All right. Thanks everyone for joining us. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst at Morgan Stanley. Before we begin, I'd like to remind our listeners that important disclosure information can be found at morganstanley.com/researchdisclosures. So it's my pleasure today to host Charles River, and speaking on behalf of the company, we have Chairman, President, and CEO, Jim Foster. Thank you for joining us today, Jim. Maybe to just set the stage, you know, let's start with the biopharma funding environment. You know, you've called out sort of stable to improving trends during the second quarter. It's something we've heard from other life science companies as well over the last couple of days. But, but then on the other hand, you've also talked about, you know, I guess an inevitable normalization following a pretty unique multi-year period of R&D budget strength. Help us think through those sort of two opposing dynamics. Sure. So I think there's a certain level of conservatism on the part of our clients, since nobody knows when things will be improved significantly, particularly I'm thinking about IPOs and secondaries. When I'm saying that, I think the VC investments have been substantial. I think pharma has been a huge source of capital, particularly for really good drugs from unmet medical needs. But we had things get incredibly frothy in 2020 and 2021. We had backlogs elongating out 18-24 months, which was enjoyable, but very difficult for the clients actually to plan out that long. So what has happened with some regularity is, you know, they book a slot to start a study out 24 months, and then when they get to 20 months, they're like, "We have to let that go," because they actually don't have a drug ready. So I would say more normal, healthy backlogs is nine months, we're 13 now. That gives us enough visibility on where things are going, gives the clients enough time to plan, it gives us some leverage from a pricing point of view, and it gives us some leverage from a managing our headcount and capacity as well. Mm-hmm. So, you know, pricing has been reasonably significant, I don't know, five, six, seven years now. Mm-hmm. It's been a while with some significant volume increases. So there is a duality. You have some of the big drug companies who obviously can afford to prosecute whatever drugs they want to develop, but they still have to make budgets, and they're public companies and whatever, so they only spend to a certain point. I think some of the smaller biotech companies who are reasonably well funded, just because of the uncertainty in what - when the capital markets will open up again- Mm. Just being more cautious. It's had the most direct impact on our discovery business. Mm-hmm. I'd say, end of sentence. To some extent in the biologics business. The discovery business obviously comes before safety. You can't have that be for too prolonged a period of time, though, because then you're gonna have no drugs later on. So we often see this spending. Well, for the last few years, we've seen healthy spending, both in discovery and safety. Mm-hmm. Now, I think it's more nuanced to safety and the clinic. So, and then, of course, there's a patent cliff coming. Right. Not as large as the last one, but there's a patent cliff coming, so clients are quite cognizant of that. So, I'm sure everybody in this room has their own sense of when they think the IPO market will open. And none of us have any idea, but we have a sense of that. And so, the clients are trying to vet that, and they're doing that by prioritizing their portfolios very carefully- Mm-hmm. ... and only prosecuting the drugs that they think have the greatest commercial opportunity. Got it. Do you hear your customers sort of bring up IRA and then the implications of the IRA at all, now that the initial list of drugs up for, you know, price negotiation is out there from CMS? I mean, it's early days, a lot could change, but is that part of your customers' longer-term calculus? I think it's impossible for me to answer that. We're not hearing about it much from the clients, and obviously there's some lawsuits that have been initiated, so they're pretty unhappy with that. Mm-hmm. And I have... I don't know what the punchline will be about whether they'll be successful or not. I think a lot of people think that the government's gonna start with 10 drugs, and then it's gonna kind of increase from there. Raises the whole issue of patent life, and are you really protected? I was reading this morning that some companies, insurance companies, were raising the price of generic drugs, so the sort of pricing dynamic is all over the place. Mm-hmm. And even if it sticks, and it's detrimental to the clients, which I suspect it would be, it's way too early to talk about what the impact would be to us. I could argue that it would necessitate more outsourcing, and I actually could say that that would be a positive, particularly by the big drug companies, to do less inside, since we can do things as quickly for the same or better quality of science at a much lower price point. So if they have to, cut things back because patent life is- Right. ... is somehow threatened, that could be beneficial. Got it. Just looking closer at your safety assessment backlog growth, I mean, are you seeing any sort of uptick in either sort of, you know, conversion or cancellation rates or proposal volumes? You know, have those metrics now bottomed in light of your, you know, comments around sort of signs of stabilization? So