Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories Third Quarter Earnings Conference Call. I would now like to hand the conference over to your speaker today, Todd Spencer, Corporate Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to Charles River Laboratories Third Quarter 2020 Earnings 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 third quarter of 2020. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which is posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning 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 the call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a 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 and prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website. In addition, today's remarks will also include estimates of the COVID-19 impact on the company. Certain methodologies and assumptions related to how we develop these estimates can be found on slide three. I will now turn the call over to Jim Foster.

Thanks, Todd. Good morning. The global pandemic is continuing to adversely affect our world, yet through these challenging times, the biopharmaceutical industry is distinguishing itself by leading the way in scientific innovation that will be vital to finding a cure for COVID-19. At Charles River, we have never been so essential to our diverse and growing client base, and we remain fully operational and continue to enable our biopharmaceutical clients to move their programs forward across a wide range of therapeutic areas, including COVID-19. Our resilience through the pandemic has served to enhance our position as the partner of choice for our clients' early-stage research needs as we continue to differentiate ourselves through our broad portfolio, our scientific expertise, and our superb client service. In the second quarter, we were encouraged as most of our research model clients were returning to their facilities and recommencing their scientific research more quickly than anticipated. This favorable trend continued in the third quarter with a V-shaped RMS recovery as clients across North America, Europe, and Asia resumed more normalized research activities. The accelerated RMS recovery was a key component of our robust third-quarter financial results, which exceeded our expectations. COVID-19 had a very limited impact on our other businesses in the third quarter, aside from Microbial Solutions, which continued to work through its backlog of delayed instrument installations. In fact, we continued to generate new business opportunities through share gains, particularly with academic clients. In addition, we are winning incremental work as clients increasingly choose to outsource in order to utilize our more flexible and efficient drug development solutions, benefiting our Biologics, Discovery, Safety Assessment, and GEMS businesses. These factors contributed to our robust third-quarter performance, which included record revenue, non-GAAP earnings per share, and free cash flow. I'll now provide additional details on our third-quarter results. We recorded $743.3 million in the third quarter, an 11.3% increase over last year. Organic revenue growth of 7.8% was driven primarily by the strong performance of our DSA and Manufacturing Support segments, both of which improved their organic growth rates compared to the second quarter levels and were consistent with our long-term targets for these businesses in the high single and low double digits, respectively. RMS also contributed to organic revenue growth, returning to growth just one quarter after reporting an 18% organic decline as a result of COVID-19-related client disruptions and academic site closures. The operating margin was 22.7%, an increase of 330 basis points year-over-year. This reflects meaningful operating margin improvement across all three business segments, primarily as a result of leverage from our strong topline performance, our continued focus on operating efficiency and cost controls associated with COVID-19. We were extremely pleased with the strong operating margin performance, which reflected the underlying margin potential across our businesses. We also benefited from lower discretionary costs due to COVID-19-related restrictions, which included travel. Earnings per share were $2.33 in the third quarter, an increase of 37.9% from $1.69 last year, which exceeded our prior expectation of high single-digit improvement. The record EPS was driven by exceptionally strong operating performance as we emerged from the second quarter, which we believe will be the worst of the COVID-19 financial impact. A lower tax rate also contributed. Based on the third-quarter performance, we are increasing our revenue growth and non-GAAP earnings per share guidance for '20. We now expect organic revenue growth in the range of 5% to 6% or a 75 basis point increase at midpoint. Non-GAAP earnings per share are expected to be between $7.75 and $7.85, which represents a $0.60 increase at midpoint and a 15% to 16.5% increase year-over-year. The revenue headwind from COVID-19 is now expected to be approximately $70 million for the year, which is below our prior estimate of $100 million. Most of this revenue loss occurred in the second quarter, and we expect to exit the year with a revenue impact from COVID-19 essentially behind us. Our guidance assumes that there will be no new stay-at-home orders or wide-scale disruptions to our operations or our clients' research activity through at least the end of the year. But should this change, we will be ready to take action to mitigate the impact as we did earlier in the year. I'd now like to provide you with additional details on our third-quarter segment performance beginning with RMS. RMS revenue in the third quarter was $159.1 million, an increase of 2% on an organic basis, primarily as a result of strong demand for research model services as well as for research models in China. Our recent cell therapy acquisitions, HemaCare and Cellero, each had excellent quarters and contributed 11.1% to the reported RMS revenue growth rate. COVID-19 had only a modest impact on our research models business in the third quarter. Research model revenue growth in China rebounded and is approaching the historical trend for the business. As expected, China recovered earlier than other geographies as clients resumed more normalized research activities after returning to their site in the middle of the second quarter. Despite a slight lag in Western markets, demand for research models in North America and Europe also improved significantly on a sequential basis as clients resumed more normalized research activities during the third quarter, particularly in Europe, where we also benefited from some stock-up orders as clients returned to their sites. In the third quarter, client ordering trends for research models in Western markets moved closer to pre-COVID levels and were only moderately below prior year levels. As