James C. Foster
Chairman of the Board, President, and Chief Executive Officer at Charles River Laboratories International
Thank you, Todd. Good morning. We're pleased to report solid financial results for the first quarter that were precisely in line with our expectations. Organic revenue growth was slightly below the 10% level. Operating margin improved by 70 basis points year-over-year, and earnings per share growth was in the high single-digits. Revenue growth rate is expected to increase from the first quarter level, positioning us well to achieve our robust outlook for the year. There are several factors that we believe support our outlook, including the continued strength of the biopharmaceutical market environment. First, we continue to benefit from strong sustained business trends, particularly in our largest business, Safety Assessment, which represents approximately half of our total revenue. We are booking work well into 2023 and have over $1 billion of backlog already for next year. We continue to get price and anticipate continued share gains. Our scale, scientific expertise and geographic reach continues to resonate with our clients. We have added a significant number of staff in the second half of last year and continued hiring in the first quarter. Coupled with our growing backlog, we are poised to meet the escalating demand, which will result in a DSA organic revenue growth rate approaching 20% in the second half of this year. Another factor that supports our 2022 outlook is our well-funded client base, both large and small. Based on daily conversations with our clients and our key performance indicators, clients are continuing to spend at the rate that we anticipated and moved the nonclinical development programs forward.
Given our early-stage focus, we are a canary in the coal mine, should funding become a concern. This is not surprising as we believe biotech clients are resilient and continue to have an average of about three years of cash on hand based on both our internal assessment and our clients and industry sources. The biotech industry is more critical to biomedical innovation than ever. Our clients are generally unaffected by the recent headlines related to public biotech financing. Beyond the public markets, we believe that broader balanced sources of funding will enable many biotechs to continue to access capital from the private sector. Venture capital funds continue to raise new larger funds and invest heavily in start-ups, providing a sustained source of funding for the biotech industry. We believe that pharma M&A and partnering investments are also utilized to help ensure that promising molecules for unmet medical needs are funded and move forward. To provide some color on our biotech client base, roughly one-quarter of our clients can be defined as pre-commercial. Segmenting that further, there is a subset of public biotech clients with less than two years of cash on hand. We estimate that these clients make up only about 10% of the current DSA backlog. We have taken action in recent years to add staff capacity, scientific capabilities and secure resources to accommodate client demand and provide them with exceptional service.
These efforts have intensified recently in order to support the robust growth that we are experiencing and continue to forecast. We are confident that we are taking the necessary steps to effectively manage the business in today's market environment and deliver on our commitments to clients. We believe that our ability to support our clients with flexible, efficient outsourcing solutions tailored to their needs and available when they need them has continued to distinguish us from the competition. I'll now provide highlights of our first quarter performance. We reported revenue of $913.9 million in the first quarter of 2022, a 10.8% increase over last year. Organic revenue growth of 9.4% was driven by a solid performance from all three business segments and was in line with the outlook that we provided in February. Biotech clients continue to be the primary driver of revenue growth in the first quarter. The operating margin was 21.4%, an increase of 70 basis points year-over-year. The improvement was driven by the RMS segment as well as lower unallocated corporate costs. Earnings per share were $2.75 in the first quarter, an increase of 8.7% from the first quarter last year. Strong mid-teens operating income growth, was partially offset by a higher tax rate and interest expense compared to the prior year. Based on the first quarter performance and an expectation that the robust business trends will continue throughout the year, we are maintaining our organic revenue growth guidance of 12.5% to 14.5% and our non-GAAP earnings per share guidance of $11.50 to $11.75 for 2022.
Our guidance has incorporated two unfavorable changes in below the line items since the beginning of the year. The expectation for a slightly higher tax rate this year due to the impact of a lowest stock price and stock based compensation and higher interest expense as a result of the Federal Reserve's recent monetary policy changes. David will discuss both of these items in more detail shortly. I'd like to provide you with the details on the first quarter segment performance, beginning with the DSA segment. Revenue was $554.3 million in the first quarter, a 9.5% year-over-year increase on an organic basis. As expected, the DSA organic growth rate improved by nearly 300 basis points from the fourth quarter level driven by the Safety Assessment business. We expect that growth to improve to the low double-digits in the second quarter and approach 20% in the second half as the quarterly gating for the year continues to track to our initial plan. The Safety Assessment business continued to benefit from strong business trends as higher pricing and increased demand drove first quarter revenue growth. We are pleased with the sequential improvement in the Safety Assessment growth rate and expect continued acceleration during the year. This is supported by booking and proposal activity, which remained robust. DSA backlog was $2.8 billion at the end of the first quarter, an increase of more than 75% in the first quarter of last year and over 15% since year-end. Proposal dollar volume in the Safety Assessment business increased by 35% year-over-year. We also have an exceptionally high proportion of Safety Assessment revenues booked into backlog already for this year but do have sufficient capacity to start certain studies during the year.
