James C. Foster
Chairman, President & Chief Executive Officer at Charles River Laboratories International
Good morning. The stability and resilience of Charles River business model were very clear in 2023. Although demand trends moderated in the broader life sciences sector, we delivered organic revenue growth of 6.5% and earnings per share of $10.67, both of which were in the upper half of the original guidance ranges that we provided last February. We accomplished this despite the pipeline reprioritization activities and more cautious spending by many of our biopharmaceutical clients, and also by successfully mitigating the impact of the NHP supply disruption in the United States. We are anticipating that constrained clients spending will persist into 2024, but that demand will stabilize during the year. At the top end of our financial guidance range, we expect that demand trends will begin to modestly improve later this year. These trends are expected to result in organic revenue that is flat to 3% growth in 2024.
Since providing a high-level outlook at our Investor Day in September, we have further derisked our 2024 financial plan and believe our current outlook is appropriately balanced as cancellations remained elevated and backlog continued to moderately decline in our Safety Assessment business during the fourth quarter of last year. I believe that the macroeconomic environment will stabilize this year is supported by early external indicators that improvement will come, including several successful biotech IPOs in January, providing early signs that the capital markets should we open and biotech funding will improve. Our internal indicators also suggest that demand trends maybe beginning to stabilize in certain businesses, including signs of the client destocking activity in Microbial Solutions is easing and increased proposal activity in Biologics Testing business in the fourth quarter.
We believe the market environment is transitory. The long-term industry fundamentals for drug development remained firmly intact because the overwhelming need to find life-saving treatments for rare disease and many other unmet medical needs is unchanged. Biotech will again move into favor and capital markets and will lead the way, using advanced modalities and new technologies to drive innovation. Large pharma has consistently adapted to scientific advancements, the regulatory environment, and a drive to be more efficient. Therefore, we anticipate little change with regard to the industry's healthy, long-term growth prospects and continued investments in R&D.
In today's market environment, we will not wait for clients' spending patterns to improve. We have proactively and continuously engaged in actions to streamline our organization to drive productivity, enhance our speed and responsiveness, and become an even stronger scientific partner to our clients. We are doing this by continuing to focus on initiatives to win additional market share and new outsourcing opportunities across all three business segments. This includes enhanced commercial efforts through optimizing our sales force to accelerate revenue growth by adjusting go-to-market strategies, focusing on selling across our entire portfolio, and leveraging technology to enhance sales insights and identify earlier selling opportunities. Our digital strategy is helping us to better connect with our clients, including through our Apollo cloud-based platform to provide real-time access to scientific data and self-service tools for clients.
We also have a culture of continuous improvement at Charles River. That enables us to drive operational efficiencies and cost-saving actions to proactively manage our cost structure and to become an even more compelling partner for our clients for the longer term. Flavia will outline the cost savings from our restructuring initiatives shortly. Overall, a successful execution in these areas will enable us to capitalize on new business opportunities as they emerge, while delivering operating margin improvement in 2024 and beyond.
Before I provide more details on our 2024 outlook, let me give you the highlights of our fourth quarter performance. We reported revenue of $1.01 billion in the fourth quarter of 2023, a 3.5% decline on an organic basis over the previous year. The decrease was driven primarily by a mid-single-digit decrease in the DSA segment as we have regularly mentioned the year-over-year DSA growth rate was affected by a challenging comparison to the 26.5% growth rate reported in the fourth quarter of 2022. As has been the trend throughout 2023, sales to the global biopharmaceutical clients segment outperformed small and midsized biotechs again in the fourth quarter.
For 2023, we were pleased to report revenue of $4.13 billion with an organic revenue increase of 6.5%. The top-line performance was driven by another solid year in our Safety Assessment business, as well as healthy growth in the RMS segment. The operating margin decreased 130 basis points year-over-year to 19.1% in the fourth quarter, principally driven by higher unallocated corporate costs, due in part to a meaningful increase in health and fringe related expenses. The DSA operating margin also contributed with a small year-over-year decline driven by lower sales volume in the Discovery business. For the full year, the operating margin declined by 70 basis points to 20.3%. The decrease was primarily driven by the Manufacturing and RMS segments, as well as higher unallocated corporate costs.
