a size. So both a healthy mix and a significant amount of work with clients that want to move quickly and get a positive price mix as a result of that as well.

And that was a little bit of -- sorry, I was just going to add. There's a little bit also a benefit of FX if you're looking at it just on a pure dollar basis versus guidance before. So about half and half of the beat were operational versus FX, and that applies to DSA as well. And to Jim's point, yes, we had strong bookings in Q1. But operationally in Q2, we -- while we always have changed orders and we always have slippage, those were let's say, better, to a certain extent, that also helped with the beat in Q2.

Understood, Flavia, That's helpful. Maybe just going back to one more on the headcount growth. I'm wondering if you could put some numbers around kind of how you're thinking about head count growth in total for this year? And then whether or not it's fair to think about headcount growth in DSA as a reasonable proxy for that segment growth in 2026?

I don't think we can necessarily put numbers around that. We have to size out with current demand -- anticipated demand for the rest of the year. And I think we've done that well over the last decade. We had areas of significant high growth, so we had to get ahead of it. And we've obviously had some workforce reductions. So we're being very careful about adding it back. And we're guardedly optimistic that we're seeing the demand stabilize across our client base and a little more pronounced in pharma.

So we want to be able to react relatively quickly as the demand improves. So it feels like an appropriate and thoughtful way to address headcount. It's the principal limiting factor. I think our space is in a good place to accommodate more work, but we simply can't even contemplate taking it on without a sufficient number of people. We also have to get them in early enough to train them. A lot of people come in as unskilled labor. And so we're -- it actually feels good to get on with that.

Yes. Just going to add again, I think the quantification that we tried to provide was -- as a headwind to the margin in the second half versus the first half, the $10 million that we both spoke about. And this is -- you got to think about it as twofold. It's -- yes, it's a little bit higher hiring when you compare to the 2 quarters. But we were also very prudent in not starting that too soon in the first half until we really felt strongly that the demand signals were robust and stable.

And so it's a comp also of maybe we were lighter in the first half even to deliver the level of revenue that we did. And then we have to kind of pick up on that and could to deliver the continuation of that demand. So I don't think head count is going to be up year-over-year if you ask me at the end of the year, given that we still have a declining revenue, but it's certainly an increase versus the beginning of the year when we came into a guidance that was much worse than we're now looking at. So I think very positive signal.

[Operator Instructions] We'll take our next question from Josh Waldman with Cleveland Research.

I had two that I'll ask then hop off. First, Jim, it sounds like you think the KPIs point to an improving trend in DSA. But I wondered if you could comment on how visibility has evolved in the business. Does it seem like visibility on bookings and cancellations is improving at all? Or is it still challenging versus what you were accustomed to historically?

And then related question. I wondered if you could comment to drivers on the increased cancellations of the longer-term post-IND studies and whether you've seen increased cancellations in DSA and what the guide assumes for cancellations going forward? Do they increase or remain stable from here?

So I think we do have better visibility and better clarity from our clients, particularly as hopefully they're coming out of a pretty cautious period, both pharma and biotech. So -- and we're trying not to overread that just given the role that we play in helping these companies get drugs into the clinic and ultimately to the market. And as I said earlier, the cancellation, difficult to predict how that continues and rolls out to the balance of the year. We had a fair number of very large complex and expensive studies that seem to have canceled different clients for totally different reasons, usually, an emphasis in the clinic to slow down some of the preclinical work.

The flip side of that is that we've had a lot of post-IND work for now, I don't know, probably a year or 1.5 years. General toxicology work was stronger in the quarter. That's a really good thing. You want to balance of general work and specialty work because the general work feeds into specialty work. And so that -- I think that's an important indicator perhaps. Again, we're always cautious and careful to say that our business isn't linear, that 1 quarter, whether it's particularly strong or particularly concerning, is not necessarily predictive. So we'd like to see what the cadence is of our clients going forward. We're also going to move into [ aeliur ] soon where our clients are beginning to put together the 2026 operating plans, as will we build that up on a case-by-case basis on a 0 basis with all of our clients.

