Charles River Laboratories (NYSE: CRL) reported a 6.5% organic revenue growth in Q4 2023, reaching $1.01 billion with an operating margin of 19.1%. The company, despite a challenging environment in the life sciences sector, anticipates a cautious market to persist into 2024 but expects demand to stabilize later in the year. For 2024, the company forecasts flat to 3% organic revenue growth and non-GAAP earnings per share between $10.90 and $11.40. This includes the benefit from a higher ownership stake in Noveprim, a non-human primate supplier, which is expected to bolster earnings by at least $0.30 per share.
Key Takeaways
- Charles River Laboratories reported Q4 2023 revenue of $1.01 billion, with an operating margin of 19.1%.
- The company forecasts flat to 3% organic revenue growth for 2024.
- Non-GAAP earnings per share are projected to be between $10.90 and $11.40 for 2024.
- The acquisition of a controlling interest in Noveprim is expected to contribute to earnings and operating margin improvement.
- Revenue is expected to decline in the first quarter of 2024, with a recovery anticipated in the second half of the year.
Company Outlook
- Charles River expects constrained client spending in early 2024, with improvement later in the year.
- Revenue growth for 2024 is projected to be 1-4%, with non-GAAP earnings per share growth of approximately 2-7%.
- The company aims to leverage technology and enhance commercial efforts to drive growth.
- Long-term targets include averaging 6-8% organic revenue growth through 2026 and delivering meaningful margin expansion.
Bearish Highlights
- The Discovery (NASDAQ:WBD) services experienced declining revenue, and the RMS segment saw a decline in Q4 2023.
- The company predicts a low to mid-single-digit decrease in organic revenue for the first half of 2024.
- First-quarter revenue is expected to decline on a reported and organic basis.
Bullish Highlights
- Charles River anticipates stronger performance in the second half of 2024.
- The company sees opportunities for share gain, supported by legislation and a diverse portfolio.
- Long-standing contracts with pharmaceutical companies are increasing in scale and duration.
Misses
- The company reported that the first quarter tends to be slower with higher cancellation rates, although they expect improvement.
- There have been no developments regarding the reintroduction of NHPs in China.
Q&A Highlights
- The company has not observed a dramatic change in the slope of bookings and proposals but has a 12-month backlog.
- There is optimism for a potential sustained capital markets recovery in biotech, leading to more aggressive spending by biotech companies later in the year.
- Charles River Laboratories is managing headcount according to demand and sees no significant changes in the growth trajectory.
Charles River Laboratories remains optimistic about their long-term prospects, emphasizing the diversification and enhancement of their NHP supply through the Noveprim acquisition. They believe this strategic move, along with their focus on streamlining operations, will strengthen their position as a partner to clients in the life sciences sector. With a cautious but hopeful outlook for 2024, the company is poised to navigate the challenges and capitalize on the opportunities that lie ahead.
InvestingPro Insights
Charles River Laboratories (NYSE: CRL) has demonstrated resilience in a tough market, with a reported organic revenue growth of 6.5% in Q4 2023. As investors evaluate the company's future prospects and its recent earnings report, several metrics and insights from InvestingPro may offer a clearer picture of its financial health and market position.
InvestingPro Data shows the company has a market capitalization of $12.51 billion and is trading with a P/E ratio of 26.27. The company's revenue for the last twelve months as of Q3 2023 stood at $4.22 billion, marking an 11.49% growth. Furthermore, the gross profit margin for the same period was 36.89%, indicating a strong ability to retain earnings after the cost of goods sold.
An InvestingPro Tip highlights that Charles River Laboratories is trading near its 52-week high, which could signal market confidence in the company's performance and outlook. Additionally, the stock has seen a strong return over the last three months, with a 23.47% price total return, aligning with the bullish sentiment expressed in the company's outlook for a stronger second half of 2024.
Investors looking for more detailed analysis and additional InvestingPro Tips can find them at
Operator: And we will take our next question from Elizabeth Anderson with Evercore ISI.
