Charles River Laboratories International, Inc. Aktie

Okay. Good morning, everyone. I'm Eric Coldwell. It's my pleasure to introduce Charles River, a little bit different. We've been on stage before. We've been on stage before at a different company, but it's a little bittersweet, not having Jim here. I'm glad for him in retirement, but it's also great to see both of you. So Birgit, obviously, is a lifer at the company, what, over 30 years. And Glenn, we knew each other at Premier, and you joined...

Five months ago.

5. I was going to say 4. 5 months ago. So fantastic to have you both with us and I'm probably sharing secrets that I shouldn't share but Charles River was once again the #1 most requested company at the conference. So you've...

Great to hear.

Thank you. Great to hear.

You've got some attention. We -- it looks like we already have a couple of questions coming in. But again, anyone who needs to send a question up to the front, please do so.Look, I want to just start off right off the bat. So you took over as CEO in May formally, right? Again, been with the company over 3 decades, you've seen it all, done it all there. Talk about the experience so far. And then just basic observations, what's harder than you thought? What's easier or better than you thought?

Great question. So the transition has actually been quite smooth. And as you said, I spent nearly my entire career at Charles River. So with that, I certainly know where Charles River's strength is, but I also know where we need to be faster and sharper. And certainly, it's going to be my focus area. So what I did over the last few months is I spent a lot of time meeting with stakeholders. I spent quite a bit of time visiting over 40 of our sites and in about 7 countries, so visiting our employees, listening to them, and also making sure that they are aligned and understand our strategy and what we want to execute on.

I also spent a considerable amount of time with shareholders and with our Board and with our clients and all in -- to really make sure I understand and refresh myself of what they need from us and what Charles River needs to execute on to become an even more stronger company. What I found was a lot of feedback that gave me confidence that Charles River is quite well positioned for the future, but also that our strategy, that we call Pathway to Purpose, is aligned with what they think we should do and is aligned with what we are currently executing on.

What I also found going to our sites is that we are already executing on many of the things that are part of Pathway to Purpose, which is modernizing the company, refining our portfolio and growing through our client-centric approach. You know about the divestitures, you know about some of the M&A we've already done. And I saw tons of examples of how we are modernizing the company. So what surprised me maybe in a nutshell is the excitement and the confidence in the company and in me personally, which is great to see. And so, so far, I've been enjoying it, and I'm looking forward making a real difference and also looking forward to our Investor Day next week and sharing more about it.

Yes. Yes, that will be great. And Glenn, you're right. It was 5 months, April 6, I would think that was the day. So you've been at several other companies, including several in health care. You've seen probably a pretty wide spectrum from day 1 where you stepped in, what was working, what was not working, what did you want to change or do differently, what's your early impression of Charles River? I assume you were left in a pretty good -- it was left in a pretty good position, not a lot of cleanup here, but...

Yes. No, it's a great company, and I'm very fortunate to work for the organization. I think first and foremost, it's a complex business. Drug development is complex. And so our business is taking a little bit of time to understand and get to the learning curve. I've actually been out with Birgit on 16 or 17 site visits. I think the biggest impression I have is we've got really committed people and deep scientific expertise. That's obvious when you get out to the sites.

I think second is we have these very strong, long-standing relationships with our clients, and our business is very sticky. And I think that's really important, and that's an observation. Our business has got significant scale in the preclinical, nonclinical space. Nobody has the scale we have. Having said that, I think there's opportunities within certain parts of our business where we can gain more scale. So bioanalysis -- bioanalytics would be one of those examples. And so that's an area, I would say, of opportunity.

We're going to talk more, I'm sure, about acquisitions and organic growth in this area because it's an important part of our business. In terms of Pathway to Purpose, there's a big opportunity for us, I think, to modernize our company. And so how can we automate more, take a lot of manual processes out of the equation, be more efficient, more productive? And so those are things we're going to lay out next week, which will not only make us more efficient, it actually shrinks the drug development process for our clients and obviously helps our overall margins moving forward.

So those are some initial observations. Obviously, excited to be here and looking forward to doing great things. And I joined at a very good time. I mean we're at a point of inflection for our business. It's happening here in the third quarter. And we're now seeing a pretty significant improvement in our business in the second half of the year.

That's great. That's great. So you've already foreshadowed this, but you have an Investor Day next week. I know you're not going to give us the numbers, not going to ask for them. You're free to, but I'm not going to ask for it. But talk to us about the agenda. What's the layout? And I'm going to do a kind of a 2-parter here. But look, I'm a straight shooter, kind of, at times, the last 2 LRPs were disasters. And I now have 2 new faces on stage in the top 2 spots in the company from a Wall Street-facing perspective, at least. How does that impact what you say and how you say what you're going to say a week from now?

Yes, certainly. And giving long-term financials is difficult at all times. It's particularly difficult when you're in a downturn era. But it also is something that you have to give a lot of thought to and really decide how you approach it. How we're approaching giving targets next week is that we are looking at what we are already executing on. So not something that we are hoping to do in the future or will be doing in the future, but you will hear about a lot of things that are going on at Charles River right now, that is in the process.

We also based our targets on what we are currently seeing and where we have clear, absolutely clear opportunities. You will hear from us that we're not looking at any moonshots in there, that we're not putting anything in there that could happen but may not be. So those are targets that we have confidence in and that we think we know how to get there and that we are actually executing on. In addition, we will spend a lot of time talking about what we're executing on, how it translates into our strategy, why we believe it translates into demand and durable shareholder value and how we will get to our margin targets, for example.

So a lot of information about -- and details about how we're going to get there. We also will meet the team, which I think will be a tremendous opportunity to see our leadership team in action. We have an incredible team with a lot of experience, both within the industry, within their functions but also within Charles River. So I'm very excited, and I hope certainly that you walk away and you will say that makes a lot of sense, and you're excited too.

From a process standpoint, if it's too much to ask, tell me so. But same process as the past 3 years, 3 segments, margin, organic growth kind of layout?

Yes. We're going to certainly give details around financial targets by segment as well. So we'll give that level of breakdown. I think in terms of the time frame, just hold off on that question for now. But obviously, we want to make sure it's in a reasonable period of time so that we can be held accountable to the numbers, but not too far out there where it's not realistic in terms of the time frame. So we'll be more specific next week on that.

Sounds great. Discovery and Safety, DSA segment. You're coming off of a quarter where you had a 13% sequential growth in bookings, 39% year-over-year. You've now executed several quarters above 1.1x. Last quarter, obviously, 1.19x, I think you made comments yesterday in an event that, that's not the new go rate, but feel free to chime in on that, nor would I expect it to be. That being said, I guess the drumroll, the question is, are 1.1x book-to-bills the new norm again, 1.05x, 1.1x, are we going back to normal times. Is it a wet finger in the air, nobody knows question?

Yes. I can start here, and then Glenn will add some details to that. So number one, we would be more than happy to stay with 1.19x. It's a spectacular net book-to-bill. We weren't expecting it to be quite that high. And it's just that a net book-to-bill becomes harder as you grow, right? So your bookings just have to go up. So that's number one. We have said repeatedly in our business because of the nature of the studies, we can actually grow with a net book-to-bill above 1x, but we certainly would like to have it higher.

So we didn't want to indicate that we don't think it could happen, but it's being such a spectacular number, we don't expect it. So we have great metrics internally for our proposals, as you said, capture rates, bookings. We already had raised our guidance to growth for the rest of the year. We're pretty happy with this as a step-up. And now we need to just see it build and build the backlog back. So that's a big thing, too. So we had several nearly years where backlog was eroding. So now we need to spend a little time to build it back, get some quarters under our belt to really see where that's going. So...

Yes, I would just add a couple of things. We've obviously been very encouraged by the last 3 quarters' net book-to-bill numbers. And it's one of the reasons why we raised our guidance on the most recent earnings call. So we raised our guidance by 1.5 points on organic growth. We raised our EPS guidance. And so seeing very positive signs on net book-to-bill on proposal volume sequentially and year-over-year. But we are building back some of the backlog that was depleted over the last couple of years. And so things are all pointing in the right direction. We are very optimistic. The numbers were better than we thought. And hopefully, those trends will continue as we get out through the rest of the year.

I know you can only guess where I'm heading with this. You talked about IND-enabling studies coming back into the fold versus some of the longer-term work. In the past, before COVID and then the post-COVID anomalies, this was an industry and you were a company that would have backlog duration, you would burn through the totality of that backlog at least in terms of revenue dollars, that amount of backlog would be completely burned in revenue.

On average, 7 to 9 months, there were periods where it was 6 months. So with 3 quarters above 1.1x, I think the common question continues to come up. It sounds like mix is getting better, demand environment is great. And the awards are above, well above the 1.0x plus that you need to grow. Why are we not looking at an even greater acceleration? And I know you have answers to that, and I know that is your answer. But it continues to come up, and there is a logical thought process behind the question.

Yes, absolutely. And I can totally understand the question. Actually, next week at the Investor Conference, our Head of the DSA business will be there. She will be prepared to talk about that a little bit, too. But we just -- we're coming out of a period where we actually were declining for many quarters. We just hit a quarter where we have a little bit of growth. Let us take a step up. We guided up for the second half of the year. We need to see this trend continuing. We need to rebuild our backlog and then just make sure we're not expecting the market to have a hockey stick, either. So I would say, just give it some time, let us work through this. And then we can see, hopefully, we're going to continue above 1.1x, but there are so many variables in there that we just want to be realistic about it.

Fair enough. The -- you talked about this proposal to booking capture rate last quarter, win rate effectively. You said you've seen improvement, but you've also -- probably the same answer as the last question. You're not calling it a trend. Is it just too soon to call it a trend? And what would be the driver of that win rate? You said you've been aggressively going after some business. Most people think price.

Yes. Yes. So win rates -- we look at capture rates, actually bounces around quite a bit a quarter or month to month. So we want to see several quarters of capture rates being above what we used to see. We're seeing a quarter, we're seeing maybe 1.5, 2 quarters which is great to see, but with the mathematical bounce in these metrics, I want to see this for a longer time period. There was also a question about are you gaining share? Without external data to validate that, I always shy away to say, "Hey, we're gaining share." So give us a year, give us 1.5 years of capture rates and maybe then I'm comfortable talking about share gain here.

In the meantime, what it tells us even on a shorter period is that strategies we have in place to win work seem to be working. Price would be the obvious, but we are not the company that leads in discounting. We might have dynamic pricing to win work or to not lose work. But what we're going after right now is winning proposals as aggressively as we can because of how we go to market, following up on proposals, making sure that our start times are at the shortest possible parcel whenever our clients want it.

We have optimized our portfolio. So we are fully focused back on our core, which is DSA. So that is not our -- not just our sales group, but it's my time. It's our leadership's time. I think this all helps and also how we differentiate ourselves to win the work in a time where our clients all are looking for getting more molecules into the clinic as fast as possible. A couple of years ago, discussions were about price, how cheap can you do it? Is there another piece of discount? And often, clients went for it, often they didn't go for it.

Right now, the discussions are, when can you start? When can I get my data? And how quickly can I get and how many molecules can I get into the clinic? Just about every one of our big clients have those lofty targets of how many more molecules they want and need in the clinic so they can hit their goals of commercial approvals. And I think that's what we're -- what I mean with being aggressive about winning the work.

