Earnings Call Transcript - CRL Q1 2025

Operator, Operator

Thank you for joining us today for the Charles River Laboratories First Quarter 2025 Earnings Conference Call. This call is being recorded. I will now hand it over to our host, Todd Spencer, Vice President of Investor Relations. Please proceed.

Todd Spencer, Vice President of Investor Relations

Good morning, and welcome to Charles River Laboratories' First Quarter 2025 Earnings Conference Call and Webcast. This morning, I am joined by Jim Foster, Chair, President and Chief Executive Officer; and Flavia Pease, Executive Vice President and Chief Financial Officer. They will comment on our results for the first quarter of 2025. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on our Investor Relations website. The replay will be available through the next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans, and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During this call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain 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 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. I will now turn the call over to Jim Foster.

Jim Foster, Chair, President, and Chief Executive Officer

Thank you, Todd, and thank you all for joining us today. Before discussing our first quarter results, I'd like to take a few minutes to directly address an important regulatory development, the FDA's announcement last month outlining their goal to accelerate the validation and adoption of New Approach Methods, or NAMs, to reduce animal testing in preclinical safety assessment. I will also provide an update on our ongoing strategy around alternative methods which we will continue to incorporate into our business in the future. Charles River supports the FDA's vision to leverage scientific advancement to safely advance innovative technologies, including alternatives to animal use. As the leader in preclinical drug development, our long-standing mission is aligned with this vision as we continue to drive greater efficiency in the drug development process and reduce costs, enhance scientific innovation and promote the responsible use of animals in biomedical research. Our perspective on leading through a NAMs-enabled future is as follows: First, the evolution of NAMs is not new and demonstrates that scientific advancements are continuing to move forward. For more than 50 years, efforts to reduce animal use by Charles River and industry have led to a gradual decline in research model volumes. These efforts include better translational models and technologies, such as genetically modified and immunodeficient models that can mimic human disease. For example, our volumes of outbred rodents often used in safety assessment have been roughly halved over the past 10 years due to the use of more complex and predictive models, technologies, and services, including imaging and in vitro applications, all while our revenue has increased significantly. NAMs are part of this broader trend. For many years, CROs like Charles River, the biopharmaceutical industry and the FDA, and international regulatory agencies have been evaluating strategies to use NAMs as tools to complement traditional methods, and in some cases, to potentially eliminate certain animal tests. Through this evolution, the promise of NAMs will be balanced with the importance of patient safety and science. NAMs are beginning to offer exciting opportunities for the future, but they are not capable of fully replacing animal studies in biomedical research and safety testing. Each NAMs tool will require rigorous validation to prove it can consistently replicate the complexity of living systems and ensure patient safety. There are applications where NAMs may play a valuable role more quickly, such as monoclonal antibodies, but significant scientific advancements and validation will be required before alternative methods can become more widely adopted. This technology to mimic a complex living organism doesn't exist today. Therefore, we believe there will be incremental progress over time, and the broader adoption of NAMs will be a longer-term journey, one that is much longer than 3 to 5 years. As the science continues to advance, we believe the biopharmaceutical industry and regulators will maintain a keen focus on ensuring patient safety without compromise. As NAMs evolve, we intend to advance hybrid study designs by complementing traditional in vivo and in vitro methods with NAMs and other non-animal technologies. Given the current state of science and technology, NAMs are still primarily used in drug discovery because of the narrower focus on drug design and optimization, whereas, in safety assessment, a more comprehensive approach is required to determine the full systemic or multi-organ impacts of a drug. Chronic or longer-term assessments of a drug's impact are also critical, as well as off-target or unintended effects, which NAMs can't fully replicate at this time. However, similar to applications in drug discovery, we believe a hybrid model submitting NAMs data in parallel with animal data will prove to be the best approach to ensure patient safety for regulated safety testing over the long term. Ultimately, we believe the future isn't binary. The use of animals will remain beneficial to support certain complex safety and efficacy endpoints even as hybrid study designs that incorporate both NAMs and animal data gain traction. As a result, we view this as an opportunity for Charles River, and we will continue to expand our non-animal platforms. Our leadership in preclinical drug development is not confined to animal models. It is rooted in science and innovation, regulatory insights, and translational expertise. That expertise is equally applicable to NAMs, for which we have a growing portfolio of capabilities. We will continue to invest heavily in these capabilities through organic innovation, technology partnerships, and targeted M&A. As regulatory expectations continue to evolve, our clients are seeking trusted partners to help them navigate the transition. Charles River is the logical partner to assist biopharmaceutical clients to validate and advance the use of NAMs because of the scientific data that we possess and our regulatory expertise. Drug development is ultimately about scientific data, and we have generated significant client databases of toxicology information over our 25 years in the industry that can help create more predictive and efficient safety methodologies that do not compromise patient safety. Charles River has a well-established commitment to and track record for the replacement, reduction, and refinement or the 3 Rs of ethical animal use for biomedical research and has supported the FDA's efforts as well as the NIH's to advance the validation and adoption of NAMs over many years. We have recognized this trajectory of science and technology for many years. And in April 2024, we formalized our own Alternative Methods Advancement Project, or AMAP initiative, dedicated to advancing the development of alternatives to reducing animal testing. We have made strategic investments over the past decade in areas that are central to the NAMs ecosystem with growing capabilities that include steroid, organoid and organ-on-a-chip platforms, human tissue models, in silico modeling, advanced in vitro toxicology, and predictive immunotoxicology assays. We have also invested in projects using computational modeling to increase efficiency and reduce animal usage, as exemplified by our Logica platform pairing AI with traditional methods. We acquired the Retrogenix's cell microarray technology for off-target screening and toxicity. And we also launched a pilot program to