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spk08: Good day, and thank you for standing by. Welcome to the Charles River Laboratories' fourth quarter and 2020-21 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I'd now like to hand the conference over to your speaker today, Todd Spencer, Vice President of Investor Relations. Please go ahead.
spk01: Thank you. Good morning and welcome to Charles River Laboratories' fourth quarter 2021 earnings and 2022 guidance conference call and webcast. This morning, Jim Foster, Chairman, President, and Chief Executive Officer, and David Smith, Executive Vice President and Chief Financial Officer, will comment on our results for the fourth quarter and full year of 2021 and our financial guidance for 2022. 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.criver.com. A webcast replay of this call will be available beginning approximately two hours after the call today and can also be accessed on our investor relations website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that 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. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable gap measures and reconciliations on the investor relations section of our website. I will now turn the call over to Jim Foster.
spk11: Good morning. I'm very pleased to speak with you today about another exceptional year for Charles River and our expectations for 2022. We believe that Charles River is a stronger company today than it has ever been. We were extremely pleased to report organic revenue growth at 15% for the full year or low double-digit growth when normalizing for the COVID-19 impact in 2020 and a second consecutive year of 100 basis points of operating margin expansion. We are seeing unprecedented demand across most of our businesses, and we believe that this demand, coupled with robust industry fundamentals, will fuel low teens revenue growth in 2022. As a result, we're continuing to invest to add people and capacity to accommodate growing client demand and to build a scalable operating model to enhance our scientifically distinguished portfolio and to strengthen our relationships with clients through our flexible, efficient outsourcing solutions. To further differentiate ourselves from the competition, we have strategically expanded our portfolio to provide clients with the critical capabilities they require to discover, develop, and safely manufacture new drugs. We have enhanced our scientific capabilities for advanced therapies in areas that offer significant growth potential with six acquisitions over the past two years. By doing so, we have built an end-to-end non-clinical portfolio of cell and gene therapy solutions to support clients from early stage research through CGMP production, and we expect it to generate nearly 15% of our total revenue in 2022. The greater complexity of scientific research is encouraging the biopharmaceutical industry to rely on Charles River's high science capabilities when choosing an outsourcing partner. Because of our extensive scientific expertise, client-centric approach, and unique non-clinical portfolio, We worked on more than 85% of the FDA approved drugs in 2021, including all of the CNS drugs and more than 90% of the oncology drugs. We are proud that our biopharmaceutical clients continue to choose to partner with us as they recognize the value that we provide. Now, let me give you the highlights of our fourth quarter and full year. We reported revenue of $905.1 million for the fourth quarter of 2021. an increase of 14.4% on a reported basis. Organic revenue growth of 10.5% was driven primarily by continued double-digit growth in the manufacturing and RMS segments. The COVID impact in 2020 resulted in a modest 50 basis point increase to the organic revenue growth rate. For 2021, revenue was $3.54 billion, with a reported growth rate of 21.1%. and organic growth rate of 15.1%. On an annual basis, the COVID impact in 2020 resulted in a 280 basis point increase to the organic revenue growth rate. Adjusted for the COVID impact, we were very pleased that we achieved low double digit normalized growth on a consolidated basis, and that each segment achieved its longer term organic growth target in 2021. The operating margin was 20.9% in the fourth quarter, an increase of 10 basis points year over year. For the full year, we met our outlook of 21%, representing the second consecutive year of 100 basis points of operating margin improvement. This demonstrates the operating leverage inherent in our business, as well as our continued efforts to drive operating efficiency and build a more scalable infrastructure. We expect to generate modest operating margin improvement in 2022, which will moderate from the past two years as we continue to make the investments needed to support growth, principally related to staffing, and because of a 20 basis point headwind from the 53rd week this year. Earnings per share were $2.49 in the fourth quarter, an increase of 4.2% from $2.39 in the fourth quarter of 2020. Strong revenue and operating income growth were partially offset by a higher tax rate and interest expense. For the full year, earnings per share were $10.32, a 26.9% increase over the prior year. We exceeded our prior guidance range of $10.20 to $10.30 and reported a second consecutive year with earnings growth above the 20% level. Our outlook for 2022, which we initially provided in January, demonstrates our firm belief that the sustained demand environment will continue this year. We believe this trend, combined with higher pricing, will drive organic revenue growth in the range of 12.5% to 14.5% in 2022. We continue to expect non-GAAP earnings per share will be in a range of $11.50 to $11.75. Earnings per share are expected to grow at a similar rate to revenue as modest operating margin improvement will be largely offset by less favorable below-the-line items, including a higher tax rate. We are enthusiastic about the year ahead and look forward to new opportunities to scientifically differentiate ourselves in the marketplace, enhance our ability to meet clients' needs, and achieve our financial goals. I'd like to provide you with additional details on our fourth quarter segment performance and our expectations for 2022, beginning with the DSA segment's results. DSA revenue in the fourth quarter was $534.1 million, a 6.7% increase on an organic basis. Biotechnology clients remain the primary driver of DSA growth in the fourth quarter, as the industry remains well-funded and ended the year on a strong note. As anticipated, the DSA segment's organic growth rate for the quarter was below 10%, But also as expected, DSA achieved a low double digit growth rate for the year at 12.2%. As we have said before, growth rates for our businesses are not linear. So quarterly fluctuations should be expected. In 2022, we expect DSA organic revenue growth will be in the mid teens. The increase from last year's growth rate is based on our belief that sustained client demand will continue. and higher price increases than in 2021 will help offset higher compensation costs and other inflationary cost pressures. The DSA growth rate is expected to accelerate during 2022, due in large part to the current pricing working through the backlog. The first quarter growth rate is also expected to improve from the fourth quarter level. Our safety assessment business continued to perform very well, benefiting from strong demand and price increases. Bookings and proposal volume remain at record levels, with total DSA backlog increasing 70% or by $1 billion to $2.4 billion at year-end 2021. We are booking work into 2023, which translates to greater visibility and a strong book of business that supports our growth expectations. The acceleration of demand during 2021 was reflected in the fact that we added nearly twice as many safety assessment staff in the second half of 2021 as we did in the first half. We expect these recent hires will help us accommodate client demand in 2022. In addition to closely managing the workload by continuing to add staff, we are taking a similar approach to capacity additions, investing in new space in a disciplined manner to ensure we meet future demand. Our discovery services business also continued to perform well with strong performances for early discovery and CNS services. Similar to the safety assessment business, we are accommodating robust client demand for discovery services by closely managing staffing levels and adding cutting edge capabilities. We