Charles River Laboratories International Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories 4th Quarter and Full Year 2022 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and good morning, and welcome to Charles River Laboratories' 4th quarter and full year 2022 earnings and 2023 guidance conference call and webcast. This morning, I am joined by Jim Foster, Chairman, President and Chief Executive Officer and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the Q4 of 2022 as well as our financial guidance for 2023. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.seariver.com.

Speaker 1

A webcast replay of this call will be available beginning approximately 2 hours after the call today and can be also accessed on our Investor Relations website. The replay will be available through the next quarter's conference call. I'd like to remind you of our Safe Harbor. All remarks We make about future expectations, plans and prospects for the company constitute forward looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated.

Speaker 1

During this call, we will primarily discuss The non GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. I will now turn the call over to Jim Foster.

Speaker 2

Good morning. Before I speak about our strong 4th quarter results, On February 17, we received a subpoena from the U. S. Department of Justice relating to an investigation into the Cambodian NHP supply chain. We have been informed that this investigation relates specifically to shipments of NHPs received by Charles River from our Cambodian supplier.

Speaker 2

We intend to fully cooperate with the U. S. Government. Once the Department of Justice concludes its investigation, we believe it will find that any concerns With respect to Charles River, Fully compliant with all U. S.

Speaker 2

And international laws and regulations, and we maintain risk based supplier due diligence, Audit and management practices to help ensure the quality of our supplier relationships and compliance of applicable laws, including the status of the NHPs we import. Based on ongoing investigations and the heightened focus on the Cambodia NHP supply chain, in recent months, we have voluntarily suspended planned future shipments The Cambodian NHP until such time that we in the U. S. Fish and Wildlife Service can develop and implement new procedures To reinforce confidence, if the NHP's we import from Cambodia are purpose spread. This will take time to implement and the duration of which is unknown.

Speaker 2

The investigation and current NHP supply situation will result in study delays and our Safety Assessment business. By way of background, NHP is the most scientifically relevant large model for the regulatory required Safety testing of biologics drugs as mandated by the FDA and other international regulatory agencies. Biologic drugs cannot be approved for commercial use without NHPs. And given the proliferation of biologic drug development activity in recent years, NHPs have been in high demand. As an example, all of the COVID-nineteen vaccines developed in the United States In Europe, utilized NHP's.

Speaker 2

In recent years, NHP sourced from Cambodia had been responsible for approximately 60% of the NHP supply to the United States and to Charles River for drug research and development. While there is no other near term global source to We are continuing to actively work to diversify our NHP supply chain. It's critical that we work diligently to resolve the NH fleet supply situation and collaborate with all agencies of the U. S. Government, including the U.

Speaker 2

S. Fish and Wildlife Service to restore this important supply chain because the U. S. Pharmaceutical industry And the patients who need new life saving treatments are counting on us. The current Cambodian NHP supply constraints And the corresponding impact to our Safety Assessment business are expected to reduce our consolidated revenue growth forecast by approximately 200 basis points to 400 basis points this year, resulting in organic revenue growth guidance of 4.5% to 7.5 and $0.06 for the total company.

Speaker 2

The non GAAP earnings per share are expected to be in a range of $9.70 to $10.90 in 2023 with the wider ranges encompassing a number of scenarios related to the timing of the resumption of Cambodian NHP imports this year. The top end of our guidance Ray, just anticipate that we will have Cambodian NHP available for studies in the Q4, whereas the bottom end of our guidance Assumes that we will have no Cambodian NHP imports for the remainder of 2023. In either case, we expect Several non operating items are significantly affecting the year over year earnings per share comparison in 2023, including higher interest expense, a higher tax rate and the divestiture of our Avian vaccine business, which was completed in December. These items will generate a combined earnings per share headwind of $1.20 to $1.40 in 2023, partially offset by up to $0.25 benefit from foreign exchange. Flavio will discuss these items in more detail shortly.

Speaker 2

Now I'll speak with you about an outstanding finish to another strong year for Charles River. We reported robust operating In 2022, highlighted by 13.4 percent organic revenue growth against the backdrop of escalating macroeconomic pressures. 2022 performance demonstrates the continued execution of our strategy, which enables us to enhance our position as a scientific partner of choice to accelerate biomedical research and therapeutic innovation. Let me give you the highlights of our Q4 and full year performance. We reported record quarterly revenue of $1,100,000,000 in the Q4 of 20 $22,000,000 exceeding the $1,000,000,000 mark for the first time and representing an increase of 21.5% On an organic on a reported basis, organic revenue growth of 18.8% was driven by increases from all three business segments In the second half, DSA organic growth rate rose to 23.6% as we exceeded the second half growth acceleration that we had forecast since the beginning of last year.

Speaker 2

For 2022, revenue was $3,980,000,000 with a reported growth rate of 12.3 percent and an organic growth rate of 13.4%. The revenue growth rates exceeded the top end of our guidance range by 140 basis points, driven primarily by outperformance in both the Discovery and Safety Assessment businesses. The operating margin was 20.4% in the 4th quarter, a decrease of 50 basis points year over year, driven primarily by the Manufacturing and RMS segments. For the full year, the operating margin was unchanged at 21%. We are pleased to have held the operating margin steady In a year with substantial cost inflation and the CDMO business generated significant margin pressure.

Speaker 2

Earnings per share were $2.98 in the 4th quarter, an increase of 19.7% from $2.49 in the Q4 of 2021. For the full year, earnings per share were $11.12 a 7.8% increase over the prior year. We exceeded our last guidance range of $10.80 $10.95 due primarily to the robust 4th quarter revenue growth, particularly in the ESA segment. We believe our 2022 performance thoroughly demonstrated the successful execution of our strategy Our exceptional market position, unique early stage focus and our large diversified client base We have confidence that many of the underlying business trends will remain intact in 2023. I'd like to provide you with additional details on our 4th quarter segment performance and our expectations for 2023, Beginning with the DSA segment's results.

Speaker 2

DSA revenue in the 4th quarter was $691,700,000 A substantial 26.5 percent increase on an organic basis. The Safety Assessment business continued to be the principal driver of BSA revenue growth with significant contributions from study volume, pricing and NHP pass throughs in order of magnitude. As we have often mentioned, our business is now linear. In this case, the record 4th quarter DSA revenue growth was When the business experienced some resource constraints, including staffing, the Discovery Business Services growth rate also improved in the quarter. For the full year, DSA organic revenue growth was also a record 17.5%, exceeding our midterms outlook.

Speaker 2

As of year end, the DSA backlog has increased 32% year over year to $3,150,000,000 The backlog remained robust in 2022 and continues to support a long growth runway and also normalized During the year as expected, because the backlog duration stabilized after substantially elongating in prior years. We are continuing to see broad based and sustained client demand across our Safety Assessment business as we have the staffing and capacity To accommodate this client demand, the current NHP supply situation may restrict the revenue growth rate and margin expansion in 2023, But the underlying strength and resilience of demand environment and pricing should afford us with healthy DSO growth Once the NHP supply situation is resolved and we have an adequate supply of these large models. The Discovery Services business had a good quarter with improvement in the revenue growth rate from the 3rd quarter level. Many of our clients who previously We've lengthened the time frame since that new projects move forward with their programs in the 4th quarter. Discovery booking and proposal activity also support a healthy growth profile as we begin 2023.