replace animals with virtual control groups for safety assessment studies. Slide 9 in our earnings presentation showcases the current state of NAMs and our capabilities across the various NAMs platforms. In total, we generate approximately $200 million of annual DSA revenue from NAMs, much of which is in the discovery phase. We believe our NAMs capabilities and associated revenue will grow meaningfully over time as gradual technological progress continues. I'd like to take a moment to address the potential financial impact on Charles River from the FDA announcement. The FDA has focused on monoclonal antibodies for its pilot program, specifically to reduce the duration of chronic NHP studies. We believe the FDA chose this path because, on a case-by-case basis, it has already been waiving certain chronic post-IND NHP studies for monoclonal antibodies for many years using a weighted evidence model because the scientific data has demonstrated that in many cases, there is limited benefit to conducting additional chronic NHP studies. This is likely because monoclonal antibodies generally show less toxicity than small molecule drugs and have a lower risk for unexpected reactions. In addition, certain monoclonal antibodies have no relevant research models to use in safety testing. Chronic NHP studies longer than 3 months in monoclonal antibodies represented $50 million of our annual revenue. We do not expect any immediate impact on our business. On Slide 11, we have provided an updated view of our Safety Assessment revenue by drug modality for reference. As you can see, the bulk of our revenue is from small molecule and newer advanced biological drugs, including cell and gene therapies. The FDA has not yet focused on these other drug modalities because understanding the safety profile can be more complex and less predictable than monoclonal antibodies. And in the case of newer biologic drugs, there is also less data available to support non-animal-based risk assessments. Therefore, extensive validation work and scientific advancements are needed to safely complement the current in vivo protocols with new alternative methods. This will take a significant amount of time and require resources and collaboration between the FDA, NIH, and other agencies, as well as the biopharmaceutical industry. We applaud the FDA's ongoing efforts to reduce animal use. And while the transition to NAMs is evolutionary rather than revolutionary, it's an important one for biomedical research, and one that Charles River is prepared to lead. In the coming years, we look forward to continuing to work with regulatory agencies, the biopharmaceutical industry, and other stakeholders to help develop, validate, and implement an efficient process for our clients' regulatory submissions that supports the use of non-animal technologies and new alternative methods. As we always have, Charles River will remain committed to following the best and latest science to ensure patient safety. Now I'd like to provide an update on the market trends. Despite considerable uncertainty in the broader market environment, our first quarter financial results demonstrated continued signs of stabilization with a better-than-expected DSA performance, leading us to modestly increase our financial guidance for the year. We were pleased to see the DSA net book-to-bill return to just above 1x for the first time in over 2 years due to improved quarterly bookings. While this is a positive development for the DSA segment, we remain cautious in light of recent market dynamics, including government funding cuts, particularly at the NIH and FDA, the slower start for biotech funding, and tariffs. These developments have understandably contributed to a broader sense of uncertainty in the marketplace. While we have not yet seen a meaningful impact on client demand, which continues to show signs of stabilization, we have taken a measured and prudent approach to our outlook for the year. I'll now provide highlights of our first quarter performance. We reported revenue of $984.2 million in the first quarter of 2025, a 2.7% decrease compared to last year. On an organic basis, revenue declined 1.8%, driven by low single-digit organic decreases in each of our three business segments. Our first quarter revenue performance was above our February outlook for a mid-single-digit decline due primarily to the DSA segment's performance, for which I will provide more details shortly. By client segment, revenue for small and midsized biotech clients grew for a second consecutive quarter. Revenue for global biopharmaceutical clients declined in the first quarter, but this was due at least in part to the fact that we have not yet anniversaried the spending reductions which began in the second half of last year. Collectively, our global academic and government revenue increased slightly in the quarter. The operating margin was 19.1%, an increase of 60 basis points year-over-year. The improvement was primarily driven by the benefit of cost savings resulting from restructuring initiatives that promoted margin expansion in the DSA segment. Favorable mix in the DSA segment also contributed, as did unallocated corporate costs, which declined year-over-year as expected. Earnings per share were $2.34 in the first quarter, an increase of 3.1% from the first quarter of last year. In addition to operating margin improvement, below the line items, including reductions in the tax rate, interest expense, and diluted shares outstanding were contributors to earnings growth. Flavia will provide more details on these items. Based primarily on the first quarter DSA outperformance and our current visibility, balanced by a cautious approach to the second half of the year, we are modestly raising our 2025 revenue guidance by 100 basis points to a 2.5% to 4.5% decrease organically and our non-GAAP earnings per share guidance by $0.20 at midpoint to $9.30 to $9.80. I'd now like to provide you with additional details on our first quarter segment performance, beginning with the DSA segment's results. DSA revenue in the first quarter was $592.6 million, a decrease of 1.4% on an organic basis driven primarily by lower revenue for Discovery Services. DSA pricing improved slightly in the first quarter. This was primarily driven by favorable mix, specifically an increase in longer duration specialty studies. We do not believe this signals broader improvement in the spot pricing environment, which we would continue to characterize as stable overall. Moving to the DSA demand KPIs on Slide 19. The DSA backlog was $1.99 billion at the end of the first quarter, up slightly from $1.97 billion at year-end. You should note that beginning this quarter, we have disclosed our net bookings and net book-to-bill data. This is the first time we are providing this information because we believe it will provide additional transparency into these important KPIs, particularly when foreign exchange can have a notable impact on backlog, as it did in the fourth quarter. As I mentioned earlier, we were pleased that the net book-to-bill improved to 1.04x in the first quarter, above 1x for the first time since the second half of 2022. This was primarily a result of quarterly net booking activity, which improved to $616 million, representing a more than 20% increase on both a year-over-year and sequential basis. This improvement was driven by higher gross bookings, principally from global biopharmaceutical clients, as well as a continued decline in study cancellations moving towards targeted levels across all client segments, including small and midsize biotechs. The incremental first quarter booking activity could largely be characterized for studies with quicker start