CRL
#Given my nationality, maybe I will make a comment on the Brexit.
And as you mentioned we gave you some of the immediate implications to Brexit being the impact on the foreign exchange.
In terms of looking forward, it's still early stages in the UK.
My personal belief is that as each week passes, I think it begins to stabilize a bit.
I think, Prime Minister May has done the right thing in terms of not signing article 50 until she's got her ducks lined up.
And I think it's becoming a much more thoughtful approach to the exit than I think it was looking like a few weeks ago.
And while we're involved in a number of industry workshops in the UK, just to quote a couple, The Association of British Pharmaceutical Industry is one, the Bioindustry Association is another, and we have a seat at the table of these associations, and they have been formally asked to look into the implications of the EU, UK exit, and I think that the workshop called the Life-Sciences Transition Group, which is giving some advice to the British government.
So, and of course we are keeping closely aligned with tax advisers, banks, and others to assess the impact on tax, trade, imports and regulatory methods.
I've got a caveat, of course it's early days, but from what we're picking up, for our industry, the impact of Brexit should be a lot less than many other industries.
The mood music at the moment seems to be that this may not be cause for major concern in our sector.
That said, I do want to caveat that it's still early days and of course there's still plenty of room to go, and get things wrong.
But it looks good at the moment.
I assume you are asking principally about safety.
Let me just, so I'll comment on that first.
We're continuing to get 5% increase over prior year.
Which we are pleased with.
We have a very healthy mix of general and specialty toxicology which also benefits margins.
And our efficiency initiatives have been quite powerful as well, so we're really pleased with how nicely we've, continuing to drive margin, and the space stays relatively full.
When I say relative I'm talking about all of our competitors and clients as well.
But, space seems fuller than it has been in years.
So, as space continues to be relatively full, we have some level of confidence we will be able to continue to get price.
And, so, we're pleased with the value proposition given the level of our investment and the quality and complexity of the work that we are doing.
So far prices are 5% over last year.
So, we'll start with the last part first.
You should think that having an operating margin over 35% is extraordinary, and we would love to do that on a continual basis.
It's not something we are ready to promise yet.
We, our longest term goals are to have operating margins in this segment in the low 30s which we have always done and are quite confident we can continue to do.
Obviously we are very serious about driving efficiency, and getting price when one can get it, and having new products and enhanced services.
So all I can say is our goal will be continue to drive those higher, and further, but I would have to stop short of promising that 35 is here to stay, although that would be our goal.
There's a lot of factors.
We had very strong productivity enhancements with our new manufacturing in our Microbial Solutions and improved inventory status so we just sold a lot of cartridges and a lot of handheld units.
That business has three parts, all of which are performing really well.
Our Celsis business is performing quite well, also at, or ahead of where we had anticipated.
Also as we said in our prepared remarks, our biologics business which is obviously driven by the increasing strength and availability, and success of new biologic drugs is really driving the demand for that sector so again our capacity utilization is good.
There is some price in there, and we are utilizing, we've got a very good mix.
We've made some investments in our facilities and I think those are bearing fruit.
We are quite confident in that segment's ability to grow at least in low double digits and certainly to have operating margins remaining at least at low 30s.
But as I said earlier we are really pleased with the quarter, and while we aspire to, we are not ready to commit to it.
Sure, <UNK>.
Well look on the capacity side, we work really hard with all of our businesses, to have capacity in sync with demand.
I should also say that we have some efficiency initiatives in place, and being further integrated into our operating modalities, such that I think we will be able to continue to use our facilities in a more efficient and more robust fashion, which should help to enhance our operating margins.
We are not concerned that we're not going to have enough space if that's part of your question.
So I'd say that the demand curve these days is driven by, we have price, we have a mix, with sales of inbred animals, and immuno-compromised animals and sort of higher value animals.
We definitely continue to take share, I would say generally, but perhaps more focused on the academic sector given our shares are very large in pharma.
We're getting significant increase in China, which is obviously a very large, very new and very large growth market for us, so we are going to continue to build space and service that locale from multiple geographies.
