Charles River at William Blair Conference: Navigating Challenges with Innovation

On Tuesday, 03 June 2025, Charles River Laboratories (NYSE:CRL) presented at the 45th Annual William Blair Growth Stock Conference, providing a strategic overview of its current performance and future prospects. Despite facing a challenging demand environment due to factors like biotech funding adjustments and high inflation, the company remains committed to innovation and technology enhancement to drive future growth. CFO Flavia Pease highlighted both the company's strong foundation and the headwinds it is currently navigating.

Key Takeaways

• Charles River reaffirmed its full-year guidance, projecting an organic revenue decline of 4.5% to 2.5%.
• The company is implementing cost-saving measures, expecting over 5% savings through workforce rightsizing and footprint restructuring.
• Despite challenges in the Discovery and Safety Assessment segment, Research Models and Services and Manufacturing Solutions have performed steadily.
• Charles River is focused on strategic capital allocation, including stock repurchases and potential mergers and acquisitions.
• The company is confident in emerging stronger from the current period of softer demand.

Financial Results

• 2023 sales reached $4 billion, with the Discovery and Safety Assessment (DSA) segment accounting for approximately 60% of revenues.
• Organic revenue decline for the first quarter was 1.8%, with a projected full-year decline between 4.5% and 2.5%.
• Margins across business segments range from 23.7% to 27.4%, with a first-quarter margin expansion of 60 basis points.
• Non-GAAP EPS for the full year is projected to be between $9.30 and $9.80, despite a 3% EPS growth amid revenue headwinds.

Operational Updates

• Research Models and Services (RMS) holds a 40% market share, focusing on digitizing the client experience and benefiting from a favorable mix.
• The DSA segment, nearly three times the size of its next largest competitor, is enhancing offerings both organically and inorganically.
• Manufacturing Solutions is leading in rapid detection and lot release testing, with only 10% adoption of rapid testing methods.

Future Outlook

• Charles River expects long-term growth opportunities, particularly in biologics testing and manufacturing solutions.
• The company anticipates continued demand in the global biopharma sector and is poised to capitalize on increased outsourcing opportunities in safety and discovery.
• Strategic actions include optimizing the cost base, selectively repurchasing stock, and maintaining disciplined capital deployment to enhance shareholder value.

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Conclusion

For a detailed understanding of Charles River's strategic direction and financial performance, readers are encouraged to refer to the full conference call transcript.

Full transcript - 45th Annual William Blair Growth Stock Conference:

Max Machen, Research Analyst, William Blair: All right. Good morning, everyone, and thanks for joining us for the management presentation. My name is Max Machen. I'm the research analyst here at William Blair who covers Charles River. We're pleased to be joined this morning by CFO, Flavia Pease.

Before we get into the presentation, I have to mention two things. First, the breakout session will be held in Maher 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, visit our website at www.williamblair.com. So again, very pleased to have Charles River with us here today. And with that, I'll turn it over to Flavia.

Flavia Pease, CFO, Charles River: Thank you, Max, and good morning, everyone. Thanks again for hosting us. I'm Flavia Pease, as Max indicated. I'm the CFO of Charles River, and it's great to be back at the Blair Conference. I was here a couple of years ago.

We are going to quickly flash our safe harbor and Reg G statement. Just give it a second, and then we'll get into the presentation. So for those of you who might be new to Charles River, let me ground you on who we are. We are the leader in the preclinical contract research space. And in that, we help our clients accelerate their biomedical research and therapeutic innovation.

We work alongside them, with them, from the discovery and early stage development, all the way through the safe and manufacture of their life saving therapies. So we play a very critical role in the drug development space. Last year, we had sales of $4,000,000,000 and as you can see here, we have a significant presence and a scale that we believe is a source of competitive advantage. And that scale materializes in several ways, whether it is the more than 2,500 colleagues that we have with advanced degrees, the 130 facilities that we operate across 20 countries in the world, or the breadth of our client base with over 2,000 biopharma clients in North America, this level of scale is something that makes us unique in terms of how we compete. And it does translate into results when you think about we were part of more than 80% of the drugs that were approved by the FDA in the last five years.

And so we really play a critical role, and it's one of the things that we're most proud of and aligns very nicely with our mission of creating healthier lives. Here you can see sort of where we operate. As I said, our presence spans the research and drug development continuum. And we think that in addition to the scale that I talked about, the distinguishing feature of Charles River is this unique and scientifically differentiated portfolio of non clinical capabilities that we bring to bear. We operate across three segments, which I'll deep dive through the presentation to help you understand better what they do and the long term growth prospects of each of them.