James Foster: Yes. So our pharma business in 2023 was particularly strong. we have had a long legacy with the pharmaceutical industry. So that is not necessarily new, except sort of the scale and rate and depth and longevity. And when I say longevity, I’m just talking about long-term contracts that we have with these two to five-year contracts have been ticking up really, really nicely. So we have an amount of our work locked in for multiple years with escalating price points that are already pre-negotiated. And increasingly, we are seeing Big Pharma by very thoroughly across the portfolio. So many of them buy everything that we sell. We also have several Biotech companies that do all of the, let’s say, pharma companies to have the safety work with us some that do most of the safety work for us and even the ones where we are not necessarily - that is just a few of them where they do a lot of work internally. I think where the default. So I mean, obviously, pharma is extremely well financed. It is probably the best thing you can say about the very well financed, placing bets with multiple biotech companies that have become the discovery engines. You have seen lots of acquisitions of drugs or geography to sell the drugs or entire drug companies almost daily since the beginning of this year with big pharma. I do think that is going to continue. And we always hope that one plus one is more than two for us. But certainly, if we are already doing work for the target and the parents we will hold out of that work. Having said that, biotech for the last decade has been a larger and more aggressive driver of growth. So let me just unpack that. So while we have much larger such a large amount of revenue that we are selling to pharmaceutical companies and they are very, very big clients. Obviously, we have many more biotech clients, none of whom have internal capacity to do the type of work that we do. So without overstating our importance, they are very dependent on either us or some company like us to move the drug through preclinical get their IND filed and ultimately gets into the clinic. So pleased with our sell-through, particularly in pharma and as the capital markets strengthen, which they will. I mean it is - we all have our own [progasication] (Ph">https://www.investing.com/pro/CRL on when that is going to happen, but they will little bit happening in January as VC monies continue to be robust. And as the pharma companies continue to bet on Biotech and as the modalities continue to strengthen things like cell and gene and immunotherapy. The biotech will continue to ramp up more aggressively with us again. So we like our client base pretty much across the board. We like the share percentage in the numbers of drugs we work on, which is over 80% of all the drugs approved in the U.S. for the last - more than the last five-years and probably on the increase. On the share gain question, I do think we have enormous opportunities to take share in virtually everything we do, certainly in biologics, certainly in the CDMO business certainly in discovery, either and - where we have the principal amount of share. Some of that is as you said, is probably bolstered by new legislation. I think some of that is just supported because of our scale, the depth of our portfolio. in the fact that every client that we work with is very interested in speed to market and the nature and both of our portfolio helps them get things at least to the clinic faster. So we should be able to pick up meaningful share as the clients are more comfortable and less cautious and less conservative with the spending patterns, which we think will be a sequential movement through the back half of the year.
Elizabeth Anderson: Got it. And one1 additional follow-up question. The 29,000 of average NHP pricing that you cited at your Investor Day, is that still the right way to think about sort of the pricing level for 2023 as a whole?
Flavia Pease: Yes, Elizabeth, it is Flavia. I will just say the numbers we shared in the call related to NHPs, whether it is the price, the price gain over three-years, the units, the amount of NHP work as a percent of Safety’s revenue, they are all still - with the year-end results, they are all still similar. So there is been no significant update from what we shared with you before.
Operator: And we will take our next question from Dave Windley with Jefferies.
David Windley: So on the Noveprim, I was trying to quickly scroll back through the deck and unable to find it. But I think it would be helpful for me certainly to understand a little bit more of the mechanics of how much revenue you expect that to contribute and what the margin structure of that business looks like relative to your comments that, that is providing I think you said most or all of the margin lift for the company in 2024. And then I have a follow-up.
Flavia Pease: Yes, I will take that. So just to reiterate, we expect Noveprim to add between $40 million and $50 million of top-line revenue, which will obviously impact reported revenue but not organic. We also expect that Noveprim will add about $0.30 of EPS, which, if you do the math, is about 50 basis points of margin expansion. And just to articulate a little bit how the construct will work at this point in time, even though Noveprim is definitely a move that will allow us to have additional oversight control and eventually higher volume of NHPs in support of our safety business. In the short term, the majority of the financial impact will be reflected in the RMS segment, where that external revenue will be reported. And so that $40 million to $50 million of third-party revenue will also increase the RMS margin approximately 200 basis points. If you think about the benefit for the Safety Assessment and DSA segments it is going to be relatively small, especially in 2024 as we obviously already have safety stock of NHPs from Noveprim and other suppliers in the case of Noveprim that were acquired prior to the acquisition. So it is only once we start having models that go into studies that benefit from Noveprim being consolidated into Charles River that will start having an impact in the DSA margin, and that will be impacted by timing. So the majority of the impact in 2024 will be reflected in the RMS segment.