we exit the year, we expect ordering trends in North America to fully recover as well. We are pleased with the V-shaped recovery in RMS business to date and see other favorable trends that are also quite encouraging. We believe that we will continue to benefit from market share gains, including from academic clients as we gain business from new academic principal investigators or APIs when we reopen their sites. Academia has been a strategic focus to drive enhanced RMS growth, with tailored initiatives targeted for the unique needs of the client base. We have always contended that our global scale, superior client support, and biosecurity initiatives have differentiated our research models business in the marketplace, leading clients to choose Charles River for their early-stage research needs. We believe our resilience and ability to remain operational during the pandemic underscores these attributes and have led to new business opportunities and market share gains due in part to competitive dislocation. The Research Model Services businesses, specifically GEMS and Insourcing Solutions, also continued to benefit from the long-term trend of clients externalizing more of their work. This trend has been reinforced during the COVID-19 pandemic as clients increasingly seek the flexibility and efficiency of utilizing our sites and staff instead of their own. The GEMS business had another strong quarter as it benefited from incremental outsourcing opportunities with GEMS clients who previously managed their model colonies in-house. They opted to outsource work due to COVID-19 restrictions at their own sites, saw the benefit of outsourcing, and we expect that many will have us retain this work. HemaCare also rebounded nicely in the third quarter. As we mentioned in August, HemaCare donor clinic reopened in May, and demand from its cell therapy clients improved meaningfully at the end of the second quarter. Coupled with the acquisition of Cellero, which was completed in August, cell therapy revenue increased more than 20% during the third quarter, reaccelerating toward our 30% 5-year target for these businesses. Cellero has enhanced our access to high-quality, human-derived cellular products, both from healthy donors and patient populations, and expanded our geographic reach with donor sites in both Eastern and Western United States. We firmly believe that our ability to supply cell therapy developers and manufacturers with these critical biomaterials will lead them to remain with us through discovery, early-stage development, and the manufacturing support processes. We continue to view the cell and gene therapy space as a high-growth market, in which we need to continue to strengthen our capabilities in order to meet clients' increasing needs and further enhance our growth profile. The RMS operating margin meaningfully improved by 120 basis points to 27.7% in Q3. The year-over-year increase was principally driven by the benefits from operating efficiency initiatives, including cost controls we implemented in response to the COVID-19 pandemic. DSA revenue was $461.2 million in the third quarter, an 8.6% increase on an organic basis over the third quarter of '19. We are pleased that the DSA performance was in line with the long-term, high single-digit growth targets for this segment as the Discovery and Safety Assessment businesses experienced a negligible impact from COVID-19 in the third quarter. DSA growth was driven by both biotechnology and global biopharmaceutical clients. Although biotech clients were the primary driver, broad-based client spending across the entire biopharmaceutical industry is reflective of the global focus on scientific innovation and the need for our clients to utilize more flexible and efficient early-stage outsourcing solutions. The Discovery Services business had another exceptional quarter, with broad-based growth across early discovery, CNS, and oncology services. We are winning incremental business as clients outsource programs that they have historically kept in-house as well as some COVID-19-related projects. We believe our in discovery portfolio, scientific expertise, and flexible working arrangements have encouraged more clients to partner with us to counteract the challenges of COVID-19. We believe our continued success and our clients' willingness to outsource more of their discovery programs will be predicated on our ability to continue to add innovative discovery capabilities to meet our clients' critical research needs, which we are actively accomplishing through our strategic partnerships as well as our ability to forge collaborative relationships that enable our clients to work with us flexibly. As a result of one of these relationships, we received a milestone payment from an integrated drug discovery partner in the third quarter, which contributed to the top line growth and operating margin performance. While milestone-based client relationships represent only a small portion of our Discovery business, we believe that our ability to structure working arrangements to meet our clients' needs and deliver the targets or molecules they seek to develop will lead to more discovery outsourcing opportunities in the future. We are pleased to have discovered more than 80 novel molecules for clients since the inception of our Early Discovery business. The Safety Assessment business continued to perform well, with sustained growth in study volume. Bookings and backlog activity remained robust, with strength in specialty toxicology and GLP bioanalysis, as well as cell and gene therapies. Each of these areas differentiates Charles River from our smaller competitors. We are also seeing increased demand for infectious disease programs, including COVID-19, and are not seeing any corresponding spending reductions in other therapeutic areas. We believe this demonstrates both the strength of the early-stage funding environment and clients' increasing use of outsourcing to ensure the continuity of the research. The DSA operating margin improved by 310 basis points year-over-year in the third quarter to 25.2%, with meaningful contributions from both the Discovery and Safety Assessment businesses. Several factors drove the improvement, including operating leverage and strong top-line growth, our continued focus on operating efficiencies, and cost controls associated with the COVID-19 pandemic. The discovery milestone payment contributed approximately 50 basis points to the margin improvement. Revenue for the manufacturing support segment was $130.2 million, an 11.5% increase on an organic basis over the third quarter of last year and also in line with our long-term growth target for this segment. The Biologics Testing Solutions business had another excellent quarter, and the revenue growth rate in the Microbial Solutions business improved from the second-quarter level as we anticipated. Last quarter, we commented that Microbial Solutions