But just at a high level, our research models and services business is a one stop shop for high quality research models and services. And here, what we do is we help scientists enable them to discover new molecules with our research models and the services that we provide them. Our discovery and safety assessment business is the we are the largest partner for outsourced drug discovery and non clinical development. And we help get preclinical success to advance to the clinic. And then the last segment of our business is the manufacturing solutions, where we provide process development, clinical to commercial manufacturing and lot release testing.

Last year, that $4,000,000,000 of revenue was split with the majority of it coming from our DSA segment. About 60% of our revenues is in DSA. The business had a challenging year with declining sales, and we'll talk a little bit more about what's happening in the market. And then the other two segments each are about 20% of our revenues. All three businesses operate with healthy margins ranging from 23.7% to 27.4%.

Talked a little bit about how the demand environment has been constrained over the last probably eighteen months, twenty four months. But when you look at a five year period, we have proven to have resilient financial performance, albeit a bit of a margin compression over the last couple of years. We have grown revenue from a CAGR perspective 8% between 2020 and 2024. EPS grew a little bit slower in this period at 6%. And we are a business that generates pretty healthy cash flows as well.

Free cash flow grew at 7% CAGR for that same period. About a month ago, we had our first quarter earnings call and announced our first quarter results. Just as a reminder, we delivered organic revenue decline of 1.8. Margin did expand 60 basis points and EPS grew 3% despite that revenue headwind. At that time, we also updated and raised our guidance for the year, which we're just reaffirming here, so there's no change from what we communicated a month ago.

So for the full year, we're expecting organic revenue to decline between 4.52.5%. Non GAAP operating margin will be down between twenty and fifty basis points. And then non GAAP EPS is forecasted to be between $9.3 and $9.8 I've been talking a little bit about this sort of challenging demand environment that we've all been experiencing. If you think about it, it started as early as 2022 with biotech funding going through an adjustment and normalization post COVID. That put pressure, especially in our biotech client base.

We also started to experience, if we may go back a couple of years, high inflation, interest rates raised. And then you fast forward to last year, where pharma went through a pipeline reprioritization or rightsizing, which also created demand headwinds for us. And then you fast forward to now, which you have additional macro storm clouds, whether it's tariffs, whether it is NIH potential reductions, FDA staffing reductions as well. So the whole healthcare and life science space has been pressure over the last probably two to three years. But I think when you take a step back and you think structurally, we are of the belief that nothing fundamentally changed in the sense that there's still a lot of unmet medical needs to be solved, a lot of diseases to be cured.

This industry has shown the power of new modalities and the ability to address these diseases and sometimes cure it. And when that happens, it still offers a compelling return for investors, right? And so we believe that we're in a little bit of a speed bump period right now, but that structurally this is still an attractive space. And so against that backdrop, we continue to be focused on advancing our strategic agenda. And in that, our priorities are to promote innovation to strengthen that portfolio of differentiated preclinical capabilities that I alluded to earlier.

And that innovation can come either organically or inorganically through M and A. We're focused on adjacencies, spaces where we already have some presence and can leverage our capabilities. And then also looking at some new adjacencies like we'll talk a little bit about NAMS or these new alternative methods or approaches that were a lot of focus over our last earnings call. Another priority for us in our strategic agenda is to continue to champion technology to enhance speed and efficiency. And in doing that, we hope to drive profitable growth through a more scalable operation.

And finally, all of that will be enabled by advancing our purpose driven culture and ensuring that our colleagues have an opportunity to develop and grow and contribute to that mission that I talked about earlier. Let's double click now in each of our three segments. So, the first one, as I said, is our research models and services segment, where we help scientists discover new molecules. This is a space that we have a pretty meaningful I don't want to call it dominant, the lawyer the antitrust lawyers might not like that, but a meaningful share of the market of 40%. So we're clearly an important player in providing these services.

From a products perspective, we produce more than 140 different strains of the most widely used small research models. And in our services business, I think the two highlights would be our Cradle business, which you can think of it as a turnkey full service Vivarium rental space. And then our GEMS business, which is genetically engineered models and services, where we provide more sophisticated models. We can turn knock genes in and out to make them a better translational model for scientists. In the research models and services space, geographic proximity is important, because you're shipping some of these live models.