And so we'll get a really good sense of how they're thinking about spending, what concerns they really have about Washington and the capital markets. what they're prioritizing and whether there's any sort of meaningful swing back balanced spending between development and the clinic. And that's -- when we've had quarters of extraordinary strong growth over years, we've had that balance of spending, obviously, for these companies to have a good pipeline several years from now, they have to get back to discovery spending and get their INDs filed. So we're hopeful that, that will happen but we're careful of what we built into our guidance for the year.

And just to add on the cancellations. The cancellation rate this quarter in Q2, so think of it as a percent of bookings, it wasn't actually too dissimilar from the last 18 months. And if anything, it was more that Q1 was really favorable, which we didn't necessarily expect to continue. So I think maybe this is another way to think about it.

We'll take our next question from Luke Sergott with Barclays. .

This is Anna Krasinski on for Luke. Just one from us actually. Can you talk about the sales cycle timing from RFP to reward and then converting into revenues? And just has this changed or gotten better at all? Any color you can share?

Any particular business that you're talking about? Or

Within DSA.

Talking about DSA. I don't think the sales cycle has changed. And I think we we've done some structural change of our sales organization and our marketing organization as well. I think we're much more client centric. I think we're doing a much better job selling from discovery into safety and are much more focused. So I would imagine, if anything, our sales cycle is more focused and elegant and probably yielding good results. As I said earlier, we got to be careful about if and when we use price. It's typically not something that we are the first people to use as a lever, but usually in response to anticipation of our clients using that as their only lever.

So look, the cadence and the speed with which we get the studies done and report out to our clients is really everything for them. Everyone's going to race to market regardless of whether the clients are large or small. And so we're always looking to both enhance, accelerate and refine that process, both with the digitization of our capabilities, and as I said a moment ago, it's kind of the amalgamation of our sales force. So I would say it's somewhat improved and enhanced over perhaps what it was last year.

And we'll take our last question today from Michael Ryskin with Bank of America.

It's a long call so I'll just ask one. Jim, maybe sort of a big picture thematic question in terms of how we should think about book-to-bill being a leading indicator for revenue growth. And what I'm getting at is traditionally, it's a pretty good leading indicator, at least the underlying bookings, and I'm focusing on DSA specifically here. But you've also got the backlog sitting there, right? And as you answered to an earlier question, I think it was Dave Windley's question about the tenth month of backlog gives you some buffer. Can you talk about how that can be used to offset the below 1 book-to-bill and what that might translate to next 10 months? How easy it is to convert that? Just sort of given the backlog that is there, what level of book-to-bill you think is sufficient to get positive or at least flat revenue growth?

I think first off, we're pleased that the last 18 months has had a steady upward trajectory of net book to bill. So that's positive. We'd like an above line, yes, but it's really not essential to get there. I mean the backlog -- both the duration of the backlog and the nature of the backlog is important. So I would say as a -- for the basic proposition, particularly for non-NHP studies, we can almost slot in and say it's backlog for something that's slipped or canceled, not always but almost always, obviously depends on whether the client has a predisposition on a particular geographic locale or not. But it's a bit easier.

And with appropriate notice, we can do a similar thing with the NHP studies, which tend to be more costly and more complex to set up. So it does depend on the mix of the backlog and the certainty of the backlog, as you may recall from, I don't know, it's probably 3 years. Now the backlog, which we enjoyed for a while actually elongated too much and there was less of a certainty from the clients in terms of actually initiating study. So we like where it is now. While some things do cancel or slip, we typically can slot something in. And so I think that backlog is in a good place for us right now as we go forward. We had several years where it was kind of 6 to 9 months or 10 months, sort of feels like we're in the ballpark to have a sufficient backlog to be able to seed any potential gaps we have in the portfolio and make sure that we keep our people busy.

And I think just as a reminder, the preclinical space, the turnaround time is much shorter than clinical, right? So our cycle was more like 6 to 9 months. And so I think that also plays into how you rebuild that backlog. And as you start to look ahead of 10 months ahead, there's plenty of time to increase the bookings in that period as well.

Sorry, I was going to say thank you. I think that's all the questions that we have. Thanks for joining us this morning, and we look forward to seeing you at an upcoming investor conference in September. And this concludes the call.

Thank you. This does conclude today's Charles River Laboratories Second Quarter 2025 Earnings Call. Thank you again for your participation, and you may now disconnect.