was affected by delayed instrument installations as certain client sites were inaccessible due to COVID-19. As expected, the backlog of instrument installations was gradually reduced in the third quarter. We gained access to additional client sites and conducted some installations virtually, but other sites remain inaccessible as certain clients maintain the COVID-related visitor restrictions. We believe microbial revenue growth will continue to gradually improve as we complete additional instrument installations, with the rate of improvement contingent upon our ability to access client sites. The biologics business reported another exceptional quarter of strong double-digit revenue growth, principally driven by two factors: robust market trends and increasing utilization of our new capacity. Last year, we opened and transitioned into our new biologics site in Pennsylvania, which more than doubled our capacity in the region. We have been filling this new capacity in 2020, due in part to robust client demand for testing, cell and gene therapies, and COVID-19 therapeutics. We believe cell and gene therapy and our core biologics testing work will continue to be significant growth drivers for years to come, and that we will benefit from these trends and take market share because clients see the value in our extensive portfolio of services to support the safe manufacture of their biologics programs and because we have available capacity to accommodate client demand. The robust biologics growth and higher utilization of the new Pennsylvania site, as well as the elimination of duplicate costs from last year's transition to the new site, were the primary drivers of the 270 basis point increase in the Manufacturing segment's third-quarter operating margin to 39.1%. The Avian business also contributed, and we continue to be pleased with the benefits from enhanced operating efficiency in the Microbial Solutions business as a result of process improvements. Our third-quarter performance is indicative of several important factors that our leading portfolio of early-stage and manufacturing support solutions continues to resonate with clients even more today than ever before: that early-stage market trends are strong, that our clients' appetite for outsourcing has become increasingly robust, and that we have the vision and experience to manage through challenging periods. We believe that clients outsourced more work to us this year because they trusted the resilience of our business model and our ability to remain fully operational, and also our ability to partner with them to advance their programs when they face significant COVID-related disruptions. As clients resume more normalized research activities, we believe they are actively reevaluating their longer-term outsourcing strategies. The COVID-19 pandemic has proven the ease and flexibility of partnering with a large, stable CRO like Charles River, as well as enhanced reliability, as clients seek greater research efficiency and continuity. Therefore, we believe biopharma clients are already committing to outsource more than they did prior to the pandemic. Biotech funding levels were particularly strong in the third quarter, surpassing the $100 billion year-to-date. Biotech IPO activity is accelerating, and year-to-date funding through September has already exceeded last year's total. We believe that biotech funding is particularly significant for our clients because many of them are emerging or smaller biotechs with programs in the discovery or preclinical development stages. That said, we see evidence from our clients, including global biopharmas that they are emphasizing greater investment in their preclinical pipelines. The favorable market environment aids us in driving our top-line growth, but is only one of the factors that we believe will continue to drive our strong financial performance. Operating margin expansion is also a key component of our strategy. We believe the exceptional third-quarter margin improvement of 330 basis points and our ability to expand operating margins in three of the last four quarters demonstrate the underlying operating leverage in our business and our continued focus on driving efficiency. We expect to be near our 20% target this year, essentially one year ahead of expectations. In order to continue to enhance our value to clients and our growth potential, it is imperative that we continue to expand our unique portfolio of potential products and services to more comprehensively support our clients' research needs. Strategic acquisitions have always been our preferred use of capital, and we are continuing to evaluate new opportunities after a pause in the second quarter. There continues to be an abundance of M&A candidates available. And we will also increasingly employ our strategic partnership strategy to stay current with new technologies and modalities and to add innovative capabilities in cutting-edge technologies with limited upfront risk. Before I conclude, I'd like to announce two recent appointments. First, earlier this month, we appointed George Llado to our Board of Directors. George is currently Senior Vice President and Chief Information Officer at Alexion Pharmaceuticals after serving 25 years at MERC. George's unique view from a client perspective and his technological expertise will be invaluable. He's a dynamic thought leader in the technology field, and we look forward to leveraging his insights as we continue to invest in our information technology platform and digital enterprise. I am pleased to welcome George to Charles River's Board. I'd also like to congratulate Vicky Creamer on her promotion to Executive Vice President and Chief People Officer. Vicky joined us last year to lead the Human Resources function as a Senior Vice President. During her time with Charles River, she has developed and executed a strategic HR plan that includes identifying and implementing world-class HR processes, developing and rewarding talent, and optimizing the organizational design. Most recently, Vicky has been instrumental in the company's COVID-19 strategy, ensuring our people are receiving the support and resources necessary to navigate this challenging time. Congratulations, Vicky. We believe that the strength and resilience of our business model, our differentiated portfolio, and our unwavering focus on the client experience have enabled us to enhance our position as the leading early-stage CRO to the COVID-19 crisis. Our success would not be possible without the collective efforts of the dedicated Charles River staff. So I'd like to again express my sincere appreciation to them for their hard work and unwavering commitment that allows us to continue to fulfill our mission every day. I'd also like to thank our clients and shareholders for their continued support. Now I'll ask David to give you additional details on our third quarter results and updated 2020 guidance.