Speaker 2

In order to strengthen our position as a single source partner to support our clients' early stage research needs, We continue to expand our discovery capabilities through our technology partnership strategy and through M and A. We achieved both with SanviTech, which we acquired in January. We established an initial partnership with SanviTech in 2018. And we were able to validate their proprietary mass spectrometry technology for label free high throughput screening with our clients. During the partnership, we determined that Sanvitec's cutting edge technology Was increasingly favored by clients to accelerate their timelines and reduce the costs required to identify a lead drug candidate And made critical gono go decisions earlier.

Speaker 2

As a result of the successful partnership, we mutually agreed to have Sanvitec join Charles River. Partnerships and acquisitions like this advance our ongoing efforts to build our scientific expertise for the discovery of novel therapeutics and strengthen our discovery toolkit by adding cutting edge capabilities to enable clients to work with us for a single project or on an integrated program in a flexible manner tailored to their specific outsourcing needs. The DSA operating margin was 26.3% in the 4th quarter, A 3 20 basis point increase from the Q4 of 2021. For the year, the DSA operating margin increased by 160 basis points to 25.3%. Both increases were driven primarily by operating leverage associated with the meaningfully higher revenue in the Safety Assessment business.

Speaker 2

RMS revenue in the 4th quarter was $196,100,000 an increase of 10.8% on an organic basis. For the year, RMS organic Revenue growth was 9%, squarely in line with our outlook of high single digit growth in 2022. Accelerating growth for Research Model Services, particularly our CRADLE initiative and research models in North America and China drove the exceptional RMS revenue growth rates for the Q4 and full year. We also continued to benefit from meaningful price increases, which were implemented in part to offset inflationary cost pressures. We expect similar trends will drive high single digit organic growth again in 2023.

Speaker 2

In the Research Model business, North America continued to generate strong revenue growth And China, although reporting a double digit increase, experienced a modest impact from an increase in COVID cases during the Q4. The expansions of the Central, Southern and Western regions of China are progressing well And each new set is operational with 2 sites already shipping research models. This will enable us to continue to generate robust double digit growth in China Gain additional market share. Research Model Services also continued to perform well with broad based growth Across Insourcing Solutions and GEMS in the Q4 and for the year, growth was primarily driven by Insourcing Solutions Credible operations or Charles River Accelerator and Development Labs, including last year's Explorer acquisition. Clients are increasingly adopting this flexible model to access vivarium space without having to invest in internal Explorer continued to perform very well and the combined cradle footprint now encompasses 28 vivarium facilities Totaling over 380,000 square feet of turnkey rental capacity, Cladal and Explorer provide us with a new and unique pathway to connect with clients in earlier stages, enabling these clients to invest in their research and not in infrastructure, preferring to leverage Charles River's broader capabilities to continue to advance their research.

Speaker 2

The RMS Operating margin declined by 4 20 basis points year over year to 22.7% in the 4th quarter and by 2 10 basis points to 25.2 percent in 2022. The declines were primarily attributable to 53rd week, which has a greater impact on the RMS segment headwinds from expansions of our Cradle and Explorer operations And new RMS sites in China and also a modest COVID impact in China, we anticipate that each of these factors will either be eliminated or generate less of an impact in 2023, resulting in improvement in the RMS operating margin. Manufacturing Solutions revenue was $212,100,000 in the 4th quarter, a growth rate 5.3% on an organic basis and the full year organic growth rate was also 5.3%, In line with our mid single digit outlook for 2022, the segment growth rate in 2022 was compressed by lower revenue in the CDMO business. The initiatives that we have implemented to improve the performance of our CDMO business continue to gain traction and earn positive feedback from clients. Our creation of centers of excellence for cell therapies, viral vectors and plasmids has been well received.

Speaker 2

Coupled with our focus on CDMO business development efforts and investing in the commercial readiness of our operations, we are generating new client interest. We've won over $100,000,000 of new CDMO projects over the past 12 months and more than 2 thirds of which for our world class cell therapy operations in Memphis. We believe that a stronger sales funnel will result in a gradual improvement in the CDMO performance during 2023 as the business returns to its targeted growth rates. We expect the CDMO business will drive a rebound in the Manufacturing segment organic growth rate to the low double digits in 2023. The Biologics Testing Solutions and Microbial Solutions businesses both performed very well in the 4th quarter, benefiting from robust client demand Asset growth prospects for these legacy manufacturing quality control businesses remain strong.

Speaker 2

These businesses and the Manufacturing segment in total will continue to be principally driven by demand for biologic drugs, including cell and gene therapies and other complex biologics. Microbial Solutions had a strong quarter and full year, Benefiting from broad based growth across its EndoSafe endotoxin testing and Actigenics microbial identification testing platforms, We are continuing to convert the marketplace to our more efficient and reliable quality control testing platform. The continued expansion of the installed base of instruments drives demand for the consumable cartridges and reagents, which provides a healthy recurring revenue stream. We believe Microbial Solutions' long term growth potential continues to be approximately 10%, including in 2023. The Biologics Testing business reported an excellent Q4 and full year.

Speaker 2

Robust demand for cell and gene therapy testing services continue to be the primary growth factor as well as traditional biologics And the business had an excellent year despite the moderation of COVID vaccine testing revenue during 2022. We have been successful in maintaining and we have been successful in gaining business because of our extensive portfolio of services To support the safe manufacturer of biologics, we believe cell and gene therapies will continue to be significant growth drivers over the longer term. The Manufacturing segment's operating growth declined meaningfully in both the 4th quarter and full year to 25.3% and 28.8%, respectively. As has been the case all year, the decline was driven almost entirely by the underperformance of the Based on our expectations for the CDMO business, we believe the manufacturing operating margin will improve meaningfully in 2020 to above the 30% level. As you know, there is inherent operating leverage in our businesses.

Speaker 2

So as project volumes improve in the CDMO business, We expect the margin profile will follow. In 2022, we celebrated our Charles River 75th anniversary. We're delighted to have evolved from a small revolutionary research model company overlooking the Charles River to a leading global drug discovery and development partner generating nearly $4,000,000,000 in annual revenue and helping to lead the biopharmaceutical industry's essential Non clinical drug development efforts. As we look to 2023, we continue to see a resilient funding environment, continued renaissance in the golden age of scientific innovation, our clients' increasing use of strategic outsourcing and their need for enhanced efficiency and speed to market. Our core competencies, including our extensive scientific knowledge And our focus on preclinical R and D are precisely tailored to these trends and make us an even more indispensable partner To advance our clients' life saving therapies, I assure you that we will continue to proactively manage the NHP supply And reinforce our firm commitment to conducting ethical regulatory compliant business practices and to the humane treatment of the research model under our To conclude, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their support.

Speaker 2

Now I'd like Flavia to give you additional details on our financial performance and 2023 guidance.