Have you seen any evidence of AI-driven volume at this point?

I would say very little. There are obviously AI-native companies out there that get great funding, and they are our clients, just like a conventional biotech because it doesn't matter if it's an AI-designed molecule, they still have to go through the validation. They still have to go through the regulatory process. So yes, we have clients. Yes, they have funding. Yes, they have a lot of programs. But in an overall aspect of Charles River and how many clients we have, it's not something where I'm like, this is driving my growth, not yet.

I do think AI will be a tailwind for us. And I do think AI will be a tailwind for drug development in general. So more efficient drug development will create more programs, more reinvestment, which is more opportunity for us. And hopefully, we will win that opportunity. Early indication, yes, big volume, not yet, but I'm sure that will come.

Okay. Boy, I'll have a Pavlovian response even saying Cambodian monkey crisis 5 years ago around this time. But we have to talk a little bit about NHPs. And I know you, again, addressed some of this in recent commentary, and I'm sure we'll get a ton more next week. We have a fair amount of evidence now that China is in shortage. It's been a very heavy R&D growth market. Monkey -- the animals can only do so much in terms of progeny and output.

And there is a concern and some would say an opportunity if you're an investor that perhaps the Asian market reaches out into other parts of the world, tries to pick up demand that drives hyperinflation in other parts of the world. It limits who can supply this market, and we get back into a price -- heavily escalating price period as we saw for a period of time a few years ago. I know you've addressed that, but not everyone's heard what you've said before. So talk to us about where we are, talk to us about why that China hyperinflation and supply chain shortage, why that didn't impact your timing of shipments last quarter, which you simply said was normal and not a driver of year-over-year growth. Talk to us about these dynamics, please.

Yes, certainly happy to. So just as a little bit of a background information. So China is a market where the nonhuman primate is not native. So they have to bring in their breed stock from other countries. When they closed down their borders during the COVID time, they haven't had any import or exports of nonhuman primates since then. So they haven't refreshed their breed stock. That in itself can be managed, but they had really focused on just putting -- producing animals for studies.

So you're right that the animal availability in China is a little challenged. I wouldn't say it's at a level where it's an emergency, but the farms are looking to refresh their breed stock to increase their productivity. So there -- I believe there have been some imports for breed stock, and that is now something that the Chinese government seemingly allows. So there's permits, but that will take a few years because you have to grow up the breed stock and then you have to produce the offspring. So it's not an immediate fix.

We have seen pricing improve a little bit in China, frankly, to the level that we've seen a few years ago. So actually, pricing went down. Now it's just coming back up a little bit. So it's not -- I wouldn't call it hyperinflation. Our volumes -- so we actually have a farm in China that we had bought for export, but then we couldn't export anymore because of the restrictions. So our Research Models business is selling the animals to third-party clients. The volume isn't very high. And so the price increase is not really that material.

And when we talked about timing of shipments, it was more of the overall revenue that comes from it and how it impacts our Research Models and Services business. So really just about not being that material what we're seeing right now. And we'll have to see where pricing goes, but it's a known fact that they need more animals and that they're looking to produce more. It's an isolated market. They're not importing right now for studies, and they're not exporting for studies.

So at this stage, it does not have an impact on what's going on in the rest of the world. If they do, they could obviously allow that. The situation now is very, very, very different than what we have seen 3 or 4 years ago. And why is it different? Because Charles River has invested in nonhuman primates farms. So just about 80% of our future needs are covered with that. There is a stability in the market, we are not relying on other third parties that may sell to the highest price.

And by the way, in 3 years ago, there was a whole market that was not accessible and that's not the fact right now. So pricing could move a little bit, not a bad thing, but I wouldn't expect those spot prices, at least not overall market prices that you saw a few years ago. We don't model it. We don't put it in our target. So I wouldn't like expect that going forward.

Okay. When you talk about the benefits of the K.F. acquisition, which is largely a fourth quarter benefit, maybe a little bit in the third, but largely fourth quarter. That is sustainable, right? That is a -- once it kicks in, once you can take those newly acquired animals, get them shipped overseas, go through quarantine prepared for studies, live in studies. Once you get that recurring volume of animals coming in, that margin lift, which you quote is due to lower input costs, lower supply costs, you're taking out the middleman. That is a permanent benefit, correct? We're not going to hear about some abnormal comp or anomaly where fourth quarter is a one-timer and next year is not as good.

Correct. I think the important point to highlight, though, in Q4 is we have a bolus of shipments and NHP study starts in the quarter that are very high, whereas typically you see them spread out over multiple quarters. And so the actual lower sourcing costs are here to stay, that's a permanent reduction in our cost base. And we would expect year-over-year on a full year basis to see accretion and margin expansion as a result of that acquisition. So that will stay with us. But it's important to note that in Q4, we have a large amount of NHP revenue from Cambodia. And so you just can't necessarily take the fourth quarter margins and say that's the going off point if that's where you're going with the question.

Yes. Deep snow -- short snow kind of seasonality almost approach. But the underlying theme is the same.

Yes. And so the real reason why we did the acquisition was to gain control of the supply chain and have a supply chain resiliency. And obviously, with that, we also have the benefit of lower costs, better margins. That will continue as we go forward. But just be careful in taking a single quarter and extrapolating that into next year.

And then the lower cost could actually -- though costs could go up and maybe has gone up a bit with tariffs and inflation and fuel shipping. I mean you do ship, right? So are you pricing or embedding the cost of the animal in the study at a market rate? I know it's not -- I would expect it's not a spot rate, but like a standard market rate, are you a little bit discounted to win over customers because you have such a better buy point? What are the dynamics on pricing to customers? What are the customers seeing?

Yes. So what we're doing is we're pricing a study and the animal is part of that. And we're pricing our studies so that we can stay competitive. So again, we are not the discounting leader. We actually generally maybe the highest price or the same price than some of our better competitors. And so don't look at it as how do we price the animal. It's really how do we make sure that we stay competitive on our studies, and that has inputs of animals, inputs of labor, inputs of facilities and so on. So we will make sure we are staying dynamic and competitive overall in the marketplace.

I've got one from the audience, and I'm going to do a little bit of a preface because you did have some corporate transformation. You had some dispositions, including the cell and gene therapy, CDMO, but there's someone in the audience asking more broadly about what you are seeing overall in terms of demand around cell and gene therapy as we go into the end of the year, as there was a period where it was a bit softer, it wasn't quite meeting the base case that the company laid out with those original acquisitions, for example.

And then if I could just perhaps tack on to that. One of the original thesis of doing the CDMO acquisitions was that it linked into other parts of Charles River, where you could get a bit of a virtuous cycle of cross-sell. How has unwinding that business actually impacted your broader cell and gene therapy support capabilities or demand?

Yes. So let me address kind of both questions. So yes, we divested our CDMO business that was a cell and gene therapy business, both reasons, market wasn't quite where we wanted it to be. But it's also happened to be a business that wasn't quite the right fit for us. So it's very different than our services business and the science still was quite immature and needed a lot of resource, science, technology investment much more than our current business. You see the benefits of our divestiture from a margin perspective.

Looking at cell and gene therapy demand, in general, I would -- I want to broaden it to complex modalities. And we do see an uptick in complex modalities, and we will actually talk about it next week, how complex modalities drive demand for our services in general because the more complex the work is, the more science is needed, more endpoints, more analytical capabilities are needed. So that's actually a good thing.

From a perspective of our manufacturing support business, there was some cross work. So we're doing testing for some of the CDMO clients. We are continuing to do that. So we have a close collaboration with the buyer on that and the clients. So it's actually going really well, really smooth, and the clients continue to see the benefits of both organizations working together on that. So nothing to be concerned of, really going really well.

And I would just highlight the financial benefit is pretty obvious based upon our most recent quarter results in the Manufacturing segment. We put margins up that were in the high 30s. We're indicating we're going to be approaching 40% as we exit the year. So a very fast-growing business with very high margins. We are in good position to continue to see that growth.

That's fantastic. We -- unfortunately, I can keep going, but we've gone past our time. So...

Thank you.

Thanks, Eric.

I'll let you get on to a busy one-on-one schedule for the rest of the day. And hopefully, you have a great week. Thanks again for joining us. Everyone, please join me in thanking Charles River.

Thank you.

Perfect. Good morning, everyone. Welcome to day 1 of Morgan Stanley's Global Healthcare Conference. I'm Kallum Titchmarsh, the life sciences analyst here at Morgan Stanley. Here today with the wonderful team from Charles River, we have Birgit Girshick, CEO; and then Glenn Coleman, CFO. And just before we get started, important disclosures, please see Morgan Stanley research disclosures website at www.morganstanley.com/researchdisclosures.

So thank you both for being here. Great to have you both.

Thank you. Thanks for having us.

Birgit, you took over the role of CEO from Jim in May, 4 months now into this new role. How has that transition been so far? You're obviously at Charles River for quite some time beforehand across different responsibilities there. So maybe what surprised you leading the ship?

Yes. So the transition has been very smooth. As you said, I spent nearly my entire career at Charles River, and I know Charles River really well. So I know our strengths, but I also know where we need to be faster and sharper and had a great transition with Jim. So I was really able to prepare myself, give it a lot of thought. But what I did in addition was really looking to see that I get more feedback from our stakeholders.

So I spent the last 4 months literally visiting over 40 of our sites in 7 countries. I met with a lot of the shareholders met with our Board and a lot of our clients. And what that allowed me to do is really double down on the confidence that I have that Charles River is in a great position at this stage to really scale up, accelerate as demand comes back in the industry.

It allowed me to validate that our strategy that we actually will talk about quite a bit next week at our Investor Day called Pathway to Purpose is the right strategy that will accelerate revenue growth, bring margin expansion and just accelerate shareholder value. So that was great, not a surprise, but really good to see and get that feedback and make sure that we are on the right track.

Amazing. And Glenn, you've also joined Charles River pretty recently. It would be great to hear a bit more about your kind of 5 months or so in the role.

Sure. So I've been with Charles River now for about 5 months as Chief Financial Officer. I would just say it's a complex business, so is the whole drug development process. So I'm up to speed and learning on a lot of different things and have gotten out to many of our sites have been out to, I think, 16 or 17 sites now. And so that's going really well. I'm very fortunate to be joining the company at this point in time, though.

I mean, if you look at our business today, we have differentiation when you look at the breadth and depth of our portfolio, we have scientific expertise that I would say nobody else has in the industry. And we're at this inflection point for our business, which is happening here starting in the second half of 2026, where we're going to see significantly better financial performance, both top line, margin expansion, earnings per share improvement and so forth. So fortunate to be joining the business at a good time.

We've done a lot of good things around the portfolio, which are now essentially complete with the divestitures of our CDMO business, some smaller assets in discovery, and we've also acquired a large NHP farm as well. So we're well positioned here to see better performance starting in the second half of the year, and I'm happy to be here.

Fantastic. A lot to discuss, but maybe DSA, we can begin with. Underlying trends there have been really strong, a good turnaround, 3 consecutive quarters now of north of 1 book-to-bill. How would you characterize the demand drivers here? How much of the improvement is coming from the overall environment versus internally at Charles River, like how are you driving those better win rates? Maybe just parse out those 2 dynamics.