this is not an inter-quarter update, but, but, I would say that hard to say. Slippage and cancellations is a, is a, is sort of a cost of developing drugs. Mm-hmm. When none of the CROs existed, that happened all the time with the drug companies, right? Drugs weren't ready on time, they couldn't, toxicity was too high. Mm-hmm. They couldn't formulate it in a way that would be tolerated by the patients. So we've always had slippage, and we've always had cancellations, for which we usually can exact a penalty, sometimes not with the larger clients. So I would say that the proportion of cancellations and slippage has increased, because the dollar volume has increased- Mm-hmm. ... and B, because Yeah. ... the backlog is elongated to the point where they actually don't, as I said earlier, they don't know what they're going to be doing. So, I think that, and I don't know whether that's bottomed out yet. It sort of feels like, there's moving towards a normalization of the timeframe to wait. Mm-hmm. Which, as I said earlier, I think is great, for all of us, right? Right. Fair enough. What about sort of industry-wide capacity utilization? You know, you've had, you know, the, the exogenous sort of NHP shock to the system, but you also have some normalizing demand trends. Where, where does that stand, and, and how do you feel about, you know, your ability to continue taking price here? And obviously, that's not the only variable. There's lots of other things at play that, that sort of drive pricing, but just give us a flavor for that. I would say our capacity is extremely well utilized. Mm-hmm. It has been for at least a decade. We've built very small, subtle amounts of incremental capacity every year in, I don't know, five, six, seven different sites because clients like proximity. We've tended to utilize it really well. There's enough play in it, so if business is better than we anticipate, as it was in 2020, 2021 and 2022, we can still accommodate that. But if it slows, in a meaningful way, we won't have too much capacity. So I don't know, it feels like with a couple of exceptions, it feels like price is readily available across the entire portfolio. Certainly has been in safety now, it feels like almost a decade, and it's been accelerating for the last three or four or five years. Mm-hmm. So both volume and mix and price are at play here. I think as long as capacity is well utilized, just given the nature of the competitive dynamics, that we'll be able to continue to get price. Got it. Switching to, you know, NHPs, you've been able to do a really good job mitigating those, you know, supply chain issues by looking, you know, moving work overseas. What, what's your confidence in being able to do this on a, on a permanent basis, should the need arise, in light of sort of your capacity abroad? And- Mm-hmm. ... are you starting to see any evidence of share shifts, you know, in terms of, your ability to do this relative to the competition? We're quite confident that we can continue to do this ad infinitum, that it's a probably a permanent change. Mm-hmm. Our non-U.S. facilities, particularly the ones we're talking about now, are quite substantial. Lots of experience doing this complex amount of work, well-staffed, friendly governments, help in building new space, you know, in terms of financing, readily available staff, and as it turned out, some incremental capacity, which was available when we needed it. So, we're quite confident we'll be able to continue to do that. You know, we still do a lot of NHP work in the U.S., but less than we did last year. And we have multiple sources of supply now, and that's, I think that holds us in good stead. So the NHP supply is plentiful, I would say, right now. Mm-hmm. That's obviously a good thing. We have not disrupted any of our clients, just in terms of study start dates throughout this whole craziness. Mm-hmm. Not at all. Mm-hmm. So we start, started studies, and so I think clients are quite pleased with that. I think we've demonstrated the power of this large international infrastructure that we have, with a lot of safety sites. And as I said earlier, a lot of clients like proximity, so Europeans will want to work in France or the Netherlands. They'll work in the States if they have to, or the expertise is better. We've also moved more towards being able to direct the clients to the site that we want them to work at, which is something we've always aspired to do, but really haven't been able to do as robustly as we have for the last few years. So we want to be able to say, "Okay, thanks for the study. We can start it in six months. Mm-hmm. And we're gonna do it in Edinburgh, Scotland. I hope you're okay with that." And you want the client to have audited Edinburgh and feel good about that. So right now, that feels to be increasingly the case. Got it. One of the, the questions we get on the NHP situation, Jim, is, you know, could the, the U.S. investigation, you know, broaden to include, you know, other countries beyond Cambodia? By when do we expect to get sort of some sort of clarity around that? And then the, the, the other part of the equation is occasionally, you know, we get the ask around, could China start importation of, of NHPs from Cambodia, to perhaps, like, tamp down local pricing, you know, in, in, in that market? And, and how do sort of, you know, these dynamics impact sort of the global supply, situation? It's impossible to predict what will transpire and impact other geographies. We don't think anything