Speaker 3

Thank you, Jim, and good morning. Before I begin, may I remind you that I'll be speaking primarily to non GAAP results, which exclude amortization and other acquisition related adjustments, costs related primarily to our global efficiency initiatives, gains or losses from our venture capital and other strategic investments, a gain on the sale of the Avian vaccine business and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, foreign currency translation and the 53rd week in 2022. My discussion this morning will focus primarily On our financial guidance for 2023, we're very pleased with our 4th quarter results, which included revenue and earnings per share that outperformed our previous guidance, including quarterly revenue exceeding the $1,000,000,000 level for the first time. Our 2023 guidance ranges reflect multiple scenarios with regards to the estimated impact from the NHP supply constraints as Jim outlined, the impact of which is expected to result in reported revenue growth of 1.5% to 4.5% and organic revenue growth of 4.5% to 7.5 Notwithstanding the NHP supply situation, our outlook reflects sustained underlying trends In most of our businesses and a resilient funding environment, we expect non GAAP earnings per share between $9.70 and $10.90 reflecting meaningful headwinds associated with both NHP Supply and non operating items.

Speaker 3

I will not provide too many more comments on the NHP supply impact since Jim covered it. So I'll focus my comments on the other headwinds, which include the impact of the Avian vaccine divestiture, a higher tax rate and increased interest expense. In combination, these non operating headwinds We'll reduce earnings per share by approximately $1.20 to $1.40 for the year, partially offset by an FX Benefit to earnings per share of up to $0.25 in 2023. These items will reduce earnings that we expect will generate headwinds for our financial performance in 2023. 1st, We completed the Avian vaccine divestiture in December as expected.

Speaker 3

The transaction will reduce 2023 revenue by Approximately $80,000,000 and non GAAP earnings per share by approximately $0.25 net of the interest expense benefit since we used the proceeds to repay debt. 2nd, the non GAAP tax rate is expected to move to the top of our long term low 20 percent range to 22.5% to 23.5% in 2023, representing a nearly 400 basis point increase at midpoint, compared to the 20 22 tax in the excess tax benefit related to stock compensation as a lower stock price by $0.50 to $0.65 and the earnings growth rate by over 500 basis points at midpoint. Finally, total adjusted net interest expense in 2023 is expected to increase to a range of $133,000,000 to $137,000,000 compared to $105,000,000 last year. We expect year over year increase will be driven by higher variable interest rates, primarily as a result of the Federal Reserve's actions, partially offset by repayment of debt. We anticipate the higher interest expense will create an earnings per share headwind of 0.45 We entered into an interest rate swap agreement effectively locking in a fixed rate for 2 years on $500,000,000 of our revolving credit facility.

Speaker 3

At year end, approximately 3 quarters of our $2,700,000,000 debt was at a fixed rate. We believe the Federal Reserve will increase rates in the near term and our outlook At the end of the Q4, our growth and net leverage ratios were approximately 2.2 times and 2.1 times respectively. This is a meaningful decline from the Q3 due in part to a cash gain on the Avian divestiture. We continuously evaluate our capital priorities and as always intend to deploy capital to the areas that we believe will generate The greatest returns. Our outlook assumes an average diluted share count of approximately 51.5 to 52,000,000 shares outstanding in 2023.

Speaker 3

From a segment perspective, our 2023 revenue growth outlook reflects sustained client demand trends offset by the NHP supply impact in the DSA segment. Similar to the prior year, the RMS segment is expected to achieve high single digit organic revenue growth, The result of continued robust demand for research models and associated services. As a reminder, The Cambodian NHP supply situation does not have an impact on our RMS segment as these large models are sourced and used to support our Safety Assessment operations. For the DSA segment, we expect the organic growth rate will be between low to mid single digits based on our NHP supply assumptions around the timing of the resumption of imports. The Manufacturing segment is expected to generate low double digit organic revenue growth with the increase from the 2022 growth rate principally driven by the expected rebound in the CDMO performance during the year.

Speaker 3

While foreign exchange was a 3 50 basis point headwind in 2022, the weakening of the U. S. Dollar since November is expected to result in a slight FX benefit of up to 50 basis points to revenue growth in 2023, Assuming near current foreign exchange rate, this will drop down to a more meaningful contribution to the bottom line and is projected to generate up to a $0.25 earnings per share benefit due largely to movements in the Canadian dollar. You may recall in Canada, we invoiced most of our revenue in U. S.

Speaker 3

Dollars, but essentially all of our costs are in current Canadian dollars. We have provided information on our 2022 revenue by currency and the foreign exchange rates that we are assuming for 2023 in our slide presentation. For the operating margin, we would have Cambodia NHP Shipment. Longer term, we still believe there is operating margin improvement that is inherent in our business from a combination of leverage from higher volume, pricing and continuing to drive efficiency. We will not provide free cash flow or capital expenditure outlooks at this time because these metrics could vary based on the level of NHP supply impact That is incurred.

Speaker 3

For 2022, free cash flow totaled $330,300,000 compared to $532,000,000 for the prior year. The decrease was due to higher CapEx As we added capacity to accommodate the robust demand as well as unfavorable working capital movement, the timing of which contributed to our free cash flow being below our prior outlook. Capital expenditures for 20 increased by $96,000,000 to $324,700,000 with most of the increase driven by the continued capacity needs of the Safety Assessment business. Given the current NHP supply situation, We will reassess our capital needs for this year. Longer term, the targeted level for CapEx remains at approximately 9% of revenue, as we expect to continue to invest in capacity in order to keep pace with the sustained underlying demand environment and support our long term growth forecast.

Speaker 3

The next slide shows a summary of our 2023 financial guidance. Looking at the Q1 of 2023, we expect that year over year revenue growth will be in the high single digit range On a reported basis and at or above the 10% level on an organic basis, we're Stronger revenue growth in the first half of twenty twenty three, both due to the comparisons to last year when growth accelerated throughout the year as well as the gating of the NHB supply impact. We expect only a small impact related to NHB supply in the Q1, Because these large models are already in place to start the scheduled study, we expect earnings per share will decline at a mid single digit rate in the Q1 compared to $2.75 in the Q1 of last year. In addition to the impact of the Avian divestiture, The non operating headwinds will have a greater impact to earnings per share in the Q1, specifically The higher tax rate and increased interest expense. As previously mentioned, the tax benefit from stock compensation is expected to be lower in 2023 with the greatest impact in the Q1.

Speaker 3

We also will not have anniversary Last year's Federal Reserve more aggressive interest rate increases in the Q1. These two items are expected to result in a combined earnings headwind of approximately $0.40 per share. In addition, the Manufacturing segment faces a difficult comparison versus the Q1 of last year With regards to commercial readiness milestones in the CDMO business and COVID testing revenue in the Biologics Testing business, This will result in a lower growth rate for the Manufacturing segment in the Q1. Each of these headwinds will improve throughout the year beginning in the Q2. In conclusion, we're very pleased with our 2022 financial performance and we'll proactively manage the challenges in 2023.