Yes, I'm certainly happy to. So what I would say is that both of those dynamics play a role. So the industry backdrop matters. We all know funding has improved. Pharma is back to work. We're seeing a lot of our internal metrics going in the right direction, proposal rates increase, bookings increase. And revenue is back to growth modestly in the second quarter, but that will accelerate. So definitely, the demand is improving.

We don't expect a straight line, but we do expect stabilization and acceleration of that. In addition to that, we have spent a considerable amount of time really refocusing on what we do best, where we have the right to win. We have reorganized our sales force and have really been aggressive in terms of winning the work. What that means is following up on proposals, making sure that we have the best time lines for starting the work that we have the resources when our clients need them and that we are providing -- continue to provide the best science and operate and work in the areas that our clients want us to work in.

Glenn already mentioned some of the divestitures. I do think that they have a benefit not only on the P&L, but also within the organization because it lets us focus on where we really should be working in. So overall, I would say both are important dynamics and both are in our favor right now.

And Kallum, let me just add to Birgit's comments. The way we measure commercial execution is our capture rates on these proposals. Are we winning at least as much or even more than we've done in the past and seen those rates go up, and we've seen some pretty good recent trends around that. So when I look at commercial execution, which is a big part of how we measure our internal success, those capture rates continuing to tick up, also help a lot in terms of how we measure ourselves.

Got it. And then the small and midsized biotech clients, I think they've been a big driver of that uplift, at least relative to what we had in the past couple of years. The funding environment helps certainly. How durable do you think trends are from your discussions on the ground with the customers? How much room do you think there is to keep those growth rates as we see them today?

Do you want to take that?

Yes. I think in general, we've seen pretty broad-based strength across the business when we look at the lead indicators. So both North America and Europe, all trending in a very good direction. When we look at large biotechs, smaller biotech, that's also got very positive trends. Biopharma has gone through the restructuring of their pipeline and portfolio. So we've seen a kind of a gradual increase there, I would say, but all moving in the right direction.

Some of the very early-stage biotech funding we haven't yet seen in our business, we see that in our CRADL business, which is the early-stage funding. And that still is, I would call it, just stable right now. So we haven't seen the recovery and the inflection there yet. But on the whole, it's been broad-based. We feel like it's durable. We've seen 3 or 4 quarters now of really strong bookings, but we'd like to see a couple more quarters before we call it a trend. And so we'll see how the rest of the year plays out here, but all indications are that things are moving in the right direction.

Yes. And it's something we received quite a few questions on just how to think about the lag from a customer getting the funding to then when they start spending on preclinical work. So how should we be thinking about that?

Yes. So what we normally model out and certainly, every study is a little bit different is that once we get a proposal, it's about a quarter to get the booking and then from a booking to a revenue start is about a quarter. The funding question from funding to proposal is a little bit more difficult because it's not a straight line, I get funding. Therefore, I'm asking for a proposal. But as the funding environment improves, our clients get more confidence that they can get the funding and start spending money that is actually already in their bank accounts, right?

So that is generally, I would say, maybe a quarter, but that can vary quite a bit. So -- but we're already seeing that. So that trend is in action. We are seeing more proposals. And so now it's about winning the work, continue to win the work and then start the work.

Got it. And you mentioned the kind of larger pharma customers stabilizing now. I think a lot of those budgets were finalized for the year before those MFN agreements were kind of put in place. So do you think we have that true inflection yet in kind of global large-scale pharma spending? Is that something we could perhaps think of for 2027?

Yes. So what we are hearing, so qualitatively from our pharma clients specifically is that everything is about more programs into the clinic, more programs into commercial. So they -- just about everyone has a program name for that, really getting more wins through internal development. And so the discussions have really shifted from reprioritization from where do we find the next cost savings to how can we speed up the program, how can we get this program faster into the clinic, how can we get it through the clinic into a commercial approval.

So I don't see any hesitancy. I would say that most of our global biopharma clients have a clear path of what they're trying to execute, and it's benefiting us right now.

You have a pretty unique view early on in the pipeline. So any specific indications or conditions you're seeing targeted biopharma customers that's perhaps evolved differently to what we've seen in prior years? Anything that's interesting to you?

Well, there's a couple of things. One, we are seeing more complex modalities coming through, and that is positive for us because complexity creates opportunity for us. More endpoints needed, more bioanalytical testing is needed, and that is driving revenue. And so that is a positive trend. We will talk about that quite a bit next week at our Investor Day because it's a trend we're really seeing and that I do think that we have great opportunities with.

And the other one is can't not mention is AI, everybody investing in it. In order to teach the AI platforms, the algorithms, more programs have to be done, have to be pushed through. That isn't quite there yet, but I do think that we will see this as a tailwind.

And how would you characterize the pricing environment right now? It feels like it was perhaps a bit softer in recent years when demand has been softer. But any green shoots you're starting to see there?

So at this point, pricing is stable, and we have been saying that for a couple of years, meaning discounting is happening, but not any more than it was before. So we have not seen pricing return as strong as we would like to see it. So at this point, we're still at the stable standpoint. But we know and we know it will happen, it always does that when capacity is filling, pricing will come back, and we would just want to be paid for, obviously, inflation and the work we do.

So -- but I would caution with that a little bit because once pricing is coming back, it has to flow through this 2-quarter process of getting in a proposal, getting to bookings and getting to execution. So from a revenue perspective, we're a little bit out from that standpoint.

That's helpful. And then just on the book-to-bill, 1.19 in Q2, highest number we've seen in nearly 4 years. How should we be interpreting this metric? And is that a number we could expect perhaps for the back half of the year?

Yes, I wouldn't call that the norm. It was the highest we've had, as you mentioned, in 4 years. I think the way we look at it is we want to see our net book-to-bill above 1, which would give us sustainable growth for our business. And so anything above 1 is what we shoot for. And we may see quarters where it's above that, maybe we have a quarter or 2 that's even below that. But I think having a net book-to-bill above 1 is really important for us to grow our business, and that's what we expect to do going forward.

I would just say also with some of the really strong net book-to-bills we've seen over the last couple of quarters, keep in mind, if you rewind the clock maybe 5 or 6 quarters ago, we were below 0.8. And so we're building a lot of that backlog back. And so you're not going to see this big inflection on revenue all of a sudden. It's going to be a gradual increase in our revenues as long as we continue to see these healthy net book-to-bill numbers. So that's the way we think about it.

Yes. And perhaps just talk through that relationship between book-to-bill and revenue growth because when I look at the Street, they're kind of at a mid-single-digit CAGR out kind of over the midterm here. How should we be interpreting that like 1.19? And how bullish perhaps could we get?

Yes. I think first and foremost, we mentioned on our last earnings call that we expect to see now organic growth in our DSA business in the second half of the year, and that was after a number of years of decline. So we're now starting to see that improvement in our actual revenue numbers. We would expect to see pretty healthy growth then from there going into 2027 as long as the net book-to-bill numbers continue to be above 1.

And so you can't just extrapolate saying it's 1.19, you should be growing 19% because, again, we're still filling a lot of the backlog that we burned off over the last couple of years. And now that we're building it back, continue to see some healthy net book-to-bill numbers. We're now confident to say that we're going to be growing in the second half of the year. And then we'll talk more about what that means to 2027 next week.

Looking forward to it. China is one of the fastest-growing drug development markets in the world right now. You don't have a significant DSA presence in the region, but you've expressed some interest before an establishing one. How seriously are you evaluating that opportunity? I'm wondering how long that would take to build those capabilities up and whether the demand environment is still as strong by the time you could do that. So maybe just talk us through the thought process there.

Yes, certainly. So China is obviously an interesting market because of the innovation that's happening there and the funding that's happening there. So the preclinical, the market right now is between $1.2 billion and $1.5 billion. That's a lot of earlier-stage work, too, but also some quite a bit of regulated work. China for China, so meaning local support for local companies there. So that is an area that we are currently not representing, as you said.

We do have a very strong presence with our Research Models and Services business. So we know how to operate in China. We have client relationships with all the leading biotech and pharmaceutical companies in China, and that positions us well to expand potentially what we're doing there. So what we're doing there right now is literally evaluating options, looking at the market.

And you used the word optionality. It's exactly what we're doing. We're looking for optionality there. But we're also considering the geopolitical risk, the competitive nature of China. The Chinese market is very, very competitive. And then also balancing it with other investment opportunities. So -- even though this is a really interesting market, it is an area that we are interested in. I would not expect anything there anytime very soon. We will talk about it more next week, too, but certainly something we're watching. And if we find the right target or the right opportunity, we're going to be ready for it. So it's really strategic flexibility, I would call it.

Understood. And a lot of positive feedback, I think, on the K.F. acquisition. Do you mind just walking through what that means for the DSA business in particular? I think you now have control over 80% of the NHP supply chain for safety assessment study. So what advantage does that give you?

Yes. Yes. So nonhuman primates is an extremely critical research model for drug development, particularly the more we get into biologics, the more we get into complex modalities, the higher the need is for nonhuman primates. And so to have a source that is basically guaranteed and under our control certainly allows us to assure our clients that we can do the work. So we have acquired a farm in Cambodia that has been a long-term partner of ours. That is in addition to a farm that we have in Mauritius. That allows us now to provide our clients in our studies. So that is for study use, approximately 80%, as you said.

This is our target for the future because we still want to do some third-party purchases because that is the best risk mitigation we can have. It allows us to make sure that our compliance is at the highest level, animal welfare is at the highest level. It allows us to control our costs, but it also allows us to control the breeding capacity, even so it takes a little while to ramp up.

And with that, I do think we're giving our clients the best reliability they can have in the industry, and that alone means a lot to our clients. So it's a great way to compete. It's a great way, obviously, to improve our margins, but it's also a great way for us to risk mitigate a very important supply chain.

Kallum, I would just add, too, just the financial benefit of that acquisition, while it happened early in the year is, not showing up until Q4. So when we actually use those NHPs on studies is when we're going to see the financial benefit. And so that's one of the reasons why our Q4 margins are expected to be the best in the year.

And that gets even better in '27?

No comment.

We spoke briefly on the pipeline that you're seeing from biopharma, saw some pretty positive data a couple of weeks back from Moderna on personalized mRNA cancer vaccines. Some investors think that could be a real paradigm change in the way we think about mRNA medicines. Is that a real tailwind in your view? Maybe just talk about the relevance to your business.

Yes. I was really excited seeing it and a really good news for Moderna. And so any innovation, any breakthroughs like that is actually putting a step into the whole demand of the drug development. And the more innovation there is, the more excitement there is and the more funding there is. So it helps the whole industry, not just one client or one program. And we don't really view it one client, one program being a benefit.

In addition, what's really exciting with that, too, is mRNA is one of those complex modalities that requires a lot of work, a lot of endpoints, a lot of bioanalytical testing. So we would love to obviously see more of that. And I do think that really sets the stage. So great news, great for Moderna, but also great for the industry and for sure, great for patients.

Amazing. Maybe switching over to RMS for a little bit, continues to face a bit of pressure there from North American small model demand and then some constrained active gov funding. How should we think about the normalized growth rate for that business, again, understanding the Investor Day next week?

