James Foster
Chairman, Chief Executive Officer & President at Charles River Laboratories International
Good morning. Our strong third quarter results demonstrate the effectiveness of our strategy and the progress we've made on it's execution as well as the sustained strength of the industry fundamentals. As anticipated, third quarter revenue increased at a low teens rate organically and we reported mid-teens earnings per share growth.
We believe that Charles River is a stronger company today than it has ever been. We have seen unprecedented demand across most of our businesses and we believe that this, coupled with the strength of our leading nonclinical portfolio, will enable us to achieve our low double-digit organic revenue growth target over the longer term as well as in 2022. As a result, we are continuing to invest to add people and capacity to accommodate growing client demand and to build a scalable operating model; to enhance our scientifically distinguished portfolio; to strengthen our relationship with clients and to work with them to devise outsourcing solutions which enable them to increase productivity and speed to market. We have maintained our focus on nonclinical drug research and manufacturing solutions, strategically expanding our portfolio to provide clients with the critical capabilities they require to discover, develop and safely manufacture new drugs.
Last month, we divested our RMS operations in Japan and our CDMO site in Sweden for a total of approximately $115 million plus potential contingent payments of up to an additional $25 million. We routinely evaluate the strategic fit and fundamental performance of our global infrastructure for acquisitions and legacy sites alike and have sold or closed operations that didn't meet our key business criteria or may have been underperforming financially. The decision to divest these two operations was consistent with our evaluation process and we intend to redeploy the capital in other growth areas of our business.
Moving to the third quarter; highlights of our financial performance are as follows. We reported revenue of $895.9 million in the third quarter of '21, a 20.5% increase over last year. Organic revenue growth was 13.6% with each of our business segments contributing a strong performance. Last year's COVID impact resulted in a modest 170 basis point increase to organic revenue growth. From a client perspective, biotech's continued to drive revenue growth with global biopharmaceutical clients also making solid contributions to the quarter. Third quarter reported revenue growth was affected by a $10 million foreign exchange headwind compared to our prior outlook. Notwithstanding the FX impact, we continue to see strong sustained client demand across most of our businesses with trends largely consistent with the first two quarters of this year.
The operating margin was 21.4%, a decrease of 130 basis points year-over-year. As anticipated, the decline was primarily driven by the comparison to the strong third quarter of last year which benefited from COVID cost controls, as well as the impact of the Cognate and Vigene acquisitions on the Manufacturing segment's operating margin. With an operating margin of 21% through the first nine months of the year, we are squarely on track to achieve our goal of approximately 21% for 2021 which represents a 100 basis point increase over the prior year. This also demonstrates our commitment to driving efficiency and achieving our longer-term margin target of 22.5% in 2024.
Earnings per share were $2.70 [Phonetic] in the third quarter, an increase of 15.9% from $2.33 in the third quarter of last year. This result was favorable to our prior outlook due in large part to a lower-than-expected tax rate. David will provide some additional details on the tax rate shortly. With the sustained strength of the demand environment, our revised financial guidance for '21 reflects three primary factors: unfavorable movements in foreign exchange, a lower tax rate and the divestitures. Reported revenue growth was lowered by approximately 150 basis points at midpoint to a range of 19.5% to 20.5% to primarily reflect current FX rates as well as the impact of these RMS Japan and CDMO Sweden divestitures. We have narrowed our organic revenue growth outlook to 13.5% to 14.5% with approximately 275 basis points of this increase generated by the comparison to last year's COVID-19 impact.
Normalized organic growth is expected to be squarely in the low double-digit range this year and that is consistent with our targeted growth rate next year as well. We also narrowed non-GAAP earnings per share guidance to a range of $10.20 to $10.30 which represents just over 25% year-over-year growth. We are pleased to have maintained our EPS growth within the previous range even after absorbing the impact of the divestitures. I'd like to provide you with details on the third quarter segment performance, beginning with the DSA segment. DSA revenue in the third quarter was $531.8 million, a 13% increase on an organic basis with strength in Safety Assessment, including lab sciences and bioanalytical services and Discovery Services.
Demand for our services and price increases are driving low double-digit organic growth in the DSA segment which is a trend that we expect to continue into next year. Biotech clients are leveraging our expertise rather than investing in internal capabilities. And global biopharmaceutical clients are choosing to partner with us because it's more efficient to leverage our flexible infrastructure instead of maintaining or expanding their own. We believe we have become the principal partner of choice for biotech clients of all sizes. Demand for our services is high because the sustained level of biotech funding is enabling clients to meaningfully invest in early-stage research at an accelerated pace and because they don't have the internal capabilities to do the type of work that we perform for them.