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 initiatives, our venture capital and our strategic investment performance, and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation. We are very pleased with our strong third-quarter results, including high single-digit organic revenue growth and meaningful operating margin improvement. The higher revenue and 330 basis points year-over-year margin increase contributed to earnings-per-share growth of 38%, as did a lower tax rate. These results reflected improved organic revenue growth across all three business segments from the second quarter level and operating margin expansion, both on a sequential and year-over-year basis. I would like to start by discussing our operating margin performance at 22.7%. In the third quarter, it was one of the highest levels in the company's history. We believe that the underlying operating leverage in our business is the primary driver of the improvement, benefiting from greater operating efficiencies and cost controls. Cost controls associated with COVID-19, including restrictions on travel and other discretionary costs, contributed to the third-quarter operating margin performance. Reflected in our operating margin guidance is a benefit of approximately $40 million from COVID-19-related cost reduction initiatives and cost controls, which is unchanged from our prior estimate. As we discussed last year, we expected to benefit from the scale of investments that we made in staff, capacity, and infrastructure, as well as our recent acquisitions, as the synergies gain traction and the profitability of the acquired businesses improved. We believe that these initiatives and our continuing focus on operational excellence and cost management are the primary drivers of the operating margin expansion. For the full year 2020, we expect to be near our 2-year operating target of 20%, effectively, a year ahead of schedule. In addition to higher revenue efficiencies and cost controls, the operating margin improvement in the third quarter was also driven by leveraging of corporate costs. Unallocated corporate costs for the third quarter were $40.7 million or 5.5% of total revenue, a 50 basis point decline from 6% last year. At 5.7% year-to-date, we continue to expect unallocated corporate costs to be approximately 5.5% of total revenue for the year. Total adjusted net interest expense for the third quarter was $18.7 million, an increase of $1.3 million year-over-year, reflecting higher debt balances and a higher interest rate in 2020. For the year, we expect adjusted net interest expense to be $1 million lower than our prior guidance in a range of $75 million to $77 million. During the quarter, we repaid approximately $245 million of debt, reducing our total debt balance to $2 billion. This resulted in the reduction of our gross leverage ratio to 2.6 times at the end of the third quarter, and our net leverage ratio was 2.3 times. As a result of the sub-3 times leverage ratio, we will benefit from interest savings on our variable rate debt, reducing the rate by 25 basis points to LIBOR plus 125 basis points. We are pleased that we were able to quickly repay debt to bring our leverage to our targeted level below 3 times after borrowing from the HemaCare acquisition earlier in the year. Strategic acquisitions to support our long-term growth strategy will remain our top priority for capital allocation. Absent any acquisitions in the near term, we intend to repay debt. For the third-quarter non-GAAP tax rate was 21.9%, representing a 170 basis point decrease from 23.6% in the third quarter of last year. The lower tax rate was due primarily to two factors: discrete tax benefits associated with foreign tax credits; and a higher-than-expected excess tax benefit associated with stock-based compensation, which occurred because a higher stock price in the quarter generated more equity exercise activity. Based on the favorable third-quarter tax rate and an expectation of additional discrete tax benefits in the fourth quarter, we are reducing our full-year non-GAAP tax rate outlook by 225 basis points at midpoint to a range of 19% to 19.5%, compared to our prior outlook of 21% to 22%. Our 2020 tax rate outlook includes substantial benefits related to stock compensation and other discrete tax items that are expected to lower this year's rate. However, over the longer term, we continue to expect our tax rate will be in the range of our low- to mid-20% target, as we previously communicated at last year's Investor Day. Free cash flow was $151.1 million in the third quarter, a substantial increase from $120.7 million in the same period last year. The increase reflected the strong underlying operating performance of our businesses and working capital improvements. As a result, we have increased our free cash outlook for the year to approximately $415 million from our prior guidance of $350 million to $365 million. CapEx was $26.2 million in the third quarter, a decrease of $9 million from the prior year. Our expectation for CapEx remains at approximately $130 million for the full year. With respect to our full-year 2020 guidance, as Jim mentioned, we are increasing our revenue growth outlook to a range of 5% to 6% on an organic basis and 9.5% to 10.5% on a reported basis, reflecting the third-quarter performance. We also expect to achieve meaningful margin improvement, which combined with the lower tax rate, is driving our higher full-year non-GAAP earnings per share outlook to a range of $7.75 to $7.85. Our full-year outlook for segment revenue growth is also more favorable, particularly for the RMS segment, given the recovery we are seeing in the business. For the RMS segment, we now expect a mid-single-digit revenue decline on an organic basis and a mid-single-digit revenue growth on a reported basis. For the DSA segment, we continue to expect high single-digit organic and low double-digit reported revenue growth. For the manufacturing segment, we expect high single-digit revenue growth on both a reported and organic basis. A detailed summary of our financial guidance can be found on slide 42. With one quarter remaining in the year, our fourth-quarter outlook is embedded in our guidance for the full year. On a year-over-year basis, we expect organic growth in the mid- to high single-digit range and reported revenue growth in the high single-digit range. Non-GAAP earnings per share is expected to increase at a low- to mid-single-digit range in the fourth quarter. We are extremely pleased with the operating margin expansion that we have generated through the first three quarters of 2020, particularly amid the COVID-19 crisis. The fourth quarter has represented the highest quarter in the last two years. But this year, we have tempered our expectations primarily because the COVID-19 revenue impact will not be behind us until we exit the year, and the COVID-related cost control benefits will also further moderate for the third quarter. We believe we are well positioned to finish the year strong, including with the achievement of a full-year operating margin near our 20% target, and are excited for the prospects as we look ahead into 2021 and beyond.