believe this will continue to enable us to achieve our annual growth rate in the low double digits or better. Our efforts to broaden and strengthen our discovery capabilities and enhance our scientific expertise are enabling us to expand the support we provide for our clients' discovery research. As a result, clients increasingly view Charles River as a premier scientific partner who can support their efforts to identify new drug targets and discover novel therapeutics. This is leading to new opportunities for our discovery business, including significant client interest in integrated drug discovery programs in which clients trust us with multiple services or their entire discovery program to advance their early stage therapy. We intend to continue to build our discovery portfolio, including through strategic partnerships and acquisitions. Acquired in early 2021, Retrogenics, with its proprietary cell microarray technology and off-target screening services, had a very successful first year as part of the Charles River family. Combined with Distributed Bio's large molecule discovery platform, clients can now partner with us for integrated end-to-end solutions for therapeutic antibody and cell and gene therapy discovery and development. Our partnership strategy has proven to be a successful approach to staying current with cutting-edge technologies and adding innovative capabilities with limited upfront risk. We recently signed a new partnership with Vallo Health to deliver a new type of offering that combines Vallo's artificial intelligence or AI-enabled drug discovery and development platform with our own capabilities to expedite the discovery of small molecule therapies for clients. This partnership has the potential to accelerate the discovery process as we utilize Vallo's OPAL closed-loop in-silico platform to rapidly identify compounds and optimize them using our leading in vitro and in vivo capabilities. We also recently announced an expanded partnership with SAMD Tech's innovative assay technology to further expedite the discovery process around high-throughput screening of lead compounds. Our innovative discovery toolkit will enable us to become a technological disruptor in the industry and positions us as an indispensable research partner who can enable clients to identify and discover new drugs faster, which will ultimately reduce their time to market. The DSA operating margin was essentially unchanged at 23.1% in the fourth quarter, despite a 40 basis point headwind related to foreign currency translation. In 2021, the DSA operating margin improved by 30 basis points to 23.7%. The foreign exchange has an 80 basis point headwind. The DSA segment is expected to be the primary contributor to the company's operating margin improvement in 2022. RMS revenue in the fourth quarter was $165.6 million, an increase of 13.3% on an organic basis, which excludes the RMS Japan divestiture. The comparison to the COVID impact in 2020 increased the fourth quarter growth rate by 2.3%. For the year... RMS organic revenue increased by 19.5%, with approximately half the increase, or 9.8%, being driven by the comparison to the COVID impact in 2020. Normalized for the COVID impact, we reported high single-digit growth in 2021, which is consistent with the RMS organic growth outlook for 2022. Our 2022 outlook reflects a continuation of the strong global demand for research models and associated services generated by the ongoing robust early stage research activity within the biopharmaceutical industry, as well as at academic and government institutions. This outlook includes robust growth for our insourcing solutions business as we continue to expand our cradle footprint. It also assumes improvement in the cell supply growth rate throughout 2022, as our efforts to enhance the operating performance of Hemokin and Solero gained traction during the year. The underlying industry fundamentals within the cell therapy sector remain strong. Research models remain foundational regulatory required tools for early stage research and toxicology and a vital component of our abilities to support our clients. Revenue for research models has increased globally during the COVID-19 pandemic due to both higher pricing and improved demand, reflecting the renewed focus on scientific innovation and the critical role that research models play in generating scientific breakthroughs and ensuring the safety of life-saving therapies. Demand in China was exceptionally strong in 2021, reflecting the resurgence of biomedical research activity following China's emergence from COVID-related shutdowns in 2020, as well as a shift towards a mid-tier biopharma and CRO client base and our expanded product offering. While we expect the growth rate in China will moderate in 2022, including in the first quarter after an exceptionally strong start last year, we are continuing to expand our geographic footprint to support the continued double-digit revenue growth that is expected in this region. The heightened level of research activity is also driving demand for our research model services, which continued to perform very well in the fourth quarter and full year. We are a natural partner for GEMS and Insourcing Solutions, or IS, with our extensive animal husbandry expertise and our ability to provide clients with flexible and efficient solutions. GEMS is benefiting from strong outsourcing demand driven by the greater complexity of scientific research and and the proprietary models that our clients are creating. IS is benefiting from the continued growth of our cradle initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity at our sites and facilitates the use of other Charles River services as the research progresses. We intend to continue to expand our existing cradle footprint in the Boston, Cambridge, and South San Francisco biohubs, and also into new regions in 2022, including Southern California and China, due to significant client interest in this service. The RMS operating margin was 26.9% in the fourth quarter, an increase of 180 basis points from the fourth quarter of 2020. The increase was driven by operating leverage from higher sales volume in the research model's business, particularly in China, To 2021, the RMS operating margin increased by 530 basis points to 27.3%. The significant improvement was primarily due to the comparison to the depressed margin in 2020 associated with COVID-related client disruptions. Manufacturing revenue was $205.3 million in the fourth quarter, a growth rate of 21.2% on an organic basis. driven primarily by double-digit organic growth across the microbial solutions, biologics, testing, and avian vaccine businesses. For the full year, organic revenue growth was 20.6%, with 210 basis points of the increase coming from the comparison to the COVID impact in 2020. In 2022, we expect mid-teens organic growth for the manufacturing segment, The moderation from the exceptional 21 performance reflects a return to more normalized growth rates for the microbial solutions business after an incremental benefit from COVID-related instrument and cartridge replenishments in 21. And then the biologics testing business due to a reduction in some COVID vaccine testing revenue as that revenue stream settles into a steadier state. We're very pleased with the mid-teens growth rate forecast for 2022. and expect the manufacturing segment will achieve its 2024 target of approaching 20% growth once the benefit of the high-growth CDMO business is fully reflected in the organic growth rate and the CDMO scale continues to increase. Microbial solutions growth rate in the fourth quarter and for the year remained well above 10%, reflecting strong demand across our portfolio of critical quality control testing solutions. We were pleased with the strength of the demand for our endotoxin testing systems and cartridges, which perform FDA-mandated lot-release testing on injectable drugs and medical devices. The advantages of our comprehensive portfolio continue to resonate with our clients, and we believe that our ability to provide a total microbial solution will enable microbial solutions to continue to deliver revenue growth at or above the 10% level. The biologics testing business reported another exceptional quarter and year of strong double-digit revenue growth. Robust demand for cell and gene therapy testing services continued to be the primary growth driver, with COVID-19 vaccines and traditional biologics also being meaningful contributors. While we expect a moderation of