James C. Foster
Chairman, President & Chief Executive Officer at Charles River Laboratories International
Good morning. We were pleased with our second quarter financial performance, including organic revenue growth of 11.2%. As expected, revenue growth rates in the RMS and Manufacturing segments improved from first quarter levels and the DSA segment had another strong quarter with low-double-digit revenue growth and operating margin improvement. The DSA performance reflected the substantial scale and duration of our backlog, which has enabled us to effectively manage the business.
For the year, we are narrowing our revenue growth and our non-GAAP earnings per share guidance to the upper-end of the previous ranges. This update largely reflects the successful implementation of our mitigation efforts around NHP supply, for which I will provide additional details shortly. However, we continue to expect the second-half growth rates to be pressured primarily in the DSA segment as a result of three primary factors.
First, the current market conditions are resulting in a continuation of the lower backlog and booking trends. Second, the DSA segment faces a challenging year-over-year comparison after having generated organic revenue growth of 23.6% in the second-half of 2022. And finally, we still expect a modest impact from NHP supply constraints, principally in the third quarter. We are also closely monitoring the near-term demand trends of our biopharmaceutical clients as they appear to be reprioritizing their pipelines and tightening their R&D budgets. This is affecting our industry and our company, but we will continue to leverage our significant DSA backlog and intend to appropriately manage the business amidst a more cautious spending environment. During times of funding or macroeconomic uncertainty, clients are looking for even more efficiency and speed-to-market, and we believe they will continue to choose an industry-leader like Charles River in order to derive additional value from our flexible and efficient outsourcing solutions.
With regard to NHP supply, we have been effective in our efforts to leverage our global safety Assessment infrastructure to alleviate the overall impact of supply constraints caused by the suspension of Cambodian imports into the US, and have made significant progress to better utilize our sites outside of the US. Based on our progress to date, we believe that we have successfully mitigated the logistical challenges posed by the current NHP supply constraints by conducting more studies outside of the US and better leveraging our global infrastructure, which is a competitive advantage for Charles River.
We have been able to effectively transfer safety assessment work between sites because much of our capacity was built flexibly to accommodate multiple species of both small and large models. The transition of this work to our international sites this year has required time to implement study scheduling, logistics, quarantine operations and retraining of some staff, as well as working with local government agencies. However, we have already made significant progress with these initiatives and do not foresee any meaningful NHP supply constraints affecting the business in the fourth quarter and next year. As a result, we now expect the impact from NHP supply constraints will be less than our initial outlook of a 2% to 4% impact to consolidated revenue growth this year.
We have narrowed our DSA organic revenue growth outlook to the mid single digits, or the upper-end of the prior range to reflect this positive update on NHP supply, but we also expect this favorable impact to be largely offset by the current DSA demand trends. Going forward, we are operating under the assumption that we will conduct meaningfully the less NHP-related study work in the US, as our international infrastructure will be sufficient to accommodate this work.
I will now provide highlights of our second quarter performance. We reported revenue of $1.06 billion in the second quarter of 2023, an 8.9% increase over last year. Organic revenue growth of 11.2% was driven by strong performance in the RMS and DSA segments as well as an improvement in the manufacturing growth rate, led by the CDMO business. By client segment, second quarter revenue growth was broad-based across global biopharma, biotech's, academic and government institutions. However, demand from global biopharmaceutical clients modestly outpaced small and mid sized biotech clients for the second consecutive quarter. This demonstrates the diversity and stability of our overall client base as globals continue to move their critical programs forward at a time when biotech's are being more selective with spending to extend their cash runway.
The operating margin was 20.4%, a decrease of 140 basis points year-over-year. The decline was driven by continued margin pressure in the Manufacturing segment as well as higher unallocated corporate costs. Earnings per share were $2.69 in the second-quarter, a decrease of 2.9% from the second quarter of last year. As anticipated, the year-over-year increase in interest expense and the tax rate continued to be meaningful headwinds to earnings growth this year, as was the divestiture of the Avian Vaccine business.
As I mentioned earlier, we have narrowed our revenue and non-GAAP earnings per share guidance ranges for the year to the upper ends of the ranges, due largely to the successful implementation of our NHP mitigation efforts. We are narrowing our organic revenue growth guidance to a range of 5.5% to 7.5%, and our non-GAAP earnings per share guidance to a range of $10.30 to $10.90 for 2023. We have increased the lower end of the ranges by 50 basis points and $0.40 per share respectively. We believe our existing DSA backlog and our in-depth assessment of the normalizing demand trends gives us continued confidence in our financial outlook for this year.