will transpire, but we don't know that for sure. I don't wanna talk too much about this DOJ thing, except to say that, as we've said multiple times, we believe with regard to us, it's without merit. Mm-hmm. We've had very few conversations with the government about that, so it's been very slowly evolving. And so we have no new information. So this has been going on for months, right? I thought this would be resolved in a couple of weeks. It's been going on for months, so what's the basis of this? Is there a basis of this? Does it really have anything to do with us? How will it slop over into other geographies? We don't know. So I mean, all we can do right now is run our business as well as possible with great integrity and speed and find out other sources of supply for our clients, which we have done. The China thing, I have no idea. I hear from the folks who work with and for me every quarter, that China's about to open up both the import and export. I don't see any evidence of that happening, so it's just noise. They have a large supply, an in-country supply, so it seems to us that they can take care of local demand from, you know, local pharma companies and CROs. Could they bring animals in from Cambodia? I guess. I don't know why that would be preferable to the Cambodians or not. I think it depends on the price point. Mm-hmm. We're not spending any time worrying about what China's doing. It's having no impact on us. We have some sources of supply in China. Mm-hmm. As I think you know, we're actually selling those animals in China. Mm-hmm. ... to CROs at pretty good margins. That really wasn't our preference. Our preference was to get those animals out of China and use that for safety assessment. And of course, we pivoted to Cambodia only because China closed its borders, and we knew that, we knew that would happen. We knew eventually that China's gonna wake up and say, "This is a valuable natural resource that we have. We're gonna keep it in country for ourselves, and we're not gonna allow these animals to be transported to the rest of the world." So not a surprise. Got it. In terms of the more, you know, budget-conscious, you know, mid-cap sort of biotech client base, is there greater sort of openness among that sort of customer constituency to look at some of these Asian CRO partners, in the context of, you know, them not having to grapple with some of these challenges? I think some of the very small companies that are poorly capitalized or have consultants that tell them that the only way that they'll be able to sustain their growth and stay in business is to do things at lower price points. Mm-hmm. The capacity that's available in China is quite small, and most of it is used for local Chinese companies. But we rarely see this from a competitive bid point of view. We're not really bidding against these Chinese companies, but we hear that some clients are going there, and I think that's... I mean, I think that's fine. There's some issues associated with doing that, right? Mm-hmm. You're gonna get lower price points, probably worse service, probably worse science, and some risk associated with IP and all of that. It's definitely not the preference for most of the clients in the space. The amount of capacity in our infrastructure, for instance, is so dramatically larger that it's really not a concern of ours. Got it. Switching to the manufacturing support business, Jim. You know, you saw really strong growth in CDMO last quarter, and you called out the Center of Excellence model that you've set up there and your investments in commercial readiness and rebuilding that funnel. Are you seeing any impact from the funding headwinds, you know, particularly for the cell and gene therapy sort of modalities? Is there perhaps a degree of industry-wide overcapacity at the moment? Doesn't feel like it. I mean, we're hearing that a lot. I can tell you that we definitely don't have excess capacity- Mm-hmm. ... in our CDMO business. We just built some new capacity. We have a larger number of clients than we had six months ago or a year ago. We also have one client that's moved from the clinical phase to the commercial phase, which is great. We've had a bunch of government audits of our site, and we have several clients that we're dealing with, all of whom I have some interaction with personally, that believe that their drug is on the precipice of being going commercial. They are, they're all gene-modified cell therapy drugs for horrendous diseases- Mm-hmm. ... for which there is no alternative therapy, so these are medical needs. There's a fair amount of caution on the part of the regulatory agencies in terms of approving these. I think there's 13 or 14 cell or gene therapy drugs that have been approved in the world, and over 3,000 are being worked on, so that's a very small number. There's some concern about the safety profile when you're dealing with people's genomes. Having said that, there's great promise in these drugs. So the sales cycle is long, but I think we're doing a good job building a base of clients. And look, we have no control over when these drugs go from the clinic to commercial. I don't even want to have an opinion because the client's opinion is always too optimistic. Mm-hmm. And I think the amount of drug that they think that they're gonna manufacture with us the first year is usually optimistic. But having said that, it's likely they'll get approved. And we are having discussions with pretty much all those clients, but some take- or- pay