These trends reinforce our DSA organic revenue growth expectation for the year and affords us visibility into the strongest future demand that we have ever seen. Capacity is well utilized both in terms of people and infrastructure, and we are continuing to add the necessary staff and space to accommodate these robust demand trends. As I mentioned earlier, we hired a significant number of Safety Assessment staff in the second half of last year, and hiring continued into the first quarter. With the staff now in place, we expect recent hires will help us meet our accelerating DSA growth outlook over the course of the year. Coupled with benefits from higher pricing continuing to work through the backlog, we are very confident in the anticipated DSA growth acceleration and our ability to achieve our mid-teens DSA organic revenue growth outlook for the year, including approaching 20% growth in the second half. Our clients are also accepting longer lead times required to start some of the studies, which is necessitating that they book projects further in advance to ensure they do not delay the drug development. Many are experiencing exploring new creative relationships with us to secure space. These discussions recently led to a large biopharmaceutical client to enter into a multiyear agreement with us to reserve Safety Assessment capacity in a take-or-pay arrangement. We anticipate that other clients will follow suit and believe that these developments demonstrate the sustained strength of the demand environment and our market position as a leading non-clinical contract research organization.
Revenue for the Discovery business increased in the first quarter, but growth rate was below its recent low double-digit trend. This was largely the result of difficult comparison to the strong first quarter of last year, which included milestone payments and some COVID-related work. Our integrated Discovery portfolio continues to resonate with clients, and it is imperative that we enable them to have access to cutting-edge scientific capabilities and expertise in major therapeutic areas as well as biologic, so that we can be the scientific partner they work with to advance their research programs to IND filing and beyond. Our technology partnership strategy has been very successful means to do this. It has enabled us to continue to add new capabilities across many of our businesses with limited risk. We believe our clients' willingness to outsource more of their Discovery programs will be predicated on our ability to continue to add innovative capabilities to meet the critical research needs. The DSA operating margin decreased by 90 basis points to 22.9% in the first quarter to primarily the higher staffing costs. We view this largely as a timing issue given the significant number of new hires and wage environment over the past six to 12 months. For the year, we continue to expect the DSA segment will be the primary driver of modest operating margin improvement for the company as leverage from the accelerated DSA growth rate offsets higher compensation costs. RMS revenue was $176.5 million, an increase of 8.7% on an organic basis over the first quarter of 2021 and in line with our high single-digit outlook for the year.
Organic revenue growth was driven by broad-based demand and meaningful price increases in the Research Model business, particularly in North America, which performed very well. China also continued to perform well, but the growth rate was impacted by the comparison to the exceptionally strong start last year. We also experienced some very small RMS revenue impact related to China's COVID restrictions this year and are closely monitoring the situation. At this time, we don't expect it will become a meaningful headwind. Research Model Services was also a significant contributor to the segment's growth led by the Insourcing Solutions business, or IS; our CRADL, or Charles River Accelerator and Development Labs initiatives, which is part of our IS business, has further accelerated the growth potential for the RMS segment as both small and large biopharmaceutical clients are increasingly seeking to rent turnkey research capacity in key biohubs. To build upon our CRADL strategy and capitalize on a significant growth opportunity, we acquired Explora Biolabs last month. San Diego-based Explora has a similar focus as CRADL, currently operating more than 15 preclinical vivarium facilities with greater presence on the West Coast. While the demand for turnkey laboratory capacity makes this an attractive transaction on its own, the enhanced value proposition is that clients utilizing CRADL or Explora will be able to easily access additional services across our comprehensive discovery and nonclinical development portfolio, providing us with a new and unique pathway to connect with clients at earlier stages.