dates, which is more reflective of our current shorter-term booking behaviors in the current market environment. We expect this will benefit revenue in the first half of this year, including the studies that were already started in the first quarter that led to the better-than-expected performance. Based on this trend, we are modestly increasing our full year revenue guidance for the DSA segment. We now expect DSA organic revenue will decline in the mid-single-digit range, rather than our prior outlook of a mid- to high single-digit decline. As I mentioned, we expect the improved first quarter bookings will generate incremental revenue during the first half of the year, also augmented by the favorable study mix during the first quarter. At this point, given the current visibility, the generally cautious sentiment in the sector and our expectation that the study mix will normalize, we are not assuming that a similar bookings tailwind will continue to benefit second half revenue. However, as I said earlier, we have not seen any meaningful evidence of deterioration in our markets. The DSA operating margin increased 40 basis points year-over-year to 23.9% in the first quarter. The year-over-year improvement primarily reflected cost savings generated from our restructuring initiatives, as well as the favorable study mix in the first quarter. RMS revenue was $213.1 million, a decrease of 2.5% on an organic basis compared to the first quarter of 2024. RMS performed in line with expectations to start the year. The year-over-year revenue decline was primarily driven by the timing of NHP shipments in China and lower revenue for the Cell Solutions business, partially offset by higher revenue for small research models in all geographic regions, driven primarily by higher pricing. Small research models remain essential, low-cost tools for biomedical research, which enhances our ability to continue to realize price increases globally. However, there have been growing concerns from our academic and government clients that proposed NIH budget cuts and uncertainty in Washington could impact their future funding levels. We have not experienced any meaningful revenue loss related to NIH budgets to date, and first quarter revenue from our North American academic and government clients increased slightly. As a reminder, this North American client base represents just over 20% of total RMS revenue, or approximately 6% of total company revenue. Any potential NIH budget cuts would be unlikely to impact client spending levels until later this year or into 2026. In addition, demand from early-stage biotech clients for our CRADL services is expected to be constrained this year due to their funding challenges. We believe this will slow the anticipated utilization of CRADL capacity during the year. As a result of these two potential headwinds, we are moderating our RMS outlook for the year to flat to slightly positive revenue growth on an organic basis compared to our previous expectation of low single-digit growth. In the first quarter, the RMS operating margin decreased by 50 basis points to 27.1%. The decline was primarily a result of the lower NHP revenue, partially offset by the benefit of cost savings resulting from our restructuring initiatives. Revenue for the Manufacturing segment was $178.5 million, a 2.2% decrease on an organic basis from the first quarter of last year. The revenue decline was driven primarily by lower commercial revenue in the CDMO business and a slow start to the year for the Biologics Testing business. Overall, the Manufacturing segment started the year in line with our expectations, and we are maintaining our prior outlook that Manufacturing revenue will be essentially flat on an organic basis in 2025. As you know, first quarter testing volumes in the Biologics Testing business can fluctuate based on seasonal trends. The business had a stronger start last year. However, we continue to expect that Biologics Testing revenue will grow in 2025, and this outlook was supported by solid booking activity in the first quarter. Our cell and gene therapy CDMO business was impacted by the lower revenue from two commercial cell therapy clients, which we discussed earlier in the year. The loss of commercial CDMO revenue reduced the Manufacturing Solutions growth rate by approximately 500 basis points in the first quarter and is expected to have a similar impact for the full year. We are continuing to make progress to enhance the quality of our CDMO operations. We were also pleased to see that our gene therapy CDMO revenue grew in the quarter. We have a healthy pipeline of biotech clients with early-stage clinical candidates ready to help move the CDMO business forward and continue to believe attractive long-term growth opportunities exist. Offsetting these headwinds, the Microbial Solutions business reported another quarter of solid growth across its leading portfolio of rapid manufacturing quality control testing solutions, led by Accugenix microbial identification services. Endosafe also performed well as a result of growth for testing consumables, and strong high throughput, automated NEXUS instrument placements last year are driving incremental cartridge demand. We expect Microbial Solutions will remain a stable source of high single-digit revenue growth for Charles River, demonstrating that clients are increasingly utilizing our comprehensive testing solutions to enhance their product release testing speed and efficiency. The Manufacturing segment's operating margin declined by 220 basis points to 23.1% in the first quarter of 2025 due principally to the impact of lower commercial revenue in the CDMO business. We believe the Manufacturing segment's margin will rebound as sales volume improves, particularly in the Biologics Testing business, and will move closer to the 30% level during the year. Before I turn it over to Flavia, I would also like to discuss this morning's announcement regarding our actions to enhance value creation opportunities at the company in conjunction with our new shareholders, Elliott Investment Management. First, we are pleased to welcome Steven Barg, Abe Ceesay, Mark Enyedy, and Paul Graves to our Board. Each brings significant professional and industry experience and will add fresh perspectives as we continue to execute our strategy and identify the best avenues for further growth and value creation. I would also like to sincerely thank the four members of our Board who are not seeking re-election: Bob Bertolini, Debbie Kochevar, George Massaro, and Richard Wallman. I appreciate the expertise and strategic counsel that each of you have provided to the company and to me over the many years that you have served on our Board, which have contributed to our enduring industry leadership, and we wish each of you the very best. In addition, the Strategic Planning and Capital Allocation Committee of our Board will undertake a comprehensive strategic review of our business to evaluate initiatives to unlock additional value. We will report back on the outcome of the Board's review once complete. I look forward to working with each of our new and continuing Board members and the Elliott team as we focus on maximizing long-term value for our investors, clients, and employees. I firmly believe the company's shares are significantly undervalued, particularly after the FDA's announcement last month, so implementing additional value creation initiatives is both necessary and timely. I'd like to thank our employees for their exceptional work and commitment and our clients and shareholders for their continued support. Now Flavia will provide additional details on our first quarter financial performance and updated 2025 guidance.