Speaker 3

We're confident in our ability to generate value for our shareholders By consistently growing revenue, earnings and cash flow, over the last 5 years, we have achieved compound annual growth of 16% revenue and 17% for earnings per share, generating robust operating and free cash flow, While continuing to make necessary investments to support the growth of our business, we're focused on continuing to drive growth, Executing our strategy and enhancing our position as the leading global non clinical drug development partner, working with our clients from discovery and preclinical development through the safe manufacture of their life saving therapies. Thank you.

Speaker 1

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

Operator

And our first question will come from Derik DeRoon with Bank of America. Your line is open.

Speaker 4

Hi, good morning. Thanks for taking my question. Jim, I'm just curious, What are your customers doing that in the biotech space and elsewhere to in terms of their studies? I mean Is are other vendors having similar delays or similar issues? Basically, are you at risk of losing business because other vendors have Better access to some of the model systems?

Speaker 2

Tough to comment on the competition, Derek. I guess my overarching comment would be number 1, we are a much larger scale. Number 2, we have different supply sources and different capabilities. But I would say that With regard to Cambodia where 60% of the animals come from, we are all at least temporarily foreclosed from bringing NUPLAZAM and utilizing them on studies in the United States. So if you I want to extrapolate this and say this is an industry issue, a relatively profound one because drugs aren't going to move Through preclinical and into the clinic, biologics aren't going to move unless they're tested on large animals and it's going to have to be NHP, so we are our focus now is to work with Fish and Wildlife to Come up with a collaborative methodology that they're in agreement with and we can execute To show parentage, which is sort of the underlying issue here, it's going to be some sort of laboratory assay that we're developing, but we Be able to do that quickly and across a large population of animals.

Speaker 2

Just to reset the table for you, The irony is that demand is really significant for us. I can't comment on the competition, but I assume similarly. So demand is exceptional. We're well staffed. Capacity is in a good place.

Speaker 2

We actually have enough animal Supply in terms of our relationships with various suppliers that we have, where we had to own a piece or have a long term contract. We've hit this unanticipated Speed bump where the Fish and Wildlife are saying that they're concerned about parentage. So I don't I can't guarantee anything. I don't think this is a situation of that we've been concerned about losing share. It's a situation of How do we and that's both Charles River and the competition to some extent move past this, so we can support the clients to get drugs So preclinical and to patients and that will be pretty much a 100% of our focus going forward.

Speaker 2

We're optimistic that we will be able that's been the request. We're optimistic that we'll be able to meet that request. It's a little bit difficult to determine Exactly when it will be resolved and exactly when we will get the animals into the U. S. We've sized our guide, As we say in the prepared remarks, to either have animals kind of late in Q3 for utilization in Q4, That would be sort of the best case.

Speaker 2

Worst case would be that Cambodia doesn't open up at all for fiscal 2023. And of course, it's about 60% of the supply source, both for Charles River and the industry at large. So it's I don't know how else to say this. It's not really optional that we fix it, have to fix it for our clients and for patients and for ourselves. I think the U.

Speaker 2

S. Government authorities understand the criticality of the work that we do and the role that NHP is play And we're hoping that work closely with us as we work through the resolution.

Speaker 4

Great. And that was sort of my next follow-up on this one. It's like how closely are FDA and Fish Working together, I mean, do they clearly understand the importance of what this And is there did you get any sort of suggestion on timing on when this will be resolved or what the milestones they need to see?

Speaker 2

I mean, the timing is high only They're pretty much insistent that we prove parentage. By the same token, Fish and Wildlife absolutely understands how these animals are used and the Critical nature of them, I know that various government agencies have been in conversation with one another. They all look at the world through a different lens. But it's going to be essential to move drug development forward for 100 of clients and drugs that we have a resolution. So we're Off working on that, we're off with an open dialogue with the Fish and Wildlife about what exactly they need and we have to explain to That's the reality of, yes, it's going to take some time to get this up and running, but we are well intentioned that we have deep science on our own.

Speaker 2

We'll collaborate with some others We'll provide these tests, which yes, that's the basis of this whole Situation to prevent wild animals being used in biomedical research. Thank you. Sure.

Operator

Thank you. Our next question will come from Eric Coldwell with Baird.

Speaker 5

Thanks very much. On the subpoena, are there any additional details you can provide on The timing of the receipt, what DOJ perhaps might think they have come across that would drive this? And then can you confirm that the decremental margin on the rough $80,000,000 to $160,000,000 revenue headwind Is about 50% to 60% that's what's embedded in the guidance? And then 3rd, could you talk about the Supply expansion, you've to what extent you've been able to achieve supply expansion beyond Cambodia. Is there any additional you could would be willing to provide on countries of origin, new suppliers, increases with existing non Cambodian suppliers.

Speaker 5

Is there anything you can share to let us know what might be the ultimate outcome if let's say worst case scenario Cambodia doesn't reopen?

Speaker 2

Sure. Subtina is relatively recent, Eric, and We're subject here meaning that they want to get information from us. Just to back up, you know That another Cambodian supplier was indicted in November. That's not something that we work with. And so we take a couple of our competitors to work with and that started the whole questioning and to prove the methodology.

Speaker 2

And so they're now looking at all of the suppliers in Cambodia, One of whom we get our monkeys from, we were just there and audited that, I guess I should say without sort of weighing in What the government thinks? It doesn't think that we believe it's a professionally run operation from a veterinary point of view, from a nutritional point of view, from a housing point of view, from a And it's a big farm and they take our advice and counsel really well. We feel that we have some input and some auditing capability with them. We believe that As this DOJ investigation continues, we're confident that they'll conclude that any concerns they had with regard to Charles River are without merit. We don't believe we did anything wrong.

Speaker 2

To the contrary, we always fully comply with So we'll work closely with them. We'll be collaborative. We'll be transparent. We will take the high road In terms of coming up with a solution that works for them, works for us and probably will work for other providers and competition, Which is great. The supply thing is, I mean it is what it is, Eric.

Speaker 2

It's frustrating. We worked really hard over the last, I'd Say COVID year, so probably 3 years now, maybe 4, particularly after China closed out 2018 to have a multiplicity of suppliers and I won't go through where they are and what the names are, but we have multiple supply sources. And so We were starting this year with more than a sufficient number of monkeys to do the work for the you know we had orders Last year, way into the back half of 'twenty three and some into 'twenty four and hopefully some incrementing on top of that. And as I said earlier, we had staff in space. We're heading into this and we only had an extraordinary second half of last year.

Speaker 2

So we're heading into this year really optimistic about our supply So I would say that we have multiple supply sources, which is great. I would tell you, Specific answer to your question that if Cambodia never opens up, there will be an insufficient number of monkeys to do the work for the whole industry. And I'm not just saying this with through Charles River Lens, that's not a Tolerable situation, that's not an acceptable situation for the health of patients, for drug development, for getting drugs Through preclinical into the clinic. So we have to find an accommodation. The dialogue with that was quite open They've been really clear to say, you just have to show parentage.