I like to provide you with additional details on our second quarter segment performance beginning with the DSA segment results. DSA revenue in the second quarter was $663.5 million, an increase of 11.7% on an organic basis. The Safety Assessment business continued to drive DSA revenue growth and contributions from base pricing and steady volume. NHP pricing was a small benefit to the growth rate, although lesser benefit than in prior quarters.
The second-quarter performance of the Discovery Services business which posted lower revenue compared to the prior year was reflective of the current market environment, coupled with the shorter-term nature of both discovery projects and the businesses backlog. The DSA backlog decreased modestly on a sequential basis to $2.8 billion at the end of the second quarter from $3 billion at the end of the first quarter. Net bookings and proposal activity continued to trend lower with net book-to-bill remaining below 1 times on a quarterly basis. This was primarily driven by the cancellation rate, which trended higher and accelerated in the second quarter.
We believe the cancellation rate has increased because during the peak demand environment over the last few years, clients booked studies further in advance of when the work would be required. Now that clients are rationalizing lower priority projects in their pipeline, they are canceling the associated studies. We view this trend as largely a reversion to the mean and expect that as clients complete the pipeline rationalization process, cancellation rates will decline and the backlog will be more rely -- will more reliably reflect the actual steady demand. We believe that cancellations will decline because incoming new business awards for gross booking activity that is not adjusted for cancellations remain robust, resulting in our gross book-to-bill remaining above 1 times in the second quarter. We now see clients booking closer to when studies are required, which increases the reliability of the backlog. The current level of gross bookings can support healthy revenue growth rates, which suggests that the solid underlying growth prospects for the safety assessment business will return once the rate of cancellations subsides.
We believe the stabilization of the demand trends will be supported by encouraging macroeconomic indicators, as well as stable to improving biotech funding levels. In the second quarter, biotech funding showed the first quarter over year increases in seven quarters on a trailing 12-month basis. We also have an average of 13 months of revenue coverage our safety assessment backlog. This solid backlog coverage affords us the ability to appropriately manage the business through fluctuations in demand environment, backfill gaps and study schedule and meet our near-term financial targets. In addition, our level of backlog coverage for the remaining quarters in 2023 is well above the historical pre-pandemic averages, which gives us additional confidence about the resilience of the business and our ability to achieve our financial goals.
The DSA margin was 27.6% in the second quarter, a 230 basis point increase from the second quarter of 2022. The increase continued to be driven by operating leverage associated with higher revenue in the safety assessment business. In addition, we are closely monitoring capacity utilization for both physical infrastructure and labor, including the pace of capital spending and hiring and are committed to keeping these metrics closely aligned with the current demand environment as the DSA growth rate normalizes.
RMS revenue was $209.9 million, an increase of 13.9% on an organic basis over the second quarter of 2022. The RMS segment continued to benefit from broad-based growth in all geographic regions for small research models, and another exceptional performance from our insourcing solutions business, led by our CRADL initiative. In addition, as we referenced last quarter, the timing of large module shipments within China benefited the second quarter growth rate, leading to the outperformance compared to our full year RMS outlook of high single-digit organic growth. The growth rate for small models in China also benefited from the comparison to last year's modest impact from COVID-related restrictions in the Beijing and Shanghai regions. While growth rates cooled a bit in the second quarter, we are continuing to see stable demand and pricing in the small research models in North America and Europe, which reinforces our growth outlook for the year. As you know these models are essential tools that enable scientists to move their biomedical research programs forward. The stable demand trends also reflects a large base of wealth under clients in the RMS segment is more than half of RMS revenue was generated from academic and government institutions and large biopharmaceutical clients.
The services business has continued to be the primary growth driver for RMS, with insourcing solutions or IS leading the way. IS's CRADL operations are continuing to expand and generate excellent client interest. We recently opened a new site in Seattle, and our first location in Philadelphia. Including these locations, we now have 32 CRADL sites, totaling over 400,000 square feet in five states with growing bio hubs, as well as in London and China. The Philadelphia side is expected to cater to a large base of cell and gene therapy companies in the region, a sector of the market which we continue to believe will generate abundant growth opportunities across our portfolio. Our CRADL network supports a flexible growth of the entire life sciences ecosystem in each bio hub, allowing researchers to utilize our flexible vivarium rental space instead of building their own infrastructure.