Flavia Pease, Executive Vice President and Chief Financial Officer

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 adjustments, costs related primarily to restructuring actions, gains or losses from certain venture capital and other strategic investments, and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures, and foreign currency translation. We are pleased that our first quarter revenue and non-GAAP earnings per share exceeded our prior outlook. This outcome was primarily driven by better-than-expected DSA results and, to a lesser extent, a lower tax rate. These results also reflect the actions we have taken to protect the operating margin. For the past two years, we have taken aggressive actions through our restructuring program to reduce our cost structure by over 5% and align our infrastructure with the current demand, which contributed to the first quarter operating margin improvement and earnings growth, even with a modest revenue decline. We remain on track to deliver annualized cost savings of over $175 million in 2025 and approximately $225 million in 2026. We are also continuing to deploy capital in a disciplined and shareholder-focused manner. As announced last quarter, we're leveraging our solid annual free cash flow generation and completed the repurchase of $350 million in shares during the first quarter of 2025. For modeling purposes, including the stock repurchases to date, we will have slightly below 50 million average diluted shares outstanding for the full year. In just over two quarters, since the $1 billion stock repurchase program was authorized, we have repurchased nearly half of this amount. As Jim referenced, we currently believe the company is significantly undervalued, and we'll closely review opportunities for value creation, including additional stock repurchases. We also experienced a significant increase in quarterly free cash flow, with $112.4 million generated in the first quarter compared to $50.7 million last year. The improvement was primarily driven by lower performance-based cash bonus payments for 2024, which are paid in the first quarter, and by lower capital expenditures. CapEx was $59.3 million or approximately 6% of revenue in the first quarter compared to $79.1 million last year, reflecting the ongoing moderation of our capacity investments in the current demand environment. For the year, we expect that free cash flow will be $350 million to $390 million, and CapEx will be approximately $230 million, consistent with our prior outlook. As Jim mentioned, we have modestly raised our revenue and non-GAAP earnings per share guidance. We now expect full year reported revenue will decline 3.5% to 5.5% and organic revenue will decline 2.5% to 4.5%. FX rates have been volatile since the election. And as a result, we now expect foreign exchange will represent an approximately 1% headwind to 2025 revenue based on recent bank forecasts, which is favorable to our prior outlook of a 1% to 1.5% headwind. Non-GAAP earnings per share are now expected to be in a range of $9.30 to $9.80. Our updated segment revenue outlook for 2025 can be found on Slide 36. We are raising our DSA outlook to reflect the solid first quarter performance, including improved bookings, which give us greater confidence in the near term. We're also tempering our IMS outlook, reflecting headwinds related to our CRADL business and potentially on our academic and government client base later in the year. Our Manufacturing outlook is unchanged on an organic basis. We expect the consolidated operating margin will decline 20 to 50 basis points in 2025, or largely consistent with our prior outlook of modestly lower. I will now provide details on the non-operating items that benefited our first quarter performance versus the prior year. Unallocated corporate costs totaled $52.4 million in the first quarter, or 5.3% of revenue, compared to 6.2% of revenue last year. The decrease was primarily due to the benefits of cost savings actions. For the full year, we expect unallocated corporate costs will be in the range of 5% to 5.5% of total revenue. The non-GAAP tax rate in the first quarter was 22.7%, representing a decrease of 60 basis points year-over-year. The first quarter tax rate was slightly favorable to our prior outlook, due primarily to the timing of the enactment of certain global minimum taxes, as well as higher R&D tax credits. For the full year, we continue to expect our non-GAAP tax rate will be in the range of 22.5% to 23.5%, consistent with our prior outlook. I'd like to briefly address the recent headlines around tariffs. Based on the current universal tariffs in place as of May 7, we expect a limited direct impact on an annual basis, principally related to NHP supply and other study-related items, and we plan to offset most of these estimated tariffs by passing along the higher costs. This has been factored into our current guidance. Total adjusted net interest expense was $26.5 million in the first quarter, essentially unchanged sequentially. For the full year, we expect total net interest expense will be at the lower end of our prior outlook of $112 million to $117 million. At the end of the first quarter, we had outstanding debt of $2.5 billion, with approximately 60% at a fixed interest rate compared to $2.2 billion at the end of the fourth quarter. As a result of the higher debt at the end of the first quarter, gross leverage increased to 2.5x and net leverage increased to 2.4x. The sequential increases in debt and the leverage ratios were primarily attributable to the short-term borrowings for stock repurchases, which we expect to largely repay through our cash flow over the course of the year. A summary of our 2025 financial guidance can be found on Slide 40. Looking ahead to the second quarter, we expect reported and organic revenue will decline at a low to mid-single-digit rate year-over-year. Earnings per share are expected to improve nicely from the first quarter level with a mid- to high single-digit sequential increase over the $2.34. In summary, we were pleased that our financial performance in the first quarter benefited from the disciplined implementation of the cost-saving initiatives that we undertook, and we'll remain focused on continuing to evaluate additional opportunities to drive future savings and operating efficiencies. These actions are important not only to align our operations with current demand and to protect the operating margin, but also as a means to allow us to continue to invest in our businesses. We are committed to being at the forefront of scientific innovation, particularly as the industry continues to evolve. Our strategic investments and scientific expertise will position us to actively shape the changing regulatory landscape, while maintaining the highest standards of safety and efficacy. We will also evaluate all opportunities to unlock value with the support of our new and continuing Board members and Elliott Investment Management. We're proud of the foundation we've built, and we are energized by the opportunities ahead. Thank you.