To meet our clients' growing needs, we have focused our business on unmatched scientific expertise; rapid turnaround times; flexible, creative solutions; and the ability to accommodate the increasing complexity of our clients' research programs. The Safety Assessment business continued to perform very well in the third quarter and bookings and proposal volume continued to track at record levels. As we have mentioned throughout the year, clients are choosing to book their safety assessment studies further in advance which enhances their ability to start working with us as soon as their molecules are ready. These early bookings which now extend well into 2022, translate into greater visibility and a stronger book of business for us.
The strong demand for our services requires us to closely manage the current workload by adding staff, capacity and other necessary resources while managing the continual shifts in client time lines and study protocols that are associated with booking work further out. Because of our client-focused business approach, we believe we can balance their priorities and our capabilities effectively, making Charles River an even more indispensable research partner to clients, both large and small. We are also making progress on our goals to continually improve our connectivity with clients, including through digital enhancements, as we strive to take an additional year out of our clients' drug development time lines.
The Discovery business had a strong year driven by our comprehensive portfolio of oncology, CNS, early discovery and antibody discovery capabilities. Biotech clients continue to choose to invest in their pipelines instead of infrastructure and utilize our integrated services to move their programs forward. Global biopharmaceutical companies are continuing to increase their reliance on outsourcing strategies for their discovery programs because they prefer to leverage our cutting-edge and industrialized discovery capabilities and flexible solutions to create a more efficient R&D model. We are pleased to be working with both biotech and global biopharma clients, partnering with them to discover, develop and bring critical therapies to patients who need them.
To support the robust demand from these clients, we will continue to strengthen our portfolio by expanding our scale, our science and our innovative technologies through a combination of internal investment, M&A and our strategic partnership strategy. By doing so, we are enabling our clients to remain with one scientific partner from target identification through IND filing and beyond and solidifying our position as the leading nonclinical CRO. The DSA operating margin decreased by 90 basis points to 24.3% in the third quarter but increased sequentially. The year-over-year decline was due to foreign exchange which reduced the DSA operating margin by approximately 70 basis points; and a Discovery milestone payment which contributed 50 basis points to last year's DSA operating margin.
RMS revenue was $171.3 million, an increase of 10.7% on an organic basis over the third quarter of 2020 with approximately 200 basis points of the increase attributable to the comparison to last year's COVID-related revenue impact. The RMS performance largely reflects the trends that we have experienced all year: robust demand for research models, particularly in China; broad-based growth across Research Model Services, partially offset by continued headwinds for the cell supply business. The Research Model business continued to experience strong double-digit growth in China as well as solid performance in North America which we believe correlates with the increased level of nonclinical research activity that's being conducted by biopharmaceutical and academic clients. We believe the global focus on scientific innovation is sustainable and will continue to drive client demand. However, the biopharmaceutical market in Japan has not participated in this trend. As a result, we chose to divest our RMS operations in Japan with an opportunistic sale to The Jackson Laboratory. We have established a licensing agreement under which JAX will produce and distribute our models in Japan.
Research Model Services performed very well. GEMS is benefiting from strong outsourcing demand as our clients seek the greater flexibility and efficiency they gain when we manage their proprietary model -- colonies. The greater complexity of scientific research and the proprietary models that our clients are creating further reinforce the value proposition for the GEMS business. Our clients' need for greater flexibility and efficiency is also driving demand for our Insourcing Solutions or IS business, particularly our CRADL initiative which provides both small and large biopharmaceutical clients with turnkey research capacity at Charles River sites.
Last month, we announced the expansion of our CRADL footprint in the Boston/Cambridge biohub and we'll continue to expand in other regions, including our South San Francisco -- in South San Francisco to provide a flexible capacity solution for our clients globally. Utilizing CRADL also provides clients with collaborative opportunities to seamlessly access other Charles River services which further enhances the speed and efficiency of their research programs.
The cell supply business which consists of HemaCare and Cellero, continues to be affected by limitations on donor availability as it has not fully recovered from last year's COVID-related restrictions. We have implemented several improvement initiatives, including expansion of donor capacity across multiple sites, productivity initiatives and enhancing the digital engagement with donors. We anticipate that revenue will improve in the coming quarters because the robust demand in the cell therapy market sector remains firmly intact.
The RMS operating margin decreased by 160 basis points year-over-year to 26.1%, primarily due to the cell supply business. Like many of our businesses, cell suppliers leveraged to sales volume, so we expect profitability will meaningfully improve once donor availability and the growth rate rebound. Revenue for the Manufacturing segment was $192.9 million, a 19.1% increase on an organic basis over the third quarter of last year. The increase was primarily driven by continued strong double-digit revenue growth in both the Biologics Testing Solutions and Microbial Solutions businesses as well as approximately 350 basis points attributable to the comparison to last year's COVID-related revenue impact. Microbial Solutions growth rate in the third quarter remained well above 10%, reflecting strong demand across our portfolio of critical quality control testing solutions.