arrangement. By that I mean, okay, so we don't know when we're getting approved, and we actually don't know how much we'll need of the product, but you better have the space for us because we don't have our own space. Right. So that, that's a good proposition for us. And basically, they're gonna pay us what they would pay us if the room was full and generating- Mm-hmm ... a revenue. We're having those conversations right now as well. I'd say that business is logarithmically better than it was a year ago- Mm - in pretty much every way: clients, quality of facility, quality of staff, quality of sales organization, sophistication of sales organization, and sophistication of manufacturing. And also the connectivity between our CDMO business and our biologics business, where we're testing just large molecules, a little bit of our microbial business, where we're doing some testing as well, usually before they go into a clinic or after a drug's approved, and our safety assessment business. So the strength of our portfolio, you know, has always distinguished us from the competition. And so this overcapacity thing, that's about the third time I've heard that today. I think some of the larger CDMOs may have some capacity issues. I don't know whether it's specifically in gene-modified cell therapy. Mm. We only have a couple of these companies that we compete with, and while they're good at what they do, I certainly wouldn't disparage them; they don't have the breadth of portfolio that we have. So I think we have a better opportunity to sort of pull the work in than they do. It's still early days. Still definitely not happy with the margin profile of that business. Right. Right. Increasingly happy with the growth rate, though. Got it. That's great to hear. And, you know, I will get to margins in a second in manufacturing support, but, you know, Microbial Solutions versus, biologics safety testing, you know, opposing dynamics there at the moment. You - I think you called out viral clearance and cell banking as pockets of weakness for biologics testing, and then, Microbial Solutions actually seems to be pretty resilient. So walk us through, you know, what you're seeing in those two sort of segments. The Biologics business tends to start off slow in Q1, so and tough to read what, if anything, that says about the rest of the year. So it started off slow. I do think that the Biologics has been impacted by some of the slowdown in demand by- Mm. ... by smaller large molecule companies, by biotech companies, that are concerned. And, the Viral Clearance stuff and Cell Banking are some things that they can delay until later in the process. Cell Banking is something that if they want to, not small companies, but some of the larger companies, can do themselves. So, both of those activities are highly profitable and pretty high growth rates. So they're waiting a little bit until later on in the drug development process there. It's tough to predict. Their work comes in very quickly- Mm-hmm. ... and goes out very quickly. The nature of the work is relatively short, and the margins are quite good. So, I don't want to get into specifics for the back half of the year, but we'll, well, typically, we see that ramp. The microbial business has tended to just be steady. Mm. It's a bit different. It's quality control clearance. I mean, you're testing drugs that have been manufactured to make sure they didn't become contaminated while they're in the manufacturing process, and that's required by law. So it's a different dynamic- Mm. ... than the Biologics Testing. Not optional. Mm-hmm. So if you have a drug, and it's going into the clinic, or you have a drug and it's commercially viable, you need to do this, you need to do this work. So it's a business that's had a really good staying power for us, both in terms of its growth metrics and margin profile. Got it. You know, on margins for manufacturing support, I mean, I think it's probably one of the more underappreciated sort of levers you have in the model today. I mean, the margins there, you know, once upon a time, were almost 30% plus. Do you see a path to recovery there, just from positive operating leverage? I mean, as you see that, you know, rehab in the CDMO piece, of course, there's, you know, some offsets from biologics testing, et cetera, and perhaps a tighter funding environment. But walk us through, you know, your expectations for leverage in that business. The margins there were in the mid-30s for years. We had a couple of years where they were 36% or 37%. So the way we look at the CDMO business, that's accretive to revenue, for sure. Mm-hmm. That is, how do I say it? That's that will be increasingly less dilutive to margin over time. As the business gets larger, as we have more commercial clients, as you are manufacturing the same drugs over and over again, we should see some efficiencies. We obviously will price a commercial product a lot higher than we're pricing a product that's in the clinic. And of course, the client can afford to pay for it because now they're getting paid for their drugs. So I think directionally, and microbial business is extremely profitable, and biologics had a while it is a slow couple of quarters, had a very strong year last year. So directionally, that should, that could be accretive as well. When we bought the CDMO businesses, what we said was that would be a headwind to margins for a while. I don't know what a while means, but less dilutive each year. Mm-hmm. Well, we still stand by that. And as I