Yes, I'll take that one. So I think as we look at our 2026 guidance, we're indicating a low single-digit decline. And if you think about volume declines happening in North America, we largely offset those with price increases and also, I'll call it, favorable price mix where we have higher-priced mice, as an example, which are more genetically engineered versus a commodity type mouse. And so we're seeing some positive indications on pricing, but it essentially offsets a lot of the volume.

We still haven't seen really a recovery in our government or academia business and our CRADL businesses. So I'd call those businesses stable right now, but we still haven't seen the recovery there yet. And then China is an area of growth, as we talked about earlier. So China, for us, has been growing double digits, seeing some good underlying market trends, and we expect that, that will continue as we go forward.

So we're not going to comment on '27 and the future of the RMS business. We'll cover that next week, and we will give long-term targets and growth rates and margins for all of our segments. So that is all coming next week. But it's not going to be the fastest-growing business we have, but it's still a very attractive business for us.

Understood.

And then maybe also just to chime in here. Our Research Models business is an important supplier for our DSA segment and, again, gives us the assurance that we will have the models that we need for our other businesses and really mitigates any risk in that supply chain. So very important for that, too.

Could you unpack a little more what you're seeing from NHP demand in '26? We've been hearing of some inflation, particularly across Asia. So maybe what's the economic impact of that for you guys, just given how much of the supply chain you have control over?

Yes, a lot of questions about that. So there is somewhat a shortage in China. And the reason for that is that the market had closed down during COVID and had not reopened. And as nonhuman primates are not native to the Chinese market, their breeder supply is not at the level they would like it to be. So they -- even though they have a lot of facilities and a lot of breeding, it looks like they're not meeting the demand for their drug development processes right now. They will mitigate that through some breeder purchases, but that will take a few years to mitigate.

We -- as you know, our Research Models business is -- we have a farm in China, and our Research Models business is selling some in the open market. We have seen pricing there a little bit going in a positive direction, really basically resetting from where it was a few years ago. And certainly, that pricing could see some positive acceleration. But for us, this is a small business, so not a major driver for us.

There's the question if it will impact pricing in the West, that is really a demand question. And that could certainly be, but I would caution that this hyperinflation -- this really high spot pricing that we saw a few years ago was a very, very different situation. At that stage, there was a whole market that was not accessible. It was different players.

We didn't own the farms that we're currently owning. So we are not expecting that. We are not putting that in our models. Certainly, a little bit price influence is nice, but I would not expect those hyperinflation pricing that some are asking for.

Understood. And then on the CRADL, we had mentioned briefly that it hasn't quite returned to growth yet, but stabilizing. Obviously, more tied to the new company formation rather than biotech funding. Can you maybe just walk us through what you're seeing on that kind of earlier-stage biotech landscape and then when perhaps we could see an inflection for the CRADL business?

Yes. So you're right. So the CRADL business is there -- the primary customer is this early-stage biotech. We actually have some clients that are global biopharmas or large biotechs there, too, but that is the focus segment. And over the last few years, demand has been declining. We actually took a lot of capacity out of our CRADL footprint to adjust for that. At this stage, our footprint is at the right level. We are not seeing acceleration yet.

I think that requires a little bit more time with positive funding, more companies being formed, as you said. And we would just be basically adjusting our footprint. So right now, we are at the right level. But as we see demand come back, we will adjust footprint to open up some new CRADL, but not on the horizon yet.

And AI has been obviously top of mind, who are the winners, who are the losers across our sector. It feels like the tone from you guys was pretty positive there from the Q2 call, maybe some early demand uptick you're seeing. But maybe just talk through how you expect that drug discovery pipeline to look maybe 3, 4 years from now, given what AI can perhaps offer.

Yes. Yes, we do see it as an interesting tailwind. It will take a little time. So a lot of the investments are in that molecule design that will check out a lot more molecules in a lot easier way, hopefully also in a more efficient, cheaper way. And then there's focus on the clinical trials. So all that maybe efficiency will be reinvested, we believe, into more drug programs, more drug programs is more revenue for us. So a nice tailwind that we're expecting.

Timing is hard to estimate. So first of all, we need to see some successes with AI generated or AI-assisted molecule design. And that isn't happening until those programs are in the clinic. So whatever is happening today will take a few years to really show if it works. But maybe we'll see some uptick from work that was happening 3 or 4 years ago sometime soon. So I do think that drug development programs will increase a few years in the future.

What we are currently seeing as an early indication and -- but small numbers is that companies that invest in AI platforms need to run more programs. They need to teach the algorithms and generally get better funding. So those companies are often coming in with more programs than a typical stand-alone biotech that uses conventional methods. So that is still small, but is an indication that AI is driving demand. And then in addition, we are working on a lot of things that we also will showcase next week.

Good stuff. And then I want to hit briefly just on NAMs. It's been about 1.5 years now since the FDA announced that road map to reduce animal testing. Quickly, maybe just describe what you've been seeing from customers there, how you're thinking about that ahead of the kind of LRP you'll give? And then maybe just talk about your strengths as well in offering NAMs.

Yes. So NAMs, new approach methodologies is definitely the right ethical and scientific direction for the industry. All industry participants would love to see more technologies incorporated in the drug development process. But it's not going to be one platform replacing an animal study. It's going to be an integrated approach of many, many, many technologies, endpoints and a hybrid approach of in vitro in silico and in vivo programs. So -- and we will have a whole session on that next week, by the way, that I think you will find very interesting.

And we will -- so we are committed to driving the NAMs, integration, NAMs adoption, and we will do that by integrating it into our safety assessment processes. So truly an integrated evidence generation. And it takes an understanding of the biology. It takes understanding of the regulatory process to be able to do that, and that is Charles River.

So what we're hearing from our clients is interest, but they need somebody like us to drive that and to tell them where they can use names as part of a study and where they can't. And so this is what we're working towards to opens up a lot of interesting discussions with clients with regulatory agencies, and we are driving that.

I will make sure we quickly cover the manufacturing business. Microbial Solutions, up high singles organic in Q2, being doing pretty well more broadly this year. What's driving that growth? And maybe just unpack the largest opportunities you see for that business more broadly?

Yes. So this is a great business that we have. It's a razor, razorblade type model. So we place equipment at these manufacturing sites, and then we have consumables growth that comes after. And most of the revenue and profitability really comes with the consumables piece of it. So the cartridges that go into doing the actual testing. So we've placed more equipment. We're winning new clients. It's an area that we see good growth coming because as more manufacturing moves to the U.S., that benefits us as well.

And so this is a business that's not just fast growing, but has very high margins. And we don't break that out specifically. But the manufacturing margins you saw the last quarter, we were in the upper 30s, and that's a big contributor to the overall margins for that business.

And I think you mentioned that could approach kind of 40% in the back half of the year. But maybe midterm, what are the different drivers constructing that manufacturing margin?

Yes. I think first and foremost, we still have a little bit of the CDMO divestiture in our numbers from Q2. So having a full quarter with that business out, which was a business that was a big anchor to the overall profitability is going to help us. This is a business that's done a lot of automation as well. And so they have a really efficient production process. That, coupled with getting leverage on the top line with the business now growing faster, we feel all is going to lead to some further margin expansion.

I temper it to say it's modest improvements because this business is now approaching 40%, which is a very healthy margin business. But there's still more opportunity is the point. And we'll lay this out again next week with some more details on what we expect.

And on capital allocation, I think good feedback on the decisions made over the past year with the portfolio. Anything now you feel is left to be done here? Or are you pretty comfortable with how the business composition looks?

Yes. I think a couple of things. When I think about capital allocation, I first start with the free cash flows of the business. Our business generates very healthy free cash flows. We actually just raised our guidance on the Q2 call for free cash flow. It's a business that annually should be generating in a normal year, at least $0.5 billion of free cash flow. And we've deployed so far this year about $800 million of capital. So $500 million towards the acquisitions of K.F. Cambodia and PathoQuest, which is a next-generation sequencing technology and NAMs, if you will, for a lot release testing.

We talked about K.F. Cambodia. And then we've done $300 million of share buybacks, $100 million in the most recent quarter. And so we've deployed a lot of capital this year so far. I think from the portfolio side, we're very happy with where the portfolio is at right now. So I don't expect us to do anything dramatic or significant. We'll still continue to evaluate the portfolio, but I think the heavy lifting is essentially done and complete for us.

Certainly, as we go forward, we want to do a couple of things, right? We'll be looking at acquisitions in areas where we have some core strength and where we need more scale. We're in a great position when you look at our balance sheet. So we've got about 2.5x leverage right now, net debt to EBITDA. We've got over $800 million on our credit facility at very attractive rates from a borrowing point of view. And we have the ability to actually upsize that if we need to with an accordion feature.

So we're in a great position when I look at the balance sheet to support the acquisition strategy, and I'm hopeful that we can get some accretive growthy deals done over the next year or so. We'll continue to invest organically as well. If you look historically, we've invested anywhere between 5% to 6% of CapEx. That's important because a lot of that CapEx is really earmarked towards growth. And so you can think about that as expanding a lot of our labs and our facilities for bioanalytics as an example, which is what we're doing right now.

In addition, we've still got about 1/3 that we point towards maintenance. So we'll still invest organically. We'll invest in the sales force. We'll invest in bringing people on board to support the revenue ramps. And then on share buybacks, we'll continue to be opportunistic. We saw a good opportunity in the second quarter when our stock pulled back. And so we bought more shares back, and we'll continue to be, I would say, opportunistic around that. And of course, lastly will be the debt paydown. But again, we're in a very good place when you look at our leverage and our debt right now.

And last question, Investor Day next week, you've given us a few hints of what could come. This is obviously an inflection, I think, for the broader market. So how are you thinking about the guide you're going to lay out? Maybe just talk through the philosophy you'll be putting through that.

Yes. So obviously, providing targets is difficult in any time. But we think the market is stabilizing and accelerating a bit. But what we are laying out here is targets that are grounded in what we're executing on right now, grounded in what we're seeing right now and opportunities we're clearly seeing ahead. So no moonshots, no things that could happen in a few years but really ground in what we do best. And then we will talk a lot about our strategy and how we get there.

Amazing. Birgit, Glenn, thank you so much.

Thank you.

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Second 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 Second Quarter 2026 Earnings Conference Call and Webcast. This morning, I am pleased to be joined by Birgit Girshick, our Chief Executive Officer; and by Glenn Coleman, our Executive Vice President and Chief Financial Officer. They will comment on our results for the second 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 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 Act of 1995. Actual results may differ materially from those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of 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 the reconciliation on the Investor Relations section of our website.

I will now turn the call over to Birgit Girshick.

Thank you, Todd, and good morning. Today, I would like to discuss the progress that we made during the second quarter, both financially and on our refreshed strategic framework pathway to purpose. I'm pleased to report that we delivered on our second quarter financial targets, exceeding our prior outlook for the quarter and that we are raising our financial guidance for the year.

We continue to remain focused on execution on achieving our financial targets and driving increased shareholder value as well as executing on our pathway to purpose strategy which includes working to modernize our company and the industry, strengthening our world-class scientific portfolio and offering a customized client-centric approach to drive growth. Execution of our pathway to purpose strategic initiatives and our financial goals will be the key to our future success.