Todd Spencer, Vice President of Investor Relations

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

Operator, Operator

Our first question will come from Max Smock with William Blair.

Max Smock, Analyst

I'm curious about the recent FDA guidance and whether the mixed messages from the agency could discourage drug developers from fully embracing the guidance on reducing animal testing. There's been a lot of discussion about enhancing the drug development process and facilitating the market entry of new drugs. However, the announcement of Dr. Prasad as Head of CBER raises concerns, as his previous remarks seem to convey a conflicting message. Based on your discussions with pharmaceutical companies, do you think this situation might resemble the FDA Modernization 2.0 Act, which didn't lead to significant changes, or does this feel different to you?

Jim Foster, Chair, President, and Chief Executive Officer

It's an interesting way to phrase that. Predicting the situation is challenging due to various changes at the FDA, which obviously come with different opinions on their impact. There are fewer personnel and new leadership, making it hard to determine the direction. This initiative isn't new; it has been ongoing for quite some time. We and others have been involved in the development of NAMs. Focusing on monoclonal antibodies seems to be a smart choice for testing and piloting. We are enthusiastic about the opportunity to lead and align our clients with regulatory agencies both domestically and internationally. We all want to refine and reduce the use of research models, a process that has been ongoing, but science will ultimately drive everything. Extensive validation will be necessary, and we will play a crucial role in that process. Your question seems to revolve around the speed and rhythm of these developments, which is very difficult to predict. Even without changes at the FDA in staffing or leadership, the validation methodology is extensive and will take considerable time. This may be slightly quicker for monoclonal antibodies, while longer-term studies with non-human primate monoclonal antibodies will serve as proof of principle. There will be some progress, and we will engage regardless of the situation at the FDA.

Max Smock, Analyst

Got it. Makes sense. Super helpful commentary. Maybe just following up, and I appreciate the detail you shared during the call around how alternative approaches are being used today. A lot of the inbounds we've gotten have been around biosimulation, in particular, PBPK and QSP. Just wondering if you can provide some more detail around how each of those offerings are being used currently and why they aren't being used more frequently already in preclinical? And then what you view as kind of the biggest hurdle before adoption of those biosimulation approaches moving forward?

Jim Foster, Chair, President, and Chief Executive Officer

I mean, a lot of those technologies are used successfully early on in drug discovery more than safety because you're looking for a single answer with something that you're questioning or prosecuting or developing. And by the way, I'd say that most of the drug companies, certainly, the large ones have their own proprietary technologies, and we've been using those for long periods of time and certainly not sharing them with others. To move this into a regulated toxicity and be looking at the systemic reaction of a drug and the multi-organ reaction of a drug is really complicated science. And so trying to simulate things that happen inside of the human body as opposed to actually using a whole animal system to actually see how it works inside of a living mammalian system is quite different, and that's a huge leap of faith. So I think it's going to be a slow build. Some of those technologies are going to be beneficial. Some won't at all. Some of them will be beneficial to discovery and maybe not to safety. And I think that continued investment by us and others, and as I said, in a proprietary nature by our clients is necessary and important. But in the final analysis, the FDA and all the other regulatory agencies are principally concerned about ensuring the safety of patients who take these drugs, and they're not going to cut any corners to do that, even with what looks like exciting technology. So it's going to be a slow continual build.

Operator, Operator

Our next question will come from Eric Coldwell with Baird.