the COVID vaccine testing revenue in 2022, we we believe cell and gene therapies will continue to be significant growth drivers over the longer term to support our 20% target for the biologics business this year and beyond. Our CDMO business is continuing to make great progress on the integrations as we gain traction on business development activities to support its robust growth outlook in 2022. We've established an end-to-end gene-modified cell therapy solution which we believe is critical to support our clients more seamlessly. Our comprehensive cell and gene therapy portfolio is resonating with clients, and they continue to explore opportunities to streamline their biologics development workflows and drive greater efficiencies by outsourcing to us. The strength of demand for CDMO services necessitates our continued investment and capacity to ensure we have available space to serve our clients. and to build upon our extensive portfolio of manufacturing services. The manufacturing segment's operating margin declined by 160 basis points to 35.7% in the fourth quarter of 2021, and by 320 basis points to 34.2% for the full year. These declines primarily reflect the inclusion of the CDMO acquisitions in 2021 of Cognate and Vigene. These businesses are profitable. but their margins are below overall manufacturing segment. We expect this margin headwind to gradually dissipate as we drive efficiency and as the significant growth we anticipate generates greater economies of scale and optimize the throughput at our CDMO sites. In 2022, we will continue to move our growth strategy forward. Disciplined M&A and strategic partnerships remain vital components of our strategy. as we endeavor to further enhance the scientific expertise, global reach, and innovative technologies that we can offer clients across all three of our business segments. We will also focus our efforts internally on ensuring that we have the necessary staff and resources to meet the needs of our clients and support the robust growth in our market. On enhancing our real-time digital connectivity with clients and on continuing to integrate our end-to-end non-clinical offering to create a more seamless solution across all drug modalities. It's incumbent upon us to be the scientific partner who can help clients move their programs forward from concept to non-clinical development to the safe manufacture of their life-saving therapies. By providing exceptional value to our clients, we believe we will continue to achieve our financial targets and deliver greater value to our shareholders. In conclusion, I'd like to thank our clients and shareholders for their support and our employees for their exceptional work and commitment. Now I'd like David Smith to give you additional details on our financial performance and 2022 guidance.
spk10: 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 charges, costs related primarily to our global efficiency initiative, the gain on the sale of RMS Japan, our venture capital, and other strategic investment performance 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 additional details regarding our financial guidance for 2022, which was originally provided on January the 11th. we continue to expect reported revenue growth of 13% to 15% in 2022 and organic revenue growth of 12.5% to 14.5%. Our revenue growth outlook for 2022 is supported by the continuation of unprecedented client demand and a healthy funding environment, along with price increases to help offset higher inflation cost pressures. We remain well positioned to expand margins while continuing to invest in the business, resulting in non-GAAP earnings per share between $11.50 and $11.75 this year, or approximately 11% to 14% growth compared to 2021. By segment, our outlook is also unchanged from last month. We expect organic revenue growth in the high single digits for the RMS segment, the result of continued robust global demand for research models and associated services, as well as improvement in the sales supply growth rate. This will be partially offset by a moderation in the RMS China growth rate after an exceptional performance in 2021. The DSA segment, we expect mid-teens organic revenue growth driven by continued strong contributions from both the discovery and safety assessment businesses. The growth rate of the safety assessment business principally as current pricing works through the backlog. We also expect Mint Team's organic revenue growth in the manufacturing segment, reflecting a slight moderation in the microbial solutions and biologics growth rates, along with the incremental contribution from the high-growth 17 therapy CDMO business once we anniversary the Cognic and Viking acquisitions. The CDMO business is expected to contribute nearly 150 basis points to our consolidated organic revenue growth rate in the second half of the year. We continue to expect foreign exchange to provide a headwind of approximately 100 basis points to our reported revenue guidance in 2022 as a result of the strengthening of the US dollar. FX rate estimates are based on the bank forecast of the year, which are currently very close to the spot rates on those currencies. Based on our current rate assumptions, FX will be a moderate headwind to earnings per share. We have provided information on our 2021 revenue by currency and the foreign exchange rate that we are assuming for 2022 on slide 32, and we'll continue to monitor fluctuations in the currency market as we progress through the year. We were pleased with the operating margin of 21% last year and the fact that it was the second consecutive year with 180 points of margin improvement. We remain well positioned to drive modest operating margin improvement in 2022, although the improvement will be less than the prior two years due to two principal factors. Higher compensation costs due to both hiring and wage increases, and the impact of the 53rd week, which is expected to reduce the operating margin by approximately 20 basis points. On a segment basis, the DSA operating margin is expected to be the primary contributor to the margin improvement in 2022, and the leverage from higher revenue growth is expected to drive the operating margin towards its longer-term target in the mid-20% range. Corporate expenses are expected to be in the mid-5% range, at or slightly below the 2021 level of 5.6% of the total revenue. We expect unallocated corporate expenses to be a small contributor to the margin expansion this year because our scalable infrastructure and investments, including in our digital enterprise, enable us to drive greater efficiencies and leverage corporate costs. The non-GAAP tax rate for 2022 is expected to be in the low 20% range, which will be a slight increase from 18.9% in 2021. The increase is principally due to the discrete tax benefits in 2021 associated with R&D tax credits and a favorable excess tax benefit related to stock-based compensation, neither of which is expected to occur at the same level. Our 2022 tax rate guidance assumes no impact from potential U.S. tax reform initiatives at this time. the first quarter tax rate has been meaningfully lower in recent years due primarily to the excess tax benefit related to stock compensation. Given our current stock price, we expect this to continue to be true in 2022, resulting in a non-gap tax rate in the mid-teens for the first Total adjusted net interest expense in 2022 is expected to increase to a range of $83 to $87 million compared to $79 million last year. We expect the year-over-year increase to be driven by the outlook for higher variable interest rates, primarily in the U.S., partly offset by repayment of debt. Our assumptions by interest rates include several rate increases this year, which is generally consistent with the Federal Reserve's guidance. It is important to note that the interest rate impact will be somewhat muted by the fact that slightly more than 50% of our debt is in fixed rate bonds that will not fluctuate. At the end of the fourth quarter, we had an outstanding debt balance of $2.7 billion, equating to gross and net leverage ratios of approximately 2.5 times. We continuously evaluate our capital priorities and, as always, intend to deploy capital to the areas that we believe will generate the greatest returns. Strategic acquisitions remain our top priority for capital allocation. Absent any meaningful M&A, we will evaluate other uses of capital, including debt repayment. Our expectations for the diluted share count will be to exit the year with