Let me now provide you with the recent highlights that demonstrate our progress on our pathway to purpose initiatives as well as our second quarter performance. First, we were encouraged that the biopharmaceutical demand environment continued to strengthen in the second quarter, particularly in the DSA segment. The DSA net book-to-bill rose to nearly 1.2x in the second quarter making this the third consecutive quarter that the DSA net book-to-bill has been above 1x and our highest level achieved in nearly 4 years.

Our constructive view was also supported by a return to organic revenue growth of 0.1% for the total company, which marks the first time that revenue has improved organically since the third quarter of 2023. We firmly believe these trends position us well to drive higher organic growth during the second half of the year. As part of our efforts to further deepen client relationships, in June, we announced a unique collaboration with Eli Lilly's TuneLab drug discovery platform. In support of Lilly's goal to advance R&D modernization efforts, we will provide our nonclinical or wet lab testing expertise to help build and optimize Eli Lilly's AI and machine learning drug discovery model.

We believe this type of collaboration demonstrates that the future state of drug discovery and development will require traditional in vivo and in vitro solutions even when integrated with AI or other in silico approaches to help enhance the speed and scientific data needed to support our clients' R&D programs. And Charles River is a scientific partner that is uniquely positioned to be able to integrate traditional in vivo, in vitro and new innovative capabilities into one comprehensive solution for the biopharmaceutical industry. We are also utilizing new technologies, including AI, to modernize and strengthen our own scientific portfolio, including an enhanced digital pathology solution that delivers AI-enabled end-to-end workflows designed to improve study turnaround times and increase pathology's efficiency.

With over 140 trained pathologies on staff, pathology always has been one of Charles River's greatest strength. And this enhanced digital solution will drive both internal operating efficiency and greater speed for our clients' programs. On both for clients that utilize our fully integrated digital pathology solution will be to cut at least 1 week from standard pathology time lines. As I discussed in detail last quarter, we completed the divestitures of certain European discovery services sites in May 2026 as well as the CDMO and sell solutions businesses. The part of quarter benefit from the divestitures was one of the drivers of the 420 basis points of sequential operating margin improvement in the second quarter to 20.5% and helps us refine the portfolio to create a more streamlined offering focused on our core competencies in regulated testing solutions.

We are also continuing to invest organically in our scientific capabilities to support our future growth and accommodate more of the testing requirements for our clients' therapeutic programs including in the area of lab sciences and specifically bioanalysis.

The main for lab science services has been growing nicely over the past 5 years, driven by large molecule, bioanalysis, biomarkers and additional testing requirements in both regulated and nonregulated programs, including in the clinical development phase. To support this growth, we recently embarked on an expansion to add bioanalytical laboratory capacity at Heriot Watt University's Research Park in Scotland. This expansion, which is 1 of 5 ongoing lab sciences expansions globally at Charles River will also offer an opportunity to partner with Harriet Watt University on the talent pipeline to further support our future growth in bioanalysis and in the region.

My final highlight demonstrates how our broader strategy is working to support our client-centric approach. We recently announced a collaboration with Arovella Therapeutics to provide next-generation sequencing or NGS services to accelerate progress towards their alternative cancer treatment approaches using cell and gene therapy. This collaboration shows that by strengthening our scientific capabilities with an innovative in vitro NGS testing solutions through our recent acquisition of PathoQuest we are able to deepen client relationships and expand the possible opportunities for collaboration.

In today's dynamic marketplace, there are abundant opportunities to further differentiate Charles River from the competition. We stand along with our strong financial profile refreshed strategic vision and scientific expertise focused on our 4 regulated testing capabilities that span early-stage development through the clinic and beyond. Clients are expecting their scientific partners to help them drive greater innovation, speed and efficiency, and we are making great progress under our pathway to purpose, strategic framework to become an even more modern client-centric organization that will operate more simply with more agility and enhanced digital connectivity. As the biopharm demand environment improves, this will enable us to become an even more essential partner to our clients, work with them across our differentiated portfolio and gain a greater share of their R&D spend.

Let me provide a brief update on the end market trends. As I mentioned, we believe the biopharma demand is continuing to sustainably improve. Small and midsized biotech clients are leading the trend as a result of the invigorated funding environment demonstrated by a trailing 12-month funding of nearly $100 billion which is just shy of peak levels achieved during the pandemic. While we continue to monitor for changes in the funding environment, whether it be from interest rates and inflation pressures or other macroeconomic factors, funding activity has been resilient and broad-based to date, including a notable increase in IPO activity as well as solidly see and follow-on funding.

Overall, revenue from small and midsized biotechs was essentially flat organically in the second quarter which is an improvement from declines in recent quarters. As a reminder, there is a natural lack of several quarters between studies are booked into backlog and work their way through to revenue. So we're just beginning to see the benefit from improved DSA booking activity from late last year. Therefore, the strengthening booking activity that we have experienced through the middle of this year gives us greater confidence that we will generate incremental organic revenue growth starting in the third quarter on both a consolidated basis and in the DSA segment.

Global biopharmaceutical clients were also a significant contributor to the improving DSA demand KPIs in the second quarter. As I mentioned last quarter, most of our global biopharma clients have progress through restructuring and pipeline reprioritization activities over the last several years. The main trends have been improving gradually over the last 18 months with a continued evidence this year. Revenue from global biopharmaceutical clients continue to increase organically in the second quarter.

I will now provide some highlights from our financial performance before Glenn provides additional detail. First, we are pleased that our second quarter results exceeded our prior outlook for revenue on non-GAAP earnings per share. Second quarter revenue increased 0.1% on an organic basis compared to our prior outlook of a low single-digit decline. In addition to the solid top line performance, the operating margin increased 420 basis points sequentially to 20.5% due to 2 primary factors: first, less pressure from several discrete margin headwinds that impacted the first quarter as we had anticipated. And second, a partial quarter benefit from the divestitures that enabled the Manufacturing segment's operating margin to jump to 37.8% in the second quarter.

For the remainder of the year, we continue to have a clear line of sight into the drivers behind at least 500 basis points of margin improvement expected in the second half of the year with the largest drivers being the actions that we have already taken to strengthen and refine our portfolio. Non-GAAP earnings per share of $3.02 increased 47% sequentially, which was well above our prior outlook of at least 30% sequential growth. Glenn will provide more details on the operating margin and earnings drivers in a moment as well as our increased financial guidance.

RMS revenue declined 1.4% organically. This represents an improvement from the first quarter level due principally to the timing of NHP shipments, which were more normalized in the second quarter and did not have a meaningful impact on the year-over-year growth rate. The primary drivers of the year-over-year revenue decline were lower revenue for small models in North America as well as for research model services including genetically engineered models and services or GEMS. These declines were largely offset by continued robust demand for research models in China from mid-tier biotech and CRO clients.

For the year, we continue to expect a low to mid-single-digit organic revenue decline in the RMS segment, which much of this decline driven by lower volumes for research models in North America. This is largely because spending from academic and government clients has been constrained by flat NIH budgets and slower brand processing. DSA revenue returned to growth, increasing 0.2% organically in the second quarter. As noted, it takes several quarters for projects booked to work through the backlog and into the revenue stream. So we are just beginning to see the benefits of the improved biopharmaceutical demand trends from the end of last year.

The second quarter improvement was broadly driven across multiple study types and modalities, including a more discernible uptick in IND-enabling studies as clients shift their research focus earlier to replenish their pipeline and continued strength for NHP related studies reflecting our clients' focus on complex biologics. Regulatory required safety assessment studies utilizing NHPs has become a competitive advantage for Charles River because of our more reliable supply of these critical research models after strengthening our portfolio through the acquisitions of suppliers in Cambodia and Mauritius in recent years.

We expect the DSA growth rate to accelerate in the second half of the year supported by encouraging trends in the DSA demand environment to date. Net bookings increased significantly year-over-year and by 12.6% sequentially to $701 million in the second quarter resulting in an increase in the DSA backlog to $1.97 billion and a net book-to-bill of 1.9x. The second quarter improvement was broad-based across both global biopharmaceutical and small and midsized biotechnology client segments.

As noted, these were the highest levels for the net book-to-bill and net bookings nearly 4 years since the third quarter of 2022 and the third consecutive quarter that the net book-to-bill was above 1x. These trends, combined with another strong increase in proposal activity during the second quarter leave us cautiously optimistic that the positive momentum will continue. Underlying DSA market demand is improving as supported by the recent strength in biotech funding and the improvement in our KPIs.

In this environment, we continue to differentiate ourselves in the marketplace through our financial stability, scientific expertise global scale and digitized client experience, which accelerates the speed with which we are able to work with our clients and enables us to take share. As a result of these collective trends, we have raised our DSA outlook to low single-digit organic revenue growth in 2026. That said, we continue to expect the recovery will be marked by gradual progress.

Manufacturing revenue increased 1.3% organically, revenue for Microbial Solutions continued to increase at a high single-digit rate in the second quarter, partially offset by more modest growth in the Biologics Testing business. The Manufacturing organic growth rate is expected to improve to mid- to high single-digit rates in the second half of the year when the Biologic Testing growth rate rebounds after we anniversary a client-specific challenge that has been a headwind since the middle of last year. In addition, CDMO was also a headwind to organic growth for the partial quarter because it's working divested until May.

As I close today, I want to share a reflection for my first few months as CEO. I've had the privilege of visiting more than 40 Charles River sites across 7 countries meeting with employees in town hall and individual settings and hearing firsthand about their work, their challenges and their ideas. What struck me the most was the consistent passion, commitment and sense of purpose I saw everywhere I went. Those conversations left me even more confident in the future of Charles River and our ability to deliver long-term success for our clients and shareholders and the patients we ultimately serve. They also reinforced for me how critical our pathway to purpose strategy is in guiding our decisions, strengthening our culture and positioning the company for sustainable growth. I remain incredibly optimistic about what we can achieve together and look forward to building on the strong foundation we have created.

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

Thank you, Birgit, and good morning. As a reminder, my comments on financial performance will largely be related 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.

We are pleased with our financial performance for the second quarter with both revenue and non-GAAP earnings per share exceeding our prior outlook. On an organic basis, revenue was essentially flat year-over-year compared to our prior forecast of a low single-digit decline driven by better-than-expected performance in our DSA and Manufacturing segments. The non-GAAP operating margin of 20.5% was in line with our forecast but improved by 420 basis points on a sequential basis over the first quarter. Non-GAAP earnings per share of $3.02 also exceeded our expectations with over half of the outperformance driven by better-than-expected top line results and the remainder by a favorable contribution from nonoperating items, which I'll discuss in more detail shortly.

In the second quarter, we also repurchased $100 million in shares at approximately $174 per share under the $1 billion stock repurchase authorization approved last October. This brings our total year-to-date share repurchases to $300 million and reflects a continuation of our thoughtful and diligent approach to capital deployment to enhance shareholder value as we balance organic investments in the business, pursue strategic acquisitions and repay debt. Our updated guidance assumes an average diluted share count of approximately 48.5 million shares for the full year 2026.

Moving to details on our segment performance. DSA revenue was $607 million in the second quarter, a decrease of 1.9% on a reported basis compared to the second quarter of 2025 and due primarily to the impact of the divestiture of certain European discovery sites. On an organic basis, revenue increased 0.2%, it was also the first time we reported organic growth in DSA since the third quarter of 2023. Year-over-year operating margin decreased by 180 basis points to 25.6%. However, increased by 460 basis points on a sequential basis from the first quarter.

