Key highlights from Charles River Laboratories International, Inc (CRL) Q2 2023 Earnings Concall
Q&A Highlights:
- [00:34:34] Sandy Draper with Guggenheim asked if the demand environment is different for different types of customers like large pharma, mid-size pharma, emerging biotech or if it’s broad-based. Jim Foster CEO replied that the demand environment is broad-based, with both large pharma and small biotech companies being careful with their spending. However, big pharma companies have been particularly active and strong in 2Q.
- [00:36:24] Eric Coldwell at Baird enquired about the the impact of NHP supply on DSA revenue for the third quarter and full year and how does this compare to the original estimate of 2% to 4%. Flavia Pease CFO replied that the impact of the NHP supply shortage on DSA revenue was meaningfully below the previous 2-4% range, and it will have a small modest impact in 3Q and no impact in 4Q. The backlog decline is due to clients canceling work that was placed when the market was very frothy.
- [00:37:05] Eric Coldwell from Baird asked how much of the $2.8 billion backlog is at risk of cancellation or delay, and do you expect to see similar backlog declines in the next few quarters. Jim Foster CEO said that the backlog is normalizing and will likely settle out to a more reasonable level, but it is difficult to say exactly where. CRL is still seeing a lot of demand, but clients are booking studies closer to when they need them, which will reduce slippage. CRL is confident that it can maintain its prices, even as the market normalizes.
- [00:42:40] Derik De Bruin with Bank of America asked about the impact of NHP price normalization on the business’s margins and how the business is mitigating it. Jim Foster CEO said the company expects the impact of the declining NHP prices to be minimal, as they have been able to pass on the costs to customers and are confident in their pricing for NHP studies.
- [00:43:50] Derik De Bruin with Bank of America also asked about the headwinds in the manufacturing segment and is double-digit growth feasible in 2024? Jim Foster CEO replied that the company is confident that double-digit growth is feasible in 2024, driven by strong performance in the microbial and CDMO businesses and improving performance in the biologics business.
- [00:47:12] Tejas Suhasaria from Morgan Stanley asked how should one think about pricing in 2H23 and 2024, given the changing market dynamics. Jim Foster CEO answered that the company expects to be able to maintain its pricing power in the future, as long as there is healthy drug development and capacity remains tight. However, the company will need to adjust its pricing as inflation normalizes.
- [00:50:33] Dan Leonard with Credit Suisse asked about the implications of the permanent solution to utilize the global footprint on NHB situation for margins or otherwise. Jim Foster CEO replied that the company is confident that the impact of the NHB shortage on its margins will be minimal, as it will continue to use its global footprint and efficiency initiatives to mitigate the impact.
- [00:55:09] Elizabeth Anderson at Evercore ISI asked about the short-term and long-term impact of DSA bookings and cancellations, and whether the improving biotech funding environment might offset the cancellations. Jim Foster CEO said that the company believes that the safety assessment industry is normalizing after a period of unusually high demand caused by COVID-19.
- [01:02:14] Dave Windley with Jeffreys enquired if there is any discounting in the market from competitors for safety assessment studies in the current environment, given the changes in demand trend. Jim Foster CEO clarified that the company’s pricing strategy is flexible and depends on various factors such as the specific competitor, type of work, and client. CRL sometimes match or beat competitors’ prices, but not if the prices are too low.
- [01:08:09] Patrick Donnelly of Citi queried about the historical context of the $200 million backlog cancellations, which is about 7% of the backlog, and how it compares to other cycles. Jim Foster CEO answered that the company believes that the high backlog is causing more slippage and cancellations, which is not comparable to other cycles. The company is normalizing the situation and has 13 months of backlog, which will be a better paradigm to predict the next quarter and to come up with the operating plan for 2024.
- [01:11:19] Casey Woodring with JPMorgan enquired about the correlation between emerging biotech budgets and cancellations, and the visibility into emerging biotech demand, given that industry funding grew 20% YoY and DSA has always been a short cycle business. Jim Foster CEO said the company believes that the demand for discovery work will increase as clients become more comfortable with their access to capital. However, the focus on clinic work is understandable given the current market conditions.
- [01:15:06] Justin Bowers from Deutsche Bank enquired about the performance of the CDMO business this year relative to the growth expectations when the business was entered a couple of years ago. Jim Foster CEO replied that the company has re-organized its cell therapy manufacturing business into three centers of excellence and is confident that it will have higher growth rates and improved margins in 2023.
- [01:19:18] John Sourbeer with UBS enquired about the growth of the microbial business within manufacturing, whether it grew double digits in the quarter, and the sustainability of the outlook and potential for long-term growth. Jim Foster CEO answered that the company’s discovery services business is expected to continue to grow at a historical rate and is becoming increasingly important to the company’s overall portfolio.