Earnings per share were $2.46 in the fourth quarter, a decrease of 17.4%, from $2.98 in the fourth quarter of 2022. In addition to the lower revenue and operating margin, a higher tax rate as well as the 53rd week in 2022, and the divestiture of the Avian Vaccine business in the fourth quarter of 2022 were earnings headwinds. 2023 earnings per share declined by 4% to $10.67, due primarily to the non-operating headwinds, including significantly higher interest expense. In total, interest expense, tax, and the Avian divestiture reduced 2023 earnings per share by over $1.
With respect to 2024, we believe our outlook is appropriately balanced. Demand from many of our large biopharmaceutical clients is expected to be stable, while small and midsized biotechnology clients may continue to spend cautiously, as they endeavor to extend their cash runways until clear indications of an improving funding environment emerge. At the same time, we expect both of these client segments to continue to increasingly utilize strategic outsourcing to gain efficiencies and cost-effectiveness in their drug development programs. As I mentioned earlier, organic revenue in 2024 is expected to be in a range from flat to 3% growth.
Non-GAAP earnings per share are expected to be in a range from $10.90 to $11.40, including at least $0.30 of earnings accretion from the November increase in our ownership stake in Noveprim, our NHP supplier in Mauritius. The range represents earnings per share growth of approximately 2% to 7%, with earnings growth expected to exceed revenue growth, due primarily to operating margin expansion of at least 50 basis points this year.
I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2024, beginning with the DSA segment. DSA revenue in the fourth quarter was $625.8 million, a decrease of 6% on an organic basis. The quarterly decline reflected the difficult comparison to the 26.5% growth rate last year, as well as a meaningful decline in the Discovery services revenue in the fourth quarter. Safety Assessment revenue also decreased by the lower rate. In the Safety Assessment business, the elevated cancellations throughout 2023 and slippage had a greater impact on the fourth quarter, with work being canceled or start dates moved out of the fourth quarter and into 2024.
For the year, DSA revenue increased 7.9% on an organic basis, which met our segment outlook due to another solid year in the Safety Assessment business. As anticipated, the backlog coverage enabled us to achieve our DSA financial outlook of high-single-digit organic revenue growth in 2023.
At year end, DSA backlog modestly declined to $2.45 billion from $2.6 billion at the end of the third quarter. Cancellation rate increased from third quarter levels, resulting in a net book-to-bill that remained relatively stable but below 1 times. However, the net book-to-bill has moved within a similar range throughout each quarter of 2023. With gross bookings remaining above 1 times at the end of the fourth quarter, we expect demand KPIs to improve modestly once the cancellation rate subsides, which is one of the assumptions behind our DSA outlook. We expect flat to low-single-digit organic revenue growth in the DSA segment in 2024. The first quarter will exhibit trends similar to the fourth quarter of 2023, due in part to the normal seasonal lag of study starts at the beginning of the year. We expect study volume to improve thereafter, but the first half growth rate will be lower before the easier year-over-year growth comparisons and improving demand KPIs benefit the second half DSA growth rate.
Another assumption is that DSA revenue growth will be principally driven by modest price increases in 2024. This includes a $15 million to $35 million impact from NHP pricing, which reflects a significantly lower price increase than in recent years.
One of the reasons that we are able to navigate a volatile NHP pricing environment is our long-standing, high-quality NHP supply relationships, which give us an important competitive advantage in the preclinical sector. The November acquisition of an additional 41% stake in Noveprim for approximately $145 to a 90% controlling interest firmly supports our stated NHP supply strategy of enhancing safeguards and diversifying our NHP supply through increased ownership and operational control. Noveprim is reported as part of our DSA segment for NHPs, vertically integrated into our safety assessment supply chain, and the RMS segment for NHPs is sold to third-party clients. Flavia will provide more details on the financial impact of Noveprim, which is now consolidated in our financial results.