David Windley: Understood. Thank you for reiterating some of that. My follow-up question is around I guess, more general pricing environment, some of your competitive - I guess a couple of different dynamics. One being some of the competitors, albeit smaller competitors have also addressed cost structure in a way to significantly lower their costs and have expressed at least to me, a willingness to be more price competitive on studies and another angle on this being to the extent that small biotechs might evaluate a trade-off between Charles River or other providers in the Western world or an Asian provider at a much lower price in the Eastern world that primate prices in China have dropped a lot, which makes the cost structure of those competitors significantly lower as well. And so the general question here is, how much price competition is seeping into the safety assessment market as a result of these lowering cost structures.
James Foster: Let me take that one. So Dave, I would say that all of our competitors and the smaller they get, the more this is factor compete with us primarily on price. And so to some extent, that is an -. And we accept that and clients that either can’t afford it or think we are too expensive or running out of cash or whatever or prefer the competition, whether it is East or Western can and will go there. And that is okay. So I mean, that is an -. The Chinese capacity - there are certainly some small, let’s say, U.S. biotech companies that do their work in China. There is a limited amount of capacity in China. So that will happen. They will come and go. And yes, the cost of labor is lower and the cost of everything that is lower there. And I won’t comment on the quality of the work, I mean they will have to make that determination themselves. We try to be rational and appropriate and professional with our pricing, as I said earlier in my comments, we have a lot of long-term contracts with big pharma for some reason, most of them came to fruition in fiscal 2023. So they have all been resigned. The pricing is locked in. So that is a significant amount of what we do. I do think that folks come to us because our portfolio is larger. Our proximity is closer. The depth of our science is better. And our scale is better. And of course, if they know us well, the presumption that were too big and too expensive is really not true. So we will use pricing as well in certain instances. And I would say those just kind of fall into a few categories, which is to protect share in big - just a big clients that we have that is out shopping specifically for price. And so we may have to do something there. We certainly will be price aggressive if we are going after a big sluggish share with a client that we either don’t have at all or have very little. But we often pass when the price point just gets too low because it is going to be at cost or below cost or a trivial operating margin, and it is just not worth it given the complexity of the studies. I guess one other thing I would say is that where - I don’t know the exact numbers these days, but it is probably in the high 30% range what our market share is. While we are pleased and proud of that, I do think our share will be much larger over time. But if we only have a 30 - whatever, 6% share, there is lots of share that they are going elsewhere. So I think it is important that we have decent competition regardless of their price points. And regardless of where they do the work. And I think it is important to engender large clients, particularly Big Pharma clients to outsource that they feel that they can outsource to folks that are capable. But I think from a pricing point of view, we have been and we will continue to hold our own. We will invest in price in safety in fiscal 2024. That is not just in fiscal 2023. I think that is a commentary and lots of things, commentary on the nature of your question, commentary on the overall economy commentary on the cautiousness of our clients as they put a little more emphasis on post-IND work and clinical work, maybe to the detriment of some of the earlier tax work and certainly on the discovery work. But I think most of the time, we feel that we are being paid quite well for our work.
Operator: We will take our next question from Justin Bowers with Deutsche Bank.
Justin Bowers: So just a two-parter for me. Can you talk about the sort of like the pros and cons of owning farms and HP suppliers? I know we have done this in the past, and there has been - your strategy is evolving over the last 18 to 24-months. So could you just sort of give us some thoughts there on that? And then part two would just be around competition, just given the demand environment has slowed in general, there had been, I think, some competitors funded over the last few years. Just what are you seeing in the competitive environment competitive environment. Generally, what are you asking about specifically with regard to compensation? Sorry, within like within DSA, for example. Are we seeing exits from competitors or anything? Yes.