The year-over-year decline was primarily due to higher study-related direct costs. However, we expect this year-over-year margin headwind turned favorable in the coming quarters as we benefit from lower NHP sourcing costs as a result of the acquisition of our Cambodian NHP supplier. The lower sourcing costs for Cambodian NHPs will begin to benefit the DSA operating margin in the third quarter, but we'll have a more significant margin contribution in the fourth quarter as we increase our use of these models on studies. As a result, we expect the operating margin in DSA to be the highest in the fourth quarter.

Shifting to the RMS segment. Revenue was $209 million in the quarter representing an organic decline of 1.4% year-over-year. Small model revenue experienced lower volume for research models in North America and for research model services partially offset by continued strong demand in China. Operating margin declined by 80 basis points to 24.5% in the second quarter, due largely to the impact of lower sales volume and an unfavorable geographic revenue mix.

Wrapping up the segment performance. The Manufacturing segment reported second quarter revenue of $188 million an increase of 1.3% on an organic basis. The CDMO business reduced the segment organic revenue growth rate by nearly 400 basis points in the quarter with the segment growing at a mid-single-digit organic growth rate excluding CDMO. The strong performance in our Manufacturing segment was largely driven by high single-digit organic growth in our Microbial Solutions business as we saw increases in demand across our 3 major geographic regions for endotoxin testing reagents, including our PTS rapid testing cartridges, as well as adding new clients to our strong broad-based quality control testing platform.

Operating margin improved by 500 basis points year-over-year to 37.8%. The driven primarily by the benefit of the CDMO divestiture. We expect the Manufacturing segment to remain a meaningful contributor to margin expansion during the second half of the year with the operating margin approaching 40% and with the full benefit being recognized from the CDMO divestiture.

Moving on to other financial metrics. Unallocated corporate costs were higher than expected in the second quarter totaling $72 million or 7.2% of revenue compared to 5.9% in the prior year period. The increase was primarily driven by increased costs related to our deferred compensation plan of $6 million or $0.10 per share due to the market performance of the planned assets during the quarter. To fund the deferred compensation plan, we separately invest in certain funds, which experienced gains of $19 million or $0.29 per share in the second quarter. These gains are included in other income.

The net benefit associated with our deferred compensation plan was $0.19 per share in the second quarter, which we do not expect to recur. Based upon our second quarter results and updated forecast, which also encompasses higher performance-based compensation, we now expect unallocated corporate costs of approximately 6.0% of revenue for the full year compared to our prior outlook of approximately 5.5%. Net interest expense was $28 million in the second quarter, a decline of $1.2 million year-over-year. For the full year, our net interest expense outlook remains unchanged at $103 million to $108 million on a non-GAAP basis. At the end of the second quarter, our net leverage improved slightly to 2.5x from the first quarter.

The non-GAAP tax rate in the second quarter was 23.8% and an increase of 110 basis points year-over-year due primarily to the impact of discrete items. For the full year, we now anticipate our non-GAAP tax rate will be in the range of 23% to 24% and an increase of approximately 100 basis points from our prior outlook, primarily as a result of the unfavorable second quarter rate and a higher tax rate due to proposed tax legislation changes in a foreign tax jurisdiction. The higher tax rate outlook for the year is expected to be a $0.20 headwind to earnings per share, with about half of the impact in the third quarter.

Free cash flow was $149 million in the second quarter, a decrease of $21 million compared to the prior year period. This decline was primarily driven by the timing of working capital. CapEx declined to $31 million or approximately 3.1% of revenue in the second quarter from $35 million last year. For the full year, we're raising our free cash flow projections to be in the range of $400 million to $420 million compared to our prior outlook of $375 million to $400 million largely driven by higher earnings.

Turning to full year 2026 P&L guidance. We are increasing both the reported and organic revenue outlook due primarily to the DSA and manufacturing outperformance in the second quarter and our expectations for further improvements during the remainder of the year. We now expect reported revenue to decline in the range of 2.5% to 3.5%, driven by the impact of completed divestitures. We're also raising our organic revenue growth in the range of flat to a 1% increase, which represents a 150 basis point improvement to our prior guidance. By segment, on an organic basis, we're increasing our DSA revenue outlook to low single-digit growth for the year, and we're also adjusting our manufacturing revenue outlook higher to a low to mid-single-digit growth rate. Our RMS outlook remains unchanged.

Moving to profitability. We continue to expect operating margin expansion of approximately 120 to 150 basis points in 2026 and with the Manufacturing and DSA segments driving the year-over-year increase. We have a clear line of sight into the second half improvement of at least 500 basis points compared to the first half of the year. As shown on Slide 14, approximately 50% of the second half improvement will be attributable to the portfolio actions already completed, including the full benefit of the divestitures as well as the lower NHP sourcing costs from the K.F. acquisition, which will largely benefit the fourth quarter.

Lower corporate costs are estimated to drive approximately 150 basis points of the improvement with the balance derived from other operational contributors, including efficiency savings. Lower corporate costs in the second half will reflect favorable stock compensation expense related to the CEO transition and fringe costs, which are typically lower in the second half of the year. We are also increasing our non-GAAP earnings per share guidance to a range of $11.15 to $11.45, which represents 8% to 11% year-over-year growth and an increase of $0.25 at the midpoint of our prior outlook. The increase reflects the expected operational outperformance for the year, driven primarily by improving trends in the DSA segment, and a better-than-expected performance in the Manufacturing segment.

Separately, we expect the $0.19 net benefit associated with the deferred compensation plan will not have a meaningful impact on non-GAAP earnings per share in 2026 as it is expected to be entirely offset by the higher tax rate outlook for the year, which is an approximate $0.20 headwind. For the third quarter, revenue is expected to decline approximately 4% to 6% on a reported basis, primarily driven by the impact of the completed divestitures. We expect organic revenue growth of approximately 1% to 3% year-over-year, reflecting improving demand trends in the DSA segment and an expected rebound in biologics testing growth rate which will drive higher manufacturing revenue growth.

In addition, operating margin is projected to improve approximately 200 basis points sequentially versus the second quarter. due largely to lower corporate costs and a full quarter benefit from the divestitures. For the third quarter, we expect non-GAAP earnings per share in the range of $2.90 to $3. Representing an approximate 20% year-over-year increase. As previously mentioned, the higher tax rate outlook creates a $0.10 headwind to third quarter earnings per share, which has been included in the guidance.

In conclusion, I'm encouraged by the recent improvement in the underlying business trends and our first half performance, including the execution of our strategic priorities, which demonstrate our commitment to our pathway to purpose strategy and enhancing long-term shareholder value. Over the past several months, I've had the opportunity to meet with employees across our global organization as well as shareholders and other stakeholders. These interactions have further strengthened my confidence in our capabilities, our people and the momentum we are building across the organization. I look forward to continuing to work with the team to execute our strategy and to sharing more information about our long-term priorities and financial targets at our upcoming Investor Day on September 24. Thank you.

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

[Operator Instructions] We'll go first to Kallum Titchmarsh with Morgan Stanley.

Wanted to start actually on AI. We've been filling quite a lot of questions on the space in relation to kind of preclinical work. Can you call out some of the partnerships here. So maybe just talk us through your expectations for the preclinical pipeline evolving from that smarter drug discovery and whether that seems like a plausible thesis to you based on the discussions you've had with customers?

I think we're just trying to work out when that impact starts creeping into numbers via more like IND-enabling studies, but would love your views there.

Thanks, Kallum. I'm absolutely happy to. So obviously, AI is a hot topic everywhere. And we talk to a lot of clients about it, what their expectations is, where they're investing into. And so from our perspective, a lot of the articles or the pieces that were published support our thesis on it. So once AI provides more productivity into the molecule design, target identification, makes more molecules may be available to move into the validation stage and the regulated safety assessment stage and makes the molecule design more efficient, we expect more programs to work itself through the safety assessment stage, the validation stage, the area that is core to us.

And we expect that it will actually be a tailwind for us and drive demand. Timing is a little bit more difficult to estimate, obviously, companies have worked on AI for a long time. But on the other hand, technology is accelerating. So really, we'll have to see when those efficiencies are being delivered when the cost savings for our clientele can materialize. What we are already seeing actually is that a lot of companies that are more AI native or drug discovery companies that use AI platforms.

They are generally running more programs than a typical biotech that generally comes in with 1 or 2 programs. The numbers are still very small but that will accelerate materially over the next, I would say, year or 2. So we should see some impact -- positive impact over the next few years. But it will take some time to really ramp that up. And when it's going to be material is a little bit harder to estimate, but I think you will see some ramp up over the next couple of years, more programs, more validation, more data needed to validate the platforms. So all of that should be a tailwind for the work we do.

In addition to that, we, as a company, are investing in AI tools, enabling platforms that give us more insights also allow us to put efficiencies in place. Those are all really focused on the work we do, so that validation, safety assessment stage that is core to us and that will allow us to differentiate ourselves, to help our clients to move faster time is money, as usual, and then also provide us for our work with some efficiencies. So we are really excited about AI. I think it will be an enabler, a differentiator. But obviously, technology has to advance and continue to advance and then prove itself. But great question, Kallum.

Yes. That's great color. And then just secondly, when we think about the portfolio refinement we've seen over the past year or so, clearly benefits starting to come through from that. Is it fair to assume you're now comfortable with the current shape of the business? Maybe just talk through appetite for maybe more deals or divestitures and then more broadly to capital allocation.

Yes. I'm going to start on that, and then I'll let Glenn chime in here a little bit more on the capital allocation. So from a point of divestitures, we absolutely are seeing the benefits from that, both financially in terms of our [ OI ] improvement but also from an ability to focus on the core portfolio.

So -- and that was a big driver for us. to really getting back to core to what we do best, where we have the biggest relevance to our clients where we provide the highest value. And that will allow us as a leadership team but also our sales organization and our operational organization to really focus on being the best partner for our clients possible. We continue to look at our portfolio like we always have done. So if you think back Charles River has, over the years, divested other businesses. We have had a program of site consolidations but we also have a healthy appetite for M&A.

So we will continue to look at all of that. nothing imminent on the divestitures. We're still continuing to execute on some site closures that we had announced last year. And certainly from an M&A perspective, we have a good road map. We have a clear target area we are interested in but as you know, it's always difficult to estimate when targets are available, are they coming in for the right price. So more to be seen. But definitely, we will keep it broad-based and continue to look at refining our portfolio.

Yes. And the other thing I'd add is, obviously, our balance sheet is in very good shape. We can support our acquisition strategy going forward. If you look at where our leverage is, we ended around 2.5x even after the most recent $100 million share repurchase that we did in the second quarter. We generated strong cash flows in the quarter. We actually raised our free cash flow guidance.

We have plenty of capacity into our existing revolver at very attractive rates. And so I think we're very well positioned from a balance sheet perspective to support our acquisition strategy. You can never predict when they're going to happen, but we'd love to be able to add a couple of additional companies to our portfolio.

Our next question comes from Ann Hynes with Mizuho.

Great. On the call, you talked about how the demand in biotech was accelerating. Can you talk about your other customer segments, especially how large biopharma is doing?