That concludes our comments. We will now take your questions.

And your first question is from the line of Dave Windley with Jefferies.

Hi, thank you. Good morning. I wanted to focus on, Jim, your comments about clients moving toward outsourcing more, committing to outsourcing more. You mentioned that at several points in your prepared remarks and that early on in 2020, with the COVID pandemic beginning to impact. You were certainly talking about Charles River keeping its facilities open and operating and that providing some benefit and some motivation to use Charles River more. I'm wondering if you could flesh out the conversations that you're now having about that kind of temporary situation moving to a more permanent situation in terms of outsourcing. And should we expect that this would manifest in bigger kind of headline type deals? Or will it just show up in the revenue growth rate on a kind of on a gradual organic basis?

Yes. Thanks, Dave. We've been able to demonstrate in large measure because of the inflection point that the virus has given, provided. Unfortunately, it exists but really magnifies the power of our portfolio and magnifies the criticality of outsourcing for clients who maybe didn't fully appreciate it. And so at a time when clients had difficulty running their own operations, opening them, getting them moving, having facilities closed, not being able to depend on themselves. We remained open in providing the smooth services for them across pretty much across the whole portfolio. And so, I think people that were either skeptical or had some kind of historical preference to do things internally now we have been enjoying the benefits of not having the study slow down because they couldn't do their own work. Hopefully, we're doing it as quickly. And I think in a lot of cases, more quickly than them, our price points, I'm sure, are better. And in a lot of cases, our science is actually deeper. And so we think actually the more prolonged this goes on and the more sort of hesitancy and concern they have about their own infrastructure, the more pronounced the strength of our capability is. So, we're definitely seeing it, as we called out in the prepared remarks, we're definitely seeing it in GEMS, we're definitely seeing it in Biologics, we're definitely seeing it in Safety and Discovery. So most of our service businesses, we're seeing it. And there's no reason to not believe, and that's just based upon client input that never one will retain a meaningful amount of the work that has been outsourced to us on an ongoing basis; clients have historically preferred it or will we're getting some input from some of them. They're rethinking their strategy that they're discussing the cost of their infrastructure and that we're part of the conversation. I wouldn't I don't know this for a fact. I wouldn't want to mislead you to think we're going to have some huge announcement and some major pop, although we could have a client that hasn't outsourced much at all that could do that. I think that's less likely and more likely that it will continue to be gradual but persistent across clients that have historically used us for outsourcing and some that have used us less. And I guess the last thing I would say as we continue to enhance the portfolio, which we surely will through these complex strategic deals that we're doing and through M&A, that will make us even a more attractive resource for the clients to satisfy needs, which they thought for whatever reason that they could only satisfy internally.

Excellent, I'll stick to my one. Thank you.

Your next question is from the line of John Kreger with William Blair.

Hi. Thank you very much. Jim, a question for you about the research models business. As the third wave plays out, do you think there's a risk that you could see a falloff in model order flow similar to what you saw in Q2? Or do you think client attitudes will have changed this time around? Thank you.

Yes. Regarding your question, John, we can't be certain. The virus is following our predictions, with a second wave expected in the fall and winter as infections rise. We believe there are two key points. Firstly, the main impact on our RMS business was the abrupt closure of major academic medical centers worldwide, especially in the U.S. and Europe, which happened within two to three weeks. In hindsight, it wasn’t a well-considered decision on their part as they didn’t fully understand the virus at that time. Now that they do, and recognizing the consequences, we are confident that these medical centers have adapted their operations, including structured workflows, PPE usage, staggered shifts, and food management, allowing them to handle the current increase in infections. We don't anticipate a significant disruption again. While we can't predict with certainty, I would be surprised if small biotech and large pharma companies close parts of their facilities for any substantial duration, if at all. As we navigate through this second wave, I believe we'll finish the year close to our historical run rate for research models, both products and services. We expect strong performance in services from China and continued strength in the U.S. and Europe despite COVID challenges. A major shutdown across sites seems unlikely given the lessons learned by all parties involved. So, I strongly believe it’s highly unlikely, John.

Very helpful, thank you.

Your next question is from the line of Eric Coldwell with Baird.

Thank you very much. You mentioned the academic share gains said particularly strong there. I'm curious if you could talk about what's driving share gains within that client base versus competition? Number one. Number two, you highlighted that there were some stock-ups, I think, specifically in Europe as institutions came back online. I'm hoping you can talk a little bit about how those stock-ups impacted the quarter. And what's the knock-on effect of that? How does that lead to future growth, future comps? How does that really play out in the academic marketplace? Thank you very much.

The stocking up is due to clients being temporarily out of business and wanting to quickly resume their operations by replenishing their colonies. It's difficult to achieve, and it's not something done continuously; rather, they stock up to return to a stable operating state that existed before COVID. We prepared for this situation, anticipating pent-up demand, and it would have been frustrating for our clients had we reduced our animal colonies during slower business periods. When it comes to epidemic share gains, several factors are at play. Academic medical centers attempted to manage some operations internally, which we consider unnecessary. They scaled up their genetically engineered model colonies instead of utilizing our larger, cost-effective capabilities to deliver animals on a just-in-time basis, which can be arranged as needed. Now, they're realizing the efficiency of outsourcing this work to us instead of maintaining their own breeding spaces, which can be risky due to biosecurity issues. Some institutions had their specialty strain colonies but become accustomed to handling those themselves, which isn't an effective use of resources. We've taken on those colonies and the associated breeding and molecular biology work. While there's always a chance some may try to bring it back in-house, we’re successfully retaining existing work and gaining more, with clients expressing appreciation for our seamless operations. They didn’t expect how smooth it would be for us to manage the work at our facilities and deliver the animals to theirs without them losing control. The main barrier to outsourcing within academic, pharmaceutical, or biotech settings is the fear of losing control, often tied to the belief that everything must be nearby. We've shown over the years that this perspective is outdated and inefficient. We're confident that our opportunities in the academic sector, which we've been developing for years, will continue to grow as we provide unique value that meets their needs.

Jim, that's a really excellent detailed discussion, and I don't mean to overly parse the semantics, but this your discussion sounded more like penetration into existing accounts as opposed to perhaps taking share from other providers servicing those accounts? And maybe it's a combination of both. But to me, that sounded more like a penetration opportunity, selling new things that were done in-house to existing clients. Is there also a component where you're taking share from other providers?

I think it's both, Eric. I think what we heard from our clients, this isn't just our perception is that particularly when COVID hit, they were disappointed in some of our competitors' ability to get animals to them, to provide services to them or indeed even be open. And as I know, because you know us well, some of our competitors have a limited geographic footprint. So we also have competitors with a couple of sites where we have a dozen or more sites. And so if one of those sites was closed even for a short period of time, and that was one that was more proximate to the clients. That would be a disruption in service. And so for sure, we again, this is we exemplified what we've said for years, which is that we have this big international infrastructure, and you can count on us even during tough times like COVID or a hurricane or tornado or whatever. So yes, we definitely got to demonstrate that. And we heard back from clients with regard to specific competitors who weren't able to support them. And in some cases, competitors who had the lion's share of the work. They kind of called us sheepishly and said, 'I know we don't do work with you, but we're stuck, can you help us?' And then, of course, the legacy of that is that we get some or all of the work going forward. I think it's both. I think it's probably actually more share penetration of work that was done in-house at the clients which is actually, in some ways, more exciting because that wasn't available to anyone. That was just, as I've said before, this kind of internal historic ethos where they said, man, we just got to do the work ourselves. And this has been a disruptor into that thought process.