Hi. Good morning. I'm Dave Windley with Jefferies Healthcare Equity Research. Welcome to Jefferies 2025 New York Conference. Pleased to have you here. I appreciate the support. I see some familiar faces in the crowd here in person. And certainly welcome to the folks that are listening to the website live or on demand. So thank you again.

Our next company to present or to talk to us in fireside style is Charles River Laboratories. I've covered the company for quite a long time. Birgit, I'll admit, I was just looking at your LinkedIn profile and comparing our tenures. And at first, I -- so I've been at Jefferies, coming up on 25 years, and I saw 23 years at Charles River. And then I scrolled down a little more and saw across 2 stints, it's even longer than that. So congratulations on your long tenure with Charles River.

Birgit Girshick is the EVP and Chief Operating Officer of the company. Todd Spencer is also here with us in the crowd. I'm going to turn it over to Birgit to talk a little bit here to lead off, and then we'll get into questions. Thanks again.

Thanks, Dave. Thanks for having us today. And yes, I have 33 years, so I have a few years.

I wasn't going to say the number.

And 33 proud years at Charles River. But let me start the session today with just a little update on our Q1, which we felt was a solid performance. It was better than we had expected and prior outlook. We ended up with still a revenue decline but less than expected at minus 1.8%. We were -- it was great to see that we achieved an OI margin improvement of 60 basis points and an EPS growth of 3%. This was a clear result of our cost savings actions and cost savings program that we have initiated just about 18 months ago now and where we have reduced our cost structure by roughly 5%.

Also great to see that we have, for the first time in 2 years, achieved a net book-to-bill of above 1, which we're waiting for, for quite a while. This was primarily driven by strong bookings, particularly in our pharma segment, but also by moderating cancellation rates in all our client segments. So really good to see and gives us some confidence going forward.

This allowed us to improve our guidance for EPS by $0.20 to $9.30 to $9.80. And also our revenue growth to -- by 1% to minus 4.5% to minus 2.5%. And my colleague, Flavia Pease, we affirmed that earlier this week. So I'm happy to see we are seeing some stability there.

We also talked about the FDA announcement at our earnings call, and that's something that we will probably touch on later in the questions. So I will leave that to that.

Excellent. Okay, great. Thank you. Thank you for that tee up. I think a good place to start is the key on the cost structure changes that the company has made. So I guess I'd start with compliments on once management identified that the environment was truly weakening, you acted pretty quickly in addressing and rightsizing cost structure and figuring out ways to mitigate margin impact. So in that regard, maybe you could talk to a few of the areas or the most significant areas where you've pulled levers. But then I want to take us into the strategic review and what more could be done. So I'll let you talk about what you've done so far first.

Yes, certainly happy to. So as I said, we reduced our cost structure by roughly 5%. And there are some key areas that we are executing on. Some of that cost reduction is completed. Some of that is still in progress. It will translate to roughly $175 million of cost savings this year and then $225 million forecasted for next year. So it will have a lasting impact.

Some of the areas that we have looked into or executing on is, for example, site consolidation. So between the sites that we have consolidated or eliminated over the last year and the ones that are still in progress, we will reduce our footprint by about 20 sites. Many of those are quite small, and we will maintain the services and solutions for our clients in one of our bigger sites. So we are not reducing our services footprint but we are reducing our square footage overall, and actually makes us a stronger company and a more competitive company because our customers are actually able to do the same amount of work or the same work in all under one roof. So it's actually something that's very, very positively seen.

Other areas that we have looked at is, obviously, or executing on is the reduction of staffing. Some of that will return as volume growth returns, particularly in areas where we used attrition to allow the staffing numbers to go down. But we also have roughly $75 million of sustainable savings where we reduced head count and other costs that we don't think we need to rehire. So we made process changes, automation, some outsourcing and other areas. I'll leave it with that. I could go on for half an hour on that, but there's a lot of activities going on.

Got it. And for clarification on the site consolidation. Are the preponderance of those breeding facilities, barrier room type facilities? Or is it other areas of business?