slightly more than 52 million shares outstanding, which does not assume any stock repurchases at this time. In 2021, free cash flow was $532 million, an increase of 40% from the preceding year and above our prior outlook of approximately $500 million due to the strong operating performance and working capital management. As indicated in January, we expect free cash flows for 2022 to be approximately $450 million. This is a decrease of $80 million from last year due entirely to an anticipated $130 million increase in capital expenditures. We're expected to total approximately $360 million in 2022. With robust client demand exceeding our expectations in 2021 and expected to continue, we believe we will require capex of approximately 9% of total revenue in 2022 to provide the additional capacity needed to keep pace with demand. Legacy businesses are driving most of the year-over-year capital increase, with safety assessment responsible for approximately two-thirds of the increase and the remainder in the manufacturing segment. A summary of our 2022 financial guidance can be found on slide 40. As a reminder, we will add a 53rd week at the end of the fourth quarter of 2022, which is periodically required to true up our fiscal year to a December 31st calendar year end. The 53rd week has historically been characterized as a partial week of revenue, since it occurs during the holidays, but a full week of costs. Looking ahead to the first quarter of 2022, our outlook includes year-over-year revenue growth of approximately 10% on both the reported and organic basis. As Jim mentioned, the DSA revenue growth rate is expected to improve in the first quarter compared to the fourth quarter level. This will be offset by a lower RMS growth rate, reflecting the comparison to an exceptionally strong start in China last year. We are also confident that the revenue growth rate will accelerate during the year, reflecting the robust BSA order book, which extends into 2023 and includes higher pricing, as well as the anticipated improvement in the RMS growth rate from the first quarter level. First quarter non-GAF earnings per share are expected to increase at a high single digit rate from $2.53 last year, reflecting a mid-teens tax rate and a year-over-year increase in interest expense. In conclusion, we are very pleased with our financial performance in 2021 and believe that we are well positioned to deliver another strong year in 2022. Our expected 2022 performance reflects our ongoing focus on disciplined investing to support the growth of our businesses, our efforts to drive efficiency, the speed and responsiveness with which we operate, and our goal to continually enhance our relationships with our clients. We are also confident in our ability to achieve our 2024 financial targets, including approximately 150 basis points of approaching margin expansions from the 2021 level.
spk01: That concludes our comments. Operator, we will now take questions.
spk08: Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question. Our first question comes from Derek Brown with Bank of America. Your line is open.
spk05: Hey, good morning. Thanks for letting me have the first question. Jim, I'm just getting some questions this morning from people that are trying to square your commentary on the really high bookings number. And I think some people think that maybe the fourth quarter DSA came in a little bit light and the Q1 guide is a little bit below what some people are thinking. Can you just sort of walk through sort of like how to reconcile the bullish outlook in the bookings number with what people are perceiving as maybe a little bit softer numbers?
spk11: Sure. Morning, Derek. It's a further manifestation of our continued articulation that these studies sort of start and stop when they start and stop, and then they don't care about our fiscal quarters. But by the same token, we've been able, I think, to call the years pretty accurately, very accurately. So, you know, we had a over 12% growth in DSA segment, uh, last year, which, you know, which, which we're proud of and where we just got it to stronger growth amid teens for this year. So I can say several things. So it kind of ends, it kind of ended the year where it ended. Uh, we just said that the first quarter will be better. Um, we have a lot of things going on, Derek. We have, uh, literally studies booking into 2023. You've known us a long time. That's sort of new. We ended the year, we ended 2021 with a backlog that was a billion dollars higher than the prior year, which is also quite extraordinary. We're getting a lot of price. We're going to stop short as usual breaking out that price, but we're getting a significant amount of price. And a lot of that price sort of builds up. through the back half of the year as we've had all these studies book into the back half of the year. We have, I would say, the best visibility we've ever had. We've had bookings elongated out more than they ever had. I don't know if it's the best pricing. I think it's probably the best pricing that we've seen as well. Very strong conversations about clients, about focused primarily on, do you have a slot for me? And when can you start? And do you perform this sort of work rather than always starting with price? So we're very pleased that we're getting paid for what has become, and I know you understand this well, very, very complex studies. The studies have grown increasingly more complex as you're looking at immunological impacts or genetic impacts. So we feel really good about DSA, really good about safety assessment in particular, really good about having hired more people in the second half of the year. I'm talking now about 20, sorry, 21, than the beginning of the year, which means that we're rolling into 22 with a higher workforce that's trained and available to do the work. So I hope that that helps. We feel particularly strong about... how we've guided you all for the year in that business.
spk05: I mean, yeah, I mean, I know you normally don't give bookings numbers, but is there any sort of like color you can give on the quarter to quarter improvement?
spk11: Tough to do, tough to do it on a quarterly basis, but, but, you know, I think, I think that backlog number is quite interesting. That's a, that's a big pop year over year, quite solid, a lot of pricing in there. So, So we will see it continue to improve as the year unfolds.
spk05: Great. And if I can squeeze in one follow-up, and I'll leave the biotech financing question to somebody else. But I'm getting a bunch of questions on cell and gene therapy demand and just your confidence in that demand for that market sort of being there. I think some investors are a little skeptical that the cell and gene therapy market you know, expectations of that demand being built out, the capacity to be out there is ultimately going to be filled, just given the complexities of that market. I guess, what's your confidence that the capacity you're building out, the demands you're assuming for cell and gene therapy is going to, you know, going to materialize?
spk11: Yeah, so, you know, we're relatively early days here, but deep into the integration of all of these assets we bought last year, I would say that our client-facing capacity capability and design is being well received. Demand is increasing and business is improving in most of those businesses. For us, it's about getting the word out that we have these services and what the breadth of the portfolio is. But we think we're in a very strong competitive position particularly if you link that with the rest of the portfolio. It gives us 15% of our revenue is going to come from there. So we're seeing good demand from cell and gene therapy. We're going to see that exemplified in the manufacturing segment, both in biologics, both in the CDMO space. We're also going to see that play through some aspects of discovery and safety. So we're seeing the anticipated level of demand that we see. expected when we did those deals. Thank you. Sure.
spk08: Our next question comes from with William Blair. Your line is open.
spk02: Hey, thanks very much. I'll ask the biotech funding question. So, Jim, you said in your comments that funding is great. It looks like the first quarter, at least from an IPO standpoint, will maybe be the first quarter that will be down quite a bit. From your standpoint, does that sort of impact the way you guys think about the year in budgeting, or do you think funding from other sources is still big enough to offset slowness there?