Eric Coldwell, Analyst

I will continue with the same line of questioning as Max. I'm interested in NAMs; you mentioned several areas of investment with around $200 million in annualized revenue. In which areas do you believe Charles River excels and positions itself as a thought leader, possibly holding a stronger market share compared to competitors? Additionally, are there areas where you feel you are currently underrepresented but may increase investment? Also, are you open to pursuing additional mergers and acquisitions to enhance what you are doing in the NAMs category?

Jim Foster, Chair, President, and Chief Executive Officer

I will begin with the last part of your question, Eric, as it provides an interesting background. We acquired our Microbial business nearly 30 years ago, becoming the only FDA-approved alternative to traditional research models. This has been a very successful segment for us. We originally expected to make numerous acquisitions in this field by now, considering the advancements in science and the growing need for sophisticated approaches. Each year, we encounter a number of companies that propose new technologies stemming from esteemed academic institutions or government sources, often suggesting that this technology could threaten our business. While these technologies appear promising, they generally lack practicality, consistency, and validity, and they are certainly not substitutes for whole animal systems or enhancements thereof. We do evaluate several companies from time to time, including some we've recently engaged with, not solely because of the FDA developments. Overall, we are interested in licensing or acquiring technologies that genuinely enhance drug development while ensuring patient safety. We have taken various steps in this direction, such as acquiring Retrogenix, which specializes in cell microarray technology for identifying off-target effects, a critical aspect of our work. We also initiated a pilot program to use virtual control groups instead of whole animals in certain toxicology studies. Moreover, we are collaborating with a company that combines AI technology with our traditional methodologies to accelerate the identification of lead compounds for our clients. We've had some previous AI initiatives that did not yield the expected results, but we remain open to exploring this area further. Additionally, we have amassed extensive toxicology data from thousands of clients over many years. We aim to utilize this data in an anonymized manner to enhance the design of more predictive preclinical trials. This is an initiative we believe we can lead effectively, leveraging what we consider to be superior technology in that domain. To address your question directly, we have a clear commitment to advancing alternative methods, supported by a dedicated Board committee and regular engagement with key opinion leaders to evaluate the science and technologies that are practical and beneficial for our portfolio. We will proceed thoughtfully and continue investing in these areas without being wasteful. Above all, our focus remains on the science, ensuring we do not compromise patient safety in any way.

Operator, Operator

Our next question will come from Elizabeth Anderson with Evercore ISI.

Elizabeth Anderson, Analyst

I have two questions. First, in the short term, following the FDA announcement, are customers taking specific actions, such as changing their study procedures, or are they still in a phase of digesting this information? Second, regarding the strong bookings in the first quarter, it was encouraging to see. Were there any one-time items to consider, and would you say that the favorable environment is continuing into the second quarter?

Jim Foster, Chair, President, and Chief Executive Officer

So I think that our customers were pleased with the general tone of the FDA's pronouncement, albeit pretty dramatic from a headline point of view, that they want to participate in additional technologies and methodologies to accelerate getting the drugs to market, maybe reduce the cost and maybe have more sophisticated technologies. And as I said, a lot of them, I think, have their own technologies. I don't think we're going to see any sort of dramatic change in the methodology for doing safety studies. As you may or may not have read, the FDA's focus on longer-term NHP studies for monoclonal antibodies is something that they have been waiving the necessity to do those longer-term studies for some period of time. So the drug companies are already participating in that. You get much less toxicity signals with monoclonal antibodies, and they tend to lend themselves to this sort of initiative. So that will save the drug companies time and money, and we're certainly happy to participate in that. So I guess they're digesting it; I mean, the pronouncement doesn't fundamentally change anything that they're doing because, as I've just said a couple of times with the previous questions, their job is to develop drugs that are effective against certain diseases, but ensure patient safety. So they'll do everything they can to do that. If they can do that partially with new technologies, that's great. We think that longer term there'll be a hybrid approach where clients will submit animal data and NAMs data at the same time. And the combination of those will answer much of the questions that the FDA and other regulatory agencies have. So as I said, this will be a journey. These new technologies will be beneficial for certain types of drugs, particularly at the moment, monoclonal antibody; it's going to be a lot harder to go after small molecules or other large molecules like cell and gene therapy, there's just much less data around them, and the toxicity issue is much more complex to deal with, and you really want to use the whole animal system to see what the multiple organ response is to the drug, whether it's swallowed or injected. And your second question was about bookings? I think Flavia is going to answer that.

Flavia Pease, Executive Vice President and Chief Financial Officer

Yes. Elizabeth, the strength of bookings in the first quarter was indeed encouraging. It's the first time that net book-to-bill went above 1x for over two years. And there was really no one-time impacting that. It was broadly based. Gross bookings, particularly in large pharma, was strong, but cancellations were down across all client segments. So it's just really operationally strong, although still only one quarter.

Operator, Operator

Our next question will come from Ann Hynes with Mizuho Securities.

Ann Hynes, Analyst

Thank you for the detailed insights; they were very informative. When I listened to your presentation, it seemed that you believe the FDA issue will not significantly hinder growth. Considering your long-term CAGR that you mentioned before this market downturn was 6% to 8% in DSA and RMS, assuming there hadn't been this market downturn, how do you think this FDA change will affect your long-term growth projections? That's my first question. My second question is about pricing. I've noticed that pricing pressures exist, but it appears to be better than what we saw during the Great Recession. Could you explain what happened with pricing during that time compared to the current situation? That would be appreciated.