Many of those small cities there of course are more than 10 million people.
And we are getting some service revenue, which again, sometimes it's not as linear as we would like it to be, but some nice service revenue in our genetically engineered models business and our diagnostic business and our insourcing solutions business.
The business has stabilized, it is affected by large reductions in pharmaceutical infrastructure.
We saw a little bit of that in the second quarter, we saw virtually none of that in the first quarter, kind of hard to predict what we will see in the third-quarter but short of that, the business feels stable.
We are really pleased with the operating margins, and obviously pleased to kind of be at our longest term growth goals for the first and second quarter.
So we are quite confident we can continue to grow the business low double digits.
I would say that we had a little bit of a blip in the first quarter because we were changing over our manufacturing modality, in the Microbial Solutions business.
So that is unusual.
And I would say that businesses very unseasonal, if that's a word, it's quite consistent.
The biologics business is hard to predict from history, but I would say, tends to have a slightly softer first quarter usually, and then a better back half of the year.
But doesn't have the kind of seasonality related to holidays and summers that we typically see in the research model business, when people just don't buy animals because they won't be there to do research with and on them.
And the other piece in that sector which we didn't call out this quarter is smallish but nicely operating egg business which is, has a couple of clients that buy more at certain points of the year but I wouldn't say that from portfolio point of view is very seasonal.
I'd have to say that whole segment is not seasonally impacted much at all, and certainly not research models perhaps even the safety assessment business may or may not so that's a good thing.
There's lots of competitive, it's interesting, it's, at the moment our most profitable segment and a very high-growth segment on an organic basis, it's quite competitive.
We have lots of big competitors both in the biologics piece, companies our size or larger that are well-financed and do good work, and we have growing competition in the microbial space.
The distinction though, is that they tend to be siloed approaches for a lot of our competition.
These businesses are in a larger context, for us, so when you talk about revenue synergies, we have lots of pharma clients who buy a whole bunch of products and services from us, but also want us to help them with quality control aspects of the manufacturing facilities or testing drugs before they go into the clinic or after they go on the market.
And of course in the egg business the products are used to manufacture vaccines and a lot of our big pharma clients have veterinary pharmaceutical subsidiaries.
Sales synergy is quite good, although the microbial and biologic sales forces tend to be more technical and a little bit more siloed than some of our other sales organizations.
But there's still some connectivity.
Very strong segment for us that is quite consistent and quite predictable, and we really do think that without additional M&A, and there may or may not be M&A in that space we can continue to grow it, at least at low double digits and we will obviously work hard to continue to drive the margins up.
But as I said to an earlier question, while we strive to get to the mid-30s we can't promise that yet.
I had a little trouble hearing the question.
I don't think I know that off the top of my head.
Our biotech revenue is pretty substantial and there are thousands of clients that comprise that.
Yes we have lots of sales with a lot of the big players.
I won't mention any by name even though you did.
But we have a lot of virtual biotech companies and we have a lot of what I would call kind of second-tier biotech companies that are public, that have substantial market caps that are in late phase 3 or have their first drug in the market and look like they'll have serial one.
We called out Moderna in a press release recently which is a very hot technology that cuts across multiple therapeutic areas.
And again, we don't have any clients, even our biggest pharma clients, that comprise more of the 5% of our revenue.
Look, there's going to continue to be churn in our client base, there has been forever, <UNK>, forever.
And our biotech clients will merge with one another and get bought, and occasionally some will go out of business, and every year hundreds more will start up.
Look, so all we can do is do the best quality work for them and even if companies get bought, it's likely that the buyer is a Charles River client and it's likely that we will continue to have the work.
Every once in a while we are going to have, whether those big biotech companies get bought by big pharma companies, that maybe does less with us than others, that would be a good thing as well.
While anything can be disruptive for a very short period of time, we think it all gets sort of meted out in the scale of the work that we do.
We are confident that we will continue to get appropriate levels of enhanced price in our safety assessment business, commensurate with the demand and available capacity the complexity of the work that we do, and the synergies that we have with other lines of business.