As we often comment, we are also deeply committed to initiatives to modify and reduce animal use, which are embedded in our 4Rs comparatives of replacement, reduction, refinement, and responsibility. We intend to remain the leader in regulatory required preclinical development services through both enhanced efforts to secure and safeguard our supply chain and also by championing methodologies to reduce animal use, including alternative technologies. Over the last four years, we have invested approximately $200 million in these technologies, principally through our strategic partnership activities, to add capabilities from AI to next-generation sequencing, as well as through investments in our digital enterprise and our animal-free Endosafe Trillium testing platform.
Discovery services had a challenging year and saw a meaningful revenue decline in the fourth quarter across all client segments. Discovery proposal volume remained low throughout the year and clients' decision-making timelines for new projects remained extended. Despite these near-term challenges, Discovery services remain a critical component of our end-to-end early-stage portfolio as we are able to partner with clients and often establish a relationship with them earlier in their life cycles. Whether for a single project or an integrated program, we are able to work flexibly by providing clients with cutting-edge capabilities to discover their novel therapeutics.
As we turn the page to 2024, we are cautiously optimistic that budget replenishment in the new year will lead to healthier demand trends, but have forecast the business to be essentially flat in 2024. The DSA operating margin was 26% in the fourth quarter, a 30-basis point decrease from the fourth quarter of 2022, due to the revenue decline in the Discovery Services business. For the year, DSA operating margin increased by 220 basis points to 27.5% as a result of operating leverage associated with higher revenue and favorable mix in the Safety Assessment business. RMS revenue in the fourth quarter was $195.8 million, a decrease of 0.4% on an organic basis. For the year, RMS organic revenue growth was 5.9%.
Demand for small research models across all client segments slowed considerably in the fourth quarter, particularly in North America and Europe. Sales of small models were the principal headwind to fourth quarter growth as well as continued softness in the Cell Solutions business. These headwinds were largely offset by healthy revenue growth in China for both small models and NHPs in the fourth quarter, despite the numerous reports of a difficult demand environment for the life science sectors within the country. For 2024, we expect RMS organic revenue will be flat to low-single-digit growth. The current demand environment will likely limit unit volume growth this year in the research model business in North America and Europe, so we expect to drive most of the growth through modest price increase. In China, we expect continued healthy demand for small models and associated services, albeit tempered from the robust historical double-digit growth rates in the region. We expect NHP revenue in China to decline in 2024 due primarily to lower pricing in the region.
Research model services are positioned to be a notable contributor to revenue growth in 2024. We are expanding our GEMS capacity in certain regions to accommodate our clients' increasing requirements for our support of their complex research and maintenance of their genetically modified model colonies. In addition, CRADL, one of the largest growth drivers for RMS in recent years, is expected to deliver a solid top-line performance in 2024, with growth accelerating in the second half of the year, due in part to the ramp-up of several new CRADL sites. Clients are continuing to adopt this flexible model to access vivarium space without having to invest in internal infrastructure, which provides a powerful value proposition to biotech clients in particular who are trying to conserve capital. The RMS operating margin increased by 40 basis points year-over-year to 23.1% in the fourth quarter, but decreased by 220 basis points to 23.23% in 2023. The one-month contribution from Noveprim as well as increased shipments of NHPs within China were the principal contributors to the fourth quarter margin improvement, partially offset by lower sales volume in the small models business. As I mentioned, Noveprim's sale of NHPs to third party external clients has been included in the RMS segment, which is expected to drive meaningful margin improvement in the RMS segment in 2024.
Manufacturing solutions revenue was $191.9 million for the fourth quarter, a growth rate of 2.3% on an organic basis, and the full year organic growth rate was 2%. The CDMO business drove the segment growth rate with solid double-digit growth in both the fourth quarter and for the full year. Initiatives that we implemented to improve the performance of our CDMO business have proven successful in 2023. We believe the business is now well-positioned competitively with its centers of excellence for cell therapies, viral vectors, and plasmids, and that investments made over the past two years have enhanced the commercial readiness of our operations. The enhancements to the business have been well received and are in positive feedback from clients. We are generating additional client interest that has undoubtedly been initiated by our announcement in December that our Memphis site received U.S. and EU approval to manufacture CASGEVY by Vertex, the first gene-edited cell therapy targeting severe sickle cell disease. We are very pleased with our relationship with Vertex and believe commercial relationships like this will continue to drive new client inquiries going forward.