Speaker 2

And by that, for anybody who's listening, it doesn't know what we mean by that. It's just That you contract the offspring to mothers and that those mothers are part of a purpose spread Operation. So we believe that we can do that. We believe that Cambodia will open up at some point. We're hopeful that it will be So that best case would be kind of end issue 3rd quarter with the animals in the 4th, because it's a big And I will let Flavia drill down on the financial impact of what we just gave in our guidance.

Speaker 3

Thanks, Jim, and good morning, Eric. Yes, our EPS guidance obviously assumes Different scenarios as we mentioned in our prepared remarks. Obviously, the revenue loss drops down at a fairly high Rate initially, but I'll prefer not to comment on the specifics.

Operator

All right. Thank you. Our next question will come from Sandy Draper with Guggenheim. Your line is open.

Speaker 1

Hey, Sandy, are you on mute? We can't hear you.

Speaker 6

Yes. Thanks, Todd. So just a quick follow-up on the NHP and then my bigger question is on the CDMO business. To make sure I understand it correctly, you've decided Jim to stop, but were you ordered to stop taking on Primates from the suppliers is resolved and basically, is this you're waiting from signals from the food and wild for the FDA and so your hands are tied or once you think things are clear, you can make the call. So just want to make sure I understand that.

Speaker 6

And then the bigger question is just on clearly encouraging signs on the CDMO in your guidance. Going back to the miss in 2022, Is this just a function of time and that you sort of gone through that 12 months of just rebuilding the pipeline that you had that sort of the air pocket Or has demand actually gotten better? Thanks.

Speaker 2

Yes. So on the Fish and Wildlife situation, so there was all sorts Contradictory and probably erroneous information about what Cambodia was doing after this first farm was indicted back November. So the initial rumor was that the Cambodian government just closed down exports, which was We don't believe it was ever true. So Cambodia is from their end is open for business. We'd like to shift the animals, but we'll provide The paperwork.

Speaker 2

The U. S. Government is saying you can't bring them in yet. And the ones that you have in country and we Southern country, you can't use yet until we sort of work out and ensure that they are indeed Purpose, Brad. So no, so I don't think it's in I don't think we can just do what we want.

Speaker 2

I mean, there's always permitting. There are these CITES permits that One has to get and then they when they once they canceled, you can go ahead and utilize the animals. So Just your problems, I guess our hands are tied, but we're trying to look at that positively that It's within our control to get them untied. They're just going to sort of wait for us to make a proposal on how we can prove That's favorable purpose Brad. So as I said, that's like 100% of our focus right now in our control.

Speaker 2

And obviously, the faster we do it, The faster they will allow us to utilize the animals. CDMO business is an As we've spoken to consistently for a while now integration has been complicated, the science It's quite complicated and new and we really had to re staff All three of the companies, the major companies that we bought from kind of top to bottom, senior management, sales, regulatory, etcetera. I think the demand has been great across the board. The sales cycle is long. So, not sure that was totally Clear to us or the length wasn't crystal clear to us when we bought the company and plus some of the clients that We felt we had firm commitments, weren't so firm.

Speaker 2

So I think we've done a great job with the new sales force with people that understand the science Can explain it well and we have in our prepared remarks and commentary that $100,000,000 of business come in last year. Our Memphis facility, which is a gene modified cell therapy manufacturing operation just sounds particularly solid right now just in terms of Numbers of clients, scale of clients, by that I mean, there's a bunch of companies that are self centric companies that are kind of small and new that you heard of that there's a bunch of really big companies, including pig biotech and pig pharma who either don't have their own space or Don't feel the sufficient space in the system. We have several clients that we're talking to who have either Finish Phase 3 are almost done. We're talking to us about commercial quantities. And there's at least one client that we are confident that we will Produce commercial quantities for them this fiscal year, which obviously would be fabulous just in terms of, I don't know, expertise, reputation, capability And really doing it because there's so few commercial products actually being manufactured.

Speaker 2

So the business feels better, stronger, Better demand, better client understanding of who we are, better integration amongst and between the cell and gene therapy companies and also between cell and therapy and our biologics business in particular, and I would say safety, secondarily, we have very good facilities that have been all 3 of the major facilities have been added on to over the past year. So we've got new space, incremental space and Pretty well staffed. It's a very attractive area. There's lots of people that want to work in cell and gene therapy. I think there's a little bit of Buzz around our capability and potential.

Speaker 2

So we should have nice growth rates In those businesses in fiscal 2023, the margins won't be anywhere near we want them to be, but they will be distinctly better the prior year, so CDMO should be accretive for sure to the manufacturing top and bottom line. And similarly, obviously to a lesser extent given the denominator, but similarly to CRL's top and bottom line also. So Feel good about those businesses as we've entered this fiscal year.

Speaker 6

Thanks for the update, Jim.

Speaker 2

Pleasure.

Operator

Thank you. Our next question will come from Elizabeth Anderson with Evercore. Your line is open.

Speaker 7

Hi, guys. Thanks so much for the question. I was wondering if you could comment. It seems like you based on the guidance that you gave for the full year on NTPs that you Probably have enough supply domestically to get you to this sort of Q4, at least between the Cambodiannon Cambodian supply. So if that's something you could comment on?

Speaker 7

And then secondarily, can you talk about the impact of potentially follow on work after NHP? It seems like maybe is that something that you guys have

Speaker 2

Yes. So we have some supply for Sure, Elizabeth. So we have we do a lot of NHP work in the U. S, but we also do mention Europe and we have other suppliers For European operations, we have other suppliers. For U.

Speaker 2

S, we had monkeys in countries, some of which Our hands are tied at the moment, but some of which our hands aren't tied. And I don't want to peel it back too finely, but I think We have a sufficient supply for a while and then it begins to dwindle a bit. We're just going to have to have conversations Well, that clients about their priorities and what they really need to be done quickly and try to match their priorities And the cadence of the drug development pipelines with availability of space and NHP. So yes, to some extent we'll have sufficient supply and to some extent, we won't. And hopefully, as we've indicated, in our prepared remarks today and in the numbers and our guidance that we'll be off and running In the back half of the year, we're continuing to take orders and book orders Certainly, the 2024, I don't want to comment on what the impact is in 'twenty four, early in the Q1 23 except to say that our hope would be to resolve this problem because we have sufficient supply if the U.

Speaker 2

S. Fish and Wildlife Service and the other regulatory agencies will let us use them. So, and just given the importance of the work, we have to figure it out. We're confident that they will listen. They understand the importance.

Speaker 2

We're also confident they don't have a lot of options. Very few of our clients have And even if they did, they can't get the NHPs either. And we have Perfectly capable competitors, but they have limited infrastructures and they have limited access to NHP's as well. So Just given our scale and prominence, we have to resolve it and We're hopeful that people will work with us and understand that we're doing everything in good faith and want to come up with a scientific Solution that satisfies everybody's expectations and demands.

Operator

Thank you. Our next question will come from Jacob Johnson with Stephens. Your line is open.

Speaker 8

Good morning. This is Mac on for Jacob. Just a quick one for me. Are there any areas of your business where the funding environment Drives additional demand or outsourcing. I think cradle is perhaps one of these areas.