Yes, happy to, Ann. So it's actually great to see that both our major client segments are strengthening, and we're seeing more demand from both of them in our KPI -- forward-looking demand KPIs are strengthening in both segments.

Looking at the global biopharma specifically, most all of our global biopharma clients, and we work with all of them, have moved through their portfolio prioritization, have moved through their restructurings over the last few years. And over the last 18 months, we've really seen them coming back to work, booking more work, more discussions, more proposals and fewer cancellations. So it's going all in the right direction. And we have a lot of discussion with those clients.

So we understand that there their focus right now is on more molecules into the clinic, more molecules approved and being approved for commercial distribution to the patients. So it's all about more programs, more speed, more agility and I think we are the differentiated partner for them to help them execute on that.

Great. And my follow-up question is just about China. I get asked a lot about this. I think there's like 2 competitive debates investors are focused on. One is just like the increasing capability Chinese CROs and the other is where the large firm is bringing more preclinical work in-house in China. Maybe can you talk about these as real risks and how do you think about it long term?

Yes. And so we certainly watch China very, very, very closely, right? So an emerging or maybe a little bit past emerging innovative market really interesting from a perspective of serving this market directly. As you know, we have a strong research models and services business in China. So we are a well-established, highly respected participant in that industry and it certainly would serve well to expand on that business. And so we're looking at options at any given time at how we can accomplish that.

From the other hand is the, as you said, the competition in China, adding more capabilities. This is a trend that has started probably a decade, maybe even longer. Really focused initially on the very early stage capabilities, chemistry and biology. And that market definitely has structurally changed and moved into a lower -- generally moved into a lower-cost countries, including China, but also a bit in India. We are now looking to see what their ability of bringing on more regulated workers. This is still the minority generally focused on companies that are doing their Phase I work in China, but we are watching that very closely and are very prepared to differentiate ourselves here in the West with our services, with our speed, with our supply chain and being the best partner we can be here for our clients.

Yes, some of our global biopharma clients are moving maybe more into China with some R&D centers. They do establish with that some capabilities. They're, again, from what I can see at the very early stage, not so much in the regulated safety assessment market. I think all our global biopharma clients have established the understanding that it's really hard to be in this area, particularly because of that regulated nature, keeping up the scale and a capability that would make sense for them. So we believe that their investments are in the true of the R&D stage and that we continue to support them in more of the development stage.

Thank you. We'll move next to David Windley with Jefferies.

I'll forewarn you. This is a multi parter, Birgit. I am interested in demand environment. You talked in the prepared remarks about pretty balanced demand in DSA across study types. I'm hearing that a large molecule or large animal NHP specifically studies are in quite high demand to the point that maybe some of your competitors are running short on capacity in the near term.

So my questions are what your view is of kind of the demand landscape by study type? And then help us to understand maybe a little bit more clearly the availability of NHPs that you have from previous Noveprim and more recently K.F. and kind of how much excess capacity or animal supply can you dip into there? Or do you have to wait for contracts to run out? Are they already claimed, et cetera, to be able to service what I think is NHP growing demand?

Certainly, David. Great questions, and I wouldn't expect anything less than a multi question from you.

I got another one for you.

So looking at demand, yes, we talked about broad-based. We were referring quite a bit to pre-IND versus post-IND studies, which really has balanced out quite a bit, which is great because we need both. We need the pre-IND because that will eventually translate into post-IND. We also referred to healthy demand in the more complex areas and in NHP studies specifically.

And we believe that this is both very positive. It shows that clients are reinvesting in the early-stage pre-IND work but it also shows that clients are very focused on more complex modalities, which provides us with a nice uptick in revenue opportunity. Both not only in the in vivo study, but also from a bioanalysis study because there's more revenue associated with a more complex modality than in small molecules.

Specific to your question on nonhuman primate supply, you obviously, knowing you referred to it, that we have acquired Mauritius farm a few years ago and then the Cambodian farm last year by having ownership of it, there's a couple of things that we can do that we would otherwise not be able to do. Number one, is control the quality, the logistics, the timing of shipments, and that is helping us a lot. But then also to control the capacity itself. So we can obviously breed more that will take a little bit of time, but we can also either accelerate some shipments or hold back some shipments. So it is really about managing the capacity to the peak levels.

We still have third-party contracts that we were executing on. They are ramping down, and we will work through that with our customer over the next few years and move more and more of those animals into client studies in our DSA segment.

So overall, we are quite happy that we are integrated into the supply chain, as you can imagine. We are in a very healthy state of having animals available. We'll have to see where domain goes. We are really differentiated now because of that nonhuman primate supply. And we see that as a possibility, obviously, to gain market share but overall, I think we're in the best state possible at this stage, and we will leverage that.

Great. If I could just squeeze in a follow-up quickly on the same topic. I think, as I'm looking at both consensus and our numbers relative to the guidance that you're giving for third quarter, I think the primary difference is kind of a cadence of perhaps your access or the benefit of the NHP cost to drop to your margin.

It sounds like it's landing mostly in the fourth quarter rather than the third quarter. Maybe I don't know if this is a Glenn question, but maybe you could talk a little bit about the cadence, are there animals that are going to be on quarantine in the third quarter that are depressing that impact a little bit just kind of the third quarter, fourth quarter cadence as to how that K.F. benefit materializes?

Yes. No. So relative to the margins and what we see right now, we're expecting a minimal impact in Q3. There will be some impact but very small. The large impact will be in Q4. And so we do expect to see a very meaningful move in margins in DSA in the fourth quarter as a result of the NHPs and then being placed on studies and those direct costs going lower in Q4. And that's where we're going to see the biggest impact.

Yes. And David, you got absolutely, you're right. So just thinking through, you understand the timing of importation quarantine, getting them on study and then generating revenue. It just takes some time to import them quarantine them, acclimate them and then get them on study and generate revenue. It's just a matter of timing.

Our next question will come from Charles Rhyee with TD Cowen.

Just wanted to follow up maybe a little bit more on David's [ cables ] question here. So I think, Glenn, you said that 4Q DSA revenue will be the highest, and I guess the question then is, is that the right kind of run rate we should think about as we look forward into '27?

Because clearly, when we've seen the strong demand uptick, and we're seeing this continuous improvement in the book-to-bill is maybe then the 4Q, the right jump-off point? Or is there anything that maybe because it's pull -- maybe delayed from 3Q to 4Q that might be sort of a onetime-ish kind of benefit partially so that we shouldn't use that as the jump-off point.

Yes. Charles, let me give you a little color. So your comment on revenues. My comment was really around margin being the highest for DSA in the fourth quarter, to be clear. And that's driven by these lower costs for NHPs. As we look at the sequencing of margins, I mentioned in my prepared remarks about a 200 basis point sequential improvement from Q2 to Q3. That's largely driven by lower corporate costs and some benefit from divestitures.

And then we'd expect probably about another 300 basis point improvement to Q4 to get to our full year guidance numbers. And most of that will come from the acquisition of K.F. Cambodia and the benefit we'll see in the DSA segment. So just so you know how we're sequencing out the Q3 and Q4 margins and obviously, the comments that I made earlier around the margins, not the revenue.

Okay. That's helpful. Sorry, I must have misheard. And then maybe just a quick follow-up on the tax rate change. You said partly due to a proposed tax legislation change. Do we know when that will actually be finalized? Or so -- is this an estimation of a pros change? And is there a chance that maybe doesn't go through?

Thanks for the question. So this is associated with Mauritius. And we are expecting to hear back literally any day now on what the changes are going to be. We've obviously been in close contact with the local authorities and understanding what this could be. And so we've modeled in our guidance the impact we are expecting. If for some reason, the impact is less, it would obviously be upside to our guidance right now. And just to put a finer point on it, when we raised our EPS guidance for the year by $0.25 at the midpoint, that's all operational.

We have about a $0.19 gain overall that we expect to flow through the year, but we're anticipating a $0.20 tax headwind to offset that. So if for some reason, this tax legislation change does not happen, there would be upside to our EPS number. But right now, from what we know, we're pretty comfortable that it's going to happen and we factor that into our guidance.

Our next question will come from Michael Ryskin with Bank of America.

Congrats on a great quarter. Birgit, maybe kind of going back to some of your prepared remarks on DSA strength, the book-to-bill commentary. You talked about demand trends, both in biotech and pharma, I would love to hear you comment on what you view as your capacity to support this. As you talked about, there's a lag between when some [ reasons ] convert into -- funding convert into bookings, bookings convert to revenue, you've kind of tweaked capacity in DSA in prior years. Just talk about where you feel like you are now in terms of ability to absorb as that funding starts to flow through or if there's incremental investment you seem to make? So like where are you looking out 12, 18, 24 months on that front?

Yes. Thanks for the question, Mike. So because of some volume declines over the last few years, we have sufficient capacity for a while. Obviously, it depends on the growth rate and the volume growth rate as such. But at this stage, we don't see any issues, neither from an in vivo perspective, so animal rooms equipment, and then we will have to make some adjustments with people, but that is not always on always. So that is just part of doing business.

From a lab perspective, we actually have expansions in progress. They are geared towards the future demand. And currently, we are fine, but we will need to execute on those expansions over the next couple of years. to be able to grow with the market or above. So overall, quite comfortable with what we have on capacity utilization will improve a little bit, which is a good thing. But we don't see a bottleneck there.

Okay. And maybe a quick follow-up on pricing, both on NHPs and just more broadly, what you see in 2Q? What are your expectations in the second half? How is that kind of playing out with the uptick in demand?

Yes, happy to address that, too. So obviously, what we're seeing in Q2 right now is mostly booked a few quarters ago. And so that what's flowing through right now is proposals that were basically done last year. But overall, what I would say is pricing has not materially improved yet. So pricing is still stable. It is at the levels that we have seen for the last few years. Not more discounting, not less discounting. We are aggressive going after work, which shows in our capture rates. I'm actually quite happy seeing a little bit of an uptick in our capture rates which indicates that our approaches, our go-to-market approach is working our pricing strategies are working and that our differentiation strategy is working.

And -- but we are looking kind of forward to the time where pricing becomes a little bit more available. We do think that will happen with capacity filling up a bit more over the next few quarters. But then again, it will take some time to work through that in our backlog.

So just as a reminder, if we get a proposal today, it generally takes a quarter to go into bookings, another quarter or 2 to go into revenue generation. So any pricing uptick we might see in the upcoming quarters would flow through then in 2027, not before. So -- but I think pricing will improve as capacity improves.

We'll take our next question from Justin Bowers with Deutsche Bank.

Just going back to an earlier question on China. I was going to take it in a different direction. But on the clinical side, we're starting to see some of the in-licensing flowback in the U.S. And given the demand profile over there and what we think is some upward pressure on price over there, are you starting to see an uptick in work from biotechs that might have otherwise gone over there, stay here or that's coming back here? Can you talk about the opportunity set there? And then on pricing? Are you starting to see that approach parity around the DSA side?

Yes. So on the first -- your first question first. So on the biotechs that did work in China, most of those -- that work is in the early stage in the chemistry biology, we don't really do that work anymore. It was actually part of the business that we divested, and we divested that because it didn't quite have the synergies nor the benefits to our portfolio that we were looking for.

So for us, the regulated work that we are really focusing on our core business, where most of our work is has had very little influx into China so far. So not seeing this coming back doesn't mean the early stage isn't coming back. So basically, I can't really answer that question. If the early stage work is coming back. because we're not seeing that in our proposals. It's not work we're doing.