Our Biologics Testing Solutions and Microbial Solutions businesses both reported modest revenue declines in the fourth quarter. Microbial Solutions did experience a modest increase in the year-end client order activity, as normally occurs, but not to the extent that occurred in the fourth quarter of 2022 when there was a significant budget flush. We are now seeing positive signs that client destocking activity is starting to wind down at both large biopharmaceutical and CDMO clients, as a number of large clients recently resumed their order activity for reagents and consumables. In addition, we're now seeing confirmed ship dates for instruments including the Endosafe Nexus 200 automated system that were delayed in 2023.
As we previously mentioned, the Biologics Testing business had a difficult year due to tighter client spending in its end markets. However, we saw an increase in client proposal activity in the fourth quarter, which was the first quarterly increase in 2023. First quarter sample volumes for the Biologics Testing business are always seasonally soft coming out of the holidays, but we believe both Biologics Testing and Microbial Solutions will see improving trends over the course of the year and are positioned to generate modest revenue growth in 2024. In total, we expect low- to mid-single-digit organic revenue growth in the Manufacturing segment this year. The Manufacturing segment's operating margin increased slightly to 25.4% in the fourth quarter, but declined by 700 basis points for the year to 21.8%. While the operating margin declined in each of the Manufacturing segments business units in 2023, the CDMO business was the most meaningful headwind throughout the year. However, as project volumes continue to improve and enhance the business' margin profile, we expect significant improvement this year, contributing to meaningful segment operating margin improvement in 2024. As we mentioned at Investor Day in September, we expect the Manufacturing segment will drive the improvement towards the company's margin expansion targets over the next three years. And the CDMO business is a key component of that goal.
Before I conclude, I'd like to congratulate Bill Barbo on a remarkable 42-year career at Charles River. As we announced previously, Bill will retire as Executive Vice President and Chief Commercial Officer at the end of 2024. Bill's career began with a love of science, working as an animal care intern before joining the company as a full-time research scientist. He continued to assume positions of increasing responsibility, eventually moving into our commercial organization. During his time at Charles River, Bill led numerous initiatives which contributed to our market-leading position, and his comprehensive knowledge of our portfolio has made him an indispensable leader of our commercial organization. Bill has dedicated his career to ensuring we deliver on our purpose and has truly embraced our values. I greatly appreciate Bill's contributions and partnership over the last 42 years, and wish him all the best in his next chapter.
For many years, Bill has been working with Kristen Eisenhauer, the Senior Vice President responsible for all client services and sales. Kristen has now assumed the Chief Commercial Officer role, so we are fortunate to have a successor in place and anticipate a seamless transition. Thanks, again, Bill, and congratulations, Kristen.
In addition to Bill's retirement, Senior Vice President, Kerstin Dolph, has now assumed responsibility for the Microbial Solutions business and will now be responsible for our entire Manufacturing Solutions segment. This aligns the operational leadership for our CGMP-certified businesses under Kerstin, as she has effectively led our Biologics Testing and CDMO operations for a number of years.
To close, we were pleased with our solid performance in 2023. Our long-term prospects for revenue growth and margin expansion remain unchanged from the targets we provided at Investor Day, including averaging 6% to 8% organic revenue growth and approximately 150 basis points of cumulative operating margin improvement through 2026. Charles River is positioned exquisitely to meet the evolving needs of our clients and will capitalize on the opportunities that emerge in today's business environment as the demand trends stabilize and eventually improve.
We are taking action to gain additional market share through enhanced commercial initiatives and by strengthening our leading non-clinical portfolio by focusing on innovation, including adding cutting-edge technologies from AI to next-generation sequencing. We are also committed to driving efficiency and appropriately managing our cost structure without sacrificing the flexibility to respond to a changing industry and client requirements. And we have stabilized and continued to secure our supply chain, including through the acquisition of Noveprim. We will continue to lead and to proactively manage the business through this dynamic market environment as well as to deliver value to our shareholders.
To conclude, I would like to thank our employees for their exceptional work and commitment, and for our clients and shareholders for their support. Now I'd like Flavia to give you additional details on our financial performance and 2024 guidance.