Speaker 2

Cradles for sure. Cradles, I don't want to overstate that. I'd say it's a relatively recession proof business and kind of the Pure play outsourcing move for we thought it was only going to be small companies, it's a whole range of companies, it's quite interesting. But For everyone at the moment who might not want to add build de novo space, add on to the current space, Just hold on to the capital and lease small amounts of space from us, use our people either in large measure or small measure. I think that business is going really well.

Speaker 2

Look, our whole thesis, I mean, the whole basis of the bargain with Charles River is that We can be and are your outsourcing partner. You use our people in our space as it's at your own. We'll invest in technology and capacity consistently. We'll help you get your drug into the market or at least tell you that it shouldn't get into the market because of high levels of toxicity or whatever lack of efficacy. So I think that so much of what we do, all of the research model Services are pure outsourcing.

Speaker 2

All of our discovery and safety work is pure outsourcing. And so is the biologics work. And so And everything that we've added through M and A over the last decade or even 2 decades has been about providing a large Cohesive portfolio to so somebody can literally give us a drug and say, please help me File my IND and get this thing to market. So obviously, it's somewhat correlated to the availability of cash. I would say that our biotech clients in particular are very judicious and thoughtful about the way they spend money.

Speaker 2

So they tend not to move forward unless they think they have Minimally into the clinic and maximally the proof of concept. And we're still hearing very little From our clients about concern about access to capital and how that would impair or slow down Both the demands from us and ability to stem. So, we think our and if they have those concerns and they're just not articulating it, think our portfolio is quite helpful for them. And yes, I would agree that Cradyl is kind of at the top of the list. Thank you

Speaker 4

for taking my question.

Speaker 2

Sure.

Operator

Thank you. Our next question will come from Patrick Donnelly with Citi. Your line is open.

Speaker 2

Hey, guys. Thank you for taking the questions. Jim, can you maybe just talk through the timeline of how this all played out? I mean, obviously, you put out the 8 ks, I think it was mid to late November, sorry. And then December, there were mixed reports.

Speaker 2

Cambodia was shut down, then it wasn't a few days later. And And this is going to shut down and just trying to get a sense in terms of how quickly you could prepare for this and just how it played out internally would be helpful. Thank you. Sure. When the information came public about the indictment in November of a supplier in Cambodia.

Speaker 2

That was the first time we knew anything about Any concern about Cambodia, just to remind you all, probably around the same Percentage of our animals, our NHP's were coming from China up until that point. We had Pretty wide scale supply agreements from China and then the Chinese government closed those exports down In favor of keeping those monkeys in country and we and our competitors pivoted to Cambodia, which has Essentially the same type of animals with the same genetic background. So we knew that the research community would be fine with them. They also didn't really have a choice. But it's similar background.

Speaker 2

So we've been working hard to validate our Supply sources, by visiting them, by telling them what our kind of requirements were from an operational point of view, we've Quite pleased with them. We've been quite pleased with the quality of monkeys. As I said earlier, we had Probably the best, not probably, we had the best year in the company's history for our Safety Assessment business in fiscal 2022, Really strong demand, way out a year or year and a half and escalating price points and market share gains. And so We were feeling very good coming into this year as we were walking down our operating plan and this came literally out of the blue. And then as you say, I can't put a finer point on it than what you said.

Speaker 2

All sorts of rumors are tough to verify, but Cambodia closed? No, it's not closed. Oh, great, it's not closed. But then the U. S.

Speaker 2

Government is, we don't care, but you can't use them until You can determine and prove to us that the animals are purpose bred. So it's just November to now, which is it feels like decades, but it's a relatively short period of time, We have finally opened up channels to have conversations with both DOJ and Fish and Wildlife. Obviously, not only will we cooperate, but I think it's incumbent upon us given our scale and who we are to be the leaders in solving this problem. We have to solve this for the client base. By that, I mean, we have to come up with the necessary tests that can be done quickly to determine which animals are that the animals Indeed, purpose, Brad, and we will do that.

Speaker 2

So, we'll stay close to all of our suppliers, particularly the one that we testing methodology such that we can just show Fish and Wildlife the data and hopefully they'll be pleased with it. And It's as straightforward as frustrating and as sort of sudden as that. It just literally sort of the information and the kind of severity of what the government was looking for Seem to come out of nowhere, certainly with no advance notice and it's not something we had spoken to them about previously. And As I said, we had an extraordinary fiscal 2022, so and never even a hint of This kind of concern or investigation or conversation. That's helpful.

Speaker 2

Thanks, Jim. Sure.

Operator

Thank you. Our next question will come from Max Smock with William Blair, your line is open.

Speaker 9

Hi. Thank you for taking our questions. Maybe one for me on the CDMO business. You mentioned a stronger Sales funnel for this part of the company. And just wondering if there's any more detail you can share around how the sales funnel has grown over the last couple of quarters here?

Speaker 9

What you're seeing in terms of the strength in the cell and gene therapy market more broadly? And then in terms of those potential opportunities that you've won so far, I guess It'd be helpful to hear really what has differentiated you or what you think differentiates you from some of your larger competitors in the space? Thank you.

Speaker 2

Sure. The market is strong and has remained strong. There's a plethora of cell and gene therapy drugs that Had been quote discovered and need to be developed either to success or failure. So we're going to be very, very busy. We've, as I said earlier, retooled the sales organization.

Speaker 2

So we've got people with great in both cell and gene therapy who understand both the science and the processes For manufacturing and the timeframe, as I said earlier, the timeframe is longer than we had anticipated. So we're really pleased with the way we've been signing up The openness to share their anticipated plans with us to what the market size they think The drugs might have, as I said earlier, we have several clients that are on A verge of commercialization, it doesn't mean the drugs will get to market, but I'm just saying that from a regulatory point of view are on the verge of Having finished clinicals and we'll be filing and one that has moved into a commercial zone. So the sales funnel feels solid, Consistent, persistent and pretty varied in terms of the scale of the companies. The market itself, it's probably a number we should update, but when we quantified it last time, we said there were about 3,000 cell and gene therapy drugs in development, probably 2 thirds of which were in the preclinical domain and obviously some meaningful portion These we'll get to work on. The differentiating factor for us and the reason we went into CBMO space having kind of fleet from a year to years ago, because it's kind of a crowded space, is that this is kind of an interesting niche.

Speaker 2

We have a couple of other very good players in the space, which is fine. The market needs them. But what the differentiating feature is that We don't just manufacture a drug. We have this big biologics testing business, which is kind of how we I ended up pivoting back into this space because clients were saying speed is of the essence. We give you our molecule You developed it for us.

Speaker 2

We can't tolerate you sending us out to find someone to manufacture prices, maybe it's someone we don't know or trust, we'd like you to be able to do that for us. So if you think about it, we can do some of the discovery We can do all the toxicology work to say it's safe. Then we can test that molecule before it goes into the clinic. Sorry, we can now manufacture the molecule then test it before it goes into the clinic and then test it as it goes into commercialization. So I do think It holds true not just for the cell and gene therapy, but pretty much everything we do.