spk11: It really doesn't, John. Last year was a very strong year. I don't know, I think it was the second strongest. Even the fourth quarter was, I think, in the top five strongest. We've done a very bottom-up, careful analysis of balance sheets of all of our clients. We think there's at least still three years of cash available for them from the capital markets. Well, I guess from a variety of sources. And so they've got the capital markets, they've got direct inflows into the VC funds, and of course they've got direct inflows from pharma, as they always have. Uh, as I think we are literally the canary in the coal mine, I can tell you that we have no conversations at all with any clients about their concern about, about several things, about any sort of articulation of a pullback or slippage or weight, or we can't prosecute our full portfolio with none of that, um, either current or forward looking. Um, We have nobody that's not paying the bills. And so I do think that, you know, as I said for many years, the biotech industry particularly, I think, spends their money thoughtfully and not wastefully. I think they're very well banked right now. I think the multiple modalities, particularly many of the new ones, particularly cell and gene therapy and the RNAi drugs continue to strengthen the the outlook and funding capabilities for these, um, to these companies. And I think, uh, you know, I think, uh, a quarter blip, if it even lasts a quarter in the IPO market relative to interest rates and all the other stuff that's going on is, uh, I understand why you asked the question, people looking at, I think it's a potentially over reading the situation or kind of, kind of waiting for things to, you know, to, to be less robust, but we think they're very well financed going forward and they, They're not articulating any concern. We pay attention to that stuff every day, and we listen for it as well, and we make sure that we're communicating with our clients in a way that we understand how they're looking out into the future. I guess conversely, if somehow this situation I just described were to change in any meaningful or significant way, which I absolutely don't think it will, I think we'd hear it first. given our footprint and given how much interface we have with so many clients. So no indications at all that there's any concern, and I don't really think there's any significant impact to their spending abilities.
spk02: That's reassuring. Thank you. A quick follow-up on CapEx. It looks like your budget in 2020 is up about $130 million. Can you just talk about where those investments are going?
spk11: Sure. So I think the first thing to just think about is just the scale of the company. So it's a much larger company, and we're growing faster. So those are sort of two kind of basic comments. Third is that we have a pretty big infrastructure, whatever it is, 5 million square feet of space. So on a maintenance basis, we just – we have a lot of facilities to take care of. Having said that, most of the increase is – is for new growth and development. You know, it's incremental work. And most of that is in legacy businesses and particularly in safety assessments. So we are working really hard as the safety assessment business continues to escalate, growth rate escalates, which it is, with all the pricing, all the things we just talked about. We have to get the capacity in place relatively quickly well, in advance. So, you know, as we said previously, kind of 18 to 24 months in advance. So increasing that capacity builds for probably the back half of 23 and 24, which is what we're doing now, because we've already built what we need for 22 and the first half of 23 isn't optional. And as you know, we're very careful not to overstep our bounds and not to overbuild by the same token. We definitely don't want to be capacity constrained with a market that's growing quickly and we're gaining share and garnering more work. So I think we have new businesses, particularly the cell and gene therapy, CDMO businesses, which are adding to that, but they aren't adding to that in a way that somehow intensifies the spend. It's part of a larger business. So I'd say the principal determinant is growth rate and space needs for the safety assessment business.
spk02: Great. Thank you.
spk11: Sure.
spk08: Our next question comes from Tyke Peterson with J.P. Morgan. Your line is open.
spk13: Hey, good morning. Jim, I hate to split hairs here, but are you able to talk at all about January trends or year-to-date trends? You know, I understand your booking study is out to 23, and, you know, you're expecting to see growth in DSA this year, but can you just talk as to whether things did, you know, hold up to the beginning of this year so far?
spk11: Yeah, well, we typically don't do that. I mean, I think I'd rather say that we we ended the year strong. We anticipate improvement in several of our businesses in the first quarter, principally and particularly the DSA business. The demand is certainly there for those businesses in particular. And as I said a moment ago, answering another question, we see Those bookings and the escalation in the price continue to unfold through the back half of the year, and we don't see any logical rationale why that won't happen. These are the first time we've booked that far out into the next year, I think, ever. And that's a commentary on the volume of work, how well capacity is utilized across the system, not just at Charles River. and how much the robust nature of the discovery pipelines that these clients have. So, you know, we're looking for sequential improvement principally in DSA in the first quarter.
spk13: And the follow-up, I know you've shied away in the past on kind of, you know, quantifying price increases, but is there any way you can just help us think about kind of the magnitude, whether this could be a source of friction with clients, and then I guess in your view, what constitutes margin improvement? And, you know, how do we think about the tradeoffs here between wage inflation, the CDMO that you're integrating, and the price increases you talked about?
spk11: Yeah, so I'll let David jump in in a minute. But without, again, without giving the explicit price increases, our price increases principally in safety assessment, which I think is at the root of your question, uh, increased in 2021 over 20 meaningfully and will increase, uh, meaningfully again, 22 over 21. And that's, that's like fat. These are booked studies. And as I said, they actually improve in the back half of the year, continue to improve in the back half of the year. So it's, it's all a function and a manifestation of demand and capacity, available space and the complexity of the work that's going on. So, uh, We feel very good about that pricing, and we feel that it's at appropriate levels. And David wants to take the sort of offsetting nature of the price increase and inflation, et cetera.
spk10: Yeah. I mean, just to pick up on that price conversation, I mean, you know, it's fair to say that the segment where we have the highest price increases is actually in our largest segment, which is DSA. And you've already heard... Jim mentioned earlier that a billion dollar increase in the order book going out into twenty three. So we've got a our biggest segment as a massive step up in the order books and we have the highest price increases in the area. So that that helps us offset some of these higher inflationary costs that everybody's seeing in twenty twenty two. so um you know and we've also got continued investment in our business not least of which is digital and it's worth calling out that despite that we are gonna we expect to deliver modest margin improvement and we have a 20 basis point headwind from the 53rd week this year so um it would be nice if we didn't have the 53rd week because we could add that 20 basis points in and we might get a bit more than the modest improvement um over last year and we still believe In the long-term targets for 2024, another 150 basis points if you take this year and the next couple of years. So we do feel that we're in a position that we can pass on, if you like, some of these cost pressures to our customers through the pricing. So it's nice to be in a position that we can do that.
spk12: Okay. Thank you.
spk08: Thank you. Our next question comes from Dave Wendley with Jefferies. Your line is open.
spk07: Hi. Thanks. Good morning. Thanks for taking my questions. I wanted to try to tie a couple themes together and questions that I'm also getting. So around thinking about growth and the progression of growth, it sounds like particularly in DSA, you're expecting to improve off a, I think it's about an 8% number in the fourth quarter. But if I'm To read the tea leaves, it sounds like maybe not quite reaching double digits. Your full year expectation is mid-teens for DSA. So maybe you could help us understand. You've mentioned pricing unfolds as the year progresses, but help us understand how you get to the mid-teens target for the full year against comps that get a little tougher as we progress through 2Q and 3Q, starting off at a level that maybe is about a little better than half that growth rate.