Jim, thank you very much. Impressive result. Good luck with the future.

Your next question comes from the line of Tycho Peterson with JPMorgan.

Hey, good morning. Jim, question on DSA. Well, actually, you flagged the milestone that you received. I'm just curious if your discussions are mix shifting more toward embedded milestones and future work. And then it looks like COVID and other infectious diseases are helping drive safety assessment demand. I'm wondering for DSA, if you could just talk about the percentage of bookings and coded tailwinds and how you think about the burn of that work, the COVID related work for DSA? Thank you.

Yes. I want to clarify that we are very pleased and proud to be involved in significant COVID-related work for many clients. We anticipate that various drugs and vaccines will eventually make it to market, which will likely contribute to our efforts. We're proud of this work, as it brings in additional revenue from several business areas, particularly safety. However, it's important to note that this is not a substantial amount. It's a positive sign that our business is performing well across a range of therapeutic areas, with some added benefit from COVID. We prioritize COVID clients in our projects. Regarding the milestone work, we are flexible and open to working with clients who prefer to engage with us on a milestone basis. We don't have a specific preference but are willing to accept smaller upfront payments in exchange for larger future payouts if we believe in the potential of the drug. Some clients prefer this approach, and we recognize that if we don't accommodate them, they might seek other options. We have a limited number of these agreements and don't overemphasize them. We're satisfied with the arrangements, especially when they lead to payouts. While we hope these clients may return for future milestone deals, it doesn't guarantee we will pursue that structure if it doesn't fit. I want to reassure everyone that the majority of our work involves upfront payments for our services. In some cases, we have a partnership arrangement where payments are made as we progress together, which helps build strong relationships with our clients. For those clients who value this approach, we are more inclined to consider it.

Okay. And then on manufacturing, Biologics, obviously, you doubled your capacity. I know it's filling up quickly. Are you able to just give us an update on where you are in terms of that capacity being filled and how you think about that for next year?

Yes. So very, very big site, Tycho. And so it will be a few years. I hope faster, but we have a few years before that fills up. I mean the business is growing very quickly. So, that's a good thing. There's a causal relationship between the growth rate of that business and available capacity. And while we had a good year in Biologics last year, it was not as because we were capacity constrained. In addition to that big Pennsylvania site, which is kind of the principal driver of growth, we did add incremental space at several other sites that we had in Europe, particularly Ireland and Germany, and we would continue to probably add space suddenly in those two sites kind of continuously and be very thoughtful and prepared to make sure that well in advance of when we think we will max out in Pennsylvania to add a substantial amount of incremental space because. So, we can stay ahead of it. It's a pretty good site from a biotech client support point of view. We have a big scientific infrastructure. So, sort of expanding around that would be a smarter thing to do than a totally new site elsewhere. We also have a small Biologics component in Massachusetts, which obviously is close to Cambridge based and Boston-based biotech companies. So, capacity is in very good shape right now and certainly will be for 2021.

Great. And then just lastly, before I hop off, Jim, I'm wondering if you're willing to comment on '21 at all. I know you don't normally at this time. But a lot of your CRO peers have at least talked qualitatively. The street's got you growing just under 10% next year. Are you able to talk at all about how you're thinking about the setup for next year?

I believe it's too early to comment on 2021 since we typically provide details during our February call, where we will offer more clarity. Generally speaking, we currently do not see any signs that the demand for our entire portfolio will change significantly. The funding environment for the biotech industry remains very strong, with a notable number of IPOs and healthy M&A activity. There is considerable pharmaceutical work occurring, not only related to COVID but also in other areas, with cell and gene therapy being a significant growth driver. The trend towards outsourcing, which I mentioned earlier, is likely to continue benefiting us as we expect to see more outsourced projects. We have good comparisons from the second quarter of RMS, which should be advantageous. Additionally, we hope to increase the installation of microbial units, although progress has been delayed due to our inability to access client sites. Overall, the demand for our services across the portfolio is expected to remain steady, giving a positive indication of our top-line growth direction.

Okay, thank you.

Thank you, Tycho.

Your next question comes from the line of Robert Jones with Goldman Sachs.

Great. Thank you for the question. Yes, Jim, clearly, RMS is probably the one segment this year that was a little volatile because of COVID. I think manufacturing support in DSA held its own fare pretty well. Certainly, this quarter seems like things are getting back to normal across all three segments. If I think about the margin opportunity from here for those businesses, assuming things hopefully stay relatively normal as we look forward. Manufacturing support in RMS specifically, performing very well already above the long-term guidance from a margin standpoint. Could you just maybe help us think through where the margin opportunity could be on the forward across the businesses, but I guess, in particular, as it relates to manufacturing support in RMS?

Sure. David, why don't you take that?