And so our global footprint again, and the proximity to the biotech hubs is an important competitive advantage. And then we also have been focused on digitizing that client experience and making it easier to do business with. In terms of the long term growth drivers in the RMS, We think price has been and will continue to be a tailwind. Model small models are low cost, but very critical tool to advance drug research. And we also benefit from favorable mix as we upgrade to these more complex models that I spoke about that tend to price at a premium.

The services business, especially Cradle, is a business model that we think will continue to resonate with clients as it allows them to invest in research and not have to deploy capital and dollars towards infrastructure. So it sort of variabilizes that investment. And then finally, China has been a good source of growth for us. We've done some geographic expansions there and again, opened new markets for our business. The next segment is DSA, Discovery and Safety Assessment.

In discovery, we, as the name says, help clients discover and characterize new drug candidates. We have in vivo and in vitro capabilities across pretty much all the modalities, and also cover most of the therapeutic areas with a primary focus in CNS and oncology. And then in our Safety Assessment business, we offer a full suite of safety studies required for regulatory submission. We are the leader in both regulated and non regulated GLP and have capabilities across general and specialty toxicology, bioanalysis, pathology, DMPK, you name it. And this is a space where, again, we have almost 3x the size of the next second largest competitor.

In terms of long term growth drivers for DSA, we're going to continue enhancing our portfolio of offerings I talked about, both organically and inorganically. Bioanalysis is an example of where we can augment our offerings organically. Some of the names and alternative technologies is maybe a place where we'll look at inorganic opportunities. There continues to be opportunity for additional outsourcing. Safety is 60% outsourced and Discovery is about 30% outsourced.

There's no reason Safety couldn't get to 80% and that Discovery continue growing. Safety at some point was only 2030%. So we've seen this movie, if you will. And then finally, we're pretty confident that the demand for global biopharma especially will come back. As they go through these cycles of large LOEs and have to look at their pipelines, they need to refuel that for future growth.

So we think that, that will happen again. You heard me talk a little bit about and we actually spent quite a bit of our last earnings call providing our perspective on NAMS. And the reason for that was in April, the FDA put forth a press release announcing this goal of accelerating the validation and adoption of what we call new approach methods or NAMS. And there was a bit from our perspective of market overreaction Because if you just read the press release at face value, it could lead somebody that is not as familiar with the space to believe that things will completely change in a three to five year horizon. And so we wanted to make sure that we share our perspectives with the investor community and we also spend a lot of time talking to clients.

So on NAMs, first of all, it's important to remind everyone that this is not new. We as an industry have been on this journey for decades. The FDA actually first provided some guidance on their strategic intent as early as 2011. And then their FDA Modernization Act two point zero of 2022 was already speaking of the same things that this press release now alluded to. So again, NAMs have been part of the evolution of how we do the work we do for many, many years.

And they have shown some nice interesting promise and some scientific advancements that we are going to continue to embrace. But at this point, it's important to understand that they are not fully capable of replacing animal studies. And when you think that the primary concern of both clients and regulatory agencies is around patient safety. We are confident that nobody is going to put at risk and sacrifice patient safety if you have tools that are not yet capable of replacing the in vivo work that we do. So we think that the way this will evolve is through a more hybrid approach, where in discovery, where you're trying to answer some specific questions.

NAMS can be a pretty powerful tool. But when you start dealing with multi organ, multi system interactions or chronic questions that you're trying to answer, NAMS are not capable of doing that. And so we think that will be more of a sort of adjunctive or hybrid approach where you're going to be using NAMS in conjunction with animal work. And then we also want to remind everyone that as this evolution continues, there's nobody better suited to participate and actually lead this journey than us. We don't think of ourselves and our leadership in the preclinical space that is confined to animal models.

It's actually rooted in our science and innovation, the understanding of the regulatory landscape and the insights that we can bring to bear to our clients to help enhance their study designs, and then the translational expertise that we have. And so this is a very fragmented space, and it's primed for a player like Charles River to come in and consolidate and help bring it the offering at scale, which is not the case today. So far, the FDA guidance in the pilot that they have announced is supposed to focus on mAbs and more specifically in reducing the duration of chronic NHP studies in mAbs. And just for reference, that type of work for us is about $50,000,000 of our annual sales. In fact, total mAbs is only about 10% of our safety assessment work.

And so when you think about sort of jumping and assuming that you can translate the NAMs pilots and experience into other modalities, that's going to be a lot harder because small molecules and other more complex biologics, newer modalities, they are less predictable than mAbs. And so 85% of our revenue is in these other spaces. But again, we've been in this journey for a while. Our leadership in actually three Rs, which stands for Replacement, Reduction and Refinement and Ethical Use of Animals in Biomedical Research, is a staple of our history. And we've been investing in NAMS for decades.