spk11: I mean, we get there by increased demand, so accelerating demand with sufficient capacity with considerably higher price points and the knowledge that this will occur given how far back into the year this is booked. So it's actually the best visibility we've had in an awfully long time. Yeah. And that's how we get there, Dave.
spk10: Okay. Yeah, let me just add a point here. So, Dave, Q1. Q1 is somewhat handicapped by a drop in RMS, which we called out because of the strong computations that we had in Q1 last year with China, right? So, you know, in a way, that kind of compresses Q1. At the same time, you know, DSA is doing, you know, it's doing well from our perspective. as we pick up from Q4 position. So that's one thought just to bear in mind. Another way of putting it, if we didn't have that compression from RMS, we would be posting higher numbers. Another point to bear in mind is that as we get into the second half of the year, we do have the CDMO businesses becoming organic. And we did call out that there's 150 basis points improvement in the second half of the year or broadly that sort of zip code. in the second half of the year. So that also helps with the second half of the year. So those are two of the softer points to point out. The major point is the one that Jim pointed out, that we've got more demand, more price, great visibility. We can see it. We can see what's being booked in Q3 and Q4. And we know what prices that are put into those places too. So from our perspective, the Q1 is somewhat depressed because of RMS. But as you go through the remainder of the year, You get that bounce from the DDMO becoming organic, but the real driver here, the core driver here, is the improvement in DSA with the volume and pricing.
spk07: Got it. That's helpful. Again, focusing on DSA in particular, Jim, you said earlier to John's question on CapEx that the spending you're embarking on now is more for late 23, 24 capacity. You have the 22 and 23 capacity in place. I guess I'm wondering, does that mean now or is it rolling out through the year? Another way to ask the question is, are you somewhat capacity constrained from a volume standpoint to start off the year until maybe some new capacity comes on? Or yet another way to ask the question is, when your clients are approaching you and saying, do you have a spot for me, why isn't the answer, yes, I do, in one queue to start off the year even faster?
spk11: Yeah. Yeah. I would describe it that we're not capacity constrained. We have lots of long-term studies that are booking out for a long period of time. We have reserved spots for shorter-term studies to get people in earlier. It's a very positive situation just in terms of kind of a supply-demand quotient that we have. We have sufficient space to accommodate our clients' needs. We're also getting our clients to prioritize what studies they actually need to start early, as opposed to saying, we have 10 studies, we want them all to start in two months, which is typically what we've had in years past. So I'd say it's a much better dialogue where we're causing or requiring our clients to plan, which is not something historically they've done well. We've caused them to We've caused them to prioritize, which is very, very powerful for us. And we've been able to slot them in throughout the year. So I wouldn't say that we're capacity-constrained. I would say that the capacity for the industry, if you can call us an industry, is sort of appropriate for the demand curve. There's enough to accommodate new work, but not tomorrow. There's some waiting period. And, of course, we build space slightly in advance of how much we think we'll need, which, of course, we have a plan for the next five years and we have to extrapolate that and build it out accordingly. So I think we've done a very good job for probably 10 years now staying ahead of the demand curve, which is obviously and clearly intensifying just as we've become a bigger player. I feel very good about the capacity both in terms of overall square footage, but perhaps more importantly, the proximity of our sites to clients, which puts us in a stronger position than the competition.
spk07: Great. Thank you very much. Sure.
spk08: Our next question comes from Patrick Donnelly with Citi. Your line is open.
spk04: Hey, guys. Thanks for taking the questions. Jim, maybe one on China, you know, obviously you guys have exposure areas like RMS there more than, more than the corporate average. So can you just talk about the outlook there? Obviously not a direct impact, but there's been some disruption on the CDMO side with, with the unverified list and things like that. So can you just talk about your outlook there? It's been a nice growth, growth vertical for you guys in RMS. I'm just curious the outlook on that front.
spk11: Yeah. You know, it's pretty much the same as it always has been. We, we, We have another small business, the microbial business. So basically, it's a research models and services play for us in China. And we really have no plans to expand that. I'd say the research model and services business is performing so well just from a quality point of view that we have, I don't know how to put it, no interference or support from the government, if you could put it that way, that I think there's an acknowledgment that we are an important element in the whole drug research and development paradigm in China, that there's real professionalism and ensuring bacteriological and virological and genetic quality of animals. And so it's a market that is very big. There's huge investments recently sort of in mid-tier and in biotech. There's CROs cropping up. investment obvious also in the pharmaceutical industries and sort of a bunch of lower quality government owned competitors that we've had for a period of years. So the business is growing, you know, it's a double digit growth business has very good operating margins to very capacity dependence because it's a big country. So our, our, the necessity and our ability to expand geographically is sort of underlying our growth rate. So we continue to add new sites. It's pretty much an immediate uptake or uptick in the demand rather than trucking the flying animals. We, you know, we're very long distances. We're very close by. You know, I said for a number of years, it sort of feels the way Europe and the U.S. did several decades ago. So I think it's a long runway. I think this will be a meaningful business for us. We're beginning to branch out. We started with the research model production side of the business, just making it side of the models, and now we're in all of our services, including GEMS and RADS and IS, and now we have a cradle operation over there. So all the things that we do in that business on a worldwide basis, we brought to China. So the government either doesn't care about us or... kind of quietly acknowledges that we're enhancing the level of play and the quality of research in China and is supporting us and I'll just remind you just so that that will totally make sense to you is that we bought a pre-existing Chinese company and we didn't buy all of it we own almost all of it now but we didn't buy all of it at the beginning so I do think that that asset has always been looked at by the Chinese government as a Chinese company even though it's owned by a U.S. company and So we're enjoying our run there. I think it's an important business. It's one of the growth drivers of our research model business. We don't anticipate any sort of government difficulty or intervention. We think the competitive scenario is quite favorable for us.
spk04: That's helpful. And then maybe just a quick follow-up on the capital allocation side. I know you mentioned share repurchases are possible, given where the stock is. Maybe just on the M&A side, can you talk a little bit about your philosophy? I mean, it certainly doesn't sound like you're wavering on leaning in on areas like cell and gene therapy, areas that are a little more tied to the high-growth funding environment. Any changes to your desire to continue to increase exposure to those types of areas inorganically here?