Speaker 2

We just have this broad we have a broader portfolio than the And even if they're bigger companies and even if they're bigger and have a larger reputation than us for Being a CDMO, they don't have the pull through that we have and they don't have the comprehensive portfolio. We think that gives us a Significant and distinct competitive advantage.

Speaker 9

Thank you.

Speaker 2

Sure.

Operator

Thank you. Our next question will come from Dan Leonard with Credit Suisse. Your line is open.

Speaker 4

Thank you for taking the question. I have a couple of follow ups to Derek's question at the start on what customers are doing with the NHP supply constraints. How actively are they pivoting to different models like mini pigs or dogs? And are clients being more discriminating about NHPUs In line with the recent FDA guidance. And then finally, is there any chance, Jim, that the heightened NHP concern Reduces long term demand for NHPs from biopharma as clients reconsider their NHP needs.

Speaker 4

And if that What does that do to Charles River's business opportunity? Thank you.

Speaker 2

Very smart and sophisticated question, not an easy one to answer. I think that we all, Particularly given the complexity of NHP availability and by the way, it's always been complex. It's just more complex these days If there was an alternative species that was, yes, so let's start with your pig question. You could produce them domestically and they have livers as opposed to 1 offspring and you could get Significant numbers, but the problem is and by the way, we do a fair amount of swine work right now, mostly for Dermatology and cardiovascular work, but it's not a bad model. Several problems Several issues.

Speaker 2

Number 1 is there aren't enough swine either. Number 2 is if you use So the farm size swine, they're just too big. And by too big, I mean, at that stage, drug companies have made a very Small amount of the drug, which is classic, extraordinary amount. So they like to put it in small animals. So if you put it in nicer rats, that's obviously a small amount of Drug and the monkeys that we use are quite small as well and plus it's years years of data Using an HP, so I would say that swine is theoretically a long term solution, But you'd have to have lots of validation work done by our clients, accepted by the FDA and then a massive breeding operation, which We would undertake that.

Speaker 2

It's not around the corner. The utilization of NH Around the world, so that's unlikely to change. I think the essence of your question as well, that's really interesting, but what if they're not available, what happens? And you know that the FDA is the protector of the public safety. So they won't do anything to impair safety.

Speaker 2

Biologics are complicated drugs that are made from human proteins or artificial human proteins. And so You really want something that's as closely aligned with a human being as possible. So I don't see Significant pivot out of that. And would it reduce demand? I mean, if you have a host sold, so let's take the worst case that Cambodia never opens up.

Speaker 2

That would beg the question of would the FDA accept smaller numbers in animals per I don't know the answer to that. And if they did accept that, would that be significantly significant enough to give them an update to approve the drug? Maybe, Probably not. They couldn't pivot overnight to another animal model. So again, I just have to go back To where I've been on this whole call, the animals are available.

Speaker 2

There are enough animals available. The farm that we use, we provided really good oversight and we think it's well run farm and we think the animals are Of high quality and we have to get through this, why Jim, it's not like think about your question, it's not like Literally aren't enough animals available in the world to satisfy the demand because they aren't. These animals typically are pests In these countries and then they take the tests and they use them as initial breed stock, so they're wild. And then we sell usually the 2nd generation, occasionally the first, but the 2nd generation. So the animals are clean and we've had an opportunity to ensure their viral So, we are trust me, we talk daily about Alternative models what our responsibility would be, how we would go at it, how we would support our clients and that may happen over the next, I I don't even know what the timeframe is, let's say 5 years, but that doesn't satisfy any of the short term needs right now.

Speaker 2

So I do think that We're quite hopeful in the final analysis organizations like NIH and the FDA will weigh in seriously about how important these animals are, Support us in the work that we do and ensure that on a long term basis these animals are available.

Speaker 4

Thank you for that perspective. And if I could ask a quick follow-up. Can you help me better understand the of showing parentage for NHPs. Presumably, this isn't just a 23 and me test. It's more complicated than that, but I'd love to be able to better understand that.

Speaker 2

Yes. It's I don't think it's all that complicated. You're just you're proving genetics and there are all sorts of Genetic assays are available. The issue is actually more trivial. It's just actual Scale, depending on how many of the animals they want tested and how do you do that on a large enough scale quickly enough, So it doesn't impede the speed, velocity of your business.

Speaker 2

So we're hopeful, speaking to a few organizations right now, we're hopeful that We can enhance the technology to be able to do it faster. So that would be good for us. That would be good for our clients. I think that's Speed is an issue with the regulatory folks. They just want proof of it.

Speaker 4

Appreciate that perspective. Thank you.

Speaker 2

Sure.

Operator

Thank you. Our next question will come from Casey Woodring with JPMorgan. Your line is open.

Speaker 9

Hi, thanks for taking my question. So just curious, is this your MAX impact from NHPs or do you think there's more downside to that range for 2023? I guess does that headwind include any pricing offset? Is there any way to go back to the table and renegotiate price for work that you maybe had booked last year pre supply crunch year? And then just as a follow-up, how much of your existing supply will you have burn through in 2023?

Speaker 9

Does that downside case that you laid out assume you'd be entering 2024 with only 40% of your NHT supply available? Thank you.

Speaker 2

Yes. So I'm going to stay away from 2024. It's too far away and we don't know how this year is going to unfold in terms of access to new animals. And so The supply will be yes, it's hard to call what it will be going to the next year, which of course is more than 10 months away. We believe based upon everything we know today and based upon our conversations with the Fish and Wildlife and others fit the guidance range that we have out there now accommodates for sort of Close to the best case and close to the worst case.

Speaker 2

And so we're pretty comfortable with that. So we'd like our shareholder base to Getting that genre, the price points for work In the kind of the back half of this year and definitely for 2024 continue to escalate. It might not be quite at the Escalating point that we had last year to really cover inflationary costs, but meaningful prices. I don't know. It feels unclear as to what we would do from a pricing point of view to accommodate for This lack of demand, I think we need to be paid well for the complexity of the work we do and for the animals that we have.

Speaker 2

But We may have a small amount of pricing power only if the costs go up dramatically, but I wouldn't think that we can make up much of this by

Operator

All right. Thank you. Our next question will come from Kim Daly with Wells Fargo. Your line is open.

Speaker 1

Great. Thanks. First, I wanted to ask on RMS. So within the RMS organic growth guidance for the year, are you assuming any Divergence in product versus service above or below the segment average? And then secondly, A few quick yes, no's for you, Jim, on DSA.

Speaker 1

Will you be providing intra quarter updates to investors regarding developments in the NHP dynamics? Does your guidance assume any resumption of China and HP exports for the U. S? And just a quick follow on to Dan's first question on the FDA Modernization Act. Where you sit today, is there any meaningful mid to long term risk to the safety assessment addressable market due to synthetic models?

Speaker 1

Thank you.

Speaker 2

Wow, 4 parter. So I would say that The FDA Modernization Act is well intentioned and is pointing to alternatives to the extent that they are available and viable. And we would be the 1st company to own those technologies where they available and viable. I think that there's Very limited technologies right now. We try to invest in them when we see them.