James Foster: The competition is pretty static. We are the largest player by 100%. Our next largest competitor is kind of LabCorp and that is a capable, relatively large, stable enterprise, very good in sort of general toxicology. Then you have another tier, which used to be sort of fourth or fifth tier, which kind of became third tier because we bought 3 of our competitors in the second tier and merged with one of them, and those are much smaller companies. When I say much smaller, maybe they do - I’m just trying to do this quickly in my head, maybe they do. 5% of what we do, maybe they do 8%, maybe they do 10%, but they are much, much smaller. I don’t know what their financial status is. One of our competitors market CapEx shrinking there is enough business to go around. But I do think it has to do with quality and science and speed and technological rigor, particularly IT capabilities. I think it is incredibly unlikely that we will have new competitors. There are several decent competitors in China that I think will focus. They are probably doing some work now for Western companies, but the raise on [indiscernible] is to do toxicology work in China for Chinese drug companies. I think many of them are funded and/or supported by the Chinese government. So I would say the competitive dynamic is kind of - it is what it is and is unlikely to change. There seems to be enough scale to support the client base. So that is positive. To go back to the other part of your question. I don’t see cons in owning the suppliers. So let’s just talk about the one that we just bought. We now own 90% of. It happens to be probably the highest quality and the one that we know the most about and the one that just exquisite job in terms of the quality of the NHPs themselves. But it just gives us control on the ground of everything, control of [indiscernible] tree, breathing veterinary oversight, nutrition, housing, ultimately shipping. We have a very, very close relationship with the government there, and we have already spoken to them about scaling up the project over the next number of years and have a workforce that we are confident in, and it is hard. So any sort of concern about, I don’t know, transportation or animals getting ill before they are put on transport or just the overall genetics or reading methodology. Number one, it is on us because we own it. Number two, we have a high degree of confidence in our own ability to do it at the highest quality level. I don’t even know the number anymore, but dozens and dozens and dozens of genarians mice from primate binaries. So we own another one in China, a much smaller one. We are considering doing more of this just to have control of our supply sources. Some of these providers are newer. They are just sort of getting their sea legs under one and I think we are trying to teach them a lot about all the things I just said. Obviously easier to teach them and train them and ensure that they are doing the right things if we own them. So we have a very, very large revenue base in NHP toxicology and growing. All large molecules have to be tested in the nonhuman primates. So the demand will continue to be significant and we need to continue to have access to large numbers of animals, but also the highest quality. So we don’t see cons. We see a lot of pros. We are delighted with the deal that we just did, both in terms of the supply source and the accretion on the top and the bottom line.
Operator: We will take our next question from Jacob Johnson with Stephens.
Jacob Johnson: Maybe a two-parter on manufacturing, the manufacturing segment. Can you just discuss probably it sounds like a lot of that is going to be driven versus - from the CDMO versus biologics, microbial, but maybe if you could talk about the breakdown of that. You would like to quantify the benefit from the CRISPR Vertex (NASDAQ:VRTX) relationship, that would be great. And then just on margins in that segment on the path to 30%. As we think about that margin expansion opportunity, how much of that really driven by the top-line or are there cost savings opportunities that could get you there quicker?