In fact, last year, before all of this FDA announcement came about, we were formalizing our own efforts and investments with our AMAP initiative. And I just have it in this slide a couple of the examples of our partnerships and investments in this space through computational modeling in our partnership with Valo and the Logica platform or the acquisition of Retrogenics that focuses on cell microarray technology for off target screening and toxicity. More broadly, this is our view of the landscape. You can see on the left of the slide what are some of the established applications of NAMs. And again, think of NAMs as there is some in vitro ways to use these technologies in silico.

And then even in vivo ways to, as I said, from a 3Rs perspective, to get reduction or refinement of use of animals. And you can see that most of the applications, the current applications are in the discovery space, where as I said, we are trying to answer specific questions. And we have capabilities in all of them. As you move towards the right side of the slide, where you have some emerging opportunities, again, most of it is still being applied to discovery. And then when you get to the future exploratory use cases, I think that's where it's a little bit more still science fiction right now in terms of whole body on a chip.

These things don't exist yet, and they're not being used today. They're more of a theoretical way to evolve. So that's our perspective on NAMs. I want to just wrap up with the last segment, which is our Manufacturing Solutions business, where we actually have three distinct businesses. The first one is our Microbial Solutions offering, where we are a leader in fast and efficient detection and lot release testing.

We also have a biologics testing business, where we do characterization testing and cell bank manufacturing for biologic compounds. And then the last segment is our CDMO in cell and gene therapy, where we focus on gene modified cell therapy, but we also have some offerings in plasmids and viral vectors. From a long term growth drivers perspective, microbial, there is a lot of runway for growth there. This type of rapid testing that we offer is only 10% adopted. Most of the LAL testing is still some of the, let's say, older, more traditional testing methods.

So you can see that as we continue to transition clients into rapid methods, it's a great opportunity for us, given that this model is a bit of a razor, razor blade construct, where you buy our equipment and then you buy the cartridges. So 70% of revenue of our revenue in microbial is from that recurring revenue stream of the cartridges. In Biologics testing, attractive long term growth opportunities as we're going to continue to test and manufacture, especially some of these new advanced modalities. But also what's been interesting to see is with some of the more recent commitments from pharma companies to bring back manufacturing into The U. S, and I think the last time I counted is over $150,000,000,000 That is also going to offer us, maybe three, four years from now, a great opportunity to help those sites get online and do a lot of the quality testing for them.

And then also, similar to DSA, we'll look at partnerships and new technologies like next generation sequencing to augment our portfolio. But we haven't also been asleep from a margin perspective. I talked about how margin has eroded for the last couple of years. And that's part of in our business, when you have declining revenue, is obviously hard to protect margin. But we really have taken decisive action to manage through this challenging environment with constrained demand, focusing on enhancing our commercial efforts, aggressively managing our cost structure and then thinking of how we might allocate capital strategically, maybe in a different way than in the past.

And as a result of this focus, we saw our capture rate in the proposals in our safety space, for example, increase 300 basis points in 2024 versus 2023 when you look year over year average. From a cost perspective, we have implemented rightsizing of our workforce and then restructuring of our footprint that will generate over 5% of cost savings. And then finally, we're balancing our capital allocation with execution of stock repurchases, which we hadn't done in a while. Speaking of capital allocation, we obviously have a balanced approach and continue to optimize our capital deployment. When we think about capital expenditures, we modulated the level of investments that we've done.

We also, as I said, reinstated stock repurchases. And we'll continue to look at strategic M and A as a priority, but we're obviously mindful to doing that in a way that we maintain reasonable debt levels. So to conclude, we're confident that we're going to emerge from this period of softer demand as a stronger and more agile organization. We took these actions to optimize our cost base, to selectively repurchase stock and to remain disciplined in how we deploy our capital, so that we can enhance shareholder value. And once the demand returns, we believe that this leaner organization, fitter organization that we now are, we'll be able to capitalize on the increased demand and drive profitable growth and shareholder value in the future.

Thank you very much.

Max Machen, Research Analyst, William Blair: All right. Thanks, everyone. I know we have a minute or two here, but I think we're gonna go ahead and wrap it there and take the, take the group up to the Second Floor again. As a reminder, the breakout will be in Maher. It's on the Second Floor, Breakout Room in Maher.

We'll see everybody up there in about ten minutes. Thank

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