So we have looked at our holistic portfolio at all our sites that are in the Charles River network. And it actually impact sites in all our businesses. A lot of those are -- the majority of those are in DSA, and in RMS, there are some CRADL facilities part of that as well. There's actually 7 to 8 facilities in CRADL that we have reduced. And about every business has had some sites that were consolidated.

Okay. So then kind of rolling forward to the strategic review. So announced the agreement, the collaboration with Elliott Management. And some of the emphasis, I guess, in discussions with you, with management have been around the preexistence of your special -- sorry, strategic planning, capital allocation committee. And so I'd suppose the question then is, as I said before, you've been pretty proactive about this. What remains or what more can be stimulated by shining a brighter light on this?

Yes, I'm happy to talk about that, obviously. So yes, in our earnings calls, we announced that we will undergo a strategic review, and this strategic review is -- we actually do that every year, but we have some new Board members and was the kind of fresh perspective. We want to do a very comprehensive review and to see where we possibly can improve shareholder value in the company. So what we will do there, we will look at every business. We'll see what fits, what doesn't fit. Are there any other costs out that we can do is certainly part of it. But I believe it's very much about the strategic fit and where we can maintain synergies.

At this point, we are in very, very early stages. And so we're going to look at all possible solutions, including if there's M&A that actually would improve our shareholder value but also areas that we shouldn't play in. Once we go through that, we will be, for sure, a few months. So we'll be a little bit of time before we can report out on that. We'll certainly come back and provide more information.

So on that, I think the question was asked on the call, and I get the question, do I think -- do people think that you'll have an update on the 2Q call? What you just said suggests that's probably a little too early. Do you think that's fair?

That's fair. It will definitely not be on the Q2 call. We're just starting the process. This will take some time. And as I said, we'll do a comprehensive analysis, some of the parts and everything else included, that will take some time.

Yes. And when you think about the businesses, you mentioned very much an emphasis on strategic fit. It seems like DSA is the biggest business. RMS is probably the most germane then of the other 2 segments to your core DSA business. I'm inclined to ask, how willing to divest of parts of the portfolio is the company, is management? And could that be up to and including a full segment of the business?

Yes. I think it's just a little bit too early to speculate. Let us go through the review. We strongly feel that our stock price is extremely undervalued right now, and particularly since the FDA announcement. So we are going to look at all options and anything that is reasonable and makes sense, we will entertain. But we're really early on, and so it's just too early to speculate.

Okay. Got it. So digging into the segments a little bit. The Manufacturing Services or Manufacturing Solutions business kind of has 3 big parts. I think management, Flavia has described that 2 of those are operating at or pretty close to target margins. One, a little more lagging. The two that are performing better, Microbial and Biologics Testing. Where would -- how would you describe their performance versus where you think they can achieve or what are our target margins?

Yes. So where we believe to get to later in the year is actually that we are getting closer to 30% margins for our Manufacturing segment. And this is primarily driven by the 2 segments: Biologics Testing and the Microbial Solutions. Biologics Testing had a little bit of a soft quarter, which we see regularly because of seasonality. A lot of the manufacturing sites that we are supporting, may that be pharma or CDMOs or biotech, are actually closing down over the holiday periods and then we don't get samples in early January. We believe this business will return to better performance in growth in the following quarters. And with that, our margin will improve.

And then our Microbial business, we have said before, this is a highly profitable business. And we are continuing to see solid growth there, and that will be always a contributor to that. So as I said, we believe that, that business, as a Manufacturing Solution as a whole, can definitely come back to just about 30% for the year.

Right. And that's 30% for the year or by the end of the year?

By the end of the year.

Yes. And so the path to that, I think, clearly, Biologics Testing was probably a little lower because of the slow start on volumes. But the path to that 30%, does an improvement in, I'll say, "normal" on Biologics Testing get you there? Or does the CDMO part of Manufacturing need to improve from its current levels?

It's primarily driven by the Biologics Testing. So our CDMO business this year is impacted by actually 2 commercial clients, and one of them will discontinue the work with us because of consolidation of their suppliers. And the other one has a little bit of a delay in their program. And so the CDMO business will most likely not return to profitability this year, whereas we have made a lot of improvements and have a road to profitability going into the future and believe that we can build this as a strong, really strong business there.