Speaker 2

We've bought one company in the last 25 years. It was clearly in vitro or non animal Based to replace an animal technology with the FDA required, it's done quite well. But I remember When I made the decision to buy it many years ago, I assume by now that the 20 other technologies and they simply aren't. So While the FDA Monetization Act means well and it's sort of pointing towards Less animals, more sophisticated animal models, earlier assays that are in vitro. I think some of that will happen.

Speaker 2

I think you're going to see AI and machine learning and utilization of data to design better trials used Potentially more in the early discovery phase to give you an indication of, I don't know, whether the new drug is likely to work as well as an old one Minimally in toxicology, we hear every month And I totally ignored by the way. We hear every month that China is opening up again for exports. I don't know why we're hearing it. I don't know who's saying it. I don't believe it.

Speaker 2

So China is at odds with the U. S. And probably Europe right now. They have lots of animals that would Potentially give them, I don't know, but an edge, but at least access to more monkeys. It's Hard to imagine what the scenario might be that they would open up again.

Speaker 2

So we're certainly assuming for All of our guidance and assumptions and plan that we don't have them available For us, you had another question. I can't imagine that we would give into quarter updates on DSA. So I would leave it at that. And on the RMS business, this is a business that's really rocking right now. It's kind of moved up into sort of high single digit genre.

Speaker 2

We did 9%. For fiscal 2022, that's the best it's been in a long time. We've got China doing well. We've got North America doing really well. I'm only laughing because it's been years since that's happened.

Speaker 2

So it happened in 'twenty two and And I would imagine 'twenty three as well. This Cradled business with the acquisition we made last year is doing particularly well. Our genetically engineered Model business is also doing particularly well. And so we see really good opportunity to take share. We always get price In those businesses, our clients are pretty much happily dependent on us.

Speaker 2

It's been nobody produces their own animals Or provides no level of services that we do. So the business feels continually stronger, Pretty much in all the geographies in which we participate. Some of our competitors, particularly because of COVID, I've had a rough time. I don't know, having enough infrastructure to work through COVID. I think they've been had some financial issues as well And some of them are only in the research model business.

Speaker 2

So I think they've been had a lot of pressure on them. So Feel really good about that business, its growth rate potential and its operating margin potential and really feel good about how it ended up in 2022.

Speaker 1

Great. Thanks and sorry for the multiparter there.

Speaker 2

It's alright.

Operator

Thank you. Our next question will come from Gabe Windley with Jefferies. Your line is open.

Speaker 8

Hi, good morning. Thanks for taking my questions. Jim, I wanted to ask one on kind of availability. You touched in one of the earlier answers about the test. I wondered if you could give us a framing as to whether you think this is a test that Kind of the assay exists, but you need to repurpose it and validate it in your area or are you kind of starting from scratch?

Speaker 8

And then more broadly in terms of kind of longer term availability of NHPs, I wonder what consideration You have given to establishing domestic colonies and or working with U. S. Primate research facilities that I think are mostly used for NIH, but is there any opportunity To leverage those for access to primates?

Speaker 2

The domestic colony questions are really good one, David. I can't tell you how many times we've discussed it. And I think you know that we did it once. So we set up a domestic colony in Southern Florida Yes. It's extraordinarily significant expense and had the bad luck of At the time, this is a long time ago, Dave, it was I remember the project was like cash flow negative for over a decade.

Speaker 2

It's just a brutal Rob, so you have 2 problems with it. One is it's crazy expensive now. I think underlying your question was, could you go to the federal government and say, can you help us with this? This is critical. National Resource and they probably would.

Speaker 2

So that would take some of the financial sting out of it, but It still would take forever. We're talking about what can we do between now and the end of this year. And it just would be forever. So It's just it's not a practical approach. On the test, I think it's both.

Speaker 2

The answer to your question is both. There are current tests that can be utilized, but are set up Not on a very large scale, so we'd have to scale them up or find a partner to scale them up. So, minimally we'll do that. What we're really hoping 4, particularly with 1 or 2 of the collaborators that we've begun to talk to is that the quality of their scientists sophisticated, they can help us refine the tests in a way that we can do more have more throughput faster With better and unequivocal results, obviously, you've got our own labs. As you know, Dave, we have Big labs all around the world in our facilities.

Speaker 2

So we have really good capacity and really capable people that would know how to do this work. We just would like to get ahead of it. So it's kind of a work in progress literally as we speak. We're working on it. I'm confident That we will minimally have kind of something relatively new and not yet standard and potentially Something better than even something that's new that would be I don't care so much about the cost as Speed and accuracy.

Speaker 2

So we're all over that and we'll update you folks on what our progress is and if the relevance of Partner assuming we have an appropriate partner. If we think that's meaningful to our shareholder base, we'll share that with you as well.

Speaker 8

That's great. And if I could follow-up on Kind of the, I guess, the breadth of the effort. Do you see, I mean, you mentioned industry, understand that, certainly Makes sense to kind of be collaborative to solve an industry problem. But for your purposes, are you needing to scale this up To kind of validate parentage with your primary supplier in Cambodia or is it kind of Needs to apply to all of Cambodia and get the U. S.

Speaker 8

Government comfortable with the whole thing as opposed to just KF, in your case?

Speaker 2

I mean, eventually, I think it's good The industry, if you can even call what we do in industry and certainly for our clients, if you could certainly they are in industry. I think it would be good if The whole Cambodian source in there, there's a couple of really big players and then some smaller ones, if they could use a similar methodology to show Who are the moms and who are the offspring? So if we're successful, we won't be selfish about it. I think the way we see the landscape right now, we're unlikely to work with anybody besides our principal supplier because We just know them so well. We like the scale at which they work and they really take our advice and counsel really well.

Speaker 2

So we are quite confident that they'll work with us. And so maybe that will be the nice edge. We'll start with our supplier. We'll work with them. We'll show Fish and Wildlife what we've accomplished.

Speaker 2

And then we can offer to share that. I don't care. We can share that with our competition. We don't have a 100% share. So we just want The biopharmaceutical industry to be well resourced here and then have access to companies that can do the work well for them.

Speaker 2

So And I do think that the U. S. Providers are quite will be quite reliant on Cambodia for The foreseeable future, just given the genetic similarity between the kimono monkeys and the It's much better for the researchers from a background data point of view. So that's how we see it unfolding. It's possible that our competition we'll do something similar and maybe they get there for us, I don't even care.

Speaker 2

We're not going to spend a lot of time, I think, working with them because we just have different, I think, viewpoints and capabilities And scale and just the way we deal with suppliers and the government. So while we may talk to them and get each other's I think we have to do this all alone and I think we have to do it quite quickly.

Speaker 8

Right, understood. Thanks for the perspective. Good luck with that.

Speaker 2

Sure, Dave. Thanks.

Operator

Thank you. Ladies and gentlemen, we have reached our allotted time And this does conclude today's Charles River Laboratories 4th quarter and full year 2022 earnings call. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Charles River Laboratories International Q4 2022
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