James Foster: So the CDMO business has been a huge headwind for us. For the past couple of years, right? Losing money growing okay. The back half of last year, grew very nicely, but had been slower than we thought it would be. And as you know, we have literally had to recapitulate, redesign, re-staff all three of these businesses, and I’m talking about general management all the way down to the technicians in the study rooms. And I think we have done a really good job as evidenced by the fact that we have had multiple regulatory audits culminating in with Vertex’s new sickle cell drug, which we are going to be producing a large amount of that. So a couple of things with that. That is obviously our key clients. That is obviously sort of wonderful almost marketing to be out there when other clients are thinking about who they are going to use, they are going to call Vertex and they are going to ask them about our relationship. And we have other clients who we are talking to right now who are about to file BLAs or finishing Phase IIIs. And I do think sort of success begets for the business. That business, while it won’t end fiscal 2024, where it should have been given our valuation models will have significantly better margins and significantly higher revenue not growing quite - we don’t have - our operating plan doesn’t have it growing quite at the rate that we thought it would when we bought them. But I still think that is transitory. And I think particularly as we get commercial clients that is going to crank up nicely. So we are liking this business a lot now. It has great connectivity with our biologics business and also with our Safety Assessment business. And so the portfolio effect is alive and well. The other two businesses in the manufacturing segment, first being the Microbial Business had its first year. I think it had one year where it grew at 9% and we have owned it for 28-years. Linear grew at 9%. Every other year, it grew double digit. Last year was the only year it grew slowly. And that is so we have explained that 50 times what happened there with that business. The top-line will expand because the clients have worked through a lot of the backlog because they loaded up on supplies during COVID. And the margins are stunning in that business. So that should continue to bolster the operating mines. And then Biologics, which is a business that in 2022 and 2021 had dynamic top-line growth teams and escalating operating margins had a very slow year last year, all because the economy, less numbers of drugs to test. It had a bunch of their capacity show Covid stuff we are still working through anyway. That business, as we said in the prepared remarks, proposal levels were up in the fourth quarter, which is a good sign that work comes back very, very quickly typically. And so we should see that whole segment, not our largest business, but to be significant not only in fiscal 2024, but if you look at the kind of three-year guidance that we gave, the CDMO business will be instrumental in driving operating margin and revenue growth for sure. It will be accretive to the manufacturing segment that will also be accretive to the business as a whole, and just reorganized that business with new general management and a different and tighter way of selling with single leadership and more commonality across those businesses. Because a couple of them are GMP businesses, which is the same sort of regulatory oversight and that sort of mindset is beneficial across the clients so important segment has some margin opportunity. Last thing just to specifically answer your question, that segment before we got in the CDMO business was around mid-30s operating margin. We had a few years where it was higher, maybe a few years where it was lower. It will continue to grow back towards that. It is a little bit difficult to say if and when it will get higher than mid-30s. But what we did say when we bought the company was that we believe that when we had a substantial bolus of commercial work at higher price points, with greater efficiency and greater predictability and just larger volumes definitely would be accretive to our operating margins. So that is going to take a while since we have only really signed our first one. But there will be more to follow. And as we get more of those and they get locked in for long periods of time. It will definitely benefit the operating margin of that segment. So we feel very optimistic, particularly optimistic about the CDMO business, in particular, but I’m quite optimistic about the home Manufacturing segment in terms of its importance to our client base in terms of the commonality of a lot of the work and in terms of the potential for better financial performance.
Operator: We will take our next question from Max Smock with William Blair.
Maxwell Smock: Just a quick one for me here on DSA. Can you just confirm that net bookings were down sequentially in the quarter and then discuss how you are thinking about net bookings moving forward in cancellations obviously elevated again here in the quarter. Can you just give us some detail around how gross bookings trended quarter-over-quarter? I think you called out still above one, but maybe just sequentially, any color there would be helpful.
Flavia Pease: I can jump in. So yes, the DSA backlog was sequentially down. I think we talked about $150 million still about 12-months, as Jim pointed out. And the gross bookings were still above one times. So we are not going to finesse the specific number, but gross bookings still above. And as Jim pointed out, with hopefully cancellation normalizing, we expect net book-to-bill will improve marginally when that happens.
Maxwell Smock: Yes, understood. Had to give it a shot there at the gross bookings. Maybe just a quick follow-up for me. Given the back half guide, can you just talk about when you need to see demand trends at the meat segment start to improve in order to hit the midpoint of your guide for this year? You had that comment in the deck about how at the top end of your financial guide. You assume demand trends will begin to modestly improve later this year. But just wanted to clarify your assumptions for when the management start to pick back up at both the low end and the high end of your guide and how that maybe differs by segment.