Yes. So well, Jim has already mentioned that we don't want to get into too much detail about 2021 because that's not our normal cadence. What we would say about the margin is that we are still, of course, focusing on achieving that 20%, and this year, we expect to be very near it. We still believe there is potential to go beyond the 20%. That is something that we've made public before, and we still stand by that statement. But at this stage, I think it would be too premature to get into detail. What I would say is that there were two key drivers that we had outlined back in September last year at our investor conference, one of which was the DSA, and we've seen in Q4, a 240 basis points increase. Q1 over Q1 was 340. Q2 over Q2, 210, and this quarter, we've seen another 310 basis point increase, so we are now getting into the ZIP code of that sort of mid-20s with DSA. So, we're obviously very pleased with that. We had called out that the way we got there was through integrating our acquisitions, generating synergies from those acquisitions, eliminating redundancies, and just leveraging on the staff capacity that we have. The second driver that we've called out is leveraging our unallocated corporate costs. And over the last several years, we've been bringing that down to about 50 basis points as a percentage of revenue and continuing to do that into this year as well, getting the leverage from the sort of way we've built our back-office units. So yes, I guess, we'll say more in February in terms of specifics as to where we think we would be going next.

Okay, great. Appreciate that. Thank you, David.

Okay. Next question comes from the line of Erin Wright with Credit Suisse.

Okay. And in terms of your view on the acquisition and partnership opportunities amid the pandemic? And would you say the pipeline is larger versus a year ago? Or what are you seeing out there from a steel pipeline standpoint? Thank you.

So, we're really enthused about the strategic partnership strategy that we have. And we have nine deals across a whole host of cutting-edge technologies from artificial intelligence to next-generation sequencing and on and on. And they're wonderful relationships to actually do living due diligence on these companies, some of which we, for sure, will buy, and we will have really in-depth knowledge of how the businesses operate, responsive to clients, how robust the technology is. And we expect to buy some of them, we expect that they will give us a competitive advantage because most of these technologies are unique and highly proprietary. So there's a lot of those. So we have nine signs. We probably have an equal number under conversation, pretty far along. Some at LOI stage, some in early discussions. So we probably will have a universe kind of on a consistent ongoing basis of 20 or so of these all kinds, and some of them will fail, some of them will continue as joint marketing relationships, and some of them will be acquisitions. So, that's a really strong source. I would say that pipeline for straight up M&A remains quite good. I would say most of the sellers or private equity firms, which means that all of the companies are to sale at some point, you have to try to get in sync from a timing point of view. I can't make a generalization of what our expectations are with regard to margins because it depends on the asset and the competition for that asset. But, we feel that we have refined methodology to value these businesses and we have got a strong balance sheet right now with reducing leverage. Our leverage has come down, I think, to the mid-2s. We have a bunch of conversations going on now, as we always do across several different products and services across different parts of our portfolio. I would say, even though you didn't specifically ask us, that none of the things we're looking at are very large, I'd say, a couple of modest size and some are small. But they all would very much improve and enhance the quality and competitive strength of our portfolio. We have no artificial goals to buy a certain number of companies or add a certain amount of revenue, but we do have a very strong strategic goal to continue to broaden the portfolio. And we think that we don't just say we know that our portfolio, the breadth of it, in particular, has become our principal distinct competitive advantage, so we want to continue to enhance that advantage.

Okay, great. Thank you.

Our next question comes from the line of Elizabeth Anderson with Evercore ISI.

As a manufacturing operations, you were helpful in talking through the utilization in the new Pennsylvania site as we move forward, is there any other puts and takes there that we should think about? Or in terms of using that 3Q number sort of like a like run rate number to go forward with at this point?

I'd advise caution in using the Q3 figure since it was an exceptionally strong quarter. This market is likely experiencing low double-digit growth, and we have two segments of the business that can both sustain growth at those rates. We don't typically break them out individually, but the market dynamics appear to be very favorable for each. The impact of COVID has likely enhanced this for both segments. Our advertising capacity and biologics have significantly boosted our presence in that area. Additionally, our enhanced manufacturing capabilities, the mergers and acquisitions we've completed, and the new equipment and software improvements in our microbial business have established us as a leader in bacterial contamination and detection. While I’m not sure if we should focus on any specific quarterly run rate because, as we often mention, our business isn't linear, we prefer you assess our performance on an annual basis. Our predictions on an annual level have proven to be quite accurate in recent years. We believe strong market demand and the right infrastructure position us well to benefit from that demand and gain market share across both sectors. Therefore, we anticipate that manufacturing, which had an exceptionally high operating margin and strong growth in Q3, will continue to be a robust business for us moving forward.

Perfect. That's very helpful.

Your next question comes from the line of Juan Avendano with Bank of America.

Follow-up on the M&A pipeline. As you look into that pipeline, are you focusing on service-oriented assets, or what is your point of view on the numerous technology-oriented assets that are out there trying to describe drug discovery and clinical development space? I mean given your addition of George to the Board and his prior experience in information technology, should we expect Charles River to become more involved on the technology side of things?

You can expect Charles River to keep using data in more impactful ways to operate our business more efficiently, connect with clients better, design improved studies aimed at achieving better outcomes for our clients, and utilize that data to expedite our work for them. We have both product and service businesses in our sights, without a strong preference for either. Historically, our roots lie in products, and currently, our portfolio is largely focused on services, which comprises about 75% to 80% of our operations. However, HemaCare and Solero are product businesses that demonstrate significant growth and strong operating margins, along with our Animal, microbial, and Avian businesses. We excel in both product innovation and ensuring efficiency in the manufacturing and delivery processes, while also having a substantial service aspect where we have successfully enhanced efficiency and client connectivity. We are exploring opportunities in both areas without prioritizing one over the other. There are definitely product businesses we are keen to add in the future, and there seems to be more potential on the service side as well.

Thank you, Jim. Congrats on the quarter.

Thank you.

Your next question comes from the line of Dan Brennan with UBS.

Microbial Solutions part. I understand this business has been somewhat affected by COVID, as you've mentioned. Can you provide more details about the extent of that impact? How much has it hindered growth? Any insights on the potential rate of improvement we might see moving forward?