With expansions currently underway in the United States and internationally, the combined CRADL and Explora operation is expected to include at least 25 vivarium facilities by the end of 2022, providing over 300,000 square feet of turnkey rental capacity in keep biohubs. Explora BioLabs will effectively double the revenue and footprint of our CRADL operation, driving strong double-digit revenue growth that will solidify the RMS segment's position as a sustained growth engine for the company. In the first quarter, the RMS operating margin increased 120 basis points to 29.9% driven primarily by operating leverage from robust sales of research models. RMS operating margin expansion will be limited for the remainder of the year due to the Explora BioLabs acquisition. Explora has healthy margins for service business, but the operating margin is below that of the RMS segment, creating a headwind to the segment margin this year. Explora is opening a number of new sites this year, so we expect the business to leverage these investments and be better positioned to enhance its operating efficiency thereafter. Revenue for the Manufacturing segment was $193.1 million, a 10.1% increase on an organic basis over the first quarter of last year. Biologics Testing services was the primary driver of the increase, with continued robust double-digit revenue growth. Microbial Solutions growth rate was below the 10% level, resulting in the Manufacturing segment's growth rate being below its mid-teens full year target in the first quarter. This was timing-related and will not affect the outlook for the year, as we still expect Microbial revenue growth in the 10% range.
Demand for our Biologics Testing services associated with cell and gene therapies and other complex biologics continues to be robust. And we are confident that cell and gene therapies will continue to be significant growth drivers for our business, even as COVID-related vaccine, testing revenue settles into a steady run rate. There is a significant market opportunity for our Biologics Testing business, which provides services that support the safe manufacture of biologics, including process development and quality control. We believe client interest in our consolidated biologics solutions offering, which provides both Biologics Testing and the cell and gene therapy CDMO services, will only increase as the synergies to produce complex biologics and conduct required analytical testing with one scientific partner are more broadly adopted by client. Utilizing our biologics solutions offering will be a strategic advantage for clients, who are looking to reduce bottlenecks and increase efficiency of their drug development and commercialization efforts. Our CDMO business also had a good quarter, and we continue to make excellent progress on our integration efforts. Our gene-modified cell therapy production business has gained traction and generated strong growth in the quarter as it continues to be one of the leaders in this emerging space. We benefited from commercial readiness milestones in the quarter, which are relatively common in the CDMO sector, and demonstrate that clients are continuing to advance their programs into later stages of development and trust us to take the critical next steps with them. We also continue to position our gene therapy product offering, plasma DNA and viral vectors, to be opportunistic in a marketplace that is greatly in need of more supply.
The Manufacturing segment's operating margin declined 240 basis points to 33.1% in the first quarter of 2022, as a result of the inclusion of the Cognate and Vigene businesses, which have margins below the overall segment, but expected to improve as we drive efficiency and leverage the significant growth potential for this business. We are operating in a robust business environment that gives us excellent growth potential. We have the best visibility that we have ever had, with an average 12 to 18 months of backlog in our largest business. We have the capacity and the people in place to deliver on the accelerated demand throughout the year. And we are benefiting from escalating pricing. It is opportune that the market dynamics will remain robust at a time when we believe we have built the premier non-clinical contract research and manufacturing organization. Before I conclude, I'd like to provide an update on our CFO transition plan. As we announced last month, Flavia Pease has been named our next Chief Financial Officer, replacing David Smith, who previously announced his plans to retire. I'd like to thank David for his dedicated service to Charles River and a remarkable career.
David has been instrumental in Charles River's growth and success since he joined the company through the Argenta and BioFocus acquisition in 2014 and subsequently when he was promoted to Chief Financial Officer in 2015. During his tenure as CFO, Charles Rivers revenue has increased 17% annually and free cash flow by 14% annually, and David has played a critical role in these accomplishments by providing strategic financial counsel and direction to our global organization. David will remain with us through year-end by transition into a role of senior financial adviser shortly after earnings. I'm pleased to announce that Flavia Pease will assume the role of CFO at that time. Flavia is a highly regarded financial leader with more than 20 years of financial leadership experience at Johnson & Johnson. Her deep biopharmaceutical industry knowledge and experience managing the finance organizations of large, growing businesses will greatly benefit Charles River. I look forward to partnering with Flavia as we work to advance the company's growth strategy and mission. In conclusion, I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their support.
Now Flavia will provide a brief introduction before David gives you additional details on our first quarter financial performance and '22 guidance.