spk11: Yeah. I mean, strategic acquisitions continues to be our preferred use of capital always before always was, I suspect, to some extent, will always will be. I mean, we've, we built a very broad portfolio, principally through M&A. And that's the distinguishing feature of the company. And that's what accelerated our growth rate. We have a fair number of assets that we're always looking at, but we're looking at we're looking in have more discovery assets, particularly in the large molecule space. We're definitely looking at more cell and gene therapy assets. I think that was your question. We're looking at some things in the research model space. We're looking at some geographic moves. We're looking at kind of some lab services capabilities. We're looking to continually build out, enhance, expand our portfolio. And that could mean filling in sort of a narrow gap that we have. We don't have a lot of gaps, but we have some small ones. I mean, we had no CDMO space capability a year ago, so we filled that gap. And some of the areas that we're in would like to have larger capabilities, and some of the areas that we're in would like to have broader geographic reach. So we're staying focused in the areas in which we play and which we have oftentimes a leadership position or at least a strong position, which is responsive to continued demands from our clients or expectations from our clients in terms of the products and services that we provide them that they either can't get elsewhere or can't get at all or don't want to do themselves. So, yeah, and I guess additionally I would add that we have these 16 technology deals that we've done some of those deals, like our distributed bio, which is our large molecule discovery platform, will become acquisitions. Some of those will fall by the wayside because the technologies don't work, but some of those will become acquisitions after very thorough due diligence. So, yeah, we aim to continue to strengthen the portfolio principally through M&A. Great. Thanks, Jim. Sure.
spk08: Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.
spk06: Hi, guys. Thanks so much for the question. I guess on the first side, just on the bookings commentary that you mentioned, is there anything you can say in terms of mix of clients? Has there been any changes in terms of more larger clients or larger biotechs or anything like that that's different from historical trends that you've been seeing?
spk11: Probably not. We don't give that fine-tuned clarity when we talk about it with you folks, except to say that pharma continues to outsource more work. They definitely don't build any new space to do the things we do. I would say they are rapidly outsourcing most of the things that we do with some but very few exceptions. They look to biotech to be the discovery engines for sure, so they provide funding. And then I would say that biotech, both large, medium, and small, is a disproportionate driver of our growth for obvious reasons. The obvious reasons are that biotech companies with a handful, literally one handful of exceptions, and you can name all five of those companies, and even those companies are principally outsources, but for any biotech startup, even a biotech company that's a few years old or that's gone public and pre-revenue, they have no internal capability to do anything that we do, none. And they have no internal capability to get us. They have no internal capability to develop their own drugs. So they have to go outside. They have to externalize. It's not optional. They have to decide who they're going to work with. And interestingly, I know you've heard this before, but I think it's worth repeating. Interestingly, I would say as a class of clients, they are less price sensitive than big pharmaceutical companies just because they're in a race to get to market. They often have one shot and goal. They often have a single drug, a single modality, a single concept that maybe they have IP on and getting a slot is working with a company like us that actually understands the science and the regulatory environment and getting them over the finish line is more important to them than the price of the study because if they don't do it in a timely fashion, if it's not done well, you know, they can miss getting to market. So, you know, we like the blend of clients. You know, there's, what is there, maybe there's 10 big drug companies left in the world and I think there'll be further consolidation. So we love them They're very big clients. They're very big outsourcers. But on a forward-going basis, biotech will continue to be the principal driver of our growth.
spk06: That's very helpful. And I think if we look back historically, last time there was sort of like a decline in biotech funding on the order that we're seeing was sort of maybe the 2016 kind of time frame. And it did seem that that year, actually, your organic growth accelerated, and then the growth actually slowed in the subsequent year. And I know, obviously, your business mix is different versus then. But is there anything you can point to in terms of visibility into, say, 2023? I know you've talked about some of your DSA being booked sort of through that time period that could sort of help give us comfort into sort of that longer-term growth profile.
spk11: Sure. I mean, just to reflect further, I guess what I said earlier, that it's unprecedented to be booking this far in advance. The strength of the pricing paradigm is quite interesting. I mean, I think that's a commentary on how much work there is out there and limited number of providers and the complexity of the work, for sure, because we basically said your studies are way, way more complex. you need to pay us for that because you can't do it yourself with regard to big pharma and biotech certainly can't do it themselves. If they had multiple years of cash, much of which came from the capital markets, but pharma will continue to be a principal source of funding as well. Money that's going into the VC sector. We have a lot of work from VC clients. I think, I think we said it the last time we, We had one of these calls that around or slightly more than 10% of our revenue is coming from VC portfolio companies. So that's quite positive. And just again, we have no dialogue about pricing or concerns about funding. We only have a dialogue about can you accommodate our work. So I don't have a crystal ball that provides great clarity on what's going to happen for this. future, but given the strength of the modalities, given the strength of our competitive posture, given the funding environment, even if it moderates a bit, we think we're in a very strong position to continue to grow our franchise at the levels that we've talked about, low double digits. I think we said through 2024 operating margins came to 22.5%. We remain very confident that about that. And, and I'd say that the current situation with starting the year with booking that much higher than the prior year, billion dollars higher, and stuff looking in work booking into the next year is, is a bit unusual, and I think sort of a manifestation of the demand curve.
spk08: A tough one. Thank you.
spk11: Sure.
spk08: Our next question comes from Tasia Vaught with Morgan Stanley, your line is open.
spk14: Hey, guys. Good morning. Just one quick follow-up there, Jim, on Elizabeth's question regarding customer mix. Is there any sort of data points that you can share on what your exposure is to pre-commercial stage customers? I guess the question we're all getting is, you know, this public market funding slowdown might sort of disproportionately impact customers in that category versus large or mid-sized pharma that already have products on the market. So just curious as to anything you can share along those lines.
spk11: Yeah, you know, we've never broken it down that way. And obviously lots of companies, maybe most, not maybe, most companies in the biotech space are pre-revenue. So I'm not sure how helpful that distinction would be for you. Yeah. If the companies are well-funded, if the companies, more importantly, have breakthrough technology, if the companies have technology that could provide either a therapy or a cure for unmet medical needs, it's sort of inconceivable to us that there would be funding either directly from the capital markets or from big pharma who will want those assets. Again, we built up our analysis on how much money is available and client by client. We talk to these clients every day and we hear no concern at all about funding, either immediate or in the future, just none, not part of the dialogue. I have no idea if or when that would change. I don't see why it would, given that there are several years of cash available to them. It's a we have sort of a meaningful amount of our clients probably fit that category. I don't know the exact percentage, and we've never broken it down that way publicly.