We were pleased with the strength of the underlying demand for our endotoxin testing systems and cartridges which perform FDA-mandated lot release testing on injectable drugs and medical devices. The advantages of our comprehensive portfolio continue to resonate with our clients and we believe that our ability to provide a total microbial testing solution will enable Microbial Solutions to deliver at least low double-digit organic revenue growth for this year and beyond.
The Biologics Testing business reported another exceptional quarter of strong double-digit revenue growth. Robust demand for cell and gene therapy testing services continued to be the primary growth drivers, with COVID-19 vaccines and traditional biologics also being meaningful contributors. We believe cell and gene therapies will continue to be significant growth drivers over the longer term to support our 20% growth target for this business. The strength of the demand for these services necessitates that we continue to build our extensive portfolio of manufacturing services to ensure we have available capacity to accommodate client demand.
The third quarter marks the first full quarter that Cognate and Vigene were part of Charles River. As anticipated, when we acquired Cognate, a large COVID-related project was completed in the second quarter and we are actively adding new projects in it's place. We continue to make great progress on the integrations and believe our cell and gene therapy CDMO business will be highly complementary to our Biologics business and our portfolio as a whole. We also believe that we now have a comprehensive cell and gene therapy portfolio which spans each of the major CDMO platforms: gene-modified cell therapy, viral vector and plasmid DNA production. Our goal is to enable clients to conduct analytical testing, process development and manufacturing for these advanced drug modalities with the same scientific partner, allowing them to achieve their goal of driving greater efficiency and accelerating their speed to market.
As mentioned earlier, the decision to divest our CDMO site in Sweden was based on several factors. First, it's capabilities, including plasmid DNA, were already duplicated at other CDMO sites in the U.K. and U.S. Second, we determined it would be advantageous to invest in and expand capacity at our other CDMO hubs that are more centrally located and proximate to clients. And finally, this was our smallest and least profitable CDMO site. This divestiture does not reflect any changes in client demand or the cell and gene therapy CDMO sector as we firmly believe the growth profile for this business remains at or above 25% over the longer term.
The Manufacturing segment's third quarter operating margin declined by 640 basis points to 32.7%. The primary driver of the decline was the inclusion of both Cognate and Vigene for the full quarter. These businesses are profitable but their margin is below the overall Manufacturing segment. As noted last quarter, we continue to expect the full year Manufacturing margin will be slightly below the mid-30% range, reflecting the addition of the CDMO business. However, beyond 2021, we expect this headwind to gradually dissipate as we drive efficiency and as the significant growth we anticipate generates greater economies of scale and optimizes throughput at our CDMO sites. We are operating in a robust business environment with excellent growth potential. Biotech funding in 2021 is continuing to track at or above the robust pre-COVID levels. The sustained funding environment both from the capital markets and the biopharmaceutical industry and the biotech industry's cash reserves are enabling an accelerated pace of scientific innovation. Clients, both large and small, view us as their partner of choice from concept to nonclinical development, to the safe manufacture of their life-saving therapeutics.
To continue to successfully execute our strategy to maintain and enhance Charles River's position as the leading nonclinical CRO and accommodate our clients' growth needs, it's essential that we continue to make investments in our scientific capabilities through M&A, technology partnerships and internal development; enhance our digital enterprise to provide real-time access to critical data for both internal and client use; and also to expand our capacity and staff.
Demand for our services in the current market environment has outpaced our expectations and we have been hiring ahead of our initial plan this year to accommodate this growth. We have hired 4,000 talented people this year to both support growth and offset attrition and plan to hire an additional 1,000 people in the fourth quarter. We believe we attract qualified employees because of our mission and the critical work that we do to help our clients develop life-saving therapies distinguishes us from other companies. For a business like Charles River, staffing is a consistent challenge on which we have placed a disproportionate focus. We believe we are effectively managing staffing levels, including increased costs and we will continue to be thoughtful with respect to compensation heading into 2022 as we strive to maintain or reduce turnover and remain competitive in the marketplace. It will be a headwind but one that will help us to support the robust client demand and achieve our low double-digit organic growth target that we expect in 2022.
By focusing intently on our strategy, we have become a trusted scientific partner for pharmaceutical and biotechnology companies, academic institutions and government and nongovernment organizations worldwide. We have demonstrated the value we can provide to clients and believe that is why they have trusted us to work on more than 80% of the drugs approved by the FDA over the last three years. We believe that our steady focus on our strategy to continue to enhance our portfolio will enable us to continue to achieve our long-term financial targets and deliver greater value to shareholders.
In conclusion, I'd like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment.
I'll now ask David to give you additional details on our third quarter results and updated 2021 guidance.