Flavia Pease: Yes, maybe I will start Jim and you can add. Max, we are not going to comment on the timing, to your point, by each of the segments and when precisely would that have to happen to get the bottom and the top end of the guidance. I think suffice to say, at the top end of the guidance, as we pointed out, we expect the main trends to marginally improve through the year. At the bottom end, it is more of the seasonal improvement that we tend to see. And I think at that top-line. And I think I made a comment about Q1 being a low point and talking about the drivers of that. And just to clarify, it is a combination of both tax, corporate and the ramp-up of our restructuring benefits that will together add about $0.25 of EPS. So the timing of it, it is probably going to defer depending on business. We have fast portfolio of different businesses that have different drivers. So we are just providing you a top and bottom for the total company. Jim, I don’t know if you want to add anything else.
James Foster: I mean I think that was fine. I mean we are quite confident that we are going to see a sequential improvement in top of the bottom line throughout the year. Some of that has to do with the comps of last year. Some of it has to do with our assumptions. I went through a bunch of those with the first question I answered business by business. There are some subtle things that are improving. There are definitely some subtle things that are improving in the marketplace, in the M&A space and with the capital markets. Look, the one thing that you should all keep in mind is that there is - there would be and there was enormous demand for our services. The preponderance of our clients have to do the work externally. They have no internal capacity. Their portfolio is quite full and robust given the lesser of modalities that they have to work on. And so our clients are holding back. Our clients have reprioritized. The clients have good drugs sitting on the shelf. So our clients are clearly very frustrated by that. And so I think we think that we get to the point where they are more comfortable spending because they have greater access to capital. The demand should improve nicely. Is it going to improve overnight in one-month, one quarter, I don’t know, but we do think that it will sequentially continue to grow when we have seen this before. We have several of our businesses where the work does come in and go out very, very quickly, particularly Discovery and Biologics, and we have others that we have very close relationships with the clients and the pricing is all fixed. And so the ability get a slot is quite straightforward. I’m so optimistic with our guidance so optimistic that the demand comes back. Yes, it comes back, it is only when. It is a little bit murky to call, but we are calling it as best we can given decades in the business given the fact that we talked to thousands of clients every week. Given the fact we actually we have a very good understanding of the competition and what the strengths and limitations are. So yes, we would be very surprised if anything happens to change the slope of growth. Obviously, there are exogenous things under our control, but the things that we see that are within our control or that are already in sort of calculated in our guidance, it is unlikely those things will change.
Operator: And we have time for one more question. We will take our last question from Dan Leonard with UBS.
Daniel Leonard: I just wanted to clarify, are you seeing any of these improved external indicators in the biotech market translate into increased inquiry activity or RFPs in DSA - and if you are not, what would you expect any lag to look like if there was a sustained capital markets recovery in biotech?
James Foster: It typically doesn’t turn on a dime. I mean we get asked this question a lot. And of course, we live lots of different I hate to turn cycle, but lots of different sort of funding time are in biotech. I think the biotech companies have increasingly gotten very careful about the way they are spending money. Having said that, as I said in the last question, I do think that they will spend more aggressively and more boldly if they have a sense that access to capital is easier and will be sustained as opposed to something that is going to be lumpy. I wouldn’t say that we have seen any dramatic change in the slope. I mean, we watch our bookings and we watch the proposal in bookings very closely. We obviously, as we talked about earlier in this call, very, very interested in cancellation and slippage levels, which I think are we are hopeful that those will come down. I mean the fact that we have a 12-month backlog, I think, is a positive. And as I said earlier, if that were to turn into a six or nine-month backlog that would be fine as well, so there is a lot of work out there, a lot of interest, limited competition and cautiousness across the board with our clients who are just like we have to hold off until we have a better understanding of where we are going to have better access to the capital markets. And there is certainly some - at least some early indications that, that is around the corner. You can see in our guidance, we believe we are going to see that at the latest in the back half of this year. And that will obviously be meaningful to, I think, most parts of our business and should accelerate our growth rate. We do have sufficient capacity, certainly physical capacity, and we are trying to manage our headcount according to demand. So I think our headcount is in good place. So as the work comes, we will be able to comment at.
Operator: Thank you. I will now turn the conference back over to Todd Spencer for closing remarks.
Todd Spencer: Thanks, Shelby, and thank you all for joining us this morning. This concludes the conference call.
Operator: Thank you. That does conclude today’s Charles River Laboratories Fourth Quarter and Full-Year 2023 Earnings Call. Thank you for your participation and you may now disconnect.
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