It's challenging to predict. We have a well-managed business with strong demand, and it's performing better than we've seen in the past. There are three product lines that I believe have significant demand, particularly due to the influences of cell and gene therapy and COVID, which have increased that demand. We offer systems that utilize reagents or cartridges, which suggests a consistent usage model. As testing continues, clients need these reagents to check for potential contaminations in their drugs. The business is stable and profitable, showing good growth metrics. We manage a large number of complex systems, where we typically conduct installations on-site. However, site closures and restrictions on outside visitors present challenges. As reported in the third quarter, some previously closed sites are beginning to reopen, allowing for virtual installations, particularly for less complex systems when clients are familiar with them. We're facing a situation where regulatory bodies are conducting their audits virtually, which is new for them and likely not preferred. Yet, this adaptation is necessary to keep R&D moving. I can't predict with certainty when we’ll have full access to sites because that is uncertain, and the ongoing impact of COVID remains a manageable headwind we are working through. It may take longer and be less straightforward, but we are actively seeking simpler solutions as the need arises, and I'm optimistic that we will find a way forward.

Okay. Thank you, Jim.

Your next question comes from the line of Patrick Donnelly with Citi.

It's been one of the big beneficiaries of some of the COVID work. Can you just talk about how you're prioritizing some of that work versus what's in the portfolio? And then also just kind of thinking about that over the next few quarters? Are you generally just going to see some of the early work in that phase as you get more toward the vaccine commercial process? Just trying to think about the durability of some of those tailwinds.

I apologize, but I seem to have a delay in hearing the initial part of everyone's question. Could you please repeat the question?

It was on the safety side. Just around some of the COVID work, the durability, just given you guys tend to be a little on the earlier side in terms of seeing some of the revs. Just wondering as we go through the next few quarters, how that trends?

Yes, I want to emphasize that this is a subtle and relatively minor amount of revenue. It's more about pride and the financial impact. The drugs and vaccines entering the clinic must first undergo safety testing. While they don't necessarily have to do it with us, many are. We're benefiting from that. There are a significant number of drugs and vaccines in development, many of which are not yet in the clinic. Without going into specifics, we are still enjoying some of these benefits and will continue to do so. This impact is so minor and subtle that as these drugs hopefully progress through the clinic and achieve market approval, there should be room for several of them, assuming they are effective COVID therapeutics or vaccines. It's hard to say how many we actually need. Unless effective drugs or vaccines become difficult to find, and they just keep creating new ones, we might find that whatever minor positive impact we have will become less noticeable. Our business is now so large that this constitutes a modest part of what we do, even within our biggest area, which is safety. As we've mentioned before, we are happy to take on this work as long as it's available, and we will likely move through it over time.

Okay, that's all. Thank you, Jim.

Sure.

Your final question comes from the line of Jack Meehan with Nitram Research.

Good morning. Hey, Jim. There's been some discussion around some supply chain constraints when it comes to nonhuman primates just being shipped around. I was curious if you've seen any of that? And how you manage through it?

An important aspect of research across various fields, especially regarding large molecules, has been this model for many years. Our supply sources predominantly come from external locations, including China, Mauritius, Cambodia, and Vietnam. We make significant efforts to maintain multiple supply sources across different regions and have several suppliers in those areas, fostering strong relationships to ensure exceptional veterinary oversight and consistent supply numbers. Ideally, we aim to secure these resources well in advance because they are crucial for our operations. We have diligently worked to enhance our overall supply, and we've seen an increase in numbers over the past few years, making more suppliers necessary. We are confident in our supply situation and our ability to maintain an adequate number of animals for the remainder of this year and into the next. We continuously engage in dialogue with our suppliers to align supply with anticipated demand based on feedback from our clients. Overall, we believe we are effectively managing our resources in HPs.

Thank you, Jim.

Sure.

Our final question comes from the line of George Hill with Deutsche Bank.

Yes. Good morning, guys and thank you for taking the question. I'll keep this from brief. As it relates to kind of the cost reductions and the margin improvement as a result of COVID, some of it, I'm sure, has to be temporary. Have you guys kind of quantified how much of the cost basis comes back as work kind of resumes to normal versus how much you think is permanent improvement? And then maybe, I guess, kind of, Jim, I know you're not talking about 2021, but what should the next margin target look like?

Yes. So I'll cover both the revenue and the temporary cost reduction. So when we sort of spoke to you in May, we thought that we could have a revenue impact, as high as $250 million in a sort of downside case. When we spoke in August, we felt good about what we saw in Q2 that we reduced that down to $100 million. And now with the strong Q3 result, we've got that down to $70 million headwind. And of course, as you know, that's mainly in research models, a little bit to do with microbial and the inability to get the instruments installed. So, when we look at the temporary cost reductions, that's also come down. When we last spoke, we said $40 million, and we're still holding to that $40 million. The majority of those cost savings came in Q2. But what I can share is that the amount in Q4 is going to be about half that of what we saw in Q3. So, that's beginning to tail off now in terms of the temporary cost reductions. Of course, as we bleed into 2021, we may still see some benefits in terms of less travel than we used to do. But by and large, much of those cost reduction initiatives are now behind us. So, in terms of your question in terms of headwinds as we go in, clearly, there's a little headwind still legacy from Q2, where most of those savings took place. But broadly speaking, we're exiting with the exception of travel, much of it now behind us.

Thank you.

Great. Thank you for joining us today on this morning's conference call. We look forward to speaking with you at several upcoming investor conferences. This concludes the conference call. Thanks.

Thank you ladies and gentlemen. You may now disconnect your lines.