Jim Foster, Chair, President, and Chief Executive Officer

I think in terms of long-term growth trajectory and the impact of the FDA initiative, we have to spend some time refreshing our long-term growth rate. We've said that for a while. We have to take this new information into consideration with our own assessment, feedback from our clients and experts in the field. We'll have a refreshment of our long-term financial goals, probably when we have an Investor Day and have a comprehensive review and assessment of that. So I would stop short of throwing out numbers at this early date. And do you want to take the pricing question?

Flavia Pease, Executive Vice President and Chief Financial Officer

Sure. The pricing environment showed a slight improvement in the first quarter, mainly due to a favorable mix, particularly with longer duration specialty studies where we have more pricing power and need to discount less. This is encouraging. Comparing the current pricing environment to the Great Financial Crisis reveals a very different situation. Capacity management is better, and outsourcing has become more common, so we are not experiencing the same severity of price pressure or declines as during that crisis. However, as we mentioned last year, we and others in the industry had to make selective pricing adjustments as demand decreased. While it is not as robust as it was during the peak of COVID, we were encouraged that in the first quarter, pricing remained stable from a spot perspective, and the mix contributed positively to our price/mix results.

Operator, Operator

Our next question comes from Dave Windley with Jefferies.

David Windley, Analyst

Ann just asked this, and I'm going to rephrase it. Flavia, you shared some historical context on pricing. If I recall your comments from last year, you mentioned that in the early part of the year, volume demand decreased, leading to lower price levels in the spot market. You described this as a decline followed by a plateau, which then transitioned into the backlog and eventually produced revenue that surpassed the higher pricing, resulting in lower pricing observed in the fourth quarter. I’m trying to grasp why you described this as a plateau and why we might expect consistently pressured pricing into the fourth, first, second quarters, and beyond. Additionally, at SOT, the conversation centered around an increase in price pressure across the market. I want to clarify if I’m understanding this correctly, as several players indicated that the price environment at the start of 2025 is more pressured than it was at the end of 2024. I look forward to your insights on this.

Flavia Pease, Executive Vice President and Chief Financial Officer

Sure, Dave. Yes, let me take the second part of your question. So I cannot comment on others. But from our pricing perspective, I would say, as we indicated in our prepared remarks that the spot price is stable in the first quarter sort of compared to how we were exiting last year. And then just more broadly around price, you're correct in how you were interpreting the selective discounting that we started doing last year and how that would matriculate through the backlog and eventually, revenue. I think what was positive and favorable, which may be a little bit of a surprise is the impact of mix, as I said before. So the favorability in the first quarter of price/mix being slightly improved is primarily driven by that mix impact.

Operator, Operator

Our next question comes from Casey Woodring with JPMorgan.

Casey Woodring, Analyst

Curious, what your updated expectations are for biotech and DSA this year, just given the weaker funding numbers to start the year? I think you said revenue for biotech clients grew in the quarter, and it seems like cancellations declined, but you said gross bookings were really led by large pharma. So just curious on biotech trends and the forward outlook here? And then on large pharma, how are your conversations going with these customers on potential tariffs and maybe just how you're thinking about that as a risk for this year?

Flavia Pease, Executive Vice President and Chief Financial Officer

Yes. So on the second part of your question, Casey, on tariffs. Obviously, we continue to monitor the news like everybody else. And just yesterday, again, I think the sector was pressured given some indication that maybe tariffs were going to be back on the table. I think in terms of how that is translating to dialogue and activity with our pharma clients, nothing in particular. It's not necessarily impacting their R&D dollars as of now. I think everybody will continue to monitor that and hope that, I would say, good sense prevails and that the tariffs are not implemented, but we obviously can't control that. Tariffs impact directly to our business, as I said in my prepared remarks, is very modest, and we'll pass that small impact along. Jim, do you want to take on biotech trends in large pharma?

Jim Foster, Chair, President, and Chief Executive Officer

Yes. I mean, it's tough to predict. I mean, the funding situation is not improving for biotech. So I don't think we would anticipate any sort of dramatic change in the demand curve from them. They're going to do everything they can to get as many drugs into the clinic as possible. So they should continue to be an important part of our client base. I think the clients that want high-quality science and some regulatory expertise will continue to primarily use Charles River. I think that's worked really well for us. And we're being very thoughtful with the way we're pricing these studies. So I wouldn't anticipate any fundamental change.

Operator, Operator

Our next question comes from Charles Rhyee with TD Cowen.

Charles Rhyee, Analyst

Could you discuss DSA from a different perspective? You noted that cancellation rates are continuing to decline. What are the risks of cancellations potentially rising again, considering the short time cycles and quick study starts? It seems that the risk is lower than it has been in the past. Additionally, could you provide an update on CDMO regarding the FDA's Form 483?

Jim Foster, Chair, President, and Chief Executive Officer

Cancellation rates have always been a part of our business and will continue to be. It’s a normal aspect of the planning process and reflects changes in our clients' priorities, which we account for in our business model. We appreciate having meaningful backlogs that allow us to accommodate new studies, although there is a penalty for cancellations. The fact that cancellations have been decreasing consistently for over a year and are nearing target levels is a significant indication of market demand stability. While we aim for continued business growth, we are pleased that the first-quarter decline in cancellations was much less than we had anticipated. There is a considerable amount of work available, with rapid study starts and more complex, expensive studies. Backlogs are sufficient, and we haven’t experienced the previous high cancellation rates. Previously, backlogs extended to about 18 months, which led to clients canceling as they were merely reserving slots without corresponding studies. We have moved past that situation, and the approach is now more measured and thoughtful. We hope this positive trend continues, and as cancellation rates keep decreasing, it is definitely a good sign for us.