All of it is subject to the long and short-term contracts that we have with clients.
We have different pricing modalities with all of them.
We have seen a classic and appropriate supply and demand curve here, as our spaces fill over a number of years.
You have been on this journey with us, and we are essentially full.
Appropriately full now.
We're using our facilities well.
We acquired a little bit of incremental capacity with WIL, and of course we have opened a little bit of incremental capacity with Massachusetts, and a couple of other sites, both last year and a little bit this year, that, I think as long as the demand is persistent, and we are able to accommodate it with the appropriate amount of increased capacity and we don't have large amounts of unused space that we would be able to get, continue to get price.
And then clients are very interested in, particularly the big ones as they shut down space and having access to us as the, particularly as the studies get more complex, access to us, helping them design the study and interpret it.
Hard to phrase what I'm about to say but I would say that price continues to be important but I would say it's often less emphasized than it was in prior years.
That everyone is really interested in quality of work in science, speed and responsiveness, I would say, and collaboration kind of, second, third, and fourth, and while price is in the mix, we rarely start conversations that way.
I'm sure we do sometimes.
It's not the principal focus, and I think that's obviously a good thing, and it's an appropriate thing given the level of our investment in the fact the clients are increasingly relying on us.
Yes so we have a wide range of clients in our discovery business from the very biggest pharma companies to start up biotech and everything in between.
I wouldn't say it's particularly focused upon or used more widely by any particular segment of clients.
Our very, very early discovery assets are small molecule-based.
So maybe there are less classic biotech companies in that segment.
We are seeing enhanced interest in our discovery capabilities.
We called out some integrated deals which we recently signed in three therapeutic areas.
We are working really hard on those.
We have lots of conversations like that ongoing with large and small clients.
It's very complicated scientific fields that tend to be multi year and multi million dollar deals.
Sometimes there are milestones, sometimes there aren't.
And we are working hard to be able to sell across that whole discovery portfolio, not just the in vivo piece but in vivo and in vitro and we're also working hard to have pulled through from discovery into safety, which sometimes happens, eventually happens.
We do the discovery work and then the drug is looking good and the client uses us for safety assessment.
Our aspiration is to have those conversations up front.
Some clients will contract that way and others won't.
Some of the integrated work is a lot longer sell than we had originally anticipated.
That's okay.
And a lot of it just has to do with educating the client base that our services are available and the nature of them.
They tend to be very highbrow scientific conversations between our scientists and the clients' scientists.
So the sorting out how we can help them and what we can do for them that they can't do themselves.
I would say the sale is among the most complex that we have, and to that point we have a very sophisticated sales organization.
Most of those people are PhDs so we are going toe to toe with our clients.
We are pleased with the trajectory and the potential and some of the recent wins that we have had.
Yes, as I said to the last questioner, the sell takes a while and we really have to have time to go in, so while I keep using the word sale, its way more sophisticated than that.
So you're really going in and saying, look, we have the scientific capabilities which we believe, if you need them, can be quite helpful to you.
Sometimes the initial feed back is, yes, we do discovery, why on earth would we need you, thanks for coming.
But often when we dig down and we tell them we've found 65 development candidates, a third of which have gotten proof of concept working through the clinic, their eyes open up and we talk about the therapeutic areas where we have had success.
We have a lot of clients that some of our discovery capabilities are what I would call industrialized aspects of some of the things that they do, but we do on a more routine basis, and we do more efficiently, and I would say that we do actually better science because we do more of it.
When you get the client to listen, I would say, look, increasingly clients are more collaborative and open-minded, and are looking for any edge they can get, with anyone, whether it's another pharma collaborator, an academic collaborator, or a CRO collaborator, who will help them either discover something or enhance something that they've discovered or help them develop it, either to elimination, or to move it through the clinic.
So I would say that clients are increasingly more open and interested in hearing our story and as the discovery portfolio gets larger, and we have greater therapeutic area coverage, and of course we start quite early in that process.
There is more to talk to them about and I've always thought that a critical mass is important for us to get their attention and I think we are doing that, increasingly doing that well.