spk14: Got it. And then on Hemocare and Solero, Jim, I think you called out sort of, you know, hoping for an improvement here through 22. Can you just give us an update on some of the initiatives you have in place that, you know, outside of the market dynamics itself that can help you, you know, get there?
spk11: Yeah, well, we, you know, we continue to strengthen, enhance the management team there, I'd say kind of particularly on the sales side and connected with other parts of the company. Both the specific cell and gene therapy assets that we have bought, but also other parts of the business so that we have this sort of sort of elegant pull through. I'd say that's number one. Number two, we've We've redesigned our donor rooms to accommodate for some of the COVID concerns. And perhaps more importantly than that, we've opened additional donor rooms. So our capacity has expanded dramatically. And the last thing that we've done is dramatically sort of enhanced our social media outreach to both identify donors and qualify them. So much more rigor in that process, much more rigor in the capacity, much more, I think, elegant and concerted outlook. The demand remains quite strong, and so we're more mindful of the fact that that business will continue to improve throughout 2022.
spk14: Got it. And one final cleanup for me on biologic safety testing. I know you mentioned this COVID vaccine lot release testing revenue that's expected to moderate in 22. Can you just help put some numbers around what it was like in 21 and where we should expect that to go this year?
spk11: So I won't give you the numbers except to say that those were big contracts that have moderated. They blew the biologics revenue up to a 30% growth rate. We reported this, I think, in the third quarter. And if you back those out, that business is growing at about 20%, which we reiterated this morning. So it was nice to have it. We'll still have some of that because obviously there's considerable work still going on with the older vaccines and perhaps some new ones. anticipating some variants and just sort of vaccine work generally. But the principal driver of growth for the biologics business is obviously the plethora of large molecules generally, but specifically demand for cell and gene therapy drugs. So we continue to feel very good about the short and long term growth rate of that business. We anticipate improving operating margins in that business and we have a very strong competitive capability. particularly enhanced by the cell and gene therapy assets that we bought. So from a competitive point of view, we just have a much broader portfolio of products and services that we can sell.
spk14: Got it. Appreciate the call, Jim. Thank you. Sure, sure.
spk08: Our next question comes from Donald with KeyBank. Your line is open.
spk03: Great. A lot of questions have been asked here. I'll just stick with kind of one for me, kind of high level. Jim, you've been asked this a number of times, but I'll ask it again just to hear any updated thoughts. You called out Valo, the partnership there in the AI ML space. I'm just wondering if you can provide any updates around any case studies using AI and ML in different ways that actually can impact what you're doing and more than just theory. And is there any kind of pushback from staff around change management to the extent that any of that stuff disrupts people's daily workflows?
spk11: So it's very, very early days. That deal was just signed. That company looks to have some promising technology that should help get to a lead compound quicker or conversely to kill the potential lead compounds that really won't pan out. And that that technology in concert with some of the things that we do both in vivo and in vitro should benefit the discovery part of our business in particular, but also the services that we provide to clients who are looking, all of them are looking to get things to market faster. So, It's very early days. This won't be the only AI deal that we do. There are multiple AI technologies out there. We're probably going to have several shots on goal, but this company is pretty advanced and quite sophisticated, and the technology looks extremely promising. If it works, I don't think that's disruptive at all to what we do. I think it's an enhancement. what we do to provide that as part of our service and our portfolio to probably not probably to reduce the timeframe with, I would, I would anticipate increased revenue and profit as a result of being able to pull things forward since time is certainly money for these folks. And yeah, I mean, to your question, I think so much of AI is anecdotal, but so much of AI is, should work and should benefit both preclinical and clinical aspects of drug development by designing better trials with better predictive outcomes. I think everybody believes that some aspect of that is possible. The question is how long will it take and how profound will it be and how much will it transform things? We're looking at it sort of very surgically that that would help us with certain aspects of our discovery business to get to get to a lead candidate faster. So we'll give updates as this relationship develops. VALOR will probably give its own updates. We'll try to do some things on a combined basis, but it's going to take a while to prove the thesis out for sure.
spk03: Okay, thank you.
spk08: Our next question comes from Salvia with UBS. Your line is open.
spk09: Hi, thanks for taking my question. Microbial is expected to normalize growth this year after some of the COVID benefits, but still grow 10%. Can you talk a little bit on the sustainability of that outlook and what is the current market penetration and any way to think about what percentage of the manufacturing segment is microbial?
spk11: Sure. It's a business that has pretty much for the entire time we've owned it, which is 25 years, grown at double-digit rates. So it's an extraordinary business. We have the only business that we do pure R&D, and we have IP and all of our technology, and we're a generation or two ahead of the competition. And so it's a, you know, we have very good visibility. You know, it's a, a lot of that business now is a sort of razor and razor blade structure. You know, we have these, handheld devices that we sell that have cartridges that are used and thrown away usually daily. So we have this built-in base and we have thousands of those machines out there. And once clients validate working with our machine, which by the way is a higher price per test than the competition or even our own historical technology, but gives you much faster answer, and the speed is money to the client. I had a little bit of disruption from COVID because machine deliveries and reagents were backed up. We're past that. We have several technologies in that business. We have an endotoxin testing business, but also business that looks for bacterial contamination and also identifies what the bacterial contamination was. So if you produced a lot of drug and it was contaminated, you need to know how it got contaminated and where it got contaminated. And we're able to do that. It was all required by law, by the way. So, um, business has enormous, uh, long-term benefits. We're by far the market leader. Uh, we've, um, I'm not going to give you explicit numbers because we've never done it, but we're in the process of transferring a lot of clients that have used our historical technology to this new technology. And we still have a long way to go in that transformation. And it will be at much higher price points and much higher margins. So we're well into it, providing advancements to the technology all the time. staying close to the regulatory authorities all the time and really continuing to have terrific penetration into some very, very big pharma companies that utilize this and a whole host of both medical device and drug companies as well. In some ways, it's the most stable high growth business. It's just been growing at this double digit level As I said, the whole time we've owned it, it's going to be a very big business now. I think we've given some details where you may be able to figure out the size of it as what portion of the manufacturing piece, but we don't explicitly or specifically break that out.
spk10: Yeah, we've said if you consider microbial biologic testing, CDMO and Avian, the four units, of those four units, microbial is the largest piece. We have called that out.
spk09: Thank you for taking my question.
spk08: Thank you. And I'm currently showing no further at this time. I'd like to turn the call back over to Todd Spencer for closing remarks.
spk01: Great. Thank you for joining us on the conference call this morning. This concludes the call. Thank you.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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