However, from discussions with clients, there is a level of uncertainty, but a bit more of a wait-and-see approach. And with the early stage work with the chemistry work because that goes relatively quickly, I think people will continue to work there until they can't anymore. So I don't think there is a huge need to build capacity here for them or move their work quickly.

So -- but certainly, discussions are very frequent about what is -- what's the future there? Should we bring work over there? Should we bring it back, but I don't think that particular biotech clients really have acted on that in a major fashion yet. From a pricing perspective, so what we're hearing is from some of our clients is that the companies that are doing work for the West. So there's a very specific group of CROs. Their pricing is not too far off anymore to the Western pricing. They're still lower, they will continue to be lower, and they need to be lower to actually have an attractiveness to work being done in the West because there's still complexity with language and time zones and other reasons. But it is moderating a little bit. Now pricing for China -- for Chinese biotech and pharma is still considerably lower.

So I don't know if that answered your question, Justin.

It does, Birgit. That's helpful.

Our next question comes from Casey Woodring with JPMorgan.

I just wanted to go back to the competitive comments you made about NHP related safety assessment studies becoming a competitive advantage for you because you have security of supply. Can you maybe just elaborate on that a little bit? You've always sort of been the leader in this space, right? I think historically, you've owned at least 1/3 of the Safety Assessment market. So just curious how much your win rate has maybe increased as a result of more of this insourcing and then how much higher you think your share could go here in the near term?

Yes, happy to. And Casey, so share is really hard to estimate. So I want to be very careful with that because there is no public figures and many of our competitors are private companies, and we don't necessarily have the insight.

So what we are looking at internally to see if our pricing strategies and our differentiation strategies are working is capture rate. And we had a nice uptick in our capture rate over the last few months. I wouldn't call it yet a trend because I want to see this trend continue for not just a quarter or 2 but for the remainder of this year into next year, but still good to see.

And I think it does show that we are focusing on the right things. In terms of differentiation and competitiveness from nonhuman primates, obviously, that's been always a risk area for the industry. Do we have enough nonhuman primates, do we have them at the time when we need them by being in control of that supply chain in control of the timing when we -- bring the main quarantine them, when we can put them on studies. That really gives our clients a lot of assurance that they can run their studies when they need them and that they don't have a time delay.

So -- and I think that is a big benefit that we're bringing to the marketplace. And I think it's very acknowledged by our clients and just steepening our client relationships and our preferred partnerships.

Got it. That's helpful. And then maybe just one quickly on RMS. You mentioned academic and government still weak. We've heard sort of mixed signals from some of the tools vendors on that end market. So maybe just talk about what you're seeing there? And then I don't think that you mentioned how CRADL performed in the quarter. So maybe just walk through that as well.

Yes, certainly. So let me start with academic and government. So this is a segment for us that primarily is being serviced by our research models and services business. It's about 15 -- it's actually about 10% of the total companies or a smaller segment of ours. What we're seeing currently is stable, but not growing demand. And historically, this has been a client segment. That has been a growth segment for our Research Models and Services business.

And what we are currently seeing is a little bit, I would say, uncertainty still, right? So NIH budget been approved, [ grains ] are coming out, but they are now multiyear some of the grand holders don't quite know how to work with this yet. I think this will open up more in the future. But currently, it's holding our research models business back a little bit compared to historical and that's why we're not quite seeing the demand in -- but specifically in North America that we would like to see.

Looking at our CRADL business, CRADL is stable from a revenue perspective as well. But again, here too, we're not seeing quite the growth that we historically have seen in our CRADL business. CRADL is specifically focused on new companies, new biotech companies that have funding, but do not want to spend or have enough funding to create their own vivarium. So we're providing them with a space to do their research early on grow them and then many of them leave and have their own vivarium, but -- or they continue to stay with us for a few years.

And this business is still a bit hindered. If you think about the company formation is growing, but only by 2% and far off from the COVID levels. So we just need to see a little bit more strengthening of that new company formation, new biotechs being established before we will see this CRADL business to return to former growth rates.

Our next question comes from Elizabeth Anderson with Evercore ISI.

As we think about the bookings, which obviously was a really nice step up to see in the quarter. Can you talk a little bit more about kind of the mix of services within those bookings? Or to what your current revenue mix is? Are you seeing like incremental demand in certain places within DSA versus previously? Any kind of additional [ case ] color there would be very helpful.

Yes, Elizabeth, happy to. So what we're seeing is a little bit of a shift from more post-IND work to more pre-IND work. Now we see this over time happening here and there in any time. But over the last few years, just because of funding was better available in later stage.

That post-IND had a bit more of a heavier component of our work. And over the last quarter, we saw that pivoting back a little bit to pre-IND work, which is great to see. We need both for the utmost profitability and capacity utilization at our company. But it is important that pre-IND work is being performed because that will just lead into later stage work, more complex work, more specialty work. So that's actually a good sign that we are taking that the market, the funding, our clients demand is strengthening.

Got it. And maybe as a follow-up, just to understand, how do you guys feel about any kind of incremental investment levels? I understand what you've been saying about some of the technology and AI investments really helping on that front, too. But just as we kind of think about this influx demand. Anything to think about on that front? Are you sort of feel comfortable with sort of where utilization levels are and staffing levels and things like that and as we think about like the back half of '26 into 2027.

Yes. So we are adding staffing just based on what we expect for demand. So that is always, always -- we'll add the staff. We'll get them trained up and make sure they are ready for revenue to pick up. The other investments we're making, I mentioned that a little bit in my remarks is in lab space and lab expansions that doesn't have an impact on revenue in 2026, but it will have -- allows us to grow in that area, '27 and beyond.

So it's very important that we execute on that. I specifically talked about an expansion in Edinburg, where we are close to one of the universities, which then also helps us with the staffing aspect, we continue to focus also on modernizing our labs, bringing more automation in, increasing throughput and bringing systems in both digital as well as lab equipment systems to really drive speed but also utilization in our laboratories.

So we will continue to talk about that, how we will modernize the company. It's both for speed and efficiencies but that is a big focus of ours right now in all segments and our functions. And particularly during our Investor Day, we will deep dive on that a bit more.

Thank you. We'll go next to Ryan Halsted with RBC.

My question is just on the guidance raise, if you could just offer some more color on the incremental visibility you have into the bookings that you now expect to convert in the second half. I thought maybe you said this was related to bookings that you've completed the middle of this year? Or is this bookings from prior year?

Yes, Ryan, thanks for the question. So the confidence in the raise to our revenue and EPS is really based upon the bookings we saw come through in Q2. So most of the year now we've got in bookings. We still have to see a book-to-bill of one or greater for the rest of the year, but that's largely going to impact 2027.

We'll get some benefit from that in the second half of the year. But just given the strength we're seeing in all the key lead indicators net book-to-bill being one, proposal volumes being a second capture rate being the third, we feel confident now that we're going to see better performance in the second half of the year. And so the guidance raised for EPS is all associated with revenue. And we raised our organic revenue growth rate by about 150 basis points.

Got it. That's helpful. And then my follow-up, just in terms of your modernization initiatives, some of the detail you provided in the prepared remarks was very helpful. But I wanted to ask specifically about NAMs, any -- should we be looking for kind of collaborations and partnerships with biotech companies that maybe have some interesting innovation in kind of NAMs? I appreciate that.

Yes. So we have a very strong NAMs focus and commitment. So we -- last year, we established a Scientific Advisory Board, we hired a leader from the industry to be our Chief Scientific Officer and to particularly focus on NAMs development. And so what we are doing is really focusing on areas where we believe NAMs can have a benefit on the reduction of animals, but also providing more insights, more evidence to our clients.

And it's going to be a very broad mix of technologies [ as ] that we are either already have or are developing or in-licensing or partnering wells. So you will see probably more internal development followed by licensing and partnering. So you will probably hear us talk about some of the technologies that we are in-licensing and partnering -- and then we also are working with several of our clients on areas where they are interested or where they see the best possible outcomes.

So it's ongoing. Again, during our Investor Day, we'll give a deep dive on NAMs development, how we think about it, where we do see opportunities, there will never be a NAMs business for Charles River. It will always be a safety assessment business where we're integrating NAMs into our safety assessment work flows, and I think that is the strength, and that is the only way NAMs can be adopted, and we're in a really good position to be the leader in the integration. And as I said, it will be from multiple sources, multiple technologies, not really focused on one thing the same.

Our next question comes from Luke Sergott with Barclays.

Just wanted to ask about the -- if you guys are seeing any demand pickup from the DoD list in the WuXi on the [ no-fly ] list, I know that was in June, but any signs of early wins or conversations with those customers?

Yes. Look, so generally, most of that work that they're doing is in the early stage like chemistry, biology, that we are no longer in the business of. So I couldn't tell you specifically if clients are looking for other providers there. But I assume there are, we had a few discussions with clients more on the regulated space, but generally, the Western clients are not yet taking their regulated work to China. And so those discussions are quite limited, but not occurring. So -- if that's English. So limited, but yes, a little bit.

Okay. Perfect. And then on the guide with the DSA business and in light of your strong bookings, it kind of implies there a decel in the conversion or burn rate.

So anything there from a mix perspective or how the projects are shaking out that gives you that decel? Or is that just kind of the conservatism based on what you guys are seeing right now?

It's more about the time it takes to go from bookings some proposal to bookings to revenue generating. And then that just will take some time. So some of the work we are doing is still booked -- was booked last year. And what you're seeing now the demand or the net book-to-bill really will have an impact in the second half into '27. So it's just a matter of timing.

And keep in mind, for the first half of the year, DSA had negative organic growth and now we're projecting low single-digit organic growth in the back half of the year. So we are reflecting some of that improvement here. And obviously, we'd like to see that continue to accelerate going into 2027.

Our final question today comes from Joshua Waldman with Cleveland Research.

I'll just keep it to one. Birgit, it sounds like you feel comfortable with the existing safety capacity. I mean when you think about your ability to get better utilization on existing capacity, the impact of NHP costs, et cetera, how do the moving pieces leave you feeling on the margin set up into next year? Or I guess, how are you thinking about the margin potential for the business in Q4 and into '27?

I think we're going to stay away from comments on 2027, that's a little bit early. There are some areas, obviously, that we already called out, for example, K.F. Cambodia acquisition and divestitures has a positive impact on margin next year, and we can walk you through. But overall, I want to stay away. There's too many variables in play that we still need to work through. For the second half of the year, we called out at least 500 basis points a big impact in Q4 because of when the nonhuman primates are coming through on the revenue line but I wouldn't necessarily translate that straight into 2027. So Glenn, you can add...

Exactly. I don't take the Q4 run rate in the run rate going forward. I think year-over-year, '27 versus '26, if you look at some of the previous comments we made, we would expect to see some margin expansion coming from the full impact of divestitures in the Cambodia acquisition. So that will have a tailwind in '27, but we're not ready to yet give guidance on our margins for next year.

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

Thank you for joining us on the conference call this morning. For those interested in our Investor Day on September 24, please visit the Investor Relations section of our website at ir.criver.com, to register for the webcast or contact me for any additional details. This concludes the conference call. Thank you.

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

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.