Particularly for clients who are now working across our portfolio, starting with them and discovery, particularly for the smaller clients is really magic, because they tend to stay with us during the lifecycle of that drug and perhaps additional drugs coming down the pipeline.
Little bit hard to do.
The research model business, the research model, so the RM part of RMS, we're getting 2% to 3% price, and I would throw mix into the pricing comment as well.
We have higher value animals.
That's playing through there, you get a little bit of share gain.
You've got pure, de novo available business in China, so you just have market availability which is increasing all the time.
And then the service business, I would say, we have slightly less pricing activity in the service business, but the volume has increased nicely over the prior year.
So kind of all of those things in the aggregate give us that 4% increase.
I think you asked a couple of questions.
We continue to be interested in expanding our portfolio, strategically, and scientifically.
So we are both more important and more helpful to our clients.
And as we said many times before we are emphasizing discovery.
We are interested in probably in vitro capabilities.
There are some geographic areas of interest for us and we would not foreclose expansion in any of our current businesses that are growing.
I would also say that we have an extremely active and robust M&A operation and we have several deals in which we are in discussions at the moment.
But that's sort of always the case with us.
But we are very focused and there are a lot of things available at the moment.
So as we delever, as we promised, and get below three turns, you should not be surprised if we do something meaningful.
I would use the term meaningful to describe something not gigantic, but meaningful that it moves the top and bottom line and also gets us service capabilities that our clients like.
Specifically on the safety assessment side which you asked about, all I can say is that all of our competitors, including WIL, which we bought, but all of our competitors traded in the last two years, three of them traded in the last 12 months.
Several of them have traded to private equity, which means that sometime in the future they will be available again.
And I couldn't really comment, I wouldn't comment anyway but I really couldn't comment on what we may or may not do in that space.
It will depend on if and when those markets, when those businesses come to market, and how strong the demand curve is then.
I wouldn't rule anything out.
If it could help us support our clients in a more holistic way.
You said discovery so I'm going to assume that you were talking about discovery and not safety.
I would say that with a big pharma companies, more of the activities that they periodically do, so good example would be in our oncology franchise, we do something called zenographs, which we put human tumors into immuno-compromised animals.
So, in some of the big drug companies where they're doing cancer research, they will do that themselves, but they kind of do it periodically, and, not the best use of their time or their people and while it's not trivial, and it's reasonably complex, it's much better in our hands where we do lots of that were lots of clients.
That's an example of something that even the big drug companies say, well fine, why don't you do that for us because you do that better and more efficiently.
I would say small clients, we can help them with target identification and enhancing their targets.
We can help them with the medicinal chemistry and we can certainly help them with the in vitro and in vivo aspects of our business.
I would say that our discovery assets are appropriate for clients large and small.
It really depends on their view on outsourcing.
I would say that almost all of our big pharma clients are increasingly more open and interested and actively doing outsourcing.
There are a few that remain reluctant to do that, but they're, you can see they are beginning to think about it.
So the client base, both large and small, will be significant and I continue to believe that the scale and depth and complexity of our portfolio and our ability to explain it to clients and sometimes link it with our safety assessment businesses or our Biologics business will be very increasingly more important to our clients.
Safety, look, is very much outsourced already.
At least 50% of the work is outside.
I know of only one big drug company that does long-term tox studies internally.
A lot of them do the early stuff internally, but even that, they are doing less of.
And of course almost all of the biotech companies have no toxicology facilities and no interest or capability or need to do that.
We feel that the outsourcing volume will over time, go from 50% or maybe 55% to 75% or 85% or higher.
And the only thing that would retard that growth is lack of capacity or staffing, neither of which we intend to have a problem with.
It's a scientific activity that's highly regulated, that we do better than the clients, and we do a lot more of it than the clients, and we do it in multiple geographic locales, so it's quite, we are quite confident that work will continue to be outsourced.
Thank you for joining us this morning.
We look forward to seeing you next week in New York at our meeting with Management.
This concludes the conference call.
Thank you.