said, as it gets big enough, it has the propensity to be accretive to margins, but we don't know that for a fact. But I do think that whole segment has the ability to grow faster on the top and the bottom line. Got it. Fair enough. Switching gears to RMS, I think you talked about, you know, over 50% of RMS revenue coming from academic and government customers. One of the questions we've gotten is, if NIH budgets do see a low- to mid-single-digit decline next year, could that be an overhang for RMS please? I mean, I guess. I don't know why you'd see a reduction in NIH budgets, but it takes a long while for that to flow down to us, so maybe not. We have a fair amount of government contracts. We have long-term relationships with these academic institutions and some of the government folks. So yes, potentially in time. Mm-hmm. That's possible, but I don't think we'd see it anytime soon. Got it. And then China, I think it's sort of a low double-digit% of RMS sales, mainly on the, on the model side of the business. We've heard some, you know, pretty alarming commentary from life science companies in terms of what's going on in China there, and biopharma customer disruption. You know, some of them called out an anti-corruption sort of crackdown. I'm not sure that really impacts you. But just curious as to, you know, what you're seeing in RMS in China at the moment. I think some of the tools companies are having a rough time there, which is probably what you're referring to. Mm-hmm. Some of those products are unlikely to be bought- Mm-hmm. ... if they're really watching their dollars. You know, you know, I think our portfolio is much more basic from an R&D point of view, and so you don't sort of have mice to do your discovery work. You're probably not doing discovery work at all. Our competition is primarily Chinese companies, and while they're working hard to have good quality, I think a lot of them have been struggling. They have no history. Mm-hmm. There's some money, probably from the government, and we've seen none of our international competitors going to China, which is really surprising. So we're kind of on our own from a historical quality and reputational point of view. I think if you want to get a drug, a Chinese drug, sold in other parts of the world, you know, the animals that you use to discover it, better be pristine. Mm-hmm. When you write that up, I think you're gonna have some regulatory focus on that. China is a complicated market for sure. The COVID issues have been complicated. But, you know, the government has pretty much left us alone. We built a bunch of facilities 'cause of the size and scale of that country to be close to some of these smaller cities that still have 10 million people in them. And that business has grown pretty much. We're probably slightly more than 10 years in in China, and it's grown really nicely. Got it. Last couple of minutes here, Jim. I wanna talk about, M&A, right? So in terms of just key learnings from Cognate and Vigene, is there anything you'd look to do differently in terms of your approach going forward? I know it's sort of not a near-term priority for you. And second, just given the regulatory backdrop and the antitrust scrutiny, how does that sort of impact your, you know, preference for size or, you know, financial profile, and how do you weigh those factors versus strategic fit? So we have a fair number of conversations going on right now with potential targets. Most of the sellers are private equity companies. I don't know yet whether multiples are gonna come down or not. We'll see as we get into some price conversations. Some of the things we're talking about, I don't think we'll have FTC problems in them at all. Mm-hmm. And I think we wanna stay close to our knitting. So one, obviously, one of the obvious complexities in the CDMO business is that it's a new business for us, and it's new science, so I think it's been more complex than we had anticipated. But some of the things we're looking at now, and most of the things are, except for one company, most of them are of modest size. Got it. You know, I wanna talk about, you know, you have an Investor Day coming up shortly, and I don't wanna steal your thunder. Next week. But, you know, a couple of years ago, you sort of, you know, pegged your long-term targets at low double-digit topline growth, 50 basis points annual margin expansion. And to your point, I mean, it came on the heels of an unusually strong funding cycle and your, you know, CDMO acquisitions back then. How do you think about sort of the puts and takes as we sort of frame your, you know, presumably revised long-term growth outlook next week? I'm not gonna give you the specifics, but we're gonna give an outlook for a few years. I think that we feel comfortable that we'll be able to call that accurately, both with regard to top-line growth- Mm-hmm. ... and margin accretion, and also free cash, and other things like that. I think we have a really good sense of the competitive dynamic and how that's unlikely to change in a material way, during that period of time. And we tried to make some reasonably conservative estimates as to demand curve and what's gonna happen with the IPO market. But, you know, we feel, you know, we feel good about the sort of directional, what the demand will be in a directional point of view, and particularly good about the rest of the portfolio. Got it. Fair enough. Looking forward to hearing more next week. Great. Thank you so much, Jim. Sure. Appreciate the time.