In the second quarter, the RMS operating margin increased by 150 basis points to 26.4%. This improvement was driven primarily by leverage from higher revenue growth in China due to the timing of large module shipments and last year's COVID-related impact. Because the timing of large module shipments in China is now linear, we are expecting the third quarter RMS revenue growth rate and operating margin will be a bit lighter than the second quarter as a result of fewer shipments.
Revenue for the Manufacturing Solutions segment was $186.5 million, an increase of 6.6% on an organic basis compared to the second quarter of last year. The increase was driven by the CDMO and Microbial Solutions businesses, partially offset by continued softer demand for biologics testing. The cell and gene therapy CDMO business had a strong quarter, reporting a solid double-digit growth rate. We are very pleased that the initiatives the CDMO team implemented over the past 18 months to improve performance have been successful and are beginning to generate the intended results. The creation of centers of excellence in gene modified cell therapy, viral vectors and plasmid has more optimally aligned the business and investments in the commercial readiness of our operations and efforts to continue to improve the sales funnel for new projects have also contributed to the performance improvement. We are also pleased to be working with the commercial cell therapy client in Memphis, and have a few other clients who are nearing commercial launches over the next one to two years at both Memphis and our gene therapy center of excellence in Maryland.
Microbial Solutions delivered a solid second quarter performance led by the continued strength of the Accugenix microbial identification platform. Last month, we were very pleased to have completed the launch of our Endosafe Trillium recombinant cascade reagent, or rCR, for bacterial endotoxin testing. This is the animal free solution reinforces our commitment to sustainability initiatives and provides a recombinant alternative for Endosafe clients who wish to become early adopters of more sustainable testing methods. Trillium utilizes three biological proteins, which we believe provides superior accuracy and testing outcomes to compare as a single-protein alternative as well as equivalents to LAL-based testing measures.
With the launch of reagent kits in July, we plan to have Trillium cartridges available this winter, which clients will be able to utilize in their existing Endosafe Systems for a seamless transition from LAL layout to rCR. We believe that client adoption will be gradual over the next several years as most clients will likely continue to rely on our LAL-based Endosafe cartridges which utilizes 95% less LAL than traditional methods. The introduction of the animal-free Trillium solution supports our advancement of responsible science and further enhances our industry-leading position as the only provider who can offer a comprehensive solution for rapid manufacturing and quality control testing.
Testing volume in the Biologics Testing business improved from the seasonally soft first quarter level, but the year-over-year growth rate continued to be pressured, particularly for viral clearance and cell banking services. We believe that performance is indicative of the current market dynamics of clients reprioritizing projects and becoming more budget focused, particularly for services that could be conducted various times during the development process.
The Manufacturing segment's operating margin declined by 570 basis points year-over-year to 22.9% in the second quarter of 2023, but did improve sequentially as anticipated. The year-over-year decline was primarily driven by the Biologics Testing and CDMO businesses, but we do expect the segment margin to continue to trend higher, particularly as the CDMO performance continues to improve.
We were very pleased with the second quarter results, which gave us the confidence to narrow the 2023 revenue growth and non-GAAP earnings per share guidance to the upper end of the previous ranges. Although some demand trends are moderating, we believe that the fundamental drivers of our business are intact, and we are well-positioned to manage through any near-term fluctuations for several salaries.
First, clients are under intense pressure to bring new drugs to market. We believe they will always seek a large experienced scientific partner like Charles River, who can provide the greatest value to them through unmatched scientific expertise and flexible and efficient outsourcing solutions. Second, the scale and duration of our DSA backlog provides us the visibility to more effectively manage the business through timing and location using our global network of facilities. And third, we will continue to drive a culture of continuous improvement, speed and efficiency as a result of our digital transformation, which provides us with better access to data and insights internally to appropriately manage costs and investments and enable our clients to access real-time data, e-commerce solutions and other self-service tools. And finally, we believe the power of our unique portfolio differentiates us today more than ever from other companies that provide R&D support services to the biopharmaceutical industry.
As part of our annual strategic planning process, we recently completed a thorough review of the current market environment, our growth prospects and the strategic imperatives for our company. Through this process, we believe the current end market trends could be characterized as a normalization from the past several years when there was unprecedented focus on investment in biomedical research and scientific innovation. However, we are optimistic that we will be able to capitalize on the many opportunities our markets provide. We intend to share more of our conclusions and update our longer-term financial targets at our virtual Investor Day, which we have planned for Thursday, September 21st.
To conclude, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now, Flavio will provide additional details on our second quarter financial performance and 2023 guidance.