Flavia Pease, Executive Vice President and Chief Financial Officer

Then on the FDA CDMO 483, I think that was the second part of your question.

Jim Foster, Chair, President, and Chief Executive Officer

Yes. So we have had the FDA in there with one of our commercial clients. We have been working really closely with the FDA back and forth to respond to their requests for things that they wanted to see improved. They wanted more information. They wanted more details. I think that's going really well, continues to give us confidence if and when current clients move into a commercial milieu that our facilities will be in good shape to accommodate their needs.

Operator, Operator

Our next question comes from Tejas Savant with Morgan Stanley.

Tejas Savant, Analyst

Jim, a lot has been asked, but I do have a couple of cleanups on the FDA animal testings done. What fraction of MABs typically require these chronic NHP studies and what fraction were getting an FDA waiver? And secondly, just in terms of some of the early conversations you may have had with your customers. Is there a scenario in which pharma might prefer to run animal studies anyway so as to make sure we don't see a spike in Phase I or II failures in human trials down the road?

Jim Foster, Chair, President, and Chief Executive Officer

Clients will continue to use methodologies that prioritize patient safety. As previously mentioned, none of the non-animal models can currently replace whole animal systems. There’s a specific niche focused on long-term monoclonal antibody studies for chronic conditions, and it's determined that extending these is unnecessary. This is a wise decision, and they have already been implementing it for some time. The pilot study is expected to demonstrate its effectiveness, but it will need to be conducted. This represents a small part of our business, approximately $50 million, linked to these long-term studies for monoclonals and other large molecules, as well as small molecules. The integration of fundamental non-animal models in conjunction with traditional methods, assuming they progress, is still quite distant. The pace of change will be slow. While the FDA has allowed drug companies to use more of these technologies, the responsibility for ensuring patient safety remains with them. Ultimately, regardless of regulatory opinions, the effectiveness of the science will determine outcomes. We believe that hybrid strategies moving forward will be advantageous, utilizing non-animal models to address specific questions while also employing whole animal systems for broader systemic implications. We are optimistic about this direction. However, advancements in technology that could substitute existing methods will take significant time and depend on acceptance and validation by regulatory agencies. We will play a key role in guiding our clients to a point where they feel comfortable with integrating non-animal models as supplementary technologies or otherwise.

Tejas Savant, Analyst

Got it. That's helpful. I have a quick follow-up on the strategic review. What is your timeline for this? You mentioned a relatively quick turnaround. Should we expect an update by the next earnings call or possibly even sooner? Also, Flavia, you've done a commendable job with the cost cuts, eliminating over 5% of your cost structure. In light of the strategic review, do you consider further cost cuts to be a lower priority, given the substantial efforts you've already made? You likely want to ensure you maintain the ability to capitalize on a potential market recovery.

Jim Foster, Chair, President, and Chief Executive Officer

I'll take the first part. So the strategic review, we haven't started yet. We just signed this deal with Elliott. That committee is going to meet often. I don't know exactly what the cadence is yet. And we're going to go really deep in all of our businesses. As I said earlier, in all the markets we're in, what's the competitive dynamic, how is the technology developing, are we getting the returns on our acquisitions that we wanted, what's the margin profile look like and how do we continue to enhance and improve our portfolio. So that's going to take some time. So I don't know exactly when we'll have the punchline. We're going to move through it as swiftly as possible without rushing. I think it’s extremely unlikely we’ll have any punchlines by the next earnings call.

Flavia Pease, Executive Vice President and Chief Financial Officer

Yes. I believe regarding the cost savings, we are satisfied with the measures we have implemented so far. They were essential due to the demand environment. As I mentioned in earlier earnings calls, some of the savings we’ve identified are sustainable. We won’t need to reinstate staffing for about $75 million of the $225 million. We will keep looking for ways to be efficient. However, I think we have already accomplished a lot in this area. We will provide an update on the strategic review once it is finished.

Operator, Operator

Our next question comes from Matt Sykes with Goldman Sachs.

Unidentified Analyst, Analyst

This is Rob Cottrell. I wanted to come back to biotech, where you mentioned sales to small and midsized biotechs grew for the second consecutive quarter despite funding challenges. Was that the case across all three segments? And then any differences to call out in terms of midsized biotech versus small biotech?

Flavia Pease, Executive Vice President and Chief Financial Officer

Yes. We don't distill that finitely between small, mid- and large-sized biotech. I think we just tried to provide color in terms of large pharma and biotech. So to your point, for the second consecutive quarter, we saw growth there, which was encouraging.

Operator, Operator

We have no further questions at this time. I'll turn the call back over to Todd Spencer for closing remarks.

Todd Spencer, Vice President of Investor Relations

Great. Thank you. Thank you for joining us on the conference call this morning. We look forward to seeing you at upcoming investor conferences. This concludes the conference call. Thank you.

Operator, Operator

Thank you. This does conclude today's Charles River Laboratories First Quarter 2025 Earnings Conference Call. Thank you for your participation. You may now disconnect.